What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-07-15 compared with 2021-07-16 · 285 added, 344 removed, 238 unchanged (73% of the section changed)

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RISK FACTORS,” for a discussion of factors that may cause results to differ materially.

We sold our majority ownership interest in eLuxury, LLC (“eLuxury”) on March 31, 2020, resulting in the elimination of our home accessories segment at such time.

Accordingly, the results of operations and assets and liabilities for this segment are excluded from the company’s continuing operations for the fiscal 2020 year (and for all prior periods of comparison) and presented as a discontinued operation in this report.

Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30.

Fiscal 2022, 2021, and 2020 included 52 weeks, 52 weeks, and 53 weeks, respectively.

Continuing Operations

Our continuing operations are classified into two business segments:

Our operations are classified into two business segments:

mattress fabrics and upholstery fabrics.

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We have mattress fabric operations located in Stokesdale, NC, High Point, NC, and Quebec, Canada.

Additionally, we acquired the remaining fifty percent ownership interest in our former unconsolidated joint venture in Ouanaminthe, Haiti during the fourth quarter of fiscal 2021, such that we are now the sole owner with full control of this cut and sewn mattress cover operation.

The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers.

Additionally, we acquired the remaining fifty percent ownership interest in our former unconsolidated joint venture located in Ouanaminthe, Haiti, during the fourth quarter of fiscal 2021.

As a result, we are now the sole owner with full control of this cut and sewn mattress cover operation (see Note 2 of the consolidated financial statements for further details regarding this business combination).

The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers.

We have upholstery fabric operations located in Shanghai, China, and Burlington, NC.

We also commenced construction on a new facility in Haiti during the fourth quarter of fiscal 2021.

This new operation will be dedicated to production of cut and sewn upholstery kits and is expected to begin operating during the second quarter of fiscal 2022.

During the third quarter of fiscal 2022, we also commenced operation of a new leased facility in Ouanaminthe, Haiti dedicated to the production of cut and sewn upholstery kits.

Additionally, Read Window Products, LLC (“Read”), a wholly-owned subsidiary with operations located in Knoxville, TN, provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read’s products, to customers in the hospitality and commercial industries.

Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.

Discontinued Operation – Home Accessories Segment

Through our June 22, 2018, majority investment in eLuxury, our operations also previously included a home accessories segment, which manufactured, sourced, and sold finished bedding accessory and home good products directly to consumers and businesses through global e-commerce and business-to-business sales channels.

However, we sold our ownership interest in eLuxury on March 31, 2020, in order to focus on the company’s core mattress and upholstery fabrics businesses, which we believed would increase our liquidity during the unprecedented disruption arising from the COVID-19 pandemic.

This sale of eLuxury resulted in the elimination of our home accessories segment at such time.

See Note 3 – Discontinued Operations, of the consolidated financial statements for further details.

Impact of COVID-19

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Executive Summary

We evaluate the operating performance of our current business segments based upon income (loss) from continuing operations before certain unallocated corporate expenses, asset impairment charges, restructuring expense (credit) and related charges, and other non-recurring items.

Cost of sales in each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead, and incoming freight charges.

Unallocated corporate

expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, and other miscellaneous expenses.

Results of Continuing Operations

We evaluate the operating performance of our business segments based upon (loss) income from operations before certain unallocated corporate expenses and other items that are not expected to occur on a regular basis.

Cost of sales in each business segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead, and incoming freight charges.

Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses.

Results of Operations

Twelve Months Ended

(dollars in thousands)

Gross profit from continuing operations

Gross profit margin from continuing operations

Gross profit margin

Selling, general, and administrative expenses

Income (loss) from continuing operations

Operating margin from continuing operations

Income (loss) before income taxes from continuing operations

Income from operations

Operating margin

(Loss) income before income taxes

Income tax expense

Net income (loss) from continuing operations

Overall, our net sales increased 17.0% in fiscal 2021 compared with a year ago, with mattress fabric net sales increasing 20% and upholstery fabric net sales increasing 13.9%.

Fiscal 2021 had 52 weeks compared to 53 weeks in fiscal 2020.

Also, fiscal 2020 was affected by the severe economic disruption caused by the COVID-19 pandemic during the fourth quarter, as retail home furnishings stores across the country closed and many of our customers shut down or limited their operations for several weeks.

The increase in net sales for both our mattress fabrics and upholstery fabrics segments during fiscal 2021 reflects increased demand driven by a greater consumer focus on the home, combined with our ability to meet this surge in demand and respond quickly to the needs of our customers through our flexible global platform and the support of our long-term supplier relationships.

This increase was partially offset by lower net sales for both segments during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially in the beginning of the first quarter as customers and retail stores were just beginning to resume operations following pandemic-related shutdowns.

See the Segment Analysis located in the Results of Continuing Operations section below for further details.

Income Before Income Taxes from Continuing Operations

Overall, our income before income taxes from continuing operations was $10.9 million for fiscal 2021, compared with loss before income taxes from continuing operations of $(7.7) million for the prior year.

Net (loss) income

Overall, our net sales decreased 1.6% in fiscal 2022 compared with a year ago, with mattress fabric net sales decreasing 3.5% and upholstery fabric net sales increasing 0.4%.

Fiscal 2021 was negatively affected by the economic disruption caused by the COVID-19 pandemic during the first quarter.

The decrease in net sales for our mattress fabrics segment during fiscal 2022 reflects the significant drop in sales during the fourth quarter of fiscal 2022, driven primarily by weakness in domestic mattress industry sales that caused customers to curtail inventory purchases and delay the timing of new product rollouts in response to slowing retail demand.

Sales were also affected by the COVID-related shutdowns of the company’s operations in China, which halted production and distribution of sewn mattress covers produced in China throughout the month of April.

The decrease in net sales was partially offset by pricing and surcharge actions that were in effect during the year, including a price increase that was effective throughout the year, as well as a materials surcharge (inclusive of freight) that was implemented during the second quarter, an additional selective price increase that was implemented during the third quarter, and additional targeted price increases on certain products implemented during the fourth quarter.

Together, these pricing actions increased net sales for the division by approximately 5.1% during fiscal 2022.

The increase in upholstery fabrics net sales during fiscal 2022 reflects higher demand for our residential upholstery products primarily during the first quarter, as compared to the prior-year first quarter, which was negatively affected by disruption from the COVID-19 pandemic.

This increase was partially offset by a significant drop in sales for residential upholstery fabric products during the fourth quarter due to COVID-related shutdowns of our facilities in China throughout the month of April and, to a lesser extent, a slowdown in new business for the residential home furnishings industry during the fourth quarter.

It was also offset by lower sales in our residential business during the second quarter, primarily due to COVID-19 related shutdowns of our sourcing partners and customers in Vietnam, as well as lower sales for Read in our hospitality business during the first six months of fiscal 2022.

The increase in net sales also reflects the impact of pricing and freight surcharge actions that were in effect during the year, including a price increase that was effective throughout the year on products sold in the U.S.

to help offset unfavorable foreign currency exchange rate fluctuations associated with our operations in China;

a freight surcharge implemented during the second quarter;

and an additional price increase implemented on new orders beginning in the third quarter.

Together, these price increases and freight surcharge accounted for approximately 2.9% of net sales for the division during fiscal 2022.

See the Segment Analysis located in the Results of Operations section below for further details.

Income Before Income Taxes

Overall, our loss before income taxes was $(325,000) for fiscal 2022, compared with income before income taxes of 10.9 million for the prior year.

The results for fiscal 2021 include an $819,000 gain on bargain purchase associated with our fourth-quarter acquisition of the remaining fifty percent ownership interest in our former unconsolidated joint venture located in Haiti.

It also includes $2.2 million in other expense relating primarily to foreign exchange rate fluctuations associated with our operations in China.

Loss before income taxes from continuing operations for fiscal 2020 included non-cash asset impairment charges of $13.7 million associated with goodwill and certain intangible assets, of which $11.5 million related to the mattress fabrics segment and $2.2 million related to the upholstery fabrics segment, a $70,000 restructuring credit associated with the closure of our Anderson, SC, upholstery fabrics facility, as well as $902,000 in other expense.

Our improved operating performance for fiscal 2021 primarily reflects higher sales as compared to the prior year, partially offset by significant pressure from unfavorable foreign exchange rate fluctuations associated with our operations in China, as well as higher SG&A expense primarily due to increased incentive compensation costs.

It also reflects pressure from the sales disruption from the COVID-19 pandemic at the beginning of the first quarter that affected both of our segments, along with significant inventory reductions and manufacturing inefficiencies associated with the dramatic ramp up in operations for our mattress fabrics segment during the latter part of the first quarter.

We also experienced operating inefficiencies in connection with servicing the surge in demand in the mattress fabrics business during the fourth quarter.

Higher freight and raw material costs, as well as disruption in our customers’ supply chains for non-fabric components, also adversely affected our operating performance to some extent during fiscal 2021.

See the Segment Analysis located in the Results of Continuing Operations section below for further details.

We recorded income tax expense of $7.7 million, or 70.7% of income before income tax expense from continuing operations, in fiscal 2021, compared with income tax expense of $3.4 million, or (43.7%) of loss before income tax expense from continuing operations in fiscal 2020.

Income tax expense during fiscal 2021 included a $4.9 million net income tax charge, which consists of an $8.5 million non-cash income tax charge to record a full valuation allowance against the company’s U.S.

Operating performance for fiscal 2022 was materially affected by lower sales;

operating inefficiencies at our mattress fabrics segment’s U.S.

and Canadian locations due to the rapid and material decline in revenues during the fourth quarter;

and higher freight, raw material, and labor costs.

Other pressures affecting the year were start-up costs for the new Haiti upholstery cut and sew facility, operating inefficiencies in our mattress fabrics segment related to product mix within the segment’s global platform, unfavorable foreign exchange rate fluctuations in China and Canada, labor shortages in the U.S.

and Canada, and additional employee training costs and operating inefficiencies at our new Haiti upholstery cut and sew facility.

These pressures were partially offset by lower total SG&A expense for the year, due primarily to lower incentive compensation expense.

See the Segment Analysis located in the Results of Operations section below for further details.

We recorded income tax expense of $2.9 million, or (888.0%) of loss before income taxes, during fiscal 2022, compared with income tax expense of $7.7 million, or 70.7% of income before income taxes, during fiscal 2021.

Our effective income tax rates for fiscal 2022 and 2021 were negatively affected by the mix of (loss) income before income taxes, as significant pre-tax losses were incurred by our U.S.

operations and almost all our taxable income was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.

As a result, income tax expense incurred stems from taxable income from our foreign jurisdictions that exceeds our consolidated (loss) income before income taxes.

Accordingly, the extent of the fluctuations in our effective income tax rates is dependent on the extent to which income tax expense incurred from foreign operations compares with our consolidated (loss) income before income taxes, which has been significantly lowered by our U.S.

In addition, income tax expense during fiscal 2021 included a $4.9 million net income tax charge, which consisted of an $8.5 million non-cash income tax charge to record a full valuation allowance against the company’s U.S.

net deferred income tax assets, partially offset by a $3.6 million non-cash income tax benefit to re-establish certain U.S.

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Treasury regulations enacted during the first quarter of fiscal 2021 regarding the Global Intangible Low Taxed Income (“GILTI”) tax provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”).

Income tax during fiscal 2020 included $1.5 million of GILTI tax that did not recur in fiscal 2021 due to the recent change in the GILTI tax regulations noted above.

Additionally, our effective income tax rates for fiscal 2021 and fiscal 2020 were adversely affected by the continued shift in the mix of our taxable income that has been mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.

During fiscal 202 2 , we had income tax payments totaling $3.

1 million , which mostly represented income tax payments associated with our foreign operations in China and Canada.

During fiscal 2021, we had income tax payments totaling $ 3.0 million , which mostly represented income tax payments of $4.3 million associated with our foreign operations located in China and Canada, partially offset by income tax refunds of $1.5 million that were associated with our U.S.

AMT credit carryforward balance .

During fiscal 2020, we had income tax payments totaling $5.0 million, all of which pertained to our foreign operations located in China and Canada.

Refer to Note 12 of the consolidated financial statements for further details regarding our provision for income taxes from continuing operations.

Refer to Note 12 of the consolidated financial statements for further details regarding our provision for income taxes from operations.

As of May 1, 2022, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively “cash and investments”) totaled $14.6 million compared with $46.9 million as of May 2, 2021.

The decrease in our cash and investments from the end of fiscal 2020 is attributable to repayment of all our outstanding borrowings associated with our U.S.

and China lines of credit and the loan we received under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) of 2020 (such loan, the “PPP loan”), which borrowings totaled $38.4 million.

Excluding the repayments made on our lines of credit and the PPP loan, our cash and investments as of May 2, 2021, would have increased $8.2 million as compared with May 3, 2020.

This increase was mostly due to (i) net cash provided by operating activities totaling $21.5 million, partially offset by (ii) $6.7 million of capital expenditures that were mostly related to our mattress segment, (iii) cash payments of $954,000 associated with our acquisition of the remaining fifty percent ownership interest in our former unconsolidated joint venture in Haiti, and (iv) cash payments of $5.3 million in the form of regular quarterly dividend payments to shareholders.

Our net cash provided by operating activities of $21.5 million during fiscal 2021 increased $16.5 million compared with $5.0 million during fiscal 2020.

The increase reflects higher earnings and a focused attention on working capital management through fiscal 2021.

Additionally, our discontinued operation had net cash used in operating activities totaling $(2.3) million and net cash used in investing activities totaling $(134,000) during fiscal 2020.

Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions from the company and the former non-controlling interest holder of eLuxury, totaling $2.4 million during fiscal 2020.

We believe our liquidity has improved in the absence of the former home accessories segment due to the significant losses incurred by that segment and the funding of its working capital requirements primarily by us through loans and capital contributions that are no longer required.

The decrease in our cash and investments from the end of fiscal 2021 was mostly due to (i) $5.7 million of capital expenditures primarily related to equipment associated with our mattress fabrics segment, our innovation campus located in downtown High Point, NC, and new equipment associated with information technology, (ii) cash payments totaling $5.5 million for regular quarterly dividend payments to shareholders, (iii) common stock repurchases totaling $1.8 million, (iv) $1.1 million of contributions to our rabbi trust that funds our deferred compensation plan, and (v) net cash used in operating activities totaling $17.4 million.

Our net cash used in operating activities was $17.4 million during fiscal 2022, compared with net cash provided by operating activities of $21.5 million during fiscal 2021.

This difference was due mostly to (i) a net increase in cash that was generated during fiscal 2021 due to a significant surge in customer demand as a result of the focus-on-the-home trend that occurred as businesses began to re-open coming out of pandemic-related closures, which such surge did not recur during fiscal 2022;

(ii) a decrease in accounts payable due to the significant decrease in net sales during the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, as noted above, and due to our return to normal credit terms with our vendors, as opposed to the extended terms previously granted in response to the COVID-19 pandemic;

(iii) an increase in inventory due to higher material costs, as well as an increase in inventory purchases to protect against supply chain disruption and support our customers;

(iv) a decrease in accrued expenses primarily due to annual incentive bonus compensation paid during the first quarter of fiscal 2022;

(v) $1.9 million in payments for the new building lease and start-up expenses associated with our upholstery fabrics cut and sew operation located in Haiti;

partially offset by (vi) a decrease in accounts receivable related to the decrease in net sales during the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, as noted above, and due to our customers’ return to normal credit terms, rather than the extended terms previously granted in response to the COVID-19 pandemic.

As of May 1, 2022, there were no outstanding borrowings under our lines of credit.

Dividend Program

On June 15, 2021, our board of directors approved a regular quarterly cash dividend of $0.11 per share.

This payment will be made on July 16, 2021, to shareholders of record as of July 9, 2021.

During fiscal 2021, dividend payments totaled $5.3 million, which represented quarterly dividend payments ranging from $0.105 to $0.11 per share.

During fiscal 2020, dividend payments totaled $5.1 million, which represented quarterly dividend payments ranging from $0.10 to $0.105 per share.

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms.

Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.

On June 29, 2022, our board of directors announced the decision to suspend the company’s quarterly cash dividend.

Considering the current and expected macroeconomic conditions, we believe that preserving capital and managing liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders.

During fiscal 2022, dividend payments totaled $5.5 million, which represented quarterly dividend payments ranging from $0.11 per share to $0.115 per share.

During fiscal 2021, dividend payments totaled $5.3 million, which represented quarterly dividend payments ranging from $0.105 per share to $0.11 per share.

Common Stock Repurchases

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Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise.

The number of shares purchased, and the timing of such purchases, will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

As part of our comprehensive response to the COVID-19 global pandemic, we announced on April 3, 2020, that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty.

On March 2, 2021, our board of directors reinstated the share repurchase program.

The number and timing of share purchases are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

During fiscal 2022, we repurchased 121,688 shares of our common stock at a cost of $1.8 million.

As a result, as of May 1, 2022, $3.2 million is available for additional repurchases of our common stock.

Despite the current share repurchase authorization, the company does not expect to repurchase any shares through at least the first quarter of fiscal 2023.

During fiscal 2021, we did not repurchase any shares of common stock.

As a result, as of May 2, 2021, we had $5.0 million available for additional repurchases of our common stock.

During fiscal 2020, we repurchased 142,496 shares of our common stock at a cost of $1.7 million pursuant to the authorization approved by our board of directors on September 5, 2019.

Results of Continuing Operations

The following table sets forth certain items in our consolidated statements of net income (loss) as a percentage of net sales.

Results of Operations

The following table sets forth certain items in our consolidated statements of net (loss) income as a percentage of net sales.

Cost of sales

Gross profit from continuing operations

Selling, general and administrative expenses

Asset impairments

Restructuring credit

Income (loss) from continuing operations

Interest income, net

Income from operations

Interest expense

Interest income

Gain on bargain purchase

Other expense

Income (loss) before income taxes from continuing operations

(Loss) income before income taxes

Income tax expense *

Income (loss) from investment in unconsolidated joint venture

Net income (loss) from continuing operations

Calculated as a percentage of income (loss) before income taxes from continuing operations.

Income from investment in unconsolidated joint venture

Net (loss) income

Calculated as a percentage of (loss) income before income taxes.

2022 compared with 2021

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(dollars in thousands)

Gross profit from continuing operations

Gross profit margin from continuing operations

SG&A expenses

Income from continuing operations

Gross profit margin

Selling, general and administrative expenses

Income from operations

Operating margin

Mattress fabrics sales increased 20.0% in fiscal 2021 compared to the prior year, which was materially affected by the COVID-19 pandemic during the fourth quarter.

The increase in net sales for fiscal 2021 generally reflects an increase in demand driven by the strong consumer focus on the home environment, combined with our ability to service the higher demand through our global platform.

This increase was partially offset by a decrease in net sales during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially in the beginning of the first quarter as customers and retail stores were just beginning to resume operations following pandemic-related shutdowns.

During fiscal 2021, we benefitted from our focus on product innovation and creative designs with growth across a diversified group of new and existing customers, including further growth in our sewn mattress cover business.

Our fabric-to-cover model, as well as our on-shore, near-shore, and off-shore supply chain strategy, is proving to be a preferred platform for providing our mattress cover customers with the agility and value they need for their business.

The strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey enabled us to support the strong demand trends and serve the needs of our mattress fabrics and cover customers throughout fiscal 2021.

We also benefitted from our virtual design capabilities, including our 3D rendering services, which allowed us to strengthen our position with customers.

In addition, we believe the domestic mattress industry and, in turn, our business, began to realize some benefits during the third and fourth quarters from the preliminary antidumping duties imposed in October 2020 by the U.S.

Department of Commerce on mattress imports from seven countries.

Looking ahead, we are faced with some continued near-term pressures relating to ongoing customer capacity limitations, primarily due to supply chain disruption for non-fabric components and labor shortages, but we expect that most of these headwinds are temporary.

Additionally, the ongoing impact and duration of the COVID-19 pandemic remains unknown and depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, actions taken to contain its spread and mitigate the public health and economic effects, the short- and long-term disruption on the global economy, consumer confidence, unemployment, employee health, and the financial health of our customers, suppliers, and distribution channels.

At this time, we cannot reasonably estimate the ongoing impact of the COVID-19 pandemic on our mattress fabrics segment;

however, if conditions relating to the pandemic worsen, the disruption could adversely affect our operations and financial performance.

Mattress fabrics sales decreased 3.5% in fiscal 2022 compared to the prior year.

These results reflect the significant drop in sales during the fourth quarter of fiscal 2022, which was primarily driven by weakness in domestic mattress industry sales.

We experienced a rapid drop in demand during the fourth quarter, particularly during the month of April, causing customers to curtail inventory purchases and delay the timing of new product rollouts in response to slowing retail demand.

We believe this industry softness was primarily due to inflationary pressures affecting consumer spending.

Sales during the fourth quarter were also affected by the COVID-related shutdowns of the company’s operations in China, which halted production and distribution of our sewn mattress covers produced in China throughout the month of April.

The decrease in net sales for fiscal 2022 was partially offset by pricing and surcharge actions that were in effect during the year, including a price increase that was effective throughout the year, as well as a materials surcharge (inclusive of freight) that was implemented during the second quarter, an additional selective price increase that was implemented during the third quarter, and additional targeted price increases on certain products implemented during the fourth quarter.

Together, these pricing actions increased net sales by approximately 5.1% during fiscal 2022.

During fiscal 2022, we maintained a continued focus on our product-driven strategy, with an emphasis on innovation, design creativity, quality, and personalized customer service.

The strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey enabled us to support the evolving needs of our mattress fabrics and cover customers throughout the year.

While we experienced lower demand in our mattress cover business, particularly during the second half of the year, we continue to believe our on-shore, near-shore, and off-shore supply chain strategy, as well as our fabric-to-cover model, remains a preferred platform for sewn mattress cover customers.

Looking ahead, we continue to navigate a convergence of macroeconomic headwinds that are affecting consumer spending patterns.

While we are optimistic about planned new programs and product development opportunities for fiscal 2023, industry weakness is expected to continue for some period of time, which may reduce demand for mattress fabric and cover products and delay the timing of new product rollouts.

We expect these conditions are likely to continue pressuring results through at least the first half of fiscal 2023.

Additionally, the continued impact of the COVID-19 pandemic and Russia’s invasion of Ukraine remain unknown and depend on factors beyond our knowledge or control.

At this time, we cannot reasonably estimate the ongoing impact of the COVID-19 pandemic or the evolving impact of the Russia-Ukraine war on our mattress fabrics segment ;

however, either of these situations could cause disruption that could adversely affect our operations and financial performance.

Gross Profit and Operating Income

The increase in mattress fabrics profitability was primarily due to the higher mattress fabrics sales noted above, offset somewhat by sales disruption from the COVID-19 pandemic during the first quarter.

Profits were also adversely affected by significant inventory reductions and manufacturing inefficiencies associated with the dramatic ramp up in our operations during the latter part of the first quarter, as well as operating inefficiencies in connection with servicing a surge in demand in our business during the fourth quarter.

In addition, operating performance for fiscal 2021 was pressured by unfavorable foreign exchange rate fluctuations in China and Canada, increased raw material prices and freight costs, and disruption in our customers’ supply chains for non-fabric components.

Notably, although we announced a price increase during the fourth quarter of fiscal 2021 to help mitigate higher freight and raw material costs, this action did not take effect until the beginning of fiscal 2022, resulting in a temporary cost-price lag that affected our operating performance for the fourth quarter.

We expect continued near-term pressures relating to increasing raw material and freight costs and ongoing foreign currency fluctuations in China and Canada.

We expect that most of these headwinds are temporary and will be mitigated to some extent by recent pric e increase noted above .

The decrease in mattress fabrics profitability during fiscal 2022, as compared to fiscal 2021, was primarily due to lower sales;

operating inefficiencies at our U.S.

and Canadian locations due to the rapid and material decline in revenues during the fourth quarter;

higher freight, raw material, and labor costs;

operating inefficiencies within our global platform due to an unfavorable product mix affecting our U.S.

and Canadian locations;

unfavorable foreign currency exchange rate fluctuations in China and Canada;

and operating inefficiencies due to labor shortages in the U.S.

Our previously implemented price increase and materials surcharge, as well as the selective price increase implemented during the third quarter and the targeted price increase on certain products implemented during the fourth quarter, have helped offset a portion of the current inflationary pressures.

However, we expect the ongoing rise in labor, freight, and raw materials to continue pressuring profitability through at least the first half of fiscal 2023.

We believe these headwinds will be mitigated to some extent by an additional targeted price increase on certain products that we are implementing during the second quarter of fiscal 2023, as well as our ongoing efforts to control our internal costs and improve efficiencies, but we will consider further reasonable pricing actions as necessary to mitigate and manage inflation.

CLASS International Holdings, Ltd.

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(“Culp International”), a wholly-owned subsidiary of the company, entered into a joint venture agreement pursuant to which Culp International owned 50% of CLASS International Holdings, Ltd.

Effective February 1, 2021, (sometimes referred to as the “acquisition date”), Culp International entered into a Share Purchase Agreement with its former joint venture partner pursuant to which Culp International acquired the remaining 50% ownership interest in CIH.

CIH produces cut and sewn mattress covers and is housed in two facilities totaling 120,000 square feet, located in a modern industrial park on the northeastern border of Haiti.

We believe having sole ownership of this operation enhances our capacity and increases our flexibility by having near-shore capabilities that help us meet the needs of our mattress cover customers.

Our now-100% ownership interest in connection with this acquisition had a fair value totaling $2.7 million, of which $1.7 million represents the fair value of our previously held 50% ownership interest in CIH, and $954,00 reflects the purchase price that was mostly paid at closing on February 1, 2021, for the remaining 50% ownership interest in CIH.

In accordance with ASC Topic 805-10-25-10, we remeasured our previously held 50% ownership interest in CIH at its acquisition date fair value.

As of the acquisition date, the fair value of our previously held 50% ownership interest totaling $1.7 million represented its carrying amount, and therefore, no gain or loss was recognized in earnings in connection with the remeasurement.

Assets Acquired and Liabilities Assumed

The following table presents the final allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values.

(dollars in thousands)

Cash and cash equivalents

Accounts receivable

Right of use assets

Equipment and leasehold improvements

Accounts payable

Gain on bargain purchase

Equipment and leasehold improvements will be depreciated on a straight-line basis over their remaining useful lives ranging from 1 to 10 years.

Gain on Bargain Purchase

Concurrent with our acquisition of the remaining 50% ownership interest in CIH, our former joint venture partner sold its mattress related business to a third party.

Our acquisition of the remaining 50% ownership interest in CIH was undertaken due to this sale and the terms negotiated in connection therewith.

As a result, the $3.5 million fair value of the identifiable assets acquired and liabilities assumed exceeded the $2.7 million fair value of our now-100% ownership interest.

Consequently, in accordance with ASC Topic 825-30-25-4, we (i) reassessed the recognition and measurement of the assets acquired, liabilities assumed, and previously held ownership interest;

(ii) gained an understanding why there was a bargain purchase;

and (iii) reviewed the rebate and supply agreements that were executed concurrently with the Share Purchase Agreement.

As part of our review of the rebate and supply agreements, we verified that the terms of these agreements were consistent with fair market value terms and are considered separate transactions and not considered part of the business combination in accordance with ASC Topic 805-20-25-21.

Accordingly, this acquisition has been accounted for as a bargain purchase and, as a result, we recognized a gain of $819,000, which is reported in the line-item “gain on bargain purchase” in the fiscal 2021 Consolidated Statement of Net Income.

In connection with the Share Purchase Agreement, we entered into a supply agreement and rebate agreement with an affiliated company of our former joint venture partner to secure plant capacity utilization and preserve a sales channel for our mattress cover and fabric products.

The supply and rebate agreements are effective as of the acquisition date and are based on future sales orders relative to current market conditions.

The transactions associated with the supply and rebate agreements will be accounted for in accordance with ASC Topic 606 Revenue from Contract with Customers.

For the period from February 1, 2021, through May 2, 2021, shipments pursuant to the supply agreement were $379,000, and a charge of $25,000 pursuant to the rebate agreement was included in net sales in the fiscal 2021 Consolidated Statement of Net Income.

Acquisition-related costs totaling $30,000 were included in selling, general, and administrative expenses in the fiscal 2021 Consolidated Statement of Net Income.

Actual revenue and net loss from the acquisition date of February 1, 2021, through May 2, 2021, included in our fiscal 2021 Consolidated Statement of Net Income and totaled $379,000 and $(2,000), respectively.

During the fourth quarter of fiscal 2021, Culp International acquired the remaining 50% ownership interest in CIH from its former joint venture partner, such that we are now the sole owner with full control of CIH.

We believe having sole ownership of this operation increases our capacity and enhances our flexibility by having near-shore capabilities that help us meet the needs of our mattress cover customers.

See Note 2 of the consolidated financial statements for further details regarding this business combination.

Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and our investment in an unconsolidated joint venture.

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.

(dollars in thousands)

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Right of use assets

Investment in unconsolidated joint venture

Total mattress fabrics segment assets

Refer to Note 18 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

As of May 2, 2021, accounts receivable increased by $8.2 million, or 67.3%, compared with May 3, 2020.

This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020.

Net sales for the fourth quarter of fiscal 2021 were $42.9 million, an increase of $19.6 million, or 83.9%, compared with net sales of $23.4 million during the fourth quarter of fiscal 2020, which was materially disrupted by the COVID-19 pandemic.

Although, we experienced a substantial increase in net sales during the fourth quarter of fiscal 2021, the increase in accounts receivable was partially offset by faster cash collections during the fourth quarter of fiscal 2021 as compared with the fourth quarter of fiscal 2020.

The faster cash collections are due to our customers’ return to making payments based on normal credit terms as opposed to the extended terms granted during the fourth quarter of fiscal 2020 in response to the COVID-19 pandemic.

As of May 1, 2022, accounts receivable decreased by $10.6 million, or 51.7%, compared with May 2, 2021.

This decrease reflects a significant decline in net sales during the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021.

Net sales for the fourth quarter of fiscal 2022 were $29.8 million, a decline of $13.1 million, or 30.6%, compared with net sales of $42.9 million during the fourth quarter of fiscal 2021.

In addition, this decrease in accounts receivable reflects improved cash collections during the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, as more customers took advantage of cash discounts during the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021.

Days’ sales outstanding was 30 days for the fourth quarter of fiscal 2022, compared with 43 days for the fourth quarter of fiscal 2021.

As of May 1, 2022, inventory increased by $9.0 million, or 29.9%, compared with May 2, 2021.

This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020.

Net sales during the fourth quarter of fiscal 2020 were adversely affected by the economic disruption caused by the COVID-19 pandemic.

Inventory turns were 4.2 during the fourth quarter of fiscal 2021, compared with 3.3 during the fourth quarter of fiscal 2020.

This increase in inventory represents higher raw material costs, as well as an increase in inventory purchases to protect against supply chain disruption and support our customers.

Inventory turns were 2.9 for the fourth quarter of fiscal 2022, compared with 4.2 for the fourth quarter of fiscal 2021.

Property, Plant, & Equipment

As of May 1, 2022, property, plant, and equipment decreased $3.0 million, or 7.1%, compared with May 2, 2021.

This decrease mostly represents (i) depreciation expense totaling $6.2 million, partially offset by (ii) capital spending of $3.4 million associated with equipment to expand capacity at our operation located in Canada.

The $38.7 million as of May 1, 2022, represents property, plant, and equipment of $25.6 million, $12.4 million, and $757,000 located in the U.S., Canada, and Haiti, respectively.

The $40.7 million as of May 3, 2020, represents property, plant, and equipment of $27.7 million and $13.0 million located in the U.S.

and Canada, respectively.

As of May 2 , 202 1 , property, plant, and equipment slightly increased compared with May 3 , 20 20 .

The slight increase mostly represents (i) capital spending of $6.2 million associated with equipment to expand our capacity in North America to support our future growth plan, along with equipment and leasehold improvements totaling $846,000 that were acquired from CIH;

partially offset by (ii) $6.0 million in depreciation expense.

The $41.7 million as of May 2, 2021, represents property, plant, and equipment of $28.8 million, $12.0 million, and $855,000 located in the U.S., Canada, and Haiti, respectively.

Right of Use Assets

As of May 1, 2022, right of use assets decreased $809,000, or 18.9%, compared with May 2, 2021.

This decrease mostly represents rent expense incurred during fiscal 2022 that related to executed lease agreements.

The $3.5 million as of May 1, 2022, represents right of use assets of $2.0 million, $1.2 million, and $291,000 located in Haiti, the U.S., and Canada, respectively.

The $362,000 as of May 3, 2020, represents right of use assets located in the U.S.

As of May 2, 2021, right of use assets increased by $3.9 million compared with May 3, 2020.

This increase represents (i) $2.5 million that pertained to building leases acquired from CIH;

(ii) $879,000 that pertained to the renewal and amendment of a building lease associated with our mattress cover operation located in the U.S., and (iii) $550,000 that pertained to a new building lease associated with our Canadian mattress fabric operation.

Investment in Unconsolidated Joint Venture

As of May 3, 2020, our investment in unconsolidated joint venture represented our 50% ownership in CIH and was accounted for under the equity method in accordance with ASC Topic 823.

Accordingly, the carrying value of our investment in CIH was reported as a single line item in the Consolidated Balance Sheets titled “Investment in unconsolidated joint venture”.

Effective February 1, 2021, we entered into an agreement with our former joint venture partner to acquire the remaining 50% interest in CIH.

Pursuant to this transaction, we are now sole owner with full control over CIH.

Accordingly, our consolidated financial statements now include all of the accounts of CIH, and any significant intercompany balances and transactions have been eliminated.

Furthermore, the equity method will no longer be used and the former investment in unconsolidated joint venture is now included in the net assets of our now 100% interest in CIH.

The $4.3 million as of May 2, 2021, represents right of use assets of $2.4 million, $1.4 million, and $400,000 located in Haiti, the U.S., and Canada, respectively.

Upholstery Fabrics Segment

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(dollars in thousands)

Upholstery fabrics sales increased 13.9% in fiscal 2021 compared to the prior year, which was materially disrupted by the COVID-19 pandemic during the fourth quarter.

The increase in upholstery fabrics net sales during fiscal 2021 reflects a significant increase in sales for our residential upholstery business compared to the prior-year period, partially offset by lower sales for our hospitality business, which remained under pressure due to pandemic-related disruptions to the travel and leisure industries.

The increase in net sales for the year was also partially offset by the decrease in net sales during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially at the beginning of the first quarter as customers and retail stores were just beginning to resume operations following pandemic-related shutdowns.

The increased demand in our residential upholstery fabrics business was driven primarily by increased consumer focus on the home.

We also benefitted from the success of our product innovation strategy, as well as the strength and flexibility of our platform in Asia, including our long-term supplier relationships and our expanded cut and sew capabilities in Vietnam.

Our highly durable, stain-resistant LiveSmart® performance fabrics, as well as our LiveSmart Evolve® performance plus sustainability fabrics, are important drivers of growth in our residential business.

These product lines continued to experience strong demand trends amidst consumer desire for cleanability, ease of maintenance, and environmentally-conscious products.

Looking ahead, we are encouraged by the continuing strong backlog and demand trends in our residential upholstery business.

We are also pleased to be expanding our capacity for cut and sewn upholstery kits with a new production facility in Haiti, which is expected to be completed during the second quarter of fiscal 2022.

We believe the solid sales performance in our residential upholstery business will continue during fiscal 2022, absent additional pandemic-related shutdowns or material disruption in our customers’ supply chains for non-fabric components.

We are also cautiously optimistic that as vaccine rollouts continue, pent up demand for travel and leisure

activities will ultimately benefit our hospitality business, although the timing of this return remains uncertain.

However, the ongoing economic and health effects of the COVID-19 pandemic, as well as the duration of such effects, remain unknown and depend on factors beyond our control.

At this time, we cannot reasonably estimate the ongoing impact of the pandemic on our upholstery fabrics segment, but note that if conditions worsen, the impact on our employees, suppliers, consumers, and the global economy could adversely affect our operations and financial performance.

Upholstery fabrics sales increased 0.4% in fiscal 2022 compared to the prior year.

to help offset unfavorable foreign currency exchange rate fluctuations associated with our operations in China;

a freight surcharge implemented during the second quarter;

and an additional price increase implemented on new orders beginning in the third quarter.

Together, these price increases and freight surcharge accounted for approximately 2.9% of net sales during fiscal 2022.

Throughout the year, we maintained our sustained focus on product innovation, including our popular portfolio of LiveSmart® performance products.

Our hospitality business continued to recover from pandemic-related impacts, with higher sales in both our hospitality/contract fabric business and our Read business during the second half of the year.

We also commenced operations at our new Haiti cut and sew facility during the third quarter, and we continued the ramp up in production at this facility during the fourth quarter.

Looking ahead, while the shutdowns that significantly curtailed our China operations throughout April and May have now been lifted, lingering constraints from the shutdowns may continue to affect us during the first quarter of fiscal 2023.

We also expect the slowdown in new retail business for the residential home furnishings industry may affect demand for our residential business for some

period of time .

Despite these challenges, we believe our business is well positioned for the long-term with our product-driven strategy and innovative product offerings, as well as our flexible Asian platform, our long-term supplier relationships, and our expanded capacity in Haiti.

Notably, the ongoing economic and health effects of the COVID-19 pandemic, as well as the impact of Russia’s invasion of Ukraine, including its effect on petrochemical pricing and consumer spending, remain unknown and depend on factors beyond our control.

At this time, we cannot reasonably estimate the impact, but we note that if conditions worsen in either of these situations, the impact on our suppliers, consumers, and/or the global economy could adversely affect our operations and financial performance.

Gross Profit and Operating Income

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(dollars in thousands)

Gross profit from continuing operations

Gross profit margin from continuing operations

SG&A expenses

Income from continuing operations

Gross profit margin

Selling, general and administrative expenses

Income from operations

Operating margin

The increase in upholstery fabrics profitability was primarily due to the increase in sales noted above, offset somewhat by unfavorable China foreign exchange rate fluctuations and reduced demand in our hospitality business.

Looking ahead, we expect that certain near-term headwinds, including rising freight and raw material costs and ongoing China foreign exchange rate fluctuations, may temporarily pressure our profitability during fiscal 2022.

However, we expect that our recent price increase initiated at the end of the fourth quarter of fiscal 2021 will help mitigate the ongoing China foreign exchange rate fluctuations to some extent.

The decrease in upholstery fabrics profitability was primarily due to higher freight and material costs;

start-up costs at our new Haiti cut and sew facility;

unfavorable foreign currency fluctuations in China;

a lower contribution from our Read business;

and additional employee training costs and operating inefficiencies at the new Haiti cut and sew facility during the fourth quarter as it continued to scale capacity to its full planned output level.

Looking ahead, we expect current inflationary pressures, as well as labor availability in our U.S.

operations, may continue to pressure our profitability to some extent, but the pricing actions implemented throughout the year have helped offset foreign currency exchange rate fluctuations and rising freight and material costs, as intended.

This was especially true during the fourth quarter, with the full realization of the additional price increase that was in effect for new orders during the quarter.

We also expect profitability will be affected over the near-term by additional employee training costs and operating inefficiencies at our new Haiti cut and sew facility as we continue to increase our labor force in order to ramp up production to meet customer demand.

Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.

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Accounts Receivable

As of May 2, 2021, accounts receivable increased by $4.4 million, or 34.3%, compared with May 3, 2020.

This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020.

Net sales for the fourth quarter of fiscal 2021 were $36.1 million, an increase of $12.1 million, or 50.4%, compared with net sales of $24.0 million during the fourth quarter of fiscal 2020, which was materially disrupted by the COVID-19 pandemic.

Although we experienced a substantial increase in net sales during the fourth quarter of fiscal 2021, the increase in accounts receivable was partially offset by faster cash collections during the fourth quarter of fiscal 2021 as compared with the fourth quarter of fiscal 2020.

The faster cash collections are due to our customers’ return to making payments based on normal credit terms, as opposed to the extended terms granted during the fourth quarter of fiscal 2020 in response to the COVID-19 pandemic.

As of May 1, 2022, accounts receivable decreased by $4.9 million, or 28.5%, compared with May 2, 2021.

This decrease reflects a significant decline in net sales during the fourth quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021.

Net sales for the fourth quarter of fiscal 2022 were $27.2 million, a decline of $8.9 million, or 24.8%, compared with net sales of $36.1 million during the fourth quarter of fiscal 2021.

Days’ sales outstanding was 40 days for the fourth quarter of fiscal 2022, compared with 42 days for the fourth quarter of fiscal 2021.

As of May 2, 2021, inventory increased $4.6 million, or 21.5%, compared with May 3, 2020.

This increase reflects the substantial increase in net sales during the fourth quarter of fiscal 2021, compared with the fourth quarter of fiscal 2020.

Net sales during the fourth quarter of fiscal 2020 were adversely affected by the economic disruption caused by the COVID-19 pandemic.

Inventory turns were 4.6 during the fourth quarter of fiscal 2021, compared with 3.8 during the fourth quarter of fiscal 2020.

As of May 1, 2022, inventory increased $1.7 million, or 6.4%, compared with May 2, 2021.This increase in inventory is primarily due to higher material costs.

Inventory purchases and shipments of inventory were minimal during April 2022 due to the COVID-19 related shutdowns that affected our China operations throughout the month.

Inventory turns were 3.0 during the fourth quarter of fiscal 2022, compared with 4.6 for the fourth quarter of fiscal 2021.

Property, Plant , & Equipment

The $1.9 million as of May 2, 2021, represents property, plant, and equipment of $1.1 million and $850,00 located in the U.S.

and China, respectively.

As of May 1, 2022, property, plant, and equipment increased by $535,000, or 35.8%, compared with May 2, 2021.

This increase mostly represents (i) capital spending of $1.0 million that was primarily associated with the start-up of our upholstery cut and sew operation located in Haiti, partially offset by (ii) depreciation expense totaling $794,000.

The $2.0 million as of May 1, 2022, represents property, plant, and equipment of $1.0 million, $756,000, and $255,00 located in the U.S., Haiti, and China, respectively.

The $1.5 million as of May 2, 2021, represents property, plant, and equipment of $1.1 million and $420,000 located in the U.S.

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Right of Use Assets

As of May 1, 2022, our right of use assets increased by $2.2 million, or 36.7%, compared with May 2, 2021.

This increase mostly represents the commencement of our agreement to lease a 90,000 square foot facility located in Haiti.

This facility is dedicated to the production of cut and sewn upholstery kits.

The lease agreement commenced during the third quarter of fiscal 2022, has an initial lease term of eight years, and required rent payments totaling $2.8 million that were paid in advance of the commencement of the lease.

The $8.1 million as of May 1, 2022, represents right of use assets of $3.7 million, $2.6 million, and $1.8 million located in China, Haiti, and the U.S., respectively.

The $5.9 million as of May 2, 2021, represents right of use assets of $5.0 million and $952,000 located in China and the U.S., respectively.

The $1.6 million as of May 3, 2020, represents right of use assets of $857,000 and $776,000 of located in the U.S.

and China, respectively.

As of May 2, 2021, right of use assets increased by $4.3 million, or 264.1%, compared with May 3, 2020.

This increase mostly pertains to the renewal or the modification of lease terms associated with all our building leases associated with our operations located in China totaling $5.5 million, partially offset by amortization expense of $1.6 million.

Discontinued Operation - Home Accessories Segment

As previously disclosed, we sold our majority ownership interest in eLuxury, LLC (“eLuxury”) during the fourth quarter of fiscal 2020, resulting in the elimination of our home accessories segment at such time.

Accordingly, there are no results of operations for the home accessories segment reported in our continuing operations during fiscal 2021 and there were no assets and liabilities reported in our Consolidated Balance Sheets as of May 2, 2021, and May 3, 2020.

See Note 3 – Home Accessories Segment - Discontinued Operation, of the consolidated financial statements for further details, and see the section titled “Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION – 2020 compared with 2019 – Segment Analysis – Discontinued Operation – Home Accessories Segment” in our Form 10-K filed with the Securities and Exchange Commission on July 17, 2020, for the fiscal year ended May 3, 2020, for additional information.

Other Income Statement Categories

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Selling, general, and administrative expenses

Asset impairments

Restructuring credit

Interest expense

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Selling, General, and Administrative Expenses

SG&A expense increased during fiscal 2021, as compared to the prior year, due mostly to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets, partially offset by our significant cost cutting measures during the fourth quarter of fiscal 2020 that continued into the first quarter of fiscal 2021 as part of our comprehensive response to the COVID-19 global pandemic.

These significant cost cutting measures primarily related to compensation and included (i) implementing temporary salary reductions, (ii) making workforce adjustments to align with demand, (iii) suspending merit pay increases, and (iv) aggressively reducing discretionary spending such as professional fees, travel and entertainment expenses, and certain marketing expenses.

Asset Impairments

During the fourth quarter of fiscal 2020, we recorded non-cash asset impairment charges totaling $13.7 million associated with goodwill and certain intangible assets, of which $11.5 million related to the mattress fabrics segment and $2.2 million related to the upholstery fabrics segment.

These asset impairment charges were the result of our annual assessments of impairment regarding our goodwill and tradename that were performed as of May 3, 2020, in accordance with ASC Topic 350 Intangibles – Goodwill and Other.

See Notes 8, 9, and 15 of the consolidated financial statements for further details regarding our assessments of impairment, conclusions reached, and the performance of our quantitative impairment tests.

The decrease in selling, general, and administrative expenses during fiscal 2022, as compared with fiscal 2021, is mostly due to lower incentive compensation expense, which includes annual bonuses and stock-based compensation, reflecting unfavorable financial results in relation to pre-established performance targets.

Interest Expense

During fiscal 2021, our interest expense was attributable to interest paid on amounts borrowed during the fourth quarter of fiscal 2020 in connection with the economic uncertainty associated with the COVID-19 global pandemic.

As a result of this uncertainty and its overall effect on our business, we proactively borrowed $30.8 million from our lines of credit and applied for and received a $7.6 million loan pursuant to the SBA’s Paycheck Protection Program (“PPP”).

During the first quarter of fiscal 2021, we repaid in full the PPP loan and all the borrowings outstanding on our lines of credit as of May 3, 2020.

Additionally, we did not incur any interest expense after the first quarter of fiscal 2021, as there were no borrowings outstanding on our line of credit agreements after such time.

The interest expense incurred during fiscal 2020 reflects our historically low level of borrowings outstanding.

Interest expense incurred during fiscal 2022 and 2021 reflects our historically low level and short duration of borrowings outstanding.

Interest Income

Interest income reflects interest earned on our current investments of excess cash held in money market funds, short-term mutual bond funds, and investment-grade U.S.

corporate, foreign, and government bonds, as well as interest earned on money market and mutual fund investments associated with our rabbi trust that funds our deferred compensation plan obligation.

The decrease in interest income during fiscal 2021 compared with fiscal 2020 is due to mostly to a decrease in interest rates associated with these investments.

Interest income in fiscal 2022 and fiscal 2021 mostly reflects investment income earned on our current investments of excess cash held in (i) money market funds, (ii) bond, other fixed income, and equity-related mutual funds, and (iii) investment-grade U.S.

corporate, foreign, and government bonds, as well as (iv) a money market fund and equity related mutual fund investments associated with our rabbi trust that funds our deferred compensation plan.

Interest income is expected to decline during fiscal 2023 primarily due to the liquidation of all of our short-term investments classified as available-for-sale and corporate bonds classified as held-to-maturity during the fourth quarter of fiscal 2022.

Gain on Bargain Purchase

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Pursuant to this transaction, we are now the sole owner with full control over CIH.

The gain from bargain purchase represents the net assets acquired from this transaction that exceeded the $954,000 total purchase price.

See Note 2 - Business Combination Achieved in Stages, of the consolidated financial statements and see also the section titled “Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION – 2021 compared with 2020 – Segment Analysis – Mattress Fabrics Segment - CLASS International Holdings, Ltd.

(“CIH”) ” of this Form 10-K for further details.

The gain from bargain purchase represents the net assets acquired from this transaction that exceeded the fair value of our previously held 50% ownership interest of $1.7 million and the $954,000 total purchase price for the remaining 50% ownership interest.

See Note 2 of the consolidated financial statements for further details.

Other Expense

In accordance with ASC Topic 830 Foreign Currency Matters , management assesses certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate.

Management is required to assess certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate.

Based on our assessments, the U.S.

dollar was determined to be the functional currency of our operations located in China and Canada.

The increase in other expense during fiscal 2021, as compared with fiscal 2020, is due mostly to significantly more unfavorable currency exchange rates associated with our operations located in China that were applied against balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S.

The decrease in other expense during fiscal 2022, as compared with fiscal 2021, is due mostly to more favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S.

dollar financial reporting amounts.

During fiscal 2021, we reported foreign exchange rate losses totaling $1.4 million, compared with foreign exchange rate gains totaling $42,000 reported during fiscal 2020.

The $1.4 million foreign exchange rate losses incurred during fiscal 2021, which were mostly non-cash, were mostly offset by $1.3 million in income tax benefits, which reduced our income tax payments.

During fiscal 2022, we reported foreign exchange rate losses associated with our China operations of $104,000, a decrease of $1.3 million as compared to $1.4 million in foreign exchange rate losses reported during fiscal 2021.

This decrease of $1.3 million was partially offset by a $450,000 realized loss on the sale of our remaining short-term available for sale and held-to-maturity investments that mostly occurred during the fourth quarter of fiscal 2021.

The significant $1.4 million foreign exchange rate loss incurred during fiscal 2021, which was mostly non-cash, was mostly offset by $1.3 million in income tax benefits, which reduced our income tax payments.

These income tax benefits were associated with income tax deductible foreign exchange rate losses based on more unfavorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S.

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dollar denominated balance sheet accounts associated with our operations located in China are income tax deductible, as we incur income tax expense and pay income taxes in China’s local currency.

See the Income Taxes – Effective Income Tax Rate & Income Tax Expense section below for further details on the income tax effects of the foreign exchange rate losses (gains) associated with our China operations on our consolidated effective income tax rate for fiscal 2021 and 2020, respectively.

Effective Income Tax Rate & Income Tax Expense

The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:

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withholding taxes associated with foreign tax jurisdictions

income tax effects of impairment of nondeductible goodwill

net deferred income tax assets, partially offset by a $3.6 million non-cash income tax benefit to re-establish certain U.S.

Federal net operating loss carryforwards in connection with U.S.

Treasury regulations enacted during the first quarter of fiscal 2021 regarding the Global Intangible Low Taxed Income (“GILTI”) tax provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”).

Income tax during fiscal 2020 included $1.5 million of GILTI tax that did not recur in fiscal 2021 due to the recent change in the GILTI tax regulations noted above.

Pursuant to the TJCA, GILTI became effective during our fiscal 2019.

Our policy to account for GILTI is to expense this tax in the period incurred.

As a result, we recorded an income tax charge totaling $1.9 million during fiscal 2020.

uncertain income tax positions

state income taxes

stock-based compensation

gain on bargain purchase

Consolidated effective income tax rate (1)

Our consolidated effective income tax rates for all fiscal years presented were negatively affected by the mix of consolidated (loss) income before income taxes, as significant pre-tax losses have been incurred by our U.S.

operations and almost all of our taxable income was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.

As a result, income tax expense incurred stems from taxable income from our foreign jurisdictions that exceeds our consolidated (loss) income before income taxes.

Accordingly, the extent of the fluctuations in our consolidated effective income tax rates is dependent on the extent to which income tax expense incurred from our foreign operations compares with consolidated (loss) income before income taxes, which has been significantly lowered by our U.S.

“Other” for all periods presented represents miscellaneous adjustments that pertain to U.S permanent differences such as meals and entertainment and income tax provision to return adjustments.

Effective July 20, 2020, the U.S.

Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the TCJA.

With the enactment of these final regulations, we are now eligible for an exclusion from GILTI since we meet the provisions for the GILTI High-Tax exception included in the final regulations.

In addition, the enactment of the new regulations and our eligibility for the GILTI High-Tax exception are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years.

As a result of the newly enacted regulations, we recorded an income tax benefit of $3.6 million resulting from the re-establishment of certain U.S.

Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”).

With the enactment of these final regulations, we became eligible for an exclusion from GILTI if we meet the provisions of the GILTI High-Tax exception included in these final regulations on a jurisdiction-by-jurisdiction basis.

To meet the provisions of the GILTI High-Tax exception, the tested foreign entity’s effective income tax rate related to current year’s earnings must be higher than 90% of the U.S.

Federal income tax rate of 21% (i.e.,18.9%).

In addition, the enactment of the new regulations and the provisions for the GILTI High-Tax exception were retroactive to the original enactment of the GILTI tax provision, which included our 2019 and 2020 fiscal years.

Since we met the requirements for the GILTI High-Tax exception for our 2019 and 2020 fiscal years, we recorded a non-cash income tax benefit of $3.6 million resulting from the re-establishment of certain U.S.

federal net operating loss carryforwards.

This $3.6 million income tax benefit was recorded as a discrete event in which its full income tax effects were recorded during the first quarter of fiscal 2021.

We did not meet the GILTI High-Tax exception for the 2021 tax year regarding our operations located in China.

This was due primarily to significant income tax deductible foreign exchange losses that significantly lowered income tax expense associated with current year’s earnings.

As a result, the current effective income tax rate was lower than the required 18.9% current effective income tax rate to meet the GILTI High-Tax exception.

Consequently, we incurred a non-cash income tax charge of $1.8 million, which charge was fully offset by a $1.8 million non-cash income tax benefit due to a corresponding reversal of our full valuation allowance associated with our U.S.

net deferred income tax assets.

We do not expect to meet the GILTI High-Tax exception for the 2022 tax year regarding our foreign operations located in Canada and Haiti.

With regard to Canada, we placed several significant capital projects into service during fiscal 2022, and therefore, are eligible for a significant amount of deductible accelerated depreciation.

As a result, our current year’s income tax expense is much lower than prior fiscal years, and therefore, our current effective income tax rate is expected to be lower than the required 18.9% current effective income tax rate to meet the GILTI High-Tax exception.

For our operations in Haiti, taxable income or losses are not subject to income tax, as we are in an economic zone that permits a 0% income tax rate for the first fifteen years of operations, for which we have ten years remaining.

Since our operations located in Haiti are not subject to income tax, our projected current effective income tax rate of 0% will be lower than the required 18.9% current effective income tax rate to meet the GILTI High-Tax exception.

Although our operations located in Canada and Haiti did not meet the GILTI High-Tax exception, we did not incur any GILTI tax for the 2022 tax year, as the losses subject to GILTI tax from our Haitian operations exceeded the income subject to GILTI tax from our Canadian operation.

Deferred Income Taxes – Valuation Allowance

In accordance with ASC Topic 740, we evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required.

ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified.

We evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required.

We assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified.

Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.

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taxable income during fiscal 2019 and 2020 that offset our U.S.

pre-tax losses during such years, and which offset is now reversed as a result of the retroactivity of the new GILTI regulations.

pre-tax losses during such years, and which offset was reversed because of the retroactivity of the new GILTI regulations.

Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S.

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As of May 1, 2022, we evaluated the realizability of our U.S.

net deferred income tax assets to determine if a full valuation allowance was required.

Based on our assessment, we have a recent history of significant cumulative U.S.

taxable losses, and we have experienced U.S.

net deferred income tax assets to determine if a full valuation allowance was still required.

Based on our assessment, we determined we still have a recent history of significant cumulative U.S.

taxable losses, in that we experienced U.S.

taxable losses during each of the last three fiscal years.

As a result of the significant weight of this negative evidence, we believe it

is more likely than not that our U.S.

In addition, we are currently expecting U.S.

taxable losses to continue into fiscal 2023.

As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S.

net deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S.

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Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries

In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S.

parent company.

We assess (i) whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S.

parent company, and (ii) if we are required to a record a deferred income tax liability for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely.

As of May 1, 2022, we assessed the liquidity requirements of our U.S.

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Uncertainty in Income Taxes

In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.

An unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the end of the reporting period, if the position is effectively settled through examination, negotiation, or litigation, or if the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.

If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.

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At this time, significant change associated with this income tax benefit is not expected within the next fiscal year.

federal income tax returns filed by us remain subject to examination for income tax years 2017 and subsequent.

federal and state income tax returns filed by us remain subject to examination for income tax years 2019 and subsequent.

Canadian federal income tax returns filed by us remain subject to examination for income tax years 2018 and subsequent.

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(dollars in thousands)

United States Federal - AMT credit refunds

United States Federal - Alternative Minimum Tax

(AMT) credit refunds (1)

United States Federal - transition tax

Alternative Minimum Tax (AMT)

In accordance with the TCJA, corporate taxpayers were eligible to treat prior AMT credit carryforwards as refundable.

Accordingly, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable, and as a result, 50% of the $1.5 million refundable balance was expected to be received in each of our fiscal years 2021 and 2022, respectively.

We received our first 50% installment totaling $746,000 during the first quarter of fiscal 2021.

In accordance with the CARES Act, 100% of AMT credit carryforwards for tax years beginning in the 2019 tax year were immediately refundable.

Accordingly, we claimed credit for the remaining 50% installment of our refundable AMT credit carryforward in May 2020.

We received our remaining 50% installment plus interest totaling $764,000 during the second quarter of fiscal 2021.

China - Income Taxes

China - Withholding Taxes Associated with Earnings

and Profits Distribution to U.S.

Canada - Income Taxes

In accordance with the provisions of the TCJA, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable.

We received refunds totaling $1.5 million in two separate installments totaling $746,000 and $764,000 during the first and second quarters of fiscal 2021, respectively.

Future Liquidity

Although we will pay income taxes associated with our subsidiaries located in China and Canada, we currently expect U.S.

cash taxes to be minimal during fiscal 2022.

Pursuant to the TCJA, we elected to pay the U.S.

Federal transition tax in annual installments over a period of eight years, of which $266,000 is due on August 15, 2021.

Additionally, we currently we do not expect to pay any income taxes in the U.S.

on a cash basis during fiscal 2022 due to:

(i) our exclusion from GILTI tax as a result of U.S.

Treasury regulations finalized and enacted on July 20, 2020;

(ii) the immediate expensing of U.S.

capital expenditures, and (iii) our existing U.S.

Federal net operating loss carryforwards totaling $19.4 million.

We are currently projecting annual cash income tax payments of approximately $3.2 million for fiscal 2023, compared with $3.1 million and $3.0 million for fiscal 2022 and 2021, respectively.

Our estimated cash income tax payments for fiscal 2023 are management’s current projections only and can be affected by actual earnings from our foreign subsidiaries located in China and Canada versus annual projections, changes in the foreign exchange rates associated with our operations located in China in relation to the U.S.

dollar, and the timing of when significant capital projects will be placed into service, which determines the deductibility of accelerated depreciation.

Additionally, we currently do not expect to incur any income taxes in the U.S.

on a cash basis during fiscal 2023 due to (i) the immediate expensing of U.S.

capital expenditures, and (ii) our existing U.S.

federal net operating loss carryforwards.

In accordance with the TCJA, we will be required to pay annual U.S.

federal transition tax payments as follows:

FY 2023 - $264,000;

FY 2024 - $499,000;

FY 2025- $665,000;

and FY 2026 - $831,000.

2021 compared with 2020

For a comparison of our results of operations for the fiscal years ended May 3, 2020, and April 28, 2019, see “Part II, Item 7.

For a comparison of our results of operations for the fiscal years ended May 2, 2021, and May 3, 2020, see “Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended May 2, 2021, filed with the SEC on July 16, 2021.

Liquidity and Capital Resources

Currently, our sources of liquidity include cash and cash equivalents, short-term investments (available for sale), cash flow from operations, and amounts available under our revolving credit lines.

Currently, our sources of liquidity include cash and cash equivalents, cash flow from operations, and amounts available under our revolving credit lines.

These sources have been adequate for day-to-day operations, capital expenditures, debt payments, common stock repurchases, and dividend payments.

We believe our cash and cash equivalents and short-term investments (available for sale) of $42.6 million as of May 2, 2021, and our cash flow from operations, will be sufficient to fund our business needs, commitments, and contractual obligations.

We believe our cash and cash equivalents of $14.6 million as of May 1, 2022, cash flow from operations, and the current availability under our revolving credit lines will be sufficient to fund our foreseeable business needs, commitments, and contractual obligations.

As of May 1, 2022, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively “cash and investments’) totaled $14.6 million compared with $46.9 million as of May 2, 2021.