# Culp Inc: Form 10-Q for the period ended Oct 29, 2023

- Company: [Culp Inc](/companies/culp.md) (CIK 723603)
- Form: 10-Q
- Filed: 2023-12-08
- Accepted by EDGAR: Dec 8, 2023, 10:03 ET
- Period: 2023-10-29
- Accession: 0000950170-23-068943
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/723603/000095017023068943/culp-20231029.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/723603/000095017023068943/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-10-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-31 to 2023-10-29 | $58.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-05-01 to 2023-10-29 | $115.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-31 to 2023-10-29 | $50.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-05-01 to 2023-10-29 | $100.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-31 to 2023-10-29 | $8.0m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-05-01 to 2023-10-29 | $15.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-31 to 2023-10-29 | $10.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-05-01 to 2023-10-29 | $19.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-31 to 2023-10-29 | −$2.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-05-01 to 2023-10-29 | −$5.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-31 to 2023-10-29 | $516.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-05-01 to 2023-10-29 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-31 to 2023-10-29 | −$2.4m | us-gaap:ProfitLoss |
| Net income | 6 months, 2023-05-01 to 2023-10-29 | −$5.8m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-07-31 to 2023-10-29 | −$0.19 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-05-01 to 2023-10-29 | −$0.47 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-31 to 2023-10-29 | −$0.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-05-01 to 2023-10-29 | −$0.47 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-31 to 2023-10-29 | 12,456,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-05-01 to 2023-10-29 | 12,394,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-05-01 to 2023-10-29 | −$4.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-05-01 to 2023-10-29 | $2.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2023-10-29 | $15.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-10-29 | $88.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-10-29 | $142.2m | us-gaap:Assets |
| Current liabilities | at 2023-10-29 | $41.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-10-29 | $58.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-10-29 | $83.6m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 59,562 characters.

The following analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes and other exhibits included elsewhere in this report.

### General

Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. The six months ended October 29, 2023, and October 30, 2022, both represent 26-week periods.

Our operations are classified into two business segments: mattress fabrics and upholstery fabrics.

#### Mattress Fabrics

The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. Currently, we have mattress fabric operations located in Stokesdale, NC, Quebec, Canada, and Ouanaminthe, Haiti.

#### Upholstery Fabrics

The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. Currently, we have upholstery fabric operations located in Shanghai, China, and Burlington, NC. During the third quarter of fiscal 2022, we commenced operation of a new leased facility located in Ouanaminthe, Haiti, dedicated to the production of cut and sewn upholstery kits. However, due to a decline in demand, we (i) terminated the agreement to lease this new facility during the third quarter of fiscal 2023, (ii) relocated a scaled-down upholstery cut and sew operation into our existing mattress cover facility located in Ouanaminthe, Haiti, during the fourth quarter of fiscal 2023, and (iii) discontinued the production of cut and sewn upholstery kits in Haiti in the latter part of the first quarter of fiscal 2024. (See Note 9 to the consolidated financial statements for further details.)

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 for 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.

### Executive Summary

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 for 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

*(dollars in thousands)*

|  | Three Months Ended October 29, 2023 | October 30, 2022 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $58,725 | $58,381 | 0.6% |
| Gross profit (loss) | 7,950 | (2,213) | (459.2)% |
| Gross margin | 13.5% | (3.8)% | 1733bp |
| Selling, general, and administrative expenses | 10,045 | 9,103 | 10.3% |
| Restructuring expense | 144 | 615 | (76.6)% |
| Loss from operations | (2,239) | (11,931) | (81.2)% |
| Operating margin | (3.8)% | (20.4)% | 1662bp |
| Loss before income taxes | (1,908) | (11,023) | (82.7)% |
| Income tax expense | 516 | 1,150 | (55.1)% |
| Net loss | (2,424) | (12,173) | (80.1)% |

I-32

*(dollars in thousands)*

|  | Six Months Ended October 29, 2023 | October 30, 2022 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $115,387 | $120,985 | (4.6)% |
| Gross profit | 15,035 | 1,914 | 685.5% |
| Gross margin | 13.0% | 1.6% | 1145bp |
| Selling, general, and administrative expenses | 19,874 | 17,968 | 10.6% |
| Restructuring expense | 482 | 615 | (21.6)% |
| Loss from operations | (5,321) | (16,669) | (68.1)% |
| Operating margin | (4.6)% | (13.8)% | 917bp |
| Loss before income taxes | (4,549) | (15,826) | (71.3)% |
| Income tax expense | 1,217 | 2,046 | (40.5)% |
| Net loss | (5,766) | (17,872) | (67.7)% |

#### Net Sales

Overall, our net sales for the second quarter of fiscal 2024 increased by 0.6% compared with the same period a year ago, with mattress fabrics sales increasing 19.6% and upholstery fabrics sales decreasing 14.9%. Our net sales for the first half of fiscal 2024 decreased by 4.6% compared with the same period a year ago, with mattress fabrics sales increasing 9.0% and upholstery fabrics sales decreasing 16.2%.

The increase in net sales in our mattress fabrics segment for both the second quarter and the first half of fiscal 2024 was primarily driven by new fabric and sewn cover placements that are priced in line with current costs, and, to a lesser extent, sku rationalization and the re-pricing of some underperforming skus to reflect current costs, resulting in higher average selling prices overall. The decrease in net sales for our upholstery fabrics segment for both the second quarter and the first half of fiscal 2024 reflects reduced demand for our residential upholstery fabrics products, driven by a slowdown in new retail business in the residential home furnishings industry. The decrease in upholstery fabrics net sales for the first half of fiscal 2024 was partially offset by higher sales in our hospitality/contract fabric business, as compared to the prior-year period.

See the Segment Analysis section below for further details.

#### Loss Before Income Taxes

Overall, our loss before income taxes for the second quarter of fiscal 2024 was $(1.9) million, compared with loss before income taxes of $(11.0) million for the prior-year period, while our loss before income taxes for the first six months of fiscal 2024 was $(4.5) million, compared with loss before income taxes of $(15.8) for the prior-year period.

Operating performance for both the second quarter and the first half of fiscal 2024, as compared to the prior-year periods, was positively affected by better inventory management; higher sales and better pricing and margins for the mattress fabrics segment; fixed cost savings in the upholstery fabrics segment; improved operating efficiencies in both segments; and a more favorable foreign exchange rate associated with our upholstery fabric operations in China. Operating performance for the first half of fiscal 2024 was also positively affected by a greater contribution from the hospitality business and Read in our upholstery fabrics segment. These factors were partially offset by lower residential upholstery fabric sales and higher SG&A expense during both periods. Notably, operating performance for both the second quarter and the first half of fiscal 2023 was negatively affected by inventory impairment charges and inventory closeout sales for our mattress fabrics segment; higher than normal markdowns of inventory for our upholstery fabrics segment; and restructuring and related charges associated with our upholstery fabrics segment.

See the Segment Analysis section below for further details.

#### Income Taxes

We recorded income tax expense of $1.2 million or (26.8%) of loss before income taxes for the six-month period ending October 29, 2023, compared with income tax expense of $2.0 million or (12.9%) of loss before income taxes, for the six-month period ending October 30, 2022.

Our consolidated effective income tax rates during the first half of fiscal 2024 and the first half of fiscal 2023 were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems from our operations located in China and Canada, which have higher income tax rates than the U.S. In addition, during the first half of fiscal 2024 and fiscal 2023, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S. net deferred income tax assets. However, the income tax charge associated with the full valuation allowance applied against our U.S. net deferred income tax assets was lower during the first half of fiscal 2024 compared with the first half of fiscal 2023, as our $(11.8) million U.S. pre-tax loss incurred during the first half of fiscal 2024 was significantly lower than the $(20.7) million U.S. pre-tax loss incurred during the first half of fiscal 2023.

During the first half of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $(4.5) million, compared with $(15.8) million during the first half of fiscal 2023. As a result, the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first half of fiscal 2024, as compared with the first half of fiscal 2023.

Refer to Note 14 of the consolidated financial statements for further details regarding our provision for income taxes.

#### Liquidity

As of October 29, 2023, our cash and cash equivalents (collectively, “cash”) totaled $15.2 million, a decrease of $5.8 million compared with cash of $21.0 million as of April 30, 2023. This decrease was mostly due to net cash used in operating activities totaling $(4.5) million and capital expenditures related to our mattress fabrics segment totaling $(2.0) million, partially offset by proceeds from the sale of our rabbi trust investments totaling $986,000 to fund withdrawals from our deferred compensation plan for certain retired employees.

Our net cash used in operating activities was $(4.5) million during the first half of fiscal 2024, a decrease of $10.6 million compared with net cash provided by operating activities of $6.2 million during the first half of fiscal 2023. This trend mostly reflects (i) a significant increase in accounts payable during the first half of fiscal 2023 primarily related to our upholstery fabrics operations located in China, as the mandated COVID-19 related shutdowns were lifted during this period, and which increase in accounts payable did not recur during the first half of fiscal 2024; (ii) a significant decrease in inventory during the first half of fiscal 2023 due to a significant (23.2%) decline in net sales during the period, which significant decline did not recur during the first half of fiscal 2024; (iii) annual incentive payments made during the first quarter of fiscal 2024, which payments did not occur during the first quarter of fiscal 2023; (iv) payments to certain retired employees totaling $986,000 for withdrawals from our deferred compensation plan during the first half of fiscal 2024; partially offset by (v) an increase in cash earnings during the first half of fiscal 2024 compared with the first half of fiscal 2023.

As of October 29, 2023, there were no outstanding borrowings under our lines of credit.

### Segment Analysis

#### Mattress Fabrics Segment

*(dollars in thousands)*

|  | Three Months Ended October 29, 2023 | October 30, 2022 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $31,377 | $26,230 | 19.6% |
| Gross profit (loss) | 2,483 | (6,057) | (141.0)% |
| Gross profit margin | 7.9% | (23.1)% | 3101bp |
| Selling, general, and administrative expenses | 3,419 | 2,945 | 16.1% |
| Loss from operations | (936) | (9,002) | (89.6)% |
| Operating margin | (3.0)% | (34.3)% | 3134bp |

*(dollars in thousands)*

|  | Six Months Ended October 29, 2023 | October 30, 2022 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $60,599 | $55,602 | 9.0% |
| Gross profit (loss) | 4,477 | (6,093) | (173.5)% |
| Gross margin | 7.4% | (11.0)% | 1835bp |
| Selling, general, and administrative expenses | 6,811 | 5,829 | 16.8% |
| Loss from operations | (2,334) | (11,922) | (80.4)% |
| Operating margin | (3.9)% | (21.4)% | 1759bp |

I-34

#### Net Sales

Mattress fabrics sales increased 19.6% in the second quarter of fiscal 2024 compared to the prior-year period. Mattress fabrics sales increased 9.0% in the first half of fiscal 2024 compared to the first half of fiscal 2023.

The increase in net sales in our mattress fabrics segment for both the second quarter and the first six months of fiscal 2024 was primarily driven by new fabric and sewn cover placements that are priced in line with current raw material and operational costs, and, to a lesser extent, sku rationalization and the re-pricing of some underperforming skus to reflect current costs, resulting in higher average selling prices as compared to historical average selling prices. While the domestic mattress industry remains pressured by ongoing demand softness, we believe we are making gains with customers through new program rollouts.

During the second quarter, we maintained our focus on executing our product-driven strategy with an ongoing emphasis on innovation, design creativity, and customer relationships. The strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey continued to support the evolving needs of our mattress fabrics and cover customers during the period. We also continued to diligently manage the aspects of our business we can control, taking necessary steps to withstand current market conditions and position our business for renewed growth. This includes the ongoing execution of a comprehensive business transformation plan focused on long-term improvement in areas that include quality, sales, marketing, and operational processes; supply chain optimization; employee engagement; and organizational structure. With new leadership and a restructured management team, we believe this plan will lay the foundation for steady, sequential improvement in this business, although the speed of this improvement will be affected by overall industry trends.

Looking ahead, we expect the current macro-economic environment will continue to affect consumer spending trends for some time, resulting in ongoing industry softness that may reduce demand for our mattress fabrics and cover products. We expect these conditions are likely to affect our results through at least the third quarter of fiscal 2024, although we believe we will mitigate this pressure to some extent by the continued rollout of new programs priced in line with current costs, along with opportunities to make additional gains with customers. Additionally, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East, as well as possible economic and health effects from additional surges in the coronavirus, remain unknown and depend on factors beyond our knowledge or control. These situations could cause disruption that could adversely affect our operations and financial performance.

#### Gross Profit, Selling, General & Administrative Expenses, and Loss from Operations

The decrease in this segment’s operating loss during both the second quarter and the first half of fiscal 2024, as compared to the prior-year periods (which were affected by certain inventory impairment charges and losses from inventory close out sales), was primarily due to better inventory management; higher sales; better pricing and margins (driven mostly by new product placements priced in line with current costs, and, to a lesser extent, sku rationalization and the re-pricing underperforming skus to reflect current costs); and improved operating efficiencies. These factors were partially offset by higher SG&A expense during both periods, which was due mostly to higher incentive compensation expense, an increase in provision for bad debts (reflecting current unfavorable macro-economic conditions relating to bedding products), and an increase in sampling expense driven by new product roll outs.

We expect the ongoing industry softness affecting sales volumes will affect profitability through at least the third quarter of fiscal 2024, although we believe these headwinds will be mitigated to some extent by our ongoing efforts to improve operational efficiencies and control internal costs, as well as our continued roll out of new products priced in line with current costs. We will consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, as well as additional reasonable pricing actions as competitive conditions permit to further mitigate and manage inflation.

#### Segment assets

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

*(dollars in thousands)*

|  | October 29, 2023 | October 30, 2022 | April 30, 2023 |
| --- | ---: | ---: | ---: |
| Accounts receivable | $11,303 | $8,700 | $12,396 |
| Inventory | 27,195 | 30,300 | 25,674 |
| Property, plant & equipment | 32,862 | 35,853 | 33,749 |
| Right of use assets | 1,969 | 2,087 | 2,308 |
|  | $73,329 | $76,940 | $74,127 |

Refer to Note 13 of the consolidated financial statements for disclosures regarding determination of our segment assets.

#### Accounts Receivable

As of October 29, 2023, accounts receivable increased by $2.6 million, or 29.9%, compared with October 30, 2022. This increase reflects the increase in net sales during the second quarter of fiscal 2024 compared with fiscal 2023, as described in the *Net Sales* section above. In addition, we experienced slower cash collections as customers did not take advantage of cash discounts as much during the second quarter of fiscal 2024, as compared with the second quarter of fiscal 2023. This led to an increase in days' sales outstanding to 33 days for the second quarter of fiscal 2024, as compared with 30 days for the second quarter of fiscal 2023.

As of October 29, 2023, accounts receivable decreased by $1.1 million, or 8.8%, compared with April 30, 2023. This decrease primarily reflects faster cash collections, as we had a mix of higher sales to customers with longer credit terms during the fourth quarter of fiscal 2023, as compared with the second quarter of fiscal 2024. As a result, days’ sales outstanding decreased to 33 days during the second quarter of fiscal 2024, a decrease from 37 days during the fourth quarter of fiscal 2023. The decrease in accounts receivable due to faster cash collections was partially offset by an increase in net sales during the second quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales for the second quarter of fiscal 2024 were $31.4 million, an increase of 2.2% compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

#### Inventory

As of October 29, 2023, inventory decreased by $3.1 million, or 10.2%, compared with October 30, 2022. Although net sales increased by 19.6% during the second quarter of fiscal 2024, as compared with the second quarter of fiscal 2023, inventory decreased during the second quarter of fiscal 2024, as compared with the prior-year period, due to improved raw materials inventory management in relation to current customer demand trends and promotional programs to reduce aged raw materials and finished goods.

As of October 29, 2023, inventory increased by $1.5 million, or 5.9%, compared with April 30, 2023. This trend reflects an increase in net sales during the second quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales during the second quarter of fiscal 2024 were $31.4 million, an increase of 2.2% compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

Inventory turns were 4.5 for the second quarter of fiscal 2024, compared with 3.9 for the second quarter of fiscal 2023 and 4.4 for the fourth quarter of fiscal 2023.

#### Property, Plant, & Equipment

As of October 29, 2023, property, plant, and equipment has steadily decreased compared to October 30, 2022, and April 30, 2023, due to reduced capital spending stemming from the current and expected unfavorable macro-economic conditions and our strategic focus on limited capital projects that will increase efficiencies and improve the quality of our products.

The $32.9 million as of October 29, 2023, represents property, plant, and equipment of $22.2 million, $10.0 million, and $661,000 located in the U.S., Canada, and Haiti, respectively. The $35.9 million as of October 30, 2022, represents property, plant, and equipment of $23.8 million, $11.4 million, and $679,000 located in the U.S., Canada, and Haiti, respectively. The $33.7 million as of April 30, 2023, represents property, plant, and equipment of $22.7 million, $10.4 million, and $608,000 located in the U.S., Canada, and Haiti, respectively.

#### Right of Use Assets

As of October 29, 2023, right of use assets have decreased due to rent expense incurred over the terms of existing lease agreements.

The $2.0 million as of October 29, 2023, represents right of use assets of $1.3 million and $663,000 located in Haiti and Canada, respectively. The $2.1 million as of October 30, 2022, represents right of use assets of $1.8 million, $167,000 million, and $164,000 located in Haiti, Canada, and the U.S., respectively. The $2.3 million as of April 30, 2023, represents right of use assets of $1.5 million and $776,000 located in Haiti and Canada, respectively.

#### Upholstery Fabrics Segment

#### Net Sales

*(dollars in thousands)*

|  | Three Months Ended October 29, 2023 |  | October 30, 2022 |  | % Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Non-U.S. Produced | $24,129 | 88% | $29,679 | 92% | (18.7)% |
| U.S. Produced | 3,219 | 12% | 2,472 | 8% | 30.2% |
| Total | $27,348 | 100% | $32,151 | 100% | (14.9)% |

*(dollars in thousands)*

|  | Six Months Ended October 29, 2023 |  | October 30, 2022 |  | % Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Non-U.S. Produced | $48,762 | 89% | $61,119 | 93% | (20.2)% |
| U.S. Produced | 6,026 | 11% | 4,264 | 7% | 41.3% |
| Total | $54,788 | 100% | $65,383 | 100% | (16.2)% |

Upholstery fabrics sales decreased 14.9% in the second quarter of fiscal 2024 compared to the prior-year period. Upholstery fabrics sales decreased 16.2% in the first half of fiscal 2024 compared to the first half of fiscal 2023.

The decrease in upholstery fabrics net sales in both the second quarter and the first six months of fiscal 2024 reflects ongoing softness in the residential home furnishings industry, where demand remains pressured by a challenging macro-economic environment. The decrease in residential fabric sales during the first six months of fiscal 2024 was partially mitigated by higher sales in our hospitality/contract fabric business during the period, as compared to the prior-year period.

Looking ahead, we expect that softness in the residential home furnishings industry may affect demand for our residential business for some period of time. Despite this challenge, we believe our business is well positioned for the long term with our product-driven strategy and innovative product offerings, including our popular portfolio of LiveSmart® performance products, as well as our flexible Asian platform and our long-term supplier relationships.

Notably, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East, as well as the economic and health effects from possible additional surges in the coronavirus, remain unknown and depend on factors beyond our control. At this time, we cannot reasonably estimate the impact on our upholstery fabrics segment, but we note that if conditions worsen in any of these situations, including additional COVID-related shutdowns of our China operations, the impact on our operations, and/or on our suppliers, customers, consumers, and the global economy, could adversely affect our financial performance.

#### Gross Profit, Selling, General & Administrative Expenses, and Income from Operations

*(dollars in thousands)*

|  | Three Months Ended October 29, 2023 | October 30, 2022 | Change |
| --- | ---: | ---: | ---: |
| Gross profit | 5,389 | 3,942 | 36.7% |
| Gross margin | 19.7% | 12.3% | 741bp |
| Selling, general, and administrative expenses | 3,998 | 3,680 | 8.6% |
| Restructuring expense | 144 | 615 | (76.6)% |
| Income from operations | 1,391 | 262 | 430.9% |
| Operating margin | 5.1% | 0.8% | 429bp |

*(dollars in thousands)*

|  | Six Months Ended October 29, 2023 | October 30, 2022 | Change |
| --- | ---: | ---: | ---: |
| Gross profit | 10,659 | 8,105 | 31.5% |
| Gross margin | 19.5% | 12.4% | 705bp |
| Selling, general, and administrative expenses | 7,939 | 7,302 | 8.7% |
| Restructuring expense | 482 | 615 | (21.6)% |
| Income from operations | 2,720 | 803 | 238.7% |
| Operating margin | 5.0% | 1.2% | 376bp |

The increase in upholstery fabrics profitability for both the second quarter and the first six months of fiscal 2024, as compared to the prior-year periods (which were negatively affected by higher than normal inventory markdowns), primarily reflects better inventory management; lower fixed costs resulting from the previous restructuring of the upholstery fabrics segment's cut and sew platforms; lower freight costs; and a more favorable foreign exchange rate associated with this segment's operations in China.

Operating performance for the first half of fiscal 2024 was also positively affected by a greater contribution from hospitality fabrics and Read in our upholstery fabrics segment. These factors were partially offset by lower residential fabric sales and higher SG&A expense during both periods. The increase in SG&A expense was mostly due to wage inflation, higher professional and consulting fees, higher travel and tradeshow costs as business travel and industry tradeshows have resumed, and an increase in sampling expense driven by new product roll outs.

Looking ahead, the residential home furnishings industry remains under pressure due to shifting consumer spending trends and inflation affecting overall consumer spending. As a result, we expect lower sales volumes in our residential business will continue to affect our profitability. However, for fiscal 2024, we expect to benefit from (i) our strategic decision to discontinue production of cut and sewn upholstery kits in Haiti; (ii) improved inventory management; (iii) a solid hospitality/contract fabric business; and (iv) improvement in our Read business. We will also continue our ongoing cost reduction efforts and will consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, while maintaining our ability to service our customers.

#### Restructuring Activities

#### Ouanaminthe, Haiti

During the third quarter of fiscal 2023, Culp Upholstery Fabrics Haiti, Ltd. ("CUF Haiti") entered into an agreement to terminate a lease associated with a facility located in Ouanaminthe, Haiti, and, in turn, moved its production of upholstery cut and sew kits to an existing facility leased by Culp Home Fashions Haiti, Ltd. (“CHF Haiti”) during the fourth quarter of fiscal 2023. Both CUF Haiti and CHF Haiti are indirect wholly-owned subsidiaries of the company. During the first quarter of fiscal 2024, demand for upholstery cut and sewn kits declined more than previously anticipated, resulting in the strategic action to discontinue the production of upholstery cut and sew kits in Haiti.

The following summarizes our restructuring expense and restructuring related (credits) charges from the restructuring activities associated with our upholstery fabrics operations located in Haiti for the three months and six months ending October 29, 2023:

*(dollars in thousands)*

|  | Three Months Ended October 29, 2023 | Six Months Ended October 29, 2023 |
| --- | ---: | ---: |
| Employee termination benefits | $2 | $103 |
| Impairment loss - equipment | 142 | 379 |
| (Gain) loss on disposal and markdowns of inventory | (78) | 101 |
| Restructuring expense and restructuring related (credits) charges (1) (2) | $66 | $583 |

(1) Of the total $66,000, $144,000 and $(78,000) were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ending October 29, 2023.

(2) Of the total $583,000, $482,000 and $101,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the six-month period ending October 29, 2023.

#### Shanghai, China

During the second quarter of fiscal 2023, we closed our cut and sew upholstery fabrics operation located in Shanghai, China, which included the termination of an agreement to lease a building. This strategic action, along with the further use of our Asian supply chain, was taken in order to adjust our operating costs to better align with the declining consumer demand for cut and sewn products.

The following summarizes our restructuring expense and restructuring related charges from the restructuring activities associated with our upholstery fabrics operations located in China for the three months and six months ending October 29, 2022:

*(dollars in thousands)*

|  | Three and Six Months Ended October 30, 2022 |
| --- | ---: |
| Employee termination benefits | $468 |
| Loss on disposal and markdowns of inventory | 98 |
| Loss on disposal of equipment | 80 |
| Lease termination costs | 47 |
| Other associated costs | 20 |
| Restructuring expense and restructuring related charges (1) | $713 |

I-38

(1) Of the total $713,000, $615,000 and $98,000 were recorded to restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month and six-month periods ending October 30, 2022.

#### Segment Assets

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

*(dollars in thousands)*

|  | October 29, 2023 | October 30, 2022 | April 30, 2023 |
| --- | ---: | ---: | ---: |
| Accounts receivable | $11,733 | $13,743 | $12,382 |
| Inventory | 17,270 | 21,924 | 19,406 |
| Property, plant & equipment | 1,175 | 2,150 | 1,671 |
| Right of use assets | 1,992 | 5,898 | 2,618 |
|  | $32,170 | $43,715 | $36,077 |

Refer to Note 13 of the consolidated financial statements for disclosures regarding determination of our segment assets.

#### Accounts Receivable

As of October 29, 2023, accounts receivable decreased by $2.0 million, or 14.6%, compared with October 30, 2022. This trend mostly reflects the decrease in net sales of 14.9% during the second quarter of fiscal 2024, compared with the second quarter of fiscal 2023, as described in the *Net Sales* section above. Days’ sales outstanding for this segment increased to 36 days for the second quarter of fiscal 2024, as compared with 35 days for the second quarter of fiscal 2023.

As of October 29, 2023, accounts receivable decreased by $649,000, or 5.2%, compared with April 30, 2023. This trend reflects a decrease in net sales of 11.0% during the second quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales for the second quarter of fiscal 2024 were $27.3 million, compared with net sales of $30.7 million during the fourth quarter of fiscal 2023. The decrease in net sales was mostly offset by slower cash collections during the second quarter of fiscal 2024, as compared to the fourth quarter of fiscal 2023, as we had a mix of higher sales volume with customers with shorter credit terms during the fourth quarter of fiscal 2023. This led to an increase in days' sales outstanding to 36 days for the second quarter of fiscal 2024, as compared with 33 days for the fourth quarter of fiscal 2023.

#### Inventory

As of October 29, 2023, inventory decreased by $4.7 million, or 21.2%, compared with October 30, 2022. This trend mostly reflects a decrease in net sales of 14.9% during the second quarter of fiscal 2024, compared with the second quarter of fiscal 2023 (as described in the *Net Sales* section above). In addition, this decrease is also attributable to promotional programs used to reduce aged raw materials and finished goods inventory.

As of October 29, 2023, inventory decreased by $2.1 million, or 11.0%, compared with April 30, 2023. This trend mostly reflects a decrease in net sales of 11.0% during the second quarter of fiscal 2024, compared with the fourth quarter of fiscal 2023. Net sales for the second quarter of fiscal 2024 were $27.3 million, compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.

Inventory turns were 4.4 for the second quarter of fiscal 2024, compared with 3.9 for the second quarter of fiscal 2023 and 4.8 for the fourth quarter of fiscal 2023.

#### Property, Plant, & Equipment

As of October 29, 2023, property, plant, and equipment steadily decreased compared to October 30, 2022, and April 30, 2023, due to (i) impairment charges of $379,000 related to our strategic action to discontinue the production of upholstery cut and sew kits in Ouanaminthe, Haiti, (ii) impairment charges of $80,000 associated with the closure of our cut and sew upholstery fabrics operation located in Shanghai, China, and (iii) a reduction in capital spending as a result of current and expected unfavorable macro-economic conditions.

The $1.2 million as of October 29, 2023, represents property, plant, and equipment of $1.0 million and $140,000 located in the U.S. and China, respectively. The $2.2 million as of October 30, 2022, represents property, plant, and equipment of $1.0 million, $1.0 million, and $137,000 located in the U.S., Haiti, and China, respectively. The $1.7 million as of April 30, 2023, represents property, plant, and equipment of $974,000, $592,000, and $105,000 located in the U.S., Haiti, and China, respectively.

#### Right of Use Assets

As of October 29, 2023, right of use assets decreased compared with October 30, 2022, and April 30, 2023. This decrease mostly resulted from (i) a six-month forgiveness of rent payments associated with COVID-19 relief permitted by the Chinese government for all of our leased facilities located in Shanghai, China, during the second quarter of fiscal 2023; (ii) the termination of a building lease agreement in connection with the exit from our cut and sew upholstery fabrics operation located in Shanghai, China, during the second quarter of fiscal 2023; (iii) the termination of a building lease agreement in connection with the discontinuance of our cut and sew upholstery fabrics operation located in Ouanaminthe, Haiti, during the third quarter of fiscal 2023; and (iv) rent expense incurred over the terms of the existing respective lease agreements.

The $2.0 million as of October 29, 2023, represents right of use assets of $1.2 million and $818,000 located in China and the U.S., respectively. The $5.9 million as of October 30, 2022, represents right of use assets of $2.5 million, $2.0 million, and $1.4 million located in Haiti, China, and the U.S., respectively. The $2.6 million as of April 30, 2023, represents right of use assets of $1.5 million and $1.1 million, located in China and the U.S., respectively.

#### Other Income Statement Categories

*(dollars in thousands)*

|  | Three Months Ended October 29, 2023 | October 30, 2022 | % Change |
| --- | ---: | ---: | ---: |
| SG&A expenses | $10,045 | $9,103 | 10.3% |
| Interest income | 282 | 79 | 257.0% |
| Other income | 49 | 829 | (94.1)% |

*(dollars in thousands)*

|  | Six Months Ended October 29, 2023 | October 30, 2022 | % Change |
| --- | ---: | ---: | ---: |
| SG&A expenses | $19,874 | $17,968 | 10.6% |
| Interest income | 627 | 96 | 553.1% |
| Other income | 145 | 747 | (80.6)% |

#### Selling, General, and Administrative Expenses

The increase in selling, general, and administrative expenses during the second quarter and first half of fiscal 2024, compared with the second quarter and first half of fiscal 2023, is due to a variety of factors, including (i) wage inflation; (ii) higher incentive compensation expense that relates to annual bonuses; (iii) higher professional and consulting fees; (iv) an increase in provision for bad debts reflecting current unfavorable macro-economic conditions relating to furniture and bedding products; and (v) an increase in sampling expense driven by new product roll outs in both business segments.

#### Interest Income

The increase in interest income is due primarily to higher market interest rates during the second quarter and first half of fiscal 2024, as compared with the second quarter and first half of fiscal 2023.

#### Other Income

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 change in other income during the second quarter and first half of fiscal 2024, as compared with the second quarter and first half of fiscal 2023, is due mostly to less 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 second quarter and first half of fiscal 2024, as compared with the second quarter and first half of fiscal 2023. During the second quarter of fiscal 2024, we reported foreign currency exchange gains associated with our operations located in China totaling $228,000, compared with $1.0 million during the second quarter of fiscal 2023. During the first half of fiscal 2024, we reported foreign currency exchange gains associated with our operations located in China totaling $679,000, compared with $1.2 million during the first half of fiscal 2023.

The foreign currency exchange gain totaling $679,000 reported during the first half of fiscal 2024 related to our operations in China, was mostly non-cash, and was partially offset by $452,000 of income tax expense. The income tax expense of $452,000 was associated with taxable foreign currency exchange gains based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S. dollars to determine the corresponding Chinese Renminbi local currency amounts. The foreign currency exchange rate gains incurred on our U.S. dollar denominated balance sheet accounts associated with our operations located in China are considered taxable income, as we incur income tax expense and pay income taxes in China's local currency. The $452,000 of income tax expense represents an increase in our income tax payments and withholding tax payments associated with future earnings and profits that will ultimately be repatriated from our operations located in China to the company's U.S. parent.

#### Income Taxes

#### Effective Income Tax Rate & Income Tax Expense

We recorded income tax expense of $1.2 million, or (26.8%) of loss before income taxes, for the six-month period ending October 29, 2023, compared with income tax expense of $2.0 million, or (12.9%) of loss before income taxes, for the six-month period ending October 30, 2022

Our effective income tax rates for the six-month periods ended October 29, 2023, and October 30, 2022, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. When calculating the annual estimated effective income tax rates for the six-month periods ended October 29, 2023, and October 30, 2022, we were subject to loss limitation rules. These loss limitation rules require any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no income tax benefit could be recognized during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, Canada, and Haiti versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the six-month periods ending October 29, 2023, and October 30, 2022:

|  | October 29, 2023 | October 30, 2022 |
| --- | ---: | ---: |
| U.S. federal income tax rate | 21.0% | 21.0% |
| U.S. valuation allowance | (32.8) | (36.7) |
| Withholding taxes associated with foreign jurisdictions | (9.9) | (3.3) |
| Foreign income tax rate differential | (5.7) | 3.2 |
| Stock-based compensation | (4.2) | (0.6) |
| Tax effects of local currency foreign exchange gains | 5.1 | 4.7 |
| Other | (0.3) | (1.2) |
|  | (26.8%) | (12.9)% |

Our consolidated effective income tax rates during the first half of fiscal 2024 and fiscal 2023 were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems from our operations located in China and Canada, which have higher income tax rates than the U.S. In addition, during the first half of fiscal 2024 and the first half of fiscal 2023, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S. net deferred income tax assets. However, the income tax charge associated with the full valuation allowance applied against our U.S. net deferred income tax assets was lower during the first half of fiscal 2024 compared with the first half of fiscal 2023, as our $(11.8) million U.S. pre-tax loss incurred during the first half of fiscal 2024 was significantly lower than the $(20.7) million U.S. pre-tax loss incurred during the first half of fiscal 2023.

During the first half of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $(4.5) million, compared with $(15.8) million during the first half of fiscal 2023. As a result, the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first half of fiscal 2024, as compared with the first half of fiscal 2023.

#### U.S. Valuation Allowance

We evaluate the realizability of our U.S. net deferred income tax assets 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.

As of October 29, 2023, 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 determined we still have a recent history of significant cumulative U.S. pre-tax losses, in that we experienced U.S. pre-tax losses during each of the last three fiscal years from 2021 through 2023, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2024. As a result of the significant weight of this negative evidence, we believe it is more likely than not that our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.

Based on our assessments as of October 29, 2023, October 30, 2022, and April 30, 2023, valuation allowances against our net deferred income tax assets pertain to the following:

*(dollars in thousands)*

|  | October 29, 2023 | October 30, 2022 | April 30, 2023 |
| --- | ---: | ---: | ---: |
| U.S. federal and state net deferred income tax assets | $17,839 | $13,958 | $16,345 |
| U.S. capital loss carryforward | 2,330 | 2,330 | 2,330 |
|  | $20,169 | $16,288 | $18,675 |

#### Undistributed Earnings

Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with undistributed earnings from our foreign subsidiaries as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively.

#### Uncertain Income Tax Positions

Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively.

#### Income Taxes Paid

The following table sets forth taxes paid by jurisdiction for the six months ended October 29, 2023, and October 30, 2022, respectively:

*(dollars in thousands)*

|  | Six Months Ended October 29, 2023 | Six Months Ended October 30, 2022 |
| --- | ---: | ---: |
| United States Transition Tax Payment | $499 | $265 |
| China Income Taxes, Net of Refunds | 1,278 | 1,286 |
| Canada Income Taxes, Net of Refunds | 336 | 161 |
|  | $2,113 | $1,712 |

#### Future Liquidity

We are currently projecting annual cash income tax payments of approximately $3.2 million for fiscal 2024, compared with $2.3 million for fiscal 2023. Our estimated income tax payments for fiscal 2024 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 China operations in relation to the U.S. dollar; the timing of when we will repatriate earnings and profits from China and Canada; and the timing of when significant capital projects will be placed into service, which determines the deductibility of accelerated depreciation.

Additionally, we currently expect to pay minimal income taxes in the U.S. on a cash basis during fiscal 2024 due to the immediate expensing of U.S. capital expenditures and our existing U.S. federal net operating loss carryforwards that totaled $48.2 million as of April 30, 2023, which are projected to increase as a result of the significant U.S. loss carryforward we expect to generate during fiscal 2024.

As of October 29, 2023, we will be required to pay annual U.S. federal transition tax payments, in accordance with the 2017 Tax Cuts and Jobs Act, as follows: FY 2025 - $665,000; and FY 2026 - $830,000.

### Liquidity and Capital Resources

#### Liquidity

#### Overall

Currently, our sources of liquidity include cash and cash equivalents (collectively, "cash"), cash flow from operations, and amounts available under our revolving credit lines. As of October 29, 2023, we believe our cash of $15.2 million and the current availability under our revolving credit lines totaling $26.2 million (Refer to Note 10 of the consolidated financial statements for further details) will be sufficient to fund our foreseeable business needs, commitments, and contractual obligations.

As of October 29, 2023, our cash totaled $15.2 million, a decrease of $5.8 million compared with cash of $21.0 million as of April 30, 2023. This decrease was mostly due to net cash used in operating activities totaling $(4.5) million and capital expenditures related to our mattress fabrics segment totaling $(2.0) million, partially offset by proceeds from the sale of our rabbi trust investments totaling $986,000 to fund withdrawals from our deferred compensation plan for certain retired employees.

Our net cash used in operating activities was $(4.5) million during the first half of fiscal 2024, a decrease of $10.6 million compared with net cash provided by operating activities of $6.2 million during the first half of fiscal 2023. This trend mostly reflects (i) a significant increase in accounts payable during the first half of fiscal 2023 primarily related to our upholstery fabrics operations located in China, as the mandated COVID-19 related shutdowns were lifted during this period, and which increase in accounts payable did not recur during the first half of fiscal 2024; (ii) a significant decrease in inventory during the first half of fiscal 2023 due to a significant (23.2%) decline in net sales during the period, which significant decline did not recur during the first half of fiscal 2024; (iii) annual incentive payments made during the first quarter of fiscal 2024, which payments did not occur during the first quarter of fiscal 2023; (iv) payments to certain retired employees totaling $986,000 for withdrawals from our deferred compensation plan during the first half of fiscal 2024; partially offset by (v) an increase in cash earnings during the first half of fiscal 2024 compared with the first half of fiscal 2023.

As of October 29, 2023, there were no outstanding borrowings under our lines of credit.

The income taxes we pay also affect our liquidity. See the above section titled “*Income Taxes Paid”* of this Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION for further detail.

Our cash balance may be adversely affected by factors beyond our control, such as (i) recent customer demand trends, (ii) supply chain disruptions, (iii) rising interest rates and inflation, (iv) world events (including wars in Ukraine and the Middle East), and (v) the continuing uncertainty associated with COVID-19. These factors could cause delays in receipt of payment on accounts receivable and could increase cash disbursements due to rising prices.

#### By Geographic Area

A summary of our cash by geographic area follows:

*(dollars in thousands)*

|  | October 29, 2023 | October 30, 2022 | April 30, 2023 |
| --- | ---: | ---: | ---: |
| United States | $5,047 | $11,255 | $9,769 |
| China | 9,301 | 5,734 | 10,669 |
| Canada | 482 | 1,194 | 281 |
| Haiti | 375 | 945 | 236 |
| Cayman Islands | 9 | 9 | 9 |
|  | $15,214 | $19,137 | $20,964 |

#### Common Stock Repurchase Program

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. 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 are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

We did not repurchase any shares of common stock during the six-month periods ending October 29, 2023, or October 30, 2022, respectively. As a result, as of October 29, 2023, $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 third quarter of fiscal 2024.

#### Dividends

In June 2022, our board of directors suspended the company’s quarterly cash dividend. Considering the current and expected macroeconomic conditions, we believe that preserving capital and managing our liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders. Accordingly, we do not expect to pay any dividends through at least the third quarter of fiscal 2024.

#### Working Capital

#### Operating Working Capital

Operating working capital (the total of accounts receivable and inventories, less accounts payable-trade, less accounts payable-capital expenditures, and less deferred revenue) was $38.4 million as of October 29, 2023, compared with $48.6 million as of October 30, 2022, and $39.2 million as of April 30, 2023. Operating working capital turnover was 5.5 during the second quarter of fiscal 2024, compared with 4.4 during the second quarter of fiscal 2023, and 4.6 during the fourth quarter of fiscal 2023.

#### Accounts Receivable

Accounts receivable was $23.0 million as of October 29, 2023, an increase of $593,000, or 2.6%, compared with $22.4 million as of October 30, 2022. This trend reflects a slight increase in net sales during the second quarter of fiscal 2024, as compared with the second quarter of fiscal 2023. Net sales were $58.7 million during the second quarter of fiscal 2024, an increase of $344,000, or 0.6%, compared with net sales of $58.4 million during the second quarter of fiscal 2023. Days’ sales outstanding were 34 days for the second quarter of fiscal 2024 and 33 days for the second quarter of fiscal 2023.

Accounts receivable was $23.0 million as of October 29, 2023, a decrease of $1.7 million, or 7.0%, compared with $24.8 million as of April 30, 2023. This decrease primarily reflects a decrease in net sales during the second quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales were $58.7 million during the second quarter of fiscal 2024, a decrease of $2.7 million, or 4.4%, compared with net sales of $61.4 million during the fourth quarter of fiscal 2023. Days’ sales outstanding were 34 days during the second quarter of fiscal 2024, compared with 35 days during the fourth quarter of fiscal 2023.

#### Inventory

As of October 29, 2023, inventory decreased by $7.8 million, or 14.9%, compared with October 30, 2022. This trend reflects improved raw materials inventory management in relation to current customer demand trends related to our mattress fabrics segment and promotional programs to reduce aged raw materials and finished goods associated with both our mattress fabrics and upholstery fabrics segments.

As of October 29, 2023, inventory decreased by $615,000, or 1.4%, compared with April 30, 2023. This decrease is primarily due to a decrease in net sales during the second quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales for the second quarter of fiscal 2024 were $58.7 million, a decrease of $2.7 million, or 4.4%, compared with net sales of $61.4 million during the fourth quarter of fiscal 2023.

Inventory turns were 4.6 for the second quarter of fiscal 2024, as compared with 4.3 for the second quarter of fiscal 2023 and 4.7 for the fourth quarter of fiscal 2023.

#### Accounts Payable - Trade

Accounts payable - trade was $27.9 million as of October 29, 2023, an increase of $3.6 million, or 14.8%, compared with $24.3 million as of October 30, 2022. This trend stems from management's focus on extending credit terms with certain vendors during the second quarter of fiscal 2024.

Accounts payable - trade was $27.9 million as of October 29, 2023, a decrease of $1.5 million, or 5.2%, compared with $29.4 million as of April 30, 2023. This trend reflects a decline in net sales during the second quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales were $58.7 million during the second quarter of fiscal 2024, a decrease of $2.7 million, or 4.4%, compared with net sales of $61.4 million during the fourth quarter of fiscal 2023. The decrease in accounts payable as a result of the decline in net sales was partially offset by management's focus on extending credit terms with certain vendors during the second quarter of fiscal 2024.

#### Financing Arrangements

Currently, we have revolving credit agreements with banks for our U.S parent company and our operations located in China. As of October 29, 2023, we did not have any outstanding borrowings associated with our revolving credit agreements. Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of October 29, 2023, we were in compliance with these financial covenants.

Refer to Note 10 of the consolidated financial statements for further disclosure regarding our revolving credit agreements.

#### Capital Expenditures and Depreciation

#### Overall

Capital expenditures on a cash basis during the first half of fiscal 2024 totaled $2.0 million and were mostly related to machinery and equipment associated with our mattress fabrics segment. Capital expenditures on a cash basis during the first half of fiscal 2023 totaled $1.1 million and pertained to machinery and equipment associated with our former upholstery cut and sew operation located in Haiti, manufacturing equipment associated with our mattress fabrics segment, and IT equipment associated with both our business segments.

Depreciation expense was $3.3 million during the first half of fiscal 2024, compared with $3.5 million for the same period a year ago. Depreciation expense mostly related to our mattress fabrics segment for both periods.

For the remainder of fiscal 2024, our planned capital spending will be centered on our mattress fabrics segment, with a strategic focus on capital projects that will increase efficiencies and improve the quality of our products. Funding for capital expenditures is expected to be from cash provided by operating activities.

#### Accounts Payable – Capital Expenditures

As of October 29, 2023, we had amounts due regarding capital expenditures totaling $298,000 that pertained to outstanding vendor invoices, none of which were financed. The total amount outstanding of $298,000 is required to be paid based on normal credit terms.

#### Purchase Commitments – Capital Expenditures

As of October 29, 2023, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $1.6 million.

### Critical Accounting Policies and Recent Accounting Developments

As of October 29, 2023, there were no changes in our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended April 30, 2023.

Refer to Note 2 of the consolidated financial statements for recently adopted and issued accounting pronouncements, if any, since the filing of our Form 10-K for the year ended April 30, 2023.

### Contractual Obligations

There were no significant or new contractual obligations since those reported in our annual report on Form 10-K for the year ended April 30, 2023.

### Inflation

Any significant increase in our raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating cost increases on to customers.

During fiscal 2023 and continuing through the second quarter of fiscal 2024, raw material costs started to decline due to lower oil prices and slowing global demand; however, higher costs and lower availability of labor remained challenging during fiscal 2023 and continuing through the second quarter of fiscal 2024.

Inflationary pressures also affected consumer spending during fiscal 2023 and through the second quarter of fiscal 2024, causing a slowdown in business in both the mattress industry and the residential home furnishings industry. This slowdown has caused reduced demand for our mattress fabrics and residential upholstery fabrics products during fiscal 2023 and during the first half of fiscal 2024.

We are unable to predict how long these trends will last, or to what extent inflationary pressures may affect the economic and purchasing cycle for home furnishing products (and therefore affect demand for our products) over the short and long term.

## Market risk

As filed, 1,748 characters.

#### Interest Rates

We are exposed to market risk from changes in interest rates with regards to our revolving credit agreements.

Effective January 19, 2023, we entered into a second amended and restated U.S. revolving credit agreement (the “Amended Agreement”) that established an asset-based revolving credit facility that required interest to be charged at a rate (applicable interest rate of 6.80% as of October 29, 2023) calculated using an applicable margin over the Federal Reserve Bank of New York’s secured overnight fund rate, as defined in the Amended Agreement. As of October 29, 2023, there were no outstanding borrowings under the Amended Agreement.

Our revolving credit line associated with our operations located in China bears interest at a rate determined by the Chinese government at the time of borrowing. As of October 29, 2023, there were no borrowings outstanding under our revolving credit agreement associated with our operations located in China.

#### Foreign Currency

We are exposed to market risk from changes in the value of foreign currencies related to our subsidiaries domiciled in Canada and China. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currency of our subsidiaries domiciled in Canada and China. However, there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the United States dollar as their functional currency. A substantial portion of the company’s imports purchased outside the United States are denominated in U.S. dollars. A 10% change in the above exchange rates as of October 29, 2023, would not have materially affected our results of operations or financial position.

## Controls and procedures

As filed, 1,391 characters.

As of October 29, 2023, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of such date, in all material respects, to ensure that information required to be disclosed in the reports filed by us and submitted under the Exchange Act, is recorded, processed, summarized, and reported as and when required, and that these disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosure.

During the quarter ended October 29, 2023, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 319 characters.

There have not been any material changes to our risk factors during the three months ended October 29, 2023. Our risk factors are disclosed in Item 1A “Risk Factors” of the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 14, 2023, for the fiscal year ended April 30, 2023.

Filed Dec 8, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-068943. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.