UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October ~~30, 2022~~29, 2023

Commission File No. 1-12597

CULP, INC.

(Exact name of registrant as specified in its charter)

North Carolina

56-1001967

(State or other jurisdiction of

incorporation or other organization)

(I.R.S. Employer

Identification No.)


1823 Eastchester Drive
High Point, North Carolina	27265-1402
(Address of principal executive offices)	(zip code)

(336) 889-5161

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


		Name of Each Exchange
Title of Each Class	Trading Symbol(s)	On Which Registered
Common Stock, par value $.05/ Share	CULP	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period after the registrant was required to submit such files). ☒ Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	~~Accelerated~~	☐

Non-accelerated filer	☒

~~Non-accelerated filer~~	☐	Smaller Reporting Company		☒

		Emerging Growth Company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common shares outstanding as of December ~~7, 2022:~~6, 2023: ~~12,293,762~~12,469,903

Par Value: $0.05 per share

INDEX TO FORM 10-Q

For the period ended October ~~30, 2022~~29, 2023


	Part I - Financial Statements	Page

Item 1.	Financial Statements: (Unaudited)	I-1

	Consolidated Statements of Net ~~(Loss) Income~~Loss — Three Months and Six Months Ended October 29, 2023, and October 30, 2022 ~~and October 31, 2021~~	I-1

	Consolidated Statements of Comprehensive ~~(Loss) Income~~Loss – Three Months and Six Months Ended October ~~30, 2022,~~29, 2023 and October ~~31, 2021~~30, 2022	I-3

	Consolidated Balance Sheets — October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022~~April 30, 2023	I-4

	Consolidated Statements of Cash Flows — Six Months Ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021~~30, 2022	I-5

	Consolidated Statements of Shareholders’ Equity – Six Months Ended October 29, 2023	I-6

	Consolidated Statements of Shareholders’ Equity – Six Months Ended October 30, 2022	~~I-6~~

	~~Consolidated Statements of Shareholders’ Equity – Six Months Ended October 31, 2021~~	I-7

	Notes to Consolidated Financial Statements	I-8

	Cautionary Statement Concerning Forward-Looking Information	~~I-28~~I-31

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	~~I-29~~I-32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~I-44~~I-47

Item 4.	Controls and Procedures	~~I-44~~I-47

	Part II - Other Information

Item 1.	Legal Proceedings	II-1

Item 1A.	Risk Factors	II-1

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	II-1

Item 6.	Exhibits	II-2

Signatures		II-3

Item 1: Financial Statements

CULP, INC.

CONSOLIDATED STATEMENTS OF NET ~~(LOSS) INCOME~~LOSS

FOR THE THREE MONTHS ENDED OCTOBER ~~30, 2022,~~29, 2023, AND OCTOBER ~~31, 2021~~30, 2022

UNAUDITED

(Amounts in Thousands, Except for Per Share Data)


	THREE MONTHS ENDED						THREE MONTHS ENDED
	October 30,			October 31,			October 29,			October 30,
	2022			2021			2023			2022
Net sales	$	58,381		$	74,561		$	58,725		$	58,381
Cost of sales		(60,594	)		(63,834	)		(50,775	)		(60,594	)
Gross (loss) profit		(2,213	)		10,727
Gross profit (loss)								7,950			(2,213	)
Selling, general and administrative expenses		(9,103	)		(9,087	)		(10,045	)		(9,103	)
Restructuring expense		(615	)		—			(144	)		(615	)
(Loss) income from operations		(11,931	)		1,640
Loss from operations								(2,239	)		(11,931	)
Interest income		79			59			282			79
Other income (expense)		829			(404	)
(Loss) income before income taxes		(11,023	)		1,295
Other income								49			829
Loss before income taxes								(1,908	)		(11,023	)
Income tax expense		(1,150	)		(444	)		(516	)		(1,150	)
Net (loss) income		(12,173	)		851
Net loss							$	(2,424	)	$	(12,173	)

Net (loss) income per share - basic	$	(0.99	)	$	0.07
Net (loss) income per share - diluted	$	(0.99	)	$	0.07
Net loss per share - basic							$	(0.19	)	$	(0.99	)
Net loss per share - diluted							$	(0.19	)	$	(0.99	)
Average shares outstanding, basic		12,280			12,223			12,456			12,280
Average shares outstanding, diluted		12,280			12,316			12,456			12,280

See accompanying notes to consolidated financial statements.

I-1

CULP, INC.

CONSOLIDATED STATEMENTS OF NET ~~(LOSS) INCOME~~LOSS

FOR THE SIX MONTHS ENDED OCTOBER ~~30, 2022,~~29, 2023, AND OCTOBER ~~31, 2021~~30, 2022

UNAUDITED

(Amounts in Thousands, Except for Per Share Data)


	SIX MONTHS ENDED						SIX MONTHS ENDED
	October 30,			October 31,			October 29,			October 30,
	2022			2021			2023			2022
Net sales	$	120,985		$	157,608		$	115,387		$	120,985
Cost of sales		(119,071	)		(134,382	)		(100,352	)		(119,071	)
Gross profit		1,914			23,226			15,035			1,914
Selling, general and administrative expenses		(17,968	)		(18,268	)		(19,874	)		(17,968	)
Restructuring expense		(615	)		—			(482	)		(615	)
(Loss) income from operations		(16,669	)		4,958
Loss from operations								(5,321	)		(16,669	)
Interest income		96			132			627			96
Other income (expense)		747			(640	)
(Loss) income before income taxes		(15,826	)		4,450
Other income								145			747
Loss before income taxes								(4,549	)		(15,826	)
Income tax expense		(2,046	)		(1,349	)		(1,217	)		(2,046	)
Net (loss) income	$	(17,872	)	$	3,101
Net loss							$	(5,766	)	$	(17,872	)

Net (loss) income per share - basic	$	(1.46	)	$	0.25
Net (loss) income per share - diluted	$	(1.46	)	$	0.25
Net loss per share - basic							$	(0.47	)	$	(1.46	)
Net loss per share - diluted							$	(0.47	)	$	(1.46	)
Average shares outstanding, basic		12,259			12,268			12,394			12,259
Average shares outstanding, diluted		12,259			12,369			12,394			12,259

See accompanying notes to consolidated financial statements.

I-2

CULP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~(LOSS) INCOME~~LOSS

FOR THE THREE AND SIX MONTHS ENDED OCTOBER ~~30 , 2022,~~29, 2023, AND OCTOBER ~~31, 2021~~30, 2022

UNAUDITED

(Amounts in Thousands)

THREE MONTHS ENDED

October 30,

October 31,

2022

2021

Net (loss) income

$
(12,173
)

$
851

Unrealized holding loss on investments, net of tax

(46
)

(5
)
Reclassification adjustment for realized gain on sale of investments

—

(4
)
Comprehensive (loss) income

$
(12,219
)

$
842


	THREE MONTHS ENDED
	October 29,			October 30,
	2023			2022
Net loss	$	(2,424	)	$	(12,173	)
Unrealized holding loss on investments, net of tax		(82	)		(46	)
Comprehensive loss	$	(2,506	)	$	(12,219	)

SIX MONTHS ENDED

October 30,

October 31,

2022

2021

Net (loss) income

$
(17,872
)

$
3,101

Unrealized holding (loss) gain on investments, net of tax

(53
)

143

Reclassification adjustment for realized gain on investments

—

(4
)
Comprehensive (loss) income

$
(17,925
)

$
3,240


	SIX MONTHS ENDED
	October 29,			October 30,
	2023			2022
Net loss	$	(5,766	)	$	(17,872	)
Unrealized holding loss on investments, net of tax		(25	)		(53	)
Comprehensive loss	$	(5,791	)	$	(17,925	)

See accompanying notes to consolidated financial statements.

I-3

CULP, INC.

CONSOLIDATED BALANCE SHEETS

OCTOBER 29, 2023, OCTOBER 30, 2022, ~~OCTOBER 31, 2021,~~ AND ~~MAY 1, 2022~~APRIL 30, 2023

UNAUDITED

(Amounts in Thousands)


	October 30,			October 31,		* May 1,		October 29,			October 30,			April 30,
	2022			2021		2022		2023			2022			2023*
Current assets:
Cash and cash equivalents	$	19,137			16,956		14,550	$	15,214		$	19,137		$	20,964
Short-term investments - held-to-maturity		—			1,564		—
Short-term investments - available for sale		—			9,709		—
Short-term investments - rabbi trust		2,237			—		—		937			2,237			1,404
Accounts receivable, net		22,443			32,316		22,226		23,036			22,443			24,778
Inventories		52,224			63,781		66,557		44,465			52,224			45,080
Short-term note receivable									256			—			219
Current income taxes receivable		510			613		857		340			510			—
Other current assets		3,462			3,811		2,986		4,346			3,462			3,071
Total current assets		100,013			128,750		107,176		88,594			100,013			95,516
Property, plant and equipment, net		38,832			43,265		41,702		34,664			38,832			36,111
Right of use assets		11,609			13,649		15,577		6,874			11,609			8,191
Intangible assets		2,440			2,816		2,628		2,064			2,440			2,252
Long-term investments - rabbi trust		7,526			9,036		9,357		6,995			7,526			7,067
Long-term investments - held-to-maturity		—			8,353		—
Long-term note receivable									1,596			—			1,726
Deferred income taxes		493			452		528		472			493			480
Other assets		717			3,004		595		901			717			840
Total assets	$	161,630			209,325		177,563	$	142,160		$	161,630		$	152,183
Current liabilities:
Accounts payable - trade	$	24,298			40,525		20,099	$	27,903		$	24,298		$	29,442
Accounts payable - capital expenditures		200			176		473		298			200			56
Operating lease liability - current		2,655			2,878		3,219		2,540			2,655			2,640
Deferred compensation		2,237			—		—
Deferred compensation - current									937			2,237			1,404
Deferred revenue		1,527			679		520		853			1,527			1,192
Accrued expenses		7,594			11,019		7,832		8,106			7,594			8,533
Accrued restructuring		33			—		—
Accrued restructuring costs									—			33			—
Income taxes payable - current		969			646		413		998			969			753
Total current liabilities		39,513			55,923		32,556		41,635			39,513			44,020
Operating lease liability - long-term		4,194			7,914		7,062		2,431			4,194			3,612
Income taxes payable - long-term		2,629			3,099		3,097		2,055			2,629			2,675
Deferred income taxes		5,700			4,918		6,004		5,663			5,700			5,954
Deferred compensation		7,486			9,017		9,343
Deferred compensation - long-term									6,748			7,486			6,842
Total liabilities		59,522			80,871		58,062		58,532			59,522			63,103
Commitments and Contingencies (Notes 9, 15, and 16)
Commitments and Contingencies (Notes 10, 16, and 17)
Shareholders' equity
Preferred stock, $0.05 par value, authorized 10,000,000		—			—		—		—			—			—
Common stock, $0.05 par value, authorized 40,000,000 shares, issued and outstanding 12,293,762 at October 30, 2022; 12,209,710 at October 31, 2021, and 12,228,629 at May 1, 2022		615			611		611
Common stock, $0.05 par value, authorized 40,000,000 shares, issued and outstanding 12,469,903 at October 29, 2023; 12,293,762 at October 30, 2022, and 12,327,414 at April 30, 2023									624			615			616
Capital contributed in excess of par value		43,671			42,719		43,143		44,581			43,671			44,250
Accumulated earnings		57,843			84,839		75,715		38,429			57,843			44,195
Accumulated other comprehensive (loss) income		(21	)		285		32		(6	)		(21	)		19
Total shareholders' equity		102,108			128,454		119,501		83,628			102,108			89,080
Total liabilities and shareholders' equity	$	161,630			209,325		177,563	$	142,160		$	161,630		$	152,183

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

I-4

CULP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED OCTOBER ~~30, 2022,~~29, 2023, AND OCTOBER ~~31, 2021~~30, 2022

UNAUDITED

(Amounts in Thousands)


	SIX MONTHS ENDED						SIX MONTHS ENDED
	October 30,			October 31,			October 29,			October 30,
	2022			2021			2023			2022
Cash flows from operating activities:
Net (loss) income	$	(17,872	)		3,101
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Net loss							$	(5,766	)	$	(17,872	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		3,489			3,471			3,251			3,489
Non-cash inventory charges		6,439			579
Non-cash inventory (credits) charges								(2,001	)		6,439
Amortization		214			267			193			214
Stock-based compensation		565			709			485			565
Deferred income taxes		(269	)		(319	)		(283	)		(269	)
Realized gain from the sale of short-term investments available for sale		—			(4	)
Gain sale of equipment		(232	)		—			(278	)		(232	)
Foreign currency exchange (gain) loss		(1,168	)		170
Non-cash restructuring expenses								379			—
Foreign currency exchange gain								(697	)		(1,168	)
Changes in assets and liabilities:
Accounts receivable		(443	)		5,441			1,644			(443	)
Inventories		7,192			(8,329	)		2,304			7,192
Other current assets		(728	)		39			(1,355	)		(728	)
Other assets		58			(987	)		(123	)		58
Accounts payable – trade		6,027			(2,269	)		(495	)		6,027
Deferred revenue		1,007			139			(339	)		1,007
Accrued restructuring costs								—			33
Accrued expenses and deferred compensation		1,254			(2,908	)		(762	)		1,254
Accrued restructuring		33			—
Income taxes		601			(428	)		(633	)		601
Net cash provided by (used in) operating activities		6,167			(1,328	)
Net cash (used in) provided by operating activities								(4,476	)		6,167
Cash flows from investing activities:
Capital expenditures		(1,051	)		(3,901	)		(1,972	)		(1,051	)
Proceeds from the sale of equipment		465			—			309			465
Proceeds from the maturity of short-term investments (Held to Maturity)		—			3,200
Purchase of short-term and long-term investments (Held to Maturity)		—			(8,876	)
Purchase of short-term investments (Available for Sale)		—			(4,371	)
Proceeds from the sale of short-term investments (Available for Sale)		—			306
Proceeds from the sale of long-term investments (rabbi trust)		46			—
Purchase of long-term investments (rabbi trust)		(505	)		(580	)
Proceeds from note receivable								150			—
Proceeds from the sale of investments (rabbi trust)								986			46
Purchase of investments (rabbi trust)								(472	)		(505	)
Net cash used in investing activities		(1,045	)		(14,222	)		(999	)		(1,045	)
Cash flows from financing activities:
Dividends paid		—			(2,699	)
Common stock repurchased		—			(1,752	)
Common stock surrendered for withholding taxes payable		(33	)		(50	)		(146	)		(33	)
Payments of debt issuance costs		(206	)		—			—			(206	)
Net cash used in financing activities		(239	)		(4,501	)		(146	)		(239	)
Effect of exchange rate changes on cash and cash equivalents		(296	)		(2	)		(129	)		(296	)
Increase (decrease) in cash and cash equivalents		4,587			(20,053	)
Cash and cash equivalents at beginning of period		14,550			37,009
(Decrease) increase in cash and cash equivalents								(5,750	)		4,587
Cash and cash equivalents at beginning of year								20,964			14,550
Cash and cash equivalents at end of period	$	19,137			16,956		$	15,214		$	19,137

See accompanying notes to consolidated financial statements.

I-5

CULP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

~~SIX-MONTHS~~FOR THE SIX MONTHS ENDED OCTOBER 29, 2023

UNAUDITED

(Dollars in thousands, except share data)



							Capital						Accumulated
							Contributed						Other			Total
	Common Stock						in Excess			Accumulated			Comprehensive			Shareholders'
	Shares			Amount			of Par Value			Earnings			Income (Loss)			Equity
Balance, April 30, 2023 *		12,327,414		$	616		$	44,250		$	44,195		$	19		$	89,080
Net loss		—			—			—			(3,342	)		—			(3,342	)
Stock-based compensation		—			—			322			—			—			322
Unrealized gain on investments		—			—			—			—			57			57
Immediately vested common stock award		16,616			1			(1	)		—			—			—
Balance, July 30, 2023		12,344,030		$	617		$	44,571		$	40,853		$	76		$	86,117
Net loss		—			—			—			(2,424	)		—			(2,424	)
Stock-based compensation		—			—			163			—			—			163
Unrealized loss on investments		—			—			—			—			(82	)		(82	)
Common stock issued in connection with the vesting of time-based restricted stock units		151,653			8			(8	)		—			—			—
Common stock surrendered in connection with payroll withholding taxes		(25,780	)		(1	)		(145	)		—			—			(146	)
Balance, October 29, 2023		12,469,903		$	624		$	44,581		$	38,429		$	(6	)	$	83,628

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements

I-6

CULP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED OCTOBER 30, 2022

UNAUDITED

(Dollars in thousands, except share data)



						Capital						Accumulated											Capital						Accumulated
						Contributed						Other			Total								Contributed						Other			Total
	Common Stock					in Excess			Accumulated			Comprehensive			Shareholders'			Common Stock					in Excess			Accumulated			Comprehensive			Shareholders'
	Shares			Amount		of Par Value			Earnings			Income			Equity			Shares			Amount		of Par Value			Earnings			Income (Loss)			Equity
Balance, May 1, 2022 *		12,228,629		$	611	$	43,143		$	75,715		$	32		$	119,501			12,228,629		$	611	$	43,143		$	75,715		$	32		$	119,501
Net loss		—			—		—			(5,699	)		—			(5,699	)		—			—		—			(5,699	)		—			(5,699	)
Stock-based compensation		—			—		252			—			—			252			—			—		252			—			—			252
Unrealized loss on investments		—			—		—			—			(7	)		(7	)		—			—		—			—			(7	)		(7	)
Common stock issued in connection with the vesting of performance-based restricted stock units		913			—		—			—			—			—			913			—		—			—			—			—
Common stock issued in connection with the vesting of time-based restricted stock units		32,199			2		(2	)		—			—			—			32,199			2		(2	)		—			—			—
Common stock surrendered in connection with payroll withholding taxes		(6,708	)		—		(52	)		—			—			(52	)		(6,708	)		—		(52	)		—			—			(52	)
Fully vested common stock award		19,753			1		(1	)		—			—			—
Immediately vested common stock award																			19,753			1		(1	)		—			—			—
Balance, July 31, 2022		12,274,786		$	614	$	43,340		$	70,016		$	25		$	113,995			12,274,786		$	614	$	43,340		$	70,016		$	25		$	113,995
Net loss		—			—		—			(12,173	)		—			(12,173	)		—			—		—			(12,173	)		—			(12,173	)
Stock-based compensation		—			—		313			—			—			313			—			—		313			—			—			313
Unrealized loss on investments		—			—		—			—			(46	)		(46	)		—			—		—			—			(46	)		(46	)
Common stock issued in connection with the vesting of performance-based restricted stock units		669			—		—			—			—			—			69			—		—			—			—			—
Common stock issued in connection with the vesting of time-based restricted stock units																			600			—		—			—			—			—
Common stock surrendered in connection with payroll withholding taxes		(20	)		—		19			—			—			19			(20	)		—		19			—			—			19
Fully vested common stock award		18,327			1		(1	)		—			—			—
Immediately vested common stock award																			18,327			1		(1	)		—			—			—
Balance, October 30, 2022		12,293,762		$	615	$	43,671		$	57,843		$	(21	)	$	102,108			12,293,762		$	615	$	43,671		$	57,843		$	(21	)	$	102,108

* Derived from audited ~~financial statements.~~

~~See accompanying notes to~~ consolidated ~~financial statements~~

~~I-6~~

~~CULP, INC.~~

~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY~~

~~SIX-MONTHS ENDED OCTOBER 31, 2021~~

~~UNAUDITED~~

~~(Dollars in thousands, except share data)~~

Capital

Accumulated

Contributed

Other

Total

Common Stock

in Excess

Accumulated

Comprehensive

Shareholders'

Shares

Amount

of Par Value

Earnings

Income

Equity

Balance, May 2, 2021 *

12,312,822

$
616

$
43,807

$
84,437

$
146

$
129,006

Net income

—

—

—

2,250

—

2,250

Stock-based compensation

—

—

274

—

—

274

Unrealized gain on investments

—

—

—

—

148

148

Common stock issued in connection with the
     vesting of performance-based restricted
     stock units

10,863

—

—

—

—

—

Common stock surrendered in connection
     with payroll withholding taxes

(3,025
)

—

(50
)

—

—

(50
)
Fully vested common stock award

4,312

—

—

—

—

—

Common stock repurchased

(48,686
)

(2
)

(721
)

—

—

(723
)
Dividends paid

—

—

—

(1,356
)

—

(1,356
)
Balance, August 1, 2021

12,276,286

$
614

$
43,310

$
85,331

$
294

$
129,549

Net income

—

—

—

851

—

851

Stock-based compensation

—

—

435

—

—

435

Unrealized loss on investments

—

—

—

—

(9
)

(9
)
Fully vested common stock award

6,426

—

—

—

—

—

Common stock repurchased

(73,002
)

(3
)

(1,026
)

—

—

(1,029
)
Dividends paid

—

—

—

(1,343
)

—

(1,343
)
Balance, October 31, 2021

12,209,710

$
611

$
42,719

$
84,839

$
285

$
128,454

* Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

I-7

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Culp, Inc. and its majority-owned subsidiaries (the “company”) include all adjustments that are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements that are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July ~~15, 2022,~~14, 2023, for the fiscal year ended ~~May 1, 2022.~~

~~Certain amounts presented in the prior period have been reclassified to conform to the current period financial statement presentation. A non-cash charge totaling $579,000~~ for markdowns of inventory estimated based on our policy for aged inventory was reclassified from the line item "Inventories" to the line item "Non-cash inventory charges" in the Consolidated Statement of Cash Flows for the six-months ended October 31, 2021. This reclassification did not have an effect on previously reported net cash used in operating activities and decrease in cash and cash equivalents.April 30, 2023.

The company’s six-months ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~30, 2022, each represent 26-week periods.

2. Significant Accounting Policies

As of October ~~30, 2022,~~29, 2023, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended ~~May 1, 2022.~~April 30, 2023.

Recently Adopted Accounting Pronouncements

There were ~~not any~~no recently adopted accounting pronouncements during the first half of fiscal ~~2023.~~2024.

Recently Issued Accounting Pronouncements

~~Currently, there are no new recent accounting pronouncements~~Effective November 27, 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 Improvements to Reportable Segment Disclosures which enhances disclosure requirements to segment reporting including (i) significant segment expenses that are ~~expected~~regularly provided to the Chief Operating Decision Maker (CODM) that are included within each measure of segment profit or loss, (ii) other segment items by reportable segment as defined by ASU 2023-07, and (iii) the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of each segment's profit or loss in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for public entities starting in annual periods beginning after December 15, 2023 (i.e., our fiscal 2025 annual report) and interim periods beginning after December 15, 2024 (i.e., first quarter of fiscal 2026 interim report). Management is currently evaluating the effects ASU 2023-07 will have ~~a material effect~~ on ~~our~~the notes to the consolidated financial statements.

3. Allowance for Doubtful Accounts

A summary of the activity in the allowance for doubtful accounts follows:


	Six Months Ended						Six Months Ended
(dollars in thousands)	October 30, 2022			October 31, 2021			October 29, 2023			October 30, 2022
Beginning balance	$	292		$	591		$	342		$	292
Provision for bad debts		49			(23	)		228			49
Write-offs, net of recoveries		(53	)		(34	)		(29	)		(53	)
Ending balance	$	288		$	534		$	541		$	288

During the six-month periods ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~30, 2022, we assessed the credit risk of our customers within our accounts receivable portfolio. Our risk assessment includes the respective ~~customer’s~~customers’ (i) financial position; (ii) past payment history; (iii) management’s general ability; and (iv) historical loss experience; as well as (v) any other ongoing economic conditions. After our risk assessment was completed, we assigned credit grades to our customers, which in turn, were used to determine our allowance for doubtful accounts totaling $~~288,000~~541,000 and $~~534,000~~288,000 as of October 29, 2023, and October 30, 2022, ~~and October 31, 2021,~~ respectively.

On June 25, 2022, a customer and its affiliates associated with our mattress fabrics segment announced that they filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Subject to court approval, our customer and its affiliates entered into an asset purchase agreement for the sale of substantially all of their assets. The proposed buyer under the asset purchase agreement has also provided a commitment for debtor-in-possession financing to allow our customer and its affiliates to conduct normal business operations pending the anticipated closing of the sale. A credit loss associated with accounts receivable outstanding as of May 1, 2022, for this customer and its affiliates was not recorded as we received payment in full regarding these invoices, and based on information available to us at this time, we do not believe there is a risk of material loss on these accounts. In addition, based on the information available to us at this time, we currently do not expect to record a material credit loss associated with accounts receivable for this customer and its affiliates for outstanding invoices after May 1, 2022 relating to products sold prior to the bankruptcy filing. During the second quarter of fiscal 2023, we received payments on a portion of the

~~I-8~~

~~outstanding invoices after May 1, 2022, and we currently expect to receive payments on the remaining outstanding invoices after May 1, 2022, during the third quarter of fiscal 2023.~~

4. Revenue from Contracts with Customers

Nature of Performance Obligations

I-8

develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. In addition, the upholstery fabrics segment includes Read Window Products LLC (“Read”), which 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.

Our primary performance obligations include the sale of mattress fabrics and upholstery fabrics, as well as the performance of customized fabrication and installation services for Read’s products associated with window treatments.

Contract Assets & Liabilities

Certain contracts, primarily those for customized fabrication and installation services associated with Read, require upfront customer deposits that result in a contract liability which is recorded in the Consolidated Balance Sheets as deferred revenue. Our terms are customary within the industries in which we operate and are not considered financing arrangements. There were no contract assets recognized as of October 29, 2023, October 30, 2022, ~~October 31, 2021, and May 1, 2022.~~or April 30, 2023.

A summary of the activity associated with deferred revenue follows:


	Six months ended						Six months ended
(dollars in thousands)	October 30, 2022			October 31, 2021			October 29, 2023			October 30, 2022
Beginning balance	$	520		$	540		$	1,192		$	520
Revenue recognized on contract liabilities		(1,747	)		(1,445	)		(1,986	)		(1,747	)
Payments received for services not yet rendered		2,754			1,584			1,647			2,754
Ending balance	$	1,527		$	679		$	853		$	1,527

Disaggregation of Revenue

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending October 29, 2023:


	Mattress		Upholstery
(dollars in thousands)	Fabrics		Fabrics		Total
Products transferred at a point in time	$	31,377	$	24,194	$	55,571
Services transferred over time		—		3,154		3,154
Total Net Sales	$	31,377	$	27,348	$	58,725

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending October 29, 2023:


	Mattress		Upholstery
(dollars in thousands)	Fabrics		Fabrics		Total
Products transferred at a point in time	$	60,599	$	48,968	$	109,567
Services transferred over time		—		5,820		5,820
Total Net Sales	$	60,599	$	54,788	$	115,387

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending October 30, 2022:


	Mattress		Upholstery
(dollars in thousands)	Fabrics		Fabrics		Total
Products transferred at a point in time	$	26,230	$	29,883	$	56,113
Services transferred over time		—		2,268		2,268
Total Net Sales	$	26,230	$	32,151	$	58,381

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending October 30, 2022:

Mattress

Upholstery

(dollars in thousands)

Fabrics

Fabrics

Total

Products transferred at a point in time

$
55,602

$
61,406

$
117,008

Services transferred over time

—

3,977

3,977

Total Net Sales

$
55,602

$
65,383

$
120,985

~~The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending October 31, 2021:~~

Mattress

Upholstery

(dollars in thousands)

Fabrics

Fabrics

Total

Products transferred at a point in time

$
40,883

$
31,415

$
72,298

Services transferred over time

—

2,263

2,263

Total Net Sales

$
40,883

$
33,678

$
74,561

I-9

~~The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending October 31, 2021:~~


	Mattress		Upholstery				Mattress		Upholstery
(dollars in thousands)	Fabrics		Fabrics		Total		Fabrics		Fabrics		Total
Products transferred at a point in time	$	83,941	$	69,705	$	153,646	$	55,602	$	61,406	$	117,008
Services transferred over time		—		3,962		3,962		—		3,977		3,977
Total Net Sales	$	83,941	$	73,667	$	157,608	$	55,602	$	65,383	$	120,985

5. Inventories

Inventories are carried at the lower of cost or net realizable value. Cost is determined using the FIFO (first-in, first-out) method.

A summary of inventories follows:


(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
Raw materials	$	9,859	$	10,626	$	13,477	$	8,433	$	9,859	$	7,908
Work-in-process		3,724		4,480		4,237		2,196		3,724		2,602
Finished goods		38,641		48,675		48,843		33,836		38,641		34,570
	$	52,224	$	63,781	$	66,557	$	44,465	$	52,224	$	45,080

~~Substantial and Unusual Losses Resulting from Subsequent~~ Measurement of Inventory to Net Realizable Value

~~Overall~~

~~Second Quarter of Fiscal 2023 and 2022~~

~~For the second quarter of fiscal 2023, we incurred~~We recorded a non-cash inventory (credit) charge ~~totaling~~of $(1.3) million and $5.3 ~~million. This~~million for the three months ended October 29, 2023 and October 30, 2022, respectively. The non-cash inventory credit of $(1.3) million for the three months ended October 29, 2023 represented a $(1.2) million credit related to adjustments made to our inventory markdowns reserve estimated based on our policy for aged inventory for both our mattress and upholstery fabrics segments, as well as a credit of ($78,000) for the gain on disposal of inventory related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. The non-cash inventory charge ~~represents~~of $5.3 million for the three months ended October 30, 2022 represented a $2.9 million write down of inventory to its net realizable value associated with our mattress fabrics segment, $2.3 million related to our inventory markdowns reserve estimated based on our policy for aged inventory for both our mattress and upholstery fabrics segments and a $98,000 charge for the loss on disposal and markdowns of inventory related to our exit of our cut and sew upholstery fabrics operation located in Shanghai, China. Of the $(1.3) million non-cash inventory credit for the second quarter of fiscal 2024, $(801,000) and $(482,000) pertained to our mattress fabrics and upholstery fabrics segments, respectively. Of the $5.3 million non-cash inventory charge for the second quarter of 2023, $3.8 million and $1.5 million pertained to our mattress fabrics and upholstery fabrics segments, respectively.

We recorded a non-cash inventory (credit) charge of $(2.0) million and $6.4 million for the six months ended October 29, 2023, and October 30, 2022, respectively. The non-cash inventory credit of $(2.0) million for the six months ended October 29, 2023, represented a $(2.1) million credit related to adjustments made to our inventory markdown reserve estimated based on our policy for aged inventory for both our mattress and upholstery fabrics segments, partially offset by a net restructuring related charge of $101,000. This net restructuring related charge represents markdowns of inventory totaling $179,000 during the first quarter of fiscal 2024, partially offset by a gain on disposal of inventory totaling $78,000 during the second quarter of fiscal 2024, both of which related to the discontinuation of production of cut and sewn upholstery kits at our facility in Ouanaminthe, Haiti during the respective periods. The non-cash inventory charge of $6.4 million for the six months ended October 30, 2022, represented a $2.9 million write down of inventory to its net realizable value associated with our mattress fabrics segment, a $3.4 million charge related to markdowns of inventory estimated based on our policy for aged inventory infor both our mattress and upholstery fabrics segments, and a $98,000 ~~for~~charge related to the loss on disposal and markdowns of inventory related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, ~~China (see Note 8 to the consolidated financial statements).~~China. Of the $$(~~5.3~~2.0) million non-cash inventory ~~charge~~credit for the ~~second quarter~~first half of fiscal ~~2023, $~~2024, $(~~3.8~~1.5) million and $$(~~1.5~~453,000 ~~million~~) pertained to our mattress fabrics and upholstery fabrics segments, respectively.

~~For the second quarter of fiscal 2022, we incurred a non-cash inventory charge totaling $226,000~~ ~~that related to markdowns of inventory estimated based on our policy for aged inventory for both mattress and upholstery fabrics segments.~~

~~Year to Date Through Second Quarter of Fiscal 2023 and 2022~~

~~For the six-month period of fiscal 2023, we incurred a non-cash inventory charge totaling $6.4~~ ~~million. This charge represents a $2.9~~ ~~million write down of inventory to its net realizable value associated with our mattress fabrics segment, $3.4~~ ~~million related to markdowns of inventory estimated based on our policy for aged inventory in both our mattress and upholstery fabrics segments, and $98,000~~ for the loss on disposal and markdowns of inventory related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China (see Note 8 to the consolidated financial statements). Of the $6.4 million non-cash inventory charge for the ~~six-month period~~first half of fiscal 2023, $4.2 million and $2.2 million pertained to our mattress fabrics and upholstery fabrics segments, respectively.

~~The non-cash inventory charge of $579,000~~ ~~for the six-month period of fiscal 2022 represents markdowns of inventory estimated based on our policy for aged inventory in both mattress and upholstery fabrics segments.~~

Mattress Fabrics Segment - Net Realizable Value

During the second quarter of fiscal 2023, our mattress fabrics segment experienced a 35.8% decline in net sales compared with the second quarter of fiscal 2022. This decline in net sales led to a significant decrease in gross margin to (8.7%)~~, excluding the~~ (excluding a non-cash inventory charge of $3.8 million disclosed ~~above,~~above) during the second quarter of fiscal 2023, as compared with gross margin of 15.0% during the second quarter of fiscal 2022. The significant decline in net sales and profitability during the second quarter of

I-10

fiscal 2023 stemmed from a greater than anticipated decline in consumer discretionary spending on mattress products, which we believe was ~~due to~~driven by the following factors: (i) inflationary effects of commodities such as gas, food, and other necessities; (ii) a significant increase in interest rates; (iii) the pulling forward of demand for home goods products during the early years of the COVID-19 pandemic,

~~I-10~~

which demand ~~has now~~then shifted to travel, leisure, and other services; and (iv) excess inventory held by customers due to the decline in consumer demand. Based on this evidence, management conducted a thorough review of its mattress fabrics inventory and, as a result, recorded a charge of $2.9 million within cost of sales to write down inventory to its net realizable value. This $2.9 million charge was based on management's best estimates of product sales prices, customer demand trends, and its plans to transition to new products.

Assessment

As of October 29, 2023, we reviewed our mattress fabrics and upholstery fabrics inventories to determine if any additional write-downs, in excess of the amount recorded based on our policy for aged inventory, were necessary. Based on our assessment, no additional write-downs of inventories to their net realizable value were recorded for the three months and six months ended October 29, 2023, other than the markdowns of inventory associated with our upholstery fabrics segment restructuring activity described more fully in Note 9 of the consolidated financial statements.

Based on the current unfavorable macroeconomic conditions, it is possible that ~~the~~ estimates used by management to determine the write down of inventory to its net realizable value could be materially different from the actual amounts or its results. These differences could result in higher than expected markdowns of inventory, ~~provisions,~~ which could adversely affect the ~~company's~~company’s results of operations and financial condition in the near term.

6. Intangible Assets

A summary of intangible assets follows:


(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
Tradename	$	540	$	540	$	540	$	540	$	540	$	540
Customer relationships, net		1,486		1,787		1,636		1,185		1,486		1,335
Non-compete agreement, net		414		489		452		339		414		377
	$	2,440	$	2,816	$	2,628	$	2,064	$	2,440	$	2,252

Tradename

Our tradename ~~as of October 30, 2022, October 31, 2021, and May 1, 2022, pertained~~pertains to Read, a separate reporting unit within the upholstery fabrics segment. This tradename was determined to have an indefinite useful life at the time of its acquisition, and therefore is not being amortized. However, we are required to assess this tradename annually or between annual tests if we believe indicators of impairment exist. Based on our assessment as of October ~~30, 2022,~~29, 2023, no indicators of impairment existed, and therefore we did not record any asset impairment charges associated with our tradename through the second quarter of fiscal ~~2023.~~2024.

Customer Relationships

A summary of the change in the carrying amount of our customer relationships follows:


	Six months ended						Six months ended
(dollars in thousands)	October 30, 2022			October 31, 2021			October 29, 2023			October 30, 2022
Beginning balance	$	1,636		$	1,937
Beginning balance, net							$	1,335		$	1,636
Amortization expense		(150	)		(150	)		(150	)		(150	)
Ending balance	$	1,486		$	1,787
Ending balance, net							$	1,185		$	1,486

Our customer relationships are amortized on a straight-line basis over useful lives ranging from nine to seventeen years.

The gross carrying amount of our customer relationships was $3.1 million as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, respectively. Accumulated amortization for these customer relationships was $~~1.6~~1.9 million, $~~1.3~~1.6 million, and $~~1.5~~1.8 million as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, respectively.

I-11

The remaining amortization expense for the next five fiscal years and thereafter are as follows: ~~FY 2023 - $151,000~~; FY 2024 - $~~301,000~~151,000; FY 2025 - $301,000; FY 2026 - $301,000; FY 2027 - $~~279,000~~278,000; FY 2028 - $52,000; and thereafter - $~~153,000~~102,000.

The weighted average amortization period for our customer relationships was ~~5.2~~4.3 years as of October ~~30, 2022.~~29, 2023.

Non-Compete Agreement

A summary of the change in the carrying amount of our non-compete agreement follows:


	Six months ended						Six months ended
(dollars in thousands)	October 30, 2022			October 31, 2021			October 29, 2023			October 30, 2022
Beginning balance	$	452		$	527
Beginning balance, net							$	377		$	452
Amortization expense		(38	)		(38	)		(38	)		(38	)
Ending balance	$	414		$	489
Ending balance, net							$	339		$	414

Our non-compete agreement is associated with a prior acquisition by our mattress fabrics segment and is amortized on a straight-line basis over the fifteen-year life of the agreement.

~~I-11~~

The gross carrying amount of our non-compete agreement was $2.0 million as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, respectively. Accumulated amortization for our non-compete agreement was $~~1.6~~1.7 million, $~~1.5~~1.6 million, and $1.6 million as of October 29, 2023, October 30, 2022, ~~October 31, 2022,~~ and ~~May 1, 2022,~~April 30, 2023, respectively.

The remaining amortization expense for the next five years and thereafter follows: FY ~~2023 - $37,000; FY~~ 2024 - $~~76,000~~38,000; FY 2025 - $76,000; FY 2026 - $76,000; FY 2027 - $76,000~~, and thereafter~~; FY 2028 - $73,000.

The weighted average amortization period for the non-compete agreement was ~~5.5~~4.5 years as of October ~~30, 2022.~~29, 2023.

Impairment

As of October ~~30, 2022,~~29, 2023, management reviewed the long-lived assets associated with our mattress fabrics segment, which consisted of property, plant, and equipment, right of use assets, and finite-lived intangible assets (collectively known as the ~~"Asset~~"Mattress Asset Group"), for impairment, as events and changes in circumstances occurred that indicated the carrying amount of the Mattress Asset Group may not be recoverable. ~~During~~The mattress fabrics segment experienced a significant cumulative operating loss totaling $18.1 million commencing in the second quarter of fiscal 2023, ~~our mattress fabrics segment experienced a~~ ~~35.8% decline in net sales compared with~~and continuing through the second quarter of fiscal ~~2022. This decline in net sales led to a significant decrease in gross margin to (23.1%) during~~2024. We believe the ~~second quarter of fiscal 2023, as compared with gross margin of~~ ~~15.0% during the second quarter of fiscal 2022. The~~ significant decline in ~~net sales and~~ profitability ~~during~~for the ~~second quarter of fiscal 2023~~mattress fabrics segment stemmed from a ~~greater than anticipated~~ decline in consumer discretionary spending on mattress products, which we believe was ~~due to~~driven by the following factors: (i) inflationary effects of commodities such as gas, food, and other necessities; (ii) a significant increase in interest rates; (iii) the pulling forward of demand for home goods products during the early years of the COVID-19 pandemic, which demand has now shifted to travel, leisure, and other services; and (iv) excess inventory held by customers due to the decline in consumer demand.

Based on the above evidence, we were required to determine the recoverability of the Mattress Asset Group, which is classified as held and used, by comparing the carrying amount of the Mattress Asset Group to the sum of the future undiscounted cash flows expected to result from its use and eventual disposition. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized for the excess of the carrying amount over the ~~fair value (i.e., the~~ sum of the undiscounted future cash ~~flows)~~flows of the ~~asset.~~asset group. The carrying amount of the Mattress Asset Group totaled $~~38.8~~35.5 million, which relates to property, plant, and equipment of $~~35.9~~32.8 million, right of use assets of $~~2.1~~2.0 million, customer relationships of $332,000, and a non-compete agreement of $~~414,000, and customer relationships of $383,000~~339,000. ~~Based on the comparison of the~~The total carrying amount of the Mattress Asset Group todid not exceed the sum of its future undiscounted cash flows from its use and ~~eventual disposition,~~disposition. As a result, we determined no impairment associated with the Mattress Asset Group existed as of October ~~30, 2022, as~~29, 2023.

7. Note Receivable

In connection with the restructuring activity of our upholstery fabrics cut and sew operation located in Ouanaminthe, Haiti, effective January 24, 2023, Culp Upholstery Fabrics Haiti, Ltd. (“CUF Haiti”) entered into an agreement to terminate a lease of a facility (“Termination Agreement”). See Note 9 of the consolidated financial statements for further details regarding this restructuring activity.

Pursuant to the terms of the original lease agreement (the “Original Lease”), CUF Haiti was required to pay in advance $2.8 million for the full amount of rent due prior to the commencement of the Original Lease, with the initial lease term set to expire on December 31, 2029. Pursuant to the terms of the Termination Agreement, the Original Lease was formally terminated when CUF

I-12

Haiti vacated and returned possession of the leased facility to the lessor. After CUF Haiti vacated and returned possession of the leased facility, a third party (the “Lessee”) took possession of this facility, and the Lessee agreed to pay CUF Haiti $2.4 million in the form of a note receivable over a period commencing on April 1, 2023, and ending on December 31, 2029, based on the terms stated in the Termination Agreement. In connection with Termination Agreement, an affiliate of the Lessee has guaranteed payment in full of all amounts due and payable to CUF Haiti by the Lessee, and CUF Haiti has been fully and unconditionally discharged from all of its remaining obligations under the Original Lease.

As of the end of our third quarter of fiscal 2023, the gross carrying amount of the ~~Asset Group~~note receivable totaling $~~38.8~~2.4 million ~~did not exceed~~was recorded at its fair value of $2.0 million, which represented the ~~sum~~present value of future discounted cash flows based on the payment amounts and timing of such payments due from the Lessee as stated in the Termination Agreement. Consequently, since the fair value of the note receivable was less than its carrying amount, we recorded a restructuring charge of $434,000 during the third quarter of fiscal 2023 to reduce the note receivable’s carrying amount to its reported fair value.

We used an interest rate of 6.0% to determine the present value of the future ~~undiscounted~~discounted cash ~~flows.~~flows, which was based on significant unobservable inputs and assumptions determined by management such as (i) the credit characteristics of the Lessee and guarantor of the Termination Agreement; (ii) the length of the payment terms as defined in the Termination Agreement; (iii) the payment terms as defined in the Termination Agreement being denominated in USD; and (iv) the fact that the facility is located in, and the Lessee and guarantor conduct business in, Haiti, a foreign country. Since management used significant unobservable inputs and assumptions to determine the fair value of this note receivable, this note receivable was classified as Level 3 within the fair value hierarchy (see Note 11 for further explanation of the fair value hierarchy).

The following table represents the remaining future principal payments as of October 29, 2023:


(dollars in thousands)
2024	$	180
2025		360
2026		360
2027		360
2028		360
Thereafter		600
Undiscounted value of note receivable	$	2,220
Less: unearned interest income		(368	)
Present value of note receivable	$	1,852

As of October 29, 2023, we believe there is no expected credit loss related to the collectibility of our note receivable, as the Lessee has made all required principal payments stated in the Termination Agreement. We will continue to evaluate the facts and circumstances at the end of each reporting period to determine if an expected credit loss is deemed necessary.

7.8. Accrued Expenses

A summary of accrued expenses follows:


(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
Compensation, commissions and related benefits	$	4,489	$	5,986	$	4,248	$	4,540	$	4,489	$	5,800
Other accrued expenses		3,105		5,033		3,584		3,566		3,105		2,733
	$	7,594	$	11,019	$	7,832	$	8,106	$	7,594	$	8,533

~~8. Exit~~9. Upholstery Fabrics Segment Restructuring

Ouanaminthe, Haiti

During the third quarter of fiscal 2023, CUF Haiti entered into an agreement to terminate a lease associated with a facility located in Ouanaminthe, Haiti and, ~~Disposal Activity~~in turn, moved the production of upholstery cut and sewn 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

I-13

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:


	Three Months Ended			Six Months Ended
(dollars in thousands)	October 29, 2023			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.

The restructuring activity related to the discontinuation of production of upholstery cut and sew kits in Haiti was completed as of October 29, 2023. As a result of our strategic decision to discontinue this production, we incurred a cumulative amount of $1.4 million in restructuring expense and restructuring related charges.

The following summarizes the activity in accrued restructuring costs for the six-month period ending October 29, 2023:


	Employee
	Termination
(dollars in thousands)	Benefits			Total
Beginning balance	$	—		$	—
Expenses incurred		103			103
Payments		(103	)		(103	)
Ending balance	$	—		$	—

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 ~~our response~~taken in order to adjust our operating costs to better align with the declining ~~consumer~~customer demand for cut and sewn products.

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


	Three and Six Months Ended
(dollars in thousands)	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 (3)	$	713

Six Months Ended

(dollars in thousands)

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-12~~I-14

~~(1)~~

(3) 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 ~~period~~periods ending October 30, 2022.

The following summarizes the activity in accrued restructuring costs for the three-month and six-month ~~period~~periods ending October 30, 2022:


	Employee			Lease			Other
	Termination			Termination			Associated
(dollars in thousands)	Benefits			Costs			Costs			Total
Beginning balance	$	—		$	—		$	—		$	—
Accrual established in fiscal 2023		468			47			—			515
Expenses incurred		—			—			20			20
Payments		(468	)		(16	)		(18	)		(502	)
Ending balance	$	—		$	31		$	2		$	33

The restructuring activity related to the discontinuation of operations of the upholstery cut and sew kits in China was completed in the third quarter of fiscal 2023.

9.10. Lines of Credit

Revolving Credit Agreement – United States

~~Existing Credit Agreement~~

~~As of May 1, 2022, we had a Credit Agreement~~On January 19, 2023, Culp, Inc., as borrower (the ~~“Existing Credit Agreement”~~“company”) ~~with Wells Fargo Bank, N.A. (“WellsFargo”) that provided a revolving loan commitment of $~~30 ~~million, was set to expire on~~ ~~August 15, 2022~~, and ~~allowed us to issue letters of credit not to exceed $~~1 ~~million.~~

~~Amended Agreement~~

~~Effective June 24, 2022, we~~Read, as guarantor (the “Guarantor”), entered into ana Second Amended and Restated Credit Agreement (“(the “ABL Credit Agreement”), by and among the ~~Amended Agreement”) with~~company, the Guarantor and Wells ~~Fargo.~~Fargo Bank, National Association, as the lender (the “Lender”), to establish an asset-based revolving credit facility (the “ABL Facility”). The ~~Amended~~proceeds from the ABL Facility may be used to pay fees and expenses related to the ABL Facility and will provide funding for ongoing working capital and general corporate purposes. The ABL Credit Agreement amends, restates and supersedes, and serves as a replacement for, the ~~Existing~~Amended and Restated Credit ~~Agreement. The Amended~~ Agreement ~~provides a revolving credit facility~~(the “Amended Agreement”), dated as of upJune 24, 2022, and the First Amendment to $40 ~~million, is secured by a lien on the company’s assets, and expires in~~ ~~June 2025. The proceeds of borrowings under~~ the Amended Agreement ~~are to~~dated as of August 19, 2022, as amended, by and between the company and the Lender.

The ABL Facility may be used for ~~working capital~~revolving credit loans and ~~other general corporate purposes.~~

~~The company’s available borrowings under the Amended Agreement are based on~~letters of credit from time to time up to a ~~borrowing base calculation using certain accounts receivable and inventory~~maximum principal amount of ~~the company,~~$35.0 million, subject to ~~certain sub-limits as defined in~~ the ~~Amended Agreement, to be calculated on a monthly basis. As of October 30, 2022, our available borrowings based on the borrowing base calculation under the Amended Agreement was $26.8~~ ~~million.~~

~~Similar to the Existing Credit Agreement, the Amended Agreement~~limitations described below. The ABL Facility contains a sub-facility that allows the company to issue letters of credit in an aggregate amount not to exceed $1 million. The amount available under the ABL Facility is limited by a borrowing base consisting of certain eligible accounts receivable and inventory, reduced by specified reserves, as follows:

•

85% of eligible accounts receivable, plus

•

the least of:

the sum of:

▪

lesser of (i) 65% of eligible inventory valued at cost based on a first-in first-out basis (net of intercompany profits) and (ii) 85% of the net-orderly-liquidation value percentage of eligible inventory, plus

▪

the least of (i) 65% of eligible in-transit inventory valued at cost based on a first-in first-out basis (net of intercompany profits), (ii) 85% of the net-orderly-liquidation value percentage of eligible in-transit inventory, and (iii) $5.0 million, plus

▪

the lesser of (i) 65% of eligible raw material inventory valued at cost based on a first-in first-out basis (net of intercompany profits) and (ii) 85% of the net-orderly-liquidation value percentage of eligible raw material inventory

~~Borrowings under~~In each case, the ~~Amended Agreement bear interest at~~net-orderly-liquidation value is calculated based on the lower of (i) a first-in first-out basis and (ii) market value, and is (A) net of intercompany profits, (B) net of write-ups and write-downs in value with respect to foreign currency exchange rates and (C) consistent with most recent appraisals received and acceptable to Lender.

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$22.5 million; and

An amount equal to 200% of eligible accounts receivable,

minus

•

applicable reserves.

The ABL Facility permits both base rate ~~calculated using a margin~~borrowings and borrowings based upon daily simple SOFR (the ~~“Applicable Margin”) over~~secured overnight financing rate administered by the Federal Reserve Bank of New ~~York’s secured overnight funding~~York (or its successor)). Borrowings under the ABL Facility bear interest at an annual rate ~~(SOFR)~~equal to daily simple SOFR plus 150 basis points (if the average monthly excess availability under the ABL Facility is greater than 50%) or 175 basis points (if the average monthly excess availability under the ABL Facility is less than or equal to 50%) or 50 basis points above base rate (if the average monthly excess availability under the ABL Facility is greater than 50%) or 75 basis points above base rate (if the average monthly excess availability under the ABL Facility is less than or equal to 50%), as applicable, with a fee on unutilized commitments at an annual rate of 37.5 basis points and an annual servicing fee of $12,000.

The ABL Facility matures on January 19, 2026. The ~~Applicable Margin~~ABL Facility may be prepaid from time to time, in whole or in part, without a prepayment penalty or premium. In addition, customary mandatory prepayments of the loans under the ABL Facility are required upon the occurrence of certain events including, without limitation, outstanding borrowing exposures exceeding the borrowing base and certain dispositions of assets outside of the ordinary course of business. Accrued interest is ~~set initially at~~ payable monthly in arrears.~~1.35~~

The company’s obligations under the ABL Facility (and certain related obligations) are (a) guaranteed by the Guarantor and each of the company’s future domestic subsidiaries is required to guarantee the ABL Facility on a senior secured basis (such guarantors and the company, the “Loan Parties”) and (b) secured by all assets of the Loan Parties, subject to certain exceptions. The liens and other security interests granted by the Loan Parties on the collateral for the benefit of the Lender under the ABL Facility are, subject to certain permitted liens, first-priority.~~% and may vary under~~

Cash Dominion. Under the terms of the ~~Amended Agreement from~~ ~~1.35% to~~ ~~2.50%, depending~~ABL Facility, if (i) an event of default has occurred or (ii) excess borrowing availability under the ABL Facility (based on the ~~ratio~~lesser of $35.0 million and the borrowing base) (the “Excess Availability”) falls below $7.0 million at such time, the Loan Parties will become subject to cash dominion, which will require prepayment of loans under the ABL Facility with the cash deposited in certain deposit accounts of the Loan Parties, including a concentration account, and will restrict the Loan Parties’ ability to transfer cash from their concentration account. Such cash dominion period (a “Dominion Period”) shall end when Excess Availability shall be equal to or greater than $7.0 million for a period of 60 consecutive days and no event of default is continuing.

Financial Covenants. The ABL Facility contains a springing covenant requiring that the company’s ~~consolidated debt~~fixed charge coverage ratio be no less than 1.10 to ~~consolidated EBITDA, as defined in~~1.00 during any period that (i) an event of default has occurred or (ii) Excess Availability under the ~~Amended~~ABL Facility falls below $5.25 million at such time. Such compliance period shall end when Excess Availability shall be equal to or greater than $5.25 million for a period of 60 consecutive days and no event of default is continuing.

Affirmative and Restrictive Covenants. The ABL Credit Agreement ~~determined on a quarterly basis. The Amended Agreement~~governing the ABL Facility contains customary representations and warranties, affirmative and negative covenants (subject, in each case, to exceptions and ~~requires compliance by~~qualifications), and events of defaults, including covenants that limit the ~~company with~~company’s ability to, among other things:

•

incur additional indebtedness;

•

make investments;

•

pay dividends and make other restricted payments;

•

sell certain ~~financial covenants, including minimum tangible net worth~~assets;

•

create liens;

I-16

•

consolidate, merge, sell or otherwise dispose of $~~100~~ ~~million plus~~ 50~~% of annual net income, and a minimum ratio of consolidated EBITDA to consolidated net interest expense of~~ ~~3.0~~ ~~to 1.0 as defined in the Amended Agreement. The EBITDA to interest expense covenant does not apply under the Amended Agreement during the first three quarters~~all or substantially all of the company’s ~~fiscal 2023, but during that period, the company must maintain “access to liquidity” of $~~assets; and

•15

enter into transactions with affiliates.

million, which is defined as unencumbered liquid assets plus available and unused credit under the revolving credit facility as calculated using the borrowing base, as defined in the Amended Agreement.

~~First Amendment~~

On August 19, 2022, we entered into a First Amendment to the Amended Agreement (“the First Amendment”) with Wells Fargo. The terms of the First Amendment amend the time period in which the financial covenant for the minimum ratio of consolidated EBITDA to consolidated net interest expense applies, such that this EBITDA to interest expense covenant does not apply during

~~I-13~~

~~any of the four quarters of the Company’s fiscal 2023. During that time period, we are still required to maintain minimum “access to liquidity” of $~~15 ~~million as mentioned in the above Amended Agreement section.~~

~~Subsequent Event~~

~~We executed a non-binding term sheet during the second quarter of fiscal 2023 with Wells Fargo for a new revolving credit facility (the "Credit Facility") of up to $~~40 million, secured by the company's assets. This proposed Credit Facility will replace our Amended Agreement and, based on information available at this time, is expected to provide greater borrowing availability and better flexibility with minimal financial covenants. The company's borrowing availability under the Credit Facility will be based on a calculation using certain of the company's accounts receivable and inventory, determined on a monthly basis. The completion of the Credit Facility is subject to the parties entering into applicable definitive agreements, which may contain additional or different terms from those described herein.

Overall

Effective ~~June 24, 2022,~~January 19, 2023, interest was charged under the ~~Amended~~ABL Credit Agreement at a rate (applicable interest rate of 6.80% and 6.30% as of October 29, 2023 and April 30, 2023, respectively) calculated using the Applicable Margin over SOFR based on the company’s excess availability under the ABL Facility, as defined in the ABL Credit Agreement. Under the Amended Agreement, interest was charged at a rate (4.38% as of October 30, 2022) calculated using the Applicable Margin over SOFR based on the ratio of ~~the~~ company’s consolidated debt to consolidated EBITDA, as defined in the Amended Agreement. ~~Under the Existing Credit Agreement interest was charged at a rate (applicable interest rate of~~ ~~1.74% and~~ ~~2.40% as of October 31, 2021, and May 1, 2022, respectively) as a variable spread over~~ ~~LIBOR~~ ~~based on a ratio of debt to EBITDA, as defined in the Existing Credit Agreement.~~

There were $535,000, $275,000, and $275,000 of outstanding letters of credit provided by the ABL Credit Agreement and the Amended Agreement, ~~and Existing Credit Agreement~~as applicable, as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022.~~April 30, 2023, respectively. As of October ~~30, 2022,~~29, 2023, we had $~~725,000~~465,000 remaining for the issuance of additional letters of ~~credit.~~credit under the ABL Credit Agreement.

There were no borrowings outstanding under either the ~~Amended~~ABL Credit Agreement or ~~e Existing~~the Amended Credit Agreement, as applicable, as of October 29, 2023, October 30, 2022, or April 30, 2023, respectively.

As of October ~~31, 2021, and May 1, 2022, respectively.~~29, 2023, our available borrowings calculated under the provisions of the ABL Credit Agreement totaled $26.2 million.

Revolving Credit ~~Agreements~~Agreement – China Operations

Denominated in Chinese Yuan Renminbi (“RMB”)

We have an unsecured credit agreement denominated in RMB with a bank located in China that provides for a line of credit of up to 4035 million RMB ($~~5.5~~4.8 million USD as of October ~~30, 2022)~~29, 2023). Interest charged under this agreement is based on an interest rate determined by the Chinese government at the time of ~~borrowing~~borrowing. ~~and was~~This agreement is set to expire on ~~November 15, 2022~~October 24, 2024.

~~On November 24, 2022, we renewed this agreement, which renewal maintains our~~ Our borrowing capacity of 4035 million RMB is restricted to certain consolidated net sales and ~~extends~~consolidated profitability requirements as defined in the ~~expiration date~~agreement. These requirements relate to our total consolidated Culp Inc. entity as a whole. Currently, Culp Inc. does not meet the consolidated net sales and consolidated profitability requirements set forth in the agreement, therefore, we cannot borrow under this agreement.~~November 24, 2023~~.

There were no borrowings outstanding under this agreement as of October 29, 2023, October 30, 2022, ~~October 31, 2021, and May 1, 2022,~~or April 30, 2023, respectively.

~~Denominated in United States Dollar (“USD”)~~

~~We had an unsecured credit agreement denominated in USD with another bank located in China that provided for a line of credit of up to $~~2 ~~million USD, which expired on~~ ~~August 30, 2022. Currently, the company does not plan to renew or replace this agreement.~~

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of October ~~30, 2022,~~29, 2023, we complied with our financial covenants.

No interest payments were made during the first half of fiscal 2024. Interest paid during the first half of fiscal 2023 totaled $8,000.No ~~interest payments were made during the first half of fiscal 2022.~~

~~10.~~11. Fair Value

~~ASC~~Accounting Standard Codification ("ASC") Topic 820,Fair Value Measurement establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends

~~I-14~~

on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.

The hierarchy consists of three broad levels as follows:

Level 1 – Quoted market prices in active markets for identical assets or ~~liabilities.~~liabilities;

Level 2 – Inputs other than level 1 inputs that are either directly or indirectly ~~observable,~~observable; and

Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.

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The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors, and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.

Recurring Basis

The following tables present information about assets measured at fair value on a recurring basis:

Fair value measurements as of October 29, 2023, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

7,060

N/A

7,060

Growth Allocation Mutual Funds

560

N/A

560

Moderate Allocation Mutual Fund

N/A

Other

266

N/A

266

Fair value measurements as of October 30, 2022, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

9,089

N/A

9,089

Growth Allocation Mutual Funds

438

N/A

438

Moderate Allocation Mutual Fund

N/A

Other

159

N/A

159

Fair value measurements as of October 31, 2021, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

$
8,351

N/A

N/A

$
8,351

Bond Mutual Funds

4,384

N/A

N/A

4,384

Inflation Protected Bond Mutual Funds

2,975

N/A

N/A

2,975

Mortgage Securities Mutual Funds

1,118

N/A

N/A

1,118

Large Cap Equity Mutual Funds

694

N/A

N/A

694

Growth Allocation Mutual Funds

449

N/A

N/A

449

Preferred Securities Mutual Fund

282

N/A

N/A

282

U.S. Event Driven Equity Mutual Fund

203

N/A

N/A

203

Moderate Allocation Mutual Fund

88

N/A

N/A

88

Other

201

N/A

N/A

201

Fair value measurements as of May 1, 2022, using:

Fair value measurements as of April 30, 2023, using:

Quoted prices

Significant

Quoted prices

Significant

in active

other

Significant

in active

other

Significant

markets for

observable

unobservable

markets for

observable

unobservable

identical assets

inputs

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

8,683

N/A

8,683

7,649

N/A

7,649

Growth Allocation Mutual Funds

435

N/A

435

528

N/A

528

Moderate Allocation Mutual Fund

N/A

Other

158

N/A

158

208

N/A

208

~~Short-Term Investments – Available for Sale~~

During the fourth quarter of fiscal 2022, we sold all of our remaining short-term investments classified as available-for-sale, and therefore we did not report short-term investments classified as available-for-sale in the accompanying Consolidated Balance Sheets as of October 30, 2022, and May 1, 2022. As of October 31, 2021, our short-term investments classified as

~~I-15~~

~~available-for-sale (i) consisted of various types of bond and equity mutual funds, (ii) were recorded at their fair value totaling $9.7~~ ~~million, (iii) had an unrealized gain of $116,000, (iv) approximated their cost basis, and (v) resided with our U.S. operations.~~

~~Short-Term and Long-Term Investments - Held-To-Maturity~~

During the fourth quarter of fiscal 2022, we sold all of our remaining investments classified as held-to-maturity, and therefore we did not report short-term or long-term investments classified as held-to-maturity in the accompanying Consolidated Balance Sheets as of October 30, 2022, and May 1, 2022. As of October 31, 2021, our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds. These investments were classified as held-to-maturity as we had the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments were recorded as either current or noncurrent in our Consolidated Balance Sheets, based on the maturity date in relation to the respective reporting period and were recorded at amortized cost.

~~As of October 31, 2021, our held-to-maturity investments had an amortized cost and fair value totaling $9.9~~ ~~million and resided with our U.S. operations.~~

Our held-to-maturity investments were classified as level 2 within the fair value hierarchy as they were traded over the counter within a broker network and not on an active market. The fair values of our held-to-maturity investments were determined based on a published source that provided an average bid price. The average bid price was based on various broker prices that were determined based on market conditions, interest rates, and the rating of the respective bond investment.

Investments - Rabbi Trust

We have a rabbi trust (the “Trust”) for the participants of our deferred compensation plan (the “Plan”), that enables participants to ~~credit~~direct their contributions to various investment options under the Plan. The investments associated with the ~~rabbi trust~~Trust consist of a ~~U.S. Government~~ money market fund and various ~~equity related~~ mutual funds that are classified as available-for-sale.

As of October 29, 2023, our investments associated with the Trust totaled $7.9 million, of which $937,000 and $7.0 million were classified as short-term and long-term, respectively. As of October 30, 2022, our investments associated with ~~our rabbi trust~~the Trust totaled $9.8 million, of which $2.2 million and $7.6 million were classified as short-term and long-term, respectively. As of ~~October 31, 2021,~~April 30, 2023, our investments associated with ~~our rabbi trust~~the Trust totaled $~~9.0~~8.5 million, ~~all~~ of which $1.4 million and $7.1 million were classified as ~~long-term. As of May 1, 2022, our~~ short-term and long-term, respectively. The investments associated with ~~our rabbi trust totaled $9.4~~ ~~million, all of which were classified as long-term. The investments associated with our rabbi trust~~the Trust had an accumulated unrealized loss of $6,000, an accumulated unrealized loss of $21,000 ~~as of October 30, 2022,~~, and an accumulated unrealized gain of $~~169,000~~19,000~~, and $32,000~~, as of October ~~31, 2021,~~29, 2023, October 30, 2022, and ~~May 1, 2022,~~April 30, 2023, respectively.

The fair value of our ~~long-term~~ investments associated with ~~our rabbi trust~~the Trust approximates their cost basis.

Other

The carrying amount of our cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximated their fair value because of the short maturity of these financial instruments.

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~~11.~~12. Net ~~(Loss) Income~~Loss Per Share

Basic net ~~(loss) income~~loss per share is computed using the weighted-average number of shares outstanding during the period. Diluted net ~~(loss) income~~loss per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.

Weighted average shares used in the computation of basic and diluted net ~~(loss) income~~loss per share ~~are as follows:~~were 12,456,000 and 12,280,000 for the three months ending October 29, 2023, and October 30, 2022, respectively.

Three months ended

(amounts in thousands)

October 30, 2022

October 31, 2021

Weighted average common shares outstanding, basic

12,280

12,223

Dilutive effect of stock-based compensation

—

93

Weighted average common shares outstanding, diluted

12,280

12,316

~~During the second quarter of fiscal 2023,~~ ~~42,127~~ ~~shares~~Shares of unvested common stock that were not included in the computation of diluted net loss per share ~~as their effect would be antidilutive due to~~consist of the ~~decrease~~following:


	Three months ended
(in thousands)	October 29, 2023		October 30, 2022
antidilutive effect from decrease in the price per share of our common stock		11		42
antidilutive effect from net loss incurred during the fiscal year		136		35
total unvested shares of common stock not included in computation of diluted net loss per share		147		77

Weighted average shares used in the ~~price~~computation of basic and diluted net loss per share ~~of our common stock during~~were 12,394,000 and 12,259,000 for the ~~reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards. In addition, during the second quarter of fiscal~~six months ending October 29, 2023, and October 30, 2022, respectively.~~35,077~~

~~shares~~

Shares of unvested common stock that were not included in the computation of diluted net loss per share ~~as we incurred a net loss during~~consist of the ~~reporting period.~~

~~During the second quarter of fiscal 2022,~~ ~~13,484~~ shares of unvested common stock were not included in the computation of diluted net income per share as their effect would be antidilutive due to the decrease in the price per share of our common stock duringfollowing:

~~I-16~~

~~the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards.~~

Six months ended

(amounts in thousands)

October 30, 2022

October 31, 2021

Weighted average common shares outstanding, basic

12,259

12,268

Dilutive effect of stock-based compensation

—

101

Weighted average common shares outstanding, diluted

12,259

12,369


	Six months ended
(in thousands)	October 29, 2023		October 30, 2022
antidilutive effect from decrease in the price per share of our common stock		20		38
antidilutive effect from net loss incurred during the fiscal year		105		47
total unvested shares of common stock not included in computation of diluted net loss per share		125		85

~~During the first half of fiscal 2023,~~ ~~37,852~~ shares of unvested common stock were not included in the computation of diluted net loss per share as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards. In addition, during the first half of fiscal 2023, ~~47,249~~ ~~shares of unvested common stock were not included in the computation of diluted net loss per share as we incurred a net loss during the reporting period.~~

~~During the first half of fiscal 2022,~~ ~~1,561~~ shares of unvested common stock were not included in the computation of diluted net income per share as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards.

~~12.~~13. Segment Information

Overall

Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. In addition, this segment includes Read, which 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.

Financial Information

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 segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executives and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. Intangible assets are not included in segment assets as these assets are not used by the Chief Operating Decision Maker to evaluate the respective segment’s operating performance, allocate resources to individual segments, or determine executive compensation.

~~I-17~~I-19

Statements of operations for our operating segments are as follows:


	Three months ended						Three months ended
	October 30, 2022			October 31, 2021			October 29, 2023			October 30, 2022
net sales by segment:
mattress fabrics	$	26,230		$	40,883		$	31,377		$	26,230
upholstery fabrics		32,151			33,678			27,348			32,151
net sales	$	58,381		$	74,561		$	58,725		$	58,381
gross (loss) profit:
gross profit (loss):
mattress fabrics	$	(6,057	)	$	6,146		$	2,483		$	(6,057	)
upholstery fabrics		3,942			4,581			5,389			3,942
total segment gross (loss) profit	$	(2,115	)	$	10,727
restructuring related charge (1)		(98	)		—
gross (loss) profit	$	(2,213	)	$	10,727
segment gross profit (loss):								7,872			(2,115	)
restructuring related credit (charge) (1)								78			(98	)
gross profit (loss)							$	7,950		$	(2,213	)
selling, general, and administrative expenses by segment:
mattress fabrics	$	2,945		$	3,007		$	3,419		$	2,945
upholstery fabrics		3,680			3,553			3,998			3,680
unallocated corporate expenses		2,478			2,527			2,628			2,478
selling, general, and administrative expenses	$	9,103		$	9,087		$	10,045		$	9,103
(loss) income from operations by segment:
mattress fabrics	$	(9,002	)	$	3,139		$	(936	)	$	(9,002	)
upholstery fabrics		262			1,028			1,391			262
unallocated corporate expenses		(2,478	)		(2,527	)		(2,628	)		(2,478	)
total segment (loss) income from operations	$	(11,218	)	$	1,640
total segment loss from operations							$	(2,173	)	$	(11,218	)
restructuring related credit (charge) (1)								78			(98	)
restructuring expense (2)		(615	)		—			(144	)		(615	)
restructuring related charge (1)		(98	)		—
(loss) income from operations	$	(11,931	)	$	1,640
loss from operations							$	(2,239	)	$	(11,931	)
interest income		79			59			282			79
other income (expense)		829			(404	)
(loss) income before income taxes	$	(11,023	)	$	1,295
other income								49			829
loss before income taxes							$	(1,908	)	$	(11,023	)

I-20

(1) ~~Restructuring related charge~~Gross profit and loss from operations for the ~~three-months ended~~three months ending October 29, 2023, includes restructuring related credits of $78,000 for the gain on disposal of inventory related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. Gross loss and loss from operations for the three months ending October 30, 2022, ~~represents~~includes restructuring related charges totaling $98,000 ~~of losses~~for loss on disposal and markdowns of inventory associated with the exit of our cut and ~~sew~~sewn upholstery fabrics operation located in Shanghai, China. ~~This $98,000~~ ~~restructuring related charge was recorded to cost of sales in the Consolidated Statements of Net Loss for the three-months ending October 30, 2022.~~

(2) Restructuring expense of $144,000 for the three months ended October 29, 2023, represents a $142,000 impairment charge related to equipment and $2,000 of employee termination benefits related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. Restructuring expense of $615,000 for the three-months ended October 30, 2022, represents $468,000 for employee termination benefits, $80,000 ~~that relates~~related to a loss on disposal of equipment, $47,000 for lease termination costs, and $20,000 of other associated costs related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China.


	Six months ended						Six months ended
	October 30, 2022			October 31, 2021			October 29, 2023			October 30, 2022
net sales by segment:
mattress fabrics	$	55,602		$	83,941		$	60,599		$	55,602
upholstery fabrics		65,383			73,667			54,788			65,383
net sales	$	120,985		$	157,608		$	115,387		$	120,985
gross (loss) profit:
gross profit (loss):
mattress fabrics	$	(6,093	)	$	12,941		$	4,477		$	(6,093	)
upholstery fabrics		8,105			10,285			10,659			8,105
total segment gross profit	$	2,012		$	23,226		$	15,136		$	2,012
restructuring related charge (1)		(98	)		—			(101	)		(98	)
gross profit	$	1,914		$	23,226		$	15,035		$	1,914
selling, general, and administrative expenses by segment:
mattress fabrics	$	5,829		$	6,191		$	6,811		$	5,829
upholstery fabrics		7,302			6,990			7,939			7,302
unallocated corporate expenses		4,837			5,087			5,124			4,837
selling, general, and administrative expenses	$	17,968		$	18,268		$	19,874		$	17,968
(loss) income from operations by segment:
mattress fabrics	$	(11,922	)	$	6,750		$	(2,334	)	$	(11,922	)
upholstery fabrics		803			3,295			2,720			803
unallocated corporate expenses		(4,837	)		(5,087	)		(5,124	)		(4,837	)
total segment (loss) income from operations	$	(15,956	)	$	4,958
total segment loss from operations							$	(4,738	)	$	(15,956	)
restructuring related charge (1)								(101	)		(98	)
restructuring expense (2)		(615	)		—			(482	)		(615	)
restructuring related charge (1)		(98	)		—
(loss) income from operations	$	(16,669	)	$	4,958
loss from operations							$	(5,321	)	$	(16,669	)
interest income		96			132			627			96
other income (expense)		747			(640	)
(loss) income before income taxes	$	(15,826	)	$	4,450
other income								145			747
loss before income taxes							$	(4,549	)	$	(15,826	)

~~I-18~~I-21

(1) ~~Restructuring~~Gross profit and loss from operations for the six months ending October 29, 2023, includes a net restructuring related charge of $101,000, which represents a markdown of inventory totaling $179,000 during the first quarter of fiscal 2024, partially offset by a gain on disposal of inventory totaling $78,000 during the second quarter of fiscal 2024, both of which related to the discontinuation of production of cut and sewn upholstery kits at our facility located in Ouanaminthe, Haiti. Gross profit and loss from operations for the ~~six-months ended~~six months ending October 30, 2022 ~~represents~~includes restructuring related charges totaling $98,000 ~~of losses~~for loss on disposal and markdowns of inventory associated with the exit of our cut and ~~sew~~sewn upholstery fabrics operation located in Shanghai, China. ~~This $98,000~~ ~~restructuring related charge was recorded to cost of sales in the Consolidated Statements of Net Loss for the six-months ending October 30, 2022.~~

(2) Restructuring expense of $482,000 for the six months ended October 29, 2023, represents a $379,000 impairment charge associated with equipment and $103,000 for employee termination benefits related to the discontinuation of production of cut and sewn upholstery kits in Ouanaminthe, Haiti. Restructuring expense of $615,000 for the six-months ended October 30, 2022, represents $468,000 for employee termination benefits, $80,000 ~~that relates~~related to a loss on disposal of equipment, $47,000 for lease termination costs, and $20,000 of other associated costs related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China.

Balance sheet information for our operating segments follows:


(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
Segment assets:
Mattress Fabrics:
Accounts receivable	$	8,700	$	16,639	$	9,865
Accounts receivable, net							$	11,303	$	8,700	$	12,396
Inventory		30,300		34,498		39,028		27,195		30,300		25,674
Property, plant and equipment (1)		35,853		40,673		38,731		32,862		35,853		33,749
Right of use assets (2)		2,087		3,838		3,469		1,969		2,087		2,308
Total mattress fabrics assets		76,940		95,648		91,093		73,329		76,940		74,127
Upholstery Fabrics:
Accounts receivable		13,743		15,677		12,361
Accounts receivable, net								11,733		13,743		12,382
Inventory		21,924		29,283		27,529		17,270		21,924		19,406
Property, plant and equipment (3)		2,150		1,680		2,030		1,175		2,150		1,671
Right of use assets (4)		5,898		5,472		8,124		1,992		5,898		2,618
Total upholstery fabrics assets		43,715		52,112		50,044		32,170		43,715		36,077
Total segment assets		120,655		147,760		141,137		105,499		120,655		110,204
Non-segment assets:
Cash and cash equivalents		19,137		16,956		14,550		15,214		19,137		20,964
Short-term investments - available for sale		—		9,709		—
Short-term investments - held-to-maturity		—		1,564		—
Short-term investments - rabbi trust		2,237		—		—		937		2,237		1,404
Short-term note receivable								256		—		219
Current income taxes receivable		510		613		857		340		510		—
Other current assets		3,462		3,811		2,986		4,346		3,462		3,071
Long-term note receivable								1,596		—		1,726
Deferred income taxes		493		452		528		472		493		480
Property, plant and equipment (5)		829		912		941		627		829		691
Right of use assets (6)		3,624		4,339		3,984		2,913		3,624		3,265
Intangible assets		2,440		2,816		2,628		2,064		2,440		2,252
Long-term investments - rabbi trust		7,526		9,036		9,357		6,995		7,526		7,067
Long-term investments - held-to-maturity		—		8,353		—
Other assets		717		3,004		595		901		717		840
Total assets	$	161,630	$	209,325	$	177,563	$	142,160	$	161,630	$	152,183

Six months ended

(dollars in thousands)

October 30, 2022

October 31, 2021

Capital expenditures (7):

Mattress Fabrics

$
267

$
2,030

Upholstery Fabrics

447

397

Unallocated Corporate

60

1,302

Total capital expenditures

$
774

$
3,729

Depreciation expense:

Mattress Fabrics

$
3,088

$
3,071

Upholstery Fabrics

401

400

Total depreciation expense

$
3,489

$
3,471

(1)

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 $~~40.7~~33.7 million as of ~~October 31, 2021,~~April 30, 2023, represents property, plant, and equipment of $~~27.3~~22.7 million, $~~12.6~~10.4 million, and $~~836,000~~ ~~located in the U.S., Canada, and Haiti, respectively. The $38.7~~ ~~million as of May 1, 2022, represents property, plant, and equipment of $25.6~~ ~~million, $12.4~~ ~~million, and $757,000~~608,000 located in the U.S., Canada, and Haiti, respectively.

(2)

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, and $164,000 located in Haiti, Canada, and the U.S., respectively. The $~~3.8~~2.3 million as of ~~October 31, 2021,~~April 30, 2023, represents right of use assets of $~~2.2~~ ~~million, $1.3~~1.5 million and $~~309,000~~776,000 located in Haiti ~~the U.S.,~~ and Canada, respectively.

I-22

(3)

The $~~3.5~~1.2 million as of ~~May 1, 2022,~~October 29, 2023, represents ~~right of use assets~~property, plant, and equipment of $~~2.0~~ ~~million, $1.2~~1.0 million and $~~291,000~~140,000 located in ~~Haiti,~~ the U.S., and ~~Canada,~~China, respectively.

~~I-19~~

~~(3)~~

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 ~~October 31, 2021,~~April 30, 2023, represents property, plant, and equipment of $~~1.1~~974,000 ~~million,~~, $~~368,000~~592,000, and $~~242,000~~ ~~located in the U.S., China, and Haiti, respectively. The $2.0~~ ~~million as of May 1, 2022, represents property, plant, and equipment of $1.0~~ ~~million, $756,000, and $255,000~~105,000 located in the U.S., Haiti, and China, respectively.

(4)

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 $~~5.5~~2.6 million as of ~~October 31, 2021,~~April 30, 2023, represents right of use assets of $~~4.3~~1.5 million and $~~1.2~~1.1 million located in China ~~and the U.S., respectively. 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.

(5)

The $~~829,000~~627,000, $~~912,000~~829,000, and $~~941,000~~691,000 as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, respectively, represent property, plant, and equipment associated with unallocated corporate ~~departments~~department and corporate departments shared by our mattress fabrics and upholstery fabrics segments. Property, plant, and equipment associated with our corporate departments reside in the U.S.

(6)

The $~~3.6~~2.9 million, $~~4.3~~3.6 million, and $~~4.0~~3.3 million as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, respectively, represent right of use assets located in the U.S.

Information about capital expenditures and depreciation expense for our operating segments follows:


	Six months ended
(dollars in thousands)	October 29, 2023		October 30, 2022
Capital expenditures (1):
Mattress Fabrics	$	1,948	$	267
Upholstery Fabrics		185		447
Unallocated Corporate		80		60
Total capital expenditures	$	2,213	$	774
Depreciation expense:
Mattress Fabrics	$	2,922	$	3,088
Upholstery Fabrics		329		401
Total depreciation expense	$	3,251	$	3,489

~~(7)~~(1)

Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis.

~~I-20~~I-23

~~13.~~14. Income Taxes

Effective Income Tax Rate

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, compared with income tax expense of $1.3~~ ~~million, or~~ ~~30.3% of income before income taxes, for the six-month period ending October 31, 2021.~~2022.

Our effective income tax rates for the six-month periods ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~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 ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~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~~as compared to 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 ~~30, 2022,~~29, 2023, and October 30, ~~2021:~~2022:


	October 30,			October 31,			October 29,			October 30,
	2022			2021			2023			2022
U.S. federal income tax rate		21.0	%		21.0	%		21.0	%		21.0	%
U.S. valuation allowance		(36.7	)		(4.5	)		(32.8	)		(36.7	)
Withholding taxes associated with foreign jurisdictions		(3.3	)		6.1			(9.9	)		(3.3	)
Foreign income tax rate differential		3.2			3.9			(5.7	)		3.2
Tax effects of local currency foreign exchange gains (losses)		4.7			(0.4	)
Stock-based compensation		(0.6	)		0.2			(4.2	)		(0.6	)
Global Intangible Low Taxed Income Tax ("GILTI")		—			3.3
Tax effects of local currency foreign exchange gains								5.1			4.7
Other		(1.2	)		0.7			(0.3	)		(1.2	)
		(12.9	)		30.3	%	(26.8%)			(12.9)%

Our consolidated effective income tax ~~rate~~rates during the first half of fiscal 2024 and the first half of fiscal 2023 ~~was much more negatively~~were both adversely affected by the mix of earnings between our U.S. operations and ~~our~~ foreign subsidiaries, as compared to the first half of fiscal 2022. During the first half of 2023, we incurred a significant pre-tax loss from our U.S. operations, and therefore, a significant income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets. In addition, all of our taxable income ~~in the first half of fiscal 2023 was earned by~~stems from our ~~foreign~~ operations located in China and Canada, which have higher income tax rates than the U.S. In ~~comparison, as of~~addition, during the ~~end of the second quarter~~first half of fiscal ~~2022,~~2024 and the first half of fiscal 2023, we incurred pre-tax losses associated with our U.S. operations, ~~were projected~~for which an income tax benefit was not recorded due to ~~earn a level of pre-tax income that did not have a significant effect on our~~the full valuation allowance orapplied 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.~~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 ~~30, 2022,~~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. ~~taxable~~pre-tax losses, in that we experienced U.S. ~~taxable~~pre-tax losses during each of the last three fiscal years from ~~2020~~2021 through ~~2022,~~2023, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal ~~2023.~~2024. As a result of the significant weight of this

I-24

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, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, valuation allowances against our net deferred income tax assets pertain to the following:

(dollars in thousands)

October 30, 2022

October 31, 2021

May 1, 2022

U.S. federal and state net deferred income tax assets

$
13,958

9,155

9,527

U.S. capital loss carryforward

2,330

2,330

2,330

$
16,288

11,485

11,857

~~I-21~~


(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

We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company and whether we are required to record a deferred income tax liability for those undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As of October ~~30, 2022,~~29, 2023, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings and profits from our foreign subsidiaries would not be reinvested indefinitely and would eventually be distributed to our U.S. parent company. The conclusion reached from this assessment was consistent with prior reporting periods.

As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a 100% dividend received deduction for earnings and profits received from a 10% owned foreign corporation. Therefore, a deferred income tax liability will be required only for unremitted withholding taxes associated with earnings and profits generated by our foreign subsidiaries that will ultimately be repatriated to the U.S. parent company. As a result, as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, we recorded a deferred income tax liability of $~~4.0~~4.6 million, $~~3.4~~4.0 million, and $~~3.5~~4.2 million, respectively.

Uncertain Income Tax Positions

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, or is effectively settled through examination, or negotiation, or litigation, or 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.

As of October ~~30, 2022, and May 1, 2022,~~29, 2023, we had a $~~1.1~~1.2 million total gross unrecognized income tax benefit, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. As of October ~~31, 2021, we had a $1.4~~ ~~million total gross unrecognized income tax benefit, of which $1.1~~ ~~million and $380,000~~ ~~were recorded to income taxes payable – long-term and noncurrent deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets.~~

~~As of October~~ 30, ~~2022, and May 1,~~ 2022, we had a $1.1 million total gross unrecognized income tax benefit, of which the entire $~~1.1~~ ~~million would favorably affect~~amount was recorded to income taxes payable – long-term in the ~~income tax rate in future periods.~~accompanying Consolidated Balance Sheets. As of ~~October 31, 2021,~~April 30, 2023, we had a $~~1.4~~1.2 million total gross unrecognized income tax benefit, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. These unrecognized income tax benefits would favorably affect income tax expense in future periods by $1.2 million, $1.1 million, ~~would favorably affect the income tax rate in future periods.~~and $1.2 million, as of October 29, 2023, October 30, 2022, and April 30, 2023, respectively.

Our gross unrecognized income tax benefit of $~~1.1~~1.2 million as of October ~~30, 2022,~~29, 2023, relates to income tax positions for which significant change is currently not expected within the next year. ~~This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions.~~

Income Taxes Paid

The following table sets forth taxes paid by jurisdiction:

Six Months

Six Months

Ended

Ended

October 30,

October 31,

(dollars in thousands)

2022

2021

United States Transition Tax Payment

$
265

$
266

China Income Taxes

1,286

921

China - Withholding Taxes Associated With
Earnings and Profits Distributed to the U.S.

—

487

Canada - Income Taxes

161

427

$
1,712

$
2,101


	Six Months Ended		Six Months Ended
	October 29,		October 30,
(dollars in thousands)	2023		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

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~~14.~~15. Stock-Based Compensation

Equity Incentive Plan Description

On September 16, 2015, our shareholders approved an equity incentive plan titled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based units, and other equity and cash related awards as determined by the Compensation Committee of our board of directors. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. Effective September 27, 2023, our shareholders approved an amendment and restatement of the 2015 Plan (the "Amended and Restated Plan"). The Amended and Restated Plan authorizes the issuance of an additional 960,000 shares of common stock in addition to the shares of common stock still available for issuance under the 2015 Plan. The Amended and Restated Plan also removed certain sub-limits that previously applied with respect to specific type of awards that may be issued under the plan.

~~I-22~~

As of October ~~30, 2022,~~29, 2023, there were ~~242,188~~765,399 shares available for future equity-based grants under the ~~2015~~Amended and Restated Plan.

Performance-Based Restricted Stock Units

Senior Executives

We grant performance-based restricted stock units to senior executives which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit award agreements. The number of shares of common stock that are earned based on performance targets that have been achieved may be adjusted based on a market-based total shareholder return component as defined in the related restricted stock unit award agreements.

Our performance-based restricted stock units granted to senior executives were measured based on their fair market value on the date of grant. The fair market value per share was determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock for the performance-based component.

The following table provides assumptions used to determine the fair market value of the market-based total shareholder return component using the Monte Carlo simulation model on our outstanding performance-based restricted stock units granted to senior executives on September 28, 2023, August 10, 2022 and July 22, 2021:

August 10,

July 22,

2022

2021

Closing price of our common stock

$
5.06

$14.75

Expected volatility of our common stock

48.2
%

54.2
%
Expected volatility of peer companies (1)

41.6% - 105.1%

45.7% - 101.5%

Risk-free interest rate

3.13
%

0.33
%
Dividend yield

0.00
%

3.00
%
Correlation coefficient of peer companies (1)

0.05 - 0.23

0.03 - 0.35

~~(1)~~

The expected volatility and correlation coefficient of our peer companies for the August 10, 2022 and July 22, 2021, grant dates were based on peer companies that were approved by the Compensation Committee of our board of directors as an aggregate benchmark for determining the market-based total shareholder return component. Therefore, we disclosed ranges of the expected volatility and correlation coefficient for the companies that represented this peer group.


	September 28,	August 10,	July 22,
	2023	2022	2021
Closing price of our common stock	$5.59	$5.06	$14.75
Expected volatility of our common stock	37.3%	48.2%	54.2%
Expected volatility of peer companies	35.7%-91.5%	41.6%-105.1%	45.7%-101.5%
Risk-free interest rate	4.90%	3.13%	0.33%
Dividend yield	0.00%	0.00%	3.00%
Correlation coefficient of peer companies	0.01-0.21	0.05-0.23	0.03-0.35

Key Employees

We grant performance-based restricted stock units to key employees which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit award agreements. Our performance-based restricted stock units granted to key employees were measured based on the fair market value (the closing price of our common stock) on the date of grant. No market-based total shareholder return component was included in these awards.

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Overall

The following table summarizes information related to our grants of performance-based restricted stock units associated with senior executives and key employees that were unvested as of October ~~30, 2022:~~29, 2023:


	(3)		(4)						(3)		(4)
	Performance-Based		Restricted Stock						Performance-Based		Restricted Stock
	Restricted Stock		Units Expected						Restricted Stock		Units Expected
Date of Grant	Units Awarded		to Vest		Price Per Share			Vesting Period	Units Awarded		to Vest		Price Per Share			Vesting Period
September 28, 2023 (1)										227,497		121,740	$	6.43	(5)	34 months
August 10, 2022 (1)		178,714		—	$	5.77	(5)	3 years		178,714		—	$	5.77	(6)	3 years
July 22, 2021 (1)		122,476		—	$	15.93	(6)	3 years
July 22, 2021 ~~(2)~~(1)		20,500		—	$	14.75	(7)	3 years		122,476		—	$	15.93	(7)	3 years
July 22, 2021 (2)										20,500		—	$	14.75	(8)	3 years

(1)

Performance-based restricted stock units awarded to senior executives.

(2)

Performance-based restricted stock units awarded to key employees.

(3)

Amounts represent the maximum number of common stock shares that could be earned if certain performance targets are met as defined in the related restricted stock unit agreements.

(4)

Compensation cost is based on an assessment each reporting period to determine the probability of whether or not certain performance goals will be met and how many shares are expected to be earned as of the end of the vesting period. These amounts represent the number of shares that were expected to vest as of October ~~30, 2022.~~29, 2023.

~~I-23~~

(5)

Price per share represents the fair market value per share ($1.15~~1.14~~ per $1, or an increase of $,0.84 to the closing price of our common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($5.59) for the performance-based component of the performance-based restricted stock units granted to senior executives on September 28, 2023.

(6)

Price per share represents the fair market value per share ($1.14 per $1, or an increase of $0.71 to the closing price of our common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($5.06) for the performance-based component of the performance-based restricted stock units granted to senior executives on August 10, 2022.

~~(6)~~(7)

Price per share represents the fair market value per share ($1.08~~1.08~~ per $1,, or an increase of $1.18 to the closing price of our common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($14.75) for the performance-based component of the performance-based restricted stock units granted to senior executives on July 22, 2021.

~~(7)~~(8)

Price per share represents the closing price of our common stock on the date of grant.

There were no performance-based restricted stock units that vested during the six-month period ended October 29, 2023. The following table summarizes information related to our performance-based restricted stock units that vested during the six-month ~~periods ending~~period ended October 30, ~~2022, and October 31, 2021:~~2022:


	Performance-Based				(4)		Performance-Based				(4)
	Restricted Stock		(3)		Price		Restricted Stock		(3)		Price
Fiscal Year	Units Vested		Fair Value		Per Share		Units Vested		Fair Value		Per Share
Fiscal 2023 (1)		545	$	3	$	5.10		545	$	3	$	5.10
Fiscal 2023 (2)		437	$	2	$	5.10		437	$	2	$	5.10
Fiscal 2022 (1)		5,051	$	87	$	17.14
Fiscal 2022 (2)		5,812	$	100	$	17.14

(1)

Performance-based restricted stock units vested by senior executives.

(2)

Performance-based restricted stock units vested by key employees.

(3)

Dollar amounts are in thousands.

(4)

Price per share is derived from the closing price of our common stock on the date the respective performance-based restricted stock units vested.

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We recorded compensation expense of $~~2,000~~23,000 and $~~109,000~~2,000 within selling, general, and administrative expenses associated with our performance-based restrictive stock units for the six-month periods ~~ending~~ended October 29, 2023, and October 30, 2022, ~~and October 31, 2021,~~ respectively. Compensation expense is recorded based on an assessment each reporting period to determine the probability of whether or not certain performance targets will be met and how many shares are expected to be earned as of the end of the vesting period. If certain performance goals are not expected to be achieved, compensation expense would not be recorded, and any previously recognized compensation expense would be reversed.

As of October 29, 2023, the remaining unrecognized compensation expense related to our performance-based restricted stock units was $759,000, which is expected to be recognized over a weighted average vesting period of 2.7 years. As of October 29, 2023, the performance-based restricted stock units that are expected to vest had a fair value totaling $674,000.

Time-Based Restricted Stock Units

The following table summarizes information related to our grants of time-based restricted stock unit awards associated with senior executives, key employees, and ~~key members of management~~outside directors that were unvested as of October ~~30, 2022:~~29, 2023:

Time-Based

Restricted Stock

(1)

Date of Grant

Units Awarded

Price Per Share

Vesting Period
September 6, 2022

37,671

$
4.58

1 to 3 years
August 10, 2022

82,016

$
5.06

3 years
July 22, 2021

37,591

$
14.75

3 years
August 6, 2020

129,095

$
11.01

3 years
August 2, 2018

10,000

$
24.35

5 years


	Time-Based
	Restricted Stock		(1)
Date of Grant	Units Awarded		Price Per Share		Vesting Period
September 28, 2023 (2)		100,068	$	5.59	34 months
September 28, 2023 (3)		59,928	$	5.59	1 year
September 6, 2022 (2)		25,114	$	4.58	2 to 3 years
August 10, 2022 (2)		78,225	$	5.06	3 years
July 22, 2021 (2)		30,835	$	14.75	3 years

(1)

Price per share represents closing price of common stock on the date the respective award was granted.

(2)

Time-based restricted stock units awarded to senior executives and key employees.

(3)

Time-based restricted stock units awarded to outside directors.

The following table summarizes information related to our time-based restricted stock units that vested during the six-month periods ending October 29, 2023, and October, 30, ~~2022:~~2022, respectively:


	Time-Based				(4)		Time-Based				(2)
	Restricted Stock		(3)		Price		Restricted Stock		(1)		Price
Fiscal Year	Units Vested		Fair Value		Per Share		Units Vested		Fair Value		Per Share
Fiscal 2023 (1)		19,786	$	101	$	5.10
Fiscal 2024								151,653	$	857	$	5.65
Fiscal 2023 ~~(2)~~		13,013	$	66	$	5.10		32,799	$	167	$	5.10

(1)

~~Time-based restricted stock units vested by senior executives.~~

~~I-24~~

~~(2)~~

~~Time-based restricted stock units vested by key employees.~~

~~(3)~~

Dollar amounts are in thousands.

~~(4)~~(2)

Price per share is derived from the closing price of our common stock on the date the respective time-based restricted stock units vested.

~~Overall~~

We recorded compensation expense of $~~396,000~~378,000 and $~~446,000~~396,000 within selling, general, and administrative expenses associated with our time-based restricted stock unit awards for the six-month periods ~~ending~~ended October 29, 2023, and October 30, 2022, ~~and October 31, 2021,~~ respectively.

As of October ~~30, 2022,~~29, 2023, the remaining unrecognized compensation expense related to our time-based restricted stock units was $1.3 million, which is expected to be recognized over a weighted average vesting period of 1.9 years. As of October ~~30, 2022,~~29, 2023, the time-based restricted stock units that are expected to vest had a fair value totaling $~~1.5~~1.6 million.

Immediately Vested Common Stock Awards

We granted a total of 16,616 shares of common stock to our outside directors on July 3, 2023. These shares of common stock vested immediately and were measured at their fair value on the date of the grant. The fair value of these awards was $5.04 per share on July 3, 2023, which represents the closing price of our common stock on the date of grant.

We granted a total of 18,326 and 19,753 shares of common stock to our outside directors on October 3, 2022, and July 1, 2022, respectively. These shares of common stock vested immediately and were measured at their fair value on the date of the grant. The

I-28

fair value of these awards was $4.57 and $4.24 per share on October ~~3, 2022~~3,2022, and July 1, 2022, respectively, which represents the closing price of our common stock on the date of grant.

We ~~granted a total of~~ ~~6,426~~ ~~and~~ ~~4,312~~ shares of common stock to our outside directors on October 1, 2021 and July 1, 2021, respectively. These shares of common stock vested immediately and were measured at their fair value on the date of grant. The fair value of these awards wasrecorded $~~13.03~~84,000 and $~~16.24~~ ~~per share on October 1, 2021 and July 1, 2021, respectively, which represents the closing price of our common stock on the date of grant.~~

~~We recorded $~~167,000 ~~and $154,000~~ of compensation expense within selling, general, and administrative expenses for common stock awards to our outside directors for the six-month periods ~~ending~~ended October 29, 2023, and October 30, 2022, ~~and October 31, 2021,~~ respectively.

~~15.~~16. Leases

Overview

We lease manufacturing facilities, showroom and office space, distribution centers, and equipment under operating lease arrangements. Our operating leases have remaining lease terms of one to ~~nine~~eight years, with renewal options for additional periods ranging up to twelve years.

Balance Sheet

The right of use assets and lease liabilities associated with our operating leases as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, are as follows:



(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
Right of use assets	$	11,609	$	13,649	$	15,577	$	6,874	$	11,609	$	8,191
Operating lease liability - current		2,655		2,878		3,219		2,540		2,655		2,640
Operating lease liability – noncurrent		4,194		7,914		7,062		2,431		4,194		3,612

Supplemental Cash Flow Information


	Six Months Ended		Six Months Ended		Six Months Ended		Six Months Ended
(dollars in thousands)	October 30, 2022		October 31, 2021		October 29, 2023		October 30, 2022
Operating lease liability payments	$	1,068	$	1,436	$	1,330	$	1,068
Right of use assets exchanged for lease liabilities		—		2,614		157		—

Operating lease expense for the three-month periods ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~30, 2022, was $~~959,000~~781,000 and $~~905,000~~959,000, respectively. Operating lease expense for the six-month periods ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~30, 2022, was $~~2.0~~1.6 million and $~~1.8~~2.0 million, respectively. Short-term lease and variable lease expenses were immaterial for the three-month and six-month periods ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021.~~30, 2022.

~~I-25~~

Other Information

Maturity of our operating lease liabilities for the remainder of fiscal ~~2023,~~2024, the subsequent next four fiscal years, and thereafter follows:


(dollars in thousands)
2023	$	1,377
2024		2,575		$	1,269
2025		1,578			1,917
2026		334			638
2027		298			342
2028					225
Thereafter		1,028			804
	$	7,190		$	5,195
Less: interest		(341	)		(224	)
Present value of lease liabilities	$	6,849		$	4,971

As of October ~~30, 2022,~~29, 2023, the weighted average remaining lease term and discount rate for our operating leases follows:


	October ~~30, 2022~~29, 2023
Weighted average lease term (in years)	~~4.0~~3.79 ~~years~~
Weighted average discount rate		~~3.39~~3.46	%

~~Impairment~~

See section titled "Impairment" located at Note 6 to the notes to the consolidated financial statements for further details of our assessment and conclusions reached regarding impairment of long-lived assets associated with our mattress fabrics segment that included property, plant, and equipment, right of use assets, and finite-lived intangible assets (i.e., customer relationships and non-compete agreement) that are classified as held and used.I-29

~~16.~~17. Commitments and Contingencies

Litigation

The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the consolidated financial position, consolidated results of operations, or consolidated cash flows of the company.

Accounts Payable – Capital Expenditures

As of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, we had ~~total~~ amounts due regarding capital expenditures totaling $~~200,000~~298,000, $~~176,000~~200,000, and $~~473,000~~56,000, respectively, which pertained to outstanding vendor invoices, none of which were financed.

Purchase Commitments – Capital Expenditures

As of October ~~30, 2022,~~29, 2023, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $~~444,000~~1.6. million.

~~17.~~18. Statutory Reserves

Our subsidiary located in China was required to transfer 10% of its net income, as determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reached 50% of the company’s registered capital. As of October ~~30, 2022,~~29, 2023, the statutory surplus reserve fund represents the 50% registered capital requirement, and therefore, our subsidiary located in China is no longer required to transfer ~~10%~~10% of its net income in accordance with PRC accounting rules and regulations.

The transfer to this reserve must be made before distributions of any dividend to shareholders. As of October ~~30, 2022,~~29, 2023, the company’s statutory surplus reserve was $4.0 million. The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any. The statutory surplus reserve fund may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

The company’s subsidiary located in China can transfer funds to the parent company, except for the statutory surplus reserve of $4.0 million, to assist with debt repayment, capital expenditures, and other expenses of the company’s business.

~~I-26~~

~~18.~~19. 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 ~~will be~~are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

~~During the first half of fiscal 2023, we~~We did not repurchase any shares of ~~our common stock. During the first half of fiscal 2022, we repurchased~~ ~~121,688~~ ~~shares of our~~ common stock ~~at a cost of $1.8~~ ~~million.~~during the six-month periods ending October 29, 2023, and October 30, 2022, respectively.

As of October ~~30, 2022, we had~~29, 2023, $3.2 million is available for additional repurchases of our common stock.

~~19. Dividend Program~~

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 our liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders. Accordingly, we did no~~t make any dividend payments during first half of fiscal 2023.~~

~~During the first half of fiscal 2022, dividend payments totaled $2.7~~ ~~million, which represented a quarterly dividend payment of $0.11~~ ~~per share.~~

~~I-27~~I-30

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

This report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties that may cause actual events and results to differ materially from such statements. Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update or alter such statements to reflect any changes in management’s expectations or any change in the assumptions or circumstances on which such statements are based, whether due to new information, future events, or otherwise. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often but not always characterized by qualifying words such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan,” “project,” and their derivatives, and include but are not limited to statements about expectations, projections, or trends for our future operations, strategic initiatives and plans, production levels, new product launches, sales, profit margins, profitability, operating (loss) income, capital expenditures, working capital levels, cost savings, income taxes, SG&A or other expenses, pre-tax (loss) income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, potential acquisitions, future economic or industry trends, public health epidemics, or future developments. There can be no assurance that we will realize these expectations or meet our guidance, or that these beliefs will prove correct.

Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses into our existing operations. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in tariffs or trade policy, including changes in U.S. trade enforcement priorities, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. In addition, because our foreign operations use the U.S. dollar as their functional currency, changes in the exchange rate between the local currency of those operations and the U.S dollar can affect our reported profits from those foreign operations. Also, economic or political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. The impact of public health epidemics on employees, customers, suppliers, and the global economy, such as the global coronavirus pandemic currently affecting countries around the world, could also adversely affect our operations and financial performance. In addition, the impact of potential goodwill or intangible asset impairments could affect our financial results. Increases in freight costs, labor costs, and raw material prices, including increases in market prices for petrochemical products, can also significantly affect the prices we pay for shipping, labor, and raw materials, respectively, and in turn, increase our operating costs and decrease our profitability. Finally, disruption in our customers’ supply chains for non-fabric components may cause declines in new orders and/or delayed shipping of existing orders while our customers wait for other components, which could adversely affect our financial results. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, are included in Item 1A “Risk Factors” section in our most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial results.

~~I-28~~I-31

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~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.~~We currently~~ Currently, we have mattress fabric operations located in Stokesdale, NC, ~~High Point, NC,~~ Quebec, Canada, and Ouanaminthe, Haiti. During the second quarter of fiscal 2023, we took action to begin implementing a rationalization of our U.S.-based mattress fabrics cut and sew platform, which will include a closure of our two High Point, NC, facilities associated with this business during the third quarter of fiscal 2023.

Upholstery Fabrics

The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. WeCurrently, we have upholstery fabric operations located in Shanghai, China, and Burlington, NC. During the third quarter of fiscal 2022, we ~~also~~ 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

Results of Operations


	Three Months Ended							Three Months Ended
(dollars in thousands)	October 30, 2022			October 31, 2021			Change	October 29, 2023			October 30, 2022			Change
Net sales	$	58,381		$	74,561		(21.7)%	$	58,725		$	58,381		0.6%
Gross (loss) profit		(2,213	)		10,727		(120.6)%
Gross profit (loss)									7,950			(2,213	)	(459.2)%
Gross margin		(3.8	)%		14.4	%	(1820)bp		13.5	%		(3.8	)%	1733bp
Selling, general, and administrative expenses		9,103			9,087		0.2%		10,045			9,103		10.3%
Restructuring expense		615			—		100.0%		144			615		(76.6)%
(Loss) income from operations		(11,931	)		1,640		N.M.
Loss from operations									(2,239	)		(11,931	)	(81.2)%
Operating margin		(20.4	)%		2.2	%	(2260)bp		(3.8	)%		(20.4	)%	1662bp
(Loss) income before income taxes		(11,023	)		1,295		N.M.
Loss before income taxes									(1,908	)		(11,023	)	(82.7)%
Income tax expense		1,150			444		159.0%		516			1,150		(55.1)%
Net (loss) income		(12,173	)		851		N.M.
Net loss									(2,424	)		(12,173	)	(80.1)%

Six Months Ended

(dollars in thousands)

October 30,
2022

October 31,
2021

Change
Net sales

$
120,985

$
157,608

(23.2)%
Gross profit

1,914

23,226

(91.8)%
Gross margin

1.6
%

14.7
%
(1310)bp
Selling, general, and administrative expenses

17,968

18,268

(1.6)%
Restructuring expense

615

—

100.0%
(Loss) income from operations

(16,669
)

4,958

N.M.
Operating margin

(13.8
)%

3.1
%
(1690)bp
(Loss) income before income taxes

(15,826
)

4,450

N.M.
Income tax expense

2,046

1,349

51.7%
Net (loss) income

(17,872
)

3,101

N.M.

~~I-29~~I-32


	Six Months Ended
(dollars in thousands)	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 ~~2023 decreased~~2024 increased by ~~21.7%~~0.6% compared with the same period a year ago, with mattress fabrics sales ~~decreasing 35.8%~~increasing 19.6% and upholstery fabrics sales decreasing ~~4.5%~~14.9%. Our net sales for the first half of fiscal ~~2023~~2024 decreased by ~~23.2%~~4.6% compared with the same period a year ago, with mattress fabrics sales ~~decreasing 33.8%~~increasing 9.0% and upholstery fabrics sales decreasing ~~11.2%~~16.2%.

The ~~decrease~~increase in net sales in our mattress fabrics segment for both the second quarter and the first half of fiscal ~~2023 reflects an ongoing slowdown~~2024 was primarily driven by new fabric and sewn cover placements that are priced in ~~consumer demand~~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 the domestic mattress industry. The impact of this industry softness has been exacerbated by mattress manufacturers and retailers continuing to work through an excess of inventory, delaying the timing of shipments and new product rollouts. The decrease in net sales during both periods was partially offset by certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 0.7% during the second quarter and by approximately 1.4% during the first half of fiscal 2023.

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 ~~2023~~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 ~~during both periods~~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 periods, as well as certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 3.0% during the second quarter and by approximately 3.6% during the first half of fiscal 2023.period.

See the Segment Analysis section below for further details.

~~Income~~Loss Before Income Taxes

Overall, our loss before income taxes for the second quarter of fiscal ~~2023~~2024 was ~~$(11.0)~~$(1.9) million, compared with ~~income~~loss before income taxes of ~~$1.3~~$(11.0) million for the prior-year period, while our loss before income taxes for the first six months of fiscal ~~2023~~2024 was ~~$(15.8)~~$(4.5) million, compared with ~~income~~loss before income taxes of ~~$4.5 million~~$(15.8) for the prior-year period.

Operating performance for both the second quarter and the first half of fiscal ~~2023,~~2024, as compared to the prior-year ~~period,~~periods, was ~~primarily~~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 ~~sales;~~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 ~~due to the write down of inventory to its net realizable value~~ and inventory closeout sales for our mattress fabrics segment; higher than normal markdowns of inventory ~~due to~~for our ~~aged inventory policy for both our mattress fabrics and~~ upholstery fabrics segment; and restructuring and related charges associated with our upholstery fabrics segment. Operating performance for the first half of fiscal 2023 was also materially pressured by the same factors, as well as continued inflationary pressures; labor challenges within both our mattress fabrics business and our Read business that resulted in increased employee training costs and operating inefficiencies, including quality issues within our mattress fabrics segment; and additional costs and operating inefficiencies associated with our new upholstery fabrics cut and sew facility in Haiti. These pressures were partially offset by slightly lower total SG&A expense for the six-month period, due primarily to lower incentive compensation expense during the first quarter of fiscal 2023, as well as a more favorable foreign exchange rate associated with our upholstery fabric operations in China.

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 ~~ended~~ending October 30, ~~2022, compared with income tax expense of $1.3 million, or 30.3% of income before income taxes, for the six-month period ended October 31, 2021.~~2022.

Our consolidated effective income tax ~~rate~~rates during the first half of fiscal 2024 and the first half of fiscal 2023 ~~was much more negatively~~were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as compared to the first half of fiscal 2022. During the first half of fiscal 2023, we incurred a significant pre-tax loss from our U.S. operations, and therefore, a significant income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets. In addition, all of our taxable income ~~in the first half of fiscal 2023 was earned by~~stems from our ~~foreign~~ operations located in China and Canada, which have higher income tax rates than the U.S. In ~~comparison, as of~~addition, during the ~~end of the second quarter~~first half of fiscal ~~2022,~~2024 and fiscal 2023, we incurred pre-tax losses associated with our U.S. operations, ~~were projected~~for which an income tax benefit was not recorded due to ~~earn a level of pre-tax income that did not have a significant effect on our~~the full valuation allowance orapplied against our U.S. net deferred income tax assets. However, the income tax

I-33

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.

Refer to Note 1314 of the consolidated financial statements for further details regarding our provision for income taxes.

~~I-30~~

Liquidity

As of October ~~30, 2022,~~29, 2023, our cash and cash equivalents (collectively, “cash”) totaled ~~$19.1~~$15.2 million, ~~an increase~~a decrease of ~~$4.5~~$5.8 million compared with ~~$14.6~~cash of $21.0 million as of ~~May 1, 2022.~~April 30, 2023. This ~~increase~~decrease was ~~primarily~~mostly due to ~~(i) $6.2~~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 ~~partially offset by (ii) capital expenditures totaling $1.1 million~~

~~Our net cash provided by operating activities was~~of $6.2 million during the first half of fiscal ~~2023, an~~2023. This trend mostly reflects (i) a significant increase ~~of $7.5 million compared with net cash used~~ in ~~operating activities of $(1.3) million~~accounts payable during the first half of fiscal 2022. This trend primarily reflects (i) a reduction of inventory related to the significant decline in net sales, improved alignment of inventory purchases with current customer demand trends, and promotional programs to reduce aged raw materials and finished goods inventory; (ii) an increase in accounts payable that2023 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 ~~quarter~~half of fiscal ~~2023; and~~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 ~~2022 that~~2024, which payments did not ~~recur~~occur during the first quarter of fiscal ~~2023,~~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 ~~(iv) a decrease~~(v) an increase in ~~net~~ cash earnings during the first half of fiscal ~~2023 as~~2024 compared with the first half of fiscal ~~2022.~~2023.

As of October ~~30, 2022,~~29, 2023, there were no outstanding borrowings under our lines of credit.

~~Dividend Program~~Segment Analysis


	Three Months Ended
(dollars in thousands)	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


	Six Months Ended
(dollars in thousands)	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 ~~company’s best interest~~second quarter of fiscal 2024 compared to ~~support future growth and~~ the ~~long-term interests~~prior-year period. Mattress fabrics sales increased 9.0% in the first half of ~~our shareholders. Accordingly, we did not make any dividend payments during~~fiscal 2024 compared to the first half of fiscal 2023.

~~During the first half of fiscal 2022, dividend payments totaled $2.7 million, which represented a quarterly cash dividend payment of $0.11 per share.~~

~~Our board of directors has sole authority to determine if and when we will declare future dividends, and on what terms. We will continue to reassess~~The increase in net sales in our dividend policy each quarter. 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.

~~Common Stock Repurchases~~

~~In March 2020, our board of directors approved an authorization~~mattress fabrics segment 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.

During the first half of fiscal 2023, we did not purchase any shares of our common stock. As a result, as of October 30, 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 third quarter of fiscal 2023.

~~During the first half of fiscal 2022, we repurchased 121,688 shares of common stock at a cost of $1.8 million.~~

~~Segment Analysis~~

~~Mattress Fabrics Segment~~

Three Months Ended

(dollars in thousands)

October 30,
2022

October 31,
2021

Change
Net sales

$
26,230

$
40,883

(35.8)%
Gross (loss) profit

(6,057
)

6,146

(198.6)%
Gross profit margin

(23.1
)%

15.0
%
(3810)bp
Selling, general, and administrative expenses

2,945

3,007

(2.1)%
(Loss) income from operations

(9,002
)

3,139

(386.8)%
Operating margin

(34.3
)%

7.7
%
(4200)bp

~~I-31~~

Six Months Ended

(dollars in thousands)

October 30,
2022

October 31,
2021

Change
Net sales

$
55,602

$
83,941

(33.8)%
Gross (loss) profit

(6,093
)

12,941

(147.1)%
Gross margin

(11.0
)%

15.4
%
(2640)bp
Selling, general, and administrative expenses

5,829

6,191

(5.8)%
(Loss) income from operations

(11,922
)

6,750

(276.6)%
Operating margin

(21.4
)%

8.0
%
(2940)bp

~~Net Sales~~

~~Mattress fabrics sales decreased 35.8% in~~both the second quarter ~~of fiscal 2023 compared to the prior-year period. Mattress fabrics sales decreased 33.8% in the first half of fiscal 2023 compared to the first half of fiscal 2022.~~

~~The decrease in mattress fabrics net sales for the second quarter~~ and ~~for~~ the first six months of fiscal ~~2023 reflects an ongoing slowdown~~2024 was primarily driven by new fabric and sewn cover placements that are priced in ~~consumer demand~~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. We~~industry remains pressured by ongoing demand softness, we believe this slowdown is primarily due to inflationary pressures affecting consumer spending, as well as a shift in demand from home goods to travel, leisure, and entertainment following a pulling forward of demand for home goods during the early years of the COVID-19 pandemic.~~The impact of this industry softness has been exacerbated by mattress manufacturers and retailers continuing to work~~we are making gains with customers through ~~an excess of inventory, delaying the timing of shipments and~~ new ~~product~~program rollouts. The decrease in net sales during both periods was partially offset by certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 0.7% during

During the second quarter, ~~and by approximately 1.4% during the first half of fiscal 2023.~~

~~Despite the headwinds,~~ we ~~remained focused~~maintained our focus on ~~inventory reductions and cash generation during the quarter. We continued to execute~~executing our product-driven strategy with an ongoing emphasis on innovation, design creativity, and ~~personalized~~ customer ~~service. Additionally, the~~relationships. The strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey continued to ~~enable us 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 ~~our market position remains solid, with strong new placements,~~this plan will lay the foundation for steady, sequential improvement in this business, although the ~~timing for new product rollouts continues to~~speed of this improvement will be affected by ~~customers working through their existing excess inventory.~~overall industry trends.

Looking ahead, we expect the current ~~macroeconomic~~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 and continue to delay the timing of new product rollouts.~~products. We expect these conditions are likely to ~~pressure~~affect our results through at least the ~~fourth~~third quarter of fiscal ~~2023.~~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 ~~impacts of~~geopolitical disruptions related to wars in Ukraine and the ~~COVID-19 pandemic,~~Middle East, as well as ~~Russia’s invasion of Ukraine, including its effect on petrochemical pricing~~possible economic and ~~consumer spending,~~health effects from additional surges in the coronavirus, 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~~These situations could cause disruption that could adversely affect our operations and financial performance.

Gross Profit, Selling, General & Administrative Expenses, and ~~Operating Income~~Loss from Operations

The decrease in ~~mattress fabrics profitability~~this segment’s operating loss during both the second quarter and the first half of fiscal ~~2023,~~2024, as compared to the prior-year ~~period,~~periods (which were affected by certain inventory impairment charges and losses from inventory close out sales), was primarily due to ~~operating inefficiencies from lower sales volume; $2.9 million in impairment charges due to the write down of~~better inventory ~~to its net realizable value, $2.1 million in losses on the closeout sale of raw material~~management; higher sales; better pricing and ~~finished goods inventory, and $869,000 in markdowns of inventory due to our policy for aged inventory; and inefficiencies due to quality issues. The timing of the inventory impacts was~~margins (driven mostly ~~driven~~ by ~~our customers' focus on~~ new product ~~offerings~~placements priced in line with current costs, and, to ~~introduce at~~a lesser extent, sku rationalization and the ~~retail level, as well as inflationary pressures, changes in consumer spending,~~re-pricing underperforming skus to reflect current costs); and ~~ongoing macro conditions.~~

~~Mattress fabrics profitability for the first half of fiscal 2023~~improved operating efficiencies. These factors were partially offset by higher SG&A expense during both periods, which was ~~pressured by the same factors that affected the second quarter, as well as labor challenges, including inefficiencies~~ due mostly to ~~hiring and training new employees;~~ higher ~~raw material costs; and an additional $499,000 in markdowns of inventory due to our policy for aged inventory during the first quarter, offset slightly by lower SG&A due primarily to lower~~ incentive compensation expense, ~~during the first quarter.~~

~~We implemented two targeted price increases on select~~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 lines during the second quarter to help offset the continued rise in raw material costs. Based on demand trends for sewn mattress covers, we also began to implement a restructuring and rationalization of our U.S.-based cut and sewn cover platform during the quarter, initiating a move of our R&D and prototyping capabilities from our High Point, North Carolina, location to our facility in Stokesdale, North Carolina. The result of this move is the discontinuation of our higher-cost on-shore production capabilities, with planned closures of our two leased facilities in High Point, North Carolina, during the third quarter of fiscal 2023. We believe this move will allow us to generate cost savings by

~~I-32~~

~~utilizing our lower-cost mattress cover production and sourcing capabilities in Haiti and Asia, where we can scale operations to align with demand and continue to support the needs of our customers.~~roll outs.

We expect the ongoing industry softness affecting sales volumes ~~as well as continued inflationary pressures,~~ will affect profitability through at least the ~~fourth~~third quarter of fiscal ~~2023,~~2024, although we believe these headwinds will be mitigated to some extent by our ongoing efforts to improve operational efficiencies and control internal costs, ~~and improve efficiencies.~~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 ~~necessary~~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 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
Accounts receivable	$	8,700	$	16,639	$	9,865	$	11,303	$	8,700	$	12,396
Inventory		30,300		34,498		39,028		27,195		30,300		25,674
Property, plant & equipment		35,853		40,673		38,731		32,862		35,853		33,749
Right of use assets		2,087		3,838		3,469		1,969		2,087		2,308
	$	76,940	$	95,648	$	91,093	$	73,329	$	76,940	$	74,127

Refer to Note 1213 of the consolidated financial statements for disclosures regarding determination of our segment assets.

I-35

Accounts Receivable

As of October ~~30, 2022,~~29, 2023, accounts receivable ~~decreased~~increased by ~~$7.9~~$2.6 million, or ~~47.7%~~29.9%, compared with October ~~31, 2021.~~30, 2022. This ~~trend~~increase reflects the ~~significant decrease~~increase in net sales during ~~second quarter of fiscal 2023 compared with~~ the second quarter of fiscal ~~2022,~~2024 compared with fiscal 2023, as described in the Net Sales section above. In addition, we experienced ~~faster~~slower cash collections ~~with a significant customer~~as customers did not take advantage of cash discounts as much during the second quarter of fiscal ~~2023~~2024, as compared with the second quarter of fiscal ~~2022, which~~2023. This led to ~~a decline~~an increase in ~~days’~~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 ~~37 days for~~ the second quarter of fiscal ~~2022.~~

2024. As a result, days’ sales outstanding decreased to 33 days during the second quarter of ~~October 30, 2022,~~fiscal 2024, a decrease from 37 days during the fourth quarter of fiscal 2023. The decrease in accounts receivable ~~decreased~~due to faster cash collections was partially offset by ~~$1.2 million, or 11.8%, compared with May 1, 2022. This trend reflects a decrease~~an increase in net sales during the second quarter of fiscal ~~2023~~2024, as compared with the fourth quarter of fiscal ~~2022.~~2023. Net sales ~~during~~for the second quarter of fiscal ~~2023 was $26.2~~2024 were $31.4 million, ~~a decrease~~an increase of ~~$3.6 million, or 11.9%,~~2.2% compared with net sales of ~~$29.8~~$30.7 million during the fourth quarter of fiscal ~~2022. Days’ sales outstanding was 30 days for both the second quarter of fiscal 2023 and the fourth quarter of fiscal 2022.~~2023.

Inventory

As of October ~~30, 2022,~~29, 2023, inventory decreased by ~~$4.2~~$3.1 million, or ~~12.2%~~10.2%, compared with October ~~31, 2021.~~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 ~~(i) the significant decrease~~an increase in net sales during the second quarter of fiscal ~~2023~~2024, as compared with the ~~second~~fourth quarter of fiscal ~~2022, as described in the~~ 2023. Net ~~Sales~~ section above; (ii) a $3.8 million non-cash charge recorded during the second quarter of fiscal 2023, which includes $2.9 million related to a write down of inventory to its net realizable value and $869,000 related to markdowns of inventory estimated based on our policy for aged inventory; and (iii) promotional programs to reduce aged raw materials and finished goods inventory; partially offset by (iv) higher raw material, labor, and overhead costs stemming from inflationary pressures.

~~As of October 30, 2022, inventory decreased by $8.7 million, or 22.4%, compared with May 1, 2022. This trend reflects a (i) the decrease in net~~ sales during the second quarter of fiscal ~~2023~~2024 were $31.4 million, an increase of 2.2% compared with net sales of $30.7 million during the fourth quarter of fiscal 2022, as described above; (ii) a $4.2 million non-cash charge recorded in the first half of fiscal 2023, which includes $2.9 million related to a write down of inventory to its net realizable value and $1.3 million related to markdowns of inventory estimated based on our policy for aged inventory; and (iii) promotional programs to reduce aged raw materials and finished goods inventory; partially offset by (iv) higher raw material, labor, and overhead costs stemming from inflationary pressures.2023.

Inventory turns were 4.5 for the second quarter of fiscal 2024, compared with 3.9 for the second quarter of fiscal 2023 ~~compared with 4.2 for the second quarter of fiscal 2022~~ and ~~2.9~~4.4 for the fourth quarter of fiscal ~~2022.~~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 ~~$40.7~~$33.7 million as of ~~October 31, 2021,~~April 30, 2023, represents property, plant, and equipment of ~~$27.3~~$22.7 million, ~~$12.6~~$10.4 million, and ~~$836,000 located in the U.S., Canada, and Haiti, respectively. The $38.7 million~~

~~I-33~~

~~as of May 1, 2022, represents property, plant, and equipment of $25.6 million, $12.4 million, and $757,000~~$608,000 located in the U.S., Canada, and Haiti, respectively.

As of October 30, 2022, property, plant, and equipment has steadily decreased compared with October 31, 2021, as we have reduced our capital spending as a result of current and expected macroeconomic conditions.

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 ~~$3.8~~$2.3 million as of ~~October 31, 2021,~~April 30, 2023, represents right of use assets of ~~$2.2 million, $1.3~~$1.5 million and ~~$309,000~~$776,000 located in Haiti ~~the U.S., and Canada, respectively. 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.

As of October 31, 2022, right of use assets have steadily decreased compared with October 31, 2021, due to rent expense recognized over the terms of the respective lease agreements, as well as the reduction in the terms for two lease agreements associated with the closure of our mattress cover operation located in High Point, NC, which are now set to expire during the third quarter of fiscal 2023. The reduction in the right of use assets associated with the expiration of these two leases agreements associated with our mattress cover operation was offset by a corresponding decrease to the related lease liabilities.I-36

Upholstery Fabrics Segment

Net Sales


	Three Months Ended									Three Months Ended
(dollars in thousands)	October 30, 2022			October 31, 2021			% Change			October 29, 2023			October 30, 2022			% Change
Non-U.S. Produced	$	29,679	92%	$	31,306	93%		(5.2	)%	$	24,129	88%	$	29,679	92%		(18.7	)%
U.S. Produced		2,472	8%		2,372	7%		4.2	%		3,219	12%		2,472	8%		30.2	%
Total	$	32,151	100%	$	33,678	100%		(4.5	)%	$	27,348	100%	$	32,151	100%		(14.9	)%


	Six Months Ended
(dollars in thousands)	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	)%

Six Months Ended

(dollars in thousands)

October 30,
2022

October 31,
2021

% Change

Non-U.S. Produced

$
61,119

93%
$
69,528

94%

(12.1
)%
U.S. Produced

4,264

7%

4,139

6%

3.0
%
Total

$
65,383

100%
$
73,667

100%

(11.2
)%

Upholstery fabrics sales decreased ~~4.5%~~14.9% in the second quarter of fiscal ~~2023~~2024 compared to the prior-year ~~period, which was adversely affected by COVID-related shutdowns in Vietnam during the quarter.~~period. Upholstery fabrics sales decreased ~~by 11.2% for~~16.2% in the first half of fiscal ~~2023, as~~2024 compared to the first half of fiscal ~~2022.~~2023.

The decrease in upholstery fabrics net sales ~~for~~in both the second quarter and ~~for~~ the first ~~half~~six months of fiscal ~~2023~~2024 reflects ~~reduced demand for our residential upholstery fabrics products compared to the prior-year periods, driven by a slowdown in new retail business~~ongoing softness in the residential home furnishings ~~industry.~~industry, where demand remains pressured by a challenging macro-economic environment. The decrease in ~~net~~residential fabric sales during the first six months of fiscal 2024 was partially ~~offset~~mitigated by higher sales in ~~both~~ our hospitality/contract fabric business ~~and our Read business,~~during the period, as compared to the prior-year periods, as well as pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These actions increased net sales for the division by approximately 3.0% during the quarter and by approximately 3.6% during the first half of fiscal 2023.period.

Looking ahead, we expect ~~the slowdown~~that softness in ~~new retail business for~~ 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~~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 offrom possible additional surges in the ~~COVID-19 pandemic, as well as the impact of Russia’s invasion of Ukraine, including its effect on petrochemical pricing and consumer spending,~~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 ~~either~~any of these situations, including additional ~~COVID-19-related~~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.

~~I-34~~

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


	Three Months Ended							Three Months Ended
(dollars in thousands)	October 30, 2022			October 31, 2021			Change	October 29, 2023			October 30, 2022			Change
Gross profit		3,942			4,581		(13.9)%		5,389			3,942		36.7%
Gross margin		12.3	%		13.6	%	(130)bp		19.7	%		12.3	%	741bp
Selling, general, and administrative expenses		3,680			3,553		3.6%		3,998			3,680		8.6%
Restructuring expense		615			—		100.0%		144			615		(76.6)%
Income from operations		262			1,028		(74.5)%		1,391			262		430.9%
Operating margin		0.8	%		3.1	%	(230)bp		5.1	%		0.8	%	429bp


	Six Months Ended
(dollars in thousands)	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

Six Months Ended

(dollars in thousands)

October 30,
2022

October 31,
2021

Change
Gross profit

8,105

10,285

(21.2)%
Gross margin

12.4
%

14.0
%

(160)bp
Selling, general, and administrative expenses

7,302

6,990

4.5%
Restructuring expense

615

—

100.0%
Income from operations

803

3,295

(75.6)%
Operating margin

1.2
%

4.5
%

(330)bp

The ~~decrease~~increase in upholstery fabrics profitability for both the second quarter and the first six months of fiscal ~~2023,~~2024, as compared to the prior-year ~~period,~~periods (which were negatively affected by higher than normal inventory markdowns), primarily reflects better inventory management; lower ~~residential sales and $1.4 million in inventory markdowns due to our policy for aged inventory, as well as operating inefficiencies in our~~fixed costs resulting from the previous restructuring of the upholstery fabrics segment's cut and sew ~~operation in Haiti due primarily to reduced customer demand during the latter part of the quarter. These pressures were partially offset by~~platforms; lower freight costs; and a ~~significantly~~ more favorable foreign exchange rate associated with ~~our~~this segment's operations in ~~China, as well as an improved contribution from our Read business.~~China.

I-37

~~Upholstery fabrics profitability~~Operating performance for the first half of fiscal ~~2023~~2024 was also positively affected by ~~the same~~a greater contribution from hospitality fabrics and Read in our upholstery fabrics segment. These factors ~~that affected the second quarter,~~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 ~~well as labor challenges~~business travel and ~~inflationary pressures affecting the Read business during the first quarter~~industry tradeshows have resumed, and an ~~additional $689,000~~increase in ~~markdowns of inventory due to our policy for aged inventory during the first quarter.~~sampling expense driven by new product roll outs.

Based on market dynamics for cut and sewn products and the strength of our Asian supply chain, we took action during the second quarter to restructure and adjust our model for this platform with the closure of our cut and sew facility located in Shanghai, China. We believe this move will allow us to reduce our operating costs while maintaining our ability to support our customers, grow our cut and sew business, and maintain our competitive advantages through our lower-cost manufacturing and sourcing operations in Asia and Haiti.

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 ~~ongoing industry softness affecting~~lower sales volumes in our residential business ~~as well as continued operating inefficiencies at our Haiti cut and sew facility due to reduced demand driven by macro-economic conditions,~~ will continue to ~~pressure~~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.~~levels, while maintaining our ability to service our customers.

~~Exit and Disposal Activity~~

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.


	Three Months Ended			Six Months Ended
(dollars in thousands)	October 29, 2023			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.

Shanghai, China


		Three and Six Months Ended
(dollars in thousands)		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-35~~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 ~~period~~periods ending October 30, 2022.

Segment Assets

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


(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
Accounts receivable	$	13,743	$	15,677	$	12,361	$	11,733	$	13,743	$	12,382
Inventory		21,924		29,283		27,529		17,270		21,924		19,406
Property, plant & equipment		2,150		1,680		2,030		1,175		2,150		1,671
Right of use assets		5,898		5,472		8,124		1,992		5,898		2,618
	$	43,715	$	52,112	$	50,044	$	32,170	$	43,715	$	36,077

Refer to Note 1213 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

As of October ~~30, 2022,~~29, 2023, accounts receivable decreased by ~~$1.9~~$2.0 million, or ~~12.3%~~14.6%, compared with October ~~31, 2021.~~30, 2022. This trend mostly reflects the decrease in net sales of 14.9% during the second quarter of fiscal ~~2023~~2024, compared with the second quarter of fiscal ~~2022,~~2023, as described in the Net Sales section above. ~~In addition, we experienced faster cash collections with a significant customer during~~Days’ sales outstanding for this segment increased to 36 days for the second quarter of fiscal ~~2023~~2024, as compared with ~~the second quarter of fiscal 2022, which led to a decline in days’ sales outstanding to~~ 35 days for the second quarter of fiscal 2023.

As of October 29, 2023, asaccounts receivable decreased by $649,000, or 5.2%, compared with ~~41 days for~~April 30, 2023. This trend reflects a decrease in net sales of 11.0% during the second quarter of fiscal ~~2022.~~

~~As of October 30, 2022, accounts receivable increased by $1.4 million, or 11.2%,~~2024, as compared with ~~May 1, 2022. This trend reflects the increase in net sales related to our upholstery fabrics operations located in China, as the mandated COVID-19 related shutdowns during~~ the fourth ~~quarter of fiscal 2022 were lifted during the first~~ quarter of fiscal 2023. Net sales for the ~~upholstery fabrics segment were $32.2 million during the~~ second quarter of fiscal ~~2023, an increase of $5.0~~2024 were $27.3 million, ~~or 18.4%,~~ compared with net sales of ~~$27.2~~$30.7 million during the fourth quarter of fiscal ~~2022.~~2023. The ~~increase in accounts receivable attributable to this increase~~decrease in net sales was mostly offset by ~~faster~~slower cash collections ~~with a significant customer~~ during the second quarter of fiscal ~~2023,~~2024, as compared ~~with~~to the fourth quarter of fiscal ~~2022.~~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 ~~a decline~~an increase in ~~days’~~days' sales outstanding to 3536 days for the second quarter of fiscal ~~2023,~~2024, as compared with 4033 days for the fourth quarter of fiscal ~~2022.~~2023.

Inventory

As of October ~~30, 2022,~~29, 2023, inventory decreased by ~~$7.4~~$4.7 million, or ~~25.1%~~21.2%, compared with October ~~31, 2021.~~30, 2022. This trend mostly reflects ~~(i) the~~a decrease in net sales of 14.9% during the second quarter of fiscal ~~2023~~2024, compared with the second quarter of fiscal ~~2022, as~~2023 (as described in the Net Sales section above; (ii) a $1.5 million non-cash charge recorded during the second quarter of fiscal 2023, which includes $1.4 million of markdowns of inventory estimated based on our policy for aged inventory and $98,000 that was associated with the loss on disposal and markdowns of inventory relatedabove). In addition, this decrease is also attributable to ~~the exit from our cut and sew upholstery fabrics operation located in Shanghai, China; and (iii)~~ promotional programs used to reduce aged raw materials and finished goods ~~inventory; partially offset by (iv) higher raw material, labor, and overhead costs stemming from inflationary pressures.~~inventory.

As of October ~~30, 2022,~~29, 2023, inventory decreased by ~~$5.6~~$2.1 million, or ~~20.4%~~11.0%, compared with ~~May 1, 2022.~~April 30, 2023. This trend mostly reflects ~~(i) the reduction in inventory, despite the increase~~a decrease in net sales of 11.0% during the second quarter of fiscal ~~2023~~2024, compared with the fourth quarter of fiscal ~~2022, due to improved alignment~~2023. Net sales for the second quarter of ~~inventory purchases~~fiscal 2024 were $27.3 million, compared with ~~current customer demand trends; (ii) a $2.2~~net sales of $30.7 million ~~non-cash charge recorded~~ during the ~~first half~~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 ~~which includes $2.1 million~~and 4.8 for the fourth quarter of ~~markdowns~~fiscal 2023.

Property, Plant, & Equipment

As of ~~inventory estimated based on~~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 ~~policy for aged inventory~~strategic action to discontinue the production of upholstery cut and ~~$98,000 that was~~sew kits in Ouanaminthe, Haiti, (ii) impairment charges of $80,000 associated with the ~~loss on disposal and markdowns~~closure of ~~inventory related to the exit from~~ our cut and sew upholstery fabrics operation located in Shanghai, China, and (iii) ~~promotional programs to reduce aged raw materials~~a reduction in capital spending as a result of current and ~~finished goods inventory; partially offset by (iv) higher raw material, labor, and overhead costs stemming from inflationary pressures.~~expected unfavorable macro-economic conditions.

~~Inventory turns were 3.8 for~~The $1.2 million as of October 29, 2023, represents property, plant, and equipment of $1.0 million and $140,000 located in the ~~second quarter of fiscal 2023, compared with 4.3 for the second quarter of fiscal 2022~~U.S. and ~~3.0 for the fourth quarter of fiscal 2022.~~

~~Property, Plant, & Equipment~~

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 ~~October 31, 2021,~~April 30, 2023, represents property, plant, and equipment of ~~$1.1 million, $368,000,~~$974,000, $592,000, and ~~$242,000 located in the U.S., China, and Haiti, respectively. The $2.0 million as of May 1, 2022, represents property, plant, and equipment of $1.0 million, $756,000, and $255,000~~$105,000 located in the U.S., Haiti, and China, respectively.

~~I-36~~I-39

As of October 30, 2022, property, plant, and equipment increased compared with October 31, 2021, due to the start-up and subsequent increase in production at our new upholstery cut and sew operation located in Haiti that commenced during the third quarter of fiscal 2022.

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 ~~$5.5~~$2.6 million as of ~~October 31, 2021,~~April 30, 2023, represents right of use assets of ~~$4.3~~$1.5 million and ~~$1.2~~$1.1 million, located in China and the U.S., respectively. ~~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.~~

As of October 30, 2022, our right of use assets increased by $426,000, or 7.8%, compared with October 31, 2021. This increase represents our agreement to lease a 90,000 square foot facility located in Haiti that commenced during the third quarter of fiscal 2022, partially offset by (i) a decrease related to a six-month forgiveness of rent payments associated with COVID relief permitted by the Chinese government for all building lease agreements located in Shanghai, China, and (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.

As of October 30, 2022, our right of use assets decreased by $2.2 million, or 27.4%, compared with May 1, 2022. This decrease mostly represents (i) a six-month forgiveness of rent payments associated with COVID relief permitted by the Chinese government for all building lease agreements located in Shanghai, China, and (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.

Other Income Statement Categories


	Three Months Ended								Three Months Ended
(dollars in thousands)	October 30, 2022		October 31, 2021			% Change			October 29, 2023		October 30, 2022		% Change
SG&A expenses	$	9,103	$	9,087			0.2	%	$	10,045	$	9,103		10.3	%
Interest income		79		59			33.9	%		282		79		257.0	%
Other income (expense)		829		(404	)		(305.2	)%
Other income										49		829		(94.1	)%


	Six Months Ended								Six Months Ended
(dollars in thousands)	October 30, 2022		October 31, 2021			% Change			October 29, 2023		October 30, 2022		% Change
SG&A expenses	$	17,968	$	18,268			(1.6	)%	$	19,874	$	17,968		10.6	%
Interest income		96		132			(27.3	)%		627		96		553.1	%
Other income (expense)		747		(640	)		(216.7	)%
Other income										145		747		(80.6	)%

Selling, General, and Administrative Expenses

~~Selling,~~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, ~~are comparable with the prior-year periods.~~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 ~~2023,~~2024, as compared with the second quarter ~~of fiscal 2022, is mostly due to the significant increase in market interest rates during fiscal 2023.~~

~~The decrease in interest income for the~~and first half of fiscal 2023, as compared with the first half of fiscal 2022, is mostly due to the liquidation of all of our remaining short-term investments classified as available-for-sale and corporate bond investments classified as held-to-maturity during the fourth quarter of fiscal 2022, partially offset by the significant increase in market interest rates during fiscal 2023.

~~I-37~~

Other Income ~~(Expense)~~

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 ~~from~~in other income ~~during the second quarter and the first half of fiscal 2023, as compared to other expense~~ during the second quarter and first half of fiscal ~~2022,~~2024, as compared with the second quarter and first half of fiscal 2023, is due mostly to ~~more~~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.~~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 ~~2023,~~2024, we reported a foreign currency exchange ~~gain~~gains associated with our operations located in China ~~operations of~~totaling $228,000, compared with $1.0 million ~~compared with a foreign exchange loss of $(151,000)~~ during the second quarter of fiscal ~~2022.~~2023. During the first half of fiscal ~~2023,~~2024, we reported a foreign currency exchange ~~gain of~~gains associated with our operations located in China totaling $679,000, compared with $1.2 million ~~compared with a foreign exchange loss of $(160,000)~~ during the first half of fiscal ~~2022.~~2023.

I-40

The ~~significant $1.2 million~~ foreign currency exchange ~~rate~~ gain totaling $679,000 reported during the first half of fiscal ~~2023, which is~~2024 related to our operations in China, was mostly non-cash, and was ~~mostly~~partially offset by ~~$1.1 million~~$452,000 of income tax ~~expense that increased our~~expense. The income tax ~~payments. This $1.1 million~~expense of ~~income tax expense~~$452,000 was associated with taxable foreign currency exchange ~~rate~~ gains based on ~~more~~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 ~~associated with~~incurred on our U.S. dollar denominated balance sheet accounts ~~related to~~associated with our operations located in China isare 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 ~~compared with income tax expense of $1.3 million, or 30.3% of income before income taxes, for the six-month period ending October 31, 2021.~~

Our effective income tax rates for the six-month periods ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~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 ~~rate~~rates for the six-month periods ended October ~~30, 2022,~~29, 2023, and October ~~31, 2021,~~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.


	October 30,			October 31,			October 29,			October 30,
	2022			2021			2023			2022
U.S. federal income tax rate		21.0	%		21.0	%		21.0	%		21.0	%
U.S. valuation allowance		(36.7	)		(4.5	)		(32.8	)		(36.7	)
Withholding taxes associated with foreign jurisdictions		(3.3	)		6.1			(9.9	)		(3.3	)
Foreign income tax rate differential		3.2			3.9			(5.7	)		3.2
Tax effects of local currency foreign exchange gains (losses)		4.7			(0.4	)
Stock-based compensation		(0.6	)		0.2			(4.2	)		(0.6	)
Global Intangible Low Taxed Income Tax ("GILTI")		—			3.3
Tax effects of local currency foreign exchange gains								5.1			4.7
Other		(1.2	)		0.7			(0.3	)		(1.2	)
		(12.9	)		30.3	%	(26.8%)			(12.9)%

Our consolidated effective income tax ~~rate~~rates during the first half of fiscal 2024 and fiscal 2023 ~~was much more negatively~~were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as compared to the first half of fiscal 2022. During the first half of fiscal 2023, we incurred a significant pre-tax loss from our U.S. operations, and therefore, a significant income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets. In addition, all of our taxable income ~~in the first half of fiscal 2023 was earned by~~stems from our ~~foreign~~ operations located in China and Canada, which have higher income tax rates than the U.S. In ~~comparison, as of~~addition, during the ~~end of the second quarter~~first half of fiscal ~~2022,~~2024 and the first half of fiscal 2023, we incurred pre-tax losses associated with our U.S. operations, ~~were projected~~for which an income tax benefit was not recorded due to ~~earn a level of pre-tax income that did not have a significant effect on our~~the full valuation allowance orapplied 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.

~~I-38~~

U.S. Valuation Allowance

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As of October ~~30, 2022,~~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 ~~that~~ we still have a recent history of significant cumulative U.S. ~~taxable~~pre-tax losses, in that we experienced U.S. ~~taxable~~pre-tax losses during each of the last three fiscal years from ~~2020~~2021 through ~~2022,~~2023, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal ~~2023.~~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.


(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
U.S. federal and state net deferred income tax assets	$	13,958		9,155		9,527	$	17,839	$	13,958	$	16,345
U.S. capital loss carryforward		2,330		2,330		2,330		2,330		2,330		2,330
	$	16,288		11,485		11,857	$	20,169	$	16,288	$	18,675

Undistributed Earnings

Refer to Note 1314 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, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, respectively.

Uncertain Income Tax Positions

Refer to Note 1314 of the consolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of October 29, 2023, October 30, 2022, ~~October 31, 2021,~~ and ~~May 1, 2022,~~April 30, 2023, respectively.

Income Taxes Paid

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


	Six Months Ended		Six Months Ended
	October 29,		October 30,
(dollars in thousands)	2023		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 ~~2023,~~2024, compared with ~~$3.1~~$2.3 million for fiscal ~~2022. These~~2023. Our estimated income tax payments for fiscal 2024 are management’s current projections only and can be affected ~~over the year~~ by actual earnings from our foreign subsidiaries located in China and Canada versus annual ~~projections,~~projections; changes in the foreign exchange rates associated with our China operations in relation to the U.S. ~~dollar,~~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 ~~2023~~2024 due to the immediate expensing of U.S. capital expenditures and our existing U.S. federal net operating loss carryforwards that totaled ~~$23.7~~$48.2 million as of ~~May 1, 2022,~~April 30, 2023, which are projected to increase as a result of the significant U.S. loss carryforward we expect to generate during fiscal ~~2023.~~2024.

~~I-39~~I-42

As of October ~~30, 2022,~~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, ~~(“TCJA”),~~ as follows: ~~FY 2024 - $499,000;~~ FY 2025 - $665,000; and FY 2026 - ~~$831,000.~~$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 ~~30, 2022,~~29, 2023, we believe our cash of ~~$19.1~~$15.2 million ~~cash flow from operations,~~ and the current availability under our revolving credit lines totaling ~~$32.3~~$26.2 million (Refer to Note 910 of the consolidated financial statements for further details) will be sufficient to fund our foreseeable business needs, commitments, and contractual obligations.

As of October ~~30, 2022,~~29, 2023, our cash ~~and cash equivalents (collectively, “cash”)~~ totaled ~~$19.1~~$15.2 million, ~~an increase~~a decrease of ~~$4.5~~$5.8 million compared with ~~$14.6~~cash of $21.0 million as of ~~May 1, 2022.~~April 30, 2023. This ~~increase~~decrease was ~~primarily~~mostly due to ~~$6.2 million in~~ net cash ~~provided by~~used in operating activities totaling $(4.5) million and capital expenditures related to our mattress fabrics segment totaling $(2.0) million, partially offset by ~~capital expenditures~~proceeds from the sale of our rabbi trust investments totaling ~~$1.1 million.~~$986,000 to fund withdrawals from our deferred compensation plan for certain retired employees.

Our net cash ~~provided by~~used in operating activities was ~~$6.2~~$(4.5) million during the first half of fiscal ~~2023, an increase~~2024, a decrease of ~~$7.5~~$10.6 million compared with net cash ~~used in~~provided by operating activities of ~~$(1.3)~~$6.2 million during the first half of fiscal 2023. This ~~change primarily~~trend mostly reflects (i) a ~~reduction of inventory related to the~~ significant ~~decline in net sales, improved alignment of inventory purchases with current customer demand trends, and promotional programs to reduce aged raw materials and finished goods inventory; (ii) an~~ increase in accounts payable ~~that~~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 ~~quarter~~half of fiscal ~~2023; and~~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 ~~2022 that~~2024, which payments did not ~~recur~~occur during the first quarter of fiscal ~~2023,~~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 ~~(iv) a decrease~~(v) an increase in ~~net~~ cash earnings during the first half of fiscal ~~2023~~2024 compared with the first half of fiscal ~~2022.~~2023.

As of October ~~30, 2022,~~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 ~~Russia-Ukraine war)~~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 ~~and investments~~ by geographic area follows:



(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022		October 29, 2023		October 30, 2022		April 30, 2023
United States	$	11,255	$	25,906	$	4,430	$	5,047	$	11,255	$	9,769
China		5,734		9,101		9,502		9,301		5,734		10,669
Canada		1,194		967		267		482		1,194		281
Haiti		945		598		341		375		945		236
Cayman Islands		9		10		10		9		9		9
	$	19,137	$	36,582	$	14,550	$	15,214	$	19,137	$	20,964

The total balance as of October 31, 2021, includes short-term investments classified as available-for-sale and short-term and long-term investments classified as held-to-maturity that were liquidated in their entirety during the fourth quarter of fiscal 2022, and therefore, the total balances as of October 30, 2022, and May 1, 2022, solely represent cash.

Common Stock Repurchase Program

I-43

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

~~I-40~~

~~During the first half of fiscal 2023, we~~We did not ~~purchase~~repurchase any shares of ~~our~~ common ~~stock.~~stock during the six-month periods ending October 29, 2023, or October 30, 2022, respectively. As a result, as of October ~~30, 2022,~~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 ~~2023.~~2024.

~~During the first half of fiscal 2022, we repurchased 121,688 shares of common stock at a cost of $1.8 million.~~Dividends

~~Dividend Program~~

OnIn June ~~29,~~ 2022, our board of directors ~~announced the decision to suspend~~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 ~~did~~do not ~~make~~expect to pay any ~~dividend payments during~~dividends through at least the ~~first half~~third quarter of fiscal ~~2023.~~

~~During the first half of fiscal 2022, dividend payments totaled $2.7 million, which represented a quarterly cash dividend payment of $0.11 per share.~~

Our board of directors has sole authority to determine if and when we will declare future dividends, and on what terms. We will continue to reassess our dividend policy each quarter. 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.2024.

Working Capital

Operating Working Capital

Operating working capital ~~(accounts~~(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, ~~compared with $54.7~~and $39.2 million as of ~~October 31, 2021, and $67.7 million as of May 1, 2022.~~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, ~~compared with 6.5 during the second quarter of fiscal 2022~~ and ~~5.2~~4.6 during the fourth quarter of fiscal ~~2022.~~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,~~2022. This trend reflects a ~~decrease~~slight increase in net sales during the second quarter of ~~$9.9~~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 ~~30.6%~~0.6%, compared with ~~$32.3~~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 ~~31, 2021.~~29, 2023, a decrease of $1.7 million, or 7.0%, compared with $24.8 million as of April 30, 2023. This ~~change~~decrease primarily reflects ~~the significant~~a decrease in net sales during the second quarter of fiscal 2023 as compared with the second quarter of fiscal 2022. Net sales were $58.4 million during the second quarter of fiscal 2023, a decrease of $16.2 million, or 21.7%, compared with net sales of $74.6 million during the second quarter of fiscal 2022. In addition, we experienced faster cash collections with significant customers associated with our mattress and upholstery fabrics segments during the second quarter of fiscal 2023, as compared with the second quarter of fiscal 2022, which led to a decline in days’ sales outstanding to 33 days for the second quarter of fiscal 2023, compared with 39 days during the second quarter of fiscal 2022.

Accounts receivable was $22.4 million as of October 30, 2022, which is comparable with the $22.2 million in accounts receivable as of May 1, 2022. This reflects an increase in net sales during the second quarter of fiscal 20232024, as compared with the fourth quarter of fiscal ~~2022.~~2023. Net sales were ~~$58.4~~$58.7 million during the second quarter of fiscal ~~2023, an increase~~2024, a decrease of ~~$1.5~~$2.7 million, or ~~2.5%~~4.4%, compared with net sales of ~~$56.9~~$61.4 million during the fourth quarter of fiscal ~~2022. The increase in accounts receivable due to this increase in net sales was offset by a decrease in days’~~2023. Days’ sales outstanding ~~which was 33~~were 34 days ~~for~~during the second quarter of fiscal ~~2023~~2024, compared with 35 days ~~for~~during the fourth quarter of fiscal ~~2022.~~2023.

Inventory

~~Inventory was $52.2 million as~~As of October ~~30, 2022, a decrease of $11.6~~29, 2023, inventory decreased by $7.8 million, or ~~18.1%~~14.9%, compared with ~~$63.8 million as~~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 ~~31, 2021.~~29, 2023, inventory decreased by $615,000, or 1.4%, compared with April 30, 2023. This decrease ~~reflects (i) the 21.7%~~is primarily due to a decrease in net sales during the second quarter of fiscal ~~2023,~~2024, as compared with the fourth quarter of fiscal 2023. Net sales for the second quarter of fiscal ~~2022; (ii)~~2024 were $58.7 million, a ~~$5.2~~decrease of $2.7 million, ~~non-cash charge recorded~~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 2023, which includes $2.9 million related to a write down of inventory to its net realizable value and $2.3 million related to the markdowns of inventory estimated based on our policy for aged inventory; (iii) $98,000 for the loss on disposal and markdowns of inventory related to the exit from our cut and sew upholstery fabrics operation located in Shanghai, China; and (iv) promotional programs to reduce aged raw materials and finished goods inventory, partially offset by (v) higher raw material, labor, and overhead costs stemming from inflationary pressures.

~~Inventory was $52.2 million~~2024, as ~~of October 30, 2022, decreased by $14.3 million, or 21.5%,~~ compared with $66.6 million as of May 1, 2022. This decrease reflects (i) improved alignment of inventory purchases with current customer demand trends in our upholstery fabrics segment; (ii) a $6.3 million non-cash charge recorded during the first half of fiscal 2023, which includes $2.9 million related to a write down of inventory to its net realizable value and $3.4 million related to the markdowns of inventory estimated based on our policy for aged inventory; (iii) $98,000 for the loss on disposal and markdowns of inventory related to the

~~I-41~~

exit from our cut and sew upholstery fabrics operation located in Shanghai, China; and (iv) promotional programs to reduce aged raw materials and finished goods inventory, partially offset by (v) higher raw material, labor, and overhead costs stemming from inflationary pressures.

~~Inventory turns were~~ 4.3 for the second quarter of fiscal 2023 ~~as compared with 4.2 for the second quarter of fiscal 2022~~ and ~~3.1~~4.7 for the fourth quarter of fiscal ~~2022.~~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, a decrease~~2022. This trend stems from management's focus on extending credit terms with certain vendors during the second quarter of ~~$16.2 million, or 40.0%, compared with $40.5~~fiscal 2024.

Accounts payable - trade was $27.9 million as of October ~~31, 2021.~~29, 2023, a decrease of $1.5 million, or 5.2%, compared with $29.4 million as of April 30, 2023. This ~~decrease primarily~~trend reflects ~~the significant decrease~~a decline in net sales during the second quarter of fiscal ~~2023,~~2024, as compared with

I-44

the ~~second~~fourth quarter of fiscal ~~2022.~~2023. Net sales were ~~$58.4~~$58.7 million during the second quarter of fiscal ~~2023,~~2024, a decrease of ~~$16.2~~$2.7 million, or ~~21.7%~~4.4%, compared with net sales of ~~$74.6 million during the second quarter of fiscal 2022. In addition, the decrease in accounts payable is also due to the improved alignment of inventory purchases with current customer demand trends.~~

Accounts payable - trade was $24.3 million as of October 30, 2022, an increase of $4.2 million, or 20.9%, compared with $20.1 million as of May 1, 2022. This trend reflects the significant increase in net sales related to our upholstery fabrics operations located in China during the second quarter of fiscal 2023, as compared to the fourth quarter of fiscal 2022, as the mandated COVID-19 related shutdowns that were in place during the fourth quarter of fiscal 2022 were lifted during the first quarter of fiscal 2023. Net sales for the upholstery fabrics segment were $32.2 million during the second quarter of fiscal 2023, an increase of $5.0 million, or 18.4%, compared with net sales of $27.2$61.4 million during the fourth quarter of fiscal ~~2022.~~2023. The ~~increase~~decrease in accounts payable ~~associated with our upholstery fabrics segment~~as a result of the decline in net sales was partially offset by ~~the significant decline in net sales associated~~management's focus on extending credit terms with ~~our mattress fabrics segment~~certain vendors during the second quarter of fiscal 2023, as compared with the fourth quarter of fiscal 2022. Net sales for the mattress fabrics segment during the second quarter of fiscal 2023 were $26.2 million, a decrease of $3.6 million, or 11.9%, compared with net sales of $29.8 million during the fourth quarter of fiscal 2022.2024.

Financing Arrangements

Currently, we have revolving credit agreements with banks for our U.S parent company and our operations located in China. The purposes of our revolving lines of credit are to support potential short-term cash needs in different jurisdictions, mitigate our risk associated with foreign currency exchange rate fluctuations, and ultimately repatriate earnings and profits from our foreign subsidiaries to our U.S. parent company to take advantage of the TCJA, which allows a U.S. corporation a 100% dividend received income tax deduction on earnings and profits repatriated to the U.S. from 10% owned foreign corporations.

As of October ~~30, 2022,~~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 ~~30, 2022,~~29, 2023, we were in compliance with these financial covenants.

Refer to Note 910 of the consolidated financial statements for further disclosure regarding our revolving credit agreements.

Capital Expenditures and Depreciation

Overall

Capital expenditures on a cash basis ~~were $1.1 million~~ during the first half of fiscal ~~2023, compared~~2024 totaled $2.0 million and were mostly related to machinery and equipment associated with ~~$3.9 million for the same period a year ago.~~our mattress fabrics segment. Capital expenditures on a cash basis during the first half of fiscal 2023 totaled $1.1 million and pertained to ~~capital expenditures~~machinery and equipment associated with our ~~new~~former upholstery ~~fabrics~~ cut and sew operation located in Haiti, ~~and~~ manufacturing equipment associated with our mattress fabrics segment, ~~as well as~~and IT equipment associated with both of our business segments. ~~Capital expenditures on a cash basis~~

Depreciation expense was $3.3 million during the first half of fiscal ~~2022 mostly related to our mattress fabrics segment.~~

~~Depreciation expense was~~2024, compared with $3.5 million ~~during~~for the ~~first half of fisca1 2023 and fiscal 2022.~~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 ~~30, 2022,~~29, 2023, we had ~~total~~ amounts due regarding capital expenditures totaling ~~$200,000~~$298,000 that pertained to outstanding vendor invoices, none of which were financed. The total amount outstanding of ~~$200,000~~$298,000 is required to be paid based on normal credit terms.

~~I-42~~

Purchase Commitments – Capital Expenditures

As of October ~~30, 2022,~~29, 2023, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling ~~$444,000.~~$1.6 million.

Critical Accounting Policies and Recent Accounting Developments

As of October ~~30, 2022,~~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 ~~May 1, 2022.~~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 ~~May 1, 2022.~~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 ~~May 1, 2022.~~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.

I-45

During fiscal ~~2022~~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 2023, higher freight costs, labor costs, and raw material prices have increased the prices we pay for shipping, labor, and raw materials. Inflationary pressures also began to affect consumer spending during the second half of fiscal 2022, and these pressures have continued through the first half of fiscal 2023. 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.

~~I-43~~I-46

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

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

Effective ~~June 24, 2022,~~January 19, 2023, we entered into ana second amended and restated U.S. revolving credit agreement ~~(“Amended~~(the “Amended Agreement”) that established an asset-based revolving credit facility that required interest to be charged at a rate (applicable interest rate of ~~4.38%~~6.80% as of October ~~30, 2022)~~29, 2023) calculated using an applicable margin over the Federal Reserve Bank of New York’s secured overnight fund rate, ~~(SOFR),~~ as defined in the Amended Agreement. As of October ~~30, 2022,~~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 ~~30, 2022,~~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 ~~for~~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 ~~30, 2022,~~29, 2023, would not have materially affected our results of operations or financial position.

ITEM 4. CONTROLS AND PROCEDURES

As of October ~~30, 2022,~~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 ~~30, 2022,~~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.

~~I-44~~I-47

Part II – Other Information

Item 1. Legal Proceedings

There have not been any material changes to our legal proceedings during the three months ended October ~~30, 2022.~~29, 2023. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July ~~15, 2022,~~14, 2023, for the fiscal year ended ~~May 1, 2022.~~April 30, 2023.

Item 1A. Risk Factors

There have not been any material changes to our risk factors during the three months ended October ~~30, 2022.~~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 ~~15, 2022,~~14, 2023, for the fiscal year ended ~~May 1, 2022.~~April 30, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES


			(c)	(d)
			Total Number of	Approximate
	(a)		Shares Purchased	Dollar Value of
	Total	(b)	as Part of	Shares that May
	Number	Average	Publicly	Yet Be Purchased
	of Shares	Price Paid	Announced Plans	Under the Plans or
Period	Purchased	per Share	or Programs	Programs (1)
July 31, 2023 to September 3, 2023	—	—	—	$3,248,094
September 4, 2023 to October 1, 2023	—	—	—	$3,248,094
October 2, 2023 to October 29, 2023	—	—	—	$3,248,094
Total	—	—	—	$3,248,094

(c)

(d)

Total Number of

Approximate

(a)

Shares Purchased

Dollar Value of

Total

(b)

as Part of

Shares that May

Number

Average

Publicly

Yet Be Purchased

of Shares

Price Paid

Announced Plans

Under the Plans or

Period

Purchased

per Share

or Programs

Programs (1)

August 1, 2022 to September 4, 2022

—

—

—

$
3,248,094

September 5, 2022 to October 2, 2022

—

—

—

$
3,248,094

October 3, 2022 to October 30, 2022

—

—

—

$
3,248,094

Total

—

—

—

$
3,248,094

(1)

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock.

II-1

Item 6. Exhibits

The following exhibits are submitted as part of this report.

10.1 Form of Annual Incentive Award Agreement

10.2 Form of Restricted Stock Unit Agreement for restricted stock units granted to executive officers pursuant to the

Amended and Restated Equity Incentive Plan

10.3 Written Description of Outside Director Compensation

10.4 Form of Restricted Stock Unit Agreement for restricted stock units granted to outside directos pursuant to the

Amended and Restated Equity Incentive Plan

31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).

31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

101.INS Inline XBRL Instance Document

101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

II-2

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		CULP, INC. (Registrant)

Date: December ~~9, 2022~~8, 2023	By:	/s/ Kenneth R. Bowling
		Kenneth R. Bowling
		Executive Vice President and Chief Financial Officer
		(Authorized to sign on behalf of the registrant and also signing as principal financial officer and principal accounting officer)


	~~By:~~	~~/s/ Thomas B. Gallagher, Jr.~~
		~~Thomas B. Gallagher, Jr.~~
		~~Vice President of Finance~~
		~~(Authorized to sign on behalf of the registrant and also signing as principal accounting officer)~~

II-3


	Six Months		Six Months
	Ended		Ended
	October 30,		October 31,
(dollars in thousands)	2022		2021
United States Transition Tax Payment	$	265	$	266
China Income Taxes		1,286		921
China - Withholding Taxes Associated With Earnings and Profits Distributed to the U.S.		—		487
Canada - Income Taxes		161		427
	$	1,712	$	2,101