Quarterly Report for Quarter Ending August 3, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL 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 company's three months ended August 3, 2025, and July 28, 2024, represent 14-week and 13-week periods, respectively. We refer to the three months ended August 3, 2025 as the "first quarter" and the three months ended July 28, 2024 as the "comparable quarter".

Our operations are classified into two business segments: bedding (formerly known as mattress fabrics) and upholstery (formerly known as upholstery fabrics).

Bedding

The bedding segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. Currently, we have a mattress fabrics manufacturing operation located in Stokesdale, North Carolina, and a sewn mattress cover operation located in Ouanaminthe, Haiti.

On April 29, 2024 (the first quarter of fiscal 2025), our board of directors made a decision to: (1) consolidate the company's North American mattress fabrics operations, including the closure and sale of the company's manufacturing facility and related land ("collectively referred to as the "Property") located in Quebec, Canada; (2) move a portion of the knitting and finishing capacity from the facility located in Quebec, Canada, to the company's manufacturing facility located in Stokesdale, North Carolina; (3) transition the mattress fabrics segment's weaving operation to a strategic sourcing model through the company's long standing supply partners; (4) consolidate the company's sewn mattress cover operation located in Ouanaminthe, Haiti, from two leased facilities into one building and reduce other operating expenses at this location; and (5) reduce unallocated corporate expenses and shared service expenses. See Note 10 of the consolidated financial statements for further details regarding this restructuring activity.

Upholstery

The upholstery segment develops, sources, manufactures, and sells fabrics primarily to residential, commercial, and hospitality furniture manufacturers. Currently, we have upholstery fabric operations located in Shanghai, China, Burlington, North Carolina, and Vietnam.

Also, Read Window Products, LLC ("Read"), is a wholly owned subsidiary that operates a leased facility in Knoxville, Tennessee, which provides window treatments and sourcing of upholstery fabrics and other products, as well as related measuring and installation services, to customers in the hospitality and commercial markets. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows. On April 24, 2025 (the fourth quarter of fiscal 2025), the company announced a strategic transformation of its operating model that will combine certain activities within the bedding and upholstery business segments and create one integrated Culp-branded business. As part of this strategic transformation, we will close our leased facilities operated by our upholstery segment located in Burlington, North Carolina and Knoxville, Tennessee and will transition their production and distribution activities to a shared management model within our owned facility located in Stokesdale, North Carolina, which has historically been solely operated by our bedding segment.

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Executive Summary

Consolidated Results of Operations

Net Sales

Overall, our consolidated net sales for the first quarter of fiscal 2026 decreased by 10.3% compared with the same period a year ago, with bedding sales remaining flat and upholstery sales decreasing 20.4%.

Sales in both of our business segments continue to be limited by overall softness across the home furnishings industry driven by macroeconomic factors outside of our control. The prolonged period of low demand in the mattress fabric market continued through the first quarter of fiscal 2026, impacting performance within our bedding segment and resulting in sales generally in line with the prior year period despite the first quarter having one additional week compared to the prior year period. Nonetheless, we were able to achieve growth in our knit fabric product lines and continued to gain additional market share among key mattress fabric customers during the quarter.

Net sales in our upholstery segment decreased year-over-year due to continued weakness in the residential furniture market coupled with tariff-related challenges. The record-high tariffs on China-produced goods in the fourth quarter of fiscal 2025 essentially shut down residential upholstery order flow for approximately five weeks, and that disruption had a significant delayed impact on sales in the first quarter of fiscal 2026. The year-over-year decrease in sales in our upholstery segment continued to be impacted by an uneven comparison driven by abnormally heavy purchases by a major residential fabric customer in the first half of fiscal 2025, which is a dynamic that we expect to normalize in ensuing periods.

Although the markets in which we operate continue to face challenges, our investments and efforts to build-out and refine a production platform with a strong United States base supplemented by nearshore and offshore foreign locations provides our customers with increasingly valuable optionality for their supply chains and go-to-market strategies in the currently fluid trade and regulatory environments. As such, we believe that we are positioned to both continue to win market share now and increase sales when business conditions improve.

See the Segment Analysis section below for further details.

Gross Profit

Gross profit for the first quarter of fiscal 2026 was $7.2 million, an increase of $2.1 million or 42.4%, compared with gross profit of $5.1 million for the first quarter of fiscal 2025, with bedding gross profit increasing $3.3 million and upholstery gross profit decreasing $1.2 million.

The significant improvement in consolidated gross profit was driven by cost reductions and efficiency gains in our bedding segment resulting from our fiscal 2025 restructuring initiatives, and was partly offset by lower upholstery sales.

See the Segment Analysis section below for further details.

Income (Loss) Before Income Taxes

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Overall, our income before income taxes for the first quarter of fiscal 2026 was $1.1 million, compared with loss before income taxes of $(7.0) million for the same period a year ago.

First quarter operating performance, relative to performance in the prior-year period, benefited from a rationalized and more efficient manufacturing platform in the bedding segment following the extensive restructuring initiatives completed last year, which included, among other actions, the consolidation of operations in Canada into our U.S. manufacturing base in North Carolina. Operating performance for the quarter also benefited from an approximately $3.5 million restructuring credit associated with a gain on the sale of our manufacturing facility in Canada that was slightly offset by other restructuring and related expenses. Excluding restructuring and related credits and expenses, operating performance improved significantly year-over-year as a result of the more streamlined bedding segment platform, although this improvement was partially offset by comparatively lower gross profit in our upholstery segment.

We have several initiatives underway related to the integration of our two former divisions that should strengthen our operating profile as we progress through fiscal 2026. The anticipated cost and efficiency benefits resulting from the transition of upholstery operations at our leased facility in Burlington, North Carolina, to a shared management model within our owned U.S. location should begin to impact our results during our second quarter. Moreover, we recently initiated a similar transition of operations in our Read Window business at a leased facility in Tennessee that should begin to positively impact profitability in the third quarter. Once fully implemented, we expect these consolidations to significantly reduce our operating costs.

Income Taxes

We recorded income tax expense of $1.4 million, or 120.3% of income before income taxes, for the first quarter, compared with income tax expense of $240,000 or (3.4%) of loss before income taxes, for the comparable period.

Our consolidated effective income tax rates were adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stemmed from our operations located in China and a gain from the sale of Property located in Canada during the first quarter of fiscal 2026 (see Notes 8 and 10 of the consolidated financial statements for further details), which jurisdictions have higher income tax rates than the U.S. In addition, we applied a full valuation allowance against our U.S. deferred income tax assets during the first quarters of fiscal 2026 and 2025, respectively. Consequently, an income tax benefit was not recognized for pre-tax losses associated with our U.S. operations totaling ($3.3) million and ($7.0) million that were incurred during the first quarters of fiscal 2026 and 2025, respectively. Lastly, our consolidated effective income tax rates were also adversely affected by pre-tax losses associated with our Haitian operations, which are not subject to income tax. Our Haitian operations are located in an economic zone that permits a 0% income tax rate for the first fifteen years of operations, for which we have seven years remaining. As a result of the 0% income tax rate , an income tax benefit was not recognized for the pre-tax losses associated with our Haitian operations totaling $(362,000) and $(633,000) that were incurred during the first quarters of fiscal 2026 and 2025, respectively.

During the first quarter of fiscal 2026, we earned a lower consolidated pre-tax income totaling $1.1 million, compared with a significantly higher consolidated pre-tax loss of $(7.0) million. As a result, we reported a positive effective income tax rate during the first quarter of fiscal 2026, compared with a negative effective income tax rate during the first quarter of fiscal 2025. Accordingly, the principal differences between our income tax expense at the U.S. Federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first quarter of fiscal 2026, compared with the first quarter of fiscal 2025.

Refer to Note 15 of the consolidated financial statements for further details regarding our provision for income taxes.

Liquidity

As of August 3, 2025, our cash and cash equivalents (collectively, "cash") totaled $11.1 million, which represents an increase of $5.5 million compared with cash of $5.6 million as of April 27, 2025. This increase was due mostly to (i) net borrowings on our lines of credit of $5.3 million, an increase of $1.3 million compared to the comparable quarter, and (ii) proceeds from the sale of property, plant, and equipment totaling $966,000, partially offset by net cash used in operating activities of $(695,000).

Our net cash used in operating activities of $(695,000) increased during the first quarter of fiscal 2026, compared with net cash used in operating activities of $(206,000) during the first quarter of fiscal 2025. This trend mostly reflects: (i) an increase in inventory related to strategically sourcing certain fabrics that have longer lead times to acquire, rising prices, and tariffs imposed

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by U.S. trade policy; (ii) a decrease in accounts payable due to a decrease in consumer demand along with timing of vendor payments as the first quarter of fiscal 2026 represented a 14-week period compared with a 13-week period for the first quarter of fiscal 2025; partially offset by (i) a decrease in cash losses and (ii) a decrease in accounts receivable due to a decrease in net sales for the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025 that was partially offset by longer payment trends during the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025.

We had outstanding borrowings totaling $18.1 million under our line of credit agreements, of which $11.1 million and $7.0 million were reported in line of credit-current and line of credit-long term, respectively, on the August 3, 2025, Consolidated Balance Sheet.

Segment Analysis

Our Chief Operating Decision Maker ("CODM") is our Chief Executive Officer ("CEO"), who regularly reviews the financial results of the company on a consolidated and business segment basis for the purpose of evaluating financial and operating performance and allocation of resources to the individual segments noted above. Beginning in the first quarter of fiscal 2026, the CODM decided to use net sales and gross profit excluding items that are not expected to occur on a regular basis (i.e. restructuring activities) as the primary measure of segment profit or loss. Previously, segment performance was primarily evaluated based on net sales and income (loss) from operations before unallocated corporate expenses and other items that are not expected to occur on a regular basis (i.e., restructuring activities). This change was made to align with internal management reporting and the decision-making processes affected by the strategic transformation of the company's operating model announced on April 24, 2025, which combined certain activities within the bedding and upholstery business segments and created one integrated Culp-branded business. The CODM evaluates segment performance based on (i) net sales, (ii) cost of sales, (iii) gross profit excluding items that are not expected to occur on a regular basis (i.e. restructuring related charges and credits), (iv) assets used in operations, which generally include accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale; and (v) capital spending.

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. Intangible assets are not included in segment assets, as these assets are not used by the CODM to evaluate the respective segment's operating performance and allocate resources to the individual segments.

Bedding Segment

Net Sales

Net sales were flat during the first quarter of fiscal 2026 compared to the prior-year period.

During the quarter, our bedding segment's markets were affected by low consumer demand primarily attributable to a macroeconomic environment that limited discretionary spending and housing activity, leading to continued softness in the domestic mattress sector. The current tariff environment and related cost uncertainty and price fluidity also impacted sales activity during the quarter. Despite these overall market conditions, we saw improvement in some areas such as knit fabrics during the quarter, and we continued to win programs with key customers.

Looking ahead, we are focused on growing placements and market share to increase revenue, but expect continued sales pressure due to the current macroeconomic environment. We believe that significant future sales growth is dependent upon a broad industry

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recovery cycle along with improved economic and global trade stability. Moreover, ongoing geopolitical risks, including the conflicts in Ukraine and the Middle East, could also disrupt global markets and affect our sales.

Gross Profit (Loss)

Gross profit was $2.9 million for the first quarter of fiscal 2026, compared with gross loss of $(326,000) for the first quarter of fiscal 2025.

The cost reductions and efficiency improvements generated by restructuring initiatives in our bedding segment drove the strong turnaround in gross profit compared to the loss in the comparable quarter. With the restructuring now fully completed and price adjustments taking effect in the second quarter of fiscal 2026, we anticipate continued profitability improvement and potential future gains supported by our segment integration initiatives and resulting shared management model.

Segment assets

Segment assets consist of accounts receivable; inventory; property, plant, and equipment; right of use assets; and assets held for sale:

Refer to Note 14 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

As of August 3, 2025, accounts receivable slightly increased by $122,000, or 1.2%, compared with July 28, 2024. This slight increase reflects longer payment trends during the first quarter of fiscal 2026, as a significant customer utilized more cash discounts during the first quarter of fiscal 2025 and such utilization of cash discounts did not recur during fiscal 2026. Accordingly, days' sales outstanding increased to 36 days for the first quarter of fiscal 2026, from 33 days for the first quarter of fiscal 2025.

As of August 3, 2025, accounts receivable decreased by $360,000, or 3.4%, compared with April 27, 2025. This trend reflects a decrease in net sales for the first quarter of fiscal 2026 compared with the fourth quarter of fiscal 2025. Net sales of $28.0 million during the first quarter of fiscal 2026, which were based on a 14-week period, were lower based on a weekly average, as compared with net sales of $27.1 million during the fourth quarter of fiscal 2025, which were based on a 13-week period. Days' sales outstanding was 36 days for the first quarter of fiscal 2026, as compared to 35 days for the fourth quarter of fiscal 2025.

Inventory

As of August 3, 2025, inventory increased by $9.8 million, or 38.9%, compared with July 28, 2024. In connection with the restructuring activity announced on May 1, 2024 (see Note 10 of the consolidated financial statements for further details), the increase in inventory reflects a transition to strategically source certain mattress fabrics with long-standing supply partners. As a result of this increased sourcing, more finished goods inventory is required to be on hand due to longer lead times to acquire products and accommodate our customers. In addition, the increase in inventory is also due to rising costs to produce and source inventory, along with tariffs imposed by U.S. trade policies related to imported products.

As of August 3, 2025, inventory increased by $1.8 million, or 5.4%, compared with April 27, 2025. This increase in inventory is due to rising costs to produce and source inventory, along with tariffs imposed by U.S. trade policies related to imported products.

Inventory turns were 2.9 for the first quarter of fiscal 2026, as compared with 4.3 for the first quarter of fiscal 2025 and 2.9 for the fourth quarter of fiscal 2025.

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Property, Plant, & Equipment

Property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macro-economic conditions within the home furnishings and bedding industries, as well as restructuring initiatives commencing at the beginning of fiscal 2025 and continuing through the first quarter of fiscal 2026. See note 10 of the consolidated financial statements for further details and description of our restructuring activities.

The $22.1 million as of August 3, 2025, represents property, plant, and equipment of $21.2 million and $888,000 located in the U.S., and Haiti, respectively. The $28.8 million as of July 28, 2024, represents property, plant, and equipment of $20.9 million, $7.4 million, and $511,000 located in the U.S., Canada, and Haiti, respectively. The $23.3 million as of April 27, 2025, represents property, plant, and equipment of $22.3 million, and $955,000 located in the U.S. and Haiti, respectively.

Right of Use Assets

Right of use assets have steadily decreased due to restructuring initiatives commencing at the beginning of fiscal 2025 and continuing through the first quarter fiscal 2026. In connection with these restructuring initiatives, right of use assets decreased due mostly to the termination of an agreement to lease a facility located in Ouanaminthe, Haiti, and the shortening of the period of use associated with two leased facilities located in Quebec, Canada.

The $50,000 as of August 3, 2025, represents a right of use asset located in Haiti. The $568,000 as of July 28, 2024, represents right of use assets of $350,000 and $218,000 located in Haiti and Canada, respectively. The $125,000 as of April 27, 2025, represents a right of use asset located in Haiti.

Assets Held for Sale

Assets held for sale are associated with our restructuring initiatives commencing at the beginning of fiscal 2025 and continuing through the first quarter. of fiscal 2026. Refer to Note 8 of the consolidated financial statements for further details.

Upholstery Segment

Net Sales

Upholstery fabrics sales decreased 20.4% during the first quarter of fiscal 2026 compared to the comparable quarter.

The year-over-year sales decline in our upholstery segment was driven primarily by what remains a muted demand climate for residential upholstery fabric due to continuing overall weakness across the home furnishings industry. First quarter upholstery fabric sales were also impacted by market uncertainty stemming from the global trade and tariff landscape, including the lagging effects of the historically high tariffs on China-produced products in the prior quarter that essentially grounded residential upholstery order flow for approximately five weeks. In addition, a purchasing cadence deviation by a large residential upholstery customer last year, including a notable spike in last year's first quarter, resulted in an uneven year-over-year comparison this quarter that we expect to normalize as we move through fiscal 2026.

We continue to expect the soft industry demand backdrop for home furnishings to affect our residential fabric business going forward, while demand in our hospitality/commercial fabric business is expected to remain relatively solid. However, as conditions improve and a broad market recovery begins, we believe our upholstery segment is well positioned for growth through our size and scale efficiencies, innovative product offerings including our popular LiveSmart® performance line, flexible and multi-location production platform, and long-term supplier relationships.

Notably, the potential ongoing geopolitical disruptions related to conflicts in Ukraine and the Middle East 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 these situations, including shipping disruptions related to conflicts in the Middle East, the impact on our operations, and/or on our suppliers, customers, consumers, and the global economy, could adversely affect our financial performance.

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Gross Profit

Gross profit was $4.3 million for the first quarter of fiscal 2026, compared to gross profit of $5.5 million for the first quarter of fiscal 2025.

The decrease in upholstery fabrics profitability for the first quarter of fiscal 2026, as compared to the prior-year period, primarily reflects the impact of lower sales.

We believe that the anticipated cost and efficiency benefits resulting from the transition of operations in our Read Window business at a leased facility in Tennessee to a shared management model within our owned U.S. location in North Carolina will begin to impact our results during our third quarter. Once fully implemented, we expect this consolidation to significantly improve profitability in our upholstery segment.

Looking forward, the residential home furnishings sector continues to face challenges stemming from evolving consumer spending patterns, global trade negotiations and tariff increases, inflation, declining home sales, and other macroeconomic factors impacting discretionary purchases. Consequently, we anticipate that the low-demand environment for residential upholstery fabrics may continue to affect profitability until the market enters a recovery cycle. However, we expect the solid demand in our hospitality and commercial upholstery fabrics business to continue, and for the fixed cost reductions resulting from the consolidation of our Read Window operations in connection with our divisional integration initiative to elevate the profitability profile of our upholstery segment. We will also consider further operational adjustments as necessary to align with prevailing demand trends while ensuring continued high-quality service for our customers.

Segment Assets

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

Refer to Note 14 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

As of August 3, 2025, accounts receivable decreased by $3.3 million, or 28.9%, as compared to July 28, 2024. This trend reflects a decrease in net sales for the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025. Net sales of $22.6 million during the first quarter of fiscal 2026, which were based on a 14-week period, were much lower based on a weekly average, as compared with net sales of $28.5 million during the first quarter of fiscal 2025, which were based on a 13-week period. Days' sales outstanding was 33 days for the first quarter of fiscal 2026, as compared with 32 days for the first quarter of fiscal 2025.

As of August 3, 2025, accounts receivable decreased by $3.1 million, or 27.5%, compared to April 27, 2025. This decrease in accounts receivable is mostly due to shorter payment trends during the first quarter of fiscal 2026, as we experienced a higher sales mix with customers who had longer credit terms during the fourth quarter of fiscal 2025, as compared with the first quarter of fiscal 2026. Accordingly, days' sales outstanding decreased to 33 days for the first quarter of fiscal 2026, from 46 days for the fourth quarter of fiscal 2025.

Inventory

As of August 3, 2025, inventory decreased by $1.4 million, or 8.4%, compared with July 28, 2024. This decrease in inventory mostly represents a decrease in net sales during the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025. Net

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sales of $22.6 million during the first quarter of fiscal 2026, which were based on a 14-week period, were much lower based on a weekly average, as compared with net sales of $28.5 million during the first quarter of fiscal 2025, which were based on a 13-week period. The decrease in inventory due to the decline in net sales was partially offset by rising costs to produce and source inventory, along with tariffs imposed by U.S. trade policies related to imported products.

As of August 3, 2025, inventory decreased by $1.0 million or 6.3%, compared with April 27, 2025. This trend reflects a decrease in net sales for the first quarter of fiscal 2026 compared with the fourth quarter of fiscal 2025. Net sales of $22.6 million during the first quarter of fiscal 2026, which were based on a 14-week period, were lower based on a weekly average, as compared with net sales of $21.7 million during the fourth quarter of fiscal 2025, which were based on a 13-week period. The decrease in inventory due to the decline in net sales was partially offset by rising costs to produce and source inventory, along with tariffs imposed by U.S. trade policies related to imported products.

Inventory turns were 4.8 for the first quarter of fiscal 2026, as compared with 5.3 for the first quarter of fiscal 2025 and 4.0 for the fourth quarter of fiscal 2025.

Property, Plant, & Equipment

As of August 3, 2025, property, plant, and equipment remained relatively flat compared with July 28, 2024, and April 27, 2025, respectively. This trend is mainly due to a reduced level of capital spending commensurate with current unfavorable macro-economic conditions within the home furnishings industry.

The $956,000 as of August 3, 2025, represents property, plant, and equipment of $897,000 and $59,000 located in the U.S. and China, respectively. The $1.1 million as of July 28, 2024, represents property, plant, and equipment of $990,000 and $108,000 located in the U.S. and China, respectively. The $1.0 million as of April 27, 2025, represents property, plant, and equipment of $940,000 and $70,000 located in the U.S. and China, respectively.

Right of Use Assets

As of August 3, 2025, right of use assets increased by $681,000 or 46.1%, as compared with July 28, 2024. This increase represents the renewal of certain lease agreements associated with our operations located in China, partially offset by rent expenses incurred over the terms of the existing respective lease agreements.

As of August 3, 2025, right of use assets decreased by $519,000, or 19.4%, as compared with April 27, 2025. This decrease mostly represents rent expense incurred over the terms of the existing respective lease agreements.

The $2.2 million as of August 3, 2025, represents right of use assets of $1.4 million and $771,000 located in China and the U.S., respectively. The $1.5 million as of July 28, 2024, represents right of use assets of $1.1 million and $393,000 located in the U.S. and China, respectively. The $2.7 million as of April 27, 2025, represents right of use assets of $1.7 million and $1.0 million located in China and the U.S., respectively.

Consolidated - Other Income Statement Categories

Selling, General, and Administrative Expenses ("SG&A")

The slight decrease in selling, general, and administrative expenses during the first quarter of fiscal 2026, as compared to the first quarter of fiscal 2025, was primarily due to: (i) a decrease in net sales of 10.3% during the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025; (ii) lower professional fees; and (iii) cost reduction initiatives in connection with our restructuring and integration activities announced on May 1, 2024, and April 24, 2025 (see Note 10 of the consolidated financial statements for further details and descriptions of our restructuring initiatives); partially offset by additional SG&A expenses

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incurred during the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025, as the first quarters of fiscal 2026 and 2025 represented 14-week and 13-week periods, respectively.

Restructuring Credit (Expense)

Restructuring Activities Announced May 1, 2024

On April 29, 2024 (first quarter of fiscal 2025), our board of directors made a decision to: (i) consolidate the company's North American mattress fabrics operations, including the closure and sale of the Property located in Quebec, Canada; (ii) move a portion of the knitting and finishing capacity from the company's manufacturing facility located in Quebec, Canada, to the company's manufacturing facility located in Stokesdale, North Carolina; (iii) transition the bedding segment's weaving operation to a strategic sourcing model through the company's long standing supply partners; (iv) consolidate the company's sewn mattress cover operation located in Ouanaminthe, Haiti, from two leased facilities into one building and reduce other operating expenses at this location; as well as (v) reduce unallocated corporate and shared service expenses.

As of the end of the first quarter of fiscal 2026, all of the above restructuring activities related to this announcement have been completed, including the sale of the Property and certain equipment located at Quebec, Canada. Accordingly, we recorded a gain from the sale of the Property and equipment totaling $4.0 million that was classified within restructuring credit in the Consolidated Statement of Net Loss for the period ending August 3, 2025. See notes 7 and 8 of the consolidated financial statements for further details regarding the Sales Agreement associated with the sale of the Property and determination of fair value regarding the Property and equipment.

During the three months ended August 3, 2025, we recorded a restructuring credit of $3.9 million that was mostly related to the gain on sale of the Property noted above and was solely related to the bedding segment. Since the inception of this restructuring initiative, we incurred cumulative restructuring and restructuring related charges totaling $4.8 million, most of which related to the bedding segment.

Restructuring Activities Announced April 24, 2025

On April 24, 2025 (fourth quarter of fiscal 2025), the company announced a strategic transformation of its operating model that will combine certain activities within the bedding and upholstery business segments and create one integrated Culp-branded business. As part of this strategic transformation, we will close our leased facilities operated by our upholstery segment located in Burlington, North Carolina, and Knoxville, Tennessee, and will transition their production and distribution activities utilizing a shared management model within our owned facility located in Stokesdale, North Carolina. Our Stokesdale, North Carolina facility has historically been solely operated by our bedding segment.

During the three months ended August 3, 2025, we incurred restructuring expense of $349,000 related to this strategic transformation, of which $256,000 and $93,000 related to the bedding and upholstery segments, respectively. The estimated cumulative restructuring and restructuring related charges for this initiative are expected to be $2.2 million, of which $674,000 is expected to be cash expenditures. The $2.2 million of estimated cumulative restructuring and restructuring related charges associated with this initiative represents: (i) a non-cash charge for impairment of Read's tradename totaling $540,000 (see Note 6 located in the notes to the consolidated financial statements for further details); (ii) a non-cash charge of $450,000 associated with the disposal and markdowns of inventory; (iii) non-cash lease termination costs of $125,000; (iv) non-cash accelerated depreciation expense, along with impairments and losses on disposal of fixed assets totaling $424,000; (v) cash charges for employee termination benefits of $207,000; (vi) cash charges for facility consolidation and relocation expenses of $432,000; and (vii) cash charges for other associated costs of $35,000. We expect the initiatives associated with this strategic transformation to be substantially completed by December 31, 2025.

The following summarizes restructuring (credit) expense associated with the above announcements for the three month periods ended August 3, 2025, and July 28, 2024:

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(1) The total $3.5 million credit was classified within restructuring credit in the Consolidated Statement of Net Loss for the three-month period ended August 3, 2025. The $3.5 million restructuring credit mostly related to the bedding segment.

(2) Of the total $2.7 million restructuring and restructuring related charges, $2.6 million and $116,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three month period ended July 28, 2024. The $2.7 million expense mostly related to the bedding fabrics segment.

Interest Expense

The increase in interest expense reflects increased borrowings under line of credit agreements associated with our operations located in the U.S. and China.

Interest Income

The decrease in interest income is due to lower average cash balances during the first quarter of fiscal 2026, compared with the first quarter of fiscal 2025.

Other 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, Canada, and Vietnam.

The change in other expense during the first quarter of fiscal 2026, compared with the first quarter of fiscal 2025, was due primarily to less favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts. During the first quarter of fiscal 2026, we incurred a foreign currency exchange rate loss associated with our operations located in China totaling $189,000, compared with a foreign currency exchange rate loss of $45,000 incurred during the first quarter of fiscal 2025.

The $189,000 foreign currency exchange rate loss described above was mostly non-cash and offset by an income tax benefit of $119,000. The income tax benefit of $119,000 was associated with tax deductible foreign currency exchange rate losses based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S. dollars to determine the corresponding Chinese Renminbi local currency amounts. The foreign currency exchange rate loss derived from U.S. dollar denominated balance sheet accounts is considered tax deductible, as we incur income tax expense and pay income taxes in China's local currency.

Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $1.4 million, or 120.3% of income before income taxes, for the three-month period ended August 3, 2025, compared with income tax expense of $240,000, or (3.4%) of loss before income taxes, for the three-month period ended July 28, 2024.

Our effective income tax rates for the three-month periods ended August 3, 2025, and July 28, 2024, 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 three-month periods ended August 3, 2025, and July 28, 2024, 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

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year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, Canada, Haiti, and Vietnam versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the three-month periods ended August 3, 2025, and July 28, 2024:

One Big Beautiful Bill Act ("OBBBA")

On July 4, 2025, OBBBA was signed into law, making several provisions of the 2017 Tax Cuts and Jobs Act ("TCJA" permanent. Such provisions include: (i) no change to the standard corporate tax rate of 21.0%; (ii) increased depreciation allowances for certain property acquired after January 19, 2025; (iii) deduction of certain U.S. research and development expenditures; (iv) limitations on the deductibility of business interest expense; and (v) modifications to GILTI and foreign-derived intangible income. Topic 740 Income Taxes, requires the income tax effects of changes in tax laws or rates to be recognized at the date of enactment. Accordingly, as of August 3, 2025, we evaluated the provisions of OBBBA and determined OBBBA did not impact our consolidated effective income tax rate, income tax expense, or our U.S. net deferred income tax assets during the three-months ended August 3, 2025,

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due to the application of a full valuation allowance applied against our U.S. net deferred income tax assets described in the below section titled - U.S. Valuation Allowance.

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 August 3, 2025, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. pre-tax losses in that we experienced U.S. pre-tax losses during each of the last three fiscal years from 2023 through 2025, and we currently expect significant U.S. pre-tax losses to continue during fiscal 2026. As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S. net deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.

Based on our assessments as of August 3, 2025, July 28, 2024, and April 27, 2025, valuation allowances against our net deferred income tax assets pertain to the following:

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 August 3, 2025, 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 TCJA, a U.S. corporation is allowed a 100% dividend-received deduction for earnings and profits received from a 10% or more 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 August 3, 2025, July 28, 2024, and April 27, 2025, we recorded a deferred income tax liability of $5.3 million, $4.9 million, and $5.2 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, negotiation, or litigation, or if the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.

As of August 3, 2025, July 28, 2024, and April 27, 2025, we had $841,000, $1.3 million, and $790,000 of total gross unrecognized income tax benefits, 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 $841,000, $1.3 million, and $790,000 as of August 3, 2025, July 28, 2024, and April 27, 2025, respectively.

Our gross unrecognized income tax benefit of $841,000 as of August 3, 2025, relates to an income tax position for which significant change is currently not expected within the next year.

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Income Taxes Paid

The following table sets forth taxes paid by jurisdiction:

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 August 3, 2025, we believe: (i) our cash of $11.1 million; (ii) improvements in cash flow from operations stemming from expected cash savings from our recent restructuring activities, (iii) the current availability under our U.S. line of credit totaling $17.6 million (refer to Note 11 of the consolidated financial statements for further details regarding our financing arrangements), and (iv) proceeds totaling $4.8 million from the collection of a note receivable associated with the sale of Property located in Quebec, Canada (see Note 7 of the consolidated financial statements for further details) will be sufficient to fund our: (i) foreseeable business needs; (ii) restructuring activities; (iii) capital expenditures; (iv) commitments; (v) contractual obligations; and (vi) income tax payments.

As of August 3, 2025, our cash of $11.1 million represents an increase of $5.5 million compared with cash of $5.6 million as of April 27, 2025. This increase was due mostly to: (i) net borrowings on our lines of credit of $5.3 million, an increase of $1.3 million compared to the comparable quarter, and (ii) proceeds from the sale of property, plant, and equipment totaling $966,000, partially offset by net cash used in operating activities of $(695,000).

Our net cash used in operating activities of $(695,000) increased during the first quarter of fiscal 2026, compared with net cash used in operating activities of $(206,000) during the first quarter of fiscal 2025. This trend mostly reflects: (i) an increase in inventory related to strategically sourcing certain fabrics that have longer lead times to acquire, rising prices, and tariffs imposed by U.S. trade policy; (ii) a decrease in accounts payable due to a decrease in consumer demand along with timing of vendor payments as the first quarter of fiscal 2026 represented a 14-week period compared with a 13-week period for the first quarter of fiscal 2025; partially offset by (i) a decrease in cash losses; and (ii) a decrease in accounts receivable due to a decrease in net sales for the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025, that was partially offset by longer payment trends during the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025.

We had outstanding borrowings totaling $18.1 million under our line of credit agreements, of which $11.1 million and $7.0 million were reported in lines of credit - current and lines of credit - long term, respectively, on the August 3, 2025, Consolidated Balance Sheet.

Our cash balance may be adversely affected by factors beyond our control, such as: (i) recent customer demand trends affecting net sales; (ii) increased tariffs or other changes in U.S. trade policy related to imported products; (iii) supply chain disruptions; (iv) rising interest rates and inflation; and (v) geopolitical events (including conflicts in Ukraine and the Middle East). These factors could cause delays in receipt of payment on accounts receivable and could increase cash disbursements due to rising prices.

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By Geographic Area

A summary of our cash by geographic area follows:

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 this 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.

We did not repurchase any shares of common stock during the three-month periods ended August 3, 2025, or July 28, 2024, respectively.

As of August 3, 2025, $3.2 million is available for additional repurchases of our common stock.

Dividends

On June 29, 2022, our board of directors announced the decision to suspend the company's quarterly cash dividend. We believed that preserving capital and managing our liquidity were in the company's best interest to support future growth and the long-term interests of our shareholders. Accordingly, we did not make any dividend payments during the first quarter of fiscal 2026, fiscal 2025, 2024, or 2023.

Consolidated Basis - Working Capital

Operating Working Capital

Operating working capital (the total of accounts receivable and inventories, less accounts payable-trade, less accounts payable-capital expenditures, and less deferred revenue) was $43.7 million as of August 3, 2025, compared with $35.1 million as of July 28, 2024, and $43.4 million as of April 27, 2025. Operating working capital turnover was 5.4 during the first quarter of fiscal 2026, compared with 5.9 during the first quarter of fiscal 2025 and 5.7 during the fourth quarter of fiscal 2025.

Accounts Receivable

Accounts receivable was $18.4 million as of August 3, 2025, a decrease of $3.2 million, or 14.8%, compared with $21.6 million as of July 28, 2024. This trend reflects a decrease in net sales for the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025, which mostly related to the upholstery segment. Net sales of $50.7 million during the first quarter of fiscal 2026, which were based on a 14-week period, were much lower based on a weekly average, as compared with net sales of $56.5 million during the first quarter of fiscal 2025, which were based on a 13-week period. The decrease in accounts receivable due to the decrease in net sales noted above was partially offset by longer payment trends associated with the bedding segment during the first quarter of fiscal 2026, as a significant customer utilized more cash discounts during the first quarter of fiscal 2025 and such utilization of cash discounts did not recur during the first quarter of fiscal 2026. Accordingly, days' sales outstanding increased to 35 days for the first quarter of fiscal 2026, from 32 days for the first quarter of fiscal 2025.

Accounts receivable was $18.4 million as of August 3, 2025, a decrease of $3.5 million, or 15.8%, compared with $21.9 million as of April 27, 2025. The decrease in accounts receivable is mostly due to shorter payments trends associated with the upholstery segment during the first quarter of fiscal 2026, as we experienced a higher sales mix with customers who had longer credit terms during the fourth quarter of fiscal 2025, as compared with the first quarter of fiscal 2026. Accordingly, days' sales outstanding decreased to 35 days for the first quarter of fiscal 2026, from 40 days for the fourth quarter of fiscal 2025.

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Inventory

Inventory was $50.1 million as of August 3, 2025, an increase of $8.4 million, or 20.3%, compared with $41.7 million as of July 28, 2024. In connection with the restructuring activity announced on May 1, 2024, which mostly related to the bedding segment (see Note 10 of the consolidated financial statements for further details), the increase in inventory reflects a transition to strategically source certain mattress fabrics with long-standing supply partners. As a result of this increased sourcing, more finished goods inventory is required to be on hand due to longer lead times to acquire products and accommodate our customers. The increase in inventory due to the above restructuring initiative was partially offset by a decrease in net sales for the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025, which mostly related to the upholstery segment. Net sales of $50.7 million during the first quarter of fiscal 2026, which were based on a 14-week period, were much lower based on a weekly average, as compared with net sales of $56.5 million during the first quarter of fiscal 2025, which were based on a 13-week period. Also, both the bedding and the upholstery segments were affected by rising costs to produce and source inventory, along with tariffs imposed by U.S. trade policies related to imported products.

Inventory was $50.1 million as of August 3, 2025, an increase of $800,000, or 1.6%, compared with $49.3 million as of April 27, 2025. This increase in inventory was mostly due to rising costs to produce and source inventory, along with tariffs imposed by U.S. trade policies related to imported products, which such costs affected both the bedding and the upholstery segments.

Inventory turns were 3.5 for the first quarter of fiscal 2026, as compared with 4.8 for the first quarter of fiscal 2025 and 3.3 for the fourth quarter of fiscal 2025.

Accounts Payable - Trade

Accounts payable - trade was $24.3 million, as of August 3, 2025, compared with $26.5 million as of July 28, 2024 and $27.3 million as of April 27, 2025. This decrease in accounts payable as of August 3, 2025, compared with July 28, 2024 and April 27, 2025, is primarily due to a decrease in consumer demand along with timing of vendor payments, as the first quarter of fiscal 2026 represented a 14-week period, compared with 13-week periods for the first and fourth quarters of fiscal 2025.

Financing Arrangements

Currently, we have line of credit agreements with banks for our U.S parent company and our operations located in China. As of August 3, 2025, we had outstanding borrowing associated with our line of credit agreements totaling $18.1 million, of which $11.1 million and $7.0 million were reported in lines of credit-current and lines of credit- long term. Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of August 3, 2025, we were in compliance with these financial covenants.

Refer to Note 11 of the consolidated financial statements for further disclosure regarding our line of credit agreements, which includes a Third Amendment to our U.S. revolving credit agreement effective June 12, 2025.

Leases

Refer to Note 17 of the consolidated financial statements for further disclosures regarding our lease obligations, which includes a five-year maturity schedule.

Capital Expenditures and Depreciation

Overall

Capital expenditures on a cash basis totaled $179,000 and $501,000 for the first quarters of fiscal 2026 and 2025, respectively. These reduced levels of capital spending reflect reduced capital spending during the current unfavorable macro-economic conditions within the home furnishings and bedding industries.

We reported depreciation expense of $1.1 million and $1.6 million for the first quarters of fiscal 2026 and 2025, respectively, which was mostly related to our bedding segment for both periods. We reported accelerated depreciation of $22,000 that was classified within restructuring credit in the Consolidated Statement of Net loss for the three-month period ended August 3, 2025. The $22,000 of accelerated depreciation related to the shortening of useful lives of equipment related to the consolidation of distribution activities from our Burlington, North Carolina facility to the manufacturing and distribution center located in Stokesdale, North Carolina. We reported accelerated depreciation of $875,000 that was classified within restructuring expense in the Consolidated Statement of Net Loss for the three-month period ended July 28, 2024. The $875,000 of accelerated depreciation related to the shortening of useful lives of equipment associated with the closure of our operations located in Quebec, Canada. See

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Note 10 of the consolidated financial statements for further details and descriptions of our restructuring activities announced on May 1, 2024 and April 24, 2025.

Based on current expectations, capital spending for fiscal 2026 is projected to be comparable to fiscal 2025 and will center on capital projects that will increase efficiencies, improve the quality of our products, and facilitate future growth. Funding for capital expenditures is expected to be from cash provided by operating activities.

Critical Accounting Policies and Recent Accounting Developments

As of August 3, 2025, there were no changes in our significant accounting policies or the application of those policies from those reported in our Annual Report on Form 10-K for the year ended April 27, 2025.

Refer to Note 2 of the consolidated financial statements for recently adopted and issued accounting pronouncements, if any, since the filing of our Form 10-K for the year ended April 27, 2025.

Contractual Obligations

There were no significant or new contractual obligations since those reported in our Annual Report on Form 10-K for the year ended April 27, 2025.

Inflation

A meaningful rise in raw material, utility, energy or other costs, as well as broader economic inflation, could materially and adversely affect our operating results. Competitive market dynamics have traditionally constrained our ability to fully offset such cost increases through price adjustments to customers.

In fiscal 2023 and 2024, raw material prices declined, primarily due to lower oil prices and softening global demand. However, both years were marked by persistent challenges associated with elevated labor costs and limited labor availability. While raw material and labor costs stabilized through fiscal 2024 and the first half of fiscal 2025, recent developments such as global trade negotiations and the implementation of new tariffs and import restrictions beginning in the fourth quarter of fiscal 2025 have begun to influence industry pricing structures and supply chain patterns. These evolving conditions have placed upward pressure on our raw material costs, and this trend is expected to continue. In addition, energy prices have demonstrated substantial volatility in recent fiscal years and continue to represent an unpredictable element of our cost structure.

We recently initiated price increases designed to mitigate the impacts of recent tariff actions affecting products imported into the U.S., including those imported from China. While the majority of these price increases began to phase in and become effective as of the second quarter of fiscal 2026, the above-referenced dynamics may ultimately lead to higher input costs, with potential adverse implications for our financial performance.

Further, persistent inflationary pressures significantly curtailed consumer spending during fiscal 2023, with effects extending into fiscal 2024 and 2025. This economic environment contributed to a broader slowdown in both the mattress and residential home furnishings markets, leading to lower demand from home furnishings manufacturers for our mattress fabrics and residential upholstery fabrics across this period. The duration and future impact of these trends remain uncertain, and it is difficult to predict how inflationary conditions may continue to influence consumer behavior and the broader economic cycle for home furnishings products over the near and long term.

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