Quarterly Report for Quarter Ending February 1, 2026 (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 nine months ended February 1, 2026, and January 26, 2025, represent 40-week and 39-week periods, respectively. We refer to the three months ended February 1, 2026, as the "third quarter" and the three months ended January 26, 2025, 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: (i) consolidate the company's North American bedding 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; (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; and (v) reduce unallocated corporate expenses and shared service expenses. Refer to 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 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 combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business. As part of this strategic transformation, we closed our leased facilities operated by our upholstery segment located in Burlington, North Carolina, and Knoxville, Tennessee, and transitioned 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. Refer to Note 10 of the consolidated financial statements for further details regarding this restructuring activity.

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Executive Summary

Consolidated Results of Operations

Net Sales

Overall, our consolidated net sales for the third quarter of fiscal 2026 decreased by $(4.3) million, or (8.2)% compared with the same period a year ago, with bedding sales decreasing by $(1.4) million, or (4.7)%, and upholstery sales decreasing by $(2.9) million, or (12.4)%. Our consolidated net sales for the first nine months of fiscal 2026 decreased by $(12.6) million, or (7.7)%, compared with the same period a year ago, with bedding sales decreasing by $(699,000), or (0.8)%, and upholstery sales decreasing by $(11.9) million, or (15.3)%.

Market conditions in the home furnishings and bedding industry remain challenging, with continued softness in consumer spending and housing activity weighing on demand and sales. These pressures, compounded by severe winter weather in the United States that effectively eliminated the final week of shipping during the third quarter in our largest market, as well as ongoing complexity related to global trade and tariff dynamics, drove the decline in consolidated net sales for the quarter. While we remain confident that our core bedding and furniture markets will recover over time, we believe that meaningful improvement will depend on a sustained rebound in housing activity and discretionary consumer spending. Encouragingly, we have observed what we believe may be some early signs of demand stabilization in the bedding segment in recent periods.

Despite the difficult macroeconomic environment, we continue to secure new programs with major customers and expand our share of available business in targeted channels. Prior to the weather-related disruptions late in the quarter, our bedding sales were tracking those in the comparable prior-year period. Moreover, we were pleased to see growth during the quarter in our sewn mattress cover product category, which remains a key growth driver within our bedding segment. We also continue to see customers recognize the strategic value of our global footprint and strong U.S. manufacturing capabilities, particularly as the current trade and tariff environment drives increased scrutiny of supply chain cost structures and reliability.

The decline in our upholstery sales reflects the broader softness in the home furnishings market and its impact on residential upholstery demand. Notwithstanding these headwinds, we delivered double-digit growth in our upholstery kit product category,

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an important strategic focus for this segment. Sales in our commercial and hospitality upholstery business also declined year-over-year, as customer demand in these markets was affected by project delays driven by ongoing macroeconomic uncertainty.

Although the markets we serve continue to face near-term challenges, we believe we are well positioned for future growth. The recent restructuring of our bedding platform, along with the completion of several additional initiatives during the quarter that should positively impact our upholstery segment-including the integration of our U.S. distribution operations and the consolidation of our production footprint in China-strengthens our operating foundation. Combined with our capabilities in product development and customer service, these actions position us to capture additional market share in the current environment and to accelerate sales growth as industry conditions improve.

See the Segment Analysis section below for further details.

Gross Profit

Consolidated gross profit for the third quarter of fiscal 2026 was $5.3 million, a decrease of $(1.0) million, or (16.1)%, compared with consolidated gross profit of $6.3 million for the third quarter of fiscal 2025, with bedding gross profit decreasing by $(787,000), or (28.7)%, and upholstery gross profit decreasing by $(861,000), or (20.4)%. Consolidated gross profit for the first nine months of fiscal 2026 was $18.3 million, an increase of $920,000, or 5.3%, compared with consolidated gross profit of $17.4 million, for the first nine months of fiscal 2025, with bedding gross profit increasing by $3.1 million, or 64.6%, and upholstery gross profit decreasing by $(2.8) million, or (19.9)%.

Overall gross profitability for the quarter was adversely affected by lower sales volumes, unfavorable foreign exchange impacts related to our China upholstery operations, and inventory-related adjustments primarily associated with the completion of our restructuring and integration initiatives, which were partially offset by the benefits of improved selling margins within our bedding business.

See the Segment Analysis section below for further details.

Loss Before Income Taxes

Overall, our loss before income taxes for the third quarter of fiscal 2026 was $(3.1) million, an improvement of $540,000, or 14.7%, compared with loss before income taxes of $(3.7) million for the same period a year ago. Our loss before income taxes for the first nine months of fiscal 2026 was $(6.1) million, an improvement of $10.3 million, or 62.8%, compared with loss before income taxes of $(16.4) million for the same period a year ago.

Although lower comparable sales and other factors adversely affected our operating performance during the quarter, we continue to benefit from the lower costs and efficiencies emanating from our recently restructured bedding manufacturing platform. Our operating performance also continues to benefit from our additional actions to reduce selling, general and administrative expenses and implement price increases to mitigate tariff impacts. Further, the integration of our domestic upholstery distribution and Read window treatment operations into our owned North Carolina facility, along with the reduction of our facility footprint in China, all of which we completed during the quarter, should further strengthen our operating profile going forward.

Income Taxes

We recorded income tax expense of $1.9 million, or (30.6)% of loss before income taxes, for the nine-month period ended February 1, 2026, compared with income tax expense of $635,000, or (3.9)% of loss before income taxes, for the nine-month period ended January 26, 2025.

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 such jurisdictions have higher income tax rates than the U.S. In addition, we applied a full valuation allowance against our U.S. net deferred income tax assets during the first nine months of fiscal 2026 and 2025. Consequently, an income tax benefit was not recognized for pre-tax losses associated with our U.S. operations totaling $(12.6) million and $(16.8) million that were incurred during the first nine months 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

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with our Haitian operations totaling $(657,000) and $(992,000) that were incurred during the first nine months of fiscal 2026 and 2025, respectively.

During the first nine months of fiscal 2026, we incurred a consolidated pre-tax loss of $(6.1) million, compared with a significantly higher consolidated pre-tax loss of $(16.4) million during the first nine months of fiscal 2025. As a result, the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first nine months of fiscal 2026, as compared with the first nine months of fiscal 2025.

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

Liquidity

As of February 1, 2026, our cash and cash equivalents (collectively, "cash") totaled $9.7 million, which represents an increase of $4.1 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; and (ii) proceeds from the sale of property, plant, and equipment totaling $1.1 million, partially offset by net cash used in operating activities of $(2.3) million.

Our net cash used in operating activities of $(2.3) million improved for the first nine months of fiscal 2026, compared with net cash used in operating activities of $(9.4) million during the first nine months of fiscal 2025. This trend mostly reflects: (i) a decrease in cash losses from savings associated with our restructuring activities announced on May 1, 2024, and April 24, 2025 (refer to section titled "-- Segment Analysis -- Consolidated Other Income Statement Categories -- Restructuring Activities" for further details regarding our restructuring initiatives), and (ii) an increase in cash flow from accounts receivable due to faster payment trends with key bedding customers, as well as a lower sales mix with upholstery customers who had longer payments trends; partially offset by a decrease in cash flow from: (i) having more finished goods on hand to accommodate customers during the transition of our restructuring activities related to our bedding segment and to prepare for the supply chain effects of the Chinese New Year Holiday, (ii) rising costs to produce and source inventory, and (iii) tariffs imposed in accordance with U.S. trade policies related to imported products, and (iv) a decline in consumer demand negatively impacting cash flow from accounts payable.

We had outstanding borrowings totaling $18.5 million under our line of credit agreements, of which $11.5 million and $7.0 million were reported in lines of credit-current and line of credit-long term, respectively, on the February 1, 2026, 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 (e.g., 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 (e.g., 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.

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Bedding Segment

Net Sales

Bedding net sales decreased (4.7)% during the third quarter of fiscal 2026, compared with the same period a year ago. Bedding net sales for the first nine months of fiscal 2026 decreased by (0.8)%, compared with the same period a year ago.

For both the three and nine-month periods ended February 1, 2026, net sales were negatively impacted by reduced demand, as well as ongoing complexity related to global trade and tariff dynamic and adverse weather conditions. However, despite ongoing market headwinds, the company continues to secure new programs with major bedding manufacturers and expand its share of available business within targeted channels. Prior to severe weather-related disruptions late in the quarter, bedding sales were tracking in line with the prior-year period and we were ultimately able to achieve growth in sewn mattress cover products, which remain a key growth driver in this segment. Our bedding customers continue to value the strategic supply alternatives provided by our global footprint and U.S. manufacturing bases, particularly given the increased emphasis on supply chain cost structures and reliability driven by the current tariff environment.

Looking ahead, we see encouraging indications that the bedding market may be stabilizing to a degree, with potential demand improvement driven by product replacement cycles. We will remain focused on expanding placements with key customers and increasing market share to drive revenue growth, while continuing to navigate sales pressure stemming from the current macroeconomic environment. We believe that meaningful future sales growth will depend on a broader industry recovery, improved economic conditions, and greater global trade stability. Ongoing geopolitical risks, including conflicts in Ukraine and the Middle East, also have the potential to disrupt global markets and adversely affect sales.

Gross Profit

Gross profit was $2.0 million for the third quarter of fiscal 2026, a decrease of $(787,000), or (28.7)%, compared with gross profit of $2.7 million for the third quarter of fiscal 2025. Gross profit for the first nine months of fiscal 2026 was $8.0 million, an increase of $3.1 million, or 64.6%, compared with gross profit of 4.9 million for the first nine months of fiscal 2025.

For the third quarter, the decrease in gross profit compared with the comparable quarter was due primarily to inventory-related adjustments resulting primarily from our decision to build inventory to ensure high customer service levels during the pendency of our restructuring activities, as well as lower comparable sales, partially offset by cost reductions, efficiency gains and improved selling margins. For the nine months ended February 1, 2026, the increase in gross profit was due primarily to cost reductions and efficiency gains achieved through the restructuring of our bedding segment in fiscal 2025, together with pricing actions and improved selling margin, partially offset by the same factors affecting the third quarter.

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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 February 1, 2026, accounts receivable of $8.6 million decreased by $(3.0) million, or (25.9)%, compared with accounts receivable totaling $11.6 million as of January 26, 2025. This decrease was driven by a decrease in net sales of (4.7)% during the third quarter of fiscal 2026, compared with the same period a year ago. In addition, this decrease reflects faster payment trends with key customers during the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025. Accordingly, days' sales outstanding decreased to 29 days for the third quarter of fiscal 2026, from 37 days for the third quarter of fiscal 2025.

As of February 1, 2026, accounts receivable totaling $8.6 million decreased by $(2.0) million, or (18.7)%, compared with accounts receivable totaling $10.6 million as of April 27, 2025. This decrease mostly represents faster payment trends with key customers during the third quarter of fiscal 2026, compared with the fourth quarter of fiscal 2025. Accordingly, days' sales outstanding decreased to 29 days for the third quarter of fiscal 2026, from 35 days for the fourth quarter of fiscal 2025.

Inventory

As of February 1, 2026, inventory of $34.3 million increased by $2.9 million, or 9.3%, compared with inventory totaling $31.4 million as of January 26, 2025. This increase in inventory is due primarily to: (i) requiring more finished goods to be on hand to accommodate customers during our restructuring-related transitions, and (ii) rising costs to produce and source inventory, along with tariffs imposed in accordance with U.S. trade policies related to imported products.

As of February 1, 2026, inventory of $34.3 increased by $1.0 million, or 3.1%, compared with inventory totaling $33.3 million as of April 27, 2025. This increase in inventory is due to the same reasons noted above for the third quarter ended February 1, 2026, compared with the third quarter ended January 26, 2025.

Inventory turns were 3.0 for the third quarter of fiscal 2026, as compared with 3.4 for the third quarter of fiscal 2025, and 2.9 for the fourth quarter of fiscal 2025.

Property, Plant, & Equipment

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

The $20.4 million as of February 1, 2026, represents property, plant, and equipment of $19.6 million and $803,000 located in the U.S. and Haiti, respectively. The $24.2 million as of January 26, 2025, represents property, plant, and equipment of $23.0 million, $973,000 and $221,000 located in the U.S., Haiti, and Canada, 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 the restructuring initiatives announced on May 1, 2024, which commenced at the beginning of fiscal 2025 and continued through the third quarter fiscal 2026. In connection with these restructuring initiatives,

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right of use assets decreased due mostly to the termination of an agreement to lease a facility located in Ouanaminthe, Haiti, and the closure of two leased facilities located in Quebec, Canada.

As of February 1, 2026, the bedding segment did not have any right of use assets due to the closure of the above mentioned facilities. The $200,000 and $125,000 as of January 26, 2025, and April 27, 2025, respectively, represents a right of use asset located in Haiti.

Assets Held for Sale

As of April 27, 2025, and January 26, 2025, we classified certain assets as held for sale totaling $2.2 million, which mostly related to the manufacturing facility and related land (collectively referred to as the "Property") associated with the closure of our operations located in Quebec, Canada.

During the first quarter of fiscal 2026, we sold the Property, and recognized a gain from this sale totaling $4.0 million that was classified within restructuring credit in the Consolidated Statement of Net Loss for the nine-month period ended February 1, 2026. As a result, the bedding segment did not have any assets classified as held for sale as of February 1, 2026.

Refer to Note 8 of the consolidated financial statements for further details.

Upholstery Segment

Net Sales

Upholstery net sales decreased (12.4)% during the third quarter of fiscal 2026, compared with the same period a year ago. Upholstery net sales for the first nine months of fiscal 2026 decreased by (15.3)%, compared with the same period a year ago.

Conditions in the upholstery market remain unsettled, continuing to adversely affect demand in the company's residential fabric business. In addition, broader macroeconomic pressures have dampened project activity in the commercial and hospitality fabric markets we serve. The year-over-year declines in upholstery sales during the quarter and first nine months of fiscal 2026 reflect these factors, as well as incremental pressure on customer demand resulting from ongoing tariff volatility. Despite these market challenges, we achieved double-digit growth in upholstery kits during the quarter. This product category represents an important strategic channel for this segment and continues to perform favorably relative to broader market trends.

Looking forward, we expect conditions in the home furnishings market to remain uncertain in the near term. However, as market conditions improve and a broader industry recovery emerges, we believe that recent scale and efficiency enhancements resulting from the completion of integration initiatives within our upholstery segment, coupled with our product innovation capabilities and multi-location manufacturing and sourcing platform, position our upholstery segment to accelerate sales growth when demand stabilizes.

The potential impact of ongoing geopolitical developments, including conflicts in Ukraine and the Middle East, remains uncertain and is dependent on factors outside of our control. At this time, we cannot reasonably estimate the effect of these events on the upholstery fabrics segment. However, an escalation of geopolitical tensions, including potential shipping disruptions related to conflicts in the Middle East, could adversely affect our operations, as well as those of our suppliers and customers, and could negatively impact the global economy and our financial performance.

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Gross Profit

Upholstery gross profit was $3.4 million for the third quarter of fiscal 2026, a decrease of $(861,000), or (20.4)%, compared with upholstery gross profit of $4.2 million for the third quarter of fiscal 2025. Upholstery gross profit for the first nine months of fiscal 2026 was $11.3 million, a decrease of $(2.8) million, or (19.9)%, compared with upholstery gross profit of $14.1 million for the first nine months of fiscal 2025.

The declines in gross profit within our upholstery segment during the quarter and first nine months of fiscal 2026 were primarily attributable to lower comparable sales and unfavorable foreign exchange impacts associated with our China upholstery operations. These factors were partially offset by our improving cost structure, which allowed us to maintain solid gross margins despite challenging market conditions affecting the home furnishings industry, including both residential and commercial upholstery channels.

The residential home furnishings market continues to experience reduced demand driven by shifts in consumer spending patterns, volatility related to global trade and tariffs, inflationary pressures, lower home sales activity, and other macroeconomic factors affecting discretionary purchases. As a result, we expect the current low-demand environment for residential upholstery fabrics to continue to adversely affect gross profit until market conditions improve.

During the quarter, we completed the integration of our U.S. upholstery distribution and window treatment operations into our owned facility in North Carolina, which is expected to enhance operating efficiency and improve this segment's profitability profile. In addition, we implemented further cost-reduction and efficiency initiatives during the quarter, including the rationalization of our production and distribution footprint in China. We continue to monitor demand trends closely and remain prepared to implement additional operational adjustments as necessary to align our cost structure in this segment with market conditions, while continuing to provide consistent service levels to 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 February 1, 2026, accounts receivable of 8.3 million decreased by $(3.3) million, or (28.2)%, compared with $11.6 million as of January 26, 2025. This trend was driven by a decrease in net sales of (12.4)% during the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025. In addition, this decrease reflects a lower sales mix with customers who had longer payment trends during the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025. Accordingly, days' sales outstanding was 34 days for the third quarter of fiscal 2026, as compared with 42 days for the third quarter of fiscal 2025.

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As of February 1, 2026, accounts receivable of $8.3 million decreased by $(3.0) million, or (26.4)%, compared with $11.3 million as of April 27, 2025. This trend stems from a decrease in net sales during the third quarter of fiscal 2026, compared with the fourth quarter of fiscal 2025. Net sales totaled $20.7 million during the third quarter of fiscal 2026, a decrease of (4.5)%, compared with $21.7 million during the fourth quarter of fiscal 2025. In addition, this decrease reflects a lower sales mix with customers who had longer payment trends during the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025. Accordingly, days' sales outstanding was 34 days for the third quarter of fiscal 2026, as compared with 46 days for the third quarter of fiscal 2025.

Inventory

As of February 1, 2026, inventory of $17.9 million increased by $677,000, or 3.9%, compared with $17.2 million as of January 26, 2025. This increase in inventory is due primarily to: (i) requiring more finished goods to prepare for the supply chain effects of the Chinese New Year Holiday, and (ii) rising costs to produce and source inventory, along with tariffs imposed in accordance with U.S. trade policies related to imported products, which were partially offset by a decrease in net sales of (12.4%) due to lower consumer demand during the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025.

As of February 1, 2026, inventory of $17.9 million increased by $1.9 million, or 11.8%, compared with $16.0 million as of April 27, 2025. This increase in inventory is due primarily to: (i) requiring more finished goods to be on hand to prepare for the supply chain effects of the Chinese New Year Holiday, and (ii) rising costs to produce and source inventory, along with tariffs imposed in accordance with U.S. trade policies related to imported products.

Inventory turns were 4.0 for the third quarter of fiscal 2026, as compared with 4.2 for the third quarter of fiscal 2025 and 4.0 for the fourth quarter of fiscal 2025.

Property, Plant, & Equipment

Property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macroeconomic conditions within the home furnishings and residential furniture industries, as well as from our recent restructuring activities announced on April 24, 2025. See note 10 of the consolidated financial statements for further details and description of our restructuring activities.

The $712,000 as of February 1, 2026, represents property, plant, and equipment of $674,000 and $38,000 located in the U.S. and China, respectively. The $1.1 million as of January 26, 2025, represents property, plant, and equipment of $1.0 million and $83,000 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

Right of use assets have steadily decreased due to the restructuring initiatives announced on April 24, 2025, which were mostly completed by the end of the third quarter fiscal 2026. In connection with these restructuring initiatives, right of use assets decreased due mostly to the termination of lease agreements associated with upholstery facilities located in Burlington, North Carolina, and Knoxville, Tennessee, as well as one facility located in Shanghai, China.

The $677,000 as of February 1, 2026, represents right of use assets of $574,000 and $103,000 located in China and the U.S., respectively. The $2.6 million as of January 26, 2025, represents right of use assets of $1.9 million and $764,000 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

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

The decrease in selling, general, and administrative expenses during the third quarter and first nine months of fiscal 2026, compared with the third quarter and first nine months of fiscal 2025, was primarily due to the 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). Also, additional SG&A expenses were incurred during the first nine months of fiscal 2026, compared with the first nine months of fiscal 2025, as the first nine months of fiscal 2026 and 2025 represented 40-week and 39-week periods, respectively.

Restructuring Activities

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 bedding 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.

These restructuring activities were completed by the end of the second quarter of fiscal 2026, including the sale of the Property located in Quebec, Canada. Accordingly, we recorded a gain from the sale of this Property totaling $4.0 million that was classified within restructuring credit in the Consolidated Statement of Net Loss for the nine-month period ended February 1, 2026. 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.

Since inception of this restructuring initiative, we incurred cumulative restructuring and restructuring related charges totaling $5.3 million, most of which is related to the bedding segment. Of this total $5.3 million, $7.2 million and $(1.9) million, represent a cash restructuring and related charge and a non-cash restructuring credit, respectively.

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 combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business. As part of this strategic transformation, we closed our leased facilities operated by our upholstery segment located in Burlington, North Carolina, and Knoxville, Tennessee, and transitioned 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.

These restructuring activities were mostly completed by the end of the third quarter of fiscal 2026. Since inception of this restructuring initiative, we incurred cumulative restructuring and restructuring related charges totaling $2.6 million, of which $2.3 million and $265,000 related to the upholstery and bedding segments, respectively. Of this total $2.6 million, $1.3 million and $1.3 million represent a cash restructuring and related charge and a non-cash restructuring charge, respectively.

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The following summarizes restructuring expense (credit) and restructuring related charges associated with the above announcements for the three-month and nine-month periods ended February 1, 2026:

(1) The $584,000 was classified within restructuring expense in the Consolidated Statement of Net Loss for the three-month period ended February 1, 2026. Of the total $584,000 restructuring expense, $565,000 and $19,000 related to the upholstery and bedding segments, respectively.

(2) Of the total $(1.5) million net restructuring credit and restructuring related charge, a $(2.4) million credit and $931,000 charge were classified within restructuring credit and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ended February 1, 2026. Of the total ($1.5) million net restructuring credit and restructuring related charge, a credit of ($3.1) million and a charge of $1.6 million related to the bedding and upholstery segments, respectively.

(3) Of the total $584,000 restructuring expense for the three months ended February 1, 2026, $577,000 and $7,000 related to the restructuring activities announced on April 24, 2025, and May 1, 2024, respectively. Of the total $(1.5) million net restructuring credit and restructuring related charge for the nine months ended February 1, 2026, a credit of $(3.4) million and a charge of $1.9 million related to the restructuring activities announced on May 1, 2024, and April 24, 2025, respectively.

The following summarizes restructuring expense and restructuring related charges associated with the May 1, 2024 announcement described above for the three-month and nine-month periods ended January 26, 2025:

(1) Of the total $2.3 million restructuring expense and restructuring related charge, $1.7 million and $624,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ended January 26, 2025. The $2.3 million mostly relates to the bedding segment.

(2) Of the total $7.8 million restructuring expense and restructuring related charge, $6.3 million and $1.5 million were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ended January 26, 2025. The $7.8 million mostly relates to the building segment.

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Interest Expense

The increase in interest expense during the third quarter and first nine months of fiscal 2026, compared with the third quarter and first nine months of fiscal 2025, reflects increased borrowings under line of credit agreements associated with our operations located in the U.S. and China.

Interest Income

The increase in interest income during the third quarter and first nine months of fiscal 2026, compared with the third quarter and first nine months of fiscal 2025, reflects interest income earned from a note receivable associated with the sale of the Property that occurred at the beginning of the first quarter of fiscal 2026. During the third quarter and the first nine months of fiscal 2026, interest income of $118,000 and $267,000, respectively, was earned from this note receivable, and this interest income was not earned during the third quarter and the first nine months of fiscal 2025. Interest income was partially offset by a decrease in interest income from lower average cash balances during first nine months of fiscal 2026, compared with the first nine months of fiscal 2025.

Refer to Notes 7 and 10 of the consolidated financial statements for further details regarding our note receivable and our restructuring activity announced on May 1, 2024.

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, Canada, and Vietnam.

The increase in other income for the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025, and the decrease in other expense for the first nine months of fiscal 2026, compared with the first nine months of fiscal 2025, reflects $1.0 million of cash proceeds in connection with the resolution of a legal matter, offset by less favorable foreign currency exchange rates associated with our operations located in China. During the third quarter of fiscal 2026, we incurred a foreign currency exchange rate loss associated with our operations located in China totaling $(532,000), compared with a foreign currency exchange rate gain of $305,000 during the third quarter of fiscal 2025. During the first nine months of fiscal 2026, we incurred a foreign currency exchange rate loss associated with our operations located in China totaling $(994,000), compared with a foreign currency exchange gain of $74,000 during the first nine months of fiscal 2025.

The $(994,000) foreign currency exchange rate loss for the first nine months of fiscal 2026 described above was mostly non-cash and offset by an income tax benefit of $839,000. The income tax benefit of $839,000 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 $1.9 million, or (30.6)% of loss before income taxes, for the nine-month period ended February 1, 2026, compared with income tax expense of $635,000, or (3.9)% of loss before income taxes, for the nine-month period ended January 26, 2025.

Our consolidated effective income tax rates for the nine-month periods ended February 1, 2026, and January 26, 2025, 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 nine-month periods ended February 1, 2026, and January 26, 2025, we were subject to loss limitation rules. These loss limitation rules require any pre-tax 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 impacted over the fiscal 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 nine-month periods ended February 1, 2026, and January 26, 2025:

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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, we evaluated the provisions of OBBBA and determined OBBBA did not have an impact on our consolidated effective income tax rate, income tax expense, or our U.S. net deferred income tax assets during the nine months ended February 1, 2026, 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.

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As of February 1, 2026, 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 February 1, 2026, January 26, 2025, 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 February 1, 2026, 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.

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 February 1, 2026, January 26, 2025, and April 27, 2025, we recorded a deferred income tax liability of $4.9 million, $5.1 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 February 1, 2026, January 26, 2025, and April 27, 2025, we had $845,000, $1.4 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 $845,000, $1.4 million, and $790,000 as of February 1, 2026, January 26, 2025, and April 27, 2025, respectively.

Our gross unrecognized income tax benefit of $845,000 as of February 1, 2026, 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 income 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 February 1, 2026, we believe: (i) our cash of $9.7 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 $13.7 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 February 1, 2026, our cash and cash equivalents (collectively, "cash") totaled $9.7 million, which represents an increase of $4.1 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; and (ii) proceeds from the sale of property, plant, and equipment totaling $1.1 million, partially offset by net cash used in operating activities of $(2.3) million.

Our net cash used in operating activities of $(2.3) million improved for the first nine months of fiscal 2026, compared with net cash used in operating activities of $(9.4) million during the first nine months of fiscal 2025. This trend mostly reflects: (i) a decrease in cash losses from savings associated with our restructuring activities announced on May 1, 2024, and April 24, 2025 (refer to section titled "-- Segment Analysis -- Consolidated Other Income Statement Categories -- Restructuring Activities" for further details regarding our restructuring initiatives), and (ii) an increase in cash flow from accounts receivable due to faster payment trends with key bedding customers, as well as a lower sales mix with upholstery customers who had longer payments trends; partially offset by a decrease in cash flow from: (i) having more finished goods on hand to accommodate customers during the transition of our restructuring activities related to our bedding segment and to prepare for the supply chain effects of the Chinese New Year Holiday, (ii) rising costs to produce and source inventory, and (iii) tariffs imposed in accordance with U.S. trade policies related to imported products, and (iv) a decline in consumer demand negatively impacting cash flow from accounts payable.

We had outstanding borrowings totaling $18.5 million under our line of credit agreements, of which $11.5 million and $7.0 million were reported in lines of credit-current and line of credit-long term, respectively, on the February 1, 2026, 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 nine-month periods ended February 1, 2026, or January 26, 2025, respectively.

As of February 1, 2026, $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 nine months of fiscal 2026, fiscal 2025, 2024, or 2023.

Tariffs

Since early 2025, the U.S. government has imposed tariffs under the International Emergency Economic Powers Act ("IEEPA"). In February 2026, the U.S. Supreme Court invalidated certain tariffs imposed under IEEPA, and the company has filed a claim seeking reimbursement for amounts it paid under the invalidated tariffs, which amount may be significant. However, the Supreme Court's ruling did not address whether importers who paid IEEPA tariffs are entitled to refunds, and that issue remains subject to further litigation. We cannot predict whether or when any reimbursement for amounts the company paid in respect of IEEPA tariffs will be available. The litigation regarding these refunds may be ongoing for a significant period of time, and we may not be successful in our claim.

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 $38.8 million as of February 1, 2026, compared with $37.9 million as of January 26, 2025, and $43.4 million as of April 27, 2025. Operating working capital turnover was 4.9 during the third quarter of fiscal 2026, compared with 5.8 during the third quarter of fiscal 2025, and 5.7 during the fourth quarter of fiscal 2025.

Accounts Receivable

Accounts receivable was $16.9 million as of February 1, 2026, a decrease of $(6.3) million, or (27.1)%, compared with $23.2 million as of January 26, 2025. This decrease was driven by a decrease in net sales of (8.2)% during the third quarter of fiscal 2026, compared with the same period a year ago. In addition, this decrease reflects faster payment trends with key bedding customers, as well as a lower sales mix with upholstery customers who had longer payment trends during the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025. Accordingly, days' sales outstanding decreased to 31 days for the third quarter of fiscal 2026, from 39 days for the third quarter of fiscal 2025.

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Accounts receivable was $16.9 million as of February 1, 2026, a decrease of $(5.0) million, or (22.7)%, compared with $21.8 million as of April 27, 2025. This decrease reflects faster payment trends with key bedding customers, as well as a lower sales mix with upholstery customers who had longer payment trends during the third quarter of fiscal 2026, compared with the fourth quarter of fiscal 2025. Accordingly, days' sales outstanding decreased to 31 days for the third quarter of fiscal 2026, from 40 days for the fourth quarter of fiscal 2025.

Inventory

Inventory was $52.2 million as of February 1, 2026, an increase of $3.6 million, or 7.4%, compared with $48.6 million as of January 26, 2025. This increase in inventory is due primarily to: (i) requiring more finished goods to be on hand to accommodate customers during our restructuring-related transitions, and (ii) rising costs to produce and source inventory, along with tariffs imposed in accordance with U.S. trade policies related to imported products, which were partially offset by a decrease in net sales related to our upholstery segment due to lower consumer demand during the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025.

Inventory was $52.2 million as of February 1, 2026, an increase of $2.9 million, or 5.9%, compared with $49.3 million as of April 27, 2025. This increase in inventory is due primarily to: (i) requiring more finished goods to be on hand to accommodate customers during our restructuring-related transitions, and supply chain effects of the Chinese New Year Holiday, and (ii) rising costs to produce and source inventory, along with tariffs imposed in accordance with U.S. trade policies related to imported products.

Inventory turns were 3.4 for the third quarter of fiscal 2026, as compared with 3.8 for the third quarter of fiscal 2025, and 3.3 for the fourth quarter of fiscal 2025.

Accounts Payable - Trade

Accounts payable - trade was $29.6 million, as of February 1, 2026, a decrease of $(3.1) million, or (9.4)%, compared with $32.7 million as of January 26, 2025. This trend represents a decrease in net sales of (8.2%) due to lower consumer demand, which ultimately led to fewer purchase orders with suppliers, during the third quarter of fiscal 2026, compared with the third quarter of fiscal 2025.

Accounts payable - trade was $29.6 million, as of February 1, 2026, an increase of $2.3 million, or 8.5%, compared with $27.3 million as of April 27, 2025. This trend represents a strategic build of inventory due to the supply chain effects of the Chinese New Year Holiday.

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 February 1, 2026, we had outstanding borrowings associated with our line of credit agreements totaling $18.5 million, of which $11.5 million and $7.0 million were reported in lines of credit-current and line of credit- long term, respectively.. Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of February 1, 2026, 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 include the Third Amendment and Fourth 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 include a five-year maturity schedule.

Capital Expenditures and Depreciation

Overall

Capital expenditures on a cash basis for the first nine months of fiscal 2026 totaled $442,000, compared with $2.4 million for the first nine months of fiscal 2025. Our decision to reduce our level of capital expenditures is due to the current unfavorable macro-economic conditions within the home furnishings and bedding industries.

During the first nine months of fiscal 2026, we reported depreciation expense of $3.1 million, compared with $4.3 million for the same period a year ago, which was mostly related to our bedding segment for both periods. We reported accelerated depreciation of $112,000 that was classified within restructuring credit in the Consolidated Statement of Net loss for the nine-month period

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ended February 1, 2026. The $112,000 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 our manufacturing and distribution center located in Stokesdale, North Carolina. We reported accelerated depreciation of $1.3 million that was classified within restructuring expense in the Consolidated Statement of Net Loss for the nine-month period ended January 26, 2025. The $1.3 million of accelerated depreciation related to the shortening of useful lives of equipment associated with the closure of our operations located in Quebec, Canada. See 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 lower than 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 February 1, 2026, 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.

In recent periods we implemented price increases designed to mitigate the impacts of recent tariff actions affecting products imported into the U.S., including those imported from China, as well as additional surcharges in response to new tariffs on imports from Haiti, Turkey and elsewhere. The majority of these price increases began to phase in and become effective as of the second quarter of fiscal 2026, and we believe that our current pricing strategies position us to effectively absorb the additional costs flowing from applicable tariffs, but 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, 2025, and 2026. 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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