Quarterly Report for Quarter Ending November 2, 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 six months ended November 2, 2025, and October 27, 2024, represent 27-week and 26-week periods, respectively. We refer to the three months ended November 2, 2025 as the "second quarter" and the three months ended October 27, 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 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; (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 bedding 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. 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 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 are closing our leased facilities operated by our upholstery segment located in Burlington, North Carolina, and Knoxville, Tennessee, and are currently transitioning 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 second quarter of fiscal 2026 decreased by (4.4)% compared with the same period a year ago, with bedding sales increasing by 2.3% and upholstery sales decreasing by (12.3)%. Our consolidated net sales for the first half of fiscal 2026 decreased by (7.4)%, compared with the same period a year ago, with bedding sales increasing by 1.1% and upholstery sales decreasing by (16.6)%.

Market conditions in the home furnishings and bedding industry remain unsettled, with consumer uncertainty and subdued housing activity continuing to pressure demand and weigh on unit sales. Despite these challenges, as well as added complexity from global trade and tariff dynamics, our consolidated net sales improved sequentially from the first quarter (which included an additional week), with bedding sales growing both sequentially and year-over-year supported by solid trends in our knit fabric and sewn cover product lines. We also continue to gain market share in key bedding customer segments. Encouragingly, the bedding market shows some signs of stabilization-albeit at lower levels-and we anticipate some potential demand improvement driven by product replacement cycles.

Upholstery sales were flat sequentially with the first quarter but declined year-over-year, reflecting the broader softness in the home furnishings market and its impact on residential upholstery. Residential upholstery sales within our U.S. customer base remained relatively stable during the quarter, while direct sales to customers in China and other regions faced some more localized challenges. Sales in our commercial and hospitality upholstery business were down year-over-year, with demand in that area affected by project delays tied to current macroeconomic and market uncertainty.

While the markets we serve continue to face headwinds, the recently completed restructuring of our bedding platform coupled with the completion of several additional restructuring and integration initiatives in the second half of the fiscal year will give us an optimized global platform for bedding and upholstery products that is unique in the home furnishings industry. We believe this platform, combined with our strengths in product development and customer service, positions us to capture additional market share in the current environment and accelerate sales growth as conditions improve.

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See the Segment Analysis section below for further details.

Gross Profit

Consolidated gross profit for the second quarter of fiscal 2026 was $5.8 million, a decrease of (3.5)%, compared with consolidated gross profit of $6.0 million for the second quarter of fiscal 2025, with bedding gross profit increasing 26.9% and upholstery gross profit decreasing (16.3)%. Consolidated gross profit for the first half of fiscal 2026 was $13.0 million, an increase of $1.9 million, or 17.6%, compared with consolidated gross profit of $11.1 million for the first half of fiscal 2025, with bedding gross profit increasing $3.9 million, or 185.4%, and upholstery gross profit decreasing $(1.9) million, or (19.7)%.

Lower upholstery sales volumes impacted gross profitability during the quarter, but the cost reductions and efficiency gains in the bedding segment following the restructuring initiatives completed in fiscal 2025 drove overall improvement in consolidated gross profit for the first half of the year.

See the Segment Analysis section below for further details.

Loss Before Income Taxes

Overall, our loss before income taxes for the second quarter of fiscal 2026 was $(4.1) million, an improvement of $1.6 million, or 28.0%, compared with loss before income taxes of $(5.7) million for the same period a year ago. Overall, our loss before income taxes for the first half of fiscal 2026 was $(3.0) million, an improvement of $9.8 million, or 76.7%, compared with loss before income taxes of $(12.7) million for the same period a year ago.

Our operating performance continues to benefit from the lower costs and efficiencies flowing from our recently restructured bedding manufacturing platform, as well as additional actions to reduce selling, general and administrative expenses, which were lower during the quarter. Excluding restructuring and related expenses, our operating performance improved significantly year-over-year despite lower upholstery sales volumes.

We continue to make adjustments to our business following the restructuring of our bedding platform in fiscal 2025, including consolidations of our upholstery distribution and Read window treatment operations into our owned U.S. manufacturing campus and the reduction of our facility footprint in China, all of which are on track for completion this fiscal year. We expect these additional initiatives, along with recently implemented price increases to mitigate tariff impacts, to further enhance our overall operating profile going forward.

Income Taxes

We recorded income tax expense of $1.6 million, or (53.2)% of loss before income taxes, for the six-month period ended November 2, 2025, compared with income tax expense of $190,000, or (1.5)% of loss before income taxes, for the six-month period ended October 27, 2024.

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 half of fiscal 2026 and 2025. Consequently, an income tax benefit was not recognized for pre-tax losses associated with our U.S. operations totaling $(8.1) million and $(12.4) million that were incurred during the first half 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 $(565,000) and $(727,000) that were incurred during the first half of fiscal 2026 and 2025, respectively.

During the first half of fiscal 2026, we incurred a consolidated pre-tax loss of $(3.0) million, compared with a significantly higher consolidated pre-tax loss of $(12.7) million during the first half of fiscal 2025. As a result, the principal differences between income

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tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during the first half of fiscal 2026, as compared with the first half of fiscal 2025.

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

Liquidity

As of November 2, 2025, our cash and cash equivalents (collectively, "cash") totaled $10.7 million, which represents an increase of $5.1 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 during the first half of fiscal 2026, an increase of $1.3 million compared with the first half of fiscal 2025, and (ii) proceeds from the sale of property, plant, and equipment totaling $979,000, partially offset by net cash used in operating activities of $(1.2) million.

Our net cash used in operating activities of $(1.2) million improved for the first half of fiscal 2026, compared with net cash used in operating activities of $(2.6) million during the first half 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 shorter payment trends associated with the upholstery segment during the second 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; partially offset by: (i) a decrease in cash flow from inventory related to strategically sourcing certain fabrics that have longer lead times to acquire, rising prices, and tariffs imposed in accordance with U.S. trade policy, and (ii) a decrease in cash flow from accounts payable due to a decline in consumer demand.

We had outstanding borrowings totaling $18.3 million under our line of credit agreements, of which $11.3 million and $7.0 million were reported in lines of credit-current and line of credit-long term, respectively, on the November 2, 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 (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.

Bedding Segment

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Net Sales

Bedding net sales increased 2.3% during the second quarter of fiscal 2026 compared with the same period a year ago. Bedding net sales for the first half of fiscal 2026 increased by 1.1%, compared with the same period a year ago.

We were able to increase our bedding sales during the quarter both sequentially and year-over-year despite continuing headwinds from the macroeconomic environment generally, and consumer purchasing hesitancy and muted housing activity more specifically, pressuring demand across the bedding market, as well as additional complexities and uncertainties created by the volatile global trade and tariff landscape. We continued to see growth in certain of our knit fabric and sewn cover product lines during the quarter, which supported our ability to gain market share in key customer segments.

Looking ahead, we see some encouraging indications that the bedding market may be stabilizing to a degree, although at lower unit levels, and we see potential for improvement in demand driven by product replacement cycles. We will continue to focus on expanding placements with key customers and growing market share to increase revenue, but expect continued sales pressure in the current macroeconomic environment. We continue to believe that significant future sales growth is dependent upon a broad industry 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 $3.1 million for the second quarter of fiscal 2026, an increase of 26.9%, compared with gross profit of $2.4 million for the second quarter of fiscal 2025. Gross profit for the first half of fiscal 2026 was $6.0 million, an increase of $3.9 million, or 185.4%, compared with gross profit of $2.1 million for the first half of fiscal 2025.

As anticipated, the cost reductions and efficiency improvements generated by the restructuring of our bedding segment in fiscal 2025, along with pricing adjustments, continued to drive significantly improving gross profit in this segment during the quarter. 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 November 2, 2025, accounts receivable of $11.2 million increased by $847,000, or 8.2%, compared with accounts receivable totaling $10.4 million as of October 27, 2024. This increase was driven by an increase in net sales of 2.3% during the second quarter of fiscal 2026, compared with the same period a year ago. In addition, this increase reflects longer payment trends with key customers during the second quarter of fiscal 2026, compared with second quarter of fiscal 2025. Accordingly, days' sales outstanding increased to 33 days for the second quarter of fiscal 2026, from 31 days for the second quarter of fiscal 2025.

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As of November 2, 2025, accounts receivable totaling $11.2 million, increased by $623,000, or 5.9%, compared with accounts receivable totaling $10.6 million as of April 27, 2025. This increase represents an increase in net sales during the second quarter of fiscal 2026, compared with the fourth quarter of fiscal 2025. During the second quarter of fiscal 2026, bedding sales were $30.8 million, an increase of $3.6 million or 13.5%, compared with $27.1 million during the fourth quarter of fiscal 2025. However, the increase in net sales was partially offset by faster payment trends with key customers during the second quarter of fiscal 2026, compared with the fourth quarter of fiscal 2025. Accordingly, days' sales outstanding decreased to 33 days for the second quarter of fiscal 2026, from 35 days for the fourth quarter of fiscal 2025.

Inventory

As of November 2, 2025, inventory of $34.5 million increased by $5.3 million, or 18.1%, compared with inventory totaling $29.3 million as of October 27, 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 in accordance with U.S. trade policies related to imported products.

As of November 2, 2025, inventory of $34.5 increased by $1.2 million, or 3.7%, compared with inventory totaling $33.3 million as of April 27, 2025. This increase in inventory is due primarily to 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 3.2 for the second quarter of fiscal 2026, as compared with 4.1 for the second 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 second quarter of fiscal 2026. See note 10 of the consolidated financial statements for further details and description of our restructuring activities.

The $21.1 million as of November 2, 2025, represents property, plant, and equipment of $20.2 million and $842,000 located in the U.S. and Haiti, respectively. The $24.7 million as of October 27, 2024, represents property, plant, and equipment of $22.2 million, $1.6 million, and $889,000 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 second 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 closure of two leased facilities located in Quebec, Canada.

As of November 2, 2025, the bedding segment did not have any right of use assets due to the closure of the above mentioned facilities. The $275,000 and $125,000 as of October 27, 2024, and April 27, 2025, respectively, 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 second quarter of fiscal 2026. Refer to Note 8 of the consolidated financial statements for further details.

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Upholstery Segment

Net Sales

Upholstery net sales decreased (12.3)% during the second quarter of fiscal 2026 compared with the same period a year ago. Upholstery net sales for the first half of fiscal 2026 decreased by (16.6)%, compared with the same period a year ago.

Conditions in the upholstery market continue to be unsettled, impacting demand in our residential fabric business. The macroeconomic environment has also pressured project activity in the commercial and hospitality fabric markets we serve. Our year-over-year sales decline during the quarter is attributable to both of these dynamics, as well as the additional pressure on demand from tariff volatility. Despite the difficult environment, we were able to maintain relatively stable sales within our U.S. residential upholstery customer base during the quarter, offset by challenged revenue conditions within China and other countries.

Looking ahead, we expect conditions in the home furnishings market to continue to be in flux to some degree. However, as conditions ultimately do improve and a broad market recovery begins, we believe the scale and efficiency enhancements driven by the integration initiatives to be completed in our upholstery segment in fiscal 2026, along with our innovative product offerings and multi-location production and sourcing platforms, will position our upholstery segment to accelerate sales growth.

Notably, the macroeconomic impact of the 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, 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.

Gross Profit

Upholstery gross profit was $3.6 million for the second quarter of fiscal 2026, a decrease of $(704,000), or (16.3)%, compared with upholstery gross profit of $4.3 million for the second quarter of fiscal 2025. Upholstery gross profit for the first half of fiscal

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2026 was $7.9 million, a decrease of $(1.9) million, or (19.7)%, compared with upholstery gross profit of $9.8 million for the first half of fiscal 2025.

The profitability decline in our upholstery segment during the second quarter of fiscal 2026 primarily stems from lower comparable sales. Nevertheless, we were encouraged by our ability to sustain solid gross margins despite the challenging market conditions across home furnishings and residential upholstery.

Looking ahead, the residential home furnishings sector continues to face headwinds from shifting consumer spending patterns, global trade negotiations and tariff increases, inflationary pressures, declining home sales, and other macroeconomic factors affecting discretionary purchases. As a result, we expect the current low-demand environment for residential upholstery fabrics to weigh on profitability until the market enters a recovery cycle. To strengthen performance, we are consolidating our U.S. upholstery distribution and window treatment operations into our owned facility in North Carolina, with completion on track for fiscal 2026. These initiatives are expected to deliver meaningful profitability improvements. In addition, we are implementing further cost-reduction and efficiency measures, including rationalizing our facility footprint in China, which should be completed this fiscal year and enhance the upholstery segment's profitability profile. We remain prepared to make additional operational adjustments as needed to align with demand trends while continuing to deliver high-quality service to 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 November 2, 2025, accounts receivable of $9.4 million decreased by $(2.5) million, or (21.2)%, compared with $12.0 million as of October 27, 2024. This trend was driven by a decrease in net sales of (12.3)% during the second quarter of fiscal 2026, compared with the second quarter of fiscal 2025. In addition, this decrease in accounts receivable is due to shorter payment trends during the second quarter of fiscal 2026, as we experienced a higher sales mix with customers who had longer credit terms during the second quarter of fiscal 2025, as compared with the second quarter of fiscal 2026. Accordingly, days' sales outstanding was 35 days for the second quarter of fiscal 2026, as compared with 39 days for the second quarter of fiscal 2025.

As of November 2, 2025, accounts receivable of $9.4 million decreased by $(1.8) million, or (16.2)%, compared with $11.3 million as of April 27, 2025. This decrease in accounts receivable is mostly due to shorter payment trends during the second 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 second quarter of fiscal 2026. Accordingly, days' sales outstanding decreased to 35 days for the second quarter of fiscal 2026, from 46 days for the fourth quarter of fiscal 2025.

Inventory

As of November 2, 2025, inventory of $15.4 million, decreased by $(477,000), or (3.0)%, compared with $15.9 million as of October 27, 2024. This decrease in inventory is mostly due to: (i) a decrease in net sales due to lower consumer demand; (ii) diligent inventory management due to uncertainty associated with tariffs imposed in accordance with U.S. trade policies, along with (iii) a concerted effort to liquidate aged inventory in connection with the closure of our leased upholstery facilities located Burlington, North Carolina and Knoxville, Tennessee associated with our restructuring initiative announced on April 24, 2025. Also, the decrease in inventory noted above was partially offset by rising costs to produce and source inventory, along with tariffs imposed in accordance with U.S. trade policies related to imported products.

As of November 2, 2025, inventory of $15.4 million decreased by $(614,000), or (3.8)%, compared with $16.0 million as of April 27, 2025. This trend is driven by diligent inventory management due to uncertainty associated with tariffs imposed in accordance with U.S. trade policies, and a concerted effort to liquidate aged inventory in connection with the closure of our leased upholstery

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facilities located Burlington, North Carolina and Knoxville, Tennessee. Also, the decrease in inventory noted above was partially offset by 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 5.0 for the second quarter of fiscal 2026, as compared with 5.1 for the second quarter of fiscal 2025 and 4.0 for the fourth quarter of fiscal 2025.

Property, Plant, & Equipment

As of November 2, 2025, property, plant, and equipment remained relatively flat compared with October 27, 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 $785,000 as of November 2, 2025, represents property, plant, and equipment of $737,000 and $48,000 located in the U.S. and China, respectively. The $1.2 million as of October 27, 2024, represents property, plant, and equipment of $1.1 million and $95,000 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 November 2, 2025, right of use assets of $1.2 million remained flat, compared with $1.1 million as of October 27, 2024.

As of November 2, 2025, right of use assets of $1.2 million, decreased by $(1.5) million, or (54.3)%, compared with $2.7 million as of April 27, 2025. The right of use assets of $2.7 million as of April 27, 2025, included the renewal of certain lease agreements associated with our operations located in Shanghai, China and Burlington, North Carolina during the third and fourth quarters of fiscal 2025. The decrease in right of use assets as of November 2, 2025, compared with April 27, 2025, represents rent expense incurred over the terms of the existing respective lease agreements.

The $1.2 million as of November 2, 2025, represents right of use assets of $725,000 and $499,000 located in China and the U.S., respectively. The $1.1 million as of October 27, 2024, represents right of use assets of $925,000 and $195,000 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 decrease in selling, general, and administrative expenses during the second quarter and first half of fiscal 2026, compared with the second quarter and first half of fiscal 2025, was primarily due to: (i) a decrease in net sales of (4.4)% and (7.4)% during the second quarter and first half of fiscal 2026, compared with the second quarter and first half of fiscal 2025, respectively; (ii) lower

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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). Also, additional SG&A expenses were incurred during the first half of fiscal 2026, compared with the first half of fiscal 2025, as the first half of fiscal 2026 and 2025 represented 27-week and 26-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.

The above restructuring activities related to the May 1, 2024 announcement were mostly completed by the end of the second quarter of fiscal 2026, including the sale of the Property and certain equipment located in Quebec, Canada. Accordingly, we recorded a gain from the sale of this Property and equipment totaling $4.0 million that was classified within restructuring credit in the Consolidated Statement of Net Loss for six-month period ended November 2, 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.

Since inception of this restructuring initiative, we incurred cumulative restructuring and restructuring related charges totaling $5.3 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 segments and create one integrated Culp-branded business. As part of this strategic transformation, we are closing our leased facilities operated by our upholstery segment located in Burlington, North Carolina, and Knoxville, Tennessee, and are currently transitioning 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.

The estimated cumulative restructuring and restructuring related charges for this initiative are expected to be $2.6 million, of which $1.1 million is expected to be cash expenditures. The $2.6 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 $393,000 associated with the disposal and markdowns of inventory; (iii) non-cash lease termination costs of $116,000; (iv) non-cash accelerated depreciation expense, along with impairments and losses on disposal of fixed assets totaling $399,000; (v) cash charges for employee termination benefits of $386,000; (vi) cash charges for facility consolidation and relocation expenses of $655,000; and (vii) cash charges for other associated costs of $69,000. We expect the initiatives associated with this strategic transformation to be substantially completed by the end of the third quarter of fiscal 2026.

The following summarizes restructuring expense (credit) and restructuring related charges associated with the above announcements for the three-month and six-month periods ended November 2, 2025:

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(1) Of the total $1.4 million restructuring expense and restructuring related charge, $499,000 and $931,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ended November 2, 2025. Of the total $1.4 million restructuring expense and restructuring related charge, $976,000 and $454,000 related to the upholstery and bedding segments, respectively.

(2) Of the total $(2.1) million net restructuring credit and restructuring related charge, a $(3.0) 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 six-month period ended November 2, 2025. Of the total ($2.1) million net restructuring credit and restructuring related charge, a credit of ($3.2) million and a charge of $1.1 million related to the bedding and upholstery segments, respectively.

(3) Of the total $1.4 million restructuring expense and restructuring related charge for the three months ended on November 2, 2025, $975,000 and $455,000 related to the restructuring activities announced on April 24, 2025 and May 1, 2024, respectively. Of the total $(2.1) million net restructuring credit and restructuring related charge for the six months ended November 2, 2025, a credit of $(3.4) million and a charge of $1.3 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 six-month periods ended October 27, 2024:

(1) Of the total $2.8 million restructuring expense and restructuring related charge, $2.0 million and $769,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ended October 27, 2024. Of the total $2.8 million, $2.8 million and $29,000 related to the bedding and upholstery segments, respectively.

(2) Of the total $5.5 million restructuring expense and restructuring related charge, $4.7 million and $885,000 were classified within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the six-month period ended October 27, 2024. Of the total $5.5 million, $5.4 million and $147,000 related to the bedding and upholstery segments, respectively.

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Interest Expense

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

Interest Income

During the second quarter and first half of fiscal 2026, interest income remained flat, compared with the second quarter and first half of fiscal 2025. This trend represents lower average cash balances during the second quarter and first half of fiscal 2026, compared with the second quarter and first half of fiscal 2025, offset by interest earned from a note receivable associated with the sale of the Property that occurred during the first quarter of fiscal 2026. During the second quarter and first half of fiscal 2026, interest income of $73,000 and $149,000, respectively, was earned from this note receivable, which such interest income was not earned during the second quarter and first half 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 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 expense during the second quarter and first half of fiscal 2026, compared with the second quarter and first half of fiscal 2025, was mostly due 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 second quarter and first half of fiscal 2026, we incurred foreign currency exchange rate losses associated with our operations located in China totaling $273,000 and $462,000, respectively, compared with foreign currency exchange rate losses of $186,000 and $231,000, respectively, incurred during the second quarter and first half of fiscal 2025. In addition, this increase in other expense included higher expenses associated with our rabbi trust that funds our deferred compensation liability during the second quarter and first half of fiscal 2026, compared with the second quarter and first half of fiscal 2025.

The $462,000 foreign currency exchange rate loss for the first half of fiscal 2026 described above was mostly non-cash and offset by an income tax benefit of $249,000. The income tax benefit of $249,000 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 $1.6 million, or (53.2)% of loss before income taxes, for the six-month period ended November 2, 2025, compared with income tax expense of $190,000, or (1.5)% of loss before income taxes, for the six-month period ended October 27, 2024.

Our consolidated effective income tax rates for the six-month periods ended November 2, 2025, and October 27, 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 six-month periods ended November 2, 2025, and October 27, 2024, 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 affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, Canada, 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 six-month periods ended November 2, 2025, and October 27, 2024:

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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 six months ended November 2, 2025, 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 November 2, 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

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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 November 2, 2025, October 27, 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 November 2, 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.

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 November 2, 2025, October 27, 2024, and April 27, 2025, we recorded a deferred income tax liability of $5.4 million, $5.0 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 November 2, 2025, October 27, 2024, 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 November 2, 2025, October 27, 2024, and April 27, 2025, respectively.

Our gross unrecognized income tax benefit of $845,000 as of November 2, 2025, relates to an income tax position for which significant change is currently not expected within the next year.

Income Taxes Paid

The following table sets forth taxes paid by jurisdiction:

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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 November 2, 2025, we believe: (i) our cash of $10.7 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 $17.4 million (refer to Note 11 of the consolidated financial statements for further details regarding our financing arrangements), and (iv) proceeds totaling $4.7 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 November 2, 2025, our cash totaled $10.7 million, which represents an increase of $5.1 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 during the first half of fiscal 2026, an increase of $1.3 million compared with the first half of fiscal 2025, and (ii) proceeds from the sale of property, plant, and equipment totaling $979,000, partially offset by net cash used in operating activities of $(1.2) million.

Our net cash used in operating activities of $(1.2) million improved during the first half of fiscal 2026, compared with net cash used in operating activities of $(2.6) million during the first half 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 shorter payment trends associated with the upholstery segment during the second 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; partially offset by: (i) a decrease in cash flow from inventory related to strategically sourcing certain fabrics that have longer lead times to acquire, rising prices, and tariffs imposed in accordance with U.S. trade policy, and (ii) a decrease in cash flow from accounts payable due to a decline in consumer demand.

We had outstanding borrowings totaling $18.3 million under our line of credit agreements, of which $11.3 million and $7.0 million were reported in lines of credit - current and line of credit - long term, respectively, on the November 2, 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.

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.

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We did not repurchase any shares of common stock during the six-month periods ended November 2, 2025, or October 27, 2024, respectively.

As of November 2, 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 half 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 $40.0 million as of November 2, 2025, compared with $33.4 million as of October 27, 2024, and $43.4 million as of April 27, 2025. Operating working capital turnover was 5.2 during the second quarter of fiscal 2026, compared with 6.0 during the second quarter of fiscal 2025, and 5.7 during the fourth quarter of fiscal 2025.

Accounts Receivable

Accounts receivable was $20.6 million as of November 2, 2025, a decrease of $(1.7) million, or (7.6)%, compared with $22.3 million as of October 27, 2024. This trend reflects a decrease in net sales of (4.4)% for the second quarter of fiscal 2026 compared with the second quarter of fiscal 2025, which related to the upholstery segment. Days' sales outstanding was 34 days and 35 days for the second quarters of fiscal 2026 and fiscal 2025, respectively.

Accounts receivable was $20.6 million as of November 2, 2025, a decrease of $(1.2) million, or (5.5)%, compared with $21.8 million as of April 27, 2025. This decrease in accounts receivable is mostly due to shorter payment trends associated with the upholstery segment during the second 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 second quarter of fiscal 2026. Accordingly, days' sales outstanding decreased to 34 days for the second quarter of fiscal 2026, from 40 days for the fourth quarter of fiscal 2025. However, the decrease in accounts receivable due to shorter payment trends was partially offset by an increase in net sales mostly associated with the bedding segment during the second quarter of fiscal 2026, compared with the fourth quarter of fiscal 2025. During the second quarter of fiscal 2026, bedding sales were $30.8 million, an increase of $3.6 million or 13.5%, compared with $27.1 million during the fourth quarter of fiscal 2025.

Inventory

Inventory was $49.9 million as of November 2, 2025, an increase of $4.8 million, or 10.7%, compared with $45.1 million as of October 27, 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 inventory related to the upholstery segment. The decrease in inventory related to the upholstery segment represents: (i) a decrease in net sales due to lower consumer demand; (ii) diligent inventory management due to uncertainty associated with tariffs imposed in accordance with U.S. trade policies, along with (iii) a concerted effort to liquidate aged inventory in connection with the closure of our leased upholstery facilities located Burlington, North Carolina and Knoxville, Tennessee. Also, inventory for both the bedding and the upholstery segments were affected by rising costs and tariffs imposed in accordance with U.S. trade policies related to imported products.

Inventory was $49.9 million as of November 2, 2025, an increase of $632,000, or 1.3%, 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 in accordance with U.S. trade policies related to imported products, affecting both the bedding and the upholstery segments.

Inventory turns were 3.7 for the second quarter of fiscal 2026, as compared with 4.5 for the second quarter of fiscal 2025, and 3.3 for the fourth quarter of fiscal 2025.

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Accounts Payable - Trade

Accounts payable - trade was $29.7 million, as of November 2, 2025, a decrease of $(2.7) million, or (8.4)%, compared with $32.4 million as of October 27, 2024. This trend represents a decline in inventory purchases related to a decrease in consumer demand and diligent inventory management associated with our upholstery segment, partially offset by an increase in inventory purchases associated with our bedding segment that reflects a transition to strategically source certain mattress fabrics with long-standing supply partners. As a result of this increased sourcing from our bedding segment, more finished goods inventory is required to be on hand due to longer lead times to acquire products and accommodate our customers. Lastly, accounts payable was adversely affected by rising costs to produce and source inventory, along with tariffs imposed in accordance with U.S. trade policies related to imported products, affecting both the bedding and the upholstery segments.

Accounts payable - trade was $29.7 million, as of November 2, 2025, an increase of $2.3 million, or 8.6%, compared with $27.3 million as of April 27, 2025. This increase was due to the same reasons discussed in the prior paragraph as it relates to the bedding segment.

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 November 2, 2025, we had outstanding borrowing associated with our line of credit agreements totaling $18.3 million, of which $11.3 million and $7.0 million were reported in lines of credit-current and line of credit- long term. Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of November 2, 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 for the first half of fiscal 2026 totaled $218,000, compared with $1.6 million for the first half 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 half of fiscal 2026, we reported depreciation expense of $2.2 million, compared with $3.1 million for the same period a year ago, which was mostly related to our bedding segment for both periods. We reported accelerated depreciation of $109,000 that was classified within restructuring credit in the Consolidated Statement of Net loss for the six-month period ended November 2, 2025. The $109,000 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 $1.3 million that was classified within restructuring expense in the Consolidated Statement of Net Loss for the six-month period ended October 27, 2024. 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 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 November 2, 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.

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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 implemented price increases designed to mitigate the impacts of recent tariff actions affecting products imported into the U.S., including those imported from China, and we are initiating additional surcharges in response to new tariffs on imports from Haiti, Turkey and elsewhere during the second quarter. 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, 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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