Culp(CULP) - 2023 Q3 - Quarterly Report

Part I - Financial Statements This part contains the unaudited consolidated financial statements and related notes for Culp, Inc Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Culp, Inc., including statements of net loss, comprehensive loss, balance sheets, cash flows, and shareholders' equity for the periods ended January 29, 2023, and January 30, 2022 Consolidated Statements of Net (Loss) Income This section details the company's net sales, gross profit, and net loss for the three and nine months ended January 29, 2023, compared to prior periods Three Months Ended January 29, 2023 vs. January 30, 2022 (Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | Change | Change (%) | | :--------------------------------- | :----------- | :----------- | :------- | :--------- | | Net sales | $52,523 | $80,291 | $(27,768) | -34.6% | | Gross profit | $2,093 | $9,110 | $(7,017) | -77.0% | | (Loss) income from operations | $(7,783) | $1,103 | $(8,886) | N.M. | | Net loss | $(8,968) | $(289) | $(8,679) | N.M. | | Net loss per share - basic | $(0.73) | $(0.02) | $(0.71) | N.M. | Nine Months Ended January 29, 2023 vs. January 30, 2022 (Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | Change | Change (%) | | :--------------------------------- | :----------- | :----------- | :------- | :--------- | | Net sales | $173,508 | $237,899 | $(64,391) | -27.1% | | Gross profit | $4,008 | $32,336 | $(28,328) | -87.6% | | (Loss) income from operations | $(24,451) | $6,061 | $(30,512) | N.M. | | Net (loss) income | $(26,839) | $2,812 | $(29,651) | N.M. | | Net (loss) income per share - basic | $(2.19) | $0.23 | $(2.42) | N.M. | Consolidated Statements of Comprehensive (Loss) Income This section presents the comprehensive loss for the three and nine months ended January 29, 2023, reflecting other comprehensive income/loss components Comprehensive (Loss) Income (Amounts in Thousands) | Period | Jan 29, 2023 | Jan 30, 2022 | | :--------------------------------- | :----------- | :----------- | | Three Months Ended | $(8,926) | $(486) | | Nine Months Ended | $(26,850) | $2,754 | Consolidated Balance Sheets This section provides a snapshot of the company's financial position, including assets, liabilities, and shareholders' equity as of January 29, 2023 Consolidated Balance Sheet Highlights (Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :-------------------------- | :----------- | :----------- | :---------- | | Total current assets | $93,040 | $130,450 | $107,176 | | Total assets | $150,598 | $211,567 | $177,563 | | Total current liabilities | $36,368 | $59,222 | $32,556 | | Total liabilities | $57,094 | $84,833 | $58,062 | | Total shareholders' equity | $93,504 | $126,734 | $119,501 | Consolidated Statements of Cash Flows This section outlines the cash flows from operating, investing, and financing activities for the nine months ended January 29, 2023 Cash Flow Highlights (Nine Months Ended, Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | | :------------------------------------------ | :----------- | :----------- | | Net cash provided by (used in) operating activities | $4,583 | $(12,369) | | Net cash used in investing activities | $(1,937) | $(6,876) | | Net cash used in financing activities | $(322) | $(6,016) | | Increase (decrease) in cash and cash equivalents | $2,175 | $(25,229) | | Cash and cash equivalents at end of period | $16,725 | $11,780 | Consolidated Statements of Shareholders' Equity This section details changes in shareholders' equity, including common stock, capital in excess of par value, and accumulated earnings Shareholders' Equity Highlights (Amounts in Thousands) | Metric | Jan 29, 2023 | May 1, 2022 | | :--------------------------------- | :----------- | :---------- | | Common Stock | $616 | $611 | | Capital contributed in excess of par value | $43,992 | $43,143 | | Accumulated earnings | $48,875 | $75,715 | | Accumulated other comprehensive income | $21 | $32 | | Total Shareholders' Equity | $93,504 | $119,501 | - Net loss significantly impacted accumulated earnings, with a $(8,968) thousand loss in the quarter ended January 29, 2023[18] - Stock-based compensation contributed $887 thousand to capital in excess of par value for the nine months ended January 29, 2023[15][18] Notes to Consolidated Financial Statements This section provides detailed notes explaining the basis of presentation, significant accounting policies, and specific financial statement line items 1. Basis of Presentation This section describes the basis for the unaudited condensed consolidated financial statements, including normal recurring adjustments and a prior period reclassification - The financial statements are unaudited and include normal recurring adjustments[25] - A $1.4 million non-cash inventory charge was reclassified in the prior period's Consolidated Statement of Cash Flows, without affecting net cash used in operating activities[26] - The nine-month periods ended January 29, 2023, and January 30, 2022, each represent 39-week periods[27] 2. Significant Accounting Policies This section confirms no changes in significant accounting policies or their application and no material effect from recently issued accounting pronouncements - No changes in significant accounting policies or their application as of January 29, 2023[28] - No recently adopted accounting pronouncements during the first nine months of fiscal 2023[29] - No new recent accounting pronouncements are expected to have a material effect on consolidated financial statements[30] 3. Allowance for Doubtful Accounts This section details the decrease in the allowance for doubtful accounts and the company's assessment of customer credit risk Allowance for Doubtful Accounts Activity (Nine Months Ended, Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | | :------------------------ | :----------- | :----------- | | Beginning balance | $292 | $591 | | Provision for bad debts | $33 | $86 | | Write-offs, net of recoveries | $(72) | $(34) | | Ending balance | $253 | $643 | - No credit loss was recorded for a significant mattress fabrics customer that filed for Chapter 11 in June 2022, as payments were received in full[32] - No credit loss was recorded for another significant mattress fabrics customer that filed for Chapter 11 in January 2023, as most receivables were paid, and no material loss is expected on the remainder[33][35] 4. Revenue from Contracts with Customers This section disaggregates revenue by segment and explains the increase in deferred revenue from upfront customer deposits for services - Operations are classified into two segments: mattress fabrics (fabrics and mattress covers) and upholstery fabrics (fabrics, window treatments, installation services, soft goods)[36] Deferred Revenue Activity (Nine Months Ended, Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | | :--------------------------------- | :----------- | :----------- | | Beginning balance | $520 | $540 | | Revenue recognized on contract liabilities | $(3,496) | $(2,276) | | Payments received for services not yet rendered | $4,406 | $2,254 | | Ending balance | $1,430 | $518 | Disaggregated Revenue by Segment (Three Months Ended, Amounts in Thousands) | Segment | Jan 29, 2023 | Jan 30, 2022 | | :---------------- | :----------- | :----------- | | Mattress Fabrics | $24,697 | $38,439 | | Upholstery Fabrics | $27,826 | $41,852 | | Total Net Sales | $52,523 | $80,291 | Disaggregated Revenue by Segment (Nine Months Ended, Amounts in Thousands) | Segment | Jan 29, 2023 | Jan 30, 2022 | | :---------------- | :----------- | :----------- | | Mattress Fabrics | $80,299 | $122,380 | | Upholstery Fabrics | $93,209 | $115,519 | | Total Net Sales | $173,508 | $237,899 | 5. Inventories This section explains the significant decrease in total inventories due to lower sales and substantial non-cash inventory charges, particularly in mattress fabrics Inventories (Amounts in Thousands) | Category | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :--------------- | :----------- | :----------- | :---------- | | Raw materials | $9,623 | $12,964 | $13,477 | | Work-in-process | $3,164 | $4,679 | $4,237 | | Finished goods | $34,840 | $55,490 | $48,843 | | Total | $47,627 | $73,133 | $66,557 | - Non-cash inventory charges totaled $6.3 million for the first nine months of fiscal 2023, including a $2.9 million write-down for mattress fabrics, $3.3 million for aged inventory markdowns, and $98,000 for the exit of Shanghai operations[44] - The mattress fabrics segment's net sales declined by 35.8% in Q2 FY23, leading to a gross margin of (8.7%) and a $2.9 million inventory write-down due to decreased consumer spending and excess customer inventory[46] 6. Intangible Assets This section details the slight decrease in total intangible assets due to amortization and confirms no impairment despite significant declines in mattress fabrics sales Intangible Assets (Amounts in Thousands) | Category | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :---------------------- | :----------- | :----------- | :---------- | | Tradename | $540 | $540 | $540 | | Customer relationships, net | $1,411 | $1,711 | $1,636 | | Non-compete agreement, net | $395 | $471 | $452 | | Total | $2,346 | $2,722 | $2,628 | - Customer relationships are amortized on a straight-line basis over 9 to 17 years, with a weighted average amortization period of 5.0 years as of January 29, 2023[52][54] - Despite a 34.4% decline in mattress fabrics net sales and a significant decrease in gross margin to (9.1%) for the first nine months of fiscal 2023, no impairment was determined for the segment's long-lived asset group ($37.8 million carrying amount)[59][60] 7. Accrued Expenses This section highlights the decrease in total accrued expenses, primarily driven by a reduction in other accrued expenses Accrued Expenses (Amounts in Thousands) | Category | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :----------------------------------- | :----------- | :----------- | :---------- | | Compensation, commissions and related benefits | $3,571 | $3,426 | $4,248 | | Other accrued expenses | $3,130 | $5,020 | $3,584 | | Total | $6,701 | $8,446 | $7,832 | 8. Upholstery Fabrics Segment Restructuring Activities This section details the restructuring activities in the upholstery fabrics segment, including the closure of Shanghai operations and consolidation in Haiti, incurring significant charges - Closed the Shanghai, China cut and sew upholstery fabrics operation in Q2 FY23, incurring $713,000 in restructuring expense and related charges[62] - Consolidated Haiti's cut and sew production into an existing facility in Q3 FY23, recording $711,000 in restructuring expense, including $434,000 for lease termination and $277,000 for leasehold improvement impairment[63][65][67][68] Restructuring Expense and Related Charges (Nine Months Ended January 29, 2023, Amounts in Thousands) | Category | Amount | | :------------------------------------------ | :----- | | Lease termination costs | $481 | | Employee termination benefits | $468 | | Impairment loss - leasehold improvements and equipment | $357 | | Loss on disposal and markdowns of inventory | $98 | | Other associated costs | $20 | | Total | $1,424 | 9. Lines of Credit This section describes the updated U.S. revolving credit facility and renewed China line of credit, noting no outstanding borrowings and compliance with covenants - Entered into a Second Amended and Restated Credit Agreement (ABL Credit Agreement) on January 19, 2023, establishing a $35.0 million asset-based revolving credit facility (ABL Facility) maturing on January 19, 2026[76][77][80] - Borrowings under the ABL Facility bear interest at an annual rate equal to daily simple SOFR plus 150-175 basis points, or 50-75 basis points above base rate, depending on excess availability[79] - As of January 29, 2023, there were no outstanding borrowings under any lines of credit, and the company had $23.0 million in available borrowings under the ABL Agreement[86][87] - The RMB 40 million ($5.9 million USD) unsecured credit agreement for China operations was renewed on November 24, 2022, extending its expiration to November 24, 2023[88][89] 10. Fair Value This section categorizes fair value measurements into a three-level hierarchy, detailing recurring measurements for rabbi trust investments and non-recurring measurements for a Haiti right of use asset - Fair value hierarchy consists of Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[94] Assets Measured at Fair Value on a Recurring Basis (Jan 29, 2023, Amounts in Thousands) | Asset | Level 1 | Total | | :-------------------------- | :------ | :---- | | U.S. Government Money Market Fund | $9,364 | $9,364 | | Growth Allocation Mutual Funds | $508 | $508 | | Moderate Allocation Mutual Fund | $85 | $85 | | Other | $188 | $188 | - A right of use asset in Haiti, classified as held for sale, was recorded at its fair value of $2.0 million using Level 3 inputs due to significant unobservable inputs and assumptions related to the Lessee's credit characteristics, payment terms, and location in a foreign country[107][108] 11. Net (Loss) Income Per Share This section reports a significant increase in basic and diluted net loss per share, with unvested common stock excluded from diluted EPS due to antidilutive effects Net (Loss) Income Per Share (Amounts in Thousands, Except Per Share Data) | Metric | Jan 29, 2023 (3 Months) | Jan 30, 2022 (3 Months) | Jan 29, 2023 (9 Months) | Jan 30, 2022 (9 Months) | | :--------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Net (loss) income per share - basic | $(0.73) | $(0.02) | $(2.19) | $0.23 | | Net (loss) income per share - diluted | $(0.73) | $(0.02) | $(2.19) | $0.23 | | Weighted average common shares outstanding, basic | 12,299 | 12,212 | 12,272 | 12,249 | | Weighted average common shares outstanding, diluted | 12,299 | 12,212 | 12,272 | 12,341 | - During Q3 FY23, 22,053 shares of unvested common stock were excluded from diluted EPS due to antidilutive effect from decreased stock price, and 87,433 shares were excluded due to net loss[109] 12. Segment Information This section provides detailed financial information for the mattress fabrics and upholstery fabrics segments, highlighting declines in sales, gross profit, and segment assets - The company's operations are classified into two business segments: mattress fabrics and upholstery fabrics, with the latter including Read Window Products LLC[113] Segment Net Sales and Gross (Loss) Profit (Amounts in Thousands) | Segment | Jan 29, 2023 (3 Months) | Jan 30, 2022 (3 Months) | Jan 29, 2023 (9 Months) | Jan 30, 2022 (9 Months) | | :---------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Net Sales: | | | | | | Mattress Fabrics | $24,697 | $38,439 | $80,299 | $122,380 | | Upholstery Fabrics | $27,826 | $41,852 | $93,209 | $115,519 | | Gross (Loss) Profit: | | | | | | Mattress Fabrics | $(1,237) | $3,164 | $(7,330) | $16,106 | | Upholstery Fabrics | $3,330 | $5,946 | $11,436 | $16,230 | Segment Assets (Amounts in Thousands) | Segment | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :------------------- | :----------- | :----------- | :---------- | | Mattress Fabrics | $74,208 | $100,780 | $91,093 | | Upholstery Fabrics | $38,536 | $65,715 | $50,044 | | Total Segment Assets | $112,744 | $166,495 | $141,137 | Capital Expenditures (Nine Months Ended, Accrual Basis, Amounts in Thousands) | Segment | Jan 29, 2023 | Jan 30, 2022 | | :------------------- | :----------- | :----------- | | Mattress Fabrics | $612 | $2,828 | | Upholstery Fabrics | $465 | $815 | | Unallocated Corporate | $75 | $1,330 | | Total | $1,152 | $4,973 | 13. Income Taxes This section explains the effective income tax rate, impacted by U.S. pre-tax loss and a full valuation allowance, and details deferred tax liabilities for foreign earnings - Effective income tax rate for the nine months ended January 29, 2023, was (9.5%) of loss before income taxes, compared to 48.4% of income before income taxes for the prior-year period[122] - A full valuation allowance of $18.071 million was applied against U.S. net deferred income tax assets as of January 29, 2023, due to a history of significant cumulative U.S. taxable losses[127][129] - A deferred income tax liability of $4.1 million was recorded as of January 29, 2023, for unremitted withholding taxes associated with foreign subsidiaries' earnings expected to be repatriated[131] Income Taxes Paid by Jurisdiction (Nine Months Ended, Amounts in Thousands) | Jurisdiction | Jan 29, 2023 | Jan 30, 2022 | | :---------------------------------------------------- | :----------- | :----------- | | United States Transition Tax Payment | $265 | $266 | | China Income Taxes, Net of Refunds | $1,680 | $2,036 | | China - Withholding Taxes Associated With Earnings and Profits Distributed to the U.S. | — | $487 | | Canada - Income Taxes, Net of Refunds | $(9) | $256 | | Total | $1,936 | $3,045 | 14. Stock-Based Compensation This section outlines the company's equity incentive plan, types of stock-based awards, and associated compensation expenses for executives and directors - As of January 29, 2023, 224,369 shares were available for future equity-based grants under the 2015 Equity Incentive Plan[138] - Performance-based restricted stock units for senior executives are measured using the Monte Carlo simulation model for market-based total shareholder return and closing price for performance-based components[139] - Compensation expense for time-based restricted stock units was $634,000 for the nine months ended January 29, 2023, with $1.0 million remaining unrecognized, expected to be recognized over 1.7 years[151][152] - Compensation expense for common stock awards to outside directors was $251,000 for the nine months ended January 29, 2023[155] 15. Leases This section details the company's operating lease arrangements, including right of use assets, lease liabilities, and operating lease expense Operating Lease Balances (Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :------------------------------ | :----------- | :----------- | :---------- | | Right of use assets | $8,913 | $16,595 | $15,577 | | Operating lease liability - current | $2,785 | $3,295 | $3,219 | | Operating lease liability – noncurrent | $4,399 | $7,848 | $7,062 | - Operating lease expense for the nine months ended January 29, 2023, was $2.9 million, compared to $2.8 million in the prior-year period[160] Operating Lease Key Metrics (As of January 29, 2023) | Metric | Value | | :-------------------------- | :-------- | | Weighted average lease term | 3.9 years | | Weighted average discount rate | 3.69 % | 16. Commitments and Contingencies This section addresses legal proceedings, capital expenditure commitments, and open purchase commitments, with no material adverse effects expected - Legal proceedings are not expected to have a material adverse effect on financial position, results of operations, or cash flows[162] - Accounts payable for capital expenditures totaled $25,000 as of January 29, 2023[163] - Open purchase commitments for mattress fabrics equipment totaled $738,000 as of January 29, 2023[164] 17. Statutory Reserves This section explains that the China subsidiary has met its statutory surplus reserve fund requirement, eliminating the need for further transfers from net income - The China subsidiary's statutory surplus reserve fund reached $4.3 million as of January 29, 2023, meeting the 50% registered capital requirement[165][166] - The China subsidiary is no longer required to transfer 10% of its net income to the statutory surplus reserve fund[165] - The statutory surplus reserve fund is non-distributable other than during liquidation but can be used for business expansion or converted into share capital[166] 18. Common Stock Repurchase Program This section details the board-authorized common stock repurchase program, noting no repurchases during the period and remaining available funds - Board authorized a $5.0 million common stock repurchase program in March 2020[169] - No shares were repurchased during the nine months ended January 29, 2023[170] - $3.2 million remains available for additional repurchases as of January 29, 2023[170] 19. Dividend Program This section explains the suspension of the quarterly cash dividend to preserve capital and manage liquidity amidst macroeconomic conditions - Quarterly cash dividend suspended on June 29, 2022, to preserve capital and manage liquidity[171] - No dividend payments were made during the first nine months of fiscal 2023[171] - Dividend payments totaled $4.1 million during the nine months ended January 30, 2022[172] Cautionary Statement Concerning Forward-Looking Information This statement highlights that the report contains forward-looking information subject to risks and uncertainties that may cause actual results to differ materially - The report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially[174] - Key factors influencing forward-looking statements include housing starts, consumer confidence, disposable income, interest rates, inflation, acquisitions, consumer tastes, tariffs, exchange rates, economic/political instability, public health epidemics, goodwill/intangible asset impairments, and freight/labor/raw material costs[175] - The company disclaims any duty to update or alter forward-looking statements to reflect changes in expectations, assumptions, or circumstances[174] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion of the company's financial condition and results of operations for the three and nine months ended January 29, 2023 General This section outlines the company's fiscal year, business segments, and recent restructuring activities - The company's fiscal year ends on the Sunday closest to April 30, with the reported nine-month periods representing 39-week periods[178] - Operations are classified into two business segments: mattress fabrics (Stokesdale, NC; Quebec, Canada; Ouanaminthe, Haiti) and upholstery fabrics (Shanghai, China; Burlington, NC; Ouanaminthe, Haiti; Read Window Products, LLC in Knoxville, TN)[178][179][180] - Restructuring activities include rationalization of U.S.-based mattress fabrics cut and sew platform and consolidation of upholstery cut and sewn kit production in Haiti[179][180] Executive Summary This summary defines how operating performance is evaluated and identifies key components of cost of sales and unallocated corporate expenses - Operating performance is evaluated based on (loss) income from operations before certain unallocated corporate expenses[181] - Cost of sales includes raw material, finished goods purchases, direct/indirect labor, overhead, and incoming freight charges[181] - Unallocated corporate expenses primarily cover executive compensation, public company costs, and amortization of intangible assets[181] Results of Operations This section presents a consolidated overview of the company's net sales, gross profit, operating income, and net income for the reported periods Consolidated Results of Operations (Three Months Ended, Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | Change (%) | | :--------------------------------- | :----------- | :----------- | :--------- | | Net sales | $52,523 | $80,291 | (34.6)% | | Gross profit | $2,093 | $9,110 | (77.0)% | | Gross margin | 4.0 % | 11.3 % | (730)bp | | Selling, general, and administrative expenses | $9,165 | $8,007 | 14.5% | | Restructuring expense | $711 | — | 100.0% | | (Loss) income from operations | $(7,783) | $1,103 | N.M. | | Operating margin | (14.8)% | 1.4 % | (1620)bp | | (Loss) income before income taxes | $(8,682) | $995 | N.M. | | Income tax expense | $286 | $1,284 | (77.7)% | | Net (loss) income | $(8,968) | $(289) | N.M. | Consolidated Results of Operations (Nine Months Ended, Amounts in Thousands) | Metric | Jan 29, 2023 | Jan 30, 2022 | Change (%) | | :--------------------------------- | :----------- | :----------- | :--------- | | Net sales | $173,508 | $237,899 | (27.1)% | | Gross profit | $4,008 | $32,336 | (87.6)% | | Gross margin | 2.3 % | 13.6 % | (1130)bp | | Selling, general, and administrative expenses | $27,133 | $26,275 | 3.3% | | Restructuring expense | $1,326 | — | 100.0% | | (Loss) income from operations | $(24,451) | $6,061 | N.M. | | Operating margin | (14.1)% | 2.5 % | (1660)bp | | (Loss) income before income taxes | $(24,507) | $5,445 | N.M. | | Income tax expense | $2,332 | $2,633 | (11.4)% | | Net (loss) income | $(26,839) | $2,812 | N.M. | Net Sales This section analyzes the significant decrease in consolidated net sales, driven by reduced consumer demand and excess customer inventory in both segments - Overall net sales decreased by 34.6% for Q3 FY23 and 27.1% for the first nine months of FY23 compared to prior-year periods[184] - Mattress fabrics sales decreased 35.8% (Q3 FY23) and 34.4% (9 months FY23) due to a slowdown in consumer demand and excess inventory held by manufacturers and retailers[184][185] - Upholstery fabrics sales decreased 33.5% (Q3 FY23) and 19.3% (9 months FY23) due to reduced demand for residential products and high inventory levels[184][186] - Pricing and surcharge actions partially offset net sales decreases, increasing mattress fabrics sales by approximately 1.3% (Q3 FY23) and 3.0% (9 months FY23), and upholstery fabrics sales by 1.7% (Q3 FY23) and 2.9% (9 months FY23)[185][186] Income Before Income Taxes This section details the significant loss before income taxes, primarily due to lower sales, operating inefficiencies, inflationary pressures, and restructuring charges - Loss before income taxes was $(8.7) million for Q3 FY23 and $(24.5) million for the first nine months of FY23, compared to income of $1.0 million and $5.4 million, respectively, in the prior-year periods[188] - Operating performance was negatively affected by lower sales, operating inefficiencies due to reduced volumes and holiday shutdowns, labor challenges, inflationary pressures, and restructuring charges[189] - Additional pressures for the nine-month period included increased employee training costs, quality issues in mattress fabrics, inventory write-downs, and restructuring charges from the Shanghai facility closure[189] Income Taxes This section explains the effective income tax rate on a pre-tax loss, impacted by U.S. losses and a full valuation allowance, with most taxable income from foreign operations - Income tax expense was $2.3 million for the nine months ended January 29, 2023, on a pre-tax loss of $(24.5) million, resulting in an effective income tax rate of (9.5%)[191] - The effective tax rate was negatively affected by a significantly higher pre-tax loss from U.S. operations ($(28.8) million) and a full valuation allowance against U.S. net deferred income tax assets[192] - Almost all taxable income was earned by foreign operations in China and Canada, which have higher income tax rates than the U.S[192] Liquidity This section highlights the increase in cash and cash equivalents, primarily driven by net cash provided by operating activities due to inventory reductions - Cash and cash equivalents totaled $16.7 million as of January 29, 2023, an increase of $2.2 million from May 1, 2022[194] - Net cash provided by operating activities was $4.6 million for the first nine months of fiscal 2023, a $17.0 million increase compared to net cash used in operating activities of $12.4 million in the prior-year period[195] - The increase in operating cash flow reflects inventory reductions, improved alignment of inventory purchases with demand, and promotional programs[195] - No outstanding borrowings existed under the company's lines of credit as of January 29, 2023[196] Dividend Program This section reiterates the suspension of the quarterly cash dividend to preserve capital and manage liquidity in response to macroeconomic conditions - The board of directors suspended the quarterly cash dividend on June 29, 2022, to preserve capital and manage liquidity[197] - No dividend payments were made during the first nine months of fiscal 2023[197] - Dividend payments totaled $4.1 million during the first nine months of fiscal 2022[198] Common Stock Repurchases This section confirms no common stock repurchases during the period and details the remaining available funds under the authorized program - No common stock repurchases were made during the first nine months of fiscal 2023[201] - $3.2 million remains available for additional repurchases under the $5.0 million authorization[201] - The company does not expect to repurchase any shares through at least the fourth quarter of fiscal 2023[201] Segment Analysis Both the Mattress Fabrics and Upholstery Fabrics segments experienced significant declines in net sales and profitability due to ongoing macroeconomic challenges, reduced consumer demand, and high customer inventory levels Mattress Fabrics Segment The Mattress Fabrics segment faced a significant decline in net sales and profitability, with sales decreasing 35.8% in Q3 FY23 and 34.4% for the first nine months of FY23 Mattress Fabrics Segment Performance (Amounts in Thousands) | Metric | Jan 29, 2023 (3 Months) | Jan 30, 2022 (3 Months) | Change (%) | Jan 29, 2023 (9 Months) | Jan 30, 2022 (9 Months) | Change (%) | | :------------------------------------------ | :---------------------- | :---------------------- | :--------- | :---------------------- | :---------------------- | :--------- | | Net sales | $24,697 | $38,439 | (35.8)% | $80,299 | $122,380 | (34.4)% | | Gross (loss) profit | $(1,237) | $3,164 | (139.1)% | $(7,330) | $16,106 | (145.5)% | | Gross profit margin | (5.0)% | 8.2 % | (1320)bp | (9.1)% | 13.2 % | (2230)bp | | (Loss) income from operations | $(4,229) | $364 | N.M. | $(16,151) | $7,115 | N.M. | | Operating margin | (17.1)% | 0.9 % | (1800)bp | (20.1)% | 5.8 % | (2590)bp | - Profitability was pressured by lower sales, operating inefficiencies, labor challenges, higher raw material costs, $2.9 million in inventory write-downs, $2.6 million in closeout sales losses, and $1.0 million in aged inventory markdowns[209] - The segment completed the rationalization of its U.S.-based cut and sewn cover platform, discontinuing higher-cost on-shore production and closing two leased facilities in High Point, NC[210] Net Sales This section analyzes the significant decrease in Mattress Fabrics net sales, attributed to a slowdown in consumer demand and excess inventory - Mattress fabrics sales decreased 35.8% in Q3 FY23 and 34.4% in the first nine months of FY23, primarily due to a slowdown in consumer demand in the domestic mattress industry[203][204] - The slowdown is attributed to inflationary pressures, a shift in demand from home goods to travel/leisure, and excess inventory held by mattress manufacturers and retailers[204] - Pricing and surcharge actions partially offset the sales decrease, contributing approximately 1.3% to net sales in Q3 FY23 and 3.0% in the first nine months of FY23[204] Gross Profit, Selling, General & Administrative Expenses, and Operating Income This section examines the decreased profitability of the Mattress Fabrics segment due to lower sales, operating inefficiencies, labor challenges, and inventory charges - Profitability decreased in Q3 FY23 due to lower sales, operating inefficiencies from reduced volumes and holiday shutdowns[208] - For the first nine months of FY23, profitability was further impacted by labor challenges, increased employee training costs, quality issues, higher raw material costs, and significant inventory charges ($2.9M write-down, $2.6M closeout losses, $1.0M markdowns)[209] - The company completed the rationalization of its U.S.-based cut and sewn cover platform, moving R&D to Stokesdale, NC, and discontinuing higher-cost on-shore production[210] Segment assets This section details the Mattress Fabrics segment assets including accounts receivable, inventory, and property, plant & equipment Mattress Fabrics Segment Assets (Amounts in Thousands) | Asset | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :-------------------------- | :----------- | :----------- | :---------- | | Accounts receivable | $8,314 | $17,617 | $9,865 | | Inventory | $28,757 | $39,544 | $39,028 | | Property, plant & equipment | $34,661 | $39,913 | $38,731 | | Right of use assets | $2,476 | $3,706 | $3,469 | | Total | $74,208 | $100,780 | $91,093 | - Accounts receivable decreased by $9.3 million (52.8%) YoY and $1.6 million (15.7%) QoQ, reflecting decreased net sales and faster cash collections[214][215] - Inventory decreased by $10.8 million (27.3%) YoY and $10.3 million (26.3%) QoQ, driven by lower purchases, $3.9 million in non-cash charges, and promotional programs[216] - Property, plant, and equipment, and right of use assets decreased due to reduced capital spending, rent expense, and lease terminations/reductions[220][222] Upholstery Fabrics Segment The Upholstery Fabrics segment experienced a significant decline in net sales, decreasing 33.5% in Q3 FY23 and 19.3% for the first nine months of FY23, primarily due to reduced demand for residential products and high customer inventory Upholstery Fabrics Segment Performance (Amounts in Thousands) | Metric | Jan 29, 2023 (3 Months) | Jan 30, 2022 (3 Months) | Change (%) | Jan 29, 2023 (9 Months) | Jan 30, 2022 (9 Months) | Change (%) | | :------------------------------------------ | :---------------------- | :---------------------- | :--------- | :---------------------- | :---------------------- | :--------- | | Net sales | $27,826 | $41,852 | (33.5)% | $93,209 | $115,519 | (19.3)% | | Gross profit | $3,330 | $5,946 | (44.0)% | $11,436 | $16,230 | (29.5)% | | Gross margin | 12.0 % | 14.2 % | (220)bp | 12.3 % | 14.0 % | (170)bp | | (Loss) income from operations | $(420) | $2,446 | (117.2)% | $383 | $5,739 | (93.3)% | | Operating margin | (1.5)% | 5.8 % | (730)bp | 0.4 % | 5.0 % | (460)bp | - Profitability decreased due to lower residential sales, operating inefficiencies in Haiti, and labor/inflation affecting the Read business, partially offset by favorable foreign exchange rates in China and cost reductions from restructuring[228] - Restructuring activities included closing the Shanghai, China cut and sew operation ($713,000 in charges) and consolidating Haiti cut and sew production ($711,000 in charges), totaling $1.424 million for the nine months ended January 29, 2023[232][233][237] Net Sales This section analyzes the significant decrease in Upholstery Fabrics net sales, primarily due to reduced demand for residential products and high inventory levels - Upholstery fabrics sales decreased 33.5% in Q3 FY23 and 19.3% for the first nine months of FY23, primarily due to reduced demand for residential products and high inventory levels[223][224] - The decrease was partially offset by higher sales in the hospitality/contract fabric business and pricing/surcharge actions (1.7% in Q3 FY23, 2.9% in 9 months FY23)[224] - The company expects high inventory levels and a slowdown in new retail business to continue affecting demand for its residential business[225] Gross Profit, Selling, General & Administrative Expenses, and Operating Income This section examines the decreased profitability of the Upholstery Fabrics segment due to lower sales and operating inefficiencies, partially offset by foreign exchange rates - Profitability decreased in Q3 FY23 due to lower residential sales, operating inefficiencies in Haiti, and labor/inflation affecting the Read business[228] - These pressures were partially offset by a significantly more favorable foreign exchange rate in China and lower costs from the Q2 FY23 restructuring in China[228] - For the first nine months of FY23, profitability was also affected by $2.3 million in inventory markdowns due to aged inventory policy[229] Restructuring Activities This section details the restructuring activities in the Upholstery Fabrics segment, including the closure of Shanghai operations and consolidation in Haiti, incurring significant charges - In Q2 FY23, the Shanghai, China cut and sew operation was closed, resulting in $713,000 in restructuring expense and related charges[232] - In Q3 FY23, the company consolidated Haiti's cut and sew upholstery kit production into an existing facility, incurring $711,000 in restructuring expense[233][237] Restructuring Expense and Related Charges (Nine Months Ended January 29, 2023, Amounts in Thousands) | Category | Amount | | :------------------------------------------ | :----- | | Lease termination costs | $481 | | Employee termination benefits | $468 | | Impairment loss - leasehold improvements and equipment | $357 | | Loss on disposal and markdowns of inventory | $98 | | Other associated costs | $20 | | Total | $1,424 | Segment Assets This section provides an overview of the Upholstery Fabrics segment assets including accounts receivable, inventory, and right of use assets Upholstery Fabrics Segment Assets (Amounts in Thousands) | Asset | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :-------------------------- | :----------- | :----------- | :---------- | | Accounts receivable | $12,927 | $21,381 | $12,361 | | Inventory | $18,870 | $33,589 | $27,529 | | Property, plant & equipment | $1,794 | $2,018 | $2,030 | | Right of use assets | $2,995 | $8,727 | $8,124 | | Assets held for sale | $1,950 | — | — | | Total | $38,536 | $65,715 | $50,044 | - Accounts receivable decreased by $8.5 million (39.5%) YoY, reflecting decreased net sales and faster cash collections, with days' sales outstanding declining to 38 days[240] - Inventory decreased by $14.7 million (43.8%) YoY and $8.7 million (31.5%) QoQ, due to lower purchases, $2.4 million in non-cash charges, and promotional programs[243][244] - Right of use assets decreased by $5.7 million (65.7%) YoY and $5.1 million (63.1%) QoQ, primarily due to rent forgiveness, and lease terminations in China and Haiti[249] Other Income Statement Categories This section analyzes changes in SG&A expenses, interest income, and other expenses, influenced by prior-year adjustments, investment liquidations, and foreign exchange rates Other Income Statement Categories (Amounts in Thousands) | Metric | Jan 29, 2023 (3 Months) | Jan 30, 2022 (3 Months) | Change (%) | Jan 29, 2023 (9 Months) | Jan 30, 2022 (9 Months) | Change (%) | | :-------------------------------- | :---------------------- | :---------------------- | :--------- | :---------------------- | :---------------------- | :--------- | | SG&A expenses | $9,165 | $8,007 | 14.5 % | $27,133 | $26,275 | 3.3 % | | Interest income | $196 | $214 | (8.4)% | $292 | $347 | (15.9)% | | Other expense | $1,095 | $322 | 240.1% | $348 | $963 | (63.9)% | - SG&A expenses increased due to the absence of change in estimate adjustments recorded in Q3 FY22 that lowered incentive compensation[254] - Interest income decreased due to the liquidation of short-term and corporate bond investments in Q4 FY22, partially offset by increased market interest rates in FY23[255] - Other expense increased in Q3 FY23 due to a $757,000 foreign exchange loss from Chinese Renminbi, but decreased for the nine-month period due to a $425,000 foreign exchange gain[257][258] Income Taxes This section explains the effective income tax rate on a pre-tax loss, impacted by U.S. losses and a full valuation allowance, with most taxable income from foreign operations - Effective income tax rate for the nine months ended January 29, 2023, was (9.5%) of loss before income taxes, compared to 48.4% of income before income taxes in the prior-year period[260] - The consolidated effective income tax rate was negatively affected by a significantly higher pre-tax loss from U.S. operations ($(28.8) million) and a full valuation allowance against U.S. net deferred income tax assets[263][266] - Projected annual cash income tax payments are approximately $3.2 million for fiscal 2023, with minimal U.S. income taxes expected due to U.S. federal net operating loss carryforwards and immediate expensing of capital expenditures[271][272] - Required annual U.S. federal transition tax payments are $499,000 for FY24, $665,000 for FY25, and $831,000 for FY26[273] Future Liquidity This section projects future cash income tax payments and outlines the impact of U.S. federal net operating loss carryforwards and capital expensing - The company projects annual cash income tax payments of approximately $3.2 million for fiscal 2023, compared with $3.1 million for fiscal 2022[271] - Minimal U.S. income taxes are expected on a cash basis during fiscal 2023 due to immediate expensing of U.S. capital expenditures and existing U.S. federal net operating loss carryforwards[272] - Annual U.S. federal transition tax payments are scheduled for FY 2024 ($499,000), FY 2025 ($665,000), and FY 2026 ($831,000)[273] Liquidity and Capital Resources This section provides a comprehensive overview of the company's liquidity, capital resources, working capital management, and the impact of macroeconomic factors Overall This section details the company's liquidity sources, including cash, operating cash flow, and available credit, deemed sufficient for foreseeable business needs - Sources of liquidity include $16.7 million in cash, cash flow from operations, and $28.9 million available under revolving credit lines, which are believed to be sufficient for foreseeable business needs[274] - Cash increased by $2.2 million to $16.7 million as of January 29, 2023, primarily due to $4.6 million in net cash provided by operating activities[275] - Net cash provided by operating activities was $4.6 million for the first nine months of fiscal 2023, an increase of $17.0 million compared to the prior-year period, mainly due to inventory reduction and improved alignment of purchases with demand[276] By Geographic Area This section presents the distribution of cash and investments across various geographic regions Cash and Investments by Geographic Area (Amounts in Thousands) | Region | Jan 29, 2023 | Jan 30, 2022 | May 1, 2022 | | :------------- | :----------- | :----------- | :---------- | | United States | $9,658 | $12,351 | $4,430 | | China | $6,114 | $8,838 | $9,502 | | Canada | $700 | $454 | $267 | | Haiti | $244 | $557 | $341 | | Cayman Islands | $9 | $10 | $10 | | Total | $16,725 | $22,210 | $14,550 | - The total balances for January 29, 2023, and May 1, 2022, solely represent cash, as short-term investments were liquidated in Q4 FY22[281] Common Stock Repurchase Program This section details the status of the common stock repurchase program, including available funds and future repurchase plans - The board authorized a $5.0 million common stock repurchase program in March 2020[282] - No shares were purchased during the first nine months of fiscal 2023, leaving $3.2 million available for additional repurchases[283] - The company does not expect to repurchase any shares through at least the fourth quarter of fiscal 2023[283] Dividend Program This section explains the suspension of the quarterly cash dividend to preserve capital and manage liquidity - The board of directors suspended the quarterly cash dividend on June 29, 2022, to preserve capital and manage liquidity[284] - No dividend payments were made during the first nine months of fiscal 2023[284] - Dividend payments totaled $4.1 million during the nine months ended January 30, 2022[285] Working Capital This section analyzes changes in operating working capital, accounts receivable, inventory, and accounts payable - Operating working capital was $44.9 million as of January 29, 2023, a significant decrease from $64.9 million in January 2022 and $67.7 million in May 2022[287][288] - Accounts receivable decreased by $17.8 million (45.5%) YoY to $21.2 million, reflecting decreased net sales and faster cash collections, with days' sales outstanding falling to 34 days from 44 days[289] - Inventory decreased by $25.5 million (34.9%) YoY to $47.7 million, driven by lower purchases, $6.2 million in non-cash charges, and promotional programs[291] - Accounts payable - trade decreased by $24.2 million (51.7%) YoY to $22.5 million, reflecting the significant decline in net sales[293] Financing Arrangements This section describes the company's revolving credit agreements and compliance with financial covenants - The company has revolving credit agreements for its U.S. parent company and China operations to support short-term cash needs, mitigate foreign currency risk, and repatriate earnings[295] - As of January 29, 2023, there were no outstanding borrowings associated with these revolving credit agreements[296] - The company was in compliance with all financial covenants as of January 29, 2023[297] Capital Expenditures and Depreciation This section outlines capital expenditures, depreciation expense, and open purchase commitments - Capital expenditures on a cash basis were $1.6 million during the first nine months of fiscal 2023, a reduction from $5.3 million in the prior-year period, reflecting current macroeconomic conditions[299] - Depreciation expense remained consistent at $5.2 million for both the first nine months of fiscal 2023 and 2022, primarily related to the mattress fabrics segment[300] - Open purchase commitments for mattress fabrics equipment totaled $738,000 as of January 29, 2023[302] Critical Accounting Policies and Recent Accounting Developments This section confirms no material changes in significant accounting policies or the impact of recent accounting pronouncements - No changes in significant accounting policies or their application as of January 29, 2023[303] - No recently adopted or issued accounting pronouncements are expected to have a material effect[303] Contractual Obligations This section states that no significant new contractual obligations have been reported since the last annual report - No significant or new contractual obligations have been reported since the annual report on Form 10-K for the year ended May 1, 2022, other than those disclosed in Note 9[304] Inflation This section discusses the adverse impact of significant increases in raw material, utility, energy, and labor costs due to general economic inflation - Significant increases in raw material, utility/energy, and labor costs, along with general economic inflation, have adversely impacted the company, with limited ability to pass these costs to customers[305] - Inflationary pressures began affecting consumer spending in the second half of fiscal 2022 and continued through the first nine months of fiscal 2023[305] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, specifically from changes in interest rates and foreign currency exchange rates Interest Rates This section details the company's exposure to interest rate risk on its revolving credit agreements, with rates tied to SOFR and Chinese government benchmarks - The company is exposed to market risk from changes in interest rates related to its revolving credit agreements[307] - The U.S. ABL Credit Agreement's interest rate is calculated using an applicable margin over the Federal Reserve Bank of New York's secured overnight fund rate (SOFR)[308] - No outstanding borrowings existed under either the U.S. or China revolving credit agreements as of January 29, 2023[308][309] Foreign Currency This section describes the company's foreign currency market risk exposure through its Canadian and Chinese subsidiaries and efforts to maintain a natural hedge - The company is exposed to market risk from changes in the value of foreign currencies for its subsidiaries in Canada and China[310] - A natural hedge is maintained by balancing assets and liabilities denominated in the local currencies of these subsidiaries[310] - A 10% change in exchange rates as of January 29, 2023, would not have materially affected the company's results of operations or financial position[310] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting - The company's disclosure controls and procedures were evaluated and deemed effective as of January 29, 2023[311] - No material changes in internal control over financial reporting occurred during the quarter ended January 29, 2023[312] Part II - Other Information This part includes other information such as legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section confirms no material changes to legal proceedings during the quarter, with existing details in the annual Form 10-K report - No material changes to legal proceedings during the three months ended January 29, 2023[314] - Legal proceedings are disclosed in the company's annual report on Form 10-K[314] Item 1A. Risk Factors This section confirms no material changes to risk factors during the quarter, with existing details in the annual Form 10-K report - No material changes to risk factors during the three months ended January 29, 2023[315] - Risk factors are disclosed in Item 1A of the company's annual report on Form 10-K[315] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no common stock repurchases during the period and details the remaining authorization under the repurchase plan Issuer Purchases of Equity Securities (October 31, 2022, to January 29, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :------------------------------------ | :------------------------------- | :--------------------------- | :----------------------------------------------------------------- | :--------------------------------------------------------------------------------- | | October 31, 2022 to December 4, 2022 | — | — | — | $3,248,094 | | December 5, 2022 to January 1, 2023 | — | — | — | $3,248,094 | | January 2, 2023 to January 29, 2023 | — | — | — | $3,248,094 | | Total | — | — | — | $3,248,094 | - In March 2020, the board of directors approved an authorization to acquire up to $5.0 million of common stock[317] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q report, including interactive data files and officer certifications - Exhibits include the Cover Page Interactive Data File (Inline XBRL), First Amendment to Second Amended and Restated Credit Agreement, and certifications from the CEO and CFO[319] Signatures This section confirms the official signing of the report by the company's Executive Vice President and Chief Financial Officer and Vice President of Finance - The report was signed on March 9, 2023, by Kenneth R. Bowling (EVP and CFO) and Thomas B. Gallagher, Jr. (VP of Finance)[323]