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"We were pleased with the sequential improvement in sales and operating performance from our mattress fabrics segment during the quarter. Sales for this segment increased 7.1 percent compared to the first quarter of fiscal 2025, driven by higher order levels, which we believe are indicative of our growing market position. The mattress fabrics segment also sequentially reduced its operating loss by 70.7 percent for the quarter, reflecting the solid progress we are making with our restructuring activity. However, as expected due to the scope of this initiative, inefficiencies associated with restructuring affected our operating performance during the period.

"In our upholstery fabrics segment, sales for our residential fabrics business were affected by further weakness in residential home furnishing sales. While we expected some pressure during the period, we experienced larger impacts from customers adjusting their inventory levels to align with demand after a more robust ordering period during the first quarter. This included a significant temporary reduction in orders from a large customer during the second quarter, which is also expected to affect sales during the third quarter. Conversely, revenue for our hospitality/contract fabric business remained solid during the second quarter, and overall, we remain pleased with the upholstery fabrics segment's continuing profitability, supported by our asset-light platform.

"Looking ahead, we are optimistic about the progress we are making with our restructuring initiatives, as well as our solid market position in both businesses. We are optimizing our operations and cost structure, providing excellent customer service, and winning new placements with our innovative product portfolio. Although the restructuring activity involves a significant undertaking and short-term inefficiencies, we are demonstrating quarter-by-quarter operating improvement in a tough macro environment. Importantly, while we anticipate that industry conditions will remain somewhat pressured through fiscal 2025, we expect the strategic actions we are taking will position us for a return to profitability post-restructuring at the currently depressed demand levels, as well as further growth opportunities as market conditions improve," added Culp.

Restructuring Update

The restructuring plan announced on May 1, 2024, primarily focused on the company's mattress fabrics segment, continues to progress as planned. The consolidation of the company's sewn mattress cover operation in Haiti was completed during the first quarter, and the consolidation of the company's North American mattress fabrics operation is nearing completion, including the phased wind-down and closure of its manufacturing facility in Canada. The company discontinued knitting production at this facility during the second quarter (end of September), and completed damask weaving production in November. The optimization and relocation of certain knitting and finishing equipment from the Canadian facility to the mattress fabrics manufacturing facility in Stokesdale, North Carolina, is also well underway, with completion planned in the third quarter.

The company still expects to generate $10.0 - $11.0 million in annualized savings and operating improvements after the restructuring initiatives are fully implemented by the end of the third quarter, with most of the restructuring benefit realized during the fourth quarter of fiscal 2025.

In addition, based on restructuring activities that have been completed along with updated estimates on those that remain in process, the company now expects to incur total restructuring and restructuring-related costs and charges of $7.3 million in fiscal 2025, of which $4.4 million is now expected to be cash expenditures. The company expects to fund close to $2.0 million of the cash costs with proceeds from the sale of excess manufacturing equipment and proceeds from a building lease termination in Haiti.

These restructuring and restructuring-related costs and charges exclude any gain on the sale of real estate, the amount and timing of which is currently unknown, but which will ultimately reduce the amount of the restructuring charges incurred. The company is actively marketing and showing the real estate, and currently anticipates receiving approximately $6.0 to $8.0 million in cash proceeds (net of all taxes and commissions) from its eventual sale.

Second Quarter Fiscal 2025 Results versus Second Quarter Fiscal 2024 Results

• Net sales were $55.7 million, down 5.2 percent compared with the prior-year period, with mattress fabrics sales down 4.2 percent and upholstery fabrics sales down 6.4 percent.

• Loss from operations was $(5.4) million (which included $2.8 million in restructuring expense and related charges during the period), compared with a loss from operations of $(2.2) million for the prior-year period (which included $66,000 in restructuring and related charges during the period).

• Adjusted loss from operations was $(2.6) million, compared with an adjusted loss from operations of $(2.2) million for the prior-year period. (See reconciliation table on page 14). Operating performance compared to the second quarter of fiscal 2024 was negatively affected by lower sales in both segments, and by manufacturing inefficiencies primarily related to the significant restructuring activity underway in the mattress fabrics segment.

• Net loss was $(5.6) million, or $(0.45) per diluted share, compared with a net loss of $(2.4) million, or $(0.19) per diluted share, for the prior-year period. The effective tax rate for the second quarter was 0.9 percent, reflecting the company’s mix of taxable income between its U.S. and foreign jurisdictions during the period.

Business Segment Highlights

Mattress Fabrics Segment ("CHF")

• Sales for this segment were $30.1 million for the second quarter, down 4.2 percent compared with sales of $31.4 million in the second quarter of fiscal 2024. Sequentially, sales were up 7.1 percent compared with sales of $28.1 million for the first quarter of fiscal 2025.

• While year-over-year sales were pressured by ongoing weakness in the domestic mattress industry, the sequential improvement in sales was driven by higher order levels, which are indicative of CHF's product innovation and improving market position.

• Operating loss was $(1.0) million for the second quarter, compared to an operating loss of $(936,000) in the prior-year period and compared to an operating loss of $(3.5) million for the first quarter of fiscal 2025. Operating performance for the quarter, as compared to the prior-year period, was pressured by lower year-over-year sales volume and manufacturing inefficiencies, including those related to the significant restructuring initiatives to wind-down CHF's Canadian operation and move certain knitting and finishing equipment to Stokesdale, North Carolina. However, while restructuring-related inefficiencies negatively affected the quarter, the reduction in operating loss as compared sequentially to the first quarter of fiscal 2025 reflected the significant progress CHF is making to reduce costs as it executes its restructuring plan.

Upholstery Fabrics Segment ("CUF")

• Sales for this segment were $25.6 million for the second quarter, down 6.4 percent compared with sales of $27.3 million in the second quarter of fiscal 2024. Sequentially, sales were down 10.0 percent compared with sales of $28.5 million for the first quarter of fiscal 2025.

• Sales for CUF's residential fabric business were lower than the prior-year period and lower sequentially. This was driven primarily by further demand weakness in the residential home furnishings industry, which resulted in lower order levels as customers, including a significant customer, adjusted their inventory to align with soft industry demand. This ordering variability will also pressure residential fabric sales for the third quarter of fiscal 2025.

• Sales for CUF's hospitality/contract business (including Read Window) were flat compared to both the prior-year and sequential periods. Sales from CUF’s hospitality/contract business accounted for approximately 35 percent of CUF's total sales during the second quarter.

• Operating income was $615,000 for the second quarter, compared with operating income of $1.4 million in the second quarter of fiscal 2024. Operating performance for the second quarter of fiscal 2025, as compared to the prior-year period, was affected by lower sales, an unfavorable foreign currency exchange rate associated with CUF's operations in China, and higher freight costs, offset somewhat by lower SG&A and lower fixed costs.

Balance Sheet, Cash Flow, and Liquidity

• As of October 27, 2024, the company reported $10.5 million in total cash and $4.1 million in outstanding debt under the company's China credit facility.

• Cash flow from operations and free cash flow were negative $(2.6) million and negative $(3.4) million, respectively, for the first six months of fiscal 2025, compared with cash flow from operations and free cash flow of negative $(4.5) million and negative $(5.6) million, respectively for the first six months of fiscal 2024. (See reconciliation table on page 11 of this press release.) The company’s cash flow from operations and free cash flow during the first six months of fiscal 2025 were affected by operating losses and planned strategic investments in capital expenditures mostly related to the mattress fabrics segment, partially offset by lower working capital. Both segments continue to do an effective job managing inventory during very challenging business conditions.

• Capital expenditures for the first six months of fiscal 2025 were $1.6 million. The company continues to strategically manage capital investments, focusing on projects that will increase efficiencies and improve quality, especially for the mattress fabrics segment.

• As of October 27, 2024, the company had approximately $33.1 million in liquidity consisting of $10.5 million in cash and $22.6 million in borrowing availability under the company's domestic credit facility. The company also had $4.1 million in borrowings outstanding under its China credit facility.

• The company intends to utilize some borrowings under its domestic and foreign credit facilities during fiscal 2025 in connection with its restructuring activities, the timing of the Chinese New Year holiday, and to fund worldwide working capital to grow the business.

Conference Call

Culp, Inc. will hold a conference call to discuss financial results for the fiscal 2025 second quarter on Thursday, December 5, 2024, at 9:00 a.m. Eastern Time. A live webcast of this call can be accessed on the "Upcoming Events" section on the investor relations page of the company’s website, www.culp.com. A replay of the webcast will be available for 30 days under the "Past Events" section on the investor relations page of the company’s website, beginning at 2:00 p.m. Eastern Time on December 5, 2024.

About the Company

Culp, Inc. is one of the largest marketers of mattress fabrics for bedding and upholstery fabrics for residential and commercial furniture in North America. The company markets a variety of fabrics to its global customer base of leading bedding and furniture companies, including fabrics produced at Culp’s manufacturing facilities and fabrics sourced through other suppliers. Culp has manufacturing and sourcing capabilities located in the United States, China, Haiti, Turkey, and Vietnam.

Forward Looking Statements

This release contains "forward-looking statements" within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties that may cause actual events and results to differ materially from such statements. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often but not always characterized by qualifying words such as "expect," "believe," "will," "may," "should," "could," "potential," "continue," "target," "predict", "seek," "anticipate," "estimate," "intend," "plan," "project," and their derivatives, and include but are not limited to statements about expectations, projections, or trends for our future operations, strategic initiatives and plans, restructuring actions, production levels, new product launches, sales, profit margins, profitability, operating (loss) income, capital expenditures, working capital levels, cost savings (including, without limitation, anticipated cost savings from restructuring actions), income taxes, SG&A or other expenses, pre-tax (loss) income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding dividends, share repurchases, liquidity, use of cash and cash requirements, ending cash balances and cash positions, borrowing capacity, investments, potential acquisitions, cash and non-cash restructuring and restructuring-related charges, expenses, and/or credits, net proceeds from restructuring related asset dispositions, future economic or industry trends, public health epidemics, or future developments. There can be no assurance that we will realize these expectations or meet our guidance, or that these beliefs will prove correct.

Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses into our existing operations. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in tariffs or trade policy, including changes in U.S. trade enforcement priorities, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. In addition, because our foreign operations use the U.S. dollar as their functional currency, changes in the exchange rate between the local currency of those operations and the U.S dollar can affect our reported profits from those foreign operations. Also, economic or political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. The impact of public health epidemics on employees, customers, suppliers, and the global economy, such as the recent coronavirus pandemic, could also adversely affect our operations and financial performance. In addition, the impact of potential asset impairments, including impairments of property, plant, and equipment, inventory, or intangible assets, as well as the impact of valuation allowances applied against our net deferred income tax assets, could affect our financial results. Increases in freight costs, labor costs, and raw material prices, including increases in market prices for petrochemical products, can also significantly affect the prices we pay for shipping, labor, and raw materials, respectively, and in turn, increase our operating costs and decrease our profitability. Also, our success in diversifying our supply chain with reliable partners to effectively service our global platform could affect our operations and adversely affect our financial results. Finally, the future performance of our business also depends on our ability to successfully restructure our mattress fabric operations and return the segment to profitability. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, is included in Item 1A "Risk Factors" in our most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission.

Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from those described in this release as anticipated, believed, estimated, expected, intended, planned or projected. The forward-looking statements included in this release are made only as of the date of this report. Unless required by United States federal securities laws, we neither intend nor assume any obligation to update these forward-looking statements for any reason after the date of this release to conform these statements to actual results or to changes in our expectations. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations or financial results.