Culp, Inc. Aktie

Good day, and welcome to the Culp, Inc. Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Good morning, and welcome to the Culp conference call to review the company's results for the third quarter of fiscal 2026. As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition and prospects of the company.

Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical facts.

The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q.

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 and financial results. You are cautioned not to place undue reliance on forward-looking statements made today, and each such statement speaks only as of today.

We undertake no obligation to update or to revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is included in the tables to the press release included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at culp.com. An Investor Relations presentation is also available on the company's website as part of the webcast of today's call. I will now turn the call over to Iv Culp, President and Chief Executive Officer of Culp. Please go ahead.

Thank you, Dru, and good morning, and thank you to everyone for joining us today. With me on the call is Ken Bowling, our Chief Financial Officer. I will begin the call with some detailed comments. And as mentioned in the introduction, we did post a slide presentation to our website that provides some information that is supplemental to what we will speak about today relating to our results and strategies.

That slide presentation is simply entitled Third Quarter FY '26 Supplemental Information. Ken will then review the financial results for the quarter. After that, I'll briefly review our business outlook for the remainder of fiscal '26, and we will take some questions. Our third quarter results are candidly frustrating given all that we've done over the last 1.5 years to transform our company and position it to generate value for shareholders. The prolonged low demand environment across the home furnishings industry just continues to pressure our top line and inhibit our ability to leverage all of the cost and efficiency enhancements we've made in recent periods.

Compounding our frustration was untimely severe weather in the Southeast that caused us to lose the last week of our quarter of shipping from Stokesdale. This was a significant onetime impact, especially to our bedding revenue results, which I will touch on a bit more shortly.

Regardless, I'm extremely proud of our team for staying focused and executing on integration and restructuring initiatives that touch pretty much every area of our company and doing so both on time and according to plan. I'm confident that the benefits of this work will become more and more evident in our results.

I'd like to thank all of our associates across the United States, China, Haiti and Dominican Republic and Vietnam as well as our former associates in Canada and our global network of strategic supply partners for all of their heavy lifting to get us to where we are today with a fully optimized manufacturing engine ready to pounce on any improvements in demand.

Importantly, our revamped platform is poised to scale and absorb capacity without adding any significant expense. We just need the unit volume. As I mentioned in our release, we are confident that industry conditions will eventually stabilize and skew favorable in our core bedding and furniture markets.

Both our own operating history and the market data are indicating a current historical deficit in overall industry units, but also conditions that are ripe, perhaps even overripe according to some for a product replacement cycle that should energize the top line.

The pockets of positive demand activity that we've seen in recent periods on the bedding side also support that proposition. However, we agree with the industry consensus that housing activity, particularly affordability and availability trends in housing and consumer confidence and discretionary spending all need to level up to drive any meaningful market recovery.

We've included some data in our supplemental presentation on Pages 14 through 18, providing additional context for the impacts of housing activity, consumer confidence levels and other related factors as well as some historical industry unit trends.

Our commercial team, led by Chief Commercial Officer, Tommy Bruno, has done an outstanding job of being proactive in increasing our share of the available business despite the top line current environment where overall sales growth is so hard to come by, if not unheard of on the supplier side.

One thing we've always done really well at Culp is to take the time to listen to our customers, fully understand what their needs are and meet those needs on their timetable with competitive and fashionable fabrics and sewn covers. We have continued to do this well and prioritize our customers above all else, which has resulted in a fairly steady stream of program wins with major customers on both the bedding and upholstery sides of our business and what we believe is a larger market share within the key segments we target.

In our bedding business, we were on pace this quarter to comp sales in the prior year period, which is no small feat in this market, but multiple snowstorms in the Southeastern U.S. caused us to basically lose the entire last week of shipping for the quarter at our most important facility in that business.

Up to that point in the quarter, we believe that our bedding sales velocity was outpacing the industry. Despite this difficult backdrop, we have solid opportunities in mattress covers, which is a key growth area for us that carries higher sales dollars and margin, and we look for the momentum we saw in our overall bedding business for most of that third quarter to resume in our fourth quarter. Sales velocity in our upholstery business was more elusive this quarter with residential furniture purchases continuing to be affected by muted housing and consumer spending activity, along with heightened tariff sensitivity due to the primarily offshore supply chain for furniture and especially for furniture components.

In addition, we've continued to see project delays in the commercial and hospitality upholstery markets we serve that have in turn delayed sales of fabric and window treatments into those channels. We see the project delays in our commercial channel as temporary, and we continue to build relationships with major hotel brands and prioritize our preferred supplier certifications under their design and construction standards.

We have built a strong competitive position in both the residential as well as the commercial and hospitality markets, and this advantage creates some natural hedge for our revenue and supply chains. In recent prior periods, hospitality and commercial performed well relative to residential, but Q3 was an anomaly with weaker sales in both areas that is expected to be nonrecurring as we look forward. One bright spot for us in upholstery during the quarter was in the upholstery kit product category. This is a high-growth area for us where we typically generate higher per unit revenue, and we were able to achieve double-digit growth there that we look to continue in the fourth quarter.

Also in upholstery, Tommy and his team continue to focus on expanding our customer base to include more brands and retailers playing in the higher price point areas. Our current customer base primarily targets consumers buying at the mid- and lower-tier furniture price points.

And one of our strategic priorities is to maintain our market-leading position in these segments while also diversifying more into the higher-end customer segment that caters to consumers less affected by economic cycles. One of the other things we've always done well at Culp across both businesses is invest in the resources necessary to maintain market-leading position in product design and development, whether that's creating or adopting new fabric technology and performance capabilities or staying ahead of design trends and other innovation efforts. Our noted growth in furniture upholstery kits and in sewn mattress covers despite the tough market conditions, provide good examples of our consistency in development, and we'll continue to leverage our advantages and expertise going forward.

This current season were also offers several great opportunities to meet with customers and show new products. This week, our key sales leaders for bedding are attending the International Sleep Products Association's biannual trade show and displaying in tandem with our long-term partner in Turkey.

This ISPA show puts us in front of many of the industry leaders and major customers we target. We'll follow that up with a bedding design showcase here at our innovation center at Congdon Yards in High Point, where we'll host our bedding customers by appointment during the week of March 23rd to review all of our new products, our Cut & Sew prototypes and our open line.

Both of these customer windows allow us great opportunity to continue placing new products and to grow our market position in bedding. Likewise, in upholstery, we have recently opened a new dedicated showroom in Vietnam to host customers any time they need to review new fabrics. Our showroom is placed conveniently in the Ho Chi Minh City area and the opening corresponds with a traditional Vietnam furniture show called the VIFA Expo for furniture and accessories.

We are pleased with customer engagement so far, and the showroom allows us to meet with visiting U.S. customers as well as Asia-based visitors and customers from all over the world. We are excited to have this global reach to display our latest introductions. The VIFA Expo also serves as a nice lead into our main fabric show Interwoven that will be in High Point at Congdon Yards in May.

At a summarized and big picture level, we feel very good about our position as a key supplier to the major players in both our core bedding and upholstery markets and believe that our market share gains will ultimately be reflected in our top line growth, certainly once demand normalizes. On the bedding side, particularly, we believe that our strategic focus aligns nicely with the ongoing consolidation trends among the major bedding brands and retailers that we believe are likely to continue.

What we've learned over our many years as a supplier is that customers value optionality and compliance in their supply chains and the redundancy and reliability we offer for production planning purposes. Our restructured global platform with flexible options across the full range of supply strategies is designed with that need foremost in mind, and it has continued to garner even more perceived value to larger customers that have complexity and diversity in their product lines.

A basic map of our global platform and production options is displayed on Page 12 of that supplemental deck. Turning now to the Global Trade and Tariff Landscape, particularly all of the change and unpredictability we are seeing there.

We believe the recent volatility of trade policy can actually be a net positive for us given that it serves to highlight the strategic value of our global platform to our customers. This was certainly the case before the recent IEEPA tariff developments, but even more so now, given the fluidity and status with those tariffs and other new tariffs either announced or under consideration.

We are watching tariff developments very closely from the Supreme Court decision to strike down IEEPA tariffs to the administration's immediate enactment of New Section 122 tariffs and recent activity under Section 301. A summary of the tariff impacts and our mitigation strategies are displayed on Page 11 of our supplemental deck.

Our decision to consolidate our North American operations within our own Stokesdale facility in the U.S. provides our bedding customers with a robust domestic production and distribution option that has proven to be prescient in this current environment.

Similarly, our platform in Haiti on the border with the Dominican Republic gives customers a nearshore and low tariff option, while our Vietnam and Turkey supply chain provide nice supplemental offshore options to complement our China production.

Encouragingly, we're seeing customers lean more and more into the various sourcing alternatives we offer as they are continually forced to factor the cost of new and changing tariffs into their models and build more flexibility into their strategies.

Our global platform presents customers with what we believe is the best opportunity out there to source in multiple geographies and tariff regimes. But with the operational and administrative ease of dealing with a single turnkey supplier partner.

Looking at that tariff issue from a pure cost perspective and how they directly affect our financials. We believe that the current go-forward tariff rates applicable to our business are manageable and in some cases, improved versus what we've had to absorb in prior periods.

Additionally, our pricing adjustments and surcharges implemented in recent periods are appropriately calibrated and are expected to offset tariff costs on a cost-neutral basis over the near to medium term, [ absent ] of course, any unanticipated governmental changes or sudden increases.

I have stated for multiple quarters that we believe our strategic platform is an advantage for Culp in an uncertain tariff environment. The problem we had for most of this year was keeping pace with the sweeping changes in tariff rates. The quick cadence of the changes often created a natural lag between tariff effective dates and price adjustments that resulted in pressured profitability.

I again want to reiterate that we are now covered with known tariffs present today. And overall, we feel positive about where we are on the tariff issue going forward, both from the perspective of our competitive positioning in the market and from a product cost perspective.

Before I move on from tariffs, I want to mention that we are, of course, taking the steps necessary to be in a position to obtain any available refunds on the IEEPA tariffs we've paid that were subject to the recent court decisions on that issue. We have filed all the necessary protests related to reliquidated entries and have also filed a lawsuit with the Court of International Trade.

Over the last 14 months, we've paid over $15 million in total baseline duties and tariffs with an estimated $6 million to $7 million in IEEPA tariffs over that same period. It is those IEEPA tariffs where we are entitled to refund. Depending, of course, on how the refund issue ultimately plays out, our receipt of the amount of IEEPA tariffs we've paid would be significant and would offset some previous period losses.

Again, that pace of tariff implementation has been punitive to our profitability. So any refunds would help to remedy the lag impacts we experienced adjusted to those policy changes. Lastly, on tariffs, in addition to those IEEFA tariffs, we're also anticipating some refunds on the baseline duties on Haiti produced on covers we paid in recent periods before the reinstatement of the Haiti HOPE/HELP trade program, which gives Haiti imports duty-free treatment. I'd now like to take some time to update all of the work we've completed on our lower cost structure and add efficiencies across both our bedding and upholstery businesses.

Our third quarter was a Capstone to the efforts we began at the beginning of last fiscal year to comprehensively restructure our operating platform as well as integrate our business and the way we go to market. We've now completed the last of several major initiatives associated with the integration of our 2 former stand-alone divisions, Mattress and Upholstery or what we call CHF and CUF into a unified Culp-branded business, which we call Project Blaze internally.

The fiscal year '26 substantive actions of this comprehensive reorganization are detailed on Pages 9 and 10 of the supplemental presentation, and Q4 will be the first quarter with all projects completed and savings and efficiencies fully enacted.

As a reminder, our Project Blaze initially involved the transition of our division presidents into company-wide Chief Commercial Officer and Chief Operating Officer roles, and we followed that with the blending of other division operations and resources.

During the third quarter, we completed 2 key related initiatives. And thanks to the hard work of our team, we now have all of our U.S. distribution operations consolidated under one roof with our own facility in Stokesdale, North Carolina, with a single management team overseeing both our bedding and upholstery business' distribution activities in our largest market.

We also completed a similar transition in our Read Window business operated within our Upholstery segment during the quarter. Our fixed costs in that business are now significantly reduced to the relocation of our former operations in a leased facility in Tennessee to a shared management model within our Stokesdale facility and the increased usage of strategic outsourcing partners.

And finally, we completed our plans to streamline our China operations, which are our second largest after the U.S. during the quarter, which included both facility and headcount reductions. All told, beginning with the restructuring of our bedding business last year and continuing through the completion of these most recent initiatives, we've generated over $20 million in annualized cost savings and enhancement, many of which have already began to positively impact our results and the remainder of which should begin to benefit our results in our fourth quarter and in fiscal 2027 in the form of lower costs and better operating margins, of course, assuming no further significant drop-off in sales.

We believe we now have the pricing and cost structure optimized throughout our U.S. nearshore and offshore operations, and we are ready to quickly and profitably increase capacity without additional cost when demand picks up. We look at our rebuilt platform as a high-performance engine that is ready to run.

We just need more unit volume for it to fully reflect in our operating results and generate the value for our shareholders that we believe it will. We estimate that with our revamped lower cost platform, any increase in our revenue numbers flows to the bottom line at an approximately 25% rate.

However, I want to be very clear that our ultimate near-term goal remains getting Culp profitable in these pressured market conditions, and we are fully committed to maintaining a disciplined approach to cash management and cost containment until we get there.

One byproduct of our recent restructuring and integration activities that I want to briefly discuss is the excess inventory that we have accumulated in connection with the facility consolidations that were part of those efforts. When we made the decision to close our operations in Canada last year, we chose to build some safety stock in certain fabrics to ensure availability to customers as we transitioned to a single North American facility and stood up our outsourced supply model for damaged products in Turkey.

We also accumulated some excess inventory as a result of the reduction of our distribution footprint to a single facility with defined capacity as well as other drivers. We took some markdowns on this inventory during the quarter that affected our profitability, and we have measurable plans to work through it and turn this inventory into a tailwind and generate cash over the next 2 quarters.

In addition, our team is intensely focused on tightening up our overall inventory management efficiency and minimizing any markdown impacts to profitability going forward. Before I turn the call over to Ken, I want to acknowledge his planned retirement that was announced in January and update you on our succession plans for his Chief Financial Officer role.

First of all, I want to thank Ken for his almost 30 years with Culp and for all he's done to help grow our company and lead us both through a variety of challenges and to many successes over the years.

Ken will leave very big shoes to [ fill ] to say the least. We're thankful he has agreed to stay with Culp throughout 2026 and help us make a smooth transition to his successor. As we are digesting Ken's decision to retire, we are looking at the Chief Financial Officer role in light of our Project Blaze initiative to integrate our operations and drive efficiencies where it makes sense.

I'm pleased to report that we've established a plan for Mary Beth Hunsberger, our current Chief Operating Officer, to begin working closely with Ken over the course of calendar 2026 with the goal of immediately taking on some of the operational functions of the CFO role, specifically the financial planning and analysis or FP&A process for our FY '27 operating plan.

Mary Beth joined us at Culp several years ago as President of what was then our CUF Upholstery division and subsequently moved into the COO role in May 2025 as part of Project Blaze. Before Culp, Mary Beth spent a significant portion of her career in the financial leadership roles, including several with Tempur Sealy, a key customer of ours now known as Somnigroup in a variety of accounting and executive roles, including CFO, COO and President of multinational furniture companies.

We are very excited to leverage Mary Beth's skill set in an interim dual role responsible for integrating financial leadership and operational execution across our global platform. We believe it is a natural fit for Mary Beth to combine our operational leadership with financial oversight to accelerate our consolidated improvement and create more efficiencies.

Mary Beth should also be instrumental in bolstering our FP&A capabilities through system enhancements and upgrades, which is an area she has valuable proven leadership experience. We are extremely grateful to Ken for agreeing to continue serving in the CFO role and as our Principal Financial and Accounting Officer until we believe the time is right to make any official leadership transition.

Ken has always been willing to share his wealth of knowledge regarding Culp and his financial and accounting functions, and we are all glad to have this time for our teams across the company to work together. I'm also excited to report that we've hired an individual to replace our recently departed Corporate Controller, which we also announced in January.

This individual will also have the opportunity to work with Ken this year. As part of his planned transition, we believe he will be a key player for us going forward. Needless to say, we are thrilled to have a comprehensive transition plan in place for our financial leadership team at Culp.

Congratulations, Ken and Mary Beth, and welcome to Culp [ Odera]. With that, I'll now turn the call over to Ken, who will review the financial results for the quarter, and then I'll review the outlook we are providing as we look ahead into the fourth quarter of fiscal '26.

Thanks, Iv, and thank you also for those kind words. It's been an honor and a privilege to work for Culp, and I'm totally committed to doing everything I can to ensure a very smooth transition. Here are the financial highlights for the third quarter.

As Iv mentioned earlier, we continue to face a challenging overall demand environment during the quarter and also lost some sales momentum to close the quarter due to severe weather, which impacted shipping at our most important facility.

These conditions drove net sales of $48 million compared with net sales in the prior year period of $52.3 million. Consolidated gross profit for the quarter was $5.3 million or 11.1% of sales compared to the prior year period gross profit of $6.3 million (sic) [ $6.4 million ] or 12.1% of sales, with the decline driven by lower comparable sales adjustments related to excess inventory stemming from our restructuring and integration initiatives and unfavorable foreign exchange rates associated with our China operations.

The company reported a loss from operations of $3.7 million compared to a loss from operations of $3.9 million for the prior year period. Excluding restructuring and related expenses, adjusted loss from operations was $3.1 million compared to a loss of $1.6 million for the prior year period.

Net loss for the third quarter was $3.4 million or $0.27 per diluted share, a sequential improvement of approximately 20% from our second quarter and an approximately 17% increase compared with a net loss of $4.1 million or $0.33 per diluted share for the prior year period.

Excluding restructuring and related expenses and other noncash charges as well as the impact of net proceeds from a legal settlement of approximately $1 million, adjusted EBITDA for the quarter was a negative $2.2 million as compared to negative $457,000 for the prior year period.

The effective income tax rate for the quarter was a negative 9.3% compared with a negative 12.1% for the same period a year ago. Our effective income tax rate for the quarter continues to be impacted by the mix of earnings between our U.S. and foreign subsidiaries with an operating loss in the U.S. and taxable income mostly from China, which has a higher income tax rate compared to the U.S.

Our cash income tax payments totaled $2.4 million for the first 9 months of this fiscal year. Notably, we do not expect to incur any income taxes in the U.S. on a cash basis for the foreseeable future due to our existing U.S. federal net operating loss carryforwards totaling almost $90 million as of last fiscal year-end, which care-related future income tax benefits of $18.5 million.

Now let's take a look at our business segments. For the bedding segment, sales for the third quarter were $27.3 million, down approximately 5% compared to last year's third quarter, with the decrease driven primarily by lower housing and discretionary spending trends Iv touched on earlier, along with the tariff-driven pressure on demand and the impacts from severe weather in late January.

Gross profit in our bedding segment was $2 million or 7.2% of sales, a decline from gross profit of $2.7 million or 9.6% of sales in the prior year period, driven primarily by adjustments related to excess inventory stemming from our restructuring and integration initiatives, which were partially offset by improved selling margins during the quarter.

For the Upholstery segment, sales for the third quarter were $20.7 million, down approximately 12% compared to the prior year period, with the decline driven by most of the same factors driving the sales decline in bedding. Gross profit in our Upholstery segment was $3.4 million or 16.3% of sales, a decline from gross profit of $4.2 million or 17.9% of sales in the prior year period, driven primarily by lower comparable sales and unfavorable foreign exchange impacts related to our China operations.

Now let me turn to the balance sheet. We reported $9.7 million in total cash and $18.5 million in outstanding debt under our credit facilities as of the end of the third quarter, giving us a net debt position of $8.8 million.

Cash flow from operations was a negative $2.3 million for the first 9 months of this fiscal year and primarily driven by operating losses, which compares favorably to a negative $9.4 million in the prior year period. Adjusted for capital expenditures, proceeds from the sale of property, plant and equipment and notes receivable and other items, free cash flow was a negative $1 million, down favorably from a negative $10.1 million in the prior year period.

Generating free cash flow and reducing our debt continue to be among our highest priorities. Capital expenditures for the first 9 months was $442,000, down from $2.4 million in the prior year period as we continue to focus on maintenance projects and strategic initiatives with quick payback.

We expect capital spending for fiscal 2026 to be in the range of $600,000 to $700,000 as we continue to spend only as necessary. With respect to liquidity, as of the end of the third quarter, we were at $27.7 million, consisting of $9.7 million in cash and $18 million in borrowing availability under our domestic and foreign credit facilities. As a reminder for our liquidity purposes, the net book value of our own manufacturing campus in North Carolina as of the end of the quarter was around $12 million, and that property has an estimated market value of $40 million to $45 million.

Our liquidity highlights are briefly summarized on Page 7 of our supplemental deck. With that, I'll turn the call over to Iv to discuss the general outlook for the fourth quarter and full year, and we will then take your questions.

Thank you, Ken. Due to the ongoing macroeconomic and increasing tariff and trade uncertainty, we expect continued industry sales pressure and are only providing limited financial guidance at this time. We expect sequential consolidated sales growth for the fourth quarter of fiscal '26 with solid expectations for our bedding segment despite the challenged demand environment for home furnishings.

We also expect our current pricing to balance tariff pressure in the fourth quarter and for the cost and efficiency benefits of our restructuring and integration initiatives to drive improving gross profit and lower SG&A for the fourth quarter and beyond.

We're not providing more specific operating guidance at this time due to the uncertainty around the potential IEEPA tariff refunds and if received, the impacts on our operating results and prior quarter losses. We intend to continue utilizing borrowings as necessary under our credit facilities to fund working capital needs and growth, but we'll continue to aggressively manage liquidity and capital expenditures and prioritize free cash flow.

Additionally, the $4.8 million balance sheet item due from the sale of our former facility in Canada is scheduled to be paid during the fourth quarter.

With that, we'll be happy to take some questions.

[Operator Instructions] Our first question today comes from Anthony Lebiedzinski with Sidoti & Company.

Congrats to Ken on his pending retirement. So you guys talked about green shoots that you're seeing on the betting side, which is certainly good to see. And you also talked about the programs with major customers. Just wondering if you guys could expand on that. And as far as that's concerned, if you could provide more details, that would be great.

Yes. Thank you, Anthony, and good to hear from you. Thanks for checking in with us. And I appreciate the comments about Ken. We're honored by his service, and I'm excited for him to retire and think about a positive future for his life, but we'll miss him a lot, and we're really grateful for the formal transition we're working through. So I'm glad you got to say hello to him about that.

Yes. Thank you, Anthony. I appreciate that. Thank.

Yes. And to the green shoots you mentioned, Anthony, it's interesting commentary, and we're careful how we want to talk about it. The market is challenged. I think you know that and everyone knows it. And it's just been a hard market for unit volume. But we were really on a pretty good pace in our third quarter in bedding to on the forecast that we thought we'd be, and we're, I think, outpacing the industry fairly well.

But then we got really crushed by weather on timely at the end of our quarter, which is -- that's just hard to do when you're making a turn like we're trying to make. So that hurt. But the fact, the pace we saw bedding operating on, and I think we see pretty cool opportunities in sewn covers.

And we would certainly never name any customers, but we just feel very bullish in our supply chain, our global strategy and our very strong domestic production, customers are leaning into us, and we're finding more opportunities and more chances to drive major national lines.

It would just be helpful to us if those products would sell at a higher rate, but we're definitely building blocks into the -- to get our market share up, which we're thrilled about.

Okay. That's good to hear. And then I know you talked about the potential refunds from tied to IEEPA. I think you said $6 million to $7 million. But I heard also some commentary about the Haiti. Are those -- this is something I probably missed as far as like -- or did you say anything about like potential Haiti refunds?

We did. Yes, we did. The -- yes, no question, you'd be confused on this whole thing. The tariff regulations and trade policies have been unbelievable for the last year, and we touched on it in 2 different ways. The Haiti tariffs, for sure, we are due refunds in process on the duties.

Haiti for a long time, which is one of the primary reasons we went there, is a duty-free treatment. That doesn't always override IEEPA or reciprocal tariffs or other things. But from a pure baseline duty, Haiti is a duty-free country.

During previous government shutdown, not even the one we're in today, the last one, the Haiti HOPE Act expired. And before it got renewed, there was a period of some time where duties were being charged. That act has now been renewed, and we're reclaiming those duties back. So that will be some fourth quarter cash for us. That's approved and in process, and those duties will be coming back. The IEEPA tariff is a much bigger thing that impacts us at all of our international locations. And with the Supreme Court ruling on that, we are now in line to claim refunds that we are entitled to based on the ruling.

We understand that the timeline and the mechanism of that is uncertain. We have filed all of our protests. We have a lawsuit filed. We are speaking daily with our customs brokers. We're tracking this really close because we are confident that we should be due somewhere between $6 million and $7 million as we check our IEEPA tariffs we've paid over the last -- since they were enacted.

And again, we just -- we don't know the timeline, and we understand there'll be more to the story, but we're just pushing that and want our investors to understand that's a significant situation that we're following very closely. We feel like we are relative experts in the tariff world.

And I'm not proud of that, but it's just been so impactful. And anything that we get back, Anthony, I mean, obviously, everyone sees how we've performed. It's not intended to boost our margin. It's to recoup losses that we took dealing with these tariffs and the lag that we had to deal with putting them in. So we really need to focus on that refund to offset previous period trouble.

Understood. Certainly. Okay. So given all the streamlining and restructuring that you guys have done, and certainly, it's been quite significant. And I know the environment is still fluid with everything that's going on in the world. But can you give us kind of a rough estimate as to what's your breakeven revenue run rate nowadays?

This is Ken. I think if you -- we -- in his comments, we talked about the inventory markdown pressure that we're under. We've got to get that fixed, and we are laser-focused on that. And beyond that, I think where we look at -- where we are today as we look out to Q4 and beyond, we're in that breakeven level at about the pace where we are for the third and fourth quarter around that $50 million per quarter level.

We feel that, that level is -- we've got a cost structure to support that. And then as we said in Iv remarks, beyond that, we've got the leverage to really kick in. And so we're just -- we said it throughout the remarks, we just need that higher sales to kick in. But we're -- [ ex ] the fixing of the markdowns, we're at that breakeven point. Now we just need more revenue to leverage.

Hello.

Yes sir. We are here.

Yes. Sorry, you cut off for a couple of seconds. Okay.

The next question comes from Doug Lane with Water Tower Research.

I have to say I'm pretty impressed that you've taken the actions on the tariffs as far as you have by getting the paperwork filed and what have you so soon and knowing what those numbers are. What's the next step there? What should we be looking for as the next step on the tariff recovery?

That's a good question, Doug, and thanks for checking that. We do feel -- as I was said with Anthony, we do feel sadly sort of experts on wrestling this. We have our protest in process. We have our lawsuit filed. We have our ACE system set up, which is how the refunds have been said would be reissued. We have our spreadsheets lined up. We are ready to enter the refund by entry or by product, by country, however they want us to do it, we're ready to do it.

I think the next steps we understand is there's maybe even a closed door meeting today with the Court of International Trade and the administration's, lawyers on that process. So we're also waiting what we understand as of today, and certainly, all this could be changed.

We recognize that we understand the uncertainty of this. We don't really think there's a question of if refunds are due to us, but we know there's a lot of uncertainty of [wins]. So I think what the process going on today is what's the timeline, what procedures will be handled by and what the administration or anyone may do to try to delay that time line.

So we're waiting every day looking at when the next hearings are and what the outcomes are to try to be first in line to strike the opportunity. But we understand there could be some further delays. So we're waiting.

Okay. So it's just unknown at this point.

Timeline. I think it's known on timing, yes, sir.

On timing, right, exactly. And then, Ken, you mentioned the inventory is up a little bit year-over-year, and you explained why. Can you give us a feel for how you plan on working off that inventory? And do you expect these noncash inventory charge markdowns to be recurring in the next quarter or 2?

Yes, Doug, we have spent a lot of time talking about the reason why, and it was just, again, building inventory to address the restructuring actions, and we did -- we purposely did that to take care of our customers, and we did a great job throughout that whole process. I mean a lot of different things were going on.

So now we recognize that we have inventory that is aging and we need to get that inventory sold. So we are totally focused today on getting that sold at a good margin. And we've set some very aggressive goals internally to get that inventory down over the next -- this quarter and next.

And then beyond that, we've looked at aggressive ways to ensure that we turn inventory faster. And so that this markdown issue will not be a problem in the future. I mean you're always going to have aged inventory, and we understand that.

But at the same time, we're at a level now where we can make the product that to meet customer needs and then get this excess sold. And then as we go into the new year, be on a much, much better cost platform. And so that's our focus today, and we're going to get it done.

And Doug, if I just add a touch of color, Ken answered that super, but touch color just on the inventory in general. It's a big impact to us, obviously, liquidity purposes and profitability purposes. And at the end of Q3, we're at a peak position from a number of reasons.

We build up in advance of Chinese New Year, which is normal. So that's part of the Q3 total inventory number. And Ken's right, we built up inventory to service customers through our restructuring transition. And that coincides with the trough in the market, some of those shipments have been delayed.

So what we've asked our team to do is be very intensely focused on moving inventory, both aged and current to turn that into cash. And over Q4 and Q1, we're expecting that working capital effort to drive cash to us. That's an intense focus for the company.

Okay. That's helpful. You mentioned the storms that came through the South at the end of January. And I guess, unfortunately, for you, that's your quarter end. So just to be clear, those sales weren't lost. They were just pushed maybe from the third quarter into the fourth quarter. Is that right?

That's right. I think I really don't like I just like -- I don't like to even use the word, hey, but I just like talking about weather because I know it's -- it is what it is. But this was so untimely and so severe for where we live. And part of our consolidation to put all of our work into this location and then to have it closed for a week was just tough.

So we don't anticipate losing those sales. They don't all ship out the next day, but we're not giving a ton of guidance, I realize. But to say that we're expecting sequential growth, particularly in the bedding segment, to me, shows, Doug, that we're expecting that business to pull through.

Yes. I mean it looks like bedding, even with that is still flat through 9 months. And I assume the market is down. So are you gaining share in bedding? And just maybe give us a couple of minutes on where you see your market position here today and where you want to be when the markets do recover.

Well, I mean, from a Culp mentality, it's never enough. We never can have enough. But yes, we do believe we're gaining market share with the right customers. Obviously, we have been through a lot of transition in our business over the last 2 years, so closing down our Canadian facility, resetting up our U.S. facility in a very strong way and having really excellent supply partners in different parts of the world.

We say it a lot, but to have a strong onshore platform backed up by a very good nearshore platform with Haiti and Dominican and then having our Asia operations and Turkey as well, we just have a lot of ways to service a major customer. We think that large customers today want to blend their sourcing.

They don't want their eggs in one basket. They want ability to flex around tariff changes, and we offer that. So with product design and innovation that we do with Cut & Sew starting to really be a pickup. We're now doing quilted mattress covers as well.

We just have a lot of ways to serve large customers. And we think our platform and our product is driving that. So being flat in a down market is probably pretty good, but we're pretty bullish on what we could see with any kind of market push the market share might really show it stuff.

So we're encouraged about that, but also recognize that we're still in a tough situation macro business-wise, and we have to be balanced in our platform.

The next question comes from Michael Wasserman, private investor.

I'm curious as to, given the challenging times we're in, whether the company has given any consideration of a sale leaseback of its headquarters facility just to build cash.

Mike, thank you for the question. We have definitely thought about that. And as Ken talked about in his remarks, we're very aware of the value of that operation. Today, we thought about it. So the answer is yes, we thought about it. We haven't decided to do that because we believe that location is so integral to how we create value going forward. And we think we need to operate that without any encumbrance. But yes, we thought about it. And yes, it's an option, but it's not something we're striking on right now.

The next question comes from Don Dyser with Pinnacle.

I appreciate the color you've given so far. I just have one minor question. The slide deck shows the headcount of about 900. And reading the 10-K at the end of last year was 830. So it was up, I won't say significantly, but noticeably. Why is the headcount up given all the integration and restructuring and sales decline you've experienced over the last year or so?

Yes. Good question, John. And I could need to look at those numbers more refined. I think some of those numbers may not match timeline perfectly. The 10-K would have been Ken as of.

It'll get filed in mid-July.

Yes. And so maybe the slide deck we have now. And what's happening with that number, John, is we are having significant increase of business in our Haiti/Dominican Republic location, where we're really striding with some large volumes of quilted mattress covers.

And so there's some personnel adds in that location, but those are very low personnel costs. in that region. So that would be where increases are. I don't think -- you're picking up on a good point. We should not be expecting to see headcount growing. It should be going the other way, but I think that's fueled temporarily with some pickup of some business in Haiti.

Do you think that's going to decline then?

Headcount? Yes, sir. Yes, sir. Our headcounts will be trending the other way. Yes, sir.

This concludes our question-and-answer session. I would like to turn the conference back over to Iv Culp for any closing remarks.

Thank you, operator, and thank you again to everyone for your participation and your interest in Culp. We look forward to updating you on our progress next quarter. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Culp, Inc. Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Good morning, and welcome to the Culp conference call to review the company's results for the second quarter of fiscal 2026. As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q.

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 and financial results. You are cautioned not to place undue reliance on forward-looking statements made today and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements.

In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included in the tables to the press release included as an exhibit to the company's Form 8-K filed yesterday and posted on the company's website at culp.com. Investor Relations presentation is also available on the company's website as part of the webcast of today's call.

I will now turn the call over to Iv Culp, President and Chief Executive Officer of Culp. Please go ahead.

Thank you, Dru. Good morning, and thank you to everyone for joining us today. With me on the call is Ken Bowling, our Chief Financial Officer. Before I begin my remarks I do want to briefly pause in which one of our longest and most loyal investors, [ John Baum ], happy birthday. John, we appreciate you and wish you all the best.

I will now begin the call with some detailed comments. And as mentioned in the introduction, we have posted a slide presentation to our website to provide some information that is supplemental to what we'll speak about today and to our results and strategies. That slide presentation is simply entitled Culp Inc. Second quarter fiscal year '26 supplemental information. Ken will then review the financial results for the quarter. And after that, I'll briefly review our business outlook for the remainder of fiscal '26, and we will take some questions.

At a headline level, our results for the second quarter were similar to our first quarter in the sense that we continued our push to improve our operating performance and make significant progress throughout our business in the face of challenging macro conditions. It's well documented and likely familiar to all of you that the home furnishings industry has been abysmal from an actual unit sold perspective. The tide generally remains out for housing and related furniture purchases and we are improving our business gradually and in spite of these conditions.

While we are seeing some encouraging signs of demand stabilization and sales growth in our bedding business, we are still yet to see the broad market recovery across some furnishings that many in the industry think could soon be pending. The macroeconomic data remains stubbornly low, with consumer confidence down based on a variety of factors and the housing market working through challenges, including some of the highest levels of unsold homes in years as well as higher interest rates. There is acute pressure on housing affordability, which continues to put downward pressure on unit sales across the entire industry. We illustrate some of these dynamics and impacts on Pages 12 through 18 of our supplemental deck, which again is posted on our website.

In the face of a difficult top line environment, we continue to focus on 2 overarching strategies at coal, winning market share and adjusting our cost structure to both achieve profitability in the current market cycle, and position Culp to accelerate growth when conditions ultimately improve without the need for additional investment. That last point is one I'd like to reemphasize. Because with the adjustments we've made to optimize our platform that we'll talk about in detail today, we have the capacity to absorb additional production driven by any uptick in demand without the need to spend significant capital dollars. Our team has been aggressive, and we have made great progress on both of these key strategies.

With respect to market share, we believe that our ability to sequentially increase our overall sales in the second quarter despite having 1 less week than the first quarter and to increase sales in our bedding segment, both sequentially and year-over-year in this demand environment are a testament to our growing share with key customers. Our stylish and innovative products, along with our global platform for betting and upholstery fabrics continue to provide a unique and increasingly valuable proposition for customers.

Moreover, we believe that the consolidation activity we are seeing downstream, especially in the bedding market, bolsters our competitive position with key customers. Our experience has been that larger customers generally gravitate to the reliability of suppliers with compliant multilocation manufacturing flexibility, scale-driven cost advantages and above all, the proven track record of product innovation and on-time performance that we offer. The supply chain complexities presented by the new global trade and tariff landscape actually provide us with additional competitive advantages. Particularly as the pace of new tariff implementation settles, and we have more time to react with product strategies and pricing adjustments.

Recent evidence of this are the surcharges and cost adjustments, we will be implementing in response to the most recent round of increased, and in some cases, unexpected tariffs on Turkey, Haiti and other imports during the second quarter. As we've said before, the winners and a fluid trade environment are very likely to be companies that can give customers multiple geographic manufacturing options to better navigate tariff impacts.

Unlike some of our competitors, we've been very intentional over the years and building out a multilocation strategy with robust domestic manufacturing as well as nearshore and multiple offshore operations. A map of our manufacturing and sourcing locations is included on Page 19 of the supplemental slide deck.

Today, for mattress fabric products, we have our expanded U.S. platform for production, finishing and distribution as well as long-time supply partners in Turkey and Asia. For cut and sewn mattress cover products, we have our nearshore production in Haiti, which is situated directly on to the border of the Dominican Republic as well as Asia supply chains in both Vietnam and China. In upholstery, we have a well-established Asia presence with solid and growing Vietnam supply options for both fabrics and sewn kits. And we also continue assessing various options in other parts of the world. Notably, only approximately 30% of our China-produced fabrics shipped in the U.S. So we have some protection currently from fluctuating tariffs in that scenario.

For window treatments, we have our U.S. platform for drapery and roller shades as well as several strategic supply partners. Bottom line, there is no slam dunk strategy for handling the current tariff environment, but we believe our global production footprint and proven ability to pivot our platform as necessary, provide customers with country of origin and speed-to-market optionality that is unique and we can provide them preferred delivery and customer service wherever they want to be supplied. We feel strongly that tariffs could ultimately be turned into an advantage for Culp but the pace of legislative change creates a lag before we can compensate with pricing and/or product strategy.

Turning to our operating performance for the quarter. I'd like to take a moment to review everything our team has done to drive the improvement we've seen in recent periods. There has been a truly formidable amount of work done on our platform, beginning with the restructuring project completed last fiscal year. That project was quite comprehensive and involved the consolidation of our North American bedding operations, including the closure and sale of our Canada facility, expansion of knitting and finished capacity to our U.S. facility, transition of our [indiscernible] a sourcing model, consolidation of our Haiti cut and sew operations and the reduction of our bedding workforce by almost 35%. We also rationalized our upholstery finishing operation in China and significantly reduced our overall administrative SG&A expenses as part of the project. A summary of those actions is detailed on Page 8 of the supplemental tag.

We continue to expect approximately $11 million in annualized cost, savings and efficiency gains from this project. And we've already seen those gains begin to reflect in our financial performance over the prior several quarters. Actions in our bedding platform have been particularly impactful with gross profitability in that business almost tripling year-over-year in the first half of fiscal 2026 and driving over 20% improvement in our consolidated operating results for the quarter. We followed up that restructuring project with an initiative to integrate our 2 former stand-alone divisions, mattress and upholstery or what we used to call CHF and CUF into a unified Culp branded business. The substantive actions of this reorganization are detailed on Page 10 of the supplemental tag.

As part of this integration, which we are calling project Blaze, we transitioned our division presidents into company-wide Chief Commercial Officer and Chief Operating Officer roles and blended other operations, resources and personnel. We are also in the final stages of transitioning our U.S. upholstery distribution and window treatment operations from leased facilities into our owned campus in Stokeston, North Carolina. Both of these consolidations are on track to begin positively impacting our results in late Q3 and the remainder of the second half of fiscal '26. And together with other integration initiatives are expected to generate annualized cost savings and efficiency gains of approximately $3.5 million.

We also recently implemented price adjustments intended to address baseline tariff uncertainty and rationalize gross margins. We expect these adjustments to generate approximately $2.5 million in annualized margin improvement in our bedding segment, and that began in late second quarter. And as I previously mentioned, we are initiating additional surcharges and other product strategies in response to new tariffs during the quarter that will be effective in late Q3 and all of Q4.

Importantly, we are not done with our work to enhance our operating profile and generate profitability across market cycles, including the current one. We are moving forward with additional measures involving the reduction of our lease facility footprint in China. That should be completed this fiscal year, and we are identifying further SG&A and other cost reductions. Commensurate with our warehouse consolidation, we've also worked to rightsize and effectively manage inventory, recognizing some noncash impairments and related charges in Q2, while focusing on turning to aged inventory into cash and filling our warehouse with strategic inventory that our customers prefer.

As we eventually move into Q4 and into fiscal year '27, we will have a much cleaner and strategic inventory and distribution platform in North Carolina to better service our markets and customers. From an all-in perspective, starting with our restructuring project in fiscal '25, and continuing through the completion of these other initiatives I mentioned, we expect to enter fiscal '27 with a benefit of over $20 million in annualized cost savings and enhancements going forward. The overall summary of this is on Page 11 of the supplemental deck.

I am extremely proud of how our team has embraced the challenge in the 3 conditions and seize the opportunity to transform our business into a leaner, and more agile organization.

Turning to our bedding business specifically, summarized on Page 5 of the supplemental deck. The sales momentum we have recently seen in that business, again, including both sequential and year-over-year growth during the quarter is highly encouraging. A lot of this activity was generated by some nice trends in our knit fabric and sewn cover product lines, which are areas we believe we have a lot of white space to drive profitable growth with our restructured bedding platform. We feel good about our current product offerings in this business and believe that our go-to-market strategies are on point. Also, as I mentioned, we are seeing some indications that the bedding market is stabilizing, and there continues to be more industry commentary indicating that the bedding market is due for an increase in unit activity driven by historical product replacement cycles. The industry consensus view supports that we're now for 4 years into a period of demand down cycle.

We included in our presentations on Pages 16 through 18, some excerpts from recent research covered by UBS, indicating that the current market downturn has now extended beyond the typical duration of prior downturns, and there is a significant amount of pent-up demand relative to historic trends as a result. We generally agree with that view and believe that the industry is due for an increase in unit activity. Although the timing of that is, of course, the critical question that no one knows for certain.

Turning to our upholstery business, summarized on Page 6 of the supplemental deck. Market conditions there are comparably more unsettled and pressuring sales, which had a notable impact on our expected consolidated gross profit dollars during the quarter. The current weakness in consumer sentiment and housing is still heavily dampening buying activity, particularly among the lower and middle income segments that the prevailing portion of our residential fabric customers typically target. Despite the difficult environment, we were pleased to be able to maintain relatively stable sales within our U.S. residential fabric customer base during the quarter. While our residential sales to customers in China and other foreign countries declined due to what appear to be more challenged revenue conditions in those markets. The macroeconomic uncertainties also impacted our hospitality and commercial upholstery business with many hotel office and other public space projects temporarily delayed in recent periods. However, that business remains an important part of our upholstery strategy, and we continue to believe it should drive solid long-term growth over time.

Despite the challenging top line environment for home furnishings, we continue to maintain a strong competitive position and believe that the foundation is there to grow upholstery over the long term. We have market-leading innovation and design capabilities along with the flexible platform, and we continue to gain new opportunities by segmenting our product and sales strategies to focus on mid- to upper price point furniture as well as the value segment. Our product lines have continued to generate positive reactions to industry events and shows, including the recent furniture market and the Interwoven Fabric Show, both in High Point, which will ultimately lead to winning placements with customers. Furthermore, with the uncertainty around tariffs, we are able to offer customers multiple options via our extensive Asia operations, including Vietnam, while also having the flexibility to consider options in other regions to enable a preferred response.

We are encouraged that we were able to maintain solid gross margins on our upholstery business during the second quarter despite lower-than-expected sales. Nonetheless, we are heavily focused on integrating that business with our bedding business and generating operating improvement. Our upholstery business is already relatively asset-light and less capital intensive compared to our bedding business and its vertical manufacturing platform, and it's been consistently profitable. The consolidations of our U.S. upholstery distribution and window treatment manufacturing into a shared management model, along with the reduction of our facility footprint in China, should enhance further our upholstery profitability in the near term and position it to accelerate when top line conditions cycle favorably.

In closing, I want to emphasize that we are now in the final innings, so to speak, of a comprehensive multiphase transformation of our business. We will finish the fiscal year with a rationalized and fully optimized global platform for both bedding and upholstery products that we believe will create a significant long-term value for shareholders. Our key investment highlights are included on Page 21 for a supplemental slide deck.

To be clear, we are committed to alter strategies and make changes within our business to adjust to market demand. Our highest priorities in the near term remain returning Culp to overall profitability in the current cycle and effectively managing our debt levels, and I can assure you that we will not take our eye off of those goals.

With that, I'll now turn the call over to Ken, who will review the financial results for the quarter, and then I'll review our outlook for the remainder of fiscal '26.

Thanks, Iv. Here are the financial highlights for the second quarter. Consolidated net sales for the second quarter were $53.2 million, a sequential improvement from the first quarter sales of $50.7 million, which included an extra week and a decline from prior year period sales of $55.7 million. The year-over-year decline was driven primarily by the continued industry-wide softness and the tariff-related uncertainty that you have discussed. Consolidated gross profit for the quarter was $5.8 million or 10.9% of sales compared to the prior year period gross profit of $6 million or 10.8% of sales. Excluding restructuring-related expenses, adjusted consolidated gross profit for the quarter was $6.7 million or 12.6% of sales compared to the prior year period adjusted gross profit of $6.8 million or 12.1% of sales. This gross profit improvement was driven primarily by cost and efficiency gains from the restructuring of our bedding segment completed last year.

SG&A expense for the quarter was $8.7 million, an approximate 7% improvement compared with SG&A expense for the prior year period, reflecting cost savings from our restructuring initiatives. Loss from operations was $3.5 million for the quarter compared to the prior year period loss of operations of $5.4 million. Excluding restructuring and related expenses, adjusted operating loss for the quarter was $2 million compared to the prior year period adjusted operating loss of $2.6 million. EBITDA adjusted for the impacts of restructuring-related expenses, stock-based compensation and other noncash charges was a negative $1 million for the second quarter, an improvement on lower sales compared to negative $1.1 million in the prior year period.

Our year-over-year operating performance improvement for the second quarter benefited primarily from continued momentum in our bedding segment driven by the positive impacts of last year's restructuring. Operating performance also benefited from the continued profitability in the upholstery fabric segment despite the low revenue industry environment and tariff-related challenges Iv spoke to. The effective income tax rate for the second quarter was a negative 5.1% compared to 0.9% for the same period a year ago and continues to be impacted by the company's mix of earnings between our U.S. and foreign subsidiaries. Our income tax payments totaled $1.7 million for the first 6 months of this fiscal year. Importantly, as of the end of last fiscal year, we had $88.1 million in U.S. federal net operating loss carryforwards with related future income tax benefits of $18.5 million.

Before we take a look at our operating segments, once again, please note that following the integration of our 2 former divisions, we now refer to our CHF mattress fabrics business as our bedding segment and our CUF upholstery fabrics business as our [indiscernible] segment. Moreover, as part of that integration, we now manage and assessed SG&A expenses on a consolidated basis. As a result, we no longer report operating performance at the segment level just down to the gross profit level.

For the bedding segment, sales for the second quarter were $30.8 million, up approximately 10% sequentially from the first quarter and up over 2% compared to the prior year period. As Iv spoke to, sales continued to be pressured by low industry demand and challenges from consumer spending and housing market trends, but we were able to continue our trend of winning share in key targeted areas. The restructured cost platform in our bedding segment drove a gross profit of $3.1 million or 10.1% of sales, a 200 basis point improvement from the prior year period. We were pleased to see the profitability momentum in this segment continued during the quarter.

For the upholstery fabric segment, sales for the second quarter were $22.4 million, sequentially flat with the first quarter and down approximately 12% compared to the prior year period. This year-over-year decline stemmed from continued softness in the home furnishings market and corresponding weakness in the residential upholstery channel as well as additional pressure on demand from tariffs. Gross profit in the upholstery segment was $3.6 million, or 16.1% of sales, down from $4.3 million or 16.9% of sales in the prior year period, and driven largely by lower comparable sales.

Now I'll turn to the balance sheet. We reported $10.7 million in total cash and $18.3 million in outstanding debt as of the end of the second quarter with a net debt position of $7.6 million as compared to a net debt position of $7.1 million at the end of the first quarter. The outstanding debt was primarily incurred to fund worldwide working capital and restructuring activities, but also includes approximately $3 million incurred voluntarily to take advantage of borrowing opportunities at current preferred rates in China. We continue to believe this decision was prudent given today's challenging economic environment and uncertain trade relations. Further, we were able to invest these proceeds into a high-yield savings account in China at a rate materially higher than the interest rate paid on the debt. This strategy more than covers our interest cost for the debt while at the same time giving us significant flexibility in managing our worldwide cash position.

Cash flow from operations was a negative $1.2 million for the first 6 months of this fiscal year and primarily driven by operating losses, which compares favorably to negative $2.6 million in the prior year period. Adjusted for capital expenditures, proceeds from the sale of PP&E and other items, free cash flow was just about breakeven at $10,000 and down favorably from a negative $3.4 million in the prior year period. Generating free cash flow and reducing our debt continue to be among our highest priorities. Capital expenditures were only $218,000 for the year-to-date period, down from $1.6 million in the prior year period with lower spending driven by our strategic efforts to closely manage capital and focus on maintenance projects and initiatives with a quick payback. We expect capital spending for fiscal 2026 to be lower than fiscal 2025 levels as we continue to spend only as necessary.

Our liquidity as of the end of the second quarter was approximately $28.1 million and consisted of $10.7 million in cash and $17.4 million in borrowing availability under our domestic credit facility. As a reminder of liquidity purposes, the net book value for our owned manufacturing campus in North Carolina as of the end of the quarter was around $12 million and has an estimated market value of $40 million to $45 million. Our liquidity highlights are briefly summarized on Page 7 of the supplemental deck.

With that, I'll turn the call back over to Iv to discuss the general outlook for the third quarter, and then we will take your questions.

Thank you, Ken. Due to the market and macroeconomic uncertainty and the fluid tariff landscape we've talked about today, we are only providing limited forward guidance at this time. Despite what we anticipate to remain a challenging demand environment for home furnishings in the near term and pressure sales in both of our businesses, we currently expect steady consolidated sales performance in the third quarter and throughout the remainder of fiscal '26, with higher expectations for the bedding segment. Moreover, we expect the cost and efficiency benefits flowing from the transformation of our betting and upholstery platforms along with recent pricing actions to drive improving gross profit and lower SG&A, resulting in a continued significant improvement in operating loss and near breakeven to positive adjusted EBITDA for the third quarter.

As Ken spoke to, while we intend to continue utilizing borrowings that's necessary under our credit facilities during fiscal '26 to fund working capital needs as well as integration and efficiency initiatives, we will continue to aggressively manage liquidity and capital expenditures to prioritize free cash flow. On that point, we are owed approximately $4.7 million in cash in the fourth quarter on the sale of our Canada facility, and we anticipate that those funds may be received earlier, perhaps in the third quarter.

Thank you again for your time listening today, and we'll now take some questions.

[Operator Instructions] Our first question comes from Doug Lane with Water Tower Research. Again, that's Doug Lane with Water Tower Research.

Operator, I'm wondering if he's dialed in on the other line. Can you...

I'm sorry, can you hear me now?

Yes, sir. We got you, Doug.

Yes. I'm encouraged to see the free cash flow, breakeven and the cash from operations, the cash use from operations being cut in half. So all the work you're doing is starting to come through. And I'm just trying to get a feel for where we are in the realization of all these cost savings. I know the implementation there, you said you're in the late innings. But of that $20 million on Slide 11, about how much of that do you think is already being realized in the P&L? And how much is still to come?

Yes. Doug, thank you for that question. It's a lot. I tried to regurgitate all the stuff we've done over the last couple of fiscal years, and it's really -- when you think about it and write it down and script it the way we have, it's a considerable amount of effort. So it's coming in different phases. We had -- obviously, the big work we did with our Canada facility is really helping us this year. That's in -- the additional savings that we did and the price adjustments to deal with baseline tariffs, that all started to impact us maybe in late Q2 and then the new things we've announced or the plans with consolidating warehouses and moving our read window production and further adjustments are really a late Q3 impact.

So by the time we get to Q4, we would expect to have the majority of everything done, and we would have it's clean of pictures we could have from a cost standpoint. Now unfortunately, what that's doing is just we're continuing to re-optimize the platform to deal with very challenged conditions. So we're not banking on any kind of improvement. We hope and have feelings that it could start to come, but we're just doing all we can do to restructure the platform to that Q4 quarter is clean quarter and all gears turn towards being profitable in this cycle. And then when the business turns, we don't have to have capacity to really start showing more fruitful results on top of that. So I hope that helps.

No, that does help. It sounds like heading into fiscal '27, you'll have a pretty clean run rate here. And then it's just a question of the benefit of the next up cycle, whenever that happens. It's going to happen, we just don't know when.

Yes. And I guess I would say I just 100%, yes. We had a very -- fiscal '27 will be a very clean position heading into the market. What we don't know is if it continues to lag or for some reason, it were to get worse. We don't believe that's the case. But if it did, we'd take more action. I just think I want investors to be clear that we are positioning ourselves to do whatever it takes to adjust to the demand cycle. And unfortunately, we've had things that have been lagging more than we expected, so we make more changes. But optimistically, we're clean in '27 and maybe even in the fourth quarter and hope to see some demand that is moving the right way, at least a little bit.

Is there any way -- have you done any math on what the incremental margin would be on the next point of sales growth. So as sales start to move up, what would be the contribution margin from that incremental point of sales?

Yes, Doug, this is Ken. And we've said this before. I mean, we've got so much build up leverage in our ability to capitalize on any increase in sales. And as Iv said, I mean, we've got all the cost reductions to be implemented in the fourth quarter. And so we're going to be able to gain a lot of those sales dollars as far as the contribution margin is concerned. I mean we're set on SG&A. We've got fixed costs in place. So we're going to be able to keep a significant amount of those incremental dollars as we grow the business based on the platform we have today.

Got it. That makes sense. And I know you mentioned new tariffs in Turkey and Haiti, can you give us a feel for when were those implemented? And when do you think you'll be able to benefit from whatever mitigation efforts you put in place for them?

Certainly, I think I'm trying so hard to have Doug, you, and other investors understand tariffs have been a real -- I mean it's just been a real pit to the business. I mean it's been so disruptive the way they've come in. But optimistically, we feel like we can handle it. We've gotten better at this. And we believe because of our platform, it's actually an advantage. So it's like any kind of -- when you think about strength and weaknesses, they can sometimes be both. And I think tariffs have been a challenge on the industry and our impact in sales, but I do think for us, they can become a strength because we have ways to navigate it.

So to answer your question directly, what's happening -- what happened in Turkey and Haiti. We had a baseline of tariffs. And then Turkey, for example, went from a 10% to 15%. It just got changed on the reciprocal part of the Indian of liberation Day. So we had to deal with that extra 5% that wasn't planned. And that comes in immediately. We are built on that day 1, and it could take us 60 days with a customer or with a strategy to adjust that. So that's a lag for us.

Haiti, we had 8 years of tariff-free treatment from regulation and Haiti. And all of a sudden, that -- because of government, I'll call it, dysfunction or delay there's been a lag on renewing that agreement. We think it will be renewed. But in the short term, we've gone from 0 tariff to 15% overnight. So we have to adjust that. And we will adjust it and believe it's -- we can easily adjust it, but not as quick as the pain. So that's why it's at least a 60-day lag for us with a change in tariff to them. Change the strategy or pass that price. And that's what we've been working on really for the last ever since the announcement of tariffs, we've been working on that, and we do feel close to the end, but it's knock on what tomorrow might bring.

And the tariff situation on a week-to-week basis, is it still somewhat volatile? Or do you think it settles a little bit?

I believe, and I want to believe it's starting to settle. I think that we have seen a slight reduction in some Asian tariffs. So there are things that are starting to neutralize. And again, we've become very proficient I don't wish we were proficient, but we've become very proficient on managing tariff change, and we have ways to mitigate it. So nothing -- not scared or worried about that. It's just the timing sometimes that it takes to get it fixed.

Well, clearly, you've been working hard in a very difficult environment. So we'll stay tuned.

This concludes our question-and-answer session. I would like to turn the conference back over to Iv Culp for any closing remarks.

Thank you, operator. And again, thank you to everyone for your participation and your interest in Culp. And we certainly look forward to updating you on our progress next quarter. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to the Culp First Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Dru Anderson. Please go ahead.

Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the first quarter of fiscal 2026. As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. .

Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q. 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 and financial results.

You are cautioned not to place undue reliance on forward-looking statements made today, and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is included in the tables to the press release included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at culp.com. The Investor Relations presentation is also available on the company's website as part of the webcast of today's call.

I will now turn the call over to Iv Culp, President and Chief Executive Officer of Culp. Please go ahead.

Thank you, Dru, and good morning, and thank you to everyone for joining us today and for your interest in our company. With me on the call is Ken Bowling, our Chief Financial Officer. Tommy Bruno and Mary Beth Hunsberger are not on the call today as they are fully engaged in their respective roles as Chief Commercial Officer and Chief Operations Officer; both of which are going exceedingly well.

I will begin the call with some detailed comments. And as mentioned in the introduction, we have posted a slide presentation to our website that provides some information that is supplemental to what we will speak about today. That slide presentation is simply entitled First Quarter FY '26 supplemental information. Ken will then review the financial results for the quarter. And after that, I will briefly review our business outlook for the remainder of fiscal '26, and we will take some questions.

Looking at our performance for the first quarter. The key takeaway from our perspective is that we were able to build on the momentum we had to close out last fiscal year and realize improvement in our operating results despite not only the depressed demand across the home furnishings industry that we're all too familiar with at this point, but also the continuing challenges from tariffs and the uncertain global trade environment. Even with these 2 significant headwinds, we were able to achieve substantial double-digit improvement in both the gross profit and operating lines during the quarter, particularly due to our streamlined bedding segment. An improvement of that nature in this market in macroeconomic environment is a testament to the effective work of the Culp team over the last year.

Throughout fiscal '25 and into fis '26, we made tremendous strides to successfully transform our Culp Home Fashions mattress fabrics business, which follow the integration of our 2 former divisions, we now call our Bedding segment. I'm impressed with how our team was able to execute on the comprehensive restructuring effort, including the closure and pivoting of production at a long-term manufacturing facility in Canada to our owned U.S. facility and some external strategic partners while also making sure that our customer service levels remained the highest priority.

I think it's important to emphasize that we're certainly not yet where we want to be from [indiscernible] a profitability standpoint and where we believe we ultimately will be. But our improving trend tells us that we're doing a good job of controlling and influencing the things we can in an unmistakably tough industry environment. The actions and gross profit impacts of our fiscal '25 North American betting consolidation and restructuring projects are summarized on Pages 8 and 9 of the supplemental presentation that is now available on our website.

Before we take a closer look at our results for the quarter, I'd like to take a moment to focus on some interesting data and market commentary out there regarding activity in the betting industry published by the International Sleep Products Association and others which we've included on Page 13 and 14 of the supplemental presentation. While the industry is obviously still in a down cycle, this information effectively shows how long the industry has been running below historic unit levels in the current cycle and correspondingly, how much [indiscernible] may be building to support an industry recovery in the future. Some analysts who closely follow the market appear to be of the mind, the demand for mattresses is finally close to bottoming out and the demand may be set to increase due to cyclical factors such as product replacement cadence and growth in [indiscernible] information.

To some degree, this information and commentary align with our thoughts on the general direction of the mattress market, given the low activity levels we've seen over the last several years. However, as I've already mentioned, we are making the changes and updates to our business the necessary to return Culp to profitability in this current demand environment. We will be pleased when the market recovers, but we are not count. We are just working to get ourselves even better positioned to strongly capitalize on any recovery. These data also indicates to us that we've been able to win market share and gain a larger piece of the available mattress business by leveraging our competitive advantages and scale, product development and innovation and the ability to use our global platform to value engineer products and offer better supply chain solutions to customers.

With our Canada restructuring mostly behind us, we have competitive and innovative offerings in knits, wovens, cut and zone covers and some bedding accessory products. Despite the historically low industry volume and ongoing tariff fluidity, our Bedding segment was able to grow sales sequentially versus last quarter and comp sales year-over-year. Moreover enable, with our newly streamlined form in place, we achieved double-digit gross margins in the bedding quarter compared to negative gross profit in the prior year period. We also expect that our bedding and margins will continue to improve, with central sales growth and normalize at a much higher range and particularly once the price increases we've initiated to mitigate [indiscernible] and also rightsize margins in certain areas become effective for the majority of the second quarter.

Turning to Culp upholstery fabrics, which we will now just refer to as our upholstery segment, soft market conditions across the home furnacing industry driven by muted cosuspending and housing market trends continued to impact that part of our business, especially on the residential upholstery side. The global trade and tariff situation continue to add more complexity to this business during the quarter, due to the primarily Asian supply concentration that the residential upholstery industry has gravitated to in the last few decades. The historically high and temporary tariffs on China produced imports last spring which again reached over 150% basically shut down our residential push orders and shipments for over a month.

Rather than absorb these cost increases for which we had no realistic time to plan, we simply did not ship any containers from China to the U.S.A. and waited for tariff rates to reduce to a commercially reasonable level. The delayed effects of that [indiscernible] activity, along with the general market uneasiness and hesitancy that all these tariff changes and negotiations have created significantly dampened sales in our first quarter of fiscal '26.

We do have the ability company-wide to navigate tariff fluidity and a snapshot of our global footprint is shown a map on Page 15 of the supplemental presentation. It has long been a hallmark of coal to have options in our supply chain, and that advantage was definitely supportive to our bedding performance in the quarter. We have tremendous flexibility in our supply chain to service betting customers strategically and from multiple locations. Likewise, our global platform has to strengthen upholstery as well, but the pace and ever-changing tariff rates in April and May were extremely challenging to the industry with time to react, we can manage upholstery tariffs effectively and with strength, and we will continue to keep our ear to the ground and balance our production to best serve our customers.

Sales in our Upholstery segment were also challenged during the quarter by an uneven year-over-year comparison caused by a large residential fabric customers decision to focus most of its purchasing in the front half of last year, including a notable onetime buying uptick in last year's first quarter. We think this issue is now pretty much behind us as we expect a more even purchasing cadence from that customer this year and for sales comparisons to smooth out in the second quarter and the rest of fiscal '26.

Despite the challenges mentioned in residential upholstery, demand in the higher-margin channels of our upholstery segment, hospitality and commercial remained relatively solid and those products comprised almost 40% of our total upholstery segment sales for the quarter. These channels are less directly impacted by discretionary consumer spending and housing market trends, given their focus on upholstery fabric for furniture window treatments and related applications in hotel, theater, office, retail and our commercial settings. Moreover, the supply chains in these channels are less Asia-centric although we are seeing some of our customers' projects and building plans impacted by the current tariff environment. As a final bigger picture note on tariffs, they've obviously been a disruption to our overall business whether it's actual tariff rates on our imported items or delays on customer projects.

Again, when we can manage through changes with appropriate warning and time, we believe the disruption can actually become a competitive advantage for us. We've also made solid progress on an initiative we announced last quarter, the integration of our 2 former divisions into a unified Culp branded business. We have internally named this activity project Blaze, and our work should provide a significant boost to the operating profile of our business overall and also help us better navigate the difficult residential upholstery demand and tariff environments.

This project supports the 2 industry sales channels we target, but also allows us to move to a shared cost and talent model under the leadership of Tommy Bruno as Chief Commercial Officer; and Mary Beth Hunsberger, as Chief Operations Officer, we are becoming more streamlined and sharing best practices across products, resources, processes, technology and supply chains. Summarized scope of this work by major project is contained on Pages 10 and 11, 10 and 11 of our supplemental deck.

The transition of upholstery operations in our lease facility in Burlington, North Carolina, to a shared management model within our Stokesdale, North Carolina location is underway and we expect the anticipated cost and efficiency benefits of that move to begin to manifest in our second quarter results, with the majority of the benefits supporting the second half of this fiscal year. Additionally, we recently announced internally a similar transition in upholstery segment's Read Window business via which we are consolidating and shuttering operations at a lease facility in Tennessee into a more cost-effective shared management platform within our own Stokesdale location, along with outsourcing to some valued domestic partners.

This move should begin to positively affect our results in the third quarter as we reduced lease and manufacturing costs accordingly. Once fully implemented, these integration actions, together with the price increases I previously mentioned, that are going into effect our Bedding segment beginning in the second quarter to mitigate tariffs and rational margins in some areas are expected to generate at least $6 million in annualized cost and efficiency enhancements which are additive to the $10 million to $11 million of annualized benefits expected from last year's restructuring initiatives.

Once again, the schedule and impacts of all these actions are summarized on the table on Slide 11. And in our supplemental deck. The Culp team has clearly not been sitting on its hands and waiting for the market turnaround. We are executing our strategies to become a leaner and more unified company that is prepared to thrive in a variety of market conditions, and we are very well poised for an eventual and general market recovery. We have best-in-class innovative products and a strong U.S. manufacturing base, with well-established nearshore and offshore platforms that together give us what we believe is a growing competitive advantage in the market, particularly as customers continue to look for supply chain alternatives and geographic diversity in the current trade and tariff landscape.

And as I mentioned in our press release, our highest priorities at Culp are to get back to sustained operating profitability and reduced debt regardless of any improvement in market conditions. And we believe that we are well on our way to doing so.

I'm encouraged by our progress, the talent we have leading our 2 segments and the opportunities I believe we have to grow revenue and increase our operating performance.

I'll now turn it over to Ken to provide more detail on our first quarter financial performance.

Thanks, Iv. Here are the financial highlights for the first quarter. Net sales for the first quarter, which included an extra week were $50.7 million compared to net sales in the prior year period of $56.5 million. The decline was driven primarily by the continued market softness and the tariff-driven pause in residential upholstery shipments that Iv discussed earlier. Gross profit for the quarter was $7.2 million or 14.3% of sales compared to prior year period gross profit of $5.1 million or 9% of sales. This year-over-year improvement of 530 basis points was driven primarily by the cost and efficiency benefits flowing from the restructuring initiatives in the Bedding segment completed last year.

Operating income for the quarter was $1.6 million compared with a loss of operations of $6.9 million for the prior year period. Adjusting for restructuring credits and expenses, including a net credit of approximately $3.5 million, driven by a gain on the sale of our Canadian manufacturing facility, non-GAAP operating loss for the quarter was $1.9 million compared to prior year period's non-GAAP operating loss of $4.1 million. Net loss for the fourth quarter was $231,000 or $0.02 per diluted share compared with a net loss of $7.3 million or $0.58 per diluted share for the prior year period. EBITDA adjusted for the impacts of restructuring and related credits and expenses was a negative $1.1 million for the first quarter compared to a negative $2.7 million in the prior year period. Our overall operating performance for the first quarter as compared to the prior year period benefited primarily from continued momentum in our Bedding segment driven by the positive impact of last year's restructuring initiatives in that area.

Operating performance also benefited from the continued profitability in our upholstery segment despite the low revenue industry environment and tariff-related challenges if spoke to. The effective income tax rate for the first quarter of this fiscal year was 120.3% compared with a negative 3.4% for the same period a year ago, and was impacted by the gain on the sale of our Canadian manufacturing facility and by the company's mix of earnings between our U.S. and foreign subsidiaries. Our cash income tax payments totaled $46,000 for the quarter. Importantly, as of April 27, 2025, we had $88.1 million in U.S. federal net operating loss carryforwards with related future income tax benefits of $18.5 million.

Before we take a look at our reporting segments, we now refer to our mattress fabric business as our Bedding segment and our upholstery fabrics business as our upholstery segment. Moreover, as part of that integration, we now manage and assess SG&A expenses on a consolidated basis. As a result, we will no longer report operating performance at the segment level just down to the gross profit level.

The segment breakdown is covered in more detail on Slides 4 through 6 in our investor presentation. For the Bedding segment, sales for the first quarter were $28 million, generally flat compared with last year's first quarter sales. As I spoke to, sales continued to be pressured by low industry demand and challenges from consumer spending and housing market trends, but we're able to continue our trend of winning share in key targeted areas. The newly restructured cost platform in our Bedding segment drove gross profit to $2.9 million or 10.5% of sales, a significant improvement from the prior year period's negative $326,000 or negative 1.2% of sales. We were pleased to see the profitability momentum in this segment continued during the quarter. For the Upholstery segment, sales in the first quarter were $22.6 million, down approximately 20% from the sales in the prior year period of $28.5 million.

This decline in sales was driven primarily by the continued softness in the home furnishings in corresponding weakness in the residential upholstery channel. Inogen the lagging effects of the pause in revenue order flow in our fourth quarter last year, stemming from historically high tariffs on China imports impacted first quarter sales and the uniquely heavier purchasing by a large residential fabric customer in last year's first quarter, unevenly impacted our year-over-year sales comparison. As we mentioned, we expect this timing driven disparity to smooth out begin second quarter given our expectations for this commercial purchasing activity in fiscal '26.

Gross profit in the upholstery segment was $4.3 million or 18.9% of sales down from $5 million or 19.4% of sales in the prior year period and driven by comparable sales or lower comparable sales.

Now I'll turn to the balance sheet. We reported $11.1 million in total cash and $18.1 million outstanding debt as of the end of the first quarter, which includes $2.8 million attributable to supplier financing maintaining an equivalent $7.1 million net debt position as compared to the end of fiscal 2025. The outstanding debt was primarily driven by worldwide working capital needs but also includes approximately $3 million in debt we incurred voluntarily to take advantage of availability and borrowing opportunities at current preferred rates in China. We believe this decision was prudent given today's challenging economic environment and uncertain trade relations. Further, we were able to invest these proceeds into a high-yield savings account in China at a rate materially higher than the interest rate paid on the debt.

This strategy more than covers our interest costs for the debt while at the same time giving us significant flexibility in managing our worldwide cash position.

Our liquidity breakdown and other supporting information are covered on Slide 7 in our investor presentation. Cash flow from operations was a negative $695,000 primarily driven by operating losses, partially offset by favorable working capital. Adjusted for capital expenditures, proceeds on the sale of PP&E and other items, free cash was $311,000 positive for the first quarter generating free cash flow and reducing our debt continues to be among our highest priorities and key focus points throughout all areas of our company. Capital expenditures were $179,000 for the first quarter compared with $501,000 for the prior year period. This decrease stems from our strategic efforts to closely manage capital and focus on integration and other initiatives targeting operating efficiency. We expect capital spending for fiscal 2026 to generally track fiscal 2025 levels as we continue to spend only as necessary.

Our liquidity at the end of the first quarter was $28.7 million, consisting $1.1 million in cash and $17.6 million in borrowing availability under our domestic credit facility, which, as we mentioned last quarter, was recently extended for 3 years. Another important call out with regards to liquidity options concerns our Stokesdale, North Carolina manufacturing , which is owned. Our net book value for the land, building and building improvements as of August 3, 2025 was $12.1 million with an estimated market value of $40 million to $45 million.

Now I'll turn the call over to Iv to discuss our updated outlook for the fiscal 2026 and then we'll take some questions.

Thank you, Ken. Due to the market and macroeconomic uncertainty in the fluid global [indiscernible] and tariff environment that we've talked about today, we are providing limited forward guidance at this time. Despite what we anticipate to remain in a low demand environment for home furnishings near term that pressure sales in both of our business, we currently expect sequential overall sales growth in the second quarter and through fiscal '26. We believe we are gaining market share with key customers that support this improvement. Moreover, we expect the cost and efficiency benefits of our multiple restructuring and division integration initiatives, along with the price increases I mentioned, to drive adjusted EBITDA results in a range from near breakeven to slightly positive for the second quarter of fiscal '26.

We also anticipate our operating performance and profitability to improve sequentially throughout the remainder of fiscal '26. As Ken spoke to, while we intend to continue to utilize borrowings as necessary under our credit facilities during fiscal '26, we will continue to aggressively manage liquidity and capital expenditures and prioritize free cash flow. And finally, please just note that our forward [indiscernible] expectations are based on information available as of today and reflect certain assumptions regarding our business and overall industry trends. the projected impact of our restructuring and initiatives and ongoing market headwinds. Our expectations also assume no further meaningful impact tariffs and trade negotiations. Thank you again. And we'll now take some questions.

[Operator Instructions] The first question comes from Doug Lane with Water Tower Research.

It's obviously been front and center in the news, particularly in your industry. Are you at the point now where all the known information on tariffs is out there and your initiatives, both from the cost side and the pricing side have captured that or is there still more actions to be taken based on the current news?

Doug, this is Iv. Thank you for joining today. I appreciate the question. Yes, we did try to touch on tariffs a lot in our script. It has been major talking port in the industry, as you referenced. I actually think that where we are today, we can, in some ways, take tariffs off of our immediate worry. It's certainly been very disruptive. And it's not so much the level of tariffs that have been applied as it is the variability and the changes to the tariffs. It's just been hard to plan and everyone's been dealing with some uncertainty. The only real major issue we had was when tariffs were up over 150% in China, and we just had to stop shipping, which we talked about was impactful to first quarter here. But we have options that's long been our strategy.

We've adjusted our pricing. We have multiple manufacturing locations we can pivot to best support our customers as we need to. And of course, I'm only speaking to what I know today, but to your direct question, as it is now, we've immersed the tariffs, and we were able to perform and grow our margins under this current environment.

No, that's good news. You mentioned part of your initiatives of pricing. What is the elasticity these days? Are you able to put the pricing through? Or is it too early to tell?

Well, Doug, we're certainly in competitive businesses, and there are certainly price levels that the markets will bear. But we have to be profitable, we have to turn our business to profitability in this environment. We have options. Again, our supply chain allows us to be competitive across a myriad of different platforms. Prices are never easy to pass, but our customers understand the competitive landscape. And we're being fair but aggressive to get prices in to cover tariffs and to also rightsize margins. And we just have to do that with some discipline.

No. And the margin story is looking really good that chart on Slide 9 showing the improvement in gross profits. Maybe could you give us a feel you have on Slide 11, [indiscernible] initiatives you've taken. And the total is $18 million. How far along are we in realizing that $18 million? And when do you think we'll fully realize that $18 million annual run rate?

Well, I can let Ken touch on some of those, too. But we tried to schedule out as best we can. I know it's maybe -- it's good to talk about it in more details. The $10 million to $11 million was really a fiscal '25 initiative. So that primarily revolved around us closing our Canadian operations and relocating that business to the U.S. into some strategic outsourced partners. That project is done. It should be fully implemented for fiscal '26. We should have an impact across the full year. So that's great. We did -- we got some of that in '25, but it's really a '26 impact. The other initiatives we talked about are pretty much back half impact. We'll get those in Q3 and Q4, although some of the price increase that we speak to is a Q2 initiative.

So I think it just -- a lot of it's in for '26 and it should be in for the back half.

Okay. That's helpful. Looking also at some of the market commentary that you referenced here. And I'm new to the company here, so I just maybe need a little bit of background on how would you compare this dip here post COVID, if you will, versus, say, the Great Recession back in the 2000s.

Yes. If you spend a long time in the textile industry, you get to talk about lots of ups and downs. It's one of the lessons and curses of my role in life. But I would say we had always been used to variability in the market, that's abnormal. We have seen down cycles and up cycles. This current period for whatever reason seems to be protracted. It's not unusual to see downtimes, but the tip will come back pretty quick. Ever since 2020, it's just been a protracted down cycle in units, whether that's some pull forward compounded by people buying early when they're staying at home, then compounded by interest rates and now deferred purchases, whatever the reasons are, housing being slow, we just have seen a low cycle.

The good news that we see is that we are in segments that while they're not necessities, people need and want to buy furniture, it's part of the lifestyle. So we know that it's going to come back, and we're confident that it will. What we just aren't willing to do is wait for it to come back. We're going to make our adjustments, get ourselves profitable in the current environment. And then when it does come back, we're just better, prepare and leaner to capitalize even stronger on the recovery. So we know it's coming, Doug, but we just -- we're going to make moves, and we're not -- we can't wait for it.

No, you can't forecast when this turn. I mean you have the commentary from the research that you cited showing significant pent-up demand, people calling a turn in 2026, which use may or may not happen. But what does that mean for Culp? Are you able to satisfy turning demand with your existing cost structure? Or will you have to begin to spend and chase the demand when it does come, assuming it does come in the next year or so?

Yes, a really good question. And what we have been very careful. But when we stress this as we've done these restructuring initiatives, we have made changes to our platform very strategically, but we have not given up capacity. Now it doesn't mean it's all -- we don't have necessarily multiple plants duplicated in similar geographies. But across the globe, we have ways to grow capacity almost unlimited with any type of planning or foresight, we can grow capacity. So we have not limited ourselves and the real benefit to us is we think that there's a lot of upside leverage on the current base.

So if we can increase the denominator, put some more fuel on the fire with revenue, we have a lot of cost leverage. We don't need to add back and margins can really go up. We're really encouraged as market grows. But we're also encouraged just as it is. We're going to grow the margins now. But when the fuel comes on, there's no limit for us, we got to plan it well, and we got to strategize it well, but that's where the cost leverage really pays off.

That sounds encouraging for sure. And again, new to the story, I'm fascinated by some of these assets that you have here, Ken. You mentioned a market value of real estate of $40 million to $45 million and you've got federal NOLs of $88 million. How much of that real estate is on the books and how much of that is really not on the books? And then how are the NOL is going to play out going forward?

Yes, Doug, thanks. Good question. So regarding the real estate, I mean, we put in there, our net book value for that asset is around $12 million. So we got about $30-some million of excess room there. And again, the $40 million to $45 million is our estimate for the value, but we've had some similar sales around the area. So we feel good about that. So that property is stellar. It's a magnificent shape, and so we feel very good about that estimate. As far as the taxes, I mean, that's -- we continue to evaluate that each year. It's made up of obviously continued losses in the U.S. And so that will probably grow over time, but will grow over time.

And so it's just something that -- as of today, it's a benefit. Now as far as future use, when the time comes when we start being profitable in the U.S., that's when we'll come into play. But that's an untapped value there that will -- that's there available once we become profitable. And so it's a tremendous benefit for us going forward.

This concludes our question-and-answer session. I would like to turn the conference back over to Iv Culp for any closing remarks.

Thank you, Drew. And again, thank you for your participation and your interest in Culp, and we certainly look forward to updating everyone on our products next quarter. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Culp, Inc. Fourth Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Dryou Anderson. Please go ahead.

Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the fourth quarter and fiscal 2025. As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact.

The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q.

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 and financial results. You are cautioned not to place undue reliance on forward-looking statements made today, and each such statement speaks only as of today. We undertake no obligation to update or revise forward-looking statements.

In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included in the tables to the press release included as an exhibit to the company's 8-K filed yesterday and also posted on the company's website at culp.com. A slide presentation on the company's restructuring plan and related topics is also available on the company's website as part of the webcast of today's call.

I will now turn the call over to Iv Culp, President and Chief Executive Officer of Call. Please go ahead.

Thank you, Dru, and good morning, and thank you to everyone for joining us today. and for your interest in our company. I would like to welcome you to the quarterly conference call with analysts and investors. With me on the call today are Ken Bowling, Chief Financial Officer; Mary Beth Hunsberger, who is now our Chief Operating Officer; and Tommy Bruno, now our Chief Commercial Officer.

I'll begin the call with some detailed comments. And as mentioned in the introduction, we have posted a slide presentation to our Investor Relations website that covers information related to our restructuring plans and actions, along with some associated topics, which I'll speak about in detail today. That slide presentation is entitled positioning for the future. Ken will then review the financial results for the quarter and the full year. After that, I'll briefly review our business outlook as we turn the page to fiscal 2026, and we will take some questions.

Fiscal 2025 was a truly transformative year for Culp. Marks that substantial efforts across the entire company to streamline our cost structure, maximize efficiency and facilitate long-term growth. Despite a challenging revenue environment across the industry and additional complexities from the ongoing tariff and global trade negotiations, we successfully implemented numerous measures that we expect to enhance our operating profile and position us to improve operating performance across a wide spectrum of demand scenarios.

In addition, we believe that we are now even better positioned from a competitive standpoint to take advantage of any improvement in market conditions. I'm proud of our team for executing on what were a variety of unique initiatives during the year. In doing so, both according to our expected time lines and while we remain committed to doing what we do best, delivering the high level of service and on-trend products for which the Culp brand is known throughout the market. And also ensuring that our global footprint continues to offer customers the most flexible supply chain in the industry.

The recent completion of the restructuring plan we announced in May of 2024 is an excellent example of our team's execution on consequential and accretive activities during fiscal '25. That plan involves a lot of heavy lifting to significantly reduce the fixed cost base in our mattress fabrics business, including facility closures and consolidations to establish a strengthened U.S.A. manufacturing platform, along with the transition of a major product line, our damask weaving fabrics to an asset-light strategic sourcing model, mostly with a long-term partner in Turkey.

Corresponding details and outcomes from this initiative are covered on Pages 3 through 5 of our posted slide presentation. We essentially transform the entire cost structure and manufacturing base of our mattress fabrics business and now have what we believe is a solid operating foundation for that business. To better navigate even the depressed demand environment, we continue to see across the mattress industry.

The recent sale of our former facility in Canada in April, provided a nice exclamation point to our completion of the plan, essentially 1 year from the date we announced it. Through this restructuring plan, we also reduced fixed costs in our upholstery fabrics business by transitioning our finishing operations in China to an outsourced model. With the uncertainty around global supply chains, tariff and cost impacts, we believe it is wise to deleverage fixed costs and lean more on the expertise of our long-term partners to continue our wide array of product offerings in upholstery fabrics.

We continue to realize $10 million to $11 million in consolidated annualized savings through this restructuring plan, and we are pleased to see those benefits and related efficiency gains begin to take shape and impact operating performance in our mattress fabrics business, including steady progress throughout the year despite continued pressure on industry sales. The lower fixed costs and the resulting operating enhancements in our mattress fabrics business, along with lower inventory markdowns, helped drive significant year-over-year improvement in our overall results for the quarter.

Looking at our overall sales for the fourth quarter, while they were generally in line with our sales in the prior year fourth quarter, we are actually encouraged by that outcome given the well-publicized low demand environment and related unit volume challenges pressuring sales across the industry. Notably, we achieved a year-over-year sales increase in our mattress fabrics business during the quarter despite the industry consensus projecting a decline in overall mattress sales, with the report issued by the International Sleep Products Association, projecting a decline in units of around 11% or more for the March calendar quarter.

We believe this provides some important context for our growth in mattress fabric sales during the fourth quarter and supports our belief that we are winning market share. particularly in key segments we are targeting in mattress fabrics and especially cut and stone covers through our strong relationships with major customers.

Our mattress fabric sales growth is also a testament to our product development and design team's ability to stay closely aligned with current market trends and consistently deliver products that are well received by customers. In our revamped manufacturing base for mattress fabrics and covers, again featuring a strong USA platform, complemented by production and sourcing capabilities in Haiti, located on the Dominican Republic border as well as Turkey, Vietnam and China, provide our customers with valuable optionality and mitigation opportunities for global tariffs and trade risks going forward.

In our upholstery fabrics business, demand trends in the furniture market segment continue to be historically low, and our sales in that business reflected those trends to a large degree during the quarter, particularly on the residential side.

Our upholstery fabric sales were also challenged by several relatively unique factors, including the recent tariff changes affecting China produced goods. The fabric manufacturing and supply chain for the residential furniture business to a large degree, is dependent on China and the frequent shifting of tariff amounts and enforcement policies occurring in our fiscal fourth quarter were debilitating to demand.

Most of our customers stop shipping containers as tariff rates were prohibitive, even above 150%, in some cases, for roughly a month, which, of course, meant we stopped shipping as well. Current tariff rates under review currently have allowed business to resume, but there is still uncertainty in the industry as to where it will all land. This uncertainty and lack of container shipments from the fourth quarter, continues to pressure our business, at least as we look into the first quarter of fiscal '26.

Additionally, the timing of the Chinese New Year holiday, which impacted pretty much only the fourth quarter rather than multiple quarters, was the pressure to our sales as well as the ordering cadence of a large residential fabric customer that uniquely front-loaded more of its total purchasing in the first half of fiscal '25.

We do expect sales for this large customer to be more consistent quarter-to-quarter in fiscal '26, but the first quarter is likely to be particularly difficult comp given the anomalous sales spike in the first quarter last year. Encouragingly, demand in our upholstery fabrics business, hospitality and commercial markets has remained relatively solid with our sales in that higher margin area of our business growing to constitute approximately 42% of our total upholstery sales during the quarter.

The team has done a good job of investing time and resources in those markets and developing relationships with key customers that we expect to continue to grow over time. The main drivers of our success in this area include the fabric business that we are selling into commercial markets and our roller shape production that we are selling into hotel installations, offices and other public spaces.

Of note, I will comment that we also see first quarter demand pressure in the commercial area as many property owners delayed projects due to tariffs and the resulting product cost uncertainty. Our pipeline is healthy in the hospitality and contract segment. So a return to normalcy should be a solid tailwind for us.

The overall market uncertainty created by the recent global trade and TAC-related actions is hard to overstate. I think our team has done a good job of reacting and making adjustments to our business in real time. But as I mentioned, given the high concentration of upholstery fabric manufactured in China and the current lack of viable options elsewhere, the tariff landscape put significant pressure on an already depressed demand environment in the home furnishings industry, particularly again on residential furniture.

Our diversified manufacturing and sourcing platform for mattress fabrics and sewn covers should continue to provide competitive advantages for us in the fluid environment. And we continue to emphasize our Vietnam operations to our upholstery customers and believe it will continue to grow in importance and increase volumes over time as the industry continues to look for alternatives to its current China-centric model.

Looking at our upholstery business from a big picture perspective. Our product line remains in style and on trend, and we are diversifying our supply base. We were pleased with customer reaction from the May, interwoven fabric show and expect to generate solid placements on retail floors. We are also pleased that our upholstery fabrics business has been able to operate profitably in the face of the extremely difficult home furnishings industry environment and the unique challenges from the tariffs.

Now importantly, we are not done taking action to adjust our model for better adaptability and alignment with the volume pressure across the industry. We recently initiated a comprehensive effort to integrate our matches fabric and upholstery fabric divisions into a single unified business. As part of this integration, which we are internally calling Project Blaze, we are consolidating facilities, relocating equipment and making other operational adjustments, all without reducing production capacity levels.

While there is a significant cost reduction aspect to this initiative, it is heavily focused on creating synergies and scale efficiencies through cross-functional and shared management strategies. Above all, we believe it will result in a more agile and flexible organization, better equipped to respond to customer needs and market trends.

A summary slide of the actions comprising this initiative are listed on Page 6 of the attached slide presentation. As part of this initiative, we made some recent changes to our executive leadership team that we believe will drive positive change throughout Culp and accelerate our transition away from the somewhat siloed approach that characterized our 2 stand-alone divisions.

Mary Beth Hunsberger, and Tommy Bruno, who previously served as the President of our 2 former divisions, have both moved into key leadership roles with a company-wide scope. Mary Beth Hunsberger now serves as our Chief Operating Officer, tasked with driving efficiency and operational excellence across all of coal. And Tommy Bruno now serves as our Chief Commercial Officer and is charged with ensuring that all of our product development and innovation, merchandising, marketing, sales and other customer-facing activities are designed to drive revenue growth.

We're excited to see Tommy and Mary Beth impact Culp's success in their new roles without any divisional constraints. Another initial steps in the integration strategy includes the closure of our lease facility in Burlington, North Carolina, with operations there transitioning to a shared management and resource model within our Stokesdale, North Carolina facility, which we own. This facility consolidation is expected to generate approximately $2 million in annualized savings beginning in the third quarter of fiscal '16 and and we believe that this and related actions will significantly enhance the operating profile of our upholstery business and position it to better navigate the challenges currently impacting the home furnishings market.

Overall, we anticipate total annualized savings of approximately $3 million per year from this integration effort, which are in addition to the $10 million to $11 million in annualized savings achieved to our recently completed restructuring plan. In addition to the integration, we have also taken action to initiate price increases responding to the [ Terra ] landscape, which we expect to be helpful in softening the new tariff impacts when the prices are fully implemented after the first quarter of fiscal '26.

The approximate annualized benefit of these price increases is expected to be $2.5 million and effective in our fiscal second quarter. We are pushing these prices through as exponentially as possible but the immediacy of the recent tariff measures does create a margin lag impacting our first quarter. We have done our best to navigate the situation in support of our customers, and we are grateful for our strong partnerships. This price action, which impacts both our mattress and upholstery businesses, coupled with the expected cost savings and synergy benefits of the integration initiative totaled $5 million to $6 million of annualized benefit, which again is on top of the $10 million to $11 million of annualized savings from the restructuring project we completed in fiscal '25.

We are doing everything we can to improve performance in a tough demand environment, and our actions should bolster sales and operating performance as we move further into fiscal '26.

Finally, as Ken will talk about in more detail, we recently took action to extend our credit facility of Wells Fargo for an additional 3 years. We are pleased to have this new agreement in place and liquidity and financing flexibility it provides us to support our ongoing initiatives and fund our growth strategies. Our team's hard work in fiscal '25 has fundamentally transformed our business positioning Culp to leverage synergies through centralized operations and a unified management team, laser-focused on the home furnishings industry.

This streamlined approach, which we'll continue to enhance and improve on in fiscal '26 strengthens our ability to adapt to varying demand scenarios and respond effectively to market changes.

With that, I'll turn the call over to Ken.

Thanks, Iv. Here are the financial highlights for the fourth quarter. Net sales were $48.8 million and generally flat with our net sales in the prior year period of $49.5 million. The company reported a loss of operations of $2.2 million, which included $1.5 million in restructuring-related expenses, as compared with a loss from operations of $4.2 million for the prior year period, which included $204,000 in restructuring expense.

Non-GAAP operating loss for the fourth quarter was $704,000 as compared to a non-GAAP operating loss of $4 million for the prior year period. I'll comment in more detail on our segment sales and operating performance in a moment.

Net loss for the fourth quarter was $2.1 million or $0.17 per diluted share compared with a net loss of $4.9 million or $0.39 per diluted share for the prior year period. Adjusted EBITDA for the fourth quarter was $559,000 compared to a negative $2.2 million in the prior year period. Our overall operating performance for the fourth quarter as compared to the prior year period benefited from continued momentum in the mattress fabrics operating performance, including significant improvement in operating loss from the prior year period driven by the cost and efficiency benefits derived from the restructuring plan.

Operating performance also benefited from the continued profitability in the upholstery fabric segment, despite the lower revenue industry environment and tariff-related challenges I spoke to earlier, and was also favorably impacted by lower inventory markdowns resulting from a change in our accounting estimates for finished goods inventory.

For the full fiscal year, net sales were $213.2 million, down 5.4% compared to the previous year. Loss on operations for the full fiscal year was $18.4 million, which included $9.4 million in restructuring-related expenses compared with a loss from operations of $11.3 million for the prior fiscal year, which included approximately $676,000 in restructuring and related expenses during the period.

Non-GAAP operating loss for the full fiscal year was $9 million compared to a non-GAAP operating loss of $10.6 million for the prior fiscal year. The improvement in non-GAAP operating performance for the year as compared to the prior year period was impacted generally by the same dynamics driving operating improvement in the fourth quarter.

Net loss for the full fiscal year was $19.1 million or $1.53 per diluted share compared with a net loss of $13.8 million or $1.11 per diluted share for the prior year. Adjusted EBITDA for the 12 months ending the fourth quarter of fiscal 2025 was a negative $3.5 million compared to negative $3.4 million in the prior year period.

Importantly, the effective income tax rate for the fourth quarter of this fiscal year was 10.5% compared with the negative 19.8% for the same period a year ago. The effective income tax rate for fiscal 2025 was a negative 2.1% compared with a negative 28.3% for the prior fiscal year. Our effective income tax rate for the fourth quarter and for the full fiscal year continues to be impacted by the company's mix of earnings between our U.S. and foreign subsidiaries with an operating loss in the U.S. and our China operations generated income that was taxed at a higher rate as compared to the U.S.

Our cash income tax payments totaled $2.3 million for this fiscal year. Expected cash income tax payments for fiscal 2026 will not be given at this time due to the ongoing integration effort, tariff uncertainty and other drivers.

Now let's take a look at our reporting segments. For the mattress fabrics segment, sales for the fourth quarter were $27.1 million, up 5.3% compared with last year's fourth quarter. For the full year, sales were $113.9 million, down 2.1% compared with the prior fiscal year. Sales continue to be pressured during the quarter by muted demand across the industry and related challenges from consumer spending and housing market trends. However, as Iv said, we are generally pleased with the sales growth in this segment given the overall industry consensus projecting declines as well as our ability to continue to win new business with larger customers.

Operating loss in the mattress fabric segment for the quarter was $217,000 compared with an operating loss of $2.9 million in the prior year period. For the full year, operating loss in the mattress fabric segment was $5.2 million compared with an operating loss of $6.8 million in fiscal 2024. This improved operating performance for the quarter was driven primarily by higher gross margins attributable to lower fixed cost and operating efficiency improvements derived from the restructuring plan and the lower inventory markdowns I mentioned earlier.

We were pleased to see operating performance in this segment improved consistently during the year with the improvement driven primarily by the same dynamics impacting the segment's operating performance for the fourth quarter. For the upholstery fabric segment, sales for the fourth quarter were $21.7 million, down 8.9% over the prior year period. For the full year, sales were $99.3 million down 8.8% compared to fiscal 2024. This sales decline was driven primarily by continued demand deterioration in the home furnishings industry pressuring our residential sales as well as lower comparable sales to the large residential fabric customer Iv mentioned earlier that uniquely concentrated more of its annual purchasing in the first half of fiscal 2025 and strategically managed inventory levels in the back half of the year.

The market uncertainty from the recent tariff related actions and the timing of the Chinese New Year holiday also hindered sales. Operating income in the upholstery fabric segment for the quarter was $1.1 million compared with operating income of $975,000 in the prior year period. Our operating performance for the quarter continued to be pressured by lower sales. However, that sales pressure was partially offset by lower inventory markdowns, I mentioned earlier as well as a more favorable mix of higher-margin hospitality contract sales and lower SG&A expenses.

For the full year, operating income in our upholstery fabric segment was $4.1 million compared to operating income of $5.8 million for fiscal 2024 with the decline driven primarily by lower sales, partially offset by lower inventory markdowns and lower SG&A expenses.

Now I'll turn to the balance sheet. We reported $5.6 million of total cash and $12.7 million in outstanding debt as of the end of this fiscal year. The outstanding debt was primarily occurred for restructuring activities and to fund worldwide working capital. Notably, $2.8 million of the outstanding debt was attributable to the supplier financing arrangements in our China operations. Cash flow from operations and free cash flow were a negative $17.7 million and $17.1 million, respectively, for the full fiscal year.

As expected, our cash flow from operations and free cash flow during the fiscal year were pressured by operating losses and included $5.6 million in nonrecurring cash restructuring expenses -- in addition, free cash flow was impacted by planned strategic investments and capital expenditures, mostly related to the fabric -- mattress fabrics segment as we focused on restructuring that business.

Generating free cash flow in fiscal 2026 will continue to be among our highest priorities and a key focus point throughout all areas of our company. Capital expenditures were $2.9 million for the year compared with $3.7 million for last fiscal year. This decrease stems from our strategic focus on projects targeting operating efficiency and future growth. Based on current expectations, capital spending for fiscal 2026 is projected to be in line with fiscal 2025 as we continue to tightly manage our cash and spend only is absolutely necessary. Based on current expectations, depreciation for fiscal 2026 is expected to be approximately $4.5 million.

With respect to liquidity, as of the end of fiscal 2025, we had approximately $27 million consisting of $5.6 million in cash and $21.4 million in borrowing availability under our domestic credit facility.

Finally, as Iv mentioned earlier, we were pleased to be able to extend the term of our domestic credit facility with Wells Fargo on June 12 for an additional 3 years and that interest rates we believe are in line with the market. Subject to borrowing base limitations, this facility allows us to borrow up to $30 million and contains an accordion feature that could increase that amount an additional $10 million based on a mutual agreement.

We intend to continue utilizing borrowings only as necessary under both our domestic and foreign credit facilities during fiscal 2026 in connection with funding working capital needs and growth, integration and efficiency initiatives and we will continue to aggressively manage liquidity and capital expenditures and prioritize free cash flow.

With that, I'll turn the call back over to Iv to discuss your general outlook for the fiscal year 2026, and then we will take your questions.

Thank you, Ken. Due to the macroeconomic uncertainty in the fluid global trade environment that I previously mentioned, which pressure demand and results in a suspended China shipments and minimal commercial flow for several weeks during the fourth quarter as well as the immediacy of tariff cost increases. We are not providing specific financial guidance and only limited annual guidance at this time.

For fiscal '26, we anticipate year-over-year sales growth in our mattress fabrics business and for the sales pressure on the residential side of our upholstery business to continue. The cost and efficiency benefits of the recently completed restructuring plan are expected to continue to drive meaningful operating improvement as the year progresses, particularly as we move beyond the tariff-related sales and margin pressure impacting the first quarter.

In addition, the fiscal '26 division integration initiative and related facility consolidation activity, along with the price increases I had discussed, should further bolster operating performance, particularly as we get beyond first quarter. As Ken said, while we intend to continue to utilize borrowings if necessary, under our credit facilities during fiscal '26, we will continue to aggressively manage liquidity and capital expenditures and prioritize free cash flow.

Our expectations today are based on information available and reflect certain assumptions regarding our business and overall industry trends, the projected impact of restructuring and integration initiatives and ongoing tariff and market headwinds. Our expectations also assume no further meaningful changes from tariffs and trade negotiations.

Thank you again for your time today. We appreciate your continued support and look forward to taking some questions. With that, I want to turn it back to the operator.

[Operator Instructions]. First question today comes from Brian Gordon with Water Tower Research.

I guess first question, could you talk a little bit about the cadence of business across mattress residential upholstery and the commercial hosting fabric side of the businesses?

Brian, you just mean the current cadence that we're seeing now?

Yes.

Yes. Well, kind of as we laid out in in the script, I think we are pretty encouraged about mattress fabrics business. I think we've done some really nice job winning some share in both fabric and some covers. And we see not always linear like we want it to be. We see optimism and strength in the backlog for mattress fabrics and covers.

I think we have a very solid pipeline in place on the hospitality side of our upholstery business, window treatments and fabrics. And again, some of those projects got delayed when the tariffs were at peak pressure. But the pipeline is there, and we're encouraged about that business. Residential Upholstery has just been a slog. It's been tough through this demand cycle.

We believe we're placing product very well. We just don't believe that things are turning at the retail floors at the level we want them to. So we're maybe a bit more muted on that portion of our business in the short term.

That makes sense. Do you have any sense on sort of like how tariffs specifically have been impacting the end customer demand plus your segments?

Yes, it's a good question, Brian. It's funny. A lot of prices are being pushed through. We're going to be doing ours now. I think all prices that have been impacted from the suppliers, the manufacturers are just going straight to retail and being passed to the consumer.

I'm not sure that tariff prices are driving consumer demand. I think there's so much uncertainty in the market where the inflation is, where interest rates are, tariffs are 1 piece of a 2, and it's just that top of mind for consumers today. I do also think on the furniture side, this season is typically a slower season anyway annually. So we just need to -- we're focused on getting through the summertime season and hoping that as we get to the fall, we see prices are pushed through. Things are maybe normalized, at least at the price level and the consumers will come back to the stores.

Yes. So I have a follow-up question, though, on the pricing action. So you guys talked about $2.5 million in respect to that over the course of the year. What are the revenue assumptions that are baked into those gains at this point?

Yes, it's a good question. We are not forecasting those revenue assumptions to get the $2.5 million are what we see today, steady state. Obviously, that can be bolstered as things were to pick up, but we aren't banking on that. Those price increases are at steady state revenue. And a lot of them -- a vast majority of those are on the mattress side that we see as we adjust our pricing in that business for fabrics and sewn covers.

Okay. That makes sense. In terms of all of the cost savings that you've outlined. And there's obviously several buckets. There's the restructuring that you first announced a year ago. there's the reorganization, the project Blaze and then there are the price adjustments. If I try and think about how that's going to impact the bottom line quarter-by-quarter. -- not arithmetic is right, we're going to see something like a gain of like maybe so Q1 up to $4 million, maybe even $4 million plus by Q4. Is that logic right? Is that how we should be thinking about this? you're speaking about the new actions or just the all actions combined and all actions combined. Just trying to fit that to a quarterly benefit as we progress across '26.

Yes. I think you see in the in our fourth quarter, you see the start of the significant fixed cost reductions coming through from the mattress fabrics restructure. That should continue on pace. I mean that's done. We're really happy to have that behind us.

The new actions we're talking about, the integration of the businesses and the warehouse consolidations and the price actions are all phasing in during Q2. So they start to impact Q2 and then they're probably very effective in Q3 and Q4.

Okay. And that's just timing.

We have leases that we have to exit. I mean -- so you start to generate some of the savings from those projects and from headcount reductions or consolidations that we may do to streamline. But when they're fully enact and done, it's the back half of the year.

All right. Next question may be more for Ken. One of the things that you guys mentioned in the release was the change in your approach to inventory markdowns -- could you maybe explain a little bit what's going on there and how that impacted the quarter and how that might impact '26 as we move through the year?

Yes. Thanks, Brian, for the question. Yes, we -- it boiled down to -- we found that we were marking down our fabric for obsolescence too quickly. In relation to the final price we were getting, I mean the -- given the longer product life cycles, we're capable now of holding our full price a lot longer, which is great news for us because we're getting full value further down the road. And so that's a great testament to our fabric value.

But in light of all this, we wanted to study our activity and make sure that we move our cadence of markdowns to better fit the actual prices we were getting and so we looked at that study that made some changes, and that generated a $1.7 million benefit in the quarter.

Now looking ahead, we feel good about this. We feel it's the right decision, obviously, to get everything balanced. But looking ahead, that way going forward, we balance our markdowns with our pricing. We don't get ahead of ourselves, and we don't get behind ourselves. So we can truly track things throughout the year and get a more consistent look at our performance and help us better manage our inventory.

Okay. That's very helpful. This is maybe another question for you, Ken. Given the macro environment, in given liquidity and cash flow projections at this point, how aggressive are you guys going to be on the debt paydown side?

Brian, you know us. We are -- we will pay down the debt as quickly as we can. We've got -- obviously, we have the initiatives that we're funding. Priority, obviously, is getting -- making sure we have the working capital needs met around the world. That's always the highest priority, but any time we have a chance to pay down that debt, we will. And obviously, we've got -- with the new 3-year deal, we've got the flexibility to pull it as needed, but also we've got the flexibility to pay it off both in the U.S. and China. So the answer to that is we will be as aggressive as we possibly can.

I might just stick in for -- on Ken's tailgate him there some of the borrowings we have outside in China are just a good strategic play for us as we balance global working capital. They are, in some cases, some borrowings we just pulled because we could get it -- it's very low, very attractive rates, and we could pay them back when we want, but we sometimes think in the uncertainty of the world, it's smart to just have some of that money available, especially as we operate our China business.

That's right.

Yes, certainly, I would agree with that. One final question maybe for you, Iv, and maybe for Tommy as well. What are the growth investments in terms of like new products and markets that you're going to be focused on prioritizing in '26? And where do you think, especially do you have the best opportunity to gain share? I mean it sounds like both hospitality and mattress on that side of the business would be maybe the bright spots for share gains?

Yes. We made a lot of comments in the script, Brian. The mattress fabric business, we have gone through a significant I mean, transformations are most not strong enough were to change that model. We now have -- we have all the team we had with designed and focused on product and the sales team and we have a really preferred manufacturing model with a U.S. platform that's certainly desire today, complemented really well by global operations that can mitigate tariffs.

We have ways to move that business to where customers want to be served. So -- and we've got a great platform for fabrics and for cut and sewn covers. And we have deep relationships with strong customers, and we just believe there's opportunity for us to win share in a tough market. And in some day when that market performs better, we're really in a good spot. Just very happy about that, the mattress potential.

Certainly not banking on a market recovery, but just thinking we have potential, and we're building and planting a lot of seeds for the future. I think we're also excited a lot about the hospitality business. We have a great model our fabric. Sometimes, I think investors don't realize how strong our fabric portfolio is to the hospitality market. We talk a lot about Read Window, and we're excited about draperies and rollers and things like that. But the fabric piece of that business -- we've got a new line. It's price with better margins. It's just an exciting time to be in that space.

Certainly got muted when everyone delayed some projects, but that's likely to to be something we can be excited about looking forward. And then I don't mean to be too tough on our residential upholstery business because that's our foundation. We -- our company was founded on that. And we -- we love that business. Our product line is as strong as it's been in a long time. I think we're placing it very well.

We just don't see a lot of short-term demand in residential furniture. And we hope that changes. But -- and we're not going to stop doing it. We're just going to manage it cost appropriately and put resources through our new integration to the -- to where we think it's growing right now.

So I'm speaking for Tommy's commercial strategy, but that is where I think we're thinking, but we're not in any way trying to say we're not also working on residential poultry because we are in a big way. we just are maybe thinking there's a lag for that recovery.

Yes. And that all certainly makes sense. And best of luck with the quarter.

Yes. Thank you, Brian. I appreciate your support, and we look forward to talking to you more.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Culp for any closing remarks.

Thank you, operator. And again, thank you for your participation and your interest in Culp. We appreciate everyone's time and look forward to updating you on our progress next quarter. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.