CULP

Good day, and welcome to the Culp, Inc. Third Quarter Fiscal 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. 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 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. 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 2026 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 2026, and we will take some questions. Our third quarter results are candidly frustrating given all that we've done over the last year and a half 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 one-time 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 presentations 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. 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. 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 non-recurring 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 we're in 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 bi-annual 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-and-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 anytime 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 US 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-in to 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 wanna 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 wanna mention that we are, of course, taking the steps necessary to be in 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-$7 million in IEEPA tariffs over that same period. It is those IEEPA tariffs where we are entitled to refunds. 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.

That pace of tariff implementation has been punitive to our profitability, so any refunds would help to remedy the lag impacts we experience adjusted to those policy changes. Lastly on tariffs, in addition to those IEEPA tariffs, we're also anticipating some refunds on the baseline duties on Haiti-produced sewn 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 the work we've completed on our lower cost structure and add efficiencies across both our Bedding and Upholstery businesses.

Our third quarter was the 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 two former standalone divisions, Mattress and Upholstery, or what we called CHF and CUF, into a unified Culp-branded business, which we called Project Blaze internally. The fiscal year 2026 substantive actions of this comprehensive reorganization are detailed on pages nine 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 two 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 businesses 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 through 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. 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 on 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 wanna 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 wanna 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 damask 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 two 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 success and plans for his Chief Financial Officer role.

First of all, I wanna 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 2027 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 a financial leadership roles, including several with Tempur Sealy, a key customer of ours now known as Somnigroup, and 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 her 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 2026.

Thanks, Iv. 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 or 12.1% of sales, with the decline driven by lower comparable sales, adjustments related to excess inventory stemming from our restructuring 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 of the third quarter was $3.4 million or $0.27 per diluted share, a sequential improvement of approximately 20% from our second quarter and 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 non-cash charges, as well as the impact of net proceeds from a legal settlement of approximately $1 million, Adjusted EBITDA for the quarter was a -$2.2 million as compared to-$457,000 for the prior year period. The effective income tax rate for the quarter was a -9.3% compared with a - 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 nine 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 carry 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 I touched on earlier, along with the tariff-driven pressure on demand and the impacts from severe weather in late January. Gross profit on 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 on 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 -$2.3 million for the first nine months of this fiscal year and primarily driven by operating losses, which compares favorably to a-$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 -$1 million, down favorably from a -$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 nine 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-$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-$45 million. Our liquidity highlights are briefly summarized on page seve 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 2026, 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 in 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.

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good morning, gentlemen, and congrats to Ken on his pending retirement. You know, you guys talked about green shoots that you're seeing on the Bedding 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'd be great.

Yeah. Thank you, Anthony. Good to hear from you. Thanks for checking in with us. Appreciate the comments about Ken. We're honored by his service and, you know, 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. I'm glad you got to say hello to him about that.

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

Yeah.

Sure.

The green shoots you mentioned, you know, Anthony, it's interesting commentary, and we're careful how we wanna talk about it. The market's challenged, and I think you know that, and everyone knows it, and it's just been a hard market for unit volume. You know, we were really on a pretty good pace in our third quarter in Bedding on the forecast that we thought we'd be, and we're, I think, outpacing the industry fairly well. We got really crushed by untimely weather 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. That hurt.

The fact, the pace we saw Bedding operating on, and I think we see pretty cool opportunities in sewn covers, and, you know, 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, you know, to get our market share up, which we're thrilled about.

Mm-hmm. Okay. That's good to hear. I know you talked about the potential refunds tied to IEEPA. I think you said $6 million-$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 tariff, yeah, 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 two 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.

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. 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-$7 million as we check our IEEPA tariffs we've paid since they were enacted.

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

Understood. Certainly. Okay. You know, 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 a kind of a rough estimate as to what's your breakeven revenue run rate nowadays?

Hey, Anthony, it's Ken. I think if you know.

Okay.

In his comments, you know, we talked about the inventory markdown or pressure that we're under. You know, we've got to get that fixed, and we are laser focused on that. Beyond that, I think where we look at where we are today, as we look out to Q4 and beyond, we're in that, you know, that breakeven level at about the pace where we are for the third and fourth quarter, around that $50 million per quarter level. You know, we feel that that level is we've got a cost structure to support that. As we said in Iv's remarks, beyond that, you know, we've got the leverage to really kick in.

We're just, you know, we said it throughout the remarks, we just need that higher sales to kick in. We're ex the fixing of the markdowns, we're at that breakeven point, now we just need more revenue to lever-

Got it. Hello?

Yes, sir. Yeah, I'm here. Yeah, we're here.

Yeah. Sorry. You cut out for a couple of seconds. Okay. All right. Well, I think I got everything that I needed. Well, thank you very much, and I'll pass it on to others.

Thank you, Anthony.

Thank you.

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

Yes. Hi, good morning, everybody. Have to say I'm pretty impressed that you've taken the actions on the tariffs, as far as you have by, you know, 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 good morning. Thanks for checking that. We do feel, as I was sitting with Anthony, we do feel sadly, sort of experts on wrestling this. We have our protests 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 next steps we understand is there's maybe even a closed-door meeting today with the United States Court of International Trade and the administration's lawyers on that process. 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 when. I think what the process going on today is, what's the timeline, what procedures will it be handled by, and what the administration or anyone may do to try to delay that timeline. We're waiting, you know, 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. We understand there could be some further delays, so we're waiting.

Okay, it's just unknown at this point.

Timewise. I think it's unknown on timing. Yes, sir.

On timing. Right. Exactly.

Yeah.

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? Do you expect these non-cash inventory charge markdowns to be, you know, recurring in the next quarter or two?

Yeah, Doug, we have spent a lot of time talking about, you know, the reason why, and it was just, again, building inventory to address the restructuring actions. We purposely did that to take care of our customers, and we did a great job, you know, throughout that whole process. I mean, a lot of different things were going on. Now we've recognized that we have inventory that is aging, and we need to get that inventory sold. We are totally focused today on getting that sold at a good margin. We've set some very aggressive goals internally to get that inventory down over the next this quarter and next.

Then beyond that, you know, 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 gonna have aged inventory, and we understand that. At the same time, we're at a level now where we can make the product that's to meet customer needs and then get this excess sold, and then as we go into the new year, be on a much better cost platform. That's our focus today and we're gonna get it done.

Doug, if I just add a touch of color. Ken answered that super. A touch of color just on the inventory in general. It's a big impact to us, obviously, liquidity purposes and profitability purposes. At the end of Q3, we're at a peak position from a number of reasons. It's we build up in advance of Chinese New Year, which is normal, so that's part of the Q3 total inventory number. Ken's right, we built up inventory to service customers through our restructuring transition. That coincides with the trough in the market. Some of those shipments have been delayed. 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. 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 and at the end of January, and I guess unfortunately for you, that's your quarter end. 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, you know, I really don't like to even use the word hate, but I dislike talking about weather 'cause I know it's, it is what it is. 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. We don't anticipate losing those sales. They don't all ship out the next day. You know, 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.

Yeah. I mean, it looks like Bedding, you know, even with that, is still flat through nine months, and I assume the market's down. Are you gaining share in Bedding? Just maybe give us a couple minutes on where you see your market position here today and where you wanna be when the markets do recover.

Well, I mean, from a Culp mentality, it's never enough. We never can have enough. Yes, we do believe we're gaining market share with the right customers. Obviously, we've been through a lot of transition in our business over the last two years. 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 wanna blend their sourcing. They don't want their eggs in one basket.

They want ability to flex around tariff changes, and we offer that. With product design and innovation that we do with cut and 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. You know, 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 that market share might really show its stuff. 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.

Okay, that's helpful. Thanks.

Thank you, Doug.

Next question comes from Michael Wasserman, Private Investor. Please go ahead.

Good morning, Iv.

Good morning, Mike.

Good morning.

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. 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. Yes, we thought about it. Yes, it's an option.

Mm-hmm.

It's not something we're focusing on right now.

Right.

Okay, thank you.

Thank you, Mike.

The next question comes from Don Deischer with Pinnacle. Please go ahead.

Hi. Good morning, Iv and Ken. Appreciate the color you've given so far. I just have one-

Good morning, Don.

Good morning. A minor question. The slide deck shows the headcount of about 900, and reading the 10-K at the end of last year was 830. 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?

Yeah, good question, Don, 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 gets filed in mid-July.

Yeah. Maybe the slide deck we have now. What's happening with that number, Don, is we're having significant increase of business in our Haiti/Dominican Republic location, where we're really striding with some large volumes of quilted mattress covers. There's some personnel adds in that location, but those are very low personnel costs in that region. 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.

Yep. Do you think that's gonna decline then?

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

Okay. That's good to hear. Thank you very much.

Thank you.

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. 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. 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. 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 and wish one of our longest and most loyal investors, John Baum, a 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 that provides some information that is supplemental to what we will 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 have still yet to see the broad market recovery across home 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've continued to focus on 2 overarching strategies at Culp, 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 bedding 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 multi-location 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 in 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 in building out a multi-location 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 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 ship 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 can 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 finish capacity to our U.S. facility, transition of our damask lines to 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 deck. We continue to expect approximately $11 million in annualized cost -- $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. The 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 deck. 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 Stokes town, 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 have also worked to rightsize and effectively manage inventory, recognizing some noncash impairments and related charges in Q2, while focusing on turning 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 challenging industry 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 over 4 years into a period of demand down cycle. We included in our presentations on Pages 16 through 18, some excerpts from recent research published 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 a 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 in 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 consolidation 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 of our 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 Iv 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 fabrics 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 upholstery segment. Moreover, as part of that integration, we now manage and assess 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 fabrics 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 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 that 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 bedding and upholstery platforms, along with recent pricing action to drive improving gross profit and lower SG&A, resulting in 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 as 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.

I'm sorry, can you hear me now?

Yes, sir. We got you, Doug.

Yes. I was encouraged to see the free cash flow breakeven and the use from cash from operations -- the cash used 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 in the implementation, maybe 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, 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 majority of everything done, and we would have as clean of pictures we have -- we could have from a cost standpoint. Now unfortunately, what that's doing is just we're continuing to reoptimize 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 so 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 and we just don't know when.

Yes. And I guess I would say I just -- 100% yes. We are 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 fourth quarter and hope to see some demand that's 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 buildup 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. And 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 are impacting 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, it's -- 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 a 15%. It just got changed on the reciprocal part of the ending 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 in Haiti. And all of a sudden, that because of government, I'll call it, dysfunction or delay, there has been a lag on renewing that agreement. We think it will get 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 the change in tariff to then 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 wood what tomorrow might bring.

And the tariff situation on a week-to-week basis, is it still somewhat volatile? Or do you think it settled 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 -- I'm 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 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 our progress next quarter. Have a great day.

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