UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JanuaryJuly 31, 2016
Commission File No. 1-12597

CULP, INC.
(Exact name of registrant as specified in its charter)

NORTH CAROLINA56-1001967
(State or other jurisdiction of(I.R.S. Employer Identification No.)
incorporation or other organization) 
  
1823 Eastchester Drive 
High Point, North Carolina27265-1402
(Address of principal executive offices)(zip code)

(336) 889-5161
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to the filing requirements for at least the past 90 days. x    ☒YES    YES     ☐ NOo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period after the registrant was required to submit and post such files).  ☒ xYES    YES     ☐ NOo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one);

Large accelerated filer   o
☐
Accelerated filer   x☒
Non-accelerated filer   o
☐
   
 
Smaller Reporting Company   o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o    ☐ YESNOx   ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common shares outstanding at JanuaryJuly 31, 2016:  12,250,48912,306,956
Par Value: $0.05 per share

INDEX TO FORM 10-Q
For the period ended JanuaryJuly 31, 2016

 Page
  
 
Part I - Financial Statements
  
 
   
 
I-1
   
 
I-2
   
 
I-3
   
 
I-4
   
 
I-5
   
 
I-6
   
 
I-26I-25
   
I-27I-26
   
I-44I-43
   
I-45I-43
   
Part II - Other Information
   
II-1
   
II-1
   
II-1
   
Item 5.     Other Information
II-2
Item 6.    Exhibits
II-3II-2
   
II-4
II-3

 
Item 1:  Financial Statements
 
       
CULP, INC.
 
CONSOLIDATED STATEMENTS OF NET INCOME
 
FOR THE THREE AND NINE MONTHS ENDED JANUARYJULY 31, 2016 AND FEBRUARY 1,AUGUST 2, 2015 
UNAUDITED 
(Amounts in Thousands, Except for Per Share Data) 
       
  THREE MONTHS ENDED 
       
  JanuaryJuly 31,  February 1,August 2, 
  2016  2015 
       
Net sales $78,46680,682   81,26980,185 
Cost of sales  61,90362,263   66,86763,983 
Gross profit  16,56318,419   14,40216,202 
         
Selling, general and        
administrative expenses  9,3379,746   8,3758,741 
Income from operations  7,2268,673   6,027
Interest income(38)(202)
Other expense85307
Income before income taxes7,1795,922
Income taxes2,3172,110
Net income$4,8623,812
Net income per share, basic$0.390.31
Net income per share, diluted0.390.31
Average shares outstanding, basic12,33112,219
Average shares outstanding, diluted12,48612,417
NINE MONTHS ENDED
January 31,February 1,
20162015
Net sales$235,607231,320
Cost of sales187,109191,925
Gross profit48,49839,395
Selling, general and
administrative expenses27,51223,173
Income from operations20,98616,2227,461 
         
Interest expense  -   5024 
Interest income  (15025)  (47866)
Other expense  405152   38095 
Income before income taxes  20,7318,546   16,2707,408 
         
Income taxes  7,3983,233   6,1132,707 
Net income $13,3335,313   10,1574,701 
         
Net income per share, basic $1.080.43   0.830.38 
Net income per share, diluted  1.070.43   0.820.38 
Average shares outstanding, basic  12,31712,286   12,21612,277 
Average shares outstanding, diluted  12,48812,463   12,41012,456
See accompanying notes to the consolidated financial statements. 
 
See accompanying notes to consolidated financial statements.I -1
CULP, INC. 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
FOR THE THREE MONTHS ENDED JULY 31, 2016 AND AUGUST 2, 2015 
UNAUDITED 
     
 THREE MONTHS ENDED 
     
 July 31, August 2, 
 2016 2015 
     
Net income $5,313   4,701 
         
Other comprehensive income (loss)        
         
    Unrealized holding gains (losses) on investments  84   (89)
         
    Reclassification adjustment for realized loss included in net income  12   - 
         
Total other comprehensive income (loss)  96   (89)
         
Comprehensive income  5,409   4,612 
         
See accompanying notes to the consolidated financial statements.        
I -2
CULP, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 2016, AUGUST 2, 2015 AND MAY 1, 2016
UNAUDITED
(Amounts in Thousands)
  July 31,  August 2,  * May 1, 
  2016  2015  2016 
Current assets:         
Cash and cash equivalents $45,549   25,933   37,787 
Short-term investments  2,434   6,336   4,359 
Accounts receivable, net  22,690   25,707   23,481 
Inventories  48,131   46,544   46,531 
Income taxes receivable  -   142   155 
Other current assets  2,294   3,502   2,477 
Total current assets  121,098   108,164   114,790 
             
Property, plant and equipment, net  41,745   37,480   39,973 
Goodwill  11,462   11,462   11,462 
Deferred income taxes  1,942   4,406   2,319 
Long-term investments  4,611   2,893   4,025 
Other assets  2,502   2,475   2,573 
             
Total assets $183,360   166,880   175,142 
             
Current liabilities:            
Current maturities of long-term debt $-   2,200   - 
Accounts payable-trade  26,708   28,233   23,994 
Accounts payable - capital expenditures  627   613   224 
Accrued expenses  6,890   7,731   11,922 
Income taxes payable - current  358   392   180 
  Total current liabilities  34,583   39,169   36,320 
             
Income taxes payable - long-term  3,779   3,634   3,841 
Deferred income taxes  1,532   1,072   1,483 
Line of credit  7,000   -   - 
Deferred compensation  5,031   4,280   4,686 
             
  Total liabilities  51,925   48,155   46,330 
             
Commitments and Contingencies (Note 15)            
             
Shareholders' equity            
Preferred stock, $0.05 par value, authorized            
10,000,000  -   -   - 
Common stock, $0.05 par value, authorized            
40,000,000 shares, issued and outstanding            
12,306,956 at July 31, 2016; 12,338,765            
at August 2, 2015; and 12,265,489 at            
May 1, 2016  615   617   614 
Capital contributed in excess of par value  44,453   43,515   43,795 
Accumulated earnings  86,415   74,777   84,547 
Accumulated other comprehensive loss  (48)  (184)  (144)
Total shareholders' equity  131,435   118,725   128,812 
             
Total liabilities and shareholders' equity $183,360   166,880   175,142 
             
* Derived from audited financial statements.            
             
See accompanying notes to consolidated financial statements.            

I -3
CULP, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE THREE MONTHS ENDED JULY 31, 2016 AND AUGUST 2, 2015 
UNAUDITED 
(Amounts in Thousands) 
       
  THREE MONTHS ENDED 
       
  July 31,  August 2, 
  2016  2015 
       
Cash flows from operating activities:      
Net income $5,313   4,701 
Adjustments to reconcile net income to net cash        
provided by operating activities:        
Depreciation  1,761   1,555 
Amortization of other assets  52   47 
Stock-based compensation  761   265 
Excess tax benefit related to stock-based compensation  (167)  (788)
Deferred income taxes  593   1,641 
Realized loss on sale of short-term investments  12   - 
Loss (gain) on sale of equipment  9   (46)
Foreign currency exchange gains  (62)  (57)
Changes in assets and liabilities:        
Accounts receivable  611   2,774 
Inventories  (1,808)  (4,068)
Other current assets  158   (1,149)
Other assets  19   23 
Accounts payable - trade  3,036   (132)
Accrued expenses and deferred compensation  (4,911)  (3,870)
Income taxes  375   159 
Net cash provided by operating activities  5,752   1,055 
         
Cash flows from investing activities:        
Capital expenditures  (3,139)  (3,336)
Proceeds from the sale of equipment  -   104 
Proceeds from the sale of short-term investments  2,000   3,612 
Purchase of short-term investments  (21)  (33)
Purchase of long-term investments  (559)  (478)
Net cash used in investing activities  (1,719)  (131)
         
Cash flows from financing activities:        
Proceeds from line of credit  7,000   - 
Excess tax benefit related to stock-based compensation  167   788 
Dividends paid  (3,445)  (5,676)
Proceeds from common stock issued  11   56 
Net cash provided by (used in) financing activities  3,733   (4,832)
         
Effect of exchange rate changes on cash and cash equivalents  (4)  116 
         
Increase (decrease) in cash and cash equivalents  7,762   (3,792)
         
Cash and cash equivalents at beginning of period  37,787   29,725 
         
Cash and cash equivalents at end of period $45,549   25,933 
         
See accompanying notes to consolidated financial statements.        
I -4
CULP, INC. 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
UNAUDITED 
(Dollars in thousands, except share data) 
                   
        Capital     Accumulated    
        Contributed     Other  Total 
  Common Stock  in Excess  Accumulated  Comprehensive  Shareholders’ 
  Shares  Amount  of Par Value  Earnings  Loss  Equity 
Balance,  May 3, 2015  12,219,121  $611   43,159   75,752   (95) $119,427 
    Net income  -   -   -   16,935   -   16,935 
    Stock-based compensation  -   -   2,742   -   -   2,742 
    Unrealized loss on investments  -   -   -   -   (49)  (49)
    Excess tax benefit related to stock                        
       based compensation  -   -   841   -   -   841 
    Common stock repurchased  (100,776)  (5)  (2,392)  -   -   (2,397)
    Common stock issued in connection                        
       with performance based units  115,855   6   (6)  -   -   - 
    Fully vested common stock award  3,000   -   -   -   -   - 
    Common stock issued in connection                  .     
       with exercise of stock options  54,500   3   197   -   -   200 
    Common stock surrendered for                        
       withholding taxes payable  (26,211)  (1)  (746)  -   -   (747)
    Dividends paid  -   -   -   (8,140)  -   (8,140)
Balance,  May 1, 2016  *  12,265,489   614   43,795   84,547   (144)  128,812 
    Net income  -   -   -   5,313   -   5,313 
    Stock-based compensation  -   -   761   -   -   761 
    Unrealized gain on investments  -   -   -   -   96   96 
    Excess tax benefit related to stock                        
       based compensation  -   -   167   -   -   167 
    Common stock issued in connection                        
       with performance based units  49,192   2   (2)   -    -   - 
    Common stock issued in connection                        
       with exercise of stock options  2,000   -   11    -    -   11 
    Common stock surrendered for                        
       withholding taxes payable  (9,725)  (1)  (279)  -   -   (280)
    Dividends paid  -    -   -   (3,445)  -   (3,445)
Balance,  July 31, 2016  12,306,956  $615   44,453   86,415   (48) $131,435 
                         
                         
*  Derived from audited financial statements.                        
                         
See accompanying notes to consolidated financial statements.                 
                         
I -5
 
I-1
CULP, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2016 AND FEBRUARY 1, 2015 
(UNAUDITED) 
(Amounts in Thousands) 
       
  THREE MONTHS ENDED 
       
  January 31,  February 1, 
  2016  2015 
       
Net income $4,862  $3,812 
         
Other comprehensive (loss) income        
         
Unrealized (losses) gains on investments        
         
Unrealized holding (losses) gains on investments  (194)  22 
         
Reclassification adjustment for realized loss included in net income  71   - 
         
Total other comprehensive (loss) income  (123)  22 
         
         
Comprehensive income
 $4,739  $3,834 
         
  NINE MONTHS ENDED 
         
  January 31,  February 1, 
  2016  2015 
         
Net income $13,333  $10,157 
         
Other comprehensive loss
        
         
Unrealized (losses) gains on investments
        
         
Unrealized holding losses on investments
  (312)  (6)
         
Reclassification adjustment for realized loss included in net income  127   - 
         
Total other comprehensive loss
  (185)  (6)
         
Comprehensive income $13,148  $10,151 
See accompanying notes to consolidated financial statements.
I-2
CULP, INC.
 
CONSOLIDATED BALANCE SHEETS 
JANUARY 31, 2016, FEBRUARY 1, 2015, AND MAY 3, 2015 
UNAUDITED 
(Amounts in Thousands) 
          
  January 31,  February 1,  * May 3, 
  2016  2015  2015 
Current assets:         
Cash and cash equivalents $31,713   28,772   29,725 
Short-term investments  4,259   8,384   10,004 
Accounts receivable, net  26,784   30,774   28,749 
Inventories  48,485   38,013   42,484 
Income taxes receivable  23   104   229 
Other current assets  2,331   2,992   2,440 
Total current assets  113,595   109,039   113,631 
             
Property, plant and equipment, net  38,157   35,269   36,078 
Goodwill  11,462   11,462   11,462 
Deferred income taxes  4,312   5,020   5,169 
Long-term investments  3,590   2,063   2,415 
Other assets  2,435   2,505   2,545 
             
Total assets $173,551   165,358   171,300 
             
Current liabilities:            
Current maturities of long-term debt $-   2,200   2,200 
Accounts payable-trade  25,601   28,644   28,414 
Accounts payable - capital expenditures  380   772   990 
Accrued expenses  12,690   9,954   11,129 
Income taxes payable - current  622   325   325 
Total current liabilities  39,293   41,895   43,058 
             
Income taxes payable - long-term  3,480   3,630   3,792 
Deferred income taxes  1,209   927   982 
Deferred compensation  4,495   3,934   4,041 
             
Total liabilities  48,477   50,386   51,873 
             
Commitments and Contingencies (Note 15)            
             
Shareholders' equity            
Preferred stock, $0.05 par value, authorized            
10,000,000  -   -   - 
Common stock, $0.05 par value, authorized            
40,000,000 shares, issued and outstanding            
12,250,489 at January 31, 2016; 12,219,121            
at February 1, 2015; and 12,219,121 at            
May 3, 2015  613   611   611 
Capital contributed in excess of par value  42,937   42,856   43,159 
Accumulated earnings  81,804   71,571   75,752 
Accumulated other comprehensive loss  (280)  (66)  (95)
Total shareholders' equity  125,074   114,972   119,427 
             
Total liabilities and shareholders' equity $173,551   165,358   171,300 
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE NINE MONTHS ENDED JANUARY 31, 2016 AND FEBRUARY 1, 2015 
UNAUDITED 
(Amounts in Thousands) 
       
  NINE MONTHS ENDED 
       
  January 31,  February 1, 
  2016  2015 
Cash flows from operating activities:      
Net income $13,333   10,157 
Adjustments to reconcile net income to net cash        
provided by operating activities:        
Depreciation  4,888   4,244 
Amortization of other assets  123   140 
Stock-based compensation  1,964   482 
Excess tax benefit related to stock-based compensation  (822)  (110)
Deferred income taxes  1,906   3,274 
Gain on sale of equipment  (66)  (74)
Realized loss on sale of short-term investments  127   - 
Foreign currency gains  (85)  (6)
Changes in assets and liabilities:        
Accounts receivable  1,091   (3,455)
Inventories  (6,485)  2,536 
Other current assets  (108)  (739)
Other assets  48   (30)
Accounts payable - trade  (1,979)  2,267 
Accrued expenses and deferred compensation  1,406   2,121 
Income taxes  535   (108)
Net cash provided by operating activities  15,876   20,699 
         
Cash flows from investing activities:        
Capital expenditures  (7,686)  (8,185)
Proceeds from the sale of equipment  230   625 
Proceeds from the sale of life insurance policies  -   320 
Payments on life insurance policies  (18)  (18)
Proceeds from the sale of short-term investments  5,612   1,628 
Purchase of short-term investments  (86)  (3,719)
Purchase of long-term investments  (1,268)  (1,298)
Net cash used in investing activities  (3,216)  (10,647)
         
Cash flows from financing activities:        
Proceeds from line of credit  7,000   - 
Payments on line of credt  (7,000)  (538)
Payments on long-term debt  (2,200)  (2,200)
Repurchase of common stock  (2,397)  (745)
Dividends paid  (7,281)  (6,846)
Payments on debt issuance costs  (43)  - 
Proceeds from common stock issued  138   94 
Excess tax benefit related to stock-based compensation  822   110 
Net cash used in financing activities  (10,961)  (10,125)
         
Effect of exchange rate changes on cash and cash equivalents  289   (458)
         
Increase (decrease) in cash and cash equivalents  1,988   (531)
         
Cash and cash equivalents at beginning of period  29,725   29,303 
         
Cash and cash equivalents at end of period $31,713   28,772 
See accompanying notes to consolidated financial statements.
I-4
CULP, INC.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 
UNAUDITED 
(Dollars in thousands, except share data) 
                   
        Capital     Accumulated    
        Contributed     Other  Total 
  Common Stock  in Excess  Accumulated  Comprehensive  Shareholders’ 
  Shares  Amount  of Par Value  Earnings  Loss  Equity 
Balance,  April 27, 2014  12,250,030  $612   42,932   68,260   (60) $111,744 
Net income  -   -   -   15,071   -   15,071 
Stock-based compensation  -   -   786   -   -   786 
Unrealized loss on investments  -   -   -   -   (35)  (35)
Excess tax benefit related to stock                        
based compensation  -   -   109   -   -   109 
Common stock repurchased  (43,014)  (2)  (743)  -   -   (745)
Fully vested common stock award  3,000   -   -   -   -   - 
Common stock issued in connection                  .     
with exercise of stock options  10,100   1   93   -   -   94 
Common stock surrendered for                        
withholding taxes payable  (995)  -   (18)  -   -   (18)
Dividends paid  -   -   -   (7,579)  -   (7,579)
Balance, May 3, 2015 *  12,219,121   611   43,159   75,752   (95)  119,427 
Net income  -   -   -   13,333   -   13,333 
Stock-based compensation  -   -   1,964   -   -   1,964 
Unrealized loss on investments  -   -   -   -   (185)  (185)
Excess tax benefit related to stock                        
based compensation  -   -   822   -   -   822 
Common stock repurchased  (100,776)  (5)  (2,392)          (2,397)
Common stock issued in connection                        
with performance based units  115,855   6   (6)          - 
Fully vested common stock award  3,000   -   -   -   -   - 
Common stock issued in connection                        
with exercise of stock options  39,500   2   136           138 
Common stock surrendered for                        
withholding taxes payable  (26,211)  (1)  (746)  -   -   (747)
Dividends paid  -       -   (7,281)  -   (7,281)
Balance,  January 31, 2016  12,250,489  $613   42,937   81,804   (280) $125,074 
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.  Basis of Presentation

The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position.  All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results.  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 17, 201515, 2016 for the fiscal year ended May 3, 2015.1, 2016.

The company’s ninethree months ended JanuaryJuly 31, 2016 and February 1,August 2, 2015, represent 39 and 4013 week periods, respectively.

2. Significant Accounting Policies

As of JanuaryJuly 31, 2016, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended May 3, 2015.1, 2016.

Recently Adopted Accounting Pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, an amendment to FASB ASC Topic 740, which simplifies the presentation of deferred income taxes on an entity’s classified balance sheet. Currently, entities that are required to issue a classified balance sheet present a net current and net noncurrent deferred income tax asset or liability for each tax jurisdiction. The amendments in this ASU require entities to offset all deferred income tax assets and liabilities for each tax jurisdiction and present a net deferred income tax asset or liability as a single noncurrent amount. The recognition and measurement guidance for deferred income tax assets and liabilities are not affected by this amendment. This amended guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred income tax assets and liabilities.

We early adopted this amendment during the third quarter of fiscal 2016 on a retrospective basis. Accordingly, we reclassified our current deferred income taxes to noncurrent on our February 1,August 2, 2015 Consolidated Balance Sheet, which increased noncurrent deferred income taxes $4.5$4.0 million and decreased noncurrent deferred tax liabilities $2.5$3.0 million. We reclassified our current deferred income taxes to noncurrent on our May 3, 2015 Consolidated Balance Sheet, which increased noncurrent deferred income taxes $4.7 million and decreased noncurrent deferred tax liabilities $68,000.

Recently Issued Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on accounting for certain share-based payment awards. The amended guidance requires that share-based compensation awards with terms of a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved.

I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The guidance will be effective in our fiscal 2017 first quarter. The guidance will permit an entity to apply the amendments in the update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the consolidated financial statements and to all new or modified awards thereafter. Currently,
I -6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
This guidance was effective for the first quarter of fiscal 2017 and did not have any impact on our consolidated financial statements as we currently do not have any share-based payment awards with terms of a performance target that affects vesting and could be achieved after the requisite service period. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are intended to enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. In April 2015, the FASB issued ASU 2015-24, Revenue from Contracts with Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are therefore required to apply the new revenue guidance in our fiscal 2019 interim and annual financial statements. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changed the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which increases transparency and comparability among companies accounting for lease transactions. The most significant change of this update will require the recognition of lease assets and liabilities on the balance sheet for operating lease arrangements with lease terms greater than twelve months for lessees. This update will require a modified retrospective application which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 18,15, 2018. We are therefore required to apply this guidance in our fiscal 2020 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting." ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public companies. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.
I -7
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
There are no other new accounting pronouncements that are expected to have a significant impact on our consolidated financial statements.

3.  Stock-Based Compensation

Equity Incentive Plan Description

On September 16, 2015, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is intended to updateupdated and replacereplaced our 2007 Equity Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity based awards substantially similar to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.

At July 31, 2016, there were 1,012,635 shares available for future equity based grants under our 2015 plan.
I-7
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Incentive Stock Option Awards

We did not grant any incentive stock option awards throughduring the thirdfirst quarter of fiscal 2016.2017.

At JanuaryJuly 31, 2016, options to purchase 98,60081,600 shares of common stock were outstanding and exercisable, had a weighted average exercise price of $7.73$8.44 per share, and a weighted average contractual term of 1.71.1 years. At JanuaryJuly 31, 2016, the aggregate intrinsic value for options outstanding and exercisable was $1.7$1.6 million.

The aggregate intrinsic value for options exercised for the ninethree months ending JanuaryJuly 31, 2016 and February 1,August 2, 2015, was $1.0 million$43,000 and $87,000,$814,000, respectively.

At JanuaryJuly 31, 2016, there were no unvested incentive stock option awards. Therefore, there was no unrecognized compensation cost related to incentive stock option awards at JanuaryJuly 31, 2016.

No compensation expense was recorded on incentive stock options for the ninethree months ended JanuaryJuly 31, 2016 and February 1,August 2, 2015, respectively.

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Common
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Performance Based Restricted Stock AwardsUnits
 
Fiscal 2017 Grant

On October 1, 2015, weJuly 14, 2016, certain key members of management were granted a total of 3,000performance based restricted stock units which could earn up to 107,880 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $28 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.

On July 14, 2016, a non-employee was granted performance based restricted stock units which could earn up to our outside directors. These11,549 shares of common stock vest immediately and wereif certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at $31.77the earlier date of when the performance criteria are met or the end of the reporting period. At July 31, 2016, this grant was unvested and was measured at $28.53 per share, which represents the closing price of our common stock at the dateend of grant.
On October 1, 2014, we granted a totalthe reporting period. The vesting of 3,000 sharesthis award is over the requisite service period of common stock to our outside directors. These shares of common stock vest immediately and were measured at $17.95 per share, which represents the closing price of our common stock at the date of grant.
We recorded $95,000 and $54,000 of compensation expense within selling, general, and administrative expense for these common stock awards for the nine months ending January 31, 2016, and February 1, 2015, respectively.
Time Vested Restricted Stock Awards

We did not grant any time vested restricted stock awards through the third quarter of fiscal 2016.
At January 31, 2016, there were no outstanding and unvested shares of time vested restricted stock. Therefore, there was no unrecognized compensation cost related to time vested restricted stock awards at January 31, 2016.
I-8
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
No compensation expense was recorded on time vested restricted stock awards for the nine months ended January 31, 2016. We recorded $4,000 within selling, general, and administrative expense for time vested restricted stock awards for the nine months ended February 1, 2015.
During the nine month period ending February 1, 2015, 61,667 shares of time vested restricted stock vested and had a weighted average fair value of $257,000 or $4.17 per share.
Performance Based Restricted Stock Unitsthree years.
 
Fiscal 2016 Grant

On July 15, 2015, certain key members of management were granted performance based restricted stock units which could earn up to 107,554 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $32.23 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.

On July 15, 2015, a non-employee was granted performance based restricted stock units which could earn up to 10,364 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At JanuaryJuly 31, 2016, this grant was unvested and was measured at $25.32$28.53 per share, which represents the closing price of our common stock at the end of the reporting period. The vesting of this award is over the requisite service period of three years.
 
Fiscal 2015 GrantGrants

On June 24, 2014, certain key members of management were granted performance based restricted stock units which could earn up to 102,845 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.70 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.

On March 3, 2015, a non-employee was granted performance based restricted stock units which could earn up to 28,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At JanuaryJuly 31, 2016, 16,000 restricted stock units associated with this grant waswere unvested and waswere measured at $25.32$28.53 per share, which represents the closing price of the company’s common stock at the end of the reporting period. The vesting of these awards is over the requisite service periods of 16 months and 28 months for performance based16,000 restricted stock units which could earn up to 12,000 and 16,000 sharesvest over their requisite service period of common stock, respectively.
28 months.
I-9I -9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the first quarter of fiscal 2017, 12,000 shares of common stock associated with the grant vested and had a weighted average fair value of $345,000 or $28.77 per share.
Fiscal
2014 Grant

On June 25, 2013, certain key members of management were granted performance based restricted stock units which could earn up to 72,380 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.12 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.

During the first quarter of fiscal 2017, 37,192 shares of common stock associated with this grant vested and had a weighted average fair value of $637,000 or $17.12 per share. Our fiscal 2014 grant is fully vested.

Fiscal 2013 Grant

On July 11, 2012, certain key members of management were granted performance based restricted stock units which could earn up to 120,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $10.21 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
 
During the nine month period ending January 31,first quarter of fiscal 2016, 115,855 shares of common stock associated with our fiscal 2013 grant vested and had a weighted average fair value of $1.2 million or $10.21 per share. As of January 31, 2016, ourOur fiscal 2013 grant wasis fully vested.
 
Overall

We recorded compensation expense of $1.9 million$761,000 and $424,000$265,000 within selling, general, and administrative expense for performance based restricted stock units for the ninethree month periods ending JanuaryJuly 31, 2016 and February 1,August 2, 2015, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability if certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, no compensation cost will be recognized and any recognized compensation cost would be reversed.

As of JanuaryJuly 31, 2016, the remaining unrecognized compensation cost related to the performance based restricted stock units was $4.2$5.0 million, which is expected to be recognized over a weighted average vesting period of 2.1 years.

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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.  Accounts Receivable

A summary of accounts receivable follows:
          
(dollars in thousands) January 31, 2016  February 1, 2015  May 3, 2015 
Customers $28,684  $31,952  $30,338 
Allowance for doubtful accounts  (814)  (449)  (851)
Reserve for returns and allowances and discounts  (1,086)  (729)  (738)
  $26,784  $30,774  $28,749 

I-10
          
(dollars in thousands)                                                                       July 31, 2016  August 2, 2015  May 1, 2016 
Customers $24,669  $27,428  $25,531 
Allowance for doubtful accounts  (850)  (935)  (1,088)
Reserve for returns and allowances and discounts  (1,129)  (786)  (962)
  $22,690  $25,707  $23,481 
 
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of the activity in the allowance for doubtful accounts follows:

    
  Three months ended 
(dollars in thousands) July 31, 2016  August 2, 2015 
Beginning balance $(1,088) $(851)
Provision for bad debts  227   (96)
Net write-offs, net of recoveries  11   12 
Ending balance  $(850) $(935)
       
  Nine months ended 
(dollars in thousands) January 31, 2016  February 1, 2015 
Beginning balance $(851) $(573)
Provision for bad debts  (93)  (20)
Net write-offs, net of recoveries  130   144 
Ending balance $(814) $(449)

A summary of the activity in the allowance for returns and allowances and discounts accounts follows:

    
  Three months ended 
(dollars in thousands) July 31, 2016  August 2, 2015 
Beginning balance $(962) $(738)
Provision for returns, allowances        
    and discounts  (919)  (709)
Credits issued  752   661 
Ending balance $(1,129) $(786)
    
  Nine months ended 
(dollars in thousands) January 31, 2016  February 1, 2015 
Beginning balance $(738) $(479)
Provision for returns, allowances        
and discounts  (2,389)  (2,065)
Credits issued  2,041   1,815 
Ending balance $(1,086) $(729)

5.  Inventories

Inventories are carried at the lower of cost or market.  Cost is determined using the FIFO (first-in, first-out) method.
          
(dollars in thousands) July 31, 2016  August 2, 2015  May 1, 2016 
Raw materials $6,779  $6,944  $5,462 
Work-in-process  3,224   3,018   2,972 
Finished goods  38,128   36,582   38,097 
  $48,131  $46,544  $46,531 

A summary of inventories follows:
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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
          
(dollars in thousands) January 31, 2016  February 1, 2015  May 3, 2015 
Raw materials $6,831  $5,787  $5,374 
Work-in-process  3,365   2,227   2,766 
Finished goods  38,289   29,999   34,344 
  $48,485  $38,013  $42,484 

6.  Other Assets

A summary of other assets follows:
          
(dollars in thousands) July 31, 2016  August 2, 2015  May 1, 2016 
Cash surrender value – life insurance $358  $339  $357 
Non-compete agreement, net  885   960   903 
Customer relationships, net  702   753   715 
Other  557   423   598 
  $2,502  $2,475  $2,573 

          
(dollars in thousands) January 31, 2016  February 1, 2015  May 3, 2015 
Cash surrender value – life insurance $357  $338  $339 
Non-compete agreement, net  922   998   979 
Customer relationships, net  728   779   766 
Other  428   390   461 
  $2,435  $2,505  $2,545 

Non-Compete Agreement

We recorded our non-compete agreement at its fair value based on a discounted cash flow valuation model. Our non-compete agreement is amortized on a straight-line basis over the fifteen year life of the respective agreement.

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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The gross carrying amount of our non-compete agreement was $2.0 million at JanuaryJuly 31, 2016, February 1,August 2, 2015 and May 3, 2015,1, 2016, respectively. At JanuaryJuly 31, 2016 and May 3, 2015,1, 2016, accumulated amortization for our non-compete agreement was $1.1 million. At February 1,August 2, 2015 accumulated amortization for our non-compete agreement was $1.0 million.

Amortization expense for our non-compete agreement was $56,000$19,000 for the ninethree month periods ended JanuaryJuly 31, 2016 and February 1,August 2, 2015. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 20162017 - $18,000;$56,000; FY 20172018 - $75,000; FY 2018-2019- $75,000; FY 20192020 - $75,000; FY 20202021 - $75,000 and Thereafter - $604,000.$529,000.

The weighted average amortization period for our non-compete agreement is 12.311.8 years as of JanuaryJuly 31, 2016.

Customer Relationships

We recorded our customer relationships at their fair value based on a multi-period excess earnings valuation model. Our customer relationships are amortized on a straight-line basis over its seventeen year useful life.

The gross carrying amount of our customer relationships was $868,000 at JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively. Accumulated amortization for our customer relationships was $140,000, $89,000,$166,000, $115,000, and $102,000$153,000 at JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively.

Amortization expense for our customer relationships was $38,000$13,000 for the ninethree months ending JanuaryJuly 31, 2016 and February 1,August 2, 2015. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2016 - $13,000; FY 2017 - $51,000;$38,000; FY 2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; FY 2021 - $51,000; and Thereafter - $511,000.$460,000.

The weighted average amortization period for our customer relationships is 14.313.8 years as of JanuaryJuly 31, 2016.

Cash Surrender Value – Life Insurance

At JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 20151, 2016 we had one life insurance contract with a death benefit of $1.4 million.
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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Our cash surrender value – life insurance balances totaling $358,000, $339,000 and $357,000 $338,000 and $339,000 at JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively, are collectible upon death of the respective insured.

On May 16, 2014, we entered into an agreement with a former employee and his irrevocable trust (the “Trust”) dated September 7, 1995. As a result of this agreement, a previous split dollar life insurance agreement in which we purchased a policy on the life of this former employee and his spouse, in which we retained ownership of the policy, paid premiums to support the policy, had the right to receive cash surrender value of the policy upon the second to die of the former employee and his spouse, with the Trust receiving the remainder of the policy’s death benefit ($2.5 million), was terminated. In connection with the termination of the previous split dollar life insurance agreement, we transferred the life insurance policy to the Trust and received cash proceeds in the amount of the cash surrender value policy totaling $320,000 during the second quarter of fiscal 2015.

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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.  Accrued Expenses

A summary of accrued expenses follows:
          
(dollars in thousands) 
July 31, 2016
  May 1, 2016  August 2, 2015 
Compensation, commissions and related benefits $5,400  $4,946  $10,011 
Advertising rebates  485   1,835   870 
Interest  7   81   - 
Other accrued expenses  998   869   1,041 
  $6,890  $7,731  $11,922 
          
(dollars in thousands) January 31, 2016  February 1, 2015  May 3, 2015 
Compensation, commissions and related benefits $8,678  $6,399  $9,081 
Advertising rebates  2,876   2,522   1,002 
Interest  -   81    37 
Other accrued expenses  1,136   952   1,009 
  $12,690  $9,954  $11,129 

8.  Long-Term Debt and Lines of Credit

A summary of long-term debt follows:

          
(dollars in thousands) July 31, 2016  May 1, 2016  August 2, 2015 
Unsecured senior term notes $-  $2,200  $- 
Current maturities of long-term debt  -   (2,200)  - 
Long-term debt, less current maturities            
 of long-term debt $-  $-  $- 
          
(dollars in thousands) January 31, 2016  February 1, 2015  May 3, 2015 
Unsecured senior term notes $-  $2,200  $2,200 
Current maturities of long-term debt  -   (2,200)  (2,200)
Long-term debt, less current maturities            
of long-term debt
 $-  $-  $- 

Unsecured Senior Term Notes

We entered into a note agreement dated August 11, 2008 that provided for the issuance of $11.0 million of unsecured senior term notes with a fixed interest rate of 8.01% and a term of seven years. Principal payments of $2.2 million per year were due on the notes beginning August 11, 2011. Any principal pre-payments would have been assessed a penalty as defined in the agreement. The agreement contained customary financial and other covenants as defined in the agreement.

On August 11, 2015, we paid our last annual payment of $2.2 million and this agreement has been paid in full.

Revolving Credit Agreement – United States

As of May 3, 2015, we had an unsecured credit agreementOur Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) that provided for an unsecuredprovides a revolving loan commitment of $10 million to be used to finance working capital and general corporate purposes.$30 million. Interest iswas charged at a rate (applicable interest rate of 1.93%, 1.77%, and 1.78%1.94% at JanuaryJuly 31, 2016, February 1, 2015, and May 3, 2015, respectively) equal to the one-month2016) as a variable spread over LIBOR rate plus a spread based on our ratio of debt to EBITDA as defined in the agreement.EBITDA. The Credit Agreement contained customarycontains certain financial and other covenants as defined in the agreement and wasis set to expire on August 31, 2015.15, 2018.

Effective July 10, 2015, we amended our Credit Agreement to extend the expiration date to August 31, 2017, and maintain an annual capital expenditure limit of $12 million.

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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We entered into a Second Amendment to our Credit Agreement dated March 10, 2016, which amends our Credit Agreement with Wells Fargo Bank, National Association.  The terms of the Second Amendment include, among other things, provisions that (i) increase our line of credit under the Credit Agreement to $30 million, (ii) increase the annual limit on capital expenditures by the company to $15 million, (iii) add a new financial covenant to establish a minimum level of unencumbered liquid assets, (iv) eliminate certain financial covenants, (v) amend the pricing matrix that provides for interest payable on obligations under the agreement as a variable spread over LIBOR, based upon the company's ratio of debt to EBITDA, and (vi) provide that the obligations under the Credit Agreement are to be secured by a pledge of 65% of the common stock of Culp International Holdings Ltd, our Cayman subsidiary.
The purpose of the increase in our revolving credit line with Wells Fargo is to support potential short term cash needs in different jurisdictions within our global operations, mitigate our risk associated with foreign currency exchange rate fluctuations, and repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes.

At JanuaryJuly 31, 2016, February 1,we had outstanding borrowings associated with the Credit Agreement totaling $7.0 million. These outstanding borrowings are secured by a pledge of 65% of the common stock of Culp International Holdings Ltd. (our subsidiary located in the Cayman Islands), as required by the Credit Agreement. There were no borrowings outstanding under the Credit Agreement at August 2, 2015, and May 3,1, 2016, respectively.
I -13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At July 31, 2016, August 2, 2015, and May 1, 2016, there was awere $250,000 in outstanding letterletters of credit (all of which related to workers compensation) provided by the Credit Agreement.

Effective August 1, 2016, we entered into a Third Amendment to our Credit Agreement that will allow us to issue letters of credit not to exceed $7.5 million. On August 3, 2016, we issued a $5.0 million letter of credit (all of which is currently outstanding and in addition to the $250,000 letter of credit noted above) for the construction of a new building associated with our mattress fabrics segment (see Note 15 for further details). At January 31, 2016,This $5.0 million letter of credit will be automatically reduced in $1.25 million increments on August 1, 2017, November 1, 2017, February 1, 2015,2018, and May 3, 2015, there were no borrowings outstanding under the Credit Agreement.15, 2018, respectively.

Revolving Credit Agreement – China

We hadhave an unsecured credit agreement associated with our operations in China that providedprovides for a line of credit of up to 40 million RMB (approximately $6.1$6.0 million USD at JanuaryJuly 31, 2016), that was set to expireexpires on February 9, 2016.March 8, 2017. This agreement hadhas an interest rate determined by the Chinese government. Theregovernment and there were no borrowings outstanding under the agreement as of JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015.1, 2016.
On March 8, 2016, we renewed our unsecured credit agreement associated with our operations located in China. The renewal extended the agreement to March 8, 2017 and maintained the line of credit up to 40 million RMB (approximately $6.1 million USD).

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At JanuaryJuly 31, 2016, the company was in compliance with these financial covenants.

The fair value of the company’s long-term debt is estimated by discounting the future cash flows at rates currently offered to the company for similar debt instruments of comparable maturities. At February 1, 2015, the carrying value of the company’s long-term debt was $2.2 million and the fair value was $2.3 million. At May 3,August 2, 2015, the carrying value of the company’s long-term debt was $2.2 million and the fair value was $2.3 million.

9. Fair Value of Financial Instruments

ASC Topic 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The hierarchy consists of three broad levels as follows:

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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Level 1 – Quoted market prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable, and

Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.

I -14
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recurring Basis

The following table presents information about assets and liabilities measured at fair value on a recurring basis:

 Fair value measurements at January 31, 2016 using: Fair value measurements at July 31, 2016 using: 
     
 
Quoted prices in
 active markets
 for identical
 assets
  
Significant other
 observable inputs
  
Significant
 unobservable
 inputs
    
Quoted prices in
active markets
for identical
assets
 
Significant other
observable inputs
 
Significant
unobservable
inputs
   
(amounts in thousands)  Level 1  Level 2  Level 3  Total Level 1 Level 2 Level 3 Total 
                    
Assets:                    
Premier Money Market Fund $3,071   N/A   N/A  $3,071   $3,950   N/A   N/A  $3,950 
Low Duration Bond Fund  1,592   N/A   N/A   1,592   1,073   N/A   N/A   1,073 
Intermediate Term Bond Fund  1,116   N/A   N/A   1,116   754   N/A   N/A   754 
Strategic Income Fund  957   N/A   N/A   957   597   N/A   N/A   597 
Limited Term Bond Fund  594   N/A   N/A   594 
Large Blend Fund  254   N/A   N/A   254   310   N/A   N/A   310 
Mid Cap Value Fund  117   N/A   N/A   
117
 
Growth Allocation Fund  128   N/A   N/A   128   97   N/A   N/A   97 
Mid Cap Value Fund  90   N/A   N/A   90 
Other  47   N/A   N/A   47   147   N/A   N/A   147 


 Fair value measurements at August 2, 2015 using: 
   
 
Quoted prices in
active markets
for identical
assets
 
Significant other
observable inputs
 
Significant
unobservable
inputs
   
         
(amounts in thousands) Level 1 Level 2 Level 3 Total 
         
Assets:        
Premier Money Market Fund $2,705   N/A   N/A  $2,705 
Intermediate Term Bond Fund  2,149   N/A   N/A   2,149 
Low Duration Bond Fund  2,100   N/A   N/A   2,100 
Limited Term Bond Fund  1,092   N/A   N/A   1,092 
Strategic Income Fund  995   N/A   N/A   995 
Growth Allocation Fund  109   N/A   N/A   109 
Other  79   N/A   N/A   79 
Fair value measurements at May 1, 2016 using: 
 Fair value measurements at February 1, 2015 using:   
     
 
Quoted prices in
 active markets
 for identical
 assets
  
Significant other
 observable inputs
  
Significant
 unobservable
 inputs
    
Quoted prices in
active markets
for identical
assets
 
Significant other
observable inputs
 
Significant
unobservable
inputs
   
                    
(amounts in thousands)  Level 1  Level 2  Level 3  Total Level 1 Level 2 Level 3 Total 
                    
Assets:                    
Premier Money Market Fund $3,404   N/A   N/A  $3,404 
Low Duration Bond Fund  1,604   N/A   N/A   1,604 
Intermediate Term Bond Fund  1,154   N/A   N/A   1,154 
Strategic Income Fund  999   N/A   N/A   999 
Limited Term Bond Fund $3,112   N/A   N/A  $3,112   602   N/A   N/A   602 
Intermediate Term Bond Fund  2,188   N/A   N/A   2,188 
Low Duration Bond Fund  2,084   N/A   N/A   2,084 
Premier Money Market Fund  1,951   N/A   N/A   1,951 
Strategic Income Fund  1,000   N/A   N/A   1,000 
Large Blend Fund  289   N/A   N/A   289 
Growth Allocation Fund  63   N/A   N/A   63   148   N/A   N/A   148 
Mid Cap Value Fund  102   N/A   N/A   102 
Other  49   N/A   N/A   49   82   N/A   N/A   82 
 
I-15I -15
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

  Fair value measurements at May 3, 2015 using: 
    
  
Quoted prices in
 active markets
 for identical
 assets
  
Significant other
 observable inputs
  
Significant
 unobservable
 inputs
    
             
(amounts in thousands)  Level 1  Level 2  Level 3  Total 
             
Assets:            
Limited Term Bond Fund $3,107   N/A   N/A  $3,107 
Premier Money Market Fund  2,285   N/A   N/A   2,285 
Intermediate Term Bond Fund  2,181   N/A   N/A   2,181 
Low Duration Bond Fund  2,096   N/A   N/A   2,096 
Strategic Income Fund  1,008   N/A   N/A   1,008 
Growth Allocation Fund  85   N/A   N/A   85 
Other  45   N/A   N/A   45 

The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.

Short-Term Investments

At JanuaryJuly 31, 2016, August 2, 2015, and FebruaryMay 1, 2015,2016, our short-term investments totaled $4.3$2.4 million, $6.3 million, and $8.4$4.4 million, respectively, and consisted of short-term bond funds. At May 3, 2015, our short-term investments totaled $10.0 million and consisted of short-term bonds of $8.4 million and a deposit account that had a maturity of more than three months of $1.6 million.

Our short-term bond funds are recorded at their fair value, are classified as available-for-sale, and their unrealized gains or losses are included in other comprehensive income (loss). Our short-term bond investments had an accumulated unrealized loss totaling $181,000, $66,000,$33,000, $184,000, and $95,000$100,000 at JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively. At JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, the fair value of our short-term bond funds approximated its cost basis.

Long-Term Investments

Effective January 1, 2014, we established a Rabbi Trust to set aside funds for participants of our deferred compensation plan (the “Plan”) and enable the participants to credit their contributions to various investment options of the Plan. The investments associated with the Rabbi Trust consist of a money market fund and various mutual funds that are classified as available for sale.

Our long-term investments are recorded at their fair value of $3.6$4.6 million, $2.1$2.9 million, and $2.4$4.0 million at JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively. Our long-term investments had an accumulated unrealized loss of $99,000$15,000 and $44,000 at JanuaryJuly 31, 2016. At February 1, 20152016 and May 3,1, 2016, respectively. At August 2, 2015, our accumulated gains or losses regarding our long-term investments were immaterial. The fair value of our long-term investments approximates its cost basis.

I-16
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other
 
The carrying amount of cash and cash equivalents, accounts receivable, other current assets, line of credit, accounts payable, and accrued expenses approximates fair value because of the short maturity of these financial instruments.

10.  Cash Flow Information

Interest and income taxes paid are as follows:
      
 Nine months ended 
 
Three months ended
 
(dollars in thousands) January 31, 2016  February 1, 2015 
 
July 31, 2016
 
August 2, 2015
 
Interest $95  $180 
 
$3
 
$-
 
Income Taxes  4,921   3,005 
Income taxes
 
2,263
 
900
 
 
Interest costs charged to operations and incurred on our long-term debt and lines of credit were $58,000$9,000 and $191,000$44,000 for the ninethree months ended JanuaryJuly 31, 2016 and February 1,August 2, 2015, respectively.

I -16
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest costs of $58,000$9,000 and $141,000$20,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’ useful lives for the ninethree months ended JanuaryJuly 31, 2016 and February 1,August 2, 2015, respectively.

11.  Net Income Per Share

Basic net income per share is computed using the weighted-average number of shares outstanding during the period.  Diluted net income per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.  Weighted average shares used in the computation of basic and diluted net income per share follows:

    
  Three months ended 
(amounts in thousands) July 31, 2016  August 2, 2015 
Weighted average common shares outstanding, basic  12,286   12,277 
Dilutive effect of stock-based compensation  177   179 
Weighted average common shares outstanding, diluted  12,463   12,456 
    
  Three months ended 
(amounts in thousands) January 31, 2016  February 1, 2015 
Weighted average common shares outstanding, basic  12,331   12,219 
Dilutive effect of stock-based compensation  155   198 
Weighted average common shares outstanding, diluted  12,486   12,417 

All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended JanuaryJuly 31, 2016 and February 1, 2015, as the exercise price of the options was less than the average market price of the common shares.
    
  Nine months ended 
(amounts in thousands) January 31, 2016  February 1, 2015 
Weighted average common shares outstanding, basic  12,317   12,216 
Dilutive effect of stock-based compensation  171   194 
Weighted average common shares outstanding, diluted  12,488   12,410 
I-17
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All options to purchase shares of common stock were included in the computation of diluted net income for the nine months ended January 31, 2016 and February 1,August 2, 2015, as the exercise price of the options was less than the average market price of the common shares.

12.  Segment Information

Our operations are classified into two business segments: mattress fabrics and upholstery fabrics.  The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers to bedding manufacturers.  The upholstery fabrics segment sources, manufactures, and sells fabrics primarily to residential furniture manufacturers.

We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses and other non-recurring items. Cost of sales in both segments include costs to manufacture or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges.  Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses.  Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, and property, plant and equipment.  The mattress fabrics segment also includes in segment assets, goodwill, a non-compete agreement, and customer relationships associated with an acquisition.

Financial information for the company’s operating segments follows:

    
  Three months ended 
(dollars in thousands) January 31, 2016  February 1, 2015 
Net sales:      
Mattress Fabrics $44,277  $45,683 
Upholstery Fabrics  34,189   35,586 
  $78,466  $81,269 
Gross profit:        
Mattress Fabrics $8,751  $8,076 
Upholstery Fabrics  7,812   6,326 
  $16,563  $14,402 
Selling, general, and administrative expenses:        
Mattress Fabrics $2,953  $2,853 
Upholstery Fabrics  3,963   3,781 
Total segment selling, general, and        
administrative expenses  6,916   6,634 
Unallocated corporate expenses  2,421   1,741 
  $9,337  $8,375 
Income from operations:        
Mattress Fabrics $5,798  $5,223 
Upholstery Fabrics  3,849   2,545 
Total segment income from operations  9,647   7,768 
Unallocated corporate expenses  (2,421)  (1,741)
Total income from operations  7,226   6,027 
Interest income  38   202 
Other expense  (85)  (307)
Income before income taxes $7,179  $5,922 
I-18I -17
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial information for the company’s operating segments follows:
    
  Nine months ended 
(dollars in thousands) January 31, 2016  February 1, 2015 
Net sales:      
Mattress Fabrics $137,522  $131,543 
Upholstery Fabrics  98,085   99,777 
  $235,607  $231,320 
         
Gross profit:        
Mattress Fabrics $28,133  $22,603 
Upholstery Fabrics  20,365   16,792 
         
  $48,498  $39,395 
         
Selling, general, and administrative expenses:        
Mattress Fabrics $8,865  $8,019 
Upholstery Fabrics  11,372   10,518 
Total segment selling, general, and        
administrative expenses  20,237   18,537 
Unallocated corporate expenses  7,275   4,636 
  $27,512  $23,173 
         
Income from operations:        
Mattress Fabrics $19,267  $14,584 
Upholstery Fabrics  8,994   6,274 
Total segment income from operations  28,261   20,858 
Unallocated corporate expenses  (7,275)  (4,636)
Total income from operations  20,986   16,222 
Interest expense  -   (50)
Interest income  150   478 
Other expense  (405)  (380)
Income before income taxes $20,731  $16,270 
I-19
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Balance sheet information for the company’s operating segments follow:
          
(dollars in thousands) January 31, 2016  February 1, 2015  May 3, 2015 
Segment assets:         
Mattress Fabrics         
Current assets (1) $44,309  $36,658  $41,328 
Non-compete agreement  922   998   979 
Customer relationships  728   779   766 
Goodwill  11,462   11,462   11,462 
Property, plant and equipment (2)  35,637   33,046   33,773 
Total mattress fabrics assets  93,058   82,943   88,308 
Upholstery Fabrics            
Current assets (1)  30,960   32,129   29,905 
Property, plant and equipment (3)  1,590   1,522   1,467 
Total upholstery fabrics assets  32,550   33,651   31,372 
Total segment assets  125,608   116,594   119,680 
Non-segment assets:            
Cash and cash equivalents  31,713   28,772   29,725 
Short-term investments  4,259   8,384   10,004 
Deferred income taxes  4,312   5,020   5,169 
Income taxes receivable  23   104   229 
Other current assets  2,331   2,992   2,440 
Property, plant and equipment (4)  930   701   838 
Long-term investments  3,590   2,063   2,415 
Other assets  785   728   800 
Total assets $173,551  $165,358  $171,300 
    
  Nine months ended 
(dollars in thousands) January 31, 2016  February 1, 2015 
Capital expenditures (5):      
Mattress Fabrics $6,215  $8,232 
Upholstery Fabrics  481   390 
Unallocated Corporate  381   62 
Total capital expenditures $7,077  $8,684 
Depreciation expense:        
Mattress Fabrics $4,273  $3,692 
Upholstery Fabrics  615   552 
Total depreciation expense $4,888  $4,244 
I-20
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Financial information for the company’s operating segments follows:
    
  Three months ended 
(dollars in thousands) July 31, 2016  August 2, 2015 
Net sales:      
Mattress Fabrics $50,530  $47,808 
Upholstery Fabrics  30,152   32,377 
  $80,682  $80,185 
Gross profit:        
Mattress Fabrics $11,901  $9,925 
Upholstery Fabrics  6,518   6,277 
  $18,419  $16,202 
Selling, general, and administrative expenses:        
Mattress Fabrics $3,499  $2,923 
Upholstery Fabrics  3,534   3,595 
Total segment selling, general, and        
administrative expenses  7,033   6,518 
Unallocated corporate expenses  2,713   2,223 
  $9,746  $8,741 
Income from operations:        
Mattress Fabrics $8,402  $7,003 
Upholstery Fabrics  2,984   2,681 
Total segment income from operations  11,386   9,684 
Unallocated corporate expenses  (2,713)  (2,223)
Total income from operations  8,673   7,461 
Interest expense  -   (24)
Interest income  25   66 
Other expense  (152)  (95)
Income before income taxes $8,546  $7,408 
I -18
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Balance sheet information for the company’s operating segments follows:
          
(dollars in thousands)                                                   July 31, 2016  August 2, 2015  May 1, 2016 
Segment assets:         
Mattress Fabrics         
Current assets (1) $39,800  $42,530  $43,472 
Non-compete agreement  885   960   903 
Customer relationships  702   753   715 
Goodwill  11,462   11,462   11,462 
Property, plant and equipment (2)  39,435   35,116   37,480 
Total mattress fabrics assets  92,284   90,821   94,032 
Upholstery Fabrics            
Current assets (1)  31,021   29,721   26,540 
Property, plant and equipment (3)  1,459   1,518   1,564 
Total upholstery fabrics assets  32,480   31,239   28,104 
Total segment assets  124,764   122,060   122,136 
Non-segment assets:            
Cash and cash equivalents  45,549   25,933   37,787 
Short-term investments  2,434   6,336   4,359 
Deferred income taxes  1,942   4,406   2,319 
Income taxes receivable                                             -   142   155 
Other current assets  2,294   3,502   2,477 
Property, plant and equipment (4)  851   846   929 
Long-term investments  4,611   2,893   4,025 
Other assets  915   762   955 
Total assets $183,360  $166,880  $175,142 
    
  Three months ended 
(dollars in thousands) July 31, 2016  August 2, 2015 
Capital expenditures (5):      
Mattress Fabrics $3,521  $2,704 
Upholstery Fabrics  14   183 
Unallocated Corporate  8   73 
Total capital expenditures $3,543  $2,960 
Depreciation expense:        
Mattress Fabrics $1,556  $1,359 
Upholstery Fabrics  205   196 
Total depreciation expense $1,761  $1,555 
(1)Current assets represent accounts receivable and inventory for the respective segment.

I -19
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2)The $35.6$39.4 million at JanuaryJuly 31, 2016, represents property, plant, and equipment of $23.0$25.5 million and $12.6$13.9 million located in the U.S. and Canada, respectively. The $33.0$35.1 million at February 1,August 2, 2015, represents property, plant, and equipment of $23.5$23.6 million and $9.5$11.5 million located in the U.S. and Canada, respectively. The $33.8$37.5 million at May 3, 2015,1, 2016, represents property, plant, and equipment of $23.8$24.8 million and $10.0$12.7 million located in the U.S. and Canada, respectively.

(3)The $1.6$1.5 million at JanuaryJuly 31, 2016, represents property, plant, and equipment of $860$847 and $730$612 located in the U.S. and China, respectively. The $1.5 million at February 1,August 2, 2015, represents property, plant, and equipment of $877$818 and $645$700 located in the U.S. and China, respectively. The $1.5$1.6 million at May 3, 2015,1, 2016, represents property, plant, and equipment of $848$893 and $619$671 located in the U.S. and China, respectively.

(4)The $930, $701,$851, $846, and $838$929 at JanuaryJuly 31, 2016, February 1,August 2, 2015 and May 3, 2015,1, 2016, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by both the mattress and upholstery fabric segments. Property, plant, and equipment associated with corporate are located in the U.S.

(5)Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis.

13.  Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $7.4$3.2 million, or 35.7%37.8% of income before income tax expense,taxes, for the ninethree month period ended JanuaryJuly 31, 2016, compared to income tax expense of $6.1$2.7 million, or 37.6%36.5% of income before income tax expense,taxes, for the ninethree month period ended February 1,August 2, 2015. Our effective income tax rates for the ninethree month periods ended JanuaryJuly 31, 2016, and February 1,August 2, 2015, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currenciescurrency exchange rates in relation to the U.S. dollar.
 
The following schedule summarizes the factors that are attributable to the difference between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:
 
 20162015
federal income tax rate34.0%34.0%
foreign tax rate differential(6.6)(6.0)
undistributed earnings from foreign subsidiaries1.44.1
increase in liability for uncertain tax positions2.93.5
tax effects of Chinese foreign exchange gains3.50.2
other0.51.8
 35.7%37.6%
  2017  2016 
federal income tax rate  34.0%  34.0%
U.S state income tax expense  1.4   0.8 
tax effects of Chinese foreign exchange gains  1.1   0.4 
increase in liability for uncertain tax positions  0.5   0.3 
other  0.8   1.0 
   37.8%  36.5%

I-21I -20
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred Income Taxes

Valuation Allowance
 
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at JanuaryJuly 31, 2016, we recorded a partial valuation allowance of $874,000,$625,000, of which $498,000$539,000 pertained to certain U.S. state net operating loss carryforwards and credits and $376,000$86,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.  Based on our assessment at February 1,August 2, 2015, we recorded a partial valuation allowance of $1.0 million,$926,000, of which $596,000$561,000 pertained to certain U.S. state net operating loss carryforwards and credits and $400,000$365,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.  Based on our assessment at May 3, 2015,1, 2016, we recorded a partial valuation allowance of $922,000,$590,000, of which $561,000$518,000 pertained to certain U.S. state net operating loss carryforwards and credits and $361,000$72,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.
 
No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively.
 
The recorded valuation allowance of $874,000$625,000 at JanuaryJuly 31, 2016, has no effect on our operations, loan covenant compliance, or the possible realization of certain U.S. state net operating loss carryforwards and credits and our loss carryforwards associated with our Culp Europe operation located in Poland. If it is determined that it is more-likely-than-not that we will realize any of these deferred tax assets, an income tax benefit will be recognized at that time.
 
Undistributed Earnings
 
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Based on our assessment as of JanuaryJuly 31, 2016, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.
 
At JanuaryJuly 31, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $134.7 million. At the netsame date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $3.3 million,$431,000, which included U.S. income and foreign withholding taxes totaling $37.3$39.8 million, offset by U.S. foreign income tax credits of $34.0$39.4 million.
I -21
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At August 2, 2015, we had accumulated earnings and profits from our foreign subsidiaries totaling $88.6 million. At February 1, 2015, the netsame date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $2.4$2.0 million, which included U.S. income and foreign withholding taxes totaling $32.1$33.8 million, offset by U.S. foreign income tax credits of $29.7$31.8 million.
At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6 million. At May 3, 2015, the netsame date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $1.7 million,$604,000, which included U.S. income and foreign withholding taxes totaling $32.4$38.5 million, offset by U.S. foreign income tax credits of $30.7$37.9 million.
 
I-22
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We had accumulated earnings from our foreign subsidiaries totaling $100.9 million, $82.4 million, and $85.2 million at January 31, 2016, February 1, 2015, and May 3, 2015, respectively.
Overall
 
At JanuaryJuly 31, 2016, our non-current deferred tax asset of $4.3$1.9 million represents $3.5$1.4 million and $773,000$561,000 from our operations located in the U.S. and China, respectively. At February 1,August 2, 2015, our non-current deferred tax asset of $5.0$4.4 million represents $4.2$3.5 million and $776,000$914,000 from our operations located in the U.S. and China, respectively. At May 3, 2015,1, 2016, our non-current deferred tax asset of $5.2$2.3 million represents $4.3$1.7 million and $868,000$572,000 from our operations located in the U.S. and China, respectively.
 
Our non-current deferred tax liability balances of $1.2$1.5 million, $927,000,$1.1 million, and $982,000$1.5 million at JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively, pertain to our operations located in Canada.

Uncertainty In Income Taxes

At JanuaryJuly 31, 2016, we had a $13.2$15.0 million total gross unrecognized tax benefit, of which $3.5$3.8 million represents the amount of gross unrecognized tax benefitbenefits that, if recognized, would favorably affect the income tax rate in future periods. At February 1,August 2, 2015, we had a $13.9$14.2 million total gross unrecognized tax benefit, of which $3.6 million represents the amount of gross unrecognized tax benefitbenefits that, if recognized, would favorably affect the income tax rate in future periods. At May 3, 2015,1, 2016, we had a $14.1$14.9 million total gross unrecognized tax benefit, of which $3.8 million represents the amount of gross unrecognized tax benefitbenefits that, if recognized, would favorably affect the income tax rate in future periods.

At JanuaryJuly 31, 2016, we had a $13.2$15.0 million total gross unrecognized tax benefit, of which $9.7$11.2 million and $3.5$3.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At February 1,August 2, 2015, we had a $13.9$14.2 million total gross unrecognized tax benefit, of which $10.3$10.6 million and $3.6 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At May 3, 2015,1, 2016, we had $14.1$14.9 million of total gross unrecognized tax benefit, of which $10.3$11.1 million and $3.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets.

We estimate that the amount of gross unrecognized tax benefitbenefits will decreaseincrease by approximately $120,000$868,000 for fiscal 2016.2017. This decreaseincrease primarily relates to double taxation under applicable tax treaties with foreign tax jurisdictions.

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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.  Statutory Reserves
 
Our subsidiaries located in China are required to transfer 10% of their net income, as determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the company’s registered capital.
 
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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of JanuaryJuly 31, 2016, the company’s statutory surplus reserve was $4.7$4.8 million, representing 10% of accumulated earnings and profits determined in accordance with PRC accounting rules and regulations. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
 
Our subsidiaries located in China can transfer funds to the parent company with the exception of the statutory surplus reserve of $4.7$4.8 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.

15.   Commitments and Contingencies

Litigation

The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
 
Purchase Commitments
 
Overall
At JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $977,000,$10.5 million, $2.6 million, and $10.6 million, respectively. The $10.5 million and $10.6 million open purchase commitments as of July 31, 2016 and May 1, 2016, include $7.4 million and $9.3 million associated with the construction of a new building noted below.
Construction of New Building

Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that will expand our distribution capabilities and office space at a current estimated cost of $11.2 million. This agreement required an installment payment of $1.9 million in April 2016 and requires additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- $3.8 million; and Fiscal 2019- $1.2 million. Interest will be charged on the required outstanding installment payments in excess of services that have been rendered at a rate of $2.25% plus the current 30 day LIBOR rate.
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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor's bank being the beneficiary. In addition to the interest that will be charged on the outstanding installment payments noted above, there will be a 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month (see Note 8 for further details).

As of July 31, 2016, we have made payments totaling $3.8 million for services rendered on the construction of this building. The remaining $7.4 million on this commitment is required to be paid on an installment basis over the next three fiscal years as follows: Fiscal 2017 - $2.4 million; Fiscal 2018 - $3.8 million; and $2.3 million, respectively.Fiscal 2019 - $1.2 million.

The construction of this new building is currently expected to be completed in December 2016.

16.  Common Stock Repurchase Program
 
On February 25, 2014,June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities.
 
During the ninethree months ended JanuaryJuly 31, 2016, and August 2, 2015, we purchased 100,776did not purchase any shares of our common stock at a cost of $2.4 million, all of which was purchased during the third quarter. During fiscal 2015, we purchased 43,014 shares of our common stock at a cost of $745,000, all of which were purchased in the first and second quarters.stock.
 
At JanuaryJuly 31, 2016, we had $1.9$5.0 million available for additional repurchases of our common stock.

17.  Dividend Program

On March 1,June 15, 2016, we announced that our board of directors approved the payment of a special cash dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.07 per share. These dividends were paid on July 15, 2016, to shareholders of record as of July 1, 2016. During the first quarter of fiscal 2017, dividend payments totaled $3.4 million, of which $2.5 million represented the special cash dividend payment of $0.21 per share, and $861,000 represented the quarterly dividend payment of $0.07 per share.

During the first quarter of fiscal 2016, dividend payments totaled $5.7 million, of which $5.0 million represented a special cash dividend of $0.40 per share, and $740,000 represented a quarterly dividend payment of $0.06 per share.

On August 30, 2016, we announced that our board of directors approved the payment of a quarterly cash dividend of $0.07 per share. This payment will be made on or about April 15,October 17, 2016, to shareholders of record as of April 1,October 3, 2016.

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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the nine months ended January 31, 2016, dividend payments totaled $7.3 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $2.3 million represented our regular quarterly cash dividend payments ranging from $0.06 to $0.07 per share.

During the nine months ended February 1, 2015, dividend payments totaled $6.8 million, of which $4.9 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $1.9 million represented our regular quarterly cash dividend payments ranging from $0.05 to $0.06 per share.

Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION


This report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934).  Such statements are inherently subject to risks and uncertainties.  Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update or alter such statements.statements, whether as a result of new information, future events or otherwise.  Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often but not always characterized by qualifying words such as “expect,” “believe,” “estimate,” “plan” and “project”“plan,” “project,” “anticipate,” “depend” and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, sales, profit margins, profitability, operating income, capital expenditures, income taxes, SG&A or other expenses, pre-tax income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding future economic or industry trends or future developments. Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on ourout business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in the value of the U.S. dollar versus other currencies can affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. Also, economic and political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. Finally, increases in market prices for petrochemical products can significantly affect the prices we pay for raw materials, and in turn, increase our operating costs and decrease our profitability. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, isare included in Item 1A “Risk Factors” section in our Form 10-K filed with the Securities and Exchange Commission on July 17, 2015,15, 2016, for the fiscal year ended May 3, 2015.1, 2016.

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes and other exhibits included elsewhere in this report.

General

Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30. The ninethree months ended JanuaryJuly 31, 2016, and February 1,August 2, 2015, each represent 39 and 40 week periods, respectively.13-week periods. Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources and sells fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment sources, manufactures, and sells fabrics primarily to residential furniture manufacturers.

We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses and other non-recurring items. Cost of sales in both segments include costs to manufacture or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses represent primarily compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses.

Executive Summary

Results of Operations

  Three Months Ended    
(dollars in thousands) January 31, 2016  February 1, 2015  % Change
Net sales $78,466  $81,269  (3.4)%
Gross profit  16,563   14,402  15.0%
Gross profit margin  21.1%  17.7% 340bp
SG&A expenses  9,337   8,375  11.5%
Income from operations  7,226   6,027  19.9%
Operating margin  9.2%  7.4% 180bp
Income before income taxes  7,179   5,922  21.2%
Income taxes  2,317   2,110  9.8%
Net income  4,862   3,812  27.5%
  Three Months Ended    
(dollars in thousands) July 31, 2016  August 2, 2015  Change 
Net sales $80,682  $80,185   0.6%
Gross profit  18,419   16,202   13.7%
Gross profit margin  22.8%  20.2%  260bp
SG&A expenses  9,746   8,741   11.5%
Income from operations  8,673   7,461   16.2%
Operating margin  10.7%  9.3%  140bp
Income before income taxes  8,546   7,408   15.4%
Income taxes  3,233   2,707   19.4%
Net income  5,313   4,701   13.0%
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  Nine Months Ended    
(dollars in thousands) January 31, 2016  February 1, 2015  % Change
Net sales $235,607  $231,320  1.9%
Gross profit  48,498   39,395  23.1%
Gross profit margin  20.6%  17.0% 360bp
SG&A expenses  27,512   23,173  18.7%
Income from operations  20,986   16,222  29.4%
Operating margin  8.9%  7.0% 190bp
Income before income taxes  20,731   16,270  27.4%
Income taxes  7,398   6,113  21.0%
Net income  13,333   10,157  31.3%

Net Sales

Overall, our net sales were slightly higherflat for the nine month year-to-date periodfirst quarter of fiscal 20162017 compared with the same period a year ago. However, we experienced a slight decrease in ourago, with mattress fabric net sales for the third quarter of fiscal 2016 compared with the prior year third quarter, which was an exceptionally strongincreasing 5.7% and upholstery fabric net sales performance for both our business segments.decreasing 6.9%. We have remained focused on our top strategic priorities of product innovation and creativity in order to provide a product mix that meets the demands of our customers.customers in both our business segments. Our scalable and flexible manufacturing platform supports this strategy, and we have made significant capital investments (mostly with our mattress fabric segment) to improve our operating efficiencies and overall capacity.

Income Before Income Taxes
 
The increase in income before income taxes primarily reflects the significant improvement in our operating results for both business segments. We continued to realize the benefits of our recent capital investments in our mattress fabrics business, with increased capacity via newer and more efficient equipment, enhanced finishing capabilities and better overall throughput. We also incurred lower raw material costs and operating expenses (primarily due to more favorable currency exchange rates) in both our business segments during the first quarter of fiscal 20162017 compared with first quarter of fiscal 2015.2016.  Partially offsetting the improvement in income before income taxes was the increase in SG&A expenses due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets.targets and higher inventory warehousing costs and design and sales expenses associated with our mattress fabrics segment.
 
See the Segment Analysis section located in the Results of Operationsbelow for further details.

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Liquidity

At JanuaryJuly 31, 2016, our cash and cash equivalents and short-term investments totaled $36.0$48.0 million compared with $39.7$42.1 million at May 3, 2015.1, 2016. As planned, we borrowed $7.0 million during the first quarter of fiscal 2017 to support our short-term cash needs and mitigate our risk associated with foreign currency exchange rate fluctuations. This decreaseincrease from the end of fiscal 2016 was therefore primarily due to the borrowings on our U.S. revolving line of credit and net cash provided by our operating activities of $5.8 million, partially offset by dividend payments of $3.4 million and capital expenditures mostly associated with our mattress fabric segment of $7.7 million, dividend payments of $7.3 million, repurchases of our common stock of $2.4 million, a long-term debt payment of $2.2 million, and long-term investment purchases of $1.3 million associated with our Rabbi Trust. This spending was partially offset by$3.1 million.
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Our net cash provided by operating activities was $5.8 million for the three months ending July 31, 2016, an increase of $15.9 million.

Net$4.7 million compared with $1.1 million for the three months ending August 2, 2015. This increase reflects improved cash collections, with customers associated with both our business segments taking more advantage of sales discounts in the first quarter of fiscal 2017 compared with the same period a year ago. Days sales in accounts receivable were 26 days and 29 days during the first quarters of fiscal 2017 and 2016, respectively. Also, this increase is due to improved inventory management during the first quarter of fiscal 2017 compared to the same period a year ago. Partially offsetting the increase in net cash provided by operating activities was $15.9 million forhigher incentive bonus payments in the nine months ending January 31, 2016, a decreasefirst quarter of $4.8 millionfiscal 2017 compared with $20.7 million for the nine months ending February 1, 2015. This decrease reflects an increase in inventory purchases, as well as higher annual bonus payments made infirst quarter of fiscal 2016 compared with those made in fiscal 2015. This spending was partially offset by cash flow from earnings and improved cash collections from customers in fiscal 2016 compared with fiscal 2015.2016.
Dividend Program

On August 11, 2015, we paid our last annual payment of $2.2 million on our unsecured term notes, and we currently do not have any long-term debt or balances due on our revolving credit lines.
On March 10, 2016, we amended our Credit Agreement with Wells Fargo to increase our borrowing capacity from $10 million to $30 million. The purpose of the increase in our revolving credit line with Wells Fargo is to support potential short term cash needs in different jurisdictions within our global operations, mitigate our risk associated with foreign currency exchange rate fluctuations, and repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes.

Dividend Program

On March 1,June 15, 2016, we announced that our board of directors approved the payment of a special cash dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.07 per share. These dividends were paid on July 15, 2016, to shareholders of record as of July 1, 2016. During the first quarter of fiscal 2017, dividend payments totaled $3.4 million, of which $2.5 million represented the special cash dividend payment of $0.21 per share, and $861,000 represented the quarterly dividend payment of $0.07 per share.

During the first quarter of fiscal 2016, dividend payments totaled $5.7 million, of which $5.0 million represented a special cash dividend of $0.40 per share, and $740,000 represented a quarterly dividend payment of $0.06 per share.

On August 30, 2016, we announced that our board of directors approved the payment of a quarterly cash dividend of $0.07 per share. This payment will be made on or about April 15,October 17, 2016, to shareholders of record as of April 1,October 3, 2016.

During the nine months ended January 31, 2016, dividend payments totaled $7.3 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $2.3 million represented our regular quarterly cash dividend payments ranging from $0.06 to $0.07 per share.

During the nine months ended February 1, 2015, dividend payments totaled $6.8 million, of which $4.9 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $1.9 million represented our regular quarterly cash dividend payments ranging from $0.05 to $0.06 per share.

Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.
 
Common Stock Repurchase Program
 
On February 25, 2014,June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities.
 
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During the ninethree months ended JanuaryJuly 31, 2016, and August 2, 2015, we purchased 100,776did not purchase any shares of our common stock at a cost of $2.4 million, all of which were purchased during the third quarter. During fiscal 2015, we purchased 43,014 shares of our common stock at a cost of $745,000, all of which were purchased in the first and second quarters.stock.
 
At JanuaryJuly 31, 2016, we had $1.9$5.0 million available for additional repurchases of our common stock.
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Segment Analysis

Mattress Fabrics Segment

  Three Months Ended    
(dollars in thousands) July 31, 2016  August 2, 2015  Change 
          
Net sales $50,530  $47,808   5.7%
Gross profit  11,901   9,925   19.9%
Gross profit margin  23.6%  20.8%  280bp
SG&A expenses  3,499   2,923   19.7%
Income from operations  8,402   7,003   20.0%
Operating margin  16.6%  14.6%  200bp
  Three Months Ended    
(dollars in thousands) January 31, 2016  February 1, 2015  % Change
          
Net sales $44,277  $45,683  (3.1)%
Gross profit  8,751   8,076  8.4%
Gross profit margin  19.8%  17.7% 210bp
SG&A expenses  2,953   2,853  3.5%
Income from operations  5,798   5,223  11.0%
Operating margin  13.1%  11.4% 170bp


  Nine Months Ended    
(dollars in thousands) January 31, 2016  February 1, 2015  % Change
          
Net sales $137,522  $131,543  4.5%
Gross profit  28,133   22,603  24.5%
Gross profit margin  20.5%  17.2% 330bp
SG&A expenses  8,865   8,019  10.5%
Income from operations  19,267   14,584  32.1%
Operating margin  14.0%  11.1% 290bp

Net Sales

OurThe increase in net sales forreflects our strategic focus on design and innovation which has allowed us to offer a diverse product line across most price points and style trends.  Our mattress fabrics were slightly higher forcover business, known as CLASS, continued to perform well. CLASS allows us to design our product offerings from fabric to finished cover and expand our business with our traditional customers and also target new market segments, especially the nine month year-to-date period of fiscal 2016 compared with the same period a year ago. However,fast growing Internet bedding space. Our scalable and flexible manufacturing platform supports this strategy, and we experienced a slight decrease inhave made significant capital investments to improve our operating efficiencies and overall capacity.

Although our net sales forincreased during the thirdfirst quarter of fiscal 2016 compared2017, we see some uncertainty with the prior year third quarter. Our net salesrespect to demand trends for the third quarter were affected by several factors, including a significant weather event at the end of the quarter, which affected our production and shipment schedules. In addition, we experienced a timing difference related to customer roll-outs of new product lines that typically occur in our third quarter as they did the previous year. We expect to recognize this business in our fourth quarterrest of fiscal 2016 following the Presidents Day holiday mattress promotional events.
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Design2017. We will continue to be strategic in targeting customers who value our innovation and innovation remain our top strategic priorities to meet customer style preferences and demand trends. As such, we are in the process of enhancing our design services and facilities. In addition, our mirrored manufacturing platform, technical expertise, and expanded reactive capacity support our strategic priorities that focus on customer demand trends and style preferences.
Our mattress fabric net sales also were affected by increased customer pricing pressures and the fact that the nine month year-to-date period of fiscal 2016 contained one less week compared with the same period a year ago.value proposition.

Gross Profit and Operating Income
 
Our mattress fabric gross profit and operating income increased in the thirdfirst quarter and the nine month year-to-date period of fiscal 20162017 compared with the same periodsperiod a year ago. These results reflect the increase in net sales noted above and the benefits of our recent capital investments, which includewith increased production capacity, via newer and more efficient equipment, enhanced finishing capabilities, and improved overall efficiency and throughput.  As planned,Also, we completed the initial phase of our expansion project at our facility located in Canada during the third quarter, and we plan to install additional new equipment and make other technological improvements to our manufacturing platform during the fourth quarter. This project is expected to improve our production capacity and operating efficiency at this location. We also experienced lower raw material costs and operating expenses due to more favorable currency exchange rates in Canada for fiscal 2016 compared with fiscal 2015.
Canada. Partially offsetting the improvement in operating income was an increase in SG&A expenses, due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets and increased customer pricing pressures as noted above.higher inventory warehousing costs and design and sales expenses.
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During the first quarter of fiscal 2017, we continued to make capital investments to enhance our operations and improve product delivery performance. We are working on additional expansion projects associated with our facilities located in North Carolina, which will add more production capacity, expand our design and administrative facilities, and enhance our distribution capabilities. Additionally, we have commenced the second phase of our expansion project with our facility located in Canada, which includes additional new equipment, enhanced finishing capabilities, and a new distribution platform that is expected to improve our service to customers located in Canada. The above mentioned capital projects are expected to be completed in the second half of fiscal 2017.

Segment assets

Segment assets consist of accounts receivable, inventory, property, plant and equipment, goodwill, a non-compete agreement and customer relationships associated with an acquisition.

(dollars in thousands) January 31, 2016  February 1, 2015  May 3, 2015  July 31, 2016  August 2, 2015  May 1, 2016 
Accounts receivable and inventory $44,309  $36,658  $41,328  $39,800  $42,530  $43,472 
Property, plant & equipment  35,637   33,046   33,773   39,435   35,116   37,480 
Goodwill  11,462   11,462   11,462   11,462   11,462   11,462 
Non-compete agreement  922   998   979   885   960   903 
Customer Relationships  728   779   766   702   753   715 

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Accounts Receivable & Inventory

As of JanuaryJuly 31, 2016, accounts receivable and inventory increased $7.7decreased $2.7 million, or 21%6.4%, compared with February 1, 2015. This increase is due to anAugust 2, 2015, despite the increase in inventory of $9.8 million, as a result of customers requiring us to hold higher inventory levels of key products. This increase in inventory was partially offset by a decrease in accounts receivable of $2.1 million, due to lower net sales andof 5.7% noted above. This decrease is primarily due to improved cash collections on accounts receivable as customers were taking more advantage of sales discounts in the thirdfirst quarter of fiscal 20162017 compared towith the thirdfirst quarter of fiscal 2015.2016.

As of JanuaryJuly 31, 2016, accounts receivable and inventory increased $3.0decreased $3.7 million, or 7%8.4%, compared with May 3, 2015.1, 2016, despite an increase in net sales of $50.5 million in the first quarter of fiscal 2017 compared with $48.9 million in the fourth quarter of fiscal 2016. This increasedecrease is due to an increase inimproved inventory of $4.4 million, as a result of customers requiring us to hold higher inventory levels of key products. This was partially offset by a decrease in accounts receivable of $1.4 million due tomanagement and improved cash collections on accounts receivable as customers were taking more advantage of sales discounts in the thirdfirst quarter of fiscal 20162017 compared with the fourth quarter of fiscal 2015.2016.

Property, Plant & Equipment

The $35.6$39.4 million at JanuaryJuly 31, 2016, represents property, plant and equipment of $23.0$25.5 million and $12.6$13.9 million located in the U.S. and Canada, respectively. The $33.0$35.1 million at February 1,August 2, 2015, represents property, plant, and equipment of $23.5$23.6 million and $9.5$11.5 million located in the U.S. and Canada, respectively. The $33.8$37.5 million at May 3, 2015,1, 2016, represents property, plant, and equipment of $23.8$24.8 million and $10.0$12.7 million located in the U.S. and Canada, respectively.

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As of JanuaryJuly 31, 2016, property, plant, and equipment increased $2.6$4.3 million, or 8%12%, compared with February 1,August 2, 2015. This increase is primarily due to the capital investments noted above, partially offset by depreciation expense.

As of JanuaryJuly 31, 2016, property, plant, and equipment increased $1.9$2.0 million, or 6%5%, compared with May 3, 2015.1, 2016. This increase is due to capital expenditures of $6.2$3.5 million that primarily relate to the construction of a new building (see Note 15 to the Consolidated Financial Statements for further details) and purchases and installation of machinery and equipment, associated with our operation located in Canada, partially offset by depreciation expense of $4.3$1.5 million for the nine month year-to-date periodfirst quarter of fiscal 2016.2017.

Upholstery Fabrics Segment

Net Sales

  Three Months Ended 
(dollars in thousands) 
January 31,
 2016
     
February 1,
 2015
     
 
% Change
                
Non U.S. Produced $31,515  92% $32,584  92% (3.3)%
U.S. Produced  2,674  8%  3,002  8% (10.9)%
Total $34,189  100% $35,586  100% (3.9)%

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                    Nine Months Ended   Three Months Ended     
(dollars in thousands) 
January 31,
 2016
    
February 1,
 2015
    
 
% Change
July 31,
2016
   
August 2,
2015
   
% Change
 
                         
Non U.S. Produced $90,037  92% $91,603  92% (1.7)% $27,845   92% $29,954   93%  (7.0)%
U.S. Produced  8,048  8%  8,174  8% (1.5)%    2,307   8%    2,423   7%  (4.8)%
Total $98,085  100% $99,777  100% (1.7)% $30,152   100% $32,377   100%  (6.9)%

Our net sales for upholstery fabrics were lower for the third quarter and nearly flat for the nine month year-to-date period of fiscal 2016 compared with the same periods a year ago. The third quarter of fiscal 2015 was an exceptionally strong quarterly performance for upholstery fabric sales.
Ourdecrease in upholstery fabric net sales also were affected by the fact that the nine month year-to-date period of fiscal 2016 contained one less week compared with the same period a year ago, the closure ofreflects softer retail demand for furniture and our finished goods warehousestrategy to enhance both our customer and distribution facility located in Poznan, Poland, in the third quarter of fiscal 2015, and some pricing pressures from key customers.
product mix to improve our profitability.

Design and product innovation remain our top strategic priorities. This strategy has allowed us to offer a diverse range of products that meet changing market trends and style preferences. As a result, we have extendedenhanced our market reach to a more diverse customer base, enhanced ourand product mix with profitable results,improved profitability, especially for our newest products. The recent launch of our product line of highly durable and increased our net sales withstain-resistant fabrics has been well received in the hospitality and lifestyle retail markets.market place.  Our 100% owned China platform supports our marketing efforts with the manufacturing flexibility to adapt to changing furniture market trends and consumer style preferences. This platform has allowed us to more effectively reach new customers, with the ability to offer a diverse product mix of fabric styles and price points.

Gross Profit, Selling, General & Administrative Expenses, and Operating Income

 Three Months Ended    Three Months Ended   
(dollars in thousands) January 31, 2016  February 1, 2015  % ChangeJuly 31, 2016 August 2, 2015 Change 
               
Gross profit $7,812  $6,326  23.5% $6,518  $6,277   3.8%
Gross profit margin  22.8%  17.8% 500bp  21.6%  19.4%  220bp
SG&A expenses  3,963   3,781  4.8%  3,534   3,595   (1.7)%
Income from operations  3,849   2,545  51.2%  2,984   2,681   11.3%
Operating margin  11.3%  7.2% 410bp  9.9%  8.3%  160bp
 
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  Nine Months Ended    
(dollars in thousands) January 31, 2016  February 1, 2015  % Change
          
Gross profit $20,365  $16,792  21.3%
Gross profit margin  20.8%  16.8% 400bp
SG&A expenses  11,372   10,518  8.1%
Income from operations  8,994   6,274  43.4%
Operating margin  9.2%  6.3% 290bp
Our upholstery fabricAlthough our net sales decreased for the first quarter of fiscal 2017, our gross profit and operating income increased in the third quarter and the nine month year-to-date period of fiscal 2016 compared withcomparison to the same periodsperiod a year ago. These results reflect the benefits fromThis trend reflects our strategic focus on product innovationstrategy of enhancing our customer and sales diversification. The benefits include an enhanced product mix that has resulted in greater operating efficiency and capacity utilization in our cut and sew operation located in China. We alsoto improve profitability as noted above. Also, we experienced lower raw material costs and operating expenses due to more favorable currency exchange rates in China for fiscal 2016 compared with fiscal 2015. Partially offsetting the improvement in income from operations was an increase in SG&A expenses due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets, and some pricing pressures from key customers as noted above.
Also, our profitability for the nine month year-to-date period of fiscal 2015 was affected by non-recurring charges of approximately $200,000 during the second quarter that related to the closure of our Culp Europe operation. No corresponding charge was recorded during the nine month year-to-date period of fiscal 2016.China.
 
Culp Europe
 
As previously announced atAt the end of the third quarter of fiscal 2015, we closed our finished goods warehouse and distribution facility located in Poznan, Poland, primarily as a result of ongoing economic weakness in Europe. We remain very interested in developing business in Europe, and we are assessing the bestpursuing a strategy for selling upholstery fabric into this market as business conditions improve.market.

Segment Assets
 
Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.
          
(dollars in thousands) January 31, 2016  February 1, 2015  May 3, 2015 July 31, 2016 August 2, 2015 May 1, 2016 
Accounts receivable and inventory $30,960  $32,129  $29,905  $31,021  $29,721  $26,540 
Property, plant & equipment  1,590   1,522   1,467   
1,459
   
1,518
   
1,564
 

Accounts Receivable & Inventory

As of January 31, 2016, accounts receivable and inventory for this segment decreased $1.2 million or 4% compared with February 1, 2015. This decrease was primarily due to a decrease in accounts receivable as a result of lower net sales and improved cash collections in the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015.

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As of JanuaryJuly 31, 2016, accounts receivable and inventory increased $1.0$1.3 million, or 4%, compared with May 3,August 2, 2015. This increase wasis primarily due to ana planned build up of inventory as the Chinese government is requiring temporary plant shutdowns of certain suppliers in order to improve air quality in anticipation of the G20 Summit taking place in September 2016. The increase in inventory was partially offset by improved cash collections on accounts receivable as customers were taking more advantage of sales discounts in the first quarter of fiscal 2017 compared with the first quarter of fiscal 2016.

As of July 31, 2016, accounts receivable and inventory increased $4.5 million or 17% compared with May 1, 2016. This increase is primarily due to a resultplanned build up of holding higher inventory levels to better service our customers.in anticipation of the G20 Summit noted above.

Property, Plant & Equipment

The $1.6$1.5 million at JanuaryJuly 31, 2016, represents property, plant, and equipment of $860,000$847,000 and $730,000$612,000 located in the U.S. and China, respectively. The $1.5 million at February 1,August 2, 2015, represents property, plant, and equipment of $877,000$818,000 and $645,000$700,000 located in the U.S. and China, respectively. The $1.5$1.6 million at May 3, 2015,1, 2016, represents property, plant, and equipment of $848,000$893,000 and $619,000$671,000 located in the U.S. and China, respectively.

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Other Income Statement Categories


  Three Months Ended    
(dollars in thousands) January 31, 2016  February 1, 2015  % Change
          
SG&A expenses $9,337  $8,375  11.5%
Interest income  38   202  (81.2)%
Other expense  85   307  (72.3)%


 Nine Months Ended    Three Months Ended   
(dollars in thousands) January 31, 2016  February 1, 2015  % ChangeJuly 31, 2016 August 2, 2015 % Change 
               
SG&A expenses $27,512  $23,173  18.7% $9,746  $8,741   11.5%
Interest expense  -   50  (100.0)%  -   24   (100.0)%
Interest income  150   478  (68.6)%  25   66   (62.1)%
Other expense  405   380  6.6%  152   95   60.0%

Selling, General and Administrative Expenses
 
The increase in SG&A expenses have increased in the third quarter and the nine month year-to-date period of fiscal 2016 compared with the same periods a year ago. This trend is primarily due to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets.targets and higher inventory warehousing costs and design and sales expenses associated with our mattress fabrics segment.

Interest Expense

Interest expense decreased for the nine month year-to-date periodfirst quarter of fiscal 20162017 compared with the same period a year ago. This trend primarily reflects lower outstanding balancespayment of the final installment on our long-term debt and interest costs that were capitalizedwas paid in connection with our capital investments associated with our mattress fabrics segment.full on August 11, 2015. Interest costs charged to operations and incurred on our U.S. line of credit and long-term debt were $9,000 and lines of credit were $58,000 and $191,000$44,000 for the nine month year-to-date periodsfirst quarter of fiscal 20162017 and 2015,2016, respectively. Interest costs charged to operations were reduced by of $58,000$9,000 and $141,000$20,000 for capitalized interest costs for the nine month year-to-date periodsfirst quarter of fiscal 20162017 and 2015,2016, respectively. These capitalized interest costs will be amortized over the related assets’ useful lives.

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Interest Income

Interest income decreased in the thirdfirst quarter and the nine month year-to-date period of fiscal 20162017 compared withto the same periods a year ago.first quarter of fiscal 2016. This trend reflects higher cash and cash equivalentequivalents and short-term investment balances held in U.S. dollar denominated account balances during the first quarter of fiscal 20162017 compared with the first quarter of fiscal 2015.2016. Cash and cash equivalents and short-term investment balances held in U.S. dollar denominated account balances earnare earning lower interest rates as compared to our cash and cash equivalents and short-term investment balances denominated in the local currency of our foreign subsidiaries.

During fiscal 2016, we implemented a strategy of substantially reducing the amount of cash we hold in Chinese Yuan Renminbi. Although this action has resulted in lower interest income, as compared to last year, thethis strategy has significantly mitigated our foreign currency exchange rate exposure in China. See discussion in “Other Expense” noted below.

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Other Expense

The decreaseincrease in other expense foris primarily due to unrealized holding gains associated with our Rabbi Trust investments that increased our deferred compensation obligation and a realized loss on the thirdsale of short-term investments used to support our current cash requirements.

During the first quarter of fiscal 2016 compared with the third quarter of fiscal 2015 resulted from our ability to better mitigate the effects of foreign currency exchange rate fluctuations associated with2017, our operations located in China. This was achieved by transferring the amount of cash held in Chinese Yuan Renminbi to U.S. dollars as noted above. As a result, we were able to mitigate the effects of foreign currency exchange rate fluctuations associated with our China operations by acheiving a balance of assetsCanada and liabilities denominated in Chinese Yuan Renminbi. Our operations located in China reported a foreign exchange gain of $48,000 for$30,000 compared with $35,000 in the thirdfirst quarter of fiscal 2016 compared with a foreign exchange loss of $136,000 for the same period a year ago.

Other expenses remained flat for the nine month year-to-date period of fiscal 2016 compared with the same period a year ago. This result reflects2016. These results reflect our ability to mitigate the effects of foreign currency exchange rate fluctuations associated with our subsidiaries domiciled in Canada and China through the maintenance of a natural hedge by keeping a balance of assets and liabilities denominated in foreign currencies other than the U.S. dollar. AlthoughAs noted above, we will continuemade a concerted effort in fiscal 2016 to try and maintain this natural hedge, there is no assurance thattransfer significant amounts of cash we will be ablehold in Chinese Yuan Renminbi to continue to do soaccounts denominated in future reporting periods.U.S. dollars.

Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $7.4$3.2 million, or 35.7%37.8% of income before income tax expense,taxes, for the ninethree month period ended JanuaryJuly 31, 2016, compared to income tax expense of $6.1$2.7 million, or 37.6%36.5% of income before income tax expense,taxes, for the ninethree month period ended February 1,August 2, 2015. Our effective income tax rates for the ninethree month periods ended JanuaryJuly 31, 2016, and February 1,August 2, 2015, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currenciescurrency exchange rates in relation to the U.S. dollar.
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The following schedule summarizes the factors that are attributable to the difference between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:

  2017  2016 
federal income tax rate  34.0%  34.0%
U.S state income tax expense  1.4   0.8 
tax effects of Chinese foreign exchange gains  1.1   0.4 
increase in liability for uncertain tax positions  0.5   0.3 
other  0.8   1.0 
   37.8%  36.5%
 20162015
federal income tax rate34.0%34.0%
foreign tax rate differential(6.6)(6.0)
undistributed earnings from foreign subsidiaries1.44.1
increase in liability for uncertain tax positions2.93.5
tax effects of Chinese foreign exchange gains3.50.2
other0.51.8
 35.7%37.6%
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Deferred Income Taxes

Valuation Allowance
 
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on
Refer to Note 13 located in the notes to the consolidated financial statements for disclosures regarding our assessment at Januaryassessments of our recorded valuation allowance as of July 31, 2016, we recorded a partial valuation allowance of $874,000, of which $498,000 pertained to certain U.S. state net operating loss carryforwards and credits and $376,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.  Based on our assessment at February 1, 2015, we recorded a partial valuation allowance of $1.0 million, of which $596,000 pertained to certain U.S. state net operating loss carryforwards and credits and $400,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.  Based on our assessment at May 3, 2015, we recorded a partial valuation allowance of $922,000, of which $561,000 pertained to certain U.S. state net operating loss carryforwards and credits and $361,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.
No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at January 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively.
 
The recorded valuation allowance of $874,000 at January 31, 2016, has no effect on our operations, loan covenant compliance, or the possible realization of certain U.S. state net operating loss carryforwards and credits and our loss carryforwards associated with our Culp Europe operation located in Poland. If it is determined that it is more-likely-than-not that we will realize any of these deferred tax assets, an income tax benefit will be recognized at that time.Undistributed Earnings
 
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Undistributed Earnings
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Based on our assessment as of January 31, 2016, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.
 
At January 31, 2016,Refer to Note 13 located in the netnotes to the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances  associated with our undistributed earnings from our foreign subsidiaries totaled $3.3 million, which included U.S. income and foreign withholding taxes totaling $37.3 million, offset by U.S. foreign income tax creditsas of $34.0 million. At February 1, 2015, the net deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $2.4 million, which included U.S. income and foreign withholding taxes totaling $32.1 million, offset by U.S. foreign income tax credits of $29.7 million. At May 3, 2015, the net deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $1.7 million, which included U.S. income and foreign withholding taxes totaling $32.4 million, offset by U.S. foreign income tax credits of $30.7 million.
We had accumulated earnings from our foreign subsidiaries totaling $100.9 million, $82.4 million, and $85.2 million at JanuaryJuly 31, 2016, February 1,August 2, 2015, and May 3, 2015,1, 2016, respectively.
Overall
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At January 31, 2016, our non-current deferred tax asset of $4.3 million represents $3.5 million and $773,000 from our operations located in the U.S. and China, respectively. At February 1, 2015, our non-current deferred tax asset of $5.0 million represents $4.2 million and $776,000 from our operations located in the U.S. and China, respectively. At May 3, 2015, our non-current deferred tax asset of $5.2 million represents $4.3 million and $868,000 from our operations located in the U.S. and China, respectively.
Our non-current deferred tax liability balances of $1.2 million, $927,000, and $982,000 at January 31, 2016, February 1, 2015, and May 3, 2015, respectively, pertain to our operations located in Canada.

Uncertainty In Income Taxes

At January 31, 2016,
In accordance with ASC Topic 740, we had a $13.2 million total gross unrecognized tax benefit, of which $3.5 million represents the amount of gross unrecognized tax benefit that, if recognized, would favorably affectmust recognize the income tax rate in future periods. At February 1, 2015, we had a $13.9 million total gross unrecognizedaffects from uncertain tax benefit, of which $3.6 million represents the amount of gross unrecognized tax benefitpositions only if it is more likely than not that if recognized, would favorably affect the income tax rateposition will be sustained on examination by the taxing authorities, based on the technical merits of the position. The income tax effect recognized in future periods. At May 3, 2015, we hadthe financial statements from such a $14.1 million total gross unrecognized tax benefit, of which $3.8 million representsposition is measured based on the amount of gross unrecognized taxlargest benefit that if recognized, would favorably affect thehas a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain income tax ratepositions are recorded as income tax expense. Significant judgment is required in future period.the identification of uncertain income tax positions and in the estimation of penalties and interest on uncertain income tax positions.
Refer to Note 13 located in the notes to the consolidated financial statements for disclosures of our uncertain income tax positions as of July 31, 2016, August 2, 2015, and May 1, 2016, respectively.

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At January 31, 2016, we had a $13.2 million total gross unrecognized tax benefit, of which $9.7 million and $3.5 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At February 1, 2015, we had a $13.9 million total gross unrecognized tax benefit, of which $10.3 million and $3.6 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At May 3, 2015, we had $14.1 million of total gross unrecognized tax benefit, of which $10.3 million and $3.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets.

We estimate that the amount of gross unrecognized tax benefits will decrease by approximately $120,000 for fiscal 2016. This decrease primarily relates to double taxation under applicable tax treaties with foreign tax jurisdictions.

Income Taxes Paid

We reported income tax expense of $7.4$3.2 million and $6.1$2.7 million for the nine month periods ending January 31,first quarters of fiscal 2017 and 2016, and February 1, 2015, respectively. Currently, we are not paying income taxes in the United States nor doas we expect to for a few more years, due to ourhave an estimated $18.0 million in operating loss carryforwards that totaled $33.3 million as of May 3, 2015. As a result,1, 2016. However, we haddid have income tax payments of $4.9$2.3 million and $3.0 million$900,000 for the nine month periods ending January 31,first quarters of fiscal 2017 and 2016, and February 1, 2015, respectively. OurThese income tax payments are associated with our subsidiaries located in China and Canada.

Liquidity and Capital Resources

Liquidity

Currently, our sources of liquidity include cash and cash equivalents, short-term investments, cash flow from operations, and amounts available under our revolving credit lines. These sources have been adequate for day-to-day operations, capital expenditures, debt payments, common stock repurchases, and dividend payments. We believe our present cash and cash equivalents and short-term investment balance of $36.0$48.0 million at JanuaryJuly 31, 2016, cash flow from operations, and the current availability under our revolving credit lines will be sufficient to fund our foreseeable business needs and contractual obligations.

On August 11, 2015,At July 31, 2016, our cash and cash equivalents and short-term investments totaled $48.0 million compared with $42.1 million at May 1, 2016. As planned, we paid our last annual paymentborrowed $7.0 million during the first quarter of $2.2 million on our unsecured senior term notes, and we currently do not have any long-term debt or balances due on our revolving credit lines.
On March 10, 2016, we amended our Credit Agreement with Wells Fargo to increase our borrowing capacity from $10 million to $30 million. The purpose of the increase in our revolving credit line with Wells Fargo isfiscal 2017 to support potential short termour short-term cash needs in different jurisdictions within our global operations,and mitigate our risk associated with foreign currency exchange rate fluctuations, and repatriate earnings and profitsfluctuations. This increase from our foreign subsidiariesthe end of fiscal 2016 was therefore primarily due to the borrowings on our U.S. for various strategic purposes.revolving line of credit and net cash provided by our operating activities of $5.8 million, partially offset by dividend payments of $3.4 million and capital expenditures mostly associated with our mattress fabric segment of $3.1 million.
 
We currently hold cash and cash equivalents and short-term investments in foreign jurisdictions to support the operational requirements of our foreign operations and for U.S. and foreign income tax planning purposes.

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A summary of our cash and cash equivalents and short-term investments by geographic area follows:
 
 January 31,  May 3,  July 31,  August 2,  May 1,  
(dollars in thousands) 2016  2015 
 2016  2015  2016 
Cayman Islands $20,077  $8,591  $36,101  $  8,591 $25,762 
China    5,720   12,019   8,454 
Canada  6,570   12,511     4,296     8,531   6,844 
China  6,479   14,630 
United States  2,846   3,977     1,866     3,128   1,086 
Poland  -   20 
 $35,972  $39,729  $47,983  $32,269 $42,146 

At January 31, 2016, our cash and cash equivalents and short-term investments totaled $36.0 million compared with $39.7 million at May 3, 2015. This decrease was primarily due to capital expenditures mostly associated with our mattress fabric segment of $7.7 million, dividend payments of $7.3 million, repurchases of our common stock of $2.4 million, a long-term debt payment of $2.2 million, and long-term investment purchases of $1.3 million  associated with our Rabbi Trust. This spending was partially offset by net cash provided by operating activities of $15.9 million.I -37

Our net cash provided by operating activities was $15.9$5.8 million for the ninethree months ending JanuaryJuly 31, 2016, a decreasean increase of $4.8$4.7 million compared with $20.7$1.1 million for the ninethree months ending February 1,August 2, 2015. This decreaseincrease reflects an increase in inventory purchases, as well as higher annual bonus payments made in fiscal 2016 compared with those made in fiscal 2015. This spending was partially offset by cash flow from earnings and improved cash collections with customers associated with both our business segments taking more advantage of sales discounts in the first quarter of fiscal 20162017 compared with the same period a year ago. Days’ sales in accounts receivable were 26 days and 29 days during the first quarters of fiscal 2015.2017 and 2016, respectively. Also, this increase is due to improved inventory management during the first quarter of fiscal 2017 compared to the same period a year ago.  Partially offsetting the increase in net cash provided by operating activities was higher incentive bonus payments in the first quarter of fiscal 2017 compared with the first quarter of fiscal 2016.

We have had a significant shift infrom cash and cash equivalents and short-term investments held in China andto the Cayman Islands. DuringSince April 2016 through the thirdend of our first quarter of fiscal 2016,2017, we distributed earnings and profits totaling $13.6$39.2 million from our subsidiaries located in China to our international holding company located in the Cayman Islands. This shift is primarily due to our strategy of ultimately repatriating earnings and profits from our subsidiaries located in China to the U.S. ($3.1 million during the fourth quarter of fiscal 2016) and mitigating our risk to foreign exchange rate fluctuations for assets and liabilities denominated in Chinese Yuan Renminbi. By reducing the amount of cash and cash equivalents held in Chinese Yuan Renminbi, we are able to obtain a better balance of assets and liabilities denominated in Chinese Yuan Renminbi, and therefore mitigate the risk against foreign currency exchange rate fluctuations in China. In addition, by transferring earnings and profits from China to the Cayman Islands, it provides increased flexibility to repatriate these earnings and profits to the U.S. for various strategic purposes.

Our cash and cash equivalents and short-term investment balance may be adversely affected by factors beyond our control, such as lower net sales due to weakening industry demand and delays in receipt of payment on accounts receivable.

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Dividend Program

On March 1,June 15, 2016, we announced that our board of directors approved the payment of a special cash dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.07 per share. These dividends were paid on July 15, 2016, to shareholders of record as of July 1, 2016. During the first quarter of fiscal 2017, dividend payments totaled $3.4 million, of which $2.5 million represented the special cash dividend payment of $0.21 per share, and $861,000 represented the quarterly dividend payment of $0.07 per share.

During the first quarter of fiscal 2016, dividend payments totaled $5.7 million, of which $5.0 million represented a special cash dividend of $0.40 per share, and $740,000 represented a quarterly dividend payment of $0.06 per share.

On August 30, 2016, we announced that our board of directors approved the payment of a quarterly cash dividend of $0.07 per share. This payment will be made on or about April 15,October 17, 2016, to shareholders of record as of April 1,October 3, 2016.

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During the nine months ended January 31, 2016, dividend payments totaled $7.3 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $2.3 million represented our regular quarterly cash dividend payments ranging from $0.06 to $0.07 per share.

During the nine months ended February 1, 2015, dividend payments totaled $6.8 million, of which $4.9 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $1.9 million represented our regular quarterly cash dividend payments ranging from $0.05 to $0.06 per share.

Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.
 
Common Stock Repurchase Program
 
On February 25, 2014,June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities.
 
During the ninethree months ended JanuaryJuly 31, 2016, and August 2, 2015, we purchased 100,776did not purchase any shares of our common stock at a cost of $2.4 million, all of which were purchased during the third quarter. During fiscal 2015, we purchased 43,014 shares of our common stock at a cost of $745,000, all of which were purchased in the first and second quarters.stock.
 
At JanuaryJuly 31, 2016, we had $1.9$5.0 million available for additional repurchases of our common stock.

Working Capital

Accounts receivable at JanuaryJuly 31, 2016, were $26.8$22.7 million, a decrease of $4.0$3.0 million, or 13%12%, compared with $30.8$25.7 million at February 1,August 2, 2015. This decrease is primarily due to lower net sales and improved cash collections withas customers associated with both our business segmentswere taking more advantage of sales discounts in the thirdfirst quarter of fiscal 20162017 compared towith the thirdfirst quarter of fiscal 2015.2016. Days’ sales outstanding were 3126 days for the thirdfirst quarter of fiscal 20162017 compared with 3429 days for the thirdfirst quarter of fiscal 2015.2016.

Inventories as of JanuaryJuly 31, 2016, were $48.5$48.1 million, an increase of $10.5$1.6 million, or 28%3%, compared with $38.0$46.5 million at February 1,August 2, 2015. This increase is primarily due to customersa planned build up of inventory associated with our upholstery fabrics segment as the Chinese government is requiring ustemporary plant shutdowns of certain suppliers in order to hold higherimprove air quality in anticipation of the G20 Summit taking place in September 2016. The increase in inventory levels of key products.associated with our upholstery fabrics segment was partially offset by a decrease in inventory associated with our mattress fabrics segment resulting from improved inventory management. Inventory turns were 5.15.3 for the thirdfirst quarter of fiscal 20162017 compared with 7.05.6 for the thirdfirst quarter of fiscal 2015.2016.

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Accounts payable-trade as of JanuaryJuly 31, 2016, were $25.6$26.7 million, a decrease of $3.0$1.5 million, or 11%5%, compared with $28.6$28.2 million at February 1,August 2, 2015.  This decrease is primarily due to the timing of payments to suppliers associatedduring the first quarter of fiscal 2017 compared with operations located in China as a resultthe first quarter of the Chinese New Year holiday.fiscal 2016.

Operating working capital (accounts receivable and inventories, less accounts payable-trade and accounts payable-capital expenditures) was $49.3$43.5 million at JanuaryJuly 31, 2016, compared with $39.4$43.4 million at February 1,August 2, 2015. Operating working capital turnover was 7.27.0 during the thirdfirst quarter of fiscal 2016,2017 compared with 7.57.7 during the thirdfirst quarter of fiscal 2015.2016.

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Financing Arrangements

Unsecured Senior Term Notes

We entered into a note agreement dated August 11, 2008 that providedCurrently, we have revolving credit agreements with banks for the issuance of $11.0 million of unsecured senior term notes with a fixed interest rate of 8.01%our U.S parent company and a term of seven years. Principal payments of $2.2 million per year were due on the notes beginning August 11, 2011. Any principal pre-payments would have been assessed a penalty as definedour operations located in the agreement. The agreement contained customary financial and other covenants as defined in the agreement.

On August 11, 2015, we paid our last annual payment of $2.2 million and this agreement has been paid in full.

Revolving Credit Agreement – United States

As of May 3, 2015, we had an unsecured credit agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) that provided for an unsecured revolving loan commitment of $10 million to be used to finance working capital and general corporate purposes. Interest is charged at a rate (applicable interest rate of 1.93%, 1.77%, and 1.78% at January 31, 2016, February 1, 2015, and May 3, 2015, respectively) equal to the one-month LIBOR rate plus a spread based on our ratio of debt to EBITDA as defined in the agreement. The Credit Agreement contained customary financial and other covenants as defined in the agreement and was set to expire on August 31, 2015.

Effective July 10, 2015, we amended our Credit Agreement to extend the expiration date to August 31, 2017, and maintain an annual capital expenditure limit of $12 million.

We entered into a Second Amendment to our Credit Agreement dated March 10, 2016, which amends our Credit Agreement with Wells Fargo Bank, National Association.  The terms of the Second Amendment include, among other things, provisions that (i) increase our line of credit under the Credit Agreement to $30 million, (ii) increase the annual limit on capital expenditures by the company to $15 million, (iii) add a new financial covenant to establish a minimum level of unencumbered liquid assets, (iv) eliminate certain financial covenants, (v) amend the pricing matrix that provides for interest payable on obligations under the agreement as a variable spread over LIBOR, based upon the company's ratio of debt to EBITDA, and (vi) provide that the obligations under the Credit Agreement are to be secured by a pledge of 65% of the common stock of Culp International Holdings Ltd, our Cayman subsidiary.
China. The purpose of the increase in our revolving lines of credit line with Wells Fargo isare to support potential short term cash needs in different jurisdictions, within our global operations, mitigate our risk associated with foreign currency exchange rate fluctuations, and repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes.

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At January 31, 2016, February 1, 2015 and May 3, 2015 there was a $250,000 outstanding letter of Our revolving credit (all of which related to workers compensation). At January 31, 2016, February 1, 2015, and May 3, 2015, there were no borrowings outstanding under the Credit Agreement.

Revolving Credit Agreement – China

We had an unsecured credit agreement associated with our operations in China that provided for a line of credit of up to 40 million RMB (approximately $6.1 million USD at January 31, 2016), that was set to expire on February 9, 2016. This agreement had an interest rate determined by the Chinese government. There were no borrowings outstanding under the agreement as of January 31, 2016, February 1, 2015, and May 3, 2015.
On March 8, 2016, we renewed our unsecured credit agreement associated with our operations located in China. The renewal extended the agreement to March 8, 2017 and maintained the line of credit up to 40 million RMB (approximately $6.1 million USD).

Overall

Our loan agreements require among other things, that weus to maintain compliance with certain financial covenants.covenants as defined in the respective agreement. At JanuaryJuly 31, 2016, the company waswe were in compliance with theseall our financial covenants.
Refer to Note 8 located in the notes to the consolidated financial statements for further details of our revolving credit agreements.

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Capital Expenditures and Depreciation

Overall

Capital expenditures on a cash basis were $7.7$3.1 million for the nine month year-to-date periodfirst quarter for fiscal 20162017 compared with $8.2$3.3 million for the same period a year ago. Capital expenditures for the nine month year-to-date periodsfirst quarters of fiscal 2017 and 2016 and 2015 were primarilymostly related to our mattress fabrics segment.

Depreciation expense was $4.9$1.8 million for the nine month year-to-date periodfirst quarter of fiscal 20162017 compared with $4.2$1.6 million for the same period a year ago.first quarter of fiscal 2016. Depreciation expense for the nine month year-to-date periodsfirst quarters of fiscal 2017 and 2016 and 2015 primarilymostly related to the mattress fabrics segment.

For fiscal 2016,2017, we are projecting capital expenditures for the company as a whole to be approximately $12.0 million. Depreciation expense for the company as a whole is projected to be approximately $7.0 million in fiscal 2016.2017. The estimated capital expenditures and depreciation expense primarilymostly relate to the mattress fabrics segment. For fiscal 2017, our preliminary estimate for capital expenditures is in the range of $11 million to $12 million, as we continue to invest in our mattress fabrics business. These are management’s current expectations only, and changes in our business needs could cause changes in plans for capital expenditures and expectations for related depreciation expense.
Accounts Payable – Capital Expenditures

At July 31, 2016, we had total amounts due regarding capital expenditures totaling $627,000, which pertain to outstanding invoices, none of which are financed. This amount due of $627,000 is required to be paid in full in fiscal 2017.

Purchase Commitments – Capital Expenditures
At July 31, 2016, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $10.5 million. The $10.5 million as of July 31, 2016, includes $7.4 million associated with the construction of a new building noted below.

Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that will expand our distribution capabilities and office space at a current estimated cost of $11.2 million. This agreement required an installment payment of $1.9 million in April 2016 and  requires additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- $3.8 million; and Fiscal 2019- $1.2 million. Interest will be charged on the required outstanding installment payments in excess of services that have been rendered at a rate of $2.25% plus the current 30 day LIBOR rate.

Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor's bank being the beneficiary. In addition to the interest that will be charged on the outstanding installment payments noted above, there will be a 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month (see Note 8 for further details).

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As of July 31, 2016, we have made payments totaling $3.8 million for services rendered on the construction of this building. The remaining $7.4 million on this commitment is required to be paid on an installment basis over the next three fiscal years as follows: Fiscal 2017 - $2.4 million; Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.2 million.
 
The construction of this new building is currently expected to be completed in December 2016.

Critical Accounting Policies and Recent Accounting Developments

At JanuaryJuly 31, 2016, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended May 3, 2015.1, 2016.

Refer to Note 2 located in the notes to the consolidated financial statements for recently adopted and issued accounting pronouncements since the filing of our Form 10-K for the year ended May 3, 2015.1, 2016.

Contractual Obligations
 
As of JanuaryJuly 31, 2016, there were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended May 3, 2015.1, 2016.

Inflation

Any significant increase in our raw material costs, utility/energy costs and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating increases on to customers.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on our revolving credit lines.

At JanuaryJuly 31, 2016, our U.S. revolving credit agreement had anrequired interest to be charged at a rate (applicable interest rate equal to the one-monthof 1.94% at July 31, 2016) as a variable spread over LIBOR rate plus a spread based on our ratio of debt to EBITDA as defined in the agreement. Our revolving credit line associated with our China subsidiaries bears interest at a rate determined by the Chinese government. At JanuaryJuly 31, 2016, thereour U.S. revolving credit line had outstanding borrowings of $7.0 million. There were no borrowings outstanding under any of our revolving credit lines.line associated with our China operations at July 31, 2016.
 
We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in Canada and China. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currency of our subsidiaries domiciled in Canada and China, although there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the United States dollar as their functional currency. A substantial portion of the company’s imports purchased outside the United States are denominated in U.S. dollars. A 10% change in the above exchange rates at JanuaryJuly 31, 2016, would not have had a significant impact on our results of operations or financial position.

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ITEM 4.  CONTROLS AND PROCEDURES

We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of JanuaryJuly 31, 2016, the end of the period covered by this report. This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, we have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports filed by us and submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported as and when required. Further, we concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosures.

There has been no change in our internal control over financial reporting that occurred during the quarter ended JanuaryJuly 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II – Other Information

Item 1. Legal Proceedings

There have not been any material changes to our legal proceedings during the ninethree months ended JanuaryJuly 31, 2016. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 17, 201515, 2016 for the fiscal year ended May 3, 2015.1, 2016.

Item 1A.  Risk Factors

There have not been any material changes to our risk factors during the ninethree months ended JanuaryJuly 31, 2016. Our risk factors are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 17, 201515, 2016 for the fiscal year ended May 3, 2015.1, 2016.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Period 
(a)
 
 
Total
Number of
Shares
Purchased
  
(b)
 
 
 
Average
Price Paid
per Share
  
(c)
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  
(d)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs (1)
 
November 2, 2015 to December 6, 2015  -   -   -  $4,256,235 
December 7, 2015 to January 3, 2016  -   -   -  $4,256,235 
January 4, 2016 to January 31, 2016  100,776  $23.79    100,776  $1,859,274 
Total  100,776  $23.79    100,776  $1,859,274 
Period 
(a)
 
 
 
Total
Number of
Shares
Purchased
  
(b)
 
 
 
 
Average
Price Paid
per Share
  
(c)
 
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  
(d)
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs (1)
 
May 2, 2016  to
June 5, 2016
  -   -   -  $1,859,274 
June 6, 2016  to
July 3, 2016
  -   -   -  $5,000,000 
July 4, 2016 to
July 31, 2016
  
-
   
-
   
-
  $5,000,000 
 
Total
  
-
   
-
   
-
  $5,000,000 

(1)On February 25, 2014,June 15, 2016, we announced that our board of directors approved anincreased the authorization for us to acquire up to $5.0 million of our common stock.

II-1II -1

Item 5.  Other Information

We entered into a Second Amendment to our Credit Agreement dated March 10, 2016, which amends our Credit Agreement with Wells Fargo Bank, National Association.  The terms of the Second Amendment include, among other things, provisions that (i) increase our line of credit under the Credit Agreement to $30 million, (ii) increase the annual limit on capital expenditures by the company to $15 million, (iii) add a new financial covenant to establish a minimum level of unencumbered liquid assets, (iv) eliminate certain financial covenants, (v) amend the pricing matrix that provides for interest payable on obligations under the agreement as a variable spread over LIBOR, based upon the company's ratio of debt to EBITDA, and (vi) provide that the obligations under the Credit Agreement are to be secured by a pledge of 65% of the common stock of Culp International Holdings Ltd, our Cayman subsidiary. This description of the Second Amendment is qualified in its entirety by reference to the terms of the Second Amendment, a copy of which is filed as Exhibit 10.1 hereto.

II-2

Item 6.  Exhibits
 
The following exhibits are submitted as part of this report.
The following exhibits are submitted as part of this report.
 3(i)
Articles of Incorporation of the company, as amended, were filed as Exhibit 3(i) to the company’s Form 10-Q for the quarter ended July 28, 2002, filed September 11, 2002 (Commission File No. 001-12597), and incorporated herein by reference.
 
 3 (ii)
Restated and Amended Bylaws of the company, as amended November 12, 2007, were filed as Exhibit 3.1 to the company’s Form 8-K dated November 12, 2007 (Commission File No. 001-12597), and incorporated herein by reference.
10.1
Second Amendment to the Credit Agreement dated as of March 10, 2016, by and between Culp, Inc and Wells Fargo. N.A.
 
 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
 
 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
 
 32.1
Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
 
 32.2
Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
 
 101.INS
XBRL Instance Document
 
 101.SCH
XBRL Taxonomy Extension Schema Document
 
 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document

II-3II -2
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
CULP, INC.
 (Registrant)(Registrant)
   
   
Date: March 11,September 9, 2016By:/s/ Kenneth R. Bowling
  Kenneth R. Bowling
  Vice President and Chief Financial Officer
  (Authorized to sign on behalf of the registrant
  and also signing as principal financial officer)
  
   
 By:
/s/ Thomas B. Gallagher, Jr.
  Thomas B. Gallagher, Jr.
  Corporate Controller
  (Authorized to sign on behalf of the registrant
  and also signing as principal accounting officer)
 
II-4II -3
 
EXHIBIT INDEX


Exhibit NumberExhibit


Exhibit Number
Exhibit
10.1Second Amendment to the Credit Agreement dated as of March 10, 2016, by and between Culp, Inc. and Wells Fargo, N.A.
31.1Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101.INSXBRL Instance Document

101.SCHXBRL Taxonomy Extension Schema Document

101.CALXBRL Taxonomy Extension Calculation Linkbase Document

101.LABXBRL Taxonomy Extension Label Linkbase Document

101.PREXBRL Taxonomy Extension Presentation Linkbase Document

101.DEFXBRL Taxonomy Extension Definition Linkbase Document