Item 1: Financial Statements

CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE THREE AND SIX MONTHS ENDED OCTOBER 29, 2017 AND OCTOBER 30, 2016 ~~AND NOVEMBER 1, 2015~~
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)

	THREE MONTHS ENDED

	October 29,			October 30,
	2017			2016

Net sales	$	80,698			75,343
Cost of sales		64,894			58,442
Gross profit		15,804			16,901

Selling, general and
administrative expenses		9,415			9,602
Income from operations		6,389			7,299

Interest expense		37			-
Interest income		(128	)		(15	)
Other expense		321			155
Income before income taxes		6,159			7,159

Income taxes		2,108			2,684

Loss from investment in unconsolidated joint venture		75			-
Net income	$	3,976			4,475

Net income per share, basic	$	0.32			0.36
Net income per share, diluted		0.32			0.36
Average shares outstanding, basic		12,440			12,308
Average shares outstanding, diluted		12,580			12,507

	SIX MONTHS ENDED

	October 29,			October 30,
	2017			2016

Net sales	$	160,230			156,026
Cost of sales		127,962			120,705
Gross profit		32,268			35,321

Selling, general and
administrative expenses		18,916			19,348
Income from operations		13,352			15,973

Interest expense		37			-
Interest income		(259	)		(40	)
Other expense		674			307
Income before income taxes		12,900			15,706

Income taxes		3,748			5,917

Loss from investment in unconsolidated joint venture		193			-
Net income	$	8,959			9,789

Net income per share, basic	$	0.72			0.80
Net income per share, diluted		0.71			0.78
Average shares outstanding, basic		12,420			12,297
Average shares outstanding, diluted		12,613			12,495

See accompanying notes to consolidated financial statements.

THREE MONTHS ENDED

October 30, November 1,
2016 2015

Net sales $ 75,343 76,956
Cost of sales 58,442 61,223
Gross profit 16,901 15,733

Selling, general and
administrative expenses 9,602 9,433
Income from operations 7,299 6,300

Interest income (15 ) (69 )
Other expense 155 225
Income before income taxes 7,159 6,144

Income taxes 2,684 2,373
Net income $ 4,475 3,771

Net income per share, basic $ 0.36 0.31
Net income per share, diluted 0.36 0.30
Average shares outstanding, basic 12,308 12,343
Average shares outstanding, diluted 12,507 12,484

SIX MONTHS ENDED

October 30, November 1,
2016 2015

Net sales $ 156,026 157,141
Cost of sales 120,705 125,206
Gross profit 35,321 31,935

Selling, general and
administrative expenses 19,348 18,175
Income from operations 15,973 13,760

Interest income (40 ) (112 )
Other expense 307 320
Income before income taxes 15,706 13,552

Income taxes 5,917 5,081
Net income $ 9,789 8,471

Net income per share, basic $ 0.80 0.69
Net income per share, diluted 0.78 0.68
Average shares outstanding, basic 12,297 12,310
Average shares outstanding, diluted 12,495 12,481

See accompanying notes to consolidated financial statements.

I-1

~~CULP, INC.~~
~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~
~~FOR THE THREE AND SIX MONTHS ENDED OCTOBER 30, 2016 AND NOVEMBER 1, 2015~~
~~(UNAUDITED)~~
~~(AMOUNTS IN THOUSANDS)~~

THREE MONTHS ENDED

October 30, November 1,
2016 2015

Net income $ 4,475 $ 3,771

Other comprehensive income (loss)

Unrealized gains (losses) on investments

    Unrealized holding gains (losses) on investments 4 (29 )

    Reclassification adjustment for realized loss included in net income - 56

Total other comprehensive income 4 27

Comprehensive income $ 4,479 $ 3,798

SIX MONTHS ENDED

October 30, November 1,
2016 2015

Net income $ 9,789 $ 8,471

Other comprehensive gain (loss)

Unrealized gains (losses) on investments

    Unrealized holding gains (losses) on investments 88 (118 )

    Reclassification adjustment for realized loss included in net income 12 56

Total other comprehensive gain (loss) 100 (62 )

Comprehensive income $ 9,889 $ 8,409

See accompanying notes to consolidated financial statements.

CULP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED OCTOBER 29, 2017 AND OCTOBER 30, 2016
(UNAUDITED)
(AMOUNTS IN THOUSANDS)

	THREE MONTHS ENDED

	October 29,		October 30,
	2017		2016

Net income	$	3,976	$	4,475

Other comprehensive income

Unrealized gains on investments		20		4

Total other comprehensive income		20		4


Comprehensive income	$	3,996	$	4,479




	SIX MONTHS ENDED

	October 29,		October 30,
	2017		2016

Net income	$	8,959	$	9,789

Other comprehensive income

Unrealized gains on investments

Unrealized holding gains on investments		64		88

Reclassification adjustment for realized loss included in net income		-		12

Total other comprehensive income		64		100


Comprehensive income	$	9,023	$	9,889

See accompanying notes to consolidated financial statements.

I-2

~~CULP, INC.~~

~~CONSOLIDATED BALANCE SHEETS~~

~~OCTOBER 30, 2016, NOVEMBER 1, 2015 AND MAY 1, 2016~~

~~UNAUDITED~~

~~(Amounts in Thousands)~~

     October 30, November 1, * May 1,
2016 2015 2016
Current assets:
Cash and cash equivalents $ 13,910 31,176 37,787
Short-term investments 2,430 6,320 4,359
Accounts receivable, net 19,039 23,314 23,481
Inventories 45,954 46,479 46,531
Income taxes receivable - 75 155
Other current assets 1,675 2,614 2,477
    Total current assets 83,008 109,978 114,790

Property, plant and equipment, net 45,537 38,319 39,973
Goodwill 11,462 11,462 11,462
Deferred income taxes 581 3,415 2,319
Long-term investments - Held-To-Maturity 31,050 - -
Long-term investments - Rabbi Trust 4,994 3,279 4,025
Other assets 2,495 2,494 2,573

    Total assets $ 179,127 168,947 175,142

Current liabilities:
Accounts payable-trade 20,183 25,221 23,994
Accounts payable - capital expenditures 3,000 1,269 224
Accrued expenses 8,878 9,895 11,922
Income taxes payable - current 513 305 180
    Total current liabilities 32,574 36,690 36,320

Income taxes payable - long-term 3,734 3,655 3,841
Deferred income taxes 1,699 1,206 1,483
Deferred compensation 5,171 4,421 4,686

    Total liabilities 43,178 45,972 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
12,311,756 at October 30, 2016; 12,350,265
at November 1, 2015; and 12,265,489 at
May 1, 2016 615 618 614
Capital contributed in excess of par value 45,349 44,708 43,795
Accumulated earnings 90,029 77,806 84,547
Accumulated other comprehensive loss (44 ) (157 ) (144 )
Total shareholders' equity 135,949 122,975 128,812

Total liabilities and shareholders' equity $ 179,127 168,947 175,142

* Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

CULP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 29, 2017, OCTOBER 30, 2016 AND APRIL 30, 2017
UNAUDITED
(Amounts in Thousands)

	October 29,		October 30,			* April 30,
	2017		2016			2017
Current assets:
Cash and cash equivalents	$	15,739		13,910			20,795
Short-term investments - Available for Sale		2,478		2,430			2,443
Short-term investments - Held-To-Maturity		4,015		-			-
Accounts receivable, net		24,220		19,039			24,577
Inventories		50,209		45,954			51,482
Other current assets		2,263		1,675			2,894
Total current assets		98,924		83,008			102,191

Property, plant and equipment, net		52,530		45,537			51,651
Goodwill		11,462		11,462			11,462
Deferred income taxes		491		581			419
Long-term investments - Held-To-Maturity		26,853		31,050			30,945
Long-term investments - Rabbi Trust		6,921		4,994			5,466
Investment in unconsolidated joint venture		1,522		-			1,106
Other assets		2,340		2,495			2,394

Total assets	$	201,043		179,127			205,634

Current liabilities:
Accounts payable-trade	$	24,600		20,183			29,101
Accounts payable - capital expenditures		3,209		3,000			4,767
Accrued expenses		7,364		8,878			11,947
Income taxes payable - current		692		513			287
Total current liabilities		35,865		32,574			46,102

Accounts payable - capital expenditures		-		-			1,322
Income taxes payable - long-term		487		3,734			467
Deferred income taxes		4,641		1,699			3,593
Deferred compensation		6,970		5,171			5,520

Total liabilities		47,963		43,178			57,004

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
12,435,276 at October 29, 2017; 12,311,756
at October 30, 2016; and 12,356,631 at
April 30, 2017		622		615			618
Capital contributed in excess of par value		47,441		45,349			47,415
Accumulated earnings		104,957		90,029			100,601
Accumulated other comprehensive income (loss)		60		(44	)		(4	)
Total shareholders' equity		153,080		135,949			148,630

Total liabilities and shareholders' equity	$	201,043		179,127			205,634

* Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

I-3

~~CULP, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~FOR THE SIX MONTHS ENDED OCTOBER 30, 2016 AND NOVEMBER 1, 2015~~

~~UNAUDITED~~

~~(Amounts in Thousands)~~

SIX MONTHS ENDED

October 30, November 1,
2016 2015

Cash flows from operating activities:
Net income $ 9,789 8,471
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,511 3,184
Amortization of other assets 80 86
Stock-based compensation 1,657 1,339
Excess tax benefit related to stock-based compensation (167 ) (838 )
Deferred income taxes 2,121 2,816
Realized loss on sale of short-term investments 12 56
Loss (gain) on sale of equipment 9 (60 )
Foreign currency exchange gains (53 ) (13 )
Changes in assets and liabilities:
Accounts receivable 4,142 4,892
Inventories 219 (4,135 )
Other current assets 751 (302 )
Other assets - 8
Accounts payable - trade (3,274 ) (2,921 )
Accrued expenses and deferred compensation (2,749 ) (1,547 )
Income taxes 554 168
Net cash provided by operating activities 16,602 11,204

Cash flows from investing activities:
Capital expenditures (6,308 ) (5,255 )
Proceeds from the sale of equipment - 225
Proceeds from the sale of short-term investments 2,000 3,612
Purchase of short-term investments (23 ) (46 )
Purchase of long-term investments (Held-To-Maturity) (31,050 ) -
Purchase of long-term investments (Rabbi Trust) (929 ) (864 )
Net cash used in investing activities (36,310 ) (2,328 )

Cash flows from financing activities:
Proceeds from line of credit 7,000 -
Payments on line of credit (7,000 ) -
Payments on long-term debt - (2,200 )
Excess tax benefit related to stock-based compensation 167 838
Dividends paid (4,307 ) (6,417 )
Payments on debt issuance costs (2 ) (43 )
Proceeds from common stock issued 11 126
Net cash used in financing activities (4,131 ) (7,696 )

Effect of exchange rate changes on cash and cash equivalents (38 ) 271

(Decrease) increase in cash and cash equivalents (23,877 ) 1,451

Cash and cash equivalents at beginning of period 37,787 29,725

Cash and cash equivalents at end of period $ 13,910 31,176

See accompanying notes to consolidated financial statements.

CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 29, 2017 AND OCTOBER 30, 2016
UNAUDITED
(Amounts in Thousands)

	SIX MONTHS ENDED

	October 29,			October 30,
	2017			2016

Cash flows from operating activities:
Net income	$	8,959			9,789
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		3,713			3,511
Amortization of other assets		166			80
Stock-based compensation		1,558			1,657
Deferred income taxes		976			2,121
Realized loss on sale of short-term investments (Available for Sale)		-			12
Loss on sale of equipment		-			9
Loss from investment in unconsolidated joint venture		193			-
Foreign currency exchange loss (gain)		42			(53	)
Changes in assets and liabilities:
Accounts receivable		561			4,142
Inventories		1,597			219
Other current assets		723			751
Other assets		(35	)		-
Accounts payable - trade		(5,074	)		(3,274	)
Accrued expenses and deferred compensation		(3,607	)		(2,469	)
Income taxes		406			554
Net cash provided by operating activities		10,178			17,049

Cash flows from investing activities:
Capital expenditures		(4,978	)		(6,308	)
Investment in unconsolidated joint venture		(609	)		-
Proceeds from the sale of equipment		6			-
Proceeds from the sale of short-term investments (Available for Sale)		-			2,000
Purchase of short-term investments (Available for Sale)		(24	)		(23	)
Purchase of long-term investments (Held-To-Maturity)		-			(31,050	)
Proceeds from the sale of long-term investments (Rabbi Trust)		54			-
Purchase of long-term investments (Rabbi Trust)		(1,457	)		(929	)
Net cash used in investing activities		(7,008	)		(36,310	)

Cash flows from financing activities:
Proceeds from line of credit		10,000			7,000
Payments on line of credit		(10,000	)		(7,000	)
Payments on vendor-financed capital expenditures		(2,500	)		-
Dividends paid		(4,603	)		(4,307	)
Common stock surrendered for withholding taxes payable		(1,147	)		(280	)
Payments on debt issuance costs		-			(2	)
Proceeds from common stock issued		5			11
Net cash used in financing activities		(8,245	)		(4,578	)

Effect of exchange rate changes on cash and cash equivalents		19			(38	)

Decrease in cash and cash equivalents		(5,056	)		(23,877	)

Cash and cash equivalents at beginning of period		20,795			37,787

Cash and cash equivalents at end of period	$	15,739			13,910

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 - - - 9,789 - 9,789
    Stock-based compensation - - 1,657 - - 1,657
    Unrealized gain on investments - - - - 100 100
    Excess tax benefit related to stock
       based compensation - - 167 - - 167
    Common stock issued in connection
       with performance based units 49,192 2 (2 ) - - -
    Fully vested common stock award 4,800 - - - - -
    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 - - - (4,307 ) - (4,307 )
Balance, October 30, 2016 12,311,756 $ 615 45,349 90,029 (44 ) $ 135,949

* Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

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) Income			Equity
Balance, May 1, 2016		12,265,489		$	614			43,795			84,547			(144	)	$	128,812
Net income		-			-			-			22,334			-			22,334
Stock-based compensation		-			-			3,358			-			-			3,358
Unrealized gain on investments		-			-			-			-			140			140
Excess tax benefit related to stock
based compensation		-			-			657			-			-			657
Common stock issued in connection with vesting
of performance based restricted stock units		49,192			2			(2	)		-			-			-
Fully vested common stock award		4,800			-			-			-			-			-
Common stock issued in connection with exercise														.
of stock options		68,000			3			585			-			-			588
Common stock surrendered for the cost of stock option
exercises and withholding taxes payable		(30,850	)		(1	)		(978	)		-			-			(979	)
Dividends paid		-			-			-			(6,280	)		-			(6,280	)
Balance, April 30, 2017 *		12,356,631			618			47,415			100,601			(4	)		148,630
Net income		-			-			-			8,959			-			8,959
Stock-based compensation		-			-			1,558			-			-			1,558
Unrealized gain on investments		-			-			-			-			64			64
Common stock issued in connection with vesting
of performance based restricted stock units		118,845			6			(6	)		-			-			-
Fully vested common stock award		4,800			-			-			-			-			-
Common stock issued in connection with vesting
of time-based restricted stock unit		1,200			-			-			-			-			-
Common stock issued in connection with exercise
of stock options		600			-			5			-			-			5
Common stock surrendered for
withholding taxes payable		(46,800	)		(2	)		(1,531	)		-			-			(1,533	)
Dividends paid		-			-			-			(4,603	)		-			(4,603	)
Balance, October 29, 2017		12,435,276		$	622			47,441			104,957			60		$	153,080

* 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"~~“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~~company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July ~~15, 2016,~~14, 2017, for the fiscal year ended ~~May 1, 2016.~~April 30, 2017.

The ~~company's~~company’s six months ended October 29, 2017, and October 30, 2016, ~~and November 1, 2015,~~ represent 26 week periods, respectively.

2. Significant Accounting Policies

As of October ~~30, 2016,~~29, 2017, 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 1, 2016.~~April 30, 2017.

Recently Adopted Accounting Pronouncements

Measurement of Inventory

In ~~November~~July 2015, the FASB issued ASU No. ~~2015-17,~~ ~~Balance Sheet Classification~~2015-11, “Simplifying the Measurement of ~~Deferred Taxes~~Inventory”, ~~an amendment~~which changed the measurement principle for inventory from the lower of cost or market to ~~FASB ASC Topic 740, which simplifies the presentation~~lower 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~~cost and net ~~noncurrent deferred income tax asset or liability for each tax jurisdiction. The amendments in this~~realizable value. 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 isNo. 2015-11 was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. ~~Early adoption is permitted and~~As a result, we adopted ASU No. 2015-11 in 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~~first quarter of fiscal ~~2016 on~~2018 and the adoption of this guidance did not have a ~~retrospective basis. Accordingly, we reclassified our current deferred income taxes to noncurrent~~significant impact on our ~~November 1, 2015 Consolidated Balance Sheet, which increased noncurrent deferred income taxes $3.0 million and decreased noncurrent deferred tax liabilities $4.7 million.~~consolidated financial statements.

Stock-Based Compensation

In ~~June 2014,~~March 2016, the ~~Financial Accounting Standards Board ("FASB") amended its authoritative~~FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting". ASU No. 2016-09 was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Accordingly, we adopted this guidance onduring the first quarter of fiscal 2018. ASU No. 2016-09 aims to simplify several aspects of accounting and financial reporting for ~~certain~~ share-based payment ~~awards. The amended guidance~~transactions. One provision within this pronouncement requires that excess income tax benefits and deficiencies related to share-based ~~compensation awards with terms of a performance target that affects vesting, and that could~~payments be ~~achieved after the requisite service period, be treated~~recognized within income tax expense 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~~discrete event in the period in which ~~it becomes probable that~~they occur, rather than within additional paid-in capital on our consolidated balance sheet on a prospective basis. The impact to our results of operations related to this provision through the ~~performance target~~second quarter of fiscal 2018 was a reduction to income tax expense of $556,000. The impact of this provision on our future results of operations will ~~be achieved. The guidance will permit~~depend in part on the market prices for the shares of our common stock on the dates there are taxable events related to the share-based awards, and therefore, the impact is difficult to predict. In connection with another provision within ASU No. 2016-09, we have elected to account for forfeitures of share-based awards as an ~~entity to apply~~estimate of the ~~amendments in the update either (a) prospectively to all~~number of 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~~expected to ~~all new or modified awards thereafter.~~vest, which is consistent with our accounting policy prior to adoption.

I-6

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~This guidance was effective~~

Also, we adopted the provisions of ASU No. 2016-09 related to changes on the Consolidated Statements of Cash Flows on a retrospective basis. As a result, we no longer classify excess income tax benefits as a financing activity, which increased net cash provided by operating activities and reduced net cash provided by financing activities by $167,000 for the ~~first quarter of fiscal 2017~~six months ended October 30, 2016. Additionally, we no longer classify payments for employee taxes when common stock shares are withheld to satisfy the employer’s statutory income tax withholding obligation as an operating activity, which increased net cash provided by operating activities 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 afterreduced net cash provided by financing activities by $280,000 for the ~~requisite service period.~~six months ended October 30, 2016.

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 applystatements but we expect this guidance to have a material impact on our disclosures in our ~~fiscal 2018 interim and annual financial statements. We are currently assessing~~notes to 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 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~~statements but we expect this guidance to ~~Employee Shares-Based Payment Accounting." ASU 2016-09 is intended to improve the accounting for share-based payment transactions~~have a material impact on our financial position as ~~part~~a result 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 benefitsrequirement to recognize right-of-use assets and lease liabilities 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.~~balance sheets.

~~I-7~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address the diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. This new guidance provides clarity around the cash flow classification for eight specific issues in an effort to reduce the current and potential future diversity in practice. This standard, which is to be applied retrospectively, will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are therefore required to apply this new guidance in our fiscal 2019 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

I-7

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to reduce the diversity in practice and complexity associated with accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits recognition of deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. The new pronouncement stipulates that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, with early adoption permitted in the first interim period only. We are therefore required to apply this new guidance in our fiscal 2019 interim and annual financial statements. The amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

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"~~“2015 Plan”). The 2015 Plan updated and replaced our 2007 Equity Incentive Plan (the ~~"2007 Plan"~~“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 October ~~30, 2016,~~29, 2017, there were ~~980,486~~902,556 shares available for future equity based grants under our 2015 plan.

~~I-8~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Incentive Stock Option Awards

We did not grant any incentive stock option awards through the through the second quarter of fiscal ~~2017.~~2018.

At October ~~30, 2016,~~29, 2017, options to purchase ~~81,600~~15,000 shares of common stock were outstanding and exercisable, had a weighted average exercise price of ~~$8.44~~$7.08 per share, and a weighted average contractual term of ~~0.8~~0.6 years. At October ~~30, 2016,~~29, 2017, the aggregate intrinsic value for options outstanding and exercisable was ~~$1.6 million.~~$373,000.

The aggregate intrinsic value for options exercised for the six months ending October 29, 2017 and October 30, 2016, was $14,000 and ~~November 1, 2015, was~~ $43,000, ~~and $1.0 million,~~ respectively.

I-8

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At October ~~30, 2016,~~29, 2017, there were no unvested incentive stock option awards. Therefore, there was no unrecognized compensation cost related to incentive stock option awards at October ~~30, 2016.~~29, 2017.

No compensation expense was recorded for incentive stock options for the six months ended October ~~30, 2016~~29, 2017 and ~~November 1, 2015, respectively.~~

~~Common Stock Awards~~

On October 3, 2016, we granted a total of 4,800 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $29.80 per share, which represents the closing price of our common stock at the date of grant.

On October 1, 2015, we granted a total of 3,000 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $31.77 per share, which represents the closing price of our common stock at the date of grant.

~~We recorded $143,000 and $95,000 within selling, general, and administrative expense for these common stock awards for the six months ending~~ October 30, 2016, ~~and November 1, 2015,~~ respectively.

Performance Based Restricted Stock Units

~~Fiscal 2017 Grant~~

Executive Management

On July ~~14, 2016, certain key members of management were~~13, 2017, we granted performance-based restricted stock units to members of executive management (NEOs) which could earn up to ~~107,880~~a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. The number of shares of common stock that are earned based on the performance targets that have been achieved will be adjusted based on a market-based total shareholder return component as defined in the related restricted stock unit agreements.

Compensation cost is measured based on the fair market value on the date of grant (July 13, 2017). The fair market value per share was determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock for the performance-based components.

The following table provides assumptions used to determine the fair market value of the market-based total shareholder return component using the Monte Carlo simulation model on the date of grant:


Closing price of our common stock	$	32.50
Expected volatility of our common stock		31.0	%
Expected volatility of peer companies		16.5	%
Risk-free interest rate		1.56	%
Dividend yield		1.66	%
Correlation coefficient of peer companies		0.46

On July 14, 2016 and July 15, 2015, we granted performance-based restricted stock units to NEOs which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. These awards were ~~valued~~measured based on the fair market value (closing price of our common stock) on the date of grant. ~~The fair value of~~No market-based total shareholder return component was included in 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.~~awards.

~~On July 14, 2016,~~Key Employees and a ~~non-employee was~~Non-Employee

We granted performance-based restricted stock units which could earn up to ~~11,549~~a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit ~~agreement. The~~agreements. Our performance based restricted stock units granted to key employees were measured based on the fair market value (the closing price of ~~this award is~~our common stock) on the date of grant. Our performance based restricted stock units granted to a non-employee were measured based on the fair market value (the closing price of our common stock) at the earlier date of when the performance criteria are met or the end of the reporting period. ~~At October 30, 2016, this grant~~No market-based total shareholder return component was unvested and was measured at $28.15 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.included in these awards.

I-9

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Fiscal 2016 Grant~~

~~On July 15, 2015, certain key members~~The following table summarizes information related to our grants of ~~management were granted performance-based~~performance based restricted stock units ~~which could earn up~~associated with NEOs and key employees that are currently unvested:


		(3)
	Restricted Stock		Price Per			Vesting
Date of Grant	Units Awarded		Share			Period
July 13, 2017 (1)		78,195		$31.85	(4)	3 years
July 13, 2017 (2)		44,000		$32.50	(5)	3 years
July 14, 2016 (1) (2)		107,880		$28.00	(5)	3 years
July 15, 2015 (1) (2)		107,554		$32.23	(5)	3 years

(1) Performance-based restricted stock units awarded to ~~107,554 shares~~NEOs.

(2) Performance-based restricted stock units awarded to key employees.

(3) Amounts represent the maximum number of common stock shares that could be earned if certain performance targets are met as defined in the related restricted stock unit agreements. ~~These awards were valued based on~~

(4) Price per share represents the fair market value ~~on the date of grant. The fair value of these awards was $32.23~~ per share ~~which~~($0.98 per $1 or a reduction of $0.65 to the closing price of the our common stock) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($32.50) for the performance-based components of the performance-based restricted stock units granted to our NEOs on July 13, 2017.

(5) Price per share 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~~The following table summarizes information related to our grants of performance-based restricted stock units ~~which could earn up to 10,364 shares~~associated with a non-employee that are currently unvested:


		(1)
	Restricted Stock		Price Per			Vesting
Date of Grant	Units Awarded		Share			Period
July 13, 2017		10,200		$31.95	(2)	3 years
July 14, 2016		11,549		$31.95	(2)	3 years
July 15, 2015		10,364		$31.95	(2)	3 years

(1) Amounts represent the maximum number of common stock shares that could be earned if certain performance targets are met as defined in the related restricted stock unit ~~agreement.~~agreements.

(2) The ~~fair value of this award is measured~~respective grant was unvested at ~~the earlier date of when the performance criteria are met or~~ the end of ~~the~~our reporting period. ~~At October 30, 2016, this grant was unvested and was measured at $28.15~~Accordingly, the price per share ~~which~~ represents the closing price of our common stock aton October 29, 2017, the end of ~~the~~our reporting period. ~~The vesting of this award is over the requisite service period of three years.~~

~~Fiscal 2015 Grants~~

I-10

Culp, Inc.

~~On June 24, 2014, certain key members of management were granted performance-based~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes information related to our performance based restricted stock units ~~which could earn up to 102,845 shares~~that vested during the six month periods ending October 29, 2017 and October 30, 2016:


			(3)
	Common Stock		Weighted Average		Price
Fiscal Year	Shares Vested		Fair Value		Per Share
Fiscal 2018 (1)		102,845		$1,820		$17.70	(4)
Fiscal 2018 (2)		16,000		$520		$32.50	(5)
Fiscal 2017 (1)		37,192		$637		$17.12	(4)
Fiscal 2017 (2)		12,000		$345		$28.77	(5)

(1) NEOs and key employees.

(2) Non-employee

(3) Dollar amounts are in thousands.

(4) Price per share represents closing price of our 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.

(5) The ~~fair value~~respective grant vested during the first quarter of ~~these awards was $17.70~~fiscal 2018 or 2017, respectively. Accordingly, the price 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 October 30, 2016, 16,000 restricted stock units associated with this grant were unvested and were measured at $28.15 per share, which represents the closing price of the company's common stock at the end of the reporting period. The vesting of these 16,000 restricted stock units vest over their requisite service period of 28 months.

~~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.~~

~~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.

~~I-10~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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 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. Our fiscal 2013 grant is fully vested.

Overall

We recorded compensation expense of ~~$1.5~~$1.4 million and ~~$1.2~~$1.5 million within selling, general, and administrative expense ~~for~~associated with our performance based restricted stock ~~unit awards~~units for the six month periods ending October 29, 2017 and October 30, 2016, ~~and November 1, 2015,~~ respectively. Compensation cost is recorded based on an assessment each reporting period of the probability ifthat 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~~At October ~~30, 2016,~~29, 2017, the remaining unrecognized compensation cost related to ~~our~~the performance based restricted stock ~~unit awards~~units was ~~$5.0~~$4.3 million, which is expected to be recognized over a weighted average vesting period of ~~2.0~~1.9 years.

Common Stock Awards

We granted a total of 4,800 shares of common stock to our outside directors on October 2, 2017, and October 3, 2016, respectively. These shares of common stock vested immediately and were valued based on the fair market value on the date of grant. The fair value of these awards were $33.20 and $29.80 per share, on October 2, 2017, and October 3, 2016, which represents the closing price of our common stock on the date of grant.

We recorded $159,000 and $143,000 of compensation expense within selling, general, and administrative expense for these common stock awards for the six month periods ending October 29, 2017 and October 30, 2016, respectively.

I-11

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Time Vested Restricted Stock Units

Fiscal 2018 Grant

On July 13, 2017, an employee was granted 1,200 shares of time vested restricted stock units which vested over the requisite service period of 11 months. This award was measured at its fair market value, which was $32.50 per share, and represented the closing price of our common stock on the date of grant.

Fiscal 2017 Grant

On July 14, 2016, an employee was granted 1,200 shares of time vested restricted stock ~~units.~~units which vested over the requisite service period of 11 months. This award was ~~valued based on the~~measured at its fair market value, ~~on the date of grant. The fair value of this award~~which was $28 per share, ~~which represents~~and represented the closing price of our common stock on the date of grant. ~~The vesting~~

During the first quarter of fiscal 2018, 1,200 shares of common stock associated with this ~~award is over the requisite service period~~grant vested and had a weighted average fair value of ~~11 months.~~$34,000 or $28 per share.

Overall

We recorded compensation expense of $17,000 and $11,000 within selling, general, and administrative expense ~~for~~associated with our time vested restricted stock unit awards for the six ~~months~~month periods ending October 29, 2017 and October 30, ~~2016. There were not any time vested restricted stock unit awards granted or unvested during the six months ending November 1, 2015 and, therefore, no compensation expense was recorded.~~2016, respectively.

At October ~~30, 2016,~~29, 2017, the remaining unrecognized compensation cost related to unvested time vested restricted stock awards was ~~$23,000,~~$27,000, which is expected to be recognized over the next 7.5 months.

~~I-11~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

4. Accounts Receivable

A summary of accounts receivable follows:

(dollars in thousands)
October 30, 2016 November 1, 2015 May 1, 2016
Customers $ 20,580 $ 25,045 $ 25,531
Allowance for doubtful accounts (420 ) (826 ) (1,088 )
Reserve for returns and allowances and discounts (1,121 ) (905 ) (962 )
$ 19,039 $ 23,314 $ 23,481


(dollars in thousands)	October 29, 2017			October 30, 2016			April 30, 2017
Customers	$	25,593		$	20,580		$	26,211
Allowance for doubtful accounts		(374	)		(420	)		(414	)
Reserve for returns and allowances and discounts		(999	)		(1,121	)		(1,220	)
	$	24,220		$	19,039		$	24,577

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

Six months ended
(dollars in thousands) October 30, 2016 November 1, 2015
Beginning balance $ (1,088 ) $ (851 )
Provision for bad debts 216 (81 )
Net write-offs, net of recoveries 452 106
Ending balance $ (420 ) $ (826 )


	Six months ended
(dollars in thousands)	October 29, 2017			October 30, 2016
Beginning balance	$	(414	)	$	(1,088	)
Provision for bad debts		40			216
Net write-offs, net of recoveries		-			452
Ending balance	$	(374	)	$	(420	)

I-12

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Six months ended
(dollars in thousands) October 30, 2016 November 1, 2015
Beginning balance $ (962 ) $ (738 )
Provision for returns, allowances
and discounts (1,620 ) (1,561 )
Credits issued 1,461 1,394
Ending balance $ (1,121 ) $ (905 )


	Six months ended
(dollars in thousands)	October 29, 2017			October 30, 2016
Beginning balance	$	(1,220	)	$	(962	)
Provision for returns, allowances and discounts		(1,330	)		(1,620	)
Credits issued		1,551			1,461
Ending balance	$	(999	)	$	(1,121	)

5. Inventories

Inventories are carried at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method.

A summary of inventories follows:

(dollars in thousands) October 30, 2016 November 1, 2015 May 1, 2016
Raw materials $ 6,128 $ 6,272 $ 5,462
Work-in-process 2,518 2,779 2,972
Finished goods 37,308 37,428 38,097
$ 45,954 $ 46,479 $ 46,531

~~I-12~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~


(dollars in thousands)	October 29, 2017		October 30, 2016		April 30, 2017
Raw materials	$	6,617	$	6,128	$	6,456
Work-in-process		2,686		2,518		3,095
Finished goods		40,906		37,308		41,931
	$	50,209	$	45,954	$	51,482

6. Other Assets

A summary of other assets follows:


(dollars in thousands)	October 30, 2016		November 1, 2015		May 1, 2016		October 29, 2017		October 30, 2016		April 30, 2017
Cash surrender value – life insurance	$	358	$	339	$	357	$	376	$	358	$	376
Non-compete agreement, net		866		941		903		790		866		828
Customer relationships, net		689		740		715		638		689		664
Other		582		474		598		536		582		526
	$	2,495	$	2,494	$	2,573	$	2,340	$	2,495	$	2,394

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.

The gross carrying amount of our non-compete agreement was $2.0 million at October ~~30, 2016, November 1, 2015 and May 1, 2016, respectively. At~~29, 2017, October 30, 2016 ~~November 1, 2015,~~ and ~~May 1, 2016, accumulated~~April 30, 2017, respectively. Accumulated amortization for our non-compete agreement was $1.2 million ~~$1.1 million,~~at October 29, 2017, October 30, 2016, and ~~$1.1 million,~~April 30, 2017, respectively.

Amortization expense for our non-compete agreement was $38,000 for the six month periods ~~ended~~ending October 29, 2017 and October 30, ~~2016 and November 1, 2015.~~2016. The remaining amortization expense for the next five fiscal years and thereafter follows: FY ~~2017~~2018 - $37,000; FY ~~2018~~2019 - ~~$75,000; FY 2019-~~ $75,000; FY 2020 - $75,000; FY 2021 - $75,000; FY 2022 - $75,000 and Thereafter - ~~$529,000.~~$453,000.

I-13

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The weighted average amortization period for our non-compete agreement is ~~11.5~~10.5 years as of October ~~30, 2016.~~29, 2017.

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 October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, respectively. Accumulated amortization for our customer relationships was $230,000, $179,000, ~~$128,000,~~ and ~~$153,000~~$204,000 at October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, respectively.

Amortization expense for our customer relationships was $26,000 for the six months ~~ending~~ended October 29, 2017 and October 30, ~~2016 and November 1, 2015.~~2016. The remaining amortization expense for the next five fiscal years and thereafter follows: FY ~~2017~~2018 - $25,000; ~~FY 2018 - $51,000;~~ FY 2019 - $51,000; FY 2020 - $51,000; FY 2021 - $51,000; FY 2022 - $51,000; and Thereafter - ~~$460,000.~~$409,000.

The weighted average amortization period for our customer relationships is ~~13.5~~12.5 years as of October ~~30, 2016.~~29, 2017.

Cash Surrender Value – Life Insurance

At October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016~~April 30, 2017, we had one life insurance contract with a death benefit of $1.4 million.

Our cash surrender value – life insurance balances totaling $376,000, $358,000 ~~$339,000~~ and ~~$357,000~~$376,000 at October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, respectively, are collectible upon death of the respective insured.

~~I-13~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

7. Accrued Expenses

A summary of accrued expenses follows:


(dollars in thousands)	October 30, 2016		November 1, 2015		May 1, 2016		October 29, 2017		October 30, 2016		April 30, 2017
Compensation, commissions and related benefits	$	7,111	$	6,657	$	10,011	$	5,399	$	7,111	$	10,188
Advertising rebates		734		2,536		870		650		734		468
Interest		5		-		-		18		5		51
Other accrued expenses		1,028		702		1,041		1,297		1,028		1,240
	$	8,878	$	9,895	$	11,922	$	7,364	$	8,878	$	11,947

8. Lines of Credit

Revolving Credit Agreement – United States

Our Credit Agreement with Wells Fargo Bank, N.A. ("(“Wells ~~Fargo"~~Fargo”) provides a revolving loan commitment of $30 million. Interest was charged at a rate (applicable interest rate of 2.69%, 1.98%, and 2.45% at October 29, 2017, October 30, ~~2016)~~2016, and April 30, 2017) as a variable spread over LIBOR based on our ratio of debt to EBITDA. The Credit Agreement contains certain financial and other covenants as defined in the agreement and is set to expire on August 15, 2018.

I-14

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The ~~purpose~~purposes of our revolving credit line 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 ultimately repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes.

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 October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016, respectively.~~April 30, 2017.

At October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, there were $250,000 in outstanding letters 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~~allows 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~~($3.75 million 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). ~~This $5.0~~The $3.75 million outstanding letter of credit will be automatically reduced in increments of $1.25 million on ~~August 1, 2017,~~ November 1, 2017, February 1, 2018, and May 15, 2018, respectively.

~~I-14~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Revolving Credit Agreement – China

We have an unsecured credit agreement associated with our operations in China that provides for a line of credit of up to 40 million Chinese Yuan Renminbi (approximately ~~$5.9~~$6.0 million USD at October ~~30, 2016)~~29, 2017), that expires ~~on March 8, 2017.~~February 15, 2018. This agreement has an interest rate determined by the Chinese government and there were no borrowings outstanding as of October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016.~~April 30, 2017.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At October ~~30, 2016,~~29, 2017, the company was in compliance with these financial covenants.

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~~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:

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~~company’s estimates and assumptions, which reflect those that market participants would use.

I-15

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recurring Basis

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

	Fair value measurements at October 29, 2017 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:
U.S. Corporate Bonds	$	-	$	30,773	$	-	$	30,773
Premier Money Market Fund		6,153		N/A		N/A		6,153
Low Duration Bond Fund		1,087		N/A		N/A		1,087
Intermediate Term Bond Fund		765		N/A		N/A		765
Strategic Income Fund		626		N/A		N/A		626
Large Blend Fund		393		N/A		N/A		393
Growth Allocation Fund		153		N/A		N/A		153
Moderate Allocation Fund		107		N/A		N/A		107
Other		115		N/A		N/A		115

	Fair value measurements at October 30, 2016 using:
									Fair value measurements at October 30, 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:
Cash and Cash Equivalents	$	23,940		N/A		N/A	$	23,940	$	23,940		N/A		N/A	$	23,940
U.S. Corporate Bonds		-		7,110		N/A		7,110		-		7,110		N/A		7,110
Premier Money Market Fund		4,421		N/A		N/A		4,421		4,421		N/A		N/A		4,421
Low Duration Bond Fund		1,075		N/A		N/A		1,075		1,075		N/A		N/A		1,075
Intermediate Term Bond Fund		750		N/A		N/A		750		750		N/A		N/A		750
Strategic Income Fund		605		N/A		N/A		605		605		N/A		N/A		605
Large Blend Fund		319		N/A		N/A		319		319		N/A		N/A		319
Growth Allocation Fund		102		N/A		N/A		102		102		N/A		N/A		102
Other		152		N/A		N/A		152		152		N/A		N/A		152

~~I-15~~I-16

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Fair value measurements at November 1, 2015 using:

	Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs				Fair value measurements at April 30, 2017 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		Level 1		Level 2		Level 3		Total

Assets:
U.S. Corporate Bonds									$	-	$	30,831	$	-	$	30,831
Premier Money Market Fund	$	2,703		N/A		N/A	$	2,703		4,811		N/A		N/A		4,811
Low Duration Bond Fund										1,081		N/A		N/A		1,081
Intermediate Term Bond Fund		2,144		N/A		N/A		2,144		751		N/A		N/A		751
Low Duration Bond Fund		2,098		N/A		N/A		2,098
Limited Term Bond Fund		1,094		N/A		N/A		1,094
Strategic Income Fund		984		N/A		N/A		984		611		N/A		N/A		611
Large Blend Fund		279		N/A		N/A		279		365		N/A		N/A		365
Growth Allocation Fund		125		N/A		N/A		125		126		N/A		N/A		126
Mid Cap Value Fund		94		N/A		N/A		94
Moderate Allocation Fund										88		N/A		N/A		88
Other		78		N/A		N/A		78		76		N/A		N/A		76

Fair value measurements at May 1, 2016 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 $ 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 602 N/A N/A 602
Large Blend Fund 289 N/A N/A 289
Growth Allocation Fund 148 N/A N/A 148
Mid Cap Value Fund 102 N/A N/A 102
Other 82 N/A N/A 82
Our U.S. corporate bonds were classified as level 2 as they are traded over the counter within a broker network and not on an active market. The fair value of our U.S. corporate bonds is determined based on a published source that provides an average bid price. The average bid price is based on various broker prices that are determined based on market conditions, interest rates, and the rating of the respective U.S. corporate bond.

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 – Available for Sale

At October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, our short-term investments classified as available for sale totaled $2.5 million, $2.4 million, ~~$6.3 million,~~ and ~~$4.4~~$2.4 million, respectively, and consisted of short-term bond funds. ~~Our~~Since these short-term bond funds are classified as available for sale, these investments are recorded at their fair market 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 $36,000, $45,000, ~~$171,000,~~ and ~~$100,000~~$47,000 at October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, respectively. At October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, the fair value of our short-term bond funds approximated its cost basis.

~~I-16~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Long- Term~~Short-Term and Long-Term Investments - Held-To-Maturity

During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities ~~primarily ranging~~that ranged from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments will be recorded as either current or noncurrent on ~~the~~our Consolidated Balance ~~Sheet,~~Sheets, based on contractual maturity date as of a respective reporting period and stated at amortized cost.

I-17

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At October 29, 2017 and April 30, 2017, our held-to-maturity investments totaled $30.9 million and consisted of U.S. Corporate bonds. At October 30, 2016, our held-to-maturity investments ~~totaling~~totaled $31.0 million and consisted of invested cash and cash equivalents of $23.9 million and U.S. Corporate bonds of $7.1 million. The $23.9 million in invested cash and cash equivalents were used to purchase U.S. Corporate bonds during our third quarter of fiscal ~~2017 (all U.S. Corporate bond purchases were completed by November 3, 2016).~~2017. The fair value of our held-to-maturity investments ~~approximates their cost basis.~~at October 29, 2017, October 30, 2016, and April 30, 2017 totaled $30.8 million, $31.0 million, and $30.8 million, respectively.

Long-Term Investments - Rabbi Trust

~~Effective January 1, 2014, we established~~We have a Rabbi Trust to set aside funds for participants of our deferred compensation plan (the ~~"Plan"~~“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~~These long-term investments are recorded at their fair ~~value~~values of $6.9 million, $5.0 million, ~~$3.3 million,~~ and ~~$4.0~~$5.5 million at October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, respectively. Our long-term investments had an accumulated unrealized gain of $96,000, $1,000 and ~~$14,000~~$43,000 at October 1,29, 2017, October 30, 2016, and ~~November 1, 2015, respectively, and an accumulated realized loss of $44,000 at May 1, 2016.~~April 30, 2017, respectively. The fair value of our long-term investments associated with our Rabbi Trust approximates its cost basis.

Other

The carrying amount of our cash and cash equivalents, accounts receivable, other current assets, accounts payable, ~~and~~ accrued expenses, and line of credit approximates fair value because of the short maturity of these financial instruments.

10. Cash Flow Information

Interest and income taxes paid are as follows:


	Six months ended				Six months ended
(dollars in thousands)	October 30, 2016		November 1, 2015		October 29, 2017		October 30, 2016
Interest	$	45	$	86	$	146	$	45
Income taxes		3,238		2,088		2,599		3,238

Interest costs charged to operations were ~~$45,000~~$137,000 and ~~$49,000~~$45,000 for the six months ended October 29, 2017 and October 30, 2016, ~~and November 1, 2015,~~ respectively.

~~I-17~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Interest costs of ~~$45,000~~$100,000 and ~~$49,000~~$45,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related ~~assets'~~assets’ useful lives for the six months ended October 29, 2017 and October 30, 2016, ~~and November 1, 2015,~~ respectively.

I-18

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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) October 30, 2016 November 1, 2015
Weighted average common shares outstanding, basic 12,308 12,343
Dilutive effect of stock-based compensation 199 141
Weighted average common shares outstanding, diluted 12,507 12,484


	Three months ended
(amounts in thousands)	October 29, 2017	October 30, 2016
Weighted average common shares outstanding, basic	12,440	12,308
Dilutive effect of stock-based compensation	140	199
Weighted average common shares outstanding, diluted	12,580	12,507

All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended October 29, 2017 and October 30, 2016, ~~and November 1, 2015,~~ as the exercise price of the options was less than the average market price of the common shares.


	Six months ended				Six months ended
(amounts in thousands)	October 30, 2016		November 1, 2015		October 29, 2017	October 30, 2016
Weighted average common shares outstanding, basic		12,297		12,310	12,420	12,297
Dilutive effect of stock-based compensation		198		171	193	198
Weighted average common shares outstanding, diluted		12,495		12,481	12,613	12,495

All options to purchase shares of common stock were included in the computation of diluted net income for the six months ended October 29, 2017 and October 30, 2016, ~~and November 1, 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 manufactures, sources, ~~manufactures,~~develops, and sells fabrics primarily to residential and commercial furniture manufacturers.

~~I-18~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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, develop, 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, investment in an unconsolidated joint venture, 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) October 30, 2016 November 1, 2015
Net sales:
Mattress Fabrics $ 45,527 $ 45,436
Upholstery Fabrics 29,816 31,520
$ 75,343 $ 76,956
Gross profit:
Mattress Fabrics $ 10,756 $ 9,456
Upholstery Fabrics 6,145 6,277
$ 16,901 $ 15,733
Selling, general, and administrative expenses:
Mattress Fabrics $ 3,296 $ 2,989
Upholstery Fabrics 3,652 3,813
Total segment selling, general, and
administrative expenses 6,948 6,802
Unallocated corporate expenses 2,654 2,631
$ 9,602 $ 9,433
Income from operations:
Mattress Fabrics $ 7,460 $ 6,467
Upholstery Fabrics 2,493 2,464
Total segment income from operations 9,953 8,931
Unallocated corporate expenses (2,654 ) (2,631 )
Total income from operations 7,299 6,300
Interest income 15 69
Other expense (155 ) (225 )
Income before income taxes $ 7,159 $ 6,144

I-19

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Six months ended
(dollars in thousands) October 30, 2016 November 1, 2015
Net sales:
Mattress Fabrics $ 96,057 $ 93,245
Upholstery Fabrics 59,969 63,896
$ 156,026 $ 157,141
Gross profit:
Mattress Fabrics $ 22,657 $ 19,381
Upholstery Fabrics 12,664 12,554
$ 35,321 $ 31,935
Selling, general, and administrative expenses:
Mattress Fabrics $ 6,795 $ 5,912
Upholstery Fabrics 7,185 7,409
Total segment selling, general, and
administrative expenses 13,980 13,321
Unallocated corporate expenses 5,368 4,854
$ 19,348 $ 18,175
Income from operations:
Mattress Fabrics $ 15,862 $ 13,468
Upholstery Fabrics 5,479 5,146
Total segment income from operations 21,341 18,614
Unallocated corporate expenses (5,368 ) (4,854 )
Total income from operations 15,973 13,760
Interest income 40 112
Other expense (307 ) (320 )
Income before income taxes $ 15,706 $ 13,552

Financial information for the company’s operating segments follows:


	Three months ended
	October 29, 2017			October 30, 2016
Net sales:
Mattress Fabrics	$	48,601		$	45,527
Upholstery Fabrics		32,097			29,816
	$	80,698		$	75,343
Gross profit:
Mattress Fabrics	$	9,730		$	10,756
Upholstery Fabrics		6,074			6,145
	$	15,804		$	16,901

Mattress Fabrics	$	3,168		$	3,296
Upholstery Fabrics		3,700			3,652
Total segment selling, general, and administrative expenses		6,868			6,948
Unallocated corporate expenses		2,547			2,654
	$	9,415		$	9,602
Income from operations:
Mattress Fabrics	$	6,562		$	7,460
Upholstery Fabrics		2,374			2,493
Total segment income from operations		8,936			9,953
Unallocated corporate expenses		(2,547	)		(2,654	)
Total income from operations		6,389			7,299
Interest expense		(37	)		-
Interest income		128			15
Other expense		(321	)		(155	)
Income before income taxes	$	6,159		$	7,159


	Six months ended
(dollars in thousands)	October 29, 2017			October 30, 2016
Net sales:
Mattress Fabrics	$	97,030		$	96,057
Upholstery Fabrics		63,200			59,969
	$	160,230		$	156,026
Gross profit:
Mattress Fabrics	$	19,495		$	22,657
Upholstery Fabrics		12,773			12,664
	$	32,268		$	35,321
Selling, general, and administrative expenses:
Mattress Fabrics	$	6,559		$	6,795
Upholstery Fabrics		7,511			7,185
Total segment selling, general, and administrative expenses		14,070			13,980
Unallocated corporate expenses		4,846			5,368
	$	18,916		$	19,348
Income from operations:
Mattress Fabrics	$	12,936		$	15,862
Upholstery Fabrics		5,262			5,479
Total segment income from operations		18,198			21,341
Unallocated corporate expenses		(4,846	)		(5,368	)
Total income from operations		13,352			15,973
Interest expense		(37	)		-
Interest income		259			40
Other expense		(674	)		(307	)
Income before income taxes	$	12,900		$	15,706

I-20

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Balance sheet information for the ~~company's~~company’s operating segments follows:

(dollars in thousands) October 30, 2016 November 1, 2015 May 1, 2016
Segment assets:
Mattress Fabrics
Current assets (1) $ 38,062 $ 40,937 $ 43,472
Non-compete agreement 866 941 903
Customer relationships 689 740 715
Goodwill 11,462 11,462 11,462
Property, plant and equipment (2) 43,228 36,050 37,480
Total mattress fabrics assets 94,307 90,130 94,032
Upholstery Fabrics
Current assets (1) 26,931 28,856 26,540
Property, plant and equipment (3) 1,480 1,474 1,564
Total upholstery fabrics assets 28,411 30,330 28,104
Total segment assets 122,718 120,460 122,136
Non-segment assets:
Cash and cash equivalents 13,910 31,176 37,787
Short-term investments 2,430 6,320 4,359
Deferred income taxes 581 3,415 2,319
Income taxes receivable - 75 155
Other current assets 1,675 2,614 2,477
Property, plant and equipment (4) 829 795 929
Long-term investments (Held-to-Maturity) 31,050 - -
Long-term investments (Rabbi Trust) 4,994 3,279 4,025
Other assets 940 813 955
Total assets $ 179,127 $ 168,947 $ 175,142


	Six months ended
(dollars in thousands)	October 30, 2016		November 1, 2015		October 29, 2017		October 30, 2016		April 30, 2017
Capital expenditures (5):
Segment assets:
Mattress Fabrics	$	8,857	$	5,138
Current assets (1)					$	42,728	$	38,062	$	47,038
Non-compete agreement						790		866		828
Customer relationships						638		689		664
Investment in unconsolidated joint venture						1,522		-		1,106
Goodwill						11,462		11,462		11,462
Property, plant and equipment (2)						49,965		43,228		48,916
Total mattress fabrics assets						107,105		94,307		110,014
Upholstery Fabrics		165		254
Unallocated Corporate		62		143
Total capital expenditures	$	9,084	$	5,535
Depreciation expense:
Mattress Fabrics	$	3,101	$	2,783
Upholstery Fabrics		410		401
Total depreciation expense	$	3,511	$	3,184
Current assets (1)						31,701		26,931		29,021
Property, plant and equipment (3)						2,063		1,480		1,879
Total upholstery fabrics assets						33,764		28,411		30,900
Total segment assets						140,869		122,718		140,914
Non-segment assets:
Cash and cash equivalents						15,739		13,910		20,795
Short-term investments (Available for Sale)						2,478		2,430		2,443
Short-term investments (Held-to-Maturity)						4,015		-		-
Deferred income taxes						491		581		419
Other current assets						2,263		1,675		2,894
Property, plant and equipment (4)						502		829		856
Long-term investments (Held-to-Maturity)						26,853		31,050		30,945
Long-term investments (Rabbi Trust)						6,921		4,994		5,466
Other assets						912		940		902
Total assets					$	201,043	$	179,127	$	205,634


	Six months ended
(dollars in thousands)	October 29, 2017		October 30, 2016
Capital expenditures (5):
Mattress Fabrics	$	4,364	$	8,857
Upholstery Fabrics		203		165
Unallocated Corporate		30		62
Total capital expenditures	$	4,597	$	9,084
Depreciation expense:
Mattress Fabrics	$	3,310	$	3,101
Upholstery Fabrics		403		410
Total depreciation expense	$	3,713	$	3,511

(1)	Current assets represent accounts receivable and inventory for the respective segment.

~~I-21~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(2)

The $50.0 million at October 29, 2017, represents property, plant, and equipment of $35.8 million and $14.2 million located in the U.S. and Canada, respectively. The $43.2 million at October 30, 2016, represents property, plant, and equipment of $28.5 million and $14.7 million located in the U.S. and Canada, respectively. The ~~$36.1~~$48.9 million at ~~November 1, 2015,~~April 30, 2017, represents property, plant, and equipment of ~~$23.3~~$34.0 million and ~~$12.8 million located in the U.S. and Canada, respectively. The $37.5 million at May 1, 2016, represents property, plant, and equipment of $24.8 million and $12.7~~$14.9 million located in the U.S. and Canada, respectively.

(3)

The $2.1 million at October 29, 2017, represents property, plant, and equipment of $1.4 million and $722 located in the U.S. and China, respectively. The $1.5 million at October 30, 2016, represents property, plant, and equipment of $890 and $590 located in the U.S. and China, respectively. The ~~$1.5~~$1.9 million at ~~November 1, 2015,~~April 30, 2017, represents property, plant, and equipment of ~~$785~~$1.2 million and ~~$689 located in the U.S. and China, respectively. The $1.6 million at May 1, 2016, represents property, plant, and equipment of $893 and $671~~$655 located in the U.S. and China, respectively.

I-21

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4)

The $502, $829, ~~$795,~~ and ~~$929~~$856 at October 29, 2017, October 30, 2016 ~~November 1, 2015~~ and ~~May 1, 2016,~~April 30, 2017, 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 $3.7 million, or 29.1% of income before income taxes, for the six month period ended October 29, 2017, compared to income tax expense of $5.9 million, or 37.7% of income before income taxes, for the six month period ended October 30, ~~2016, compared to income tax expense of $5.1 million, or 37.5% of income before income taxes, for the six month period ended November 1, 2015.~~2016. Our effective income tax rates for the six month periods ended October 29, 2017, and October 30, 2016, ~~and November 1, 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 currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the factors that ~~are attributable~~contribute 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 0.6 0.7
tax effects of Chinese foreign exchange gains 1.6 2.3
increase in liability for uncertain tax positions 0.3 0.3
other 1.2 0.2
37.7 % 37.5 %

~~I-22~~

~~Culp, Inc.~~

	2018			2017
Federal income tax rate		34.0	%		34.0	%
Excess income tax benefits related to stock-based compensation		(4.3	)		-
Tax effects of Chinese foreign exchange (losses) gains		(1.5	)		1.6
U.S. state income tax expense		0.4			0.6
Other		0.5			1.5
		29.1	%		37.7	%

~~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"~~“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 October 29, 2017, we recorded a partial valuation allowance of $632,000, of which $554,000 pertained to certain U.S. state net operating loss carryforwards and credits and $78,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at October 30, 2016, we recorded a partial valuation allowance of $603,000, of which $519,000 pertained to certain U.S. state net operating loss carryforwards and credits and $84,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at ~~November 1, 2015,~~April 30, 2017, we recorded a partial valuation allowance of ~~$938,000,~~$536,000, of which $561,000 pertained to certain U.S. state net operating loss carryforwards and credits and $377,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at May 1, 2016, we recorded a partial valuation allowance of $590,000, of which $518,000$464,000 pertained to certain U.S. state net operating loss carryforwards and credits and $72,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.

I-22

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

No valuation allowance was recorded against our net deferred income tax assets associated with our operations located in China and Canada at October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, respectively.

The recorded valuation allowance of ~~$603,000~~$632,000 at October ~~30, 2016,~~29, 2017, 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 income 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 October ~~30, 2016,~~29, 2017, it is our intention not to permanently invest our undistributed earnings from our foreign ~~subsidiaries.~~subsidiaries, with the exception of $1.8 million that has been reinvested indefinitely since the fourth quarter of fiscal 2017 in our unconsolidated joint venture located in Haiti. 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 October 29, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling $145.3 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $322,000, which included U.S. income and foreign withholding taxes totaling $42.4 million, offset by U.S. foreign income tax credits of $42.1 million.

At October 30, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $138.9 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $657,000, which included U.S. income and foreign withholding taxes totaling $41.4 million, offset by U.S. foreign income tax credits of $40.7 million.

~~I-23~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

At ~~November 1, 2015,~~April 30, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling ~~$93.2~~$146.9 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled ~~$2.4 million,~~$497,000, which included U.S. income and foreign withholding taxes totaling ~~$35.7~~$44.0 million, offset by U.S. foreign income tax credits of ~~$33.3~~$43.5 million.

At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $604,000, which included U.S. income and foreign withholding taxes totaling $38.5 million, offset by U.S. foreign income tax credits of $37.9 million.

I-23

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Overall

At October 29, 2017, our non-current deferred tax asset of $491,000 pertains to our operations located in China. At October 30, 2016, our non-current deferred tax asset of $581,000 ~~represents~~represented $109,000 and $472,000 from our operations located in the U.S. and China, respectively. At ~~November 1, 2015,~~April 30, 2017, our non-current deferred tax asset of ~~$3.4~~$419,000 pertained to our operations located in China.

At October 29, 2017, our non-current deferred tax liability of $4.6 million represents $2.5 million and ~~$898,000~~$2.1 million from our operations located in the U.S. and ~~China,~~Canada, respectively. Our non-current deferred tax liability balance of $1.7 million at October 30, 2016 pertained to our operations located in Canada. At ~~May 1, 2016,~~April 30, 2017, our non-current deferred tax ~~asset~~liability of ~~$2.3~~$3.6 million ~~represents $1.7~~represented $2.1 million and ~~$572,000~~$1.5 million from our operations located in Canada and the U.S. ~~and China,~~, respectively.

Our non-current deferred tax liability balances of $1.7 million, $1.2 million, and $1.5 million at October 30, 2016, November 1, 2015, and May 1, 2016, respectively, pertain to our operations located in Canada.

Uncertainty In Income Taxes

At October 29, 2017, we had a $12.6 million total gross unrecognized income tax benefit, of which $12.1 million and $487,000 were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At October 30, 2016, we had a $15.1 million total gross unrecognized income tax benefit, of which $11.4 million and $3.7 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At ~~November 1, 2015,~~April 30, 2017, we had a $14.2 million total gross unrecognized income tax benefit, of which $10.5 million and $3.7 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At May 1, 2016, we had $14.9$12.2 million of total gross unrecognized income tax benefit, of which ~~$11.1~~$11.8 million and ~~$3.8 million~~$467,000 were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets.

At October 29, 2017, our $12.6 million total gross unrecognized income tax benefit included $487,000 that, if recognized, would favorably affect the income tax rate in future periods. At October 30, 2016, our $15.1 million total gross unrecognized income tax benefit, included $3.7 million that, if recognized, would favorably affect the income tax rate in future periods. At ~~November 1, 2015,~~April 30, 2017, our ~~$14.2~~$12.2 million total gross unrecognized income tax benefit included ~~$3.7 million that, if recognized, would favorably affect the income tax rate in future periods. At May 1, 2016, our $14.9 million total gross unrecognized income tax benefit included $3.8 million~~$467,000 that, if recognized, would favorably affect the income tax rate in future periods.

Our gross unrecognized income tax benefit of ~~$15.1~~$12.6 million at October ~~30, 2016,~~29, 2017, relates to tax positions for which significant change is reasonably possible ~~in fiscal 2017.~~within the next year (see below disclosure of ongoing income tax exams). This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2005 and subsequent due to loss carryforwards. Canadian federal and provincial (Quebec) returns filed by us remain subject to examination for income tax years ~~2009~~2013 and subsequent, with the statute of limitations for the 2009 income tax year expiring in January 2017. Canadian provincial (Quebec) returns remain subject to examination for income tax years 2009 and subsequent, with the statute of limitations for the 2009 income tax year expiring in April 2017.subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year ~~2011~~2012 and subsequent.

~~I-24~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Currently, the~~The Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal years 2014 through 2016. As a result of this examination, the IRS proposed an adjustment approximating $12.5 million of income taxes that relates to our transfer pricing with certain foreign subsidiaries. Management does not agree with the IRS' proposed adjustment and ~~no adjustments have been~~intends to vigorously defend its position. Currently, the ultimate outcome of this proposed ~~at this time.~~adjustment and any potential cash settlement cannot be determined as it is dependent upon potential legal and competent authority proceedings, interpretation of income tax law, and utilization of available loss carryforwards and certain income tax credits associated with the fiscal years under exam. We ~~currently~~believe our unrecognized income tax benefit balance of $12.6 million has adequately provided for our uncertain income tax positions for all open income tax years and jurisdictions. Currently, we expect this examination to be completed ~~by the end of our~~during fiscal ~~year 2017 (April 30, 2017).~~ 2019.

I-24

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the third quarter of fiscal 2017, Revenue Quebec commenced an examination of our Canadian provincial (Quebec) income tax returns for fiscal years 2013 through ~~2015.~~2015, and no adjustments have been proposed at this time. We currently expect this examination to be completed ~~by the end of our first quarter of~~during fiscal ~~2018 (July 30, 2017).~~2018.

In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statue of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.

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~~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~~company’s registered capital.

The transfer to this reserve must be made before distributions of any dividend to shareholders. As of October ~~30, 2016,~~29, 2017, the ~~company's~~company’s statutory surplus reserve was ~~$4.6~~$4.4 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'~~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 ~~$4.6~~$4.4 million to assist with debt repayment, capital expenditures, and other expenses of the ~~company's~~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.

Accounts Payable – Capital Expenditures

At October 29, 2017, October 30, 2016, and April 30, 2017, we had total amounts due regarding capital expenditures totaling $3.2 million, $3.0, and $6.1 million, respectively, of which $2.7 million, $1.5 million, and $5.1 million was financed and pertained to completed work for the construction of a new building (see below). Of the total $2.7 million due at October 29, 2017, $1.3 million is required to be paid during the remainder of fiscal 2018, with a remaining amount of $1.4 million due in fiscal 2019 (May 2018).

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Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Purchase Commitments

~~Overall~~ – Capital Expenditures

At October ~~30, 2016, November 1, 2015, and May 1, 2016,~~29, 2017, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling ~~$9.8~~$3.8 million. The $3.8 million ~~$1.9~~includes $2.7 million ~~and $10.6 million, respectively. The $9.8 million and $10.6 million open purchase commitments as~~(all of ~~October 30, 2016 and May 1, 2016, include $6.1 million and $9.3 million~~which represents completed work) associated with the construction of a new building ~~noted~~discussed 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~~to expand our distribution capabilities and office space at a ~~current estimated~~ cost of ~~$11.2~~$11.3 million. This agreement required an installment payment of $1.9 million in April 2016 ~~and requires~~with additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- ~~$3.8~~$3.7 million; and Fiscal ~~2019- $1.2~~2019 - $1.4 million. Interest ~~will be~~is charged on the required outstanding installment payments ~~in excess of~~for services that ~~have been~~were previously 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~~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~~is 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).

AsThis new building was placed into service in July 2017.

16. Investment in Unconsolidated Joint Venture

Effective January 1, 2017, Culp International Holdings, Ltd. (Culp), a wholly-owned subsidiary of Culp, Inc., entered into a joint venture agreement, pursuant to which Culp owns fifty percent of CLASS International Holdings, Ltd (CLIH). CLIH produces cut and sewn mattress covers, and its operations are located in a modern industrial park in northeastern Haiti, which borders the Dominican Republic. CLIH commenced production during the second quarter of fiscal 2018 (October 2017) and is expected to complement our existing U.S. mattress fabric operations with a mirrored platform that will enhance our ability to meet customer demand while adding a lower cost operation to our platform.

During the six month period ended October ~~30, 2016, we have made payments totaling $5.1 million for services rendered on~~29, 2017, CLIH incurred a $386,000 net loss that primarily pertained to start-up operating expenses. Our equity interest in this net loss was $193,000, which represents the construction of this building. The remaining $6.1 million on this commitment is required to be paid on an installment basis over the next three fiscal years as follows: Fiscal 2017 - $1.1 million; Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.2 million.company’s fifty percent ownership in CLIH.

The ~~construction~~following table summarizes information on assets, liabilities and members’ equity of ~~this new building is currently expected to be completed~~our equity method investment in ~~December 2016.~~CLIH:

	October 29,		April 30,
(dollars in thousands)	2017		2017
Total assets	$	3,180	$	2,258
Total liabilities	$	136	$	46
Total members’ equity	$	3,044	$	2,212

At October 29, 2017 and April 30, 2017, our investment in CLIH totaled $1.5 million and $1.1 million, respectively, which represents the company’s fifty percent ownership interest in CLIH.

~~16.~~

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Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

17. Common Stock Repurchase Program

On 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 six months ended October 29, 2017, and October 30, 2016, ~~and November 1, 2015,~~ we did not purchase any shares of our common stock.

At October ~~30, 2016,~~29, 2017, we had $5.0 million available for ~~additional~~ repurchases of our common stock.

~~I-26~~

~~Culp, Inc.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~17.~~18. Dividend Program

On ~~December 1, 2016,~~November 30, 2017, we announced that our board of directors approved a ~~14%~~12.5% increase in our quarterly cash dividend from ~~$0.07~~$0.08 per share to ~~$0.08~~$0.09 per share. This payment will be made on January ~~17, 2017,~~16, 2018, to shareholders of record as of January ~~3, 2017.~~2, 2018.

During the first half of fiscal 2016, dividend payments totaled $6.4 million, of which $5.0 million represented a special cash dividend of $0.40 per share, and $1.4 million represented quarterly dividend payments of $0.06 per share.

Future dividend payments are subject to board approval and may be adjusted at the ~~board's~~board’s discretion as business needs or market conditions change.

I-27

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

This report and the exhibits attached hereto contain ~~"forward-looking statements"~~“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, 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," "project," "anticipate," "depend"~~“expect,” “believe,” “estimate,” “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, working capital levels, 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 potential acquisitions, 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.~~conditions, as well as our success in finalizing acquisition negotiations. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. 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, are included in Item 1A ~~"Risk Factors"~~“Risk Factors” section in our Form 10-K filed with the Securities and Exchange Commission on July ~~15, 2016,~~14, 2017, for the fiscal year ended ~~May 1, 2016.~~April 30, 2017.

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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 six months ended October 29, 2017, and October 30, 2016, ~~and November 1, 2015,~~ each represent 26-week periods. Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment ~~manufactures,~~manufacturers, sources and sells fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment ~~sources, manufactures,~~develops, manufacturers, and sells fabrics primarily to residential and commercial furniture manufacturers. We have wholly owned mattress fabric operations that are located in Stokesdale, NC, High Point, NC, and Quebec, Canada and a fifty percent owned cut and sew mattress cover operation located in Haiti. We have wholly owned upholstery fabric operations that are located in Shanghai, China, Burlington, NC, and Anderson, SC.

Executive Summary

Results of Operations

	Three Months Ended								Three Months Ended
(dollars in thousands)	October 30, 2016			November 1, 2015			Change		October 29, 2017			October 30, 2016			Change
Net sales	$	75,343		$	76,956			(2.1)%	$	80,698		$	75,343			7.1	%
Gross profit		16,901			15,733			7.4%		15,804			16,901			(6.5	)%
Gross profit margin		22.4	%		20.4	%		200bp		19.6	%		22.4	%		(280	)bp
SG&A expenses		9,602			9,433			1.8%		9,415			9,602			(1.9	)%
Income from operations		7,299			6,300			15.9%		6,389			7,299			(12.5	)%
Operating margin		9.7	%		8.2	%		150bp		7.9	%		9.7	%		(180	)bp
Income before income taxes		7,159			6,144			16.5%		6,159			7,159			(14.0	)%
Income taxes		2,684			2,373			13.1%		2,108			2,684			(21.5	)%
Net income		4,475			3,771			18.7%		3,976			4,475			(11.2	)%

I-29

	Six Months Ended								Six Months Ended
(dollars in thousands)	October 30, 2016			November 1, 2015			Change		October 29, 2017			October 30, 2016			Change
Net sales	$	156,026		$	157,141			(0.7)%	$	160,230		$	156,026			2.7	%
Gross profit		35,321			31,935			10.6%		32,268			35,321			(8.6	)%
Gross profit margin		22.6	%		20.3	%		230bp		20.1	%		22.6	%		(250	)bp
SG&A expenses		19,348			18,175			6.5%		18,916			19,348			(2.2	)%
Income from operations		15,973			13,760			16.1%		13,352			15,973			(16.4	)%
Operating margin		10.2	%		8.8	%		140bp		8.3	%		10.2	%		(190	)bp
Income before income taxes		15,706			13,552			15.9%		12,900			15,706			(17.9	)%
Income taxes		5,917			5,081			16.5%		3,748			5,917			(36.7	)%
Net income		9,789			8,471			15.6%		8,959			9,789			(8.5	)%

Net Sales

Overall, our net sales ~~decreased~~increased through the first six months of fiscal 2018 compared with fiscal 2017. This increase in net sales was experienced during the second quarter, ~~and the first half of fiscal 2017 as compared with the same periods~~reversing a ~~year ago. The~~ decrease in net sales ~~reflects primarily softer retail demand for home furnishings. In spite of the softer retail environment, we have remained focused on~~in our top strategic priorities of product innovation and creativity to provide a product mix that meets the demands of our customers in both our business segments. Our scalable and flexible manufacturing platform supports our strategy, and have made significant capital investments (mostly within our mattress fabrics segment) to improve our operating efficiencies and overall capacity.

~~Currently, we expect both overall net sales and profitability to be negatively affected in the third~~first quarter of fiscal ~~2017~~2018 as compared to the same period a year ~~earlier, due primarily~~ago. These results reflect our strategic focus on product innovation and creativity and our ability to ~~the timing of the Chinese New Year holiday, with the disruptive impact of the holiday on~~offer a diverse product offering and expand our ~~upholstery fabrics business occurring in January this year as opposed to February in the prior year.~~

~~Income Before Income Taxes~~

Despite the decrease in net sales noted above, income before income taxes increased for the second quarter and the first half of fiscal 2017 as compared with the same periods a year ago. The increase reflects the improvement in our profitability for both business segments. We continued to realize the benefits of our recent capital investments in our mattress fabrics business, which increased capacity via newer and more efficient equipment, enhanced finishing capabilities and better overall throughput. We also benefited from lower raw material costscustomer base in both our business segments and incurred lower operating expenses (primarily due to more favorable exchange rates) associated with our operations located in China. Income before income taxes for the first half of fiscal 2017 was affected by an increase in SG&A expenses, due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets. We also incurred higher inventory warehousing costs and design and sales expenses associated with our mattress fabrics segment. For the second quarter of fiscal 2017, SG&A expenses increased slightly compared with the second quarter of fiscal 2016.

~~I-30~~

segments.

See the Segment Analysis section below for further details.

Income Before Income Taxes

Although our net sales were higher in the second quarter and first half of fiscal 2018, we experienced a decrease in our income before income taxes. The decrease was primarily due to higher operating costs associated with disruptions from the consolidation of our U.S. mattress fabric production facilities. In addition, we incurred higher than anticipated freight costs associated with our upholstery fabric operations located in China. During the second quarter, a forced Chinese government shutdown of certain textile mills for environmental control disrupted our supply chain. As a result, we incurred additional freight costs in order to ensure customer deliveries. Lastly, we incurred non-recurring legal and other professional fees of approximately $400,000 during the second quarter of fiscal 2018, relating to a proposed acquisition of a China business that did not close.

See the Segment Analysis section below for further details.

Income Taxes

The reduction in our income tax expense and effective income tax rate for the first half of fiscal 2018 compared to the first half of fiscal 2017 was primarily due to the adoption of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” during the first quarter of fiscal 2018 (Refer to Note 2 located in the notes to the consolidated financial statements). As a result of the adoption of ASU No. 2016-09, we recorded a reduction to income tax expense of $556,000 or 4.3% on our effective income tax rate. Additionally, our income tax expense and effective income tax rate decreased due to favorable differences in the mix of earnings between our U.S. parent company and foreign subsidiaries that have lower income tax rates.

I-30

Refer to Note 13 located in the notes to the consolidated financial statements for further details regarding our provision for income taxes.

Liquidity

At October ~~30, 2016,~~29, 2017, our cash and investments (which comprise cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity), totaled ~~$47.4~~$49.1 million compared with ~~$42.1~~$54.2 million at May 1, 2016. This increase from the end of fiscal 2016 was primarily due to net cash provided by our operating activities of $16.6 million, partially offset by $6.3 million in capital expenditures mostly associated with our mattress fabric segment, $4.3 million in dividend payments, and $929,000 in long-term investment purchases associated with our Rabbi Trust that is partially funding our deferred compensation plan. Our net cash provided by operating activities of $16.6 million increased $5.4 million compared with $11.2 million for the six months ending November 1, 2015. This increase is primarily due to increased earnings and improved accounts receivable and inventory management during the first half of fiscal 2017 compared to the same period a year ago.April 30, 2017.

During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. At October 30, 2016, our held-to-maturity investments totaling $31.0 million consisted of invested cash and cash equivalents of $23.9 million and U.S. Corporate bonds of $7.1 million. The $23.9 million in invested cash and cash equivalentsAdditionally, there were ~~used to purchase U.S. Corporate bonds during our third quarter of fiscal 2017 (all U.S. Corporate bond purchases were completed by November 3, 2016).~~

~~Currently, we do not have any~~no borrowings outstanding under our revolving credit ~~agreements.~~agreements as of October 29, 2017, and April 30, 2017, respectively. At the end of our first quarter of fiscal ~~2017,~~2018, we had an outstanding balance of ~~$7.0~~$5.0 million on our U.S. revolving line of credit. This outstanding balance ~~was repaid~~and additional borrowings of $5.0 million that were made during ~~our~~the second quarter of fiscal ~~2017.~~2018 have been repaid.

During the first half of fiscal 2018, we had capital expenditures of $7.5 million (of which $2.5 million was vendor-financed) that were mostly associated with our mattress fabric segment, returned $4.6 million to our shareholders in the form of regularly quarterly and special dividend payments, $1.5 million in long-term investment purchases associated with our Rabbi Trust that funds our deferred compensation plan, and $1.1 million in employee withholding tax payments associated with the vesting of certain stock-based compensation awards. These payments were partially offset by $10.2 million from net cash provided by operating activities.

Our net cash provided by operating activities of $10.2 million during the first half of fiscal 2018 decreased from $17.0 million during the same period a year ago. The decrease was primarily due to lower net income and increased working capital requirements associated with the increase in net sales and supply chain disruptions experienced by our operations located in China during the second quarter of fiscal 2018.

See the Liquidity section below for further details.

Dividend ~~Program~~and Common Stock Repurchase Programs

During the first half of fiscal 2018, dividend payments totaled $4.6 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $2.0 million represented quarterly dividend payments of $0.08 per share. During the first half of fiscal 2017, dividend payments totaled $4.3 million, of which $2.5 million represented a special cash dividend payment of $0.21 per share, and $1.8 million represented quarterly dividend payments of $0.07 per share.

During the first half of fiscal ~~2016, dividend payments totaled $6.4 million, of which $5.0 million represented a special cash dividend of $0.40 per share,~~2018 and ~~$1.4 million represented quarterly dividend payments of $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.~~

~~I-31~~

~~Common Stock Repurchase Program~~

On June 15, 2016, we announced that our board of directors approved an authorization 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 six months ended October 30, 2016, and November 1, 2015,~~2017, we did not purchase any shares of our common stock.

At October ~~30, 2016,~~29, 2017, we had $5.0 million available for ~~additional~~ repurchases of our common stock.

I-31

Segment Analysis

Mattress Fabrics Segment

	Three Months Ended								Three Months Ended
(dollars in thousands)	October 30, 2016			November 1, 2015			Change		October 29, 2017			October 30, 2016			Change

Net sales	$	45,527		$	45,346			0.2%	$	48,601		$	45,527			6.8	%
Gross profit		10,756			9,456			13.7%		9,730			10,756			(9.5	)%
Gross profit margin		23.6	%		20.8	%		280bp		20.0	%		23.6	%		(360	)bp
SG&A expenses		3,296			2,989			10.3%		3,168			3,296			(3.9	)%
Income from operations		7,460			6,467			15.4%		6,562			7,460			(12.0	)%
Operating margin		16.4	%		14.2	%		220bp		13.5	%		16.4	%		(290	)bp

	Six Months Ended								Six Months Ended
(dollars in thousands)	October 30, 2016			November 1, 2015			Change		October 29, 2017			October 30, 2016			Change

Net sales	$	96,057		$	93,245			3.0%	$	97,030		$	96,057			1.0	%
Gross profit		22,657			19,381			16.9%		19,495			22,657			(14.0	)%
Gross profit margin		23.6	%		20.8	%		280bp		20.1	%		23.6	%		(350	)bp
SG&A expenses		6,795			5,912			14.9%		6,559			6,795			(3.5	)%
Income from operations		15,862			13,468			17.8%		12,936			15,862			(18.4	)%
Operating margin		16.5	%		14.4	%		210bp		13.3	%		16.5	%		(320	)bp

Net Sales

Overall

Net sales associated with our mattress fabrics segment increased through the first six months of fiscal 2018 compared with fiscal 2017. This increase was experienced during the second quarter, reversing a decrease in net sales in our first quarter of fiscal 2018 as compared to the same period a year ago. These results demonstrate our strategic focus on design creativity and innovation and our ability to provide a diverse product offering across all price points, including mattress fabrics and sewn covers. Additionally, net sales for the second quarter of fiscal 2018 reflected aggressive marketing of some new product roll-outs.

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~~Net Sales~~

Mattress Cover Business

~~Mattress fabric~~Our net sales ~~were almost the same for the second quarter of fiscal 2017 compared with the second quarter of fiscal 2016. However, our net sales increased 3%~~ for the first half of fiscal ~~2017 compared with the first half of fiscal 2016. Our focus on design and innovation has allowed us to offer a diverse product line across all price points and style trends. Our~~2018 reflected continued growth in our mattress cover business known as CLASS. The growth in CLASS ~~continued to perform well. CLASS allows~~has allowed us to ~~design our product offerings from fabric to finished cover and~~ expand our business with ~~our~~both traditional customers and ~~also~~ reach new ~~market segments,~~customer markets, especially the fast growing ~~Internet~~boxed bedding space.

Our ~~scalable and flexible manufacturing platform supports this strategy,~~recent joint venture (and is known as Class International Holdings Ltd) that produces mattress covers in a facility located in Haiti is expected to further strengthen our ability to grow our CLASS business. Production activities commenced during the second quarter of fiscal 2018, and we will gradually add capacity in line with expected demand. This operation will provide additional capacity and complements our existing U.S. mattress fabric operations with a mirrored platform that will enhance our ability to meet customer demand and remain cost-competitive (Refer to Note 16 located in the notes to the consolidated financial statements for further details regarding the investment in our unconsolidated joint venture).

We also have ~~made significant capital investments~~the ability to ~~improve~~utilize our ~~operating efficiencies~~fabric and ~~overall capacity.~~cut and sew platform located in China to expand our business to new markets. We believe with the transformation of our North American operations (see discussion below in the Gross Profit and Operating Income section) and our global production facilities for both fabric and sewn covers, we are positioned to meet demand in all segments of the mattress fabric marketplace.

Gross Profit and Operating Income

~~Our mattress fabric gross profit and operating income increased~~

Although our net sales were higher in the second quarter and first half of fiscal ~~2017 compared with~~2018, we experienced a decrease in the ~~same periods a year ago. These results reflect the benefits of~~profitability in our recent capital investments, with increased production capacity, enhanced finishing capabilities, and improved overall efficiency and throughput. Also, we benefited from lower raw material costs. Operating incomemattress fabrics business. Profitability was affected by ~~an increase in SG&A expenses, due primarily to~~ higher ~~incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets, design and sales expenses, and higher inventory warehousing~~operating costs ~~that were primarily incurred during~~associated with disruptions from the ~~first quarter.~~

~~During~~consolidation of our U.S. mattress fabric production facilities. As of the ~~first half~~end of our second quarter of fiscal ~~2017,~~2018, we ~~continued to make capital investments to enhance~~completed a major transformation of our North American manufacturing operations located in the U.S. and ~~improve product delivery performance. We are near completion with the latest project associated with~~Canada. All of our ~~facilities~~knitting and other fabric forming equipment has been placed into service in our expanded facility located in North ~~Carolina that will expand~~Carolina. Our U.S. mattress cover operation, CLASS, is fully operational in its new location in North Carolina. We have also finished the installation of new equipment in our ~~production capacity~~operation located in Canada, and ~~make major improvements to~~are now focused on further refinement of our ~~distribution capabilities. We are planning more facility consolidation~~overall inspection and ~~equipment relocation to further streamline our production platform~~quality processes to support our continuous improvement initiatives and long-term growth strategy. This consolidation will involve relocating the knit fabric operation from our facility in High Point, NC to our expanded facility in Stokesdale, NC, approximately thirty miles away. The benefits of this move include savings in the areas of freight, labor and lease costs. Additionally, the move will improve our reactive capacity and provide our ability to substantially increase knit production.initiatives. We expect ~~this consolidation~~ to ~~begin in February 2017 and take approximately five months to complete.~~ realize greater operating efficiencies from these changes going forward.

~~We are also making progress on~~In addition, our expansion project at our facility located in Canada, which includes new equipment installations, enhanced finishing capabilities, and a new distribution platform that will allow us to ship directly to customers located in Canada. The new distribution platform is expected to commence operations inprofitability for the ~~fourth~~second quarter of fiscal ~~2017.~~2018 was affected by higher selling expenses associated with the new product roll-outs.

We are also in the final planning stages to expand our production capacity for mattress covers through a new production facility located in Haiti. This cut and sew facility, which will be a joint venture with our existing marketing joint venture partner for mattress covers, will be located in a modern industrial park on the northeast border of Haiti, which borders the Dominican Republic. This new operation, which is expected to commence production in the first half of next fiscal year, will complement our existing production capabilities with a mirrored platform and enhance our ability to meet customer demand while remaining cost competitive. Other benefits of this strategic move include the lowest labor cost in Central America and the Caribbean, and the most favorable tariff and duty rules in this hemisphere.

~~I-33~~

Segment assets

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

(dollars in thousands) October 30, 2016 November 1, 2015 May 1, 2016
Accounts receivable and inventory $ 38,062 $ 40,937 $ 43,472
Property, plant & equipment 43,228 36,050 37,480
Goodwill 11,462 11,462 11,462
Non-compete agreement 866 941 903
Customer Relationships 689 740 715

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(dollars in thousands)	October 29, 2017		October 30, 2016		April 30, 2017
Accounts receivable and inventory	$	42,728	$	38,062	$	47,038
Property, plant & equipment		49,965		43,228		48,916
Goodwill		11,462		11,462		11,462
Investment in unconsolidated joint venture		1,522		-		1,106
Non-compete agreement		790		866		828
Customer relationships		638		689		664

Accounts Receivable & Inventory

As of October 29, 2017, accounts receivable and inventory increased $4.7 million, or 12%, compared with October 30, ~~2016,~~2016. This increase is primarily due to the increased sales volume experienced in the second quarter of fiscal 2018 compared to the same period a year ago.

As of October 29, 2017, accounts receivable and inventory decreased ~~$2.9~~$4.3 million or ~~7%,~~9% compared with ~~November 1, 2015.~~April 30, 2017. This decrease is primarily due to a decrease in inventory as a result of improved ~~cash collections on~~inventory management and a decrease in accounts receivable as ~~customers were taking more advantage~~this business segment experienced lower sales volume in the last month of ~~sales discounts in~~ the second quarter of fiscal ~~2017~~2018 compared with the ~~second quarter~~last month of ~~fiscal 2016.~~

As of October 30, 2016, accounts receivable and inventory decreased $5.4 million, or 12%, compared with May 1, 2016. This decrease is due to improved inventory management in the first half of fiscal 2017 and improved cash collections on accounts receivable as customers were taking more advantage of sales discounts in the second quarter of fiscal 2017 compared with the fourth quarter of fiscal ~~2016.~~2017.

Property, Plant & Equipment

The $50.0 million at October 29, 2017, represents property, plant and equipment of $35.8 million and $14.2 million located in the U.S. and Canada, respectively. The $43.2 million at October 30, 2016, represents property, plant, and equipment of $28.5 million and $14.7 million located in the U.S. and Canada, respectively. The ~~$36.1~~$48.9 million at ~~November 1, 2015,~~April 30, 2017, represents property, plant, and equipment of ~~$23.3~~$34.0 million and ~~$12.8 million located in the U.S. and Canada, respectively. The $37.5 million at May 1, 2016, represents property, plant, and equipment of $24.8 million and $12.7~~$14.9 million located in the U.S. and Canada, respectively.

As of October ~~30, 2016,~~29, 2017, property, plant, and equipment increased ~~$7.1~~$6.7 million, or ~~20%~~16%, compared with ~~November 1, 2015. This increase is primarily due to the capital investments noted above, partially offset by depreciation expense.~~

~~As of~~ October 30, ~~2016, property, plant, and equipment increased $5.7 million, or 15%, compared with May 1,~~ 2016. This increase is due to capital expenditures ~~of $8.8 million~~ that primarily relate to the construction of a new building (see Note 15 to the ~~Consolidated Financial Statements~~consolidated financial statements for further details) and purchases and installation of machinery and equipment.

As of October 29, 2017, property, plant, and equipment increased $1.0 million, or 2%, compared with April 30, 2017. This increase is due to capital expenditures of $4.3 million that primarily relate to purchases and installation of machinery and equipment, partially offset by depreciation expense of ~~$3.1 million for~~$3.3 million.

Investment in Unconsolidated Joint Venture

Our investment in unconsolidated joint venture represents our fifty percent ownership of Class International Holdings Ltd. noted above and in Note 16 in the ~~first half of fiscal 2017.~~notes to the consolidated financial statements.

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Non-Compete Agreement and Customer Relationships

The decreases in carrying values of our non-compete agreement and customer relationships at October 29, 2017, compared with October 30, 2016, and April 30, 2017, are primarily due to amortization expense.

Upholstery Fabrics Segment

Net Sales

			Three Months Ended										Three Months Ended
(dollars in thousands)	October 30, 2016					November 1, 2015				% Change			October 29, 2017				October 30, 2016				% Change

Non U.S. Produced	$	27,738		93	%	$	28,568	91	%		(2.9	)%	$	30,138	94	%	$	27,738	93	%		8.7	%
U.S. Produced		2,078		7	%		2,952	9	%		(29.6	)%		1,959	6	%		2,078	7	%		(5.7	)%
Total	$	29,816		100	%	$	31,520	100	%		(5.4	)%	$	32,097	100	%	$	29,816	100	%		7.7	%

			Six Months Ended										Six Months Ended
(dollars in thousands)	October 30, 2016					November 1, 2015				% Change			October 29, 2017				October 30, 2016				% Change

Non U.S. Produced	$	55,583		93	%	$	58,522	92	%		(5.0	)%	$	59,522	94	%	$	55,583	93	%		7.1	%
U.S. Produced		4,386		7	%		5,374	8	%		(18.4	)%		3,678	6	%		4,386	7	%		(16.1	)%
Total	$	59,969		100	%	$	63,896	100	%		(6.1	)%	$	63,200	100	%	$	59,969	100	%		5.4	%

~~The decrease~~Our increase in ~~upholstery fabric~~ net sales ~~reflects softer retail demand for residential furniture~~in the second quarter and the first half of fiscal 2018 compared to the same periods a year ago reflect our product-driven strategy and various growth initiatives. Our ability to ~~enhance both our customer and product mix to improve our profitability.~~

~~We have continued to focus on design and innovation and to offer~~provide a diverse ~~range~~product offering has allowed us to reach new market segments. Our results reflect the success of ~~products that meet changing market trends and style preferences. For example, the recent launch~~this strategy, highlighted by expanded sales of LiveSmart®, our ~~latest performance~~popular “performance” line of highly durable ~~and~~ stain-resistant fabric. We have recently launched a new website specifically to promote this innovative product line along with a more aggressive marketing campaign. Also, we achieved continued sales growth in fabrics ~~has been well received~~designed for the hospitality market. In addition, we are currently exploring potential acquisitions in the hospitality market ~~place.~~ that will complement our upholstery fabrics business, which is principally in the residential market.

Our 100% owned China platform supports our marketing efforts with the ~~manufacturing~~ flexibility to adapt to changing ~~furniture market~~customer demand trends with a diverse product mix of fabric styles and ~~consumer style preferences.~~price points.

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Currently, we expect both net sales and profitability in this segment to be negatively affected in the third quarter of fiscal 2017 as compared to the same period a year earlier, due primarily to the timing of the Chinese New Year holiday, with the disruptive impact of the holiday on this segment's business occurring in January this year as opposed to February in the prior year.

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

	Three Months Ended									Three Months Ended
(dollars in thousands)	October 30, 2016			November 1, 2015			Change			October 29, 2017			October 30, 2016			Change

Gross profit	$	6,145		$	6,277			(2.1	)%	$	6,074		$	6,145			(1.2	)%
Gross profit margin		20.6	%		19.9	%		70	bp		18.9	%		20.6	%		(170	)bp
SG&A expenses		3,652			3,813			(4.2	)%		3,700			3,652			1.3	%
Income from operations		2,493			2,464			1.2	%		2,374			2,493			(4.8	)%
Operating margin		8.4	%		7.8	%		60	bp		7.4	%		8.4	%		(100	)bp

~~I-35~~

	Six Months Ended
(dollars in thousands)	October 29, 2017			October 30, 2016			Change

Gross profit	$	12,773		$	12,664			0.9	%
Gross profit margin		20.2	%		21.1	%		(90	)bp
SG&A expenses		7,511			7,185			4.5	%
Income from operations		5,262			5,479			(4.0	)%
Operating margin		8.3	%		9.1	%		(80	)bp

Six Months Ended
(dollars in thousands) October 30, 2016 November 1, 2015 Change

Gross profit $ 12,664 $ 12,554 0.9 %
Gross profit margin 21.1 % 19.6 % 150 bp
SG&A expenses 7,185 7,409 (3.0 )%
Income from operations 5,479 5,146 6.5 %
Operating margin 9.1 % 8.1 % 100 bp

~~In spite of the softer demand for residential furniture,~~Although our ~~gross profit and operating income remained relatively flat for~~net sales were higher in the second quarter and first half of fiscal ~~2017~~2018, we experienced a decrease in ~~comparison~~the profitability of our upholstery fabrics business. The profitability of our upholstery fabrics segment was affected by higher than anticipated freight costs associated with our upholstery fabric operations located in China. During the second quarter, a forced Chinese government shutdown of certain textile mills for environmental control disrupted our supply chain. As a result, we incurred additional freight costs in order to ~~the same periods~~ensure customer deliveries. To a ~~year ago. This trend reflects the decline in net sales noted above, offset~~limited extent, our profitability was also affected by ~~lower raw material costs and~~higher operating expenses due to ~~more~~less favorable foreign currency exchange rates ~~in China.~~

~~Culp Europe~~

~~At the end of the third quarter of fiscal 2015, we closed~~associated with our ~~finished goods warehouse and distribution facility~~operations located in Poznan, Poland, primarily as a result of ongoing economic weakness in Europe. We remain interested in developing business in Europe, and we are pursuing a strategy for selling upholstery fabric into this market.China.

Segment Assets

Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.

(dollars in thousands)	October 30, 2016		November 1, 2015		May 1, 2016		October 29, 2017		October 30, 2016		April 30, 2017
Accounts receivable and inventory	$	26,931	$	28,856	$	26,540	$	31,701	$	26,931	$	29,021
Property, plant & equipment		1,480		1,474		1,564		2,063		1,480		1,879

Accounts Receivable & Inventory

As of October ~~30, 2016,~~29, 2017, accounts receivable and inventory ~~decreased $1.9~~increased $4.8 million, or 7%18%, compared with ~~November 1, 2015.~~October 30, 2016. This ~~decrease~~increase is primarily due to ~~improved cash collections on accounts receivable as customers were taking more advantage of~~the increased sales ~~discounts~~volume experienced in the second quarter of fiscal ~~2017~~2018 compared to the same period a year ago. In addition, inventory also increased due to the supply chain disruptions associated with ~~the second quarter of fiscal 2016.~~our operations located in China noted above.

I-36

As of October ~~30, 2016,~~29, 2017, accounts receivable and inventory increased ~~modestly~~$2.7 million, or 9%, compared with ~~May 1, 2016,~~April 30, 2017. This increase is primarily due to an increase in inventory ($1.7 million) as a result of holding higher inventory levels to better service our customers. This increase was mostly offset by a decrease in accounts receivable ($1.3 million) as a result of improved cash collections as customers were taking more advantage ofthe increased sales ~~discounts~~volume experienced in the second quarter of fiscal ~~2017~~2018 compared ~~with~~to the fourth quarter of fiscal ~~2016.~~2017.

~~I-36~~

Property, Plant & Equipment

The $2.1 million at October 29, 2017, represents property, plant, and equipment of $1.4 million and $722,000 located in the U.S. and China, respectively. The $1.5 million at October 30, 2016, represents property, plant, and equipment of $890,000 and $590,000 located in the U.S. and China, respectively. The ~~$1.5~~$1.9 million at ~~November 1, 2015,~~April 30, 2017, represents property, plant, and equipment of ~~$785,000~~$1.2 million and ~~$689,000 located in the U.S. and China, respectively. The $1.6 million at May 1, 2016, represents property, plant, and equipment of $893,000 and $671,000~~$655,000 located in the U.S. and China, respectively.

Other Income Statement Categories

	Three Months Ended							Three Months Ended
(dollars in thousands)	October 30, 2016		November 1, 2015		% Change			October 29, 2017		October 30, 2016		% Change
SG&A expenses	$	9,602	$	9,433		1.8	%	$	9,415	$	9,602		(1.9	)%
Interest expense		-		-		-			37		-		100.0	%
Interest income		15		69		(78.3	)%		128		15		753.3	%
Other expense		155		225		(31.1	)%		321		155		107.1	%

	Six Months Ended							Six Months Ended
(dollars in thousands)	October 30, 2016		November 1, 2015		% Change			October 29, 2017		October 30, 2016		% Change
SG&A expenses	$	19,348	$	18,175		6.5	%	$	18,916	$	19,348		(2.2	)%
Interest expense		-		-		-			37		-		100.0	%
Interest income		40		112		(64.3	)%		259		40		547.5	%
Other expense		307		320		(4.1	)%		674		307		119.5	%

Selling, General and Administrative Expenses

The ~~increase~~decrease in SG&A expenses ~~for~~during the second quarter and first half of fiscal ~~2017~~2018 compared with the ~~first half of fiscal 2016 was due primarily to higher~~same periods a year ago included lower incentive compensation expense reflecting ~~stronger~~weaker financial results in relation to pre-established ~~performance~~financial targets, ~~higher inventory warehousing costs and design and sales expenses associated with our mattress fabrics segment. For~~offset by the ~~second quarter of fiscal 2017,~~following items that increased SG&A ~~expenses increased slightly compared with the second quarter of fiscal 2016.~~expenses:

·	Non-recurring charges associated with the consolidation of our mattress production facilities.

·	Higher selling expenses that were incurred during the second quarter of fiscal 2018 that were primarily due to new product roll-outs associated with our mattress fabrics business.

·	Non-recurring legal and other professional fees of approximately $400,000 incurred during the second quarter of fiscal 2018, relating to a proposed acquisition of a China business that did not close.

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Interest Expense

Interest costs charged to operations were $73,000 during the second quarter of fiscal 2018 compared with $36,000 ~~and $5,000~~ for the ~~three months ended October 30, 2016 and November 1, 2015, respectively.~~same period a year ago. Interest costs charged to operations were ~~$45,000 and $49,000~~$137,000 for the ~~six months ended October 30, 2016~~first half of fiscal 2018 compared with $45,000 for the first half of fiscal 2017. These interest costs for fiscal 2018 and ~~November 1, 2015, respectively.~~ 2017 pertain to borrowings on our U.S. revolving line of credit and in connection with the construction of a new building associated with our mattress fabrics segment (Refer to Note 15 located in the notes to the consolidated financial statements for further details).

The interest costs charged to operations in fiscal 2018 were partially offset by interest costs totaling $36,000 and $100,000 in the second quarter and the first half of fiscal 2018, respectively, for the construction of qualifying fixed assets that were capitalized. The interest costs charged to operations in fiscal 2017 were fully offset by interest costs for the construction of qualifying fixed assets that were capitalized. Interest costs that have been capitalized ~~and~~ will be amortized over the related assets’ useful lives.

~~I-37~~

Interest Income

Interest income ~~decreased~~increased in the second quarter and first half of fiscal ~~2017~~2018 compared with the same periods a year ago. ~~This trend reflects higher cash and cash equivalents and short-term investment balances held~~The increase in U.S. dollar denominated account balances during fiscal 2017 compared with fiscal 2016. Cash and cash equivalents and short-term investment balances held in U.S. dollar denominated account balances were 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 reducing the amount of cash we hold in Chinese Yuan Renminbi. Although this action has resulted in lower~~ interest income ~~this strategy has significantly mitigated our foreign currency exchange rate exposure in China. See discussion in “Other Expense” noted below.~~

~~Currently, we expect~~was due to ~~earn more interest income starting in the third quarter of fiscal 2017. At~~management's decision at the end of the second quarter ~~and beginning of the third quarter~~ of fiscal 2017 ~~we invested~~to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities that primarily ~~ranging~~ranged from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. ~~See the Liquidity section below for further details.~~

Other Expense

~~The decrease in other~~Other expense inincreased for the second quarter of fiscal 2017 compared with the second quarter of fiscal 2016 is primarily due to a realized loss on the sale of short-term investments in the second quarter of fiscal 2016 that did not recur in the second quarter of fiscal 2017.

~~Other expenses were flat in the~~and first half of fiscal ~~2017~~2018 compared with the ~~first half of fiscal 2016.~~

~~During the first half of fiscal 2017, we did not have~~same periods a year ago. This increase was mostly due to less favorable foreign currency exchange ~~gain or loss~~rates associated with our operations located in Canada and China compared with a foreign exchange gain of $5,000 in the first half of fiscal 2016. These results reflect our ability to mitigate the effects of foreign currency exchange rate fluctuations through the maintenance of a natural hedge by keeping a balance of assets and liabilities in foreign currencies other than the U.S. dollar. As noted above, we made a concerted effort starting in fiscal 2016 to transfer significant amounts of cash we hold in Chinese Yuan Renminbi to accounts denominated in U.S. dollars.

~~Income Taxes~~China.

Effective Income Tax Rate

I-38

2017

2016

federal income tax rate

34.0
%

34.0
%
U.S state income tax expense

0.6

0.7

tax effects of Chinese foreign exchange gains

1.6

2.3

increase in liability for uncertain tax positions

0.3

0.3

other

1.2

0.2

37.7
%

37.5
%

	2018			2017
Federal income tax rate		34.0	%		34.0	%
Excess income tax benefits related to stock-based compensation		(4.3	)		-
Tax effects of Chinese foreign exchange (losses) gains		(1.5	)		1.6
U.S. state income tax expense		0.4			0.6
Other		0.5			1.5
		29.1	%		37.7	%

Deferred Income Taxes

Valuation Allowance

Refer to Note 13 located in the notes to the consolidated financial statements for disclosures regarding our assessments of our recorded valuation allowance as of October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, respectively.

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. 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.

Refer to Note 13 located in the notes to the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with undistributed earnings from our foreign subsidiaries as of October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and ~~May 1, 2016,~~April 30, 2017, respectively.

~~I-39~~

Uncertainty In Income Taxes

~~At October 30, 2016, we had a $15.1 million total~~Our gross unrecognized income tax benefit ~~that included $3.7~~of $12.6 million ~~if recognized, would favorably affect~~at October 29, 2017, relates to tax positions for which significant change is reasonably possible within the next year (see below disclosure of ongoing income tax ~~rate in future periods. Our gross unrecognized income tax benefit~~exams). This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2005 and subsequent due to loss carryforwards. Canadian federal and provincial (Quebec) returns filed by us remain subject to examination for income tax years ~~2009~~2013 and subsequent, with the statute of limitations for the 2009 income tax year expiring in January 2017. Canadian provincial (Quebec) returns remain subject to examination for income tax years 2009 and subsequent, with the statute of limitations for the 2009 income tax year expiring in April 2017.subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year ~~2011~~2012 and subsequent.

~~Currently, the~~

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The Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal years 2014 through 2016. As a result of this examination, the IRS proposed an adjustment approximating $12.5 million of income taxes that relates to our transfer pricing with certain foreign subsidiaries. Management does not agree with the IRS' proposed adjustment and ~~no adjustments have been~~intends to vigorously defend its position. Currently, the ultimate outcome of this proposed ~~at this time.~~adjustment and any potential cash settlement cannot be determined as it is dependent upon potential legal and competent authority proceedings, interpretation of income tax law, and utilization of available loss carryforwards and certain income tax credits associated with the fiscal years under exam. We ~~currently~~believe our unrecognized income tax benefit balance of $12.6 million has adequately provided for our uncertain income tax positions for all open income tax years and jurisdictions. Currently, we expect this examination to be completed ~~by the end of our~~during fiscal ~~year 2017 (April 30, 2017).~~ 2019.

Income Taxes Paid

We reported income tax expense of ~~$5.9~~$3.7 million and ~~$5.1~~$5.9 million for the first half of fiscal ~~2017~~2018 and ~~2016,~~2017, respectively. Currently, ~~we are not paying~~our income ~~taxes~~tax payments in the United States are not expected to be significant in fiscal 2018 as we have ~~an estimated $18.0~~approximately $9.0 million in operating loss carryforwards and certain income tax credits available as of ~~May 1, 2016.~~April 30, 2017. Our operating loss carryforwards are expected to be fully utilized during fiscal 2018. However, we did have income tax payments oftotaling $2.6 million and $3.2 million ~~and $2.1 million for~~during the first half of fiscal ~~2017~~2018 and ~~2016,~~2017, respectively. These income tax payments are associated with our subsidiaries located in China and Canada.

Liquidity and Capital Resources

Liquidity

Overall

Currently, our sources of liquidity include cash and cash equivalents, short-term investments (available for sale), 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 (available for sale) of ~~$16.3~~$18.2 million at October ~~30, 2016,~~29, 2017, cash flow from operations, and the current availability ($~~35.9~~36.0 million as of October ~~30, 2016)~~29, 2017) under our revolving credit lines will be sufficient to fund our foreseeable business needs, contractual obligations, and ~~contractual obligations.~~potential acquisitions.

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At October 29, 2017, our cash and investments (which comprise cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity), totaled $49.1 million compared with $54.2 million at April 30, 2017. Additionally, there were no borrowings outstanding under our revolving credit agreements as of October 29, 2017, and April 30, 2017, respectively. At the end of our first quarter of fiscal 2018, we had an outstanding balance of $5.0 million on our U.S. revolving line of credit. This outstanding balance and additional borrowings of $5.0 million that were made during the second quarter of fiscal 2018 have been repaid.

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.

At October 30, 2016, our cash and cash equivalents, short-term investments, and long-term investments (held-to-maturity) totaled $47.4 million compared with $42.1 million at May 1, 2016. This increase from the end of fiscal 2016 was primarily due to net cash provided by our operating activities of $16.6 million, partially offset by $6.3 million in capital expenditures mostly associated with our mattress fabric segment, $4.3 million in dividend payments, and $929,000 in long-term investment purchases associated with our Rabbi Trust that is partially funding our deferred compensation plan. Our net cash provided by operating activities of $16.6 million increased $5.4 million compared with $11.2 million for the six months ending November 1, 2015. This increase is primarily due to increased earnings and improved accounts receivable and inventory management during the first half of fiscal 2017 compared to the same period a year ago.

Currently, we do not have any borrowings outstanding under our credit agreements. At the end of our first quarter of fiscal 2017, we had an outstanding balance due of $7.0 million on our U.S. revolving line of credit. This outstanding balance was repaid during our second quarter of fiscal 2017.

By Geographic Area

We currently hold cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) in the U.S. and our foreign jurisdictions to support our operational requirements, potential acquisitions, mitigate our risk to foreign exchange rate fluctuations, and U.S. and foreign income tax planning purposes.

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A summary of our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) by geographic area follows:


							October 29,		October 30,		April 30,
(dollars in thousands)	October 30, 2016		November 1, 2015		May 1, 2016		2017		2016		2017
Cayman Islands	$	36,100	$	8,591	$	25,762	$	39,004	$	36,100	$	34,965
China		6,766		18,690		8,454		6,153		6,766		12,722
Canada		4,513		8,856		6,844		3,275		4,513		4,268
United States		11		1,359		1,086		653		11		2,228
	$	47,390	$	37,496	$	42,146	$	49,085	$	47,390	$	54,183

~~We have had~~Currently, we are holding a significant ~~shift from~~amount of our cash and ~~cash equivalents and~~ investments held in China to the Cayman Islands. Since April 2016 through the end of our second quarter of fiscal 2017, we distributed earnings and profits totaling $39.2 million from our subsidiaries located in China towith our international holding company located in the Cayman Islands. ~~This shift was primarily due to our strategy of mitigating our risk to foreign exchange rate fluctuations for assets and liabilities denominated in Chinese Yuan Renminbi. By reducing the amount of~~Our cash and ~~cash equivalents held~~investments located 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 of foreign currency exchange rate fluctuations in China. In addition, by transferringthis jurisdiction stemmed from accumulated earnings and profits (totaling $50.4 million as of October 29, 2017) that were distributed from ~~China to~~our subsidiaries located in China. Our cash and investments held in the Cayman Islands ~~it provides increased flexibility~~are currently expected to ~~ultimately repatriate these earnings and profits to~~be used for the U.S. for various strategic purposes. Currently, we do not intend to repatriate any earnings and profits to the U.S. until after our U.S. loss carryforwards are fully utilized, which we expect in two to three more years.following business purposes:

~~I-41~~

·	Mitigate our risk to foreign exchange rate fluctuations for assets and liabilities denominated in Chinese Yuan Renminbi by holding more cash and investments denominated in U.S. dollars.

·	Support, if necessary, our fifty percent ownership interest in a joint venture located in Haiti that produces cut and sewn mattress covers (see Note 16 in the notes to the consolidated financial statements for further details).

·	Fund any proposed acquisitions.

Repatriate earnings and profits generated from our China operations to the U.S. parent for various strategic purposes when our U.S. loss carryforwards are fully utilized (which we expect to occur in fiscal 2018). Currently, we have repatriated accumulated earnings and profits residing in the Cayman Islands totaling $12.1 million, of which $9.0 million and $3.1 million were repatriated in fiscal 2018 and 2016, respectively. No earnings and profits from our foreign subsidiaries were repatriated to the U.S. during fiscal 2017.

During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities ~~primarily ranging~~that ranged from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. At October 30, 2016, our held-to-maturity investments totaling $31.0 million consisted of invested cash and cash equivalents of $23.9 million and U.S. Corporate bonds of $7.1 million. The $23.9 million in invested cash and cash equivalents were used to purchase U.S. Corporate bonds during our third quarter of fiscal 2017 (all U.S. Corporate bond purchases were completed by November 3, 2016). The fair value of our held-to-maturity investments approximates their cost basis.

Dividend Program

On ~~December 1, 2016,~~November 30, 2017, we announced that our board of directors approved a ~~14%~~12.5% increase in our quarterly cash dividend from ~~$0.07~~$0.08 per share to ~~$0.08~~$0.09 per share. This payment will be made on January ~~17, 2017~~16, 2018, to shareholders of record as of January ~~3, 2017.~~2, 2018.

I-42

During the first half of fiscal 2017, dividend payments totaled $4.3 million, of which $2.5 million represented a special cash dividend payment of $0.21 per share, and $1.8 million represented quarterly dividend payments of $0.07 per share. During the first half of fiscal 2016, dividend payments totaled $6.4 million, of which $5.0 million represented a special cash dividend of $0.40 per share, and $1.4 million represented quarterly dividend payments of $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

During the six months ended October 29, 2017, and October 30, 2016, ~~and November 1, 2015,~~ we did not purchase any shares of our common stock.

At October ~~30, 2016,~~29, 2017, we had $5.0 million available for ~~additional~~ repurchases of our common stock.

~~I-42~~

Working Capital

Accounts receivable at October ~~30, 2016,~~29, 2017, were ~~$19.0~~$24.2 million, ~~a decrease~~an increase of ~~$4.3~~$5.2 million, or ~~18%~~27%, compared with ~~$23.3~~$19.0 million at ~~November 1, 2015.~~October 30, 2016. This ~~decrease~~increase is primarily due to ~~improved cash collections as customers were taking more advantage of~~the increased sales ~~discounts~~volume experienced in the second quarter of fiscal ~~2017~~2018 compared ~~with~~to the same period a year ago. Days’ sales outstanding were 27 days for the second quarter of fiscal ~~2016. Days’ sales outstanding were~~2018 compared with 23 days for the second quarter of fiscal ~~2017 compared with 28 days for the second quarter of fiscal 2016.~~2017.

Inventories as of October ~~30, 2016,~~29, 2017, were $50.2 million, an increase of $4.2 million, or 9%, compared with $46.0 million at October 30, 2016. This increase is primarily due to the increased sales volume experienced in the second quarter of fiscal 2018 compared to the same period a year ago. In addition, inventory also increased due to supply chain disruptions associated with ~~$46.5 million at November 1, 2015.~~our operations located in China. Inventory turns were 5.2 for the second quarter of fiscal 2018 and 2017, ~~compared with 5.3 for the second quarter of fiscal 2016.~~respectively.

Accounts payable-trade as of October ~~30, 2016,~~29, 2017, were ~~$20.2~~$24.6 million, ~~a decrease~~an increase of ~~$5.0~~$4.4 million, or ~~20%~~22%, compared with ~~$25.2~~$20.2 million at ~~November 1, 2015.~~October 30, 2016. This ~~decrease~~increase is ~~primarily~~ due to the ~~decrease in net sales and the timing of payments to suppliers during the second quarter of fiscal 2017 compared with the second quarter of fiscal 2016.~~increased inventory purchases noted above.

Operating working capital (accounts receivable and inventories, less accounts payable-trade and accounts payable-capital expenditures) was $46.6 million at October 29, 2017, compared with $41.8 million at October 30, ~~2016, compared with $43.3 million at November 1, 2015.~~2016. Operating working capital turnover was 7.4 during the second quarter of fiscal 2018 compared with 7.0 during the second quarter of fiscal ~~2017 compared with 7.7 during the second quarter of fiscal 2016.~~2017.

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Financing Arrangements

Currently, we have revolving credit agreements with banks for our U.S parent company and our operations located in China. The ~~purpose~~purposes of our revolving lines of credit are to support potential ~~short term~~short-term cash needs in different jurisdictions, mitigate our risk associated with foreign currency exchange rate fluctuations, and ultimately repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes. Our revolving credit agreements require us to maintain compliance with certain financial covenants as defined in the respective agreements.

At October ~~30, 2016,~~29, 2017, we were in compliance with all our financial covenants.

Refer to Note 8 located in the notes to the consolidated financial statements for further details of our revolving credit agreements.

Capital Expenditures and Depreciation

Overall

Capital expenditures on a cash basis were ~~$6.3~~$7.5 million (of which $2.5 million was vendor- financed) for the first half ~~for~~of fiscal ~~2017~~2018 compared with ~~$5.3~~$6.3 million for the same period a year ago. Capital expenditures for the first half of fiscal ~~2017~~2018 and ~~2016~~2017 mostly related to our mattress fabrics segment.

Depreciation expense was $3.7 million for the first half of fiscal 2018 compared with $3.5 million for the first half of fiscal 2017 ~~compared with $3.2 million for the first half of fiscal 2016. Depreciation expense for the first half of fiscal 2017~~ and ~~2016~~ mostly related to the mattress fabrics segment.

~~I-43~~

For fiscal ~~2017,~~2018, we are projecting capital expenditures ~~for the company as a whole~~(including those that are vendor-financed) to be ~~approximately $12.0 million.~~comparable to fiscal 2017. Depreciation expense for the company as a whole is projected to be approximately ~~$7.0~~$8.0 million in fiscal ~~2017.~~2018. The estimated capital expenditures and depreciation expense mostly relate to the mattress fabrics segment. 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 to depreciation expense.

Accounts Payable – Capital Expenditures

At October ~~30, 2016,~~29, 2017, we had total amounts due regarding capital expenditures totaling ~~$3.0~~$3.2 million, inof which ~~$1.5~~$2.7 million is financed and pertains to completed work for the construction of a new building (see below). ~~The~~Of the total amount due of ~~$3.0~~$2.7 million at October 29, 2017, $1.3 million is required to be paid ~~within one year from~~during the ~~end of our second quarter~~remainder of fiscal ~~2017.~~2018, with a remaining amount of $1.4 million due in fiscal 2019 (May 2018).

Purchase Commitments – Capital Expenditures

At October ~~30, 2016,~~29, 2017 we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling ~~$9.8~~$3.8 million. The ~~$9.8~~$3.8 million asincludes $2.7 million (all of ~~October 30, 2016, includes $6.1 million~~which represents completed work) associated with the construction of athe new building noted below.

I-44

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~~is 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 October 30, 2016, we have made payments totaling $5.1 million for services rendered on the construction of this building. The remaining $6.1 million on this commitment is required to be paid on an installment basis over the next three fiscal years as follows: Fiscal 2017 - $1.1 million; Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.2 million.

~~The construction of this~~This new building ~~is currently expected to be completed~~was placed into service in ~~December 2016.~~July 2017.

Critical Accounting Policies and Recent Accounting Developments

At October ~~30, 2016,~~29, 2017, 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 1, 2016.~~April 30, 2017.

~~I-44~~

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 1, 2016.~~April 30, 2017.

Contractual Obligations

As of October ~~30, 2016,~~29, 2017, there were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended ~~May 1, 2016.~~April 30, 2017.

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.

I-45

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 October ~~30, 2016,~~29, 2017, our U.S. revolving credit agreement requires interest to be charged at a rate (applicable interest rate of ~~1.98%~~2.69% at October ~~30, 2016)~~29, 2017) as a variable spread over LIBOR 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 October ~~30, 2016,~~29, 2017, there were no borrowings outstanding under any of our revolving credit lines.

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 October ~~30, 2016,~~29, 2017, would not have had a significant impact on our results of operations or financial position.

ITEM 4. CONTROLS AND PROCEDURES

We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of October ~~30, 2016,~~29, 2017, 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 October ~~30, 2016,~~29, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

I-46

Part II – Other Information

Item 1. Legal Proceedings

There have not been any material changes to our legal proceedings during the six months ended October ~~30, 2016.~~29, 2017. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July ~~15, 2016~~14, 2017 for the fiscal year ended ~~May 1, 2016.~~April 30, 2017.

Item 1A. Risk Factors

There have not been any material changes to our risk factors during the six months ended October ~~30, 2016.~~29, 2017, with the exception of the financial risks associated with the Internal Revenue Service's exam of our fiscal 2014 through 2016 U.S. Federal income tax returns. (Refer to Note 13 in the notes to consolidated financial statements for further details). Our risk factors are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July ~~15, 2016~~14, 2017 for the fiscal year ended ~~May 1, 2016.~~April 30, 2017.

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

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares ~~Shares~~ Purchased as Part of ~~Publicly~~ Publicly Announced Plans or Programs	(d) Approximate Dollar Value of of Shares that May Yet Be ~~Purchased~~ Purchased Under the Plans or or Programs (1)
~~August 1, 2016~~July 31, 2017 to September 3, 2017	-	-	-	$5,000,000
September 4, ~~2016~~2017 to October 1, 2017	-	-	-	$5,000,000
~~September 5, 2016 to~~ October 2, ~~2016~~ 2017 to October 29, 2017	-	-	-	$5,000,000
~~October 3, 2016 to~~ ~~October 30, 2016~~ Total	-	-	-	$5,000,000
~~Total~~	-	-	-	~~$ 5,000,000~~

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

II-1

Item 6. Exhibits

~~The following exhibits are submitted as part of this report.~~

	~~3(i)~~The following exhibits are submitted as part of this report.
	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~~

~~Written description of non-employee director compensation.~~

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-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)


Date: December ~~9, 2016~~ 8, 2017	By:	/s/ Kenneth R. Bowling
		Kenneth R. Bowling
		Senior 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 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-3

EXHIBIT INDEX

~~Exhibit NumberExhibit~~

~~10.1~~Exhibit Number

~~Written description of non-employee director compensation.~~

Exhibit

	~~31.1~~
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

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

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

	~~32.2~~
	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

	NORTH CAROLINA		56-1001967
	(State or other jurisdiction of		(I.R.S. Employer Identification No.)
	incorporation or other organization)

	1823 Eastchester Drive
	High Point, North Carolina		27265-1402
	(Address of principal executive offices)		(zip code)

		Page

Part I - Financial Statements

Item 1. Financial Statements: (Unaudited)
	~~Page~~


		Smaller Reporting Company ☐			Emerging Growth Company ☐

	Consolidated Statements of Net Income — Three and Six Months Ended October 29, 2017 and October 30, 2016 ~~and November 1, 2015~~	I-1

	Consolidated Statements of Comprehensive Income – Three and Six Months Ended October 29, 2017 and October 30, 2016 ~~and November 1, 2015~~	I-2

	Consolidated Balance Sheets — October 29, 2017, October 30, 2016, ~~November 1, 2015,~~ and April 30, 2017
	~~May 1, 2016~~	I-3

	Consolidated Statements of Cash Flows — Six Months Ended October 29, 2017 and October 30, 2016 ~~and November 1, 2015~~	I-4

	Consolidated Statements of ~~Shareholders'~~Shareholders’ Equity	I-5

	Notes to Consolidated Financial Statements	I-6

	Cautionary Statement Concerning Forward-Looking Information	I-28

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		I-29

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~		~~I-46~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk		I-46

Item 4. Controls and Procedures		I-46

Part II - Other Information

Item 1. Legal Proceedings		II-1
~~Item 1A. Risk Factors~~		~~II-1~~

Item 1A. Risk Factors		II-1

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		II-1

Item 6. Exhibits		II-2

Signatures		II-3