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

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

For the quarterly period ended JanuaryOctober 29, 2017
Commission File No. 1-12597

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

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)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to the filing requirements for at least the past 90 days.     ☒ YES   NO ☐  NO


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period after the registrant was required to submit and post such files).     ☒ YES   NO ☐  NO


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

Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller Reporting Company ☐
Emerging Growth Company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ☐ YES   NO ☒  NO

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

Common shares outstanding at JanuaryOctober 29, 2017:  12,314,75612,435,276
Par Value: $0.05 per share



INDEX TO FORM 10-Q
For the period ended JanuaryOctober 29, 2017

  
Page
   
Part I - Financial Statements
   
Item 1.    Financial Statements: (Unaudited)
 
   
 
Consolidated Statements of Net Income — Three and NineSix Months Ended JanuaryOctober 29, 2017 and January 31,October 30, 2016
I-1
   
 
Consolidated Statements of Comprehensive Income – Three and NineSix Months Ended JanuaryOctober 29, 2017 and January 31,October 30, 2016
I-2
   
 
Consolidated Balance Sheets — JanuaryOctober 29, 2017, January 31,October 30, 2016, and May 1, 2016April 30, 2017
I-3
   
 
Consolidated Statements of Cash Flows — NineSix Months Ended JanuaryOctober 29, 2017 and January 31,October 30, 2016
I-4
   
 
Consolidated Statements of 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-47I-46
   
Item 4.    Controls and Procedures
I-47I-46
   
Part II - Other Information
   
Item 1.    Legal Proceedings
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
 
Item 1:  Financial Statements
CULP, INC. 
CONSOLIDATED STATEMENTS OF NET INCOME
 
FOR THE THREE AND NINE MONTHS ENDED JANUARY 29, 2017 AND JANUARY 31, 2016 
UNAUDITED 
(Amounts in Thousands, Except for Per Share Data) 
       
  THREE MONTHS ENDED 
       
  January 29,  January 31, 
  2017  2016 
       
Net sales $76,169   78,466 
Cost of sales  59,410   61,903 
Gross profit  16,759   16,563 
         
Selling, general and        
  administrative expenses  9,824   9,337 
Income from operations  6,935   7,226 
         
Interest income  (124)  (38)
Other expense  69   85 
Income before income taxes  6,990   7,179 
         
Income taxes  643   2,317 
Net income $6,347   4,862 
         
Net income per share, basic $0.52   0.39 
Net income per share, diluted  0.51   0.39 
Average shares outstanding, basic  12,313   12,331 
Average shares outstanding, diluted  12,544   12,486 
         
  NINE MONTHS ENDED 
         
  January 29,  January 31, 
  2017  2016 
         
Net sales $232,194   235,607 
Cost of sales  180,115   187,109 
Gross profit  52,079   48,498 
         
Selling, general and        
  administrative expenses  29,171   27,512 
Income from operations  22,908   20,986 
         
Interest income  (164)  (150)
Other expense  376   405 
Income before income taxes  22,696   20,731 
         
Income taxes  6,560   7,398 
Net income $16,136   13,333 
         
Net income per share, basic $1.31   1.08 
Net income per share, diluted  1.29   1.07 
Average shares outstanding, basic  12,302   12,317 
Average shares outstanding, diluted  12,517   12,488 
CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE THREE AND SIX MONTHS ENDED OCTOBER 29, 2017 AND OCTOBER 30, 2016
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
October 29,October 30,
20172016
Net sales$80,69875,343
Cost of sales64,89458,442
Gross profit15,80416,901
Selling, general and
  administrative expenses9,4159,602
Income from operations6,3897,299
Interest expense37-
Interest income(128)(15)
Other expense321155
Income before income taxes6,1597,159
Income taxes2,1082,684
Loss from investment in unconsolidated joint venture75-
Net income$3,9764,475
Net income per share, basic$0.320.36
Net income per share, diluted0.320.36
Average shares outstanding, basic12,44012,308
Average shares outstanding, diluted12,58012,507
SIX MONTHS ENDED
October 29,October 30,
20172016
Net sales$160,230156,026
Cost of sales127,962120,705
Gross profit32,26835,321
Selling, general and
  administrative expenses18,91619,348
Income from operations13,35215,973
Interest expense37-
Interest income(259)(40)
Other expense674307
Income before income taxes12,90015,706
Income taxes3,7485,917
Loss from investment in unconsolidated joint venture193-
Net income$8,9599,789
Net income per share, basic$0.720.80
Net income per share, diluted0.710.78
Average shares outstanding, basic12,42012,297
Average shares outstanding, diluted12,61312,495
See accompanying notes to consolidated financial statements.
 
I-1
CULP, INC. 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
FOR THE THREE AND NINE MONTHS ENDED JANUARY 29, 2017 AND JANUARY 31, 2016 
(UNAUDITED) 
(AMOUNTS IN THOUSANDS) 
       
  THREE MONTHS ENDED 
       
  January 29,  January 31, 
  2017  2016 
       
Net income $6,347  $4,862 
         
Other comprehensive loss        
         
Unrealized losses on investments        
         
Unrealized holding losses on investments  (13)  (194)
         
Reclassification adjustment for realized loss included in net income  -   71 
         
Total other comprehensive loss  (13)  (123)
         
         
Comprehensive income $6,334  $4,739 
         
         
         
         
  NINE MONTHS ENDED 
         
  January 29,  January 31, 
  2017  2016 
         
Net income $16,136  $13,333 
         
Other comprehensive gain (loss)        
         
Unrealized gains (losses) on investments        
         
Unrealized holding gains (losses) on investments  75   (312)
         
Reclassification adjustment for realized loss included in net income  12   127 
         
Total other comprehensive gain (loss)  87   (185)
         
         
Comprehensive income $16,223  $13,148 
See accompanying notes to consolidated financial statements.
I-2
CULP, INC. 
CONSOLIDATED BALANCE SHEETS
 
JANUARY 29, 2017, JANUARY 31, 2016 AND MAY 1, 2016 
UNAUDITED 
(Amounts in Thousands) 
          
  January 29,  January 31,  * May 1, 
  2017  2016  2016 
Current assets:         
Cash and cash equivalents $15,659   31,713   37,787 
Short-term investments  2,410   4,259   4,359 
Accounts receivable, net  22,726   26,784   23,481 
Inventories  46,193   48,485   46,531 
Income taxes receivable  -   23   155 
Other current assets  2,514   2,331   2,477 
Total current assets  89,502   113,595   114,790 
             
Property, plant and equipment, net  50,333   38,157   39,973 
Goodwill  11,462   11,462   11,462 
Deferred income taxes  422   4,312   2,319 
Long-term investments - Held-To-Maturity  30,832   -   - 
Long-term investments - Rabbi Trust  5,488   3,590   4,025 
Investment in unconsolidated joint venture  600   -   - 
Other assets  2,417   2,435   2,573 
            
Total assets $191,056   173,551   175,142 
             
Current liabilities:            
Accounts payable-trade $22,352   25,601   23,994 
Accounts payable - capital expenditures  4,886   380   224 
Accrued expenses  10,511   12,690   11,922 
Income taxes payable - current  217   622   180 
Total current liabilities  37,966   39,293   36,320 
             
Accounts payable - capital expenditures  708   -     
Income taxes payable - long-term  1,817   3,480   3,841 
Deferred income taxes  2,924   1,209   1,483 
Deferred compensation  5,327   4,495   4,686 
            
Total liabilities  48,742   48,477   46,330 
             
Commitments and Contingencies (Notes 15 and 16)            
             
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            
12,314,756 at January 29, 2017; 12,250,489            
at January 31, 2016; and 12,265,489 at            
May 1, 2016  615   613   614 
Capital contributed in excess of par value  46,365   42,937   43,795 
Accumulated earnings  95,391   81,804   84,547 
Accumulated other comprehensive loss  (57)  (280)  (144)
Total shareholders' equity  142,314   125,074   128,812 
             
Total liabilities and shareholders' equity $191,056   173,551   175,142 
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-3
CULP, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE NINE MONTHS ENDED JANUARY 29, 2017 AND JANUARY 31, 2016 
UNAUDITED 
(Amounts in Thousands) 
       
  NINE MONTHS ENDED 
       
  January 29,  January 31, 
  2017  2016 
       
Cash flows from operating activities:      
Net income $16,136   13,333 
Adjustments to reconcile net income to net cash        
provided by operating activities:        
Depreciation  5,304   4,888 
Amortization of assets  162   123 
Stock-based compensation  2,619   1,964 
Excess tax benefit related to stock-based compensation  (195)  (822)
Deferred income taxes  3,533   1,906 
Realized loss on sale of short-term investments  12   127 
Gain on sale of equipment  (71)  (66)
Foreign currency exchange gains  (18)  (85)
Changes in assets and liabilities:        
Accounts receivable  340   1,091 
Inventories  (137)  (6,485)
Other current assets  90   (108)
Other assets  51   48 
Accounts payable - trade  (946)  (1,979)
Accrued expenses and deferred compensation  (948)  1,406 
Income taxes  (1,695)  535 
Net cash provided by operating activities  24,237   15,876 
         
Cash flows from investing activities:        
Capital expenditures  (9,253)  (7,686)
Investment in unconsolidated joint venture  (600)  - 
Proceeds from the sale of equipment  80   230 
Payment on life insurance policy  (18)  (18)
Proceeds from the sale of short-term investments  2,000   5,612 
Purchase of short-term investments  (8)  (86)
Purchase of long-term investments (Held-To-Maturity)  (31,050)  - 
Purchase of long-term investments (Rabbi Trust)  (1,431)  (1,268)
Net cash used in investing activities  (40,280)  (3,216)
         
Cash flows from financing activities:        
Proceeds from line of credit  7,000   7,000 
Payments on line of credit  (7,000)  (7,000)
Payments on vendor-financed capital expenditures  (1,050)  - 
Payments on long-term debt  -   (2,200)
Excess tax benefit related to stock-based compensation  195   822 
Repurchase of common stock  -   (2,397)
Dividends paid  (5,292)  (7,281)
Payments on debt issuance costs  (2)  (43)
Proceeds from common stock issued  37   138 
Net cash used in financing activities  (6,112)  (10,961)
         
Effect of exchange rate changes on cash and cash equivalents  27   289 
         
(Decrease) increase in cash and cash equivalents  (22,128)  1,988 
         
Cash and cash equivalents at beginning of period  37,787   29,725 
         
Cash and cash equivalents at end of period $15,659   31,713 
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  -   -   -   16,136   -   16,136 
Stock-based compensation  -   -   2,619   -   -   2,619 
Unrealized gain on investments  -   -   -   -   87   87 
Excess tax benefit related to stock                        
       based compensation  -   -   195   -   -   195 
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  5,000   -   37   -   -   37 
Common stock surrendered for                        
       withholding taxes payable  (9,725)  (1)  (279)  -   -   (280)
Dividends paid  -   -   -   (5,292)  -   (5,292)
Balance, January 29, 2017  12,314,756  $615   46,365   95,391   (57) $142,314 
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.  Basis of Presentation

The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position.  All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results.  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 15, 2016, for the fiscal year ended May 1, 2016.

The company’s nine months ended January 29, 2017, and January 31, 2016, represent 39 week periods, respectively.

2.  Significant Accounting Policies

As of January 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.

Recently Adopted Accounting Pronouncements

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

In June 2014, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on accounting for certain share-based payment awards. The amended guidance requires that share-based compensation awards with terms of a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The guidance will permit an entity to apply the amendments in the update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the consolidated financial statements and to all new or modified awards thereafter. This guidance was effective for the first quarter of fiscal 2017 and did not have any impact on our consolidated financial statements as we currently do not have any share-based payment awards with terms of a performance target that affects vesting and could be achieved after the requisite service period.
I-6
 
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 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 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) 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”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position.  All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results.  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 14, 2017, for the fiscal year ended April 30, 2017.

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

2.  Significant Accounting Policies

As of October 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 April 30, 2017.

Recently Adopted Accounting Pronouncements

Measurement of Inventory

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. ASU No. 2015-11 was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. As a result, we adopted ASU No. 2015-11 in the first quarter of fiscal 2018 and the adoption of this guidance did not have a significant impact on our consolidated financial statements.

Stock-Based Compensation

In March 2016, the 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 during the first quarter of fiscal 2018. ASU No. 2016-09 aims to simplify several aspects of accounting and financial reporting for share-based payment transactions. One provision within this pronouncement requires that excess income tax benefits and deficiencies related to share-based payments be recognized within income tax expense as a discrete event in the period in which 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 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 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 estimate of the number of awards that are expected to vest, which is consistent with our accounting policy prior to adoption.
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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 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 reduced net cash provided by financing activities by $280,000 for the 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 but we expect this guidance to have a material impact on our disclosures in our notes to the 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 but we expect this guidance to have a material impact on our financial position as a result of the requirement to recognize right-of-use assets and lease liabilities on our consolidated balance sheets.

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. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which increases transparency and comparability among companies accounting for lease transactions. The most significant change of this update will require the recognition of lease assets and liabilities on the balance sheet for operating lease arrangements with lease terms greater than twelve months for lessees. This update will require a modified retrospective application which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. We are therefore required to apply this guidance in our fiscal 2020 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting." ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public companies. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.
 
I-7
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets 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 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”). The 2015 Plan updated and replaced our 2007 Equity Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity based awards substantially similar to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.

At January 29, 2017, there were 959,942 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 third quarter of fiscal 2017.

At January 29, 2017, options to purchase 78,600 shares of common stock were outstanding and exercisable, had a weighted average exercise price of $8.43 per share, and a weighted average contractual term of 0.6 years. At January 29, 2017, the aggregate intrinsic value for options outstanding and exercisable was $2.0 million.

The aggregate intrinsic value for options exercised for the nine months ending January 29, 2017 and January 31, 2016, was $128,000 and $1.0 million, respectively.

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

No compensation expense was recorded for incentive stock options for the nine months ended January 29, 2017 and January 31, 2016, 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 nine months ending January 29, 2017, and January 31, 2016, respectively.

Performance Based Restricted Stock Units
Fiscal 2017 Grants

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

On July 14, 2016, a non-employee was granted performance-based restricted stock units which could earn up to 11,549 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At January 29, 2017, this grant was unvested and was measured at $33.80 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.
I-9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fiscal 2016 Grants

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

On July 15, 2015, a non-employee was granted performance-based restricted stock units which could earn up to 10,364 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At January 29, 2017, this grant was unvested and was measured at $33.80 per share, which represents the closing price of our common stock at the end of the reporting period. The vesting of this award is over the requisite service period of three years.
Fiscal 2015 Grants

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

On March 3, 2015, a non-employee was granted performance-based restricted stock units which could earn up to 28,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At January 29, 2017, 16,000 restricted stock units associated with this grant were unvested and were measured at $33.80 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 $2.5 million and $1.9 million within selling, general, and administrative expense for our performance based restricted stock unit awards for the nine month periods ending January 29, 2017 and January 31, 2016, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability if certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, no compensation cost will be recognized and any recognized compensation cost would be reversed.

As of January 29, 2017, the remaining unrecognized compensation cost related to our performance based restricted stock unit awards was $4.8 million, which is expected to be recognized over a weighted average vesting period of 1.9 years.

Time Vested Restricted Stock Units

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

We recorded compensation expense of $20,000 within selling, general, and administrative expense for our time vested restricted stock unit awards for the nine months ending January 29, 2017. There were not any time vested restricted stock unit awards granted or unvested during the nine months ending January 31, 2016 and, therefore, no compensation expense was recorded.

At January 29, 2017, the remaining unrecognized compensation cost related to unvested time vested restricted stock awards was $14,000, which is expected to be recognized over the next 4.5 months.

I-11
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.  Accounts Receivable

A summary of accounts receivable follows:
          
(dollars in thousands)                                              
 January 29, 2017  January 31, 2016  May 1, 2016 
Customers $24,339  $28,684  $25,531 
Allowance for doubtful accounts  (397)  (814)  (1,088)
Reserve for returns and allowances and discounts  (1,216)  (1,086)  (962)
  $22,726  $26,784  $23,481 

A summary of the activity in the allowance for doubtful accounts follows:
       
  Nine months ended 
(dollars in thousands) January 29, 2017  January 31, 2016 
Beginning balance $(1,088) $(851)
Provision for bad debts  239   (93)
Net write-offs, net of recoveries  452   130 
Ending balance $(397) $(814)
A summary of the activity in the allowance for returns and allowances and discounts accounts follows:
       
  Nine months ended 
(dollars in thousands) January 29, 2017  January 31, 2016 
Beginning balance $(962) $(738)
Provision for returns, allowances        
    and discounts  (2,357)  (2,389)
Credits issued  2,103   2,041 
Ending balance $(1,216) $(1,086)

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) January 29, 2017  January 31, 2016  May 1, 2016 
Raw materials $6,977  $6,831  $5,462 
Work-in-process  3,161   3,365   2,972 
Finished goods  36,055   38,289   38,097 
  $46,193  $48,485  $46,531 
I-12

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.  Other Assets

A summary of other assets follows:
          
(dollars in thousands) January 29, 2017  January 31, 2016  May 1, 2016 
Cash surrender value – life insurance $376  $357  $357 
Non-compete agreement, net  847   922   903 
Customer relationships, net  677   728   715 
Other  517   428   598 
  $2,417  $2,435  $2,573 
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 January 29, 2017, January 31, 2016 and May 1, 2016, respectively. At January 29, 2017, January 31, 2016, and May 1, 2016, accumulated amortization for our non-compete agreement was $1.2 million, $1.1 million, and $1.1 million, respectively.

Amortization expense for our non-compete agreement was $56,000 for the nine month periods ended January 29, 2017 and January 31, 2016. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2017 - $18,000; FY 2018 - $75,000; FY 2019- $75,000; FY 2020 - $75,000; FY 2021 - $75,000 and Thereafter - $529,000.

The weighted average amortization period for our non-compete agreement is 11.3 years as of January 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 January 29, 2017, January 31, 2016, and May 1, 2016, respectively. Accumulated amortization for our customer relationships was $191,000, $140,000, and $153,000 at January 29, 2017, January 31, 2016, and May 1, 2016, respectively.

Amortization expense for our customer relationships was $38,000 for the nine months ending January 29, 2017 and January 31, 2016. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2017 - $13,000; FY 2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; FY 2021 - $51,000; and Thereafter - $460,000.

The weighted average amortization period for our customer relationships is 13.3 years as of January 29, 2017.

Cash Surrender Value – Life Insurance

At January 29, 2017, January 31, 2016, and May 1, 2016 we had one life insurance contract with a death benefit of $1.4 million.
I-13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our cash surrender value – life insurance balances totaling $376,000, $357,000 and $357,000 at January 29, 2017, January 31, 2016, and May 1, 2016, respectively, are collectible upon death of the respective insured.

7.  Accrued Expenses

A summary of accrued expenses follows:
          
(dollars in thousands) January 29, 2017  January 31, 2016  May 1, 2016 
Compensation, commissions and related benefits $9,205  $8,678  $10,011 
Advertising rebates  118   2,876   870 
Interest  11   -   - 
Other accrued expenses  1,177   1,136   1,041 
  $10,511  $12,690  $11,922 

8.  Lines of Credit

Revolving Credit Agreement – United States

Our Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $30 million. Interest was charged at a rate (applicable interest rate of 2.23% at January 29, 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.

The 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 January 29, 2017, January 31, 2016, and May 1, 2016, respectively.

At January 29, 2017, January 31, 2016, and May 1, 2016, 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 us to issue letters of credit not to exceed $7.5 million. On August 3, 2016, we issued a $5.0 million letter of credit (all of which is currently outstanding and in addition to the $250,000 letter of credit noted above) for the construction of a new building associated with our mattress fabrics segment (see Note 15 for further details). This $5.0 million 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.

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 $5.8 million USD at January 29, 2017), that expires February 15, 2018. This agreement has an interest rate determined by the Chinese government and there were no borrowings outstanding as of January 29, 2017, January 31, 2016, and May 1, 2016.
I-14
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At January 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 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 estimates and assumptions, which reflect those that market participants would use.

Recurring Basis

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

   Fair value measurements at January 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  $ -  $30,682   N/A  $30,682 
Premier Money Market Fund   4,888   N/A   N/A   4,888 
Low Duration Bond Fund   1,073   N/A   N/A   1,073 
Intermediate Term Bond Fund   739   N/A   N/A   739 
Strategic Income Fund   598   N/A   N/A   598 
Large Blend Fund   343   N/A   N/A   343 
Growth Allocation Fund   113   N/A   N/A   113 
Moderate Allocation Fund   83   N/A   N/A   83 
Other   61   N/A   N/A   61 
I-15
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Fair value measurements at January 31, 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  $3,071   N/A   N/A  $3,071 
Low Duration Bond Fund   1,592   N/A   N/A   1,592 
Intermediate Term Bond Fund   1,116   N/A   N/A   1,116 
Strategic Income Fund   957   N/A   N/A   957 
Limited Term Bond Fund   594   N/A   N/A   594 
Large Blend Fund   254   N/A   N/A   254 
Growth Allocation Fund   128   N/A   N/A   128 
Mid Cap Value Fund   90   N/A   N/A   90 
Other   47   N/A   N/A   47 

   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 

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

Short-Term Investments

At January 29, 2017, January 31, 2016, and May 1, 2016, our short-term investments totaled $2.4 million, $4.3 million, and $4.4 million, respectively, and consisted of short-term bond funds. Our short-term bond funds are recorded at their fair value, are classified as available-for-sale, and their unrealized gains or losses are included in other comprehensive income (loss). Our short-term bond investments had an accumulated unrealized loss totaling $68,000, $181,000, and $100,000 at January 29, 2017, January 31, 2016, and May 1, 2016, respectively. At January 29, 2017, January 31, 2016, and May 1, 2016, 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 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 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 our Consolidated Balance Sheets, based on contractual maturity date and stated at amortized cost.

At January 29, 2017, our held-to-maturity investments totaled $30.8 million and consisted of U.S. Corporate bonds. The fair value of our held-to-maturity investments totaled $30.7 million.

Long-Term Investments - Rabbi Trust

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

Our long-term investments are recorded at their fair value of $5.5 million, $3.6 million, and $4.0 million at January 29, 2017, January 30, 2016, and May 1, 2016, respectively. Our long-term investments had an accumulated unrealized gain of $11,000 at January 29, 2017 and an accumulated unrealized loss of $99,000 and $44,000 at January 31, 2016 and May 1, 2016, respectively. The fair value of our long-term investments associated with our Rabbi Trust approximates its cost basis.

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

10.  Cash Flow Information

Interest and income taxes paid are as follows:
       
  Nine months ended 
(dollars in thousands) January 29, 2017  January 31, 2016 
Interest $110  $95 
Income taxes  4,704   4,921 
Interest costs charged to operations were $97,000 and $58,000 for the nine months ended January 29, 2017 and January 31, 2016, respectively.
I-17

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest costs of $97,000 and $58,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’ useful lives for the nine months ended January 29, 2017 and January 31, 2016, respectively.

11.  Net Income Per Share

Basic net income per share is computed using the weighted-average number of shares outstanding during the period.  Diluted net income per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.  Weighted average shares used in the computation of basic and diluted net income per share follows:
       
  Three months ended 
(amounts in thousands) January 29, 2017  January 31, 2016 
Weighted average common shares outstanding, basic  12,313   12,331 
Dilutive effect of stock-based compensation  231   155 
Weighted average common shares outstanding, diluted  12,544   12,486 

All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended January 29, 2017 and January 31, 2016, as the exercise price of the options was less than the average market price of the common shares.
       
  Nine months ended 
(amounts in thousands) January 29, 2017  January 31, 2016 
Weighted average common shares outstanding, basic  12,302   12,317 
Dilutive effect of stock-based compensation  215   171 
Weighted average common shares outstanding, diluted  12,517   12,488 
All options to purchase shares of common stock were included in the computation of diluted net income for the nine months ended January 29, 2017 and January 31, 2016, as the exercise price of the options was less than the average market price of the common shares.

12.  Segment Information

Our operations are classified into two business segments: mattress fabrics and upholstery fabrics.  The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers to bedding manufacturers.  The upholstery fabrics segment sources, manufactures, and sells fabrics primarily to residential furniture manufacturers.
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 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, investment in an unconsolidated joint venture, goodwill, a non-compete agreement, and customer relationships associated with an acquisition.


Financial information for the company’s operating segments follows:
       
  Three months ended 
(dollars in thousands) January 29, 2017  January 31, 2016 
Net sales:      
Mattress Fabrics $45,920  $44,277 
Upholstery Fabrics  30,249   34,189 
  $76,169  $78,466 
Gross profit:        
Mattress Fabrics $9,758  $8,751 
Upholstery Fabrics  7,001   7,812 
  $16,759  $16,563 
Selling, general, and administrative expenses:        
Mattress Fabrics $3,391  $2,953 
Upholstery Fabrics  3,901   3,963 
Total segment selling, general, and        
  administrative expenses  7,292   6,916 
Unallocated corporate expenses  2,532   2,421 
  $9,824  $9,337 
Income from operations:        
Mattress Fabrics $6,367  $5,798 
Upholstery Fabrics  3,100   3,849 
Total segment income from operations  9,467   9,647 
Unallocated corporate expenses  (2,532)  (2,421)
Total income from operations  6,935   7,226 
Interest income  124   38 
Other expense  (69)  (85)
Income before income taxes $6,990  $7,179 
I-19
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

       
  Nine months ended 
(dollars in thousands) January 29, 2017  January 31, 2016 
Net sales:      
Mattress Fabrics $141,977  $137,522 
Upholstery Fabrics  90,217   98,085 
  $232,914  $235,607 
Gross profit:        
Mattress Fabrics $32,414  $28,133 
Upholstery Fabrics  19,665   20,365 
  $52,079  $48,498 
Selling, general, and administrative expenses:        
Mattress Fabrics $10,185  $8,865 
Upholstery Fabrics  11,086   11,372 
Total segment selling, general, and        
  administrative expenses  21,271   20,237 
Unallocated corporate expenses  7,900   7,275 
  $29,171  $27,512 
Income from operations:        
Mattress Fabrics $22,229  $19,267 
Upholstery Fabrics  8,579   8,994 
Total segment income from operations  30,808   28,261 
Unallocated corporate expenses  (7,900)  (7,275)
Total income from operations  22,908   20,986 
Interest income  164   150 
Other expense  (376)  (405)
Income before income taxes $22,696  $20,731 


I-20

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

Balance sheet information for the company’s operating segments follows:
          
(dollars in thousands) January 29, 2017  January 31, 2016  May 1, 2016 
Segment assets:         
Mattress Fabrics         
Current assets (1) $41,498  $44,309  $43,472 
Non-compete agreement  847   922   903 
Customer relationships  677   728   715 
Investment in unconsolidated joint venture  600   -   - 
Goodwill  11,462   11,462   11,462 
Property, plant and equipment (2)  47,755   35,637   37,480 
Total mattress fabrics assets  102,839   93,058   94,032 
Upholstery Fabrics            
Current assets (1)  27,421   30,960   26,540 
Property, plant and equipment (3)  1,826   1,590   1,564 
Total upholstery fabrics assets  29,247   32,550   28,104 
Total segment assets  132,086   125,608   122,136 
Non-segment assets:            
Cash and cash equivalents  15,659   31,713   37,787 
Short-term investments  2,410   4,259   4,359 
Deferred income taxes  422   4,312   2,319 
Income taxes receivable   -   23   155 
Other current assets  2,514   2,331   2,477 
Property, plant and equipment (4)  752   930   929 
Long-term investments (Held-to-Maturity)  30,832   -   - 
Long-term investments (Rabbi Trust)  5,488   3,590   4,025 
Other assets  893   785   955 
Total assets $191,056  $173,551  $175,142 

       
  Nine months ended 
(dollars in thousands) January 29, 2017  January 31, 2016 
Capital expenditures (5):      
Mattress Fabrics $14,957  $6,215 
Upholstery Fabrics  645   481 
Unallocated Corporate  72   381 
Total capital expenditures $15,674  $7,077 
Depreciation expense:        
Mattress Fabrics $4,673  $4,273 
Upholstery Fabrics  631   615 
Total depreciation expense $5,304  $4,888 
I-21
 
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”). The 2015 Plan updated and replaced our 2007 Equity Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity based awards substantially similar to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.

At October 29, 2017, there were 902,556 shares available for future equity based grants under our 2015 plan.

Incentive Stock Option Awards

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

At October 29, 2017, options to purchase 15,000 shares of common stock were outstanding and exercisable, had a weighted average exercise price of $7.08 per share, and a weighted average contractual term of 0.6 years. At October 29, 2017, the aggregate intrinsic value for options outstanding and exercisable was $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 $43,000, respectively.
I-8
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At October 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 29, 2017.

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

Performance Based Restricted Stock Units

Executive Management
On July 13, 2017, we granted performance-based restricted stock units to members of executive management (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. 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 measured based on the fair market value (closing price of our common stock) on the date of grant. No market-based total shareholder return component was included in these awards.

Key Employees and a Non-Employee

We granted performance-based restricted stock units 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. Our performance based restricted stock units granted to key employees were measured based on the fair market value (the closing price of 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. No market-based total shareholder return component was included in these awards.

I-9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes information related to our grants of performance based restricted stock units associated with NEOs and key employees that are currently unvested:
        
   (3)     
  Restricted StockPrice PerVesting
Date of Grant Units AwardedSharePeriod
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 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.
(4) Price per share represents the fair market value per share ($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 following table summarizes information related to our grants of performance-based restricted stock units associated with a non-employee that are currently unvested:
       
   (1)     
  Restricted StockPrice PerVesting
Date of Grant Units AwardedSharePeriod
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 agreements.
(2) The respective grant was unvested at the end of our reporting period. Accordingly, the price per share represents the closing price of our common stock on October 29, 2017, the end of our reporting period.
I-10

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes information related to our performance based restricted stock units that vested during the six month periods ending October 29, 2017 and October 30, 2016:

         
    (3)  
  Common StockWeighted AveragePrice
Fiscal Year Shares VestedFair ValuePer 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 on the date of grant.
(5) The respective grant vested during the first quarter of fiscal 2018 or 2017, respectively. Accordingly, the price per share represents the closing price of our common stock on the date the award vested.
Overall
We recorded compensation expense of $1.4 million and $1.5 million within selling, general, and administrative expense associated with our performance based restricted stock units for the six month periods ending October 29, 2017 and October 30, 2016, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability that 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.
At October 29, 2017, the remaining unrecognized compensation cost related to the performance based restricted stock units was $4.3 million, which is expected to be recognized over a weighted average vesting period of 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 which vested over the requisite service period of 11 months. This award was measured at its fair market value, which was $28 per share, and represented the closing price of our common stock on the date of grant.

During the first quarter of fiscal 2018, 1,200 shares of common stock associated with this grant vested and had a weighted average fair value of $34,000 or $28 per share.

Overall

We recorded compensation expense of $17,000 and $11,000 within selling, general, and administrative expense associated with our time vested restricted stock unit awards for the six month periods ending October 29, 2017 and October 30, 2016, respectively.

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

4.  Accounts Receivable

A summary of accounts receivable follows:
          
(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 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 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 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 29, 2017 October 30, 2016April 30, 2017
Cash surrender value – life insurance $376  $358  $376 
Non-compete agreement, net  790   866   828 
Customer relationships, net  638   689   664 
Other  536   582   526 
  $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 29, 2017, October 30, 2016 and April 30, 2017, respectively. Accumulated amortization for our non-compete agreement was $1.2 million at October 29, 2017, October 30, 2016, and April 30, 2017, respectively.

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

I-13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The weighted average amortization period for our non-compete agreement is 10.5 years as of October 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, and April 30, 2017, respectively. Accumulated amortization for our customer relationships was $230,000, $179,000, and $204,000 at October 29, 2017, October 30, 2016, and April 30, 2017, respectively.

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

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

Cash Surrender Value – Life Insurance

At October 29, 2017, October 30, 2016, and 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 and $376,000 at October 29, 2017, October 30, 2016, and April 30, 2017, respectively, are collectible upon death of the respective insured.

7.  Accrued Expenses

A summary of accrued expenses follows:
       
(dollars in thousands) October 29, 2017 October 30, 2016 April 30, 2017
Compensation, commissions and related benefits $5,399  $7,111  $10,188 
Advertising rebates  650   734   468 
Interest  18   5   51 
Other accrued expenses  1,297   1,028   1,240 
  $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”) 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, 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 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, and April 30, 2017.

At October 29, 2017, October 30, 2016, and 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 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 ($3.75 million is currently outstanding 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). The $3.75 million outstanding letter of credit will be automatically reduced in increments of $1.25 million on November 1, 2017, February 1, 2018, and May 15, 2018, respectively.

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 $6.0 million USD at October 29, 2017), that expires 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, and April 30, 2017.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At October 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 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 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: 
  
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:            
Cash and Cash Equivalents $23,940   N/A   N/A  $23,940 
U.S. Corporate Bonds  -   7,110   N/A   7,110 
Premier Money Market Fund  4,421   N/A   N/A   4,421 
Low Duration Bond Fund  1,075   N/A   N/A   1,075 
Intermediate Term Bond Fund  750   N/A   N/A   750 
Strategic Income Fund  605   N/A   N/A   605 
Large Blend Fund  319   N/A   N/A   319 
Growth Allocation Fund  102   N/A   N/A   102 
Other  152   N/A   N/A   152 
I-16

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  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 
Assets:            
U.S. Corporate Bonds $-  $30,831  $-  $30,831 
Premier Money Market Fund  4,811   N/A   N/A   4,811 
Low Duration Bond Fund  1,081   N/A   N/A   1,081 
Intermediate Term Bond Fund  751   N/A   N/A   751 
Strategic Income Fund  611   N/A   N/A   611 
Large Blend Fund  365   N/A   N/A   365 
Growth Allocation Fund  126   N/A   N/A   126 
Moderate Allocation Fund  88   N/A   N/A   88 
Other  76   N/A   N/A   76 

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, and April 30, 2017, our short-term investments classified as available for sale totaled $2.5 million, $2.4 million, and $2.4 million, respectively, and consisted of short-term bond funds. Since these short-term bond funds are classified as available for sale, these investments are recorded at their fair market value 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, and $47,000 at October 29, 2017, October 30, 2016, and April 30, 2017, respectively. At October 29, 2017, October 30, 2016, and April 30, 2017, the fair value of our short-term bond funds approximated its cost basis.

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 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 our Consolidated Balance 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 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. The fair value of our held-to-maturity investments 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

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

These long-term investments are recorded at their fair values of $6.9 million, $5.0 million, and $5.5 million at October 29, 2017, October 30, 2016, and April 30, 2017, respectively. Our long-term investments had an accumulated unrealized gain of $96,000, $1,000 and $43,000 at October 29, 2017, October 30, 2016, and 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, 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
(dollars in thousands) October 29, 2017 October 30, 2016
Interest $146  $45 
Income taxes  2,599   3,238 
Interest costs charged to operations were $137,000 and $45,000 for the six months ended October 29, 2017 and October 30, 2016, respectively.

Interest costs of $100,000 and $45,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’ useful lives for the six months ended October 29, 2017 and October 30, 2016, 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 29, 2017October 30, 2016
Weighted average common shares outstanding, basic12,44012,308
Dilutive effect of stock-based compensation140199
Weighted average common shares outstanding, diluted12,58012,507
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, as the exercise price of the options was less than the average market price of the common shares.

  
 Six months ended
(amounts in thousands)October 29, 2017October 30, 2016
Weighted average common shares outstanding, basic12,42012,297
Dilutive effect of stock-based compensation193198
Weighted average common shares outstanding, diluted12,61312,495
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, 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, develops, and sells fabrics primarily to residential and commercial furniture manufacturers.

We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses and other non-recurring items. Cost of sales in both segments include costs to manufacture, 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.

I-19
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 operating segments follows:
       
(dollars in thousands) October 29, 2017 October 30, 2016 April 30, 2017
Segment assets:         
Mattress Fabrics         
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            
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.

(2)The $47.8 million at January 29, 2017, represents property, plant, and equipment of $32.6 million and $15.2 million located in the U.S. and Canada, respectively. The $35.6 million at January 31, 2016, represents property, plant, and equipment of $23.0 million and $12.6 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 million located in the U.S. and Canada, respectively.

(3)The $1.8 million at January 29, 2017, represents property, plant, and equipment of $1.1 million and $711 located in the U.S. and China, respectively. The $1.6 million at January 31, 2016, represents property, plant, and equipment of $860 and $730 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 located in the U.S. and China, respectively.

(4)The $752, $930, and $929 at January 29, 2017, January 31, 2016 and May 1, 2016, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by both the mattress and upholstery fabric segments. Property, plant, and equipment associated with corporate are located in the U.S.

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

13.  Income Taxes
(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 $48.9 million at April 30, 2017, represents property, plant, and equipment of $34.0 million and $14.9 million located in the U.S. and Canada, respectively.

Effective Income Tax Rate

We recorded income tax expense of $6.6
(3)The $2.1 million or 28.9% of income before income taxes, for the nine month period ended Januaryat October 29, 2017, compared to income tax expenserepresents property, plant, and equipment of $7.4 million, or 35.7% of income before income taxes, for the nine month period ended January 31, 2016. Our effective income tax rates for the nine month periods ended January 29, 2017, and January 31, 2016, 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 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%
Tax effects of Chinese foreign exchange gains  1.9   3.5 
Reversal of foreign uncertain tax position  (9.1)  - 
U.S state income tax expense  0.6   0.7 
Other  1.5   (2.5)
   28.9%  35.7%
I-22
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred Income Taxes

Valuation Allowance
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at January 29, 2017, we recorded a partial valuation allowance of $557,000, of which $473,000 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 January 31, 2016, we recorded a partial valuation allowance of $874,000, of which $498,000 pertained to certain U.S. state net operating loss carryforwards and credits and $376,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.  Based on our assessment at May 1, 2016, we recorded a partial valuation allowance of $590,000, of which $518,000 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.
No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at January 29, 2017, January 31, 2016, and May 1, 2016, respectively.
The recorded valuation allowance of $557,000 at January 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 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 January 29, 2017, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.
At January 29, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling $143.2 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $405,000, which included U.S. income and foreign withholding taxes totaling $42.5 million, offset by U.S. foreign income tax credits of $42.1 million.
I-23
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At January 31, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $100.9 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $3.3 million, which included U.S. income and foreign withholding taxes totaling $37.3 million, offset by U.S. foreign income tax credits of $34.0 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.
Overall
At January 29, 2017, our non-current deferred tax asset of $422,000 pertains to our operations located in China. At January 31, 2016, our non-current deferred tax asset of $4.3 million represents $3.5$1.4 million and $773,000 from our operations$722 located in the U.S. and China, respectively. At May 1,The $1.5 million at October 30, 2016, our non-current deferred tax assetrepresents property, plant, and equipment of $2.3 million represents $1.7 million$890 and $572,000 from our operations$590 located in the U.S. and China, respectively.
At January 29, The $1.9 million at April 30, 2017, our non-current deferred tax liability of $2.9 million represents $1.7 millionproperty, plant, and $1.2 million from our operations located in Canada and the U.S., respectively. Our non-current deferred tax liability balancesequipment of $1.2 million and $1.5 million at January 31, 2016 and May 1, 2016, respectively, pertain to our operations$655 located in Canada.

Uncertainty In Income Taxes

At January 29, 2017, we had a $13.4 million total gross unrecognized income tax benefit, of which $11.6 million and $1.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At January 31, 2016, we had a $13.2 million total gross unrecognized income tax benefit, of which $9.7 million and $3.5 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At May 1, 2016, we had $14.9 million of total gross unrecognized income tax benefit, of which $11.1 million and $3.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets.

At January 29, 2017, our $13.4 million total gross unrecognized income tax benefit included $1.8 million that, if recognized, would favorably affect the income tax rate in future periods. At January 31, 2016, our $13.2 million total gross unrecognized income tax benefit, included $3.5 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 that, if recognized, would favorably affect the income tax rate in future periods.

Our gross unrecognized income tax benefit of $13.4 million at January 29, 2017, relates to tax positions for which significant change is reasonably possible within the next year. 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 returns filed by us remain subject to examination for income tax years 2010 and subsequent. Canadian provincial (Quebec) returns filed by us 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. Income tax returns associated with our operations located in China are subject to examination for income tax year 2011 and subsequent.
I-24

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Currently, the Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal 2014, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 2018. 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, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 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.

During the third quarter of fiscal 2017, we recognized an income tax benefit of $2.1 million for the reversal of an uncertain income tax position associated with a foreign jurisdiction in which the statute of limitations expired. This income tax benefit was treated as a discrete event in which the full income tax effects of the adjustment were recorded in the three and nine month periods ending January 29, 2017.

14.  Statutory Reserves
Our subsidiaries located in China are required to transfer 10% of their net income, as determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the company’s registered capital.
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of January 29, 2017, the company’s statutory surplus reserve was $4.5 million, representing 10% of accumulated earnings and profits determined in accordance with PRC accounting rules and regulations. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
Our subsidiaries located in China can transfer funds to the parent company with the exception of the statutory surplus reserve of $4.5 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.

15.  Commitments and Contingencies

Litigation

The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Purchase Commitments

Overall

At January 29, 2017, January 31, 2016, and May 1, 2016, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $8.2 million, $977,000, and $10.6 million, respectively. The $8.2 million and $10.6 million open purchase commitments as of January 29, 2017 and May 1, 2016, include $4.9 million (of which $4.5 million represents completed work) and $9.3 million associated with the construction of a new building noted below.
Construction of New Building

Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that will expand our distribution capabilities and office space at an current estimated cost of $11.1 million. This agreement required an installment payment of $1.9 million in April 2016 and requires additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- $3.8 million; and Fiscal 2019 - $1.1 million. Interest will be charged on the required outstanding installment payments in excess of services that have been rendered at a rate of $2.25% plus the current 30 day LIBOR rate.

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

The remaining $4.9 million on this commitment is required to be paid on an installment basis over the next two fiscal years as follows: Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.1 million.

This new building is currently expected to be completed and placed in service in our fourth quarter of fiscal 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 will produce cut and sewn mattress covers, and its operations will be located in a modern industrial park on the northeast border of Haiti, which borders the Dominican Republic. CLIH is currently expected to commence production in the second quarter of fiscal 2018 and will complement our existing 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.
I-26
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Culp’s investment in CLIH will be accounted for under the equity method of accounting in accordance with ASC Topic 823 – Investments – Equity Method and Joint Ventures. The equity method of accounting is required for an investee entity (i.e. CLIH) that is not consolidated but over which the reporting entity (i.e. Culp Inc.) exercises significant influence. Whether or not a reporting entity exercises significant influence with respect to an investee depends on an evaluation of several factors, including representation on the investee’s board of directors, voting rights, and ownership level. Under the equity method of accounting, CLIH’s accounts are not reflected within our Consolidated Balance Sheets and Statements of Net Income. Our share of earnings and losses from CLIH will be reflected in the caption “Equity in net income (loss) of unconsolidated joint venture” in the Consolidated Statements of Net Income. Our carrying value in CLIH is reflected in the caption “Investment in unconsolidated joint venture” in our Consolidated Balance Sheets.

If our carrying value in CLIH is reduced to zero, no further losses will be recorded in our consolidated financial statements. However, if CLIH subsequently reports income, we will not record our share of such income until it equals the amount of its share of losses previously recognized.

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 nine months ended January 29, 2017, and January 31, 2016, we did not purchase any shares of our common stock.
At January 29, 2017, we had $5.0 million available for additional repurchases of our common stock.

18.  Dividend Program

On February 28, 2017, we announced that our board of directors approved a quarterly cash dividend of $0.08 per share. This payment will be made on or about April 17, 2017, to shareholders of record as of April 3, 2017.

During the nine months ended January 29, 2017, dividend payments totaled $5.3 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $2.7 million represented quarterly dividend payments ranging from $0.07 to $0.08 per share.

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

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


This report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934).  Such statements are inherently subject to risks and uncertainties.  Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update or alter such statements, 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” and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, sales, profit margins, operating income, capital expenditures, income taxes, SG&A or other expenses, pre-tax income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding future economic or industry trends or future developments. Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on 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” section in our Form 10-K filed with the Securities and Exchange Commission on July 15, 2016, for the fiscal year ended May 1, 2016.
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Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4)The $502, $829, and $856 at October 29, 2017, October 30, 2016 and 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. Our effective income tax rates for the six month periods ended October 29, 2017, and October 30, 2016, 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 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:
  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
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at 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 April 30, 2017, we recorded a partial valuation allowance of $536,000, of which $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, and April 30, 2017, respectively.
The recorded valuation allowance of $632,000 at October 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 29, 2017, it is our intention not to permanently invest our undistributed earnings from our foreign 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.
At April 30, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling $146.9 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $497,000, which included U.S. income and foreign withholding taxes totaling $44.0 million, offset by U.S. foreign income tax credits of $43.5 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 represented $109,000 and $472,000 from our operations located in the U.S. and China, respectively. At April 30, 2017, our non-current deferred tax asset of $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 $2.1 million from our operations located in the U.S. and 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 April 30, 2017, our non-current deferred tax liability of $3.6 million represented $2.1 million and $1.5 million from our operations located in Canada and the U.S., respectively.

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 April 30, 2017, we had $12.2 million of total gross unrecognized income tax benefit, of which $11.8 million and $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 April 30, 2017, our $12.2 million total gross unrecognized income tax benefit included $467,000 that, if recognized, would favorably affect the income tax rate in future periods.

Our gross unrecognized income tax benefit of $12.6 million 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 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 2013 and subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year 2012 and subsequent.

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 intends to vigorously defend its position. Currently, the ultimate outcome of this proposed 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 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 during fiscal 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, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 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 Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the company’s registered capital.
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of October 29, 2017, the company’s statutory surplus reserve was $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’ 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 $4.4 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.

15.   Commitments and Contingencies

Litigation

The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.

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 – Capital Expenditures

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

Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina to expand our distribution capabilities and office space at a cost of $11.3 million. This agreement required an installment payment of $1.9 million in April 2016 with additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- $3.7 million; and Fiscal 2019 - $1.4 million. Interest is charged on the required outstanding installment payments for services that 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 bank being the beneficiary. In addition to the interest charged on the outstanding installment payments noted above, there 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).

This 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 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 company’s fifty percent ownership in CLIH.

The following table summarizes information on assets, liabilities and members’ equity of our equity method investment in 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.

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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, we did not purchase any shares of our common stock.
At October 29, 2017, we had $5.0 million available for repurchases of our common stock.

18.  Dividend Program

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

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.

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

This report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934).  Such statements are inherently subject to risks and uncertainties.  Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update or alter such statements, 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” 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, 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” section in our Form 10-K filed with the Securities and Exchange Commission on July 14, 2017, for the fiscal year ended April 30, 2017.
I-28

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 ninesix months ended JanuaryOctober 29, 2017, and January 31,October 30, 2016, each represent 39-week26-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. OurWe have wholly owned mattress fabric operations that are located in Stokesdale, NC, High Point, NC, and Quebec, Canada.  OurCanada 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, North Carolina,NC, and Anderson, South Carolina.SC.

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, source, or sourcedevelop our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses represent primarily compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses.

Executive Summary

Results of Operations

 Three Months Ended     Three Months Ended   
(dollars in thousands) January 29, 2017  January 31, 2016  Change  October 29, 2017 October 30, 2016 Change
Net sales $76,169  $78,466   (2.9)% $80,698  $75,343   7.1%
Gross profit  16,759   16,563   1.2%  15,804   16,901   (6.5)%
Gross profit margin  22.0%  21.1%  90bp  19.6%  22.4%  (280)bp
SG&A expenses  9,824   9,337   5.2%  9,415   9,602   (1.9)%
Income from operations  6,935   7,226   (4.0)%  6,389   7,299   (12.5)%
Operating margin  9.1%  9.2%  (10)bp  7.9%  9.7%  (180)bp
Income before income taxes  6,990   7,179   (2.6)%  6,159   7,159   (14.0)%
Income taxes  643   2,317   (72.2)%  2,108   2,684   (21.5)%
Net income  6,347   4,862   30.5%  3,976   4,475   (11.2)%
 
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 Nine Months Ended     Six Months Ended   
(dollars in thousands) January 29, 2017  January 31, 2016  Change  October 29, 2017 October 30, 2016 Change
Net sales $232,194  $235,607   (1.4)% $160,230  $156,026   2.7%
Gross profit  52,079   48,498   7.4%  32,268   35,321   (8.6)%
Gross profit margin  22.4%  20.6%  180bp  20.1%  22.6%  (250)bp
SG&A expenses  29,171   27,512   6.0%  18,916   19,348   (2.2)%
Income from operations  22,908   20,986   9.2%  13,352   15,973   (16.4)%
Operating margin  9.9%  8.9%  100bp  8.3%  10.2%  (190)bp
Income before income taxes  22,696   20,731   9.5%  12,900   15,706   (17.9)%
Income taxes  6,560   7,398   (11.3)%  3,748   5,917   (36.7)%
Net income  16,136   13,333   21.0%  8,959   9,789   (8.5)%

Net Sales

Overall, our net sales were slightly lower in the third quarter and the year-to-date period of fiscal 2017 as compared with the same periods a year ago, as both business segments were affected by  an uncertain economic environment and soft consumer demand trends for home furnishings. Our mattress fabrics segment reported year-over-year improvement in both the third quarter andincreased through the first ninesix months of fiscal 20172018 compared with fiscal 2017. This increase in spitenet sales was experienced during the second quarter, reversing a decrease in net sales in our first quarter of a more challenging marketplace. However, in additionfiscal 2018 as compared to the uncertain economic environmentsame period a year ago. These results reflect our strategic focus on product innovation and soft consumer demand trends,creativity and our upholstery fabrics net sales were also affected by the timing of the Chinese New Year holiday that startedability to offer a diverse product offering and expand our customer base in January for fiscal 2017 compared with February in fiscal 2016.

both our business segments.
See the Segment Analysis section below for further details.

Income Before Income Taxes
Income before income taxes decreased slightly forAlthough our net sales were higher in the thirdsecond quarter and first half of fiscal 2017 as compared with the third quarter of fiscal 2016. Our upholstery fabrics segment reported2018, we experienced a decrease in operatingour income thatbefore income taxes. The decrease was primarily due to the decrease in net sales noted above. However, partially offsetting the decrease in our upholstery fabricshigher operating income was an increase in the mattress fabrics operating income due to lower raw material costs and the operational benefits of recent capital investments. Operating income for the mattress fabrics segment was also negatively affected by non-recurring plant facility consolidation charges associated with disruptions from the consolidation of our expansion projects located in North Carolina.
Despite the decrease in net sales for the first nine months of fiscal 2017, income before income taxes increased by 9.5% compared to the same period a year ago. This increase primarily reflects the improvement in profitability from ourU.S. mattress fabrics segment, as discussed above, partially offset by lower operating incomefabric production facilities. In addition, we incurred higher than anticipated freight costs associated with our upholstery fabrics segment,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 higher SG&A expenses.
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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

IncomeThe reduction in our income tax expense decreasedand effective income tax rate for the third quarter and nine month year-to-date periodfirst half of fiscal 2018 compared to the first half of fiscal 2017 compared withwas primarily due to the same periods a year ago. Duringadoption of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” during the thirdfirst quarter of fiscal 2017,2018 (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 recognized anrecorded a reduction to income tax benefitexpense of $2.1 million for the reversal of an uncertain$556,000 or 4.3% on our effective income tax position associated with a foreign jurisdiction in which the statute of limitations expired. Thisrate. Additionally, our income tax benefit was treated as a discrete event in which the fullexpense and effective income tax effects of the adjustment were recordedrate decreased due to favorable differences in the threemix of earnings between our U.S. parent company and nine month periods ending January 29, 2017.foreign subsidiaries that have lower income tax rates.

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

Liquidity

At JanuaryOctober 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 $48.9$49.1 million compared with $42.1$54.2 million at May 1, 2016. This increase fromApril 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 2016 was primarily due to net cash provided by operating activities2018, we had an outstanding balance of $24.2$5.0 million partially offset by $10.3on our U.S. revolving line of credit. This outstanding balance and additional borrowings of $5.0 million inthat were made during the second quarter of fiscal 2018 have been repaid.

During the first half of fiscal 2018, we had capital expenditures of $7.5 million (of which $1.0$2.5 million was vendor financed)vendor-financed) that were mostly associated with our mattress fabric segment, $5.3returned $4.6 million to our shareholders in the form of regularly quarterly and special dividend payments, and $1.4$1.5 million in long-term investment purchases associated with our Rabbi Trust that fundfunds our deferred compensation plan. 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 $24.2$10.2 million increased $8.3during the first half of fiscal 2018 decreased from $17.0 million compared with $15.9 million forduring the nine months ending January 31, 2016. This increase issame period a year ago. The decrease was primarily due to lower net income and increased earningsworking capital requirements associated with the increase in net sales and improved inventory managementsupply chain disruptions experienced by our operations located in China during fiscal 2017 compared with fiscal 2016.

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.

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 of $7.0 million on our U.S. revolving line of credit.  This outstanding balance was repaid during our second quarter of fiscal 2017.2018.
See the Liquidity section below for further details.
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Dividend and Common Stock Repurchase Programs

On February 28,November 30, 2017, we announced that our board of directors approved a 12.5% increase in our quarterly cash dividend offrom $0.08 per share to $0.09 per share. This payment will be made on or about April 17, 2017,January 16, 2018, to shareholders of record as of April 3, 2017.January 2, 2018.

During the nine months ended January 29, 2017,first half of fiscal 2018, dividend payments totaled $5.3$4.6 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $2.7$2.0 million represented quarterly dividend payments ranging from $0.07 toof $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 nine months ended January 29,first half of fiscal 2018 and 2017, and January 31, 2016, we did not purchase any shares of our common stock.
At JanuaryOctober 29, 2017, we had $5.0 million available for additional repurchases of our common stock.

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Segment Analysis

Mattress Fabrics Segment

 Three Months Ended     Three Months Ended   
(dollars in thousands) January 29, 2017  January 31, 2016  Change  October 29, 2017 October 30, 2016 Change
                  
Net sales $45,920  $44,277   3.7% $48,601  $45,527   6.8%
Gross profit  9,758   8,751   11.5%  9,730   10,756   (9.5)%
Gross profit margin  21.3%  19.8%  150bp  20.0%  23.6%  (360)bp
SG&A expenses  3,391   2,953   14.8%  3,168   3,296   (3.9)%
Income from operations  6,367   5,798   9.8%  6,562   7,460   (12.0)%
Operating margin  13.9%  13.1%  80bp  13.5%  16.4%  (290)bp


 Nine Months Ended     Six Months Ended   
(dollars in thousands) January 29, 2017  January 31, 2016  Change  October 29, 2017 October 30, 2016 Change
                  
Net sales $141,977  $137,522   3.2% $97,030  $96,057   1.0%
Gross profit  32,414   28,133   15.2%  19,495   22,657   (14.0)%
Gross profit margin  22.8%  20.5%  230bp  20.1%  23.6%  (350)bp
SG&A expenses  10,185   8,865   14.9%  6,559   6,795   (3.5)%
Income from operations  22,229   19,267   15.4%  12,936   15,862   (18.4)%
Operating margin  15.7%  14.0%  170bp  13.3%  16.5%  (320)bp

Net Sales

Overall

OurNet sales associated with our mattress fabrics segment reported year-over-year improvementincreased 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 for both the thirdin our first quarter and the first nine months of fiscal 2017 in spite of2018 as compared to the same period a more challenging marketplace. Ouryear ago. These results demonstrate our strategic focus on design creativity and innovation remainand our top priorities and has allowed usability to meet customer style preferences and changing demand trends byprovide a diverse product offering a full complement ofacross all price points, including mattress fabrics and sewn covers across all price points. covers. Additionally, net sales for the second quarter of fiscal 2018 reflected aggressive marketing of some new product roll-outs.
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Mattress Cover Business

Our net sales for the first half of fiscal 2018 reflected continued growth in our mattress cover business known as CLASS, has continued to perform well in fiscal 2017.CLASS. The growth in CLASS allowshas allowed us to design product offerings from fabric to finished covers. We also have an opportunity to expand our business with ourboth traditional customers and also reach new market segments,customer markets, especially the fast growing Internetboxed bedding space.

Our scalable and flexible manufacturing platform supports our focus on design and innovation, and we have made significant capital investments to improve our operating efficiencies and overall capacity.
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Industry disruptions and demand trends have caused some short-term uncertaintyrecent joint venture (and is known as Class International Holdings Ltd) that produces mattress covers in the mattress fabrics industry. Some of these disruptions involve major customers of our mattress fabrics business, including changes to the distribution channels of at least one significant customer. As a result, we have indications from a customer that there will be reductionsfacility located in orders from them, but at the same time we have indications from other large customers that our levels of business with themHaiti is expected to increase. The structure offurther strengthen our supply arrangements and contracts with major customers are such that it is difficultability to make predictions with certainty, and this is further complicated by the just in time (JIT) order and delivery model. Nonetheless, we are cautiously optimistic that we will not experience a significant negative impact ongrow our mattress fabrics business related to these issues. While industry disruptions and demand issues in the bedding industry may affect sales trends in the short term, we believe that challenges with certain customers will at least be partially offset by increased sales and opportunities with others.

Gross Profit and Operating Income

Overall
Our mattress fabric gross profit and operating income increased in the third quarter and the first nine months of fiscal 2017 compared with the same periods a year ago. The increase in our operating income reflects lower raw material costs and the benefits of our capital investments. However, operating income for mattress fabrics was also negatively affected by increased SG&A expenses relating to higher inventory warehousing costs, design and sales expenses, and non-recurring plant facility consolidation charges (approximately $200,000 in the third quarter) associated with the expansion projects located in North Carolina noted below.
In addition to the industry disruptions and demand trends noted above, this segment’s operating income will continue to be affected by non-recurring plant consolidation expenses associated with the expansion projects located in North CarolinaCLASS business. Production activities commenced during the fourth quarter of fiscal 2017.

Capital Projects

During fiscal 2017, we continued to make capital investments to enhance our operations and improve product delivery performance. Our expansion projects in North Carolina, including our new distribution center, are expected to be completed in the fourth quarter of fiscal 2017. We are underway with our planned knitted fabric plant consolidation project in North Carolina to streamline our production platform and more effectively support our continuous improvement initiatives and long-term growth strategy. Currently, we expect an annual cost savings of $1 million to $1.5 million related to our North Carolina expansion projects.

Additionally, we have made excellent progress with an expansion project at our facility located in Canada. This project includes the installation of new finishing equipment and a new distribution center, which will allow us to ship directly to customers located in Canada. The new distribution platform is expected to commence operations in the fourth quarter of fiscal 2017.
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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 will produce cut and sewn mattress covers, and its operations will be located in a modern industrial park on the northeast border of Haiti, which borders the Dominican Republic. CLIH is currently expected to commence production in the second quarter of fiscal 2018, and we will complementgradually 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 while adding a lower cost operationand remain cost-competitive (Refer to Note 16 located in the notes to the consolidated financial statements for further details regarding the investment in our platform.unconsolidated joint venture).

Culp’s investmentWe also have the ability to utilize our fabric and cut and sew platform located in CLIH will be accounted for underChina to expand our business to new markets. We believe with the equity methodtransformation of accounting in accordance with ASC Topic 823 – Investments – Equity Method and Joint Ventures. The equity method of accounting is required for an investee entity (i.e. CLIH) that is not consolidated but over which the reporting entity (i.e. Culp Inc.) exercises significant influence. Whether or not a reporting entity exercises significant influence with respect to an investee depends on an evaluation of several factors, including representation on the investee’s board of directors, voting rights, and ownership level. Under the equity method of accounting, CLIH’s accounts are not reflected within our Consolidated Balance Sheets and Statements of Net Income. Our share of earnings and losses from CLIH will be reflectedNorth American operations (see discussion below in the caption “EquityGross 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

Although our net income (loss) of unconsolidated joint venture”sales were higher in the Consolidated Statementssecond quarter and first half of Net Income. Our carrying value in CLIH is reflectedfiscal 2018, we experienced a decrease in the caption “Investment in unconsolidated joint venture”profitability in our Consolidated Balance Sheets.mattress fabrics business. Profitability was affected by higher operating costs associated with disruptions from the consolidation of our U.S. mattress fabric production facilities. As of the end of our second quarter of fiscal 2018, we completed a major transformation of our North American manufacturing operations located in the U.S. and Canada. All of our knitting and other fabric forming equipment has been placed into service in our expanded facility located in North 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 operation located in Canada, and are now focused on further refinement of our overall inspection and quality processes to support our continuous improvement initiatives. We expect to realize greater operating efficiencies from these changes going forward.

IfIn addition, our carrying value in CLIH is reduced to zero, no further losses will be recorded in our consolidated financial statements. However, if CLIH subsequently reports income, we will not record our shareprofitability for the second quarter of such income until it equalsfiscal 2018 was affected by higher selling expenses associated with the amount of its share of losses previously recognized.new product roll-outs.
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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) January 29, 2017  January 31, 2016  May 1, 2016 
Accounts receivable and inventory $41,498  $44,309  $43,472 
Property, plant & equipment  47,755   35,637   37,480 
Goodwill   11,462   11,462   11,462 
Investment in unconsolidated joint venture  600   -   - 
Non-compete agreement  847   922   903 
Customer Relationships  677   728   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 JanuaryOctober 29, 2017, accounts receivable and inventory increased $4.7 million, or 12%, compared with 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.

As of October 29, 2017, accounts receivable and inventory decreased $2.8$4.3 million or 6%,9% compared with January 31, 2016.April 30, 2017. This decrease is primarily due to a decrease in inventory as a result of improved inventory management and more timely cash collections ona decrease in accounts receivable as customers were taking more advantage ofthis business segment experienced lower sales discountsvolume in the thirdlast month of the second quarter of fiscal 20172018 compared with the thirdlast month of the fourth quarter of fiscal 2016.

As of January 29, 2017, accounts receivable and inventory decreased $2.0 million, or 5%, compared with May 1, 2016. This decrease is due to improved inventory management in fiscal 2017 compared to fiscal 2016.2017.

Property, Plant & Equipment

The $47.8$50.0 million at JanuaryOctober 29, 2017, represents property, plant and equipment of $32.6$35.8 million and $15.2$14.2 million located in the U.S. and Canada, respectively. The $35.6$43.2 million at January 31,October 30, 2016, represents property, plant, and equipment of $23.0$28.5 million and $12.6$14.7 million located in the U.S. and Canada, respectively. The $37.5$48.9 million at May 1, 2016,April 30, 2017, represents property, plant, and equipment of $24.8$34.0 million and $12.7$14.9 million located in the U.S. and Canada, respectively.

As of JanuaryOctober 29, 2017, property, plant, and equipment increased $12.1$6.7 million, or 34%16%, compared with January 31, 2016. This increase is primarily due to the capital investments noted above, partially offset by depreciation expense.

As of January 29, 2017, property, plant, and equipment increased $10.3 million, or 27%, compared with May 1,October 30, 2016. This increase is due to capital expenditures of $15.0 million that primarily relate to the construction of a new building (see Note 15 to the Consolidated Financial Statementsconsolidated 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 $4.7 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 nine months of fiscal 2017.notes to the consolidated financial statements.

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I-36Non-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)
 
January 29,
2017
     
January 31,
2016
     
%
Change
  
October 29,
2017
    
October 30,
2016
    
% Change
                              
Non U.S. Produced $27,696   92% $31,515   92%  (12.1)% $30,138   94% $27,738   93%  8.7%
U.S. Produced  2,553   8%  2,674   8%  (4.5)%  1,959   6%  2,078   7%  (5.7)%
Total $30,249   100% $34,189   100%  (11.5)% $32,097   100% $29,816   100%  7.7%


    Nine Months Ended        Six Months Ended   
(dollars in thousands)
 
January 29,
2017
     
January 31,
2016
     
%
Change
  
October 29,
2017
    
October 30,
2016
    
% Change
                              
Non U.S. Produced $83,279   92% $90,037   92%  (7.5)% $59,522   94% $55,583   93%  7.1%
U.S. Produced  6,938   8%  8,048   8%  (13.8)%  3,678   6%  4,386   7%  (16.1)%
Total $90,217   100% $98,085   100%  (8.0)% $63,200   100% $59,969   100%  5.4%

The decreaseOur increase in upholstery fabric net sales reflects continued soft demand trends for home furnishingsin the second quarter and the uncertain economic environment. In addition, upholstery fabric sales were affected byfirst half of fiscal 2018 compared to the timing of the Chinese New Year holiday that started in January for fiscal 2017 as opposed to February in fiscal 2016.

In spite of the challenging demand trends, we have remained focus onsame periods a year ago reflect our product-driven strategy. For example, we have seen positive demand trends forstrategy and various growth initiatives. Our ability to provide a diverse product offering has allowed us to reach new market segments.   Our results reflect the success of this strategy, highlighted by expanded sales of LiveSmart®, our latest performancepopular “performance” line of highly durable and stain-resistant fabrics.fabric. We have also experienced meaningfulrecently 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 designed for this fiscal yearthe hospitality market. In addition, we are currently exploring potential acquisitions in the hospitality segment,market that will complement our upholstery fabrics business, which is a key area of focusprincipally in our product diversification strategy.the residential market.

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

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

 Three Months Ended     Three Months Ended   
(dollars in thousands) January 29, 2017  January 31, 2016  Change  October 29, 2017 October 30, 2016 Change
                  
Gross profit $7,001  $7,812   (10.4)% $6,074  $6,145   (1.2)%
Gross profit margin  23.1%  22.8%  30bp  18.9%  20.6%  (170)bp
SG&A expenses  3,901   3,963   (1.6)%  3,700   3,652   1.3%
Income from operations  3,100   3,849   (19.5)%  2,374   2,493   (4.8)%
Operating margin  10.2%  11.3%  (110)bp  7.4%  8.4%  (100)bp
 
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Nine Months Ended
     
(dollars in thousands) January 29, 2017  January 31, 2016  Change 
             
Gross profit $19,665  $20,365   (3.4)%
Gross profit margin  21.8%  20.8%  100bp
SG&A expenses  11,086   11,372   (2.5)%
Income from operations  8,579   8,994   (4.6)%
Operating margin  9.5%  9.2%  30bp
  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
 
Our gross profit and operating income forAlthough our net sales were higher in the thirdsecond quarter and first nine monthshalf of fiscal 2017 decreased2018, we experienced a decrease in comparisonthe 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 periodsensure customer deliveries. To a year ago. This trend reflects the decline in net sales noted above, partially offsetlimited extent, our profitability was also affected by lower raw material costs andhigher operating expenses due to moreless favorable foreign currency exchange rates in China.

Culp Europe
At the end of the third quarter of fiscal 2015, we closedassociated with our finished goods warehouse and distribution facilityoperations 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 alternatives 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) January 29, 2017  January 31, 2016  May 1, 2016  October 29, 2017 October 30, 2016 April 30, 2017
Accounts receivable and inventory $27,421  $30,960  $26,540  $31,701  $26,931  $29,021 
Property, plant & equipment  
1,826
   
1,590
   
1,564
   2,063   1,480   1,879 

Accounts Receivable & Inventory

As of JanuaryOctober 29, 2017, accounts receivable and inventory decreased $3.5increased $4.8 million, or 11%18%, compared with January 31,October 30, 2016. This decreaseincrease is primarily due to a decrease in accounts receivable. Accounts receivable decreased as a result of lower businessthe increased sales volume experienced in the thirdsecond quarter of fiscal 20172018 compared to the same period a year ago. In addition, inventory also increased due to the timing of the Chinese New Year holiday that startedsupply chain disruptions associated with our operations located in January for fiscal 2017 as opposed to February in fiscal 2016.China noted above.

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As of JanuaryOctober 29, 2017, accounts receivable and inventory modestly increased 3%$2.7 million, or 9%, compared with May 1, 2016.April 30, 2017. This increase is primarily due to the increased sales volume experienced in the second quarter of fiscal 2018 compared to the fourth quarter of fiscal 2017.

Property, Plant & Equipment

The $1.8$2.1 million at JanuaryOctober 29, 2017, represents property, plant, and equipment of $1.1$1.4 million and $711,000$722,000 located in the U.S. and China, respectively. The $1.6$1.5 million at January 31,October 30, 2016, represents property, plant, and equipment of $860,000$890,000 and $730,000$590,000 located in the U.S. and China, respectively. The $1.6$1.9 million at May 1, 2016,April 30, 2017, represents property, plant, and equipment of $893,000$1.2 million and $671,000$655,000 located in the U.S. and China, respectively.
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Other Income Statement Categories

 Three Months Ended     Three Months Ended   
(dollars in thousands) January 29, 2017  January 31, 2016  % Change  October 29, 2017 October 30, 2016 % Change
SG&A expenses $9,824  $9,337   5.2% $9,415  $9,602   (1.9)%
Interest expense  -   -   -   37   -   100.0%
Interest income  124   38   226.3%  128   15   753.3%
Other expense  69   85   (18.8)%  321   155   107.1%


 Nine Months Ended     Six Months Ended   
(dollars in thousands) January 29, 2017  January 31, 2016  % Change  October 29, 2017 October 30, 2016 % Change
SG&A expenses $29,171  $27,512   6.0% $18,916  $19,348   (2.2)%
Interest expense  -   -   -   37   -   100.0%
Interest income  164   150   9.3%  259   40   547.5%
Other expense  376   405   (7.2)%  674   307   119.5%

Selling, General and Administrative Expenses
The increasesdecrease in SG&A expenses for thirdduring the second quarter and the first nine monthshalf of fiscal 20172018 compared with the same periods a year ago were due primarily to higherincluded lower incentive compensation expense reflecting strongerweaker financial results in relation to pre-established performance targets. The increases infinancial targets, offset by the following items that increased SG&A expenses were also due to higher inventory warehousing costs, design and sales expenses, and non-recurring plant facility consolidation charges (approximately $200,000 in the third quarter) associated with our mattress fabrics segment.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 $52,000 and $9,000 for$73,000 during the thirdsecond quarter of fiscal 2017 and 2016, respectively.2018 compared with $36,000 for the same period a year ago. Interest costs charged to operations were $97,000 and $58,000$137,000 for the nine months ended January 29,first half of fiscal 2018 compared with $45,000 for the first half of fiscal 2017. These interest costs for fiscal 2018 and 2017 pertain to borrowings on our U.S. revolving line of credit and January 31, 2016, respectively. 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.

Interest Income

Interest income increased in the thirdsecond quarter and the nine month year-to-date periodfirst half of fiscal 20172018 compared with the same periods a year ago. The increasesincrease in interest income werewas due to management's decision at the end of the second quarter of fiscal 2017 to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities that primarily rangingranged 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.
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Other Expense

Other expenses inexpense increased for the thirdsecond quarter and the year-to-date periodfirst half of fiscal 2017 were comparable to2018 compared with the same periods a year ago.

Income Taxes This increase was mostly due to less favorable foreign currency exchange rates associated with our operations located in China.

Effective Income Tax Rate

We recorded income tax expense of $6.6$3.7 million, or 28.9%29.1% of income before income taxes, for the ninesix month period ended JanuaryOctober 29, 2017, compared to income tax expense of $7.4$5.9 million, or 35.7%37.7% of income before income taxes, for the ninesix month period ended January 31,October 30, 2016. Our effective income tax rates for the ninesix month periods ended JanuaryOctober 29, 2017, and January 31,October 30, 2016, 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.

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The following schedule summarizes the factors that are attributablecontribute 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%
Tax effects of Chinese foreign exchange gains  1.9   3.5 
Reversal of foreign uncertain tax position  (9.1)  - 
U.S state income tax expense  0.6   0.7 
Other  1.5   (2.5)
   28.9%  35.7%
  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

In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law.
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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 JanuaryOctober 29, 2017, January 31,October 30, 2016, 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 JanuaryOctober 29, 2017, January 31,October 30, 2016, and May 1, 2016,April 30, 2017, respectively.

Uncertainty In Income Taxes

Our gross unrecognized income tax benefit of $13.4$12.6 million at JanuaryOctober 29, 2017, relates to tax positions for which significant change is reasonably possible within the next year.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 returns filed by us remain subject to examination for income tax years 2010 and subsequent. Canadian provincial (Quebec) returns filed by us remain subject to examination for income tax years 20092013 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 20112012 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 beenintends 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 currentlybelieve 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 during fiscal 2018. 2019.

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, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 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.
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During the third quarter of fiscal 2017, we recognized an income tax benefit of $2.1 million for the reversal of an uncertain income tax position associated with a foreign jurisdiction in which the statute of limitations expired. This income tax benefit was treated as a discrete event in which the full income tax effects of the adjustment were recorded in the three and nine month periods ending January 29, 2017.

Income Taxes Paid

We reported income tax expense of $6.6$3.7 million and $7.4$5.9 million for the nine month periods ending January 29,first half of fiscal 2018 and 2017, and January 31, 2016, respectively. Currently, we are not payingour income taxestax payments in the United States are not expected to be significant in fiscal 2018 as we have $19.2approximately $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 of $4.7totaling $2.6 million and $4.9$3.2 million forduring the nine month periods ending January 29,first half of fiscal 2018 and 2017, and January 31, 2016, 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 $18.1$18.2 million at JanuaryOctober 29, 2017, cash flow from operations, and the current availability ($35.836.0 million as of JanuaryOctober 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 JanuaryOctober 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 $48.9$49.1 million compared with $42.1$54.2 million at May 1, 2016. This increase fromApril 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 2016 was primarily due to net cash provided by operating activities2018, we had an outstanding balance of $24.2$5.0 million partially offset by $10.3on our U.S. revolving line of credit. This outstanding balance and additional borrowings of $5.0 million inthat were made during the second quarter of fiscal 2018 have been repaid.

During the first half of fiscal 2018, we had capital expenditures of $7.5 million (of which $1.0$2.5 million was vendor financed)vendor-financed) that were mostly associated with our mattress fabric segment, $5.3returned $4.6 million to our shareholders in the form of regularly quarterly and special dividend payments, and $1.4$1.5 million in long-term investment purchases associated with our Rabbi Trust that fundfunds our deferred compensation plan. 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 $24.2$10.2 million increased $8.3during the first half of fiscal 2018 decreased from $17.0 million compared with $15.9 million forduring the nine months ending January 31, 2016. This increase issame period a year ago. The decrease was primarily due to lower net income and increased earningsworking capital requirements associated with the increase in net sales and improved inventory managementsupply chain disruptions experienced by our operations located in China during fiscal 2017 compared to fiscal 2016.

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 of $7.0 million on our U.S. revolving line of credit.  This outstanding balance was repaid during our second quarter of fiscal 2017.2018.

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

         
 January 29,  January 31,  May 1,  October 29, October 30, April 30,
(dollars in thousands)  2017  2016  2016  2017 2016 2017
Cayman Islands $35,416  $20,077  $25,762  $39,004  $36,100  $34,965 
China  8,624   6,479   8,454   6,153   6,766   12,722 
Canada  4,560   6,570   6,844   3,275   4,513   4,268 
United States  301   2,846   1,086   653   11   2,228 
 $48,901  $35,972  $42,146  $49,085  $47,390  $54,183 

We have hadCurrently, we are holding a significant shift fromamount of our cash and cash equivalents and investments held in China to the Cayman Islands. Since April 2016 through the end of our third 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 limiting the amount ofOur cash and cash equivalents heldinvestments 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 toour subsidiaries located in China. Our cash and investments held in the Cayman Islands it provides increased flexibility to ultimately repatriate these earnings and profits to 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 currently expectexpected to be approximately two years.used for the following business purposes:

·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 rangingthat 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.

Dividend Program

On February 28,November 30, 2017, we announced that our board of directors approved a 12.5% increase in our quarterly cash dividend offrom $0.08 per share to $0.09 per share. This payment will be made on or about April 17, 2017,January 16, 2018, to shareholders of record as of April 3, 2017.January 2, 2018.
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During the nine months ended January 29, 2017,first half of fiscal 2018, dividend payments totaled $5.3$4.6 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $2.7$2.0 million represented quarterly dividend payments ranging from $0.07 toof $0.08 per share.

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During the nine months ended January 31, 2016,first half of fiscal 2017, dividend payments totaled $7.3$4.3 million, of which $5.0$2.5 million represented a special cash dividend payment of $0.40$0.21 per share, and $2.3$1.8 million represented quarterly dividend payments ranging from $0.06 toof $0.07 per share.

Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.
Common Stock Repurchase Program
On 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 ninesix months ended JanuaryOctober 29, 2017, and January 31,October 30, 2016, we did not purchase any shares of our common stock.
At JanuaryOctober 29, 2017, we had $5.0 million available for additional repurchases of our common stock.

Working Capital

Accounts receivable at JanuaryOctober 29, 2017, were $22.7$24.2 million, a decreasean increase of $4.1$5.2 million, or 15%27%, compared with $26.8$19.0 million at January 31,October 30, 2016.  This decreaseincrease is primarily due to lower businessthe increased sales volume associated with our upholstery fabrics segment as a result of the timing of the Chinese New Year holiday that started in January for fiscal 2017 as opposed to February for fiscal 2016. In addition, this decrease is also due to improved cash collections as customers associated with our mattress fabrics segment were taking more advantage of sales discountsexperienced in the thirdsecond quarter of fiscal 20172018 compared withto the third quarter of fiscal 2016.same period a year ago. Days’ sales outstanding were 27 days for the thirdsecond quarter of fiscal 20172018 compared with 3123 days for the thirdsecond quarter of fiscal 2016.2017.

Inventories as of JanuaryOctober 29, 2017, were $46.2$50.2 million, a decreasean increase of $2.3$4.2 million, or 5%9%, compared with $48.5$46.0 million at January 31,October 30, 2016. The decrease in inventoryThis increase is primarily due to improvedthe increased sales volume experienced in the second quarter of fiscal 2018 compared to the same period a year ago. In addition, inventory management.also increased due to supply chain disruptions associated with our operations located in China. Inventory turns were 5.2 for the thirdsecond quarter of fiscal 2018 and 2017, compared with 5.1 for the third quarter of fiscal 2016.respectively.

Accounts payable-trade as of JanuaryOctober 29, 2017, were $22.4$24.6 million, a decreasean increase of $3.2$4.4 million, or 13%22%, compared with $25.6$20.2 million at January 31,October 30, 2016.  This decreaseincrease is primarily due to lower business volume associated with our upholstery fabrics segment as a result of the timing of the Chinese New Year holiday asincreased inventory purchases noted above.
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Operating working capital (accounts receivable and inventories, less accounts payable-trade and accounts payable-capital expenditures) was $41.0$46.6 million at JanuaryOctober 29, 2017, compared with $49.3$41.8 million at January 31,October 30, 2016. Operating working capital turnover was 7.4 during the second quarter of fiscal 2018 compared with 7.0 during the thirdsecond quarter of fiscal 2017 compared with 7.2 during the third 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 purposes of our revolving lines of credit are to support potential short termshort-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 JanuaryOctober 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 $10.3$7.5 million (of which $1.0$2.5 million was vendorvendor- financed) for the nine month period ending January 29, 2017,first half of fiscal 2018 compared with $7.7$6.3 million for the same period a year ago. Capital expenditures for the first half of fiscal 20172018 and 20162017 mostly related to our mattress fabrics segment.

Depreciation expense was $5.3$3.7 million for the nine month period ending January 29, 2017first half of fiscal 2018 compared with $4.9$3.5 million for the same period a year ago. Depreciation expense forfirst half of fiscal 2017 and 2016 mostly related to the mattress fabrics segment.

For fiscal 2017,2018, we are projecting capital expenditures for the company as a whole(including those that are vendor-financed) to be in the range of $12.0 millioncomparable to $15.0 million.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.

We have incurred a higher than normal level of capital spending in fiscal 2017 on expansion projects to support our growth strategy and provide flexibility to meet expected demand trends. We expect capital spending to be somewhat lower in fiscal 2018 as compared to fiscal 2017.

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 JanuaryOctober 29, 2017, we had total amounts due regarding capital expenditures totaling $5.6$3.2 million, of which $4.5$2.7 million is financed and pertains to completed work for the construction of a new building (see below). Of the total amount due of $5.6$2.7 million $4.9at October 29, 2017, $1.3 million is required to be paid within one year fromduring the end of our third quarterremainder of fiscal 2017,2018, with a remaining amount of $708,000$1.4 million due in May 2018.fiscal 2019 (May 2018).
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Purchase Commitments – Capital Expenditures

At JanuaryOctober 29, 2017 we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $8.2$3.8 million. The $8.2$3.8 million includes $4.9$2.7 million (of(all of which $4.5 million represents completed work) associated with the construction of athe new building noted below.

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Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that willto expand our distribution capabilities and office space at an current estimateda cost of $11.1$11.3 million. This agreement required an installment payment of $1.9 million in April 2016 and requireswith 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 - $1.1$1.4 million. Interest will beis charged on the required outstanding installment payments in excess offor services that have beenwere 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 bank being the beneficiary. In addition to the interest that will be charged on the outstanding installment payments noted above, there will beis 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).

The remaining $4.9 million on this commitment is required to be paid on an installment basis over the next two fiscal years as follows: Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.1 million.

This new building is currently expected to be completed andwas placed ininto service in our fourth quarter of fiscalJuly 2017.

Critical Accounting Policies and Recent Accounting Developments

At JanuaryOctober 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.

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 JanuaryOctober 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, with the exception of the joint venture agreement disclosed in the mattress fabrics segment analysis section of the Results of Operations.April 30, 2017.

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Inflation

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

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

At JanuaryOctober 29, 2017, our U.S. revolving credit agreement requires interest to be charged at a rate (applicable interest rate of 2.23%2.69% at JanuaryOctober 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 JanuaryOctober 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 JanuaryOctober 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 JanuaryOctober 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 JanuaryOctober 29, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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Part II – Other Information

Item 1.  Legal Proceedings

There have not been any material changes to our legal proceedings during the ninesix months ended JanuaryOctober 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, 201614, 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 ninesix months ended JanuaryOctober 29, 2017.2017, 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, 201614, 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 Shares Purchased
(b)
Average
Price Paid
per Share
(c)
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
(d)
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plans
or Programs (1)
July 31, 2017 to September 3, 2017---$5,000,000
September 4, 2017 to October 1, 2017---$5,000,000
October 2, 2017 to October 29, 2017---$5,000,000
Total---$5,000,000
Period 
(a)
Total
Number
of Shares
Purchased
  
(b)
Average Price
Paid per Share
  
(c)
Total Number of
Shares Purchased
as Part of Publicly Announced Plans
or Programs
  
(d)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased Under the Plans or Programs (1)
 
October 31, 2016  to
December 4, 2016
  -   -   -  $5,000,000 
December 5, 2016  to
January 1, 2017
  -   -   -  $5,000,000 
January 2, 2017 to
January 29, 2017
  
-
   
-
   
-
  $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)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.
10.1Written description of non-employee compensation was filed as Exhibit 10.1 to the company’s Form 10-Q dated December 9, 2016 (Commission File No. 001-12597), and incorporated herein by reference.
31.1Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document

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: March 10, 2017By:Kenneth R. Bowling
Kenneth R. Bowling
Vice President and Chief Financial Officer
(Authorized to sign on behalf of the registrant
and also signing as principal financial officer)
By:/s/ Thomas B. Gallagher, Jr.
Thomas B. Gallagher, Jr.
Corporate Controller
(Authorized to sign on behalf of the registrant
and also signing as principal accounting officer)
II-3
EXHIBIT INDEX
Exhibit Number
Exhibit
   
 31.1Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
   
 31.2Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
   
 32.1Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
   
 32.2Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
   
 101.INSXBRL Instance Document
   
 101.SCHXBRL Taxonomy Extension Schema Document
   
 101.CALXBRL Taxonomy Extension Calculation Linkbase Document
   
 101.LABXBRL Taxonomy Extension Label Linkbase Document
   
 101.PREXBRL Taxonomy Extension Presentation Linkbase Document
   
 101.DEFXBRL Taxonomy Extension Definition Linkbase Document
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 8, 2017By:/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 accounting officer)
II-3

EXHIBIT INDEX

Exhibit Number
Exhibit
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.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document