Item 1: Financial Statements

CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE THREE AND SIX MONTHS ENDED ~~JULY 30,~~OCTOBER 29, 2017 AND ~~JULY 31,~~OCTOBER 30, 2016
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)

THREE MONTHS ENDED

~~July 30,~~October 29, ~~July 31,~~ October 30,
2017 2016

Net sales $ ~~79,533~~80,698 $ ~~80,682~~75,343
Cost of sales ~~63,068~~64,894 ~~62,263~~58,442
Gross profit ~~16,465~~15,804 ~~18,419~~16,901

Selling, general and
  administrative expenses ~~9,501~~9,415 ~~9,746~~9,602
Income from operations ~~6,964~~6,389 ~~8,673~~7,299

Interest expense 37 -
Interest income (~~131~~128 ) (2515 )
Other expense ~~353~~321 ~~152~~155
Income before income taxes ~~6,742~~6,159 ~~8,546~~7,159

Income taxes ~~1,640~~2,108 ~~3,233~~2,684

Loss from investment in unconsolidated joint venture ~~118~~75 -
Net income $ 3,976
~~Net income~~ $ ~~4,984~~ $ ~~5,313~~4,475

Net income per share, basic $ ~~0.40~~0.32 $ ~~0.43~~0.36
Net income per share, diluted $ ~~0.40~~0.32 �� $ ~~0.43~~0.36
Average shares outstanding, basic ~~12,399~~12,440 ~~12,286~~12,308
Average shares outstanding, diluted ~~12,590~~12,580 ~~12,463~~12,507

SIX MONTHS ENDED
October 29, October 30,
2017 2016
Net sales $ 160,230 156,026
Cost of sales 127,962 120,705
Gross profit 32,268 35,321
Selling, general and
  administrative expenses 18,916 19,348
Income from operations 13,352 15,973
Interest expense 37 -
Interest income (259 ) (40 )
Other expense 674 307
Income before income taxes 12,900 15,706
Income taxes 3,748 5,917
Loss from investment in unconsolidated joint venture 193 -
Net income $ 8,959 9,789
Net income per share, basic $ 0.72 0.80
Net income per share, diluted 0.71 0.78
Average shares outstanding, basic 12,420 12,297
Average shares outstanding, diluted 12,613 12,495

See accompanying notes to ~~the~~ consolidated financial statements.

I-1

CULP, INC.
CULP, INC.
CULP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JULY 30, 2017 AND JULY 31, 2016
FOR THE THREE AND SIX MONTHS ENDED OCTOBER 29, 2017 AND OCTOBER 30, 2016 FOR THE THREE AND SIX MONTHS ENDED OCTOBER 29, 2017 AND OCTOBER 30, 2016
(UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS) (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

THREE MONTHS ENDED SIX MONTHS ENDED

July 30, July 31, October 29, October 30,
2017 2016 2017 2016

Net income $ 4,984 5,313 $ 8,959 $ 9,789

Other comprehensive income

Unrealized gains on investments

Unrealized holding gains on investments 44 84 64 88

Reclassification adjustment for realized loss included in net income - 12 - 12

Total other comprehensive income 44 96 64 100

Comprehensive income 5,028 5,409 $ 9,023 $ 9,889

See accompanying notes to the consolidated financial statements.
See accompanying notes to consolidated financial statements.

I-2

CULP, INC.
CULP, INC.
CULP, INC.
CONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS

JULY 30, 2017, JULY 31, 2016 AND APRIL 30, 2017
OCTOBER 29, 2017, OCTOBER 30, 2016 AND APRIL 30, 2017 OCTOBER 29, 2017, OCTOBER 30, 2016 AND APRIL 30, 2017
UNAUDITED UNAUDITED UNAUDITED
(Amounts in Thousands) (Amounts in Thousands) (Amounts in Thousands)

July 30, July 31, * April 30, October 29, October 30, * April 30,
2017 2016 2017 2017 2016 2017
Current assets:
Cash and cash equivalents $ 18,322 45,549 20,795 $ 15,739 13,910 20,795
Short-term investments 2,469 2,434 2,443
Short-term investments - Available for Sale 2,478 2,430 2,443
Short-term investments - Held-To-Maturity 4,015 - -
Accounts receivable, net 22,140 22,690 24,577 24,220 19,039 24,577
Inventories 55,227 48,131 51,482 50,209 45,954 51,482
Other current assets 3,441 2,294 2,894 2,263 1,675 2,894
Total current assets 101,599 121,098 102,191 98,924 83,008 102,191

Property, plant and equipment, net 52,912 41,745 51,651 52,530 45,537 51,651
Goodwill 11,462 11,462 11,462 11,462 11,462 11,462
Deferred income taxes 436 1,942 419 491 581 419
Long-term investments (Held-To-Maturity) 30,907 - 30,945
Long-term investments (Rabbi Trust) 6,714 4,611 5,466
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 1,477 - 1,106 1,522 - 1,106
Other assets 2,397 2,502 2,394 2,340 2,495 2,394

Total assets $ 207,904 183,360 205,634 $ 201,043 179,127 205,634

Current liabilities:
Accounts payable-trade $ 29,112 26,708 29,101 $ 24,600 20,183 29,101
Accounts payable - capital expenditures 5,647 627 4,767 3,209 3,000 4,767
Accrued expenses 6,075 6,890 11,947 7,364 8,878 11,947
Income taxes payable - current 884 358 287 692 513 287
Total current liabilities 41,718 34,583 46,102 35,865 32,574 46,102

Line of credit 5,000 7,000 -
Accounts payable - capital expenditures - - 1,322 - - 1,322
Income taxes payable - long-term 487 3,779 467 487 3,734 467
Deferred income taxes 4,253 1,532 3,593 4,641 1,699 3,593
Deferred compensation 6,769 5,031 5,520 6,970 5,171 5,520

Total liabilities 58,227 51,925 57,004 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
12,441,161 at July 30, 2017; 12,306,956
at July 31, 2016; and 12,356,631 at
12,435,276 at October 29, 2017; 12,311,756
at October 30, 2016; and 12,356,631 at
April 30, 2017 622 615 618 622 615 618
Capital contributed in excess of par value 47,038 44,453 47,415 47,441 45,349 47,415
Accumulated earnings 101,977 86,415 100,601 104,957 90,029 100,601
Accumulated other comprehensive income (loss) 40 (48 ) (4 ) 60 (44 ) (4 )
Total shareholders' equity 149,677 131,435 148,630 153,080 135,949 148,630

Total liabilities and shareholders' equity $ 207,904 183,360 205,634 $ 201,043 179,127 205,634

* Derived from audited financial statements.

See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements.

I-3

CULP, INC.
CULP, INC.
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JULY 30, 2017 AND JULY 31, 2016
FOR THE SIX MONTHS ENDED OCTOBER 29, 2017 AND OCTOBER 30, 2016 FOR THE SIX MONTHS ENDED OCTOBER 29, 2017 AND OCTOBER 30, 2016
UNAUDITED UNAUDITED UNAUDITED
(Amounts in Thousands) (Amounts in Thousands) (Amounts in Thousands)

THREE MONTHS ENDED SIX MONTHS ENDED

July 30, July 31, October 29, October 30,
2017 2016 2017 2016

Cash flows from operating activities:
Net income $ 4,984 5,313 $ 8,959 9,789
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,807 1,761 3,713 3,511
Amortization of assets 82 52
Amortization of other assets 166 80
Stock-based compensation 757 761 1,558 1,657
Deferred income taxes 643 593 976 2,121
Realized loss on sale of short-term investments - 12
Realized loss on sale of short-term investments (Available for Sale) - 12
Loss on sale of equipment - 9 - 9
Loss from investment in unconsolidated joint venture 118 - 193 -
Foreign currency exchange loss (gain) 35 (62 ) 42 (53 )
Changes in assets and liabilities:
Accounts receivable 2,524 611 561 4,142
Inventories (3,539 ) (1,808 ) 1,597 219
Other current assets (467 ) 158 723 751
Other assets (47 ) 19 (35 ) -
Accounts payable - trade (397 ) 3,036 (5,074 ) (3,274 )
Accrued expenses and deferred compensation (4,704 ) (4,631 ) (3,607 ) (2,469 )
Income taxes 608 375 406 554
Net cash provided by operating activities 2,404 6,199 10,178 17,049

Cash flows from investing activities:
Capital expenditures (2,260 ) (3,139 ) (4,978 ) (6,308 )
Investment in unconsolidated joint venture (489 ) - (609 ) -
Proceeds from the sale of short-term investments - 2,000
Purchase of short-term investments (12 ) (21 )
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) 49 - 54 -
Purchase of long-term investments (Rabbi Trust) (1,267 ) (559 ) (1,457 ) (929 )
Net cash used in investing activities (3,979 ) (1,719 ) (7,008 ) (36,310 )

Cash flows from financing activities:
Proceeds from line of credit 5,000 7,000 10,000 7,000
Payments on line of credit (10,000 ) (7,000 )
Payments on vendor-financed capital expenditures (1,250 ) - (2,500 ) -
Dividends paid (3,608 ) (3,445 ) (4,603 ) (4,307 )
Common stock surrendered for withholding taxes payable (1,135 ) (280 ) (1,147 ) (280 )
Payments on debt issuance costs - (2 )
Proceeds from common stock issued 5 11 5 11
Net cash (used in) provided by financing activities (988 ) 3,286
Net cash used in financing activities (8,245 ) (4,578 )

Effect of exchange rate changes on cash and cash equivalents 90 (4 ) 19 (38 )

(Decrease) increase in cash and cash equivalents (2,473 ) 7,762
Decrease in cash and cash equivalents (5,056 ) (23,877 )

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

Cash and cash equivalents at end of period $ 18,322 45,549 $ 15,739 13,910

See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements.

I-4

CULP, INC.
CULP, INC.
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

UNAUDITED UNAUDITED UNAUDITED
(Dollars in thousands, except share data) (Dollars in thousands, except share data) (Dollars in thousands, except share data)

Capital Accumulated Capital Accumulated
Contributed Other Total Contributed Other Total
Common Stock in Excess Accumulated Comprehensive Shareholders’ Common Stock in Excess Accumulated Comprehensive Shareholders’
Shares Amount of Par Value Earnings (Loss) Income Equity Shares Amount of Par Value Earnings (Loss) Income Equity
Balance, May 1, 2016 12,265,489 $ 614 43,795 84,547 (144 ) $ 128,812 12,265,489 $ 614 43,795 84,547 (144 ) $ 128,812
Net income - - - 22,334 - 22,334 - - - 22,334 - 22,334
Stock-based compensation - - 3,358 - - 3,358 - - 3,358 - - 3,358
Unrealized gain on investments - - - - 140 140 - - - - 140 140
Excess tax benefit related to stock
based compensation - - 657 - - 657 - - 657 - - 657
Common stock issued in connection
with performance based units 49,192 2 (2 ) - - -
Common stock issued in connection with vesting
of performance based restricted stock units 49,192 2 (2 ) - - -
Fully vested common stock award 4,800 - - - - - 4,800 - - - - -
Common stock issued in connection .
with exercise of stock options 68,000 3 585 - - 588
Common stock issued in connection with exercise .
of stock options 68,000 3 585 - - 588
Common stock surrendered for the cost of stock option Common stock surrendered for the cost of stock option
exercises and withholding taxes payable (30,850 ) (1 ) (978 ) - - (979 ) (30,850 ) (1 ) (978 ) - - (979 )
Dividends paid - - - (6,280 ) - (6,280 ) - - - (6,280 ) - (6,280 )
Balance, April 30, 2017 * 12,356,631 618 47,415 100,601 (4 ) 148,630 12,356,631 618 47,415 100,601 (4 ) 148,630
Net income - - - 4,984 - 4,984 - - - 8,959 - 8,959
Stock-based compensation - - 757 - - 757 - - 1,558 - - 1,558
Unrealized gain on investments - - - - 44 44 - - - - 64 64
Common stock issued in connection
with performance based units 118,845 6 (6 ) - - -
Common stock issued in connection
with exercise of stock options 600 - 5 - - 5
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 (34,915 ) (2 ) (1,133 ) - - (1,135 ) (46,800 ) (2 ) (1,531 ) - - (1,533 )
Dividends paid - - - (3,608 ) - (3,608 ) - - - (4,603 ) - (4,603 )
Balance, July 30, 2017 12,441,161 $ 622 47,038 101,977 40 $ 149,677

Balance, October 29, 2017 12,435,276 $ 622 47,441 104,957 60 $ 153,080

* Derived from audited financial statements. * Derived from audited financial statements.

See accompanying notes to consolidated 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 ~~three~~six months ended ~~July 30,~~October 29, 2017, and ~~July 31,~~October 30, 2016, represent 1326 week periods, respectively.

2. Significant Accounting Policies

As of ~~July 30,~~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 inthrough the ~~first~~second quarter of fiscal 2018 was a reduction to income tax expense of ~~$554,000.~~$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 ~~three~~six months ended ~~July 31,~~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 ~~three~~six months ended ~~July 31,~~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. We are currently assessing the impact that this guidance will have on our consolidated financial statements.

I-7

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

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

There are no other new accounting pronouncements that are expected to have a significant impact on our consolidated financial statements.

3. Stock-Based Compensation

Equity Incentive Plan Description

On September 16, 2015, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). 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 ~~July 30,~~October 29, 2017, there were ~~895,623~~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 ~~first~~second quarter of fiscal 2018.

At ~~July 30,~~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 ~~0.9~~0.6 years. At ~~July 30,~~October 29, 2017, the aggregate intrinsic value for options outstanding and exercisable was ~~$354,000~~$373,000.

The aggregate intrinsic value for options exercised for the ~~three~~six months ending ~~July 30,~~October 29, 2017 and ~~July 31,~~October 30, 2016, was $14,000 and $43,000, respectively.

I-8

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

At ~~July 30,~~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 ~~July 30,~~October 29, 2017.

No compensation expense was recorded for incentive stock options for the ~~three~~six months ended ~~July 30,~~October 29, 2017 and ~~July 31,~~October 30, 2016, respectively.

Performance Based Restricted Stock Units

~~We have~~Executive Management
On July 13, 2017, we granted ~~performance based~~performance-based restricted stock units to ~~certain key~~ members of executive management ~~and a non-employee~~(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 ~~members of management~~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 ~~members of management~~employees that are currently unvested:

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

Vesting
Date of Grant Units Awarded Share Period
July 13, 2017 122,195 $32.50 3 years
July 14, 2016 107,880 $28.00 3 years
July 15, 2015 107,554 $32.23 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 Stock Price Per Vesting
Date of Grant Units Awarded Share Period
July 13, 2017 10,200 $31.95 (2) 3 years
July 14, 2016 11,549 $31.95 (2) 3 years
July 15, 2015 10,364 $31.95 (2) 3 years

(1) Amounts represent the maximum number of common stock shares that could be earned if certain performance targets are met as defined in the related restricted stock unit agreements.
~~(2) 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 for that are currently unvested:~~

~~Date of Grant~~
~~(1)~~
~~Restricted Stock~~
~~Units Awarded~~
~~Price Per~~
~~Share~~
~~Vesting~~
~~Period~~
~~July 13, 2017~~ ~~10,200~~ ~~$30.65 (2)~~ ~~3 years~~
~~July 14, 2016~~ ~~11,549~~ ~~$30.65 (2)~~ ~~3 years~~
~~July 15, 2015~~ ~~10,364~~ ~~$30.65 (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 ~~July 30,~~October 29, 2017, the end of our reporting period.

~~I-9~~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 ~~three~~six month periods ending ~~July 30,~~October 29, 2017 and ~~July 31,~~October 30, 2016:

Fiscal Year

Common Stock
Shares Vested

(1)
Weighted Average
Fair Value

Price
Per Share

Fiscal 2018 – Management 102,845 $ 1,820 $ 17.70 (2)
Fiscal 2018 – Non-employee 16,000 $ 520 $ 32.50 (3)
Fiscal 2017 - Management
37,192 $ 637 $ 17.12 (2)
Fiscal 2017 - Non-Employee
12,000 $ 345 $ 28.77 (3)

   (3)
Common Stock Weighted Average Price
Fiscal Year Shares Vested Fair Value Per Share
Fiscal 2018 (1) 102,845 $1,820 $17.70 (4)
Fiscal 2018 (2) 16,000 $520 $32.50 (5)
Fiscal 2017 (1) 37,192 $637 $17.12 (4)
Fiscal 2017 (2) 12,000 $345 $28.77 (5)
(1) NEOs and key employees.
(2) Non-employee
(3) Dollar amounts are in thousands.
~~(2)~~(4) Price per share represents ~~the~~ closing price of our common stock on the date of grant.
~~(3)~~(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 ~~$751,000~~$1.4 million and ~~$761,000~~$1.5 million within selling, general, and administrative expense associated with our performance based restricted stock units for the ~~three months~~six month periods ending ~~July 30,~~October 29, 2017 and ~~July 31,~~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 ~~July 30,~~October 29, 2017, the remaining unrecognized compensation cost related to the performance based restricted stock units was ~~$5.3~~$4.3 million, which is expected to be recognized over a weighted average vesting period of ~~2.1~~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.
~~I-10~~

~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
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 ~~$6,000~~$17,000 and $11,000 within selling, general, and administrative expense associated with our time vested restricted stock unit awards for the ~~three months~~six month periods ending ~~July~~October 29, 2017 and October 30, ~~2017. Compensation expense for the three months ending July 31,~~ 2016, ~~was immaterial.~~respectively.

At ~~July 30,~~October 29, 2017, the remaining unrecognized compensation cost related to unvested time vested restricted stock awards was ~~$37,000,~~$27,000, which is expected to be recognized over the next ~~10.5~~7.5 months.

4. Accounts Receivable

A summary of accounts receivable follows:


(dollars in thousands)
July 30, 2017 July 31, 2016 April 30, 2017 October 29, 2017 October 30, 2016 April 30, 2017
Customers
$ 23,548 $ 24,669 $ 26,211 $ 25,593 $ 20,580 $ 26,211
Allowance for doubtful accounts
(325 ) (850 ) (414 ) (374 ) (420 ) (414 )
Reserve for returns and allowances and discounts
(1,083 ) (1,129 ) (1,220 ) (999 ) (1,121 ) (1,220 )

$
22,140

$
22,690

$
24,577
$ 24,220 $ 19,039 $ 24,577

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


Three months ended Six months ended
(dollars in thousands) July 30, 2017 July 31, 2016 October 29, 2017 October 30, 2016
Beginning balance $ (414 ) $ (1,088 ) $ (414 ) $ (1,088 )
Provision for bad debts 89 227 40 216
Net write-offs, net of recoveries - 11 - 452
Ending balance $ (325 ) $ (850 ) $ (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:

Three months ended
(dollars in thousands) July 30, 2017 July 31, 2016
Beginning balance $ (1,220 ) $ (962 )
Provision for returns, allowances and discounts (628 ) (919 )
Credits issued 765 752
Ending balance $ (1,083 ) $ (1,129 )
~~I-11~~
~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

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) July 30, 2017 July 31, 2016 April 30, 2017 October 29, 2017 October 30, 2016 April 30, 2017
Raw materials $ 6,956 $ 6,779 $ 6,456 $ 6,617 $ 6,128 $ 6,456
Work-in-process 2,782 3,224 3,095 2,686 2,518 3,095
Finished goods 45,489 38,128 41,931 40,906 37,308 41,931
$ 55,227 $ 48,131 $ 51,482 $ 50,209 $ 45,954 $ 51,482

6. Other Assets

A summary of other assets follows:


(dollars in thousands) July 30, 2017 July 31, 2016 April 30, 2017 October 29, 2017 October 30, 2016 April 30, 2017
Cash surrender value – life insurance $ 376 $ 358 $ 376 $ 376 $ 358 $ 376
Non-compete agreement, net 809 885 828 790 866 828
Customer relationships, net 651 702 664 638 689 664
Other 561 557 526 536 582 526
$ 2,397 $ 2,502 $ 2,394 $ 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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016 and April 30, 2017, respectively. ~~At July 30, 2017, July 31, 2016, and April 30, 2017, accumulated~~Accumulated amortization for our non-compete agreement was $1.2 million ~~$1.1 million,~~at October 29, 2017, October 30, 2016, and ~~$1.2 million,~~April 30, 2017, respectively.

Amortization expense for our non-compete agreement was ~~$19,000~~$38,000 for the ~~three~~six month periods ~~ended July 30,~~ending October 29, 2017 and ~~July 31,~~October 30, 2016. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2018 - ~~$56,000;~~$37,000; FY 2019 - $75,000; FY 2020 - $75,000; FY 2021 - $75,000; FY 2022 - $75,000 and Thereafter - $453,000.

~~The weighted average amortization period for our non-compete agreement is 10.8 years as of July 30, 2017.~~
~~I-12~~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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and April 30, 2017, respectively. Accumulated amortization for our customer relationships was ~~$217,000, $166,000,~~$230,000, $179,000, and $204,000 at ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and April 30, 2017, respectively.

Amortization expense for our customer relationships was ~~$13,000~~$26,000 for the ~~three~~six months ~~ending July 30,~~ended October 29, 2017 and ~~July 31,~~October 30, 2016. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2018 - ~~$38,000;~~$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 ~~12.8~~12.5 years as of ~~July 30,~~October 29, 2017.

Cash Surrender Value – Life Insurance

At ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 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)
July 30, 2017
July 31, 2016 April 30, 2017 October 29, 2017 October 30, 2016 April 30, 2017
Compensation, commissions and related benefits $ 4,535 $ 5,400 $ 10,188 $ 5,399 $ 7,111 $ 10,188
Advertising rebates 347 485 468 650 734 468
Interest 19 7 51 18 5 51
Other accrued expenses 1,174 998 1,240 1,297 1,028 1,240
$ 6,075 $ 6,890 $ 11,947 $ 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 ~~2.68%~~2.69%, ~~1.94%~~1.98%, and 2.45% at ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 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.

~~I-13~~
~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
At July 30, 2017 and July 31, 2016, we had outstanding borrowings associated with our Credit Agreement totaling $5.0 million and $7.0 million, respectively. There were no borrowings outstanding under our Credit Agreement at April 30, 2017. 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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 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 ~~will allow~~allows us to issue letters of credit not to exceed $7.5 million. On August 3, 2016, we issued a $5.0 million letter of credit ~~(all of which~~($3.75 million is currently outstanding ~~and~~ in addition to the $250,000 letter of credit noted above) for the construction of a new building associated with our mattress fabrics segment (see Note 15 for further details). The ~~$5.0~~$3.75 million outstanding letter of credit will be automatically reduced in increments of $1.25 million on ~~August 1, 2017,~~ November 1, 2017, February 1, 2018, and May 15, 2018, respectively.

Revolving Credit Agreement – China

We have an unsecured credit agreement associated with our operations in China that provides for a line of credit of up to 40 million Chinese Yuan Renminbi (approximately ~~$5.9~~$6.0 million USD at ~~July 30,~~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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and April 30, 2017.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At ~~July 30,~~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-14~~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 July 30, 2017 using:
Fair value measurements at October 29, 2017 using:

Quoted prices in
active markets
for identical
assets

Significant other
observable inputs

Significant
unobservable
inputs

Quoted prices in
active markets for
identical assets

Significant other
observable inputs

Significant
unobservable
inputs

(amounts in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Assets:
U.S. Corporate Bonds $ - $ 30,846 $ - $ 30,846 $ - $ 30,773 $ - $ 30,773
Premier Money Market Fund 5,991 N/A N/A 5,991 6,153 N/A N/A 6,153
Low Duration Bond Fund 1,085 N/A N/A 1,085 1,087 N/A N/A 1,087
Intermediate Term Bond Fund 762 N/A N/A 762 765 N/A N/A 765
Strategic Income Fund 622 N/A N/A 622 626 N/A N/A 626
Large Blend Fund 381 N/A N/A 381 393 N/A N/A 393
Growth Allocation Fund 140 N/A N/A 140 153 N/A N/A 153
Moderate Allocation Fund 102 N/A N/A 102 107 N/A N/A 107
Other 100 N/A N/A 100 115 N/A N/A 115

Fair value measurements at July 31, 2016 using:
Fair value measurements at October 30, 2016 using:

Quoted prices in
active markets
for identical
assets

Significant other
observable inputs

Significant
unobservable
inputs

Quoted prices in
active markets for
identical assets

Significant other
observable inputs

Significant
unobservable
inputs

(amounts in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Assets:
Cash and Cash Equivalents $ 23,940 N/A N/A $ 23,940
U.S. Corporate Bonds - 7,110 N/A 7,110
Premier Money Market Fund $ 3,950 N/A N/A $ 3,950 4,421 N/A N/A 4,421
Low Duration Bond Fund 1,073 N/A N/A 1,073 1,075 N/A N/A 1,075
Intermediate Term Bond Fund 754 N/A N/A 754 750 N/A N/A 750
Strategic Income Fund 597 N/A N/A 597 605 N/A N/A 605
Large Blend Fund 310 N/A N/A 310 319 N/A N/A 319
Mid Cap Value Fund 117 N/A N/A 117
Growth Allocation Fund 97 N/A N/A 97 102 N/A N/A 102
Other 147 N/A N/A 147 152 N/A N/A 152

~~I-15~~I-16

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

Fair value measurements at April 30, 2017 using:
Fair value measurements at April 30, 2017 using:

Quoted prices in
active markets
for identical
assets

Significant other
observable inputs

Significant
unobservable
inputs

Quoted prices in
active markets for
identical assets

Significant other
observable inputs

Significant
unobservable
inputs

(amounts in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Assets:
U.S. Corporate Bonds $ - $ 30,831 $ - $ 30,831 $ - $ 30,831 $ - $ 30,831
Premier Money Market Fund 4,811 N/A N/A 4,811 4,811 N/A N/A 4,811
Low Duration Bond Fund 1,081 N/A N/A 1,081 1,081 N/A N/A 1,081
Intermediate Term Bond Fund 751 N/A N/A 751 751 N/A N/A 751
Strategic Income Fund 611 N/A N/A 611 611 N/A N/A 611
Large Blend Fund 365 N/A N/A 365 365 N/A N/A 365
Growth Allocation Fund 126 N/A N/A 126 126 N/A N/A 126
Moderate Allocation Fund 88 N/A N/A 88 88 N/A N/A 88
Other 76 N/A N/A 76 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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 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. ~~Our~~Since these short-term bond funds are classified as available for sale, these investments are recorded at their fair market value ~~are classified as available-for-sale,~~ and their unrealized gains or losses are included in other comprehensive income (loss). Our short-term bond investments had an accumulated unrealized loss totaling ~~$33,000, $33,000,~~$36,000, $45,000, and $47,000 at ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and April 30, 2017, respectively. At ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and April 30, 2017, the fair value of our short-term bond funds approximated its cost basis.

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

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

~~I-16~~I-17

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

At ~~July 30,~~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 ~~totaled $30.8 million~~ at ~~July~~October 29, 2017, October 30, ~~2017~~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 ~~$6.7~~$6.9 million, ~~$4.6~~$5.0 million, and $5.5 million at ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and April 30, 2017, respectively. Our long-term investments had an accumulated unrealized gain of ~~$73,000~~$96,000, $1,000 and $43,000 at ~~July~~October 29, 2017, October 30, ~~2017~~2016, and April 30, 2017, ~~respectively, and an accumulated unrealized loss of $15,000 at July 31, 2016.~~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
Three months ended
(dollars in thousands) July 30, 2017 July 31, 2016
Interest $ 83 $ 3
Income taxes 536 2,263

Interest costs charged to operations were ~~$64,000~~$137,000 and ~~$9,000~~$45,000 for the ~~three~~six months ended ~~July 30,~~October 29, 2017 and ~~July 31,~~October 30, 2016, respectively.

Interest costs of ~~$64,000~~$100,000 and ~~$9,000~~$45,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’ useful lives for the ~~three~~six months ended ~~July 30,~~October 29, 2017 and ~~July 31,~~October 30, 2016, respectively.

~~I-17~~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, 2017 October 30, 2016
Weighted average common shares outstanding, basic 12,440 12,308
Dilutive effect of stock-based compensation 140 199
Weighted average common shares outstanding, diluted 12,580 12,507
Three months ended
(amounts in thousands) July 30, 2017 July 31, 2016
Weighted average common shares outstanding, basic 12,399 12,286
Dilutive effect of stock-based compensation 191 177
Weighted average common shares outstanding, diluted 12,590 12,463

All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended ~~July 30,~~October 29, 2017 and ~~July 31,~~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, 2017 October 30, 2016
Weighted average common shares outstanding, basic 12,420 12,297
Dilutive effect of stock-based compensation 193 198
Weighted average common shares outstanding, diluted 12,613 12,495
All options to purchase shares of common stock were included in the computation of diluted net income for the six months ended October 29, 2017 and October 30, 2016, 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
Three months ended
(dollars in thousands) July 30, 2017 July 31, 2016
Net sales:
Mattress Fabrics $ 48,429 $ 50,530
Upholstery Fabrics 31,104 30,152
$ 79,533 $ 80,682
Gross profit:
Mattress Fabrics $ 9,760 $ 11,901
Upholstery Fabrics 6,705 6,518
$ 16,465 $ 18,419

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-18~~I-20

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

~~Selling, general, and administrative expenses:~~
Mattress Fabrics $ 3,391 $ 3,499
Upholstery Fabrics 3,811 3,534
Total segment selling, general, and
administrative expenses 7,202 7,033
Unallocated corporate expenses 2,299 2,713
$ 9,501 $ 9,746

Income from operations:
Mattress Fabrics $ 6,368 $ 8,402
Upholstery Fabrics 2,895 2,984
Total segment income from operations 9,263 11,386
Unallocated corporate expenses (2,299 ) (2,713 )
Total income from operations 6,964 8,673
Interest income 131 25
Other expense (353 ) (152 )
Income before income taxes $ 6,742 $ 8,546

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

(dollars in thousands)    July 30, 2017 July 31, 2016 April 30, 2017
Segment assets:
Mattress Fabrics
Current assets (1) $ 46,750 $ 39,800 $ 47,038
Non-compete agreement 809 885 828
Customer relationships 651 702 664
Investment in unconsolidated joint venture 1,477 - 1,106
Goodwill 11,462 11,462 11,462
Property, plant and equipment (2) 50,270 39,435 48,916
Total mattress fabrics assets 111,419 92,284 110,014
Upholstery Fabrics
Current assets (1)
30,617

31,021

29,021

Property, plant and equipment (3) 1,857 1,459 1,879
Total upholstery fabrics assets 32,474 32,480 30,900
Total segment assets 143,893 124,764 140,914
Non-segment assets:
Cash and cash equivalents
18,322

45,549

20,795

Short-term investments 2,469 2,434 2,443
Deferred income taxes 436 1,942 419
Other current assets 3,441 2,294 2,894
Property, plant and equipment (4) 785 851 856
Long-term investments (Held-to-Maturity) 30,907 - 30,945
Long-term investments (Rabbi Trust) 6,714 4,611 5,466
Other assets 937 915 902
Total assets $ 207,904 $ 183,360 $ 205,634

~~I-19~~

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

Three months ended Six months ended
(dollars in thousands) July 30, 2017 July 31, 2016 October 29, 2017 October 30, 2016
Capital expenditures (5):
Mattress Fabrics $ 2,967 $ 3,521 $ 4,364 $ 8,857
Upholstery Fabrics 85 14 203 165
Unallocated Corporate 16 8 30 62
Total capital expenditures $ 3,068 $ 3,543 $ 4,597 $ 9,084
Depreciation expense:
Mattress Fabrics $ 1,612 $ 1,556 $ 3,310 $ 3,101
Upholstery Fabrics 195 205 403 410
Total depreciation expense $ 1,807 $ 1,761 $ 3,713 $ 3,511

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

(2) The ~~$50.3~~$50.0 million at ~~July 30,~~October 29, 2017, represents property, plant, and equipment of $35.8 million and ~~$14.5~~$14.2 million located in the U.S. and Canada, respectively. The ~~$39.4~~$43.2 million at ~~July 31,~~October 30, 2016, represents property, plant, and equipment of ~~$25.5~~$28.5 million and ~~$13.9~~$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.

(3) The ~~$1.9~~$2.1 million at ~~July 30,~~October 29, 2017, represents property, plant, and equipment of ~~$1.2~~$1.4 million and ~~$684~~$722 located in the U.S. and China, respectively. The $1.5 million at ~~July 31,~~October 30, 2016, represents property, plant, and equipment of ~~$847~~$890 and ~~$612~~$590 located in the U.S. and China, respectively. The $1.9 million at April 30, 2017, represents property, plant, and equipment of $1.2 million and $655 located in the U.S. and China, respectively.

I-21
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) The ~~$785, $851,~~$502, $829, and $856 at ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 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 ~~$1.6~~$3.7 million, or ~~24.3%~~29.1% of income before income taxes, for the ~~three~~six month period ended ~~July 30,~~October 29, 2017, compared to income tax expense of ~~$3.2~~$5.9 million, or ~~37.8%~~37.7% of income before income taxes, for the ~~three~~six month period ended ~~July 31,~~October 30, 2016. Our effective income tax rates for the ~~three~~six month periods ended ~~July 30,~~October 29, 2017, and ~~July 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.
~~I-20~~
~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

The following schedule summarizes the factors that ~~contributed~~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 2018 2017
Federal income tax rate 34.0 % 34.0 % 34.0 % 34.0 %
Excess income tax benefits related to stock-based compensation (8.2 ) - (4.3 ) -
Undistributed earnings from foreign subsidiaries (1.5 ) -
Tax effects of Chinese foreign exchange (losses)gains (0.9 ) 1.1
Change in valuation allowance 1.4 0.3
Tax effects of Chinese foreign exchange (losses) gains (1.5 ) 1.6
U.S. state income tax expense 0.4 1.4 0.4 0.6
Other (0.9 ) 1.0 0.5 1.5
24.3 % 37.8 % 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 ~~July 30,~~October 29, 2017, we recorded a partial valuation allowance of ~~$637,000,~~$632,000, of which ~~$559,000~~$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 ~~July 31,~~October 30, 2016, we recorded a partial valuation allowance of ~~$625,000,~~$603,000, of which ~~$539,000~~$519,000 pertained to certain U.S. state net operating loss carryforwards and credits and ~~$86,000~~$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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and April 30, 2017, respectively.
The recorded valuation allowance of ~~$637,000~~$632,000 at ~~July 30,~~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.

~~I-21~~
~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

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 ~~July 30,~~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 ~~will be~~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 ~~July 30,~~October 29, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling ~~$150.8~~$145.3 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled ~~$810,000,~~$322,000, which included U.S. income and foreign withholding taxes totaling ~~$45.4~~$42.4 million, offset by U.S. foreign income tax credits of ~~$44.6~~$42.1 million.
At ~~July 31,~~October 30, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling ~~$134.7~~$138.9 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled ~~$431,000,~~$657,000, which included U.S. income and foreign withholding taxes totaling ~~$39.8~~$41.4 million, offset by U.S. foreign income tax credits of ~~$39.4~~$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 ~~July 30,~~October 29, 2017, our non-current deferred tax asset of ~~$436,000~~$491,000 pertains to our operations located in China. At ~~July 31,~~October 30, 2016, our non-current deferred tax asset of ~~$1.9 million~~$581,000 represented ~~$1.4 million~~$109,000 and ~~$561,000~~$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 ~~July 30,~~October 29, 2017, our non-current deferred tax liability of ~~$4.3~~$4.6 million represents ~~$2.3~~$2.5 million and ~~$2.0~~$2.1 million from our operations located in the U.S. and Canada, respectively. Our non-current deferred tax liability balance of ~~$1.5~~$1.7 million at ~~July 31,~~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 ~~July 30,~~October 29, 2017, we had a ~~$12.4~~$12.6 million total gross unrecognized income tax benefit, of which ~~$11.9~~$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 ~~July 31,~~October 30, 2016, we had a ~~$15.0~~$15.1 million total gross unrecognized income tax benefit, of which ~~$11.2~~$11.4 million and ~~$3.8~~$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.
~~I-22~~
~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

At ~~July 30,~~October 29, 2017, our ~~$12.4~~$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 ~~July 31,~~October 30, 2016, our ~~$15.0~~$15.1 million total gross unrecognized income tax benefit, included ~~$3.8~~$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 ~~$12.4~~$12.6 million at ~~July 30,~~October 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 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.

~~Currently, the~~The Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal years 2014 through ~~2016,~~2016. As a result of this examination, the IRS proposed an adjustment approximating $12.5 million of income taxes that relates to our transfer pricing with certain foreign subsidiaries. Management does not agree with the IRS' proposed adjustment and ~~no adjustments have been~~intends to vigorously defend its position. Currently, the ultimate outcome of this proposed ~~at this time.~~adjustment and any potential cash settlement cannot be determined as it is dependent upon potential legal and competent authority proceedings, interpretation of income tax law, and utilization of available loss carryforwards and certain income tax credits associated with the fiscal years under exam. We ~~currently~~believe our unrecognized income tax benefit balance of $12.6 million has adequately provided for our uncertain income tax positions for all open income tax years and jurisdictions. Currently, we expect this examination to be completed during fiscal ~~2018.~~ 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 ~~July 30,~~October 29, 2017, the company’s statutory surplus reserve was ~~$4.3~~$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.
~~I-23~~
~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
Our subsidiaries located in China can transfer funds to the parent company with the exception of the statutory surplus reserve of ~~$4.3~~$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 ~~July~~October 29, 2017, October 30, ~~2017~~2016, and April 30, 2017, we had total amounts due regarding capital expenditures totaling ~~$5.6~~$3.2 million, $3.0, and $6.1 million, respectively, of which ~~$3.9~~$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 ~~$3.9~~$2.7 million due at ~~July 30,~~October 29, 2017, ~~$2.5~~$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).

~~At July 31, 2016, we had total amounts due regarding capital expenditures totaling $627,000, which pertained to outstanding vendor invoices, none of which were financed.~~
I-25
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Purchase Commitments – Capital Expenditures

At ~~July 30,~~October 29, 2017, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling ~~$6.4~~$3.8 million. The ~~$6.4~~$3.8 million includes ~~$3.9~~$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.

~~I-24~~

~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
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~~produces cut and sewn mattress covers, and its operations ~~will be~~are located in a modern industrial park in northeastern Haiti, which borders the Dominican Republic. CLIH ~~is currently expected to commence~~commenced production induring 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 ~~three~~six month period ended ~~July 30,~~October 29, 2017, CLIH incurred a ~~$236,000~~$386,000 net loss that primarily pertained to start-up operating ~~expenses in the first quarter of fiscal 2018.~~expenses. Our equity interest in this net loss was ~~$118,000,~~$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:

(dollars in thousands)

July 30,
2017

April 30,
2017

total assets $ 3,003 $ 2,258
total liabilities $ 48 $ 46
total members’ equity $ 2,955 $ 2,212
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 ~~July 30,~~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.

I-26

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 ~~three~~six months ended ~~July 30,~~October 29, 2017, and ~~July 31,~~October 30, 2016, we did not purchase any shares of our common stock.
At ~~July 30,~~October 29, 2017, we had $5.0 million available for repurchases of our common stock.
~~I-25~~

~~Culp, Inc.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~
18. Dividend Program

On ~~June 13,~~November 30, 2017, we announced that our board of directors approved ~~the payment of~~ a ~~special cash dividend of $0.21 per share and a regular~~12.5% increase in our quarterly cash dividend ~~payment of~~from $0.08 per share to $0.09 per share. ~~These dividends were paid~~This payment will be made on ~~July 17, 2017,~~January 16, 2018, to shareholders of record as of ~~July 3, 2017.~~ January 2, 2018.

During the first ~~quarter~~half of fiscal 2018, dividend payments totaled ~~$3.6~~$4.6 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and ~~$1.0~~$2.0 million represented a quarterly dividend ~~payment~~payments of $0.08 per share.

During the first ~~quarter~~half of fiscal 2017, dividend payments totaled ~~$3.4~~$4.3 million, of which $2.5 million represented a special cash dividend payment of $0.21 per share, and ~~$861,000~~$1.8 million represented a quarterly dividend ~~payment~~payments of $0.07 per share.

On August 30, 2017, we announced that our board of directors approved a quarterly cash dividend of $0.08 per share. This payment will be made on October 16, 2017, to shareholders of record as of October 2, 2017.

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

~~I-26~~I-27

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-27~~I-28

~~ITEM 2.~~
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 ~~three~~six months ended ~~July 30,~~October 29, 2017, and ~~July 31,~~October 30, 2016, each represent ~~13-week~~26-week periods. Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufacturers, sources and sells fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment ~~sources,~~develops, manufacturers, and sells fabrics primarily to residential and commercial furniture manufacturers. We have ~~wholly-owned~~wholly owned mattress fabric operations that are located in Stokesdale, NC, High Point, NC, and Quebec, Canada and a fifty percent owned cut and sew mattress cover operation located in Haiti. We have ~~wholly-owned~~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 ~~source~~develop our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses represent primarily compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses.

Executive Summary

Results of Operations

Three Months Ended
(dollars in thousands) July 30, 2017 July 31, 2016 Change
Net sales $ 79,533 $ 80,682 (1.4 )%
Gross profit 16,465 18,419 (10.6 )%
Gross profit margin 20.7 % 22.8 % (210 )bp
SG&A expenses 9,501 9,746 (2.5 )%
Income from operations 6,964 8,673 (19.7 )%
Operating margin 8.8 % 10.7 % (190 )bp
Income before income taxes 6,742 8,546 (21.1 )%
Income taxes 1,640 3,233 (49.3 )%
Net income 4,984 5,313 (6.2 )%
Three Months Ended
(dollars in thousands) October 29, 2017 October 30, 2016 Change
Net sales $ 80,698 $ 75,343 7.1 %
Gross profit 15,804 16,901 (6.5 )%
Gross profit margin 19.6 % 22.4 % (280 )bp
SG&A expenses 9,415 9,602 (1.9 )%
Income from operations 6,389 7,299 (12.5 )%
Operating margin 7.9 % 9.7 % (180 )bp
Income before income taxes 6,159 7,159 (14.0 )%
Income taxes 2,108 2,684 (21.5 )%
Net income 3,976 4,475 (11.2 )%

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Six Months Ended
(dollars in thousands) October 29, 2017 October 30, 2016 Change
Net sales $ 160,230 $ 156,026 2.7 %
Gross profit 32,268 35,321 (8.6 )%
Gross profit margin 20.1 % 22.6 % (250 )bp
SG&A expenses 18,916 19,348 (2.2 )%
Income from operations 13,352 15,973 (16.4 )%
Operating margin 8.3 % 10.2 % (190 )bp
Income before income taxes 12,900 15,706 (17.9 )%
Income taxes 3,748 5,917 (36.7 )%
Net income 8,959 9,789 (8.5 )%

Net Sales

Overall, our net sales ~~were slightly lower~~increased through the first six months of fiscal 2018 compared with fiscal 2017. This increase in net sales was experienced during the second quarter, reversing a decrease in net sales in our first quarter of fiscal 2018 as compared to the same period a year ~~ago, with mattress fabric net sales decreasing 4.2%, partially offset by an increase~~ago. These results reflect our strategic focus on product innovation and creativity and our ability to offer a diverse product offering and expand our customer base in upholstery fabric net sales of 3.2%. Our net sales were affected by an uncertain and weak retail environment for home furnishings and other market disruptions specifically related to the mattress industry.
both our business segments.
See the Segment Analysis section below for further details.

Income Before Income Taxes
~~The~~Although our net sales were higher in the second quarter and first half of fiscal 2018, we experienced a decrease in our income before income ~~taxes~~taxes. The decrease was primarily due to ~~lower sales noted above, as well as cost pressures~~higher operating costs associated with ~~significant manufacturing inefficiencies resulting~~disruptions from the consolidation of our U.S. mattress fabric production facilities. ~~Partially offsetting those inefficiencies were lower SG&A expenses due primarily~~In addition, we incurred higher than anticipated freight costs associated with our upholstery fabric operations located in China. During the second quarter, a forced Chinese government shutdown of certain textile mills for environmental control disrupted our supply chain. As a result, we incurred additional freight costs in order to ~~lower incentive compensation expense reflecting weaker financial results in relation~~ensure customer deliveries. Lastly, we incurred non-recurring legal and other professional fees of approximately $400,000 during the second quarter of fiscal 2018, relating to ~~pre-established financial targets.~~
a proposed acquisition of a China business that did not close.
See the Segment Analysis section below for further details.
Income Taxes

The reduction in our income tax expense and effective income tax rate for the first half of fiscal 2018 compared to the first half of fiscal 2017 was primarily due to the adoption of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” during the first quarter of fiscal 2018 (Refer to Note 2 located in the notes to the consolidated financial statements). As a result of the adoption of ASU No. 2016-09, we recorded a reduction to income tax expense of ~~$554,000,~~$556,000 or ~~8.2%~~4.3% on our effective income tax rate. Additionally, our income tax expense and effective income tax rate decreased due to favorable differences in the mix of earnings between our U.S. parent company and foreign subsidiaries that have lower income tax rates.

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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 taxes.

Liquidity

At ~~July 30,~~October 29, 2017, our cash and investments (which comprise ofcash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity)), totaled ~~$51.7~~$49.1 million compared with $54.2 million at April 30, 2017. ~~Additionally, we borrowed $5.0 million on our U.S. line of credit to support our short-term cash needs that historically occur during the first quarter.~~

~~During~~Additionally, there were no borrowings outstanding under our revolving credit agreements as of October 29, 2017, and April 30, 2017, respectively. At the end of our first quarter of fiscal 2018, we had ~~dividend payments totaling $3.6~~an outstanding balance of $5.0 million on our U.S. revolving line of credit. This outstanding balance and additional borrowings of $5.0 million that were made during the second quarter of fiscal 2018 have been repaid.

During the first half of fiscal 2018, we had capital expenditures of ~~$3.5~~$7.5 million (of which ~~$1.3~~$2.5 million was vendor-financed) that were mostly associated with our mattress fabric segment, ~~$1.3~~returned $4.6 million to our shareholders in the form of regularly quarterly and special dividend payments, $1.5 million in long-term investment purchases associated with our Rabbi Trust that funds our deferred compensation plan, and $1.1 million in employee withholding tax payments associated with the vesting of certain stock-based compensation awards. These payments were partially offset by ~~$5.0 million in borrowings on our U.S. line of credit noted above and $2.4~~$10.2 million from net cash provided by operating activities.
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Our net cash provided by operating activities of ~~$2.4~~$10.2 million during the first ~~quarter~~half of fiscal 2018 decreased from ~~$6.2~~$17.0 million during the same period a year ago. The decrease was primarily ~~associated with~~due to lower net income and increased working capital requirements associated with ~~inventory purchases. Both business segments have implemented plans to reduce inventory~~the increase in net sales and supply chain disruptions experienced by our operations located in China during the second quarter of fiscal 2018.
See the Liquidity section below for further details.

Dividend and Common Stock Repurchase Programs

On ~~August~~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 ~~October~~January 16, ~~2017,~~2018, to shareholders of record as of ~~October~~January 2, ~~2017.~~2018.

During the first ~~quarter~~half of fiscal 2018, dividend payments totaled ~~$3.6~~$4.6 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and ~~$1.0~~$2.0 million represented a quarterly dividend ~~payment~~payments of $0.08 per share. During the first ~~quarter~~half of fiscal 2017, dividend payments totaled ~~$3.4~~$4.3 million, of which $2.5 million represented a special cash dividend payment of $0.21 per share, and ~~$861,000~~$1.8 million represented a quarterly dividend ~~payment~~payments of $0.07 per share.
During the first ~~quarters~~half of fiscal 2018 and 2017, we did not purchase any shares of our common stock. At ~~July 30,~~October 29, 2017, we had $5.0 million available for repurchases of our common stock.

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Segment Analysis

Mattress Fabrics Segment

Three Months Ended Three Months Ended
(dollars in thousands) July 30, 2017 July 31, 2016 Change October 29, 2017 October 30, 2016 Change

Net sales $ 48,429 $ 50,530 (4.2 )% $ 48,601 $ 45,527 6.8 %
Gross profit 9,760 11,901 (18.0 )% 9,730 10,756 (9.5 )%
Gross profit margin 20.2 % 23.6 % (340 )bp 20.0 % 23.6 % (360 )bp
SG&A expenses 3,391 3,499 (3.1 )% 3,168 3,296 (3.9 )%
Income from operations 6,368 8,402 (24.2 )% 6,562 7,460 (12.0 )%
Operating margin 13.1 % 16.6 % (350 )bp 13.5 % 16.4 % (290 )bp

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

Net sales $ 97,030 $ 96,057 1.0 %
Gross profit 19,495 22,657 (14.0 )%
Gross profit margin 20.1 % 23.6 % (350 )bp
SG&A expenses 6,559 6,795 (3.5 )%
Income from operations 12,936 15,862 (18.4 )%
Operating margin 13.3 % 16.5 % (320 )bp

Net Sales

Overall

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

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~~Net Sales~~Mattress Cover Business

~~The decrease in~~Our net sales for ~~our mattress fabrics segment reflects ongoing uncertainties and weakness in~~ the ~~mattress industry compared with market conditions a year ago. However, our net sales~~first half of fiscal 2018 reflected continued growth in our mattress cover business known as CLASS. The growth in CLASS has allowed us to expand our business with both traditional customers and reach new ~~market segments,~~customer markets, especially the fast growing ~~internet~~boxed bedding space.

~~Industry disruptions and demand trends have caused some short-term uncertainty~~Our recent 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 reductions~~facility located in ~~orders from them, but at the same time, we have indications from other large customers that our levels of business with them are~~Haiti is expected to ~~increase. The structure of~~further strengthen our ~~supply arrangements and contracts with major customers is such that it is difficult~~ability to make predictions with certainty, and this is further complicated by the just in time (JIT) order and delivery model used in the bedding industry. At this time, it is uncertain what the impact will be ongrow our ~~mattress fabrics~~CLASS business. While industry disruptions and demand issues may affect short-term sales trends, we believe challenges with certain customers will be at least partially offset by increased sales and opportunities with other.

~~During the second quarter of fiscal 2018, we currently expect the continuing uncertainty in the mattress industry to affect short-term demand trends and our operating performance.~~

~~Gross Profit and Operating Income~~

In addition to the decrease in our net sales noted above, our profitability was also affected by cost pressures associated with the significant manufacturing inefficiencies resulting from the consolidation of our mattress production facilities. During the first quarter of fiscal 2018, we completed the move of the majority of our knitting equipment to a new location in North Carolina. Simultaneously, we relocated our mattress cover operation to a new facility during the last month of the quarter. Both of theseProduction activities created more disruption to our production process than we had anticipated, especially in light of the current weakness in the mattress industry. In addition, we incurred non-recurring charges during the first quarter approximating $610,000, of which $375,000 pertained to plant consolidation moving expenses and $235,000 was associated with a workers’ compensation claim.

During the second quarter of fiscal 2018, we currently expect some continuing impact on operating efficiencies related to the equipment relocations and production changes that occurred at the end of the first quarter.

~~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 in northeastern Haiti, which borders the Dominican Republic. CLIH is currently expected to commence productioncommenced during the second quarter of fiscal 2018, ~~(October 2017)~~ and ~~to complement~~we will gradually add capacity in line with expected demand. This operation will provide additional capacity and complements our existing U.S. mattress fabric operations with a mirrored platform that will enhance our ability to meet customer demand ~~while adding a lower cost operation to our platform.~~
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~~Refer~~and remain cost-competitive (Refer to Note 16 located in the notes to the consolidated financial statements for further details regarding the investment in our unconsolidated joint ~~venture.~~

~~Proposed Acquisition~~venture).

We also have ~~executed a non-binding letter of intent~~the ability to ~~acquire a mattress fabrics business located in China. The business has annual revenues of $12 million~~utilize our fabric and pre-tax income of approximately $2.5 million. We currently expect to fund the acquisition with cash and investments on hand without incurring any additional debt, with closing expected to occur within 90 days.

This proposed acquisition is expected to establish a mattress fabrics business in Asia, with potential sales expansion to non-North American markets. It would also serve as a low-cost source for mattress fabrics being sold to North American bedding customers. Additionally, we believe this new platform provides opportunities for operating synergies with our current upholstery fabrics facilities located at Culp China, including a substantial cut and sew ~~operation that can serve~~platform located in China to expand our business to new markets. We believe with the transformation of our North American operations (see discussion below in the Gross Profit and Operating Income section) and our global production facilities for both ~~traditional bedding customers~~fabric and sewn covers, we are positioned to meet demand in all segments of the ~~growing internet bedding market.~~mattress fabric marketplace.

~~The current letter~~Gross Profit and Operating Income

Although our net sales were higher in the second quarter and first half of ~~intent is non-binding~~fiscal 2018, we experienced a decrease in the profitability in our 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 ~~remains subject to completion~~Canada. All of ~~due diligence, negotiation of a definitive purchase agreement,~~our knitting and other ~~approvals, without which~~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 ~~acquisition will not occur.~~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.

In addition, our profitability for the second quarter of fiscal 2018 was affected by higher selling expenses associated with the new product roll-outs.

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) July 30, 2017 July 31, 2016 April 30, 2017
Accounts receivable and inventory $ 46,750 $ 39,800 $ 47,038
Property, plant & equipment 50,270 39,435 48,916
Goodwill
Investment in unconsolidated joint venture

11,462
1,477

11,462
-

11,462
1,106

Non-compete agreement 809 885 828
Customer relationships 651 702 664

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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 ~~July 30,~~October 29, 2017, accounts receivable and inventory increased ~~$7.0~~$4.7 million, or ~~17%~~12%, compared with ~~July 31,~~October 30, 2016. This increase is ~~mostly~~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 $4.3 million or 9% compared with April 30, 2017. This decrease is primarily due to a ~~temporary increase~~decrease in ~~this segment’s~~ inventory as a result of ~~having more~~improved inventory ~~on hand to meet estimated demand trends that have been more difficult to predict due to the current uncertainty~~management and ~~weakness~~a decrease in accounts receivable as this business segment experienced lower sales volume in the ~~mattress industry.~~

Aslast month of ~~July 31, 2017, accounts receivable and inventory were relatively flat~~the second quarter of fiscal 2018 compared with ~~April 30,~~the last month of the fourth quarter of fiscal 2017.

Property, Plant & Equipment

The ~~$50.3~~$50.0 million at ~~July 30,~~October 29, 2017, represents property, plant and equipment of $35.8 million and ~~$14.5~~$14.2 million located in the U.S. and Canada, respectively. The ~~$39.4~~$43.2 million at ~~July 31,~~October 30, 2016, represents property, plant, and equipment of ~~$25.5~~$28.5 million and ~~$13.9~~$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.

As of ~~July 30,~~October 29, 2017, property, plant, and equipment increased ~~$10.8~~$6.7 million, or ~~28%~~16%, compared with ~~July 31,~~October 30, 2016. This increase is due to capital expenditures that primarily relate to the construction of a new building (see Note 15 to the consolidated financial statements for further details) and purchases and installation of machinery and equipment.

As of ~~July 30,~~October 29, 2017, property, plant, and equipment increased ~~$1.4~~$1.0 million, or 3%2%, compared with April 30, 2017. This increase is due to capital expenditures of ~~$3.0~~$4.3 million that primarily relate to purchases and installation of machinery and equipment, partially offset by depreciation expense of ~~$1.6~~$3.3 million.

Investment in Unconsolidated Joint Venture

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

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Non-Compete Agreement and Customer Relationships

The decreases in carrying values of our non-compete agreement and customer relationships at ~~July 30,~~October 29, 2017, compared with ~~July 31,~~October 30, 2016, and April 30, 2017, are primarily due to amortization expense.
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Upholstery Fabrics Segment

Net Sales

Three Months Ended Three Months Ended

(dollars in thousands)

July 30,
2017

July 31,
2016

% Change

October 29,
2017

October 30,
2016

% Change

Non U.S. Produced $ 29,386 95 % $ 27,845 92 % 5.5 % $ 30,138 94 % $ 27,738 93 % 8.7 %
U.S. Produced 1,718 5 % 2,307 8 % (25.5 )% 1,959 6 % 2,078 7 % (5.7 )%
Total $ 31,104 100 % $ 30,152 100 % 3.2 % $ 32,097 100 % $ 29,816 100 % 7.7 %

Six Months Ended

(dollars in thousands)

October 29,
2017

October 30,
2016

% Change

Non U.S. Produced $ 59,522 94 % $ 55,583 93 % 7.1 %
U.S. Produced 3,678 6 % 4,386 7 % (16.1 )%
Total $ 63,200 100 % $ 59,969 100 % 5.4 %

Our increase in net sales in the second quarter and the first ~~quarter~~half of fiscal 2018 compared to the same ~~period~~periods a year ago ~~reflects our ability to execute~~reflect our product-driven strategy and ~~diversify~~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 ~~customer base, in spite of a continued weak retail environment for home furnishings. We have seen positive demand trends for our latest performance~~popular “performance” line of highly durable ~~and~~ stain-resistant ~~fabrics.~~fabric. We have recently launched a new website specifically to promote this innovative product line along with a more aggressive marketing campaign. Also, we achieved ~~meaningful~~continued sales growth in fabrics designed for the hospitality ~~market, which accounted for a higher percentage of total upholstery fabric sales this quarter. Additionally,~~market. In addition, we are currently exploring potential acquisitions in the hospitality market that will complement our upholstery fabrics business, which is principally in the residential market.

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

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

Three Months Ended Three Months Ended
(dollars in thousands) July 30, 2017 July 31, 2016 Change October 29, 2017 October 30, 2016 Change

Gross profit $ 6,705 $ 6,518 2.9 % $ 6,074 $ 6,145 (1.2 )%
Gross profit margin 21.6 % 21.6 % - 18.9 % 20.6 % (170 )bp
SG&A expenses 3,811 3,534 7.8 % 3,700 3,652 1.3 %
Income from operations 2,895 2,984 (3.0 )% 2,374 2,493 (4.8 )%
Operating margin 9.3 % 9.9 % (60 )bp 7.4 % 8.4 % (100 )bp

~~Our profitability for~~
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
Although our net sales were higher in the second quarter and first ~~quarter~~half of fiscal 2018, ~~reflects~~we experienced a decrease in the ~~increase~~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 ~~net sales noted above, offset~~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. To a limited extent, our profitability was also affected by higher operating expenses due to less favorable foreign currency exchange rates associated with our operations located in China.
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Segment Assets

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

(dollars in thousands) July 30, 2017 July 31, 2016 April 30, 2017 October 29, 2017 October 30, 2016 April 30, 2017
Accounts receivable and inventory $ 30,617 $ 31,021 $ 29,021 $ 31,701 $ 26,931 $ 29,021
Property, plant & equipment
1,857

1,459

1,879
2,063 1,480 1,879

Accounts Receivable & Inventory

As of ~~July 30, 2017, accounts receivable and inventory were relatively flat compared with July 31, 2016.~~

~~As of July 30,~~October 29, 2017, accounts receivable and inventory increased 5%$4.8 million, or 18%, 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. In addition, inventory also increased due to the supply chain disruptions associated with our operations located in China noted above.

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As of October 29, 2017, accounts receivable and inventory increased $2.7 million, or 9%, compared with April 30, 2017. This increase is primarily due to ~~an increase~~the increased sales volume experienced in ~~this segment’s inventory balance due~~the second quarter of fiscal 2018 compared to the ~~increase in net sales noted above.~~fourth quarter of fiscal 2017.

Property, Plant & Equipment

The ~~$1.9~~$2.1 million at ~~July 30,~~October 29, 2017, represents property, plant, and equipment of ~~$1.2~~$1.4 million and ~~$684,000~~$722,000 located in the U.S. and China, respectively. The $1.5 million at ~~July 31,~~October 30, 2016, represents property, plant, and equipment of ~~$847,000~~$890,000 and ~~$612,000~~$590,000 located in the U.S. and China, respectively. The $1.9 million at April 30, 2017, represents property, plant, and equipment of $1.2 million and $655,000 located in the U.S. and China, respectively.

Other Income Statement Categories

Three Months Ended Three Months Ended
(dollars in thousands) July 30, 2017 July 31, 2016 % Change October 29, 2017 October 30, 2016 % Change
SG&A expenses $ 9,501 $ 9,746 (2.5 )% $ 9,415 $ 9,602 (1.9 )%
Interest expense - - - 37 - 100.0 %
Interest income 131 25 424.0 % 128 15 753.3 %
Other expense 353 152 132.2 % 321 155 107.1 %

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

Selling, General and Administrative Expenses

The decrease in SG&A expenses during the second quarter and first ~~quarter~~half of fiscal 2018 compared with the same ~~period~~periods a year ago ~~is due primarily to~~included lower incentive compensation expense reflecting weaker financial results in relation to pre-established financial ~~targets. The lower incentive compensation expense was partially~~targets, offset by ~~non-recurring charges associated with~~ the ~~consolidation of our mattress production facilities noted above.~~following items that increased SG&A 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 ~~$64,000 and $9,000 for~~$73,000 during the ~~first~~second quarter of fiscal 2018 compared with $36,000 for the same period a year ago. Interest costs charged to operations were $137,000 for the first half of fiscal 2018 compared with $45,000 for the first half of fiscal 2017. These interest costs for fiscal 2018 and 2017 ~~respectively.~~ pertain to borrowings on our U.S. revolving line of credit and in connection with the construction of a new building associated with our mattress fabrics segment (Refer to Note 15 located in the notes to the consolidated financial statements for further details).

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

Interest Income

Interest income increased in the second quarter and first ~~quarter~~half of fiscal 2018 compared with the same ~~period~~periods a year ago. The increase in interest income was 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 ~~ranging~~ranged from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. ~~These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity.~~

Other Expense

~~The~~Other expense increased for the second quarter and first half of fiscal 2018 compared with the same periods a year ago. This increase ~~in other expense~~ was ~~primarily~~mostly due to less favorable foreign currency exchange rates associated with our operations located in China during the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017. We recorded a foreign currency exchange loss of $159,000 during the first quarter of fiscal 2018 compared to a foreign currency exchange gain of $23,000 during the first quarter of fiscal 2017 regarding our operations located in China.

~~Income Taxes~~

Effective Income Tax Rate

We recorded income tax expense of ~~$1.6~~$3.7 million, or ~~24.3%~~29.1% of income before income taxes, for the ~~three~~six month period ended ~~July 30,~~October 29, 2017, compared to income tax expense of ~~$3.2~~$5.9 million, or ~~37.8%~~37.7% of income before income taxes, for the ~~three~~six month period ended ~~July 31,~~October 30, 2016. Our effective income tax rates for the ~~three~~six month periods ended ~~July 30,~~October 29, 2017, and ~~July 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 ~~contributed~~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 (8.2 ) -
Undistributed earnings from foreign subsidiaries (1.5 ) -
Tax effects of Chinese foreign exchange (losses)gains (0.9 ) 1.1
Change in valuation allowance 1.4 0.3
U.S. state income tax expense 0.4 1.4
Other (0.9 ) 1.0
24.3 % 37.8 %

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.

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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and 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 ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and April 30, 2017, respectively.
~~I-37~~

Uncertainty In Income Taxes

Our gross unrecognized income tax benefit of ~~$12.4~~$12.6 million at ~~July 30,~~October 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 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.

~~Currently, the~~
I-39
The Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal years 2014 through ~~2016,~~2016. As a result of this examination, the IRS proposed an adjustment approximating $12.5 million of income taxes that relates to our transfer pricing with certain foreign subsidiaries. Management does not agree with the IRS' proposed adjustment and ~~no adjustments have been~~intends to vigorously defend its position. Currently, the ultimate outcome of this proposed ~~at this time.~~adjustment and any potential cash settlement cannot be determined as it is dependent upon potential legal and competent authority proceedings, interpretation of income tax law, and utilization of available loss carryforwards and certain income tax credits associated with the fiscal years under exam. We ~~currently~~believe our unrecognized income tax benefit balance of $12.6 million has adequately provided for our uncertain income tax positions for all open income tax years and jurisdictions. Currently, we expect this examination to be completed 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.

Income Taxes Paid

We reported income tax expense of ~~$1.6~~$3.7 million and ~~$3.2~~$5.9 million for the first ~~quarters~~half of fiscal 2018 and 2017, respectively. Currently, our income tax payments in the United States are not expected to be significant in fiscal 2018 as we have approximately $9.0 million in operating loss carryforwards and certain income tax credits available as of April 30, ~~2017, which~~2017. Our operating loss carryforwards are ~~currently~~ expected to be fully utilized ~~in approximately one year.~~during fiscal 2018. However, we did have income tax payments totaling ~~$536,000~~$2.6 million and ~~$2.3~~$3.2 million during the first ~~quarters~~half of fiscal 2018 and 2017, respectively. These income tax payments are associated with our subsidiaries located in China and Canada.

Liquidity and Capital Resources

Liquidity

Overall

Currently, our sources of liquidity include cash and cash equivalents, short-term investments (available for sale), cash flow from operations, and amounts available under our revolving credit lines. These sources have been adequate for day-to-day operations, capital expenditures, debt payments, common stock repurchases, and dividend payments. We believe our present cash and cash equivalents and short-term investment balance (available for sale) of ~~$20.8~~$18.2 million at ~~July 30,~~October 29, 2017, cash flow from operations, and the current availability ($~~30.9~~36.0 million as of ~~July 30,~~October 29, 2017) under our revolving credit lines will be sufficient to fund our foreseeable business needs, contractual obligations, and potential acquisitions.

~~I-38~~I-40

At ~~July 30,~~October 29, 2017, our cash and investments (which comprise ofcash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity)), totaled ~~$51.7~~$49.1 million compared with $54.2 million at April 30, 2017. Additionally, ~~we borrowed $5.0 million on~~there were no borrowings outstanding under our ~~U.S. line~~revolving credit agreements as of ~~credit to support~~October 29, 2017, and April 30, 2017, respectively. At the end of our ~~short-term cash needs that historically occur during the first quarter.~~

~~During the~~ first quarter of fiscal 2018, we had ~~dividend payments totaling $3.6~~an outstanding balance of $5.0 million on our U.S. revolving line of credit. This outstanding balance and additional borrowings of $5.0 million that were made during the second quarter of fiscal 2018 have been repaid.

During the first half of fiscal 2018, we had capital expenditures of ~~$3.5~~$7.5 million (of which ~~$1.3~~$2.5 million was vendor-financed) that were mostly associated with our mattress ~~fabrics~~fabric segment, ~~$1.3~~returned $4.6 million to our shareholders in the form of regularly quarterly and special dividend payments, $1.5 million in long-term investment purchases associated with our Rabbi Trust that funds our deferred compensation plan, and $1.1 million in employee withholding tax payments associated with the vesting of certain stock-based compensation awards. These payments were partially offset by ~~$5.0 million in borrowings on our U.S. line of credit noted above and $2.4~~$10.2 million from net cash provided by operating activities.

Our net cash provided by operating activities of ~~$2.4~~$10.2 million during the first ~~quarter~~half of fiscal 2018 decreased from ~~$6.2~~$17.0 million during the same period a year ago. The decrease was ~~associated with~~primarily due to lower net income and increased working capital requirements associated with ~~inventory purchases. Both business segments have implemented plans to reduce inventory~~the increase in net sales and supply chain disruptions experienced by our operations located in China during the second quarter of fiscal 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.

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.
I-41

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

October 29, October 30, April 30,

(dollars in thousands)

July 30,
2017

July 31,
2016

April 30,
2017
2017 2016 2017
Cayman Islands $ 37,460 $ 36,101 $ 34,965 $ 39,004 $ 36,100 $ 34,965
China 8,301 5,720 12,722 6,153 6,766 12,722
Canada 2,818 4,296 4,268 3,275 4,513 4,268
United States 3,119 1,866 2,228 653 11 2,228

$ 51,698 $ 47,983 $ 54,183 $ 49,085 $ 47,390 $ 54,183

~~I-39~~
Currently, we are holding a significant amount of our cash and investments with our international holding company located in the Cayman Islands. ~~These~~Our cash and investments located in this jurisdiction stemmed from accumulated earnings and profits ~~totaling $39.7~~(totaling $50.4 million as of October 29, 2017) that were distributed from our subsidiaries located in ~~China through the first quarter of fiscal 2018.~~China. Our cash and investments held in the Cayman Islands are currently expected to be used for the following business purposes:

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

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

· Fund ~~our~~any proposed ~~acquisition of a mattress fabrics business located in China.~~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 ~~currently~~ expect to occur in ~~approximately one year)~~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 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.

Dividend Program

On ~~June 13,~~November 30, 2017, we announced that our board of directors approved ~~the payment of~~ a ~~special cash dividend of $0.21 per share and a regular~~12.5% increase in our quarterly cash dividend ~~payment of~~from $0.08 per share to $0.09 per share. ~~These dividends were paid~~This payment will be made on ~~July 17, 2017,~~January 16, 2018, to shareholders of record as of ~~July 3, 2017.~~ January 2, 2018.

During the first ~~quarter~~half of fiscal 2018, dividend payments totaled ~~$3.6~~$4.6 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and ~~$1.0~~$2.0 million represented a quarterly dividend ~~payment~~payments of $0.08 per share.

I-42
During the first ~~quarter~~half of fiscal 2017, dividend payments totaled ~~$3.4~~$4.3 million, of which $2.5 million represented a special cash dividend payment of $0.21 per share, and ~~$861,000~~$1.8 million represented a quarterly dividend ~~payment~~payments of $0.07 per share.

On August 30, 2017, we announced that our board of directors approved a quarterly cash dividend of $0.08 per share. This payment will be made on October 16, 2017, to shareholders of record as of October 2, 2017.

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 ~~three~~six months ended ~~July 30,~~October 29, 2017, and ~~July 31,~~October 30, 2016, we did not purchase any shares of our common stock.
~~I-40~~
At ~~July 30,~~October 29, 2017, we had $5.0 million available for repurchases of our common stock.
~~I-41~~

Working Capital

Accounts receivable at ~~July 30,~~October 29, 2017, were ~~$22.1~~$24.2 million, an increase of $5.2 million, or 27%, compared with ~~$22.7~~$19.0 million at ~~July 31,~~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. Days’ sales outstanding were 2527 days for the ~~first~~second quarter of fiscal 2018 compared with 2623 days for the ~~first~~second quarter of fiscal 2017.

Inventories as of ~~July 30,~~October 29, 2017, were ~~$55.2~~$50.2 million, an increase of ~~$7.1~~$4.2 million, or ~~15%~~9%, compared with ~~$48.1~~$46.0 million at ~~July 31,~~October 30, 2016. This increase is ~~mostly due to a temporary increase in the mattress fabrics segment’s inventory, as a result of having more inventory on hand to meet estimated demand trends that have been more difficult to predict~~primarily due to the ~~current uncertainty and weakness~~increased sales volume experienced in the ~~mattress industry. Inventory turns were 4.7 for the first~~second quarter of fiscal 2018 compared to the same period a year ago. In addition, inventory also increased due to supply chain disruptions associated with ~~5.3~~our operations located in China. Inventory turns were 5.2 for the ~~first~~second quarter of fiscal ~~2017.~~2018 and 2017, respectively.

Accounts payable-trade as of ~~July 30,~~October 29, 2017, were ~~$29.1~~$24.6 million, an increase of ~~$2.4~~$4.4 million, or 9%22%, compared with ~~$26.7~~$20.2 million at ~~July 31,~~October 30, 2016. This increase is due to the increased inventory purchases noted above.

Operating working capital (accounts receivable and inventories, less accounts payable-trade and accounts payable-capital expenditures) was ~~$42.6~~$46.6 million at ~~July 30,~~October 29, 2017, compared with ~~$43.5~~$41.8 million at ~~July 31,~~October 30, 2016. Operating working capital turnover was 7.4 during the ~~first~~second quarter of fiscal 2018 compared with 7.0 during the ~~first~~second quarter of fiscal 2017.

I-43
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-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 ~~July 30,~~October 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 ~~$3.5~~$7.5 million (of which ~~$1.3~~$2.5 million was ~~vendor-financed)~~vendor- financed) for the first ~~quarter~~half of fiscal 2018 compared with ~~$3.1~~$6.3 million for the same period a year ago. Capital expenditures for the first ~~quarters~~half of fiscal 2018 and 2017 mostly related to our mattress fabrics segment.

Depreciation expense was ~~$1.8~~$3.7 million for the first ~~quarters~~half of fiscal 2018 ~~and~~compared with $3.5 million for the first half of fiscal 2017 and mostly related to the mattress fabrics segment.
~~I-42~~

For fiscal 2018, we are projecting capital expenditures (including those that are vendor-financed) to be comparable to fiscal 2017. Depreciation expense for the company as a whole is projected to be approximately $8.0 million in fiscal 2018. The estimated capital expenditures and depreciation expense mostly relate to the mattress fabrics segment. These are management’s current expectations only, and changes in our business could cause changes in plans for capital expenditures and expectations related to depreciation expense.

Accounts Payable – Capital Expenditures

At ~~July 30,~~October 29, 2017, we had total amounts due regarding capital expenditures totaling ~~$5.6~~$3.2 million, of which ~~$3.9~~$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 ~~$3.9~~$2.7 million at ~~July 30,~~October 29, 2017, ~~$2.5~~$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).

Purchase Commitments – Capital Expenditures

At ~~July 30,~~October 29, 2017 we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling ~~$6.4~~$3.8 million. The ~~$6.4~~$3.8 million includes ~~$3.9~~$2.7 million (all of which represents completed work) associated with the construction of the new building noted below.

I-44
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.

Critical Accounting Policies and Recent Accounting Developments

At ~~July 30,~~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 ended 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 April 30, 2017.
~~I-43~~

Contractual Obligations
As of ~~July 30,~~October 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 April 30, 2017.

Inflation

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

~~I-44~~I-45

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

At ~~July 30,~~October 29, 2017, our U.S. revolving credit agreement requires interest to be charged at a rate (applicable interest rate of ~~2.68%~~2.69% at ~~July 30,~~October 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 ~~July 30,~~October 29, 2017, ~~our U.S. revolving credit line had outstanding borrowings of $5.0 million. There~~there were no borrowings outstanding under any of our revolving credit ~~line associated with our China operations at July 30, 2017.~~
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 ~~July 30,~~October 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 ~~July 30,~~October 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 ~~July 30,~~October 29, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~I-45~~I-46

Part II – Other Information

Item 1. Legal Proceedings

There have not been any material changes to our legal proceedings during the ~~three~~six months ended ~~July 30,~~October 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 14, 2017 for the fiscal year ended April 30, 2017.

Item 1A. Risk Factors

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

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

ISSUER PURCHASES OF EQUITY SECURITIES

Period
(a)
Total
Number
~~Total~~
~~Number~~ of
Shares
Purchased
(b)
Average
~~Average~~
Price Paid
per Share
(c)
Total Number of
Shares
Purchased
as Part of
Publicly
Announced Plans
or Programs
(d)
Approximate
Dollar Value
of
Shares that May
Yet Be
Purchased
Under the Plans
or
Programs (1)
~~May 1,~~July 31, 2017 to
~~June 4,~~ September 3, 2017
- - -
$5,000,000
~~June 5,~~September 4, 2017 to
~~July 2,~~ October 1, 2017
- - -
$5,000,000
~~July 3,~~October 2, 2017 to
~~July 30,~~ October 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.~~
~~10.1~~The following exhibits are submitted as part of this report.
~~Form of restricted stock unit agreement for restricted stock units granted to executive officers pursuant to the 2015 Equity Incentive Plan.~~
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
~~31.2~~
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
~~32.1~~
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
~~32.2~~
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document

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: ~~September~~December 8, 2017 By: /s/ Kenneth R. Bowling

Kenneth R. Bowling
Senior Vice President and Chief Financial Officer
(Authorized to sign on behalf of the registrant
and also signing as principal financial officer)

By: /s/ Thomas B. Gallagher, Jr.
Thomas B. Gallagher, Jr.
Corporate Controller
(Authorized to sign on behalf of the registrant
and also signing as principal accounting officer)

II-3

EXHIBIT INDEX

~~EXHIBIT INDEX~~
Exhibit Number
Exhibit
~~10.1~~
~~Form of restricted stock unit agreement for restricted stock units granted to the executive officers pursuant to the 2015 Equity Incentive Plan.~~31.1
~~31.1~~
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

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

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

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

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

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

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

		Page

Part I - Financial Statements

Item 1. Financial Statements: (Unaudited)

	Consolidated Statements of Net Income — Three and Six Months Ended ~~July~~October 29, 2017 and October 30, ~~2017~~
~~and July 31,~~ 2016	I-1

	Consolidated Statements of Comprehensive Income – Three and Six Months Ended
~~July 30,~~ October 29, 2017 and ~~July 31,~~October 30, 2016	I-2

	Consolidated Balance Sheets — ~~July~~October 29, 2017, October 30, ~~2017, July 31,~~ 2016, and
April 30, 2017	I-3

	Consolidated Statements of Cash Flows — ~~Three~~Six Months Ended ~~July~~October 29, 2017 and October 30, ~~2017~~
~~and July 31,~~ 2016	I-4

	Consolidated Statements of Shareholders’ Equity	I-5

	Notes to Consolidated Financial Statements	I-6

	Cautionary Statement Concerning Forward-Looking Information	~~I-27~~I-28

Item 2. Management's Discussion and Analysis of Financial Condition and Results ~~ofOperations~~of Operations		~~I-28~~I-29

Item 3. Quantitative and Qualitative Disclosures About Market Risk		~~I-45~~I-46

Item 4. Controls and Procedures		~~I-45~~I-46

Part II - Other Information

~~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