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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 1O-K

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

For the fiscal year ended April 30, 2017

Commission File No. 1-12597

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

NORTH CAROLINA
(State or other jurisdiction of
incorporation or other organization)
56-1001967
(I.R.S. Employer Identification No.)
   
1823 Eastchester Drive, High Point, North Carolina
(Address of principal executive offices)
 
27265
(zip code)
 
(336) 889-5161
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Each Exchange
On Which Registered
   
Common Stock, par value $.05/ Share
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:   None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐     NO ☒
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. YES ☐     NO ☒
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days. YES ☒     NO ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒      NO ☐
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer ☐  Accelerated Filer ☒  Non-Accelerated Filer ☐ 
Smaller Reporting Company☐  Emerging Growth Company ☐   
                                                                                            
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES ☐     NO ☒
 
As of April 30, 2017, 12,356,631 shares of common stock were outstanding. As of October 30, 2016, the aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $304,910,582 based on the closing sales price of such stock as quoted on the New York Stock Exchange (NYSE), assuming, for purposes of this report, that all executive officers and directors of the registrant are affiliates.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s Proxy Statement to be filed pursuant to Regulation 14A of the Securities and Exchange Commission in connection with its Annual Meeting of Shareholders to be held on September 20, 2017 are incorporated by reference into Part III of this Form 10-K.
 

CULP, INC.
FORM 10-K REPORT
TABLE OF CONTENTS
 
Item No.     Page
    PART 1  
1.    Business  
   
2
   
3
   
4
   
5
   
6
   
6
   
6
   
8
   
9
   
10
   
10
   
11
   
11
   
11
   
12
   
13
   
13
   
14
 1A.
 
15
 1B.
 
18
 2.
 
19
 3.
 
20
 4.
 
20
       
 
PART II
 
 5.
 
20
 6.
 
23
 7.
 
24
 7A.
 
46
 8.
 
47
 9.
 
81
 9A.
 
81
 9B.
 
83
 

 
Item No.
 
 Page
       
 
  PART III  
10.
 
83
11.
 
83
12.
 
83
13.
 
84
14.
 
84
       
 
  PART IV  
15.
 
85
   
85
   
87
   
87
   
88
   
89
       
 
 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
 
Parts I and II of this report 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 27A 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,” 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 measures, as well as any statements regarding future economic or industry trends or future developments. Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in the value of the U.S. dollar versus other currencies could 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 in the U.S. 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. 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 the “Risk Factors” section of this report in Item 1A. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.

 
PART 1
 
ITEM 1. BUSINESS

 
Overview
 
Culp, Inc. manufacturers, sources, and markets mattress fabrics and sewn covers used for covering mattresses and foundations and other bedding products; and upholstery fabrics, including cut and sewn kits, primarily used in production of upholstered furniture. The company competes in a fashion-driven business, and we strive to differentiate ourselves by placing sustained focus on product innovation and creativity. In addition, Culp places great emphasis on providing creative designs, along with excellent and dependable service to our customers. Our focused efforts to protect our financial strength have allowed us to maintain our position as a financially stable and trusted supplier of innovative fabrics to bedding and furniture manufacturers.

We believe Culp is the largest producer of mattress fabrics in North America and one of the largest marketers of upholstery fabrics for furniture in North America, measured by total sales. We have two operating segments — mattress fabrics and upholstery fabrics. The mattress fabrics business markets primarily knitted and woven fabrics, and sewn covers made from those fabrics, which are used in the production of bedding products, including mattresses, foundations, and mattress sets. The upholstery fabrics business markets a variety of fabric products that are used principally in the production of residential and commercial upholstered furniture, including sofas, recliners, chairs, loveseats, sectionals, sofa-beds and office seating.
 
Culp markets a variety of fabrics in different categories to a global customer base, including fabrics produced at our manufacturing facilities and fabrics produced by other suppliers. We had fifteen active production facilities as of the end of fiscal 2017, located in North and South Carolina; Quebec, Canada; and Shanghai, China. We also source fabrics from other manufacturers, located primarily in China and Turkey, with almost all of those fabrics produced specifically for Culp and created by Culp designers. We operate distribution centers in North Carolina and Shanghai, China, plus a new distribution facility in Canada, to facilitate distribution of our products. Over the past decade, the portion of total company sales represented by fabrics produced outside of the U.S. and Canada has increased, while sales of goods produced in the U.S. have decreased. This trend is due primarily to the upholstery fabrics segment, where 92% of our sales in fiscal 2017 consist of fabrics produced in Asia, while the mattress fabrics business remains mostly based in North America.
 
Total net sales in fiscal 2017 were $309.5 million. The mattress fabrics segment had net sales of $190.8 million (62% of total net sales), while the upholstery fabrics segment had net sales of $118.7 million (38% of total net sales).
 
During fiscal 2017, both segments continued to build upon strategic initiatives and structural changes that were implemented  over the  last several  years. A number  of steps were  taken to  consolidate and streamline operations, while adding capacity where necessary. The flexible manufacturing and sourcing platform created through these changes has allowed Culp to place a greater emphasis on product innovation and introduction of new designs to keep current with industry trends and differentiate our products, and at the same time allows the company to focus its efforts on shifting demand trends. Although we did not experience continued sales growth in fiscal 2017, the company was still able to set another record for income before income taxes.
2

Industry demand in our principal markets has been somewhat challenged during the past two years, with more difficult conditions in upholstered furniture than in the bedding industry. During this period, we have worked to maintain sales levels in both of our business segments in the face of weaker demand. At the same time, we have balanced our drive for higher sales against a desire to avoid sacrificing profits at the expense of higher revenue. We have continued to experience positive responses from customers to our innovative designs and new products introduced during these years, and our profits have responded accordingly. Sales and operating income in mattress fabrics increased 2% and 11%, respectively, during fiscal 2017. Net sales for upholstery fabrics were 6% lower in fiscal 2017, but operating income in that segment declined by only 2%, due primarily to a more profitable mix of products sold and the positive impact of foreign currency exchange rate changes. An increasing percentage of our sales are now based on new product introductions. For the company as a whole, while net sales declined by 1% for fiscal 2017, pre- tax income was $29.7 million, the highest level in company history, exceeding the record level of the previous year.
 
The mattress fabrics segment has continued to make strategic investments in capital projects and expansion initiatives. Investments have been targeted at expanded capacity, continuing improvements in service capabilities, maintaining a flexible approach to fabric sourcing, and dealing with challenging industry conditions. These expenditures included expansion projects to provide increased manufacturing capacity and more efficient equipment for this segment, following several successful acquisitions. The mattress fabrics segment significantly enhanced its distribution capabilities in both the U.S. and Canada during fiscal 2017. This segment has also furthered its design capabilities with additional personnel, product software, and a new system for cataloguing designs to enhance innovation.
 
The upholstery fabrics segment operates on a flexible variable cost model, with most of its fabrics now sourced in Asia. This division has focused its efforts in recent years on innovation in its products and exploration of new markets. An emphasis on product innovation has caused an increase in profit margins as compared to recent years when the company had somewhat higher overall upholstery sales, and new products continue to be introduced. In fiscal 2017, the company developed and began to market new lines of performance fabrics, which have become a growth category for the upholstery division. In addition, the upholstery segment continues to seek new market opportunities, with a recent example being emphasis on sales to the hospitality market, mostly to hotels and motels.
 
Additional information about trends and developments in each of our business segments is provided in the “Segments” discussion below.
 
General Information
 
Culp, Inc. was organized as a North Carolina corporation in 1972 and made its initial public offering in 1983. Since 1997, our stock has been listed on the New York Stock Exchange and traded under the symbol “CFI” until July 13, 2017, at which time the Company’s ticker symbol changed to “CULP.” Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30. Our executive offices are located in High Point, North Carolina. References in this document to “Culp,” the “company,” “we,” “our,” and “us” refer to Culp, Inc. and its consolidated subsidiaries.
 
Culp maintains an Internet website at www.culp.com. We will make this annual report and our other annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports available free of charge on our Internet site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Information included on our website is not incorporated by reference into this annual report.
3

Segments
 
Our two operating segments are mattress fabrics and upholstery fabrics. The following table sets forth certain information for each of our segments.

    Sales by Fiscal Year ($ in Millions) and Percentage of Total Company Sales   
                               
 Segment
 
Fiscal 2017
         
Fiscal 2016
         
Fiscal 2015
 
Mattress Fabrics
 
190.8
     
(62
%)
 
186.4
     
(60
%)
 
$
179.7
     
(58
%)
 Upholstery Fabrics                                                
Non-U.S.-Produced
 
109.0
     
(35
%)
 
115.3
     
(37
%)
 
$
119.2
     
(38
%)
U.S.-Produced
  $
9.7
     
(3
%)
 
11.2
     
(3
%)
 
$
11.3
     
(4
%)
Total Upholstery
 
118.7
     
(38
%)
 
126.5
     
(40
%)
 
$
130.5
     
(42
%)
Total company
 
309.5
     
(100
%)
 
312.9
     
(100
%)
 
$
310.2
     
(100
%)
 
Additional financial information about our operating segments can be found in Note 16 to the Consolidated Financial Statements included in Item 8 of this report.

Mattress Fabrics. The mattress fabrics segment, also known as Culp Home Fashions, manufactures and markets mattress fabrics and mattress covers to bedding manufacturers. These products include woven jacquard fabrics, knitted fabrics, and some converted fabrics. Culp Home Fashions has manufacturing facilities located in Stokesdale and High Point, North Carolina, and St. Jerome, Quebec, Canada. One of the Stokesdale plants and the St. Jerome plant manufacture and finish knitted and jacquard (damask) fabric. Both of these facilities now offer finished goods distribution capabilities, with the new distribution facility in Canada added during fiscal 2017. The main Stokesdale  plant continues to house the division offices.
 
Culp Home Fashions had capital expenditures totaling $70 million during the past ten years with especially high spending levels during the past three fiscal years. These expenditures provided for increased knit machine capacity, faster and more efficient weaving machines, and the initial capital required for our sewn cover business, while also allowing us to maintain our leading edge technology through support of modernization and expansion projects. These capital expenditures also provided high technology finishing equipment for woven and knitted fabric and a much improved platform for warehousing and distribution, including the distribution facility in Canada noted above.
 
Asset acquisition transactions in fiscal 2009 and fiscal 2014 allowed us to enhance and secure our competitive position and to expand our mattress fabrics business. Taken together, the two transactions allowed us to secure our supply for knitted mattress fabrics, an important and growing product category, while also gaining control of product development and improving customer service. The transactions also involved consulting and non-compete agreements that enhanced our mattress fabrics product development and helped to secure our end-markets. In addition to these transactions, we have continued to make further investments in knitting machines and finishing equipment, increasing our internal production capacity substantially.
 
Our sewn mattress cover business, established during fiscal 2013, participates in a joint marketing agreement for the production and marketing of sewn mattress covers and represents a further step in our efforts to respond to industry demands. The marketing venture is known as Culp-Lava Applied Sewn Solutions (CLASS), and is a joint marketing effort with A. Lava & Son Co. of Chicago (A Lava), a leading provider of mattress covers. This manufacturing operation, located near our other plants in North Carolina, involves leased space and a limited capital investment in equipment. Teaming with A Lava has allowed us to have two mirrored manufacturing facilities and great flexibility in meeting demand for mattress covers from bedding producers.  In fiscal 2017, in response to continued growth in mattress cover demand, we entered into a joint venture with A Lava to construct a second location for CLASS in Haiti, which is expected to begin production of mattress covers during the second quarter of 2018.
4

Upholstery Fabrics. The upholstery fabrics segment markets fabrics for residential and commercial furniture, including jacquard woven fabrics, velvets, microdenier suedes, woven dobbies, knitted fabrics, piece-dyed woven products, and polyurethane “leather look” fabrics. This segment operates fabric manufacturing facilities in Anderson, South Carolina, and Shanghai, China. We market fabrics produced in these two locations, as well as a variety of upholstery fabrics sourced from third party producers, mostly in China. In the past fiscal year, sales of non-U.S. produced upholstery accounted for approximately 92% of our upholstery fabric sales. Our China facilities near Shanghai include fabric sourcing, finishing, warehousing, quality control and inspection operations, as well as a plant where sourced fabrics are cut and sewn into “kits” made to specifications of furniture manufacturing customers. We continue to expand our marketing efforts to sell our China products in countries other than the U.S., including the Chinese local market. The U.S. facility in South Carolina produces a variety of woven upholstery fabrics, including velvets and certain decorative fabrics.
 
Our upholstery fabrics business has moved from one that relied on a large fixed capital base that is difficult to adjust to a more flexible and scalable marketer of upholstery fabrics that meets changing levels of customer demand and tastes. At the same time, we have maintained control of the most important “value added” aspects of our business, such as design, finishing, quality control, and logistics. This strategic approach has allowed us to limit our investment of capital in fixed assets and control the costs of our products, while continuing to leverage our design and finishing expertise, industry knowledge, and important relationships.
 
After six consecutive years of sales growth, sales declined slightly in fiscal 2016 and by 6% in fiscal 2017, mainly as a result of challenging demand conditions for upholstered furniture in those years. We were able to maintain solid growth in operating income through fiscal 2016. In fiscal 2017, operating income fell by only 2%, reflecting our focus on better margin products and more favorable foreign currency exchange rates. We believe our success over the longer term and our ability to maintain operating income margins is due largely to a business strategy that has included: 1) innovation in a low- cost environment, 2) speed-to-market execution, 3) consistent quality, 4) reliable service and lead times, and 5) increased recognition of and reliance on the Culp brand. Our progress has been achieved through a unique business model that has enabled the upholstery fabrics segment to execute a strategy that we believe is clearly differentiated from our competitors. In this way, we have maintained our ability to provide furniture manufacturers with products from every category of fabric used to cover upholstered furniture and meet continually changing demand levels and consumer preferences. Most recently, we have implemented additional steps to grow net sales, including an emphasis on markets beyond residential furniture, such as the hospitality market.
 
Overview of Industry and Markets
 
Culp markets products primarily to manufacturers that operate in three principal markets. The mattress fabrics segment supplies the bedding industry, which produces mattress sets (mattresses, box springs, foundations and top of bed components). The upholstery fabrics segment supplies the residential furniture industry and, to a lesser extent, the commercial furniture industry. The residential furniture market includes upholstered furniture sold to consumers for household use, including sofas, sofa-beds, chairs, recliners, and sectionals. The commercial furniture and fabrics market includes fabrics used in the hospitality industry (primarily hotels and motels), upholstered office seating and modular office systems sold primarily for use in offices and other institutional settings, and commercial textile wall coverings. The principal industries into which the company sells products are described below. Currently, the vast majority of our products are sold to manufacturers for end use in the U.S., and thus the discussions below are focused on that market.
5

Overview of Bedding Industry
 
The bedding industry has contracted and expanded in recent years in accordance with the general economy, although traditionally the industry has been relatively mature and stable. This is due in part to the fact that a majority of bedding industry sales are replacement purchases, which are less volatile than sales based on economic growth and new household formations. Unlike the residential furniture industry, which continues to face intense competition from imports, the U.S. bedding industry has largely remained a North American-based business with limited competition from imports. Imports of bedding into the U.S. have increased in recent years, but imported beds still represent only a minor portion of total U.S. bedding sales. The primary reasons include: 1) the short lead times demanded by mattress manufacturers and retailers due to their quick service delivery model, 2) the limited inventory carried by manufacturers and retailers requires “just-in-time” delivery of product, 3) the customized nature of each manufacturer’s and retailer’s product lines, 4) high shipping and import duty costs, 5) the relatively low direct labor content in mattresses, and 6) strong brand recognition and importance.
 
A key trend driving the bedding industry is increased awareness among consumers about the health benefits of better sleep, which has caused an increased focus on the quality of bedding products and an apparent willingness on the part of consumers to upgrade their bedding. Another important trend is the strong and growing emphasis on the design knitted or woven into mattress fabrics to appeal to the customer’s visual attraction and perceived value of the mattress on the retail floor. Mattress fabric design efforts are based on current trends in home decor and fashion. Another trend has been the growth in non- traditional sources for retail mattress sales such as internet and “bed in a box” sales, as well as wholesale warehouse clubs. These sales channels have the potential to increase overall consumption of goods due to convenience and high traffic volume, which in turn results in higher turnover of product. Among fabric types, knitted fabrics have continued to increase in popularity.  Knitted fabric was initially used primarily on premium mattresses, but these products are now being placed increasingly on mattresses at mid-range to lower retail price points.
 
Overview of Residential and Commercial Furniture Industry
 
Sales of residential and commercial furniture were both severely affected by the global economic downturn in 2008-2009, and have now been in recovery for several years along with the overall economy. The pace of recovery, however, has been uneven and often weak in recent years. In general, sales of residential furniture are influenced significantly by the housing industry and by trends in home sales and household formations, while demand for commercial furniture generally reflects economic trends affecting businesses.
 
The sourcing of components and fully assembled furniture from overseas continues to play a major role in the furniture industry. By far, the largest source for these imports continues to be China. Imports of upholstery fabric, both in roll and in “kit” form, have also had a significant impact on the market for upholstery fabrics in recent years. Fabrics entering the U.S. from China and other low labor cost countries have resulted in increased price competition in the upholstery fabric and upholstered furniture markets.
 
In general, the residential furniture industry has been consolidating for several years. The result of this trend is fewer, but larger, customers for marketers of upholstery fabrics. Intense price competition continues to be an important consideration for both residential and commercial furniture.
 
Products
 
As described above, our products include mattress fabrics and upholstery fabrics, which are our identified operating segments. These fabrics are sold in roll form and as sewn mattress covers by the mattress fabrics segment, and in roll form and as cut and sewn kits by the upholstery fabrics segment.
6

Mattress Fabrics Segment
 
Mattress fabrics segment sales constituted 58% to 62% of our total net sales in each of the past three fiscal years. The company has emphasized fabrics that have broad appeal at prices generally ranging from $1.50 to more than $10.00 per yard.
 
Upholstery Fabrics Segment
 
Upholstery fabrics segment sales totaled 38% to 42% of our sales for each of the past three fiscal years. The company has emphasized fabrics that have broad appeal at “good” and “better” prices, generally ranging from $3.00 to $10.00 per yard.

Culp Product Categories by Segment
 
We market products in most categories of fabric that manufacturers currently use for bedding and furniture. The following table indicates the product lines within each segment, and a brief description of their characteristics.

Mattress Fabrics
 
Woven jacquards
Various patterns and intricate designs. Woven on complex looms using a variety of synthetic and natural yarns.
 
Converted
Suedes, pile and embroidered fabrics, and other specialty type products are sourced to offer diversity for higher end mattresses.
 
Knitted fabric
Various patterns and intricate designs produced on special-width circular knit machines utilizing a variety of synthetic and natural yarns. Knitted mattress fabrics have inherent stretching properties and spongy softness, which conforms well with layered foam packages.
 
Sewn mattress covers
Covers for bedding (primarily specialty beds), sewn from mattress fabrics produced by our facilities or sourced from others.
 
Upholstery Fabrics
 
Woven jacquards
Elaborate, complex designs such as florals and tapestries in traditional, transitional, and contemporary styles. Woven on intricate looms using a wide variety of synthetic and natural yarns.
 
Woven dobbies
Fabrics that use straight lines to produce geometric designs such as plaids, stripes, and solids in traditional and country styles. Woven on less complicated looms using a variety of weaving constructions and primarily synthetic yarns.
 
Velvets
Soft fabrics with a plush feel. Woven or knitted in basic designs, using synthetic yarns that are yarn dyed or piece dyed.
 
Suedes
Fabrics woven or knitted using microdenier polyester yarns, which are piece dyed and finished, usually by sanding. The fabrics are typically plain or small jacquard designs, with some being printed. These are sometimes referred to as microdenier suedes.
 
7

 
Faux leathers
Sueded or knitted base cloths which are overprinted with polyurethane, and composite products consisting of a base fabric that is coated with a top layer of polyurethane, which simulates the look and feel of leather.
 
Cut and sewn kits
Covers made from various types of upholstery fabrics and cut and sewn to specifications of furniture manufacturing customers for use on specific furniture frames.

Manufacturing and Sourcing
 
Mattress Fabrics Segment
 
Our mattress fabrics segment operates five manufacturing plants, with four located in North Carolina and one in St. Jerome, Quebec, Canada. Over the past ten fiscal years, we made capital expenditures of approximately $70 million to consolidate our production facilities and to modernize both knit and weaving equipment, enhance and provide knit and woven finishing capabilities, and expand capacity. The result has been an increase in manufacturing efficiency and reductions in operating costs, as well as expanded product offerings and capacity.
 
Jacquard mattress fabrics and knitted fabrics are produced at both our main Stokesdale facility and our St. Jerome plant. The majority of finishing and inspection processes for mattress fabrics are conducted at the main Stokesdale plant, and the St. Jerome plant has added knit finishing and inspection, along with distribution capabilities, within the past year. We have a joint marketing arrangement with a producer of sewn mattress covers for bedding. This arrangement includes an additional manufacturing facility to produce and market sewn mattress covers. The mattress cover operation is being further expanded through a joint venture to construct an additional mattress cover facility in Haiti, which is expected to begin production during the second quarter of fiscal 2018.
 
In addition to the mattress fabrics we manufacture, we have important supply arrangements in place that allow us to source mattress fabric from strategic suppliers. A portion of our woven jacquard fabric and knitted fabric is obtained from a supplier located in Turkey, based on designs and a production schedule created by Culp. We are also sourcing some Culp-designed knitted fabrics, certain converted fabric products, and some sewn mattress covers using our Culp China platform.
 
Upholstery Fabrics Segment
 
We currently operate one upholstery manufacturing facility in the U.S. and three in China. The U.S. plant is located in Anderson, South Carolina, and mainly produces velvet upholstery fabrics with some production of certain decorative fabrics.
 
Our upholstery manufacturing facilities in China are all located within the same industrial area near Shanghai. At these facilities, we apply value-added finishing processes to fabrics sourced from a limited number of strategic suppliers in China, and we inspect sourced fabric there as well. In addition, the Shanghai operations include facilities where sourced fabric is cut and sewn to provide “kits” that are designed to be placed on specific furniture frames designated by our customers.
 
A large portion of our upholstery fabric products, as well as certain elements of our production processes, are being sourced from outside suppliers. Our facilities in China provide a base from which to access a variety of products, including certain fabrics (such as microdenier suedes and polyurethane fabrics) that are not produced anywhere within the U.S. We have found opportunities to develop significant relationships with key overseas suppliers in China that allow us to source products on a cost-effective basis, while limiting our investment of capital in manufacturing assets. We source unfinished and finished fabrics, as well as a portion of our cut and sewn kits, from a limited number of strategic suppliers in China who are willing to commit significant capacity to meet our needs while working with our product development team to meet the demands of our customers. We also source a portion of our yarns for our U.S. operation through our China facilities. The remainder of our yarn is obtained from other suppliers around the world.
8

Product Design and Styling
 
Consumer tastes and preferences related to bedding and upholstered furniture change over time. The use of new fabrics and creative designs remains an important consideration for manufacturers to distinguish their products at retail and to capitalize on changes in preferred colors, patterns and textures. Culp’s success is largely dependent on our ability to market fabrics with appealing designs and patterns. The process of developing new designs involves maintaining an awareness of broad fashion and color trends both in the United States and internationally.

Mattress Fabrics Segment
 
Design innovation is a very important element of producing mattress fabrics. The company invests significant resources to stay ahead of current design trends, including maintaining a trained and active design staff, investing in research and development activities such as participation in international design shows, and implementing systems for creating and cataloguing new designs. Price point delineation is accomplished through fabric quality as well as variation in design. Additionally, consumers are drawn to the mattress that is the most visually appealing when walking into a retail showroom. Fiber differentiation also plays an important part in design. For example, rayon, organic cotton, and other special fibers are incorporated into the design process to allow the retailer to offer consumers additional benefits related to their sleeping experience. Similarly, many fabrics contain special production finishes that enhance fabric performance.
 
Mattress fabric designs are not routinely introduced on a scheduled season. Designs are typically introduced upon the request of the customer as they plan introduction to their retailers. Additionally, we work closely with our customers on new design offerings around the major furniture markets such as Las Vegas, Nevada, and High Point, North Carolina.
 
Upholstery Fabrics Segment
 
The company has developed an upholstery fabrics design and product development team (with staff located in the U.S. and in China) with a primary focus on value in designing body cloths, while promoting style leadership with pillow fabrics and color. Our design staff travels regularly to international trade and design shows to maintain familiarity with current design and fashion trends. The team searches continually for new ideas and for the best sources of raw materials, yarns, and fabrics, utilizing a supply network located mostly in China. Using these design elements, they develop product offerings using ideas and materials that take both fashion trends and cost considerations into account to offer products designed to meet the needs of furniture manufacturers and ultimately the desires of consumers.

Upholstery fabric designs are introduced at major fabric trade conferences that occur twice a year in the United States (June and December). In recent years we have become more aggressive in registering copyrights for popular fabric patterns and taking steps to discourage the illegal copying of our proprietary designs.
9

Distribution
 
Mattress Fabrics Segment
 
The vast majority of our shipments of mattress fabrics originate from our facilities in Stokesdale, North Carolina, and we have additional distribution capabilities in Canada and China. Through arrangements with major customers and in accordance with industry practice, we maintain a significant inventory of mattress fabrics at our distribution facility in Stokesdale (“make to stock”), so that products may be shipped to customers with short lead times and on a “just in time” basis.

Upholstery Fabrics Segment
 
A majority of our upholstery fabrics are marketed on a “make to order” basis and are shipped directly from our distribution facilities in Burlington, North Carolina, and Shanghai, China. In addition to “make to order” distribution, an inventory of a limited number of fabric patterns is held at our distribution facilities in Burlington and Shanghai from which our customers can obtain quick delivery of sourced fabrics through a program known as “Culp Express.” Beginning in fiscal 2010 and continuing through fiscal 2017, market share opportunities have been expanded through strategic selling partnerships.

Sources and Availability of Raw Materials
 
Mattress Fabrics Segment
 
Raw materials account for approximately 60%-70% of mattress fabric production costs. The mattress fabrics segment purchases primarily synthetic yarns (polyester, polypropylene, and rayon), certain greige (unfinished) goods, latex adhesives, laminates, dyes, and other chemicals. Most of these materials are available from several suppliers, and prices fluctuate based on supply and demand, the general rate of inflation, and particularly on the price of petrochemical products. The mattress fabrics segment has generally not had significant difficulty in obtaining raw materials.

Upholstery Fabrics Segment
 
Raw materials account for approximately 60%-70% of upholstery fabric manufacturing costs for products the company manufactures. This segment purchases synthetic yarns (polyester, acrylic, rayon, and polypropylene), acrylic staple fiber, latex adhesives, dyes, and other chemicals from various suppliers.

Increased reliance by both our U.S. and China upholstery operations on outside suppliers for basic production needs such as base fabrics, yarns, and finishing services has caused the upholstery fabrics segment to become more vulnerable to price increases, delays, or production interruptions caused by problems within businesses that we do not control.
 
Both Segments
 
Many of our basic raw materials are petrochemical products or are produced from such products. For this reason, our material costs can be sensitive to changes in prices for petrochemicals and the underlying price of oil. From fiscal 2015 through fiscal 2017, our profitability was aided by lower raw material prices due to lower oil prices, among other factors.
10

 
Seasonality
 
Mattress Fabrics Segment
 
The mattress fabrics business and the bedding industry in general are slightly seasonal, with sales being the highest in early spring and late summer, with another peak in mid-winter.

Upholstery Fabrics Segment
 
The upholstery fabrics business is somewhat seasonal, with sales often higher during our first and fourth fiscal quarters. In the past, seasonality resulted from one-week closings of our manufacturing facilities and the facilities of most of our customers in the United States during our first and third fiscal quarters for the holiday weeks of July 4th and Christmas. This effect has become less pronounced as a larger portion of our fabrics are produced or sold in locations outside of the U.S. The timing of the Chinese National Holiday in October and the Chinese New Year (which occurs in January or February each year) now have a more significant impact on upholstery sales than the effects of U.S. holiday periods.

Competition
 
Competition for our products is high and is based primarily on price, design, quality, timing of delivery, and service.

Mattress Fabrics Segment
 
The mattress fabrics market is concentrated in a few relatively large suppliers. We believe our principal mattress fabric competitors are BekaertDeslee Textiles, Global Textile Alliance, and several smaller companies producing knitted and other fabric.
 
Upholstery Fabrics Segment
 
In the upholstery fabrics market, we compete against a large number of companies, ranging from a few large manufacturers comparable in size to the company to small producers, and a growing number of “converters” of fabrics (companies who buy and re-sell, but do not manufacture fabrics). We believe our principal upholstery fabric competitors are Dorell Fabrics Co., Merrimack Fabrics, Morgan Fabrics, Richloom Fabrics and Specialty Textile, Inc. (or STI), plus a large number of smaller competitors (both manufacturers and converters).

The trend in the upholstery fabrics industry to greater overseas competition and the entry of more converters has caused the upholstery fabrics industry to become substantially more fragmented in recent years, with lower barriers to entry. This has resulted in a larger number of competitors selling upholstery fabrics, with an increase in competition based on price.
 
Environmental and Other Regulations
 
We are subject to various federal and state laws and regulations, including the Occupational Safety and Health Act (“OSHA”) and federal and state environmental laws, as well as similar laws governing our manufacturing facilities in China and Canada. We periodically review our compliance with these laws and regulations in an attempt to minimize the risk of violations.
11

Our operations involve a variety of materials and processes that are subject to environmental regulation. Under current law, environmental liability can arise from previously owned properties, leased properties and properties owned by third parties, as well as from properties currently owned and leased by the company. Environmental liabilities can also be asserted by adjacent landowners or other third parties in toxic tort litigation.
 
In addition, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), and analogous state statutes, liability can be imposed for the disposal of waste at sites targeted for cleanup by federal and state regulatory authorities. Liability under CERCLA is strict as well as joint and several.
 
The U.S. Congress is considering legislation to address climate change that is intended to reduce overall greenhouse gas emissions, including carbon dioxide. In addition, the U.S. Environmental Protection Agency has made a determination that greenhouse gas emissions may be a threat to human health and the environment. International agreements may also result in new regulations on greenhouse gas emissions. It is uncertain if, when, and in what form, a mandatory carbon dioxide emissions reduction program may be enacted either through legislation or regulation. However, if enacted, this type of program could materially increase our operating costs, including costs of raw materials, transportation, and electricity. It is difficult to predict the extent to which any new rules or regulations would affect our business, but we would expect the effect on our operations to be similar to that for other manufacturers, particularly those in our industry.
 
We are periodically involved in environmental claims or litigation and requests for information from environmental regulators. Each of these matters is carefully evaluated, and the company provides for environmental matters based on information presently available. Based on this information, we do not currently believe that environmental matters will have a material adverse effect on either the company’s financial condition or results of operations. However, there can be no assurance that the costs associated with environmental matters will not increase in the future.
 
Employees
 
As of April 30, 2017, we had 1,325 employees, compared to 1,217 at the end of fiscal 2016.  Overall, our total number of employees has expanded gradually over the past five years, with increases in the mattress fabrics segment and decreases in the upholstery segment during that period.
 
The hourly employees at our manufacturing facility in Canada (approximately 15% of the company’s workforce) are represented by a local, unaffiliated union. The collective bargaining agreement for these employees expires on February 1, 2020. We are not aware of any efforts to organize any more of our employees, and we believe our relations with our employees are good.
 
The following table illustrates the changes in the location of our workforce and number of employees, as of year-end, over the past five fiscal years.
 
     
Fiscal
2017
     
Fiscal
2016
     
Fiscal
2015
     
Fiscal
2014
     
Fiscal
2013
 
Mattress Fabrics Segment
   
793
     
682
     
631
     
592
     
577
 
Upholstery Fabrics Segment United States
   
148
     
134
     
129
     
129
     
121
 
Poland
   
-
     
-
     
-
     
4
     
5
 
China
    380       397       424       438       464  
Total Upholstery Fabrics Segment     528       531       553       571       590  
Unallocated corporate     4       4       4       4       4  
Total     1,325       1,217       1,188       1,167       1,171  
 
12

Customers and Sales

Mattress Fabrics Segment
 
Major customers for our mattress fabrics include the leading bedding manufacturers: Serta-Simmons Bedding (SSB), Tempur + Sealy International (TSI), and Corsicana Bedding. Our two largest customers in the mattress fabrics segment are (1) Serta Simmons Holdings, LLC, accounting for approximately 22% of the company’s overall sales in fiscal 2017, and (2) Tempur + Sealy International, Inc., accounting for approximately 10% of our overall sales in fiscal 2017. Our mattress fabrics customers also include many small and medium-size bedding manufacturers.

Upholstery Fabrics Segment
 
Our major customers for upholstery fabrics are leading manufacturers of upholstered furniture, including Ashley, Bassett, Best Home Furnishings, Flexsteel, Heritage Home Group (Broyhill and Lane), Jackson Furniture, Jonathan Louis, La-Z-Boy (La-Z-Boy Residential and England), and Southern Motion. Major customers for the company’s fabrics for commercial furniture include HON Industries. Our largest customer in the upholstery fabrics segment is La-Z-Boy Incorporated, which accounted for 11% of the company’s consolidated sales in fiscal 2017.
 
The following table sets forth our net sales by geographic area by amount and percentage of total net sales for the three most recent fiscal years.
 
Net Sales by Geographic Area
(dollars in thousands)

      Fiscal 2017                 Fiscal 2016                 Fiscal 2015           
                                                 
United States
 
$
241,236
     
77.9
%
 
$
244,930
     
78.3
%
 
$
242,833
     
78.3
%
North America
 
$
29,995
     
9.7
%
 
$
31,667
     
10.1
%
 
$
30,758
     
10.0
%
(Excluding USA)(1)
                                               
Far East and Asia(2)
   
34,695
     
11.2
%
   
31,927
     
10.2
%
   
31,855
     
10.3
%
All other areas
   
3,618
     
1.2
%
   
4,336
     
1.4
%
   
4,720
     
1.4
%
Subtotal (International)
 
$
68,308
     
22.1
%
 
$
67,930
     
21.7
%
 
$
67,333
     
21.7
%
Total
 
$
309,544
     
100
%
 
$
312,860
     
100
%
 
$
310,166
     
100
%
 
(1) Of this amount, $22.3 million, $24.2 million, and $24.1 million are attributable to shipments to Mexico in fiscal 2017, 2016, and 2015, respectively.

(2) Of this amount, $26.6 million, $23.1 million, and $26.5 million are attributable to shipments to China in fiscal 2017, 2016, and 2015, respectively.

Sales are attributed to individual countries based upon the location that the company ships its products to for delivery to customers.
13

For additional segment information, including the geographic location of long-lived assets, see Note 16 in the consolidated financial statements.

Backlog
 
Mattress Fabrics Segment
 
The backlog for mattress fabric is not a reliable predictor of future shipments because the majority of sales are on a just-in-time basis.

Upholstery Fabrics Segment
 
Although it is difficult to predict the amount of backlog that is “firm,” we have reported the portion of the upholstery fabric backlog from customers with confirmed shipping dates within five weeks of the end of the fiscal year. On April 30, 2017, the portion of the upholstery fabric backlog with confirmed shipping dates prior to June 5, 2017 was $9.2 million, all of which are expected to be filled during the first quarter of fiscal 2018, compared with $8.4 million as of the end of fiscal 2016 (for confirmed shipping dates prior to June 6, 2016).
14

ITEM 1A.  RISK FACTORS
 
Our business is subject to risks and uncertainties. In addition to the matters described above under “Cautionary Statement Concerning Forward-Looking Information,” set forth below are some of the risks and uncertainties that could cause a material adverse change in our results of operations or financial condition. The risks described below are not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us also may materially adversely affect our business, financial condition or results of operations in future periods.

Continued economic uncertainty could negatively affect our sales and earnings.

Overall demand for our products depends upon consumer demand for furniture and bedding, which is subject to variations in the general economy. Because purchases of furniture or bedding are discretionary purchases for most individuals and businesses, demand for these products is sometimes more easily influenced by economic trends than demand for other products. Economic downturns can affect consumer spending habits and demand for home furnishings, which reduces the demand for our products and therefore can cause a decrease in our sales and earnings. Economic uncertainty has caused a decrease in consumer spending and demand for home furnishings, including goods that incorporate our products. If these conditions persist, our business will be negatively affected.
 
It has been challenging to maintain and increase sales levels in the upholstery fabrics segment.
 
Increased competition and fragmentation of the upholstery fabrics business, including a dramatic shift to imported fabrics and resulting price deflation for upholstery fabrics, have led to a significant reduction in the size of our upholstery business. Opportunities for growth and profitability gains for this segment are encouraging, but there is no assurance that we will be able to maintain or consistently grow this business in the future.
 
Greater reliance on offshore operations and foreign sources of products or raw materials increases the likelihood of disruptions to our supply chain or our ability to deliver products to our customers on a timely basis.
 
We rely significantly on operations in distant locations, particularly China, and in addition we have been purchasing a significant share of our products and raw materials from offshore sources, particularly Asia and Turkey. At the same time, our domestic manufacturing capacity for the upholstery fabrics segment has been greatly reduced. These changes have caused us to rely on a much longer supply chain and on a larger number of suppliers that we do not control, both of which are inherently subject to greater risks of delay or disruption. In addition, operations and sourcing in foreign areas are subject to the risk of changing local governmental rules, taxes, changes in import rules or customs, potential political unrest, or other threats that could disrupt or increase the costs of operating in foreign areas or sourcing products overseas. 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 can have a negative impact on our sales of products produced in those countries. Any of the risks associated with foreign operations and sources could cause unanticipated increases in operating costs or disruptions in business, which could negatively impact our ultimate financial results.
15

Our business faces several risks associated with doing business in China.
 
We source a variety of fabrics from a limited number of strategic suppliers in China, and we operate three upholstery manufacturing facilities in Shanghai, China. The Chinese economy is characterized by extensive state ownership, control, and regulation. Therefore, our business is continually subject to the risk of changes in Chinese laws and regulations that could have an adverse effect on our suppliers and manufacturing operations. Any changes in policies governing tariffs, imports and exports, taxation, inflation, environmental regulations, foreign currency exchange rates, the labor market, property, and financial regulations could have an adverse effect on our business. Further, the Chinese legal system is continuing to develop and evolve, and the enforcement of rules and regulations is not always consistent or uniform. Moreover, any potential civil unrest, natural disasters, or other threats could disrupt or increase the costs of operating in China. The Chinese economy poses additional risks to our business, including fluctuating rates of inflation and currency exchange rates, a declining labor force participation rate, and rising employee wages. In addition, changes in the political climate or trade policy of the United States, such as increased duties or tariffs on Chinese imports, may adversely affect our business. Any of the risks associated with our Chinese operations and sources could cause unanticipated increases in operating costs or disruptions in business, which could negatively impact our ultimate financial results.

We may have difficulty managing the outsourcing arrangements being used for products and services.
 
We rely on outside sources for various products and services, including yarn and other raw materials, greige (unfinished) fabrics, finished fabrics, and services such as weaving and finishing. Increased reliance on outsourcing lowers our capital investment and fixed costs, but it decreases the amount of control that we have over certain elements of our production capacity. Interruptions in our ability to obtain raw materials or other required products or services from our outside suppliers on a timely and cost effective basis, especially if alternative suppliers cannot be immediately obtained, could disrupt our production and damage our financial results.
 
Write-offs or write-downs of assets would result in a decrease in our earnings and shareholders’ equity.
 
The company has long-lived assets, primarily consisting of property, plant and equipment and goodwill and to a lesser extent other intangible assets. ASC Topic 360 establishes an impairment accounting model for long-lived assets such as property, plant, and equipment and requires the company to assess for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recovered. ASC Topic 350 requires that goodwill and other intangible assets be tested at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recovered. Although no material write-downs were experienced in the past several fiscal years, there is no assurance that future write-downs of fixed assets or goodwill will not occur if business conditions deteriorate.

Changes in the price, availability, and quality of raw materials could increase our costs or cause production delays and sales interruptions, which would result in decreased earnings.
 
We depend upon outside suppliers for most of our raw material needs, and we rely upon outside suppliers for component materials such as yarn and unfinished fabrics, as well as for certain services such as finishing and weaving. Fluctuations in the price, availability, and quality of these goods and services could have a negative effect on our production costs and ability to meet the demands of our customers, which would affect our ability to generate sales and earnings. In many cases, we are not able to pass through increased costs of raw materials or increased production costs to our customers through price increases. In particular, many of our basic raw materials are petrochemical products or are produced from such products. For this reason, our material costs are especially sensitive to changes in prices for petrochemicals and the underlying price of oil. Increases in prices for oil, petrochemical products or other raw materials and services provided by outside suppliers could significantly increase our costs and negatively affect earnings. Although our raw material costs were lower during our most recent fiscal years, higher raw material prices could have a negative effect on our profits in the future.
16

Increases in energy costs would increase our operating costs and could adversely affect earnings.
 
Higher prices for electricity, natural  gas, and fuel increase our  production and shipping costs. A significant shortage, increased prices, or interruptions in the availability of these energy sources would increase the costs of producing and delivering products to our customers, and would be likely to adversely affect our earnings. In many cases, we are not able to pass along the full extent of increases in our production costs to customers through price increases. Energy costs have varied significantly during recent fiscal years, and remain a volatile element of our costs. Increases in energy costs could have a negative effect on our earnings.

Business difficulties or failures of large customers could result in a decrease in our sales and earnings.
 
We currently have several customers that account for a substantial portion of our sales. In the mattress fabrics segment, several large bedding manufacturers have large market shares and comprise a significant portion of our mattress fabric sales, with Serta Simmons Holdings, LLC accounting for approximately 22% of consolidated net sales, and Tempur Sealy International, Inc. accounting for approximately 10% of consolidated net sales, in fiscal 2017. In the upholstery fabrics segment, La-Z-Boy Incorporated accounted for approximately 11% of consolidated net sales during fiscal 2017, and several other large furniture manufacturers comprised a significant portion of sales. A business failure or other significant financial difficulty by one or more of our major customers, or the loss of one or more of these customers, could cause a significant loss in sales, an adverse effect on our earnings, and difficulty in collection of our trade accounts receivable.

Loss of market share due to competition would result in declines in sales and could result in losses or decreases in earnings.
 
Our business is highly competitive, and in particular the upholstery fabric industry is fragmented and is experiencing an increase in the number of competitors. As a result, we face significant competition from a large number of competitors, both foreign and domestic. We compete with many other manufacturers of fabric, as well as converters who source fabrics from various producers and market them to manufacturers of furniture and bedding. In many cases, these fabrics are sourced from foreign suppliers who have a lower cost structure than the company. The highly competitive nature of our business in both segments means we are constantly subject to the risk of losing market share. As a result of increased competition, there have been deflationary pressures on the prices for many of our products, which make it more difficult to pass along increased operating costs such as raw materials, energy or labor in the form of price increases and puts downward pressure on our profit margins. Also, the wide range of product offerings in our business can make it more difficult to differentiate our products through design, styling, finish, and other techniques.

If we fail to anticipate and respond to changes in consumer tastes and fashion trends, our sales and earnings may decline.
 
Demand for various types of upholstery fabrics and mattress coverings changes over time due to fashion trends and changing consumer tastes for furniture and bedding. Our success in marketing our fabrics depends upon our ability to anticipate and respond in a timely manner to fashion trends in home furnishings. If we fail to identify and respond to these changes, our sales of these products may decline. In addition, incorrect projections about the demand for certain products could cause the accumulation of excess raw material or finished goods inventory, which could lead to inventory mark-downs and decreases in earnings.
17

Increasing dependence on information technology systems comes with specific risks, including cybersecurity breaches and data leaks, which could have an adverse effect on our business.
 
We increasingly rely on technology systems and infrastructure. Greater dependence on such systems heightens the risk of potential vulnerabilities from system failure and malfunction, breakdowns due to natural disasters, human error, unauthorized access, power loss, and other unforeseen events. Data privacy breaches by employees and others with or without authorized access to our systems poses risks that sensitive data may be permanently lost or leaked to the public or other unauthorized persons. With the growing use and rapid evolution of technology, not limited to cloud-based computing and mobile devices, there are additional risks of unintentional data leaks. There is also the risk of our exposure to theft of confidential information, intentional vandalism, industrial espionage, and a variety of cyber- attacks that could compromise our internal technology system and infrastructure, or result in data leakage in-house or at our third-party providers and business partners. Failures of technology or related systems, or an improper release of confidential information, could damage our business or subject us to unexpected liabilities.
 
We are subject to litigation and environmental regulations that could adversely impact our sales and earnings.
 
We have been, and in the future may be, a party to legal proceedings and claims, including environmental matters, product liability, and employment disputes, some of which claim significant damages. We face the continual business risk of exposure to claims that our operations have caused personal injury or property damage. We maintain insurance against product liability claims and in some cases have indemnification agreements with regard to environmental claims, but there can be no assurance that these arrangements will continue to be available on acceptable terms or that such arrangements will be adequate for liabilities actually incurred. Given the inherent uncertainty of litigation, there can be no assurance that claims against the company will not have a material adverse impact on our earnings or financial condition. We are also subject to various laws and regulations in our business, including those relating to environmental protection and the discharge of materials into the environment. We could incur substantial costs as a result of noncompliance with or liability for cleanup or other costs or damages under environmental laws or other regulations.
 
We must comply with a number of governmental regulations applicable to our business, and changes in those regulations could adversely affect our business.
 
Our products and raw materials are and will continue to be subject to regulation in the United States by various federal, state, and local regulatory authorities. In addition, other governments and agencies in other jurisdictions regulate the manufacture, sale, and distribution of our products and raw materials. Also, rules and restrictions regarding the importation of fabrics and other materials, including custom duties, quotas and other regulations, are continually changing. Environmental laws, labor laws, tax regulations, and other regulations continually affect our business. All of these rules and regulations can and do change from time to time, which can increase our costs or require us to make changes in our manufacturing processes, product mix, sources of products and raw materials, or distribution. Changes in the rules and regulations applicable to our business may negatively impact our sales and earnings.
 

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.

18

 
ITEM 2. PROPERTIES
 

Our corporate headquarters are located in High Point, North Carolina. As of the end of fiscal 2017 (April 30, 2017), we leased our corporate headquarters and owned or leased fifteen facilities associated with our mattress and upholstery fabric operations. The following is a list of our principal administrative and production facilities. Our facilities listed below are organized by business segment.
 

                        
                                                                      
     Approx.      
     Total Area    Expiration  
 Location  Principal Use  (Sq. Ft.)    of Lease  
           
·            Administrative:
 
 
 
 
 
High Point, North Carolina (1)
Upholstery fabric division
29,812
 
2025
 
  
offices and corporate
       
  
headquarters
       
·            Mattress Fabrics:
 
 
 
 
 
Stokesdale, North Carolina
Manufacturing and
299,163
 
Owned
 
  
headquarters office
       
Stokesdale, North Carolina
Distribution center
220,222
 
Owned
 
Stokesdale, North Carolina (3)
Manufacturing
56,950
 
2017
 
High Point, North Carolina (1)
Manufacturing
63,522
 
2023
 
High Point, North Carolina
Warehouse and offices
65,886
 
2020
 
Summerfield, North Carolina (3)
Manufacturing
39,320
 
2017
 
St. Jerome, Quebec, Canada
Manufacturing
202,500
 
Owned
 
             
·            Upholstery Fabrics:
 
 
 
 
 
Anderson, South Carolina
Manufacturing
99,000
 
Owned
 
Burlington, North Carolina (2)
Finished goods distribution
132,000
 
-
 
Burlington, North Carolina
Design center
15,000
 
2021
 
Shanghai, China
Manufacturing and offices
68,677
 
2018
 
Shanghai, China
Manufacturing and offices
89,857
 
2020
 
Shanghai, China
Manufacturing and warehousing
89,857
 
2018
 
Shanghai, China
Warehouse and offices
64,583
 
2020
 
Shanghai, China
Warehouse
48,610
 
2018
 
____________________________________________________________
(1)
Includes all options to renew.
(2)
This lease agreement is currently on a month to month basis.
(3)
The lease regarding this facility expires after our fiscal year end of April 30, 2017, and will not be renewed. The production that resides as this location is currently being moved to an existing mattress fabrics facility.

We believe that our facilities are in good condition, well-maintained and suitable and adequate for present utilization. In the upholstery fabrics segment, we have the ability to source upholstery fabric from outside suppliers to meet current and expected demand trends and further increase our output of finished goods. This ability to source upholstery fabric is part of our long-term strategy to have a low-cost platform that is scalable, but not capital intensive. In the mattress fabrics segment, management has estimated that it is currently performing at near capacity. Also, we have the ability to source additional mattress fabric from outside suppliers to further increase our ultimate output of finished goods.
19

 
ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings to which the company, or its subsidiaries, is a party to or of which any of their property is the subject that are required to be disclosed under this item.
 
ITEM 4. MINE SAFETY DISCLOSURE
 
Not applicable.

PART II
 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 

Registrar and Transfer Agent
 
Computershare Trust Company, N.A.

Correspondence should be mailed to:
Computershare
P.O. Box 505000
Louisville, KY 40233

Overnight correspondence should be sent to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202

(800) 254-5196
(781) 575-2879 (Foreign shareholders)
www.computershare.com/investor
 
Stock Listing
 
Prior to July 13, 2017, Culp, Inc. common stock was traded on the New York Stock Exchange (“NYSE”) under the symbol CFI. Effective July 13, 2017, Culp, Inc. common stock started trading on the NYSE under the symbol CULP. As of April 30, 2017, Culp, Inc. had approximately 4,326 shareholders based on the number of holders of record and an estimate of individual participants represented by security position listings.
 
Analyst Coverage
 
These analysts cover Culp, Inc.:
 
Raymond, James & Associates - Budd Bugatch, CFA

Value Line – Craig Sirois
 
Stifel Financial Corp - John A. Baugh, CFA
 
Stonegate Capital Partners, Inc. – Marco Rodriguez, CFA
20

Dividends and Share Repurchases; Sales of Unregistered Securities

Share Repurchases
 
ISSUER PURCHASES OF EQUITY SECURITIES

 
 
 
 
 
Period
(a)
 
 
Total Number
of Shares
Purchased
(b)
 
 
 
Average Price
Paid per Share
(c)
Total Number of
Shares Purchased as
 Part of Publicly
Announced Plans or
Programs
(d)
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
January 30, 2017 to
March 5, 2017
-
$ -
-
$5,000,000
March  6,  2017  to
April 2, 2017
-
$ -
-
$5,000,000
April 3, 2017 to April
30, 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.
 
Dividends
 
On June 13, 2017, we announced that our board of directors approved the payment of a special cash dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.08 per share. These dividend payments are payable on July 17, 2017, to shareholders of record as of July 3, 2017.
 
During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
 
During fiscal 2016, dividend payments totaled $8.1 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $3.1 million represented our regular quarterly cash dividend payments ranging from $0.06 to $0.07 per share.
 
During fiscal 2015, dividend payments totaled $7.6 million, of which $4.9 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $2.7 million represented our regular quarterly cash dividend payments ranging from $0.05 to $0.06 per share.

Sales of Unregistered Securities
 
There were no sales of unregistered securities during fiscal 2017, 2016, or 2015.
 
Performance Comparison
 
The following graph shows changes over the five fiscal years ending April 30, 2017, in the value of $100 invested in (1) the common stock of the company, (2) the Hemscott Textile Manufacturing Group Index reported by Standard and Poor’s, consisting of eight companies (including the company) in the textile industry, and (3) the Standard & Poor’s 500 Index.
21

The graph assumes an initial investment of $100 at the end of fiscal 2012 and the reinvestment of all dividends during the periods identified.



 
Market Information
 
See Item 6, Selected Financial Data, and Selected Quarterly Data in Item 8, for market information regarding the company’s common stock.
22

 
ITEM 6.  SELECTED FINANCIAL DATA
 
 
                                 
percent
 
   
fiscal
   
fiscal
   
fiscal
   
fiscal
   
fiscal
   
change
 
(amounts in thousands, except per share, ratios & other, stock data)
 
2017
   
2016
   
2015
   
2014
   
2013
     
2017/2016
 
INCOME STATEMENT DATA
                                     
net sales
 
$
309,544
     
312,860
     
310,166
     
287,162
     
268,814
     
-1.1
%
cost of sales
   
240,309
     
247,749
     
254,599
     
238,256
     
219,284
     
-3.0
%
gross profit
   
69,235
     
65,111
     
55,567
     
48,906
     
49,530
     
6.3
%
selling, general, and administrative expenses
   
39,157
     
36,773
     
32,778
     
28,657
     
28,445
     
6.5
%
income from operations
   
30,078
     
28,338
     
22,789
     
20,249
     
21,085
     
6.1
%
interest expense
   
-
     
-
     
64
     
427
     
632
     
0.0
%
interest income
   
(299
)
   
(176
)
   
(622
)
   
(482
)
   
(419
)
   
69.9
%
other expense
   
681
     
616
     
391
     
1,261
     
583
     
10.6
%
income before income taxes
   
29,696
     
27,898
     
22,956
     
19,043
     
20,289
     
6.4
%
income taxes
   
7,339
     
10,963
     
7,885
     
1,596
     
1,972
     
-33.1
%
loss from investment in unconsolidated joint venture
   
23
     
-
     
-
     
-
     
-
     
100.0
%
net income
 
$
22,334
     
16,935
     
15,071
     
17,447
     
18,317
     
31.9
%
depreciation
 
$
7,085
     
6,671
     
5,773
     
5,312
     
5,115
     
6.2
%
weighted average shares outstanding
   
12,312
     
12,302
     
12,217
     
12,177
     
12,235
     
0.1
%
weighted average shares outstanding, assuming dilution
   
12,518
     
12,475
     
12,422
     
12,414
     
12,450
     
0.3
%
PER SHARE DATA
                                               
net income per share - basic
 
$
1.81
     
1.38
     
1.23
     
1.43
     
1.50
     
31.2
%
net income per share - diluted
   
1.78
     
1.36
     
1.21
     
1.41
     
1.47
     
30.9
%
                                                 
dividends per share
 
$
0.51
     
0.66
     
0.62
     
0.18
     
0.62
     
-22.7
%
                                                 
book value
 
$
12.03
     
10.50
     
9.77
     
9.12
     
7.82
     
14.6
%
BALANCE SHEET DATA
                                               
operating working capital (4)
 
$
40,869
     
45,794
     
41,829
     
41,120
     
39,228
     
-10.8
%
property, plant and equipment, net
   
51,651
     
39,973
     
36,078
     
31,376
     
30,594
     
29.2
%
total assets
   
205,634
     
175,142
     
171,300
     
160,935
     
142,779
     
17.4
%
capital expenditures
   
18,771
     
10,708
     
11,174
     
5,310
     
4,457
     
75.3
%
dividends paid
   
6,280
     
8,140
     
7,579
     
2,204
     
7,593
     
-22.9
%
long-term debt, current maturities of long-term debt and line of credit
   
-
     
-
     
2,200
     
4,986
     
7,161
     
0.0
%
shareholders' equity
   
148,630
     
128,812
     
119,427
     
111,744
     
95,583
     
15.4
%
capital employed (3)
   
98,429
     
90,357
     
83,225
     
80,038
     
74,747
     
8.9
%
RATIOS & OTHER DATA
                                               
gross profit margin
   
22.4
%
   
20.8
%
   
17.9
%
   
17.0
%
   
18.4
%
       
operating income margin
   
9.7
%
   
9.1
%
   
7.3
%
   
7.1
%
   
7.8
%
       
net income margin
   
7.2
%
   
5.4
%
   
4.9
%
   
6.1
%
   
6.8
%
       
effective income tax rate
   
24.7
%
   
39.3
%
   
34.3
%
   
8.4
%
   
9.7
%
       
debt to total capital employed ratio (1) (3)
   
0.0
%
   
0.0
%
   
2.6
%
   
6.2
%
   
9.6
%
       
operating working capital turnover (4)
   
7.3
     
7.0
     
7.7
     
7.0
     
7.4
         
days sales in receivables
   
29
     
27
     
34
     
35
     
32
         
inventory turnover
   
5.0
     
5.6
     
6.1
     
6.0
     
5.9
         
STOCK DATA
                                               
stock price
                                               
 high
 
$
37.80
     
35.23
     
29.19
     
21.10
     
18.15
         
 low
   
25.57
     
22.72
     
16.60
     
14.93
     
9.00
         
close
   
32.10
     
26.24
     
26.02
     
18.61
     
16.25
         
P/E ratio (2)
                                               
 high
   
21
     
26
     
24
     
15
     
12
         
 low
   
14
     
17
     
14
     
11
     
6
         
daily average trading volume (shares)
   
42.1
     
67.3
     
38.6
     
27.5
     
40.9
         
                                                 
 
 (1)
 Debt includes long-term and current maturities of long-term debt and line of credit.
                 
                                                   
 (2)
 P/E ratios based on trailing 12-month diluted net income per share.     
 
                                                   
 (3)
Capital employed does not include cash and cash equivalents, short-term investments, long-term investments (held-to-maturity), long-term investments (rabbi trust), current maturities of long-term debt, long-term debt, line of credit, noncurrent deferred tax assets and liabilities, income taxes receivable and payable, and deferred compensation.
 (4) Operating working capital for this calculation is accounts receivable and inventories, offset by accounts payable-trade and account payable - capital expenditures.                  
 
23

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis of the financial condition and results of operations should be read in conjunction with the consolidated 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. Fiscal 2017 and 2016 each included 52 weeks. Fiscal 2015 included 53 weeks. Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources and sells fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment sources, manufacturers 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 or source our products, including costs such as raw material and finished good 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.
 
Executive Summary
 
Results of Operations
 
                         
Twelve Months Ended
 
                         
(dollars in thousands)    
April 30, 2017
     
May 1, 2016
     
Change
 
Net sales
 
$
309,544
   
$
312,860
     
(1.1
)%
Gross profit
   
69,235
     
65,111
     
6.3
%
Gross profit margin
   
22.4
%
   
20.8
%
   
160
bp
SG&A expenses
   
39,157
     
36,773
     
6.5
%
Income from operations
   
30,078
     
28,338
     
6.1
%
Operating margin
   
9.7
%
   
9.1
%
   
60
bp
Income before income taxes
   
29,696
     
27,898
     
6.4
%
Income taxes
   
7,339
     
10,963
     
(33.1
)%
Net income
   
22,334
     
16,935
     
31.9
%
                         
 
Net Sales
 
Overall, our net sales were slightly lower in fiscal 2017 compared to a year ago, with mattress fabric net sales increasing 2.4% and upholstery fabric net sales decreasing 6.1%. The decrease in upholstery fabric net sales was primarily due to the soft retail environment for residential furniture that persisted for most of fiscal 2017.
24

Income Before Income Taxes
 
Despite the decrease in net sales noted above, income before income taxes increased 6.4% compared to the same period a year ago. This was primarily due to the improvement in profitability from our mattress fabrics segment, due to lower raw material costs and the benefits of our capital investments, partially offset by higher SG&A expenses.

Income Taxes
 
We recorded income tax expense of $7.3 million, or 24.7% of income before income tax expense, in fiscal 2017, compared with income tax expense of $11.0 million, or 39.3% of income before income tax expense, in fiscal 2016. This decrease primarily represents an income tax benefit of $3.4 million for the reversal of an uncertain income tax position associated with foreign jurisdictions in which the statute of limitations expired.
 
See the Segment Analysis section located in the Results of Operations for further details.
 
Liquidity
 
At April 30, 2017, our cash and cash equivalents, short-term investments, and long-term investments (held-to-maturity) totaled $54.2 million compared with $42.1 million at May 1, 2016. This increase from the end of fiscal 2016 was primarily due to net cash provided by operating activities of $33.0 million, partially offset by $12.9 million in capital expenditures (of which $1.1 million was vendor-financed) that were mostly associated with our mattress fabric segment, $1.1 million in our investment in an unconsolidated joint venture located in Haiti, $6.3 million in dividend payments, and $1.4 million in long- term investment purchases associated with our Rabbi Trust that funds our deferred compensation plan. Our net cash provided by operating activities of $33.0 million in fiscal 2017 increased $6.2 million compared with $26.8 million in fiscal 2016. The increase in our net cash provided by operating activities is primarily due to increased earnings in fiscal 2017.

Currently, we do not have any borrowings outstanding under our credit agreements.
 
Dividend Program
 
On June 13, 2017, we announced that our board of directors approved the payment of a special cash dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.08 per share. These dividend payments are payable on July 17, 2017, to shareholders of record as of July 3, 2017.

During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
 
During fiscal 2016, dividend payments totaled $8.1 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $3.1 million represented our regular quarterly cash dividend payments ranging from $0.06 to $0.07 per share.

Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.
 
Common Stock Repurchases
 
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.
25

During fiscal 2017, there were no repurchases of our common stock.

At April 30, 2017, we had $5.0 million available for additional repurchases of our common stock.
 
Results of Operations
 
The following table sets forth certain items in our consolidated statements of net income as a percentage of net sales.
 
 
Fiscal
   
Fiscal
   
Fiscal
 
   
2017
   
2016
   
2015
 
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
Cost of sales
   
77.6
     
79.2
     
82.1
 
Gross profit
   
22.4
     
20.8
     
17.9
 
Selling, general and administrative expenses
   
12.7
     
11.7
     
10.6
 
Income from operations
   
9.7
     
9.1
     
7.3
 
Interest income, net
   
0.1
     
0.0
     
0.2
 
Other expense
   
(0.2
)
   
(0.2
)
   
(0.1
)
Income before income taxes
   
9.6
     
8.9
     
7.4
 
Income taxes *
   
24.7
     
39.3
     
34.3
 
Loss from investment in unconsolidated joint venture
   
0.0
     
0.0
     
0.0
 
Net income
   
7.2
%
   
5.4
%
   
4.9
%
 
*
Calculated as a percentage of income before income taxes.

26

2017 compared with 2016
 
Segment Analysis
 
Mattress Fabrics Segment
                   
    Twelve Months Ended           
                   
 (dollars in thousands)   April 30, 2017     May 1, 2016     Change  
 
Net sales
 
$
190,805
   
$
186,419
     
2.4
%
Gross profit
   
43,065
     
38,718
     
11.2
%
Gross profit margin
   
22.6
%
   
20.8
%
   
180
bp
SG&A expenses
   
13,685
     
12,223
     
12.0
%
Income from operations
   
29,380
     
26,496
     
10.9
%
Operating margin
   
15.4
%
   
14.2
%
   
120
bp
 
Net Sales
                       
 
Our mattress fabrics segment reported year-over-year improvement in net sales, in spite of disruptions within the mattress industry and a soft retail sales environment. Our focus on design and innovation continues to remain our top priority and has allowed us to provide a favorable product mix of mattress fabrics and cut and sew covers across most price points and style trends. Our mattress cover business, known as CLASS, has continued to perform well. The growth in CLASS has allowed us to develop new products with existing customers and reach new customers and additional market segments, especially the growing internet bed in a box space. Our scalable and flexible manufacturing platform supports our focus on design and innovation, and we have made significant capital investments to improve our operating efficiencies and overall capacity.
 
Industry disruptions and demand trends have caused some short-term uncertainty 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 in orders from them, but at the same time, we have indications from other large customers that our levels of business with them is expected to increase. The structure of our supply arrangements and contracts with major customers is such that it is difficult 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. Nonetheless, we are cautiously optimistic that we will not experience a significant negative impact on our mattress fabrics business related to these issues. While industry disruptions and demand issues in the bedding industry may affect sales trends in the short term, we believe that challenges with certain customers will at least be partially offset by increased sales and opportunities with others.
27

Gross Profit and Operating Income

Overall
 
Our mattress fabric gross profit and operating income increased in fiscal 2017 compared to fiscal 2016. The increase in this segment’s operating income primarily reflects lower raw material costs and benefits of our capital investments. Additionally, operating income for mattress fabrics was negatively affected by SG&A expenses relating to higher inventory warehousing costs, design and sales expenses, and non- recurring plant facility consolidation charges (approximately $560,000 for fiscal 2017) associated with the expansion projects located in North Carolina noted below.

In addition to the industry disruptions and demand trends discussed above, this segment’s operating income will continue to be affected during the first quarter of fiscal 2018 by non-recurring plant consolidation charges associated with the expansion projects located in North Carolina.
 
Capital Projects
 
During fiscal 2017, we continued to make substantial capital investments and significant changes within our multi-country production facilities that are designed to enhance our operations and improve product delivery performance. Below is a summary of our capital projects:
 

·
Our building expansion projects in North Carolina, including a new distribution center and knitted fabric plant consolidation, were substantially complete as of the fourth quarter of fiscal 2017.

·
We expect to have all of the associated equipment relocated and new installations finalized by the end of the first quarter of fiscal 2018.
 
·
We completed expansion of our Canadian operations in the fourth quarter of fiscal 2017, with additional finishing equipment and a new distribution center that will allow us to ship directly to our customers in Canada.

·
We are moving our CLASS production platform to a new location in July 2017 that offers a more efficient and streamlined production flow and access to a larger labor pool. Additionally, this facility will include expanded showroom and production development space.
 
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 production in the second quarter of fiscal 2018 and will complement our 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 fiscal 2017, CLIH incurred a $46,000 net loss that pertained to start-up operating expenses in the fourth quarter. Our equity in this net loss was $23,000, 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)
 
April 30,
2017
   
May 1,
2016
 
total assets
 
$
2,258
   
$
-
 
total liabilities
 
$
46
   
$
-
 
total members’ equity
 
$
2,212
   
$
-
 

28

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)   April 30, 2017     May 1, 2016     % Change  
  Accounts receivable
and inventory
  $ 47,038     $ 43,472       8.2 %
                         
Property, plant & equipment
   
48,916
     
37,480
     
30.5
%
Goodwill
   
11,462
     
11,462
     
0.0
%
Investment in unconsolidated joint venture
   
1,106
     
-
     
100
%
Non-compete agreement
   
828
     
903
     
(8.3
)%
Customer Relationships
   
664
     
715
     
(7.1
)%
 
Accounts Receivable & Inventory
                       
 
As of April 30, 2017, accounts receivable and inventory increased $3.6 million compared with May 1, 2016. This included an increase in inventory of $2.5 million, as a result of having higher inventory levels to meet expected demand trends for new production introductions, and a $1.1 million increase in accounts receivable primarily due to the extension of discount credit terms with certain key customers that occurred in the fourth quarter of fiscal 2017.

Property, Plant & Equipment
 
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. The $37.5 million at May 1, 2016, represents property, plant, and equipment of $24.8 million and $12.7 million located in the U.S. and Canada, respectively.
 
As of April 30, 2017, property, plant, and equipment increased $11.4 million compared with May 1, 2016. This increase is due to capital expenditures of $17.6 million that primarily relate to the construction of a new building (see Note 11 of the consolidated financial statements for further details) and purchases and installation of machinery and equipment, partially offset by depreciation expense of $6.2 million for fiscal 2017.

Investment in Unconsolidated Joint Venture
 
Our investment in unconsolidated joint venture represents our fifty percent ownership of CLIH noted above.

Non-Compete Agreement and Customer Relationships
 
The decreases in carrying values of our non-compete agreement and customer relationships at April 30, 2017, compared with May 1, 2016, are primarily due to amortization expense in fiscal 2017.
29

Upholstery Fabrics Segment

Net Sales

     
  Twelve Months Ended   
 
 
(dollars in thousands)
April 30, 2017
        May 1, 2016    
% Change
 
 
Non U.S. Produced
 
$
109,012
     
92
%  
115,167
     
91
%
   
(5.3
)%
U.S Produced
   
9,727
     
8
   
11,274
     
9
%
   
(13.7
)%
Total
 
$
118,739
     
100
 %  
126,441
     
100
%
   
(6.1
)%
 
Our decrease in net sales primarily reflects the soft retail environment for residential furniture that has persisted for most of fiscal 2017 and our strategy to change our product mix to improve our profitability.
 
In spite of the challenging demand trends, we continued to execute our product-driven strategy with a focus on design and innovation. As a result, we have seen positive demand trends for our performance line of highly durable and stain resistant upholstery fabrics. We have also experienced meaningful sales growth in the hospitality segment, which accounted for a higher percentage of overall upholstery fabric net sales in fiscal 2017. The hospitality segment is a key area of focus in our product diversification strategy.

Our 100% owned China platform supports our marketing efforts with the manufacturing flexibility to adapt to changing furniture market trends and consumer style preferences.

Gross Profit and Operating Income
 
                   
          Twelve Months Ended        
                   
 (dollars in thousands)    April 30, 2017      May 1, 2016      Change  
             
  Gross profit
 
$
26,170
   
$
26,393
     
(0.8
)%
Gross profit margin
   
22.0
%
   
20.9
%
   
110
bp
SG&A expenses
   
15,079
     
15,094
     
(0.1
)%
Income from operations
   
11,091
     
11,298
     
(1.8
)%
Operating margin
   
9.3
%
   
8.9
%
   
40
bp
 
Despite the decrease in net sales noted above, our gross profit and operating margins increased in fiscal 2017 compared with the same period a year ago. This trend reflects our strategy to enhance both our customer and product mix to improve our profitability, and lower operating expenses due to more favorable currency exchange rates in China.
 
30

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

     
 
   
(dollars in thousands)
April 30, 2017
  May 1, 2016  
% Change
 
  Accounts receivable and inventory
 
$
29,021
   
$
26,540
     
9.4
%
                         
Property, plant & equipment
   
1,879
     
 1,564
     
20.1
%
 
Accounts Receivable & Inventory
 
As of April 30, 2017, accounts receivable and inventory increased $2.5 million compared with May 1, 2016. This increase was due to an increase in inventory of $2.5 million, as a result of customers requiring us to hold higher inventory levels of key products.
 
Property, Plant & Equipment
 
The $1.9 million at April 30, 2017, represents property, plant, and equipment located in the U.S. of $1.2 million and located in China of $655,000. The $1.6 million at May 1, 2016, represents property, plant, and equipment located in the U.S. of $893,000 and located in China of $671,000.

Other Income Statement Categories
 
   
Twelve Months Ended
 
(dollars in thousands)                             
  April 30, 2017     May 1, 2016    
% Change
 
 
SG&A expenses                                                                   
  $ 39,157     $ 36,773      
6.5
%
Interest income                                                                        
    299       176      
69.9
%
Other expense                                                                        
    681       616      
10.6
%
 
Selling, General and Administrative Expenses
 
The increase in SG&A expenses for fiscal 2017 compared with fiscal 2016, was primarily due to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets. The increase was also due to higher inventory warehousing costs, design and sales expenses, and non-recurring plant facility consolidation charges (approximately $560,000 for fiscal 2017) associated with our mattress fabrics segment.
 
Interest Expense
 
Interest costs charged to operations were $158,000 and $58,000 for fiscal 2017 and 2016, respectively. The interest costs charged to operations were fully offset by interest costs for the  construction of qualifying fixed assets that were capitalized and will be amortized over the related assets’ useful lives.
31

 
Interest Income
 
Interest income increased for fiscal 2017 compared with fiscal 2016. The increase 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 primarily ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are  classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity.
 
Other Expense
 
Other expense for fiscal 2017 was comparable to fiscal 2016.
 
Income Taxes
 
Effective Income Tax Rate
 
We recorded income tax expense of $7.3 million, or 24.7% of income before income tax expense, in fiscal 2017 compared with income tax expense of $11.0 million, or 39.3% of income before income tax expense, in fiscal 2016. The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:
 
   
2017
   
2016
 
federal income tax rate
   
34.0
%
   
34.0
%
tax effects of Chinese foreign exchange gains
   
1.6
     
4.4
 
change in valuation allowance
   
(0.2
)
   
(1.2
)
change in North Carolina income tax rates
   
 -
      0.7  
reversal of foreign uncertain income tax position
    (11.6
)
   
-
 
other
   
0.9
     
1.4
 
     
24.7
%
   
39.3
%
 
Deferred Income Taxes – Valuation Allowance
               
Summary
               
 
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 9 located in the notes to the consolidated financial statements for disclosures regarding our assessments of our recorded valuation allowance as of April 30, 2017 and May 1, 2016, respectively.
 
Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries
 
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.
32

 
Refer to Note 9 located in the notes to the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with our undistributed earnings from our foreign subsidiaries as of April 30, 2017 and May 1, 2016, respectively.

Uncertainty in Income Taxes
 
Our gross unrecognized income tax benefit of $12.2 million at April 30, 2017, relates to tax positions for which significant change is reasonably possible within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2005 and subsequent due to loss carryforwards. Canadian federal 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 Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal years 2014 through 2016, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 2018. During the third quarter of fiscal 2017, Revenue Quebec commenced an examination of our Canadian provincial (Quebec) income tax returns for fiscal years 2013 through 2015, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 2018.

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

During the fiscal 2017, we recognized an income tax benefit of $3.4 million for the reversal of an uncertain income tax position associated with certain foreign jurisdictions in which the statute of limitations expired. Accordingly, of this $3.4 million income tax benefit, $2.1 million and $1.3 million were treated as discrete events in which the full income tax effects of these adjustments were recorded in the third and fourth quarters, respectively.
 
Income Taxes Paid
 
We reported income tax expense of $7.3 million and $11.0 million in fiscal 2017 and 2016, respectively. Currently, we are not paying income taxes in the United States as we have an estimated $9.0 million in operating loss carryforwards at April 30, 2017. However, we did have income tax payments of $5.5 million in fiscal 2017 and $6.7 million in fiscal 2016. Our income tax payments are associated with our subsidiaries located in China and Canada.
33

 
2016 compared with 2015
 
Segment Analysis
 
Mattress Fabrics Segment
             
    Twelve Months Ended  
 (dollars in thousands)   May 1, 2016     May 3, 2015     Change  
   Net sales
 
$
186,419
   
$
179,739
     
3.7
%
Gross profit
   
38,718
     
32,877
     
17.8
%
Gross profit margin
   
20.8
%
   
18.3
%
   
250
bp
SG&A expenses
   
12,223
     
11,206
     
9.1
%
Income from operations
   
26,496
     
21,671
     
22.3
%
Operating margin
   
14.2
%
   
12.1
%
   
210
bp
 
Net Sales
 
Our steady sales growth for fiscal 2016 outperformed overall industry trends. Our focus on design and innovation allowed us to create a diversified product mix of products from mattress fabrics to finished cover. As a result, we achieved significant progress in our mattress cover business during fiscal 2016 compared to the same period a year earlier. This has allowed us to reach new customers and additional market segments, especially the internet bedding space.
 
Our mattress fabric net sales also were affected somewhat by increased customer pricing pressures and the fact that fiscal 2016 contained one less week of operations compared with fiscal 2015.
 
Gross Profit and Operating Income
 
Our increased gross profit and operating income reflected the benefits of our capital investments that were placed into service in the last half of fiscal 2015, which included increased production capacity via newer and more efficient equipment, enhanced finishing capabilities, and improved overall efficiency and throughput. During the last half of fiscal 2016, we completed the first phase of our expansion project at our facility located in Canada, which primarily included the installation of additional new equipment and other technological improvements to our manufacturing platform.

The increases in our gross profit and operating income for this segment were also due to lower raw material costs and lower operating expenses due to more favorable exchange rates in Canada.

Partially offsetting the improvement in operating income was an increase in SG&A expenses, due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre- established performance targets. Also, the improvement in operating income was somewhat affected by increased customer pricing pressures as noted above.

Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant and equipment, goodwill, a non- compete agreement and customer relationships associated with an acquisition.
34

 
                   
(dollars in thousands)
  May 1, 2016     May 3, 2015     % Change  
   Accounts receivable
and inventory
  $ 43,472     $ 41,328       5.2 %
Property, plant & equipment
   
37,480
     
33,773
     
11.0
%
Goodwill
   
11,462
     
11,462
     
0.0
%
Non-compete agreement
   
903
     
979
     
(7.8
)%
Customer Relationships
   
715
     
766
     
(6.7
)%
 
 
                       
Accounts Receivable & Inventory
 
The increase in accounts receivable and inventory was due to an increase in inventory of $4.6 million, as a result of customers requiring us to hold higher inventory levels of key products. This was partially offset by a decrease in accounts receivable of $2.5 million due to improved cash collections in the fourth quarter of fiscal 2016 compared with the fourth quarter fiscal 2015.
 
Property, Plant & Equipment

The $37.5 million at May 1, 2016, represented property, plant and equipment of $24.8 million and $12.7 million located in the U.S. and Canada, respectively. The $33.8 million at May 3, 2015, represented property, plant, and equipment of $23.8 million and $10.0 million located in the U.S. and Canada, respectively.

The increase in property, plant, and equipment for this segment was due to the capital expansion projects noted above, offset by depreciation expense.
 
Non-Compete Agreement and Customer Relationships
 
The decreases in carrying values of our non-compete agreement and customer relationships at May 1, 2016, compared with May 3, 2015 were primarily due to amortization expense in fiscal 2016.

Upholstery Fabrics Segment
 
Net Sales
 
       
 
   Twelve Months Ended  
(dollars in thousands)
 
May 1, 2016
 
    May 3, 2015    
% Change
 

Non U.S. Produced
 
$
115,167
     
91
%
  $ 119,177      
92
%
   
(3.4
)%
U.S Produced
   
11,274
     
9
%
    11,250      
8
%
   
0.2
%
Total
 
$
126,441
     
100
%
  $ 130,427      
100
%
   
(3.1
)%
 
Our decrease in net sales reflected softer retail demand for home furnishings and our strategy to change our product mix to improve our profitability. Our upholstery fabric net sales were also affected by the fact that fiscal 2016 contained one less week of operations compared with the same period a year earlier and by the closure of our finished goods warehouse and distribution facility located in Poland during the third quarter of fiscal 2015.
35

Gross Profit and Operating Income

             
    Twelve Months Ended  
 (dollars in thousands)   May 1, 2016     May 3, 2015     Change  
 
Gross profit
 
$
26,393
   
$
22,690
     
16.3
%
Gross profit margin
   
20.9
%
   
17.4
%
   
350
bp
SG&A expenses
   
15,094
     
14,562
     
3.7
%
Income from operations
   
11,298
     
8,128
     
39.0
%
Operating margin
   
8.9
%
   
6.2
%
   
270
bp
 
The increases in this segment's gross profit and operating income reflected the benefits of our strategic focus on product innovation and sales diversification. The benefits included an enhanced product mix that resulted in greater operating efficiency and capacity utilization. We also experienced lower raw material costs and operating expenses due to more favorable foreign exchange rates in China.
 
Partially offsetting the improvement in income from operations was an increase in SG&A expenses due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre- established performance targets, and some pricing pressures from key customers.
 
Also, our profitability was affected by non-recurring charges of approximately $200,000 during the second quarter of fiscal 2015 related to the closure of our Culp Europe operation. No corresponding charge was recorded in fiscal 2016.
 
Segment Assets
 
Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.

     
 
   
(dollars in thousands)
May 1, 2016
  May 3, 2015  
% Change
 
Accounts receivable
and inventory
 
$
26,540
   
$
29,905
     
 (11.3
)
                         
Property, plant & equipment 
   
 1,564
     
1,467
     
6.6
%
 
 
 
 
 

 

 
Accounts Receivable & Inventory
 
The decrease in accounts receivable and inventory was primarily due to a decrease in this segment's accounts receivable as a result of lower net sales and improved cash collections in the fourth quarter of fiscal 2016 compared with the fourth quarter of fiscal 2015.
 
Property, Plant & Equipment
 
The $1.6 million at May 1, 2016, represented property, plant, and equipment located in the U.S. of $893,000 and located in China of $671,000. The $1.5 million at May 3, 2015, represented property, plant, and equipment located in the U.S. of $848,000 and located in China of $619,000.
36


Other Income Statement Categories

             
    Twelve Months Ended  
 (dollars in thousands)   May 1, 2016     May 3, 2015     % Change  
 
SG&A expenses
 
$
36,773
   
$
32,778
     
12.2
%
Interest expense
   
-
     
64
     
(100.0
)%
Interest income
   
176
     
622
     
(71.7
)%
Other expense
   
616
     
391
     
57.5
%
 
Selling, General and Administrative Expenses
 
The increase in SG&A expenses was primarily due to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets in fiscal 2016 compared to fiscal 2015.

Interest Expense
 
Interest expense decreased in fiscal 2016 compared with fiscal 2015. This trend primarily reflected lower outstanding balances of long-term debt and interest costs that were capitalized in connection with our capital investments associated with our mattress fabrics segment. Interest costs charged to operations and incurred on our long-term debt and lines of credit were $58,000 and $235,000 for fiscal 2016 and 2015, respectively. Interest costs charged to operations were reduced by $58,000 and $171,000 for capitalized interest costs for fiscal 2016 and 2015, respectively.
 
Interest Income

Interest income decreased in fiscal 2016 compared with fiscal 2015. This trend reflected higher cash and cash equivalents and short-term investment balances held in U.S. dollar denominated account balances during fiscal 2016 compared with fiscal 2015. Cash and cash equivalents and short-term investment balances held in U.S. dollar denominated account balances earned lower interest rates as compared to our cash and cash equivalents and short-term investment balances denominated in the local currency of our foreign subsidiaries.
 
Other Expense
 
The increase in other expense was primarily due to foreign exchange rate fluctuations associated with our subsidiaries domiciled in Canada and China. Our operations located in Canada and China reported a foreign exchange gain of $6,000 in fiscal 2016 compared to $131,000 in fiscal 2015.
37

Income Taxes
 
Effective Income Tax Rate

We recorded income tax expense of $11.0 million, or 39.3% of income before income tax expense, in fiscal 2016 compared with income tax expense of $7.9 million, or 34.3% of income before income tax expense, in fiscal 2015. The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:
 

   
2016
   
2015
 
federal income tax rate
   
34.0
%
   
34.0
%
tax effects of Chinese foreign exchange gains
   
4.4
     
0.3
 
change in valuation allowance
   
(1.2
)
   
(0.2
)
change in North Carolina income tax rates
   
0.7
     
-
 
other
   
1.4
     
0.2
 
     
39.3
%
   
34.3
%
 
Liquidity and Capital Resources
               
 
Liquidity
               
 
Overall
               
 
Currently, our sources of liquidity include cash and cash equivalents, short-term investments, cash flow from operations, and amounts available under our revolving credit lines. These sources have been adequate for day-to-day operations, capital expenditures, debt payments, common stock repurchases, and dividend payments. We believe our present cash and cash equivalents and short-term investment balance of $23.2 million at April 30, 2017, cash flow from operations, and current availability under our revolving credit lines will be sufficient to fund our business needs and our contractual obligations (see commitments table below).
 
At April 30, 2017, our cash and cash equivalents, short-term investments, and long-term investments (held-to-maturity) totaled $54.2 million compared with $42.1 million at May 1, 2016. This increase from the end of fiscal 2016 was primarily due to net cash provided by operating activities of $33.0 million, partially offset by $12.9 million in capital expenditures (of which $1.1 million was vendor-financed) that were mostly associated with our mattress fabric segment, $1.1 million in our investment in an unconsolidated joint venture located in Haiti, $6.3 million in dividend payments, and $1.4 million in long- term investment purchases associated with our Rabbi Trust that funds our deferred compensation plan. Our net cash provided by operating activities of $33.0 million in fiscal 2017 increased $6.2 million compared with $26.8 million in fiscal 2016. The increase in our net cash provided by operating activities is primarily due to increased earnings in fiscal 2017.

Currently, we do not have any borrowings outstanding under our credit agreements.
 
Our cash and cash equivalents and short-term investments may be adversely affected by factors beyond our control, such as weakening industry demand and delays in receipt of payments on accounts receivable.
38

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

A summary of our cash and cash equivalents, short-term investments, and long-term investments (held-to- maturity) by geographic area follows:
 
   
April 30,
   
May 1,
 
(dollars in thousands)
 
2017
   
2016
 
Cayman Islands
 
$
34,966
    $
25,762
 
China
   
12,722
     
8,454
 
Canada
   
4,268
     
6,844
 
United States
   
2,228
     
1,086
 
   
$
54,184
    $
42,146
 
 
Since April 2015, we distributed earnings and profits totaling $39.2 million from our subsidiaries located in China to our international holding company located in the Cayman Islands. This shift was primarily due to our strategy of mitigating our risk to foreign exchange rate fluctuations for assets and liabilities denominated in Chinese Yuan Renminbi. By limiting the amount of cash and cash equivalents held in Chinese Yuan Renminbi, we are able to obtain a better balance of assets and liabilities denominated in Chinese Yan Renminbi, and therefore mitigate the risk of foreign currency exchange rate fluctuations in China. In addition, transferring earnings and profits from China to the Cayman Islands provides increased flexibility to ultimately repatriate these earnings and profits to the U.S. for various strategic purposes. Currently, we do not intend to repatriate any earnings and profits to the U.S. until after our U.S. loss carryforwards are fully utilized, which we currently expect to occur in approximately one fiscal year.

During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity.
 
Dividend Program
 
On June 13, 2017, we announced that our board of directors approved the payment of a special cash dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.08 per share. These dividend payments are payable on July 17, 2017, to shareholders of record as of July 3, 2017.

During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
 
During fiscal 2016, dividend payments totaled $8.1 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $3.1 million represented our regular quarterly cash dividend payments ranging from $0.06 to $0.07 per share.
 
Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.
39

 
Common Stock Repurchases
 
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 fiscal 2017, there were no repurchases of our common stock.

At April 30, 2017, we had $5.0 million available for additional repurchases of our common stock.
 
Working Capital
 
Accounts receivable at April 30, 2017, were $24.6 million, an increase of 5% compared with $23.5 million at May 1, 2016. This increase was primarily due to the extension of discount credit terms with certain key customers associated with our mattress fabrics segment that occurred in the fourth quarter of fiscal 2017. Days’ sales in receivable were 29 days and 28 days during the fourth quarters of fiscal 2017 and 2016, respectively.

Inventories at April 30, 2017, were $51.5 million, an increase of 11% compared with $46.5 million at May 1, 2016. This increase is mostly associated with customers requiring us to hold higher inventory levels of key products associated with the upholstery fabrics segment and to meet expected demand trends for new product introductions in the mattress fabrics segment. Inventory turns were 5.0 and 5.3 during the fourth quarters of fiscal 2017 and 2016, respectively.

Accounts  payable-trade at  April  30, 2017,  was $29.1  million, an  increase of  21% compared with $24.0 million at May 1, 2016. This increase is associated with the increase in our inventories noted above.
 
Operating working capital (accounts receivable and inventories, less accounts payable –trade and capital expenditures) was $40.9 million at April 30, 2017, compared with $45.8 million at May 1, 2016. Operating working capital turnover was 7.3 in fiscal 2017 compared to 7.0 in fiscal 2016.

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 credit 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 April 30, 2017, we were in compliance with all of our financial covenants.

Refer to Note 10 located in the notes to the consolidated financial statements for further details of our revolving credit agreements.
40

Commitments
 
The following table summarizes our contractual payment obligations and commitments for each of the next five fiscal years (in thousands):

    2018     2019     2020     2021     2022     Thereafter     Total  
 Capital expenditures   $ 2,094       -       -       -       -       -     $ 2,094  
Accounts payable - 
capital expenditures
    4,767       1,322       -       -       -       -       6,089  
Operating leases
   
2,154
     
1,307
     
911
     
127
     
78
      -      
4,577
 
Interest expense
   
91
     
-
     
-
     
-
     
-
      -      
91
 
Total (1)
 
$
9,106
     
2,629
     
911
     
127
     
78
      -     $
12,851
 
 
Note: Payment Obligations by End of Each Fiscal Year
 
(1) At April 30, 2017, we had $12.2 million of total gross unrecognized tax benefits, of which $11.8 million and $467,000 were classified as net non-current deferred income taxes and income taxes payable – long-term, respectively. The final outcome of these tax uncertainties is dependent upon various matters including tax examinations, legal proceedings, competent authority proceedings, changes in regulatory tax laws, or interpretations of those tax laws, or expiration of statutes of limitation. As a result of these inherent uncertainties, the company cannot reasonably estimate the timing of payment of these amounts. Of the $12.2 million in total gross unrecognized tax benefits, $3.8 million would not be subject to cash payments due to the company’s U.S. federal and state net operating loss carryforwards.
 
Capital Expenditures

Capital expenditures on a cash basis were $12.9 million (of which $1.1 million was vendor-financed) for fiscal 2017, compared with $11.5 million for fiscal 2016. Capital expenditures for fiscal 2017 and 2016 mostly related to our mattress fabrics segment.
 
Depreciation expense was $7.1 million for fiscal 2017 compared with $6.7 million for fiscal 2016. Depreciation expense for fiscal 2017 and 2016 mostly related to our mattress fabrics segment.

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 $8.0 million for fiscal 2018. The estimated capital expenditures and depreciation expense for fiscal 2018 primarily relate to our 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 for related depreciation expense. Funding for capital expenditures is expected to be primarily from cash provided by operating activities.
 
Accounts Payable – Capital Expenditures
 
At April 30, 2017, we had total amounts due regarding capital expenditures totaling $6.1 million, of which $5.1 million is financed and pertains to completed work for the construction of a new building (see below). Of the total $6.1 million, $4.8 million is required to be paid in fiscal 2018, with a remaining amount of $1.3 million due in fiscal 2019 (May 2018).

At May 1, 2016, we had total amounts due regarding capital expenditures totaling $224,000, which pertained to outstanding vendor invoices, none of which were financed. This amount was paid in full in fiscal 2017.
41

 
Purchase Commitments - Capital Expenditures
 
At April 30, 2017, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $7.2 million. The $7.2 million includes $5.1 million (all of which represents completed work) associated with the construction of a new building noted below.

Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that will expand our distribution capabilities and office space at a current cost of $11.3 million. This agreement required an installment payment of $1.9 million in April 2016, $4.3 million in fiscal 2017, $3.8 million in fiscal 2018, and $1.3 million in fiscal 2019. Interest is being charged on the outstanding installment payments at a rate of $2.25% plus the current 30 day LIBOR rate. Also, we are required to issue a letter of a credit totaling $5.0 million with the contractor being the beneficiary. In addition to the interest that will be charged on the outstanding installment payments, there will be 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month.

This new building is currently expected to be fully operational by the end of our first quarter of fiscal 2018.
 
Handling Costs
 
We record warehousing costs in SG&A expenses. These costs were $4.6 million, $4.2 million, and $3.8 million, in fiscal 2017, 2016, and 2015 respectively. Warehousing costs include the operating expenses of our various finished goods distribution centers, such as personnel costs, utilities, building rent and material handling equipment, and lease expense. Had these costs been included in cost of sales, gross profit would have been $64.6 million or 20.9% of net sales, in fiscal 2017, $60.9 million or 19.5% of net sales, in fiscal 2016, and $51.8 million, or 16.7% of net sales, in fiscal 2015.
 
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.
 
Critical Accounting Policies
 
U.S. generally accepted accounting principles require us to make estimates and assumptions that affect our reported amounts in the consolidated financial statements and accompanying notes. Some of these estimates require difficult, subjective and/or complex judgments about matters that are inherently uncertain, and as a result actual results could differ significantly from those estimates. Due to the estimation processes involved, management considers the following summarized accounting policies and their application to be critical to understanding the company’s business operations, financial condition and results of operations.

Accounts Receivable - Allowance for Doubtful Accounts. Substantially all of our accounts receivable are due from residential furniture and bedding manufacturers. As of April 30, 2017, accounts receivable from furniture manufacturers totaled approximately $9.1 million, and accounts receivable from bedding manufacturers totaled approximately $15.5 million. Additionally, as of April 30, 2017, the aggregate accounts receivable balance of our ten largest customers was $13.8 million, or 56% of trade accounts receivable. No customers within the upholstery fabrics segment accounted for 10% or more of consolidated accounts receivable as of April 30, 2017. One customer within the mattress fabrics segment represented 18% of consolidated accounts receivable at April 30, 2017.
42

 
We continuously perform credit evaluations of our customers, considering numerous inputs including customers’ financial position, past payment history, cash flows and management capability; historical loss experience; and economic conditions and prospects. Once evaluated, each customer is assigned a credit grade. Credit grades are adjusted as warranted. Significant management judgment and estimates must be used in connection with establishing the reserve for allowance for doubtful accounts.  While management believes that adequate allowances for doubtful accounts have been provided in the consolidated financial statements, it is possible that we could experience additional unexpected credit losses.

The reserve balance for doubtful accounts was $414,000 and $1.1 million at April 30, 2017, and May 1, 2016, respectively.
 
Inventory Valuation. We operate as a “make-to-order” and “make-to-stock” business. Although management closely monitors demand in each product area to decide which patterns and styles to hold in inventory, the increasing availability of low cost imports and the gradual shifts in consumer preferences expose the company to markdowns of inventory.

Management continually examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value. Experience has shown that the most significant indicator of the need for inventory markdowns is the age of the inventory and the planned discontinuance of certain patterns. As a result, the company provides inventory valuation markdowns based upon set percentages for inventory aging categories, generally using six, nine, twelve and fifteen month categories. We also provide inventory valuation write-downs based on the planned discontinuance of certain products based on the current market values at that time as compared to their current carrying values. While management believes that adequate markdowns for excess and obsolete inventory have been made in the consolidated financial statements, significant unanticipated changes in demand or changes in consumer tastes and preferences could result in additional excess and obsolete inventory in the future.
 
The reserve for inventory markdowns was $3.4 million and $3.1 million at April 30, 2017, and May 1, 2016, respectively.

Goodwill. Management assesses goodwill for impairment at the end of each fiscal year or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying values. In accordance with ASU No. 2011-08, Intangibles – Goodwill and Other, we performed our annual impairment test on a qualitative basis. Based on our qualitative assessment, we determined that our goodwill is not impaired using a more likely than not standard.
 
The company’s goodwill of $11.5 million at April 30, 2017, relates to the mattress fabrics segment.

Although we believe we have based the impairment testing on reasonable estimates and assumptions, the use of different estimates and assumptions could result in materially different results.
 
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for temporary differences between the financial statement carrying amounts and the tax bases of the company’s assets and liabilities and operating loss and tax credit carryforwards at income tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred income taxes of a change in tax rates is recognized in income (loss) in the period that includes the enactment date.
 
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 this assessment, we recorded a partial valuation allowance of $536,000 and $590,000 million against our net deferred tax assets at April 30, 2017 and May 1, 2016, respectively. Our valuation allowance of $536,000 at April 30, 2017, represents a $464,000 valuation allowance against certain U.S. state net operating loss carryforwards and credits and a valuation allowance of $72,000 against our loss carryforwards associated with our Culp Europe operation located in Poland. Our valuation allowance of $590,000 at May 1, 2016, represents a $518,000 valuation allowance against certain U.S. state net operating loss carryforwards and credits and a valuation allowance of $72,000 against our loss carryforwards associated with our Culp Europe operation located in Poland.
43

 
Refer to Note 9 located in the notes to the consolidated statements for additional disclosures regarding our assessment of our recorded valuation allowance as of April 30, 2017 and May 1, 2016, respectively.
 
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.
 
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.
 
In accordance with ASC Topic 740, we must recognize the income tax impact from an uncertain income tax position only if it is more likely than not that the income tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The income tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain income tax positions are recorded as income tax expense. Significant judgment is required in the identification of uncertain income tax positions and in the estimation of penalties and interest on uncertain income tax positions.
 
At April 30, 2017, we had $12.2 million of total gross unrecognized tax benefits, of which $11.8 million and $467,000 were classified as net non-current deferred income taxes and income taxes payable – long- term, respectively, in the accompanying consolidated balance sheets.
 
Stock-Based Compensation. ASC Topic 718, “Compensation-Stock Compensation”, requires that all stock-based compensation be recognized as compensation expense in the financial statements and that such cost be measured at the grant date for awards issued to employees and our board of directors. Equity awards issued to non-employees are measured at the earlier date of when the performance criteria are met or at the end of each reporting period.
 
Compensation expense for unvested incentive stock options and time vested restricted stock awards are amortized on a straight-line basis over the remaining vesting periods. At April 30, 2017, there were 1,200 shares of time vested restricted stock awards that were unvested and no unvested incentive stock options. Our common stock awards issued to our board of directors vest immediately, and therefore, compensation cost was measured at the closing price of our common stock on the date of grant and recognized in full at that time. Compensation expense for performance based restricted stock units is recorded based on an assessment each reporting period of the probability that certain performance goals will be met during the contingent vesting period. If performance goals are not probable of occurrence, no compensation expense will be recognized. Performance goals that were previously deemed probable and were not or are not expected to be met, previously recognized compensation cost will be reversed. At April 30, 2017, the remaining compensation cost related to our performance based restricted stock units was $3.9 million.
44

 
We recorded $3.4 million, $2.7 million, and $786,000 of compensation expense within selling, general, and administrative expense for our equity based awards in fiscal 2017, 2016, and 2015, respectively.
 
Excess income tax benefits related to our equity incentive plans are reflected as financing cash inflows on the Statement of Cash Flows. We have elected to record the additional excess tax benefits associated with our equity incentive awards as a reduction in current income tax payable prior to utilizing any net operating loss carryforward.
 
Our equity incentive plans are described more fully in Note 12 in the notes to the consolidated financial statements.

Adoption of New Accounting Pronouncements

Refer to Note 1 located in the notes to the consolidated statements for recently adopted accounting pronouncements for fiscal 2017.
 
Recently Issued Accounting Standards

Refer to Note 1 located in the notes to the consolidated statements for recently issued accounting pronouncements for fiscal 2018 and beyond.
 
45

 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

At April 30, 2017, our U.S. revolving credit agreement requires interest to be charged at a rate (applicable interest rate of 2.45% at April 30, 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 April 30, 2017, there were no borrowings outstanding under any of our revolving credit lines.
 

We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in Canada and China. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currency of our subsidiaries domiciled in Canada and China, although there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the United States dollar as their functional currency. A substantial portion of the company’s imports purchased outside the United States are denominated in U.S. dollars. A 10% change in the above exchange rates at April 30, 2017, would not have had a significant impact on our results of operations or financial position.
 

46

 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders Culp, Inc.:

We have audited the accompanying consolidated balance sheets of Culp, Inc. (a North Carolina Corporation) and Subsidiaries (the “Company”) as of April 30, 2017 and May 1, 2016, and the related consolidated statements of net income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Culp, Inc. and Subsidiaries as of April 30, 2017 and May 1, 2016 and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2017 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of April 30, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 14, 2017 expressed an unqualified opinion.


/s/ GRANT THORNTON LLP

Raleigh, North Carolina
July 14, 2017
 
47

 
CONSOLIDATED BALANCE SHEETS
           
             
             
(dollars in thousands, except per share data and preferred and common stock shares)
           
             
April 30, 2017 and May 1, 2016
 
2017
   
2016
 
ASSETS
           
current assets:
           
cash and cash equivalents
 
$
20,795
   
$
37,787
 
short-term investments
   
2,443
     
4,359
 
accounts receivable, net
   
24,577
     
23,481
 
inventories
   
51,482
     
46,531
 
income taxes receivable
   
-
     
155
 
other current assets
   
2,894
     
2,477
 
total current assets
   
102,191
     
114,790
 
                 
property, plant and equipment, net
   
51,651
     
39,973
 
goodwill
   
11,462
     
11,462
 
deferred income taxes
   
419
     
2,319
 
long-term investments - held-to-maturity
   
30,945
     
-
 
long-term investments - rabbi trust
   
5,466
     
4,025
 
investment in unconsolidated joint venture
   
1,106
     
-
 
other assets
   
2,394
     
2,573
 
total assets
 
$
205,634
   
$
175,142
 
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
current liabilities:
               
accounts payable - trade
 
$
29,101
   
$
23,994
 
accounts payable - capital expenditures
   
4,767
     
224
 
accrued expenses
   
11,947
     
11,922
 
income taxes payable
   
287
     
180
 
total current liabilities
   
46,102
     
36,320
 
                 
accounts payable - capital expenditures
   
1,322
     
-
 
income taxes payable - long-term
   
467
     
3,841
 
deferred income taxes
   
3,593
     
1,483
 
deferred compensation
   
5,520
     
4,686
 
total liabilities
   
57,004
     
46,330
 
                 
commitments and contingencies (notes 10 and 11)
               
                 
shareholders' equity:
               
preferred stock, $.05 par value, authorized 10,000,000 shares
   
-
     
-
 
common stock, $.05 par value, authorized 40,000,000
               
shares, issued and outstanding 12,356,631 at
               
April 30, 2017 and 12,265,489 at May 1, 2016
   
618
     
614
 
capital contributed in excess of par value
   
47,415
     
43,795
 
accumulated earnings
   
100,601
     
84,547
 
accumulated other comprehensive loss
   
(4
)
   
(144
)
total shareholders' equity
   
148,630
     
128,812
 
total liabilities and shareholders' equity
 
$
205,634
   
$
175,142
 
                 
The accompanying notes are an integral part of these consolidated financial statements.
               
 
48

 
CONSOLIDATED STATEMENTS OF NET INCOME
                 
                   
For the years ended April 30, 2017, May 1, 2016 and May 3, 2015
             
                   
                   
(dollars in thousands, except per share data)
 
2017
   
2016
   
2015
 
                   
net sales
 
$
309,544
   
$
312,860
   
$
310,166
 
cost of sales
   
240,309
     
247,749
     
254,599
 
gross profit
   
69,235
     
65,111
     
55,567
 
                         
selling, general and administrative expenses
   
39,157
     
36,773
     
32,778
 
income from operations
   
30,078
     
28,338
     
22,789
 
                         
interest expense
   
-
     
-
     
64
 
interest income
   
(299
)
   
(176
)
   
(622
)
other expense
   
681
     
616
     
391
 
income before income taxes
   
29,696
     
27,898
     
22,956
 
income tax expense (note 9)
   
7,339
     
10,963
     
7,885
 
loss from investment in unconsolidated joint venture (note 6)
   
23
     
-
     
-
 
net income
 
$
22,334
   
$
16,935
   
$
15,071
 
                         
                         
net income per share-basic
 
$
1.81
   
$
1.38
   
$
1.23
 
net income per share-diluted
 
$
1.78
   
$
1.36
   
$
1.21
 
                         
The accompanying notes are an integral part of these consolidated financial statements.
         
 
 
49

 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
             
                   
For the years ended April 30, 2017, May 1, 2016 and May 3, 2015
             
                   
                   
                   
   
2017
   
2016
   
2015
 
                   
Net income
 
$
22,334
   
$
16,935
   
$
15,071
 
                         
Other comprehensive income (loss)
                       
                         
Unrealized gains (losses) on investments
                       
                         
Unrealized holding gains (losses) on investments
   
128
     
(176
)
   
(35
)