Company Quick10K Filing
Quick10K
Culp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$24.95 12 $309
10-Q 2019-08-04 Quarter: 2019-08-04
10-K 2019-04-28 Annual: 2019-04-28
10-Q 2019-01-27 Quarter: 2019-01-27
10-Q 2018-10-28 Quarter: 2018-10-28
10-Q 2018-07-29 Quarter: 2018-07-29
10-K 2018-04-29 Annual: 2018-04-29
10-Q 2018-01-28 Quarter: 2018-01-28
10-Q 2017-10-29 Quarter: 2017-10-29
10-Q 2017-07-30 Quarter: 2017-07-30
10-K 2017-04-30 Annual: 2017-04-30
10-Q 2017-01-29 Quarter: 2017-01-29
10-Q 2016-10-30 Quarter: 2016-10-30
10-Q 2016-07-31 Quarter: 2016-07-31
10-K 2016-05-01 Annual: 2016-05-01
10-Q 2016-01-31 Quarter: 2016-01-31
10-Q 2015-11-01 Quarter: 2015-11-01
10-Q 2015-08-02 Quarter: 2015-08-02
10-K 2015-05-03 Annual: 2015-05-03
10-Q 2015-02-01 Quarter: 2015-02-01
10-Q 2014-11-02 Quarter: 2014-11-02
10-Q 2014-08-03 Quarter: 2014-08-03
10-K 2014-04-27 Annual: 2014-04-27
10-Q 2014-01-26 Quarter: 2014-01-26
8-K 2019-09-26 Officers, Shareholder Vote, Exhibits
8-K 2019-09-05 Earnings, Exhibits
8-K 2019-06-24 Officers, Exhibits
8-K 2019-06-11 Earnings, Officers, Exhibits
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-03-06 Officers, Exhibits
8-K 2019-02-27 Earnings, Exhibits
8-K 2018-12-08 Other Events, Exhibits
8-K 2018-11-29 Earnings, Exhibits
8-K 2018-09-20 Officers, Shareholder Vote, Exhibits
8-K 2018-08-29 Earnings, Exhibits
8-K 2018-08-13 Enter Agreement
8-K 2018-06-26 Regulation FD, Exhibits
8-K 2018-06-13 Earnings, Exit Costs, Exhibits
8-K 2018-03-08 Regulation FD, Exhibits
8-K 2018-02-28 Earnings, Exhibits
AIN Albany International 2,579
PLG Platinum Group Metals 439
AVD American Vanguard 401
UFI Unifi 355
AAU Almaden Minerals 79
CRWS Crown Crafts 54
AUMN Golden Minerals 25
CSWC Capital Southwest 0
GLAD Gladstone Capital 0
RAND Rand Capital 0
CULP 2019-08-04
Item 1: Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 a52089758ex10_1.htm
EX-10.2 a52089758ex10_2.htm
EX-31.1 a52089758ex31_1.htm
EX-31.2 a52089758ex31_2.htm
EX-32.1 a52089758ex32_1.htm
EX-32.2 a52089758ex32_2.htm

Culp Earnings 2019-08-04

CULP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a52089758.htm CULP, INC. 10-Q


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

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

For the quarterly period ended August 4, 2019
Commission File No. 1-12597

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

 NORTH CAROLINA
 
 56-1001967
 (State or other jurisdiction of 
 
 (I.R.S. Employer Identification No.)
 incorporation or other organization)
 
 
 
 
 
 1823 Eastchester Drive
 
 
 High Point, North Carolina
 
  27265-1402
 (Address of principal executive offices)    
 
  (zip code)
                                                                                             
                                                                         
(336) 889-5161
(Registrant's telephone number, including area code)

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

Title of Each Class
 
Trading Symbol(s)
Name of Each Exchange
On Which Registered
     
Common Stock, par value $.05/ Share
CULP
New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period after the registrant was required to submit such files). ☒ YES      NO  ☐

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

Large accelerated filer      ☐     Accelerated filer     ☒        Non-accelerated filer   ☐

   Smaller Reporting Company     ☐         Emerging Growth Company   ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

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

Common shares outstanding at September 12, 2019:  12,405,014
Par Value: $0.05 per share


INDEX TO FORM 10-Q
For the period ended August 4, 2019


  Page
   

Part I - Financial Statements
 
Financial Statements: (Unaudited)  
     
 
I-1
     
 
I-2
     
  I-3
     
 
I-4
     
  I-5
     
  I-6
     
 
I-7
     
 
I-33
     
I-34
     
I-55
     
I-56
     

 Part II - Other Information  
     
II-1
     
II-1
     
II-1
     
II-2
     

II-3



Item 1:  Financial Statements

CULP, INC.
 
CONSOLIDATED STATEMENTS OF NET INCOME
 
FOR THE THREE MONTHS ENDED AUGUST 4, 2019 AND JULY 29, 2018
 
UNAUDITED
 
(Amounts in Thousands, Except for Per Share Data)
 
             
   
THREE MONTHS ENDED
 
             
   
August 4,
   
July 29,
 
   
2019
   
2018
 
             
Net sales
 
$
74,847
     
71,473
 
Cost of sales
   
61,482
     
60,914
 
Gross profit
   
13,365
     
10,559
 
                 
Selling, general and
               
  administrative expenses
   
10,711
     
8,033
 
Restructuring (credit) expense
   
(35
)
   
451
 
Income from operations
   
2,689
     
2,075
 
                 
Interest expense
   
9
     
20
 
Interest income
   
(249
)
   
(150
)
Other expense
   
87
     
257
 
Income before income taxes
   
2,842
     
1,948
 
                 
Income taxes
   
1,681
     
906
 
                 
(Income) loss from investment in unconsolidated joint venture
   
(13
)
   
77
 
Net income
 
$
1,174
     
965
 
      Net loss (income) attributable to non-controlling interest
   
164
     
(8
)
Net income attributable to Culp, Inc. common shareholders
 
$
1,338
     
957
 
                 
                 
Net income attributable to Culp Inc. common shareholders per share - basic
 
$
0.11
     
0.08
 
Net income attributable to Culp Inc. common shareholders per share - diluted
 
$
0.11
     
0.08
 
Average shares outstanding, basic
   
12,399
     
12,510
 
Average shares outstanding, diluted
   
12,410
     
12,600
 

See accompanying notes to consolidated financial statements.

I-1

CULP, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
FOR THE THREE MONTHS ENDED AUGUST 4, 2019 AND JULY 29, 2018
 
(UNAUDITED)
 
(AMOUNTS IN THOUSANDS)
 
             
   
THREE MONTHS ENDED
 
             
   
August 4,
   
July 29,
 
   
2019
   
2018
 
             
Net income
 
$
1,174
   
$
965
 
                 
Other comprehensive income
               
                 
Unrealized gain on investments, net of tax
               
                 
Unrealized holding gains on investments
   
6
     
40
 
Reclassification adjustment for realized loss on investments
   
-
     
94
 
                 
Total unrealized gain on investments
   
6
     
134
 
                 
Unrealized gain on foreign currency cash flow hedge, net of tax
               
                 
Unrealized holding loss on foreign currency cash flow hedge
   
-
     
(25
)
Reclassification adjustment for realized loss on foreign currency cash flow hedge
   
-
     
40
 
                 
Total unrealized gain on foreign currency cash flow hedge
   
-
     
15
 
                 
Total other comprehensive income
   
6
     
149
 
                 
Comprehensive income
 
$
1,180
   
$
1,114
 
      Comprehensive loss (income) attributable to non-controlling interest
   
164
     
(8
)
Comprehensive income attributable to Culp, Inc. common shareholders
 
$
1,344
   
$
1,106
 

See accompanying notes to consolidated financial statements.

I-2

CULP, INC.
 
CONSOLIDATED BALANCE SHEETS
 
AUGUST 4, 2019, JULY 29, 2018 AND APRIL 28, 2019
 
UNAUDITED
 
(Amounts in Thousands)
 
                   
   
   
        
     August 4,      July 29,      * April 28,
 
   
2019
   
2018
   
2019
 
Current assets:
                 
Cash and cash equivalents
 
$
44,236
     
8,593
     
40,008
 
Short-term investments - Held-To-Maturity
   
-
     
30,756
     
5,001
 
Accounts receivable, net
   
24,090
     
23,225
     
23,751
 
Inventories
   
50,660
     
54,989
     
50,860
 
Current income taxes receivable
   
776
     
-
     
776
 
Assets held for sale
   
100
     
-
     
-
 
Other current assets
   
2,578
     
3,852
     
2,849
 
Total current assets
   
122,440
     
121,415
     
123,245
 
                         
Property, plant and equipment, net
   
47,289
     
53,178
     
48,389
 
Goodwill
   
27,222
     
27,222
     
27,222
 
Intangible assets
   
10,354
     
10,730
     
10,448
 
Long-term investments - Rabbi Trust
   
7,347
     
7,671
     
7,081
 
Right of use assets
   
6,530
     
-
     
-
 
Noncurrent income taxes receivable
   
733
     
-
     
733
 
Deferred income taxes
   
486
     
3,721
     
457
 
Investment in unconsolidated joint venture
   
1,520
     
1,525
     
1,508
 
Other assets
   
526
     
910
     
643
 
Total assets
 
$
224,447
     
226,372
     
219,726
 
                         
Current liabilities:
                       
Accounts payable-trade
 
$
22,628
     
25,070
     
24,377
 
Accounts payable - capital expenditures
   
60
     
862
     
78
 
Operating lease liability - current
   
2,456
     
-
     
-
 
Deferred revenue
   
684
     
634
     
399
 
Accrued expenses
   
8,566
     
8,176
     
9,192
 
Accrued restructuring costs
   
42
     
445
     
124
 
Income taxes payable - current
   
1,116
     
1,244
     
1,022
 
Total current liabilities
   
35,552
     
36,431
     
35,192
 
                         
Line of credit
   
-
     
4,000
     
-
 
Accrued expenses - long-term
   
333
     
749
     
333
 
Subordinated loan payable
   
925
     
-
     
675
 
Operating lease liability - noncurrent
   
3,955
     
-
     
-
 
Contingent consideration - earn-out obligation
   
5,931
     
5,600
     
5,856
 
Income taxes payable - long-term
   
3,640
     
3,733
     
3,249
 
Deferred income taxes
   
2,543
     
2,150
     
3,176
 
Deferred compensation
   
7,232
     
7,679
     
6,998
 
Total liabilities
   
60,111
     
60,342
     
55,479
 
                         
Commitments and Contingencies (Notes 12, 19 and 20)
                       
                         
Shareholders' equity
                       
      Preferred stock, $0.05 par value, authorized
                       
          10,000,000
   
-
     
-
     
-
 
 Common stock, $0.05 par value, authorized
                       
     40,000,000 shares, issued and outstanding
                       
     12,405,014 at August 4, 2019; 12,522,246
                       
     at July 29, 2018; and 12,391,160 at
                       
     April 28, 2019
   
621
     
627
     
620
 
 Capital contributed in excess of par value
   
43,803
     
46,334
     
43,694
 
 Accumulated earnings
   
115,676
     
114,465
     
115,579
 
Accumulated other comprehensive income
   
46
     
64
     
40
 
Total shareholders' equity attributable to Culp Inc.
   
160,146
     
161,490
     
159,933
 
Non-controlling interest
   
4,190
     
4,540
     
4,314
 
Total equity
   
164,336
     
166,030
     
164,247
 
         Total liabilities and shareholders' equity
 
$
224,447
     
226,372
     
219,726
 

*  Derived from audited financial statements.

See accompanying notes to consolidated financial statements.
I-3

CULP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE THREE MONTHS ENDED AUGUST 4, 2019 AND JULY 29, 2018
 
UNAUDITED
 
(Amounts in Thousands)
 
             
   
THREE MONTHS ENDED
 
             
   
August 4,
   
July 29,
 
   
2019
   
2018
 
             
Cash flows from operating activities:
           
Net income
 
$
1,174
     
965
 
Adjustments to reconcile net income to net cash provided by
               
(used in) operating activities:
               
Depreciation
   
1,905
     
2,015
 
Amortization of assets
   
176
     
145
 
Stock-based compensation
   
154
     
(501
)
Deferred income taxes
   
(662
)
   
(2,263
)
Realized loss on sale of short-term investments (Available for Sale)
   
-
     
94
 
(Gain) loss on disposal of equipment
   
(17
)
   
35
 
(Income) loss from investment in unconsolidated joint venture
   
(13
)
   
77
 
Foreign currency exchange gain
   
(47
)
   
(91
)
Changes in assets and liabilities:
               
Accounts receivable
   
(375
)
   
2,837
 
Inventories
   
(25
)
   
(429
)
Other current assets
   
161
     
(989
)
Other assets
   
111
     
34
 
Accounts payable - trade
   
(1,468
)
   
(2,494
)
Deferred revenue
   
285
     
(175
)
Accrued expenses and deferred compensation
   
222
     
(1,566
)
Accrued restructuring costs
   
(82
)
   
445
 
Income taxes
   
524
     
(75
)
Net cash provided by (used in) operating activities
   
2,023
     
(1,936
)
                 
Cash flows from investing activities:
               
Net cash paid for acquisition of businesses
   
-
     
(11,971
)
Capital expenditures
   
(935
)
   
(757
)
Proceeds from the sale of equipment
   
209
     
-
 
Investment in unconsolidated joint venture
   
-
     
(100
)
Proceeds from the sale of short-term investments (Held to Maturity)
   
5,000
     
-
 
Proceeds from the sale of short-term investments  (Available for Sale)
   
-
     
2,458
 
Purchase of short-term investments  (Available for Sale)
   
-
     
(10
)
Purchase of long-term investments (Rabbi Trust)
   
(259
)
   
(302
)
Net cash used provided by (used in) investing activities
   
4,015
     
(10,682
)
                 
Cash flows from financing activities:
               
Proceeds from line of credit
   
-
     
11,000
 
Payments on line of credit
   
-
     
(7,000
)
Payments on vendor-financed capital expenditures
   
-
     
(1,412
)
Proceeds from subordinated loan payable
   
250
     
-
 
Cash paid for acquisition of business
   
(763
)
   
-
 
Dividends paid
   
(1,241
)
   
(1,127
)
Common stock surrendered for withholding taxes payable
   
(44
)
   
(1,292
)
Captial contribution from non-controlling interest
   
40
     
-
 
Common stock repurchased
   
-
     
(72
)
Net cash (used in) provided by financing activities
   
(1,758
)
   
97
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
(52
)
   
(114
)
                 
Increase (decrease) in cash and cash equivalents
   
4,228
     
(12,635
)
                 
Cash and cash equivalents at beginning of period
   
40,008
     
21,228
 
                 
Cash and cash equivalents at end of period
 
$
44,236
     
8,593
 

See accompanying notes to consolidated financial statements.
I-4

CULP, INC.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
THREE-MONTH PERIOD ENDED AUGUST 4, 2019  
UNAUDITED
 
(Dollars in thousands, except share data)
 
                                                 
     Shareholders' eqity attributable to Culp Inc.
             
                                                 
                Capital           Accumulated                    
           Contributed           Other
                   
     Common Stock
     in Excess      Accumulated      Comprehensive           Non-Controlling      Total  
   
Shares
   
Amount
   
of Par Value
   
Earnings
   
Income
   
Total
   
Interest
   
Equity
 
Balance,  April 28, 2019  *
   
12,391,160
     
620
     
43,694
     
115,579
     
40
     
159,933
     
4,314
     
164,247
 
Net income (loss)
   
-
     
-
     
-
     
1,338
     
-
     
1,338
     
(164
)
   
1,174
 
Stock-based compensation
   
-
     
-
     
154
     
-
     
-
     
154
     
-
     
154
 
Unrealized gain on investments
   
-
     
-
     
-
     
-
     
6
     
6
     
-
     
6
 
Common stock issued in connection with vesting
                                                               
of performance based restricted stock units
   
12,776
     
1
     
(1
)
   
-
     
-
     
-
     
-
     
-
 
Fully vested common stock award
   
3,659
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Common stock surrendered for withholding taxes payable
   
(2,581
)
   
-
     
(44
)
   
-
     
-
     
(44
)
   
-
     
(44
)
Dividends paid
   
-
     
-
     
-
     
(1,241
)
   
-
     
(1,241
)
   
-
     
(1,241
)
Capital contribution from non-controlling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
40
     
40
 
Balance,  August 4, 2019
   
12,405,014
     
621
     
43,803
     
115,676
     
46
     
160,146
     
4,190
     
164,336
 

*  Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

I-5

CULP, INC.
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
THREE-MONTH PERIOD ENDED JULY 29, 2018
 
UNAUDITED
 
(Dollars in thousands, except share data)
 
                                                        
     Shareholders' equity attributable to Culp Inc.
               
           
           
                         
           
Capital
           Accumulated
                      
           

Contributed         

Other
                      
     Common Stock
 
in Excess
    Accumulated
    Comprehensive
           Non-Controlling
    Total
 
    Shares
    Amount
    of Par Value
    Earnings
    (Loss) Income
    Total
    Interest
    Equity  
Balance, April 29, 2018 *
   
12,450,276
   
$
623
     
48,203
     
114,635
     
(85
)
 
$
163,376
   
$
-
   
$
163,376
 
Net income
   
-
     
-
     
-
     
957
     
-
     
957
     
8
     
965
 
Acquisition of subsidiary with non-controlling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
4,532
     
4,532
 
Stock-based compensation
   
-
     
-
     
(501
)
   
-
     
-
     
(501
)
   
-
     
(501
)
Unrealized gain on foreign currency cash flow hedge
   
-
     
-
     
-
     
-
     
15
     
15
     
-
     
15
 
Unrealized gain on investments
   
-
     
-
     
-
     
-
     
134
     
134
     
-
     
134
 
Common stock issued in connection with vesting
                                                               
of performance based restricted stock units
   
115,917
     
6
     
(6
)
   
-
     
-
     
-
     
-
     
-
 
Common stock issued in connection with vesting
                                                               
of time-based restricted stock units
   
1,200
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Common stock surrendered for withholding
                                                               
taxes payable
   
(42,157
)
   
(2
)
   
(1,290
)
   
-
     
-
     
(1,292
)
   
-
     
(1,292
)
Common stock repurchased
   
(2,990
)
   
-
     
(72
)
   
-
     
-
     
(72
)
   
-
     
(72
)
Dividends paid
   
-
     
-
     
-
     
(1,127
)
   
-
     
(1,127
)
   
-
     
(1,127
)
Balance,  July 29, 2018
   
12,522,246
     
627
     
46,334
     
114,465
     
64
     
161,490
     
4,540
     
166,030
 

* Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

I-6

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

1.  Basis of Presentation

The accompanying unaudited consolidated financial statements of Culp, Inc. and its majority-owned subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position.  All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results.  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 12, 2019, for the fiscal year ended April 28, 2019.

The company’s three-months ended August 4, 2019, and July 29, 2018, represent 14-week and 13-week periods, respectively.

2. Significant Accounting Policies

As of August 4, 2019, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended April 28, 2019.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on the balance sheet and disclose certain key information about their leasing arrangements. The new standard establishes a right of use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability for certain lease contracts. Topic 842 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. As a result, we adopted Topic 842 on April 29, 2019, electing to use the modified retrospective transition method, which requires us to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, financial information and disclosures will not be provided for periods prior to April 29, 2019.

Topic 842 allows the election of several practical expedients as part of adopting this new standard. We elected the “package of practical expedients” which permits us not to reassess, under Topic 842, our previous conclusions regarding lease identification and classification. We did not elect the use of hindsight with respect to determining the lease term. Also, Topic 842, provides practical expedients after adopting the new standard. We elected the short-term lease exemption, and therefore, we will not recognize ROU assets or lease liabilities for leases shorter than twelve months. We did not elect the practical expedient to combine lease and non-lease components for any class of assets and will account for lease components separately from non-lease components.

The adoption of Topic 842 had a material effect on our Consolidated Balance Sheets and increased the required disclosures in our notes to the consolidated financial statements (see note 19 for further details). The most significant effect related to the recognition of ROU assets totaling $7.2 million that were mostly offset by the recognition of lease liabilities totaling $7.1 million on our Consolidated Balance Sheets. The adoption of Topic 842 did not have a material impact on our Consolidated Statements of Net Income and our Consolidated Statement of Cash Flows.

I-7

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


Recently Issued Accounting Pronouncements

The company has considered all recent accounting pronouncements and currently believes there are no recent accounting pronouncements that may have a material impact on our Consolidated Financial Statements.

3.  Business Combinations

eLuxury, LLC (eLuxury)

Overview

Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement) in which we acquired an initial 80% ownership interest in eLuxury, a company that offers bedding accessories and home goods directly to consumers. eLuxury’s primary products include a line of mattress pads manufactured at eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, as well as other bedding items. Its products are available on eLuxury’s own branded website, eLuxury.com, Amazon, and other leading online retailers for specialty home goods.

This acquisition brings together eLuxury’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise with our global production, sourcing, and distribution capabilities.

The estimated consideration given for the initial 80% ownership interest in eLuxury totaled $18.1 million, of which $12.5 million represents the estimated purchase price and $5.6 million represents the fair value for contingent consideration associated with an earn-out obligation (see below for further details). Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018, $185,000 was paid in August 2018, and $749,000 is to be paid in September 2019, subject to certain conditions as defined in the Equity Agreement.

Assets Acquired and Liabilities Assumed

The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.

(dollars in thousands)
 
Fair Value
 
Goodwill
 
$
13,653
 
Tradename
   
6,549
 
Equipment
   
2,179
 
Inventory
   
1,804
 
Accounts receivable and other current assets
   
108
 
Accounts payable
   
(1,336
)
Accrued expenses
   
(295
)
Non-controlling interest in eLuxury
   
(4,532
)
   
$
18,130
 

We recorded the tradename at fair market value based on the relief from royalty method. This tradename was determined to have an indefinite useful life and, therefore, is not being amortized. Equipment will be depreciated on a straight-line basis over useful lives ranging from five to ten years.
I-8

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


The goodwill related to this acquisition is attributable to eLuxury’s reputation with the products it offers and management’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise. Goodwill is deductible for income tax purposes over the statutory period of fifteen years.

As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires us to pay the seller, who is also the owner of the noncontrolling interest, an earn-out payment based on a multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending August 31, 2021, less $12.0 million We recorded a contingent liability at the acquisition date for this earn-out obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model.

Non-Controlling Interest

The Equity Agreement contains substantive profit-sharing arrangement provisions which explicitly state the ownership interests at the effective date of this business combination and the allocation of net income or loss between Culp Inc., as the controlling interest, and the noncontrolling interest. The Equity Agreement states that at the effective date of this acquisition (June 22, 2018), we acquired an 80% ownership interest in eLuxury with the seller retaining a 20% noncontrolling interest. Additionally, the Equity Agreement states that eLuxury’s net income or loss and future capital contributions will be allocated, at a percentage of 70% and 30% to Culp Inc. and the noncontrolling interest, respectively.

Based on the terms of the Equity Agreement, we believe the related risks associated with the ownership interests are aligned and therefore, the total consideration of $18.1 million for the 80% controlling interest provides information for the equity value of eLuxury as a whole, and is useful in estimating fair value of the 20% noncontrolling interest. In order to determine the carrying value of the noncontrolling interest in eLuxury, we applied the Hypothetical-Liquidation-At-Book-Value method (HLBV). HLBV is an approach that is used in practice to determine the carrying value of a noncontrolling interest if it is consistent with an existing profit-sharing arrangement such as the Equity Agreement. Therefore, the carrying amount of the noncontrolling interest of $4.2 million at August 4, 2019, mostly represents the $4.5 million fair value determined at the acquisition date minus its allocation of net loss subsequent to the acquisition date and through the end of our first quarter of fiscal 2020.

Other

Acquisitions costs totaling $270,000 were included in selling, general, and administrative expenses in our Consolidated Statement of Net Income for the three-month period ending July 29, 2018.
I-9

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


Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations for the three-month periods ending August 4, 2019, and July 29, 2018, have been prepared as if the acquisition of eLuxury had occurred on May 1, 2017.

             
     Three Months Ended     
(dollars in thousands, except per share data)
 
August 4, 2019
   
July 29, 2018
 
Net Sales
 
$
74,847
   
$
74,598
 
Income from operations
   
2,689
     
2,073
 
Net income
   
1,174
     
939
 
Net loss - noncontrolling interest
   
164
     
-
 
 Net income – Culp Inc. common shareholders     1,338
       939  
Net income per share (basic) –
Culp Inc. common shareholders
   
0.11
     
0.08
 
 Net income per share (diluted) –                
        Culp Inc. common shareholders
     0.11        0.07  
















The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would actually have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

4.  Allowance for Doubtful Accounts

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

     Three months ended     
(dollars in thousands)
 
August 4, 2019
   
July 29, 2018
 
Beginning balance
 
$
393
   
$
357
 
Provision for bad debts 
   
(30
)
   
9
 
Net write-offs, net of recoveries     -
      -
 
Ending balance
 
$
363
   
$
366
 

5.  Revenue from Contracts with Customers

Nature of Performance Obligations

Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories.  The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. Effective April 1, 2018, we acquired Read Window Products LLC (Read), a turn-key provider of window treatments that offers sourcing of upholstery fabrics and other products, measuring, and installation services of their own products for the hospitality and commercial industries. In addition, Read supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows. The home accessories segment is our finished products business that manufactures, sources, and sells bedding accessories and home goods directly to consumers and businesses through global e-commerce and business-to-business sales channels.
I-10

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


Our primary performance obligations include the sale of mattress fabrics, upholstery fabrics, and bedding and home accessories products, as well as the performance of customized fabrication and installation services of our own products associated with window treatments.

Contract Assets & Liabilities

Certain contracts, primarily those for customized fabrication and installation services, require upfront customer deposits that result in a contract liability which is recorded on the Consolidated Balance Sheets as deferred revenue.  If upfront deposits or prepayments are not required, customers may be granted credit terms which generally range from 15 – 45 days.  Such terms are common within the industries in which we operate and are not considered financing arrangements.  There were no contract assets recognized as of August 4, 2019, July 29, 2018, and April 28, 2019.

A summary of the activity of deferred revenue for the three-month periods ended August 4, 2019, and July 29, 2018, follows:
       
     Three months ended     
(dollars in thousands)
 
August 4, 2019
   
July 29, 2018
 
Beginning balance
 
$
399
   
$
809
 
Revenue recognized on contract liabilities
   
(483
)
   
(742
)
Payments received for services not yet rendered
   
768
     
567
 
Ending balance
 
$
684
   
$
634
 

Disaggregation of Revenue


The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending August 4, 2019:

Net Sales
   
   Mattress    Upholstery    Home      
 (dollars in thousands)
Fabrics
 
 Fabrics
 
 Accessories
 
Total
 
Products transferred at a point in time
 
$
38,685
   
$
29,827
   
$
4,302
   
$
72,814
 
                                 
Services transferred over time
   
-
     
2,033
     
-
     
2,033
 
                                 
Total Net Sales
 
$
38,685
   
$
31,860
   
$
4,302
   
$
74,847
 

I-11

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

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending July 29, 2018:

Net Sales
   
   Mattress    Upholstery    Home      
(dollars in thousands)
Fabrics
 
 Fabrics
 
Accessories
 
Total
 
Products transferred at a point in time
 
$
34,398
   
$
31,821
   
$
2,585
   
$
68,804
 
                                 
Services transferred over time
   
-
     
2,669
     
-
     
2,669
 
                                 
Total Net Sales
 
$
34,398
   
$
34,490
   
$
2,585
   
$
71,473
 

6.  Inventories

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

A summary of inventories follows:
                   
(dollars in thousands)
 
August 4, 2019
   
July 29, 2018
   
April 28, 2019
 
Raw materials
 
$
6,467
   
$
5,291
   
$
5,617
 
Work-in-process
   
2,677
     
2,413
     
2,289
 
Finished goods
   
41,516
     
47,285
     
42,954
 
   
$
50,660
   
$
54,989
   
$
50,860
 

7.  Intangible Assets

A summary of intangible assets follows:
                   
(dollars in thousands)
 
August 4, 2019
   
July 29, 2018
   
April 28, 2019
 
Tradenames
 
$
7,232
   
$
7,232
   
$
7,232
 
Customer relationships, net
   
2,463
     
2,764
     
2,538
 
Non-compete agreement, net
   
659
     
734
     
678
 
   
$
10,354
   
$
10,730
   
$
10,448
 

Tradenames

A summary of the carrying amount of our tradenames follows:
       
     Three months ended     
(dollars in thousands)
 
August 4, 2019
   
July 29, 2018
 
Beginning balance
 
$
7,232
   
$
683
 
Acquisition of business (note 3)
   
-
     
6,549
 
Ending balance
 
$
7,232
   
$
7,232
 

I-12

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


Our tradenames were determined to have an indefinite useful life and therefore, are not being amortized. However, our tradenames will be assessed annually for impairment.
Customer Relationships
A summary of the change in the carrying amount of our customer relationships follows:
     
  Three months ended    
(dollars in thousands)
August 4, 2019
 
July 29, 2018
 
Beginning balance
 
$
2,538
   
$
2,839
 
Amortization expense
   
(75
)
   
(75
)
Ending balance
 
$
2,463
   
$
2,764
 

Our customer relationships are amortized on a straight-line basis over useful lives ranging from nine to seventeen years.
The gross carrying amount of our customer relationships were $3.1 million at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. Accumulated amortization for these customer relationships were $652,000, $351,000 and $577,000 at August 4, 2019, July 29, 2018, and April 28, 2019, respectively.
The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2020 - $226,000; FY 2021 - $301,000; FY 2022 - $301,000; FY 2023 - $301,000; FY 2024 - $301,000; and Thereafter - $1,033,000.
The weighted average amortization period for our customer relationships is 8.4 years as of August 4, 2019.

Non-Compete Agreement
A summary of the change in the carrying amount of our non-compete agreement follows:
     
 
Three months ended
 
(dollars in thousands)
August 4, 2019
 
July 29, 2018
 
Beginning balance
 
$
678
   
$
753
 
Amortization expense
   
(19
)
   
(19
)
Ending balance
 
$
659
   
$
734
 

Our non-compete agreement is amortized on a straight-line basis over the fifteen-year life of the agreement.
The gross carrying amount of our non-compete agreement was $2.0 million at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. Accumulated amortization for our non-compete agreement was $1.4 million at August 4, 2019, $1.3 million at July 29, 2018, and $1.4 million at April 28, 2019.
The remaining amortization expense for the next five years and thereafter follows: FY 2020 - $57,000; FY 2021 - $75,000; FY 2022 - $75,000; FY 2023 - $75,000; FY 2024 - $75,000, and Thereafter - $302,000.
The weighted average amortization period for the non-compete agreement is 8.8 years as of August 4, 2019.

I-13

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

8.  Goodwill

A summary of the change in the carrying amount of goodwill follows:
     
  Three months ended    
(dollars in thousands)
August 4, 2019
 
July 29, 2018
 
Beginning balance
 
$
27,222
   
$
13,569
 
Acquisition of business (see note 3)
   
-
     
13,653
 
Ending balance
 
$
27,222
   
$
27,222
 

9.  Investment in Unconsolidated Joint Venture

Culp International Holdings, Ltd. (Culp International), a wholly-owned subsidiary of the company, entered into a joint venture agreement, pursuant to which Culp International owns fifty percent of Class International Holdings, Ltd. (CLIH). CLIH produces cut and sewn mattress covers, and its operations are located in a modern industrial park in northeastern Haiti, which borders the Dominican Republic. CLIH commenced production in the second quarter of fiscal 2018 and complements our mattress fabric operations with a mirrored platform that enhances our ability to meet customer demand while adding a lower cost operation to our platform.

CLIH reported net income totaling $26,000 for the three-month period ending August 4, 2019, and incurred a net loss totaling $154,000 for the three-month period ending July 29, 2018. Our equity interest in CLIH’s net income for the three-month period ending August 4, 2019, was $13,000, and our equity interest in CLIH’s net loss for the three-month period ending July 29, 2018, was $77,000.

The following table summarizes information on assets, liabilities and members’ equity of our equity method investment in CLIH:
                   
 
(dollars in thousands)
 
August 4,
2019
   
July 29,
2018
   
April 28,
2019
 
Total assets
 
$
3,161
   
$
3,153
   
$
3,126
 
Total liabilities
 
$
120
   
$
103
   
$
111
 
Total members’ equity
 
$
3,041
   
$
3,050
   
$
3,015
 

At August 4, 2019, July 29, 2018, and April 28, 2019, our investment in CLIH totaled $1.5 million, which represents the company’s fifty percent ownership interest in CLIH.

10.  Accrued Expenses

A summary of accrued expenses follows:
                   
(dollars in thousands)
 
August 4, 2019
   
July 29, 2018
   
April 28, 2019
 
Compensation, commissions and related benefits
 
$
3,493
   
$
3,719
   
$
4,229
 
Interest
   
13
     
12
     
4
 
Other accrued expenses
   
5,393
     
5,194
     
5,292
 
   
$
8,899
   
$
8,925
   
$
9,525
 

I-14

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

At August 4, 2019, we had accrued expenses totaling $8.9 million, of which $8.6 million and $333,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets. At July 29, 2018, we had accrued expenses totaling $8.9 million of which $8.2 million and $749,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets. At April 28, 2019,  we had accrued expenses totaling $9.5 million, of which $9.2 million and $333,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets.

11. Exit and Disposal Activity

On June 12, 2018, our board of directors announced the closure of our upholstery fabrics manufacturing facility located in Anderson, South Carolina. This closure was completed during the second quarter of fiscal 2019 and was due to a continued decline in demand for the products manufactured at this facility, reflecting a change in consumer style preferences.

The following summarizes our restructuring (credit) expense and restructuring related charges that were associated with the above exit and disposal activity:                                         
     
  Three months ended  
 
 (dollars in thousands) August 4, 2019
  July 29, 2018
 
Inventory markdowns
 
$
-
   
$
1,565
 
Employee termination benefits
   
(35
)    
451
 
Restructuring (credit) expense and restructuring related charges (1)(2)
 
(35 )
  $ 2016  

(1)
The $35,000 credit was recorded to restructuring credit in the Consolidated Statements of Net Income for the three-month period ending August 4, 2019.

(2)
Of the $2.0 million, $1.6 million and $451,000 were recorded to cost of sales and restructuring expense, respectively, in the Consolidated Statements of Net Income for the three-month period ending July 29, 2018.

The following summarizes the activity in accrued restructuring costs:
       
   
Three months ended
 
(dollars in thousands)
 
August 4, 2019
   
July 29, 2018
 
Beginning balance
 
$
124
   
$
-
 
 Accrual established in fiscal 2019      -        451  
Payments
   
(47
)
   
(6
)
Adjustments
   
(35
)
   
-
 
Ending balance
 
$
42
   
$
445
 

The above restructuring accrual pertains to employee termination benefits that were associated with the above exit and disposal activity.

I-15

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
12. Lines of Credit

Revolving Credit Agreement – United States

Our Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $25 million, is set to expire on August 15, 2020, and allows us to issue letters of credit not to exceed $1 million.

Interest is charged at a rate (applicable interest rate of 3.68%, 3.53%, and 3.93% at August 4, 2019, July 29, 2018, and April 28, 2019) as a variable spread over LIBOR based on our ratio of debt to EBITDA.

Outstanding borrowings are secured by a pledge of 65% of the common stock of Culp International Holdings Ltd. (our subsidiary located in the Cayman Islands), as required by the Credit Agreement. There were no borrowings outstanding under the Credit Agreement at August 4, 2019 and April 28, 2019, respectively. At July 29, 2018, we had outstanding borrowings associated with the Credit Agreement totaling $4.0 million.

At August 4, 2019, July 29, 2018, and April 28, 2019, there were $250,000 in outstanding letters of credit (all of which related to workers compensation) provided by the Credit Agreement.

Revolving Credit Agreement – China

We have an unsecured credit agreement associated with our operations in China that provides for a line of credit up to 40 million RMB ($5.8 million USD at August 4, 2019). This agreement has an interest rate determined by the Chinese government and is set to expire on January 31, 2020. There were no outstanding borrowings as of August 4, 2019, July 29, 2018, and April 28, 2019, respectively.

Subordinated Loan Payable

On February 7, 2019, eLuxury entered into a subordinated credit agreement with the owner of its noncontrolling interest which provides a revolving loan commitment of $1.0 million that expires on June 22, 2023. Interest is charged at a rate (applicable interest rate of 3.68% at August 4, 2019) as a variable spread over LIBOR based on Culp’s ratio of debt to EBITDA. There were outstanding borrowings under this agreement totaling $925,000 and $675,000 at August 4, 2019 and April 28, 2019, respectively.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. We were in compliance with these financial covenants as of August 4, 2019.

I-16

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

13. Fair Value of Financial Instruments

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

Level 1 – Quoted market prices in active markets for identical assets or liabilities;

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

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


Recurring Basis

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

 
 
Fair value measurements at August 4, 2019 using:
 
       
   
Quoted prices
in active markets for identical assets
   
Significant other
observable inputs
   
Significant
unobservable
inputs
       
(amounts in thousands) 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Premier Money Market Fund
 
$
6,920
     
N/A
     
N/A
   
$
6,920
 
Growth Allocation Fund
   
213
     
N/A
     
N/A
     
213
 
Moderate Allocation Fund
   
130
     
N/A
     
N/A
     
130
 
Other
   
84
     
N/A
     
N/A
     
84
 


   
Fair value measurements at July 29, 2018 using:
 
       
   
Quoted prices
in active markets for identical assets
   
Significant other
observable inputs
   
Significant
unobservable
inputs
       
(amounts in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Premier Money Market Fund
 
$
6,749
     
N/A
     
N/A
   
$
6,749
 
Large Blend Fund
   
438
     
N/A
     
N/A
     
438
 
Growth Allocation Fund
   
180
     
N/A
     
N/A
     
180
 
Moderate Allocation Fund
   
117
     
N/A
     
N/A
     
117
 
Other
   
187
     
N/A
     
N/A
     
187
 

I-17

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

   
Fair value measurements at April 28, 2019 using:
 
       
   
Quoted prices
in active markets for identical assets
   
Significant other
observable inputs
   
Significant
unobservable
inputs
       
(amounts in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Premier Money Market Fund
 
$
6,639
     
N/A
     
N/A
   
$
6,639
 
Growth Allocation Fund
   
203
     
N/A
     
N/A
     
203
 
Moderate Allocation Fund
   
127
     
N/A
     
N/A
     
127
 
Other
   
112
     
N/A
     
N/A
     
112
 

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

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

Our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds with maturities that ranged from 2 to 2.5 years, in which these bonds have since matured during the first quarter of fiscal 2020. These investments were classified as held-to-maturity as we had the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments were recorded as either current or noncurrent in our Consolidated Balance Sheets, based on contractual maturity date in relation to the respective reporting period and recorded at amortized cost.

At April 28, 2019, and July 29, 2018, our held-to-maturity investments recorded at amortized cost totaled $5.0 million and $30.8 million, respectively. The fair value of our held-to-maturity investments at April 28, 2019, and July 29, 2018, totaled $5.0 million and $30.6 million, respectively.

Our U.S. corporate bonds were classified as level 2 as they were traded over the counter within a broker network and not on an active market. The fair value of our U.S. corporate bonds was determined based on a published source that provided an average bid price. The average bid price was based on various broker prices that were determined based on market conditions, interest rates, and the rating of the respective U.S. corporate bond.

Long-Term Investments - Rabbi Trust

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

These long-term investments are recorded at their fair values of $7.3 million, $7.7 million, and $7.1 million at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. Our long-term investments had an accumulated unrealized gain of $46,000, $104,000, and $40,000 at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. The fair value of our long-term investments associated with our Rabbi Trust approximates its cost basis.
I-18

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

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

Nonrecurring Basis

At July 29, 2018, we had no assets that were required to be measured at fair value on a nonrecurring basis other than the assets acquired from eLuxury (see note 3) that were acquired at fair value:

 
 
Fair value measurements at July 29, 2018 using:
 
       
 
 
Quoted prices in
active markets
for identical
assets
   
Significant other
observable inputs
   
Significant
unobservable
inputs
       
                         
(amounts in thousands) 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Assets:
                       
                         
Goodwill
   
N/A
     
N/A
   
$
13,653
   
$
13,653
 
Tradename
   
N/A
     
N/A
     
6,549
     
6,549
 
Equipment
   
N/A
     
N/A
     
2,179
     
2,179
 
Inventory
   
N/A
     
N/A
     
1,804
     
1,804
 
                                 
Liabilities:
                               
                                 
Contingent Consideration –
                               
    Earn-Out Obligation
   
N/A
     
N/A
   
$
5,600
   
$
5,600
 

The tradename was recorded at fair market value using the royalty from relief method that used significant unobservable inputs and were classified as level 3. The contingent consideration – earn-out obligation was recorded at fair market value using the Black Sholes pricing model.

Additionally, we acquired certain current assets such as accounts receivable and prepaid expenses and assumed certain liabilities such as accounts payable and accrued expenses.  Based on the nature of these items and their short maturity, the carrying amount of these items approximated their fair values. See note 3 for the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.

I-19

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

14.  Cash Flow Information

Interest and income taxes paid are as follows:
     
 
Three months ended     
 
(dollars in thousands)

August 4, 2019 
 

July 29, 2018 
 
Interest
 
$
-
   
$
24
 
Income taxes
   
1,822
     
3,223
 

15.  Net Income Per Share

Basic net income per share is computed using the weighted-average number of shares outstanding during the period.  Diluted net income per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.

Weighted average shares used in the computation of basic and diluted net income per share follows:
       
      Three months ended
 
(amounts in thousands)
 
August 4, 2019
   
July 29, 2018
 
Weighted average common shares outstanding, basic
   
12,399
     
12,510
 
Dilutive effect of stock-based compensation
   
11
     
90
 
Weighted average common shares outstanding, diluted
   
12,410
     
12,600
 

16.  Segment Information

Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories.  The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. The home accessories segment is our finished products business that manufactures, sources and sells bedding accessories and home goods directly to consumers and businesses through global e-commerce and business-to-business sales channels.

We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses, restructuring (credit) expense and restructuring related charges, and other non-recurring items. Cost of sales for all segments include costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges.  Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers, all costs associated with being a public company, and other miscellaneous expenses.  Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, property, plant and equipment, and right of use assets (see note 19 for further details). The mattress fabrics segment also includes in segment assets their assets held for sale and investment in an unconsolidated joint venture. Goodwill and intangible assets are not included in segment assets, as these assets are not used by the Chief Operating Decision Maker to evaluate the respective segment’s operating performance, to allocate resources to the individual segments, or determine executive compensation.

I-20

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

Financial information for the company’s operating segments follows:
       
    Three months ended   
 
    August 4, 2019
    July 29, 2018
 
 Net sales:                
Mattress Fabrics
 
$
38,685
   
$
34,398
 
Upholstery Fabrics
   
31,860
     
34,490
 
Home Accessories
   
4,302
     
2,585
 
   
$
74,847
   
$
71,473
 
 Gross profit:                
  Mattress Fabrics
 
$
5,691
   
$
5,302
 
Upholstery Fabrics
   
6,721
     
6,153
 
Home Accessories
   
953
     
669
 
Total segment gross profit
 
$
13,365
   
$
12,124
 
Restructuring related charges (2)
   
-
     
(1,565
)
   
$
13,365
   
$
10,559
 
Selling, general, and administrative expenses
               
Mattress Fabrics
 
$
3,071
   
$
2,512
 
Upholstery Fabrics
   
3,846
     
3,626
 
Home Accessories
   
1,488
     
636
 
Unallocated corporate expenses
   
2,306
     
1,259
 
   
$
10,711
   
$
8,033
 

 Income (loss) from operations:                
Mattress Fabrics                                                                                   
  $ 2,620    
$
2,790
 
Upholstery Fabrics                                                                                         
    2,875
     
2,527
 
Home Accessories
     (535 )
     33  
Unallocated corporate expenses                                                                
    (2,306 )    
(1,259
)
Total segment income from operations                                            
    2,654
     
4,091
 
Restructuring credit (expense) and restructuring related charges (1) (2)            
    35
     
(2,016
)
Total income from operations                                                            
    2,689
     
2,075
 
Interest expense                                                                                     
    (9 )    
(20
)
Interest income                                                                                   
    249
     
150
 
Other expense                                                                                      
    (87 )    
(257
)
Income before income taxes                                                    
  $ 2,842    
$
1,948
 

 (1) The $35 restructuring credit represents employee termination benefits associated with the closure of our upholstery fabrics plant facility located in Anderson, SC (see note 11 for further details). The $35 restructuring credit was recorded to restructuring credit in the Consolidated Statements of Net Income for the three-month period ending August 4, 2019.

(2) The total charge of $2.0 million, represents a restructuring related charge of $1.6 million for inventory markdowns and a $451 restructuring charge for employee termination benefits associated with the closure of our upholstery fabrics plant facility in Anderson, SC. The $1.6 million restructuring related charge and the $451 restructuring charge were recorded to cost of sales and restructuring expense in the Consolidated Statements of Net Income for the three-month period ending July 29, 2018.

I-21

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


Balance sheet information for the company’s operating segments follows:                         
                   
 (dollars in thousands)  
  August 4, 2019
    July 29, 2018
    April 28, 2019
 
 Segment assets:                  
     Mattress Fabrics                  
Accounts receivable
 
$
12,632
   
$
11,408
   
$
12,098
 
Inventory
   
24,410
     
31,506
     
24,649
 
Assets held for sale
   
100
     
-
     
-
 
Property, plant and equipment (1)
   
43,211
     
48,156
     
44,266
 
Right of use assets (2)
   
235
     
-
     
-
 
Investment in unconsolidated joint venture
   
1,520
     
1,525
     
1,508
 
Total mattress fabrics assets
   
82,108
     
92,595
     
82,521
 
 Upholstery Fabrics                        
  Accounts receivable
   
11,029
     
11,345
     
11,274
 
Inventory
   
23,183
     
21,784
     
22,915
 
Property, plant and equipment (3)
   
1,856
     
2,370
     
1,795
 
Right of use assets (4)
   
3,054
     
-
     
-
 
Total upholstery fabrics assets
   
39,122
     
35,499
     
35,984
 
 Home Accessories                        
  Accounts receivable
   
429
     
472
     
379
 
Inventory
   
3,067
     
1,699
     
3,296
 
Property, plant and equipment (5)
   
1,815
     
2,141
     
1,910
 
Right of use assets (6)
   
1,042
     
-
     
-
 
Total home accessories assets
   
6,353
     
4,312
     
5,585
 
Total segment assets
   
127,583
     
132,406
     
124,090
 
 Non-segment assets:                        
Cash and cash equivalents
   
44,236
     
8,593
     
40,008
 
Short-term investments (Held-to-Maturity)
   
-
     
30,756
     
5,001
 
Current income taxes receivable
   
776
     
-
     
776
 
Other current assets
   
2,578
     
3,852
     
2,849
 
Deferred income taxes
   
486
     
3,721
     
457
 
Property, plant and equipment (7)
   
407
     
511
     
418
 
Right of use assets (8)
   
2,199
     
-
     
-
 
Goodwill
   
27,222
     
27,222
     
27,222
 
Intangible assets
   
10,354
     
10,730
     
10,448
 
Long-term investments (Rabbi Trust)
   
7,347
     
7,671
     
7,081
 
Noncurrent income taxes receivable
   
733
     
-
     
733
 
Other assets
   
526
     
910
     
643
 
Total assets
 
$
224,447
   
$
226,372
   
$
219,726
 
I-22

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


    Three months ended     
(dollars in thousands)
 
August 4, 2019
   
July 29, 2018
 
Capital expenditures (9):
           
Mattress Fabrics
 
$
669
   
$
1,198
 
Upholstery Fabrics
   
184
     
57
 
Home Accessories
   
-
     
-
 
Unallocated Corporate
   
56
     
-
 
Total capital expenditures
 
$
909
   
$
1,255
 
Depreciation expense:
               
Mattress Fabrics
 
$
1,620
   
$
1,762
 
Upholstery Fabrics
   
190
     
215
 
Home Accessories
   
95
     
38
 
Total depreciation expense
 
$
1,905
   
$
2,015
 

(1)
The $43.2 million at August 4, 2019, represents property, plant, and equipment of $31.2 million and $12.0 million located in the U.S. and Canada, respectively. The $48.2 million at July 29, 2018, represents property, plant, and equipment of $35.1 million and $13.1 million located in the U.S. and Canada, respectively. The $44.3 million at April 28, 2019, represents property, plant, and equipment of $32.4 million and $11.9 million located in the U.S. and Canada, respectively.

(2)
The $235 at August 4, 2019, represents right of use assets located in the U.S.

(3)
The $1.9 million at August 4, 2019, represents property, plant, and equipment of $1.3 million and $548 located in the U.S. and China, respectively. The $2.4 million at July 29, 2018, represents property, plant, and equipment of $1.8 million and $616 located in the U.S. and China, respectively. The $1.8 million at April 28, 2019, represents property, plant, and equipment of $1.2 million and $591 located in the U.S. and China, respectively.

(4)
The $3.1 million at August 4, 2019, represents right of use assets of $1.8 million and $1.3 million located in China and the U.S., respectively

(5)
The $1.8 million at August 4, 2019, $2.1 million at July 29, 2018, and $1.9 million at April 28, 2019, represents property, plant and equipment located in the U.S.

(6)
The $1.0 million at August 4, 2019, represents right of use assets located in the U.S.

(7)
The $407, $511, and $418 at August 4, 2019, July 29, 2018, and April 28, 2019, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by our mattress fabrics, upholstery fabrics, and home accessories segments. Property, plant, and equipment associated with our corporate departments reside in the U.S.

(8)
The $2.2 million at August 4, 2019, represents right of use assets located in the U.S.

(9)
Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis.

I-23

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

17.  Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $1.7 million, or 59.1% of income before income taxes, for the three- month period ended August 4, 2019, compared with income tax expense of $906,000, or 46.5% of income before income taxes, for the three-month period ended July 29, 2018. Our effective income tax rates for the three-month periods ended August 4, 2019, and July 29, 2018, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China and Canada versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:

 
2020
2019
  U.S. federal income tax rate
21.0%
21.0%
  Global Intangible Low Taxed Income Tax (GILTI)
23.7
2.5
  Foreign income tax rate differential
10.6
8.3
  Tax effects of Chinese foreign exchange gains
1.3
2.1
  Change in estimate of U.S. valuation allowance
1.8
8.6
  Excess income tax deficiency related to stock-based compensation
0.8 1.7
  Other
(0.1)
2.3
 
59.1%
46.5%

Deferred Income Taxes

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

Based on our assessments at August 4, 2019, July 29, 2018, and April 28, 2019, valuation allowances against our deferred income taxes pertain to the following jurisdictions:
 
  (dollars in thousands)
 
August 4,
2019
   
July 29,
2018
   
April 28,
2019
 
  U.S. state loss carryforwards and credits
 
$
711
     
849
     
666
 
  U.S. foreign income tax credits
   
-
     
4,550
     
82
 
   
$
711
     
5,399
     
748
 







I-24

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

Undistributed Earnings
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Based on our assessment as of August 4, 2019, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.

As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a 100% dividend received deduction for earnings and profits received from a 10% owned foreign corporation.  Therefore, a deferred tax liability will be required for withholding taxes that are incurred by our foreign subsidiaries at the time earnings and profits are distributed. As a result, at August 4, 2019, July 29, 2018, and April 28, 2019, we recorded a deferred income tax liability of $2.9 million, $2.8 million, and $3.5 million, respectively, for withholding taxes on undistributed earnings and profits from our foreign subsidiaries.

Uncertainty In Income Taxes

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 benefits will be recorded at that time.

At August 4, 2019, we had a $914,000 total gross unrecognized income tax benefit that was recorded to income taxes payable- long-term in the accompanying Consolidated Balance Sheets. At July 29, 2018, we had a $820,000 total gross unrecognized income tax benefit, of which $440,000 and $380,000 were classified as income taxes payable – long-term and non-current deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. At April 28, 2019, we had a $903,000 total gross unrecognized income tax benefit, of which $523,000 and $380,000 were classified as income taxes payable – long-term and non-current deferred income taxes respectively, in the accompanying Consolidated Balance Sheets.

At August 4, 2019, our $914,000 total gross unrecognized income tax benefit would favorably affect the income tax rate in future periods. At July 29, 2018, our $820,000 total gross unrecognized income tax benefit, included $440,000 that, if recognized, would favorably affect the income tax rate in future periods. At April 28, 2019, our $903,000 total gross unrecognized income tax benefit included $523,000 that, if recognized, would favorably affect the income tax rate in future periods.

Our gross unrecognized income tax benefit of $914,000 relates to income tax positions for which significant change is currently not expected within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions.

I-25

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


18.  Stock-Based Compensation

Equity Incentive Plan Description

On September 16, 2015, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan.

At August 4, 2019, there were 913,648 shares available for future equity-based grants under our 2015 plan.

Performance-Based Restricted Stock Units

Executive Management

We grant performance-based restricted stock units to certain senior executives which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. The number of shares of common stock that are earned based on the performance targets that have been achieved will be adjusted based on a market-based total shareholder return component as defined in the related restricted stock unit agreements.

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

Key Employees and a Non-Employee

We grant performance-based restricted stock units which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements.

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

Our performance-based restricted stock units granted to a non-employee, which vested during the first quarter of fiscal 2020, were measured based on the fair market value (the closing price of our common stock) on the date when the performance criteria was met.

I-26

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


The following table summarizes information related to our grants of performance-based restricted stock units associated with certain senior executives and key employees that are currently unvested:
 
Date of Grant
 
(3)
Restricted Stock
Units Awarded
 
Price Per Share
 
 
Vesting Period
July 18, 2019 (1)
 
93,653
 
$18.49 (6)

3 years
July 18, 2019 (2)
 
15,213
 
$18.49 (6)

3 years
August 2, 2018 (1)
 
86,599
 
$18.51 (4)

3 years
August 2, 2018 (2)
 
47,800
 
$24.35 (6)

3 years
July 13, 2017 (1)
 
78,195
 
$31.85 (5)

3 years
July 13, 2017 (2)
 
44,000
 
$32.50 (6)

3 years
(1) Performance-based restricted stock units awarded to certain senior executives.
(2) Performance-based restricted stock units awarded to key employees.
(3) Amounts represent the maximum number of common stock shares that could be earned if certain performance targets are met as defined in the related restricted stock unit agreements.
(4) Price per share represents the fair market value per share ($0.76 per $1 or a reduction of $5.84 to the closing price of the common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($24.35) for the performance-based components of the performance-based restricted stock units granted to certain senior executives on August 2, 2018.
(5) Price per share represents the fair market value per share ($0.98 per $1 or a reduction of $0.65 to the closing price of the common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($32.50) for the performance-based components of the performance-based restricted stock units granted to certain senior executives on July 13, 2017.
(6) Price per share represents the closing price of our common stock on the date of grant.

The following table summarizes information related to our performance-based restricted stock units that vested during the three-month periods ending August 4, 2019 and July 29, 2018:
                   
 
Fiscal Year
 
Restricted Stock
Units Vested
 
(3)
Fair Value
 
Weighted Average
Price
Per Share
Fiscal 2020 (1)
   
9,489
   
$
165
   
$
17.36
(4)
Fiscal 2020 (2)
   
4,148
   
$
72
   
$
17.36
(4)
Fiscal 2019 (1)
   
128,632
   
$
3,754
   
$
29.19
(4) 
Fiscal 2019 (2)
   
10,364
   
$
320
   
$
30.90
(4)

(1) Certain senior executives and key employees.
(2) Non-employee
(3) Dollar amounts are in thousands.
(4) The weighted average price per share is derived from the closing prices of our common stock on the dates the respective performance based restricted stock units vested.
I-27

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Overall
We recorded compensation expense of $68,000 and a credit to compensation expense of $506,000 within selling, general, and administrative expenses for the three-month periods ending August 4, 2019, and July 29, 2018, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability that certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, compensation cost will not be recorded and any previously recognized compensation cost would be reversed.
At August 4, 2019, the remaining unrecognized compensation cost related to our performance based restricted stock units was $1.4 million, which is expected to be recognized over a weighted average vesting period of 2.7 years. At August 4, 2019, the performance based restricted stock units that were expected to vest had a fair value totaling $1.5 million.

Time Based Restricted Stock Units

The following table summarizes information related to our grants of time-based restricted stock units associated with key members of management that are currently unvested:
 
Date of Grant
 
Time Based Stock
Units Awarded
 
Price Per Share
 
 
Vesting Period
July 18, 2019
 
15,213
 
$18.49(1)

3 years
August 2, 2018
 
10,000
 
$24.35(1)

5 years
(1) Price per share represents closing price of common stock on the date the respective award was granted
 
The following table summarizes information related to our time-based restricted stock units that vested during the three-month periods ending August 4, 2019 and July 29, 2018:

 
  Fiscal Year
 
Restricted Stock
Units Vested
 
(1)
Fair Value
 
Weighted Average
Price
Per Share
Fiscal 2020
   
-
   
$
-
     
-
 
Fiscal 2019
   
1,200
    $ 21    
$