SEC Info - Culp Inc. - ‘10-Q’ for 7/31/22

Tradename

i 540

Customer relationships, net

i 1,561

i 1,862

i 1,636

Non-compete agreement, net

i 433

i 508

i 452

i 2,534

i 2,910

i 2,628

Tradename

Our tradename as of July 31, 2022, August 1, 2021, and May 1, 2022, pertained to Read, a separate reporting unit within the upholstery fabrics segment. This tradename was determined to have an indefinite useful life at the time of its acquisition, and therefore is not being amortized. However, we are required to assess this tradename annually or between annual tests if we believe indicators of impairment exist. Based on our assessment as of July 31, 2022, no indicators of impairment existed, and therefore we did i not record any asset impairment charges associated with our tradename during the first quarter of fiscal 2023.

Customer Relationships

A summary of the change in the carrying amount of our customer relationships follows:

	Three months ended
(dollars in thousands)	July 31, 2022			August 1, 2021
Beginning balance	$	i 1,636		$	i 1,937
Amortization expense		( i 75	)		( i 75	)
Ending balance	$	i 1,561		$	i 1,862

Our customer relationships are amortized on a straight-line basis over useful lives ranging from i nine to i seventeen years.

The gross carrying amount of our customer relationships was $ i i i 3.1 / / million as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively. Accumulated amortization for these customer relationships was $ i 1.6 million, $ i 1.3 million, and $ i 1.5 million as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively.

The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2023 - $ i 226,000; FY 2024 - $ i 301,000; FY 2025 - $ i 301,000; FY 2026 - $ i 301,000; FY 2027 - $ i 278,000; and thereafter - $ i 154,000.

The weighted average amortization period for our customer relationships was i 5.5 years as of July 31, 2022.

Non-Compete Agreement

A summary of the change in the carrying amount of our non-compete agreement follows:

	Three months ended
(dollars in thousands)	July 31, 2022			August 1, 2021
Beginning balance	$	i 452		$	i 527
Amortization expense		( i 19	)		( i 19	)
Ending balance	$	i 433		$	i 508

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Our non-compete agreement is associated with a prior acquisition by our mattress fabrics segment and 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 $ i i i 2.0 / / million as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively. Accumulated amortization for our non-compete agreement was $ i i i 1.6 / / million as of July 31, 2022, August 1, 2021, and May 1, 2022.

The remaining amortization expense for the next five years and thereafter follows: FY 2023 - $ i 56,000; FY 2024 - $ i 76,000; FY 2025 - $ i 76,000; FY 2026 - $ i 76,000; FY 2027 - $ i 76,000, and thereafter - $ i 73,000.

The weighted average amortization period for the non-compete agreement was i 5.8 years as of July 31, 2022.

7. Accrued Expenses

A summary of accrued expenses follows:

(dollars in thousands)

Compensation, commissions and related benefits

i 3,890

i 5,006

i 4,248

Other accrued expenses

i 3,268

i 4,944

i 3,584

i 7,158

i 9,950

i 7,832

8. Lines of Credit

Revolving Credit Agreement – United States

Existing Credit Agreement

As of May 1, 2022, we had a Credit Agreement (the “Existing Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”) that provided a revolving loan commitment of $ i 30 million, was set to expire on i August 15, 2022, and allowed us to issue letters of credit not to exceed $ i 1 million.

Amended Agreement

Effective June 24, 2022, we entered into an Amended and Restated Credit Agreement (“the Amended Agreement”) with Wells Fargo. The Amended Agreement amends, restates, supersedes, and serves as a replacement for the Existing Credit Agreement. The Amended Agreement provides a revolving credit facility of up to $ i 40 million, is secured by a lien on the company’s assets, and expires in i June 2025. The proceeds of borrowings under the Amended Agreement are to be used for working capital and other general corporate purposes.

The company’s available borrowings under the Amended Agreement are based on a borrowing base calculation using certain accounts receivable and inventory of the company, subject to certain sub-limits as defined in the Amended Agreement, to be calculated on a monthly basis. Similar to the Existing Credit Agreement, the Amended Agreement contains a sub-facility that allows the company to issue letters of credit in an aggregate amount not to exceed $ i 1 million.

Borrowings under the Amended Agreement bear interest at a rate calculated using a margin (the “Applicable Margin”) over the Federal Reserve Bank of New York’s secured overnight funding rate (SOFR). The Applicable Margin is set initially at i 1.35% and may vary under the terms of the Amended Agreement from i 1.35% to i 2.50%, depending on the ratio of the company’s consolidated debt to consolidated EBITDA, as defined in the Amended Agreement, determined on a quarterly basis. The Amended Agreement contains customary affirmative and negative covenants and requires compliance by the company with certain financial covenants, including minimum tangible net worth of $ i 100 million plus i 50% of annual net income, and a minimum ratio of consolidated EBITDA to consolidated net interest expense of i 3.0 to 1.0 as defined in the Amended Agreement. The EBITDA to interest expense covenant does not apply under the Amended Agreement during the first three quarters of the company’s fiscal 2023, but during that period, the company must maintain “access to liquidity” of $ i 15 million, which is defined as unencumbered liquid assets plus available and unused credit under the revolving credit facility as calculated using the borrowing base, as defined in the Amended Agreement.

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First Amendment

On August 19, 2022, we entered into a First Amendment to the Amended Agreement (“the First Amendment”) with Wells Fargo. The terms of the First Amendment amend the time period in which the financial covenant for the minimum ratio of consolidated EBITDA to consolidated net interest expense applies, such that this EBITDA to interest expense covenant does not apply during any of the four quarters of the Company’s fiscal 2023. During that time period, we are still required to maintain minimum “access to liquidity” of $ i 15 million as mentioned in the above Amended Agreement section.

Overall

Effective June 24, 2022, interest was charged under the Amended Agreement at a rate (applicable interest rate of i 2.88% as of July 31, 2022) calculated using the Applicable Margin over i SOFR based on the ratio of the company’s consolidated debt to consolidated EBITDA, as defined in the Amended Agreement. Under the Existing Credit Agreement interest was charged at a rate (applicable interest rate of i 1.69% and i 2.40% as of August 1, 2021, and May 1, 2022, respectively) as a variable spread over i LIBOR based on a ratio of debt to EBITDA, as defined in the Existing Credit Agreement.

There were $ i i i 275,000 / / of outstanding letters of credit provided by the Amended Agreement and Existing Credit Agreement as of July 31, 2022, August 1, 2021, and May 1, 2022. As of July 31, 2022, we had $ i 725,000 remaining for the issuance of additional letters of credit.

There were i i i no / / borrowings outstanding under either the Amended Agreement or the Existing Credit Agreement, as applicable, as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively.

Revolving Credit Agreements – China Operations

Denominated in Chinese Yuan Renminbi (“RMB”)

We have an unsecured credit agreement denominated in RMB with a bank located in China that provides for a line of credit of up to i 40 million RMB ($ i 5.9 million USD as of July 31, 2022). i Interest charged under this agreement is based on an interest rate determined by the Chinese government at the time of borrowing and is set to expire on i November 15, 2022.

There were i i i no / / borrowings outstanding under this agreement as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively.

Denominated in United States Dollar (“USD”)

We had an unsecured credit agreement denominated in USD with another bank located in China that provided for a line of credit of up to $ i 2 million USD, which expired on i August 30, 2022. i Interest charged under this agreement is based on an interest rate determined by the Chinese government at the time of borrowing. Currently, the company does not plan to renew or replace this agreement.

There were i i i no / / borrowings outstanding under this agreement as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of July 31, 2022, we complied with our financial covenants.

Interest paid during the first quarter of fiscal 2023 totaled $ i 8,000. i No interest payments were made during the first quarter of fiscal 2022.

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9. Fair Value

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.

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.

Recurring Basis

The following tables present information about assets measured at fair value on a recurring basis:

Fair value measurements as of July 31, 2022, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

i 8,853

N/A

i 8,853

Growth Allocation Mutual Funds

i 464

N/A

i 464

Moderate Allocation Mutual Fund

i 82

N/A

i 82

Other

i 168

N/A

i 168

Fair value measurements as of August 1, 2021, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

i 8,205

N/A

i 8,205

Bond Mutual Funds

i 4,656

N/A

i 4,656

Inflation Protected Bond Mutual Funds

i 2,979

N/A

i 2,979

Mortgage Securities Mutual Funds

i 1,124

N/A

i 1,124

Large Cap Equity Mutual Funds

i 708

N/A

i 708

Growth Allocation Mutual Funds

i 419

N/A

i 419

U.S. Event Driven Equity Mutual Fund

i 194

N/A

i 194

Moderate Allocation Mutual Fund

i 91

N/A

i 91

Other

i 163

N/A

i 163

/ /

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Fair value measurements as of May 1, 2022, using:

Quoted prices

Significant

in active

other

Significant

markets for

observable

unobservable

identical assets

inputs

(amounts in thousands)

Level 1

Level 2

Level 3

Total

Assets:

U.S. Government Money Market Fund

i 8,683

N/A

i 8,683

Growth Allocation Mutual Funds

i 435

N/A

i 435

Moderate Allocation Mutual Fund

i 81

N/A

i 81

Other

i 158

N/A

i 158

Short-Term Investments – Available for Sale

During the fourth quarter of fiscal 2022, we sold all of our remaining short-term investments classified as available-for-sale, and therefore we did not report short-term investments classified as available-for-sale in the accompanying Consolidated Balance Sheets as of July 31, 2022, and May 1, 2022. As of August 1, 2021, our short-term investments classified as available-for-sale (i) consisted of various types of bond and equity mutual funds, (ii) were recorded at their fair value totaling $ i 9.7 million, (iii) had an unrealized gain of $ i 143,000, (iv) approximated their cost basis, and (v) resided with our U.S. operations.

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

During the fourth quarter of fiscal 2022, we sold all of our remaining investments classified as held-to-maturity, and therefore we did not report short-term or long-term investments classified as held-to-maturity in the accompanying Consolidated Balance Sheets as of July 31, 2022, and May 1, 2022. As of August 1, 2021, our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds. 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 the maturity date in relation to the respective reporting period and were recorded at amortized cost.

As of August 1, 2021, our held-to-maturity investments had an amortized cost and fair value totaling $ i i 8.3 / million and resided with our U.S. operations.

Our held-to-maturity investments were classified as level 2 within the fair value hierarchy as they were traded over the counter within a broker network and not on an active market. The fair values of our held-to-maturity investments were 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 bond investment.

Long-Term Investments - Rabbi Trust

We have a rabbi trust for the participants of our deferred compensation plan (the “Plan”), that enables participants to credit their contributions to various investment options under the Plan. The investments associated with the rabbi trust consist of a U.S. Government money market fund and various equity related mutual funds that are classified as available-for-sale.

Our long-term investments associated with our rabbi trust are classified as available-for-sale and recorded at their fair values of $ i 9.6 million, $ i 8.8 million, and $ i 9.4 million as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively. The long-term investments associated with our rabbi trust had an accumulated unrealized gain of $ i 25,000, $ i 151,000, and $ i 32,000, as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively. The fair value of our long-term investments associated with our rabbi trust approximates their cost basis.

Other

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

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10. Net (Loss) Income Per Share

Basic net (loss) income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net (loss) 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 (loss) income per share are as follows:

	Three months ended
(amounts in thousands)	July 31, 2022		August 1, 2021
Weighted average common shares outstanding, basic		i 12,238		i 12,313
Dilutive effect of stock-based compensation		—		i 102
Weighted average common shares outstanding, diluted		i 12,238		i 12,415

During the first quarter of fiscal 2023, i 38,779 shares of unvested common stock were not included in the computation of diluted net loss per share as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards. In addition, during the first quarter of fiscal 2023, i 42,489 shares of unvested common stock were not included in the computation of diluted net loss per share as we incurred a net loss during the reporting period.

During the first quarter of fiscal 2022, all unvested shares of common stock were included in the computation of diluted net income per share.

11. Segment Information

Overall

Our operations are classified into i two business segments: mattress fabrics and upholstery fabrics. 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. In addition, this segment includes Read, which provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services for Read’s products, to customers in the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.

Financial Information

We evaluate the operating performance of our business segments based upon (loss) income from operations before certain unallocated corporate expenses and other items that are not expected to occur on a regular basis. Cost of sales for each segment includes 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 executives and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. i 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, allocate resources to individual segments, or determine executive compensation.

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Statements of operations for our operating segments are as follows:

	Three months ended
	July 31, 2022			August 1, 2021
net sales by segment:
mattress fabrics	$	i 29,371		$	i 43,058
upholstery fabrics		i 33,233			i 39,989
net sales	$	i 62,604		$	i 83,047
gross (loss) profit:
mattress fabrics	$	( i 37	)	$	i 6,795
upholstery fabrics		i 4,165			i 5,704
gross profit	$	i 4,128		$	i 12,499
selling, general, and administrative expenses by segment:
mattress fabrics	$	i 2,885		$	i 3,184
upholstery fabrics		i 3,622			i 3,437
unallocated corporate expenses		i 2,359			i 2,560
selling, general, and administrative expenses	$	i 8,866		$	i 9,181
(loss) income from operations by segment:
mattress fabrics	$	( i 2,921	)	$	i 3,611
upholstery fabrics		i 542			i 2,267
unallocated corporate expenses		( i 2,359	)		( i 2,560	)
(loss) income from operations		( i 4,738	)		i 3,318
interest income		i 17			i 74
other expense		( i 82	)		( i 237	)
(loss) income before income taxes	$	( i 4,803	)	$	i 3,155

Balance sheet information for our operating segments follows:

(dollars in thousands)

Segment assets:

Mattress Fabrics:

Accounts receivable

i 12,382

i 18,016

i 9,865

Inventory

i 36,471

i 31,778

i 39,028

Property, plant and equipment (1)

i 37,354

i 41,311

i 38,731

Right of use assets (2)

i 3,232

i 4,058

i 3,469

Total mattress fabrics assets

i 89,439

i 95,163

i 91,093

Upholstery Fabrics:

Accounts receivable

i 12,430

i 16,992

i 12,361

Inventory

i 27,278

i 26,835

i 27,529

Property, plant and equipment (3)

i 2,271

i 1,650

i 2,030

Right of use assets (4)

i 7,520

i 5,984

i 8,124

Total upholstery fabrics assets

i 49,499

i 51,461

i 50,044

Total segment assets

i 138,938

i 146,624

i 141,137

Non-segment assets:

Cash and cash equivalents

i 18,874

i 26,061

i 14,550

Short-term investments - available for sale

—

i 9,698

—

Short-term investments - held-to-maturity

—

i 1,661

—

Current income taxes receivable

i 798

i 524

i 857

Other current assets

i 3,840

i 3,889

i 2,986

Deferred income taxes

i 546

i 455

i 528

Property, plant and equipment (5)

i 865

i 969

i 941

Right of use assets (6)

i 3,804

i 1,405

i 3,984

Intangible assets

i 2,534

i 2,910

i 2,628

Long-term investments - rabbi trust

i 9,567

i 8,841

i 9,357

Long-term investments - held-to-maturity

—

i 6,629

—

Other assets

i 724

i 2,582

i 595

Total assets

i 180,490

i 212,248

i 177,563

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	Three months ended
(dollars in thousands)	July 31, 2022		August 1, 2021
Capital expenditures (7):
Mattress Fabrics	$	i 197	$	i 1,117
Upholstery Fabrics		i 360		i 262
Unallocated Corporate		i 26		i 274
Total capital expenditures	$	i 583	$	i 1,653
Depreciation expense:
Mattress Fabrics	$	i 1,568	$	i 1,521
Upholstery Fabrics		i 202		i 205
Total depreciation expense	$	i 1,770	$	i 1,726

(1)

The $ i 37.4 million as of July 31, 2022, represents property, plant, and equipment of $ i 24.7 million, $ i 11.9 million, and $ i 718,000 located in the U.S., Canada, and Haiti, respectively. The $ i 41.3 million as of August 1, 2021, represents property, plant, and equipment of $ i 28.0 million, $ i 12.4 million, and $ i 875,000 located in the U.S., Canada, and Haiti, respectively. The $ i 38.7 million as of May 1, 2022, represents property, plant, and equipment of $ i 25.6 million, $ i 12.4 million, and $ i 757,000 located in the U.S., Canada, and Haiti, respectively.

(2)

The $ i 3.2 million as of July 31, 2022, represents right of use assets of $ i 1.9 million, $ i 1.1 million, and $ i 228,000 located in Haiti, the U.S., and Canada, respectively. The $ i 4.1 million as of August 1, 2021, represents right of use assets of $ i 2.3 million, $ i 1.4 million, and $ i 355,000 located in Haiti, the U.S., and Canada, respectively. The $ i 3.5 million as of May 1, 2022, represents right of use assets of $ i 2.0 million, $ i 1.2 million, and $ i 291,000 located in Haiti, the U.S., and Canada, respectively.

(3)

The $ i 2.3 million as of July 31, 2022, represents property, plant, and equipment of $ i 1.1 million, $ i 988,000, and $ i 232,000 located in the U.S., Haiti, and China, respectively. The $ i 1.7 million as of August 1, 2021, represents property, plant, and equipment of $ i 1.1 million, $ i 400,000, and $ i 130,000 located in the U.S., China, and Haiti, respectively. The $ i 2.0 million as of May 1, 2022, represents property, plant, and equipment of $ i 1.0 million, $ i 756,000, and $ i 255,000 located in the U.S., Haiti, and China, respectively.

(4)

The $ i 7.5 million as of July 31, 2022, represents right of use assets of $ i 3.4 million, $ i 2.5 million and $ i 1.6 million located in China, Haiti, and the U.S., respectively. The $ i 6.0 million as of August 1, 2021, represents right of use assets of $ i 4.6 million and $ i 1.4 million located in China and the U.S., respectively. The $ i 8.1 million as of May 1, 2022, represents right of use assets of $ i 3.7 million, $ i 2.6 million, and $ i 1.8 million located in China, Haiti, and the U.S., respectively.

(5)

The $ i 865,000, $ i 969,000, and $ i 941,000 as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by our mattress fabrics and upholstery fabrics segments. Property, plant, and equipment associated with our corporate departments reside in the U.S.

(6)	The $ i 3.8 million, $ i 1.4 million, and $ i 4.0 million as of July 31, 2022, August 1, 2021, and May 1, 2022, respectively, represent right of use assets located in the U.S.

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

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12. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $ i 896,000, or ( i 18.7%) of loss before income taxes, for the three-month period ending July 31, 2022, compared with income tax expense of $ i 905,000, or i 28.7% of income before income taxes, for the three-month period ending August 1, 2021.

Our effective income tax rates for the three-month periods ended July 31, 2022, and August 1, 2021, 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. When calculating the annual estimated effective income tax rate for the three-month periods ended July 31, 2022, and August 1, 2021, we were subject to loss limitation rules. These loss limitation rules require any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no income tax benefit could be recognized during the current fiscal year. 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, Canada, and Haiti 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 for the three-month periods ending July 31, 2022, and August 1, 2021:

	July 31,			August 1,
	2022			2021
U.S. federal income tax rate		i 21.0	%		i 21.0	%
U.S. valuation allowance		( i 35.4	)		( i 3.9	)
Withholding taxes associated with foreign jurisdictions		( i 5.0	)		i 4.7
Foreign income tax rate differential		i 2.7			i 2.8
Stock-based compensation		( i 2.1	)		i 0.2
Global Intangible Low Taxed Income Tax ("GILTI")		—			i 3.4
Other		i 0.1			i 0.5
	( i 18.7%)				i 28.7	%

Our consolidated effective income tax rate during the first quarter of fiscal 2023 was much more negatively affected by the mix of earnings between our U.S. operations and our foreign subsidiaries, in comparison with the first quarter of fiscal 2022. During the first quarter of fiscal 2023, we incurred a significant pre-tax loss from our U.S. operations, and therefore, a significant income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets. In addition, all of our taxable income in the first quarter of fiscal 2023 was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. In comparison, our U.S. operations earned a level of pre-tax income during the first quarter of fiscal 2022 that did not have a significant effect on our full valuation allowance or our consolidated effective income tax rate.

U.S. Valuation Allowance

We evaluate the realizability of our U.S. net deferred income tax assets to determine if a valuation allowance is required. We 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, considering the effects of local tax law.

As of July 31, 2022, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the last three fiscal years from 2020 through 2022, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2023. As a result of the significant weight of this negative evidence, we believe it is more likely than not that our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.

i /

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Based on our assessments as of July 31, 2022, August 1, 2021, and May 1, 2022, valuation allowances against our net deferred income tax assets pertain to the following:

(dollars in thousands)