What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-30 · 83 added, 88 removed, 103 unchanged (62% of the section changed)

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Forward-looking statements in this report, including without limitation, statements related to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that such forward-looking statements involve risks and uncertainties that may impact the Company’s business, operations and financial results, including those risks and uncertainties resulting from the global COVID-19 pandemic, future waves of COVID-19, including through the Delta and Omicrom variants and any new variant strains of the underlying virus;

Investors are cautioned that such forward-looking statements involve risks and uncertainties that may impact the Company’s business, operations and financial results, including those risks and uncertainties resulting from the global COVID-19 pandemic, future waves of COVID-19, including through the Delta and Omicron variants and any new variant strains of the underlying virus;

any future pandemics;

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the effectiveness, availability, and public acceptance of vaccines against variant strains of potential new viruses;

and the heightened impact the pandemic has on many of the risks described herein, including, without limitation, risks relating to disruptions in our supply chain, and labor shortages, any of which could materially adversely impact the Company’s ability to manufacture, source or distribute its products, both domestically and internationally.

and the heightened impact the pandemic has on many of the risks described herein, including, without limitation, risks relating to disruptions in our domestic and global supply chains, and labor shortages, any of which could materially adversely impact the Company’s ability to manufacture, source or distribute its products, both domestically and internationally.

These risks and uncertainties further include, without limitation, the following:

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(ii) the impact of uncertainties in global economic conditions, whether caused by COVID-19 or otherwise, including the impact on the Company’s suppliers and customers;

(iii) additional disruptions in the Company’s supply chains, whether caused by COVID-19 or otherwise;

(iv) labor shortages and related costs the Company may incur, including costs of acquiring and training new employees;

(v) the impact of rising inflation rates;

(vi) the Company’s ability to effectively manage its inventory in a rapidly changing business environment, including the additional inventory it acquired in 2020 and 2021 in anticipation of supply chain disruptions;

uncertainties;

(iii) additional disruptions in the Company’s supply chains, whether caused by COVID-19, the war in Ukraine, or otherwise, including trucker shortages, port closures and delays, and delays with container ships themselves;

(iv) labor shortages and related costs the Company has and may continue to incur, including costs of acquiring and training new employees and rising wages and benefits;

(v) the continuing adverse impact of inflation, including product costs, and transportation costs;

(vi) currency fluctuations including, for example, the increasing strength of the dollar against the euro:

the Company’s ability to effectively manage its inventory in a rapidly changing business environment, including the additional inventory the Company has acquired in anticipation of supply chain disruptions and uncertainties;

(vii) changes in client needs and consumer spending habits;

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(x) the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business it might acquire;

(xi) rising wages and benefits;

(xii) currency fluctuations;

(xiii) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates;

and (xiv) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission.

For a more detailed discussion of these and other factors affecting the Company, see the Risk Factors described in Item 1A included in this Report Annual Report on Form 10-K and below under “Financial Condition”.

(xi) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates;

and (xiii) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission.

For a more detailed discussion of these and other factors affecting the Company, see the Risk Factors described in Item 1A included in this Annual Report on Form 10-K and below under “Financial Condition”.

All forward-looking statements in this report are based upon information available to the Company on the date of this report.

The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by applicable law or regulation.

The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

Critical Accounting Policies & Estimates

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Estimates – Operating results may be affected by certain accounting estimates.

The most sensitive and significant accounting estimates in the financial statements relate to customer rebates, valuation allowances for deferred income tax assets, obsolete and slow-moving inventories, potentially uncollectible accounts receivable, intangibles, accruals for income taxes, and stock-based compensation.

Although the Company’s management has used available information to make judgments on the appropriate estimates to account for the above matters, there can be no assurance that future events will not significantly affect the estimated amounts related to these areas where estimates are required.

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For its contracts with customers, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is transferred to the customer.

A good or service is transferred when (or as) the

customer obtains control of that good or service.

A good or service is transferred when (or as) the customer obtains control of that good or service.

Depending on the contractual terms of each customer, revenue is recognized either at the time of shipment “FOB Shipping Point” or upon delivery “FOB Destination".

When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue.

When revenue is recorded, estimates of returns are made and recorded

as a reduction of revenue.

Customer rebates and incentives earned based on promotional programs in place volume of purchases or other factors are also estimated at the time of revenue recognition and recorded as a reduction of that revenue.

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As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives.

Contingent Consideration - As part of the acquisition of Safety Made, a $1.5 million payment will be due, contingent on the acquired business meeting certain revenue milestones over a two-year period, commencing on the date of the acquisition.

The fair value of the contingent liability at each reporting date is based on certain estimates and judgements made by management.

Those estimates are made from the most relevant data available at that time and include historical data and future projections.

At December 31, 2022, the fair value of the contingent consideration was $1,330,000.

Accounting for Stock-Based Compensation – Stock based compensation cost is measured at the grant date fair value of the award and is recognized as expense over the requisite service period.

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Results of Operations 2022 Compared with 2021

Traditionally, the Company’s sales are stronger in the second and third quarters and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the back-to-school market.

COVID-19 Pandemic Related Considerations

As noted above under “Forward-Looking Statements” and the Risk Factors described in Item 1A included in this Report Annual Report on Form 10-K, in response to the COVID-19 pandemic U.S.

federal, state, local, and foreign governments adopted mitigation measures, creating significant uncertainties in the U.S.

and global economies, including the shutdown of large portions of, or imposition of restrictions on, the U.S.

and global economies.

Notwithstanding a general improvement in conditions and reduction of adverse effects from the pandemic, as of December 31, 2021 there continues to be significant uncertainty around the scope, severity, and duration of the pandemic, as well as the breadth and duration of business disruptions related to it and the overall impact on the U.S., global economies, and our operating results in future periods.

Commencing late in the first quarter of 2020 and continuing through the filing of this report, the COVID-19 pandemic and certain related challenges have affected the Company’s financial results and business operations.

These challenges include:

difficulties in hiring employees for

its manufacturing and distribution centers due to current domestic labor shortages, increased labor costs, higher employee turnover compared to pre-pandemic levels.

In addition, a portion of the Company’s workforce in its headquarters and elsewhere continue to work remotely.

As a result, the Company has experienced and continues to experience operating inefficiencies.

In addition, as economies have re-opened, global supply chains have struggled to keep up with increasing demand, and the resulting supply chain disruptions have, in certain cases, affected our ability to ship products in a timely manner.

These supply chain disruptions and the increase in demand have also led to increased freight, labor and product costs that affected our operating margin in 2021, and those disruptions and increased costs are likely to persist in the near term and potentially for the foreseeable future.

As a result, the Company, beginning in April 2020 and continuing through the end of 2021 and through the present has acquired and maintained additional inventory to minimize the impact of any potential disruption to its supply chain.

The Company believes that it has sufficient inventory of its products to meet anticipated demand in the near future.

However, any further increase in the duration or severity of the COVID-19 pandemic or a resurgence of the pandemic and the continuation of related supply chain and labor issues, might adversely affect the Company’s ability to manufacture, source or distribute its products both domestically and internationally.

The occurrence of any of these factors could have a material adverse effect on the Company’s business, operations and financial condition.

Further, the resurgence in the spread of COVID-19 toward the end of 2021 and into 2022 has created greater uncertainty regarding the economic outlook for the near term, even as vaccines have become widely available.

The extent to which the COVID-19 pandemic will continue to affect the Company’s business, financial condition, liquidity and the Company’s operating results will depend on future developments, which are highly uncertain and cannot be predicted.

Traditionally, the Company’s sales and profits are stronger in the second and third quarters and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the Westcott back-to-school market.

Macroeconomic, Supply Chain and Related Considerations

The global macroeconomic environment has continued to be challenging in 2022, characterized by global inflation at multi-decade highs, rising interest rates, and significant currency fluctuations.

These factors have exacerbated an economy that was struggling to recover from the COVID-19 pandemic.

During 2022, the Company experienced significant supply chain issues.

In anticipation of potential supply chain disruptions, the Company had purchased and maintained additional inventory to minimize the impact of any disruption in our supply chain.

However, as economies have become less restricted by the COVID pandemic, global supply chains have struggled to keep up with increasing demand, and the resulting supply chain disruptions have significantly increased costs.

The supply chain issues caused exceptional ocean and inland freight and demurrage

The freight and demurrage costs began to decrease in the third quarter of 2022.

We recognize those expenses as products are sold and, as a result, the unusually high freight and demurrage costs continued to adversely impact our results for the quarter s ended September 30 , 2022 and December 31 , 2022 and had an overall adverse effect on our operating margin for the twelve months of 2022.

In addition, the war in Ukraine is causing a slowdown in the European economy.

This softness, coupled with a historically low exchange rate for the Euro, has led to challenges in our European markets which we anticipate will continue for at least the near future.

Any continuation of supply chain issues, continued high inflation, currency fluctuations, high interest rates, and any further increase in the duration or severity of the COVID-19 pandemic or a resurgence of the pandemic might continue to adversely affect the Company’s business, operations and financial condition.

The impact of these developments is highly uncertain and cannot be predicted.

In 2022, sales increased by $11,874,798, or 7%, to $193,962,357 compared to $182,087,559 in 2021.

segment sales increased by 8%, in 2022 compared to 2021.

Approximately 65% was attributable to strong sales of first aid and medical products, primarily due to continued market share gains in the industrial channel as well as increases in mass market and e-commerce channels.

Approximately 35% of the growth came from strong sales of Westcott craft products.

Net sales in Canada for the year ended December 31, 2021, increased 31% in U.S.

dollars and 22% in local currency compared to the same period in 2020, primarily due to higher sales of first aid products.

European net sales for the year ended December 31, 2021, increased 19% in U.S.

dollars and 15% in local currency, compared with the same period in 2020.

Approximately 75% of the increase was due to increased sales in the e-commerce channel across all brands.

The remaining growth was mainly due to market share gains in Westcott cutting products

Gross profit was 35.6% of net sales in 2021 compared to 36.3% in 2020.

The decline was primarily due to cost inflation pressures and higher transportation costs, which equally contributed to the decline.

Price increases have partially offset the cost increases.

The large majority of the increase was attributable to strong sales of first aid and medical products, primarily due to continued market share gains in the industrial, mass market and e-commerce channels as well as sales coming from the Safety Made acquisition.

European net sales for the year ended December 31, 2022, decreased 2% in U.S.

dollars but increased 10% in local currency, compared with the same period in 2021.

The increase was mainly due to market share gains in Westcott cutting products.

Net sales in Canada for the year ended December 31, 2022, decreased 4% in U.S.

dollars and were constant in local currency compared to the same period in 2021.

Gross profit was $63,558,785 (32.8% of net sales) in 2022 compared to $64,800,357 (35.6% of net sales) in 2021.

The decline was primarily due to exceptionally high ocean container costs and demurrage charges (1.7% impact).

Also contributing to the decline in gross profit were weaker currencies in Europe and Canada, where we purchase most of our inventory in U.S.

Selling, General and Administrative

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SG&A expenses were 29.5% of net sales in 2022 compared to 28.6% in 2021.

Approximately 80% of the increase in SG&A expenses was due to higher commissions and shipping costs related to higher sales.

The remaining increases was mainly due to added expenses related to the acquisition of Med Nap.

Approximately 34% of the increase in SG&A expenses was due to higher personnel related costs.

Approximately 31% of the increase was due to higher commissions and shipping costs related to higher sales.

The increased shipping costs included fuel surcharges due to higher gas prices in the first half of 2022.

The remaining increase was mainly due to Safety Made related ordinary S,G&A expenses.

Operating Income

Operating income was $12,769,987 in 2021, compared with $11,412,664 in 2020, and increase of $1,357,323.

Operating income was $6,273,302 in 2022, compared with $12,769,987 in 2021, a decrease of $6,496,685.

Operating income in the U.S.

segment increased in 2021 by approximately $649,000 over 2020, primarily due to higher sales.

Operating income in Canada increased in 2021 by approximately $561,000 over 2020, primarily due to the acquisition of First Aid Central.

Operating income in the European segment increased in 2021 by approximately $147,000 over 2020, primarily due to higher sales.

segment decreased in 2022 by approximately $4,750,000 compared to 2021, primarily due to increased supply chain costs which include exceptionally high ocean container costs and demurrage charges.

$3.3 million of exceptional supply chain costs were recognized in 2022 compared to $0 in 2021.

Operating income in the European segment decreased by $1,000,000 compared to 2021 primarily due to increased supply chain costs as well as a weaker currency in Europe where we purchase most of our inventory in U.S.

$700,000 of exceptional supply chain costs were recognized in 2022 compared to $0 in 2021.

Operating income in Canada decreased in 2022 by approximately $757,000 compared to 2021, primarily due to higher inbound and outbound freight.

Interest Expense, Net

Net interest expense for 2021 was $908,223, compared with $919,709 for 2020, a decrease of $11,486.

Net interest expense for 2022 was $2,364,461, compared with $908,223 for 2021, an increase of $1,456,238.

The increase in net interest expense resulted from a higher average interest rate on the outstanding debt as well as higher average debt outstanding under the Company’s revolving loan agreement.

The weighted average interest rate in 2022 was 3.8% compared to 2.1% in 2021.

Other Expense

Other expense was $246,396 in 2022 compared to $194,877 in 2021.

The decrease in other expense is primarily related to a one-time non-cash charge of approximately $750,000 related to the termination of the Company’s Defined Benefit Pension Plan in 2020.

The increase in total other expense was due to losses from foreign currency transactions, primarily due to a declining Euro in our European business.

Income Tax Expense

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Income tax expense in 2021 included a $1.4 million tax credit for stock-based compensation.

The Company’s effective tax rate for the year ended December 31, 2021, excluding the tax credit and the income from the PPP Loan forgiveness was 24%, compared to 21% in 2020.

The higher effective tax rate in 2021 is due to a higher proportion of earnings in jurisdictions with a higher tax rate.

The Company’s effective tax rate in 2021, excluding the tax credit and the income from the PPP Loan forgiveness was 24%.

The lower effective tax rate in 2022 was due to a lower proportion of earnings in jurisdictions with a higher tax rate.

Off-Balance Sheet Transactions

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Inventory increased by approximately $9.7 million, or 18%.

The increase was primarily due to anticipated growth in our business as well as the acquisition of product to offset the impact of potential supply chain interruptions.

We increased inventory during 2022 to anticipate our continued growth and to be positioned to offset the impact of potential supply chain disruptions related to COVID-19.

The increase also reflects higher product costs.

We believe the risk of supply chain disruptions has been reduced, and we are now lowering our inventory.

During 2023, our goal is to reduce inventory by $5.0 million.

The Company expects that changes in inventory levels will continue to be consistent with changes in sales, including the seasonal impact on the Company’s revenue stream.

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We do not anticipate material increases in the allowance for slow moving and obsolete inventory in the ordinary course of business during 2023.

Receivables increased by approximately $7.0 million at December 31, 2021 compared to December 31, 2020.

The increase is primarily due to higher sales in the second half of the fourth quarter.

Receivables decreased by approximately $1.6 million at December 31, 2022 compared to December 31, 2021.

The average number of days sales outstanding in accounts receivable was 62 days in 2022 compared to 60 days in 2021.

Long-term debt consists of (i) borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A.

and (ii) amounts outstanding under the fixed rate mortgage related on the Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA.

The revolving loan agreement provides for borrowings of up to $50 million at Prime Rate less 1.25%.

The credit facility has an expiration date of May 24, 2023.

The Company must pay a facility fee, payable quarterly, in an amount equal to two tenths of one percent (.20%) per annum of the average daily unused portion of the revolving credit line.

The facility is intended to provide liquidity for working capital, growth, share repurchases, dividends, acquisition and other business activities.

Under the revolving loan agreement, the Company is required to maintain specific amounts of tangible net worth, a specified debt to net worth ratio and a fixed charge coverage ratio and must have annual net income greater than zero, measured as of the end of each fiscal year.

At December 31, 2021, the Company was in compliance with the covenants then in effect under the loan agreement.

At December 31, 2021, total debt outstanding under the Company’s revolving credit facility decreased by approximately $5.7 million compared to total debt at December 31, 2020.

and (ii) amounts outstanding under the fixed rate mortgage related to the Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA.

On May 31, 2022, the Company amended its revolving loan agreement with HSBC Bank, N.A.

The amendment increases the amount available for borrowing to $65 million from $50 million, at an interest rate of SOFR plus 1.75%;

interest is payable monthly.

In addition, the expiration date of the revolving loan agreement was extended to May 31, 2026.

The Company must pay a facility fee, payable quarterly, in an amount equal to one eighth of one percent (.125%) per annum of the average daily unused portion of the revolving credit line.

The facility is intended to provide liquidity for growth, share repurchases, dividends, acquisitions, and other business activities.

Under the revolving loan agreement, the Company is required to maintain specific amounts of funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year.

On November 8, 2022, the revolving loan agreement was amended to increase the ratio of funded debt to EBITDA.

The amendment is in effect for four quarters commencing in the third quarter of 2022 and includes an increase in the funded debt to EBITDA ratio for the four quarters ranging from a low of 4.75 to 1 to a high of 5.75 to 1.

The amendment also increases the interest rate from SOFR +1.75% up to a high of SOFR + 2.35% on a basis that varies on a quarterly basis with the funded debt to EBITDA ratio.

The increase in the ratio brought the Company into compliance with the covenant as of September 30, 2022, and going forward, provides the Company with flexibility to conduct its business in light of current and anticipated economic conditions.

As of December 31, 2022, the Company was in compliance with the covenants under the revolving loan agreement, as amended.

At December 31, 2022, total debt outstanding under the Company’s revolving credit facility increased by approximately $16.9 million compared to total debt outstanding at December 31, 2021.

As of December 31, 2022, $50,000,000 was outstanding and $15,000,000 was available for borrowing under the Company’s revolving credit facility.

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Capital expenditures during 2022 and 2021 were $4,304,264 and $6,372,615, respectively, which were, in part, financed with borrowings under the Company’s revolving credit facility.

The increase is primarily related to improvements at our distribution center in Rocky Mount, NC including new HVAC (approximately $2 million) and warehouse management systems (approximately $1 million).

The decrease is primarily related to 2021 improvements at our distribution center in Rocky Mount, NC including new HVAC (approximately $2 million) and warehouse management systems (approximately $1 million).

On June 1, 2022, the Company purchased the assets of Live Safely Products, LLC (d/b/a “Safety Made”) for approximately $11 million, including $1.5 million of which is contingent upon meeting certain annual financial targets during a two-year period.

Based in Keene, NH, Safety Made is a leading manufacturer of first aid kits for the promotional products industry.

In response to the challenges encountered by the Company commencing with the COVID-19 pandemic, the Company has implemented a series of cost reduction initiatives that are expected to generate over $5.0 million in savings in 2023.

These initiatives have included the implementation of a wide range of productivity improvements in our manufacturing and distribution facilities and a reduction of SG&A expenses and other costs.

The Company believes that cash on hand, and cash generated from operating activities, together with funds available under its revolving credit facility, are expected, under current conditions, to be sufficient to finance the Company’s planned operations for at least the next twelve months from the issuance of this Form 10-K.

Recently Issued and Adopted Accounting Standards

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

The update eliminates, clarifies and modifies certain guidance related to the accounting for income taxes.

ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020.

The adoption of ASU 2019-12 did not have a material effect on the Company’s consolidated financial statements.

In January 2017 , the FASB issued ASU No.

2017 - 04 , Intangibles – Goodwill and Other (Topic 350 ):

Simplifying the Test for Goodwill Impairment .

The amendments in this update eliminate Step 2 from the goodwill impairment test.

The annual, or interim, goodwill impairment

test is performed by comparing the fair value of a reporting unit with its carrying amount.

An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value;

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.

The Company adopted this standard on January 1, 2020 .

The adoption of this standard did not have an impact to the financial statements of the Company.

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis