What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-06-09 compared with 2020-12-10 · 135 added, 193 removed, 41 unchanged (89% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q may contain certain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995.

This information involves risks and uncertainties.

Our actual results may differ materially from the results discussed in the forward-looking statements.

See “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS” at the beginning of Part I, Item 1.

Response to COVID 19 Outbreak

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this quarterly report on Form 10-Q.

This Form 10-Q may contain certain forward-looking statements.

When used in this Form 10-Q or in any other presentation, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “project” and similar expressions, are intended to identify forward-looking statements.

They also include statements containing a projection of sales, earnings or losses, capital expenditures, dividends, capital structure or other financial terms.

The forward-looking statements in this Form 10-Q are based upon our management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to us.

These statements are not statements of fact.

Forward-looking statements involve risks and uncertainties, some of which are not currently known to us that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements.

Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:

we are subject to risk as a result of our international manufacturing operations and are subject to the risk of doing business in foreign countries;

a terrorism attack, other geopolitical crisis, or widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic, could negatively impact our domestic and/or international operations;

as a result of the COVID-19 pandemic, a recession may result which would negatively affect our results of operations;

sales and operating profits for the three month period ended April 30, 2021, and for the fiscal year ended January 31, 2021, were positively affected by COVID 19 related demand;

upon diminishment of this pandemic, we will no longer experience this effect;

our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates;

the implementation of our "Enterprise Resource Planning ("ERP") system had, and may in the future as we implement ERP into foreign operations have, an adverse effect on operating results;

we have manufacturing and other operations in China which may be adversely affected by tariff wars and other trade maneuvers;

our results of operations may vary widely from quarter to quarter;

some of our sales are to foreign buyers, which exposes us to additional risks;

we deal in countries where corruption is an obstacle;

we are exposed to tax expense risks;

because we do not have long-term commitments from many of our customers, we must estimate customer demand, and errors in our estimates could negatively impact our inventory levels and net sales;

we face competition from other companies, a number of which have substantially greater resources than we do;

our operations are substantially dependent upon key personnel;

technological change could negatively affect sales of our products and our performance;

cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information and adversely impact our reputation and result of operations;

we may be subject to product liability claims, and insurance coverage could be inadequate or unavailable to cover these claims;

environmental laws and regulations may subject us to significant liabilities;

our directors and executive officers have the ability to exert significant influence on us and on matters subject to a vote of our stockholders;

provisions in our restated certificate of incorporation and by-laws and Delaware law could make a merger, tender offer or proxy contest difficult;

acquisitions could be unsuccessful;

we may need additional funds, and if we are unable to obtain these funds, we may not be able to expand or operate our business as planned;

rapid technological change could negatively affect sales of our products, inventory levels and our performance;

the other factors referenced in this Form 10-Q, including, without limitation, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the factors described under “Risk Factors” disclosed in our fiscal 2021 Form 10-K.

We believe these forward-looking statements are reasonable;

however, you should not place undue reliance on any forward-looking statements, which are based on current expectations.

Furthermore, forward-looking statements speak only as of the date they are made.

We undertake no obligation to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might not occur.

We qualify any and all of our forward-looking statements entirely by these cautionary factors.

We manufacture and sell a comprehensive line of industrial protective clothing and accessories for the industrial and public protective clothing market.

10 unchanged sentences

Manufacturing expansion is not only necessary to control rising costs, it is also necessary for Lakeland to achieve its growth objectives.

Our net sales attributable to customers outside the United States were $24.4 million and $13.3 million for the three months ended October 31, 2020 and 2019, respectively.

The last two weeks of FY20 and the first nine months of FY21 were dominated by response to the COVID 19 outbreak.

The virus’ progression into a global pandemic will likely continue to impact our business for the remainder of FY21 and into the first half of FY22.

We believe that COVID 19 demand will begin to diminish in Q4 FY21 and continuing into Q2 FY22, when vaccines become widely available.

As COVID 19 demand, currently estimated at approximately 35% of revenue, decreases we anticipate a continuation of an increase in our core businesses (industrial) that began in Q2 FY21 and continued through Q3 FY21.

The negative impact of lock downs and stay at home orders peaked in Q2 FY21 with core business sales down by approximately 25%.

Through the second half of Q2 and through Q3 FY21 our core business sales have been recovering steadily.

Based on recent, third quarter U.S.

GDP Growth of 33.1%;

November 2020 manufacturing Purchasing Manager Index of 57.5%, up from 56.0% at August 2020, and our increased market penetration and new customers, we expect our core business sales to recover fully and continue to grow through FY22.

We anticipate that COVID 19 related sales will continue for the remainder of FY21 and into the first half of FY22, however not at the levels experienced in the first three quarters of FY21 as demand for immediate use diminishes and give way to stockpiling demand and increased core business sales.

At present, raw materials supply appears to have caught up with demand, albeit at prices well above pre-COVID 19 pricing.

We anticipate raw material pricing to continue at inflated levels into FY22.

Our net sales attributable to customers outside the United States were $18.4 million and $22.5 million for the three months ended April 30, 2021 and 2020, respectively.

Response to COVID-19 Outbreak

Our strategy for responding to the COVID-19 outbreak evolved from prior “black swan” events.

These events have been very disruptive for the users of our products and contributed little in terms of sustainable business improvement or growth for the suppliers.

Any gains attributable to these events were limited to short-term increases in sales volume and price increases associated with capacity expansion and expedited deliveries.

In responding to COVID-19 Lakeland sought a new approach.

We decided to focus on our existing business, adding new customers, and increasing market penetration by prioritizing service to our existing industrial end users and seeking new customers who were experiencing supply shortages.

We decided to service the COVID-19 market to the extent that Lakeland had excess capacity after servicing existing and new industrial customers.

We believe that focusing on the industrial market first and the pandemic market second, is a sound strategy for diminishing the impact of any post-event recession and loss of COVID-19 related sales while accelerating our growth by developing new, permanent business that will remain after the “black swan” event passes.

Our manufacturing flexibility allows us to rapidly shift capacity between product lines and alter our product offering so that we can maximize throughput of critical products.

In the case of COVID-19 we shifted our sewing capacity heavily to disposable and chemical garments;

increased daily working hours;

and ran a 7-day work week until market supply caught up with demand.

We rationalized our product offerings and eliminated SKUs that did not meet our profitability goals, did not create a competitive advantage or were detrimental to manufacturing efficiencies due to change over times.

Because we own our manufacturing facilities, Lakeland was able to make these changes within the first couple of months of the pandemic.

The last two weeks of FY20, all of FY21, and Q1 FY22 were impacted by our COVID-19 response strategy.

As the pandemic progressed in FY21, we saw reductions in industrial activity due to lockdowns and work restrictions that resulted in diminished sales into petrochemicals, the utility sector, and industrial segments like automotive and airlines.

Our second and third quarters of FY21 were the peak quarters for Personal Protective Equipment (PPE) pandemic sales.

In Q4FY21 we began to see a softening in demand for COVID-19 related sales, and a return of general industrial demand that continued into Q1 FY22.

As the COVID-19 pandemic wanes, demand for associated PPE is falling, but the decline is being offset in part by an increase in industrial activity and associated industrial demand for PPE.

COVID-19 related demand was estimated to be approximately 30% to 35% of FY21 revenue and accounted for an estimated 13% of Q1 FY22 sales.

As this demand continues to decrease, we anticipate a continuation of an increase in our industrial core businesses that began in Q2 FY21 and continued through Q1 FY22 with our sales also benefitting from repeat orders by new industrial customers that began using Lakeland during the pandemic.

The negative impact of lock downs and stay at home orders peaked in Q2 FY21 with industrial business sales down by approximately 25%.

Through the second half of Q2 FY21 and through Q1 FY22 our core business sales have been recovering steadily.

At present, we anticipate our core industrial sales will not only return, but as a result of our focus on increased market penetration and new product offerings we believe revenues will attain levels higher than pre-pandemic revenue levels.

We are not deviating from our growth strategy, rather we are looking to utilize the short-term, increased demand as a catalyst to accelerate attainment of growth objectives.

The success of this strategy is clearly exemplified by our Q1 FY22 new customer order rate of approximately 68% of the more than 500 new customers we have developed.

Over the course of FY21, raw materials supply appears to have caught up with demand.

Prices have declined, but remain above pre-COVID-19 pricing as we anticipated.

We believe that raw materials prices will continue at inflated levels through FY22.

Our future sales would be affected should there be an industry-wide shortage of necessary raw materials in the event of another rise or surge in COVID-19 cases.

As noted, we did experience significant price increases for fabric during the first nine months of FY21 and managed our available manufacturing capacity to lower costs, and increase prises to meet customer demand at these higher prices.

With the exception of our India export manufacturing operation, which did not qualify for “essential status” due to its export only restrictions we have not experienced any manufacturing capacity issues due to inability to source raw materials, government quarantine, or shelter-in-place orders, or due to COVID 19 outbreaks in any of our factories, however there can be no assurance that this will continue to be the case.

While leading economic indicators indicate a relatively robust industrial market recovery, potential headwinds to revenue as we emerge from pandemic sales include the possibility of a recession and consumer stockpiled inventories, as well as a decline in our oil and gas industrial sector that may temper demand within our regular markets in the second half of FY21.

Reference is made to “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

As previously noted, we did experience significant price increases for fabric during FY21 and managed our available manufacturing capacity to lower costs, and increased prices, to meet customer demand at these higher prices.

With the exception of our India export manufacturing operation, which did not qualify for “essential status” due to its export only restrictions, and where a recent surge has led to government imposed lockdowns, we have not experienced any manufacturing capacity issues due to inability to source raw materials, government quarantine, or shelter-in-place orders, or due to COVID-19 outbreaks in any of our factories, however there can be no assurance that this will continue to be the case.

While current economic indicators and industry data indicate a robust industrial market recovery, potential headwinds to revenue as we emerge from pandemic sales include the possibility of a recession and consumer stockpiled inventories that may temper demand within our regular markets in the second half of FY22.

Reference is made to “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 and to “Forward-Looking Statements” above in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”.

Offsetting these risks are changes to our sales environment, as a result of COVID-19, that we believe represent considerable upside to sales.

We believe that once the pandemic subsides, there will be continued demand establishing PPE stockpiles for the long-term.

We believe that once the pandemic subsides, there will be continued demand for establishing PPE stockpiles for the long-term.

This stockpiling will be filled in part by inventory that is in the distribution channels as the pandemic ends.

3 unchanged sentences

And finally, we are seeing the emergence of institutional cleaning as a new market segment as countries and states reopen and seek to prevent further infections.

More recently we are seeing increased demand related to COVID-19 surges in Vietnam and India.

For these reasons we are maximizing our manufacturing capacity in the near-term and evaluating expansion opportunities to allow us to further increase our industrial market penetration as our competitors abandon their industrial customers as they seek to maximize COVID-19 related sales.

This strategy combined with new product development, manufacturing expansion, and the addition of key senior personnel also serves to prepare us for any economic slowdown that may occur as COVID-19 business ends and our industry transitions to a more traditional product mix.

Lakeland’s strategy for response to these “black swan” events is to remain focused on our long term growth strategies and tailor our response to these events so as to accelerate our strategic plans.

We believe that focusing on our long-term growth strategy is also a solid strategy for minimizing the impact of any post-pandemic recession.

In this particular case, our long-term strategy for revenue and margin improvement is to increase market penetration into markets that use higher value, higher margin products, that are recession resistant.

Our manufacturing flexibility allows the Company to maximize the manufacture of disposable and chemical garments without degrading its ability to supply higher end, flame resistant and arc flash resistant garments.

In order to maximize our response to pandemic demand, we have increased the daily working hours for our disposables and chemical manufacturing product lines, and we have significantly reduced the number of SKUs in these product lines in order to maximize efficiencies.

This will have the effect of increasing throughput and reducing manufacturing costs to help mitigate any raw materials prices increases.

Additionally, by focusing on a few core styles, we believe we can minimize the impact on inventory of any production over run when the pandemic subsides.

SKU reduction also affords Lakeland the opportunity to discontinue any styles that have ceased being profitable due to pricing or sales volume We are not deviating from our growth strategy, rather we are looking to utilize the short-term, increased demand as a catalyst to accelerate attainment of growth objectives.

Having successfully implemented the above strategy, as evidenced by significantly increased market penetration in international markets, the addition of new customers accounting for additional sales of approximately $10 million, and realizing efficiency gains that we intend to make permanent, we are now focused on adding human and IT resources required to accelerate our growth rate in a post-COVID 19 environment.

We believe that we will emerge from FY21 a full year ahead of our pre-COVID 19 growth plan, and we are committed to leveraging our position to accelerate growth in Critical Environment Markets such as pharmaceutical cleanrooms, isolation gowns, and Chemo-gowns;

Having successfully implemented the above strategy, as evidenced by significantly increased market penetration in international markets, the addition of new customers, and realizing efficiency gains that we intend to make permanent, we are now focused on adding human and IT resources required to accelerate our growth rate in a post-COVID-19 environment.

We believe that we emerged from FY21 a full year ahead of our pre-COVID-19 growth plan, and we are committed to leveraging our position to accelerate growth in Critical Environment Markets such as pharmaceutical cleanrooms, isolation gowns, and Chemo-gowns;

the Electric Utility Market;

2 unchanged sentences

These personnel will facilitate future manufacturing expansion.by assuring that we have the skill sets necessary to meet our growth targets.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and disclosure of contingent assets and liabilities.

We base our estimates on the past experience and on various other assumptions that we believe to be reasonable under the circumstances, and we periodically evaluate these estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements.

Revenue Recognition .

Substantially all of the Company’s revenue is derived from product sales, which consist of sales of the Company’s personal protective wear products to distributors.

The Company considers purchase orders to be a contract with a customer.

Contracts with customers are considered to be short-term when the time between order confirmation and satisfaction of the performance obligations is equal to or less than one year, and virtually all of the Company’s contracts are short-term.

The Company recognizes revenue for the transfer of promised goods to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods.

The Company typically satisfies its performance obligations in contracts with customers upon shipment of the goods.

Generally, payment is due from customers within 30 to 90 days of the invoice date, and the contracts do not have significant financing components.

The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation.

Shipping and handling costs associated with outbound freight are included in operating expenses.

Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue.

The transaction price includes estimates of variable consideration related to rebates, allowances, and discounts that are reductions in revenue.

All estimates are based on the Company’s historical experience, anticipated performance, and the Company’s best judgment at the time the estimate is made.

Estimates for variable consideration are reassessed each reporting period and are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur upon resolution of uncertainty associated with the variable consideration.

All the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as quantity time’s price per unit.

Accounts Receivable , Net.

Trade accounts receivable are stated at the amount the Company expects to collect.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.

The Company recognizes losses when information available indicates that it is probable that a receivable has been impaired based on criteria noted above at the date of the consolidated financial statements, and the amount of the loss can be reasonably estimated.

Management considers the following factors when determining the collectability of specific customer accounts:

Customer creditworthiness, past transaction history with the customers, current economic industry trends and changes in customer payment terms.

Past due balances over 90 days and other less creditworthy accounts are reviewed individually for collectability.

If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance.

Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

Inventories .

Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or net realizable value.

Impairment of Long-Lived Assets.

The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value may not be recoverable.

The Company measures any potential impairment on a projected undiscounted cash flow method.

Estimating future cash flows requires the Company’s management to make projections that can differ materially from actual results.

The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the asset is less than its carrying value.

In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset.

Income Taxes.

The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing the consolidated financial statements.

This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes.

These differences, together with net operating loss carryforwards and tax credits, are recorded as deferred tax assets or liabilities on the Company’s consolidated balance sheet.

A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income.

A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized.

In the event the Company determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination.

The Company recognizes tax positions that meet a “more likely than not” minimum recognition threshold.

If necessary, the Company recognizes interest and penalties associated with tax matters as part of the income tax provision and would include accrued interest and penalties with the related tax liability in the consolidated balance sheets.

Foreign Operations and Foreign Currency Translation.

The Company maintains manufacturing operations in the People’s Republic of China, Mexico, Vietnam, India, and Argentina and can access independent contractors in China, Vietnam, Argentina, and Mexico.

It also maintains sales and distribution entities located in China, Canada, the U.K., Chile, Argentina, Russia, Kazakhstan, India, Mexico, Uruguay, Australia, and Vietnam.

The Company is vulnerable to currency risks in these countries.

The functional currency for the United Kingdom subsidiary is the Euro;

the trading company in China, the RMB;

and the Russian operation, the Russian Ruble, and the Kazakhstan operation the Kazakhstan Tenge.

All other operations have the US dollar as its functional currency.

Pursuant to US GAAP, assets and liabilities of the Company’s foreign operations with functional currencies other than the US dollar, are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods.

Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity.

Cash flows are also translated at average translation rates for the periods, therefore amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Fair Value of Financial Instruments.

US GAAP defines fair value, provides guidance for measuring fair value and requires certain disclosures utilizing a fair value hierarchy which is categorized into three levels based on the inputs to the valuation techniques used to measure fair value.

The following is a brief description of those three levels:

Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Unobservable inputs that reflect management’s own assumptions.

Foreign currency forward and hedge contracts are recorded in the consolidated balance sheets at their fair value as of the balance sheet dates based on current market rates.

The financial instruments of the Company classified as current assets or liabilities, including cash and cash equivalents, accounts receivable, short-term borrowings, borrowings under revolving credit facility, accounts payable and accrued expenses, are recorded at carrying value, which approximates fair value based on the short-term nature of these instruments.

Significant Balance Sheet Fluctuation October 31, 2020, Compared to January 31, 2020

Cash increased by $25.6 million, primarily as a result of increased profitability and improved accounts receivable collection efficiency, offset by the payoff of the term loan outstanding at January 31, 2020.

Accounts receivable increased due to the increase in sales.

Inventory increased $0.8 million to support the increase in sales.

In addition, we may pursue growth through acquistions.

Significant Balance Sheet Fluctuation April 30, 2021 , Compared to January 31, 2021

Cash increased by $7.7 million, primarily as a result of continued profitability and improved accounts receivable collection efficiency.

Accounts receivable decreased due to improved collections and lower sales compared to the previous quarter.

Inventory increased less than $0.1 million.

Accounts payable, accrued compensation, and other accrued expenses increased $0.1 million.

Capital expenditures for the three and nine months ended October 31, 2020 were $0.6 million and $1.3 million, respectively.

Three Months ended October 31, 2020, Compared to the Three Months Ended October 31, 2019

Reference is made to “Overview;

Response to COVID 19 Outbreak” above which should be read in conjunction with this Section.

Net sales increased to $41.5 million for the three months ended October 31, 2020 compared to $27.5 million for the three months ended October 31, 2019, an increase of 50.9%.

Sales globally were driven by COVID 19 demand, as we realized increased sales in all markets for our disposable and chemical product lines.

In addition to the increased volumes, sales were also impacted by price increases based on our normal, annual adjustments, special price increases due to increases in raw material costs, which we expect will be temporary, and increased sales to new customers, which are typically at prices above those for our recurring customers.

We were able to meet this demand by increasing our manufacturing capacity with expanded operating hours.

We estimate that approximately 35% of our revenues in the current quarter were related to COVID 19 demands.

Other product lines such as fire, high performance high visibility, and wovens, which are primarily used by industrial customers, declined during the period due to various global shutdowns and quarantines.

Gross Profit.

Gross profit increased $12.4 million, or 133.5%, to $21.7 million for the three months ended October 31, 2020, from $9.3 million for the three months ended October 31, 2019.

Gross profit as a percentage of net sales increased to 52.3% for the three month period ended October 31, 2020, from 33.9% for the three months ended October 31, 2019.

Major factors driving gross margins were:

Significant increases in volumes driven by COVID 19 demand.

Price increases described above.

Improved manufacturing efficiency in substantially all locations as we increased the number of hours per shift and number of days per week.

Increase in direct container sales.

Operating Expense.

Operating expenses increased 23.2% from $7.5 million for the three months ended October 31, 2019 to $9.2 million for the three months ended October 31, 2020.

Operating expenses as a percentage of net sales was 22.2% for the three months ended October 31, 2020, down from 27.1% for the three months ended October 31, 2019.

Selling expenses were essentially flat, with increases in sales compensation and commissions offset by decreases in freight out, travel, advertising and marketing.

General and administrative expenses were increased primarily due to increases in stock-based compensation, currency fluctuations, and increased incentive accruals.

During the three months ended October 31, 2020 stock-based compensation of $0.7 million was recorded as a result of an increase in estimate of the number of shares expected to be earned under the stock performance plan due to increase in profitability over the measurement period.

In the period ended October 31, 2019, stock-based compensation was reduced by $0.4 million due to a reduction in the number of shares expected to be earned under the performance plan.

Operating Profit.

Operating profit increased to $12.5 million for the three months ended October 31, 2020 from $1.8 million for the three months ended October 31, 2019, due to the impacts detailed above.

Operating margins were 30.1% for the three months ended October 31, 2020, as compared to 6.7% for the three months ended October 31, 2019

Interest Expense.

Interest expense decreased slightly to $0.01 million for the three months ended October 31, 2020 from $0.03 million for the three months ended October 31, 2019 as a result of reduced borrowings.

Income Tax Expense.

Income tax expense consists of federal, state and foreign income taxes.

Income tax expense was $3.2 million for the three months ended October 31, 2020, compared to $0.7 million for the three months ended October 31, 2019, due to the increase in operating profit.

Net income increased by $8.2 million to $9.3 million for the three months ended October 31, 2020 from $1.1 million for the three months ended October 31, 2019.

Nine Months ended October 31, 2020, Compared to the Nine Months Ended October 31, 2019

Capital expenditures for the three months ended April 30, 2021 were $0.1 million.

Three Months ended April 30, 2021, Compared to the Three Months Ended April 30, 2020

Reference is made to “Overview;

Response to COVID-19 Outbreak” above which should be read in conjunction with this Section.

Net sales increased to $122.1 million for the nine months ended October 31, 2020 compared to $79.6 million for the nine months ended October 31, 2019, an increase of 53.3%.

Sales globally were driven by COVID 19 demand, as we realized significant increases in all markets for our disposable and chemical product lines.

We were able to meet this demand with inventory on hand by increasing our manufacturing capacity with expanded operating hours.

Other product lines such as wovens, which are primarily used by industrial customers, declined during the period due to various global shutdowns and quarantines.

Net sales were $34.1 million for the three months ended April 30, 2021 a decrease of $11.5 million or 25.2% compared to $45.6 million for the three months ended April 30, 2020, Sales of our disposable and chemical product line were impacted in the first quarter due to reduction in direct container sales that were COVID-19 driven demand.

As noted, it is anticipated that COVID-19 demand will continue to diminish.

Other product lines such as fire, high performance, and wovens, which are primarily used by industrial customers, increased during the period due to strengthening in those markets.

Gross Profit .

Gross profit increased $33.9 million, or 124.3%, to $61.2 million for the nine months ended October 31, 2020, from $27.3 million for the nine months ended October 31, 2019.

Gross profit as a percentage of net sales increased to 50.1% for the nine months ended October 31, 2020, from 34.3% for the nine months ended October 31, 2019.

Gross profit for the three months ended April 30, 2021 was $14.4 million, a decrease of $7.8 million, or 35.0%, compared to $22.1 million for the three months ended April 30, 2020.

Gross profit as a percentage of net sales decreased to 42.2% for the three month period ended April 30, 2021, from 48.6% for the three months ended April 30, 2020.

Major factors driving gross margins were:

Significant increases in volumes driven by COVID 19 demand.

Price increases described above.

Improved manufacturing efficiency in substantially all locations as we increased the number of hours per shift and number of days per week.

Reduction in SKUs led to increased run size that increased manufacturing throughput and improved efficiency.

Increase in direct container sales.

Sales of reserved inventory into COVID 19 applications.

Lower level of direct container sales in the current period.

Return to competitive pricing pressures as we shift from COVID-19 driven demand to industrial driven demand.

Operating Expense.

Operating expenses increased 15.0% from $23.1 million for the nine months ended October 31, 2019 to $26.6 million for the nine months ended October 31, 2020.

Operating expenses as a percentage of net sales was 21.8% for the nine months ended October 31, 2020, down from 29.0% for the nine months ended October 31, 2019.

Selling expenses increased $1.8 million, primarily due to sales compensation, external commissions, volume rebates to certain customers, and freight out, offset in part by decreases in travel, advertising and marketing.

General and administrative expenses were increased due to increases in stock-based compensation, currency fluctuations, and incentive accruals, which were offset by decreases in salaries (including severance), temporary staffing, and professional fees.

During the nine months ended October 31, 2020 stock-based compensation of $0.7 million was recorded as a result of an increase in estimate of the number of shares expected to be earned under the stock performance plan due to significant improvement in profitability for the period.

For the nine months ended October 31, 2019, stock-based compensation was reduced by $0.8 million as it was deemed improbable that such shares would vest based on performance to date.

Operating expenses decreased 17.3% from $9.8 million for the three months ended April 30, 2020 to $8.1 million for the three months ended April 30, 2021.

Operating expenses as a percentage of net sales was 23.9% for the three months ended April 30, 2021, up from 21.4% for the three months ended April 30, 2020.

Selling expenses were decreased, with decreases in sales compensation and commissions and freight out due to the decrease in sales.

General and administrative expenses in total were essentially the same for each period which included a gain in currency fluctuations of $0.5 million in Q1 FY22 as compared to currency losses of $0.2 million in Q1 FY21.

This currency gain was offset by compensation costs and licensing and depreciation associated with our ERP investment.

Operating Profit .

Operating profit increased to $34.6 million for the nine months ended October 31, 2020 from $4.2 million for the nine months ended October 31, 2019, due to the impacts detailed above.

Operating margins were 28.3% for the nine months ended October 31, 2020, as compared to 5.2% for the nine months ended October 31, 2019.

Operating profit declined to $6.2 million for the three months ended April 30, 2021 from $12.4 million for the three months ended April 30, 2020, due to the impacts detailed above.

Operating margins were 18.3% for the three months ended April 30, 2021, as compared to 27.1% for the three months ended April 30, 2020.

Interest Expense .

Interest expense decreased to $0.01 million for the nine months ended October 31, 2020 from $0.1 million for the nine months ended October 31, 2019, as a result of less borrowings for the more current period.

Interest expense decreased slightly to less than $0.01 million for the three months ended April 30, 2021 from $0.02 million for the three months ended April 30, 2020 as a result of reduced borrowings.

Income Tax Expense .

Income tax expense consists of federal, state and foreign income taxes.

Income tax expense was $7.4 million for the nine months ended October 31, 2020, compared to $2.0 million for the nine months ended October 31, 2019, due to the increase in operating profit.

Income tax expense for the nine months ended October 31, 2020 was reduced by $1.7 million due to certain modifications to the GILTI tax provisions enacted in the period.

Net income increased by $25.2 million to $27.2 million for the nine months ended October 31, 2020 from $2.1 million for the nine months ended October 31, 2019.

Income tax expense was $1.6 million for the three months ended April 30, 2021, compared to $3.7 million for the three months ended April 30, 2020, due to the reduction in operating profit.

Net income decreased by $4.0 million to $4.6 million for the three months ended April 30, 2021 from income of $8.6 million for the three months ended April 30, 2020.

Liquidity and Capital Resources

At October 31, 2020, cash and cash equivalents were approximately $40.2 million and working capital was approximately $98.7 million.

Cash and cash equivalents increased $25.6 million and working capital increased $31.8 million from January 31, 2020, due to increased profitability and a focus on working capital efficiencies.

Of the Company’s total cash and cash equivalents of $40.2 million as of October 31, 2020, cash held in Latin America of $1.8 million, cash held in Russia and Kazakhstan of $1.3 million, cash held in the UK of $1.4 million, cash held in India of $0.9 million and cash held in Canada of $3.1 million would not be subject to additional US tax due to the change in the US tax law as a result of the December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the “Tax Act”).

In the event the Company repatriated cash from China, of the $18.8 million balance at October 31, 2020 there would be an additional 10% withholding tax incurred in that country.

The Company has strategically employed a dividend plan subject to declaration and certain approvals in which its Canadian subsidiary sends dividends to the US in the amount of 100% of the previous year’s earnings, the UK subsidiary sends dividends to the US in the amount of 50% of the previous year’s earnings, and the Weifang China subsidiary sends dividends to the US in declared amounts of the previous year’s earnings.

No dividends were proposed by management or declared by our Board of Directors for our China subsidiary in the nine months ended October 31, 2020.

Net cash provided by operating activities of $28.0 million for the nine months ended October 31, 2020 was primarily due to net income of $27.2 million, non-cash expenses of $6.2 million for deferred taxes, depreciation and amortization, stock compensation, other non-cash charges and a $5.4 million increase in net working capital accounts.

Net cash used in investing activities of $1.3 million for the nine months ended October 31, 2020 reflects planned investments in property and equipment.

Net cash used in financing activities of $1.2 million for the nine months ended October 31, 2020, was due to the repayment of a term loan under a previous credit facility as the Company transitioned to the new Loan Agreement with Bank of America described below.

The Company has a $12.5 million revolving credit facility with Bank of America which commenced June 25, 2020, and which will expire on June 25, 2025.

This facility currently carries an interest rate of 2.25% per annum.

There are no borrowings outstanding under this facility at October 31, 2020.

Maximum availability under this facility at October 31, 2020 was approximately $12.5 million.

Our current credit facility requires, and any future credit facilities may also require, that we comply with specified financial covenants relating to fixed charge coverage ratio and limits on capital expenditures and investments in foreign subsidiaries.

Our ability to satisfy these financial covenants can be affected by events beyond our control, and we cannot guarantee that we will meet the requirements of these covenants.

These restrictive covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business.

Default under our credit facilities would allow the lenders to declare all amounts outstanding to be immediately due and payable.

Our primary lender, Bank of America, has a security interest in substantially all of our US assets and pledges of 65% of the equity of the Company’s foreign subsidiaries.

If our lender declares amounts outstanding under the credit facility to be due, the lender could proceed against our assets.

Any event of default, therefore, could have a material adverse effect on our business.

The Company has experienced increased sales and order activity as a result of the COVID 19 pandemic and may need to increase inventories in order to continue to respond to this increased demand.

Additionally, the Company intends to invest in capacity expansion which may require significant capital expenditures.

See “Capital Expenditures” below.

At this time the Company believes it has sufficient cash balances and other capital to fund operations, working capital, and future capital expenditures on both a short-term and long-term basis.

At April 30, 2021, cash and cash equivalents were approximately $60.3 million and working capital was approximately $112.7 million.

Cash and cash equivalents increased $7.7 million and working capital increased $4.5 million from January 31, 2021, due to continued profitability and a focus on working capital efficiencies.

Of the Company’s total cash and cash equivalents of $60.3 million as of April 30, 2021, cash held in Latin America of $2.7 million, cash held in Russia and Kazakhstan of $0.7 million, cash held in the UK of $1.7 million, cash held in India of $1.2 million and cash held in Canada of $4.7 million would not be subject to additional US tax in the event such cash was repatriated due to the change in the US tax law as a result of the December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the “Tax Act”).

In the event the Company repatriated cash from China, of the $26.6 million balance at April 30, 2021 there would be an additional 10% withholding tax incurred in that country.

Net cash provided by operating activities of $8.3 million for the three months ended April 30, 2021 was primarily due to net income of $4.6 million, non-cash expenses of $1.1 million for deferred taxes, depreciation and amortization and stock compensation, and decrease in accounts receivable of $2.3 million.

Net cash used in investing activities of $0.1 million for the quarter ended April 30, 2021 reflects equipment purchases.

Net cash used in financing activities was $0.5 million for the quarter ended April 30, 2021, was due to shares returned to pay income taxes on shares vested under our restricted stock program.

We believe our current cash balance and cashflow from operations will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.

On June 25, 2020, we entered into a Loan Agreement (the “Loan Agreement”) with Bank of America (“Lender”).

The Loan Agreement provides the Company with a secured $12.5 million revolving credit facility, which includes a $5.0 million letter of credit sub-facility.

The Company may request from time to time an increase in the revolving credit loan commitment of up to $5.0 million (for a total commitment of up to $17.5 million).

Borrowing pursuant to the revolving credit facility is subject to a borrowing base amount calculated as (a) 80% of eligible accounts receivable, as defined, plus (b) 50% of the value of acceptable inventory, as defined, minus (c) certain reserves as the Lender may establish for the amount of estimated exposure, as reasonably determined by the Lender from time to time, under certain interest rate swap contracts.

The borrowing base limitation only applies during periods when the Company’s quarterly funded debt to EBITDA ratio, as defined, exceeds 2.00 to 1.00.

The credit facility will mature on June 25, 2025.

Borrowings under the revolving credit facility bear interest at a rate per annum equal to the sum of the LIBOR Daily Floating Rate (“LIBOR”), plus 125 basis points.

LIBOR is subject to a floor of 100 basis points.

All outstanding principal and unpaid accrued interest under the revolving credit facility is due and payable on the maturity date.

On a one-time basis, and subject to there not existing an event of default, the Company may elect convert up to $5.0 million of the then outstanding principal of the revolving credit facility to a term loan facility with an assumed amortization of 15 years and the same interest rate and maturity date as the revolving credit facility.

The Loan Agreement provides for an annual unused line of credit commitment fee, payable quarterly, of 0.25%, based on the difference between the total credit line commitment and the average daily amount of credit outstanding under the facility during the preceding quarter.

Stock Repurchase Program.

On July 19, 2016, the Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $2,500,000 of its outstanding common stock.

During the nine months ended October 31, 2020, the Company repurchased no shares of stock.

The Company has repurchased 152,801 shares of stock under this program as of the date of this filing which amounted to $1,671,188, inclusive of commissions.

On February 17, 2021, the Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $5,000,000 of its outstanding common stock.

The new program replaces the prior program which had approximately $800,000 remaining for repurchases.

There were no shares repurchased in Q1 FY22.

Capital Expenditures.

Our capital expenditures for first nine months of FY21 of $1.3 million principally relate to capital purchases for our manufacturing facilities in Mexico, Vietnam and India, and the enhancement of our global IT infrastructure.

Our capital expenditures for first three months of FY22 of $0.1 million principally relate to capital purchases for our manufacturing facilities in Mexico, Vietnam and India, and the enhancement of our global IT infrastructure.

We anticipate FY22 capital expenditures to be approximately $3.0 million as we continue to deploy our ERP solution globally, invest in strategic capacity expansion, and replace existing equipment in the normal course of operations.

The Company may also seek to expend funds in connection with acquisitions.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S.

GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our fiscal year 2021 Annual Report.

Certain of our accounting policies are considered critical, as these policies are the most important to the depiction of our financial statements and require significant, difficult or complex judgments, often employing the use of estimates about the effects of matters that are inherently uncertain.

Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2021 Annual Report.

There have been no significant changes in the application of our critical accounting policies during the Q1 FY2022.

Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item and therefore, no disclosure is required under Item 7A for the Company.

A smaller reporting company is not required to provide the information required by this Item and therefore, no disclosure is required under Item 3 for the Company.

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-Q

Item 2. Management’s Discussion and Analysis