What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-09 compared with 2021-12-09 · 58 added, 148 removed, 93 unchanged (69% of the section changed)

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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 or other negative economic conditions may result which could negatively affect our results of operations;

sales and operating profits for the nine month period ended October 31, 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;

a terrorist 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;

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

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

Business Overview

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

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Our facilities and capabilities in China and Mexico allow access to a less expensive labor pool than is available in the United States and permit us to purchase certain raw materials at a lower cost than they are available domestically.

We added manufacturing operations in Vietnam and India in fiscal 2019, to offset increasing manufacturing costs in China and further diversify our manufacturing capabilities.

More recently we have added manufacturing operations in Vietnam and India to offset increasing manufacturing costs in China and further diversify our manufacturing capabilities.

Our China operations will continue primarily manufacturing for the Chinese market and other markets where duty advantages exist.

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 $19.4 million and $24.4 million for the three months ended October 31, 2021 and 2020, respectively and $55.1 million and $67.5 million for the nine months ended October 31, 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 disruptive for the users of our products and contributed little in terms of sustainable business improvement or growth for the suppliers.

Any business 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.

Throughout COVID-19 we focused our attention 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 sought 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 increasing market penetration in a post COVID-19 environment.

Even though we were successful in selling to more than 500 new distributrors and end users, 75% of whom were outside of the U.S.

market, excess pipeline inventory and freight delays have proven a significant headwind.

We anticipate that excess inventory will decline steadily as intermittent surges in COVID-19 cases continue and that industrial growth will continue to improve internationally as we transition from an emergency COVID-19 response to a business environment where COVID-19 is a dimisnished, but persistent component of sales.

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 changes over time.

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 the nine months ended October 31, 2021, 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 Q4 FY21 we began to see a softening in demand for COVID-19 related sales, and a return of general industrial demand that continued into Q3 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 20% of Q3 FY22 sales.

The increase in COVID-19 driven sales in Q3 FY22, (approximately 20%) compared to Q2 FY22 (approximately 13%) is a significant departure from our previous expectations for continuous quarter over quarter declines in COVID-19 demand as the pandemic winds down.

We attribute this change primarily to regional differences in COVID-19 responses and preparation.

Q3 FY22 saw a wave of COVID-19 outbreaks in Southeast Asia while Q2 FY22 was the height of the delta variant outbreak in the U.S.

We believe that the quarter over quarter increase in COVID sales as a percent of revenue reflects how regional pandemic responses, specifically the percentage of the the population vaccinated and the quantities of PPE stockpiled, may lead to fluctuations in COVID-19 sales going forward.

COVID-19 outbreaks in developing regions of the world are likely to result in greater demand than outbreaks in developed countries where vaccination levels and stockpiles are greater.

Q2 FY22 saw the bulk of the delta variant outbreak in the U.S.

but generated less demand than the Q3 FY22 outbreak of the same variant in Southeast Asia.

We believe this trend is likely to repeat itself, with diminishing demand differences, as the pandemic runs its course to some persistent level with an indeterminant demand level similar to the seasonal flu.

Our strategy in response to this development is unchanged as we are well positioned to address demand fluctuations around the world and have adequate inventory of finished good to respond, without delay, to these events as they unfold.

Likewise, this development does not alter our internal growth projections as the net result of this trend is demand for our products exceeding our previous expectations.

While we saw, and noted, an initial recovery in the industrial markets in the U.S., we now believe that the strength of the recovery was magnified by freight delays extending order leadtimes leading distributors and end users to place more orders as industrial activity surged.

As these delayed shipments arrived throughout the nine months ended October 31, 2021, an excess of inventory was created in U.S.

distribution channels.

As stated earlier, we believe that intermittent surges in COVID-19 cases and the subsequent high rates of hospitalizations in the U.S.

will draw down this inventory as freight delays continue.

We believe that industrial activity in developed regions of the world is likely to continue to increase as vaccination levels increase and therapeutics improve, lessening reliance on shutdowns or lockdowns to control virus spread.

As stated previously, we believe that developing regions of the world that are less prepared and have less robust medical care, will be slower in industrial recovery.

We do not anticipate a slower industrial recovery in developing regions to negatively impact our growth potential primarily because the regional dispersion of our sales favors the developed regions of the world by a significant margin.

As noted above, as freight delayed orders have arrived through late Q1, and all of Q2 and Q3 FY22, PPE manufacturing has caught up to current COVID-19 demand.

Raw materials and finished goods pricing have declined, but increased freight costs and lack of availability of some precursors threaten to limit if not reverse the downward trend.

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, including any surges due to COVID-19 variants such as the delta or omicron variants.

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.

In Q3 FY22 we did not experience any manufacturing shutdowns or closures of any of our facilities due to COVID-19.

Employee absence due to potential exposure or quarantine of the neighborhood in which they live is a persistent problem, but has not resulted in the shutdown of any facilties.

Our net sales attributable to customers outside the United States were $16.0 million and $18.4 million for the three months ended April 30, 2022 and 2021, respectively.

We are continually monitoring the potential financial impact of the Russian invasion of Ukraine on our operations.

For Q1 FY23, sales in Russia were approximately 2.8% of our consolidated sales and sales into Ukraine were not significant.

We do not have any capital assets in Russia.

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.

In addition, we cannot predict any potential incremental cost that may be associated with any federal, state or local vaccine mandates or related testing protocol.

While current economic indicators and industry data indicate an 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 fourth quarter of FY22.

While we have not experienced any raw materials shortages in our Asian manufacturing operations, we are experiencing some issues with U.S.

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Where we can, we will seek to recover increased costs with corresponding price increases.

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 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 subsides.

When specific governments will issue RFQs for additional product is unknown, but some RFQs are already pending release;

others are expected to be released over the next several months.

Additionally, we believe the private sector will also engage in stockpiling of PPE as supply channels catch up to demand.

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.

Having successfully realized significant efficiency gains, resulting in increased profitability, 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 have emerged from FY21 and COVID-19 nearly twice as profitable as we were pre-COVID-19.

This is evident when comparing Q3 FY20 (pre-COVID) to Q3 FY22.

Sales revenues of $30.0 million in Q3 FY22 exceeded Q3 FY20 sales of $27.5 million and net income more than doubled from $1.1 million in Q3 FY20 to $2.8 million in Q3 FY22.

Going forward, we will continue improving efficiencies by rationalizing our product offering in non-COVID product lines.

To do this we will be acquiring additional senior and middle managers with specific skills in Sales and Marketing, Quality Control, Supply Chain Management, and Industrial Engineering.

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

In addition, we may pursue growth through acquisitions.

On October 18, 2021, the Company made a strategic investment of $2.8 million in Inova Design Solutions Ltd.

(doing business as Bodytrak®) as a groundbreaking step toward entering the Connected Worker Market for “Smart PPE.” Bodytrak’s unique ear-based sensor platform uses precise physiological measurements and cloud-based analytics to automate health, safety and performance monitoring, making it an ideal complement to Lakeland’s portfolio of industrial protective solutions.

Bodytrak (London, UK) provides wearable monitoring solutions for customers in industrial health, safety, defense and first responder markets wanting to achieve better employee health and performance.

Bodytrak’s solution is provided as a platform as a service (PaaS), delivering real-time data and cloud-based analytics, and hardware that includes a patented earpiece, for physiological monitoring and audio communications.

Significant Balance Sheet Fluctuation October 31, 2021 , Compared to January 31, 2021

Cash increased by $2.9 million, primarily as continued profitability and improved accounts receivable collection generated $12.6 million of cash flow from operations offset by our investment of $2.8 million in Bodytrak, $5.9 million of share purchases under our treasury stock program.

Accounts receivable decreased due to improved collections and lower sales levels compared to prior year.

Inventory increased $3.2 million due to planned increases to offset freight delays, and reduced demand as compared to prior year.

Accounts payable, accrued compensation, and other accrued expenses decreased $2.0 million.

Capital expenditures for the three and nine months ended October 31, 2021 were $0.1 million and $0.6 million, respectively.

Three Months ended October 31, 2021, Compared to the Three Months Ended October 31, 2020

Reference is made to “Overview;

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

Net sales were $30.0 million for the three months ended October 31, 2021 a decrease of $11.5 million or 27.7% compared to $41.5 million for the three months ended October 31, 2020.

Sales of our disposable and chemical product line were impacted in the third quarter due to a reduction in direct container sales driven by COVID-19 demand and continued softness in demand from our industrial markets.

Other product lines such as fire, high performance, and wovens, increased by $0.4 million due to strengthening demand in those markets.

Additionally, we have experienced, along with most other companies across many industries, the macro-economic impact of a challenging employment environment related to hiring and retaining employees and wage inflation.

We expect that these hiring, retention, and wage inflation challenges, as well as challenges related to maintaining our current workforce, will continue into FY23.

These hiring, retention, and cost challenges may negatively affect our ability to grow our business and keep our best employees or increase our cost of operations.

Results of Operations

Three Months ended April 30, 2022, Compared to the Three Months Ended April 30, 2021

Net sales were $27.3 million for the three months ended April 30, 2022, a decrease of $6.8 million or 19.9% compared to $34.1 million for the three months ended April 30, 2021.

Sales of our disposable and chemical product lines were impacted in the first quarter due to a reduction in direct container sales driven by COVID-19 demand and continued softness in demand from our industrial markets.

Other product lines such as fire, high performance, and high visibility, increased by $1.6 million due to strengthening demand in those markets.

Sales were affected by customers over-ordering in prior periods, resulting in excess channel inventories, and shipping delays with ocean freight carriers.

Gross Profit .

Gross profit for the three months ended October 31, 2021 was $12.6 million, a decrease of $9.1 million, or 41.9%, compared to $21.7 million for the three months ended October 31, 2020.

Gross profit as a percentage of net sales decreased to 42.1% for the three month period ended October 31, 2021, from 52.3% for the three months ended October 31, 2020.

Gross profit for the three months ended April 30, 2022 was $11.1 million, a decrease of $3.7 million, or 25%, compared to $14.8 million for the three months ended April 30, 2021.

Gross profit as a percentage of net sales decreased to 40.5% for the three month period ended April 30, 2022, from 43.4% for the three months ended April 30, 2021.

Gross profit performance in the fiscal 2022 period benefited from higher volumes including direct container shipments, related factory utilization and an improving product mix with pricing power.

Major factors driving the decline in gross margins in the three months ended October 31, 2021, were:

Major factors driving the decline in gross margins in the three months ended April 30, 2022, were:

Lower level of direct container sales in the current period.

Return to competitive pricing pressures as COVID-19 demand decreases.

Increases in transportation costs.

Operating Expense .

Operating expenses decreased 7.6% from $9.2 million for the three months ended October 31, 2020 to $8.5 million for the three months ended October 31, 2021.

This decrease is attributable to decreases in sales compensation, equity compensation, bad debt, and currency fluctuations offset by increases in travel and administrative expenses.

Operating expenses as a percentage of net sales was 28.4% for the three months ended October 31, 2021, up from 22.2% for the three months ended October 31, 2020 primarily due to the lower volume of sales.

Operating expenses increased 18.5% from $8.1 million for the three months ended April 30, 2021 to $9.6 million for the three months ended April 30, 2022.

This increase is attributable to increases in travel and trade show expenses, administrative expenses and currency fluctuations.

Currency fluctuations accounted for $0.8 million of the increases due primarily to the fluctuation in the Chinese yuan.

Operating expenses as a percentage of net sales was 35.2% for the three months ended April 30, 2022, up from 23.9% for the three months ended April 30, 2021 primarily due to the lower volume of sales.

Operating Profit .

Operating profit declined to $4.1 million for the three months ended October 31, 2021 from $12.5 million for the three months ended October 31, 2020, due to the impacts detailed above.

Operating margins were 13.6% for the three months ended October 31, 2021, as compared to 30.1% for the three months ended October 31, 2020.

Operating profit declined to $1.4 million for the three months ended April 30, 2022 from $6.6 million for the three months ended April 30, 2021, due to the impacts detailed above.

Operating margins were 5.3% for the three months ended April 30, 2022, as compared to 19.4% for the three months ended April 30, 2021.

Income Tax Expense .

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

Income tax expense was $1.3 million for the three months ended October 31, 2021, compared to $3.2 million for the three months ended October 31, 2020.

Income tax expense was $0.3 million for the three months ended April 30, 2022, compared to $1.6 million for the three months ended April 30, 2021.

The decrease is due to the reduction in pre-tax income.

The effective rate for the three months ended October 31, 2021 was 31.7%.

The effective rate for the three months ended October 31, 2020 was 25.9%.

Net income decreased by $6.5 million to $2.8 million for the three months ended October 31, 2021 from income of $9.3 million for the three months ended October 31, 2020.

Nine Months ended October 31, 2021, Compared to the Nine Months Ended October 31, 2020

Reference is made to “Overview;

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

Net sales were $91.6 million for the nine months ended October 31, 2021 as compared to $122.1 million for the nine months ended October 31, 2020, a decrease of 25.0%.

Sales of our disposable and chemical product line declined by $33.5 million due to reduction in direct container sales driven by COVID-19 demand and continued softness in demand for industrial applications.

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

Other product lines such as fire, high performance and wovens, increased by $3.1 million in the aggregate during the period due to strengthening in those markets.

For the nine months ended October 31, 2020 sales globally were driven by COVID-19 demand, as we realized significant increases in all markets for our disposable and chemical product lines.

Gross Profit.

Gross profit was $39.7 million for the nine months ended October 31, 2021, a decrease of $21.5 million, or 35.1%, from $61.2 million for the nine months ended October 31, 2020.

Gross profit as a percentage of net sales decreased to 43.4% for the nine months ended October 31, 2021, from 50.1% for the nine months ended October 31, 2020.

Major factors driving gross margins were:

Significant decreases in volumes driven by COVID-19 demand.

Decrease in direct container sales.

Return to competitive pricing pressures as COVID-19 demand decreases.

Increases in transportation costs.

Operating Expense.

Operating expenses declined $1.1 million, or 4.1%, to $25.5 million for the nine months ended October 31, 2021 from $26.6 million for the nine months ended October 31, 2020.

This decrease was due to decreases in sales compensation, customer incentives, equity compensation, and currency fluctuations offset by increases in administrative expenses, technology licenses, and depreciation.

Operating expenses as a percentage of net sales was 27.8% for the nine months ended October 31, 2021, up from 21.8% for the nine months ended October 31, 2020 primarily due to the lower volume of sales.

Operating Profit .

Operating profit decreased to $14.3 million for the nine months ended October 31, 2021 from $34.6 million for the nine months ended October 31, 2020, due to the impacts detailed above.

Operating margins were 15.6% for the nine months ended October 31, 2021, as compared to 28.3% for the nine months ended October 31, 2020.

Income Tax Expense .

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

Income tax expense was $4.2 million for the nine months ended October 31, 2021, compared to $7.4 million for the nine months ended October 31, 2020.

The decrease is mainly attributable to the decrease in operating profit.

The Company recorded a discrete item related to the remeasurement of deferred taxes for $0.8million of tax expense primarily as a result of the statutory change in the State of Alabama apportionment factor.

The effective rate for the nine months ended October 31, 2021 was 29.8%.

The effective rate for the nine months ended October 31, 2020 was 21.3%.

Net income decreased by $17.2 million to $10.0 million for the nine months ended October 31, 2021 from $27.2 million for the nine months ended October 31, 2020.

The effective rate for the three months ended April 30, 2022 was 20.2%.

The Company recorded deferred tax benefits of $0.2 million related to accruals for China social taxes.

Excluding this discrete benefit the effective rate was 32.9%.

The effective rate for the three months ended April 30, 2021 was 24.4%.

Net income decreased by $3.9 million to $1.1 million for the three months ended April 30, 2022 from net income of $5.0 million for the three months ended April 30, 2021.

Significant Balance Sheet Fluctuation April 30, 2022 , Compared to January 31, 2022

Cash decreased by $1.9 million, primarily as continued profitability and working capital management generated $1.9 million of cash flow from operations offset by our additional investment of $1.9 million in Bodytrak and $0.4 million of share purchases under our Existing Share Repurchase Program.

Accounts receivable decreased due to improved collections and lower sales levels compared to prior year.

Inventory increased $2.2 million due to planned increases to offset freight delays, and reduced demand as compared to prior year.

Accounts payable, accrued compensation, and other accrued expenses increased $1.7 million.

Capital expenditures for the three months ended April 30, 2022 were $0.4 million.

Liquidity and Capital Resources

At October 31, 2021, cash and cash equivalents were approximately $55.5 million and working capital was approximately $111.0 million.

Cash and cash equivalents increased $2.9 million and working capital increased $2.8 million from January 31, 2021, due to continued profitability and a focus on working capital efficiencies, partially offset by treasury stock purchases of $5.9 million and investment in Bodytrak of $2.8 million.

Of the Company’s total cash and cash equivalents of $55.5 million as of October 31, 2021, cash held in Latin America of $2.6 million, cash held in Russia and Kazakhstan of $0.7 million, cash held in the UK of $0.6 million, cash held in India of $0.9 million, cash held in Hong Kong of $7.0 million and cash held in Vietnam of $2.0 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 $26.3 million balance at October 31, 2021 there would be an additional 10% withholding tax incurred in that country.

Net cash provided by operating activities of $12.6 million for the nine months ended October 31, 2021 was primarily due to net income of $10.0 million, non-cash expenses of $3.5 million, and decrease in net current assets of $1.6 million offset by a reduction in current liabilities of $2.5 million.

Net cash used in investing activities of $3.4 million for the nine months ended October 31, 2021 reflects office and manufacturing equipment purchases and the investment in Bodytrak of $2.8 million.

Net cash used in financing activities was $6.5 million for the nine months ended October 31, 2021, due to $5.9 million in shares repurchased under our treasury stock buyback program and shares returned to pay income taxes on shares vested under our restricted stock program.

At April 30, 2022, cash and cash equivalents were approximately $50.8 million and working capital was approximately $106.0 million.

Cash and cash equivalents decreased $1.9 million and working capital decreased $2.6 million from January 31, 2022, primarily due to treasury stock purchases of $0.4 million, additional investment in Bodytrak of $1.9 million and $0.4 million of capital expenditures.

Of the Company’s total cash and cash equivalents of $50.8 million as of April 30, 2022, cash held in Latin America of $1.7 million, cash held in Russia and Kazakhstan of $0.5 million, cash held in the UK of $0.8 million, cash held in India of $1.0 million, cash held in Hong Kong of $2.7 million and cash held in Vietnam of $0.2 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 $35.5 million balance at April 30, 2022 there would be an additional 10% withholding tax incurred in that country.

Net cash provided by operating activities of $1.9 million for the three months ended April 30, 2022 was primarily due to net income of $1.1 million, non-cash expenses of $0.4 million for deferred taxes, depreciation and amortization and stock compensation, and increase in current liabilities of $2.5 million offset by an increase in current assets of $2.1 million.

Net cash used in investing activities of $2.4 million for the three months ended April 30, 2022 reflects office and manufacturing equipment purchases and the additional investment in Bodytrak of $1.9 million.

Net cash used in financing activities was $1.1 million for the three months ended April 30, 2022, due to $0.4 million in shares repurchased under our Existing Share Repurchase Program and shares returned to pay income taxes on shares vested under our equity compensation 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.

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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.

Borrowings under the revolving credit facility bear interest at a rate per annum equal to the sum of the one-month 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.

The one-month LIBOR is expected to cease publication after June 30, 2023.

The Loan Agreement provides that if the rate is not available for any reason, then the rate will be determined by such alternate method as reasonably selected by the Lender.

On a one-time basis, and subject to there not existing an event of default, the Company may elect to 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.

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The Loan Agreement requires the Company to maintain a Funded Debt to EBITDA (as each such term is defined in the Loan Agreement) ratio of 3.0 to 1.0 or less and a Basic Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of at least 1.15 to 1.0.

The Loan Agreement also contains customary covenants, including covenants that, among other things, limit or restrict the Company’s and/or the Company’s subsidiaries ability, subject to certain exceptions and qualifications, to incur liens or indebtedness, or merge, consolidate or sell or otherwise transfer assets.

The Company was in compliance with all of its debt covenants as of October 31, 2021.

The Loan Agreement also contains customary covenants, including covenants that, among other things, limit or restrict the Company’s and/or the Company’s subsidiaries ability, subject to certain exceptions and qualifications, to incur liens or indebtedness, pay dividends, or merge, consolidate or sell or otherwise transfer assets.

The Company was in compliance with all of its debt covenants as of April 30, 2022.

Other than the changes described above, the terms and conditions of the Loan Agreement remain in full force and effect.

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

On July 6, 2021, the Board of Directors authorized an increase in the Company’s current stock repurchase program under which the Company may repurchase up to an additional $5 million of its outstanding common stock.

Shares repurchased in the nine months ended October 31, 2021 totaled 271,024 shares at a cost of $5.9 million leaving $4.1 million remaining under the stock repurchase program at October 31, 2021.

On April 7, 2022, the Board of Directors authorized a new stock repurchase program under which the Company may repurchase up to $5 million of its outstanding common stock (the “New Share Repurchase Program”).

The New Share Repurchase Program will become effective upon the completion of the Existing Share Repurchase Program, which has approximately $0.4 million remaining for repurchases as of April 30, 2022.

The New Share Repurchase Program has no expiration date but may be terminated by the Board of Directors at any time.

Shares repurchased in the three months ended April 30, 2022 totaled 25,017 shares at a cost of $0.4 million leaving $5.4 million remaining available for repurchase under the Existing Share Repurchase Program and the New Share Repurchase Program at April 30, 2022.

Capital Expenditures.

Our capital expenditures for the first nine months of FY22 of $0.6 million principally relate to capital purchases for our manufacturing facilities in Mexico, Vietnam and India, enhancement of our global IT infrastructure and furnishing our new corporate headquarter office.

Our capital expenditures for the first three months of FY23 of $0.4 million principally relate to capital purchases for our manufacturing facilities in Mexico, Vietnam and India, enhancement of our global IT infrastructure and furnishing our new corporate headquarter office.

We anticipate FY23 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.

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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.

A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our fiscal year 2022 Form 10-K.

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 nine months ended October 31, 2021.

Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2022 Form 10-K.

There have been no significant changes in the application of our critical accounting policies during the three months ended April 30, 2022.

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-Q

Item 2. Management’s Discussion and Analysis