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Item 7. Management’s Discussion and Analysis

2023-04-18 compared with 2022-04-21 · 105 added, 107 removed, 130 unchanged (62% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

You should read the following summary together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this Form 10-K and in the documents that we incorporate by reference into this Form 10-K.

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thus, for example, Q4 FY23 refers to the fourth quarter of the fiscal year ended January 31, 2023.

Revision of Prior Period Financial Statements

In connection with the preparation of the consolidated financial statements for the fiscal year ended January 31, 2022, the Company identified errors in its previously filed annual consolidated financial statements and unaudited quarterly consolidated financial statements.

The errors were not material to any individual prior quarterly or annual period.

For further details, refer to Note 1.

Business and Summary of Significant Accounting Policies:

Restatement For Correction of Immaterial Errors in Previously Issued Consolidated Financial Statements in our consolidated financial statements included in Part II.

of this Form 10-K.

Accordingly, we have revised prior period financial results contained in this Form 10-K to correct the effect of these errors for the corresponding periods.

Management’s discussion and analysis included herein is based on the revised financial results for the year ended January 31, 2021.

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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Internationally, we sell to a mixture of end users directly and to industrial distributors depending on the particular country and market.

In addition to the United States, sales are made to more than 50 foreign countries, the majority of which were into China, countries within the European Economic Community (“EEC”), Canada, Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador, India and countries within Southeast Asia.

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

For FY22, sales in Russia were approximately 2.5% of our consolidated sales and sales into Ukraine were not significant.

We had net sales of $112.8 million in FY23 and $118.4 million in FY22.

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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.

During FY23, the Company was impacted by tariff costs on certain products imported from China.

The Company has been able to pass along a portion of these costs to its customers.

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

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Our net sales attributable to customers outside the United States were $63.9 million and $70.8 million for the fiscal years ended January 31, 2023 and 2022, 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 distributors 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 diminished, 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 and all of FY21 and 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 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 Q4 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 15% of FY22 sales.

While we saw, and noted, an initial recovery in the industrial markets in the U.S.

in FY22, 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 FY22, 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 arrived through late Q1 and the remainder of FY22, PPE manufacturing has caught up to current COVID-19 demand.

Raw materials and finished goods pricing have declined from their pandemic-inflated levels, 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 FY22 we did not experience any significant 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 facilities.

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 FY23.

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

sourced raw materials due to labor and precursor shortages affecting our higher margin product lines.

In both Asia and the U.S., increasing labor and freight costs, as well as inflationary pressures threaten to drive raw material costs up and may negatively impact our gross margins.

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

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.

On December 2, 2022, we acquired UK-based Eagle Technical Products Limited (“Eagle”) in an all-cash transaction valued at approximately $10.5 million subject to post-closing adjustments and potential future earnout payments.

The acquisition enhances Lakeland’s product portfolio, particularly within fire service protective clothing and expands its sales presence in the Middle East and Europe.

Headquartered in Manchester, UK, Eagle is a leading designer and provider of protective apparel to the fire and industrial sectors.

Eagle provides differentiated product offerings through its innovative and technical solutions.

The cost to manufacture and distribute our products is influenced by the cost of raw materials, finished goods, labor, and transportation.

During FY23, we have experienced continued inflationary pressure and higher costs as a result of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs associated with the normal course of business.

The increase in cost of raw materials and finished goods are due in part to a shortage in the availability of certain products, the higher cost of shipping, and inflation.

We can only pass elevated costs onto customers in an effort to offset inflationary pressures on a limited basis.

Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results.

Impact of Russia’s Invasion of Ukraine on Our Business

The current conflict between Russia and Ukraine is creating substantial uncertainty about the role Russia will play in the global economy in the future.

Although the length, impact and outcome of the ongoing military conflict between Russia and Ukraine is highly unpredictable, this conflict could lead to significant market and other disruptions.

The escalation or continuation of this conflict presents heightened risks and has resulted and could continue to result in volatile commodity markets, supply chain disruptions, increased risk of cyber incidents or other disruptions to information systems, heightened risks to employee safety, significant volatility of the Russian ruble, limitations on access to credit markets, increased operating costs (including fuel and other input costs), the frequency and volume of failures to settle securities transactions, inflation, potential for increased volatility in commodity, currency and other financial markets, safety risks, and restrictions on the transfer of funds to and from Russia.

We cannot predict how and the extent to which the conflict will affect our customers, operations or business partners or the demand for our products and our global business.

Depending on the actions we take or are required to take, the ongoing conflict could also result in loss of cash, assets or impairment charges.

Additionally, we may also face negative publicity and reputational risk based on the actions we take or are required to take as a result of the conflict, which could damage our brand image or corporate reputation.

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

Our business in Russia accounted for approximately 2.4% and 2.5% of our consolidated net revenues and 1.9% and 3.0% of our net income for the years ended January 31, 2023 and 2022, respectively.

Our assets in Russia were approximately 2.5% and 2.1% of our consolidated assets at January 31, 2023 and 2022, respectively.

The net book value of our assets in Russia at January 31, 2023 was approximately $3.5 million of which $1.3 million is cash.

We currently have not recognized any impairment charges related to the assets of our Russian business.

However, the extent, severity, duration and outcome of the conflict between Russia and Ukraine and related sanctions could potentially impact the value of our assets in Russia as the conflict continues.

Our Russian business is part of our Other Foreign segment.

Our sales into Ukraine were not significant.

The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantine and shelter-in-place orders.

The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets.

The COVID-19 pandemic and the measures taken by many countries in response have affected and could in the future materially impact the Company’s business, results of operations and financial condition.

Certain of the Company’s materials suppliers and logistical service providers have experienced disruptions during the COVID-19 pandemic, resulting in supply shortages.

Similar disruptions could occur in the future.

Critical Accounting Policies and Estimates

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If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

In FY22 and FY21, we recorded approximately $0.6 million in write-downs of inventory and $0.1 million in inventory adjustments in FY21.

In FY23 we recorded approximately $1.3 million in write-downs of inventory and $0.6 million in inventory adjustments in FY22.

Income Taxes.

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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.

Business combinations .

In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.

The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill.

Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, the values of assets in use, and often requires the application of judgment regarding estimates and assumptions.

While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets, tangible long-lived assets, and contingent consideration.

Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased.

Several significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, discount rates, attrition rates and working capital changes.

If the contingent consideration is deemed significant or absent an agreed upon payout amount, the initial measurement of contingent consideration and the corresponding liability is evaluated using the Monte Carlo Method.

For this valuation method, management develops projections during the contingent consideration period utilizing various potential pay-out scenarios.

Probabilities are applied to each potential scenario and the resulting values are discounted using a rate that considers weighted average cost of capital as well as a specific risk premium associated with the riskiness of the contingent consideration itself, the related projections, and the overall business.

Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable.

Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in our operating results.

Refer to Note 1, “Business and Summary of Significant Accounting Policies,” and Note 5, “Acquisitions,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s business acquisitions.

Net Income Per Share.

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Significant Balance Sheet Fluctuation January 31, 2023, as Compared to January 31, 2022

Cash increased by $0.1 million, primarily as a result of $12.8 million of cash generated from operations offset by $9.2 million in share repurchases, $2.8 million in equity investment and $0.8 million in capital improvements.

Operating cashflow changes were driven by a decline in accounts receivable of $6.7 million due to collections and reduced revenue in FY22.

Inventory increased $4.4 million driven by investment in inventory to reduce the impact on our supply chain of a global slowdown in freight deliveries.

Accounts payable, accrued compensation, and other accrued expenses decreased $5.0 million due to a decrease in purchasing activity and lower variable compensation caused by lower sales and profitability in FY22.

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

Cash decreased by $28.1 million, primarily as a result of $5.5 million of cash used in operations coupled with $5.4 million in share repurchases, $10.5 million for the acquisition of Eagle, $3.1 million in equity investment and $2.0 million in capital improvements.

Operating cash flow changes were driven by an increase in accounts receivable of $2.3 million due to timing of collections, increased sales in Q4 FY23 over Q4 FY22 and the acquisition of Eagle in December FY23.

Excluding inventory acquired from Eagle, inventory increased $9.7 million driven by investment in inventory to reduce the impact on our supply chain of a global slowdown in freight deliveries.

The Company has made strategic investments of $6.1 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.

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Interest expense

Income (loss) before tax

Income before tax

Income tax expense

Net sales decreased to $112.8 million for the year ended January 31, 2023 compared to $118.4 million for the year ended January 31, 2022, a decrease of $5.6 million.

Sales in the US decreased $23.0 million or 32.6% primarily due to decreases in the number of direct container shipments in the US, and lower sales driven by COVID-19 demand.

Sales to the Asian market decreased by $1.4 million or 4.5% due to lower COVID-19 demand.

Sales to the European market decreased by $6.5 million or 38.7% driven by reduced COVID-19 demand and inventory overhang at our customers.

Canada sales decreased by $5.4 million or 39.7% due to lower direct container shipments.

Latin America sales decreased $0.8 million or 6.6% due to lower COVID-19 demand.

Sales into the Mexican market decreased $1.6 million or 28.1% driven by lower COVID-19 demand.

Our other foreign markets accounted for $1.9 million of decreased sales or 21.1% due to lower COVID-19 demand.

Sales of our disposable and chemical product line were impacted 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 $2.0 million due to strengthening demand in those markets.

Sales in the U.S.

increased $1.4 million or 2.9%, primarily due to increases in sales of fire gear coupled with improvements in direct container sales.

Sales to the Asian market decreased by $5.1 million or 17.1% due to the impacts of COVID-19 on demand, including shutdowns in China and the absence of typical year-end stocking ahead of the Chinese New Year due to the country’s “Zero COVID Policy.” Sales to the European market decreased by $2.0 million or 19.4%, driven by reduced demand across Europe and a stronger dollar impact offset by Eagle sales of $1.3 million in Q4 FY23.

Canada sales increased by $0.9 million or 11.0% due to improvements in the industrial markets.

Latin America sales decreased $0.5 million or 4.4% due to weaker local currency, primarily the Argentine peso.

Sales into the Mexican market decreased by $0.4 million or 9.8%, driven by weaker industrial demand at the beginning of FY23.

Sales of our disposable and chemical product line were impacted due to a reduction in COVID-19 demand, primarily in Asia and uneven demand from our industrial markets.

Other product lines, such as fire, high performance, and wovens, increased by $8.7 million due to strengthening demand in those markets and the impact of Eagle’s sales during the last two months of our fiscal year.

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

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Major factors driving the decline in gross margins in FY23, 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.

Inflationary pressure on certain materials

Stronger dollar impacting revenue in key Asian and Latin American markets

Pricing pressure on non-strategic products

Writedown of the carrying value of certain inventory as freight rates declined toward year-end

Operating Expense .

Operating expenses decreased 1.4% from $35.4 million for the year ended January 31, 2021 to $34.9 million for the year ended January 31, 2022.

Operating expenses as a percentage of net sales was 29.5% for the year ended January 31, 2022, as compared to 22.3% for the year ended January 31, 2021.

Operating expenses were down primarily due to reductions in sales compensation due to lower sales freight out expenses, and currency translation offset by increases in administrative salaries for new staff and technology expenses..

Operating expenses increased 15.6% from $34.9 million for the year ended January 31, 2022 to $40.3 million for the year ended January 31, 2023.

Operating expenses as a percentage of net sales were 35.7% for the year ended January 31, 2023, as compared to 29.5% for the year ended January 31, 2022.

Operating expenses increased primarily due to increases in currency translation expense of $1.9 million, acquisition costs associated with the Eagle transaction of $0.6 million, restructuring costs of $0.4 million, increased outbound freight of $0.3 million, administrative costs associated with the start-up of the Monterrey, Mexico facility of $0.2 million, and increases in professional expenses, primarily legal and accounting, to support future initiatives.

Operating Profit .

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

Income tax expense was $4.8 million and included $0.7 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2022, as compared to an income tax expense of $8.5 million, including $1.9 million associated with the GILTI component, for the year ended January 31, 2021.

Income tax expense was $3.6 million and included $0.2 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2023, as compared to an income tax expense of $4.8 million and included $0.7 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2022.

All international subsidiaries impacted the GILTI component of income tax expense.

The Company changed its permanent reinvestment assertions for its Chinese operations during the second quarter due to increased volatility of the Chinese yuan and an updated evaluation of investment strategies.

The Company recorded $2.0 million in withholding taxes for a planned repatriation during FY23.

Net income decreased to $1.9 million for the year ended January 31, 2023 from $11.4 million for the year ended January 31, 2022.

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Factors affecting Q4 FY23 results of operations included:

Decreased sales due to COVID-19 demand in the U.S.

Margins were impacted by lower sales and increased freight costs.

Improvement in sales primarily in the fire and industrial markets and due to the Eagle acquisition

Pricing pressure on non-strategic products

Margins were negatively impacted by product mix and currency and the write-down of the carrying value of certain inventory as freight rates declined toward year-end

Liquidity and Capital Resources

At January 31, 2023, cash and cash equivalents were approximately $24.6 million and working capital was approximately $87.0 million.

Cash and cash equivalents increased $0.1 million and working capital increased $1.7 million from January 31, 2021 reflecting positive earnings and the Company’s focus on working capital efficiencies.

Of the Company’s total cash and cash equivalents of $52.7 million as of January 31, 2022, cash held in Latin America of $1.9 million, cash held in Hong Kong of $2.1 million, cash held in the UK of $1.0 million, cash held in Vietnam of $1.1 million, cash held in India of $0.9 million and cash held in Canada of $1.4 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 2017 Tax Cuts and Jobs Act (the “Tax Act”).

In the event the Company repatriated cash from China, of the $30.0 million balance at January 31, 2022 there would be an additional 10% withholding tax incurred in that country.

The Company strategically employs a dividend plan subject to subsidiary profitability, cash requirements and withholding taxes.

During FY22 the Company’s subsidiaries in Canada, Uruguay and Hong Kong declared and paid dividends of $2.6 million, $1.0 million and $4.4 million.

Cash and cash equivalents decreased $28.1 million and working capital decreased $21.6 million from January 31, 2022 reflecting the impact of the Company’s purchase of Eagle, additional investment in Bodytrak and stock repurchases.

Of the Company’s total cash and cash equivalents of $24.6 million as of January 31, 2023, cash held in Latin America of $1.8 million, cash held in Hong Kong of $0.7 million, cash held in the UK of $2.4 million, cash held in Vietnam of $0.8 million, cash held in India of $0.7 million and cash held in Canada of $1.0 million would not be subject to additional US tax in the event such cash was repatriated due to the change in the U.S.

tax law as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”).

The Company monitors its financial depositories by their credit rating which varies by country.

In addition, cash balances in banks in the United States are insured by the FDIC subject to certain limitations.

There was approximately $1.3 million total included in the U.S.

bank accounts and approximately $23.5 million total in foreign bank accounts as of January 31, 2023, of which $24.1 million was uninsured.

These balances could be impacted if one or more of the financial institutions with which the Company deposits its funds fails or is subject to other adverse conditions in the financial or credit markets.

To date, the Company has experienced no loss of principal or lack of access to invested cash or cash equivalents;

however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions that hold the Company’s cash and cash equivalents fail.

See Part I, Item 1A.

Risk Factors in this Annual Report on Form 10-K under the caption “Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition or results of operations.”

The Company strategically employs an intercompany dividend plan subject to subsidiary profitability, cash requirements and withholding taxes.

During FY23 the Company changed its’ permanent reinvestment assertions for its Chinese operations due to increased volatility of the Chinese yuan and an updated evaluation of investment strategies.

During FY23 the Company’s subsidiaries in Canada, China and Hong Kong declared and paid dividends of $1.0 million, $12.5 million and $2.0 million.

Withholding taxes totaling $2.0 million are included in income tax expense.

No dividends were proposed by management or declared by our Board of Directors for our China subsidiary in FY22 or FY21.

Net cash provided by operating activities of $12.8 million for the year ended January 31, 2022 was primarily due to net income of $11.4 million, non-cash expenses of $4.3 million for deferred taxes, depreciation and amortization, and stock compensation, and decrease in accounts receivable due to lower sales activity of $6.7 million offset by increase in net inventories of $4.4 million and a decrease in accounts payable, accrued expenses and other liabilities of $5.2 million due to lower sales volume.

Net cash used in investing activities of $3.6 million for the year ended January 31, 2022 reflects the Company’s $2.8 million investment in Bodytrak®) as a groundbreaking step toward entering the Connected Worker Market for “Smart PPE.” Purchases in property and equipment were $0.8 million as the Company optimized capital expenditures in the year for the ERP project, leasehold improvements for our new corporate headquarters, and equipment purchases in Mexico and China.

Net cash used in operating activities of $5.5 million for the year ended January 31, 2023 was primarily due to an increase in net inventories of $9.7 million and an increase in accounts receivable of $2.3 million due to stronger Q4 FY23 sales, partially offset by non-cash expenses of $3.6 million for deferred taxes, depreciation and amortization, and stock compensation.

Net cash used in investing activities of $16.5 million for the year ended January 31, 2023 includes the $10.5 million Eagle acquisition and reflects the Company’s $3.1 million investment in Bodytrak®.

Purchases of property and equipment were $2.0 million as the Company increased capital expenditures in the year for the ERP project and equipment purchases in Mexico and Vietnam.

Net cash used in financing activities was $5.9 million for the year ended January 31, 2023 primarily due to the purchase of $5.4 million of our common stock.

Net cash provided by operating activities of $12.8 million for the year ended January 31, 2022 was primarily due to net income of $11.4 million, non-cash expenses of $4.3 million for deferred taxes, depreciation and amortization, and stock compensation, and a decrease in accounts receivable due to lower sales activity of $6.7 million offset by an increase in net inventories of $4.4 million and a decrease in accounts payable, accrued expenses and other liabilities of $5.2 million due to lower sales volume.

Net cash used in investing activities of $3.6 million for the year ended January 31, 2022 reflects the Company’s $2.8 million investment in Bodytrak® as a groundbreaking step toward entering the Connected Worker Market for “Smart PPE.” Purchases in property and equipment were $0.8 million as the Company made capital expenditures in the year for the ERP project, leasehold improvements for our new corporate headquarters, and equipment purchases in Mexico and China.

Net cash used in financing activities was $9.8 million for the year ended January 31, 2022 due to the purchase of $9.2 million of our common stock.

Net cash provided by operating activities of $40.7 million for the year ended January 31, 2021 was primarily due to net income of $35.3 million, non-cash expenses of $6.8 million for deferred taxes, depreciation and amortization, and stock compensation, decrease in net inventories of $0.8 million and an increase in accounts payable, accrued expenses and other liabilities of $3.5 million, offset in part by a $4.0 million increase to accounts receivable due to a higher sales volumes in the fourth quarter as compared to prior year and an increase in other current assets of $1.7 million due to an increase in amounts due from HSBC under the UK factoring agreement.

Net cash used in investing activities of $1.7 million for the year ended January 31, 2021 reflects purchases in property and equipment as the Company optimized capital expenditures in the year for the ERP project, the set-up of manufacturing facilities in Vietnam and India, the enhancement of IT infrastructure, and equipment purchases in Mexico and China.

Net cash used in financing activities was $1.3 million for the year ended January 31, 2021, primarily due to the repayment of $1.2 million term loan with SunTrust Bank as part of the transition to the new Loan Agreement with Bank of America.

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

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LIBOR is subject to a floor of 100 basis points.

On March 3, 2023 the Company changed the benchmark interest rate in our credit facility from the LIBOR to the Secured Overnight Financing Rate (“SOFR”).

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

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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 (the “Existing Share Repurchase Program”).

Shares repurchased in FY22 totaled 430,463 shares at a cost of $9.2 million leaving $0.8 million remaining under the Existing Share Repurcahse Program at January 31, 2022.

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 $800,000 remaining for repurchases as of April 21, 2022.

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

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

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 which became effective upon the completion of the prior share repurchase program.

On December 1, 2022, the Board of Directors authorized an increase in the Company’s stock repurchase program, under which the Company may repurchase up to an additional $5 million of its outstanding common stock.

Shares repurchased in FY23 totaled 390,989 shares at a cost of $5.4 million leaving $5.4 million remaining under the share repurchase program at January 31, 2023.

The share repurchase program has no expiration date but may be terminated by the Board of Directors at any time.

On February 1, 2023, the Board of Directors declared a quarterly cash dividend as part of the initiation of a recurring quarterly dividend program.

The initial quarterly dividend of $0.03 per share was paid on February 22, 2023, to stockholders of record as of February 15, 2023.

Capital Expenditures.

Our capital expenditures for FY22 of $0.8 million principally relate to capital purchases for our manufacturing facilities in Vietnam and India, the enhancement of IT infrastructure, and equipment purchases in Mexico and the US.

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.

Our capital expenditures for FY23 of $2.0 million principally relate to our capital purchases for our manufacturing facilities in Vietnam, the enhancement of IT infrastructure, and equipment purchases supporting the new manufacturing facility under development in Monterey, Mexico.

We anticipate FY24 capital expenditures to be approximately $3.0 million as we continue to deploy our ERP solution globally, complete the new manufacturing facility in Monterrey, Mexico, and replace existing equipment in the normal course of operations.

We expect to fund the capital expenditures from our cash flow from operations.

Recent Accounting Pronouncements

See Note 1 – Business and Significant Accounting Policies of the consolidated financial statements in Part II Item 8 of this Form 10-K.

Recently Adopted and Recently Issued Accounting Standards

No recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-K

Item 7. Management’s Discussion and Analysis