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Item 2. Management’s Discussion and Analysis

2023-06-07 compared with 2022-12-08 · 74 added, 108 removed, 81 unchanged (69% of the section changed)

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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;

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, particularly in China and Vietnam, which could affect our ability to manufacture or sell our products, obtain products from foreign suppliers or control the costs of our products;

we identified a material weakness in our internal control over accounting for foreign currency exchange and foreign currency translation and remeasurement related to our international subsidiaries that could adversely affect our results of operations, our stock price and investor confidence in our Company;

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;

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

disruption in our supply chain, manufacturing or distribution operations could adversely affect our business;

climate change and other sustainability matters may adversely affect our business and operations;

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;

we are exposed to U.S.

and foreign tax 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;

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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 and investments could be unsuccessful;

we may not achieve the expected benefits from strategic acquisitions, investments, joint ventures, capital investments and other corporate transactions that we have pursued or may pursue;

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;

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;

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

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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, the European Economic Community (“EEC”), Canada, Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador, India and Southeast Asia.

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

We have operated facilities in Mexico since 1995 and in China since 1996.

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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.

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

During Q1 FY24, 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 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.

The Company is adding a new manufacturing facility in Monterrey, Mexico that we expect to be operational in FY 24.

The Company is adding a new manufacturing facility in Monterrey, Mexico that we expect to be operational in the second half of FY 24.

This new capacity will help shorten delivery times for the North American markets.

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

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

On December 2, 2022, the Company 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.

Our net sales attributable to customers outside the United States were $14.4 million and $19.4 million for the three months ended October 31, 2022 and 2021, respectively and $46.7 million and $55.1 million for the nine months ended October 31, 2022 and 2021, respectively.

Our net sales attributable to customers outside the United States were $16.4 million and $16.0 million for the three months ended April 30, 2023 and 2022, respectively.

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

For the nine months ended October 31, 2022, sales in Russia were approximately 2.4% of our consolidated sales and sales into Ukraine were not significant.

For the three months ended April 30, 2023, sales in Russia were approximately 4.4% 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 the continued presence of consumer stockpiled inventories that may temper demand within our regular markets in the remainder of 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 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 through the remainder of 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 October 31, 2022, Compared to the Three Months Ended October 31, 2021

Net sales were $28.4 million for the three months ended October 31, 2022, a decrease of $1.6 million or 5.3% compared to $30.0 million for the three months ended October 31, 2021.

Sales of our fire and high performance product lines increased by $2.5 million reflecting strengthening in the industrial markets.

Our sales were negatively impacted by declines in our disposable product line by $4.1 million, though we were seeing continued increases in direct container activity in the third quarter.

Gross Profit.

Gross profit for the three months ended October 31, 2022 was $12.3 million, a decrease of $0.5 million, or 3.9%, compared to $12.8 million for the three months ended October 31, 2021.

Gross profit as a percentage of net sales improved to 43.3% for the three month period ended October 31, 2022, from 42.5% for the three months ended October 31, 2021.

Gross profit performance in the fiscal 2023 period benefited from improving product mix with pricing power and lower freight rates.

Operating Expense.

Operating expenses increased 18.8% from $8.5 million for the three months ended October 31, 2021 to $10.1 million for the three months ended October 31, 2022.

This increase is attributable to increases in freight out and selling expenses of $0.4 million, administrative expenses of $0.4 million and currency fluctuations of $0.8 million.

Increase in currency expense is due primarily to the fluctuation in the Chinese yuan.

Operating expenses in the quarter ended October 31, 2022 also included $0.2 million in severance expenses.

Operating expenses as a percentage of net sales was 35.5% for the three months ended October 31, 2022, up from 28.4% for the three months ended October 31, 2021 primarily due to the increased costs noted above.

Operating Profit .

Operating profit declined to $2.1 million for the three months ended October 31, 2022 from $4.2 million for the three months ended October 31, 2021, due to the impacts detailed above.

Operating margins were 7.6% for the three months ended October 31, 2022, as compared to 14.1% for the three months ended October 31, 2021.

Income Tax Expense .

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

Income tax expense was $0.7 million for the three months ended October 31, 2022, compared to $1.3 million for the three months ended October 31, 2021.

The effective rate for the three months ended October 31, 2022, was 33.3%.

The effective rate for the three months ended October 31, 2021 was 31.4%.

Net income for the three months ended October 31, 2022 was $1.4 million, a decline of $1.5 million from net income of $2.9 million for the three months ended October 31, 2021.

The decline was due to the factors discussed above.

Nine Months ended October 31, 2022, Compared to the Nine Months Ended October 31, 2021

Net sales were $83.8 million for the nine months ended October 31, 2022 as compared to $91.6 million for the nine months ended October 31, 2021, a decrease of $7.8 million or 8.5%.

Our fire, high performance, high visibility and wovens product lines increased by $5.5 million in the aggregate reflecting strengthening in our industrial markets.

Sales of our disposable and chemical product lines declined by $13.3 million in the nine months ended October 31, 2022, driven by diminishing COVID-19 demand.

For the nine months ended October 31, 2021 sales globally were driven by COVID-19 demand, as we realized significant increases in all markets for our disposable and chemical product lines.

Three Months ended April 30, 2023, Compared to the Three Months Ended April 30, 2022

Net sales were $28.7 million for the three months ended April 30, 2023, an increase of $1.4 million or 5.2% compared to $27.3 million for the three months ended April 30, 2022.

Sales of our Fire product line increased $2.8 million due to $2.0 million in sales from Eagle and $.8 million growth in the product line.

We also saw strength in the Woven product line with an increase of $0.8 million, primarily in the international market.

The increases were partially offset by $2.2 million in reduced sales in our Disposable product line, primarily in China as the impact of COVID-19 lockdowns waned early in the prior fiscal year and other challenges in our Asian markets.

Foreign exchange currency translations negatively impacted sales by approximately $0.3 million in the first quarter of fiscal year 2024 due primarily to the strengthening of the U.S.

dollar against the Chinese yuan, compared to negative impact of $0.3 million in the prior year period.

Gross Profit.

Gross profit was $35.0 million for the nine months ended October 31, 2022, a decrease of $5.4 million, or 13.4%, from $40.4 million for the nine months ended October 31, 2021.

Gross profit as a percentage of net sales decreased to 41.7% for the nine months ended October 31, 2022, from 44.1% for the nine months ended October 31, 2021.

Major factors driving gross margins were:

Significant decreases in volumes driven by reduced COVID-19 demand.

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

Increases in freight rates beginning in FY22.

Gross profit for the three months ended April 30, 2023 was $12.4 million, an increase of $1.3 million, or 12.6%, compared to $11.1 million for the three months ended April 30, 2022.

Gross profit as a percentage of net sales increased to 43.4% for the three-month period ended April 30, 2023, from 40.5% for the three months ended April 30, 2022.

Gross profit performance improved in the three months ended April 30, 2023 due to a better product mix with the reduction in Disposable sales and increases in our higher - value products lines and a continued focus on cost savings.

Freight costs declined significantly compared to the prior year, further improving margins.

Operating Expense .

Operating expenses increased $4.0 million, or 15.7%, to $29.5 million for the nine months ended October 31, 2022 from $25.5 million for the nine months ended October 31, 2021.

Selling expenses were higher by $1.6 million due to increases in freight out and customs fees coupled with higher travel, advertising and trade show expenses as COVID-19 restrictions have lifted.

General and administrative expenses increased by $2.6 million, driven by currency fluctuations accounting for $1.9 million of the increase due to the strengthening of the U.S.

dollar primarily against the Chinese yuan.

The remaining increase was due to increases in rent and technology costs.

Operating expenses as a percentage of net sales was 35.2% for the nine months ended October 31, 2022, up from 27.8% for the nine months ended October 31, 2021.

Operating expenses increased by $0.9 million, or 9.3%, from $9.6 million for the three months ended April 30, 2022 to $10.5 million for the three months ended April 30, 2023.

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

Currency fluctuations accounted for $0.3 million of the increases due primarily to the fluctuation in the Argentine peso.

During the quarter ended April 30, 2023, the Company evaluated the earnout consideration accrual related to the Eagle acquisition and reduced the accrual by $0.5 million, which was recorded as a reduction in operating expenses.

Operating expenses as a percentage of net sales was 36.6% for the three months ended April 30, 2023, up from 35.2% for the three months ended April 30, 2022, primarily due to the factors noted above.

Operating Profit .

Operating profit decreased to $5.5 million for the nine months ended October 31, 2022 from $14.9 million for the nine months ended October 31, 2021, due to the impacts detailed above.

Operating margins were 6.5% for the nine months ended October 31, 2022, as compared to 16.3% for the nine months ended October 31, 2021.

Operating profit increased to $1.9 million for the three months ended April 30, 2023 from $1.4 million for the three months ended April 30, 2022, due to the impacts detailed above.

Operating margins were 6.8% for the three months ended April 30, 2023, as compared to 5.3% for the three months ended April 30, 2022.

Income Tax Expense .

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

Income tax expense was $3.6 million for the nine months ended October 31, 2022, compared to $4.0 million for the nine months ended October 31, 2021.

In Q2 FY23, the Company changed its’ permanent reinvestment assertions for its Chinese operations during the second quarter due to increased volatility of the Chinese yuan and geopolitical uncertainties.

The Company recorded $2 million in withholding taxes for a planned repatriation during FY23.

In Q1 FY23, the Company recorded deferred tax benefits of $0.2 million related to accruals for China social taxes.

Excluding these discrete items the Company’s effective rate was 33.8% and 27.1% for the nine months ended October 31, 2022 and 2021, respectively.

Net income decreased by $9.2 million to $1.7 million for the nine months ended October 31, 2022 from $10.9 million for the nine months ended October 31, 2021.

Significant Balance Sheet Fluctuation October 31, 2022 , Compared to January 31, 2022

Cash decreased by $17.8 million due to cash used in operating activities of $5.2 million for the nine months ended October 31, 2022 primarily due to an increase in current assets of $12.5 million driven by a build in inventory to support customers by reducing delivery times and an increase in accounts receivable due to timing of sales, including direct containers, in the current quarter.

Offsetting these increases were net income of $1.7 million, non-cash expenses of $4.6 million for deferred taxes, depreciation and amortization, stock compensation, and equity in loss of equity investment, and increase in current liabilities of $1.0 million.

The Company invested $1.3 million for the nine months ended October 31, 2022 in office and manufacturing equipment purchases and made an additional investments in Bodytrak of $3.1 million.

Net cash used in financing activities was $6.2 million for the nine months ended October 31, 2022, due to $5.4 million in shares repurchased and $0.8 million in shares returned to pay income taxes on shares vested under our equity compensation program.

Capital expenditures for the three and nine months ended October 31, 2022 were $0.8 million and $1.3 million, respectively.

Income tax expense was $0.5 million for the three months ended April 30, 2023, compared to $0.3 million for the three months ended April 30, 2022.

The increase is due to the increase in pre-tax income.

The Company's effective tax rate for the first quarter of FY24 was 29.1%, which differs from the U.S.

federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions and GILTI.

The Company's effective tax rate for the first quarter of FY23 was 20.2%.

The Company recorded deferred tax benefits of $0.2 million related to accruals for China social taxes based on our evaluation of the deductibility of these items.

Excluding this discrete benefit, the effective rate was 32.9% which differs from the U.S.

federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions and GILTI.

Net income increased by $0.2 million to $1.3 million for the three months ended April 30, 2023 from $1.1 million for the three months ended April 30, 2022.

Significant Balance Sheet Fluctuation April 30, 2023 , Compared to January 31, 2023

Cash increased by $1.4 million due to cash provided by operating activities of $3.7 million for the three months ended April 30, 2023, primarily due to net income of $1.3 million, non-cash activity of $0.5 million for depreciation and amortization, stock compensation, equity in loss of equity investment and revaluation of the Eagle acquisition earnout accrual, and a net reduction in working capital of $1.8 million due to collection of accounts receivable, increases in accounts payable and customer advances offset by increases in prepayments for inventory and other prepaid expenses.

Capital expenditures were $0.7 million for the three months ended April 30, 2023, primarily for capital equipment for the Company’s new manufacturing facility in Monterrey, Mexico, that is scheduled to open in the second half of the current year.

Net cash used in financing activities was $1.2 million for the three months ended April 30, 2023, due to $0.3 million in shares repurchased, dividends of $0.2 million, repayment of short-term borrowings of $0.2 million and $0.3 million in shares returned to pay income taxes on shares vested under our equity compensation program.

Liquidity and Capital Resources

At October 31, 2022, cash and cash equivalents were approximately $34.9 million and working capital was approximately $99.6 million.

Cash and cash equivalents decreased $17.8 million and working capital decreased $9.0 million from January 31, 2022, primarily due to treasury stock purchases of $5.4 million, additional investments in Bodytrak of $3.1 million and $1.0 million of capital expenditures.

Of the Company’s total cash and cash equivalents of $34.9 million as of October 31, 2022, cash held in Latin America of $1.5 million, cash held in Russia and Kazakhstan of $1.2 million, cash held in the UK of $0.7 million, cash held in India of $0.6 million, cash held in Hong Kong of $0.2 million and cash held in Vietnam of $0.3 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”).

When the Company repatriates cash from China, of the $25.9 million balance at October 31, 2022, there could be an additional 10% withholding tax incurred in that country.

The Company expects to repatriate cash from China during FY 23, and in anticipation of doing so, has accrued a withholding tax expense of $2.0 million as of October 31, 2022.

Net cash used in operating activities of $5.2 million for the nine months ended October 31, 2022 was primarily due to an increase in current assets of $12.5 million partially offset by net income of $1.7 million, non-cash expenses of $4.6 million for deferred taxes, depreciation and amortization, stock compensation and equity in loss of equity investment, and increase in current liabilities of $1.0 million.

The increase in current assets was driven by a build in inventory to support customers by reducing delivery times.

We do not expect the inventory build to continue in the fourth quarter.

Net cash used in investing activities of $4.1 million for the nine months ended October 31, 2022 reflects office and manufacturing equipment purchases and the additional investments in Bodytrak of $3.3 million.

Net cash used in financing activities was $6.2 million for the nine months ended October 31, 2022, due to $5.4 million in shares repurchased under our share repurchase program and shares returned to pay income taxes on shares vested under our equity compensation program.

At April 30, 2023, cash and cash equivalents were approximately $26.0 million, and working capital was approximately $87.5 million.

Cash and cash equivalents increased $1.4 million, and working capital increased $0.5 million from January 31, 2023 due to the balance sheet fluctuations described above.

Of the Company’s total cash and cash equivalents of $26.0 million as of April 30, 2023, cash held in Latin America of $2.6 million, cash held in the UK of $2.6 million, cash held in Russia and Kazakhstan of $1.1 million, , cash held in India of $0.8 million, cash held in Vietnam of $0.5 million, and cash held in Hong Kong of $0.1 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”).

When the Company repatriates cash from China, of the $15.5 million balance at April 30, 2023, there could be an additional 10% withholding tax incurred in that country.

The Company expects to repatriate cash from China during FY 24 and in anticipation of doing so, has accrued withholding tax expense of $0.8 million as of April 30, 2023.

Net cash provided by operating activities of $3.7 million for the three months ended April 30, 2023 was primarily due to an increase in current liabilities of $3.0 million, net income of $1.3 million, non-cash expenses of $0.5 million for deferred taxes, depreciation and amortization, stock compensation, equity in loss of equity investment and revaluation of the Eagle acquisition earnout accrual, partially offset by an increase in current assets of $1.2 million.

Net cash used in investing activities of $0.7 million for the three months ended April 30, 2023 reflects capital purchases for the new manufacturing facility in Monterrey, Mexico scheduled to open in the second half of this year.

On December 2, 2022, the Company acquired 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.

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.

We believe our current cash, cash equivalents, borrowing capacity under our Loan Agreement, and the cash to be generated from expected product sales will be sufficient to meet our projected operating and investing requirements (including planned capital expenditures) for at least the next twelve months.

However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect.

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

The Loan Agreement, as amended to date (the “Loan Agreement”), provides the Company with a secured $25.0 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 $30.0 million).

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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 Loan Agreement permits, without the prior consent of the Lender, acquisitions of a business or its assets by the Company or its subsidiaries if there is no default under the Loan Agreement and the aggregate consideration does not exceed $7.5 million for any individual acquisition or $15.0 million on a cumulative basis for all such acquisitions.

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 one-month LIBOR Daily Floating Rate (“LIBOR”), plus 125 basis points.

Per the terms of the Loan Agreement, 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.

On March 3, 2023, the Company changed the benchmark interest rate in our credit facility from 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.

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.

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.

On June 18, 2021, the Company entered into an Amendment No.

1 to Loan Agreement (the “Amendment”) with the Lender, which modifies certain terms of the Company’s existing Loan Agreement with the Lender.

The Amendment increases the credit limit under the Loan Agreement’s senior secured revolving credit facility from $12.5 million to $25.0 million.

The Amendment also amends the covenant in the Loan Agreement that restricts acquisitions by the Company or its subsidiaries in order to allow, without the prior consent of the Lender, acquisitions of a business or its assets if there is no default under the Loan Agreement and the aggregate consideration does not exceed $7.5 million for any individual acquisition or $15.0 million on a cumulative basis for all such acquisitions.

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, pay dividends, or merge, consolidate or sell or otherwise transfer assets.

The Company was in compliance with all of its debt covenants as of October 31, 2022.

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

The Company was in compliance with all of its debt covenants as of April 30, 2023.

Stock Repurchase Program.

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 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”).

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 became effective upon the completion of the Existing Share Repurchase Program.

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 October 31, 2022, totaled 194,839 shares at a cost of $2.3 million leaving $0.4 million remaining available for repurchase under the New Share Repurchase Program at October 31, 2022.

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 the three months ended April 30, 2023 totaled 22,814 shares at a cost of $0.3 million, leaving $5.1 million remaining under the share repurchase program at April 30, 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 initiating 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.

On May 1, 2023, the Board of Directors declared a quarterly cash dividend.

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

Capital Expenditures.

Our capital expenditures for the first nine months of FY23 of $1.3 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 $1.8 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 the three months ended April 30, 2023 of $0.7 million principally relate to capital purchases for our new manufacturing facilities in Monterrey, Mexico, scheduled to open in the second half of this fiscal year.

We anticipate FY24 capital expenditures to be approximately $3.0 million as we invest in strategic capacity expansion and replace existing equipment in the normal course of operations.

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

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

On December 2, 2022 the Company acquired Eagle in an all-cash transaction valued at approximately $10.8 million subject to post-closing adjustments and potential future earnout payments.

The Company paid the portion of the purchase price due at closing using available cash on hand.

The Company may also expend funds in connection with potential acquisitions.

Critical Accounting Policies and Estimates

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Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2023 Form 10-K.

There have been no significant changes in the application of our critical accounting policies during the nine months ended October 31, 2022.

There have been no significant changes in the application of our critical accounting policies during the three months ended April 30, 2023.

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