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Item 2. Management’s Discussion and Analysis

2024-06-06 compared with 2023-12-07 · 95 added, 133 removed, 77 unchanged (75% of the section changed)

4 unchanged sentences

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

They also include statements containing a projection of sales, earnings or losses, capital expenditures, dividends, capital structure or other financial terms and expectations with respect to the timing and intended use for our planned manufacturing expansion.

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

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

3 unchanged sentences

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;

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

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

global supply chain constraints have led to inflation in prices of some fabrics we acquire, as well as labor and operating costs, and further pricing increases may result in a decline in our future profitability;

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

the failure to optimize the Company’s manufacturing capacity may have an adverse impact on our business and operations;

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

26 unchanged sentences

Our products are sold globally by our in-house sales teams, our customer service group, and authorized independent sales representatives to a network of over 2,000 global safety and industrial supply distributors.

Our authorized distributors supply end users, such as integrated oil, chemical/petrochemical, automobile, steel, glass, construction, smelting, cleanroom, janitorial, pharmaceutical, and high technology electronics manufacturers, as well as scientific, medical laboratories and the utilities industry.

Our authorized distributors supply end users, such as integrated oil, chemical/petrochemical, automobile, transportation, steel, glass, construction, smelting, cleanroom, janitorial, pharmaceutical, and high technology electronics manufacturers, as well as scientific, medical laboratories and the utilities industry.

In addition, we supply federal, state and local governmental agencies and departments, such as fire and law enforcement, airport crash rescue units, the Department of Defense, the Department of Homeland Security and the Centers for Disease Control.

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 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.

Beginning in 1995, we moved the labor-intensive sewing operation for our limited use/disposable protective clothing lines to these facilities.

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.

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.

Due to damage recently experienced at our newly leased Monterrey site we are currently evaluating our leasehold improvement buildout schedule which may impact our go-live production timing.

The Company believes it has global capacity to support its operations for the foreseeable future.

During the third quarter, the Company sent a letter to the landlord outlining certain structural defects on the newly constructed facility in Monterrey, Mexico that would inhibit the Company from effectively utilizing the facility for its intended purpose.

The Company has initiated discussions with the landlord as to potential remedies which may inform our decision-making process with respect to this property.

Changes in our long-term intended use for the building may impact the carrying value of the currently recorded right of use asset.

In addition to the United States, sales are made into 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, Uruguay, Middle East and Southeast Asia.

The Company’s strong market position across its focus product categories and markets is supported by continued and increasing investment in its global footprint, particularly owning and operating its own manufacturing facilities acquiring complementary companies or products that expand and enhance product offerings and/or geographic customer territories, and investing in sales and marketing resources in countries around the world.

We believe that ownership of manufacturing is the keystone to building a resilient supply chain and providing high-quality products to our customers.

Having seven manufacturing locations in seven countries on five continents, coupled with sourcing core raw materials from multiple suppliers in various countries, affords Lakeland with superior manufacturing capabilities and supply chain resilience when compared to our competitors who use contractors.

Additionally, our focus on providing customers with best-in-class service includes the strategic location of our sales team members.

Lakeland has 95 sales employees located in 24 countries selling into more than 50 countries globally.

On February 5, 2024, the Company acquired Italy and Romania-based Jolly Scarpe S.p.A.

and Jolly Scarpe Romania S.R.L.

(collectively, "Jolly") in an all-cash transaction.

Total consideration was $9.6 million, of which $7.5 million was paid to the seller at closing, $0.6 million paid to retire the remainder of Jolly’s debt and $1.5 million remained unpaid subject to post-closing adjustments and customary holdback provisions.

Jolly is a leading designer and manufacturer of professional footwear for the firefighting, military, police, and rescue markets.

The company is headquartered in Montebelluna, Italy, with manufacturing operations in Bucharest, Romania, and has 150 employees.

Jolly provides a differentiated product portfolio through its continued investment in research and development and use of modern materials and cutting-edge technologies in the production of its footwear.

On November 30, 2023 the Company acquired New Zealand-based Pacific Helmets NZ Limited (“Pacific”) in an all-cash transaction valued at approximately NZ$14,000,000 ($8.6 million) including assumption of debt, subject to post-closing adjustments and customary holdback provisions.

The acquisition enhances Lakeland’s product portfolio, particularly within fire service protective helmets.

Headquartered in Whanganui, New Zealand, Pacific is a leading designer and provider of structural firefighting, wildland firefighting, and technical rescue helmets.

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 $16.6 million and $14.4 million for the three months ended October 31, 2023 and 2022, respectively, and $50.8 million and $46.7 million for the nine months ended October 31, 2023 and 2022, respectively.

Our net sales attributable to customers outside the United States were $22.0 million and $16.4 million for the three months ended April 30, 2024 and 2023, 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, 2023, sales in Russia were approximately 3.2% of our consolidated sales and sales into Ukraine were not significant.

For the three months ended April 30, 2024, sales in Russia were approximately 2.9% of our consolidated sales and sales into Ukraine were not significant.

We do not have any capital assets in Russia.

We are monitoring the potential financial impact of the Middle East conflict.

The Company does not have physical assets in the Middle East but does have sales in the region.

The continued conflict could have an impact on the level and timing of sales in the region.

Results of Operations

Three Months ended October 31, 2023, Compared to the Three Months Ended October 31, 2022

The economy has been impacted by certain macroeconomic challenges which have contributed to a rising inflationary trend that has impacted both our revenues and costs globally, and which we expect will continue into the foreseeable future.

If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases.

There can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.

Net sales were $31.7 million for the three months ended October 31, 2023, an increase of $3.3 million or 11.6% compared to $28.4 million for the three months ended October 31, 2022.

Sales of our fire service and industrial product lines increased by $6.1 million, reflecting continued market share expansion in the first responder markets and ongoing strength in oil and gas turnarounds and utilities markets.

Eagle contributed $1.3 million in fire service sales during the quarter.

Our sales were negatively impacted by declines in our disposable products, particularly in Asia, and chemical product lines by $2.8 million.

Gross Profit.

Gross profit for the three months ended October 31, 2023 was $13.4 million, an increase of $1.1 million, or 8.9%, compared to $12.3 million for the three months ended October 31, 2022.

Gross profit as a percentage of net sales declined to 42.2% for the three-month period ended October 31, 2023, from 43.3% for the three months ended October 31, 2022.

Gross profit performance in the current period was positively impacted by increased revenue during the quarter, including sales of previously reserved excess inventory, partially offset by an adjustment for deferred profit in ending inventory.

Major factors driving the change in gross margins in the three months ended October 31, 2023, were:

Adjustments for deferred profit in inventory and inventory revaluation amortizations.

Partially offset by reduction of total inventory including previously reserved excess inventory.

Operating Expense .

Operating expenses decreased 4.0% from $10.1 million for the three months ended October 31, 2022 to $9.7 million for the three months ended October 31, 2023.

The Company evaluated the earnout consideration accrual related to the Eagle acquisition and reduced the accrual by $1.5 million, which was recorded during the third quarter as a reduction in operating expenses.

This decrease was partially offset by .increases in currency fluctuations of $0.7 million, primarily as a result of declines in the Argentine peso.

The remaining difference resulted from increases in selling expenses, travel and trade show expenses.

Operating expenses as a percentage of net sales was 30.7% for the three months ended October 31, 2023, an improvement from 35.5% for the three months ended October 31, 2022 primarily due to increased revenue.

Operating Profit .

Operating profit increased to $3.6 million for the three months ended October 31, 2023 from $2.2 million for the three months ended October 31, 2022, due to the impacts detailed above.

Operating margins were 11.4% for the three months ended October 31, 2023, as compared to 7.6% for the three months ended October 31, 2022.

Income Tax Expense .

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

Income tax expense was $0.9 million for the three months ended October 31, 2023, compared to $0.7 million for the three months ended October 31, 2022.

The effective rate for the three months ended October 31 2023, was 26.4%.

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

Net Income (Loss).

Net income for the three months ended October 31, 2023 was $2.6 million an increase of $1.2 million from net income of $1.4 million for the three months ended October 31, 2022.

The increase was due to the factors discussed above.

Nine Months ended October 31, 2023, Compared to the Nine Months Ended October 31, 2022

Net sales were $93.4 million for the nine months ended October 31, 2023 as compared to $83.8 million for the nine months ended October 31, 2022, an increase of 11.5%.

Our fire service and wovens product lines increased by $14.1 million in the period due to strengthening in the first responder and utilities markets and the impact of Eagle which contributed $6.8 million in sales.

Sales of our disposable and chemical product lines declined by $6.7 million due to diminishing COVID-19 demand and weakness in China.

Three Months ended April 30, 2024, Compared to the Three Months Ended April 30, 2023

Net sales were $36.3 million for the three months ended April 30, 2024, an increase of $7.6 million or 26.5% compared to $28.7 million for the three months ended April 30, 2023.

Sales of our Fire Services product line increased $5.0 million due to $3.8 million in sales from Jolly, acquired in February 2024 and Pacific, acquired in November 2023, and $1.2 million growth in the product line.

We also saw strength in the Woven product line with an increase of $1.1 million, primarily in the international market.

We also saw improvements in our Disposable and Chemical product lines with an increase of $1.6 million.

Gross Profit.

Gross profit was $40.0 million for the nine months ended October 31, 2023, an increase of $5.0 million, or 14.3%, from $35.0 million for the nine months ended October 31, 2022.

Gross profit as a percentage of net sales increased to 42.8% for the nine months ended October 31, 2023, from 41.7% for the nine months ended October 31, 2022.

Major factors driving gross margins were:

Increased sales in our strategic product lines.

Reduced manufacturing costs due to increased throughput.

Reduction in freight costs.

Reduction of total inventory including previously reserved excess inventory.

Partially offset by adjustments to deferred profit in ending inventory.

Gross profit for the three months ended April 30, 2024 was $16.2 million, an increase of $3.7 million, or 30.1%, compared to $12.4 million for the three months ended April 30, 2023.

Gross profit as a percentage of net sales increased to 44.6% for the three-month period ended April 30, 2024, from 43.4% for the three months ended April 30, 2023.

Gross profit performance improved in the three months ended April 30, 2024 due to increased sales in our higher margin product lines and improvements in our manufacturing facilities.

Operating Expense .

Operating expenses increased $1.2 million, or 4.1%, to $30.7 million for the nine months ended October 31, 2023 from $29.5 million for the nine months ended October 31, 2022.

Operating expenses as a percentage of net sales was 32.9% for the nine months ended October 31, 2023, down from 35.2% for the nine months ended October 31, 2022.

The decreased percentage is primarily due to increased revenue.

Selling expenses were higher by $0.7 million due to increases in sales commissions, freight out and higher travel, advertising and trade show expenses as COVID-19 restrictions have lifted.

General and administrative expenses increased by $0.5 million, with currency fluctuations accounting for $1.1 million of the increase due to the strengthening of the U.S.

dollar primarily against the Chinese yuan and Argentine peso.

The remaining increase was due to increases in compensation, professional fees and intangibles amortization.

The Company evaluated the earnout consideration accrual related to the Eagle acquisition and reduced the accrual by $2.7 million, which was recorded during the third quarter as a reduction in operating expenses.

Severance costs of $0.8 million were partially offset by $0.4 million of forfeitures of equity awards on equity compensation expense recorded in the nine months ended October 31, 2023.

Operating expenses increased by $3.5 million, or 33.3%, from $10.5 million for the three months ended April 30, 2023 to $14.0 million for the three months ended April 30, 2024.

This increase is attributable to the acquisition of Jolly and Pacific which increased operating expenses by $1.3 million.

In addition, the Company incurred transaction expenses of $1.0 million coupled with costs of $0.2 million due to ongoing PFAS litigation and $0.3 million of costs associated with the Monterrey facility.

The remaining increase was related to additional selling expenses including travel and trade shows, professional fees and administrative expenses of $0.9 million.

During the quarter ended April 30, 2024, the Company evaluated the earnout consideration accrual related to the Eagle and Pacific acquisitions and reduced the accrual by $0.7 million, which was recorded as a reduction in operating expense.

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

Operating expenses as a percentage of net sales was 38.5% for the three months ended April 30, 2024, up from 36.6% for the three months ended April 30, 2023, primarily due to the factors noted above.

Operating Profit .

Operating profit increased to $9.3 million for the nine months ended October 31, 2023 from $5.5 million for the nine months ended October 31, 2022, due to the impacts detailed above.

Operating margins were 9.9% for the nine months ended October 31, 2023, as compared to 6.5% for the nine months ended October 31, 2022.

Operating profit increased to $2.2 million for the three months ended April 30, 2024 from $1.9 million for the three months ended April 30, 2023, due to the impacts detailed above.

Operating margins were 6.1% for the three months ended April 30, 2024, as compared to 6.8% for the three months ended April 30, 2023.

Income Tax Expense .

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

Income tax expense was $2.7 million for the nine months ended October 31, 2023, compared to $3.6 million for the nine months ended October 31, 2022.

In Q2 FY23, the Company recorded $2 million in withholding taxes for a planned repatriation of cash from our China operations 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 29.5% and 33.8% for the nine months ended October 31, 2023 and 2022, respectively.

Net Income (Loss).

Net income increased by $4.7 million to $6.4 million for the nine months ended October 31, 2023 from $1.7 million for the nine months ended October 31, 2022.

Significant Balance Sheet Fluctuation October 31, 2023 , Compared to January 31, 2023

Cash increased by $1.8 million due to $7.7 million in cash provided by operations primarily due to a $3.2 million reduction in inventory coupled with profitable operations.

Offsetting the operating cash flow were $3.0 million in investing activities split between capital equipment and additional investment in Bodytrak.

Financing activities, primarily quarterly dividends, UK borrowing repayments and treasury stock purchases totaled $1.8 million.

Finally, cash balances were impacted by $1.1 million due to currency fluctuations, primarily the Chinese yuan and Argentine peso.

The Company invested $1.5 million for the nine months ended October 31, 2023 in manufacturing equipment purchases and made an additional investment in Bodytrak of $1.5 million.

Net cash used in financing activities was $1.8 million for the nine months ended October 31, 2023, due to $0.7 million in dividends paid, $0.3 million in shares repurchased, $0.4 million repayments of short term borrowings and $0.4 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, 2023 were $0.4 million and $1.5 million, respectively.

Income tax expense was $0.4 million for the three months ended April 30, 2024, compared to $0.5 million for the three months ended April 30, 2023.

The decrease is a result of the increase in pre-tax income offset by the impacts of final earn-out adjustments related to the Pacific and Eagle acquisitions.

The Company's effective tax rate for the first quarter of FY25 was 19.0% which differs from the U.S.

federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions, GILTI, and the earn-out adjustments related to the Pacific and Eagle acquisitions mentioned above.

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.

Net income increased by $0.4 million to $1.7 million for the three months ended April 30, 2024 from $1.3 million for the three months ended April 30, 2023.

Significant Balance Sheet Fluctuation April 30, 2024 , Compared to January 31, 2024

Cash increased by $3.1 million primarily due to the acquisition of Jolly.

Cash provided by operations was $0.3 million due to net income of $1.7 million, non-cash charges of $0.3 million, reductions in working capital of $0.5 million, offset by payments historically made in the first fiscal quarter including insurance and other annual costs and payment of accrued employee compensation.

The impact of these payments was a net use of cash of $2.2 million.

Net cash used in investing activities was $9.2 million which included the acquisition of Jolly which required net cash of $8.1 million and a further investment in Bodytrak’s convertible debt instruments of $0.6 million.

Capital expenditures were $0.5 million for the three months ended April 30, 2024, primarily for manufacturing equipment.

Net cash provided by financing activities was $11.6 million for the three months ended April 30, 2024, due to $12.3 million borrowed to fund the Jolly acquisition offset by dividends of $0.2 million, repayment of short-term borrowings of $0.4 million and $0.1 million in shares returned to pay income taxes on shares vested under our equity compensation program.

Liquidity and Capital Resources

At October 31, 2023, cash and cash equivalents were approximately $26.4 million and working capital was approximately $88.5 million.

Cash and cash equivalents increased $1.8 million and working capital increased $1.5 million from January 31, 2023.

Of the Company’s total cash and cash equivalents of $26.4 million as of October 31, 2023, cash held in Latin America of $5.2 million, cash held in Russia and Kazakhstan of $0.9 million, cash held in the UK of $1.4 million, cash held in India of $1.2 million, cash held in Hong Kong of $0.4 million and cash held in Vietnam of $1.6 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”).

If the Company repatriates any of the $5.9 million balance at October 31, 2023 of cash from China, there could be an additional 10% withholding tax incurred in that country.

Net cash provided by operating activities of $7.7 million for the nine months ended October 31, 2023 was primarily due to net income of $6.4 million offset by non-cash items of $1.8 million for deferred taxes, depreciation and amortization, stock compensation and reduction in the accrued Eagle earnout, offset by net increase in working capital of $3.1 million.

Net cash used in investing activities of $3.0 million for the nine months ended October 31, 2023 reflects manufacturing equipment purchases and the additional investment in Bodytrak of $1.5 million.

Net cash used in financing activities was $1.8 million for the nine months ended October 31, 2023, due to $0.7 million in dividends, $0.3 million in shares repurchased under our share repurchase program, $0.4 million of repayment of short-term borrowings, and shares returned to pay income taxes on shares vested under our equity compensation program.

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

At April 30, 2024, cash and cash equivalents were approximately $28.4 million, and working capital was approximately $92.4 million.

Cash and cash equivalents increased $3.1 million, and working capital increased $9.5 million from January 31, 2024 due to the balance sheet fluctuations described above and the acquisition of Pacific and Jolly.

Of the Company’s total cash and cash equivalents of $28.4 million as of April 30, 2024, cash held in Latin America of $2.0 million, cash held in the UK of $1.4 million, cash held in Russia and Kazakhstan of $1.0 million, cash held in the EEC of $4.2, cash held in India of $0.8 million, cash held in Vietnam of $0.9 million, and cash held in Hong Kong of $0.6 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 $9.4 million balance at April 30, 2024, there could be an additional 10% withholding tax incurred in that country.

The Company expects to repatriate cash from China during FY 25 and in anticipation of doing so, has accrued withholding tax expense of $0.4 million as of April 30, 2024.

The impact of these payments was a net use of cash of $2.2 million.

Capital expenditures were $0.5 million for the three months ended April 30, 2024, primarily for manufacturing equipment.

On February 5, 2024, the Company acquired Italy and Romania-based Jolly Scarpe S.p.A.

and Jolly Scarpe Romania S.R.L.

(collectively, "Jolly") in an all-cash transaction.

Jolly is a leading designer and manufacturer of professional footwear for the firefighting, military, police, and rescue markets.

The company is headquartered in Montebelluna, Italy, with manufacturing operations in Bucharest, Romania, and has 150 employees.

The acquisition enhances Lakeland’s product portfolio, particularly within fire service protective helmets.

Headquartered in Whanganui, New Zealand, Pacific is a leading designer and provider of structural firefighting, wildland firefighting, and technical rescue helmets.

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 through November 30, 2023 (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).

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

The borrowing base limitation only applies during periods when the Company’s quarterly funded debt to EBITDA ratio, as defined, exceeds 2.00 to 1.00, however, the borrowing base limitation has been waived through January 31, 2024 as a result of the Third Amendment to the Loan Agreement.

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.

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.

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

The Loan Agreement provided the Company with a secured $25.0 million revolving credit facility, which included a $5.0 million letter of credit sub-facility.

The Company could 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).

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

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

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

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

The credit facility was to mature on June 25, 2025.

On November 30, 2023, the Company entered into Amendment No.

3 to Loan Agreement by and between the Lender and the Company (the “Third Amendment”).

3 to the Loan Agreement by and between the Lender and the Company (the “Third Amendment”).

Pursuant to the Third Amendment, the Lender consented to the Company’s acquisition of one hundred percent (100%) of the equity interests of Pacific.

1 unchanged sentence

The Third Amendment also provided for the reaffirmation of representations, warranties and covenants under the Loan Agreement as are customary in connection with similar amendments of credit documents.

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, 2023.

On November 30, 2023, the Company acquired Pacific in an all-cash transaction valued at approximately $8.6 million including assumption of debt, subject to post-closing adjustments and customary holdback provisions.

The transaction was funded through the revolving credit facility and cash balances.

On March 28, 2024, the Company entered into Amendment No.

4 to the Loan Agreement by and between the Lender and the Company (the “Fourth Amendment”).

Pursuant to the Fourth Amendment, the Lender and the Company agreed to, among other things, (i) extend the expiration date of the credit facility to March 28, 2029, (ii) increase the availability under the revolving credit facility to $40.0 million with an accordion feature providing for the potential funding of an additional $10.0 million, (iii) remove the borrowing base component of the credit facility;

and (iv) modify the interest rate based on Daily SOFR plus the Applicable Rate.

The Applicable Rate is based upon a Funded Debt to EBITDA Ratio and includes four (4) different levels constituting a SOFR margin range from 1.25% to 2.00%.

In addition, the Fourth Amendment (i) modified the Funded Debt to EBITDA Ratio covenant so as not to exceed 3.5x (with step-downs to 3.25 and 3.0 in 2025 and 2026), (ii) modified the Basic Fixed Charge Coverage Ratio covenant to a minimum of 1.20x, (iii) includes a springing Asset Coverage Ratio covenant of at least 1.10x, but only to the extent that the maximum Total Leverage Ratio exceeds 3.00x at any reporting period, (iv) increases the sublimit for letters of credit to $10.0 million, and (v) imposes a floor to Daily SOFR of one percent (1.00%).

The Fourth Amendment provides for additional indebtedness or the assumption of existing indebtedness for acquisitions of foreign subsidiaries (not to exceed $10.0 million in USD) and increased the size of Permitted Acquisitions, without prior approval from the Lender, to $17.5 million per occurrence and $35.0 million in the aggregate.

We were in compliance with all financial covenants of the Loan Agreement as of April 30, 2024.

Stock Repurchase Program.

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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.

There is approximately $5.0 million remaining under the share repurchase program at October 31, 2023.

No shares were repurchased in the three months ended April 30, 2024 leaving $5.0 million remaining under the share repurchase program at April 30, 2024.

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.

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

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

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

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

Quarterly Cash Dividend .

On February 1, 2024, the Board of Directors declared a quarterly cash dividend.

The quarterly dividend of $0.03 per share was paid on February 22, 2024, to stockholders of record as of February 15, 2024.

Capital Expenditures.

Our capital expenditures for the nine months ended October 31, 2023 of $1.5 million principally relate to capital purchases for our manufacturing facilities in Mexico.

Our capital expenditures for the three months ended April 30, 2024 of $0.5 million principally relate to capital purchases for replacement of manufacturing equipment.

We anticipate FY25 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.

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

The Company has initiated discussions with the landlord as to potential remedies which may inform our decision-making process with respect to this property.

Changes in our long-term intended use for the building may impact the carrying value of the currently recorded right of use asset.

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 2024 Form 10-K.

There have been no significant changes in the application of our critical accounting policies during the nine months ended October 31, 2023.

There have been no significant changes in the application of our critical accounting policies during the three months ended April 30, 2024.

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