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. This document may contain certain
"forward-looking" information within the meaning of the Private Securities
Litigation Reform Act of 1995. This information involves risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. In this Form 1-K, (a) "FY" means
fiscal year; thus for example, FY20 refers to the fiscal year ended January 31,
2020 and (b) "Q" refers to a quarter; thus, for example, Q4 FY20 refers to the
fourth quarter of the fiscal year ended January 31, 2020.
Overview; Response to COVID-19 Outbreak
FY20 revenue growth was led by the Americas (US, Canada, Latin America, and
Mexico). Other markets experienced essentially flat revenue results. Growth in
the Americas can be attributed to general economic conditions, high finished
goods inventory levels allowing for lead-time reduction, and an increase in
direct container sales to customers in the US and Canada. The second half of
FY20 saw headwinds due to contentious trade negotiations between the US and
China, which resulted in decreased sales in China and necessitated a shift in
the manufacture of US products from China to Vietnam in order provide
uninterrupted supply to our US customers. The revenue short fall in China was
somewhat ameliorated by increased late January sales of limited use/disposable
protective clothing of approximately $0.99 million in China in response to
orders related to the COVID-19 virus outbreak. The US also saw a late Q4 sales
increase of for COVID-19 related products. Overall, coronavirus related sales
during the last weeks of January totaled $1.2 million to $1.5 million and
accounted for the Q4 revenue growth over Q3 FY20. European sales were flat year
over year largely because of second half uncertainty over whether or not Brexit
would be successfully negotiated or not and increased pricing pressure on our
disposable and chemical sales within Europe. Gross margins improved continually
throughout the year, returning to normal levels of 37.7% in Q4 and 35.2% for the
year as our ERP system allowed us to gain control of our freight in costs, and
direct container shipments increased into North America. Operating expenses as a
percentage of sales decreased from 30.6% in FY19 to 29.7% in FY20.
The last two weeks of FY20 were dominated by response to the COVID-19 outbreak.
The virus' progression into a global pandemic will likely impact our business
throughout the entirety of FY21. In the near term, increased demand for our
disposable product lines and to some extent our lower end chemical lines,
combined with our high inventory levels will produce sales revenues beyond our
sustainable manufacturing capacity on an annualized basis. We anticipate strong
sales through Q1 and Q2 of FY21, and the possibility of a recession, and
consumer stockpiled inventories, that may temper demand within our regular
markets in the second half of the year. We believe that once the pandemic
subsides, there will likely be an eventual secondary government-based pandemic
demand as governments around the world seek to replenish and perhaps increase
their PPE stockpiles in an effort to correct the deficiencies exposed by
COVID-19. This stockpiling will be filled in part by inventory that is in the
distribution channels as the pandemic ends, When governments will issue RFQs for
additional product is unknown, but could take as long as a year in some cases.
For these reasons we are maximizing our manufacturing capacity in the near-term
and preparing for a slower second half to last quarter of the year.
Lakeland's strategy for response to these "black swan" events is to remain
focused on our long term growth strategies and tailor our response to these
events so as to accelerate our strategic plans. We believe that focusing on our
long-term growth strategy is also a solid strategy for minimizing the impact of
any post-pandemic recession. In this particular case, our long-term strategy for
revenue and margin improvement is to increase market penetration into markets
that use higher value, higher margin products, that are recession resistant. Our
manufacturing flexibility allows the company to maximize the manufacture of
disposable and chemical garments without degrading its ability to supply higher
end, flame resistant and arc flash resistant garments. In order to maximize our
response to pandemic demand, we are running our disposables and chemical
manufacturing 12 hours per day, 7 days per week and we have significantly
reduced the number of SKUs in these product lines in order to maximize
efficiencies. This will have the effect of increasing throughput and reducing
manufacturing costs to mitigate any raw materials prices increases.
Additionally, by focusing on a few core styles, we believe we can minimize the
impact on inventory of any production over run when the pandemic subsides. In
short, Lakeland is responding to COVID-19 as it did to Ebola and Avian Flu in
2015. We are not deviating from our growth strategy, rather we are looking to
utilize the short-term, increased demand as a catylast to accelerate attainment
of growth objectives.
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On December 22, 2017, federal tax reform legislation was enacted in the United
States, resulting in significant changes from previous tax law. The 2017 Tax
Cuts and Jobs Act (the Tax Act) reduced the federal corporate income tax rate to
21% from 35% effective January 1, 2018. The Tax Act requires us to recognize the
effect of the tax law changes in the period of enactment, such as determining
the transition tax, re-measuring our US deferred tax assets as well as
reassessing the net realizability of our deferred tax assets. The Company
completed this re-measurement and reassessment in FY18. While the Tax Act
provides for a modified territorial tax system, beginning in 2018, it includes
two new U.S. tax base erosion provisions, the global intangible low-taxed income
("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT")
provisions. The GILTI provisions require the Company to include in its U.S.
income tax return foreign subsidiary earnings in excess of an allowable return
on the foreign subsidiary's tangible assets. The proposed regulations were not
finalized as of January 31, 2019. The regulations were finalized as of June 14,
2019. Re-measurement and reassessment of the GILTI tax as it is currently
written resulted in a charge to tax expense of $1.0 million for FY20 and $0.6
million for FY19. The Company intends to account for the GILTI tax in the period
in which it is incurred. Though this non-cash expense had a materially negative
impact on FY20 earnings, the Tax Act also changes the taxation of foreign
earnings, and companies generally will not be subject to United States federal
income taxes upon the receipt of dividends from foreign subsidiaries.
The personal protective equipment market continues to grow worldwide at an
estimated rate of 7.0% to 7.5%, prior to the COVID-19 pandemic, as developing
countries increasingly adopt protection standards similar to those of North
America and Europe, and standards in more mature markets become more stringent,
cover more workers, and more hazards. This growth rate will likely be impacted
by the COVID-19 pandemic and resultant post-pandemic economic conditions,
however these fundamental growth drivers will remain in place. Management
believes Lakeland is uniquely positioned to take advantage of these trends with
its presence in many major and high growth potential markets worldwide. However,
management also understands that significant investment in these markets in
terms of sales personnel, sales collateral and improved distribution (local
warehousing) is required for the Company to realize its goals for growth in
revenue and income as many of these markets become more competitive.
In order to promote future improvements in operating income, cash availability,
and business outlook, the Company made multiple investments in operations and
organizational expansion. Additional personnel in sales and marketing have been
hired worldwide in order to increase penetration in existing markets and pursue
new sales channels. On February 1, 2020, we relocated our corporate offices from
New York to our Decatur, AL facility where we have hired additional personnel to
improve centralized planning, finance, and IT support throughout the
organization. New equipment has been purchased to increase manufacturing
capacity and efficiency as well as to replace older equipment. New manufacturing
facilities in Vietnam and India commenced production in FY19 and continued to
add capacity until the latter half of FY20 when inventory levels necessitated
curtailment. Curtailment of these operations was ended at all facilities in
early February as C0VID-19 sales begain to escalate. New accounting and
operations software is being installed to improve processes, planning, and
access to sales, financial, and manufacturing data. Additionally we continue to
explore new fabrics and new technologies that may improve our product offerings
and/or profitability. Management believes the Company's ability to compete for
the global opportunities in its industry are being enhanced.
We manufacture and sell a comprehensive line of industrial protective clothing
and accessories for the industrial and public protective clothing market. All
Lakeland products either protect the wearer from something in their environment,
or protect a product or process from the wearer. Our products must meet minimum
performance requirements defined by industry best practice, and/or international
or local standards.
Our products are sold globally by our in-house sales teams, our customer service
group, and authorized independent sales representatives to a global network of
approximately 1,600 safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil, chemical/petrochemical,
automobile, steel, glass, construction, smelting, heavy and light industry,
cleanroom, janitorial, pharmaceutical, and high technology electronics
manufacturers, as well as scientific, medical laboratories and the utilities
industries (electrical, natural gas, and water). 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 US Food and Drug Administration.
Internationally, we sell to a mixture of end users directly, and to industrial
distributors depending on the particular country and market. Sales are made in
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 FY19 we had
net sales of $99.0 million and $107.8 million in FY20.
27
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. In FY19, we opened
manufacturing facilities in Vietnam and India. Our facilities and capabilities
in China, Mexico, Vietnam and India allow access to a less expensive labor pool
than is available in the United States of America and permit us to purchase
certain raw materials at a lower cost than they are available domestically. As
we have increasingly moved production of our products to our facilities in
Mexico, China, India and Vietnam, we have seen improvements in the profit
margins for these products. Our net sales attributable to customers outside the
United States of America were $51.9 million and $49.1 million for the years
ended January 31, 2020 and 2019, respectively.
We anticipate our R&D expenses to remain essentially the same in FY21 as in FY20
at approximately $0.7 million as we continue to develop vertical product lines
for new markets and expand production of existing product lines to our new
manufacturing facilities in Vietnam and India. R&D expense will include material
testing as we seek new raw material sources nearer to our new manufacturing
facilities.
Critical Accounting Policies and Estimates
Revenue Recognition. Substantially all the Company's revenue is derived from
product sales, which consist of sales of the Company's personal protective wear
products to distributors. The Company considers purchase orders to be a contract
with a customer. Contracts with customers are considered to be short-term when
the time between order confirmation and satisfaction of the performance
obligations is equal to or less than one year, and virtually all of the
Company's contracts are short-term. The Company recognizes revenue for the
transfer of promised goods to customers in an amount that reflects the
consideration to which the Company expects to be entitled in exchange for those
goods. The Company typically satisfies its performance obligations in contracts
with customers upon shipment of the goods. Generally, payment is due from
customers within 30 to 90 days of the invoice date, and the contracts do not
have significant financing components. The Company elected to account for
shipping and handling activities as a fulfillment cost rather than a separate
performance obligation. Shipping and handling costs associated with outbound
freight are included in operating expenses, and for the years ended in FY20 and
FY19 aggregated approximately $3.3 million and $2.7 million, respectively. Taxes
collected from customers relating to product sales and remitted to governmental
authorities are excluded from revenue.
The transaction price includes estimates of variable consideration, related to
rebates, allowances, and discounts that are reductions in revenue. All estimates
are based on the Company's historical experience, anticipated performance, and
the Company's best judgment at the time the estimate is made. Estimates for
variable consideration are reassessed each reporting period and are included in
the transaction price to the extent it is probable that a significant reversal
of cumulative revenue recognized will not occur upon resolution of uncertainty
associated with the variable consideration. All the Company's contracts have a
single performance obligation satisfied at a point in time and the transaction
price is stated in the contract, usually as quantity times price per unit.
The Company has seven revenue generating reportable geographic segments under
ASC Topic 280 "Segment Reporting" and derives its sales primarily from its
limited use/disposable protective clothing and secondarily from its sales of
reflective clothing, high-end chemical protective suits, firefighting and heat
protective apparel, reusable woven garments and gloves and arm guards. The
Company believes disaggregation of revenue by geographic region best depicts the
nature, amount, timing, and uncertainty of its revenue and cash flows (see table
below). Net sales by geographic region and by product line are included below:
28
Year Ended
January 31,
(in millions of dollars)
2020 2019
External Sales by region:
USA $55.89 $49.88
Other foreign 3.66 3.02
Europe (UK) 9.35 9.42
Mexico 2.82 3.51
Asia 18.15 18.00
Canada 9.64 8.56
Latin America 8.30 6.62
Consolidated external sales $107.81 $99.01
Year Ended
January 31,
(in millions of dollars)
2020 2019
External Sales by product lines:
Disposables $53.42 $53.18
Chemical 22.96 18.03
Fire 8.63 5.98
Gloves 3.12 3.22
Hi-Vis 7.75 6.99
Wovens 11.93 11.61
Consolidated external sales $107.81 $99.01Accounts Receivable, Net. Trade accounts receivable are stated at the amount the
Company expects to collect. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. The Company recognizes losses when information available
indicates that it is probable that a receivable has been impaired based on
criteria noted above at the date of the consolidated financial statements, and
the amount of the loss can be reasonably estimated. Management considers the
following factors when determining the collectability of specific customer
accounts: Customer creditworthiness, past transaction history with the
customers, current economic industry trends and changes in customer payment
terms. Past due balances over 90 days and other less creditworthy accounts are
reviewed individually for collectability. If the financial condition of the
Company's customers were to deteriorate, adversely affecting their ability to
make payments, additional allowances would be required. Based on management's
assessment, the Company provides for estimated uncollectible amounts through a
charge to earnings and a credit to a valuation allowance. Balances that remain
outstanding after the Company has used reasonable collection efforts are written
off through a charge to the valuation allowance and a credit to accounts
receivable.
Inventories. Inventories include freight-in, materials, labor and overhead costs
and are stated at the lower of cost (on a first-in, first-out basis) or net
realized value.
Goodwill. Goodwill represents the future economic benefits arising from other
assets acquired in a business combination that are not individually identified
and separately recognized. Goodwill is evaluated for impairment at least
annually; however, this evaluation may be performed more frequently when events
or changes in circumstances indicate the carrying amount may not be recoverable.
Factors that the Company considers important that could identify a potential
impairment include: significant changes in the overall business strategy and
significant negative industry or economic trends. Management assesses whether it
is more likely than not that goodwill is impaired and, if necessary, compares
the fair value of the reporting unit to the carrying value. Fair value is
generally determined by management either based on estimating future discounted
cash flows for the reporting unit or by estimating a sales price for the
reporting unit based on multiple of earnings. These estimates require the
Company's management to make projections that can differ from actual results.
29
Impairment of Long-Lived Assets. The Company evaluates the carrying value of
long-lived assets to be held and used when events or changes in circumstances
indicate the carrying value may not be recoverable. The Company measures any
potential impairment on a projected undiscounted cash flow method. Estimating
future cash flows requires the Company's management to make projections that can
differ materially from actual results. The carrying value of a long-lived asset
is considered impaired when the total projected undiscounted cash flows from the
asset is less than its carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair value of the
long-lived asset. At January 31, 2019, a non-cash impairment charge was recorded
to reflect the change in the carrying value from $0.2 million to $0.0 million as
the Company believed there was no recoverable value for the asset held for sale
previously on the Company's consolidated balance sheet.
Income Taxes. The Company is required to estimate its income taxes in each of
the jurisdictions in which it operates as part of preparing the consolidated
financial statements. This involves estimating the actual current tax in
addition to assessing temporary differences resulting from differing treatments
for tax and financial accounting purposes. These differences, together with net
operating loss carryforwards and tax credits, are recorded as deferred tax
assets or liabilities on the Company's consolidated balance sheet. A judgment
must then be made of the likelihood that any deferred tax assets will be
recovered from future taxable income. A valuation allowance may be required to
reduce deferred tax assets to the amount that is more likely than not to be
realized. In the event the Company determines that it may not be able to realize
all or part of its deferred tax asset in the future, or that new estimates
indicate that a previously recorded valuation allowance is no longer required,
an adjustment to the deferred tax asset is charged or credited to income in the
period of such determination.
The Company recognizes tax positions that meet a "more likely than not" minimum
recognition threshold. If necessary, the Company recognizes interest and
penalties associated with tax matters as part of the income tax provision and
would include accrued interest and penalties with the related tax liability in
the consolidated balance sheets.
Foreign Operations and Foreign Currency Translation. The Company maintains
manufacturing operations in the People's Republic of China, Mexico, Vietnam,
India, and Argentina and can access independent contractors in China, Vietnam,
Argentina, and Mexico. It also maintains sales and distribution entities located
in China, Canada, the U.K., Chile, Argentina, Russia, Kazakhstan, India, Mexico,
Uruguay, Australia, and Vietnam. The Company is vulnerable to currency risks in
these countries. The functional currency for the United Kingdom subsidiary is
the Euro; the trading company in China, the RMB; and the Russian operation, the
Russian Ruble, and the Kazakhstan operation the Kazakhstan Tenge. All other
operations have the US dollar as its functional currency.
Pursuant to US GAAP, assets and liabilities of the Company's foreign operations
with functional currencies other than the US dollar, are translated at the
exchange rate in effect at the balance sheet date, while revenues and expenses
are translated at average rates prevailing during the periods. Translation
adjustments are reported in accumulated other comprehensive loss, a separate
component of stockholders' equity. Cash flows are also translated at average
translation rates for the periods, therefore amounts reported on the
consolidated statement of cash flows will not necessarily agree with changes in
the corresponding balances on the consolidated balance sheet. Transaction gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
Fair Value of Financial Instruments. US GAAP defines fair value, provides
guidance for measuring fair value and requires certain disclosures utilizing a
fair value hierarchy which is categorized into three levels based on the inputs
to the valuation techniques used to measure fair value. The following is a brief
description of those three levels:
Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2:
Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets
or liabilities in markets that are not active.
Level 3:
Unobservable inputs that reflect management's own assumptions.
Foreign currency forward and hedge contracts are recorded in the consolidated
balance sheets at their fair value as of the balance sheet dates based on
current market rates.
30
The financial instruments of the Company classified as current assets or
liabilities, including cash and cash equivalents, accounts receivable,
short-term borrowings, borrowings under revolving credit facility, accounts
payable and accrued expenses, are recorded at carrying value, which approximates
fair value based on the short-term nature of these instruments.
The Company believes that the fair values of its long-term debt approximates its
carrying value based on the effective interest rate compared to the current
market rate available to the Company.
Net Income Per Share
Basic net income per share is based on the weighted average number of common
shares outstanding without consideration of common stock equivalents. Diluted
net income per share is based on the weighted average number of common shares
and common stock equivalents. The diluted net income per share calculation takes
into account unvested restricted shares and the shares that may be issued upon
exercise of stock options and warrants, reduced by shares that may be
repurchased with the funds received from the exercise, based on the average
price during the fiscal year.
Significant Balance Sheet Fluctuation January 31, 2020, as Compared to January
31, 2019
Balance Sheet Accounts. Cash increased by $1.8 million, primarily as a result of
increased profitability, improved accounts receivable collection efficiency, an
increase in inventory turns, and a net increase in current liabilities. Accounts
receivable was increased due to an increase in sales. Inventory was increased
$1.9 million due to the increase in sales, albeit at a slower rate as inventory
turns were increased. Accounts payable, accrued compensation, and other accrued
expenses increased $0.8 million due to an increase in accounts payable for raw
material purchases offset by a reduction in accrued legal expenses. Treasury
stock increased $0.5 million due to repurchases under the stock buyback program
approved in October 2016.
Results of Operations
The following table sets forth our historical results of continuing operations
for the years and three-months ended January 31, 2020 and 2019 as a percentage
of our net sales from operations.
For the Three Months Ended
January 31, For the Year Ended
(Unaudited) January 31,
2020 2019 2020 2019
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 62.3% 72.3% 64.8% 65.8%
Gross profit 37.7% 27.7% 35.2% 34.2%
Operating expenses 31.6% 33.7% 29.7% 30.6%
Operating profit (loss) 6.1% (6.0)% 5.5% 3.6%
Other income, net 0.1% 0.1% 0.0% 0.0%
Interest expense (0.1)% (0.1)% (0.1)% (0.1)%
Income (loss) before tax 6.1% (6.0)% 5.3% 3.5%
Income tax expense (benefit) 1.9% 1.6% 2.3% 2.0%
Net income (loss)
4.3% (7.6)% 3.0% 1.5%
Net Sales. Net sales increased to $107.8 million for the year ended January 31,
2020 compared to $99.0 million for the year ended January 31, 2019, an increase
of 8.9%. Sales in the US increased $6.0 million or 12% primarily due to a
reduction in lead times as we began to realize benefits from our ERP
implementation, an increase in the number of direct container shipments in the
US and Canada, and sales driven by COVID 19 demand, primarily in the US and
China. Canada sales increased modestly by $1.1 million or 12.6% due to direct
container shipments. Latin America sales increased $1.7 million or 25.4% as the
Company continued to expand its selling efforts into the Chilean market and also
expanded to Uruguay. Sales in all other markets in FY20 were essentially the
same as in FY19.
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Gross Profit. Gross profit increased $4.0 million, or 11.8%, to $37.9 million
for the year ended January 31, 2020, from $33.9 million for the year ended
January 31, 2019. Gross profit as a percentage of net sales increased from 34.2%
for the year ended January 31, 2019 to 35.2% for the year ended January 31,
2020. Major factors driving gross margins were:
?
Increased volumes and pricing overall, primarily in Q4.
?
Increased sales of higher margin product lines, primarily diposables, chemical,
and fire.
?
Reduction in freight costs due to improved controls over logistics.
?
Improved manufacturing efficiency in Vietnam even after curtailments in Q3.
Operating Expense.Operating expenses increased 5.5% from $30.3 million for the
year ended January 31, 2019 to $32.0 million for the year ended January 31,
2020. Operating expenses as a percentage of net sales was 29.7% for the year
ended January 31, 2020, down from 30.6 % for the year ended January 31, 2019.
Selling expenses increased $1.2 million, including sales compensation, freight
out, advertising and marketing. General and administrative expenses were
increased due to increases in salaries and compensation (including bonuses and
cash director fees), banking and insurance expenses, depreciation, and bad debt
expense. These increases were offset by decreases in professional fees due
primarily to reduced legal fees; equity-based compensation as the Company
reduced its estimate of future vested amounts, and currency fluctuation impacts.
In connection with the 2017 and 2018 restricted stock grants, stock-based
compensation expense was reversed in an amount of $835,000 in FY20 as a result
of a change in estimate in the numbers of shares expected to be earned under the
performance plan.
Operating Profit. Operating profit increased to $5.9 million for the year ended
January 31, 2020, from $3.6 million for the year ended January 31, 2019, due to
the impacts detailed above. Operating margin increased to 5.5% for the year
ended January 31, 2020, compared to 3.6% for the year ended January 31, 2019.
Interest Expense. Interest expenses was $0.1 million for the year ended January
31, 2020 compared to $0.1 million for the year ended January 31, 2019.
Income Tax Expense. Income tax expense consists of federal, state and foreign
income taxes. Income tax expense was $2.5 million for the year ended January 31,
2020 and included $1.0 million associated with the GILTI component of the Tax
Act of 2017, as compared to an income tax expense of $2.0 million for the year
ended January 31, 2019. All international subsidiaries are impacted GILTI
calculation.
Net Income. Net income increased to $3.3 million for the year ended January 31,
2020 from $1.5 million for the year ended January 31, 2019.
Fourth Quarter Results
Net sales and net income (loss) were $28.2 million and $1.2 million,
respectively, for Q4 FY20, as compared to $25.0 million and $(1.9) million,
respectively, for Q4 FY19.
Factors affecting Q4 FY20 results of operations included:
?
Increased sales volumes as issues associated with order fulfillment and shipment
from the ERP implementation in Q4 FY19 were resolved.
?
Increased sales due to COVID 19 demand in the US and China.
?
Margins were increased due to improved manufacturing efficiency, primarily in
our Vietnam facility.
?
Operating expenses were increased $0.5 million overall. Significant changes
include increases in compensation (selling and administrative), advertising and
marketing, and debt expense. These increases were offset by a significant
decrease in legal fees.
32
Liquidity and Capital Resources
At January 31, 2020, cash and cash equivalents were approximately $14.6 million
and working capital was approximately $66.9 million. Cash and cash equivalents
increased $1.8 million and working capital increased $1.7 million from January
31, 2019 as the Company focused on working capital efficiencies.
Of the Company's total cash and cash equivalents of $14.6 million as of January
31, 2020, cash held in Latin America of $1.1 million, cash held in Russia and
Kazakhstan of $0.5 million, cash held in the UK of $0.2 million, cash held in
India of $0.2 million and cash held in Canada of $0.8 million would not be
subject to additional US tax due to the change in the US tax law as a result of
the December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the "Tax
Act"). In the event the Company repatriated cash from China, of the $6.0 million
balance at January 31, 2020 there would be an additional 10% withholding tax
incurred in that country. The Company has strategically employed a dividend plan
subject to declaration and certain approvals in which its Canadian subsidiary
sends dividends to the US in the amount of 100% of the previous year's earnings,
the UK subsidiary sends dividends to the US in the amount of 50% of the previous
year's earnings, and the Weifang China subsidiary sends dividends to the US in
declared amounts of the previous year's earnings. No dividends were proposed by
management or declared by our Board of Directors for our China subsidiary in
FY20.
Net cash provided by operating activities of $3.6 million for the year ended
January 31, 2020 was primarily due to net income of $3.3 million, non-cash
expenses of $2.6 million for deferred taxes, depreciation and amortization and
stock compensation, and an increase in accounts payable of $1.1 million, offset
in part by a $1.4 million increase to accounts receivable due to a higher
concentration of sales in the latter part of the fourth quarter and an increase
in inventories of approximately $2.2 million. Net cash used in investing
activities of $1.0 million for the year ended January 31, 2020 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 $0.7 million for the year ended January 31, 2020, was primarily due to a
$0.5 million increase in treasury stock for shares purchased under the
previously approved stock repurchase program.
Net cash provided by operating activities of $1.8 million for the year ended
January 31, 2019 was primarily due to net income of $1.5 million, non-cash
expenses of $1.7 million for depreciation and amortization and stock
compensation, and an increase in accrued expenses and other liabilities of $0.9
million, offset in part by a $2.5 million increase to accounts receivable due to
a higher concentration of sales in the latter part of the fourth quarter. Net
cash used in investing activities of $3.1 million for the year ended January 31,
2019 reflects purchases in property and equipment of $3.1 million 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 $1.6 million for the year ended January 31, 2019, was
primarily due to a $1.2 million increase in treasury stock for shares purchased
under the previously approved stock repurchase program.
We currently have a $20 million revolving credit facility which commenced May
10, 2017, of which we had no borrowings outstanding as of January 31, 2020,
expiring on May 10, 2020, at a current per annum rate of 3.3%. Maximum
availability in excess of amount outstanding at January 31, 2020 was
approximately$14.0 million. Our current credit facility requires, and any future
credit facilities may also require, that we comply with specified financial
covenants relating to fixed charge coverage ratio and limits on capital
expenditures and investments in foreign subsidiaries. Our ability to satisfy
these financial covenants can be affected by events beyond our control, and we
cannot guarantee that we will meet the requirements of these covenants. These
restrictive covenants could affect our financial and operational flexibility or
impede our ability to operate or expand our business. Default under our credit
facilities would allow the lenders to declare all amounts outstanding to be
immediately due and payable. Our primary lender, SunTrust Bank, has a security
interest in substantially all of our US assets and pledges of 65% of the equity
of the Company's foreign subsidiaries. If our lender declares amounts
outstanding under the credit facility to be due, the lenders could proceed
against our assets. Any event of default, therefore, could have a material
adverse effect on our business. We are currently negotiating with another
prospective lender to provide a revolving credit facility agreement which would
replace the existing agreement with SunTrust.
The Company has experienced increased sales and order activity as a result of
the COVID-19 pandemic and may need to increase inventories in order to continue
to respond to this increased demand. Additionally, the Company may accelerate
investments in capacity expansion which may require significant capital
expenditures.
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Stock Repurchase Program. On July 19, 2016, the Company's board of directors
approved a stock repurchase program under which the Company may repurchase up to
$2,500,000 of its outstanding common stock. During the year ended January 31,
2020, the Company repurchased 47,153 shares of stock, which amounted to
approximately $506,000, inclusive of commissons. The Company has repurchased
152,801 shares of stock under this program as of the date of this filing which
amounted to $1,671,188, inclusive of commissions.
Capital Expenditures. Our capital expenditures for FY20 of $1.0 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 FY21 capital expenditures to be
approximately $2.0 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.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all accounting standards
updates ("ASUs"). Management periodically reviews new accounting standards that
are issued.
New Accounting Pronouncements Recently Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") established
Topic 842, Leases, by issuing Accounting Standards Update ("ASU") No. 2016-02,
which requires lessees to recognize leases on their balance sheets and disclose
key information about leasing arrangements. Topic 842 was subsequently amended
by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic
842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU
No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use
model ("ROU") that requires a lessee to recognize a ROU asset and lease
liability on the balance sheet for all leases with a term longer than 12 months.
Leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income statement.
The new standard was effective on February 1, 2019. A modified retrospective
transition approach is required, applying the new standard to all leases
existing at the date of initial application. An entity may choose to use either
(1) its effective date or (2) the beginning of the earliest comparative period
presented in the financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for existing
leases also apply to leases entered into between the date of initial application
and the effective date. The entity must also recast its comparative period
financial statements and provide the disclosures required by the new standard
for the comparative periods. The Company adopted the new standard on February 1,
2019 and used the effective date as the date of initial application.
Consequently, financial information will not be updated and the disclosures
required under the new standard will not be provided for dates and periods
before February 1, 2019. The new standard provides a number of optional
practical expedients in transition. The Company elects the 'package of practical
expedients', which permits the Company not to reassess under the new standard
prior conclusions about lease identification, lease classification and initial
direct costs. On adoption, the Company recognized additional operating lease
liabilities of approximately $2.8 million with corresponding ROU assets of the
same amount based on the present value of the remaining minimum rental payments
under the prior leasing standard for existing operating leases.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From
Accumulated Other Comprehensive Income," which allows institutions to elect to
reclassify the stranded tax effects from AOCI to retained earnings, limited only
to amounts in AOCI that are affected by the tax reform law. For public entities,
the amendments are effective for annual reporting periods beginning after
December 15, 2018, including interim reporting periods within that reporting
period. For all other entities, the amendments in this Update are effective for
annual reporting periods beginning after December 15, 2019, including interim
reporting periods within that reporting period. The Company has adopted this
guidance, which had no material impact on its consolidated financial statements
and related disclosures.
New Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other
(Topic 350), which includes provisions, intended to simplify the test for
goodwill impairment. The standard is effective for annual periods beginning
after December 15, 2019, with early adoption permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The
Company does not expect the adoption of this standard to have a significant
impact on its financial position and results of operations.
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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740),
Simplying the Accounting for Income Taxes. The ASU removes certain exceptions
for performing intra-period allocation and calculating income taxes in interim
periods. It also simplifies the accounting for income taxes by requiring
recognition of franchise tax partially based on income as an income-based tax,
requiring reflection of enacted chages in tax laws in the interim period and
making improvements for income taxes related to employee stock owernship plans.
ASU 2019-12 is effective for fiscal years and interim periods within those
years, beginning after December 15, 2020. Early adoption is permitted, including
adoption in any interim period for which financial statements have not been
issued. The Company is currently evaluating the impact the standard will have on
its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to
Financial Instruments, which makes improvements to financial instruments
guidance. The standard is effective immediately for certain amendments and for
fiscal years beginning after December 15, 2019. The implementation of this
pronouncement will not have a material impact on the Company's consolidated
financial statements.
No other recently issued accounting pronouncements had or are expected to have a
material impact on the Company's consolidated financial statements.
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