This Form 10-Q 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. See
"SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" at the beginning of Part I,
Item 1.
Overview; Response to COVID 19 Outbreak
We manufacture and sell a comprehensive line of industrial protective clothing
and accessories for the industrial and public protective clothing market. 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
1,600 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. 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 into China, the European Economic Community ("EEC"), Canada, Chile,
Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador, India 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. More recently we
have added manufacturing operations in Vietnam and India to offset increasing
manufacturing costs in China and further diversify our manufacturing
capabilities. Our China operations will continue primarily manufacturing for the
Chinese market and other markets where duty advantages exist. Manufacturing
expansion is not only necessary to control rising costs, it is also necessary
for Lakeland to achieve its growth objectives. Our net sales attributable to
customers outside the United States were $24.4 million and $13.3 million for the
three months ended October 31, 2020 and 2019, respectively.
The last two weeks of FY20 and the first nine months of FY21 were dominated by
response to the COVID 19 outbreak. The virus' progression into a global pandemic
will likely continue to impact our business for the remainder of FY21 and into
the first half of FY22. We believe that COVID 19 demand will begin to diminish
in Q4 FY21 and continuing into Q2 FY22, when vaccines become widely available.
As COVID 19 demand, currently estimated at approximately 35% of revenue,
decreases we anticipate a continuation of an increase in our core businesses
(industrial) that began in Q2 FY21 and continued through Q3 FY21. The negative
impact of lock downs and stay at home orders peaked in Q2 FY21 with core
business sales down by approximately 25%. Through the second half of Q2 and
through Q3 FY21 our core business sales have been recovering steadily. Based on
recent, third quarter U.S. GDP Growth of 33.1%; November 2020
manufacturing Purchasing Manager Index of 57.5%, up from 56.0% at August 2020,
and our increased market penetration and new customers, we expect our core
business sales to recover fully and continue to grow through FY22. We anticipate
that COVID 19 related sales will continue for the remainder of FY21 and into the
first half of FY22, however not at the levels experienced in the first three
quarters of FY21 as demand for immediate use diminishes and give way to
stockpiling demand and increased core business sales.
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At present, raw materials supply appears to have caught up with demand, albeit
at prices well above pre-COVID 19 pricing. We anticipate raw material pricing to
continue at inflated levels into FY22. Our future sales would be affected should
there be an industry-wide shortage of necessary raw materials in the event of
another rise or surge in COVID 19 cases. As noted, we did experience significant
price increases for fabric during the first nine months of FY21 and managed our
available manufacturing capacity to lower costs, and increase prises to meet
customer demand at these higher prices. With the exception of our India export
manufacturing operation, which did not qualify for "essential status" due to its
export only restrictions 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. While
leading economic indicators indicate a relatively robust industrial market
recovery, potential headwinds to revenue as we emerge from pandemic sales
include the possibility of a recession and consumer stockpiled inventories, as
well as a decline in our oil and gas industrial sector that may temper demand
within our regular markets in the second half of FY21.
Reference is made to "Risk Factors" in Part I, Item 1A, of our Annual Report on
Form 10-K for the fiscal year ended January 31, 2020. Offsetting these risks are
changes to our sales environment, as a result of COVID 19, that we believe
represent considerable upside to sales. We believe that once the pandemic
subsides, there will be continued demand establishing PPE stockpiles for the
long-term. This stockpiling will be filled in part by inventory that is in the
distribution channels as the pandemic ends. When specific governments will issue
RFQs for additional product is unknown, but some RFQs are already pending
release; others are expected to be released over the next several months.
Additionally, we believe the private sector will also engage in stockpiling of
PPE as supply channels catch up to demand. And finally, we are seeing the
emergence of institutional cleaning as a new market segment as countries and
states reopen and seek to prevent further infections. For these reasons we are
maximizing our manufacturing capacity in the near-term and evaluating expansion
opportunities to allow us to further increase our industrial market penetration
as our competitors abandon their industrial customers as they seek to maximize
COVID 19 related sales. This strategy combined with new product development,
manufacturing expansion, and the addition of key senior personnel also serves to
prepare us for any economic slowdown that may occur as COVID 19 business ends
and our industry transitions to a more traditional product mix.
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 have increased the daily working hours for our
disposables and chemical manufacturing product lines, 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 help 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. SKU
reduction also affords Lakeland the opportunity to discontinue any styles that
have ceased being profitable due to pricing or sales volume We are not deviating
from our growth strategy, rather we are looking to utilize the short-term,
increased demand as a catalyst to accelerate attainment of growth objectives.
Having successfully implemented the above strategy, as evidenced by
significantly increased market penetration in international markets, the
addition of new customers accounting for additional sales of approximately $10
million, and realizing efficiency gains that we intend to make permanent, we are
now focused on adding human and IT resources required to accelerate our growth
rate in a post-COVID 19 environment. We believe that we will emerge from FY21 a
full year ahead of our pre-COVID 19 growth plan, and we are committed to
leveraging our position to accelerate growth in Critical Environment Markets
such as pharmaceutical cleanrooms, isolation gowns, and Chemo-gowns; the
Electric Utility Market; and to continue improving efficiencies by rationalizing
our product offering in non-Covid product lines. To do this we will be acquiring
additional senior and middle managers with specific skills in Sales and
Marketing, Quality Control, Supply Chain Management, and Industrial Engineering.
These personnel will facilitate future manufacturing expansion.by assuring that
we have the skill sets necessary to meet our growth targets.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of our unaudited condensed
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, net sales and
expenses and disclosure of contingent assets and liabilities. We base our
estimates on the past experience and on various other assumptions that we
believe to be reasonable under the circumstances, and we periodically evaluate
these estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our unaudited
condensed consolidated financial statements.
Revenue Recognition. Substantially all of 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. 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 time's price per unit.
Accounts 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
realizable value.
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.
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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.
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.
Significant Balance Sheet Fluctuation October 31, 2020, Compared to January 31,
2020
Cash increased by $25.6 million, primarily as a result of increased
profitability and improved accounts receivable collection efficiency, offset by
the payoff of the term loan outstanding at January 31, 2020. Accounts receivable
increased due to the increase in sales. Inventory increased $0.8 million to
support the increase in sales. Accounts payable, accrued compensation, and other
accrued expenses increased $5.2 million. Capital expenditures for the three and
nine months ended October 31, 2020 were $0.6 million and $1.3 million,
respectively.
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Three Months ended October 31, 2020, Compared to the Three Months Ended October
31, 2019
Reference is made to "Overview; Response to COVID 19 Outbreak" above which
should be read in conjunction with this Section.
Net Sales. Net sales increased to $41.5 million for the three months ended
October 31, 2020 compared to $27.5 million for the three months ended October
31, 2019, an increase of 50.9%. Sales globally were driven by COVID 19 demand,
as we realized increased sales in all markets for our disposable and chemical
product lines. In addition to the increased volumes, sales were also impacted by
price increases based on our normal, annual adjustments, special price increases
due to increases in raw material costs, which we expect will be temporary, and
increased sales to new customers, which are typically at prices above those for
our recurring customers. We were able to meet this demand by increasing our
manufacturing capacity with expanded operating hours. We estimate that
approximately 35% of our revenues in the current quarter were related to COVID
19 demands. Other product lines such as fire, high performance high visibility,
and wovens, which are primarily used by industrial customers, declined during
the period due to various global shutdowns and quarantines.
Gross Profit. Gross profit increased $12.4 million, or 133.5%, to $21.7 million
for the three months ended October 31, 2020, from $9.3 million for the three
months ended October 31, 2019. Gross profit as a percentage of net sales
increased to 52.3% for the three month period ended October 31, 2020, from 33.9%
for the three months ended October 31, 2019. Major factors driving gross margins
were:
· Significant increases in volumes driven by COVID 19 demand.
· Price increases described above.
· Improved manufacturing efficiency in substantially all locations as we
increased the number of hours per shift and number of days per week.
· Increase in direct container sales.
Operating Expense. Operating expenses increased 23.2% from $7.5 million for the
three months ended October 31, 2019 to $9.2 million for the three months ended
October 31, 2020. Operating expenses as a percentage of net sales was 22.2% for
the three months ended October 31, 2020, down from 27.1% for the three months
ended October 31, 2019. Selling expenses were essentially flat, with increases
in sales compensation and commissions offset by decreases in freight out,
travel, advertising and marketing. General and administrative expenses were
increased primarily due to increases in stock-based compensation, currency
fluctuations, and increased incentive accruals. During the three months ended
October 31, 2020 stock-based compensation of $0.7 million was recorded as a
result of an increase in estimate of the number of shares expected to be earned
under the stock performance plan due to increase in profitability over the
measurement period. In the period ended October 31, 2019, stock-based
compensation was reduced by $0.4 million due to a reduction in the number of
shares expected to be earned under the performance plan.
Operating Profit. Operating profit increased to $12.5 million for the three
months ended October 31, 2020 from $1.8 million for the three months ended
October 31, 2019, due to the impacts detailed above. Operating margins were
30.1% for the three months ended October 31, 2020, as compared to 6.7% for the
three months ended October 31, 2019
Interest Expense. Interest expense decreased slightly to $0.01 million for the
three months ended October 31, 2020 from $0.03 million for the three months
ended October 31, 2019 as a result of reduced borrowings.
Income Tax Expense. Income tax expense consists of federal, state and foreign
income taxes. Income tax expense was $3.2 million for the three months ended
October 31, 2020, compared to $0.7 million for the three months ended October
31, 2019, due to the increase in operating profit.
Net Income. Net income increased by $8.2 million to $9.3 million for the three
months ended October 31, 2020 from $1.1 million for the three months ended
October 31, 2019.
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Nine Months ended October 31, 2020, Compared to the Nine Months Ended October
31, 2019
Reference is made to "Overview; Response to COVID 19 Outbreak" above which
should be read in conjunction with this Section.
Net Sales. Net sales increased to $122.1 million for the nine months ended
October 31, 2020 compared to $79.6 million for the nine months ended October 31,
2019, an increase of 53.3%. Sales globally were driven by COVID 19 demand, as we
realized significant increases in all markets for our disposable and chemical
product lines. In addition to the increased volumes, sales were also impacted by
price increases based on our normal, annual adjustments, special price increases
due to increases in raw material costs, which we expect will be temporary, and
increased sales to new customers, which are typically at prices above those for
our recurring customers. We were able to meet this demand with inventory on hand
by increasing our manufacturing capacity with expanded operating hours. Other
product lines such as wovens, which are primarily used by industrial customers,
declined during the period due to various global shutdowns and quarantines.
Gross Profit. Gross profit increased $33.9 million, or 124.3%, to $61.2 million
for the nine months ended October 31, 2020, from $27.3 million for the nine
months ended October 31, 2019. Gross profit as a percentage of net sales
increased to 50.1% for the nine months ended October 31, 2020, from 34.3% for
the nine months ended October 31, 2019. Major factors driving gross margins
were:
· Significant increases in volumes driven by COVID 19 demand.
· Price increases described above.
· Improved manufacturing efficiency in substantially all locations as we
increased the number of hours per shift and number of days per week.
· Reduction in SKUs led to increased run size that increased manufacturing
throughput and improved efficiency.
· Increase in direct container sales.
· Sales of reserved inventory into COVID 19 applications.
Operating Expense. Operating expenses increased 15.0% from $23.1 million for the
nine months ended October 31, 2019 to $26.6 million for the nine months ended
October 31, 2020. Operating expenses as a percentage of net sales was 21.8% for
the nine months ended October 31, 2020, down from 29.0% for the nine months
ended October 31, 2019. Selling expenses increased $1.8 million, primarily due
to sales compensation, external commissions, volume rebates to certain
customers, and freight out, offset in part by decreases in travel, advertising
and marketing. General and administrative expenses were increased due to
increases in stock-based compensation, currency fluctuations, and incentive
accruals, which were offset by decreases in salaries (including severance),
temporary staffing, and professional fees. During the nine months ended October
31, 2020 stock-based compensation of $0.7 million was recorded as a result of an
increase in estimate of the number of shares expected to be earned under the
stock performance plan due to significant improvement in profitability for the
period. For the nine months ended October 31, 2019, stock-based compensation was
reduced by $0.8 million as it was deemed improbable that such shares would vest
based on performance to date.
Operating Profit. Operating profit increased to $34.6 million for the nine
months ended October 31, 2020 from $4.2 million for the nine months ended
October 31, 2019, due to the impacts detailed above. Operating margins were
28.3% for the nine months ended October 31, 2020, as compared to 5.2% for the
nine months ended October 31, 2019.
Interest Expense. Interest expense decreased to $0.01 million for the nine
months ended October 31, 2020 from $0.1 million for the nine months ended
October 31, 2019, as a result of less borrowings for the more current period.
Income Tax Expense. Income tax expense consists of federal, state and foreign
income taxes. Income tax expense was $7.4 million for the nine months ended
October 31, 2020, compared to $2.0 million for the nine months ended October 31,
2019, due to the increase in operating profit. Income tax expense for the nine
months ended October 31, 2020 was reduced by $1.7 million due to certain
modifications to the GILTI tax provisions enacted in the period.
Net Income. Net income increased by $25.2 million to $27.2 million for the nine
months ended October 31, 2020 from $2.1 million for the nine months ended
October 31, 2019.
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Liquidity and Capital Resources
At October 31, 2020, cash and cash equivalents were approximately $40.2 million
and working capital was approximately $98.7 million. Cash and cash equivalents
increased $25.6 million and working capital increased $31.8 million from January
31, 2020, due to increased profitability and a focus on working capital
efficiencies.
Of the Company's total cash and cash equivalents of $40.2 million as of October
31, 2020, cash held in Latin America of $1.8 million, cash held in Russia and
Kazakhstan of $1.3 million, cash held in the UK of $1.4 million, cash held in
India of $0.9 million and cash held in Canada of $3.1 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 $18.8
million balance at October 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 the nine months ended October 31, 2020.
Net cash provided by operating activities of $28.0 million for the nine months
ended October 31, 2020 was primarily due to net income of $27.2 million,
non-cash expenses of $6.2 million for deferred taxes, depreciation and
amortization, stock compensation, other non-cash charges and a $5.4 million
increase in net working capital accounts. Net cash used in investing activities
of $1.3 million for the nine months ended October 31, 2020 reflects planned
investments in property and equipment. Net cash used in financing activities of
$1.2 million for the nine months ended October 31, 2020, was due to the
repayment of a term loan under a previous credit facility as the Company
transitioned to the new Loan Agreement with Bank of America described below.
The Company has a $12.5 million revolving credit facility with Bank of America
which commenced June 25, 2020, and which will expire on June 25, 2025. This
facility currently carries an interest rate of 2.25% per annum. There are no
borrowings outstanding under this facility at October 31, 2020. Maximum
availability under this facility at October 31, 2020 was approximately $12.5
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, Bank of America, 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 lender could proceed against our assets. Any event of
default, therefore, could have a material adverse effect on our business.
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 intends to invest
in capacity expansion which may require significant capital expenditures. See
"Capital Expenditures" below. At this time the Company believes it has
sufficient cash balances and other capital to fund operations, working capital,
and future capital expenditures on both a short-term and long-term basis.
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 nine months ended October
31, 2020, the Company repurchased no shares of stock. 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 first nine months of FY21 of
$1.3 million principally relate to capital purchases for our manufacturing
facilities in Mexico, Vietnam and India, and the enhancement of our global IT
infrastructure. 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.
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