LAKELAND INDUSTRIES INC (LAKE)

ITEM 7. 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 10-K, (a) “FY” means fiscal year; thus for example, FY25 refers to the fiscal year ended January 31, 2025, and (b) “Q” refers to a quarter; thus, for example, Q4 FY25 refers to the fourth quarter of the fiscal year ended January 31, 2025.

Overview

Lakeland Fire + Safety manufactures and sells a comprehensive line of fire services and industrial protective clothing and accessories for the industrial and first responder markets. Our products are sold globally by our in-house sales teams, our customer service group, and authorized independent sales representatives to a strategic global network of selective fire safety and industrial distributors and wholesale partners. 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 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, Southeast Asia, Australia, Hong Kong and New Zealand.

We had net sales of $167.2 million in FY25 and $124.7 million in FY24.

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 our access to a labor pool that is less expensive than that available in the United States and permits us to purchase certain raw materials at a lower cost than they are available domestically. During FY25, the Company was impacted by tariff costs on certain products imported from China. Beginning in 2025 the U.S. trade policy has undergone significant shifts under the Trump administration, which has emphasized the use of tariffs as a strategic tool. Recent developments have generated widespread uncertainty, including the United States’ imposition of new and expanded tariffs on key trading partners such as China, Vietnam, Canada, Mexico, and the European Union.  Furthermore, certain trading partners that are the subject of such new and expanded tariffs have announced that they are contemplating retaliatory tariffs to be imposed on U.S. exports.  In prior years, the Company has been able to pass along a portion of costs resulting from tariffs to its customers, but there is no guarantee that we will be able to successfully do so in the future.   We added manufacturing operations in Vietnam and India in fiscal 2019 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, but also for Lakeland to achieve its growth objectives.  We added three U.S. based manufacturing locations through our acquisition of Veridian Limited in December 2024.  These facilities currently produce Veridian’s brand of fire turnout gear and gloves, but they are in the process of being certified to produce Lakeland turnout gear for the U.S. market.  They are also capable of producing Lakeland’s woven and high-performance garments.

Our net sales attributable to customers outside the United States were $106.8 million and $69.4 million for the fiscal years ended January 31, 2025 and 2024, respectively.

On January 24, 2025, the Company issued 2,093,000 shares of its common stock in an underwritten offering at a price of $20.68 after an underwriting discount.  After expenses the Company received approximately $46.2 million which was used to pay down the Company’s revolving credit facility.

On December 16, 2024, the Company acquired U.S. based Veridian Limited for cash consideration of approximately $26.1 million subject to post-closing adjustments and customary holdback provisions. Founded in 1992, Veridian is a leading provider of firefighter protective apparel, including fire and rescue garments, gloves and boots, with an annual revenue of approximately $21 million. Veridian has approximately 150 employees and is headquartered in Des Moines, Iowa.

On July 1, 2024, the Company acquired the fire and rescue business of LHD Group Deutschland GmbH and its subsidiaries in Hong Kong and Australia (collectively, "LHD") in an all-cash transaction subject to post-closing adjustments and customary holdback provisions. Total consideration was $14.8 million, net of $1.5 million cash acquired, of which $15.5 million was paid to retire LHD’s debt, and $0.8 million was paid to the seller at closing. LHD is a leading provider of firefighter turnout gear, accessories, and personal protective equipment cleaning, repair, and maintenance. LHD has 111 employees worldwide and is headquartered in Wesseling, Germany, with operations in Hong Kong and Australia.

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 valued at approximately $9.0 million 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 the use of modern materials and cutting-edge technologies in the production of its footwear.

On November 30, 2023, we acquired New Zealand-based Pacific Helmets NZ Limited ("Pacific") in an all-cash transaction valued at approximately $6.3 million, subject to post-closing adjustments and customary holdback provisions. Pacific is a leading designer and manufacturer of helmets for the structural firefighting, wildland firefighting, and rescue markets. The company has 70 employees and is headquartered in Whanganui, New Zealand. Pacific provides differentiated product offerings through its innovative and premium solutions.

The cost to manufacture and distribute our products is influenced by the cost of raw materials, finished goods, labor, and transportation. During FY25, we have experienced continued inflationary pressure and higher costs because of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs associated with the normal course of business. The increase in the cost of raw materials and finished goods is due in part to a shortage in the availability of certain products, the higher cost of shipping, and inflation. We can only pass elevated costs onto customers in an effort to offset inflationary pressures on a limited basis. Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results.

Impact of Russia’s Invasion of Ukraine on Our Business

The current conflict between Russia and Ukraine is creating substantial uncertainty about the role Russia will play in the global economy in the future. Although the length, impact, and outcome of the ongoing military conflict between Russia and Ukraine are highly unpredictable, this conflict could lead to significant market disruptions and other disruptions. The escalation or continuation of this conflict presents heightened risks and has resulted and could continue to result in volatile commodity markets, supply chain disruptions, increased risk of cyber incidents or other disruptions to information systems, heightened risks to employee safety, significant volatility of the Russian ruble, limitations on access to credit markets, increased operating costs (including fuel and other input costs), the frequency and volume of failures to settle securities transactions, inflation, potential for increased volatility in commodity, currency and other financial markets, safety risks, and restrictions on the transfer of funds to and from Russia. We cannot predict how and the extent to which the conflict will affect our customers, operations or business partners or the demand for our products and our global business. Depending on the actions we take or are required to take, the ongoing conflict could also result in loss of cash, assets or impairment charges. Additionally, we may also face negative publicity and reputational risk based on the actions we take or are required to take as a result of the conflict, which could damage our brand image or corporate reputation. We are continually monitoring the potential financial impact of the Russian invasion of Ukraine on our operations.

Our business in Russia accounted for approximately 2.4% and 3.0% of our consolidated net revenues for the years ended January 31, 2025 and 2024, respectively. Our assets in Russia were approximately 2.4% and 2.6% of our consolidated assets at January 31, 2025 and 2024, respectively. The net book value of our assets in Russia on January 31, 2025 was approximately $5.2 million, of which $1.4 million is cash. We currently have not recognized any impairment charges related to the assets of our Russian business. However, the extent, severity, duration and outcome of the conflict between Russia and Ukraine and related sanctions could potentially impact the value of our assets in Russia as the conflict continues. Our Russian business is part of our Other Foreign segment.

Our sales in Ukraine were not significant in FY25 or FY24.

Critical Accounting Policies and Estimates

Inventories. Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out or moving average basis) or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory.  We assess our inventory for estimated obsolescence or unmarketable inventory and write down such inventory to estimated net realizable value based upon assumptions about future sales and supply on hand, if necessary.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company recorded approximately ($0.8) million and $3.4 million in inventory adjustments in FY25 and FY24, respectively.  The inventory adjustments in FY24 included $2.3 million in adjustments for certain products that the Company decided to discontinue or no longer support from a sales and marketing perspective.

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 assets 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. In FY25 and FY24, we recorded a change in our valuation allowance of less than $50,000 and approximately $3.1 million, respectively.

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.

Business combinations. In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values and the values of assets in use and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions, we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets, tangible long-lived assets, and contingent consideration. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. Several significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, discount rates, attrition rates and working capital changes.  Tangible long-lived assets are valued using a combination of the cost and market valuation approaches.

If the contingent consideration is deemed significant or absent an agreed-upon payout amount, the initial measurement of contingent consideration and the corresponding liability is evaluated using the Monte Carlo Method. For this valuation method, management develops projections during the contingent consideration period utilizing various potential pay-out scenarios. Probabilities are applied to each potential scenario, and the resulting values are discounted using a rate that considers the weighted average cost of capital as well as a specific risk premium associated with the riskiness of the contingent consideration itself, the related projections, and the overall business. Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in our operating results.

Goodwill and Other Intangible Assets.  Intangible assets with a finite useful life are amortized on a straight-line basis over their useful lives. Indefinite lived intangible assets are assessed for possible impairment annually on November 1st or whenever circumstances change such that the recorded value of the asset may not be recoverable.

All goodwill is assigned to and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Goodwill is not amortized but evaluated for impairment at least annually or whenever events or changes in circumstance indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company may perform either a qualitative assessment of potential impairment or proceed directly to a quantitative assessment of potential impairment. If the Company chooses not to perform a qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to conclude that no impairment has occurred qualitatively, then the Company will perform a quantitative assessment. Quantitative testing involves comparing the estimated fair value of each reporting unit to its carrying value. We estimate reporting unit fair value using a weighted average of fair values determined by discounted cash flow ("DCF") and market approach methodologies, as we believe both are important indicators of fair value. A number of assumptions and estimates are involved in the application of the DCF model, including sales volumes and prices, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The market approach methodology measures value through an analysis of peer companies. The analysis entails measuring the multiples of EBITDA at which peer companies are trading.

Refer to Note 1, “Business and Summary of Significant Accounting Policies,” and Note 6, “Acquisitions,” to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further information on the Company’s business acquisitions.

Recent Developments

On February 1, 2025, the Company’s Board of Directors declared a quarterly cash dividend.  The quarterly dividend of $0.03 per share or approximately $0.2 million, was paid on February 24, 2025, to stockholders of record as of February 14, 2025.

Significant Balance Sheet Fluctuation January 31, 2025, as Compared to January 31, 2024

Cash decreased by $7.7 million, primarily as a result of $15.9 million of cash used in operations and $47.7 million used in investing activities of which $45.1 million was spent on acquisitions, offset by $56.6 million in net cash provided by financing activities primarily borrowing from the Company’s credit facility.  The Company invested $45.1 million in the Jolly, LHD and Veridian acquisitions and $1.1 million in Bodytrak and $1.5 million in capital expenditures.  Cash provided by financing activities was $56.6 million, including the net proceeds from the Company’s underwritten public stock offering, which was used to pay down the Company’s revolving credit facility. The Company borrowed $59.4 million to fund the acquisitions noted above. Operating cash flow changes were driven by an increase in inventory of $14.2 million to support planned growth in FY26 and a $2.6 million increase in accounts receivable offset by an increase in accounts payable.

Results of Operations

The following tables set forth our external sales by our product lines and geographic regions and our historical results of continuing operations as a percentage of our net sales from operations, for the years and three-months ended January 31, 2025 and 2024.

Net Sales. Net sales increased to $167.2 million for the year ended January 31, 2025 compared to $124.7 million for the year ended January 31, 2024, an increase of $42.5 million. Sales in the U.S. increased $5.2 million or 9.4%, primarily due to increased sales of fire services gear and improvements in direct container sales. Sales to the European market increased by $25.8 million or 158.2%.  The key driver was the acquisitions of Jolly and LHD, which accounted for $27.0 million of the increase offset by weakness in the industrial markets.   Canada sales increased by $0.9 million or 9.6% due to improvements in the industrial markets. Latin America sales increased $5.1 million or 31.7% due to continued strong sales in Argentina due to the strengthening of their  economy.  Sales into the Mexican market increased by $1.0 million or 25.0%, driven by improved sales of fire services and woven products. Sales in our other foreign markets increased by $4.4 million or 44.4% primarily due to the acquisition of Pacific in November 2023. Overall, our Fire Services line was a key driver of our revenue growth in FY25, increasing $36.5 million or 137.7%. The execution of our acquisition strategy and the acquisitions of Pacific in November 2023 and Jolly, LHD and Veridian in FY25 accounted for $33.1 million of the increase.  The significant increase in Fire Services was complemented by an $8.0 million increase in our Wovens, Disposables and Chemical products, partially offset by a $1.2 million decline in our High Visibility products.

Gross Profit. Gross profit increased $17.5 million, or 34.2%, to $68.7 million for the year ended January 31, 2025, from $51.2 million for the year ended January 31, 2024. Gross profit as a percentage of net sales was consistent at 41.1% for the years ended January 31, 2025 and 2024.

Operating Expense.  Operating expenses increased 49.1% from $45.2 million for the year ended January 31, 2024 to $67.4 million for the year ended January 31, 2025. Operating expenses as a percentage of net sales were 40.3% for the year ended January 31, 2025, as compared to 36.3% for the year ended January 31, 2024.  Operating expenses increased primarily due to the acquisition of Pacific in November 2023 and the acquisitions of Jolly, LHD and Veridian in FY2025 accounting for $9.8 million of the increase.  Approximately $10.0 million of the increase was due to a) foreign currency remeasurement expense of $2.3 million driven by the continued devaluation of the Argentine peso, b) restructuring costs of $2.2 million, c) costs associated with the Monterrey, Mexico facility of $1.3 million, d) acquisition-related expenses of $3.7 million, and e) litigation costs for PFAS of $0.7 million.  The remainder of the increase is from selling and administrative expenses incurred to support the growth of the Company and increased sales levels.

Goodwill Impairment.  The Company recognized a goodwill impairment charge of $3.0 million representing the entire amount of goodwill related to the Pacific reporting unit in the Other Foreign geographic segment and an impairment charge of $7.5 million representing 83% of the goodwill related to the Eagle reporting unit in the Europe geographic segment, during the year ended January 31, 2025.

Operating Income (Loss). Operating loss was ($9.3) million for the year ended January 31, 2025, as compared to operating income of $6.0 million for the year ended January 31, 2024, due to the impacts detailed above. Operating margin decreased to (5.5%) for the year ended January 31, 2025, compared to 4.8% for the year ended January 31, 2024.

Impairment of Equity Method Investment. The Company’s investment in Bodytrak has generated losses since its initial acquisition and has required repeated rounds of financing to maintain operations. In February 2025, Bodytrak entered insolvency proceedings in the United Kingdom. Through January 31, 2025, the Company has recognized a total of $1.5 million in losses from its investment in Bodytrak.  As of January 31, 2025, the Company recorded an impairment loss of $7.6 million for the remaining recorded value of the equity method and convertible notes investments.

Interest Expense. Interest expense was $1.7 million and less than $0.1 million for the years ended January 31, 2025 and 2024, respectively.  The increase in interest expense is due to the increase in borrowing on the Company’s line of credit to fund its acquisition strategy.

Other Income.  On November 27, 2023, the Company sold its office and warehouse facility in Brantford, Ontario to an unrelated party for $4.9 million.  The sale resulted in a pre-tax gain, after selling expenses, of approximately $3.8 million.  Going forward, the Company is utilizing third party logistics providers for customer fulfillment in Canada.

Income Tax Benefit. Income tax benefit consists of federal, state and foreign income taxes. Income tax benefit was $0.3 million, which did not include any amount associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2025, as compared to an income tax expense of $3.9 million and included $0.8 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2024. All international subsidiaries impacted the GILTI component of income tax expense.

Net Income (Loss).  Net loss was ($18.1) million for the year ended January 31, 2025 compared to net income of $5.4 million for the year ended January 31, 2024 for the reasons discussed above.

Fourth Quarter Results

Net sales and net loss were $46.6 million and ($18.4) million, respectively, for Q4 FY25, as compared to sales of $31.2 million and net loss of ($1.0) million, for Q4 FY24.

Factors affecting Q4 FY25 results of operations included:

Liquidity and Capital Resources

At January 31, 2025, cash and cash equivalents were approximately $17.5 million and working capital was approximately $101.6 million. Cash and cash equivalents decreased $7.7 million and working capital increased $18.4 million from January 31, 2024 reflecting the impact of the Company’s acquisition strategy with the purchase of Jolly, LHD and Veridian in FY25.

Of the Company’s total cash and cash equivalents of $17.5 million as of January 31, 2025, cash held in Latin America of $2.2 million, cash held in Hong Kong of $0.2 million, cash held in the UK of $2.8 million, cash held in Vietnam of $0.4 million, cash held in India of $0.4 million and cash held in Canada of $0.4 million would not be subject to additional US income tax in the event such cash was repatriated due to the change in the U.S. tax law as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”).  The Company monitors its financial depositories by their credit rating, which varies by country. In addition, cash balances in banks in the United States are insured by the FDIC subject to certain limitations. There was approximately $1.3 million included in U.S. bank accounts and approximately $16.2 million in foreign bank accounts as of January 31, 2025, of which $16.7 million was uninsured. These balances could be impacted if one or more financial institutions with which the Company deposits its funds fails or is subject to other adverse conditions in the financial or credit markets. To date, the Company has experienced no loss of principal or lack of access to invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions that hold the Company’s cash and cash equivalents fail. See Part I, Item 1A. Risk Factors in this Annual Report on Form 10-K under the caption “Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition or results of operations.”

The Company strategically employs an intercompany dividend plan subject to subsidiary profitability, cash requirements and withholding taxes.  During FY23 the Company changed its’ permanent reinvestment assertions for its Chinese operations due to the increased volatility of the Chinese yuan and an updated evaluation of investment strategies.  During FY25 two of the Company’s subsidiaries in China declared and paid dividends of an aggregate of $4.8 million.

Net cash used in operating activities of $15.9 million for the year ended January 31, 2025 was primarily due to an increase in net inventories of $14.2 million, an increase in accounts receivable of $2.6 million, reductions in accrued expenses and other liabilities of $5.4 million offset by an increase in accounts payable of $6.0 million.  The growth in inventory is to support anticipated sales growth in the first half of FY26.  Net non-cash income items were $19.9 million due to the write-off of the Company’s total investment in Bodytrak of $7.6 million, the impairment of Pacific’s goodwill of $3.0 million and the partial impairment of Eagle’s goodwill of $7.5 million.  Net cash used in investing activities of $47.7 million for the year ended January 31, 2025 includes the acquisitions of Jolly, LHD and Veridian.  Net cash provided by financing activities was $56.6 million driven by the borrowings under our credit facility of $59.4 million to fund the acquisitions.  The Company successfully completed an underwritten offering of our common stock and raised net proceeds of $42.6 million which was used to pay down the credit facility.

Net cash provided by operating activities of $10.9 million for the year ended January 31, 2024 was primarily due to a decrease in net inventories of $7.7 million and an increase in accounts payable and accrued expenses of $2.4 million offset by an increase in accounts receivable and prepaids of $1.6 million due to stronger Q4 FY24 sales.  Net non-cash income items were $3.0 million due to the gain on the sale of our Canadian facility of $3.8 million and the revaluation of the Eagle earnout of $2.5 million.  These items were partially offset by the impact of depreciation and amortization and equity compensation expense.  Net cash used in investing activities of $5.1 million for the year ended January 31, 2024 includes the $5.5 million Pacific acquisition and reflects the Company’s further investment of $2.2 million in Bodytrak®.  Property and equipment purchases totaled $2.1 million primarily for equipment purchases in Mexico and Vietnam.  These investments were offset by $4.6 million in proceeds from the sale of the Canadian facility.  Net cash used in financing activities was $3.5 million for the year ended January 31, 2024 due to $0.9 million in dividends, $1.8 million in net debt repayments, primarily $1.4 million of debt acquired with the Pacific acquisition, $0.3 million of stock repurchases and $0.4 million in shares returned to pay taxes for our restricted stock programs.

Loan Agreement

On June 25, 2020, the Company entered into a Loan Agreement (the “Original Loan Agreement”) with Bank of America, N.A. (“Lender”), as amended by Amendment No. 1 to the Loan Agreement, dated June 18, 2021 (“Amendment No. 1”), Amendment No. 2 to the Loan Agreement, dated March 3, 2023 (“Amendment No. 2”), Amendment No. 3 to the Loan Agreement, dated November 30, 2023 (“Amendment No. 3”), Amendment No. 4 to the Loan Agreement, dated March 28, 2024 (“Amendment No. 4”), and Amendment No. 5 to the Loan Agreement, dated December 12, 2024 (“Amendment No. 5” and, collectively with Amendment No. 1, Amendment No. 2, Amendment No. 3, and Amendment No. 4, the “Loan Agreement Amendments”; and the Original Loan Agreement, as amended by the Loan Agreement Amendments, the “Amended Loan Agreement”).

The Amended Loan Agreement provides the Company with a secured revolving credit facility of up to $60.0 million of borrowings from December 12, 2024 through January 31, 2026 and of up to $50.0 million of borrowings from February 1, 2026 through January 31, 2027 (in each case, such limits remain subject to a reduction to no less than $40.0 million from the net proceeds of equity issuances if the Company raises capital during such periods). The revolving credit facility includes a $10.0 million letter of credit sub-facility. On January 24, 2025, as required by the Amended Loan Agreement, the Company used certain net proceeds of its equity issuance to reduce the principal amount outstanding under the Amended Loan Agreement. As a result thereof, the maximum principal amount under the revolving credit facility was reduced to $40 million. The credit facility matures on December 12, 2029.

Borrowings under the revolving credit facility bear interest at a rate per annum equal to the sum of (i) the greater of the daily Secured Overnight Financing Rate (“SOFR”) or an index floor of 1% plus (ii) the Applicable Rate (as defined in the Amended Loan Agreement). The Applicable Rate is based upon a funded debt to EBITDA ratio (discussed below) and includes four different levels constituting a SOFR margin range from 1.25% to 2.00%. 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 Amended Loan Agreement provides for a fee on any difference between the line of credit commitment and the amount of credit it actually uses, determined by the daily amount of credit outstanding during the specified period. Such fee is calculated at the Applicable Rate and is payable quarterly.

The Company made certain representations and warranties to the Lender in the Amended Loan Agreement that are customary for credit arrangements of this type. The Company also agreed to maintain, as of the end of each fiscal quarter a minimum “basic fixed charge coverage ratio” (as defined in the Amended Loan Agreement) of at least 1.20x and a “funded debt to EBITDA ratio” (as defined in the Amended Loan Agreement) not to exceed 3.5x (with step-downs to 3.25x and 3.0x on February 1, 2026 and February 1, 2027, respectively), in each case for the trailing 12-month period ending with the applicable quarterly reporting period. In addition, the Company has agreed to maintain a springing “asset coverage ratio” (as defined in the Amended Loan Agreement) of at least 1.10x, but only to the extent that the maximum funded debt to EBITDA ratio exceeds 3.25x at any reporting period. The Company was in compliance with all of its debt covenants as of January 31, 2025.

The Company also agreed to certain negative covenants under the Amended Loan Agreement that are customary for credit arrangements of this type, including restrictions regarding the ability of the Company and/or its subsidiaries to conduct business, grant liens, make certain investments, make substantial changes in the present executive or management personnel, and incur additional indebtedness, which negative covenants are subject to certain exceptions. Moreover, the Amended Loan Agreement contains restrictions on the Company’s ability to enter into mergers and other business combination transactions and to purchase or acquire other businesses or their assets, although the Company may purchase a business or its assets without the consent of the Lender if the aggregate amount of consideration paid for by the Company is less than $26,000,000 for any individual acquisition or $36,000,000 on a cumulative basis for all such acquisitions or purchases subsequent to the date of Amendment No. 5. The Amended Loan Agreement also authorizes the Company to enter into additional lines of credit or incur liabilities in connection with the acquisitions of foreign subsidiaries in foreign countries where the Lender lacks a physical presence (such amounts not to exceed $10.0 million in the aggregate).

The Amended Loan Agreement contains customary events of default that include, among other things (subject to any applicable cure periods and materiality qualifier), non-payment of principal, interest or fees, defaults under related agreements with the Lender, cross-defaults under agreements for other indebtedness, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments and material adverse change. Upon the occurrence of an event of default, the Lender may terminate all loan commitments, declare all outstanding indebtedness owing under the Amended Loan Agreement and related documents to be immediately due and payable, and may exercise its other rights and remedies provided for under the Amended Loan Agreement.

In connection with the Amended Loan Agreement, the Company entered into with the Lender (i) a security agreement dated June 25, 2020, pursuant to which the Company granted to the Lender a first priority perfected security interest in substantially all of the personal property and the intangibles of the Company, and (ii) a pledge agreement, dated June 25, 2020, pursuant to which the Company granted to the Lender a first priority perfected security interest in the stock of its subsidiaries (limited to 65% of those subsidiaries that are considered “controlled foreign subsidiaries” as set forth in the Internal Revenue Code and regulations). The Company’s obligations to the Lender under the Amended Loan Agreement are also secured by a negative pledge evidenced by a Non-encumbrance Agreement covering the real property owned by the Company in Decatur, Alabama.

As of January 31, 2025, the Company had no borrowings outstanding on the letter of credit sub-facility and borrowings of $13.2 million outstanding under the revolving credit facility.  The revolving credit facility carried an interest rate of 6.47% at January 31, 2025.

Acquisitions

On December 16, 2024, the Company acquired U.S. based Veridian Limited in an all-cash transaction valued at approximately $26.1 million subject to post-closing adjustments and customary holdback provisions. Founded in 1992, Veridian is a leading provider of firefighter protective apparel, including fire and rescue garments, gloves and boots, with an annual revenue of approximately $21 million. Veridian has approximately 150 employees and is headquartered in Des Moines, Iowa.

On July 1, 2024, the Company acquired the fire and rescue business of LHD Group Deutschland GmbH and its subsidiaries in Hong Kong and Australia (collectively, "LHD") in an all-cash transaction subject to post-closing adjustments and customary holdback provisions.  Total consideration was $14.8 million, net of $1.5 million cash acquired, of which $15.5 million was paid to retire LHD’s debt and $0.8 million was paid to the seller at closing, and $1.1 million remained unpaid subject to post-closing adjustments and customary holdback provisions. LHD is a leading provider of firefighter turnout gear, accessories, and personal protective equipment cleaning, repair, and maintenance. LHD has 111 employees worldwide and is headquartered in Wesseling, Germany, with operations in Hong Kong and Australia.

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 valued at approximately $9.0 million 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 the use of modern materials and cutting-edge technologies in the production of its footwear.

January 2025 Equity Issuance

On January 24, 2025, the Company closed an underwritten offering of 2,093,000 shares (the “Underwritten Shares”) of the Company’s common stock.  The public offering price of the Underwritten Shares was $22.00 per share, and the underwriters agreed to purchase the Underwritten Shares from the Company at a price of $20.68 per share. The Company’s net proceeds from the offering, after deducting underwriting discounts and commissions and offering expenses, were approximately $42.6 million. We used the net proceeds of the offering to pay down the outstanding principal under our Loan Agreement.

We believe that 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 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.  We were in compliance with all financial covenants of the Loan Agreement as of January 31, 2025.

Stock Repurchase Program. On April 7, 2022, the Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $5 million of its outstanding common stock which became effective upon the completion of a prior share repurchase program.  On December 1, 2022, the Board of Directors authorized an increase in the share repurchase program under which the Company may repurchase up to an additional $5 million of its outstanding common stock.  The share repurchase program has no expiration date but may be terminated by the Board of Directors at any time.

The common shares available for repurchase under the authorizations currently in effect may be purchased from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant considerations.  Repurchases may be made on the open market or through privately negotiated transactions.

The Company did not repurchase any shares in FY25 and has $5.0 million remaining under the share repurchase program at January 31, 2025.

Capital Expenditures. Our capital expenditures for FY25 of $1.5 million principally relate to our capital purchases for our manufacturing facilities in Vietnam and Mexico.  We anticipate FY26 capital expenditures to be approximately $3.0 million to replace existing equipment in the normal course of operations, expand our fire services products manufacturing capabilities and invest in our new ERP system.  We expect to fund the capital expenditures from our cash flow from operations.

Recently Issued Accounting Standards and Disclosure Rules

Income Taxes

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This guidance requires a public entity to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if the items meet a quantitative threshold. The guidance also requires all entities to disclose annually income taxes paid (net of refunds received) disaggregated by federal (national), state and foreign taxes and to disaggregate the information by jurisdiction based on a quantitative threshold. This guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted, and this guidance should be applied prospectively but there is the option to apply it retrospectively. The Company plans to adopt the provisions of this guidance in conjunction with our Form 10-K for our fiscal year ending January 31, 2026.

Disaggregation of Income Statement Expenses

In November 2024, the FASB issued ASU No. 2024-03 (“ASU 2024-03”), Disaggregation of Income Statement Expenses (“DISE”). ASU 2024-03 requires disaggregated disclosure of income statement expenses for public business entities. ASU 2024-03 does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. As revised by ASU No. 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures, the provisions of ASU 2024-03 are effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. With the exception of expanding disclosures to include more granular income statement expense categories, we do not expect the adoption of ASU 2024-03 to have a material effect on our consolidated financial statements taken as a whole.

ITEM 7. 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 10-K, (a) “FY” means fiscal year; thus for example, FY24 refers to the fiscal year ended January 31, 2024, and (b) “Q” refers to a quarter; thus, for example, Q4 FY24 refers to the fourth quarter of the fiscal year ended January 31, 2024.

Overview

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

We had net sales of $124.7 million in FY24 and $112.8 million in FY23.

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 our access to a labor pool that is less expensive than that available in the United States and permits us to purchase certain raw materials at a lower cost than they are available domestically. During FY24, the Company was impacted by tariff costs on certain products imported from China. The Company has been able to pass along a portion of these costs to its customers. We added manufacturing operations in Vietnam and India in fiscal 2019 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 $69.4 million and $63.9 million for the fiscal years ended January 31, 2024 and 2023, respectively.

On November 30, 2023, we acquired New Zealand-based Pacific Helmets NZ Limited ("Pacific") in an all-cash transaction valued at approximately $8.6 million, subject to post-closing adjustments and customary holdback provisions. Pacific is a leading designer and manufacturer of helmets for the structural firefighting, wildland firefighting, and rescue markets. The company has 70 employees and is headquartered in Whanganui, New Zealand. Pacific provides differentiated product offerings through its innovative and premium solutions. The existing staff and the majority of the management team will remain in place and will continue to service customer needs.

On December 2, 2022, we acquired UK-based Eagle Technical Products Limited (“Eagle”) in an all-cash transaction valued at approximately $10.5 million, net of net working capital acquired, subject to post-closing adjustments and potential future earnout payments. The acquisition enhances Lakeland’s product portfolio, particularly within fire service protective clothing and expands its sales presence in the Middle East and Europe.  Headquartered in Manchester, UK, Eagle is a leading designer and provider of protective apparel to the fire and industrial sectors. Eagle provides differentiated product offerings through its innovative and technical solutions.

The cost to manufacture and distribute our products is influenced by the cost of raw materials, finished goods, labor, and transportation. During FY24, we have experienced continued inflationary pressure and higher costs as a result of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs associated with the normal course of business. The increase in the cost of raw materials and finished goods is due in part to a shortage in the availability of certain products, the higher cost of shipping, and inflation. We can only pass elevated costs onto customers in an effort to offset inflationary pressures on a limited basis. Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results.

Impact of Russia’s Invasion of Ukraine on Our Business

The current conflict between Russia and Ukraine is creating substantial uncertainty about the role Russia will play in the global economy in the future. Although the length, impact, and outcome of the ongoing military conflict between Russia and Ukraine are highly unpredictable, this conflict could lead to significant market disruptions and other disruptions. The escalation or continuation of this conflict presents heightened risks and has resulted and could continue to result in volatile commodity markets, supply chain disruptions, increased risk of cyber incidents or other disruptions to information systems, heightened risks to employee safety, significant volatility of the Russian ruble, limitations on access to credit markets, increased operating costs (including fuel and other input costs), the frequency and volume of failures to settle securities transactions, inflation, potential for increased volatility in commodity, currency and other financial markets, safety risks, and restrictions on the transfer of funds to and from Russia. We cannot predict how and the extent to which the conflict will affect our customers, operations or business partners or the demand for our products and our global business. Depending on the actions we take or are required to take, the ongoing conflict could also result in loss of cash, assets or impairment charges. Additionally, we may also face negative publicity and reputational risk based on the actions we take or are required to take as a result of the conflict, which could damage our brand image or corporate reputation. We are continually monitoring the potential financial impact of the Russian invasion of Ukraine on our operations.

Our business in Russia accounted for approximately 3.0% and 2.4% of our consolidated net revenues for the years ended January 31, 2024 and 2023, respectively. Our assets in Russia were approximately 2.6% and 2.5% of our consolidated assets at January 31, 2024 and 2023, respectively. The net book value of our assets in Russia on January 31, 2024 was approximately $4.0 million, of which $0.3 million is cash. We currently have not recognized any impairment charges related to the assets of our Russian business. However, the extent, severity, duration and outcome of the conflict between Russia and Ukraine and related sanctions could potentially impact the value of our assets in Russia as the conflict continues. Our Russian business is part of our Other Foreign segment.

Our sales in Ukraine were not significant.

Critical Accounting Policies and Estimates

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, and for FY24 and FY23 aggregated approximately $3.4 million and $3.2 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.

Inventories. Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out or moving average basis) or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory.  We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and supply on hand, if necessary.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company recorded approximately $3.4 million and $1.3 million in inventory adjustments in FY24 and FY23, respectively.  The inventory adjustments in FY24 included $2.3 million in adjustments for certain products that the Company decided to discontinue or no longer support from a sales and marketing perspective.

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. In FY24 and FY23, we recorded a change in our valuation allowance of approximately $3.1 million and $0.4 million, respectively.

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.

Business combinations. In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values and the values of assets in use and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions, we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets, tangible long-lived assets, and contingent consideration. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. Several significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, discount rates, attrition rates and working capital changes.

If the contingent consideration is deemed significant or absent an agreed-upon payout amount, the initial measurement of contingent consideration and the corresponding liability is evaluated using the Monte Carlo Method. For this valuation method, management develops projections during the contingent consideration period utilizing various potential pay-out scenarios. Probabilities are applied to each potential scenario, and the resulting values are discounted using a rate that considers weighted average cost of capital as well as a specific risk premium associated with the riskiness of the contingent consideration itself, the related projections, and the overall business. Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in our operating results.

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

Equity Method Investments. Investments in which the Company can exercise significant influence but do not control, are accounted for using the equity method and are presented on the consolidated balance sheets. The Company’s share of the net earnings or losses of the investee is presented within the consolidated statements of operations as other income (expense). The Company evaluates its equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired.  The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company's carrying value; the severity of the decline; and the financial condition, operating performance and near-term prospects of the investee.  If the decline in fair value is deemed to be other than temporary, the security is written down to fair value. In situations where the fair value of an investment is not evident due to a lack of a public market price or other factors, the Company estimates fair value based on a discounted cash flow model and a market-based approach using inputs which include expected cash flows and a discount rate representative of the risks within the underlying business and forecasts to arrive at the estimated fair value of such investment. The Company's assessment of the foregoing factors involves a high degree of judgment and accordingly, actual results may differ materially from the Company's estimates and judgments.

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 the 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.

Recent Developments

On February 1, 2024, the Company’s Board of Directors declared a quarterly cash dividend.  The quarterly dividend of $0.03 per share or approximately $0.2 million, was paid on February 22, 2024, to stockholders of record as of February 15, 2024.

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 valued at approximately $9.3 million subject to post-closing adjustments and customary holdback provisions.  The Company drew down $12.3 million on its credit line to fund the acquisition, with a portion of the funds used to paydown Jolly’s existing debt.  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’s primary customers are based in Europe.

On February 13, 2024, the Company made an additional funding investment of £500,000 ($0.6 million on the date of investment) in Bodytrak’s convertible notes.

On March 28, 2024, the Company entered into Amendment No. 4 to the Loan Agreement by and between Bank of America, N.A. (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 increases the size of Permitted Acquisitions, without prior approval from the Lender, to $17.5 million per occurrence and $35.0 million in the aggregate.

Significant Balance Sheet Fluctuation January 31, 2024, as Compared to January 31, 2023

Cash increased by $0.7 million, primarily as a result of $10.8 million of cash provided by operations coupled with $4.6 million in proceeds from the sale of our Canada warehouse facility.  The Company invested $5.4 million in the Pacific acquisition and $2.2 million in Bodytrak and $2.0 million in capital expenditures.  The Company used $3.5 million in financing activities including paying down $1.4 million in debt acquired from Pacific, $0.4 million in the UK credit facility, $0.3 million in stock repurchases and $0.9 million in dividends. Operating cash flow changes were driven by $7.6 million in inventory reductions, increases in accruals of $2.5 million and increases in accounts receivables and prepayments of $1.5 million.

Results of Operations

The following tables set forth our external sales by our product lines and geographic regions and our historical results of continuing operations as a percentage of our net sales from operations, for the years and three-months ended January 31, 2024 and 2023.

Net Sales.  Net sales increased to $124.7 million for the year ended January 31, 2024 compared to $112.8 million for the year ended January 31, 2023, an increase of $11.9 million. Sales in the U.S. increased $6.2 million or 12.7%, primarily due to increased sales of fire services gear and improvements in direct container sales. Sales to the Asian market decreased by $10.9 million or 44.1% due to the reduction in COVID-19 driven demand coupled with slow improvement in the Chinese industrial sector.  Sales to the European market increased by $8.0 million or 96.4%.  Eagle was the primary driver with an increase in fire services sales of $7.2 million in FY24.  Eagle was acquired on December 2, 2022 and contributed $1.3 million in sales in FY23.  The remaining increase was due to strengthening in European demand, primarily in the industrial sector.  Canada sales increased by $0.3 million or 3.3% due to improvements in the industrial markets. Latin America sales increased $5.3 million or 49.1% due to stronger sales in Argentina as many competitors have exited the market due to the weakening Argentine peso and high inflation.  Sales into Uruguay increased $1.1 million or 1.0% due to increased fire services orders.  Sales into the Mexican market increased by $0.3 million or 8.1%, driven by the strengthening Mexican peso against the US dollar.  Sales in our other foreign markets increased $2.2 million, including $1.0 million in sales from Pacific acquired in November, and a $1.0 million increase in sales to the Russian market.  Sales of our disposable and chemical product line were impacted due to a reduction in COVID-19 demand, primarily in Asia offset by improving demand in our industrial markets. Other product lines, such as fire services, high performance, and wovens, increased by $18.7 million due to strengthening demand in those markets and the impact of Eagle’s sales during FY24.

Gross Profit. Gross profit increased $5.4 million, or 11.8%, to $51.2 million for the year ended January 31, 2024, from $45.8 million for the year ended January 31, 2023. Gross profit as a percentage of net sales increased to 41.1% for the year ended January 31, 2024 from 40.6% for the year ended January 31, 2023. Gross profit performance in FY24 benefited from higher volumes including direct container shipments, related factory utilization and an improving product mix with pricing power.  These improvements were offset by $2.3 million in inventory adjustments for certain end-of-life products and planned disposal of certain products that were constraining manufacturing operations.

Operating Expense.  Operating expenses increased 12.2% from $40.3 million for the year ended January 31, 2023 to $45.2 million for the year ended January 31, 2024. Operating expenses as a percentage of net sales were 36.3% for the year ended January 31, 2024, as compared to 35.7% for the year ended January 31, 2023.  Operating expenses increased primarily due to increases in currency translation expense of $1.7 million driven by the devaluation of the Argentine peso in December 2023, restructuring costs of $1.3 million, administrative costs associated with the Monterrey, Mexico facility of $0.7 million, acquisition-related expenses of $0.5 million, and increases in professional expenses, primarily legal and accounting, to support future initiatives.  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 $2.5 million, which was recorded during FY24 as a reduction in operating expenses.

Operating Profit. Operating profit increased to $6.0 million for the year ended January 31, 2024, from $5.5 million for the year ended January 31, 2023, due to the impacts detailed above. Operating margin decreased to 4.8% for the year ended January 31, 2024, compared to 4.9% for the year ended January 31, 2023.

Interest Expense. Interest expense was less than $0.1 million for the years ended January 31, 2024 and 2023.

Other Income.  On November 27, 2023, the Company sold its office and warehouse facility in Brantford, Ontario to an unrelated party for $4.9 million.  The sale resulted in a pre-tax gain, after selling expenses, of approximately $3.8 million.  Going forward, the Company will utilize third party logistics providers for customer fulfillment in Canada.

Income Tax Expense. Income tax expense consists of federal, state and foreign income taxes. Income tax expense was $3.9 million and included $0.8 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2024, as compared to an income tax expense of $3.6 million and included $0.2 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2023. All international subsidiaries impacted the GILTI component of income tax expense. The Company changed its permanent reinvestment assertions for its Chinese operations during the second quarter of FY23 due to increased volatility of the Chinese yuan and an updated evaluation of investment strategies.  The Company recorded $2.0 million in withholding taxes for a planned repatriation during FY23.

Net Income.  Net income increased to $5.4 million for the year ended January 31, 2024 from $1.9 million for the year ended January 31, 2023.

Fourth Quarter Results

Net sales and net loss were $31.2 million and ($1.0) million, respectively, for Q4 FY24, as compared to sales of $29.0 million and net income of $0.6 million, for Q4 FY23.

Factors affecting Q4 FY24 results of operations included:

Liquidity and Capital Resources

At January 31, 2024, cash and cash equivalents were approximately $25.2 million and working capital was approximately $83.2 million. Cash and cash equivalents increased $0.5 million and working capital decreased $3.8 million from January 31, 2023 reflecting the impact of the Company’s purchase of Pacific and additional investment in Bodytrak offset by the sale of our Canadian facility.

Of the Company’s total cash and cash equivalents of $25.2 million as of January 31, 2024, cash held in Latin America of $4.1 million, cash held in Hong Kong of $1.7 million, cash held in the UK of $1.7 million, cash held in Vietnam of $0.8 million, cash held in India of $0.6 million and cash held in Canada of $4.5 million would not be subject to additional US income tax in the event such cash was repatriated due to the change in the U.S. tax law as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”).  The Company monitors its financial depositories by their credit rating, which varies by country. In addition, cash balances in banks in the United States are insured by the FDIC subject to certain limitations. There was approximately $3.3 million included in U.S. bank accounts and approximately $21.9 million in foreign bank accounts as of January 31, 2024, of which $24.4 million was uninsured. These balances could be impacted if one or more of the financial institutions with which the Company deposits its funds fails or is subject to other adverse conditions in the financial or credit markets. To date, the Company has experienced no loss of principal or lack of access to invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions that hold the Company’s cash and cash equivalents fail. See Part I, Item 1A. Risk Factors in this Annual Report on Form 10-K under the caption “Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition or results of operations.”

The Company strategically employs an intercompany dividend plan subject to subsidiary profitability, cash requirements and withholding taxes.  During FY23 the Company changed its’ permanent reinvestment assertions for its Chinese operations due to the increased volatility of the Chinese yuan and an updated evaluation of investment strategies.  During FY24 the Company’s subsidiaries in Canada and China declared and paid dividends of $4.5 million and $7.0 million, respectively.

Net cash provided by operating activities of $10.9 million for the year ended January 31, 2024 was primarily due to a decrease in net inventories of $7.7 million and an increase in accounts payable and accrued expenses of $2.4 million offset by an increase in accounts receivable and prepaids of $1.6 million due to stronger Q4 FY24 sales.  Net non-cash income items were $3.0 million due to the gain on the sale of our Canadian facility of $3.8 million and the revaluation of the Eagle earnout of $2.5 million.  These items were partially offset by the impact of depreciation and amortization and equity compensation expense.  Net cash used in investing activities of $5.1 million for the year ended January 31, 2024 includes the $5.5 million Pacific acquisition and reflects the Company’s further investment of $2.2 million in Bodytrak®.  Property and equipment purchases totaled $2.1 million primarily for equipment purchases in Mexico and Vietnam.  These investments were offset by $4.6 million in proceeds from the sale of the Canadian facility.  Net cash used in financing activities was $3.5 million for the year ended January 31, 2024 due to $0.9 million in dividends, $1.8 million in net debt repayments, primarily $1.4 million of debt acquired with the Pacific acquisition, $0.3 million of stock repurchases and $0.4 million in shares returned to pay taxes for our restricted stock programs.

Net cash used in operating activities of $5.5 million for the year ended January 31, 2023 was primarily due to an increase in net inventories of $9.7 million and an increase in accounts receivable of $2.3 million due to stronger Q4 FY23 sales, partially offset by non-cash expenses of $3.6 million for deferred taxes, depreciation and amortization, and stock compensation.  Net cash used in investing activities of $16.5 million for the year ended January 31, 2023 includes the $10.5 million Eagle acquisition and reflects the Company’s $3.1 million investment in Bodytrak®.  Purchases of property and equipment were $2.0 million as the Company increased capital expenditures in the year for the ERP project and equipment purchases in Mexico and Vietnam.  Net cash used in financing activities was $5.9 million for the year ended January 31, 2023 primarily due to the purchase of $5.4 million of our common stock.

On June 25, 2020, we entered into a Loan Agreement (the “Loan Agreement”) with Bank of America (“Lender”). The Loan Agreement provides the Company with a secured $12.5 million revolving credit facility, which includes a $5.0 million letter of credit sub-facility. 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 $17.5 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. The credit facility was to mature on June 25, 2025. Borrowings under the revolving credit facility bear interest at a rate per annum equal to the sum of the 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 the LIBOR to the Secured Overnight Financing Rate (“SOFR”). All outstanding principal and unpaid accrued interest under the revolving credit facility is due and payable on the maturity date. On a one-time basis, and subject to there not existing an event of default, the Company may elect to convert up to $5.0 million of the then outstanding principal of the revolving credit facility to a term loan facility with an assumed amortization of 15 years and the same interest rate and maturity date as the revolving credit facility. The Loan Agreement provides for an annual unused line of credit commitment fee, payable quarterly, of 0.25%, based on the difference between the total credit line commitment and the average daily amount of credit outstanding under the facility during the preceding quarter.

On June 18, 2021, the Company entered into Amendment No. 1 to Loan Agreement (the “Amendment”) with the Lender, which modified certain terms of the Company’s existing Loan Agreement with the Lender. The Amendment increased the credit limit under the Loan Agreement’s senior secured revolving credit facility from $12.5 million to $25.0 million. The Amendment also amended the covenant in the Loan Agreement that restricts acquisitions by the Company or its subsidiaries in order to allow, without the prior consent of the Lender, acquisitions of a business or its assets if there is no default under the Loan Agreement and the aggregate consideration does not exceed $7.5 million for any individual acquisition or $15.0 million on a cumulative basis for all such acquisitions.

The Loan Agreement requires the Company to maintain a Funded Debt to EBITDA (as each such term is defined in the Loan Agreement) ratio of 3.0 to 1.0 or less and a Basic Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of at least 1.15 to 1.0. The Loan Agreement also contains customary covenants, including covenants that, among other things, limit or restrict the Company’s and/or the Company’s subsidiaries ability, subject to certain exceptions and qualifications, to incur liens or indebtedness, or merge, consolidate or sell or otherwise transfer assets.

On November 30, 2023, the Company entered into Amendment No. 3 to the Loan Agreement by and between Bank of America, N.A. (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.  The Third Amendment further provided for certain amendments to the Loan Agreement to permit additional indebtedness to be made available to Pacific, to exempt Pacific from certain requirements of the Loan Agreement pertaining to subsidiary guaranty and asset pledges that would otherwise be required under the Loan Agreement and to waive the Company’s borrowing base limitations through January 31, 2024.  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.

As of January 31, 2024, the Company had no borrowings under the Loan Agreement, and there was $25 million of additional available credit under the Loan Agreement.

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 valued at approximately $9.3 million subject to post-closing adjustments and customary holdback provisions.  The Company drew down $12.3 million on its credit line to fund the acquisition which included paydown of existing Jolly debt.  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.

On March 28, 2024, the Company entered into Amendment No. 4 to Loan Agreement by and between Bank of America, N.A. (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 believe that 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 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.  We were in compliance with all financial covenants of the Loan Agreement as of January 31, 2024.

Stock Repurchase Program. On February 17, 2021, the Company’s Board of Directors approved a stock repurchase program under which the Company may repurchase up to $5 million of its outstanding common stock. On July 6, 2021, the Board of Directors authorized an increase in the Company’s then-current stock repurchase program under which the Company may repurchase up to an additional $5 million of its outstanding common stock.  On April 7, 2022, the Board of Directors authorized a new stock repurchase program under which the Company may repurchase up to $5 million of its outstanding common stock which became effective upon the completion of the prior share repurchase program.  On December 1, 2022, the Board of Directors authorized an increase in the share repurchase program under which the Company may repurchase up to an additional $5 million of its outstanding common stock.  The share repurchase program has no expiration date but may be terminated by the Board of Directors at any time.

The common shares available for repurchase under the authorizations currently in effect may be purchased from time to time, with consideration given to the market price of the common shares, the nature of other investment opportunities, cash flows from operations, general economic conditions and other relevant considerations.  Repurchases may be made on the open market or through privately negotiated transactions.

Shares repurchased in FY24 totaled 27,514 shares at a cost of $0.3 million, leaving $5.0 million remaining under the share repurchase program at January 31, 2024.  The share repurchase program has no expiration date but may be terminated by the Board of Directors at any time.

Capital Expenditures. Our capital expenditures for FY24 of $2.1 million principally relate to our capital purchases for our manufacturing facilities in Vietnam and Mexico.  We anticipate FY25 capital expenditures to be approximately $3.0 million to replace existing equipment in the normal course of operations and expand our fire services products manufacturing capabilities.  We expect to fund the capital expenditures from our cash flow from operations.

Recently Adopted and Recently Issued Accounting Standards

Income Taxes

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This guidance requires a public entity to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if the items meet a quantitative threshold. The guidance also requires all entities to disclose annually income taxes paid (net of refunds received) disaggregated by federal (national), state and foreign taxes and to disaggregate the information by jurisdiction based on a quantitative threshold. This guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted, and this guidance should be applied prospectively but there is the option to apply it retrospectively. The Company plans to adopt the provisions of this guidance in conjunction with our Form 10-K for our fiscal year ending January 31, 2026.

Segment Reporting

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This guidance requires a public entity to disclose for each reportable segment, on an interim and annual basis, the significant expense categories and amounts that are regularly provided to the chief operating decision-maker (“CODM”) and included in each reported measure of a segment’s profit or loss. Additionally, it requires a public entity to disclose the title and position of the individual or the name of the group or committee identified as the CODM. This guidance is effective for fiscal years beginning after December 31, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted and the guidance should be applied retrospectively to all periods presented in the financial statements, unless it is impracticable. The Company plans to adopt the provisions of this guidance in conjunction with our Form 10-K for the fiscal year ending January 31, 2025.

OECD and Pillar Two

In 2021, the Organization for Economic Cooperation and Development (OECD) announced an Inclusive Framework on Base Erosion and Profit Shifting including Pillar Two Model Rules defining the global minimum tax, which calls for the taxation of large multinational corporations at a minimum rate of 15%. Subsequently multiple sets of administrative guidance have been issued. Many non-U.S. tax jurisdictions have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in 2024 with the adoption of additional components in later years or announced their plans to enact legislation in future years. Although we expect increased tax compliance efforts as a result of new legislation, we do not expect Pillar Two to have a significant impact on our effective tax rate or our consolidated results of operations, financial position and cash flows.

ITEM 7. 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 10-K, (a) “FY” means fiscal year; thus for example, FY23 refers to the fiscal year ended January 31, 2023 and (b) “Q” refers to a quarter; thus, for example, Q4 FY23 refers to the fourth quarter of the fiscal year ended January 31, 2023.

Overview

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

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

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. During FY23, the Company was impacted by tariff costs on certain products imported from China. The Company has been able to pass along a portion of these costs to its customers. We added manufacturing operations in Vietnam and India in fiscal 2019 to offset increasing manufacturing costs in China and further diversify our manufacturing capabilities. 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 $63.9 million and $70.8 million for the fiscal years ended January 31, 2023 and 2022, respectively.

On December 2, 2022, we acquired UK-based Eagle Technical Products Limited (“Eagle”) in an all-cash transaction valued at approximately $10.5 million subject to post-closing adjustments and potential future earnout payments. The acquisition enhances Lakeland’s product portfolio, particularly within fire service protective clothing and expands its sales presence in the Middle East and Europe.  Headquartered in Manchester, UK, Eagle is a leading designer and provider of protective apparel to the fire and industrial sectors. Eagle provides differentiated product offerings through its innovative and technical solutions.

The cost to manufacture and distribute our products is influenced by the cost of raw materials, finished goods, labor, and transportation. During FY23, we have experienced continued inflationary pressure and higher costs as a result of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs associated with the normal course of business. The increase in cost of raw materials and finished goods are due in part to a shortage in the availability of certain products, the higher cost of shipping, and inflation. We can only pass elevated costs onto customers in an effort to offset inflationary pressures on a limited basis. Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results.

Impact of Russia’s Invasion of Ukraine on Our Business

The current conflict between Russia and Ukraine is creating substantial uncertainty about the role Russia will play in the global economy in the future. Although the length, impact and outcome of the ongoing military conflict between Russia and Ukraine is highly unpredictable, this conflict could lead to significant market and other disruptions. The escalation or continuation of this conflict presents heightened risks and has resulted and could continue to result in volatile commodity markets, supply chain disruptions, increased risk of cyber incidents or other disruptions to information systems, heightened risks to employee safety, significant volatility of the Russian ruble, limitations on access to credit markets, increased operating costs (including fuel and other input costs), the frequency and volume of failures to settle securities transactions, inflation, potential for increased volatility in commodity, currency and other financial markets, safety risks, and restrictions on the transfer of funds to and from Russia. We cannot predict how and the extent to which the conflict will affect our customers, operations or business partners or the demand for our products and our global business. Depending on the actions we take or are required to take, the ongoing conflict could also result in loss of cash, assets or impairment charges. Additionally, we may also face negative publicity and reputational risk based on the actions we take or are required to take as a result of the conflict, which could damage our brand image or corporate reputation. We are continually monitoring the potential financial impact of the Russian invasion of Ukraine on our operations.

Our business in Russia accounted for approximately 2.4% and 2.5% of our consolidated net revenues and 1.9% and 3.0% of our net income for the years ended January 31, 2023 and 2022, respectively. Our assets in Russia were approximately 2.5% and 2.1% of our consolidated assets at January 31, 2023 and 2022, respectively. The net book value of our assets in Russia at January 31, 2023 was approximately $3.5 million of which $1.3 million is cash. We currently have not recognized any impairment charges related to the assets of our Russian business. However, the extent, severity, duration and outcome of the conflict between Russia and Ukraine and related sanctions could potentially impact the value of our assets in Russia as the conflict continues. Our Russian business is part of our Other Foreign segment.

Our sales into Ukraine were not significant.

COVID-19

The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantine and shelter-in-place orders. The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. The COVID-19 pandemic and the measures taken by many countries in response have affected and could in the future materially impact the Company’s business, results of operations and financial condition.

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

Critical Accounting Policies and Estimates

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 FY23 and FY22 aggregated approximately $3.2 million and $2.9 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.

Inventories. Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out or moving average basis) or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and supply on-hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In FY23 we recorded approximately $1.3 million in write-downs of inventory and $0.6 million in inventory adjustments in FY22.

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. In FY23 and FY22, we recorded a valuation allowance of approximately $0.4 million and $0.8 million, respectively.

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.

Business combinations. In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets, tangible long-lived assets, and contingent consideration. Acquired intangible assets, excluding goodwill, are valued using certain discounted cash flow methodologies based on future cash flows specific to the type of intangible asset purchased. Several significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, discount rates, attrition rates and working capital changes.

If the contingent consideration is deemed significant or absent an agreed upon payout amount, the initial measurement of contingent consideration and the corresponding liability is evaluated using the Monte Carlo Method. For this valuation method, management develops projections during the contingent consideration period utilizing various potential pay-out scenarios. Probabilities are applied to each potential scenario and the resulting values are discounted using a rate that considers weighted average cost of capital as well as a specific risk premium associated with the riskiness of the contingent consideration itself, the related projections, and the overall business. Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in our operating results.

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

Net Income Per Share. 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, 2023, as Compared to January 31, 2022

Cash decreased by $28.1 million, primarily as a result of $5.5 million of cash used in operations coupled with $5.4 million in share repurchases, $10.5 million for the acquisition of Eagle, $3.1 million in equity investment and $2.0 million in capital improvements.  Operating cash flow changes were driven by an increase in accounts receivable of $2.3 million due to timing of collections, increased sales in Q4 FY23 over Q4 FY22 and the acquisition of Eagle in December FY23.  Excluding inventory acquired from Eagle, inventory increased $9.7 million driven by investment in inventory to reduce the impact on our supply chain of a global slowdown in freight deliveries.

The Company has made strategic investments of $6.1 million in Inova Design Solutions Ltd. (doing business as Bodytrak®) as a groundbreaking step toward entering the Connected Worker Market for “Smart PPE.” Bodytrak’s unique ear-based sensor platform uses precise physiological measurements and cloud-based analytics to automate health, safety and performance monitoring, making it an ideal complement to Lakeland’s portfolio of industrial protective solutions.

Results of Operations

The following tables set forth our external sales by our product lines, and geographic regions and our historical results of continuing operations as a percentage of our net sales from operations, for the years and three-months ended January 31, 2023 and 2022.

Net Sales. Net sales decreased to $112.8 million for the year ended January 31, 2023 compared to $118.4 million for the year ended January 31, 2022, a decrease of $5.6 million. Sales in the U.S. increased $1.4 million or 2.9%, primarily due to increases in sales of fire gear coupled with improvements in direct container sales. Sales to the Asian market decreased by $5.1 million or 17.1% due to the impacts of COVID-19 on demand, including shutdowns in China and the absence of typical year-end stocking ahead of the Chinese New Year due to the country’s “Zero COVID Policy.”  Sales to the European market decreased by $2.0 million or 19.4%, driven by reduced demand across Europe and a stronger dollar impact offset by Eagle sales of $1.3 million in Q4 FY23.  Canada sales increased by $0.9 million or 11.0% due to improvements in the industrial markets. Latin America sales decreased $0.5 million or 4.4% due to weaker local currency, primarily the Argentine peso.  Sales into the Mexican market decreased by $0.4 million or 9.8%, driven by weaker industrial demand at the beginning of FY23.  Sales of our disposable and chemical product line were impacted due to a reduction in COVID-19 demand, primarily in Asia and uneven demand from our industrial markets. Other product lines, such as fire, high performance, and wovens, increased by $8.7 million due to strengthening demand in those markets and the impact of Eagle’s sales during the last two months of our fiscal year.  Sales were affected by customers over-ordering in prior periods, resulting in excess channel inventories and shipping delays with ocean freight carriers.

Gross Profit. Gross profit decreased $5.1 million, or 10.0%, to $45.8 million for the year ended January 31, 2023, from $50.9 million for the year ended January 31, 2022. Gross profit as a percentage of net sales decreased to 40.6% for the year ended January 31, 2023 from 43.0% for the year ended January 31, 2022. Gross profit performance in FY22 benefited from higher volumes including direct container shipments, related factory utilization and an improving product mix with pricing power. Major factors driving the decline in gross margins in FY23, were:

Operating Expense.  Operating expenses increased 15.6% from $34.9 million for the year ended January 31, 2022 to $40.3 million for the year ended January 31, 2023. Operating expenses as a percentage of net sales were 35.7% for the year ended January 31, 2023, as compared to 29.5% for the year ended January 31, 2022.  Operating expenses increased primarily due to increases in currency translation expense of $1.9 million, acquisition costs associated with the Eagle transaction of $0.6 million, restructuring costs of $0.4 million, increased outbound freight of $0.3 million, administrative costs associated with the start-up of the Monterrey, Mexico facility of $0.2 million,  and increases in professional expenses, primarily legal and accounting, to support future initiatives.

Operating Profit. Operating profit decreased to $5.5 million for the year ended January 31, 2023, from $16.0 million for the year ended January 31, 2022, due to the impacts detailed above. Operating margin decreased to 4.9% for the year ended January 31, 2023, compared to 13.6% for the year ended January 31, 2022.

Interest Expense. Interest expenses was less than $0.1 million for the year ended January 31, 2023 compared to $0.1 million for the year ended January 31, 2022. The Company did not drawdown any of its available line of credit during FY23.

Income Tax Expense. Income tax expense consists of federal, state and foreign income taxes. Income tax expense was $3.6 million and included $0.2 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2023, as compared to an income tax expense of $4.8 million and included $0.7 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2022. All international subsidiaries impacted the GILTI component of income tax expense. The Company changed its permanent reinvestment assertions for its Chinese operations during the second quarter due to increased volatility of the Chinese yuan and an updated evaluation of investment strategies. The Company recorded $2.0 million in withholding taxes for a planned repatriation during FY23.

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

Fourth Quarter Results

Net sales and net income were $29.0 million and $0.6 million, respectively, for Q4 FY23, as compared to $26.8 million and $0.5 million, respectively, for Q4 FY22.

Factors affecting Q4 FY23 results of operations included:

Liquidity and Capital Resources

At January 31, 2023, cash and cash equivalents were approximately $24.6 million and working capital was approximately $87.0 million. Cash and cash equivalents decreased $28.1 million and working capital decreased $21.6 million from January 31, 2022 reflecting the impact of the Company’s purchase of Eagle, additional investment in Bodytrak and stock repurchases.

Of the Company’s total cash and cash equivalents of $24.6 million as of January 31, 2023, cash held in Latin America of $1.8 million, cash held in Hong Kong of $0.7 million, cash held in the UK of $2.4 million, cash held in Vietnam of $0.8 million, cash held in India of $0.7 million and cash held in Canada of $1.0 million would not be subject to additional US tax in the event such cash was repatriated due to the change in the U.S. tax law as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”). The Company monitors its financial depositories by their credit rating which varies by country. In addition, cash balances in banks in the United States are insured by the FDIC subject to certain limitations. There was approximately $1.3 million total included in the U.S. bank accounts and approximately $23.5 million total in foreign bank accounts as of January 31, 2023, of which $24.1 million was uninsured. These balances could be impacted if one or more of the financial institutions with which the Company deposits its funds fails or is subject to other adverse conditions in the financial or credit markets. To date, the Company has experienced no loss of principal or lack of access to invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions that hold the Company’s cash and cash equivalents fail. See Part I, Item 1A. Risk Factors in this Annual Report on Form 10-K under the caption “Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition or results of operations.”

The Company strategically employs an intercompany dividend plan subject to subsidiary profitability, cash requirements and withholding taxes.  During FY23 the Company changed its’ permanent reinvestment assertions for its Chinese operations due to increased volatility of the Chinese yuan and an updated evaluation of investment strategies.  During FY23 the Company’s subsidiaries in Canada, China and Hong Kong declared and paid dividends of $1.0 million, $12.5 million and $2.0 million.  Withholding taxes totaling $2.0 million are included in income tax expense.

Net cash used in operating activities of $5.5 million for the year ended January 31, 2023 was primarily due to an increase in net inventories of $9.7 million and an increase in accounts receivable of $2.3 million due to stronger Q4 FY23 sales, partially offset by non-cash expenses of $3.6 million for deferred taxes, depreciation and amortization, and stock compensation.  Net cash used in investing activities of $16.5 million for the year ended January 31, 2023 includes the $10.5 million Eagle acquisition and reflects the Company’s $3.1 million investment in Bodytrak®.  Purchases of property and equipment were $2.0 million as the Company increased capital expenditures in the year for the ERP project and equipment purchases in Mexico and Vietnam.  Net cash used in financing activities was $5.9 million for the year ended January 31, 2023 primarily due to the purchase of $5.4 million of our common stock.

Net cash provided by operating activities of $12.8 million for the year ended January 31, 2022 was primarily due to net income of $11.4 million, non-cash expenses of $4.3 million for deferred taxes, depreciation and amortization, and stock compensation, and a decrease in accounts receivable due to lower sales activity of $6.7 million offset by an increase in net inventories of $4.4 million and a decrease in accounts payable, accrued expenses and other liabilities of $5.2 million due to lower sales volume.  Net cash used in investing activities of $3.6 million for the year ended January 31, 2022 reflects the Company’s $2.8 million investment in Bodytrak® as a groundbreaking step toward entering the Connected Worker Market for “Smart PPE.”  Purchases in property and equipment were $0.8 million as the Company made capital expenditures in the year for the ERP project, leasehold improvements for our new corporate headquarters, and equipment purchases in Mexico and China.  Net cash used in financing activities was $9.8 million for the year ended January 31, 2022 due to the purchase of $9.2 million of our common stock.

On June 25, 2020, we entered into a Loan Agreement (the “Loan Agreement”) with Bank of America (“Lender”). The Loan Agreement provides the Company with a secured $12.5 million revolving credit facility, which includes a $5.0 million letter of credit sub-facility. 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 $17.5 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. The credit facility will mature on June 25, 2025. Borrowings under the revolving credit facility bear interest at a rate per annum equal to the sum of the 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 the LIBOR to the Secured Overnight Financing Rate (“SOFR”). All outstanding principal and unpaid accrued interest under the revolving credit facility is due and payable on the maturity date. On a one-time basis, and subject to there not existing an event of default, the Company may elect to convert up to $5.0 million of the then outstanding principal of the revolving credit facility to a term loan facility with an assumed amortization of 15 years and the same interest rate and maturity date as the revolving credit facility. The Loan Agreement provides for an annual unused line of credit commitment fee, payable quarterly, of 0.25%, based on the difference between the total credit line commitment and the average daily amount of credit outstanding under the facility during the preceding quarter.

On June 18, 2021, the Company entered into an Amendment No. 1 to Loan Agreement (the “Amendment”) with the Lender, which modifies certain terms of the Company’s existing Loan Agreement with the Lender. The Amendment increases the credit limit under the Loan Agreement’s senior secured revolving credit facility from $12.5 million to $25.0 million. The Amendment also amends the covenant in the Loan Agreement that restricts acquisitions by the Company or its subsidiaries in order to allow, without the prior consent of the Lender, acquisitions of a business or its assets if there is no default under the Loan Agreement and the aggregate consideration does not exceed $7.5 million for any individual acquisition or $15.0 million on a cumulative basis for all such acquisitions.

The Loan Agreement requires the Company to maintain a Funded Debt to EBITDA (as each such term is defined in the Loan Agreement) ratio of 3.0 to 1.0 or less and a Basic Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of at least 1.15 to 1.0. The Loan Agreement also contains customary covenants, including covenants that, among other things, limit or restrict the Company’s and/or the Company’s subsidiaries ability, subject to certain exceptions and qualifications, to incur liens or indebtedness, or merge, consolidate or sell or otherwise transfer assets. The Company was in compliance with all of its debt covenants as of January 31, 2023. As of January 31, 2023, the Company had no borrowings under the Loan Agreement, and there was $25 million of additional available credit under the Loan Agreement.

We believe that 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 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.

Stock Repurchase Program. On February 17, 2021, the Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $5 million of its outstanding common stock. On July 6, 2021, the Board of Directors authorized an increase in the Company’s stock repurchase program under which the Company may repurchase up to an additional $5 million of its outstanding common stock.   On April 7, 2022, the Board of Directors authorized a new stock repurchase program under which the Company may repurchase up to $5 million of its outstanding common stock which became effective upon the completion of the prior share repurchase program.  On December 1, 2022, the Board of Directors authorized an increase in the Company’s stock repurchase program, under which the Company may repurchase up to an additional $5 million of its outstanding common stock.

Shares repurchased in FY23 totaled 390,989 shares at a cost of $5.4 million leaving $5.4 million remaining under the share repurchase program at January 31, 2023. The share repurchase program has no expiration date but may be terminated by the Board of Directors at any time.

On February 1, 2023, the Board of Directors declared a quarterly cash dividend as part of the initiation of a recurring quarterly dividend program. The initial quarterly dividend of $0.03 per share was paid on February 22, 2023, to stockholders of record as of February 15, 2023.

Capital Expenditures. Our capital expenditures for FY23 of $2.0 million principally relate to our capital purchases for our manufacturing facilities in Vietnam, the enhancement of IT infrastructure, and equipment purchases supporting the new manufacturing facility under development in Monterey, Mexico. We anticipate FY24 capital expenditures to be approximately $3.0 million as we continue to deploy our ERP solution globally, complete the new manufacturing facility in Monterrey, Mexico, and replace existing equipment in the normal course of operations. We expect to fund the capital expenditures from our cash flow from operations.

Recently Adopted and Recently Issued Accounting Standards

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

You should read the following summary together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this Form 10-K and in the documents that we incorporate by reference into this Form 10-K. 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 10-K, (a) “FY” means fiscal year; thus for example, FY22 refers to the fiscal year ended January 31, 2022 and (b) “Q” refers to a quarter; thus, for example, Q4 FY22 refers to the fourth quarter of the fiscal year ended January 31, 2022.

Revision of Prior Period Financial Statements

In connection with the preparation of the consolidated financial statements for the fiscal year ended January 31, 2022, the Company identified errors in its previously filed annual consolidated financial statements and unaudited quarterly consolidated financial statements. The errors were not material to any individual prior quarterly or annual period. For further details, refer to Note 1. Business and Summary of Significant Accounting Policies: Restatement For Correction of Immaterial Errors in Previously Issued Consolidated Financial Statements in our consolidated financial statements included in Part II. Item 8. of this Form 10-K. Accordingly, we have revised prior period financial results contained in this Form 10-K to correct the effect of these errors for the corresponding periods. Management’s discussion and analysis included herein is based on the revised financial results for the year ended January 31, 2021.

Overview

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

We are continually monitoring the potential financial impact of the Russian invasion of Ukraine on our operations. For FY22, sales in Russia were approximately 2.5% of our consolidated sales and sales into Ukraine were not significant.

We had net sales of $118.4 million in FY22 and $159.0 million in FY21.

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. We added manufacturing operations in Vietnam and India in fiscal 2019, 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 $70.8 million and $88.4 million for the fiscal years ended January 31, 2022 and 2021, respectively.

Response to COVID-19 Outbreak

Our strategy for responding to the COVID-19 outbreak evolved from prior “black swan” events. These events have been disruptive for the users of our products and contributed little in terms of sustainable business improvement or growth for the suppliers. Any business gains attributable to these events were limited to short-term increases in sales volume and price increases associated with capacity expansion and expedited deliveries. In responding to COVID-19 Lakeland sought a new approach. Throughout COVID-19 we focused our attention on our existing business, adding new customers, and increasing market penetration by prioritizing service to our existing industrial end users and seeking new customers who were experiencing supply shortages. We sought to service the COVID-19 market to the extent that Lakeland had excess capacity after servicing existing and new industrial customers. We believe that focusing on the industrial market first and the pandemic market second, is a sound strategy for increasing market penetration in a post COVID-19 environment. Even though we were successful in selling to more than 500 new distributors and end users, 75% of whom were outside of the U.S. market, excess pipeline inventory and freight delays have proven a significant headwind. We anticipate that excess inventory will decline steadily as intermittent surges in COVID-19 cases continue and that industrial growth will continue to improve internationally as we transition from an emergency COVID-19 response to a business environment where COVID-19 is a diminished, but persistent component of sales.

Our manufacturing flexibility allows us to rapidly shift capacity between product lines and alter our product offering so that we can maximize throughput of critical products. In the case of COVID-19 we shifted our sewing capacity heavily to disposable and chemical garments; increased daily working hours; and ran a 7-day work week until market supply caught up with demand. We rationalized our product offerings and eliminated SKUs that did not meet our profitability goals, did not create a competitive advantage or were detrimental to manufacturing efficiencies due to changes over time. Because we own our manufacturing facilities, Lakeland was able to make these changes within the first couple of months of the pandemic.

The last two weeks of FY20 and all of FY21 and FY22, were impacted by our COVID-19 response strategy. As the pandemic progressed in FY21, we saw reductions in industrial activity due to lockdowns and work restrictions that resulted in diminished sales into petrochemicals, the utility sector, and industrial segments like automotive and airlines. Our second and third quarters of FY21 were the peak quarters for Personal Protective Equipment (PPE) pandemic sales. In Q4 FY21 we began to see a softening in demand for COVID-19 related sales, and a return of general industrial demand that continued into Q4 FY22. As the COVID-19 pandemic wanes, demand for associated PPE is falling, but the decline is being offset in part by an increase in industrial activity and associated industrial demand for PPE. COVID-19 related demand was estimated to be approximately 30% to 35% of FY21 revenue and accounted for an estimated 15% of FY22 sales.

While we saw, and noted, an initial recovery in the industrial markets in the U.S. in FY22, we now believe that the strength of the  recovery was magnified by freight delays extending order leadtimes leading distributors and end users to place more orders  as industrial activity surged.  As these delayed shipments arrived throughout FY22, an excess of inventory was created in U.S. distribution channels.  As stated earlier, we believe that intermittent surges in COVID-19 cases and the subsequent high rates of hospitalizations in the U.S. will draw down this inventory as freight delays continue.  We believe that industrial activity in developed regions of the world is likely to continue to increase as vaccination levels increase and therapeutics improve, lessening reliance on shutdowns or lockdowns to control virus spread.  As stated previously, we believe that developing regions of the world that are less prepared and have less robust medical care, will be slower in industrial recovery.  We do not anticipate a slower industrial recovery in developing regions to negatively impact our growth potential primarily because the regional dispersion of our sales favors the developed regions of the world by a significant margin.

As noted above, as freight delayed orders arrived through late Q1 and the remainder of FY22, PPE manufacturing has caught up to current COVID-19 demand. Raw materials and finished goods pricing have declined from their pandemic-inflated levels, but increased freight costs and lack of availability of some precursors threaten to limit if not reverse the downward trend. Our future sales would be affected should there be an industry-wide shortage of necessary raw materials in the event of another rise or surge in COVID-19 cases, including any surges due to COVID-19 variants such as the delta or omicron variants. As previously noted, we did experience significant price increases for fabric during FY21 and managed our available manufacturing capacity to lower costs, and increased prices, to meet customer demand.

In FY22 we did not experience any significant manufacturing shutdowns or closures of any of our facilities due to COVID-19. Employee absence due to potential exposure or quarantine of the neighborhood in which they live is a persistent problem, but has not resulted in the shutdown of any facilities. We have not experienced any manufacturing capacity issues due to inability to source raw materials, government quarantine, or shelter-in-place orders, or due to COVID-19 outbreaks in any of our factories, however there can be no assurance that this will continue to be the case. In addition, we cannot predict any potential incremental cost that may be associated with any federal, state or local vaccine mandates or related testing protocol. While current economic indicators and industry data indicate an industrial market recovery, potential headwinds to revenue as we emerge from pandemic sales include the possibility of a recession and consumer stockpiled inventories that may temper demand within our regular markets in FY23.

While we have not experienced any raw materials shortages in our Asian manufacturing operations, we are experiencing some issues with U.S. sourced raw materials due to labor and precursor shortages affecting our higher margin product lines. In both Asia and the U.S., increasing labor and freight costs, as well as inflationary pressures threaten to drive raw material costs up and may negatively impact our gross margins. Where we can, we will seek to recover increased costs with corresponding price increases.

Additionally, we have experienced, along with most other companies across many industries, the macro-economic impact of a challenging employment environment related to hiring and retaining employees and wage inflation. We expect that these hiring, retention, and wage inflation challenges, as well as challenges related to maintaining our current workforce, will continue into FY23. These hiring, retention, and cost challenges may negatively affect our ability to grow our business and keep our best employees or increase our cost of operations.

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 FY22 and FY21 aggregated approximately $2.9 million and $3.9 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.

Inventories. Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out or moving average basis) or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and supply on-hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In FY22 and FY21, we recorded approximately $0.6 million in write-downs of inventory and $0.1 million in inventory adjustments in FY21.

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. In FY22 and FY21, we recorded a valuation allowance of approximately $0.8 million and $1.0 million, respectively.

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.

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, 2022, as Compared to January 31, 2021

Cash increased by $0.1 million, primarily as a result of $12.8 million of cash generated from operations offset by $9.2 million in share repurchases, $2.8 million in equity investment and $0.8 million in capital improvements.  Operating cashflow changes were driven by a decline in accounts receivable of $6.7 million due to collections and reduced revenue in FY22.  Inventory increased $4.4 million driven by investment in inventory to reduce the impact on our supply chain of a global slowdown in freight deliveries.  Accounts payable, accrued compensation, and other accrued expenses decreased $5.0 million due to a decrease in purchasing activity and lower variable compensation caused by lower sales and profitability in FY22.

On October 18, 2021, the Company made a strategic investment of $2.8 million in Inova Design Solutions Ltd. (doing business as Bodytrak®) as a groundbreaking step toward entering the Connected Worker Market for “Smart PPE.”   Bodytrak’s unique ear-based sensor platform uses precise physiological measurements and cloud-based analytics to automate health, safety and performance monitoring, making it an ideal complement to Lakeland’s portfolio of industrial protective solutions.

Results of Operations

The following tables set forth our external sales by our product lines, and geographic regions and our historical results of continuing operations as a percentage of our net sales from operations, for the years and three-months ended January 31, 2022 and 2021.

Net Sales. Net sales decreased to $118.4 million for the year ended January 31, 2022 compared to $159.0 million for the year ended January 31, 2021, a decrease of $40.6 million. Sales in the US decreased $23.0 million or 32.6% primarily due to decreases in the number of direct container shipments in the US, and lower sales driven by COVID-19 demand. Sales to the Asian market decreased by $1.4 million or 4.5% due to lower COVID-19 demand. Sales to the European market decreased by $6.5 million or 38.7% driven by reduced COVID-19 demand and inventory overhang at our customers. Canada sales decreased by $5.4 million or 39.7% due to lower direct container shipments. Latin America sales decreased $0.8 million or 6.6% due to lower COVID-19 demand. Sales into the Mexican market decreased $1.6 million or 28.1% driven by lower COVID-19 demand. Our other foreign markets accounted for $1.9 million of decreased sales or 21.1% due to lower COVID-19 demand. Sales of our disposable and chemical product line were impacted due to a reduction in direct container sales driven by COVID-19 demand and continued softness in demand from our industrial markets. Other product lines such as fire, high performance, and wovens, increased by $2.0 million due to strengthening demand in those markets. Sales were affected by customers over-ordering in prior periods, resulting in excess channel inventories, and shipping delays with ocean freight carriers.

Gross Profit. Gross profit decreased $28.4 million, or 35.8%, to $50.9 million for the year ended January 31, 2022, from $79.3 million for the year ended January 31, 2021. Gross profit as a percentage of net sales decreased to 43.0% for the year ended January 31, 2022 from 49.9% for the year ended January 31, 2021. Gross profit performance in FY 21 benefited from higher volumes including direct container shipments, related factory utilization and an improving product mix with pricing power. Major factors driving the decline in gross margins in FY22, were:

Operating Expense.  Operating expenses decreased 1.4% from $35.4 million for the year ended January 31, 2021 to $34.9 million for the year ended January 31, 2022. Operating expenses as a percentage of net sales was 29.5% for the year ended January 31, 2022, as compared to 22.3% for the year ended January 31, 2021.  Operating expenses were down primarily due to reductions in sales compensation due to lower sales freight out expenses, and currency translation offset by increases in administrative salaries for new staff and technology expenses..

Operating Profit. Operating profit decreased to $16.0 million for the year ended January 31, 2022,  from $43.8 million for the year ended January 31, 2021, due to the impacts detailed above. Operating margin decreased to 13.6% for the year ended January 31, 2022, compared to 27.6% for the year ended January 31, 2021.

Interest Expense. Interest expenses was less than $0.1 million for the year ended January 31, 2022 compared to $0.1 million for the year ended January 31, 2021. The Company did not drawdown any of its available line of credit during FY22.

Income Tax Expense. Income tax expense consists of federal, state and foreign income taxes. Income tax expense was $4.8 million and included $0.7 million associated with the GILTI component of the Tax Act of 2017 for the year ended January 31, 2022, as compared to an income tax expense of $8.5 million,  including $1.9 million associated with the GILTI component, for the year ended January 31, 2021. All international subsidiaries impacted the GILTI component of income tax expense.

Net Income.  Net income decreased to $11.4 million for the year ended January 31, 2022 from $35.3 million for the year ended January 31, 2021.

Fourth Quarter Results

Net sales and net income were $26.8 million and $0.5 million, respectively, for Q4 FY22, as compared to $36.9 million and $7.7 million, respectively, for Q4 FY21.

Factors affecting Q4 FY22 results of operations included:

Liquidity and Capital Resources

At January 31, 2022, cash and cash equivalents were approximately $52.7 million and working capital was approximately $108.9 million. Cash and cash equivalents increased $0.1 million and working capital increased $1.7 million from January 31, 2021 reflecting positive earnings and the Company’s focus on working capital efficiencies.

Of the Company’s total cash and cash equivalents of $52.7 million as of January 31, 2022, cash held in Latin America of $1.9 million, cash held in Hong Kong of $2.1 million, cash held in the UK of $1.0 million, cash held in Vietnam of $1.1 million, cash held in India of $0.9 million and cash held in Canada of $1.4 million would not be subject to additional US tax in the event such cash was repatriated due to the change in the US tax law as a result of the 2017 Tax Cuts and Jobs Act (the “Tax Act”). In the event the Company repatriated cash from China, of the $30.0 million balance at January 31, 2022 there would be an additional 10% withholding tax incurred in that country. The Company strategically employs a dividend plan subject to subsidiary profitability, cash requirements and withholding taxes. During FY22 the Company’s subsidiaries in Canada, Uruguay and Hong Kong declared and paid dividends of $2.6 million, $1.0 million and $4.4 million. Withholding taxes totaling $0.2 million are included in income tax expense. No dividends were proposed by management or declared by our Board of Directors for our China subsidiary in FY22 or FY21.

Net cash provided by operating activities of $12.8 million for the year ended January 31, 2022 was primarily due to net income of $11.4 million, non-cash expenses of $4.3 million for deferred taxes, depreciation and amortization, and stock compensation, and decrease in accounts receivable due to lower sales activity of $6.7 million offset by increase in net inventories of $4.4 million and a decrease in accounts payable, accrued expenses and other liabilities of $5.2 million due to lower sales volume. Net cash used in investing activities of $3.6 million for the year ended January 31, 2022 reflects the Company’s $2.8 million investment in Bodytrak®) as a groundbreaking step toward entering the Connected Worker Market for “Smart PPE.” Purchases in property and equipment were $0.8 million as the Company optimized capital expenditures in the year for the ERP project, leasehold improvements for our new corporate headquarters, and equipment purchases in Mexico and China. Net cash used in financing activities was $9.8 million for the year ended January 31, 2022 due to the purchase of $9.2 million of our common stock.

Net cash provided by operating activities of $40.7 million for the year ended January 31, 2021 was primarily due to net income of $35.3 million, non-cash expenses of $6.8 million for deferred taxes, depreciation and amortization, and stock compensation, decrease in net inventories of $0.8 million and an increase in accounts payable, accrued expenses and other liabilities of $3.5 million, offset in part by a $4.0 million increase to accounts receivable due to a higher sales volumes in the fourth quarter as compared to prior year and an increase in other current assets of $1.7 million due to an increase in amounts due from HSBC under the UK factoring agreement. Net cash used in investing activities of $1.7 million for the year ended January 31, 2021 reflects purchases in property and equipment as the Company optimized capital expenditures in the year for the ERP project, the set-up of manufacturing facilities in Vietnam and India, the enhancement of IT infrastructure, and equipment purchases in Mexico and China. Net cash used in financing activities was $1.3 million for the year ended January 31, 2021, primarily due to the repayment of $1.2 million term loan with SunTrust Bank as part of the transition to the new Loan Agreement with Bank of America.

On June 25, 2020, we entered into a Loan Agreement (the “Loan Agreement”) with Bank of America (“Lender”). The Loan Agreement provides the Company with a secured $12.5 million revolving credit facility, which includes a $5.0 million letter of credit sub-facility. 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 $17.5 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. The credit facility will mature on June 25, 2025. Borrowings under the revolving credit facility bear interest at a rate per annum equal to the sum of the LIBOR Daily Floating Rate (“LIBOR”), plus 125 basis points. LIBOR is subject to a floor of 100 basis points. 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 18, 2021, the Company entered into an Amendment No. 1 to Loan Agreement (the “Amendment”) with the Lender, which modifies certain terms of the Company’s existing Loan Agreement with the Lender. The Amendment increases the credit limit under the Loan Agreement’s senior secured revolving credit facility from $12.5 million to $25.0 million. The Amendment also amends the covenant in the Loan Agreement that restricts acquisitions by the Company or its subsidiaries in order to allow, without the prior consent of the Lender, acquisitions of a business or its assets if there is no default under the Loan Agreement and the aggregate consideration does not exceed $7.5 million for any individual acquisition or $15.0 million on a cumulative basis for all such acquisitions.

The Loan Agreement requires the Company to maintain a Funded Debt to EBITDA (as each such term is defined in the Loan Agreement) ratio of 3.0 to 1.0 or less and a Basic Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of at least 1.15 to 1.0. The Loan Agreement also contains customary covenants, including covenants that, among other things, limit or restrict the Company’s and/or the Company’s subsidiaries ability, subject to certain exceptions and qualifications, to incur liens or indebtedness, or merge, consolidate or sell or otherwise transfer assets. The Company was in compliance with all of its debt covenants as of January 31, 2022. As of January 31, 2022, the Company had no borrowings under the Loan Agreement, and there was $25 million of additional available credit under the Loan Agreement.

We believe that 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 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.

Stock Repurchase Program. On February 17, 2021, the Company’s Board of Directors approved a stock repurchase program under which the Company may repurchase up to $5 million of its outstanding common stock. On July 6, 2021, the Board of Directors authorized an increase in the Company’s current stock repurchase program under which the Company may repurchase up to an additional $5 million of its outstanding common stock (the “Existing Share Repurchase Program”). Shares repurchased in FY22 totaled 430,463 shares at a cost of $9.2 million leaving $0.8 million remaining under the Existing Share Repurcahse Program at January 31, 2022.

On April 7, 2022, the Board of Directors authorized a new stock repurchase program under which the Company may repurchase up to $5 million of its outstanding common stock (the “New Share Repurchase Program”). The New Share Repurchase Program will become effective upon the completion of the Existing Share Repurchase Program, which has approximately $800,000 remaining for repurchases as of April 21, 2022. The New Share Repurchase Program has no expiration date but may be terminated by the Board of Directors at any time.

Capital Expenditures. Our capital expenditures for FY22 of $0.8 million principally relate to capital purchases for our manufacturing facilities in Vietnam and India, the enhancement of IT infrastructure, and equipment purchases in Mexico and the US. We anticipate FY23 capital expenditures to be approximately $3.0 million as we continue to deploy our ERP solution globally, invest in strategic capacity expansion, and replace existing equipment in the normal course of operations. We expect to fund the capital expenditures from our cash flow from operations.

Recent Accounting Pronouncements

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