Management's Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following summary together with the more detailed business
information and consolidated financial statements and related notes that appear
elsewhere in this Form 10-K and in the documents that we incorporate by
reference into this Form 10-K. This document may contain certain
"forward-looking" information within the meaning of the Private Securities
Litigation Reform Act of 1995. This information involves risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. In this Form 1-K, (a) "FY" means
fiscal year; thus for example, FY21 refers to the fiscal year ended January 31,
2021 and (b) "Q" refers to a quarter; thus, for example, Q4 FY21 refers to the
fourth quarter of the fiscal year ended January 31, 2021.
Overview; Response to COVID-19 Outbreak
We manufacture and sell a comprehensive line of industrial protective clothing
and accessories for the industrial and public protective clothing market. Our
products are sold globally by our in-house sales teams, our customer service
group, and authorized independent sales representatives to a network of over
1,600 global safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil, chemical/petrochemical,
automobile, steel, glass, construction, smelting, cleanroom, janitorial,
pharmaceutical, and high technology electronics manufacturers, as well as
scientific, medical laboratories and the utilities industry. In addition, we
supply federal, state and local governmental agencies and departments, such as
fire and law enforcement, airport crash rescue units, the Department of Defense,
the Department of Homeland Security and the Centers for Disease Control.
Internationally, we sell to a mixture of end users directly, and to industrial
distributors depending on the particular country and market. In addition to the
United States, sales are made to more than 50 foreign countries, the majority of
which were into China, the European Economic Community ("EEC"), Canada, Chile,
Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador, India and Southeast
Asia.
In FY21 we had net sales of $159.0 million and $107.8 million in FY20.
We have operated facilities in Mexico since 1995 and in China since 1996.
Beginning in 1995, we moved the labor intensive sewing operation for our limited
use/disposable protective clothing lines to these facilities. Our facilities and
capabilities in China and Mexico allow access to a less expensive labor pool
than is available in the United States and permit us to purchase certain raw
materials at a lower cost than they are available domestically. More recently we
have added manufacturing operations in Vietnam and India to offset increasing
manufacturing costs in China and further diversify our manufacturing
capabilities. Our China operations will continue primarily manufacturing for the
Chinese market and other markets where duty advantages exist. Manufacturing
expansion is not only necessary to control rising costs, it is also necessary
for Lakeland to achieve its growth objectives.
Our net sales attributable to customers outside the United States were $88.4
million and $51.9 million for the fiscal years ended January 31, 2021 and 2020,
respectively.
The last two weeks of FY20 and all of FY21 were dominated by response to the
COVID 19 outbreak. The virus' progression into a global pandemic will likely
continue to impact our business into the first half of FY22. We experienced a
drop in COVID 19 demand in Q4 FY21 that will continue into Q2 FY22, when
vaccines become more widely available. As COVID 19 demand, currently estimated
at approximately 30% to 35% of revenue decreases, we anticipate a continuation
of an increase in our core businesses (industrial) that began in Q2 FY21 and
continued through Q4 FY21. The negative impact of lock downs and stay at home
orders peaked in Q2 FY21 with core business sales down by approximately 25%.
Through the second half of Q2 FY21 and through Q4 FY21 our core business sales
have been recovering steadily. Based on recent, third quarter U.S. GDP Growth of
33.1%; November 2020 manufacturing Purchasing Manager Index of 57.5%, up from
56.0% at August 2020, and our increased market penetration and new customers, we
expect our core business sales to recover fully and continue to grow through
FY22. We anticipate that COVID 19 related sales will continue for the first half
of FY22, however not at the levels experienced in FY21 as demand for immediate
use diminishes and give way to stockpiling demand and increased core business
sales.
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At present, raw materials supply appears to have caught up with demand, albeit
at prices well above pre-COVID-19 pricing. We anticipate raw material pricing to
continue at inflated levels into FY22.Our future sales would be affected should
there be an industry-wide shortage of necessary raw materials in the event of
another rise or surge in COVID-19 cases. As noted, we did experience significant
price increases for fabric during FY21 and managed our available manufacturing
capacity to lower costs, and increase prices, to meet customer demand at these
higher prices. With the exception of our India export manufacturing operation,
which did not qualify for "essential status" due to its export only restrictions
we have not experienced any manufacturing capacity issues due to inability to
source raw materials, government quarantine, or shelter-in-place orders, or due
to COVID-19 outbreaks in any of our factories, however there can be no assurance
that this will continue to be the case. While leading economic indicators
indicate a relatively robust industrial market recovery, potential headwinds to
revenue as we emerge from pandemic sales include the possibility of a recession
and consumer stockpiled inventories, as well as a decline in our oil and gas
industrial sector that may temper demand within our regular markets in the
second half of FY21.
Reference is made to "Risk Factors" in Part I, Item 1A, of this Annual Report on
Form 10-K for the fiscal year ended January 31, 2021. Offsetting these risks are
changes to our sales environment, as a result of COVID-19, that we believe
represent considerable upside to sales. We believe that once the pandemic
subsides, there will be continued demand establishing PPE stockpiles for the
long-term. This stockpiling will be filled in part by inventory that is in the
distribution channels as the pandemic ends. When specific governments will issue
RFQs for additional product is unknown, but some RFQs are already pending
release; others are expected to be released over the next several months.
Additionally, we believe the private sector will also engage in stockpiling of
PPE as supply channels catch up to demand. And finally, we are seeing the
emergence of institutional cleaning as a new market segment as countries and
states reopen and seek to prevent further infections. For these reasons we are
maximizing our manufacturing capacity in the near-term and evaluating expansion
opportunities to allow us to further increase our industrial market penetration
as our competitors abandon their industrial customers as they seek to maximize
COVID-19 related sales. This strategy combined with new product development,
manufacturing expansion, and the addition of key senior personnel also serves to
prepare us for any economic slowdown that may occur as COVID-19 business ends
and our industry transitions to a more traditional product mix.
Lakeland's strategy for response to these "black swan" events is to remain
focused on our long term growth strategies and tailor our response to these
events so as to accelerate our strategic plans. We believe that focusing on our
long-term growth strategy is also a solid strategy for minimizing the impact of
any post-pandemic recession. In this particular case, our long-term strategy for
revenue and margin improvement is to increase market penetration into markets
that use higher value, higher margin products, that are recession resistant. Our
manufacturing flexibility allows the Company to maximize the manufacture of
disposable and chemical garments without degrading its ability to supply higher
end, flame resistant and arc flash resistant garments. In order to maximize our
response to pandemic demand, we have increased the daily working hours for our
disposables and chemical manufacturing product lines, and we have significantly
reduced the number of SKUs in these product lines in order to maximize
efficiencies. This will have the effect of increasing throughput and reducing
manufacturing costs to help mitigate any raw materials prices increases.
Additionally, by focusing on a few core styles, we believe we can minimize the
impact on inventory of any production over run when the pandemic subsides. SKU
reduction also affords Lakeland the opportunity to discontinue any styles that
have ceased being profitable due to pricing or sales volume We are not deviating
from our growth strategy, rather we are looking to utilize the short-term,
increased demand as a catalyst to accelerate attainment of growth objectives.
Having successfully implemented the above strategy, as evidenced by
significantly increased market penetration in international markets, the
addition of new customers accounting for additional sales of approximately $10
million, and realizing efficiency gains that we intend to make permanent, we are
now focused on adding human and IT resources required to accelerate our growth
rate in a post-COVID-19 environment. We believe that we will emerge from FY21 a
full year ahead of our pre-COVID-19 growth plan, and we are committed to
leveraging our position to accelerate growth in Critical Environment Markets
such as pharmaceutical cleanrooms, isolation gowns, and Chemo-gowns; the
Electric Utility Market; and to continue improving efficiencies by rationalizing
our product offering in non-Covid product lines. To do this we will be acquiring
additional senior and middle managers with specific skills in Sales and
Marketing, Quality Control, Supply Chain Management, and Industrial Engineering.
These personnel will facilitate future manufacturing expansion.by assuring that
we have the skill sets necessary to meet our growth targets.
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The personal protective equipment market continues to grow worldwide at an
estimated rate of 7.0% to 7.5%, prior to the COVID-19 pandemic, as developing
countries increasingly adopt protection standards similar to those of North
America and Europe, and standards in more mature markets become more stringent,
cover more workers, and more hazards. This growth rate will likely be impacted
by the COVID-19 pandemic and resultant post-pandemic economic conditions,
however these fundamental growth drivers will remain in place. Management
believes Lakeland is uniquely positioned to take advantage of these trends with
its presence in many major and high growth potential markets worldwide. However,
management also understands that significant investment in these markets in
terms of sales personnel, sales collateral and improved distribution (local
warehousing) is required for the Company to realize its goals for growth in
revenue and income as many of these markets become more competitive.
In order to promote future improvements in operating income, cash availability,
and business outlook, the Company made multiple investments in operations and
organizational expansion. Additional personnel in sales and marketing have been
hired worldwide in order to increase penetration in existing markets and pursue
new sales channels. On February 1, 2020, we relocated our corporate offices from
New York to our Decatur, AL facility where we have hired additional personnel to
improve centralized planning, finance, and IT support throughout the
organization. New equipment has been purchased to increase manufacturing
capacity and efficiency as well as to replace older equipment. New manufacturing
facilities in Vietnam and India commenced production in FY19 and continued to
add capacity until the latter half of FY20 when inventory levels necessitated
curtailment. Curtailment of these operations was ended at all facilities in
early February of 2020 as COVID-19 sales began to escalate. New accounting and
operations software is being installed to improve processes, planning, and
access to sales, financial, and manufacturing data. Additionally we continue to
explore new fabrics and new technologies that may improve our product offerings
and/or profitability. Management believes the Company's ability to compete for
the global opportunities in its industry are being enhanced.
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 FY21 and
FY20 aggregated approximately $3.9 million and $3.3 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 basis) or net
realized value. Adjustments 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.
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.
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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, 2021, as Compared to January
31, 2020
Cash increased by $38.0 million, primarily as a result of increased
profitability, improved accounts receivable collection efficiency, an increase
in inventory turns, and a net increase in current liabilities. Accounts
receivable was increased due to an increase in sales. Inventory decreased $0.4
million due to improved inventory management and increased inventory turns from
higher sales levels. Accounts payable, accrued compensation, and other accrued
expenses increased $2.1 million due to an increase in accounts payable for raw
material purchases and increased accruals for employee incentive plans.
Results of Operations
The following table sets forth our historical results of continuing operations
for the years and three-months ended January 31, 2021 and 2020 as a percentage
of our net sales from operations.
Three Months Ended
January 31, Year Ended
(Unaudited) January 31,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 51.1 % 62.3 % 50.2 % 64.8 %
Gross profit 48.9 % 37.7 % 49.8 % 35.2 %
Operating expenses 23.9 % 31.6 % 22.3 % 29.7 %
Operating profit 25.1 % 6.1 % 27.6 % 5.5 %
Other income, net 0.0 % 0.1 % 0.0 % 0.0 %
Interest expense 0.0 % (0.1 )% 0.0 % (0.1 )%
Income (loss) before tax 25.1 % 6.1 % 27.6 % 5.3 %
Income tax expense 3.8 % 1.9 % 5.5 % 2.3 %
Net income 21.3 % 4.3 % 22.1 % 3.0 %
Net Sales. Net sales increased to $159.0 million for the year ended January 31,
2021 compared to $107.8 million for the year ended January 31, 2020, an increase
of 47.5%. Sales in the US increased $14.7 million or 26.3% primarily due to
increases in the number of direct container shipments in the US and Canada
throughout the year, and sales driven by COVID-19 demand. Sales to the Asian
market increased by $13.1 million or 72.0% driven by COVID-19 demand. Sales to
the European market increased by $7.5 million or 79.7% driven by COVID-19
demand. Canada sales increased by $4.0 million or 41.2% due to direct container
shipments. Latin America sales increased $3.8 million or 45.3% as the Company
continued to expand its selling efforts into the Chilean market and also
expanded to Uruguay. Sales into the Mexican market increased $2.9 million or
102.1% driven by COVID-19 demand. Our other foreign markets accounted for $5.4
million of increased sales or 146.7% as we further penetrated these markets
coupled with COVID-19 demand.
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Gross Profit. Gross profit increased $41.4 million, or 109.2%, to $79.3 million
for the year ended January 31, 2021, from $37.9 million for the year ended
January 31, 2020. Gross profit as a percentage of net sales increased from 35.2%
for the year ended January 31, 2020 to 49.8% for the year ended January 31,
2021. Major factors driving gross margins were:
· Increased volumes and pricing overall, throughout the entire year.
· Increased sales of higher margin product lines, primarily disposables,
chemical, and fire.
· Improved manufacturing efficiency in Vietnam.
Operating Expense. Operating expenses increased 10.5% from $32.0 million for the
year ended January 31, 2020 to $35.4 million for the year ended January 31,
2021. Operating expenses as a percentage of net sales was 22.3% for the year
ended January 31, 2021, down from 29.7% for the year ended January 31, 2020.
Selling expenses increased $0.8 million, including sales compensation, freight
out, advertising and marketing. General and administrative expenses increased
$2.6 million due to increases in salaries and compensation (including bonuses
and equity based compensation), banking and insurance expenses, depreciation,
and bad debt expense. During FY20, the Company reversed stock-based compensation
expense of $0.8 million related to restricted stock grants due to cumulative
financial performance for the grant awards. Due to the results in FY21, the
Company recognized $0.8 million of expense as a result of a change in estimate
in the numbers of shares expected to be earned under the performance plan.
Operating Profit. Operating profit increased to $43.9 million for the year ended
January 31, 2021, from $5.9 million for the year ended January 31, 2020, due to
the impacts detailed above. Operating margin increased to 27.6% for the year
ended January 31, 2021, compared to 5.5% for the year ended January 31, 2020.
Interest Expense. Interest expenses was less than $0.1 million for the year
ended January 31, 2021 compared to $0.1 million for the year ended January 31,
2020.
Income Tax Expense. Income tax expense consists of federal, state and foreign
income taxes. Income tax expense was $8.8 million and included $1.9 million
associated with the GILTI component of the Tax Act of 2017 for the year ended
January 31, 2021, as compared to an income tax expense of $2.5 million,
including $1.0 million associated with the GILTI component, for the year ended
January 31, 2020. All international subsidiaries impacted the GILTI calculation.
Net Income. Net income increased to $35.1 million for the year ended January 31,
2021 from $3.3 million for the year ended January 31, 2020.
Fourth Quarter Results
Net sales and net income were $36.9 million and $7.9 million, respectively, for
Q4 FY21, as compared to $28.2 million and $1.2 million, respectively, for Q4
FY20.
Factors affecting Q4 FY21 results of operations included:
· Increased sales due to COVID-19 demand in the US and China.
· Margins were increased due to increased pricing and improved manufacturing
efficiency, primarily in our Vietnam facility.
Liquidity and Capital Resources
At January 31, 2021, cash and cash equivalents were approximately $52.6 million
and working capital was approximately $108.0 million. Cash and cash equivalents
increased $38.0 million and working capital increased $41.1 million from January
31, 2020 reflecting positive earnings and the Company's focus on working capital
efficiencies.
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Of the Company's total cash and cash equivalents of $52.6 million as of January
31, 2021, cash held in Latin America of $1.4 million, cash held in Russia and
Kazakhstan of $1.1 million, cash held in the UK of $2.5 million, cash held in
India of $0.9 million and cash held in Canada of $3.8 million would not be
subject to additional US tax in the event such cash was repatriated due to the
change in the US tax law as a result of the December 22, 2017 enactment of the
2017 Tax Cuts and Jobs Act (the "Tax Act"). In the event the Company repatriated
cash from China, of the $23.8 million balance at January 31, 2021 there would be
an additional 10% withholding tax incurred in that country. The Company has
strategically employed a dividend plan subject to declaration and certain
approvals in which its Canadian subsidiary sends dividends to the US in the
amount of 100% of the previous year's earnings, the UK subsidiary sends
dividends to the US in the amount of 50% of the previous year's earnings, and
the Weifang China subsidiary sends dividends to the US in declared amounts of
the previous year's earnings. No dividends were proposed by management or
declared by our Board of Directors for our China subsidiary in FY21.
Net cash provided by operating activities of $40.7 million for the year ended
January 31, 2021 was primarily due to net income of $35.1 million, non-cash
expenses of $7.0 million for deferred taxes, depreciation and amortization, and
stock compensation, decrease in net inventories of $0.5 million and an increase
in accounts payable, accrued expenses and other liabilities of $3.8 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.
Net cash provided by operating activities of $3.6 million for the year ended
January 31, 2020 was primarily due to net income of $3.3 million, non-cash
expenses of $2.6 million for deferred taxes, depreciation and amortization and
stock compensation, and an increase in accounts payable of $1.1 million, offset
in part by a $1.4 million increase to accounts receivable due to a higher
concentration of sales in the latter part of the fourth quarter and an increase
in inventories of approximately $2.2 million. Net cash used in investing
activities of $1.0 million for the year ended January 31, 2020 reflects
purchases in property and equipment as the Company optimized capital
expenditures in the year for the ERP project, the set-up of manufacturing
facilities in Vietnam and India, the enhancement of IT infrastructure, and
equipment purchases in Mexico and China. Net cash used in financing activities
was $0.7 million for the year ended January 31, 2020, was primarily due to a
$0.5 million increase in treasury stock for shares purchased under the
previously approved stock repurchase program.
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 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.
The Company has experienced increased sales and order activity as a result of
the COVID-19 pandemic and may need to increase inventories in order to continue
to respond to this increased demand. Additionally, the Company may accelerate
investments in capacity expansion which may require significant capital
expenditures.
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
$5,000,000 of its outstanding common stock. The new program replaces the prior
program which had approximately $800,000 remaining for repurchases. There were
no shares repurchased in FY21. The Company has repurchased 152,801 shares of
stock under the prior program as of the date of this filing which amounted to
$1,671,188, inclusive of commissions.
Capital Expenditures. Our capital expenditures for FY21 of $1.7 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 FY22 capital expenditures to be
approximately $4.0 million as we continue to deploy our ERP solution globally,
invest in strategic capacity expansion, and replace existing equipment in the
normal course of operations.
Recent Accounting Pronouncements
See Note 1 - Business and Significant Accounting Policies of the consolidated
financial statements in Part II Item 8 of this Form 10-K.
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