Lakeland Industries, Inc. — Q1 FY2022 Form 10-Q Summary
Business context and reporting period
Lakeland manufactures and sells industrial protective clothing and accessories through more than 1,600 distributors and directly to industrial, governmental, medical and other customers in more than 50 countries. The unaudited report covers the three months ended April 30, 2021, the first quarter of fiscal 2022, compared with the three months ended April 30, 2020.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $34.1 million | $45.6 million | Down 25.2% |
| Gross profit | $14.4 million | $22.1 million | Down 35.0% |
| Gross margin | 42.2% | 48.6% | Down 6.4 percentage points |
| Operating profit | $6.2 million | $12.4 million | Down 49.6% |
| Operating margin | 18.3% | 27.1% | Down 8.8 percentage points |
| Net income | $4.6 million | $8.6 million | Down 46.2% |
| Diluted EPS | $0.57 | $1.07 | Down $0.50 |
| Cash flow from operations | $8.3 million | $10.3 million | Down $1.9 million |
Cash and cash equivalents were $60.3 million at April 30, 2021, up from $52.6 million at January 31, 2021. Working capital was approximately $112.7 million. Accounts receivable were $19.2 million and inventories were $43.9 million.
The Company had no borrowings under its $12.5 million revolving credit facility or its $5.0 million letter-of-credit sub-facility. The facility may be increased to $17.5 million and matures June 25, 2025. Total liabilities were $17.7 million and stockholders’ equity was $127.4 million at April 30, 2021.
Capital expenditures were $0.1 million during the quarter. Management expects approximately $3.0 million of fiscal 2022 capital expenditures for ERP deployment, capacity expansion and equipment replacement. No shares were repurchased during the quarter; a new authorization permits up to $5.0 million of repurchases.
Material changes versus the prior comparable period
- Sales declined primarily because COVID-19-related direct container demand for disposable and chemical products decreased. COVID-19-related demand represented an estimated 13% of Q1 FY2022 sales.
- Industrial demand improved, particularly for fire, high-performance and woven products, but did not offset the reduction in pandemic-related sales.
- Gross margin contracted because of lower direct-container sales and a return to competitive pricing pressures as the product mix shifted from pandemic-driven demand to industrial demand.
- Operating expenses declined 17.3% to $8.1 million, but increased to 23.9% of sales from 21.4% because sales fell faster than expenses. ERP-related compensation, licensing and depreciation also affected expenses.
- Operating profit and net income declined substantially despite lower operating expenses and interest expense.
- Operating cash flow remained positive, supported by profitability and a $2.3 million decrease in accounts receivable, while inventory was essentially unchanged.
- External sales outside the United States decreased to $18.4 million from $22.5 million. Asia external sales declined to $5.6 million from $9.1 million, while Europe increased to $4.4 million from $3.0 million.
Guidance, outlook, risks and unusual items
Management does not provide formal revenue or earnings guidance in the filing. It expects COVID-19-related demand to continue declining, partly offset by recovering industrial activity and repeat orders from new customers acquired during the pandemic. Management believes core industrial revenue could exceed pre-pandemic levels, but cautions that customer stockpiles, a potential recession and changing pandemic conditions could temper demand.
Management reported that raw-material prices remained above pre-pandemic levels and expects inflationary pricing to continue through fiscal 2022. Potential shortages, supply-chain disruptions, renewed COVID-19 outbreaks, factory shutdowns and restrictions in countries such as India could affect production and sales.
The Company plans to add personnel in sales, marketing, quality control, supply-chain management and industrial engineering, evaluate manufacturing expansion and may pursue acquisitions. It also identified opportunities in pharmaceutical cleanrooms, isolation gowns, chemo-gowns and electric utilities.
Material risks include international manufacturing and geopolitical exposure, tariffs affecting China operations, foreign-currency fluctuations, ERP implementation risk, cybersecurity, product liability, environmental regulation, competition, customer-demand estimation, tax matters and dependence on key personnel.
Brazil-related contingencies remain outstanding following the former subsidiary’s shutdown. The filing describes three VAT claims totaling approximately R$1.3 million, excluding interest, penalties and fees; one labor claim in which Lakeland is currently not a co-defendant but could become one; and a civil claim seeking approximately $0.7 million in which Lakeland has not been served. Management states that ordinary-course litigation is not expected to have a material effect, but outcomes in Brazil remain uncertain.
Cash held in China totaled approximately $26.6 million and could incur an additional 10% withholding tax if repatriated. Approximately $59.6 million of the Company’s $60.3 million cash balance was uninsured as of April 30, 2021.
Facts investors should verify
- Whether the continued decline in COVID-19-related sales is offset by sustainable industrial demand and repeat orders from pandemic-acquired customers.
- The pace of gross-margin normalization amid competitive pricing and elevated raw-material costs.
- Execution, cost and operating effects of the global ERP implementation.
- Progress toward the approximately $3.0 million fiscal 2022 capital-expenditure plan and any acquisition or expansion activity.
- Liquidity, geographic concentration and potential repatriation taxes on foreign cash, particularly in China.
- Developments and ultimate exposure related to the remaining Brazil VAT, labor and civil contingencies.
- Whether the $5.0 million stock-repurchase authorization is utilized and how repurchases affect liquidity and share count.