Lakeland Industries, Inc. Form 10-Q Summary
Reporting period: Three months ended April 30, 2020, compared with April 30, 2019. The supplied metadata identifies “2019 Q1,” but the filing is for Q1 fiscal 2021. Lakeland manufactures and sells industrial and public-sector protective clothing and accessories through more than 1,600 distributors and customers in over 50 countries.
Financial Performance and Liquidity
| Metric | Q1 FY21 | Q1 FY20 | Change |
|---|---|---|---|
| Net sales | $45.6 million | $24.7 million | +84.7% |
| Gross profit | $22.1 million | $7.6 million | +193.1% |
| Gross margin | 48.6% | 30.6% | +18.0 percentage points |
| Operating profit (loss) | $12.4 million | $(0.3) million | Improved |
| Operating margin | 27.1% | (1.3)% | Improved |
| Net income (loss) | $8.6 million | $(0.5) million | Improved |
| Diluted EPS | $1.07 | $(0.06) | Improved |
| Operating cash flow | $10.3 million | $1.5 million | Increased |
- Operating expenses rose 24.2% to $9.8 million, but declined to 21.4% of sales from 31.9%.
- Cash and cash equivalents were $23.5 million at April 30, 2020, up $8.9 million from January 31, 2020. Working capital was approximately $77.9 million.
- Accounts receivable increased to $25.1 million, while inventory declined to $37.5 million from $44.2 million at January 31, 2020.
- Capital expenditures were $0.2 million in the quarter. Management expects approximately $2.0 million of capital expenditures for FY21.
- The Company had $139,000 of short-term borrowings in Argentina and no U.S. term-loan or revolving-credit borrowings at April 30, 2020. The $1.2 million U.S. term loan outstanding at January 31, 2020 was repaid on April 10, 2020.
- The $20 million revolving credit facility had approximately $15.7 million of availability at April 30, 2020 and was scheduled to expire August 10, 2020. The Company was negotiating a replacement facility.
Material Changes Versus the Prior Comparable Period
- COVID-19-driven demand substantially increased sales of disposable and chemical protective products. Disposable product sales rose to $31.2 million from $12.4 million, while chemical product sales rose to $8.9 million from $5.1 million.
- International sales increased to $22.5 million from $11.8 million; U.S. sales increased to $23.1 million from $12.9 million.
- Margins benefited from higher volumes, price increases, expanded production hours, reduced product SKUs, improved manufacturing efficiency, and sales of reserved inventory.
- Woven product sales declined, primarily because global shutdowns and quarantines reduced industrial-market demand.
- Income tax expense increased to $3.7 million from $89,000, including a $1.2 million GILTI-related charge. The filing characterizes the GILTI charge as non-cash because existing net operating losses were used.
- Foreign-currency translation resulted in a $289,000 other comprehensive loss, compared with a $69,000 loss in the prior period.
Guidance, Outlook, Risks and Unusual Items
- Management expects COVID-19-related sales to continue through FY21, but not at Q1 levels. Inventory has been reduced and current manufacturing throughput limits sustainable annualized growth.
- Potential headwinds include a recession, customer stockpiled inventories, lower oil and gas activity, raw-material shortages and higher fabric prices. Management also expects possible government and private-sector PPE restocking and institutional-cleaning demand after the pandemic.
- The Company increased working hours, reduced SKUs and is prioritizing disposable and chemical production to maximize throughput while preserving capacity for higher-end protective garments.
- COVID-19 could disrupt manufacturing facilities or supply chains. Other risks include international operations, tariffs and trade actions affecting China, foreign-exchange volatility, cybersecurity, product liability, environmental matters, customer-demand estimation, competition and former Brazilian operations.
- Brazilian labor and civil claims remain outstanding. The Company has a $0.2 million reserve for professional fees and litigation-related matters and does not expect a significant adverse outcome, although management cannot assure the ultimate results.
- Disclosure controls were not effective at April 30, 2020 because of the material weakness previously reported in internal control over financial reporting. Management expected remediation before the end of FY21.
- The Company held approximately $12.9 million of cash in China; repatriation could incur a 10% Chinese withholding tax. Approximately $22.8 million of total cash was uninsured.
- The filing states that no customer or supplier represented more than 10% of sales or purchases in either comparable quarter.
Most Important Facts to Verify
- Confirm the reporting-period designation: the filing is for April 30, 2020, or Q1 FY21, not Q1 2019.
- Assess how much of the Q1 sales and margin surge was temporary COVID-19 demand versus sustainable market-share, pricing and capacity improvements.
- Monitor inventory levels, customer stockpiling, raw-material costs and manufacturing capacity as pandemic demand normalizes.
- Verify renewal or replacement of the revolving credit facility before the August 10, 2020 maturity and continued covenant compliance.
- Track remediation of the material weakness and the effectiveness of subsequent disclosure and financial-reporting controls.
- Review the potential financial exposure from Brazilian litigation, foreign-currency movements and cash trapped or subject to withholding taxes in foreign jurisdictions.