Lakeland Industries, Inc. — Q3 FY2023 Form 10-Q Summary
Business context and reporting period
Lakeland manufactures and sells industrial and public-sector protective clothing and accessories through more than 1,600 distributors and direct sales channels in over 50 countries. The filing covers the three and nine months ended October 31, 2022, within the fiscal year ending January 31, 2023. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Oct. 31, 2022 | Three months ended Oct. 31, 2021 | Nine months ended Oct. 31, 2022 | Nine months ended Oct. 31, 2021 |
|---|---|---|---|---|
| Net sales | $28.4 million | $30.0 million | $83.8 million | $91.6 million |
| Gross profit | $12.3 million | $12.8 million | $35.0 million | $40.4 million |
| Gross margin | 43.3% | 42.5% | 41.7% | 44.1% |
| Operating profit | $2.2 million | $4.2 million | $5.5 million | $14.9 million |
| Operating margin | 7.6% | 14.1% | 6.5% | 16.3% |
| Net income | $1.4 million | $2.9 million | $1.7 million | $10.9 million |
| Diluted EPS | $0.19 | $0.36 | $0.22 | $1.34 |
- Cash and cash equivalents were $34.9 million at October 31, 2022, compared with $52.7 million at January 31, 2022.
- Working capital was approximately $99.6 million.
- Inventories increased to $57.2 million from $47.7 million, primarily to support customers and reduce delivery times.
- Net cash used in operating activities was $5.2 million for the nine months, compared with $12.6 million of operating cash flow generated in the prior-year period.
- Capital expenditures were $1.3 million for the nine months. Management expects approximately $1.8 million of capital expenditures for FY2023.
- The company had no borrowings under its $25.0 million secured revolving credit facility or its UK credit facility at October 31, 2022 and was in compliance with debt covenants.
- Total liabilities were $17.6 million and stockholders’ equity was $118.8 million at October 31, 2022.
Material changes versus the prior comparable period
- Third-quarter sales declined 5.3%, while nine-month sales declined 8.5%, primarily because COVID-19-related demand for disposable and chemical products diminished.
- Nine-month disposable and chemical product sales decreased $13.3 million in aggregate, partially offset by a $5.5 million increase in fire, high-performance, high-visibility and woven products.
- Third-quarter gross margin improved because of product mix, pricing power and lower freight rates; however, nine-month gross margin declined because of lower volumes, renewed competitive pricing pressure and higher freight costs.
- Operating expenses increased 18.8% in the third quarter and 15.7% for the nine months. Drivers included higher freight-out, selling, administrative and technology costs, foreign-currency effects, and $0.2 million of third-quarter severance expense.
- The nine-month effective tax rate was 68.1%, including a $2.0 million withholding-tax provision related to anticipated repatriation of Chinese cash and a $0.2 million deferred-tax benefit recorded in the first quarter. Excluding these discrete items, management reported a 33.8% effective rate.
- Cash flow was affected by a $10.3 million increase in inventory and a $2.2 million increase in accounts receivable, as well as $3.1 million of additional Bodytrak investments and $5.4 million of treasury-stock purchases.
- The company repurchased 194,839 shares for $2.3 million during the third quarter. Approximately $0.4 million remained available under the repurchase authorization at October 31, 2022.
Guidance, outlook, commentary, risks and unusual items
- Management expects current cash and operating cash flow to fund projected working capital and planned capital expenditures for the foreseeable future.
- The company expects the inventory build to moderate and not continue into the fourth quarter.
- A new manufacturing facility in Monterrey, Mexico is expected to be operational in FY2024 to improve North American delivery times and support capacity expansion.
- Management cited potential recessionary conditions, customer inventory stockpiles, inflation, higher labor and raw-material costs, hiring and retention challenges, and foreign-exchange volatility as risks to revenue and margins.
- U.S.-sourced raw-material availability was affected by labor and precursor shortages, particularly for higher-margin product lines. Management intends to seek price increases where possible.
- Sales in Russia represented approximately 2.4% of consolidated sales for the nine months; the company had no capital assets in Russia and sales into Ukraine were not significant.
- The company owns 22.5% of Bodytrak after an additional $1.2 million investment in October 2022. It recorded $0.1 million and $0.3 million of equity-method losses for the quarter and nine months, respectively.
- On December 2, 2022, after the reporting period, Lakeland acquired UK-based Eagle Technical Products Limited for approximately $10.8 million in cash, subject to adjustments and potential earnout payments. The transaction expands fire-protection products and the company’s presence in Europe and the Middle East.
- On December 1, 2022, the board authorized an additional $5.0 million of share-repurchase capacity.
- The company reported no significant outstanding claims or litigation as of October 31, 2022. Management stated that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether the post-period Eagle acquisition and related earnout obligations affect liquidity, leverage and future earnings.
- The pace at which disposable-product demand normalizes and whether growth in fire and other industrial products offsets the decline.
- Inventory levels, receivable collections and the timing of operating-cash-flow recovery.
- The effect of currency movements, especially the Chinese yuan, on operating expenses and accumulated other comprehensive loss.
- The sustainability of gross-margin improvement in the third quarter amid inflation, labor shortages and competitive pricing pressure.
- The tax consequences and timing of repatriating approximately $25.9 million of Chinese cash, including the accrued $2.0 million withholding-tax provision.
- Available liquidity after the Eagle acquisition, continued stock repurchases and Bodytrak investments, including the $25.0 million revolving facility and its covenants.