Lakeland Industries, Inc. — 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 in over 50 countries. The filing covers the quarter and nine months ended October 31, 2021, representing Q3 FY22. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 FY22 | Q3 FY21 | 9M FY22 | 9M FY21 |
|---|---|---|---|---|
| Net sales | $30.0 million | $41.5 million | $91.6 million | $122.1 million |
| Gross profit | $12.6 million | $21.7 million | $39.7 million | $61.2 million |
| Gross margin | 42.1% | 52.3% | 43.4% | 50.1% |
| Operating profit | $4.1 million | $12.5 million | $14.3 million | $34.6 million |
| Operating margin | 13.6% | 30.1% | 15.6% | 28.3% |
| Net income | $2.8 million | $9.3 million | $10.0 million | $27.2 million |
| Diluted EPS | $0.35 | $1.14 | $1.23 | $3.36 |
For the nine months, operating expenses declined 4.1% to $25.5 million, but increased to 27.8% of sales from 21.8% because of lower revenue. The nine-month effective tax rate was 29.8%, including a $0.8 million discrete deferred-tax remeasurement charge related primarily to Alabama apportionment changes.
Net cash provided by operating activities was $12.6 million for the nine months, versus $28.0 million in the prior-year period. Capital expenditures were $0.6 million, and investing cash outflows included a $2.8 million Bodytrak investment. Financing cash outflows were $6.5 million, principally from $5.9 million of share repurchases.
At October 31, 2021, cash and cash equivalents were $55.5 million, working capital was approximately $111.0 million, total assets were $145.2 million, and stockholders’ equity was $127.4 million. Inventory was $47.0 million, up from $43.8 million at January 31, 2021, while accounts receivable declined to $16.9 million from $21.7 million.
The company had no borrowings outstanding under its $25.0 million secured revolving credit facility or its letter-of-credit sub-facility. The facility matures June 25, 2025, and the company was in compliance with its debt covenants at October 31, 2021.
Material Changes Versus the Prior Comparable Period
- Q3 sales decreased 27.7%, and nine-month sales decreased 25.0%, primarily because COVID-19-related disposable and chemical product demand and direct-container shipments declined.
- Q3 gross margin fell 10.2 percentage points, and nine-month gross margin fell 6.7 percentage points, due to lower volumes, reduced direct-container sales, competitive pricing pressure, and higher transportation costs.
- Q3 net income declined 69.9%; nine-month net income declined 63.3%.
- Other product lines, including fire, high-performance wear and wovens, showed improving demand. Nine-month sales in these lines increased in the aggregate by approximately $3.1 million.
- COVID-19-related sales were estimated at approximately 20% of Q3 FY22 revenue, compared with approximately 13% in Q2 FY22. Management stated that regional outbreaks, particularly in Southeast Asia, caused this unexpected sequential increase.
- The company repurchased 271,024 shares for $5.9 million during the nine months and had approximately $4.1 million remaining under the repurchase program at October 31, 2021.
- On October 18, 2021, Lakeland invested £2.0 million, or approximately $2.8 million, for an 11.43% interest in Bodytrak, a wearable monitoring and connected-worker technology company. Lakeland may acquire additional shares for approximately $2.0 million within 30 months.
- The revolving credit commitment was increased from $12.5 million to $25.0 million in June 2021, and acquisition covenant limits were amended.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance. It expects COVID-19-related demand to diminish over time, although intermittent regional outbreaks may continue to create demand fluctuations. Management expects industrial demand to recover as economic activity improves, but noted that excess inventory in U.S. distribution channels and delayed freight could temper near-term orders.
Management expects FY22 capital expenditures of approximately $1.0 million, primarily for global ERP deployment, strategic capacity expansion and equipment replacement. It believes cash and operating cash flow will be sufficient for projected working capital and planned capital expenditures for the foreseeable future.
Key risks include declining pandemic-driven demand, distributor inventory overhang, freight and labor disruptions, raw-material and precursor shortages, inflation, higher transportation costs, competitive pricing pressure, foreign-currency exposure, international manufacturing and geopolitical risks, China tariffs, ERP implementation, cybersecurity, product liability, environmental matters and potential recessionary effects.
Approximately $54.8 million of the company’s $55.5 million cash balance was uninsured at October 31, 2021. Approximately $26.3 million was held in China and could incur a 10% withholding tax if repatriated. One Brazilian civil labor claim seeks approximately $0.7 million; Lakeland had not been served and no merits decision had been issued. Management stated that other litigation was not expected to materially affect the company.
Most Important Facts for Investors to Verify
- Whether industrial demand can offset the continuing decline in COVID-19-related sales and excess distributor inventory.
- Whether gross margins stabilize as direct-container sales decline, pricing normalizes and freight, labor and raw-material costs remain elevated.
- The quality and sustainability of operating cash flow, particularly as inventory increased and current liabilities declined.
- The strategic and financial performance of the Bodytrak investment and the potential additional investment obligation.
- The remaining authorization and execution of the stock repurchase program; the filing reports 43,570 program shares purchased in Q3, while the quarter’s total purchases also include shares withheld for employee taxes.
- Cash repatriation restrictions, uninsured foreign cash balances and exposure to currency, geopolitical and international operating risks.
- The status and potential exposure associated with the outstanding Brazilian labor litigation.