Lakeland Industries, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Lakeland manufactures and sells protective clothing and accessories for industrial, public safety, governmental, medical, utility, fire service and cleanroom markets. Products are sold through more than 1,600 distributors in the United States and more than 50 foreign countries. The filing covers the fiscal year ended January 31, 2022; Q4 FY2022 ended January 31, 2022.
The company operates five manufacturing facilities in China, Mexico, Vietnam, India and Argentina. FY2022 remained affected by the COVID-19 pandemic, including lower pandemic-related demand, excess distributor inventory and elevated freight, labor and raw-material costs.
Key financial metrics
| ($ millions, except per-share data) | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $118.4 | $159.0 | (25.5%) |
| Gross profit | $50.9 | $79.3 | (35.8%) |
| Gross margin | 43.0% | 49.9% | (690 bps) |
| Operating profit | $16.0 | $43.9 | (63.4%) |
| Operating margin | 13.6% | 27.6% | (1,400 bps) |
| Net income | $11.4 | $35.3 | (67.8%) |
| Diluted EPS | $1.41 | $4.34 | (67.5%) |
| Operating cash flow | $12.8 | $40.7 | (68.6%) |
Q4 FY2022 net sales were $26.8 million and net income was $0.5 million, compared with $36.9 million and $7.7 million, respectively, in Q4 FY2021.
- FY2022 sales from customers outside the United States were $70.8 million, or approximately 60% of consolidated sales.
- COVID-19-related sales represented an estimated 15% of FY2022 revenue versus approximately 30% to 35% in FY2021.
- Disposables revenue declined to $67.2 million from $103.8 million; chemical revenue declined to $24.5 million from $31.2 million.
- Fire, high-visibility, high-performance wear and woven product sales generally improved, partly offsetting lower disposable and chemical demand.
- Cash and cash equivalents were $52.7 million, working capital was approximately $108.9 million, and total assets were $140.8 million at January 31, 2022.
- Inventory increased to $47.7 million from $43.6 million, principally to mitigate freight and supply-chain disruptions.
- Accounts receivable declined to $14.8 million from $21.7 million, primarily because of lower sales and collections.
- The company generated $12.8 million of operating cash flow, invested $2.8 million in Bodytrak and spent $0.8 million on capital expenditures.
Debt and liquidity
Under its amended Bank of America facility, Lakeland had a $25.0 million secured revolving credit facility maturing June 25, 2025. No borrowings or letters of credit were outstanding at January 31, 2022, leaving $25.0 million available. The company was in compliance with its debt covenants and stated that cash, borrowing capacity and expected operating cash flow should fund operating and investing requirements for at least the next twelve months.
The company repurchased 430,463 shares for $9.2 million during FY2022. Approximately $0.8 million remained under the existing program at January 31, 2022. On April 7, 2022, the board authorized an additional $5.0 million program effective after completion of the existing program. Lakeland has not paid common-stock dividends since 2006 and does not anticipate paying dividends in the foreseeable future.
Material changes versus the prior comparable period
- Revenue decreased $40.6 million, primarily from lower COVID-19 demand, fewer direct-container shipments, customer inventory overhang and ocean-freight delays.
- Gross margin contracted because of lower volumes, a return to competitive pricing, higher transportation costs and reduced pandemic pricing power.
- Operating expenses declined slightly in absolute dollars, but increased materially as a percentage of sales because of the revenue decline.
- Operating profit and net income fell substantially from unusually strong pandemic-period results in FY2021.
- Operating cash flow declined by $27.9 million, reflecting lower earnings and increased inventory investment.
- The company made a $2.8 million minority investment in Bodytrak, a connected-worker and smart-PPE company, receiving approximately 11.43% of its share capital and recognizing a $0.1 million equity-method loss through January 31, 2022.
- Previously issued financial statements were revised for immaterial errors involving intercompany inventory profit, state tax-loss calculations and foreign employee-benefit estimates. The correction reduced retained earnings at January 31, 2020 by $1.4 million; FY2021 net income was revised upward by $0.2 million.
Guidance, outlook, commentary and risks
Management expects COVID-19-related demand to continue into the first half of FY2023, but at lower levels, while core industrial demand continues to recover. It anticipates approximately $3.0 million of FY2023 capital expenditures for global ERP deployment, strategic capacity expansion and equipment replacement, funded from operating cash flow. The filing does not provide formal FY2023 revenue or earnings guidance.
- Raw-material prices, freight costs, labor costs and wage inflation were expected to remain elevated and could pressure gross margins.
- Potential recessionary conditions and customer stockpiled inventory could weaken post-pandemic demand.
- Supply-chain disruption, raw-material shortages, shipping delays and renewed COVID-19 surges could affect production and sales.
- International operations expose Lakeland to currency volatility, tariffs, trade restrictions, geopolitical instability, sanctions and changing regulatory requirements. Russia represented approximately 2.5% of FY2022 consolidated sales; Ukraine sales were not significant.
- The company faces larger competitors, including DuPont, Honeywell, Ansell and Kimberly-Clark, with greater financial, sales, marketing and research resources.
- Key contingencies include product-liability exposure, environmental compliance, tax audits, cybersecurity and data-privacy incidents, and potential inventory obsolescence.
- Inventory valuation was a critical audit matter. Inventory was approximately $47.7 million, including an excess and obsolete adjustment of approximately $3.1 million.
- Management and Deloitte & Touche reported effective internal control over financial reporting, and the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Whether core industrial demand offsets the expected decline in COVID-19-related sales during FY2023.
- The pace at which excess distributor and finished-goods inventory is reduced, and whether additional inventory write-downs are required.
- The effect of freight, labor, raw-material inflation and competitive pricing on gross margin.
- Cash conversion, inventory growth and operating cash flow relative to the planned $3.0 million FY2023 capital-spending program and share repurchases.
- Utilization of the $25.0 million revolving facility and continued compliance with its financial covenants.
- Financial performance and potential follow-on investment rights associated with the Bodytrak investment.
- Effects of the Russia-Ukraine conflict, China-U.S. trade relations, foreign exchange movements and other geopolitical developments.
- The impact of the disclosed prior-period restatement and the company’s revised financial statements when comparing historical results.