Lakeland Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Report for the quarter and nine months ended October 31, 2020, filed December 10, 2020. Lakeland manufactures and sells industrial and public-sector protective clothing and accessories through more than 1,600 distributors and direct sales channels in the United States and over 50 foreign countries. The filing covers Q3 FY21 and compares results with the corresponding periods of FY20.
Results were significantly influenced by COVID-19 demand for disposable and chemical protective products. Management estimated that approximately 35% of current-quarter revenue was COVID-19 related.
Financial Performance and Liquidity
| Metric | Q3 FY21 | Q3 FY20 | 9M FY21 | 9M FY20 |
|---|---|---|---|---|
| Net sales | $41.5 million | $27.5 million | $122.1 million | $79.6 million |
| Gross profit | $21.7 million | $9.3 million | $61.2 million | $27.3 million |
| Gross margin | 52.3% | 33.9% | 50.1% | 34.3% |
| Operating profit | $12.5 million | $1.8 million | $34.6 million | $4.2 million |
| Operating margin | 30.1% | 6.7% | 28.3% | 5.2% |
| Net income | $9.3 million | $1.1 million | $27.2 million | $2.1 million |
| Diluted EPS | $1.14 | $0.14 | $3.36 | $0.26 |
- Q3 sales increased 50.9%; nine-month sales increased 53.3%.
- Q3 gross profit increased 133.5%; nine-month gross profit increased 124.3%.
- Operating expenses rose 23.2% in Q3 and 15.0% for the nine-month period, but declined as a percentage of sales to 22.2% and 21.8%, respectively.
- Net cash provided by operating activities was $28.0 million for the nine months ended October 31, 2020, compared with cash used of $2.8 million in the prior-year period.
- Capital expenditures were $1.3 million for the nine months. Management expects approximately $2.0 million of FY21 capital expenditures.
- Cash and cash equivalents were $40.2 million at October 31, 2020, up from $14.6 million at January 31, 2020. Working capital was approximately $98.7 million.
- Accounts receivable increased to $26.8 million from $17.7 million, primarily reflecting higher sales. Inventory was $45.0 million, compared with $44.2 million at January 31, 2020.
- Total liabilities were $18.6 million and stockholders’ equity was $113.6 million at October 31, 2020.
- The Company had no borrowings outstanding under its new revolving credit facility or its letter-of-credit sub-facility at quarter-end.
Material Changes Versus the Prior Comparable Period
- COVID-19-related demand drove substantial volume growth in disposable and chemical product lines. Disposable product sales rose to $25.8 million in Q3 from $12.5 million and to $80.8 million for the nine months from $39.2 million.
- Other product categories, including fire, high-visibility, and woven products, were negatively affected by industrial shutdowns and quarantines.
- Gross margins benefited from higher volumes, price increases, expanded operating hours, improved manufacturing efficiency, reduced SKUs, larger production runs, direct-container sales, and sales of reserved inventory into COVID-19 applications.
- Raw-material prices, particularly fabric, increased substantially. Management passed through some increases and expects pricing pressure to remain elevated into FY22.
- Operating cash flow improved primarily because of increased profitability and working-capital efficiencies, although accounts receivable increased by $9.2 million during the nine-month period.
- Interest expense declined as borrowings were reduced. The Company repaid approximately $1.2 million of term debt and terminated its prior SunTrust borrowing agreement.
- The Company recorded a $1.7 million tax benefit for the nine-month period from changes to GILTI regulations and the resulting recapture of federal NOLs.
- Stock-based compensation expense increased materially because improved profitability made vesting of certain performance awards probable. Approximately $0.7 million related to prior grants was recorded in Q3, and approximately $1.8 million remained unrecognized at October 31, 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects COVID-19 demand to diminish beginning in Q4 FY21 and continuing into Q2 FY22 as immediate-use demand declines and stockpiling demand emerges. The filing does not provide formal revenue or earnings guidance.
- Management expects core industrial sales to recover fully and continue growing through FY22, supported by market penetration, new customers, and recovering industrial activity. Management stated that new customers contributed approximately $10 million of additional sales.
- Potential post-pandemic risks include customer inventory stockpiling, recessionary conditions, lower oil and gas demand, raw-material shortages or elevated costs, and reduced COVID-19 demand.
- The Company intends to maximize manufacturing capacity, pursue strategic capacity expansion, rationalize product offerings, and add personnel in sales, marketing, quality control, supply chain management, and industrial engineering.
- The Bank of America facility provides a secured $12.5 million revolving commitment, expandable by up to $5.0 million, maturing June 25, 2025. Borrowings bear interest at LIBOR plus 125 basis points, subject to a 100-basis-point LIBOR floor. The facility includes financial covenants and security interests in substantially all U.S. personal property and certain foreign-subsidiary equity.
- Cash included approximately $18.8 million held in China; repatriation could result in an additional 10% Chinese withholding tax. Approximately $39.5 million of total cash was uninsured at October 31, 2020.
- The Company continues to face residual labor and civil claims related to former Brazilian operations. Management believes the claims lack merit or are unlikely to result in significant expense; the recorded Brazil litigation reserve was approximately $30,000 at October 31, 2020.
- Disclosure controls and procedures were not effective at October 31, 2020 because of the same material weakness in internal control over financial reporting disclosed in the FY20 Form 10-K. Management expected remediation before the end of fiscal 2021, but the weakness was not yet remediated as of the filing date.
- Foreign manufacturing and sales operations expose the Company to currency, geopolitical, trade, tariff, regulatory, cybersecurity, supply-chain, and operational risks. The Company also identified customer concentration, with one customer exceeding 10% of sales in both the quarter and nine-month period.
Investor Verification Priorities
- Verify the sustainability of COVID-19-related revenue, unusually high gross margins, and elevated operating profitability as pandemic demand declines.
- Assess the recovery of core industrial product sales and the timing and value of expected government and private-sector PPE stockpiling orders.
- Monitor raw-material pricing, availability, manufacturing capacity, inventory levels, and potential excess inventory after the pandemic.
- Review the $1.7 million GILTI-related tax benefit and distinguish recurring tax effects from period-specific benefits.
- Confirm remediation and operating effectiveness of the material weakness in internal control over financial reporting.
- Evaluate cash accessibility, foreign withholding-tax exposure, uninsured deposits, and covenant compliance under the secured Bank of America facility.
- Track the outcome and potential cost of residual Brazilian litigation and other contingencies.