Lakeland Industries, Inc. — Q2 FY2023 Form 10-Q Summary
Business context and reporting period
Lakeland manufactures and sells industrial and public protective clothing and accessories through more than 1,600 distributors and direct channels in over 50 countries. The unaudited report covers the three and six months ended July 31, 2022, compared with the corresponding periods in 2021. Fiscal 2023 ends January 31, 2023.
Financial results and key metrics
| Metric | Q2 FY23 | Q2 FY22 | Six months FY23 | Six months FY22 |
|---|---|---|---|---|
| Net sales | $28.2 million | $27.5 million | $55.5 million | $61.6 million |
| Gross profit | $11.6 million | $12.9 million | $22.7 million | $27.6 million |
| Gross margin | 41.3% | 46.8% | 40.9% | 44.9% |
| Operating profit | $1.8 million | $4.1 million | $3.2 million | $10.7 million |
| Operating margin | 6.4% | 14.8% | 5.8% | 17.4% |
| Net income (loss) | $(0.9) million | $3.0 million | $0.3 million | $8.0 million |
| Diluted EPS | $(0.11) | $0.36 | $0.03 | $0.98 |
Cash and cash equivalents were $41.2 million at July 31, 2022, down from $52.7 million at January 31, 2022. Working capital was approximately $103.1 million. Inventory increased to $56.8 million from $47.7 million, primarily to support customers and reduce delivery times. Accounts receivable was $15.9 million.
Operating cash flow was negative $4.6 million for the first six months, compared with positive $13.1 million in the prior-year period. Investing cash flow was negative $2.3 million, including $1.9 million invested in Bodytrak and $0.5 million of capital expenditures. Financing cash flow was negative $3.9 million, primarily from $3.1 million of share repurchases and $0.8 million of shares withheld for employee taxes.
The company had no borrowings outstanding under its $25.0 million secured revolving credit facility or its UK credit facility. The revolving facility matures June 25, 2025. The company was in compliance with its debt covenants at July 31, 2022.
Material changes versus the prior comparable period
- Q2 sales increased 2.5%, but first-half sales declined 9.9% as COVID-19-related disposable and chemical product demand continued to diminish.
- First-half disposable and chemical sales declined by $9.3 million, partly offset by $3.2 million of aggregate growth in fire, high-performance and glove products.
- Gross margins declined because of product mix, lower volumes, reduced direct-container sales, competitive pricing pressure and higher transportation costs.
- Operating expenses increased 11.4% in Q2 and 14.8% for the first half. Reported drivers included higher travel, trade show, administrative, freight, customs, rent and technology costs, as well as unfavorable currency effects, principally involving the Chinese yuan.
- Net income was significantly affected by a $2.0 million withholding-tax accrual related to the planned repatriation of Chinese cash. Excluding this Q2 discrete item, the effective tax rate was 35.0%, compared with the reported 149.9%.
- The company invested an additional $1.9 million in Bodytrak, increasing its ownership to 18.42%. The investment is accounted for under the equity method, and Lakeland recognized a $0.1 million share of Bodytrak’s loss during Q2.
- The company repurchased 171,133 shares for approximately $2.7 million during Q2, leaving approximately $2.7 million available under the repurchase programs at July 31, 2022.
Guidance, outlook, commentary and risks
- Management expects FY23 capital expenditures of approximately $3.0 million, including global ERP deployment, capacity expansion and equipment replacement.
- A new manufacturing facility in Monterrey, Mexico is expected to be operational in FY24 and is intended to improve North American delivery times and support growth.
- Management expects the inventory build to moderate in the second half of FY23 and believes existing cash and operating cash flow will meet projected working capital and planned capital expenditure needs for the foreseeable future.
- Management reported no manufacturing capacity issues from raw-material shortages, quarantines, shelter-in-place orders or COVID-19 outbreaks at its factories, but noted that conditions could change.
- Potential headwinds include recession risk, remaining customer stockpiles, declining pandemic-related demand, inflation, higher labor and freight costs, U.S. raw-material shortages, hiring and retention challenges, wage inflation, foreign-exchange volatility, geopolitical developments and tariffs affecting China operations.
- Russia represented approximately 2.5% of consolidated sales in the first half of FY23; Ukraine sales were not significant and the company had no capital assets in Russia.
- The company has approximately $29.5 million of cash in China and expects repatriation during FY23. A potential 10% Chinese withholding tax was reflected in the $2.0 million accrual.
- The filing identifies risks involving international operations, COVID-19 and other health events, ERP implementation, cybersecurity, product liability, environmental matters, customer-demand forecasting, competition, acquisitions and investments, tax exposure and access to additional funding.
Most important facts for investors to verify
- Whether the post-pandemic decline in disposable and chemical demand stabilizes and whether growth in higher-value product categories offsets it.
- Progress on gross-margin recovery amid freight, labor, raw-material and inflationary pressures.
- Inventory conversion, receivables collection and the timing of recovery in operating cash flow.
- The timing and tax cost of Chinese cash repatriation, including any changes to the $2.0 million withholding-tax accrual.
- Bodytrak’s operating performance and the potential return on Lakeland’s $4.7 million cumulative investment.
- Execution and cost of the Monterrey facility, ERP rollout and approximately $3.0 million FY23 capital-expenditure plan.
- Remaining share-repurchase authorization and its effect on liquidity and share count.
- Exposure to foreign-exchange movements, China-related geopolitical and tariff risks, and uninsured foreign cash balances; approximately $40.5 million of cash was uninsured at July 31, 2022.