Lakeland Industries, Inc. — Q2 FY2022 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 channels in over 50 countries. The filing covers the quarter and six months ended July 31, 2021, corresponding to the second quarter of fiscal 2022. Results remained affected by the transition from elevated COVID-19 PPE demand toward recovering core industrial demand.
Key financial metrics
| ($ in thousands, except per-share data) | Three months ended July 31, 2021 | Three months ended July 31, 2020 | Six months ended July 31, 2021 | Six months ended July 31, 2020 |
|---|---|---|---|---|
| Net sales | $27,466 | $35,021 | $61,558 | $80,603 |
| Gross profit | $12,718 | $17,340 | $27,104 | $39,484 |
| Gross margin | 46.3% | 49.5% | 44.0% | 49.0% |
| Operating profit | $3,927 | $9,734 | $10,165 | $22,104 |
| Operating margin | 14.3% | 27.8% | 16.5% | 27.4% |
| Net income | $2,558 | $9,339 | $7,199 | $17,973 |
| Diluted EPS | $0.31 | $1.16 | $0.89 | $2.23 |
Net cash provided by operating activities was $13.1 million in the first six months, compared with $22.3 million in the prior-year period. Capital expenditures were $0.5 million, and cash used in financing activities was $5.5 million, including $5.0 million for share repurchases. Cash and equivalents were $59.8 million at July 31, 2021, versus $52.6 million at January 31, 2021. Working capital was approximately $111.5 million.
The company had no borrowings outstanding under its revolving credit facility or UK credit facility. Its secured revolving credit commitment was increased from $12.5 million to $25.0 million in June 2021 and matures June 25, 2025. The company was in compliance with its debt covenants. Total liabilities were $17.8 million and stockholders’ equity was $125.2 million at July 31, 2021.
Material changes versus the prior comparable period
- Second-quarter sales declined 21.4%; six-month sales declined 23.6%, primarily because COVID-19-related disposable and chemical product demand and direct-container sales decreased.
- Gross margin declined 320 basis points in the quarter and 500 basis points year to date, reflecting lower volumes, reduced direct-container sales and renewed competitive pricing pressure.
- Quarterly operating expenses increased 15.8%, driven by higher freight and customs costs, travel, professional fees and compensation. Year-to-date operating expenses declined 2.9%, although expenses represented a higher percentage of sales.
- Operating profit fell 59.7% in the quarter and 54.0% year to date. Net income fell 72.6% in the quarter and 59.9% year to date.
- Product mix shifted: disposables declined to $15.19 million of quarterly external sales from $23.78 million, while fire, gloves and high-performance wear increased.
- Core industrial demand continued recovering, but U.S. distributors held excess inventory following prior over-ordering and freight delays. International sales growth was offset by weaker U.S. results.
- The company repurchased 227,454 shares for approximately $5.0 million at an average price of $21.95 per share, leaving $5.0 million authorized for repurchases.
Guidance, outlook, risks and unusual items
- Management expects COVID-19 demand to diminish and believes recovering industrial activity, new customers and higher market penetration can support revenue above pre-pandemic levels. No formal revenue or earnings guidance was provided.
- Management anticipates fiscal 2022 capital expenditures of approximately $3.0 million for ERP deployment, capacity expansion and equipment replacement.
- Freight delays, excess channel inventory, labor constraints, inflation and higher freight and raw-material costs may pressure sales and gross margins through fiscal 2022 and potentially calendar 2022.
- Management reported no COVID-related manufacturing shutdowns and no material raw-material shortages in Asian operations, but cited U.S.-sourced material and labor constraints affecting higher-margin products.
- The second-quarter effective tax rate was 34.8%, including approximately $762,000 of discrete tax expense from remeasurement of deferred taxes, primarily related to an Alabama apportionment-factor change. The six-month effective rate was 29.1%.
- Cash included approximately $30.7 million held in China that would incur an additional 10% withholding tax if repatriated. Approximately $59.1 million of total cash was uninsured.
- Two significant Brazil-related claims remain: a labor matter in which Lakeland is currently not a co-defendant but could potentially be added, and a civil claim seeking approximately $700,000. Management states that no material loss has been recorded and that outcomes are uncertain.
- Other risks include international operations, China tariffs and trade restrictions, foreign exchange, ERP implementation, cybersecurity, product liability, environmental matters, customer-demand estimation and the loss of pandemic-related demand.
Important facts for investors to verify
- Whether core industrial sales growth offsets the continuing decline in COVID-19-related PPE demand and channel inventory normalization.
- Future gross-margin performance as pricing pressure, freight costs, labor constraints and raw-material inflation continue.
- Cash generation and liquidity after share repurchases, planned capital expenditures and any potential acquisitions.
- Execution of the global ERP rollout and planned manufacturing-capacity expansion.
- The status and potential financial exposure of the remaining Brazil labor and civil claims.
- The sustainability of the company’s improved post-pandemic profitability relative to the unusually strong fiscal 2021 comparison period.