Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the
historical financial statements and other financial information included
elsewhere in this quarterly report on Form 10-Q. This Form 10-Q may contain
certain forward-looking statements. When used in this Form 10-Q or in any other
presentation, statements which are not historical in nature, including the words
"anticipate," "estimate," "should," "expect," "believe," "intend," "project",
"plan," "seek," "will," "may," "might," "would," "could" and similar
expressions, are intended to identify forward-looking statements. They also
include statements containing a projection of sales, earnings or losses, capital
expenditures, dividends, capital structure or other financial terms.
The forward-looking statements in this Form 10-Q are based upon our management's
beliefs, assumptions and expectations of our future operations and economic
performance, taking into account the information currently available to us.
These statements are not statements of fact. Forward-looking statements involve
risks and uncertainties, some of which are not currently known to us that may
cause our actual results, performance or financial condition to be materially
different from the expectations of future results, performance or financial
condition we express or imply in any forward-looking statements. Some of the
important factors that could cause our actual results, performance or financial
condition to differ materially from expectations are:
· we are subject to risk as a result of our international manufacturing
operations and are subject to the risk of doing business in foreign
countries;
· a terrorist attack, other geopolitical crisis, or widespread outbreak of
an illness or other health issue, such as the COVID-19 pandemic, could
negatively impact our domestic and/or international operations;
· our results of operations could be negatively affected by potential
fluctuations in foreign currency exchange rates;
· the implementation of our Enterprise Resource Planning ("ERP") system had,
and may in the future as we implement ERP into foreign operations have, an
adverse effect on operating results;
· we have manufacturing and other operations in China which may be adversely
affected by tariff wars and other trade maneuvers;
· our results of operations may vary widely from quarter to quarter;
· some of our sales are to foreign buyers, which exposes us to additional
risks;
· we deal in countries where corruption is an obstacle;
· we are exposed to tax expense risks;
· because we do not have long-term commitments from many of our customers,
we must estimate customer demand, and errors in our estimates could
negatively impact our inventory levels and net sales;
· we face competition from other companies, a number of which have
substantially greater resources than we do;
· our operations are substantially dependent upon key personnel;
· cybersecurity incidents could disrupt business operations, result in the
loss of critical and confidential information and adversely impact our
reputation and results of operations;
· we may be subject to product liability claims, and insurance coverage
could be inadequate or unavailable to cover these claims;
· environmental laws and regulations may subject us to significant
liabilities;
· our directors and executive officers have the ability to exert significant
influence on us and on matters subject to a vote of our stockholders;
· provisions in our restated certificate of incorporation and by-laws and
Delaware law could make a merger, tender offer or proxy contest difficult;
· acquisitions and investments could be unsuccessful;
· we may not achieve the expected benefits from strategic acquisitions,
investments, joint ventures, capital investments and other corporate
transactions that we have pursued or may pursue;
· we may need additional funds, and if we are unable to obtain these funds,
we may not be able to expand or operate our business as planned;
· rapid technological change could negatively affect sales of our products,
inventory levels and our performance; and
· the other factors referenced in this Form 10-Q, including, without
limitation, in the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the factors
described under "Risk Factors" disclosed in our fiscal 2022 Form 10-K.
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We believe these forward-looking statements are reasonable; however, you should
not place undue reliance on any forward-looking statements, which are based on
current expectations. Furthermore, forward-looking statements speak only as of
the date they are made. We undertake no obligation to publicly update or revise
any forward-looking statements after the date of this Form 10-Q, whether as a
result of new information, future events or otherwise, except as may be required
by law. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Form 10-Q might not occur. We qualify
any and all of our forward-looking statements entirely by these cautionary
factors.
Business Overview
We manufacture and sell a comprehensive line of industrial protective clothing
and accessories for the industrial and public protective clothing market. Our
products are sold globally by our in-house sales teams, our customer service
group, and authorized independent sales representatives to a network of over
1,600 global safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil, chemical/petrochemical,
automobile, steel, glass, construction, smelting, cleanroom, janitorial,
pharmaceutical, and high technology electronics manufacturers, as well as
scientific, medical laboratories and the utilities industry. In addition, we
supply federal, state and local governmental agencies and departments, such as
fire and law enforcement, airport crash rescue units, the Department of Defense,
the Department of Homeland Security and the Centers for Disease Control.
Internationally, we sell to a mixture of end users directly, and to industrial
distributors depending on the particular country and market. In addition to the
United States, sales are made to more than 50 foreign countries, the majority of
which were into China, the European Economic Community ("EEC"), Canada, Chile,
Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador, India and Southeast
Asia.
We have operated facilities in Mexico since 1995 and in China since 1996.
Beginning in 1995, we moved the labor intensive sewing operation for our limited
use/disposable protective clothing lines to these facilities. Our facilities and
capabilities in China and Mexico allow access to a less expensive labor pool
than is available in the United States and permit us to purchase certain raw
materials at a lower cost than they are available domestically. More recently we
have added manufacturing operations in Vietnam and India to offset increasing
manufacturing costs in China and further diversify our manufacturing
capabilities. Our China operations will continue primarily manufacturing for the
Chinese market and other markets where duty advantages exist. The Company is
adding a new manufacturing facility in Monterrey, Mexico that we expect to be
operational in FY 24. This new capacity will help shorten delivery times for
the North American markets. Manufacturing expansion is not only necessary to
control rising costs, it is also necessary for Lakeland to achieve its growth
objectives.
On December 2, 2022 the Company acquired UK-based Eagle Technical Products
Limited ("Eagle") in an all-cash transaction valued at approximately $10.8
million subject to post-closing adjustments and potential future earnout
payments. The acquisition enhances Lakeland's product portfolio, particularly
within fire service protective clothing and expands its sales presence in the
Middle East and Europe.
Our net sales attributable to customers outside the United States were $14.4
million and $19.4 million for the three months ended October 31, 2022 and 2021,
respectively and $46.7 million and $55.1 million for the nine months ended
October 31, 2022 and 2021, respectively.
We are continually monitoring the potential financial impact of the Russian
invasion of Ukraine on our operations. For the nine months ended October 31,
2022, sales in Russia were approximately 2.4% of our consolidated sales and
sales into Ukraine were not significant. We do not have any capital assets in
Russia.
We have not experienced any manufacturing capacity issues due to inability to
source raw materials, government quarantine, or shelter-in-place orders, or due
to COVID-19 outbreaks in any of our factories, however there can be no assurance
that this will continue to be the case. In addition, we cannot predict any
potential incremental cost that may be associated with any federal, state or
local vaccine mandates or related testing protocol. While current economic
indicators and industry data indicate an industrial market recovery, potential
headwinds to revenue as we emerge from pandemic sales include the possibility of
a recession and the continued presence of consumer stockpiled inventories that
may temper demand within our regular markets in the remainder of FY23.
While we have not experienced any raw materials shortages in our Asian
manufacturing operations, we are experiencing some issues with U.S. sourced raw
materials due to labor and precursor shortages affecting our higher margin
product lines. In both Asia and the U.S., increasing labor costs, as well as
inflationary pressures threaten to drive raw material costs up and may
negatively impact our gross margins. Where we can, we will seek to recover
increased costs with corresponding price increases.
Additionally, we have experienced, along with most other companies across many
industries, the macro-economic impact of a challenging employment environment
related to hiring and retaining employees and wage inflation. We expect that
these hiring, retention, and wage inflation challenges, as well as challenges
related to maintaining our current workforce, will continue through the
remainder of FY23. These hiring, retention, and cost challenges may negatively
affect our ability to grow our business and keep our best employees or increase
our cost of operations.
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Results of Operations
Three Months ended October 31, 2022, Compared to the Three Months Ended October
31, 2021
Net Sales. Net sales were $28.4 million for the three months ended October 31,
2022, a decrease of $1.6 million or 5.3% compared to $30.0 million for the three
months ended October 31, 2021. Sales of our fire and high performance product
lines increased by $2.5 million reflecting strengthening in the industrial
markets. Our sales were negatively impacted by declines in our disposable
product line by $4.1 million, though we were seeing continued increases in
direct container activity in the third quarter.
Gross Profit. Gross profit for the three months ended October 31, 2022 was $12.3
million, a decrease of $0.5 million, or 3.9%, compared to $12.8 million for the
three months ended October 31, 2021. Gross profit as a percentage of net sales
improved to 43.3% for the three month period ended October 31, 2022, from 42.5%
for the three months ended October 31, 2021. Gross profit performance in the
fiscal 2023 period benefited from improving product mix with pricing power and
lower freight rates.
Operating Expense.
Operating expenses increased 18.8% from $8.5 million for the three months ended
October 31, 2021 to $10.1 million for the three months ended October 31, 2022.
This increase is attributable to increases in freight out and selling expenses
of $0.4 million, administrative expenses of $0.4 million and currency
fluctuations of $0.8 million. Increase in currency expense is due primarily to
the fluctuation in the Chinese yuan. Operating expenses in the quarter ended
October 31, 2022 also included $0.2 million in severance expenses. Operating
expenses as a percentage of net sales was 35.5% for the three months ended
October 31, 2022, up from 28.4% for the three months ended October 31, 2021
primarily due to the increased costs noted above.
Operating Profit. Operating profit declined to $2.1 million for the three months
ended October 31, 2022 from $4.2 million for the three months ended October 31,
2021, due to the impacts detailed above. Operating margins were 7.6% for the
three months ended October 31, 2022, as compared to 14.1% for the three months
ended October 31, 2021.
Income Tax Expense. Income tax expense consists of federal, state and foreign
income taxes. Income tax expense was $0.7 million for the three months ended
October 31, 2022, compared to $1.3 million for the three months ended October
31, 2021. The effective rate for the three months ended October 31, 2022, was
33.3%. The effective rate for the three months ended October 31, 2021 was 31.4%.
Net Income. Net income for the three months ended October 31, 2022 was $1.4
million, a decline of $1.5 million from net income of $2.9 million for the three
months ended October 31, 2021. The decline was due to the factors discussed
above.
Nine Months ended October 31, 2022, Compared to the Nine Months Ended October
31, 2021
Net Sales. Net sales were $83.8 million for the nine months ended October 31,
2022 as compared to $91.6 million for the nine months ended October 31, 2021, a
decrease of $7.8 million or 8.5%. Our fire, high performance, high visibility
and wovens product lines increased by $5.5 million in the aggregate reflecting
strengthening in our industrial markets. Sales of our disposable and chemical
product lines declined by $13.3 million in the nine months ended October 31,
2022, driven by diminishing COVID-19 demand.
For the nine months ended October 31, 2021 sales globally were driven by
COVID-19 demand, as we realized significant increases in all markets for our
disposable and chemical product lines.
Gross Profit. Gross profit was $35.0 million for the nine months ended October
31, 2022, a decrease of $5.4 million, or 13.4%, from $40.4 million for the nine
months ended October 31, 2021. Gross profit as a percentage of net sales
decreased to 41.7% for the nine months ended October 31, 2022, from 44.1% for
the nine months ended October 31, 2021. Major factors driving gross margins
were:
· Significant decreases in volumes driven by reduced COVID-19 demand.
· Return to competitive pricing pressures as COVID-19 demand decreases.
· Increases in freight rates beginning in FY22.
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Operating Expense. Operating expenses increased $4.0 million, or 15.7%, to $29.5
million for the nine months ended October 31, 2022 from $25.5 million for the
nine months ended October 31, 2021. Selling expenses were higher by $1.6 million
due to increases in freight out and customs fees coupled with higher travel,
advertising and trade show expenses as COVID-19 restrictions have lifted.
General and administrative expenses increased by $2.6 million, driven by
currency fluctuations accounting for $1.9 million of the increase due to the
strengthening of the U.S. dollar primarily against the Chinese yuan. The
remaining increase was due to increases in rent and technology costs. Operating
expenses as a percentage of net sales was 35.2% for the nine months ended
October 31, 2022, up from 27.8% for the nine months ended October 31, 2021.
Operating Profit. Operating profit decreased to $5.5 million for the nine months
ended October 31, 2022 from $14.9 million for the nine months ended October 31,
2021, due to the impacts detailed above. Operating margins were 6.5% for the
nine months ended October 31, 2022, as compared to 16.3% for the nine months
ended October 31, 2021.
Income Tax Expense. Income tax expense consists of federal, state and foreign
income taxes. Income tax expense was $3.6 million for the nine months ended
October 31, 2022, compared to $4.0 million for the nine months ended October 31,
2021.
In Q2 FY23, the Company changed its' permanent reinvestment assertions for its
Chinese operations during the second quarter due to increased volatility of the
Chinese yuan and geopolitical uncertainties. The Company recorded $2 million in
withholding taxes for a planned repatriation during FY23. In Q1 FY23, the
Company recorded deferred tax benefits of $0.2 million related to accruals for
China social taxes. Excluding these discrete items the Company's effective rate
was 33.8% and 27.1% for the nine months ended October 31, 2022 and 2021,
respectively.
Net Income. Net income decreased by $9.2 million to $1.7 million for the nine
months ended October 31, 2022 from $10.9 million for the nine months ended
October 31, 2021.
Significant Balance Sheet Fluctuation October 31, 2022, Compared to January 31,
2022
Cash decreased by $17.8 million due to cash used in operating activities of $5.2
million for the nine months ended October 31, 2022 primarily due to an increase
in current assets of $12.5 million driven by a build in inventory to support
customers by reducing delivery times and an increase in accounts receivable due
to timing of sales, including direct containers, in the current quarter.
Offsetting these increases were net income of $1.7 million, non-cash expenses of
$4.6 million for deferred taxes, depreciation and amortization, stock
compensation, and equity in loss of equity investment, and increase in current
liabilities of $1.0 million.
The Company invested $1.3 million for the nine months ended October 31, 2022 in
office and manufacturing equipment purchases and made an additional investments
in Bodytrak of $3.1 million.
Net cash used in financing activities was $6.2 million for the nine months ended
October 31, 2022, due to $5.4 million in shares repurchased and $0.8 million in
shares returned to pay income taxes on shares vested under our equity
compensation program.
Capital expenditures for the three and nine months ended October 31, 2022 were
$0.8 million and $1.3 million, respectively.
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Liquidity and Capital Resources
At October 31, 2022, cash and cash equivalents were approximately $34.9 million
and working capital was approximately $99.6 million. Cash and cash equivalents
decreased $17.8 million and working capital decreased $9.0 million from January
31, 2022, primarily due to treasury stock purchases of $5.4 million, additional
investments in Bodytrak of $3.1 million and $1.0 million of capital
expenditures.
Of the Company's total cash and cash equivalents of $34.9 million as of October
31, 2022, cash held in Latin America of $1.5 million, cash held in Russia and
Kazakhstan of $1.2 million, cash held in the UK of $0.7 million, cash held in
India of $0.6 million, cash held in Hong Kong of $0.2 million and cash held in
Vietnam of $0.3 million would not be subject to additional US tax in the event
such cash was repatriated due to the change in the US tax law as a result of the
December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the "Tax Act").
When the Company repatriates cash from China, of the $25.9 million balance at
October 31, 2022, there could be an additional 10% withholding tax incurred in
that country. The Company expects to repatriate cash from China during FY 23,
and in anticipation of doing so, has accrued a withholding tax expense of $2.0
million as of October 31, 2022.
Net cash used in operating activities of $5.2 million for the nine months ended
October 31, 2022 was primarily due to an increase in current assets of $12.5
million partially offset by net income of $1.7 million, non-cash expenses of
$4.6 million for deferred taxes, depreciation and amortization, stock
compensation and equity in loss of equity investment, and increase in current
liabilities of $1.0 million. The increase in current assets was driven by a
build in inventory to support customers by reducing delivery times. We do not
expect the inventory build to continue in the fourth quarter. Net cash used in
investing activities of $4.1 million for the nine months ended October 31, 2022
reflects office and manufacturing equipment purchases and the additional
investments in Bodytrak of $3.3 million. Net cash used in financing activities
was $6.2 million for the nine months ended October 31, 2022, due to $5.4 million
in shares repurchased under our share repurchase program and shares returned to
pay income taxes on shares vested under our equity compensation program.
On December 2, 2022 the Company acquired Eagle in an all-cash transaction valued
at approximately $10.8 million subject to post-closing adjustments and potential
future earnout payments. The acquisition enhances Lakeland's product portfolio,
particularly within fire service protective clothing and expands its sales
presence in the Middle East and Europe.
We believe our current cash balance and cashflow from operations will be
sufficient to satisfy our projected working capital and planned capital
expenditures for the foreseeable future.
On June 25, 2020, we entered into a Loan Agreement (the "Loan Agreement") with
Bank of America ("Lender"). The Loan Agreement provides the Company with a
secured $12.5 million revolving credit facility, which includes a $5.0 million
letter of credit sub-facility. The Company may request from time to time an
increase in the revolving credit loan commitment of up to $5.0 million (for a
total commitment of up to $17.5 million). Borrowing pursuant to the revolving
credit facility is subject to a borrowing base amount calculated as (a) 80% of
eligible accounts receivable, as defined, plus (b) 50% of the value of
acceptable inventory, as defined, minus (c) certain reserves as the Lender may
establish for the amount of estimated exposure, as reasonably determined by the
Lender from time to time, under certain interest rate swap contracts. The
borrowing base limitation only applies during periods when the Company's
quarterly funded debt to EBITDA ratio, as defined, exceeds 2.00 to 1.00. The
credit facility will mature on June 25, 2025. Borrowings under the revolving
credit facility bear interest at a rate per annum equal to the sum of the
one-month LIBOR Daily Floating Rate ("LIBOR"), plus 125 basis points. LIBOR is
subject to a floor of 100 basis points. All outstanding principal and unpaid
accrued interest under the revolving credit facility is due and payable on the
maturity date. The one-month LIBOR is expected to cease publication after June
30, 2023. The Loan Agreement provides that if the rate is not available for any
reason, then the rate will be determined by such alternate method as reasonably
selected by the Lender. On a one-time basis, and subject to there not existing
an event of default, the Company may elect to convert up to $5.0 million of the
then outstanding principal of the revolving credit facility to a term loan
facility with an assumed amortization of 15 years and the same interest rate and
maturity date as the revolving credit facility. The Loan Agreement provides for
an annual unused line of credit commitment fee, payable quarterly, of 0.25%,
based on the difference between the total credit line commitment and the average
daily amount of credit outstanding under the facility during the preceding
quarter.
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On June 18, 2021, the Company entered into an Amendment No. 1 to Loan Agreement
(the "Amendment") with the Lender, which modifies certain terms of the Company's
existing Loan Agreement with the Lender. The Amendment increases the credit
limit under the Loan Agreement's senior secured revolving credit facility from
$12.5 million to $25.0 million. The Amendment also amends the covenant in the
Loan Agreement that restricts acquisitions by the Company or its subsidiaries in
order to allow, without the prior consent of the Lender, acquisitions of a
business or its assets if there is no default under the Loan Agreement and the
aggregate consideration does not exceed $7.5 million for any individual
acquisition or $15.0 million on a cumulative basis for all such acquisitions.
The Loan Agreement requires the Company to maintain a Funded Debt to EBITDA (as
each such term is defined in the Loan Agreement) ratio of 3.0 to 1.0 or less and
a Basic Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of at
least 1.15 to 1.0. The Loan Agreement also contains customary covenants,
including covenants that, among other things, limit or restrict the Company's
and/or the Company's subsidiaries ability, subject to certain exceptions and
qualifications, to incur liens or indebtedness, pay dividends, or merge,
consolidate or sell or otherwise transfer assets. The Company was in compliance
with all of its debt covenants as of October 31, 2022.
Other than the changes described above, the terms and conditions of the Loan
Agreement remain in full force and effect.
Stock Repurchase Program. On February 17, 2021, the Company's board of directors
approved a stock repurchase program under which the Company may repurchase up to
$5 million of its outstanding common stock. On July 6, 2021, the Board of
Directors authorized an increase in the Company's stock repurchase program under
which the Company may repurchase up to an additional $5 million of its
outstanding common stock (the "Existing Share Repurchase Program"). On April 7,
2022, the Board of Directors authorized a new stock repurchase program under
which the Company may repurchase up to $5 million of its outstanding common
stock (the "New Share Repurchase Program"). The New Share Repurchase Program
became effective upon the completion of the Existing Share Repurchase Program.
The New Share Repurchase Program has no expiration date but may be terminated by
the Board of Directors at any time. Shares repurchased in the three months
ended October 31, 2022, totaled 194,839 shares at a cost of $2.3 million leaving
$0.4 million remaining available for repurchase under the New Share Repurchase
Program at October 31, 2022. On December 1, 2022, the Board of Directors
authorized an increase in the Company's stock repurchase program under which the
Company may repurchase up to an additional $5 million of its outstanding common
stock.
Capital Expenditures. Our capital expenditures for the first nine months of FY23
of $1.3 million principally relate to capital purchases for our manufacturing
facilities in Mexico, Vietnam and India, enhancement of our global IT
infrastructure and furnishing our new corporate headquarter office. We
anticipate FY23 capital expenditures to be approximately $1.8 million as we
continue to deploy our ERP solution globally, invest in strategic capacity
expansion, and replace existing equipment in the normal course of operations.
We expect to fund the capital expenditures from our cash flow from operations.
The Company may also seek to expend funds in connection with acquisitions. On
December 2, 2022 the Company acquired Eagle in an all-cash transaction valued at
approximately $10.8 million subject to post-closing adjustments and potential
future earnout payments. The Company paid the portion of the purchase price due
at closing using available cash on hand.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. A summary of our significant
accounting policies is included in Note 1 to our consolidated financial
statements in our fiscal year 2022 Form 10-K. Certain of our accounting policies
are considered critical, as these policies are the most important to the
depiction of our financial statements and require significant, difficult, or
complex judgments, often employing the use of estimates about the effects of
matters that are inherently uncertain. Such policies are summarized in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section in our 2022 Form 10-K. There have been no significant changes
in the application of our critical accounting policies during the nine months
ended October 31, 2022.
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LAKELAND INDUSTRIES, INC. 
