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. Manufacturing
expansion is not only necessary to control rising costs, it is also necessary
for Lakeland to achieve its growth objectives.
Our net sales attributable to customers outside the United States were $16.0
million and $18.4 million for the three months ended April 30, 2022 and 2021,
respectively.
We are continually monitoring the potential financial impact of the Russian
invasion of Ukraine on our operations. For Q1 FY23, sales in Russia were
approximately 2.8% 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 consumer stockpiled inventories that may temper demand within
our regular markets in 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 and freight 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 into 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 April 30, 2022, Compared to the Three Months Ended April 30,
2021
Net Sales. Net sales were $27.3 million for the three months ended April 30,
2022, a decrease of $6.8 million or 19.9% compared to $34.1 million for the
three months ended April 30, 2021. Sales of our disposable and chemical product
lines were impacted in the first quarter due to a reduction in direct container
sales driven by COVID-19 demand and continued softness in demand from our
industrial markets. Other product lines such as fire, high performance, and high
visibility, increased by $1.6 million due to strengthening demand in those
markets. Sales were affected by customers over-ordering in prior periods,
resulting in excess channel inventories, and shipping delays with ocean freight
carriers.
Gross Profit. Gross profit for the three months ended April 30, 2022 was $11.1
million, a decrease of $3.7 million, or 25%, compared to $14.8 million for the
three months ended April 30, 2021. Gross profit as a percentage of net sales
decreased to 40.5% for the three month period ended April 30, 2022, from 43.4%
for the three months ended April 30, 2021. Gross profit performance in the
fiscal 2022 period benefited from higher volumes including direct container
shipments, related factory utilization and an improving product mix with pricing
power. Major factors driving the decline in gross margins in the three months
ended April 30, 2022, were:
· Lower level of direct container sales in the current period.
· Increases in transportation costs.
Operating Expense. Operating expenses increased 18.5% from $8.1 million for the
three months ended April 30, 2021 to $9.6 million for the three months ended
April 30, 2022. This increase is attributable to increases in travel and trade
show expenses, administrative expenses and currency fluctuations. Currency
fluctuations accounted for $0.8 million of the increases due primarily to the
fluctuation in the Chinese yuan. Operating expenses as a percentage of net sales
was 35.2% for the three months ended April 30, 2022, up from 23.9% for the three
months ended April 30, 2021 primarily due to the lower volume of sales.
Operating Profit. Operating profit declined to $1.4 million for the three months
ended April 30, 2022 from $6.6 million for the three months ended April 30,
2021, due to the impacts detailed above. Operating margins were 5.3% for the
three months ended April 30, 2022, as compared to 19.4% for the three months
ended April 30, 2021.
Income Tax Expense. Income tax expense consists of federal, state and foreign
income taxes. Income tax expense was $0.3 million for the three months ended
April 30, 2022, compared to $1.6 million for the three months ended April 30,
2021. The decrease is due to the reduction in pre-tax income. The effective rate
for the three months ended April 30, 2022 was 20.2%. The Company recorded
deferred tax benefits of $0.2 million related to accruals for China social
taxes. Excluding this discrete benefit the effective rate was 32.9%. The
effective rate for the three months ended April 30, 2021 was 24.4%.
Net Income. Net income decreased by $3.9 million to $1.1 million for the three
months ended April 30, 2022 from net income of $5.0 million for the three months
ended April 30, 2021.
Significant Balance Sheet Fluctuation April 30, 2022, Compared to January 31,
2022
Cash decreased by $1.9 million, primarily as continued profitability and working
capital management generated $1.9 million of cash flow from operations offset by
our additional investment of $1.9 million in Bodytrak and $0.4 million of share
purchases under our Existing Share Repurchase Program. Accounts receivable
decreased due to improved collections and lower sales levels compared to prior
year. Inventory increased $2.2 million due to planned increases to offset
freight delays, and reduced demand as compared to prior year. Accounts payable,
accrued compensation, and other accrued expenses increased $1.7 million. Capital
expenditures for the three months ended April 30, 2022 were $0.4 million.
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Liquidity and Capital Resources
At April 30, 2022, cash and cash equivalents were approximately $50.8 million
and working capital was approximately $106.0 million. Cash and cash equivalents
decreased $1.9 million and working capital decreased $2.6 million from January
31, 2022, primarily due to treasury stock purchases of $0.4 million, additional
investment in Bodytrak of $1.9 million and $0.4 million of capital expenditures.
Of the Company’s total cash and cash equivalents of $50.8 million as of April
30, 2022, cash held in Latin America of $1.7 million, cash held in Russia and
Kazakhstan of $0.5 million, cash held in the UK of $0.8 million, cash held in
India of $1.0 million, cash held in Hong Kong of $2.7 million and cash held in
Vietnam of $0.2 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”).
In the event the Company repatriated cash from China, of the $35.5 million
balance at April 30, 2022 there would be an additional 10% withholding tax
incurred in that country.
Net cash provided by operating activities of $1.9 million for the three months
ended April 30, 2022 was primarily due to net income of $1.1 million, non-cash
expenses of $0.4 million for deferred taxes, depreciation and amortization and
stock compensation, and increase in current liabilities of $2.5 million offset
by an increase in current assets of $2.1 million. Net cash used in investing
activities of $2.4 million for the three months ended April 30, 2022 reflects
office and manufacturing equipment purchases and the additional investment in
Bodytrak of $1.9 million. Net cash used in financing activities was $1.1 million
for the three months ended April 30, 2022, due to $0.4 million in shares
repurchased under our Existing Share Repurchase Program and shares returned to
pay income taxes on shares vested under our equity compensation program.
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.
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 April 30, 2022.
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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 current 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
will become effective upon the completion of the Existing Share Repurchase
Program, which has approximately $0.4 million remaining for repurchases as of
April 30, 2022. 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 April 30, 2022 totaled 25,017 shares at a cost of $0.4
million leaving $5.4 million remaining available for repurchase under the
Existing Share Repurchase Program and the New Share Repurchase Program at April
30, 2022.
Capital Expenditures. Our capital expenditures for the first three months of
FY23 of $0.4 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 $3.0 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.
The Company may also seek to expend funds in connection with acquisitions.
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 three months
ended April 30, 2022.
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