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Item 2. Management’s Discussion and Analysis

2022-09-08 compared with 2022-06-09 · 80 added, 42 removed, 109 unchanged (53% of the section changed)

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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.

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.

Our net sales attributable to customers outside the United States were $16.4 million and $17.3 million for the three months ended July 31, 2022 and 2021, respectively and $32.4 million and $35.7 million for the six months ended July 31, 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.

For the first half of FY23, sales in Russia were approximately 2.5% of our consolidated sales and sales into Ukraine were not significant.

We do not have any capital assets in Russia.

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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 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.

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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.

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.

Results of Operations

Three Months ended April 30, 2022, Compared to the Three Months Ended April 30, 2021

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.

Three Months ended July 31, 2022, Compared to the Three Months Ended July 31, 2021

Net sales were $28.2 million for the three months ended July 31, 2022, an increase of $0.7 million or 2.5% compared to $27.5 million for the three months ended July 31, 2021.

Sales of our fire, high performance, high visibility and woven product lines increased by $1.6 million reflecting strengthening in the industrial markets.

Our sales were negatively impacted by declines in our disposable and chemical product lines by $0.9 million though we were seeing an increase in direct container activity at the end of the second quarter.

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.

Gross profit for the three months ended July 31, 2022 was $11.6 million, a decrease of $1.3 million, or 10.0%, compared to $12.9 million for the three months ended July 31, 2021.

Gross profit as a percentage of net sales decreased to 41.3% for the three month period ended July 31, 2022, from 46.8% for the three months ended July 31, 2021.

Gross profit performance in the fiscal 2022 period benefited from higher factory utilization and an improving product mix with pricing power.

Major factors driving the decline in gross margins in the three months ended July 31, 2022, were:

Change in product mix during the current quarter with a decline in disposable and chemical sales.

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.

Operating expenses increased 11.4% from $8.8 million for the three months ended July 31, 2021 to $9.8 million for the three months ended July 31, 2022.

This increase is attributable to increases in travel and trade show expenses, administrative expenses and currency fluctuations.

Currency fluctuations accounted for $0.4 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 expenses as a percentage of net sales was 34.8% for the three months ended July 31, 2022, up from 32.0% for the three months ended July, 2021 primarily due to the increased costs noted above.

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.

Operating profit declined to $1.8 million for the three months ended July 31, 2022 from $4.1 million for the three months ended July 31, 2021, due to the impacts detailed above.

Operating margins were 6.4% for the three months ended July 31, 2022, as compared to 14.8% for the three months ended July 31, 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 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.

Income tax expense was $2.6 million for the three months ended July 31, 2022, compared to $1.1 million for the three months ended July 31, 2021.

The Company changed its’ permanent reinvestment assertions for their Chinese operations during the second quarter due to increased volatility of the Chinese yuan and an updated evaluation of investment strategies.

The Company recorded $2 million in withholding taxes for a planned repatriation during FY23.

The effective rate for the three months ended July 31 2022 was 149.9%.

Excluding the discrete item above the effective rate was 35.0%.

The effective rate for the three months ended July 31, 2021 was 26.9%.

Net Income (Loss).

Net loss for the three months ended July 31, 2022 was $0.9 million a decline of $3.9 million from net income of $3.0 million for the three months ended July 31, 2021.

The decline was due to the factors discussed above.

Six Months ended July 31, 2022, Compared to the Six Months Ended July 31, 2021

Net sales were $55.5 million for the six months ended July 31, 2022 as compared to $61.6 million for the six months ended July 31, 2021, a decrease of 9.9%.

Sales of our disposable and chemical product lines declined by $9.3 million in the first half of the year due to reduction in direct container sales driven by diminishing COVID-19 demand and continued softness in demand for industrial applications.

As noted, it is anticipated that COVID-19 demand will continue to diminish.

Other product lines such as fire, high performance, and gloves, increased by $3.2 million in the aggregate during the period due to strengthening in those markets.

For the six months ended July 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 $22.7 million for the six months ended July 31, 2022, a decrease of $4.9 million, or 17.8%, from $27.6 million for the six months ended July 31, 2021.

Gross profit as a percentage of net sales decreased to 40.9% for the six months ended July 31, 2022, from 44.9% for the six months ended July 31, 2021.

Major factors driving gross margins were:

Significant decreases in volumes driven by reduced COVID-19 demand.

Decrease in direct container sales.

Return to competitive pricing pressures as COVID-19 demand decreases.

Operating Expense.

Operating expenses increased $2.5 million, or 14.8%, to $19.4 million for the six months ended July 31, 2022 from $16.9 million for the six months ended July 31, 2021.

Operating expenses as a percentage of net sales was 35% for the six months ended July 31, 2022, up from 27.5% for the six months ended July 31, 2021.

The increased percentage is primarily due to the expenses noted below and lower sales volumes.

Selling expenses were higher by $1.0 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 $1.4 million driven by currency fluctuations accounting for $1.1 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 Profit .

Operating profit decreased to $3.2 million for the six months ended July 31, 2022 from $10.7 million for the six months ended July 31, 2021, due to the impacts detailed above.

Operating margins were 5.8% for the six months ended July 31, 2022, as compared to 17.4% for the six months ended July 31, 2021.

Income Tax Expense .

Income tax expense consists of federal, state and foreign income taxes.

Income tax expense was $2.9 million for the six months ended July 31, 2022, compared to $2.7 million for the six months ended July 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 34.1% and 29.1% for the six months ended July 31, 2022 and 2021, respectively.

Net Income (Loss).

Net income decreased by $7.7 million to $0.3 million for the six months ended July 31, 2022 from $8.0 million for the six months ended July 31, 2021.

Significant Balance Sheet Fluctuation July 31, 2022 , Compared to January 31, 2022

Cash decreased by $11.5 million due to cash used in operating activities of $4.6 million for the six months ended July 31, 2022 primarily due to an increase in current assets of $11.9 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 in the current quarter.

Offsetting these increases was net income of $0.3 million, non-cash expenses of $3.5 million for deferred taxes, depreciation and amortization and stock compensation, and increase in current liabilities of $3.5 million.

The Company invested $0.5 million for the six months ended July 31, 2022 in office and manufacturing equipment purchases and made an additional investment in Bodytrak of $1.9 million.

Net cash used in financing activities was $3.9 million for the six months ended July 31, 2022, due to $3.1 million in shares repurchased and shares returned to pay income taxes on shares vested under our equity compensation program.

Capital expenditures for the three and six months ended July 31, 2022 were $0.1 million and $0.5 million respectively.

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.

At July 31, 2022, cash and cash equivalents were approximately $41.2 million and working capital was approximately $103.1 million.

Cash and cash equivalents decreased $11.5 million and working capital decreased $5.6 million from January 31, 2022, primarily due to treasury stock purchases of $3.1 million, additional investment in Bodytrak of $1.9 million and $0.5 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.

Of the Company’s total cash and cash equivalents of $41.2 million as of July 31, 2022, cash held in Latin America of $2.1 million, cash held in Russia and Kazakhstan of $0.9 million, cash held in the UK of $0.5 million, cash held in India of $0.6 million, cash held in Hong Kong of $0.5 million and cash held in Vietnam of $0.7 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 $29.5 million balance at July 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 July 31, 2022.

Net cash used in operating activities of $4.6 million for the six months ended July 31, 2022 was primarily due to an increase in current assets of $11.9 million partially offset by net income of $0.3 million, non-cash expenses of $3.5 million for deferred taxes, depreciation and amortization and stock compensation, and increase in current liabilities of $3.5 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 second half of the year.

Net cash used in investing activities of $2.3 million for the six months ended July 31, 2022 reflects office and manufacturing equipment purchases and the additional investment in Bodytrak of $1.9 million.

Net cash used in financing activities was $3.9 million for the six months ended July 31, 2022, due to $3.1 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.

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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.

The Company was in compliance with all of its debt covenants as of July 31, 2022.

Other than the changes described above, the terms and conditions of the Loan Agreement remain in full force and effect.

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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 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 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.

Shares repurchased in the three months ended July 31, 2022, totaled 171,133 shares at a cost of $2.7 million leaving $2.7 million remaining available for repurchase under the New Share Repurchase Program at July 31, 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.

Our capital expenditures for the first six months of FY23 of $0.5 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.

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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.

There have been no significant changes in the application of our critical accounting policies during the six months ended July 31, 2022.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis