What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-12-08 compared with 2022-09-08 · 66 added, 66 removed, 123 unchanged (52% of the section changed)

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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 $16.4 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.

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

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.

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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.

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.

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Results of Operations

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.

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

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 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.

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 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 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 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 $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.

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 $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.

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 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.

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.

Nine Months ended October 31, 2022, Compared to the Nine Months Ended October 31, 2021

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 $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.

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.

Decrease in direct container sales.

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

Increases in freight rates beginning in FY22.

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.

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.

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 $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.

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 $2.9 million for the six months ended July 31, 2022, compared to $2.7 million for the six months ended July 31, 2021.

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.

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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.

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 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.

Liquidity and Capital Resources

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 $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.

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 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 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.

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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 July 31, 2022.

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.

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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 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”).

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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 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.

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 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.

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

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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 six months ended July 31, 2022.

There have been no significant changes in the application of our critical accounting policies during the nine months ended October 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