LAKELAND INDUSTRIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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, particularly in China and Vietnam, which could affect our ability to manufacture or sell our products, obtain products from foreign suppliers or control the costs of our products; · 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; · 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; · disruption in our supply chain, manufacturing or distribution operations could adversely affect our business; · climate change and other sustainability matters may adversely affect our business and operations; · 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 U.S. and foreign tax 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; · provisions in our restated certificate of incorporation and by-laws and Delaware law could make a merger, tender offer or proxy contest difficult; · 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; · adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition or results of operations; · 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 2024 Form 10-K. 22 Table of Contents 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 2,000 global safety and industrial supply distributors. Our authorized distributors supply end users, such as integrated oil, chemical/petrochemical, automobile, transportation, 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 into 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, Uruguay, Middle East and Southeast Asia. The Company’s strong market position across its focus product categories and markets is supported by continued and increasing investment in its global footprint, particularly owning and operating its own manufacturing facilities acquiring complementary companies or products that expand and enhance product offerings and/or geographic customer territories, and investing in sales and marketing resources in countries around the world. We believe that ownership of manufacturing is the keystone to building a resilient supply chain and providing high-quality products to our customers. Having seven manufacturing locations in seven countries on five continents, coupled with sourcing core raw materials from multiple suppliers in various countries, affords Lakeland with superior manufacturing capabilities and supply chain resilience when compared to our competitors who use contractors. Additionally, our focus on providing customers with best-in-class service includes the strategic location of our sales team members. Lakeland has 95 sales employees located in 24 countries selling into more than 50 countries globally. On February 5, 2024, the Company acquired Italy and Romania-based Jolly Scarpe S.p.A. and Jolly Scarpe Romania S.R.L. (collectively, "Jolly") in an all-cash transaction. Total consideration was $9.6 million, of which $7.5 million was paid to the seller at closing, $0.6 million paid to retire the remainder of Jolly’s debt and $1.5 million remained unpaid subject to post-closing adjustments and customary holdback provisions. Jolly is a leading designer and manufacturer of professional footwear for the firefighting, military, police, and rescue markets. The company is headquartered in Montebelluna, Italy, with manufacturing operations in Bucharest, Romania, and has 150 employees. Jolly provides a differentiated product portfolio through its continued investment in research and development and use of modern materials and cutting-edge technologies in the production of its footwear. On November 30, 2023 the Company acquired New Zealand-based Pacific Helmets NZ Limited (“Pacific”) in an all-cash transaction valued at approximately NZ$14,000,000 ($8.6 million) including assumption of debt, subject to post-closing adjustments and customary holdback provisions. The acquisition enhances Lakeland’s product portfolio, particularly within fire service protective helmets. Headquartered in Whanganui, New Zealand, Pacific is a leading designer and provider of structural firefighting, wildland firefighting, and technical rescue helmets. On December 2, 2022, the Company acquired UK-based Eagle Technical Products Limited (“Eagle”) in an all-cash transaction valued at approximately $10.5 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 $22.0 million and $16.4 million for the three months ended April 30, 2024 and 2023, respectively. 23 Table of Contents We are continually monitoring the potential financial impact of the Russian invasion of Ukraine on our operations. For the three months ended April 30, 2024, sales in Russia were approximately 2.9% of our consolidated sales and sales into Ukraine were not significant. We do not have any capital assets in Russia. Results of Operations Three Months ended April 30, 2024, Compared to the Three Months Ended April 30, 2023 Net Sales. Net sales were $36.3 million for the three months ended April 30, 2024, an increase of $7.6 million or 26.5% compared to $28.7 million for the three months ended April 30, 2023. Sales of our Fire Services product line increased $5.0 million due to $3.8 million in sales from Jolly, acquired in February 2024 and Pacific, acquired in November 2023, and $1.2 million growth in the product line. We also saw strength in the Woven product line with an increase of $1.1 million, primarily in the international market. We also saw improvements in our Disposable and Chemical product lines with an increase of $1.6 million. Gross Profit. Gross profit for the three months ended April 30, 2024 was $16.2 million, an increase of $3.7 million, or 30.1%, compared to $12.4 million for the three months ended April 30, 2023. Gross profit as a percentage of net sales increased to 44.6% for the three-month period ended April 30, 2024, from 43.4% for the three months ended April 30, 2023. Gross profit performance improved in the three months ended April 30, 2024 due to increased sales in our higher margin product lines and improvements in our manufacturing facilities. Operating Expense . Operating expenses increased by $3.5 million, or 33.3%, from $10.5 million for the three months ended April 30, 2023 to $14.0 million for the three months ended April 30, 2024. This increase is attributable to the acquisition of Jolly and Pacific which increased operating expenses by $1.3 million. In addition, the Company incurred transaction expenses of $1.0 million coupled with costs of $0.2 million due to ongoing PFAS litigation and $0.3 million of costs associated with the Monterrey facility. The remaining increase was related to additional selling expenses including travel and trade shows, professional fees and administrative expenses of $0.9 million. During the quarter ended April 30, 2024, the Company evaluated the earnout consideration accrual related to the Eagle and Pacific acquisitions and reduced the accrual by $0.7 million, which was recorded as a reduction in operating expense. During the quarter ended April 30, 2023, the Company evaluated the earnout consideration accrual related to the Eagle acquisitions and reduced the accrual by $0.5 million, which was recorded as a reduction in operating expense. Operating expenses as a percentage of net sales was 38.5% for the three months ended April 30, 2024, up from 36.6% for the three months ended April 30, 2023, primarily due to the factors noted above. Operating Profit . Operating profit increased to $2.2 million for the three months ended April 30, 2024 from $1.9 million for the three months ended April 30, 2023, due to the impacts detailed above. Operating margins were 6.1% for the three months ended April 30, 2024, as compared to 6.8% for the three months ended April 30, 2023. Income Tax Expense . Income tax expense consists of federal, state and foreign income taxes. Income tax expense was $0.4 million for the three months ended April 30, 2024, compared to $0.5 million for the three months ended April 30, 2023. The decrease is a result of the increase in pre-tax income offset by the impacts of final earn-out adjustments related to the Pacific and Eagle acquisitions. The Company's effective tax rate for the first quarter of FY25 was 19.0% which differs from the U.S. federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions, GILTI, and the earn-out adjustments related to the Pacific and Eagle acquisitions mentioned above. The Company's effective tax rate for the first quarter of FY24 was 29.1%, which differs from the U.S. federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions and GILTI. Net Income. Net income increased by $0.4 million to $1.7 million for the three months ended April 30, 2024 from $1.3 million for the three months ended April 30, 2023. Significant Balance Sheet Fluctuation April 30, 2024 , Compared to January 31, 2024 Cash increased by $3.1 million primarily due to the acquisition of Jolly. Cash provided by operations was $0.3 million due to net income of $1.7 million, non-cash charges of $0.3 million, reductions in working capital of $0.5 million, offset by payments historically made in the first fiscal quarter including insurance and other annual costs and payment of accrued employee compensation. The impact of these payments was a net use of cash of $2.2 million. Net cash used in investing activities was $9.2 million which included the acquisition of Jolly which required net cash of $8.1 million and a further investment in Bodytrak’s convertible debt instruments of $0.6 million. Capital expenditures were $0.5 million for the three months ended April 30, 2024, primarily for manufacturing equipment. Net cash provided by financing activities was $11.6 million for the three months ended April 30, 2024, due to $12.3 million borrowed to fund the Jolly acquisition offset by dividends of $0.2 million, repayment of short-term borrowings of $0.4 million and $0.1 million in shares returned to pay income taxes on shares vested under our equity compensation program. 24 Table of Contents Liquidity and Capital Resources At April 30, 2024, cash and cash equivalents were approximately $28.4 million, and working capital was approximately $92.4 million. Cash and cash equivalents increased $3.1 million, and working capital increased $9.5 million from January 31, 2024 due to the balance sheet fluctuations described above and the acquisition of Pacific and Jolly. Of the Company’s total cash and cash equivalents of $28.4 million as of April 30, 2024, cash held in Latin America of $2.0 million, cash held in the UK of $1.4 million, cash held in Russia and Kazakhstan of $1.0 million, cash held in the EEC of $4.2, cash held in India of $0.8 million, cash held in Vietnam of $0.9 million, and cash held in Hong Kong of $0.6 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 $9.4 million balance at April 30, 2024, there could be an additional 10% withholding tax incurred in that country. The Company expects to repatriate cash from China during FY 25 and in anticipation of doing so, has accrued withholding tax expense of $0.4 million as of April 30, 2024. Cash provided by operations was $0.3 million due to net income of $1.7 million, non-cash charges of $0.3 million, reductions in working capital of $0.5 million, offset by payments historically made in the first fiscal quarter including insurance and other annual costs and payment of accrued employee compensation. The impact of these payments was a net use of cash of $2.2 million. Net cash used in investing activities was $9.2 million which included the acquisition of Jolly which required net cash of $8.1 million and a further investment in Bodytrak’s convertible debt instruments of $0.6 million. Capital expenditures were $0.5 million for the three months ended April 30, 2024, primarily for manufacturing equipment. Net cash provided by financing activities was $11.6 million for the three months ended April 30, 2024, due to $12.3 million borrowed to fund the Jolly acquisition offset by dividends of $0.2 million, repayment of short-term borrowings of $0.4 million and $0.1 million in shares returned to pay income taxes on shares vested under our equity compensation program. On February 5, 2024, the Company acquired Italy and Romania-based Jolly Scarpe S.p.A. and Jolly Scarpe Romania S.R.L. (collectively, "Jolly") in an all-cash transaction. Total consideration was $9.6 million, of which $7.5 million was paid to the seller at closing, $0.6 million paid to retire the remainder of Jolly’s debt and $1.5 million remained unpaid subject to post-closing adjustments and customary holdback provisions. Jolly is a leading designer and manufacturer of professional footwear for the firefighting, military, police, and rescue markets. The company is headquartered in Montebelluna, Italy, with manufacturing operations in Bucharest, Romania, and has 150 employees. Jolly provides a differentiated product portfolio through its continued investment in research and development and use of modern materials and cutting-edge technologies in the production of its footwear. On November 30, 2023 the Company acquired New Zealand-based Pacific Helmets NZ Limited (“Pacific”) in an all-cash transaction valued at approximately NZ$14,000,000 ($8.6 million) including assumption of debt, subject to post-closing adjustments and customary holdback provisions. The acquisition enhances Lakeland’s product portfolio, particularly within fire service protective helmets. Headquartered in Whanganui, New Zealand, Pacific is a leading designer and provider of structural firefighting, wildland firefighting, and technical rescue helmets. We believe our current cash, cash equivalents, borrowing capacity under our Loan Agreement, and the cash to be generated from expected product sales will be sufficient to meet our projected operating and investing requirements (including planned capital expenditures) for at least the next twelve months. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. On June 25, 2020, the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America (the “Lender”). The Loan Agreement provided the Company with a secured $25.0 million revolving credit facility, which included a $5.0 million letter of credit sub-facility. The Company could 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 $30.0 million). Borrowing pursuant to the revolving credit facility was 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 applied during periods when the Company’s quarterly funded debt to EBITDA ratio, as defined, exceeds 2.00 to 1.00. The Loan Agreement permitted, without the prior consent of the Lender, acquisitions of a business or its assets by the Company or its subsidiaries if there was no default under the Loan Agreement and the aggregate consideration did not exceed $7.5 million for any individual acquisition or $15.0 million on a cumulative basis for all such acquisitions. On March 3, 2023, the Company changed the benchmark interest rate in the credit facility from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The credit facility was to mature on June 25, 2025. 25 Table of Contents On November 30, 2023, the Company entered into Amendment No. 3 to the Loan Agreement by and between the Lender and the Company (the “Third Amendment”). Pursuant to the Third Amendment, the Lender consented to the Company’s acquisition of one hundred percent (100%) of the equity interests of Pacific. The Third Amendment further provided for certain amendments to the Loan Agreement to permit additional indebtedness to be made available to Pacific, to exempt Pacific from certain requirements of the Loan Agreement pertaining to subsidiary guaranty and asset pledges that would otherwise be required under the Loan Agreement and to waive the Company’s borrowing base limitations through January 31, 2024. The Third Amendment also provided for the reaffirmation of representations, warranties and covenants under the Loan Agreement as are customary in connection with similar amendments of credit documents. On March 28, 2024, the Company entered into Amendment No. 4 to the Loan Agreement by and between the Lender and the Company (the “Fourth Amendment”). Pursuant to the Fourth Amendment, the Lender and the Company agreed to, among other things, (i) extend the expiration date of the credit facility to March 28, 2029, (ii) increase the availability under the revolving credit facility to $40.0 million with an accordion feature providing for the potential funding of an additional $10.0 million, (iii) remove the borrowing base component of the credit facility; and (iv) modify the interest rate based on Daily SOFR plus the Applicable Rate. The Applicable Rate is based upon a Funded Debt to EBITDA Ratio and includes four (4) different levels constituting a SOFR margin range from 1.25% to 2.00%. In addition, the Fourth Amendment (i) modified the Funded Debt to EBITDA Ratio covenant so as not to exceed 3.5x (with step-downs to 3.25 and 3.0 in 2025 and 2026), (ii) modified the Basic Fixed Charge Coverage Ratio covenant to a minimum of 1.20x, (iii) includes a springing Asset Coverage Ratio covenant of at least 1.10x, but only to the extent that the maximum Total Leverage Ratio exceeds 3.00x at any reporting period, (iv) increases the sublimit for letters of credit to $10.0 million, and (v) imposes a floor to Daily SOFR of one percent (1.00%). The Fourth Amendment provides for additional indebtedness or the assumption of existing indebtedness for acquisitions of foreign subsidiaries (not to exceed $10.0 million in USD) and increased the size of Permitted Acquisitions, without prior approval from the Lender, to $17.5 million per occurrence and $35.0 million in the aggregate. We were in compliance with all financial covenants of the Loan Agreement as of April 30, 2024. 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. 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, which became effective upon the completion of the prior share repurchase program. 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. No shares were repurchased in the three months ended April 30, 2024 leaving $5.0 million remaining under the share repurchase program at April 30, 2024. The share repurchase program has no expiration date but may be terminated by the Board of Directors at any time. Quarterly Cash Dividend . On February 1, 2024, the Board of Directors declared a quarterly cash dividend. The quarterly dividend of $0.03 per share was paid on February 22, 2024, to stockholders of record as of February 15, 2024. Capital Expenditures. Our capital expenditures for the three months ended April 30, 2024 of $0.5 million principally relate to capital purchases for replacement of manufacturing equipment. We anticipate FY25 capital expenditures to be approximately $3.0 million as we 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 expend funds in connection with potential acquisitions. 26 Table of Contents 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 2024 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 2024 Form 10-K. There have been no significant changes in the application of our critical accounting policies during the three months ended April 30, 2024. Item 3. Quantitative and Qualitative Disclosures About Market Risk A smaller reporting company is not required to provide the information required by this Item, and therefore, no disclosure is required under Item 3 for the Company.