What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-09-06 compared with 2024-06-06 · 81 added, 56 removed, 116 unchanged (54% of the section changed)

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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.

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Lakeland has 95 sales employees located in 24 countries selling into more than 50 countries globally.

On July 1, 2024, the Company acquired the fire and rescue business of LHD Group Deutschland GmbH and its subsidiaries in Hong Kong and Australia (collectively, "LHD") in an all-cash transaction subject to post-closing adjustments and customary holdback provisions.

Total consideration was $15.9 million, net of $1.5 million cash acquired, of which $15.5 million was paid to retire LHD’s debt, $0.8 million was paid to the seller at closing, and $1.1 million remained unpaid subject to post-closing adjustments and customary holdback provisions.

LHD is a leading provider of firefighter turnout gear, accessories, and personal protective equipment cleaning, repair, and maintenance.

LHD has 111 employees worldwide and is headquartered in Wesseling, Germany, with operations in Hong Kong and Australia.

On February 5, 2024, the Company acquired Italy and Romania-based Jolly Scarpe S.p.A.

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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.

Jolly’s primary customers are based in Europe.

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.

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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.

Our net sales attributable to customers outside the United States were $26.2 million and $17.9 million for the three months ended July 31, 2024 and 2023, respectively, and $48.2 million and $34.3 million for the six months ended July 31, 2024 and 2023, respectively.

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.

For the first half of FY25, 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.

Results of Operations

Three Months ended April 30, 2024, Compared to the Three Months Ended April 30, 2023

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.

Three Months ended July 31, 2024, Compared to the Three Months Ended July 31, 2023

Net sales were $38.5 million for the three months ended July 31, 2024, an increase of $5.4 million or 16.3% compared to $33.1 million for the three months ended July 31, 2023.

Sales of our Fire Services product line increased $3.0 million due to $5.8 million in sales from LHD, acquired in July 2024, Jolly, acquired in February 2024 and Pacific, acquired in November 2023, and growth in the product line offset by a $2.6 million reduction in sales from Eagle due to a large order delivery in the prior year.

We also saw strength in the Woven product line with an increase of $3.1 million, primarily in the Latin America market.

These improvements were offset by a slight decline in industrial sales.

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.

Gross profit for the three months ended July 31, 2024 was $15.2 million, an increase of $1.0 million, or 7.0%, compared to $14.2 million for the three months ended July 31, 2023.

Gross profit as a percentage of net sales decreased to 39.6% for the three-month period ended July 31, 2024, from 42.9% for the three months ended July 31, 2023.

Gross profit performance declined in the three months ended July 31, 2024 due to increased manufacturing costs, in-bound freight expense, increase in deferred profit in ending inventory and amortization of the step up in basis of acquired inventory, partially offset by a favorable sales mix.

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.

Operating expenses increased by $6.4 million, or 61.5%, from $10.4 million for the three months ended July 31, 2023 to $16.8 million for the three months ended July 31, 2024.

This increase is attributable to the acquisition of LHD, Jolly and Pacific which increased operating expenses by $2.4 million.

In addition, the Company incurred transaction expenses of $0.7 million, restructuring costs of $0.7 million, $0.5 million of foreign currency losses from the continued devaluation of the Argentine peso, equity compensation of $0.4 million, ongoing PFAS litigation costs of $0.2 million and $0.2 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 $0.8 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.

During the quarter ended July 31, 2023, the Company evaluated the earnout consideration accrual related to the Eagle acquisition and reduced the accrual by $0.7 million, which was recorded as a reduction in operating expense.

Operating expenses as a percentage of net sales was 43.6% for the three months ended July 31, 2024, up from 31.6% for the three months ended July 31, 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.

Operating loss was $(1.6) million for the three months ended July 31, 2024 compared to operating profit of $3.7 million for the three months ended July 31, 2023, due to the impacts detailed above.

Operating margins were (4.2%) for the three months ended July 31, 2024, as compared to 11.2% for the three months ended July 31, 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.

Income tax benefit was $0.4 million for the three months ended July 31, 2024, compared to an expense of $1.2 million for the three months ended July 31, 2023.

The reduction in tax expense between the two periods is primarily a result of the decrease in pre-tax income.

The Company's effective tax rate for the second quarter of FY25 was 23.4% which differs from the U.S.

federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions, GILTI, and the impacts from stock compensation vestings during the quarter, partially offset by foreign withholding taxes accrued during the quarter in anticipation of additional repatriations of cash from China.

The Company's effective tax rate for the second quarter of FY24 was 32.7%, which differs from the U.S.

federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions and GILTI.

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.

Net Income (Loss).

Net loss was $(1.4) million for the three months ended July 31, 2024, compared to net income of $2.5 million for the three months ended July 31, 2023.

Six Months ended July 31, 2024, Compared to the Six Months Ended July 31, 2023

Net sales were $74.8 million for the six months ended July 31, 2024 as compared to $61.8 million for the six months ended July 31, 2023, an increase of 21.0%.

Our fire service product line increased by $8.0 million in the period due to the impact of the acquisitions of LHD, Jolly and Pacific which contributed $9.6 million in sales coupled with organic growth of $1.1 million, offset by a $2.6 million reduction in sales from Eagle due to a large order delivery in the prior year.

Sales of our woven product line increased $4.2 million due to strength in the Latin America market, primarily from Argentina.

Our remaining product lines delivered modest growth of $0.8 million.

Gross Profit.

Gross profit was $31.4 million for the six months ended July 31, 2024, an increase of $4.8 million, or 18.0%, from $26.6 million for the six months ended July 31, 2023.

Gross profit as a percentage of net sales decreased to 42.0% for the six months ended July 31, 2024, from 43.1% for the six months ended July 31, 2023 due to increased manufacturing costs, in-bound freight expense, increase in deferred profit in ending inventory and amortization of the step up in basis of acquired inventory partially offset by a favorable sales mix.

Operating Expense.

Operating expenses increased $9.8 million, or 46.7%, to $30.8 million for the six months ended July 31, 2024 from $21.0 million for the six months ended July 31, 2023.

The acquisitions of LHD, Jolly and Pacific accounted for $3.7 million of the increase in operating expenses.

The Company incurred $1.7 million in acquisition costs associated with these acquisitions.

In addition, the Company incurred ongoing PFAS litigation costs of $0.4 million and $0.5 million of costs associated with the Monterrey facility.

The impact of the adjustment to the earnout consideration accrual related to the Eagle acquisition was a reduction to operating expenses of $0.7 million for the 6 months ended July 31, 2024 compared to a reduction of $1.2 million for the six months ended July 31, 2023, which was recorded as a reduction in operating expense.

The remaining increase was related to additional selling expenses including travel and trade shows, professional fees and administrative expenses of $3.1 million.

Operating expenses as a percentage of net sales was 41.1% for the six months ended July 31, 2024, up from 33.9% for the six months ended July 31, 2023.

Operating Profit .

Operating profit decreased to $0.6 million for the six months ended July 31, 2024 from $5.7 million for the six months ended July 31, 2023, due to the impacts detailed above.

Operating margins were 0.8% for the six months ended July 31, 2024, as compared to 9.2% for the six months ended July 31, 2023.

Income Tax Expense .

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

Income tax benefit was less than $0.1 million for the six months ended July 31, 2024, compared to an expense of $1.7 million for the six months ended July 31, 2023.

In Q2 FY23, the Company changed its permanent reinvestment assertions for its Chinese operations 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 (13.1%) and 31.5% for the six months ended July 31, 2024 and 2023, respectively.

Net Income (Loss).

Net income decreased by $3.5 million to $0.3 million for the six months ended July 31, 2024 from $3.8 million for the six months ended July 31, 2023.

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.

The impact of these payments was a net use of cash of $2.2 million.

Capital expenditures were $0.5 million for the three months ended April 30, 2024, primarily for manufacturing equipment.

At July 31, 2024, cash and cash equivalents were approximately $24.9 million, and working capital was approximately $98.2 million.

Cash and cash equivalents decreased $0.3 million, and working capital increased $15.0 million from January 31, 2024 due to the balance sheet fluctuations described above and the acquisition of LHD, Pacific and Jolly.

Of the Company’s total cash and cash equivalents of $24.9 million as of July 31, 2024, cash held in Latin America of $2.4 million, cash held in the UK of $1.7 million, cash held in Russia and Kazakhstan of $1.5 million, cash held in the EEC of $6.3 million, cash held in India of $0.5 million, cash held in Vietnam of $0.2 million, and cash held in Hong Kong 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 $7.4 million balance at July 31, 2024, there could be an additional 10% withholding tax incurred in that country.

The Company expects to repatriate cash from China during the third quarter of FY 25 and in anticipation of doing so, has accrued withholding tax expense of $0.5 million as of July 31, 2024.

Cash used in operations was $4.1 million due to net income of $0.5 million, non-cash charges of $1.4 million, increases in working capital of $6.0 million, primarily due to a build in inventory in preparation for forecasted increase in sales in the second half of the year.

Net cash used in investing activities was $24.4 million which included the acquisition of LHD and Jolly which required net cash of $22.9 million and a further investment in Bodytrak’s convertible debt instruments of $0.6 million.

Capital expenditures were $0.8 million for the six months ended July 31, 2024, primarily for manufacturing equipment.

Net cash provided by financing activities was $27.0 million for the six months ended July 31, 2024, due to $28.3 million borrowed to fund the LHD and Jolly acquisitions offset by dividends of $0.4 million, term loan borrowings of $2.9 million to support Jolly operations, repayment of term loan borrowings of $0.4 million and repayments of our revolving credit facility of $3.0 million and $0.3 million in shares returned to pay income taxes on shares vested under our equity compensation program.

On July 1, 2024, the Company acquired the fire and rescue business of LHD Group Deutschland GmbH and its subsidiaries in Hong Kong and Australia (collectively, "LHD") in an all-cash transaction valued at approximately $16.3 million subject to post-closing adjustments and customary holdback provisions.

LHD is a leading provider of firefighter turnout gear, accessories, and personal protective equipment cleaning, repair, and maintenance.

LHD has 111 employees worldwide and is headquartered in Wesseling, Germany, with operations in Hong Kong and Australia.

On February 5, 2024, the Company acquired Italy and Romania-based Jolly Scarpe S.p.A.

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(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.

Total consideration was $9.6 million, of which $7.5 million was paid to the seller at closing, $0.6 million was 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’s primary customers are based in Europe.

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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 borrowing base limitation only applied during periods when the Company’s quarterly funded debt to EBITDA ratio, as defined, exceeded 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.

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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%.

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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.

We were in compliance with all financial covenants of the Loan Agreement as of July 31, 2024.

Stock Repurchase Program.

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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.

No shares were repurchased in the six months ended July 31, 2024 leaving $5.0 million remaining under the share repurchase program at July 31, 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.

On May 1, 2024, the Board of Directors declared a quarterly cash dividend.

The quarterly dividend of $0.03 per share was paid on May 22, 2024, to stockholders of record as of May 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.

Our capital expenditures for the six months ended July 31, 2024 of $0.8 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.

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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 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.

There have been no significant changes in the application of our critical accounting policies during the six months ended July 31, 2024.

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