Lakeland(LAKE) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the Company Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Lakeland Industries, Inc. and its subsidiaries, including statements of operations, comprehensive income (loss), balance sheets, stockholders' equity, and cash flows, along with detailed notes explaining business operations, accounting policies, investments, debt, equity, and segment performance Condensed Consolidated Statements of Operations This chapter presents the Company's Condensed Consolidated Statements of Operations for the specified periods | Metric ($000s) | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :-------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales | $31,678 | $28,387 | $93,449 | $83,849 | | Gross profit | $13,361 | $12,304 | $39,988 | $34,987 | | Operating profit | $3,621 | $2,222 | $9,289 | $5,465 | | Net income (loss) | $2,618 | $1,431 | $6,402 | $1,690 | | Basic EPS | $0.35 | $0.19 | $0.87 | $0.22 | | Diluted EPS | $0.34 | $0.19 | $0.85 | $0.22 | Condensed Consolidated Statements of Comprehensive Income (Loss) This chapter presents the Company's Condensed Consolidated Statements of Comprehensive Income (Loss) for the specified periods | Metric ($000s) | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :-------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $2,618 | $1,431 | $6,402 | $1,690 | | Foreign currency translation adjustments | $(483) | $(1,744) | $(2,110) | $(2,916) | | Comprehensive income (loss) | $2,135 | $(313) | $4,292 | $(1,226) | Condensed Consolidated Balance Sheets This chapter presents the Company's Condensed Consolidated Balance Sheets for the specified periods | Asset/Liability ($000s) | October 31, 2023 | January 31, 2023 | | :---------------------- | :--------------- | :--------------- | | Cash and cash equivalents | $26,425 | $24,639 | | Accounts receivable, net | $18,227 | $17,296 | | Inventories | $54,350 | $58,176 | | Total current assets | $104,020 | $104,982 | | Total assets | $148,315 | $142,327 | | Total current liabilities | $15,511 | $17,988 | | Total liabilities | $24,726 | $22,337 | | Total stockholders' equity | $123,589 | $119,990 | Condensed Consolidated Statements of Stockholders' Equity This chapter presents the Company's Condensed Consolidated Statements of Stockholders' Equity for the specified periods - Total stockholders' equity increased from $119,990 thousand at January 31, 2023, to $123,589 thousand at October 31, 2023, primarily driven by net income of $6,402 thousand, partially offset by accumulated other comprehensive loss of $2,110 thousand and dividends paid of $687 thousand[18] Condensed Consolidated Statements of Cash Flows This chapter presents the Company's Condensed Consolidated Statements of Cash Flows for the specified periods | Cash Flow Activity ($000s) | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $7,733 | $(5,230) | | Net cash (used in) investing activities | $(3,015) | $(4,334) | | Net cash (used in) financing activities | $(1,845) | $(6,245) | | Effect of exchange rate changes on cash and cash equivalents | $(1,087) | $(1,961) | | Net increase (decrease) in cash and cash equivalents | $1,786 | $(17,770) | | Cash and cash equivalents at end of period | $26,425 | $34,949 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Business This note describes Lakeland Industries' global operations in industrial protective clothing and accessories - Lakeland Industries, Inc. manufactures and sells industrial protective clothing and accessories globally through in-house sales teams, customer service, and a network of over 2,000 distributors to various end-users and governmental agencies in over 50 countries[24] 2. Basis of Presentation This note outlines the basis for preparing the unaudited condensed consolidated financial statements and their limitations - The condensed consolidated financial statements are unaudited, include normal recurring adjustments, eliminate intercompany accounts, and are not necessarily indicative of full fiscal year results, requiring review with the most recent Form 10-K[25] 3. Investments and Acquisitions This note details the Company's strategic investments and recent acquisitions, including earnout adjustments - The Company increased its investment in Bodytrak, a wearable monitoring solutions provider, through additional Series A1 Shares and a secured convertible loan, bringing its total share capital ownership to 22.5%[28][29] - Lakeland acquired 100% of Eagle Technical Products Limited for $10.5 million in December 2022, enhancing its fire service protective apparel portfolio and expanding its sales presence in the Middle East and Europe[33][90] - The estimated earnout payment for the Eagle acquisition was adjusted from $3.2 million to $0.5 million for the period May 1, 2023, through April 30, 2024, as the prior period's revenue threshold was not met, resulting in a $2.7 million reduction in operating expenses for the nine months ended October 31, 2023[35][36][101] 4. Inventories This note provides a breakdown of inventory components and related adjustments | Inventory Component ($000s) | October 31, 2023 | January 31, 2023 | | :-------------------------- | :--------------- | :--------------- | | Raw materials | $26,798 | $29,036 | | Work-in-process | $760 | $952 | | Finished goods | $31,088 | $32,855 | | Excess and obsolete adjustments | $(4,296) | $(4,668) | | Total Inventories | $54,350 | $58,176 | 5. Goodwill and Intangible Assets, Net This note presents the carrying values and amortization of goodwill and intangible assets | Intangible Assets ($000s) | Amount | | :------------------------ | :----- | | Balance at February 1, 2023 | $6,042 | | Amortization expense | $(306) | | Balance at October 31, 2023 | $5,736 | - There were no material changes to goodwill during the three and nine months ended October 31, 2023[42] 6. Contract Advances This note details the changes in contract liability balances over the period | Contract Liability ($000s) | Amount | | :------------------------- | :----- | | Contract liability – January 31, 2023 | $1,627 | | Increases to contract liability | $326 | | Decreases to contract liability | $(1,752) | | Contract liability – October 31, 2023 | $201 | 7. Long-Term Debt This note describes the Company's revolving credit facilities and outstanding borrowings - The Company has a secured $25.0 million revolving credit facility with Bank of America, maturing on June 25, 2025, with no outstanding borrowings as of October 31, 2023[44][46] - The benchmark interest rate for the credit facility was changed from LIBOR to SOFR on March 3, 2023[45] - Borrowings outstanding under the HSBC Bank credit facility in the UK decreased from $0.4 million at January 31, 2023, to $0 at October 31, 2023[47] 8. Concentration of Risk This note discusses the Company's credit risk diversification and cash holdings in foreign accounts - The Company's credit risk is diversified across a large customer base and geographic areas, with no single customer or vendor accounting for more than 10% of net sales or purchases[48][50][51] - As of October 31, 2023, approximately $20.1 million of cash was held in foreign bank accounts, with $25.6 million of total cash uninsured[49] 9. Stockholders' Equity This note covers stock-based compensation, unrecognized expenses, and the ongoing stock repurchase program | Stock-Based Compensation ($000s) | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total restricted stock and stock option programs | $302 | $351 | $747 | $1,141 | | Total income tax expense recognized for stock-based compensation arrangements | $63 | $74 | $157 | $240 | - As of October 31, 2023, unrecognized stock-based compensation expense totaled $1.9 million, expected to be recognized over approximately two years[57] - The Company has an ongoing stock repurchase program with $5.0 million remaining under authorization as of October 31, 2023, with no expiration date[58][59] 10. Income Taxes This note provides details on income tax expense, effective tax rates, and valuation allowances for deferred tax assets | Metric | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Income tax expense | $937 | $715 | $2,677 | $3,610 | | Effective tax rate | 26.4% | 33.3% | 29.5% | 68.1% (33.8% excluding discrete items) | - The effective tax rate for the nine months ended October 31, 2022, was significantly impacted by a $2 million withholding tax for planned cash repatriation from China operations and $0.2 million deferred tax benefits for China social taxes[62][104] - The valuation allowance for deferred tax assets increased from $3.6 million at January 31, 2023, to $4.0 million at October 31, 2023[63] 11. Net Income (Loss) Per Share This note presents the basic and diluted net income (loss) per share for the reported periods | Metric | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic net income (loss) per share | $0.35 | $0.19 | $0.87 | $0.22 | | Diluted net income (loss) per share | $0.34 | $0.19 | $0.85 | $0.22 | 12. Contingencies This note addresses potential impacts from facility defects and the absence of material outstanding claims or litigation - The Company is in discussions with the landlord regarding structural defects at its newly constructed facility in Monterrey, Mexico, which may impact the facility's intended use and the carrying value of the right-of-use asset[69][89] - As of October 31, 2023, there were no significant outstanding claims or litigation that management believes would have a material effect on the Company's financial position, results of operations, or cash flows[70] 13. Segment Reporting This note provides a breakdown of external sales and operating profit by product line and geographic segment | External Sales by Product Line ($ millions) | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :---------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Disposables | $11.9 | $14.1 | $36.7 | $41.3 | | Chemical | $4.7 | $5.2 | $15.4 | $17.5 | | Fire service | $5.6 | $3.6 | $20.0 | $9.2 | | Gloves | $0.5 | $0.6 | $1.7 | $1.7 | | High Visibility | $2.6 | $1.7 | $5.4 | $4.6 | | High Performance Wear | $2.4 | $1.3 | $5.2 | $3.8 | | Wovens | $4.0 | $1.9 | $9.0 | $5.7 | | Consolidated external sales | $31.7 | $28.4 | $93.4 | $83.8 | | Operating Profit (Loss) by Segment ($ millions) | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | USA Operations (including Corporate) | $1.9 | $(0.1) | $1.6 | $(3.4) | | Other foreign | $0.6 | $0.3 | $1.8 | $0.4 | | Europe (UK) | $(0.4) | $(0.5) | $0.0 | $(1.1) | | Mexico | $(0.4) | $(0.3) | $(1.3) | $(0.9) | | Asia | $1.3 | $2.4 | $3.1 | $8.4 | | Canada | $0.5 | $0.3 | $1.1 | $1.3 | | Latin America | $0.8 | $0.4 | $2.9 | $1.2 | | Intersegment profit (loss) | $(0.7) | $(0.3) | $0.1 | $(0.4) | | Consolidated operating profit | $3.6 | $2.2 | $9.3 | $5.5 | - USA Operations showed a significant turnaround in operating profit, moving from a loss of $(0.1) million in Q3 FY23 to a profit of $1.9 million in Q3 FY24, and from a loss of $(3.4) million to a profit of $1.6 million for the nine months[73] - Asia's operating profit declined from $2.4 million to $1.3 million for the three months and from $8.4 million to $3.1 million for the nine months, reflecting weakness in the region[73] 14. Subsequent Events This note discloses significant events occurring after the reporting period, including dividends, asset sales, and acquisitions - On November 1, 2023, the Board declared a quarterly cash dividend of $0.03 per share, paid on November 22, 2023[77] - On November 27, 2023, the Company sold its Brantford, Ontario facility for $4.9 million, expecting a pre-tax gain of approximately $3.8 million, and will transition to third-party logistics in Canada[78] - On November 30, 2023, Lakeland acquired New Zealand-based Pacific Helmets NZ Limited for approximately NZ$14.0 million ($8.6 million), enhancing its fire service protective helmets portfolio, funded through the revolving credit facility and cash balances[79][117] - The Loan Agreement was amended on November 30, 2023, to consent to the Pacific acquisition, permit additional indebtedness for Pacific, exempt Pacific from certain guaranty/pledge requirements, and waive borrowing base limitations through January 31, 2024[80][115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, and future outlook, highlighting key operational results, balance sheet changes, liquidity, capital resources, and critical accounting policies Forward-Looking Statements This chapter discusses the inherent risks and uncertainties associated with the Company's forward-looking statements - The report contains forward-looking statements based on management's beliefs and expectations, which involve risks and uncertainties that could cause actual results to differ materially[81][82] - Key risks include international manufacturing operations (China, Vietnam), material weakness in foreign currency accounting, geopolitical crises, foreign currency exchange rate fluctuations, ERP system implementation, supply chain constraints, and competition[82][87] Business Overview This chapter provides an overview of Lakeland's global operations, manufacturing strategy, and market monitoring efforts - Lakeland manufactures and sells industrial protective clothing globally, with manufacturing facilities in Mexico, China, Vietnam, and India, aiming for diversified supply chains and cost efficiency[85][86][88] - Foreign sales accounted for $16.6 million and $50.8 million for the three and nine months ended October 31, 2023, respectively[91] - The Company is monitoring the financial impact of the Russian invasion of Ukraine (Russia sales ~3.2% of consolidated sales for nine months) and the Middle East conflict, which could affect sales levels and timing[92][93] Results of Operations This chapter analyzes the Company's financial performance, including sales, gross profit, operating expenses, and net income, for the reported periods Three Months Ended October 31, 2023 vs 2022 | Metric | 2023 ($ millions) | 2022 ($ millions) | Change ($ millions) | Change (%) | | :----- | :---------------- | :---------------- | :------------------ | :--------- | | Net Sales | $31.7 | $28.4 | $3.3 | 11.6% | | Gross Profit | $13.4 | $12.3 | $1.1 | 8.9% | | Gross Margin | 42.2% | 43.3% | -1.1 pp | | | Operating Expenses | $9.7 | $10.1 | $(0.4) | -4.0% | | Operating Profit | $3.6 | $2.2 | $1.4 | 63.6% | | Operating Margin | 11.4% | 7.6% | 3.8 pp | | | Net Income | $2.6 | $1.4 | $1.2 | 85.7% | Nine Months Ended October 31, 2023 vs 2022 | Metric | 2023 ($ millions) | 2022 ($ millions) | Change ($ millions) | Change (%) | | :----- | :---------------- | :---------------- | :------------------ | :--------- | | Net Sales | $93.4 | $83.8 | $9.6 | 11.5% | | Gross Profit | $40.0 | $35.0 | $5.0 | 14.3% | | Gross Margin | 42.8% | 41.7% | 1.1 pp | | | Operating Expenses | $30.7 | $29.5 | $1.2 | 4.1% | | Operating Profit | $9.3 | $5.5 | $3.8 | 69.1% | | Operating Margin | 9.9% | 6.5% | 3.4 pp | | | Net Income | $6.4 | $1.7 | $4.7 | 276.5% | - Sales of fire service and industrial product lines increased by $6.1 million (Q3) and $14.1 million (9M), driven by market share expansion and strength in oil & gas and utilities, with Eagle contributing $1.3 million (Q3) and $6.8 million (9M)[95][100] - Disposable and chemical product lines declined by $2.8 million (Q3) and $6.7 million (9M) due to diminishing COVID-19 demand and weakness in Asia/China[95][100] - Operating expenses for Q3 FY24 decreased by $1.5 million due to a reduction in the Eagle earnout accrual, partially offset by $0.7 million in currency fluctuations (Argentine peso)[96] - Gross profit margin improved for the nine months ended October 31, 2023, due to increased sales in strategic product lines, reduced manufacturing costs from higher throughput, lower freight costs, and inventory reduction[101][105] Significant Balance Sheet Fluctuation October 31, 2023, Compared to January 31, 2023 This chapter highlights key changes in the Company's balance sheet, focusing on cash, investing, and financing activities - Cash increased by $1.8 million, primarily from $7.7 million in operating cash flow (driven by a $3.2 million inventory reduction and profitable operations), offset by $3.0 million in investing activities and $1.8 million in financing activities[106] - Investing activities included $1.5 million in manufacturing equipment purchases and an additional $1.5 million investment in Bodytrak[107] - Financing activities included $0.7 million in dividends, $0.3 million in share repurchases, $0.4 million in short-term borrowing repayments, and $0.4 million for employee tax payments on vested restricted stock[107] Liquidity and Capital Resources This chapter assesses the Company's ability to meet its financial obligations and fund operations, including cash, working capital, credit facilities, and dividend programs | Metric ($ millions) | October 31, 2023 | January 31, 2023 | | :------------------ | :--------------- | :--------------- | | Cash and cash equivalents | $26.4 | $24.6 | | Working capital | $88.5 | $87.0 | - The Company believes its current cash balance and operating cash flow are sufficient for projected working capital and capital expenditures, with FY24 capital expenditures anticipated to be approximately $2.0 million[112][122] - A $25.0 million revolving credit facility is available, with no outstanding borrowings as of October 31, 2023, and the borrowing base limitation waived through January 31, 2024, following the Pacific acquisition[113][115] - The Company was in compliance with all debt covenants as of October 31, 2023[116] - The Company has a recurring quarterly dividend program, with $0.03 per share declared for Q3 FY24[119][120][121] Critical Accounting Policies and Estimates This chapter confirms the consistency of the Company's critical accounting policies and estimates - There have been no significant changes in the application of the Company's critical accounting policies during the nine months ended October 31, 2023, as detailed in its fiscal year 2023 Form 10-K[124][125] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Lakeland Industries, Inc. is not required to provide quantitative and qualitative disclosures about market risk - No disclosure is required under Item 3 for the Company as it is a smaller reporting company[125] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were not effective as of October 31, 2023, due to a material weakness in internal control over financial reporting related to foreign currency translation, with remediation efforts ongoing Evaluation of Disclosure Controls and Procedures This chapter details management's assessment of the effectiveness of the Company's disclosure controls and procedures - Management concluded that the Company's disclosure controls and procedures were not effective as of October 31, 2023, due to a material weakness in internal control over financial reporting[126] - Despite the ineffective controls, the condensed consolidated financial statements present fairly, in all material respects, the Company's financial position, results of operations, and cash flows in accordance with U.S. GAAP[127] Material Weakness in Internal Control over Financial Reporting This chapter identifies a material weakness in the Company's internal control over financial reporting related to foreign currency accounting - A material weakness was identified related to the Company's internal control over accounting for foreign currency exchange and foreign currency translation or remeasurement for its international subsidiaries[128] Management's Remediation Plan and Status This chapter outlines the Company's plan and ongoing efforts to remediate the identified material weakness in internal control - Remediation actions include enhancing monthly financial statement management review with reconciliation of key account balances, reconfiguring the trial balance import process for the Argentina subsidiary, and developing enhancements to quantify and review currency fluctuation impact on financial statements[129][131] - The material weakness will not be considered remediated until controls are designed, implemented, and operate effectively for a sufficient period, confirmed by independent testing[129] Changes in Internal Control Over Financial Reporting This chapter reports on any changes in internal control over financial reporting during the quarter - Other than ongoing remediation efforts for the identified material weakness, there were no other changes in internal control over financial reporting during the quarter ended October 31, 2023, that materially affected or are reasonably likely to affect the Company's internal control over financial reporting[132] PART II - OTHER INFORMATION This section includes details on unregistered equity sales, a list of exhibits, and the report's signature pages Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's stock repurchase program, including authorizations and activity during the third quarter of fiscal 2024 Issuer Purchases of Equity Securities This chapter provides information on the Company's stock repurchase activities - The Board of Directors has authorized a stock repurchase program, with $5.0 million remaining under the authorization as of October 31, 2023, and no expiration date[132] | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Dollar Amount of Shares that May Yet Be Purchased Under the Programs | | :----- | :----------------------------------- | :--------------------------- | :-------------------------------------------------------------------- | :------------------------------------------------------------------------- | | August 1 – August 31 | --- | $--- | --- | $5,030,479 | | September 1 – September 30 | 771 | $— | — | $5,030,479 | | October 1 – October 31 | --- | $--- | --- | $5,030,479 | | Total | 771 | $--- | --- | $5,030,479 | - The 771 shares purchased during September 2023 include withholding of restricted shares to cover taxes on vested restricted shares[134] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate documents, agreements, certifications, and XBRL financial statements - Exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, a General Release and Separation Agreement, CEO and CFO certifications (pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350), and financial statements formatted in Inline XBRL[135][136] Signature Pages The signature page confirms the due authorization and filing of the Form 10-Q report by Lakeland Industries, Inc.'s Chief Financial Officer - The report was signed on December 7, 2023, by Roger D. Shannon, Chief Financial Officer of Lakeland Industries, Inc[139]