LAKELAND INDUSTRIES, INC. This Form 10-Q may contain certain "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. See "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" at the beginning of Part I, Item 1.
Overview; Response to COVID-19 Outbreak
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
1,600 global safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil, chemical/petrochemical,
automobile, 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
We have operated facilities in
The last two weeks of FY20 and Q1 FY21 were dominated by response to the
COVID-19 outbreak. The virus' progression into a global pandemic will likely
impact our business throughout the entirety of FY21. In the near term, increased
demand for our disposable and chemical lines, combined with our high inventory
levels has produced sales revenues beyond our sustainable manufacturing capacity
on an annualized basis. We anticipate that COVID-19 sales will continue for the
remainder of FY21 however not at the levels experienced in Q1 FY21 as inventory
has been reduced by the high demand and we are limited to our maximum available
manufacturing throughput until we can meaningfully increase sustainable
manufacturing capacity. Our future sales would also be affected should there be
an industry-wide shortage of necessary raw materials in the event of a new rise
in COVID-19 cases; in this respect we did experience significant price increases
for fabric during the first quarter of FY 21 and managed our available
manufacturing capacity to meet customer demand at these higher prices. While we
have not experienced any manufacturing capacity issues due to government
quarantine or shelter-in-place orders, or due to COVID-19 outbreaks in any of
our factories, there can be no assurance that this will continue to be the case.
Potential headwinds to revenue as we emerge from pandemic sales include the
possibility of a recession and consumer stockpiled inventories, as well as a
decline in our oil and gas industrial sector that may temper demand within our
regular markets in the second half of the year. Reference is made to "Risk
Factors" in Part I, Item 1, of our Annual Report on Form 10-K for the fiscal
year ended
28Lakeland's strategy for response to these "black swan" events is to remain focused on our long term growth strategies and tailor our response to these events so as to accelerate our strategic plans. We believe that focusing on our long-term growth strategy is also a solid strategy for minimizing the impact of any post-pandemic recession. In this particular case, our long-term strategy for revenue and margin improvement is to increase market penetration into markets that use higher value, higher margin products, that are recession resistant. Our manufacturing flexibility allows the company to maximize the manufacture of disposable and chemical garments without degrading its ability to supply higher end, flame resistant and arc flash resistant garments. In order to maximize our response to pandemic demand, we have increased the daily working hours for our disposables and chemical manufacturing product lines, and we have significantly reduced the number of SKUs in these product lines in order to maximize efficiencies. This will have the effect of increasing throughput and reducing manufacturing costs to help mitigate any raw materials prices increases. Additionally, by focusing on a few core styles, we believe we can minimize the impact on inventory of any production over run when the pandemic subsides. We are not deviating from our growth strategy, rather we are looking to utilize the short-term, increased demand as a catylast to accelerate attainment of growth objectives.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements.
Revenue Recognition. Substantially all of the Company's revenue is derived from
product sales, which consist of sales of the Company's personal protective wear
products to distributors. The Company considers purchase orders to be a contract
with a customer. Contracts with customers are considered to be short-term when
the time between order confirmation and satisfaction of the performance
obligations is equal to or less than one year, and virtually all of the
Company's contracts are short-term. The Company recognizes revenue for the
transfer of promised goods to customers in an amount that reflects the
consideration to which the Company expects to be entitled in exchange for those
goods. The Company typically satisfies its performance obligations in contracts
with customers upon shipment of the goods. Generally, payment is due from
customers within 30 to 90 days of the invoice date, and the contracts do not
have significant financing components. The Company elected to account for
shipping and handling activities as a fulfillment cost rather than a separate
performance obligation. Shipping and handling costs associated with outbound
freight are included in operating expenses. For the three months ended
The transaction price includes estimates of variable consideration related to rebates, allowances, and discounts that are reductions in revenue. All estimates are based on the Company's historical experience, anticipated performance, and the Company's best judgment at the time the estimate is made. Estimates for variable consideration are reassessed each reporting period and are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur upon resolution of uncertainty associated with the variable consideration. All the Company's contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as quantity time's price per unit.
The Company has seven revenue generating reportable geographic segments under ASC Topic 280 "Segment Reporting" and derives its sales primarily from its limited use/disposable protective clothing and secondarily from its sales of reflective clothing, high-end chemical protective suits, firefighting and heat protective apparel, reusable woven garments and gloves and arm guards. The Company believes disaggregation of revenue by geographic region best depicts the nature, amount, timing, and uncertainty of its revenue and cash flows (see table below).
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Net sales by geographic region and by product line are included below:
Three Months Ended
April 30,
(in millions of dollars)
2020 2019
External Sales by geographic region:
USA $23.11 $12.87
Other foreign 2.30 0.78
Europe (UK) 3.01 2.39
Mexico 1.37 0.60
Asia 9.05 3.83
Canada 4.31 2.49
Latin America 2.43 1.72
Consolidated external sales $45.58 $24.68
Three Months Ended
April 30,
(in millions of dollars)
2020 2019
External Sales by product lines:
Disposables $31.21 $12.36
Chemical 8.88 5.06
Fire 1.45 1.40
Gloves 0.78 0.75
High Visibility 1.35 2.12
High Performance Wear 0.29 0.23
Wovens 1.62 2.76
Consolidated external sales $45.58 $24.68 Accounts Receivable, Net. Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company recognizes losses when information available indicates that it is probable that a receivable has been impaired based on criteria noted above at the date of the consolidated financial statements, and the amount of the loss can be reasonably estimated. Management considers the following factors when determining the collectability of specific customer accounts: Customer creditworthiness, past transaction history with the customers, current economic industry trends and changes in customer payment terms. Past due balances over 90 days and other less creditworthy accounts are reviewed individually for collectability. If the financial condition of the Company's customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management's assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
Inventories. Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or net realizable value.
Impairment of Long-Lived Assets. The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value may not be recoverable. The Company measures any potential impairment on a projected undiscounted cash flow method. Estimating future cash flows requires the Company's management to make projections that can differ materially from actual results. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset.
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Income Taxes. The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing the consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carryforwards and tax credits, are recorded as deferred tax assets or liabilities on the Company's consolidated balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination.
The Company recognizes tax positions that meet a "more likely than not" minimum recognition threshold. If necessary, the Company recognizes interest and penalties associated with tax matters as part of the income tax provision and would include accrued interest and penalties with the related tax liability in the consolidated balance sheets.
Foreign Operations and Foreign Currency Translation. The Company maintains
manufacturing operations in
Pursuant to US GAAP, assets and liabilities of the Company's foreign operations with functional currencies other than the US dollar, are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders' equity. Cash flows are also translated at average translation rates for the periods, therefore amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Fair Value of Financial Instruments. US GAAP defines fair value, provides guidance for measuring fair value and requires certain disclosures utilizing a fair value hierarchy which is categorized into three levels based on the inputs to the valuation techniques used to measure fair value. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3: Unobservable inputs that reflect management's own assumptions.
Foreign currency forward and hedge contracts are recorded in the consolidated balance sheets at their fair value as of the balance sheet dates based on current market rates.
The financial instruments of the Company classified as current assets or liabilities, including cash and cash equivalents, accounts receivable, short-term borrowings, borrowings under revolving credit facility, accounts payable and accrued expenses, are recorded at carrying value, which approximates fair value based on the short-term nature of these instruments.
The Company believes that the fair values of its long-term debt approximates its carrying value based on the effective interest rate compared to the current market rate available to the Company.
Recent Accounting Pronouncements See Note 3 in the unaudited condensed consolidated financial statements for management's periodic review of new accounting standards that were issued.
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Significant Balance Sheet Fluctuation
Cash increased by
Three Months ended
Reference is made to "Overview; Response to COVID-19 Outbreak" above which should be read in conjunction with this Section.
Gross Profit. Gross profit increased
? Significant increases in volumes driven by COVID-19 demand. ? Price increases described above. ? Improved manufacturing efficiency in substantially all locations as we increased the number of hours per shift and number of days per week. ? Reduction in SKUs led to increased run size that increased manufacturing throughput and improved efficiency. ? Sales of reserved inventory into COVID-19 applications.
Operating Expense.Operating expenses increased 24.2% from
Operating Profit (Loss). Operating profit increased to
Interest Expense. Interest expense decreased slightly to
Income Tax Expense. Income tax expense consists of federal, state and foreign
income taxes. Income tax expense was
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Net Income (loss). Net income increased by
Liquidity and Capital Resources
At
Of the Company's total cash and cash equivalents of
Net cash provided by operating activities of
We currently have a
The Company has experienced increased sales and order activity as a result of the COVID-19 pandemic and may need to increase inventories in order to continue to respond to this increased demand. Additionally, the Company may accelerate investments in capacity expansion which may require significant capital expenditures.
Stock Repurchase Program. On
Capital Expenditures. Our capital expenditures for first quarter of FY21 of
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