Lakeland Industries, Inc. — Q2 FY2017 Form 10-Q Summary
Business context and reporting period
Lakeland manufactures and sells protective garments and accessories for industrial, governmental, and public-safety markets. The filing covers the three and six months ended July 31, 2016, with comparisons to July 31, 2015. Brazil is presented as a discontinued operation following the 2015 disposal.
Key financial metrics
| Metric | Three months ended July 31, 2016 | Three months ended July 31, 2015 | Six months ended July 31, 2016 | Six months ended July 31, 2015 |
|---|---|---|---|---|
| Net sales from continuing operations | $22.269 million | $29.465 million | $42.638 million | $54.284 million |
| Gross profit | $8.590 million | $11.795 million | $15.366 million | $21.073 million |
| Gross margin | 38.6% | 40.0% | 36.0% | 38.8% |
| Operating profit | $2.631 million | $5.700 million | $2.800 million | $8.919 million |
| Operating margin | 11.8% | 19.3% | 6.6% | 16.4% |
| Net income from continuing operations | $1.431 million | $3.588 million | $1.434 million | $5.748 million |
| Net income | $1.431 million | $2.034 million | $1.434 million | $3.263 million |
| Diluted EPS | $0.20 | $0.28 | $0.20 | $0.45 |
Six-month net cash provided by operating activities was $4.295 million, compared with $4.305 million of cash used in the prior-year period. Capital expenditures were $46,000, compared with $24,000 of net investing cash use in the prior year. Cash increased to $7.940 million from $7.022 million at January 31, 2016.
At July 31, 2016, working capital was $45.9 million. Inventory was $39.239 million, accounts receivable were $11.978 million, and total assets were $88.694 million. Total liabilities were $19.555 million and stockholders’ equity was $69.139 million.
Debt included $6.160 million outstanding under the senior revolving credit facility, $3.232 million of short-term borrowings, $50,000 of current long-term debt, and $731,000 of long-term debt. The senior facility had $8.8 million of additional availability, carried a 4.25% interest rate, and matures in 2017. Management stated that the Company was in compliance with all loan covenants.
Material changes versus the prior comparable period
- Third-quarter? The filing reports the second quarter of fiscal 2017; quarterly sales declined 24% and six-month sales declined 21%, primarily from lower volume, industrial-sector weakness, the oil and gas downturn, currency volatility, and unusually strong prior-year Ebola and bird-flu-related demand.
- Six-month operating profit fell 69% to $2.8 million, and operating margin declined 9.8 percentage points to 6.6%.
- Six-month gross margin declined 2.8 percentage points. Chemical margins were particularly affected by the absence of prior-year pandemic-related high-margin sales; severance and production-transition costs also affected margins.
- Operating expenses decreased slightly in the quarter but increased $0.4 million for the six-month period, including payroll administration, severance, professional fees, director fees, and currency-related charges.
- U.S. and China/Asia-Pacific sales declined materially, while Canada sales increased. International sales represented 43.8% of six-month continuing-operations sales, compared with 42.3% in the prior year.
- Brazil generated no discontinued-operation loss in the current periods, compared with a $1.554 million quarterly loss and a $2.485 million six-month loss in the prior year.
- Cash flow improved primarily because inventory decreased $1.925 million and accounts payable increased $2.311 million. Revolver borrowings declined $3.298 million.
Outlook, commentary, risks, and unusual items
- Management expects fiscal 2017 capital expenditures of approximately $1.0 million and reported no further specific material capital-expenditure plans.
- Management believes cash, revolver availability, expected operating cash flow, and cash-management measures are sufficient for liquidity needs over the next 12 months.
- The Company expects a dividend from Chinese subsidiaries later in fiscal 2017; cash was retained in China in anticipation of that dividend. International cash transfers may be slowed by local requirements.
- The board authorized a stock-repurchase program of up to $2.5 million on July 19, 2016; no shares had been repurchased as of the filing.
- Principal risks include weak industrial and oil-and-gas demand, foreign-currency volatility, international manufacturing and corruption risks, customer-demand estimation, supplier concentration, competition, product liability, key-person dependence, and restrictive debt covenants.
- The Company remains exposed to potential liabilities related to former Brazilian operations, including labor claims and VAT matters. Management believes the remaining exposure is diminishing, but the filing states that liability cannot be assured to be eliminated.
- The Company claimed an approximately $9.5 million U.S. tax benefit from a worthless-stock deduction related to Brazil. The IRS could challenge the deduction, and the outcome is uncertain.
- Approximately $23.1 million of foreign-subsidiary earnings were considered permanently reinvested; potential U.S. tax on repatriation was estimated at approximately $3.2 million.
- The filing states that disclosure controls were effective as of July 31, 2016, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether industrial demand, oil-and-gas weakness, and the absence of pandemic-related orders continue to pressure sales and margins.
- Whether the Company maintains compliance with the senior facility’s fixed-charge coverage, EBITDA, capital-expenditure, and foreign-investment covenants through the 2017 maturity.
- The timing and amount of anticipated Chinese subsidiary dividends and the ability to transfer cash internationally.
- The collectability of the approximately $2.286 million Brazil-related loan and the ultimate resolution of remaining labor, VAT, and potential fraudulent-bankruptcy exposures.
- Whether the IRS challenges the Brazil worthless-stock deduction and the potential effect on cash taxes and liquidity.
- The impact of currency movements, particularly in Argentina, China, Kazakhstan, Mexico, Canada, and the United Kingdom.