Lakeland Industries, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
Lakeland manufactures and sells industrial protective clothing and accessories, including disposable garments, chemical suits, firefighting apparel, reusable woven garments, high-visibility clothing, gloves and sleeves. Products are sold through distributors and direct channels in more than 40 countries. The filing covers the fiscal year ended January 31, 2013, with fourth-quarter information for the three months ended January 31, 2013. India glove manufacturing is reported as discontinued operations.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales from continuing operations | $95.1 million | $96.3 million | Down 1.3% |
| Gross profit | $27.3 million | $28.8 million | Down 5.1% |
| Gross margin | 28.7% | 29.9% | Down 1.2 percentage points |
| Operating profit/(loss) | $(1.0) million | $1.7 million | Turned to loss |
| Income/(loss) from continuing operations | $(25.8) million | $1.1 million | Material deterioration |
| Net income/(loss) | $(26.3) million | $(0.4) million | Material deterioration |
| Basic loss per share | $(4.97) | $(0.07) | Material deterioration |
| Net cash provided by operating activities | $2.2 million | $(0.0) million | Improved |
| Cash and cash equivalents | $6.7 million | $5.7 million | Up $1.0 million |
| Stockholders’ equity | $46.0 million | $73.3 million | Down $27.3 million |
Fourth-quarter continuing-operations sales increased 16.0% to $23.4 million from $20.2 million. Fourth-quarter gross margin was 23.9%, compared with 26.4% in the prior-year quarter, and net loss was approximately $18.1 million, including discontinued operations.
Material changes versus the prior comparable period
- Domestic sales declined by approximately $9.8 million, primarily because of the termination of DuPont’s Tyvek and Tychem supply agreement. Foreign sales increased by approximately $8.6 million to $54.4 million.
- China, Europe, Chile and Argentina contributed to international growth; China’s full-year sales increased 15.7%, while UK sales increased 49.3%.
- Brazil deteriorated materially. Operating loss was $1.6 million for FY2013, compared with a $0.2 million loss in FY2012. A 10% currency devaluation increased the cost of imported materials and weakened margins.
- Brazil-related charges included a $7.9 million arbitration settlement charge, a $10.0 million goodwill and intangible impairment charge, a $0.7 million foreign-exchange loss, and a $4.5 million valuation allowance against deferred tax assets.
- Operating expenses increased 4.9% to $28.4 million, driven primarily by higher sales salaries, commissions, insurance, professional fees and bad debt expense.
- Inventories declined $6.4 million to $39.3 million, including a $0.3 million additional write-down resulting from a change in the U.S. slow-moving inventory estimate.
- Assets declined to $83.3 million from $102.4 million, primarily because of Brazil-related impairment charges and the deferred tax valuation allowance.
Liquidity, debt and cash flow
- Liquidity is a critical concern. Cash was $6.7 million at January 31, 2013, while working capital was $36.0 million, down from $64.3 million in the prior year, primarily because TD Bank debt was classified as current.
- The company was in default under its TD Bank facility, including financial covenant defaults. At year-end, TD Bank borrowings included approximately $9.6 million under the revolving facility and $5.5 million of term loans; substantially all assets secured the debt.
- The TD Bank facility was scheduled to mature in June 2013, and the lender could accelerate the outstanding balance. Contractual obligations totaled approximately $25.1 million, including debt, leases and the Brazil arbitration settlement.
- Operating cash flow was positive at $2.2 million, supported by a $4.6 million inventory reduction and noncash impairment, arbitration and tax charges. Investing cash outflow was $1.4 million, primarily for property and equipment.
- The Brazil settlement liability was approximately $5.7 million at January 31, 2013. The remaining amount was payable in quarterly installments of $250,000 over approximately six years, without interest, subject to the settlement terms.
Guidance, outlook, risks and unusual items
- Management stated that substantial additional operating losses in Brazil were expected through at least the first half of FY2014. The Brazilian operation was being resized, with the initiative expected to be completed in the first quarter of FY2014.
- Management anticipated approximately $1.0 million of FY2014 capital expenditures and expected research and development expense to remain approximately $240,000.
- On May 15, 2013, the company accepted a conditional commitment letter for a new senior credit facility. Closing remained subject to documentation, due diligence, at least $3.5 million of junior debt and an intercreditor agreement; there was no assurance the financing would close.
- The independent auditors included a going-concern explanatory paragraph because of the TD Bank defaults, potential acceleration of debt, losses and the absence of replacement financing as of the audit report date.
- Subsequent to year-end, the company agreed to sell its Qingdao, China real estate for approximately $1.1 million and entered into an agreement concerning the sale of an India property for approximately $0.5 million. Production from Qingdao was transferred to other facilities.
- Brazil remains exposed to currency, political, contract, tax and litigation risks. A 10% change in the Brazilian real was estimated to affect profit or loss by approximately $212,000.
- The company disclosed a material weakness in internal control over financial reporting related to international financial reporting and review, although management concluded its disclosure controls were effective.
- Potential contingencies include Brazilian VAT claims. The filing describes a maximum potential judicial deposit of approximately $7.8 million, although management expected a lower outcome through amnesty and tax-credit mechanisms.
Important facts for investors to verify
- Whether the proposed senior credit facility closed and whether TD Bank waived, amended or accelerated the defaulted debt.
- Current cash balances, borrowing availability, covenant compliance and the company’s ability to fund operations and Brazil settlement payments.
- Progress in reducing Brazilian losses and the ultimate cash cost of the arbitration settlement and related executive termination.
- Whether sales and margins recovered after the loss of the DuPont supply agreement, particularly in North American disposable products.
- The status and recoverability of the Qingdao and India property-sale proceeds.
- Remediation of the material weakness in international financial reporting and any subsequent restatements or control deficiencies.
- The resolution and cash exposure associated with the Brazilian VAT claims and other tax matters.