LAKE

Lakeland Industries Inc. - 10-Q Summary (Period Ended Oct 31, 2016)

Business Context and Reporting Period

Lakeland Industries, Inc. is a manufacturer and seller of safety garments and accessories for the industrial protective clothing market. The company operates manufacturing facilities in the USA, China, Mexico, and India, with sales and distribution entities globally. This Form 10-Q covers the quarterly period ended October 31, 2016 (Q3 of Fiscal Year 2017) and the nine-month period ended October 31, 2016. The company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 6.6% in the quarter and 16.8% for the nine-month period compared to the prior year. This was driven by global softness in the industrial sector, a downturn in the oil and gas industry, and a stronger US dollar reducing reported foreign revenues.
• Comparison to Prior Year Peaks: The prior year period included significant sales related to the Ebola crisis and bird flu pandemic, which inflated comparables for disposable and chemical protective clothing. Excluding these one-time events, the decline is less severe but still reflects market weakness.
• Profitability: Operating profit dropped significantly (29.6% in the quarter; 58.7% for nine months) due to lower sales volume and margin compression in chemical and reflective product lines. Gross margins remained relatively stable at 36-37% for the quarter but dipped slightly for the nine-month period.
• Discontinued Operations: The company exited its Brazilian operations in the prior fiscal year. There were no losses from discontinued operations in the current period, compared to a $2.49 million net loss in the prior nine-month period.
• Balance Sheet: Inventory decreased by $4.2 million as the company focused on working through existing stock. Borrowings under the revolving credit facility decreased by $3.7 million, and short-term debt in China was repaid.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued global softness in the industrial sector. Capital expenditures for FY17 are expected to be approximately $0.5 million, with a larger technology project planned for FY18.
• Liquidity: The company believes its current cash position ($8.45 million) and available credit ($9.2 million) are sufficient to cover liquidity needs for the next 12 months. A stock repurchase program of up to $2.5 million was approved in July 2016, though no shares have been repurchased yet.
• Key Risks:
  • Foreign Currency: Significant exposure to currency fluctuations in China, Canada, UK, and Argentina. A stronger US dollar negatively impacts reported international sales.
  • Brazil Contingencies: Although the Brazilian subsidiary was sold, the company retains potential exposure to labor claims and VAT tax liabilities. The company has reserved against a loan to the transferee to settle VAT claims.
  • Customer Concentration: No single customer accounts for more than 10% of sales, but the company relies on a limited number of suppliers for specific fabrics.
  • Tax Reform: Potential changes in US tax law could result in a significant one-time noncash charge to adjust deferred tax assets.

Investor Verification Checklist

• Verify the sustainability of gross margins in the chemical and reflective product lines given the volume decline.
• Monitor the resolution of outstanding labor claims and VAT liabilities related to the former Brazilian subsidiary.
• Assess the impact of the stronger US dollar on future international revenue growth.
• Review the company's ability to meet financial covenants (Fixed Charge Coverage Ratio and Minimum EBITDA) under the Senior Credit Facility.
• Track the execution of the approved $2.5 million stock repurchase program.