LAKE

Lakeland Industries Inc. 10-Q Summary

Business Context and Reporting Period

Lakeland Industries, Inc. manufactures and sells safety garments and accessories for industrial protective clothing and homeland security markets. This report covers the quarterly period ended July 31, 2008. The Company operates manufacturing facilities in the U.S., Mexico, China, India, and, following a recent acquisition, Brazil.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 26.8% ($5.8M) for the quarter and 15.9% ($7.5M) for the six months compared to the prior year periods. Growth was driven by foreign sales, specifically the inclusion of Qualytextil (Brazil) and increased sales from China, Canada, the UK, and Chile.
• Profitability: Net income increased 111.8% for the quarter and 85% for the six months. Gross margins improved significantly (from 23.9% to 29.6% in the quarter) due to the high-margin Brazilian operations (55.9% gross profit) and the cessation of a prior-year sales rebate program.
• Acquisition Impact: The acquisition of Qualytextil, S.A. on May 13, 2008, added $3.1 million in sales and $0.79 million in operating profit for the quarter. This transaction was funded by an increase in the revolving credit facility from $25 million to $30 million.
• Operating Expenses: Expenses rose 39.5% for the quarter, primarily due to $0.92 million in new operating costs from Qualytextil, higher freight rates, and $0.30 million in costs related to a proxy contest.
• Tax Settlement: The Company settled an IRS audit regarding tax years 2003-2005 for $91,000, resulting in a $207,000 reduction in income tax expense for the quarter.

Guidance, Outlook, and Risks

• Outlook: Management expects continuing profit margin improvements as production of reusable woven garments and gloves shifts to lower-cost facilities in Mexico and China. Capital expenditures for fiscal 2009 are expected to be approximately $1.1 million.
• Liquidity: The Company believes its cash position ($4.3M) and borrowing availability under the $30M credit facility are sufficient for the next 12 months. The Company is in compliance with all financial covenants.
• Risks and Contingencies:
  • Supplier Concentration: 41% of raw materials were purchased from a single supplier in the six-month period (normally ~75%).
  • Foreign Currency: Significant exposure to the Brazilian Real and Chinese Yuan, which are not currently hedged. A currency translation adjustment of $790,349 was recorded in other comprehensive income.
  • Internal Controls: Previously identified material weaknesses regarding inter-company profit elimination and inventory cutoffs in China have been remediated as of July 31, 2008, through new internal review procedures and staffing changes.
  • Acquisition Contingencies: The Qualytextil purchase price includes a potential supplementary payment based on 2010 EBITDA performance.

Investor Verification Checklist

• Verify the sustainability of the 55.9% gross margin reported by the new Brazilian subsidiary (Qualytextil) and its impact on consolidated margins.
• Confirm the status of the single major supplier relationship (41% of raw materials) and any potential supply chain disruptions.
• Review the details of the $30 million revolving credit facility covenants and the Company's compliance status given the increased debt load.
• Assess the impact of the proxy contest costs ($0.3M) and whether similar legal or governance expenses are expected in future periods.
• Monitor the integration of Qualytextil and the realization of the estimated $402,000 revenue benefit from the Brazilian customs strike backlog.