LAKE

Lakeland Industries Inc. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Lakeland Industries, Inc., a Delaware corporation manufacturing safety garments and accessories for industrial protective clothing and homeland security markets. The report covers the quarterly and six-month periods ended July 31, 2006. The company operates manufacturing facilities in the United States, Mexico, China, and India, with principal markets in the United States.

Key Financial Metrics

Cash Flow (Six Months): Net cash provided by operating activities was $1.4 million. Net cash used in investing activities was $0.4 million, primarily for property and equipment purchases. Net cash used in financing activities was $0.2 million.

Material Changes vs. Prior Period

• Revenue: Net sales decreased 4.0% in the quarter ($24.1M vs $25.1M) but increased 1.0% for the six-month period ($51.3M vs $50.8M). The quarterly decline was driven by lower sales in disposable garments (Tyvek surplus) and chemical protective suits, partially offset by growth in gloves, the UK subsidiary, and the Mifflin Valley acquisition.
• Profitability: Gross profit margins improved to 26.8% (quarter) and 25.3% (six months) compared to 23.1% and 23.5% in the prior year periods. This was due to aggressive raw material purchasing, cost reduction programs, and shifting production to lower-cost facilities in China and Mexico.
• Expenses: Operating expenses increased 22.2% in the quarter and 21.4% for the six months. Increases were attributed to the inclusion of Mifflin Valley operations, new foreign entities (India, Chile, Japan), higher sales commissions, and personnel reassignments from Cost of Goods Sold to SG&A.
• Net Income: Net income decreased 17.8% in the quarter and 16.2% for the six months compared to the prior year, primarily due to lower sales volumes in key product lines and increased operating expenses from new international operations.

Guidance, Outlook, and Risks

Outlook: Management expects continuing profit margin improvements as production of reusable woven garments and gloves shifts to Mexico and China through fiscal 2008. Capital expenditures are expected to be approximately $1.2 million for equipment and $2.0 million for a new Canadian facility.

Risks and Contingencies:

• Supplier Concentration: 65.7% of raw materials were purchased from a single supplier during the six-month period.
• Foreign Operations: Risks associated with international manufacturing, currency fluctuations (hedging program active for CAD, Euro, MXN; no hedge for Chinese Yuan), and start-up losses in India, Chile, and Japan.
• Legal/Tax: A Mexican tax audit claim of approximately $800,000 was decided in Lakeland's favor in August 2006, though a review by a higher court is anticipated by December 31, 2006. Federal tax returns for fiscal years 2003 and 2004 are under IRS audit.
• Debt Covenants: The company has a $25 million revolving credit facility with financial covenants (fixed charge ratio, debt to EBITDA). The company was in compliance as of July 31, 2006.

Investor Verification Checklist

• Verify the sustainability of gross margin improvements given the reliance on aggressive raw material purchasing and potential future price increases.
• Monitor the resolution of the Mexican tax appeal and the outcome of the ongoing IRS audit for fiscal years 2003 and 2004.
• Assess the impact of the single major supplier (65.7% of raw materials) on supply chain stability and pricing power.
• Review the performance of new international subsidiaries (India, Chile, Japan) which contributed to operating losses and increased SG&A expenses.
• Confirm compliance with debt covenants under the $25 million revolving credit facility, particularly regarding inventory and accounts receivable collateral coverage.