Lakeland Industries, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2011, compared with the corresponding periods ended October 31, 2010. The supplied metadata identifies “2010 Q3,” but the filing itself is for the 2011 third quarter. Financial statements are unaudited.
Business Context
Lakeland manufactures and sells protective garments and accessories for industrial protective clothing and homeland security markets. Operations include the United States, Mexico, China, Brazil, Canada, the United Kingdom, Argentina, Chile, Russia/Kazakhstan and India. The India glove manufacturing operation was classified as discontinued and was being offered for sale or prepared for shutdown.
Key Financial Metrics
| Metric | Three months ended October 31, 2011 | Three months ended October 31, 2010 | Nine months ended October 31, 2011 | Nine months ended October 31, 2010 |
|---|---|---|---|---|
| Net sales | $24.7 million | $25.7 million | $76.2 million | $74.7 million |
| Gross profit | $7.4 million | $7.2 million | $23.5 million | $22.0 million |
| Gross margin | 30.0% | 28.0% | 30.8% | 29.5% |
| Operating profit | $0.2 million | $0.9 million | $2.9 million | $2.4 million |
| Operating margin | 0.9% | 3.5% | 3.8% | 3.2% |
| Income from continuing operations | $0.1 million | $0.7 million | $2.1 million | $0.2 million |
| Net income (loss) | $(0.6) million | $0.6 million | $1.2 million | $(0.1) million |
| Basic EPS | $(0.11) | $0.12 | $0.22 | $(0.02) |
Cash flow and liquidity: Operating cash flow was $(1.4) million for the nine months ended October 31, 2011, compared with $5.4 million in the prior-year period. Capital expenditures were $3.6 million, primarily for expansion in Brazil and Mexico. Financing activities provided $5.1 million, including net borrowings of $5.5 million. Cash ended at $5.9 million, essentially unchanged from January 31, 2011. Working capital was $66.9 million.
Balance sheet and debt: Total assets were $105.4 million and stockholders’ equity was $74.9 million at October 31, 2011. Revolver borrowings were $12.7 million against a $23.5 million facility. A $6.5 million term loan had $3.7 million outstanding, primarily funding capital projects in Brazil and Mexico. Current maturities and short-term borrowings were $1.5 million. The company stated that it was in compliance with all credit-facility covenants.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 3.6%, while nine-month sales increased 2.0%, reflecting weaker U.S. sales and stronger international sales, particularly Brazil.
- Third-quarter operating profit declined substantially because of lower volume, weaker disposable-product margins, higher operating expenses and a $0.4 million Brazilian foreign-exchange loss versus a prior-year gain of approximately $0.2 million.
- Nine-month gross margin improved to 30.8% from 29.5%, and operating margin improved to 3.8% from 3.2%, despite higher operating expenses.
- Disposable-product margins declined because Lakeland sold finished goods purchased from DuPont at lower margins than products previously manufactured internally. The DuPont wholesaler agreement was terminated effective July 12, 2011, with orders fulfilled through September 10, 2011.
- Brazil sales increased materially, but Brazil’s nine-month gross margin declined to 42.3% from 45.9%, partly because the prior-year period benefited from a larger bid contract.
- Inventories increased to $47.3 million from $45.3 million at January 31, 2011, primarily due to Brazil inventory buildup for anticipated bid contracts and higher China raw-material sourcing.
- Shares outstanding declined from 5.25 million to 5.23 million, reflecting a $0.3 million stock repurchase program during the nine months.
Outlook, Risks, Contingencies and Unusual Items
- Management did not provide specific numerical revenue or earnings guidance. It stated that cash, operating cash flow and available borrowing capacity were expected to fund anticipated operations, capital expenditures and debt service for at least the next 12 months.
- The India discontinuation generated a $0.9 million pretax disposal and shutdown loss, including a $0.6 million inventory write-down. The operation produced a $0.9 million net loss for the nine months.
- Brazil VAT matters remain significant. The balance sheet included approximately $3.3 million of long-term VAT taxes payable and $2.2 million of VAT tax credits. Potential judicial deposits and related exposure were described as up to approximately $8.8 million in total, subject to amnesty, credits, indemnification and litigation outcomes.
- The Brazilian subsidiary was under a tax audit concerning goodwill amortization from the 2008 acquisition. Management had not received a formal claim and could not determine the likelihood or amount of any potential liability. Tax benefits recognized from the goodwill deduction totaled approximately $0.7 million.
- Arbitration involving two terminated Brazilian sellers could result in payments of up to approximately $10.3 million if the terminations are determined not to have been for cause. Management believes no liability is probable and recorded no accrual, but disclosed a reasonable possibility of loss.
- Foreign-currency exposure remains material, particularly in Brazil. The company hedges selected currencies but does not hedge its long positions in the Brazilian Real or Chinese Yuan. Currency movements caused significant earnings volatility in the quarter.
- Other risks include supplier pricing and availability, dependence on international manufacturing, customer-demand variability, competition, product liability, environmental liabilities, acquisition and expansion execution, credit-facility covenants and possible reductions in federal homeland-security funding.
- Management stated that disclosure controls and procedures were effective as of October 31, 2011, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile the filing’s reporting date of October 31, 2011, with any dataset label identifying the period as “2010 Q3.”
- Assess whether the $47.3 million inventory balance, including Brazil and China buildup, is supported by subsequent sales and demand.
- Monitor disposable-product margins and the effect of the DuPont agreement termination on future product availability, pricing and profitability.
- Review liquidity under the $23.5 million revolver and $6.5 million term-loan facility, including covenant compliance and borrowing availability.
- Track Brazilian VAT proceedings, potential judicial deposits, tax credits, amnesty timing and seller indemnification recoveries.
- Follow the Brazilian seller arbitration and the potential maximum exposure of approximately $10.3 million.
- Evaluate the impact of Brazil-related currency losses and the company’s decision not to hedge the Brazilian Real.
- Confirm the timing and financial consequences of the India facility sale or shutdown.