Lakeland Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Lakeland manufactures and sells protective clothing and accessories for industrial, governmental, homeland security and related markets. The filing covers the unaudited three months ended April 30, 2013, compared with the three months ended April 30, 2012. The company is a smaller reporting company with approximately 5.35 million common shares outstanding as of June 11, 2013.
Financial performance and condition
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $21.7 million | $24.0 million | Down 9.4% |
| Gross profit | $6.1 million | $7.3 million | Down 16.8% |
| Gross margin | 28.0% | 30.5% | Down 250 basis points |
| Operating expenses | $6.3 million | $7.3 million | Down 13.3% |
| Operating loss | $(0.2) million | $0.02 million profit | Declined approximately $0.3 million |
| Net loss | $(0.8) million | $(10.1) million | Improved $9.3 million |
| Loss per diluted share | $(0.16) | $(1.94) | Improved |
| Cash flow from operations | $0.7 million | $0.3 million | Improved |
Net sales declined primarily because foreign sales decreased $4.3 million, including a $3.4 million decline in Brazil. Domestic sales increased $2.1 million. Sales outside the United States were $9.9 million versus $14.2 million in the prior-year quarter.
Gross margin contracted mainly because Brazil margin fell to 16.7% from 44.1%, reflecting prior-year large, high-margin bid contracts and current-year discounting. Disposables, wovens and chemical products had margin improvements, while China and Argentina experienced margin pressure.
Operating expenses declined by approximately $1.0 million, reflecting lower sales commissions, officer salaries, currency-related expenses, research and development, payroll administration and payroll taxes. The company nevertheless reported an operating loss because the gross-profit decline exceeded the expense reduction.
The prior-year net loss included a $10.0 million Brazilian arbitration judgment. In the current quarter, the company recorded a $27,142 Brazilian foreign-exchange loss, $273,435 of interest expense and $178,693 of income tax expense.
Cash flow, liquidity and debt
- Cash and cash equivalents were $7.0 million at April 30, 2013, up from $6.7 million at January 31, 2013.
- Working capital was $35.5 million, down approximately $0.5 million from January 31, 2013.
- Operating activities provided $0.7 million; investing activities used $0.4 million, primarily for capital expenditures; financing activities used $0.1 million.
- Capital expenditures were $353,214 during the quarter. Management expected approximately $0.7 million of capital expenditures for FY2014.
- The balance sheet included $9.6 million of borrowings under the revolving credit facility, $5.3 million of TD Bank term loans, $1.8 million of short-term borrowings and $5.5 million of accrued arbitration settlement obligations.
- The TD Bank facility was scheduled to mature on June 30, 2013. The company was in default of applicable financial covenants, including fixed-charge, funded-debt-to-EBITDA and collateral-coverage requirements. Default could permit acceleration of outstanding debt.
Material changes versus the prior comparable period
- Revenue decreased 9.4%, driven primarily by Brazil and other international markets, while sales excluding Brazil increased 6.3%.
- Gross margin declined from 30.5% to 28.0%, principally because of weaker Brazilian performance and discounting.
- Operating expenses fell 13.3%, but the company moved from a small operating profit to an operating loss.
- Net loss improved substantially because the prior-year period included the $10.0 million Brazilian arbitration judgment.
- Cash flow from operations increased to $0.7 million from $0.3 million despite the current-period net loss.
- Total assets were $83.6 million at April 30, 2013, compared with $83.3 million at January 31, 2013. Stockholders’ equity declined to $45.3 million from $46.0 million.
Guidance, outlook, risks and unusual items
Management expected substantial additional operating losses from Brazil through at least the first half of FY2014. The filing states that the company’s $7.0 million cash balance, operating cash flow and borrowing capacity in Brazil and the United Kingdom may not be sufficient to meet operating, capital-expenditure and debt-service requirements for at least the next 12 months without a new credit facility.
On May 15, 2013, the company accepted a commitment letter for a proposed senior credit facility. Closing remained subject to documentation, due diligence, at least $3.5 million of satisfactory junior debt and an intercreditor agreement. The filing provides no assurance that the refinancing would close.
These conditions, together with continuing losses and the TD Bank covenant default, raised substantial doubt about the company’s ability to continue as a going concern. The financial statements were nevertheless prepared on a going-concern basis.
The company must make 24 quarterly payments of $250,000 beginning March 31, 2013, under the approximately $8.5 million Brazilian arbitration settlement. The settlement liability was $5.5 million at April 30, 2013, and the company was current on its obligations.
Brazilian VAT proceedings remain material. Potential judicial deposits described in the filing could total approximately $7.8 million, although management expected a lower cash-flow outcome if anticipated amnesty arrangements became available. The filing also discusses a Brazilian tax audit, foreign-currency exposure, discontinued India operations and risks from international manufacturing and suppliers.
Disclosure controls were not effective as of April 30, 2013. Management identified a material weakness in internal control over international financial reporting and review and stated that it was restructuring the international review process.
Important facts for investors to verify
- Whether the proposed senior credit facility closed and whether the TD Bank default and June 30, 2013 maturity were resolved or refinanced.
- Actual cash requirements and timing for the Brazilian arbitration settlement and VAT-related proceedings.
- Whether Brazilian operations returned to profitability after the expected first-half FY2014 losses.
- Whether revenue and gross-margin trends, particularly in Brazil, China and Argentina, improved in subsequent quarters.
- Remediation of the material weakness in international financial reporting and whether subsequent filings were timely and accurate.
- The company’s ability to fund operations, debt service, settlement payments and planned capital expenditures without additional equity, debt or asset-sale proceeds.