Lakeland Industries, Inc. Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2019 (FY19), with comparison to FY18. The request metadata identifies “2017 Q4,” which does not match the filing period. The filing also presents unaudited fourth-quarter results for the three months ended January 31, 2019.
Business Context
Lakeland manufactures and sells industrial and public-sector protective clothing and accessories, including disposable garments, chemical suits, firefighting apparel, reusable woven garments, high-visibility clothing, gloves and sleeves. Products are sold through more than 1,600 distributors and directly to customers in more than 50 countries. Manufacturing operations are located principally in China, Mexico, Vietnam and India, with additional U.S. and international facilities.
FY19 included the commencement of manufacturing operations in Vietnam and India, continued international expansion, product development and a significant global enterprise resource planning (ERP) implementation.
Key Financial Metrics
| Metric | FY19 | FY18 | Change |
|---|---|---|---|
| Net sales | $99.0 million | $96.0 million | Up 3.2% |
| Gross profit | $33.9 million | $36.2 million | Down 6.3% |
| Gross margin | 34.2% | 37.7% | Down 350 basis points |
| Operating profit | $3.6 million | $8.5 million | Down 57.9% |
| Operating margin | 3.6% | 8.8% | Down 520 basis points |
| Income before taxes | $3.5 million | $8.3 million | Down 58.3% |
| Income tax expense | $2.0 million | $7.9 million | Down $5.9 million |
| Net income | $1.5 million | $0.4 million | Up $1.0 million |
| Diluted EPS | $0.18 | $0.06 | Improved |
| Cash flow from operations | $1.8 million | $0.6 million | Improved |
| Capital expenditures | $3.1 million | $0.9 million | Increased |
| Cash and equivalents | $12.8 million | $15.8 million | Down $3.0 million |
Fourth-quarter FY19 net sales were $25.0 million versus $25.2 million in Q4 FY18. The company reported a fourth-quarter net loss of $1.9 million versus a $4.9 million loss in the prior-year quarter.
At January 31, 2019, working capital was $65.1 million, total assets were $94.7 million, total liabilities were $11.5 million and stockholders’ equity was $83.2 million. Inventory was $42.4 million and accounts receivable were $16.5 million.
The company had no borrowings outstanding under its $20 million revolving credit facility and reported $1.3 million of total debt, including current maturities. The facility matures May 10, 2020 and is subject to fixed-charge coverage, capital expenditure, investment and other covenants.
Material Changes Versus FY18
- Sales growth was driven primarily by Asia, Mexico, Russia and Kazakhstan, Latin America and the United Kingdom. U.S. sales declined 1.6%.
- Product growth in disposables, chemical products, firefighting products, gloves and reusable woven garments was partly offset by a significant decline in high-visibility product sales.
- Gross margin declined because of ERP-related supply-chain and distribution costs, rush freight, additional U.S. labor and overtime, higher inventory-related rent, product mix and competitive pricing.
- Operating expenses increased 9.4% to $30.3 million, including higher professional fees and Brazil litigation reserves, sales salaries, advertising, freight, rent, computer and office costs, and stock-based compensation.
- Cash flow from operations improved, but investing and financing uses of cash resulted in a $3.0 million decrease in cash. The company repurchased 105,648 shares for approximately $1.2 million during FY19.
- The company recorded a $0.2 million non-cash impairment charge for former Brazilian assets held for sale and accrued an additional $1.2 million for Brazilian litigation and professional fees.
Guidance, Outlook, Risks and Unusual Items
- Management expects FY20 capital expenditures of approximately $2.0 million, primarily for the ERP project and expansion of Vietnam and India manufacturing capacity.
- Research and development expense is expected to increase to approximately $0.7 million in FY20 from $0.2 million in FY19.
- Management expects ERP-related adverse effects to continue, although at a lesser level, through at least the second quarter of FY20. The filing attributes the implementation to higher expenses, operational disruptions, longer lead times and order cancellations.
- Management believes available cash, operating cash flow and the unused revolving facility are sufficient to meet liquidity needs for the next 12 months.
- International exposure is material: approximately 50% of FY19 net sales were from foreign customers, with foreign-currency, political, trade-policy, tariff, supply-chain and economic risks.
- Brexit uncertainty, threatened changes in U.S. trade policy involving China and Mexico, higher Chinese labor costs, competitive pricing and changing international product standards may affect demand and margins.
- The 2017 Tax Cuts and Jobs Act produced a $0.6 million FY19 GILTI tax charge. FY18 included a substantially larger tax charge related to deferred-tax-asset remeasurement and tax reform.
- Management identified material weaknesses in revenue recognition, inventory valuation and entity-level monitoring and IT general controls. The independent auditor issued an adverse opinion on internal control over financial reporting. Remediation was ongoing and not complete as of the filing date.
- The company remains exposed to potential liabilities related to its former Brazilian operations, including labor claims and other contingencies. Management accrued $1.2 million in FY19 but stated that outcomes remain uncertain.
- The company does not pay cash dividends and does not anticipate doing so in the foreseeable future. Credit agreements restrict dividends and impose other operating limitations.
Most Important Facts to Verify
- Confirm the intended period: the supplied filing is FY19, not 2017 Q4.
- Assess whether ERP remediation has restored order fulfillment, revenue-recognition controls, inventory valuation controls and operating margins.
- Monitor the three material weaknesses and whether management and the auditor subsequently conclude they have been remediated.
- Review the sustainability of the 34.2% FY19 gross margin after ERP costs, freight, labor and inventory expenses normalize.
- Evaluate cash conversion, inventory levels, receivables growth and the funding requirements of the Vietnam and India facilities.
- Review the $1.2 million Brazil litigation accrual, remaining claims and potential parent-company liability.
- Confirm compliance with revolving-credit covenants and the availability of the $20 million facility.
- Consider foreign-exchange, trade-policy, China and Mexico manufacturing, Brexit, customer-demand and competitive-pricing risks.
- Reconcile the filing’s inconsistent references to the ERP implementation date and verify the correct implementation timeline.