Lakeland Industries, Inc. Form 10-K Summary
Business Context and Reporting Period
Lakeland manufactures and sells protective clothing and accessories, including disposable and chemical-protective garments, firefighting and heat-protective apparel, reusable woven garments, high-visibility clothing, gloves and sleeves. Products are sold through distributors and direct channels in the United States and more than 40 foreign countries.
The filing covers the fiscal year ended January 31, 2015 (FY15), with comparison to the fiscal year ended January 31, 2014 (FY14). Fourth-quarter results are unaudited and cover the three months ended January 31, 2015.
Key Financial Metrics
| Metric | FY15 | FY14 | Change |
|---|---|---|---|
| Net sales | $99.7 million | $91.4 million | Up 9.1% |
| Gross profit | $33.7 million | $24.8 million | Up 35.8% |
| Gross margin | 33.8% | 27.2% | Up 6.6 percentage points |
| Operating profit (loss) | $5.0 million | $(0.4) million | Improved $5.3 million |
| Operating margin | 5.0% | (0.4)% | Improved |
| Income (loss) before taxes | $0.1 million | $(3.0) million | Improved |
| Net income (loss) | $8.4 million | $(0.1) million | Improved $8.5 million |
| Basic diluted EPS | $1.35 / $1.33 | $(0.02) / $(0.02) | Improved |
| Cash flow from operations | $3.3 million | $(3.9) million | Improved $7.2 million |
FY15 net income was materially affected by an approximately $9.5 million U.S. tax benefit related to a claimed worthless-stock deduction for the Brazilian operations, net of a $2.9 million valuation allowance. The filing also includes a $2.3 million charge related to early extinguishment of subordinated debt and a $1.0 million noncash stock-compensation charge.
At January 31, 2015, cash and cash equivalents were $6.8 million, working capital was approximately $43.0 million, total assets were $93.2 million and stockholders’ equity was $63.3 million. Inventory was $40.3 million and accounts receivable were $14.2 million.
Borrowings included $5.6 million outstanding under a $15 million senior revolving facility, $3.3 million of short-term borrowings, approximately $0.8 million of long-term Canadian debt, and $4.0 million remaining under the Brazilian arbitration settlement. The subordinated debt was fully repaid in October 2014. The company reported $9.4 million of availability under the senior revolving facility at year-end and compliance with its financial covenants.
FY15 capital expenditures were $0.9 million, and management anticipated approximately $1.0 million of FY16 capital expenditures. No cash dividends were paid, and dividends are restricted by the company’s credit agreements.
Fourth-Quarter Performance
Q4 FY15 net sales were $26.5 million, compared with $22.2 million in Q4 FY14. Gross profit was $9.9 million, or 37.5% of sales, compared with $6.2 million, or 28.2%, in the prior-year quarter. Operating profit was $2.2 million versus an operating loss of $0.4 million. Q4 net income was $11.3 million, including the significant tax benefit associated with Brazil.
Q4 sales and margins benefited from Ebola-related demand for disposable and chemical-protective products, strong sales in Europe, Argentina and China, and cost reductions from closing the Pennsylvania reflective facility and shifting production to Mexico and China.
Material Changes Versus FY14
- Sales increased primarily from Ebola-related orders, stronger branded-product sales, higher U.S. disposable and chemical sales, increased U.K. volume, and a large fire-gear sale in Ecuador.
- International sales rose to $49.7 million from $44.7 million, representing approximately 50% of FY15 net sales.
- Operating results improved in the United States, China and the United Kingdom. Brazil remained unprofitable, with a reported operating loss of approximately $2.0 million in FY15 versus $4.4 million in FY14.
- Gross margin improved through production transfers, facility consolidation, improved fire and chemical product mix, and lower costs in the reflective business.
- A private placement of 1.11 million common shares generated gross proceeds of $11.1 million. Proceeds were used principally to repay subordinated debt and reduce revolving borrowings.
- Cash increased by $2.2 million, while revolving-credit borrowings decreased by $6.8 million and subordinated debt decreased by approximately $1.5 million before being fully repaid.
- Prior-period financial statements were restated for Brazil-related VAT and judicial-deposit accounting matters. The filing states that these adjustments did not affect FY14 net income or EPS.
Guidance, Outlook, Risks and Unusual Items
Management expected Ebola-related sales to support the first quarter of FY16, but stated that Q2 FY16 Ebola-product sales would be significantly lower as the preparedness market moves toward the timing of federal funding. The company expects demand to recur as infectious-disease preparedness funds reach the states, although the duration of its largest international contract was uncertain.
Management expected FY16 research and development expense of approximately $200,000, compared with $90,000 in FY15, and capital expenditures of approximately $1.0 million.
On April 29, 2015, the board approved a plan to exit Brazil through a proposed sale of the Brazilian subsidiary to a current officer, subject to a definitive agreement and lender approval. The company expected closing in the second quarter of FY16. Estimated pre-tax exit and disposal costs were approximately $1.9 million, including approximately $1.6 million of funding to the buyer and $0.3 million of legal and accounting costs. The sale was not assured, and the company could remain exposed to Brazilian labor, VAT and other liabilities.
Brazilian labor plaintiffs were seeking nearly $8.0 million; management estimated ultimate resolution at less than $1.0 million, but considered losses as high as $1.5 million reasonably possible. A Brazilian VAT liability of approximately $5.5 million was classified as probable, with approximately $2.3 million recorded as a long-term liability. The Brazilian subsidiary’s auditor also reported a qualification related to approximately $2.3 million of VAT interest and penalties not recorded in the subsidiary’s financial statements.
Management identified a material weakness in internal control over financial reporting related to Brazil and concluded that disclosure controls were not effective as of January 31, 2015. Previously identified China and related-party weaknesses were reported as remediated. The consolidated financial statements were audited, but the auditor did not provide an opinion on internal control effectiveness.
Additional risks include dependence on volatile Ebola-related demand, foreign currency exposure, international operations, changing safety standards, competition from larger companies, inventory forecasting, supplier concentration, product liability, environmental liabilities, debt covenants, and the need to maintain sufficient liquidity. The company’s senior facility is secured by substantially all U.S. and Canadian assets and includes restrictions on capital expenditures, foreign-subsidiary investment and Brazilian funding.
Subsequent to year-end, the senior revolver was amended to reduce the interest-rate spread and floor and extend maturity to June 28, 2017. The filing does not provide a formal revenue or earnings forecast.
Most Important Facts to Verify
- Whether Ebola-related demand normalized, declined or recurred after Q1 FY16 and how much of FY15 growth was nonrecurring.
- Whether the proposed Brazil sale closed, the actual exit costs incurred, and the company’s remaining exposure to Brazilian labor, VAT and tax liabilities.
- Whether the $9.5 million Brazil-related tax benefit is sustained after potential IRS review and how quickly associated tax attributes can reduce future cash taxes.
- Whether the Brazil internal-control material weakness was remediated and whether subsequent filings contain additional restatements or audit qualifications.
- Compliance with senior-credit-facility covenants, revolver availability, and the maturity or refinancing of short-term borrowings.
- Operating cash flow excluding noncash tax benefits, debt-extinguishment charges and other unusual items.
- Inventory levels, reserves and working-capital requirements if Ebola-related demand or government orders weaken.
- Exposure to foreign exchange volatility, particularly in Brazil, Argentina, China, Canada and Europe.