Lakeland Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2018. The supplied filing is for Q2 fiscal 2019, not 2017 Q2; comparable periods ended July 31, 2017. Lakeland manufactures and sells industrial and public-sector protective garments and accessories through distributors and international sales channels.
Key financial metrics
| Metric | Three months ended July 31, 2018 | Three months ended July 31, 2017 | Six months ended July 31, 2018 | Six months ended July 31, 2017 |
|---|---|---|---|---|
| Net sales | $25.616 million | $23.909 million | $49.960 million | $46.870 million |
| Gross profit | $9.151 million | $8.690 million | $18.656 million | $17.247 million |
| Gross margin | 35.7% | 36.3% | 37.3% | 36.8% |
| Operating profit | $1.646 million | $2.182 million | $4.063 million | $4.654 million |
| Operating margin | 6.5% | 9.1% | 8.2% | 10.0% |
| Net income | $1.017 million | $1.842 million | $2.885 million | $3.552 million |
| Diluted EPS | $0.12 | $0.25 | $0.35 | $0.49 |
For the six months, operating cash flow was $0.676 million versus $6.311 million in the prior-year period. Capital expenditures were $1.220 million versus $0.448 million. Cash and cash equivalents were $14.933 million at July 31, 2018, compared with $15.788 million at January 31, 2018. Working capital was approximately $68.3 million.
Debt consisted of $85,000 of short-term borrowings, $158,000 of current maturities of long-term debt and $1.233 million of long-term debt. No borrowings were outstanding under the $20 million revolving credit facility. The company had approximately $1.476 million of total debt, excluding any undrawn capacity.
Material changes versus the prior comparable period
- Second-quarter sales increased 7.1%; six-month sales increased 6.6%.
- Second-quarter gross profit increased 5.3%, but gross margin declined 60 basis points because of product mix, including lower-margin disposables and chemical products. Six-month gross margin increased 50 basis points, aided by chemical and woven products, including higher-margin fire-retardant products.
- Operating expenses increased 15.3% in the quarter and 15.9% year to date. Drivers included foreign-currency fluctuations, Vietnam facility rent, bad-debt expense, sales personnel and commissions, freight, information technology investment, ERP implementation and equity compensation.
- Operating profit declined 24.6% in the quarter and 12.7% for the six-month period. Net income declined 44.8% in the quarter and 18.8% year to date.
- Inventory increased $3.5 million from January 31, 2018 to $46.358 million, primarily as the company built core U.S. inventory and increased fire-resistant product availability. Accounts payable increased $1.7 million, partly reflecting Vietnam manufacturing activity.
- International external sales increased to $12.26 million in the quarter and $24.25 million for the six months, representing 47.8% and 48.5% of total external sales, respectively.
Guidance, outlook, risks and unusual items
- Management anticipates approximately $2.5 million of fiscal 2019 capital expenditures, including the ERP project and manufacturing expansion in Vietnam and India.
- Management cited improving industrial activity, increased demand in China and Asia-Pacific, new European distributors, and growth in Russia, Kazakhstan and Latin America. It also expects Vietnam and India expansion to help offset rising China manufacturing costs.
- Foreign-currency transaction losses were approximately $0.4 million in the quarter and $0.7 million for the six months. The company uses selected forward contracts and cash-flow hedges but does not hedge all currencies.
- Cash is distributed internationally and may not be readily transferable across borders. Repatriating approximately $5.0 million held in China would incur an additional 10% withholding tax.
- The company adopted the revenue standard under ASC Topic 606 effective February 1, 2018; management reported no material impact. Lease accounting under ASC Topic 842 was still being evaluated.
- The company recorded $0.302 million of stock-based compensation expense during the six months and had $1.277 million of unrecognized expense based on maximum performance awards.
- Four labor proceedings related to the former Brazilian subsidiary remain outstanding. The balance-sheet accrual was approximately $0.1 million. Management considers the claims to be without merit, but the filing identifies continuing potential exposure, including a claim of approximately $0.7 million.
- Other risks include international manufacturing and supply-chain dependence, currency volatility, cybersecurity, competition, customer-demand forecasting, environmental regulation, tax exposure, debt covenants and the successful completion and profitability of Vietnam and India facilities.
- Management stated that disclosure controls and procedures were effective as of July 31, 2018, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether sales growth can continue while second-quarter gross margin remains pressured by product mix.
- Whether operating expenses, ERP costs, international expansion costs and foreign-currency losses moderate.
- Inventory growth and resulting working-capital requirements, particularly relative to the weak year-to-date operating cash flow.
- Progress, capital spending and profitability of the Vietnam and India manufacturing facilities.
- Availability under the revolving credit facility and compliance with its minimum 1.10-to-1.00 fixed-charge coverage covenant.
- Potential outcomes and final costs of the remaining Brazilian labor proceedings and any IRS challenge related to the prior worthless-stock deduction.
- Future tax effects of the Tax Cuts and Jobs Act, including GILTI, BEAT and foreign cash repatriation.