Lakeland Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2018, corresponding to the first quarter of fiscal 2019. The request metadata identifies “2017 Q1,” but the filing itself reports April 30, 2018 results compared with April 30, 2017.
Business Context and Reporting Period
Lakeland manufactures and sells protective garments and accessories for industrial, governmental, chemical, utility, construction, fire protection, and other markets. Products are sold in more than 40 countries through distributors, direct sales, and sales representatives. Manufacturing operations include China, Mexico, India, and developing operations in Vietnam.
The unaudited condensed consolidated financial statements were prepared under U.S. GAAP. The company adopted ASC 606 revenue recognition effective February 1, 2018 using the retrospective transition method; management reported no material impact and did not recast prior-period financial statements.
Financial Performance and Liquidity
| Metric | Q1 FY19 | Q1 FY18 | Change |
|---|---|---|---|
| Net sales | $24.344 million | $22.961 million | +6.0% |
| Gross profit | $9.504 million | $8.558 million | +11.1% |
| Gross margin | 39.0% | 37.3% | +170 bps |
| Operating expenses | $7.088 million | $6.085 million | +16.5% |
| Operating profit | $2.416 million | $2.473 million | -2.3% |
| Operating margin | 9.9% | 10.8% | -90 bps |
| Net income | $1.867 million | $1.711 million | +9.1% |
| Diluted EPS | $0.23 | $0.23 | Flat |
| Cash flow from operations | $0.881 million | $4.269 million | Down $3.388 million |
Income tax expense declined to $0.517 million from $0.688 million, primarily reflecting the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act. Foreign currency transaction losses included in net income increased to approximately $0.243 million from $0.065 million.
At April 30, 2018, cash and cash equivalents were $16.285 million, working capital was approximately $68.0 million, and total current assets were $79.414 million against current liabilities of $11.373 million. Total debt was approximately $1.608 million, consisting of $1.273 million of long-term debt, $0.158 million of current maturities, and $0.177 million of short-term borrowings. There were no borrowings outstanding under the company’s revolving credit facility.
Inventory increased to $44.411 million from $42.919 million at January 31, 2018, while accounts payable increased to $7.844 million from $7.057 million. Cash flow from operations was reduced principally by a $1.603 million inventory increase. Capital expenditures were $0.272 million, and net cash used in financing activities was $0.072 million.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by China and the Asia-Pacific region, stronger Canada activity tied to an oil and gas recovery, new European distributor stocking orders, and increased sales in Russia and Kazakhstan. U.S. sales decreased modestly.
- Gross margin improved because of production efficiencies, price increases, and favorable product mix in disposable, chemical, woven, UK, and Canadian products. Reflective and fire product margins declined because of competitive pricing and discounting.
- Operating expenses increased by approximately $1.0 million. Notable drivers included $0.3 million of currency-related charges, higher professional fees, medical insurance costs, sales compensation, advertising and travel, and outbound freight.
- Operating profit declined slightly despite higher sales and gross profit because operating expenses grew faster than revenue.
- Net income increased because of higher sales and gross profit and lower income taxes.
- Operating cash flow declined substantially from the prior year, principally because the prior-year period benefited from a $3.233 million inventory reduction, whereas the current period used $1.603 million for inventory growth.
- Weighted-average basic shares increased to 8.116 million from 7.264 million, reflecting the 2017 public offering and other equity activity. The company had 8,116,199 shares outstanding as of June 5, 2018.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management anticipated fiscal 2019 capital expenditures of approximately $2.5 million, primarily for an enterprise resource planning project and expansion of manufacturing capacity in Vietnam and India. The filing does not provide revenue or earnings guidance.
Management stated that improved industrial activity, customer inventory replenishment, international sales expansion, production efficiencies, and pricing actions supported the quarter. The company also continues to develop Vietnam and India manufacturing operations to manage costs and expand capacity.
- Foreign currency exposure is significant, including transaction losses and translation effects. The company uses selected forward contracts and cash flow hedges but does not hedge all currencies.
- International manufacturing, supply-chain interruptions, dependence on selected fabric suppliers, customer demand estimation, competition, cybersecurity, environmental requirements, and reliance on key personnel may adversely affect results.
- The company has a secured $20 million revolving facility, with a $5 million letter-of-credit subfacility, and a $1.575 million term loan. The facility includes borrowing-base requirements, a minimum fixed-charge coverage ratio of 1.10 to 1.00, and customary restrictive covenants.
- Four labor-related proceedings remain associated with the former Brazilian subsidiary. Management believes the claims lack merit and has accrued $0.15 million. One claim seeks approximately $0.7 million, and other claims involve amounts of approximately $0.1 million and $0.3 million; outcomes remain uncertain.
- The company retains tax-related risk concerning deferred tax assets, foreign earnings, and the interpretation and future effects of the Tax Cuts and Jobs Act. Management does not expect significant GILTI or BEAT taxes beginning in fiscal 2019.
- Cash held in China totaled approximately $4.6 million; repatriation could incur a 10% Chinese withholding tax. International cash movements may also be restricted or delayed by local requirements.
- The company reported no impairment charge in the current quarter. A $0.7 million non-cash impairment charge related to an asset held for sale was recorded in fiscal 2018.
- Disclosure controls and procedures were deemed effective as of April 30, 2018, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether sales growth and improved gross margins are sustainable after the quarter’s pricing actions, product mix benefits, and customer inventory replenishment.
- Whether operating expenses, particularly currency costs, sales expansion costs, professional fees, and medical expenses, moderate enough to restore operating-margin expansion.
- Inventory growth, backlog conversion, inventory obsolescence exposure, and the effect of working-capital needs on operating cash flow.
- Progress, required investment, and profitability prospects for the Vietnam and India manufacturing expansions and the ERP project.
- Compliance with the secured credit facility’s borrowing-base and fixed-charge coverage covenants as borrowing or operating conditions change.
- Foreign exchange effects, particularly in China, Canada, Europe, Latin America, Russia, and Kazakhstan, and the effectiveness of the company’s limited hedging program.
- The status and ultimate cost of the four remaining Brazilian labor proceedings and any continuing liabilities from the former Brazilian subsidiary.
- The company’s ability to access or repatriate foreign cash without material withholding taxes or local restrictions.