Lakeland Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2012, compared with April 30, 2011. The supplied metadata identifies “2011 Q1,” but the filing itself is for the first quarter of fiscal 2013. Financial statements are unaudited.
Business Context
Lakeland manufactures and sells protective garments and accessories for industrial, government, homeland-security, chemical, utility, construction, and related markets. Operations include the United States, Mexico, China, Brazil, Canada, Europe, India, and other international markets. The India glove manufacturing operation was shut down in December 2011 and is presented as a discontinued operation.
Financial Performance and Position
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales from continuing operations | $24.0 million | $25.6 million |
| Gross profit | $7.3 million | $8.3 million |
| Gross margin | 30.5% | 32.3% |
| Operating profit | $0.025 million | $1.6 million |
| Operating margin | Approximately 0.1% | 6.2% |
| Income from continuing operations | $(10.1) million | $1.3 million |
| Net income (loss) | $(10.1) million | $1.2 million |
| Basic EPS | $(1.94) | $0.22 |
| Cash flow from operating activities | $0.3 million | $(3.8) million |
- Operating expenses increased 9.0% to $7.3 million, or 30.4% of sales, from 26.1% of sales in the prior-year quarter.
- The quarter included a $10.0 million accrual for a Brazilian arbitration award and a $0.3 million Brazilian foreign-exchange loss. The prior-year quarter included a $0.2 million Brazilian foreign-exchange gain.
- Cash and cash equivalents were $4.7 million at April 30, 2012, compared with $5.7 million at January 31, 2012. Reported working capital was $38.8 million.
- Total assets were $101.5 million and stockholders’ equity was $61.4 million at April 30, 2012, compared with $73.3 million of equity at January 31, 2012.
- Inventories declined to $42.3 million from $45.7 million, while accounts receivable increased to $16.2 million from $12.6 million.
- Capital expenditures were $0.4 million during the quarter. Management expected approximately $1.0 million of capital expenditures for the remainder of fiscal 2013.
Material Changes Versus the Prior Comparable Period
- Sales decreased 6.2%, primarily because U.S. domestic sales fell approximately $5.0 million following termination of the DuPont wholesaler agreement. Foreign sales increased approximately $3.4 million.
- Brazil sales increased 28% to approximately $5.2 million, supported by large bid orders. China external sales also increased, while U.S. external sales declined materially.
- Gross margin declined 180 basis points. Wovens margins were adversely affected by the Missouri plant closure, production relocation disruptions, inefficiencies, shortages, and inventory write-downs. Brazil margins improved to 44.1% from 39.3%.
- Operating profit fell to approximately breakeven from $1.6 million, reflecting lower sales and higher operating expenses, including higher sales commissions and sales-related personnel costs.
- Net income declined by approximately $11.3 million, principally because of the $10.0 million arbitration accrual and weaker U.S. volume.
- Operating cash flow improved to $0.3 million from a use of $3.8 million, primarily because the arbitration accrual and inventory reduction offset the reported net loss.
- The St. Joseph, Missouri facility closed in April 2012, with production moved primarily to Mexico and distribution moved to Alabama.
Debt, Liquidity, Outlook, and Risks
- At April 30, 2012, $6.7 million was outstanding under the revolving credit facility, and approximately $14.8 million was outstanding under the TD Bank loan agreement in total. Debt was reclassified as current because of covenant defaults.
- The Brazilian arbitration award resulted in one or more events of default, including failure to satisfy a minimum EBITDA covenant. TD Bank had not waived the defaults and could accelerate the loan. The company was negotiating with the bank and stated that scheduled principal and interest payments had been made.
- The company engaged Raymond James & Associates to assist the board in evaluating financial and strategic alternatives, including potential debt or equity financing and asset sales.
- Management stated that available cash, operating cash flow, and potential outside funding would enable the company to satisfy the arbitration award and meet expected operating, capital-expenditure, and debt-service requirements for at least the next 12 months. The filing provides no assurance that financing or a satisfactory bank resolution will be achieved.
- The arbitration award, received May 8, 2012, ordered approximately $9.0 million of damages related to supplemental purchase price, approximately $0.6 million of remuneration, approximately $0.2 million from escrow, and related arbitration costs. The company accrued $10.0 million and sought clarification, with a possible subsequent court challenge.
- Brazilian VAT matters remained outstanding. The filing described potential judicial-deposit exposure of approximately $8.9 million, although management expected amnesty-related payments and believed a portion could be satisfied by pledging real estate rather than paying cash.
- Additional risks include foreign-currency volatility, supplier and raw-material costs, international operations, competition, customer-demand estimation, product liability, environmental liabilities, limited stock liquidity, federal funding reductions affecting homeland-security demand, and possible goodwill impairment associated with Brazil.
- The company did not provide formal revenue or earnings guidance. Management expected continuing margin improvement from production shifts to Mexico and China over time, but near-term results were subject to plant-transition effects, sales mix, currency movements, litigation, and financing uncertainty.
Most Important Facts for Investors to Verify
- Whether the Brazilian arbitration award was modified, set aside, or enforced, and the ultimate cash cost including fees and related payments.
- Whether TD Bank waived the covenant defaults or accelerated any portion of the approximately $14.8 million loan balance.
- How the company funded the arbitration obligation and whether additional debt, equity financing, or asset sales were completed.
- Whether Brazilian VAT claims resulted in cash payments, judicial deposits, tax credits, penalties, or additional liabilities.
- Whether the U.S. sales decline following DuPont’s license termination stabilized and whether production relocation improved wovens margins.
- Whether the company recorded an impairment of Brazilian goodwill or other assets in subsequent filings.
- The conversion of reported working capital and cash-flow improvements into sustainable operating liquidity, given the low cash balance and current classification of debt.