LAKE

Lakeland Industries Inc. - 10-Q Summary (Period Ended July 31, 2011)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Lakeland Industries, Inc., a Delaware corporation manufacturing safety garments and accessories for industrial protective clothing and homeland security markets. The reporting period covers the three and six months ended July 31, 2011. The company operates manufacturing facilities in the United States, Mexico, China, India, and Brazil.

Key Financial Metrics

Cash Flow: Net cash used in operating activities was $3.6 million, primarily due to a $4.6 million increase in inventories and a $2.3 million increase in accounts receivable. Net cash provided by financing activities was $5.7 million, driven by net borrowings of $6.0 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4.0% year-over-year for the six-month period. International sales grew by $3.6 million, offsetting a $1.6 million decline in domestic sales. Brazil sales increased by $2.2 million (36.7% growth).
• Profitability: Operating profit increased 106% to $2.3 million. This improvement is largely attributable to the absence of a $1.6 million VAT tax charge recorded in the prior year's first quarter.
• Margin Pressure: Gross margins for disposables decreased due to lower margins on products purchased from DuPont and severance charges. Brazil's gross margin declined to 40.8% from 48.1% due to the absence of a high-margin contract in the prior year.
• Balance Sheet: Inventory increased by $4.7 million, driven by buildups in Brazil for anticipated contracts and local sourcing needs in China. Total debt increased due to higher utilization of the revolving credit facility ($16.1 million outstanding) and a new $1.5 million term loan.

Guidance, Risks, and Unusual Items

• Brazil VAT Contingency: The company faces significant tax exposure in Brazil. A claim for the 2007-2009 period totals approximately R$11.1 million (US$6.9 million). Management expects to utilize an amnesty program to pay taxes without penalties, potentially requiring a judicial deposit of R$3.1 million (US$1.9 million) for the 2004-2006 period. The company is pursuing arbitration against former sellers for indemnification.
• DuPont License Termination: DuPont notified the company on July 12, 2011, of the termination of the DuPont Wholesaler Agreement. DuPont will fulfill orders through September 10, 2011. This impacts the supply of Tychem and Tyvek finished garments.
• Capital Expenditures: Expected capital expenditures for the remainder of the fiscal year are approximately $2.0 million, focused on property expansion in Mexico and Brazil.
• Forward-Looking Risks: Risks include supply chain disruptions, foreign currency fluctuations (though hedging programs are active), and the ability to obtain fabrics at competitive prices.

Investor Verification Checklist

• Verify the status of the DuPont license termination and the company's plan to secure alternative sources for Tychem and Tyvek materials post-September 2011.
• Monitor the resolution of the Brazil VAT tax dispute, specifically the timing of the next amnesty period and the outcome of arbitration against former sellers.
• Assess the impact of the $4.6 million inventory buildup on future working capital requirements and cash flow.
• Review the company's compliance with credit facility covenants (fixed charge ratio, funded debt to EBITDA) given the increased debt load.
• Track the performance of the Brazil subsidiary, which saw significant sales growth but margin compression.