LAKE

Lakeland Industries Inc. - 10-Q Summary (Period Ended April 30, 2009)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Lakeland Industries, Inc., a Delaware corporation manufacturing and selling safety garments and accessories for industrial protective clothing and homeland security markets. The reporting period covers the three months ended April 30, 2009. The company operates manufacturing facilities in the United States, Mexico, China, India, and Brazil.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 12.1% ($3.3 million) year-over-year, primarily driven by a $5.2 million drop in domestic disposable sales and declines in the UK and Chile markets. This was partially offset by the inclusion of Brazil operations ($2.6 million) and growth in Australian sales.
• Profitability Compression: Operating profit fell 53.1% to $0.7 million. While gross margin percentage improved slightly to 25.1%, operating expenses as a percentage of sales rose to 22.2% from 19.2% due to the inclusion of Brazil operations and reallocation of China costs.
• Net Income Drop: Net income plummeted 89% to $97,319. This was caused by lower sales, losses in India, and a non-recurring $350,000 allowance against deferred taxes related to the restructuring of Indian operations.
• Balance Sheet: Cash increased by $1.2 million due to a reduction in borrowings under the revolving credit facility (down $3.9 million). Inventory decreased by $4.8 million as the company reduced raw materials and finished goods levels.

Guidance, Outlook, and Risks

Management Commentary: Management expects continuing profit margin improvements as production of reusable woven garments and gloves shifts to lower-cost facilities in Mexico and China. Capital expenditures for fiscal 2010 are expected to be approximately $1.5 million, primarily for plant expansion in Brazil and equipment upgrades.

Liquidity: The company maintains a $30 million revolving credit facility with $20.5 million outstanding. Management believes current cash and borrowing availability are sufficient for the next 12 months.

Risks and Contingencies:

• Internal Controls: Management concluded that previously identified material weaknesses regarding China operations (inventory waste sales and intercompany profit elimination) have been remediated as of April 30, 2009.
• Tax Exposure: The company faces potential tax audits in China and Brazil. A $350,000 allowance was recorded for deferred taxes in India.
• Supplier Concentration: Approximately 75% of raw materials are normally purchased from a single supplier.
• Foreign Currency: Significant exposure exists due to operations in Brazil, China, Mexico, and sales in the UK and Canada. The company hedges specific currencies but does not hedge the Chinese Yuan or Brazilian Real.

Investor Verification Checklist

• India Restructuring: Verify the $350,000 deferred tax allowance and the ongoing impact of losses in the India segment on future earnings.
• Brazil Integration: Assess the sustainability of Brazil's gross margins (46.7% in Q1) given the one-time nature of the large order shipped in April 2009 and the impact of exchange rate fluctuations.
• China Controls: Confirm the effectiveness of the new "China Internal Control Committee" and the remediation of previous fraud and inventory control weaknesses.
• Supplier Dependency: Evaluate the risk associated with sourcing 75% of raw materials from a single supplier.
• Debt Covenants: Monitor compliance with financial covenants (fixed charge ratio, debt to EBITDA) given the high level of borrowings ($20.5M) relative to operating profit.