Lakeland Industries, Inc. — Form 10-Q Summary
Reporting period: The provided filing covers the three and nine months ended October 31, 2018, Lakeland’s third quarter of fiscal 2019. The request metadata identifies “2017 Q3,” but the filing itself is clearly for 2018 Q3/FY19.
Business Context
Lakeland manufactures and sells industrial and public-sector protective clothing and accessories, including disposable, chemical, firefighting, high-visibility, woven, glove and arm-protection products. It sells through distributors and direct channels in more than 40 countries and operates manufacturing facilities in China, Mexico, Vietnam, India and Argentina.
Financial Results
| Metric | Q3 FY19 | Q3 FY18 | Nine Months FY19 | Nine Months FY18 |
|---|---|---|---|---|
| Net sales | $24.0 million | $24.0 million | $74.0 million | $70.8 million |
| Gross profit | $8.3 million | $9.1 million | $27.0 million | $26.3 million |
| Gross margin | 34.6% | 37.8% | 36.5% | 37.1% |
| Operating profit | $1.0 million | $2.7 million | $5.1 million | $7.3 million |
| Operating margin | 4.2% | 11.1% | 6.9% | 10.3% |
| Net income | $0.5 million | $1.8 million | $3.4 million | $5.4 million |
| Diluted EPS | $0.06 | $0.23 | $0.41 | $0.71 |
Q3 sales were essentially flat year over year, while nine-month sales increased 4.4%. International sales increased to $12.2 million in Q3 and $36.4 million for the nine-month period, representing approximately 50.8% and 49.3% of sales, respectively.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $11.7 million at October 31, 2018, down $4.1 million from January 31, 2018.
- Working capital was approximately $68.1 million, up approximately $2.0 million from fiscal year-end.
- Operating cash flow was negative $1.7 million for the first nine months, compared with positive $5.5 million in the prior-year period.
- Investing cash flow was negative $2.2 million, primarily for equipment, Vietnam manufacturing development, and the U.S. ERP project.
- Total debt was approximately $1.5 million, comprising $179,000 of short-term borrowings, $158,000 of current maturities and $1.2 million of long-term debt.
- No borrowings were outstanding under the $20.0 million revolving credit facility. The facility matures in May 2020 and includes customary financial and operating covenants, including a minimum fixed-charge coverage ratio of 1.10 to 1.00.
- Capital expenditures were $1.0 million in Q3 and $2.2 million for the first nine months. Management expected approximately $0.3 million of Q4 FY19 capital expenditures and approximately $1.5 million in FY20.
Material Changes Versus Prior Period
- Q3 gross profit declined 8.1% and gross margin fell 3.2 percentage points, primarily due to higher U.S. distribution, supply-chain, payroll and inventory-related costs associated with the ERP implementation and increased inventory.
- Q3 operating expenses rose 14.4% to $7.3 million, driven by higher sales compensation and travel, ERP-related temporary labor, information-technology spending, Vietnam start-up costs and equity compensation.
- Q3 operating profit fell 62% to $1.0 million and net income fell 72% to $0.5 million.
- For the nine months, sales growth in the U.K., Mexico, Russia, Chile and other foreign markets more than offset lower U.S. sales. Mexico sales increased 62.6%, U.K. sales increased 14.6%, and other foreign sales increased 9.0%.
- Inventory increased $3.7 million to $46.6 million, and accounts receivable increased $2.2 million to $16.3 million. Management attributed these increases to higher core and fire-resistant product inventories and the timing of late-quarter sales.
- The company adopted ASC Topic 606 effective February 1, 2018. Management reported no material impact on financial position, results of operations or cash flows.
Outlook, Risks and Unusual Items
- Management expects continued investment in Vietnam and India manufacturing capacity and the ERP and global information-technology infrastructure.
- Management stated that GILTI and BEAT provisions under the U.S. Tax Cuts and Jobs Act were not expected to result in significant U.S. tax beginning in FY19. The filing states that the prior-year transition tax was approximately $5.1 million and was fully offset by foreign tax credits, with no related cash outlay.
- Key risks include foreign-exchange volatility, international manufacturing and corruption risks, dependence on customer demand estimates and selected suppliers, competition, cybersecurity, key personnel, government funding, environmental liabilities, tax exposure and credit-facility covenants.
- The company remains exposed to potential liabilities from its former Brazilian subsidiary. Four labor-related proceedings remain active, with a $0.1 million accrual at October 31, 2018. Additional storage-fee and VAT claims totaled approximately $275,000; management did not record an additional liability.
- Foreign-currency translation produced an other comprehensive loss of $0.9 million for the first nine months, compared with other comprehensive income of $0.2 million in the prior-year period.
- The filing contains no formal revenue or earnings guidance beyond the capital-expenditure expectations noted above.
Important Facts for Investors to Verify
- Whether ERP implementation issues and order cancellations have been resolved and whether U.S. sales recover.
- Whether increased inventory converts to sales without additional markdowns or obsolescence charges.
- Whether Vietnam and India operations achieve profitable scale and whether related capital spending remains within expectations.
- Compliance with the revolving-credit facility’s fixed-charge coverage covenant and availability under the borrowing base.
- The status and ultimate exposure from the remaining Brazilian labor, storage-fee and VAT claims.
- The sustainability of gross margins after higher logistics, labor, rent, technology and international expansion costs.
- Foreign-exchange exposure, particularly in China, Canada, Europe, Argentina, Chile and Russia.