Lakeland Industries Inc. - 10-Q Summary (Period Ended Oct 31, 2010)
Business Context and Reporting Period
Lakeland Industries, Inc. is a Delaware corporation manufacturing and selling safety garments and accessories for industrial protective clothing and homeland security markets. The company operates manufacturing facilities in the U.S., Mexico, China, India, and Brazil. This report covers the quarterly period ended October 31, 2010, and the nine-month period ended on that date. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2010 | Nine Months Ended Oct 31, 2010 |
|---|---|---|
| Net Sales | $26.3 million | $76.2 million |
| Gross Profit | $7.2 million (27.3% margin) | $21.9 million (28.7% margin) |
| Operating Profit | $0.8 million | $2.0 million |
| Net Income (Loss) | $0.6 million | $(0.1) million |
| Cash and Equivalents | $5.5 million (as of Oct 31, 2010) | |
| Working Capital | $57.0 million (as of Oct 31, 2010) | |
| Debt (Revolving Credit) | $5.9 million outstanding (reclassified as long-term) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18% ($4.0 million) for the quarter and 9.9% ($6.9 million) for the nine months compared to the prior year periods. Growth was driven by a 129% increase in external sales from China and a 19.6% increase in Canadian sales.
- Profitability: Operating profit surged 340% for the quarter to $0.8 million, driven by improved gross margins in disposables (due to lower fabric costs and industry shortages) and favorable sales mix. However, the nine-month net loss of $0.1 million was primarily due to a $1.6 million non-recurring VAT tax charge in Brazil.
- Balance Sheet: Accounts payable increased by $3.5 million, largely due to sourcing in China and resumption of purchases from DuPont. Cash increased by $0.4 million, and borrowings under the revolving credit facility decreased by $3.7 million.
- Intercompany Profit Deferral: A pretax profit of $0.7 million ($0.10 EPS) was deferred in the quarter due to unusually high production in China that remained in consolidated inventory.
Guidance, Outlook, Risks, and Unusual Items
- Brazil VAT Tax Contingency: The company faces significant tax exposure in Brazil regarding VAT payments from 2004-2009. A $1.6 million charge was recorded in the nine-month period. The company expects to pay approximately $5.5 million in judicial deposits by late 2011, though it anticipates recouping these amounts via tax credits or indemnification from sellers. Management expects the next amnesty period to occur before the end of the judicial process.
- DuPont License Agreement: Effective May 2010, Lakeland transitioned from manufacturing Tyvek/Tychem garments to acting as a wholesale distributor for DuPont. This caused temporary "stock-out" conditions and increased freight costs as the company managed inventory transitions.
- Legal Proceedings: The company terminated the President and VP of Operations of its Brazilian subsidiary for cause and has initiated arbitration regarding the Supplemental Purchase Price and damages. Legal fees of $0.225 million were incurred in the period.
- Outlook: Management believes current cash and borrowing availability ($23.5 million facility) are sufficient for the next 12 months. Capital expenditures are expected to be approximately $1.5 million for fiscal 2012.
Investor Verification Checklist
- Brazil Tax Resolution: Verify the timeline and likelihood of the next Brazilian amnesty period and the success of the company's defense against the $3.3 million unasserted claim.
- Indemnification Recovery: Monitor the status of arbitration against former Brazilian sellers to determine if the $1.3 million indemnification claim will be realized.
- DuPont Transition: Assess the impact of the shift to a distributor model on long-term gross margins and inventory levels for Tyvek/Tychem products.
- China Operations: Review the sustainability of the 129% sales growth in China and the management of intercompany profit deferrals.
- Debt Covenants: Confirm continued compliance with the fixed charge ratio and funded debt to EBITDA covenants under the $23.5 million credit facility.