Lakeland Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Lakeland manufactures and sells protective garments and accessories for industrial, government, homeland-security, chemical, utility, construction and related markets. Operations include the United States, China, Mexico, Brazil and other international markets. The filing covers the three and nine months ended October 31, 2012, the third quarter of fiscal 2013. The financial statements are unaudited.
The India glove manufacturing facility was shut down in December 2011 and is presented as a discontinued operation. Prior-year results were reclassified accordingly.
Financial highlights
| Metric | Three months ended October 31, 2012 | Three months ended October 31, 2011 | Nine months ended October 31, 2012 | Nine months ended October 31, 2011 |
|---|---|---|---|---|
| Net sales from continuing operations | $24.2 million | $24.7 million | $71.7 million | $76.2 million |
| Gross profit | $7.3 million | $7.4 million | $21.7 million | $23.5 million |
| Gross margin | 30.1% | 30.0% | 30.3% | 30.8% |
| Operating profit | $0.3 million | $0.6 million | $0.4 million | $3.0 million |
| Operating margin | 1.1% | 2.3% | 0.6% | 3.9% |
| Income from continuing operations | $0.3 million | $0.1 million | $(8.2) million | $2.1 million |
| Net income (loss) | $0.3 million | $(0.6) million | $(8.2) million | $1.2 million |
| Basic EPS | $0.05 | $(0.11) | $(1.55) | $0.22 |
The nine-month loss includes a $7.9 million charge for the Brazilian arbitration settlement. Excluding that charge, management stated that the nine-month loss from continuing operations would have been approximately $0.3 million.
- Cash and cash equivalents were $5.6 million at October 31, 2012, compared with $5.7 million at January 31, 2012.
- Operating cash flow was $1.6 million for the first nine months of fiscal 2013, compared with $(1.2) million in the prior-year period.
- Capital expenditures were $1.3 million, compared with $3.7 million in the prior-year period.
- Working capital was $44.5 million, down $19.8 million from January 31, 2012, primarily because TD Bank debt was classified as current and the arbitration settlement was accrued.
- Total assets were $101.0 million and stockholders’ equity was $62.1 million at October 31, 2012.
- Accounts receivable increased to $15.6 million from $12.6 million, while inventories declined to $41.2 million from $45.7 million.
Debt, liquidity and financing
- TD Bank borrowings totaled approximately $15.4 million at October 31, 2012, consisting of $9.6 million under the revolving facility and $5.8 million of term loans.
- The October 17, 2012 amendment reduced the revolving facility from $30.0 million to $17.5 million, increased the maximum revolving interest rate from LIBOR plus 2.50% to LIBOR plus 3.50%, and accelerated the revolving maturity to June 30, 2013.
- The Company had previously failed to comply with certain leverage and EBITDA covenants. TD Bank waived the specified defaults and revised or waived certain October 31 testing requirements; management stated that the Company was in compliance after the amendment.
- The Brazilian arbitration settlement requires approximately $8.5 million of payments over six years, including approximately $1.0 million due by December 31, 2012 and 24 quarterly payments of $250,000 beginning March 31, 2013.
- Management stated that available resources, additional borrowing capacity and potential debt, equity or asset-sale financing were expected to support operations and obligations for at least the next 12 months, but acknowledged that additional financing may not be obtained.
Material changes versus the prior comparable period
- Nine-month sales declined 5.8%, primarily because U.S. sales fell $12.3 million following the termination of the DuPont supply agreement, inventory shortages and relocation-related operating inefficiencies. Foreign sales increased $7.8 million.
- International sales represented 60% of nine-month sales, compared with 47% in the prior-year period. China, the United Kingdom, Chile, Argentina and Brazil contributed to foreign growth.
- Quarterly sales decreased 2.0%, but gross margin was broadly stable. Lakeland-branded products generally carried higher margins than the discontinued DuPont product mix.
- Nine-month operating expenses increased 3.8% and rose to 29.7% of sales from 26.9%, reflecting higher sales personnel, commissions, professional fees and certain other costs.
- Brazilian margins deteriorated because of increased material costs, currency weakness and unfavorable economics on the approximately $5.0 million Brazilian Navy contract and other utility contracts.
- Stockholders’ equity declined $11.2 million, principally because of the arbitration settlement and $3.2 million of accumulated foreign-currency translation losses.
- The Company recorded no India discontinued-operation loss in fiscal 2013, compared with a $0.9 million net loss in the first nine months of fiscal 2012.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects fiscal 2013 capital expenditures for the remainder of the year to be insignificant and is focused on replacing lost DuPont volume with Lakeland-branded products. Management stated that branded-product margins are higher, but the lost sales volume had not yet been fully replaced.
- Liquidity risk: The revolving facility matures June 30, 2013, and the Company may need refinancing or additional capital to repay debt and fund settlement obligations.
- Covenant risk: The Company experienced covenant defaults and currently relies on waivers and amended requirements.
- Brazil arbitration: Failure to make settlement payments could permit the former officers to seek the original award of approximately $12.6 million, plus adjustments, interest and penalties.
- Brazil tax contingencies: Brazilian VAT claims could require judicial deposits of up to approximately $7.8 million in total, although management expects amnesty or other favorable outcomes and has accrued related liabilities as described in the filing.
- Impairment risk: Management identified the need for updated year-end reviews of India discontinued-operation assets and Brazilian goodwill and intangible assets. No impairment charge had been recorded through October 31, 2012.
- Operating risk: Results remain exposed to demand estimates, inventory levels, supplier pricing, foreign currency movements, international operations, competition and the economics of the Brazilian Navy contract.
- Foreign exchange: The Company recorded a Brazilian foreign-exchange loss of $0.8 million for the nine-month period and uses forward contracts and cash-flow hedges to partially mitigate currency exposure.
- Strategic alternatives: Raymond James was engaged to assist the Board in evaluating financing and other strategic alternatives.
Most important facts for an investor to verify
- Whether the Company refinanced or repaid the TD Bank revolving balance before its June 30, 2013 maturity.
- Whether the December 31, 2012 and subsequent Brazilian settlement payments were made on schedule.
- Whether Lakeland-branded sales replaced the volume lost after the DuPont agreement termination.
- Whether Brazilian Navy and other contract losses continued to pressure margins and cash flow.
- The outcome of the Brazilian VAT claims, tax audit and potential judicial-deposit requirements.
- The results of year-end impairment reviews for Brazilian goodwill and India discontinued-operation assets.
- Whether operating cash flow remained sufficient after considering working-capital needs, debt service and settlement payments.