Lakeland Industries, Inc. — Fiscal 2012 Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2012. The supplied filing is a FY2012 annual report, not a 2010 Q4 filing. Lakeland manufactures and sells industrial protective garments and accessories, including disposable clothing, chemical suits, firefighting apparel, reusable woven garments, high-visibility clothing, gloves and sleeves. International sales represented 47.5% of FY12 net sales, compared with 40.2% in FY11.
Financial performance and position
| Metric | FY12 | FY11 | Change |
|---|---|---|---|
| Net sales from continuing operations | $96.3 million | $99.5 million | Down 3.2% |
| Gross profit | $28.8 million | $30.1 million | Down 4.3% |
| Gross margin | 29.88% | 30.23% | Down 35 basis points |
| Operating profit | $1.4 million | $4.1 million | Down 65% |
| Operating margin | 1.49% | 4.13% | Down 264 basis points |
| Income from continuing operations | $1.1 million | $1.4 million | Down 22% |
| Net income (loss) | $(0.4) million | $1.0 million | Declined to a loss |
| Diluted EPS | $(0.07) | $0.18 | Declined |
- Cash flow: Operating cash flow was approximately $(4,000), versus $(1.0) million in FY11. Investing cash flow was $(4.9) million, primarily for property and equipment in Brazil and Mexico. Financing cash flow was $4.6 million.
- Liquidity: Cash and equivalents were $5.7 million, and working capital was $64.4 million at January 31, 2012.
- Debt: The company reported $11.5 million outstanding under its revolving facility and $3.5 million outstanding under term loans, in addition to Canadian and Brazilian borrowings. Total liabilities were $29.1 million and stockholders’ equity was $73.3 million.
- Assets: Total assets were $102.4 million. Inventory was $45.7 million, or approximately 62% of current assets.
Material changes versus FY11
- DuPont terminated the Tyvek/Tychem license and supply arrangement effective September 2011. Products containing these fabrics represented 59.2% of FY12 revenue, compared with 50.0% in FY11 and 40.0% in FY10. U.S. disposable sales declined approximately 28.6% for the year, and fourth-quarter disposable sales fell 49% year over year.
- U.S. external sales declined from $59.5 million to $50.6 million, while international sales increased from $40.0 million to $45.8 million.
- Disposable-product gross margin declined 4.6 percentage points, primarily because Lakeland resold finished DuPont products at lower margins and incurred additional rebate costs.
- Operating expenses increased 5.3% to $27.3 million, driven by foreign-exchange losses, higher sales activity, administrative payroll, U.S. sales hiring, rent and research and development.
- Brazilian operating profit declined to a $0.5 million loss from $0.4 million of profit, partly because FY12 lacked the large bid contracts recorded in the prior-year fourth quarter.
- The company discontinued its loss-making India glove manufacturing operation, shut the facility in December 2011 and recorded a $1.7 million pretax disposal and shutdown loss, producing a $1.5 million net loss from discontinued operations.
- St. Joseph, Missouri operations were being closed, with production moving primarily to Alabama and Mexico. Management expected a significant net overhead reduction beginning in the second quarter of FY13.
Outlook, commentary and risks
- Management expects the DuPont termination to adversely affect at least the first two quarters of FY13, while it transitions customers to proprietary alternatives with higher expected margins. The filing states that the success and timing of this transition are uncertain.
- Management expected strong FY13 Brazil sales based on large bid purchase orders received for the first through third quarters of FY13.
- International expansion, higher-value products, new certifications and additional sales offices were identified as principal growth initiatives. Management planned to open sales operations in four to six additional countries.
- FY13 research and development expense was projected at approximately $510,000, compared with approximately $428,000 in FY12.
- Management expected approximately $2 million of FY13 capital expenditures, including about $1 million for China expansion.
- The April 2012 amendment to the TD Bank facility addressed covenant breaches arising from FY12 losses. The amendment reclassified $3.0 million of revolving debt into a term loan, imposed borrowing-base and collateral requirements, and modified EBITDA, leverage and fixed-charge covenants. The company reported approximately $1.7 million of availability at January 31, 2012 under the amended terms.
- Management stated that cash, operating cash flow and available borrowings should fund anticipated operations, capital expenditures and debt service for at least the next twelve months, but availability is constrained by borrowing-base and covenant requirements.
- Material contingencies include Brazil arbitration relating to the Qualytextil acquisition, with potential exposure stated at more than $10.3 million, and Brazilian VAT proceedings with potential judicial-deposit requirements of approximately $8.9 million in aggregate. No accrual was recorded for the Qualytextil arbitration exposure.
- Additional risks include foreign-currency volatility, dependence on international manufacturing, supplier concentration, government funding for first-responder purchases, product liability, customer-demand forecasting, competition from larger companies and variable-rate debt.
Investor verification checklist
- Verify the pace and profitability of customer migration from DuPont-related Tyvek/Tychem products to Lakeland proprietary alternatives.
- Review the April 2012 TD Bank amendment, borrowing-base calculations and compliance with the revised EBITDA, leverage and fixed-charge covenants.
- Assess the liquidity impact of inventory requirements, scheduled debt repayments and the limited reported borrowing availability.
- Track the Qualytextil arbitration and Brazilian VAT proceedings, including potential cash deposits, indemnification recoveries and escrow releases.
- Confirm whether Brazil bid orders and the Missouri-to-Alabama/Mexico consolidation produce the forecast sales and cost benefits.
- Evaluate the recoverability of India disposal assets, Brazilian goodwill, deferred tax assets and other balance-sheet estimates.
- Review currency exposure, particularly the unhedged Brazilian real, and the effect of foreign-exchange movements on margins and debt service.
- Confirm that the reported FY12 net loss includes discontinued India operations and distinguish continuing-operation performance from total-company results.
The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting as of January 31, 2012; the independent auditor was not required to provide an internal-control attestation because Lakeland qualified as a smaller reporting company.