Lakeland Industries, Inc. — Form 10-Q Summary
Reporting period: The supplied filing is for the quarter ended October 31, 2017, representing Q3 FY18, with comparisons to October 31, 2016. This differs from the request metadata identifying “2016 Q3.” Lakeland manufactures and sells industrial and public-sector protective garments and accessories through North American distributors and international sales channels.
Financial performance
| Metric | Three months ended Oct. 31, 2017 | Three months ended Oct. 31, 2016 | Nine months ended Oct. 31, 2017 | Nine months ended Oct. 31, 2016 |
|---|---|---|---|---|
| Net sales | $24.0 million | $23.2 million | $70.8 million | $65.9 million |
| Gross profit | $9.1 million | $8.5 million | $26.3 million | $23.9 million |
| Gross margin | 37.8% | 36.6% | 37.1% | 36.3% |
| Operating profit | $2.7 million | $2.2 million | $7.3 million | $5.0 million |
| Operating margin | 11.1% | 9.7% | 10.3% | 7.6% |
| Net income | $1.8 million | $1.5 million | $5.4 million | $2.9 million |
| Diluted EPS | $0.23 | $0.21 | $0.71 | $0.40 |
- Third-quarter sales increased 3.1%; nine-month sales increased 7.5%.
- Third-quarter operating profit rose approximately 18.5%; nine-month operating profit rose approximately 46.5%.
- Third-quarter net income increased approximately 19.4%; nine-month net income increased approximately 81.9%.
- Interest expense declined to $35,000 from $150,000 in the quarter and to $147,000 from $522,000 for the nine months.
- Foreign customers represented 46.4% of third-quarter sales and 46.1% of nine-month sales.
Cash flow, liquidity, debt, and balance sheet
- Net cash provided by operating activities was $5.5 million for the first nine months of FY18, compared with $8.2 million in the prior-year period. Working-capital usage included increases of $2.1 million in accounts receivable and $3.0 million in inventory, partly offset by a $3.5 million increase in accounts payable.
- Cash and cash equivalents increased to $21.5 million at October 31, 2017, from $10.4 million at January 31, 2017. Working capital was $64.7 million.
- Financing activities provided $6.2 million, including approximately $10.1 million of net proceeds from a public equity offering, partly offset by $4.9 million of revolving-credit repayments and other debt repayments.
- Total debt was approximately $2.3 million at October 31, 2017, consisting of $754,000 of short-term borrowings, $158,000 of current long-term maturities, $1.35 million of long-term debt, and $60,000 of Argentine borrowings; the revolving credit balance was zero.
- In May 2017, the Company replaced its prior facility with a secured SunTrust agreement providing a $20.0 million revolving facility, including a $5.0 million letter-of-credit subfacility, and a $1.575 million term loan. The facility matures in May 2020 and includes a minimum fixed-charge coverage ratio of 1.10 to 1.00 and customary restrictive covenants.
- Capital expenditures were $619,000 for the nine months. Management expected approximately $1.2 million of FY18 capital expenditures, including an ERP project.
Material changes and management commentary
- U.S. sales benefited from increased disposable and chemical-product demand, hurricane cleanup activity, and stronger oil-field and refinery activity.
- China and Asia-Pacific sales increased substantially as industrial activity improved, customers replenished inventories, and the Company worked through a backlog. The Company also reported stronger demand in Canada, Russia, Kazakhstan, and Latin America, while UK sales declined for the nine-month period amid Brexit-related uncertainty, currency pressure, and the exit from two private-label businesses.
- Gross-margin improvement reflected product mix, pricing, higher volumes, and production shifts toward lower-cost Mexico and China facilities. Wage increases and overtime associated with relieving supply-chain stress partially offset the improvement.
- Operating expenses were broadly flat for the nine months and declined as a percentage of sales to 26.8% from 28.7%. Higher sales salaries, freight, bad-debt expense, utilities, currency expense, and professional fees were largely offset by lower commissions, officer compensation, payroll administration, and depreciation.
- The Company issued 808,750 shares in an August 2017 public offering and September overallotment exercise at $13.80 per share, generating approximately $10.1 million of net proceeds.
- The Board’s $2.5 million stock-repurchase authorization remained unused.
- Management stated that current cash and projected revenue should be sufficient to fund operations for the next twelve months, while noting that international cash transfers may be restricted or delayed and that repatriation may create additional taxes.
Guidance, risks, contingencies, and unusual items
- No formal revenue or earnings guidance was provided. The Company disclosed expected FY18 capital expenditures of approximately $1.2 million.
- Key risks include foreign-currency volatility, international regulatory and corruption risks, dependence on key personnel and limited suppliers, competition, customer-demand estimation, product liability, restrictive debt covenants, and dependence on government funding for terrorism preparedness.
- Foreign-currency transaction losses were approximately $119,000 for the quarter and $586,000 for the nine months. The Company uses forward contracts and cash-flow hedges but leaves certain currencies, particularly the Argentine peso, substantially unhedged.
- A 1% increase in the applicable variable interest rate on approximately $1.5 million of bank borrowings was estimated to increase annual interest expense by approximately $200,000.
- The Company claimed an approximately $9.5 million tax benefit from a worthless-stock deduction related to its exit from Brazil. The IRS could challenge the deduction, and the Company may not prevail.
- Potential continuing Brazilian exposure includes VAT claims, labor litigation, and possible parent-company liability under Brazilian fraudulent-bankruptcy laws. Four labor cases remained active; one counterclaim sought approximately $700,000, which management considers without merit.
- Management reported no material litigation claims outstanding as of October 31, 2017 and no goodwill or long-lived-asset impairment.
- The Company adopted inventory and stock-compensation accounting updates during FY18 without a material financial-statement impact. It planned to adopt the new revenue standard in FY19 using the retrospective method and did not expect a significant impact.
Important facts for investors to verify
- Confirm the applicable period: the filing is Q3 FY18, ended October 31, 2017, rather than Q3 2016.
- Assess whether sales growth and backlog conversion are sustainable, particularly in China, the United States, and other industrial markets.
- Monitor inventory, receivables, customer payment performance, and freight costs, which affected operating cash flow and expenses.
- Review the SunTrust facility’s borrowing-base requirements, fixed-charge covenant, collateral, interest-rate exposure, and maturity schedule.
- Evaluate the sustainability of margin gains from product mix, price increases, and production transfers to Mexico and China.
- Track the IRS position on the Brazilian worthless-stock deduction and the remaining Brazilian litigation and tax exposures.
- Consider restrictions and potential tax costs associated with repatriating foreign cash, including the approximately $26.4 million of foreign earnings not provided for withholding or U.S. taxes.