Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark
one)
☒
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended January 31,
2019
OR
☐
TRANSITION REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _____________ to ______________
Commission
File Number: 0-15535
LAKELAND INDUSTRIES,
INC.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
|
13-3115216
|
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
3555
Veterans Memorial Highway, Suite C, Ronkonkoma, NY
|
|
11779
|
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(Registrant's telephone number, including area code) (631)
981-9700
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock $0.01 Par Value
(Title of Class)
Name of Exchange on which registered – NASDAQ
Market
Securities registered pursuant to Section 12(g) of the
Act:
Not Applicable
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes☐ No
☒
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
☐ No ☒
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.Yes
☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒ No
☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this Chapter) is not contained
herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☒
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a nonaccelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company”, and
“emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated
filer
Accelerated filer
☒
Nonaccelerated
filer
Smaller reporting
company ☒
Emerging growth
company
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes☐ No
☒
As of July 31, 2018, the aggregate market value
of the registrant’s common stock held by nonaffiliates of the
registrant was $102,475,563 based on the closing price of the
common stock as reported on the National Association of Securities
Dealers Automated Quotation System National Market
System.
Indicate the number
of shares outstanding of each of the registrant’s classes of
common stock, as of the latest practicable date.
|
Class
|
|
Outstanding at
April 10, 2019
|
|
Common Stock, $0.01
par value per share
|
|
8,013,840
Shares
|
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive
proxy statement to be filed pursuant to Regulation 14A of the
Security Exchange Act of 1934 are incorporated by reference into
Part III (Items 10, 11, 12, 13 and 14) of this Form
10-K.
LAKELAND INDUSTRIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PART 1:
|
Item
1
|
Business
|
1
|
|
Item
1A.
|
Risk
Factors
|
12
|
|
Item
1B.
|
Unresolved
Staff Comments
|
18
|
|
Item
2.
|
Properties
|
18
|
|
Item
3.
|
Legal
Proceedings
|
20
|
|
Item
4.
|
Mine
Safety Disclosures
|
20
|
|
PART
II:
|
|
21
|
|
Item
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
21
|
|
Item
6.
|
Selected
Financial Data
|
23
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
24
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
32
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
33
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
66
|
|
Item
9A.
|
Controls
and Procedures
|
66
|
|
Item
9B.
|
Other
Information
|
68
|
|
PART
III:
|
|
68
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters
|
68
|
|
PART
IV:
|
|
69
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
69
|
This Annual Report on Form 10-K contains forward-looking statements
that are made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements involve risks, uncertainties and assumptions as
described from time to time in registration statements, annual
reports and other periodic reports and filings of the Company filed
with the Securities and Exchange Commission. All statements, other
than statements of historical facts, which address the
Company’s expectations of sources of capital or which express
the Company’s expectation for the future with respect to
financial performance or operating strategies, can be identified as
forward-looking statements. As a result, there can be no assurance
that the Company’s future results will not be materially
different from those described herein as “believed,”
“anticipated,” “estimated” or
“expected,” “may,” “will” or
“should” or other similar words which reflect the
current views of the Company with respect to future events. We
caution readers that these forward-looking statements speak only as
of the date hereof. The Company hereby expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any such statements to reflect any change in the
Company’s expectations or any change in events, conditions or
circumstances on which such statement is based.
PART I
Lakeland
Industries, Inc. (the “Company” or
“Lakeland,” “we,” “our,” or
“us”) was incorporated in the State of Delaware in
1986. Our executive office is located at 3555 Veterans Memorial
Hwy, Suite C, Ronkonkoma, New York 11779, and our telephone number
is (631) 981-9700. Our website is located at www.lakeland.com.
Information contained on our website is not part of this
report.
ITEM 1. BUSINESS
Overview
We
manufacture and sell a comprehensive line of industrial protective
clothing and accessories for the industrial and public protective
clothing market. Our products are sold globally by our in-house
sales teams, our customer service group, and authorized independent
sales representatives to a network of over 1,600 global
safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil,
chemical/petrochemical, automobile, steel, glass, construction,
smelting, cleanroom, janitorial, pharmaceutical, and high
technology electronics manufacturers, as well as scientific,
medical laboratories and the utilities industry. In addition, we
supply federal, state and local governmental agencies and
departments, such as fire and law enforcement, airport crash rescue
units, the Department of Defense, the Department of Homeland
Security and the Centers for Disease Control. Internationally, we
sell to a mixture of end users directly, and to industrial
distributors depending on the particular country and market. Sales
are made to more than 50 countries, the majority of which were into
China, the European Economic Community (“EEC”), Canada,
Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador,
India and Southeast Asia. For purposes of this Form 10-K, FY refers
to a fiscal year ended January 31; for example, FY19 refers to the
fiscal year ended January 31, 2019. In FY19 we had net sales of
$99.0 million and $96.0 million in FY18.
For the
first half of the year (FY 19), economic growth and investment
globally was relatively strong as the global economy continued its
recovery from the second half of FY 2018. In the second half
of FY19 we encountered headwinds due to threatened changes to U.S.
trade policies relative to several key markets in which we
manufacture and sell, specifically China and Mexico. In
Europe, uncertainty around Brexit saw customers less confident in
economic growth. This was reflected in the purchases and business
investment of many of our EEC end users. This in turn limited
growth opportunities in these markets while leading to more
aggressive pricing from the competition which had to be met.
Unfortunately during the second half of the fiscal year, global
talks between the US administration and China and the U.K and
European Union became more contentious and less certain. In
addition, in the second half of FY19, Lakeland initiated a
significant global enterprise resource planning
(“ERP”) project in order to strengthen its
foundation for future growth globally. The result of this
investment was an increase in operating expenses and some loss of
sales due to operational issues relating to the ERP implementation,
adversely effecting operating results.
The Company recognizes the need
to grow faster than what organic growth will contribute, so it has
accelerated product development, is pressing ahead aggressively
with the rollout of our new ERP system, investing in increasing our
global manufacturing capacity by opening new manufacturing
facilities, and investing in new manufacturing equipment and
processes to reduce manufacturing costs and increase
efficiencies.
Additionally, a
major strategic companywide objective to accelerate growth
throughout the Company is to push additional products and sales
tools that are successful in the key US and China markets to the
other international operations, which have traditionally carried
smaller lines. To facilitate this, the Company is evaluating
and redeploying sales and marketing assets into regions that offer
the greatest potential for sales and margin
growth.
As
always, the cornerstone of the Company’s strategy is the
belief that owning and operating its own factories is a strategic
advantage for Lakeland. It provides the Company with advantages
over its competition in terms of rapidly scaling up manufacturing
to meet emergency demand, shift product between manufacturing
locations to take advantage of ever changing trade agreements, and
to maintain the highest level of product quality. In contrast, most
of the Company’s competitors utilize contractors. Contractor
agreements significantly reduce their market responsiveness as the
contractors typically require forecast leadtimes in excess of 30
days and service multiple customers; all of whom are vying for
their capacity in times of emergency or unusually high demand. The
end result is longer lead times and higher costs as contractors bid
up prices.
Industry Overview
The
industrial work clothing market includes our limited use/disposable
protective or safety clothing, high-end chemical protective suits,
high visibility clothing/vests, firefighting and heat protective
apparel, gloves and reusable woven Flame Resistant (FR) and arc
flash protective garments. The industrial protective safety
clothing market in the United States has evolved over the past 49
years as a result of governmental regulations and requirements and
commercial product development. In 1970, Congress enacted the
Occupational Safety and Health Act, or OSHA, which requires
employers to supply protective clothing in certain work
environments. Certain states have also enacted worker safety
laws that further supplement OSHA standards and
requirements.
The
advent of OSHA coincided with the development of light disposable
fabrics, such as SMS (a three layered nonwoven) and Polypropylene
which, for the first time, allowed for the economical production of
lightweight, disposable protective clothing. The attraction of
disposable garments grew in the late 1970s as a result of increases
in labor and material costs of producing cloth garments and the
promulgation of federal, state and local safety regulations. Also,
in order to comply with World Trade Organization
(“WTO”) entry requirements, foreign countries are
beginning to adopt and imitate OSHA regulations, American National
Standards Institute (“ANSI”) and Committee European de
Normalization (“CE”) standards. Thus, these developing
international markets are growing much more rapidly than the US
markets.
International and Domestic Standards
Standards
development, within both the US and global markets, continues to
challenge manufacturers as the pace of change and adoption of new
standards increase. Complex and changing international
standards play to Lakeland’s strengths when compared to most
multinationals or smaller manufacturers. Lakeland currently
sits on boards and/or works closely with groups involved in writing
many international standards such as the American Society for
Testing and Materials International (“ASTM”), the
National Fire Protection Association (“NFPA”),
International Safety Equipment Association (“ISEA”),
the European Committee for Standardization (“CEN”), the
International Organization for Standardization (“ISO”),
the China National Standards Board (“GB”) in China, and
the Standards Australia and Standards New Zealand
(“ASNZ”).
Globally, not only
are the standards continuing to change, but the focus of standards
activity is shifting. In response to increasing use of
certification processes as a technical barrier to trade, standards
writing bodies in the US and Europe have both concluded efforts to
update and define conformity assessment (ANSI/ISEA 125 and the PPE
Regulation respectively) within their own spheres of influence,
unfortunately, these are not “international standards”
and can be easily ignored by other countries who wish to impose
their own conformity assessment systems on importers. The result is
an increasingly dynamic standards environment where not only are
the standards changing, but the minimum requirements for conformity
with the certification process itself are
changing.
A
number of developing nations are now becoming active in their own
standards development based on existing international
standards. However, we believe that the primary goal of their
standards writing activity is not focused on worker protection
(that is provided for by the use of international standards),
rather they are attempting to establish their own certification
criteria that will protect their domestic markets, or favor
specific regional suppliers. This presents a new challenge in that
not only are we faced with multiple test methods and standards, but
we have the potential for multiple certification processes. While
this adds to product development and sales expenses, the additional
cost is only incremental. The real challenge is in navigating the
certification process itself. Lakeland, by virtue of its
international manufacturing and sales operations, is in a unique
position to capitalize on this complex dynamic.
Business Strategy
Key
elements of our strategy include:
●
Increase International Sales
Opportunities: In the past, we have aggressively sought to
increase our penetration into international markets. We opened
sales offices in Beijing, Shanghai, Chongqing, Guangzhou and
Weifang, China; Santiago, Chile and Buenos Aires, Argentina; and in
Russia, India and Kazakhstan. We continue to believe in this
strategy of aggressively penetrating international markets. Aiding
our focus is the fact that many countries have adopted legislation
similar to the 1970 US OSHA in order to facilitate their entry into
the WTO which has, as a requisite for entry, worker safety laws
(like OSHA), social security, environmental and tax laws similar to
that of the USA and Europe. These new worker safety laws have
driven the demand for our products in these growing economies.
●
Improve Marketing in Existing Markets:
We believe significant growth opportunities are available to us
through better branding, and enhanced cross-selling of our reusable
woven protective clothing, glove and arm guards, reflective
clothing, high-end chemical suit product lines and our limited
use/disposable lines as a bundled offering. This allows our
customers one-stop shopping using combined freight shipments. As a
manfacturer, Lakeland is uniquely positioned to offer one-stop
shopping to multinational corporations via global
contracts.
●
Continued Emphasis on Customer Service.
We continue to offer a high level of customer service to
distinguish our products and to create customer loyalty. We offer
well-trained and experienced sales and support personnel, on-time
delivery and accommodation of custom and rush orders. We also seek
to advertise our Lakeland branded tradenames and
trademarks.
●
Introduce New Products: We continued
our history of product development and innovation by introducing
new proprietary products across all our product lines. Last year we
introduced our CleanMax line of clean and sterile manufactured
garments for use in critical and aseptic work environments. We also
continued the development and introduction of our utility/energy
product line targeting electrical and gas distribution. These
product rollouts will continue into FY 20 as we continue to ramp up
manufacturing and add products to these lines.
We own
20 patents on fabrics and production machinery, with one
application in process, and continue to work on developing fabrics
that could potentially lead us into new markets and channels.
In North America, our growth strategy
is to focus on key target sectors where we have advantages, and to
increase our involvement at the end user level by adding sales
personnel and enhancing our marketing and product training tools to
make it easier for the sales teams of our distributors to be
successful promoting our products.
Our
investment in a stronger sales team in Mexico is beginning to pay
off with sales growth in manufacturing, particularly noticeable in
the number of new automobile factories located in that country. We
believe that as this growth continues, and Mexico will become a
very important region for the Company, building on our competitive
advantage of local manufacturing, provided that immigration issues
do no cause disruptions. We have integrated the US, Canadian, and
Mexican sales teams into one coordinated unit, a strategic
recognition that the three countries are increasingly part of a
great North American market with inter-related industries and
companies throughout, and our sales teams are sharing opportunities
with each other. We have experienced situations in which we could
not break through with a company in one country, but the team in
another country was able to make a conversion to our products.
Then, after successful use of our products in one country, the
doors open to us in the other.
We
continue to pursue conversion of end users to our products, based
on our overall performance and prices. Our marketing is being
significantly upgraded in terms of resources , better sales
collateral materials, and increasingly effective use of social
media. An example of this is the recent completion of a our new web
site that meets our global marketing requirements. The Company
plans to continue its efforts to align its global markets in terms
of sales collateral, sales software, and e-commerce in the coming
year and into the future.
●
Decrease Manufacturing Expenses by Opening New
Manufacturing Facilites: We have successfully opened a new
manufacturing facility in Vietnam and a pilot manufacturing
facility in India in an effort to hedge against ever increasing
manufacturing costs in China. Our China operation will continue for
the foreseeable future to service products that are more complex
and higher margin and for the manufacture of products for sale into
China. Beginning in 1995, we successfully moved the labor-intensive
sewing operations for our limited use/disposable protective
clothing lines to facilities in Mexico and China. Manufacturing
expansion is not only necessary to control rising costs, it is also
necessary for Lakeland to achieve its growth
objectives.
●
We continue to
press our raw material and component suppliers for price reductions
and better payment terms.
●
We are sourcing
more raw materials and components from our China based operations
as opposed to sourcing from Europe and North America.
●
We are
re-engineering many products to reduce the amount of raw materials
used and reduce the direct labor required.
Our Competitive Strengths
Our
competitive strengths include:
●
Industry Reputation. We devote
significant resources to creating customer loyalty and brand
integrity by accommodating custom and rush orders and focusing on
on-time delivery. Additionally, our ISO 9001 and 9002 certified
facilities manufacture high-quality products. As a result of these
factors, we believe that we have an excellent reputation in the
industry.
●
Technical Expertise: The breadth of the
Company’s product lines, the raw materials used, the markets
serviced and standards compliance globally, all contribute to a
level of expertise and cross-functional knowledge that is unique in
the industrial protective clothing market. Manufacturing our own
products around the world for various global markets results in a
body of knowledge that is not easiliy replicated. Lakeland’s
knowledge of product design, technical fabrics and films, combined
with market specific knowledge of standards, and the ability to
navigate manufacturing in a number of different countries around
the world provides synergies that few competitors can
match.
●
International Manufacturing
Capabilities. We have operated our own manufacturing
facilities in Mexico since 1995 and in China since 1996. In 2018,
we commenced manufacturing operations in Vietnam and India. Our
facilities in China in FY19 totaled 177,316 sq. ft. of
manufacturing, warehousing and administrative space, in Mexico
totaled 74,000 sq. ft. of manufacturing, warehousing and
administrative space, in Vietnam totaled 141,588 sq. ft of
manufacturing, warehousing and administrative space and in India
totaled 32,905 sq ft of manufacturing, warehousing and
administrative space. Our facilities and capabilities in China,
India, Mexico and Vietnam allow access to a less expensive labor
pool than is available in the US and permits us to purchase certain
raw materials at a lower cost than are available
domestically.
●
International Sales Offices. We have
sales offices around the world to service various major markets,
including offices in Toronto, Canada; Hull, UK; Beijing, Weifang,
Chongqing and Shanghai, China; Melbourne, Australia; Southeast
Asia: Noida, India; Santiago, Chile; Buenos Aires, Argentina;
Jerez, Mexico; Moscow, Russia; and Ust-Kamenogorsk,
Kazakhstan.
●
Comprehensive Inventory. We have a
large product offering with numerous variants, such as size, hood
design, elastic wrists and ankles, and pockets, and maintain a
large inventory of each in order to satisfy customer orders in a
timely manner. Many of our customers traditionally make purchases
of industrial protective gear with expectation of immediate
delivery. We believe our ability to provide timely service for
these customers enhances our reputation in the industry and
positions us strongly for repeat business, particularly in our
limited use/disposable protective clothing lines.
●
Manufacturing Flexibility. By locating
labor-intensive manufacturing processes, such as sewing, in Mexico,
China, Vietnam, and India, and by utilizing sewing subcontractors,
we have the ability to increase production without substantial
additional capital expenditures. Our manufacturing systems allow us
flexibility for unexpected production surges and alternative
capacity in the event any of our independent contractors become
unavailable.
Products
The
following table summarizes our principal product lines, the raw
materials used to manufacture them, their applications and end
markets:
|
Product Line
|
Raw Material
|
Protection Against
|
End Market
|
|
Limited
use/disposable protective clothing
|
● Laminates
of Polyethylene, Spunlaced Polyester, SMS, Polypropylene, and
Company Micromax®, Micromax NS, Micromax and HBF,
ChemMax® 1,
ChemMax® 2,
Pyrolon®,CleanMAX®
and numerous other non-woven fabrics
|
● Contaminants,
irritants, metals, chemicals, fertilizers, pesticides, acids,
asbestos, PCBs, lead, dioxin and many other hazardous
chemicals
● Viruses
and bacteria (AIDS, streptococcus, SARS, Bird flu and
hepatitis)
|
● Integrated
oil
● Chemical
industries
● Pharmaceuticals
● Cleanrooms
● Public
utilities
● Automotive and
pharmaceutical industries
● Government
(terrorist response)
● Laboratories
● Janitorial
|
|
High-end
chemical protective suits
|
● ChemMax® 3 and
4
● Interceptor®
● Pyrolon®
CRFR
● Other
Lakeland patented co-polymer laminates
|
● Chemical
spills
● Toxic chemicals
used in many varied manufacturing processes
● Terrorist
attacks, biological and chemical warfare (sarin, anthrax and
ricin)
|
● Integrated oil,
chemical and nuclear industries
● Hazardous material
teams
● Fire departments
(hazmat)
● Government
(first responders)
|
|
Firefighting
and heat protective apparel
|
● Nomex®
● Aluminized
Nomex®
● Aluminized PBI/
Kevlar®
● PBI Matrix and
Gemini
● Millenia
XT®
● Basofil®
● Advance
● Advance
Ultra
● Fyrban
|
● Fire,
burns and excessive heat
|
● Municipal,
corporate and volunteer fire departments
● Wildland fire
fighting
● Hot equipment
maintenance personnel and industrial fire departments
● Oil well
fires
● Airport
crash rescue
|
|
Reusable
woven garments
|
● Staticsorb carbon
thread with polyester
● Cotton polyester
blends
● Cotton
● Polyester
● Tencate® FR
cottons
● Nomex®/FR
Aramids
● Nylon
● Indura® Ultrasoft/FR
cotton
● Stedfast
BB
|
● Protects
manufactured products from human contamination or static electrical
charge
● Bacteria, viruses
and blood borne pathogens
● Protection from
Flash fires
● Electric
Arc Flash
|
● General industrial
applications
● Household
uses
● Clean room
environments
● Emergency medical
ambulance services
● Chemical and oil
refining
● Medical and
laboratory facilities
● Electric
and Gas Utilities
|
|
Products (con’t)
|
|
Product Line
|
Raw
Material
|
Protection
Against
|
End
Market
|
|
High
Visibility Clothing
|
● Polyester
mesh
● Solid
polyester
● FR polyester
mesh
● FR solid
polyester
● Modacrylic
● Modacrylic antistatic
● FR
cotton
● Nomex
● FR
trim
|
● Lack of
visibility
● Heat, flame,
sparks
● Arc
flash
● Static buildup,
explosive atmospheres
● Fire,
heat explosions
|
● Highway
● Construction
● Maintenance
● Transportation
● Airports
● Police
● Fire,
EMS
● Electric, coal and
gas utilities
● Extrication
● Confined
space rescue
|
|
Gloves
and Sleeves
|
● Kevlar®
yarns
● Kevlar® wrapped steel
core yarns
● Spectra®
yarns
● High Performance
Polyethylene yarns (“HPPE”)
● Composite
engineered yarns
● Nitrile,
latex, natural rubber, neoprene, polyurethane compounds and
mixtures thereof
|
● Cuts,
lacerations, heat, hazardous chemicals and dermatological
irritants
|
● Integrated
oil
● Automotive, glass
and metal fabrication industries
● Chemical
plants
● Food
processing
● Electronic
industries
|
Limited Use/Disposable Protective Clothing
We
manufacture a complete line of limited use/disposable protective
garments, including coveralls, laboratory coats, shirts, pants,
hoods, aprons, sleeves, arm guards, caps and smocks. Limited use
garments can also be coated or laminated to increase splash
protection against harmful inorganic acids, bases and other
hazardous liquid and dry chemicals. Limited use garments are made
from several different nonwoven fabrics. We use spunbonded
polypropylene (SBPP), spundonded meltblow spunbond (SMS),
hydroentangled woodpulp polyester, and needlepunched fabrics. We
use these fabrics in combination with various film of varying
composition, and/or topical chemical application to make our own
trademarked fabrics, like Pyrolon® Plus 2, XT,
CRFR, Micromax®, Micromax NS,
Safegard®,
Zonegard®, and
ChemMax® 1, 2, and 3 as
well as our patented Interceptor fabric. We incorporate many
seaming, heat sealing and taping techniques depending on the level
of protection needed in the end use application.
Typical
users of these garments include integrated oil/petrochemical
refineries, chemical plants and related installations, automotive
manufacturers, pharmaceutical companies, construction companies,
coal, gas and oil power generation utilities and telephone utility
companies, laboratories, mortuaries and governmental entities.
Numerous smaller industries use these garments for specific safety
applications unique to their businesses. Additional applications
include protection from viruses and bacteria, such as Ebola, AIDS,
streptococcus, SARS and hepatitis at medical facilities,
laboratories, and emergency rescue sites. Clean manufactured and
sterilized versions of our MicroMAX NS product, trademarked
CleanMax, is used in aseptic laboratories to protect both the
wearer and the product from cross contamination.
Our
limited use/disposable protective clothing products range in unit
price from $0.19 for shoe covers to approximately $6.00-$14.40 for
a light duty ChemMax® 1 serged or
sealed seam hooded and booted coverall. Our largest selling item, a
standard white Micromax NS ANSI standard or CE standard coverall,
sells for approximately $2.00 to $3.85 per garment. By comparison,
similar reusable cloth coveralls range in price from $35.00 to
$93.00, exclusive of laundering, maintenance and shrinkage
expenses.
We
warehouse and distribute our limited use/disposable garments
primarily from our Alabama, China, Vietnam and India facilities and
secondarily from warehouses in the United Kingdom, Poland, Canada,
Argentina, Chile, Colombia, Mexico, Russia, Kazakhstan, India,
Australia, Texas and Nevada. Fabrics are cut, sewn, assembled
into finish garments and packaged at either our China, Mexico,
Vietnam, or India facilities, then shipped to any of our regional
warehouses or, in some cases, directly to our
customers.
High-End Chemical Protective Suits
We
manufacture and sell heavy duty chemical protective suits and
protective apparel from our proprietary CRFR, ChemMax® 3, 4,
Interceptor and other fabrics. These suits are worn by individuals
on hazardous material teams and within general industry to provide
protection from powerful, highly concentrated, toxic and/or
potentially lethal chemicals and biological toxins. These suits are
useful against toxic wastes at Superfund sites, toxic chemical
spills or biological discharges, chemical or biological warfare
weapons (such as sarin, anthrax or ricin and mustard gas) and
chemicals and petro-chemicals present during the cleaning of
refineries and nuclear facilities and protection from infectious
diseases such as Avian Flu and Ebola. Our line of chemical
protective clothing ranges in price from about $22 to $1,340 per
garment. The chemical suits can be used in conjunction with a fire
protective shell that we manufacture to protect the user from both
chemical and flash fire hazards. We have also introduced two
patented garments approved by the National Fire Protection Agency
(NFPA) for varying levels of protection:
●
Interceptor®
is a patented fabric consisting of two multilayer films laminated
on either side of durable nonwoven substrate. This garment
provides a broad spectrum chemical barrier to gases, vapors and
liquids. This garment is of an encapsulating design and is
available in CE Type 1 certified configurations.
●
ChemMax® 4 is
a multilayer barrier film laminated to a durable nonwoven
substrate. This garment is a broad spectrum chemical barrier, but
its greatest advantage is that the material is strong enough to
hold an airtight zipper and light enough to provide better range of
motion than heavier fabrics. As a result, it provides a low cost
option for encapsulating garments and is durable enough for
multiple uses provided the garment is not exposed to chemical
hazards. It is available in CE type 4 and 3 certified
garments.
The
addition of Interceptor and ChemMax® 4 to our
product line provides Lakeland with, what we believe to be, the
most complete and cost-effective line of chemical protective
garments available on the market today. Garments are certified to
both NFPA and CE standards allowing us to offer products composed
of these fabrics all over the world.
We
manufacture higher end chemical protective clothing with taped
seams at our facilities in Mexico, China and in Alabama. Using
fabrics, such as ChemMax® 1,
ChemMax® 2,
ChemMax® 3,
ChemMax® 4 and
Interceptor, we design, cut, sew and seal these materials to meet
customer specifications.
Firefighting and Heat Protective Apparel
We
manufacture an extensive line of UL/NFPA-certified structural
firefighter protective apparel (turnout gear) for domestic and
foreign fire departments. Our turnout gear is available both in
standard stock patterns and custom configurations.
We
offer basic firefighter turnout gear in the Attack (A10) and
Battalion (B1) styles. Introduced in 2013, are the Battalion
(“B2”) style with advanced ergonomic features and the
Stealth style, with innovative features new to the fire
industry.
We also
manufacture each of the above styles in our UL/NFPA-certified
Proximity line for Aircraft Rescue Fire Fighting
(“ARFF”) with aluminized shells.
We
manufacture full lines of Fire service extrication suits in FR
cotton, UL/NFPA-certified Wildland firefighting apparel in multiple
fabrics and Aluminized Kiln entry/Approach suits to protect
industrial workers from extreme heat.
We
manufacture fire suits at our facilities in China, Mexico and
Alabama. Our fire suits range in price from about $800 for standard
fire department turnout gear to $2,000 for custom gear. Our
Lakeland Fire® brand of
firefighting apparel continues to benefit from ongoing research and
development investment, as we seek to address the ergonomic needs
of stressful occupations.
Reusable Woven Garments
We
manufacture and market a line of reusable, launderable woven
garments that complement our firefighting and heat protective
offerings and provide alternatives to our limited use/disposable
protective clothing lines. These products provide us access to the
much larger woven industrial and health care-related markets. Woven
reusable garments are favored by customers for certain applications
because of familiarity with and acceptance of these fabrics. These
products allow us to supply and satisfy a wider range of safety and
customer needs.
Our
product lines include the following:
●
Electrostatic
dissipative apparel used by electric and gas
utilities.
●
Flame resistant
(FR) meta aramid and FR Cotton coveralls/pants/jackets used in
petrochemical and refining operations.
●
Cotton and
Polycotton coveralls, lab coats, pants and shirts.
●
FR fabrics
containing blends of cotton, Modacrylic, meta aramid, para aramid, and
viscose
Our
reusable woven garments range in price from $30 to $200 per
garment. We manufacture woven garments at our facilities in China,
Mexico, Argentina and Alabama. We are continuing to relocate highly
repetitive sewing processes for our high volume, standard product
lines, such as woven protective coveralls and flame retardant
coveralls, to our facilities in China, Mexico, Vietnam and India
where lower fabric and labor costs allow increased profit
margins.
High Visibility Clothing
Lakeland’s
High-Visibility Division manufactures and markets a comprehensive
line of reflective apparel meeting the American National Standards
Institute (ANSI) requirements. The line includes vests, T-shirts,
sweatshirts, jackets, coats, raingear, jumpsuits, hats and
gloves.
Fabrics
available include solid and mesh fluorescent, polyester, both
standard and FR treated and Modacrylic materials, which meet ASTM F1560 for
standard NFPA 70E Electric Arc Protection, are part of our
offering. The breathable Modacrylic fabric, has a strong appeal in
regions where very hot weather affects utility workers during
spring and summer (heat prostration).
Our
High Vis Polyurethane FR/ARC rated rainwear is light in weight,
soft, flexible and provides a breathable, cooler garment. This
product is intended for the Gas and Electrical Utility markets. The
Lakeland ARC-X FR/PU garment exceeds all of the required ASTM arc
flash and flash fire ratings for the Electric and Gas Utility
market.
Our
vest production occurs in our facilities in Alabama, Mexico and
China. Much of this manufacturing is for custom products. Many
corporations and agencies, such as State Departments of
Transportation, develop custom specifications which they feel are
more efficient in meeting their specific needs versus an
off-the-shelf product. We also can import a significant amount of
product from China and Mexico to meet the demand for items in high
volume commodity markets.
In
addition to ANSI Reflective items, Lakeland Hi-Visibility
manufactures Nomex and FR cotton garments which have reflective
trim attached as a part of their design criteria. These garments
typically are used in rescue or extrication operations, such as
those encountered as a result of vehicular accidents. Garments in
this group are not as price sensitive as those in other reflective
categories. Consequently, they are made in our facilities in
Mexico, China and Alabama where we can customize the product to
meet customer needs and offer quicker turnaround. Garments in this
group can range in price from $200 to $360.
Gloves and Sleeves
We
manufacture and sell specially designed glove and sleeve products
made from Kevlar®, a cut and heat
resistant fiber produced by DuPont, Spectra®, a cut
resistant fiber made by Honeywell and our patented engineered
yarns. We are one of only nine companies licensed in North America
to sell 100% Kevlar® gloves, which
are high strength, lightweight, flexible and durable.
Kevlar® gloves offer a
better overall level of protection and lower worker injury rate,
and are more cost effective than traditional leather, canvas or
coated work gloves. Kevlar® gloves, which
can withstand temperatures of up to 400°F and are cut
resistant enough to allow workers to safely handle sharp or jagged
unfinished sheet metal, are used primarily in the automotive, glass
and metal fabrication industries. Our higher end string knit gloves
range in price from about $40 to $175 for a dozen pair. We
manufacture these string knit gloves primarily at our Mexican
facility, affording Lakeland lower production and labor
costs.
We have
patents for our Despro® and
Despro® Plus products
that provide greater cut and abrasion hand protection to the areas
of a glove where injury is most likely to occur. For example, the
areas of the thumb crotch and index fingers are made heavier than
the balance of the glove, providing increased wear protection and
longer glove life, reducing overall glove costs. This proprietary
manufacturing process allows us, to produce our gloves more
economically and provide a greater value to our end
user.
Quality
All of
our manufacturing facilities are ISO 9001 or 9002 certified. ISO
standards are internationally recognized quality manufacturing
standards established by the International Organization for
Standardization based in Geneva, Switzerland. To obtain our ISO
registration, our factories were independently audited to test our
compliance with the applicable standards and norms. In order to
maintain registration, our factories receive regular announced
inspections by an independent certification organization. While ISO
certification is advantageous in retaining CE certification of
products, we believe that the ISO 9001 and ISO 9002 certifications
make us more competitive in the marketplace, as customers
increasingly recognize the standard as an indication of product
quality.
As we
source more and more of our fabrics internationally, we have
installed a quality control laboratory at our China facility. This
laboratory is critical for ensuring that our incoming raw materials
meet our quality requirements. We continue to add new capabilities
to this facility to further guarantee product quality, to aid in
new product development, and to meet the requirements for new
products and markets.
We have
also added a test lab in Decatur, Alabama. This lab was
completed in FY16 and mirrors our laboratory in China. It will be
our primary facility to pre-test all NFPA certified
garments. This lab will ensure that garments submitted
to Underwriter’s Laboratories (“UL”) for
certification are assured to pass certification, thus reducing
overall certification costs.
Marketing and Sales
Domestically,
we employ a field sales force in order to better support customers
and enhance marketing. We further leverage our in-house sales team
with 50 independent sales representatives. These employees and
representatives call on over 1,600 industrial safety and fire
service distributors nationwide to promote and sell our products.
Distributors buy our products for resale and typically maintain
inventory at the local level in order to assure quick response
times and the ability to serve their customers properly. Our sales
employees and independent representatives are in constant
communication with decision makers at the end user and distribution
levels, thereby allowing us valuable feedback on market perception
of our products, as well as information about new developments in
our industry.
Internationally,
Lakeland has sales representatives in 17 countries outside of the
US and product sales in 50 or more countries. Our
sustainable market advantages continue to be our knowledge of
global standards, the diversity of our product offering and the
fact that we manufacture our own products. This provides our
customers with high level product selection, quality, delivery and
customer service. There are no customers who accounted for 10% of
sales or more in FY19 and FY18.
As a
key competitive and marketing advantage, we manufacture nearly all
the garments we sell in our own factories for better control of
costs, quality and delivery. Our competitors rely largely on
contractors, which is a major selling point in our favor, as
customers are more comfortable dealing with the actual
manufacturer.
We seek
to maximize the efficiency of our established distribution network
through direct promotion of our products at the end user level. We
advertise primarily through trade publications, and our promotional
activities include sales brochures, emails and our website. We
exhibit at both regional and national trade shows, such as the
National Safety Congress, the American Industrial Hygiene
Association (AIHA), the American Society of Safety Engineers
(ASSE), the CIOSH, the COS+H and the A+A show in Dusseldorf,
Germany.
Product line expansion to higher value products is progressing in
all markets and is contributing to increased brand recognition,
sales growth and profitability. We believe that future
international growth is still sustainable in the coming year, based
on our current estimates of market penetration, the introduction of
higher value products and the opportunity to open new markets in
which we do not yet have a presence.
Suppliers and Materials
Our
largest supplier was Precision Fabrics Group from whom we purchased
7.63% and 10.5% of our total purchases in FY19 and FY18. Materials,
such as polypropylene, polyethylene, polyvinyl chloride, spunlaced
polyester, melt blown polypropylene and their derivatives and
laminates, are available from 30 or more major mills. FR fabrics
are also available from a number of both domestic and international
mills. The accessories used in the production of our disposable
garments, such as thread, boxes, snaps and elastics, are obtained
from unaffiliated suppliers. We have not experienced difficulty in
obtaining our requirements for these commodity component
items.
We have
not experienced difficulty in obtaining materials, including
cotton, polyester and nylon, used in the production of reusable
nonwovens and commodity gloves. We obtain Honeywell
Spectra® yarn, used in
our super cut-resistant Dextra Guard gloves, and Kevlar®, used in the
production of our specialty safety gloves, from independent mills
that purchase the fibers from Honeywell and DuPont,
respectively.
Materials
used in our fire and heat protective suits include woven glass
fabric, aluminized glass, Nomex®, aluminized
Nomex®,
Kevlar®, aluminized
Kevlar® and
polybenzimidazole, as well as combinations utilizing neoprene
coatings. Traditional chemical protective suits are made of
Viton®, butyl rubber
and polyvinyl chloride, all of which are available from multiple
sources. Advanced chemical protective suits are made from our
proprietary ChemMax® 1, 2, 3, 4 and
Interceptor®. We have not
experienced difficulty obtaining any of these
materials.
Competition
Our
business is highly competitive due to large competitors who have
monopolistic positions in the fabrics that are standards in the
industry for disposable and high-end chemical suits. We believe
that the barriers to entry in the reusable garments and gloves
industries are relatively low. We face competition in some of our
other product markets from large established companies that have
greater financial, research and development, sales and technical
resources. Where larger competitors, such as DuPont, Kimberly
Clark, Ansell and Honeywell, offer products that are directly
competitive with our products, particularly as part of an
established line of products, there can be no assurance that we can
successfully compete for sales and customers. Larger competitors
outside of our Disposable and Chemical Suit Lines also may be able
to benefit from economies of scale and technological innovation and
may introduce new products that compete with our
products.
Seasonality
Our
operations have historically been moderately seasonal, with higher
sales generally occurring in March, April and May when scheduled
maintenance on nuclear, coal, oil and gas fired utilities,
chemical, petrochemical and smelting facilities, and other heavy
industrial manufacturing plants occurs, primarily due to moderate
spring temperatures and low Energy demands. Sales decline during
the warmer summer vacation months and gradually increase from Labor
Day through February with slight declines during holidays, such as
Christmas. As a result of this seasonality in our sales, we have
historically experienced a corresponding seasonality in our working
capital, specifically inventories, with peak inventories occurring
between December and May, coinciding with lead times required to
accommodate the spring maintenance schedules. We believe that by
sustaining higher levels of inventory, we gain a competitive
advantage in the marketplace. Certain of our large customers seek
sole sourcing to avoid sourcing their requirements from multiple
vendors whose prices, delivery times and quality standards
differ.
In
recent years, due to increased demand by first responders for our
chemical suits and fire gear, our growing sales into the southern
hemisphere, and our development of non-seasonal products like
CleanMAX, our historical seasonal pattern has shifted. Governmental
disbursements are dependent upon budgetary processes and grant
administration processes that do not follow our traditional
seasonal sales patterns. Due to the size and timing of these
governmental orders, our net sales, results of operations, working
capital requirements and cash flows can vary between different
reporting periods. As a result, we expect to experience increased
variability in net sales, net income, working capital requirements
and cash flows on a quarterly basis.
Patents and Trademarks
We own
20 patents and have one patent in the application and approval
process with the US Patent and Trademark Office. We own 56
trademarks and have six trademarks in the application and approval
process. Intellectual property rights that apply to our various
products include patents, trade secrets, trademarks and, to a
lesser extent, copyrights. We maintain an active program to protect
our technology by ensuring respect for our intellectual property
rights.
Employees
As of
January 31, 2019, we had 1,632 full-time employees, 1,530, or 94%,
of who were employed in our international facilities, and 102, or
6%, of who were employed in our domestic facilities. An aggregate
of approximately 1,232 of international employees are members of
unions in their respective countries. We are not currently a party
to any collective bargaining agreements or any other contracts with
these unions. We believe our employee relations to be
excellent.
Environmental Matters
We are
subject to various foreign, federal, state and local environmental
protection, chemical control, and health and safety laws and
regulations, and we incur costs to comply with those laws. We own
and lease real property, and certain environmental laws hold
current or previous owners or operators of businesses and real
property responsible for contamination on or originating from
property, even if they did not know of or were not responsible for
the contamination. The presence of hazardous substances on any of
our properties or the failure to meet environmental regulatory
requirements could affect our ability to use or to sell the
property or to use the property as collateral for borrowing, and
could result in substantial remediation or compliance
costs.
Although
we have not in the past had any material costs or damages
associated with environmental claims or compliance, and we do not
currently anticipate any such costs or damages, we cannot guarantee
that we will not incur material costs or damages in the future as a
result of the discovery of new facts or conditions, acquisition of
new properties, the release of hazardous substances, a change in
interpretation of existing environmental laws or the adoption of
new environmental laws.
Executive Officers of the Registrant
The
following is a list of the names and ages of all of our executive
officers indicating all positions and offices they hold with us as
of April 15, 2019.
|
Name
|
|
Age
|
|
Position
|
|
Christopher
J. Ryan
|
|
67
|
|
Chief
Executive Officer, President, Secretary and Director
|
|
Charles
D. Roberson
|
|
56
|
|
Chief
Operating Officer
|
|
Teri W.
Hunt
|
|
57
|
|
Chief
Financial Officer
|
|
Daniel
L. Edwards
|
|
52
|
|
Senior
Vice President Sales for North America
|
Christopher J. Ryan
has served as our Chief Executive Officer and President since
November 2003, Secretary since April 1991, and a director since May
1986. Mr. Ryan was our Executive Vice President - Finance from May
1986 until becoming our President in November 2003. Mr. Ryan also
worked as a Corporate Finance Partner at Furman Selz Mager Dietz
& Birney, Senior Vice President-Corporate Finance at Laidlaw
Adams & Peck, Inc., Managing-Corporate Finance Director of
Brean Murray Foster Securities, Inc. and Senior Vice
President-Corporate Finance of Rodman & Renshaw, respectively,
from 1983 to 1991. Mr. Ryan has served as a Director of Lessing,
Inc., a privately held restaurant chain based in New York, from
1995 to 2008. Mr. Ryan received his BA from Stanford University,
his MBA from Columbia Business School and his J.D. from Vanderbilt
Law School.
Charles D. Roberson
has served as our Chief Operating Officer since July 2018. From
2009 to July 2018, he was our Senior Vice President, International
Sales. Mr. Roberson joined our Company in 2004 as Technical
Marketing Manager and later served as International Sales Manager.
Prior to joining our Company, Mr. Roberson was employed by
Precision Fabrics Group, Inc. as a Market Manager from 1995-2001
and as a Nonwovens Manufacturing Manager from 1991-1995. He began
his career as a manufacturing manager for Burlington Industries,
Inc. in its Menswear Division from 1985-1991.
Teri W. Hunt has
served as our Chief Financial Officer since November 2015 after
serving as the Acting Chief Financial Officer of the Company since
July 2015. Ms. Hunt has also served as the Company’s
Vice President of Finance from November 2010 to November 2015,
before which time she served as Corporate Controller from November
2007 to November 2010. Prior to joining Lakeland Ms. Hunt
served in multiple operational and financial management positions
including Corporate Controller for a privately held yarn
manufacturer, TNS Mills.
Daniel L. Edwards
has been our Senior Vice President Sales for North America since
March 2017 after most recently serving as our Vice President of USA
Sales since March 2013. Mr. Edwards has been employed by us in
various capacities since joining Lakeland in 2005, including as our
National Accounts Manager and Eastern Regional Sales
Manager. Prior to joining our Company, Mr. Edwards was a
Senior Market Manager at Precision Fabrics Group, Inc., where he
began his career in 1990 and held various roles at that company in
manufacturing, technical and quality management.
Item 1A. Risk Factors
RISK FACTORS
You should carefully consider the following risks before investing
in our common stock. These are not the only risks that we may face.
If any of the events referred to below actually occur, our
business, financial condition, liquidity and results of operations
could suffer. In that case, the trading price of our common stock
could decline, and you may lose all or part of your investment. You
should also refer to the other information in this Form 10-K and in
the documents we incorporate by reference into this Form 10-K,
including our consolidated financial statements and the related
notes.
Risks Related to Our Business and Industry and Other
Matters
We are subject to risk as a result of our international
manufacturing operations.
Because
most of our products are manufactured at our facilities located in
China, Vietnam, Mexico and India, our operations are subject to
risk inherent in doing business internationally. Such risks include
the adverse effects on operations from corruption, war,
international terrorism, civil disturbances, political instability,
government activities such as border taxes and renegotiation of
treaties, deprivation of contract and property rights and currency
valuation changes.
Since
1978, the Chinese government has been reforming its economic and
political systems, and we expect this to continue. Although we
believe that these reforms have had a positive effect on the
economic development of China and have improved our ability to
successfully operate our facilities in China, we cannot assure you
that these reforms will continue or that the Chinese government
will not take actions that impair our operations or assets in
China. In addition, periods of international unrest may impede our
ability to manufacture goods in other countries and could have a
material adverse effect on our business and results of
operations.
Our results of operations could be negatively affected by potential
fluctuations in foreign currency exchange rates.
Most of
our assembly arrangements with our foreign-based subsidiaries or
third-party suppliers require payment to be made in US dollars or
the Chinese RenminBi (“RMB”). Any decrease in the value
of the US dollar or RMB in relation to foreign currencies could
increase the cost of the services provided to us upon contract
expirations or supply renegotiations. There can be no assurance
that we will be able to increase product prices to offset any such
cost increases, and any failure to do so could have a material
adverse effect on our business, financial condition and results of
operations.
We are also exposed to foreign currency exchange
rate risks as a result of our sales to customers in foreign
countries in the amount of $49.1 million in FY19. Our sales
in these countries are usually denominated in the local currency.
If the value of the US dollar increases relative to these local
currencies, and we are unable to raise our prices proportionally,
then our profit margins could decrease because of the exchange rate
change.
We are
exposed to changes in foreign currency exchange rates as a result
of our purchases and sales in other countries. To manage the
volatility relating to foreign currency exchange rates, we seek to
limit, to the extent possible, our non-US dollar denominated
purchases and sales.
In
connection with our operations in China, we purchase a significant
amount of products from outside of the United States. However, our
purchases in China are primarily made in the RMB, the value of
which has floated for the last 3 years, therefore we have been
exposed to additional foreign exchange rate risk on our Chinese raw
material and component purchases.
Our
primary risk from foreign currency exchange rate changes is
presently related to non-US dollar denominated sales in China,
Canada and Europe and, to a smaller extent, in South American
countries and in Russia. Our sales to customers in Canada are
denominated in Canadian dollars, in Europe in Euros and British
pounds, and in China in RMB and US dollars. If the value of the US
dollar increases relative to the Canadian dollar, the Pound, the
Euro, or the RMB then our net sales could decrease as our products
would be more expensive to these international customers because of
changes in rate of exchange. We manage the foreign currency risk
when appropriate through the use of rolling 90-day forward
contracts against the Canadian dollar and Euro and through cash
flow hedges in the US against the RMB and the Euro. We do not hedge
other currencies at this time. In the event that non-US dollar
denominated international purchases and sales grow, exposure to
volatility in exchange rates could have a material adverse impact
on our financial results.
We may be exposed to continuing
and other liabilities arising from our former Brazilian
operations.
Although we
formally completed the terms of the “Shares Transfer
Agreement”, pursuant to which our entire equity interest in
our former Brazilian subsidiary (“Lakeland Brazil”) was
transferred during the fiscal year ended January 31, 2016, we may
continue to be exposed to certain liabilities arising in connection
with the operations of Lakeland Brazil, which was shut down in late
March 2019. We understand that under the laws of Brazil, a parent
company may be held liable for the liabilities of a former
Brazilian subsidiary in the event of fraud, misconduct, or under
various theories. In this respect, as regards labor claims, a
parent company could conceivably be held liable for the liabilities
of a former Brazilian subsidiary. Although we would have the right
of adversary system, full defense and due process, in case of a
potential litigation, there can be no assurance as to the findings
of the courts in Brazil.
The implementation of our ERP system had, and may continue to have,
an adverse effect on operating results.
We
suffered a net loss of $1.9 million in the fourth quarter of fiscal
2019, and the implementation on August 1, 2019 of our ERP system
was a factor. Such software application enables us to better
manage and interpret important parts of our
business. Implementation is a complex task, often initially
causing difficulties and adversely effecting operations of
implementing companies. In our case, implementation resulted
in order cancellations in certain product lines and increased
expenses. We anticipate continued, but lesser, adverse effects
from ERP implementation through at least the 2nd quarter of
FY20.
During the fourth quarter of fiscal year 2019, management
identified material weaknesses in our control over financial
reporting. If we continue to fail maintaining proper and effective
internal controls or are unable to remediate a material weakness in
our internal controls, our ability to produce accurate and timely
financial statements could be impaired, and investors’ views
of us could be harmed.
Ensuring
that we have adequate internal financial and accounting controls
and procedures in place so that we can produce accurate financial
statements on a timely basis involves substantial effort that needs
to be reevaluated frequently. Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements in accordance with generally
accepted accounting principles. Management has assessed the
effectiveness of the Company’s internal control over
financial reporting as of January 31, 2019. In making this
assessment, management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013 (COSO). As a
result of this assessment, management determined that there were
three areas of material weakness: Revenue Recognition,
Inventory Valuation and Monitoring Entity Level Controls. A
material weakness is a deficiency or combination of deficiencies,
in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of a
company’s financial statements will not be prevented or
detected on a timely basis. Upon our discovery of these material
weaknesses, additional substantive procedures were performed to
validate completeness and accuracy of underlying data and we
determined and began implementation of a remediation
plan.
These
additional substantive procedures have allowed us to conclude that,
notwithstanding the material weakness in our internal control over
financial reporting, the consolidated financial statements included
in this Report fairly present, in all material respects, the
Company’s financial position, results of operations, and cash
flows for the periods presented in conformity with generally
accepted accounting principles.
We may be adversely effected by the withdrawal of the United
Kingdom from the European Union
Our
performance depends in part on general economic conditions
affecting all countries in which we do business. In March 2017, the
United Kingdom announced its decision to exit the European Union
(“Brexit”). The U.K.'s withdrawal is currently
scheduled to take place in the second half of 2019, unless a
further extension is agreed to; however, uncertainty remains as to
what kind of post- Brexit agreement between the U.K. and the
European Union ("E.U."), if any, may be approved by the U.K.
Parliament. Our business in the U.K. may be adversely affected by
the uncertainty surrounding the timing of the withdrawal and the
future relationship between the U.K. and the E.U. Brexit and
any uncertainty with respect thereto could adversely impact
consumer demand and create significant currency fluctuations. In
addition, we could be adversely impacted by changes in trade
policies, labor, tax or other laws and regulations, intellectual
property rights and supply chain logistics. We may incur additional
costs as it addresses any such changes. All or any one of these
factors could adversely affect our business, revenue, financial
condition and results of operations.
Our results of operations may vary widely from quarter to
quarter.
Our
quarterly results of operations have varied and are expected to
continue to vary in the future. These fluctuations may be caused by
many factors, including:
●
Global crisis, such
as the Ebola outbreak or oil spills;
●
Our expansion of
international operations;
●
Competitive pricing
pressures;
●
Seasonal buying
patterns resulting from the cyclical nature of the business of some
of our customers;
●
Changes in the mix
of products and services sold;
●
The timing of
introductions and enhancements of products by us or our
competitors;
●
Market acceptance
of new products;
●
Technological
changes in fabrics or production equipment used to make our
products;
●
Changes in the mix
of domestic and international sales;
●
General industry
and economic conditions.
These
variations could negatively impact our stock price.
Some of our sales are to foreign buyers, which exposes us to
additional risks.
We
derived approximately 50% of our net sales from customers located
in foreign countries in FY19. We intend to seek to increase the
amount of foreign sales we make in the future. The additional risks
of foreign sales include:
●
Potential adverse
fluctuations in foreign currency exchange rates;
●
Restrictive trade
policies of the US foreign governments;
●
Currency
hyperinflation and weak banking institutions;
●
Changing economic
conditions in local markets;
●
Political and
economic instability in foreign markets; and
●
Changes in
leadership of foreign governments.
Some or
all of these risks may negatively impact our results of operations
and financial condition.
We deal in countries where corruption is an obstacle.
We must
comply with American laws such as the Foreign Corrupt Practices Act
(FCPA) and Sarbanes-Oxley and also with anticorruption legislation
in the U.K. Some of our competitors and customers in foreign
jurisdictions may not adhere to such legislation. As a result, we
believe that we lose sales orders due to our strict adherence to
such regulations.
We are exposed to tax expense risks.
We are
exposed to tax rate risk with respect to our deferred tax asset. On
December 22, 2017, new federal tax reform legislation was enacted
in the United States, resulting in significant changes from
previous tax law. The 2017 Tax Cuts and Jobs Act (the
“Tax Act”) reduced the federal corporate income tax
rate to 21% from 35% effective January 1, 2019. The Tax Act
requires us to recognize the effect of the tax law changes in the
period of enactment, such as determining the transition tax,
re-measuring our US deferred tax assets as well as reassessing the
net realizability of our deferred tax assets. The Company completed
this re-measurement and reassessment in the fiscal year ended
January 31, 2018. The rate change, along with certain
immaterial changes in tax basis resulting from the 2017 Tax Act,
resulted in a reduction of our net deferred tax asset to $7.6
million with a corresponding deferred income tax expense of $5.1
million in FY18. While the Tax Act provides for a modified
territorial tax system, beginning in 2018, it includes two new
U.S. tax base erosion provisions, the global intangible low-taxed
income (“GILTI”) provisions and the base-erosion and
anti-abuse tax (“BEAT”) provisions. The GILTI
provisions require the Company to include in its U.S. taxable
income foreign subsidiary earnings in excess of an allowable return
on the foreign subsidiary’s tangible assets. The proposed
regulations were not finalized as of January 31, 2019 and, as of
this reporting date, remain in the proposal stage. Due to this
uncertainty, it is difficult to predict the future impact, however,
the Company does expect that the GILTI income inclusion will
result in significant U.S. tax expense beginning
in FY19. Re-measurement and reassessment
of the GILTI tax as it is currently written resulted in a charge to
tax expense of $0.6 million in FY19. The Company intends to
account for the GILTI tax in the period in which it is incurred.
Though this non-cash expense had a materially negative impact on
FY19 earnings, the Tax Act also changes the taxation of foreign
earnings, and companies generally will not be subject to United
States federal income taxes upon the receipt of dividends from
foreign subsidiaries. The
BEAT provisions in the Tax Act pertain to companies with average
annual gross receipts of $500 million for the prior 3-year period
and eliminate the deduction of certain base-erosion payments made
to related foreign corporations and impose a minimum tax if greater
than regular tax. Based on current guidelines the Company
does not expect
the BEAT provision to have an impact on U.S. tax
expense.
The
Company claimed a worthless stock deduction in connection with our
exit from Brazil which generated a tax benefit of approximately US
$9.5 million in its fiscal year ended January 31, 2016. While,
along with our tax advisors, we believe that this deduction is
valid, there can be no assurance that the IRS will not challenge it
and, if challenged, there is no assurance that the Company will
prevail.
Covenants in our credit facilities may restrict our financial and
operating flexibility.
As a
result of the Loan Agreement the Company entered into on May 10,
2017 we currently have a $20 million revolving credit facility,
expiring May 10, 2020. Our credit facility requires, and any future
credit facilities may also require, among others that we comply
with specified financial covenants relating to fixed charge
coverage and maximum capital expenditures. Our ability to satisfy
these financial covenants can be affected by events beyond our
control, and we cannot guarantee that we will meet the requirements
of these covenants. These restrictive covenants could affect our
financial and operational flexibility or impede our ability to
operate or expand our business, including a limitation on annual
investments and advances we can make to foreign subsidiaries.
Default under our credit facilities would allow the lenders to
declare all amounts outstanding to be immediately due and payable.
Our lenders have a security interest in substantially all of our
assets to secure the debt under our current credit facilities, and
it is likely that our future lenders will have security interests
in our assets. If our lenders declare amounts outstanding under any
credit facility to be due, the lenders could proceed against our
assets. Any event of default, therefore, could have a material
adverse effect on our business.
Because we do not have long-term commitments from many of our
customers, we must estimate customer demand, and errors in our
estimates could negatively impact our inventory levels and net
sales.
Our
sales are generally made on the basis of individual purchase
orders, which may later be modified or canceled by the customer,
rather than on long-term commitments. We have historically been
required to place firm orders for fabrics and components with our
suppliers prior to receiving an order for our products, based on
our forecasts of customer demands. Our sales process requires us to
make multiple demand forecast assumptions, each of which may
introduce error into our estimates, causing excess inventory to
accrue or a lack of manufacturing capacity when needed. If we
overestimate customer demand, we may allocate resources to
manufacturing products that we may not be able to sell when we
expect to or not at all. As a result, we would have excess
inventory, which would negatively impact our financial results.
Conversely, if we underestimate customer demand or if insufficient
manufacturing capacity is available, we would lose sales
opportunities, lose market share and damage our customer
relationships. On occasion, we have been unable to adequately
respond to delivery dates required by our customers because of the
lead time needed for us to obtain required materials or to send
fabrics to our assembly facilities in China and Mexico. We must
recruit and retain skilled employees, including our senior
management, to succeed in our business.
We face competition from other companies, a number of which have
substantially greater resources than we do.
Three
of our competitors, DuPont, Honeywell and Kimberly Clark, have
substantially greater financial, marketing and sales resources than
we do. In addition, we believe that the barriers to entry in the
disposable and reusable garments and gloves markets are relatively
low. We cannot assure you that our present competitors or
competitors that choose to enter the marketplace in the future will
not exert significant competitive pressures. Such competition could
have a material adverse effect on our net sales and results of
operations.
Our operations are substantially dependent upon key
personnel.
Our
performance is substantially dependent on the continued services
and performance of our senior management and certain other key
personnel, including Christopher J. Ryan, our Chief Executive
Officer, President and Secretary, Charles D. Roberson, our Chief
Operating Officer, Teri W. Hunt, our Chief Financial Officer and
Daniel L. Edwards, our Senior Vice President Sales for North
America. The loss of services of any of our executive officers or
other key employees could have a material adverse effect on our
business, financial condition and results of operations. In
addition, any future expansion of our business will depend on our
ability to identify, attract, hire, train, retain and motivate
other highly skilled managerial, marketing, customer service and
manufacturing personnel, and our inability to do so could have a
material adverse effect on our business, financial condition and
results of operations.
Technological change could negatively affect sales of our products
and our performance.
The
rapid development of fabric technology continually affects our
apparel applications and may directly impact the performance of our
products. We cannot assure you that we will successfully maintain
or improve the effectiveness of our existing products, nor can we
assure you that we will successfully identify new opportunities or
continue to have the needed financial resources to develop new
fabric or apparel manufacturing techniques in a timely or
cost-effective manner. In addition, products manufactured by others
may render our products obsolete or noncompetitive. If any of these
events occur, our business, prospects, financial condition and
operating results will be materially and adversely
affected.
Cybersecurity incidents could disrupt business operations, result
in the loss of critical and confidential information and adversely
impact our reputation and results of operations.
Global
cybersecurity threats can range from uncoordinated individual
attempts to gain unauthorized access to our information technology
(“IT”) systems to sophisticated and targeted measures
known as advanced persistent threats. While we employ comprehensive
measures to prevent, detect, address and mitigate these threats
(including access controls, data encryption, vulnerability
assessments, management training, continuous monitoring of our IT
networks and systems and maintenance of backup and protective
systems), cybersecurity incidents, depending on their nature and
scope, could potentially result in the misappropriation,
destruction, corruption or unavailability of critical data and
confidential or proprietary information (our own or that of third
parties) and the disruption of business operations. While no
cybersecurity attack to date has had a material impact on our
financial condition, results of operations or liquidity, the threat
remains and the potential consequences of a material cybersecurity
incident include reputational damage, litigation with third
parties, diminution in the value of our investment in research,
development and engineering, and increased cybersecurity protection
and remediation costs, which in turn could adversely affect our
competitiveness and results of operations.
A significant reduction in government funding for preparations for
terrorist incidents could adversely affect our net
sales.
As a
general matter, a significant portion of our sales growth to our
distributors is dependent upon resale by those distributors to
customers that are funded in large part by federal, state and local
government funding. Specifically, depending on the year,
approximately 10% of our high-end chemical suit sales are dependent
on government funding. Congress passed the 2001 Assistance to
Firefighters Grant Program and the Bioterrorism Preparedness and
Response Act of 2002. Both of these Acts provide for funding to
fire and police departments and medical and emergency personnel to
respond to terrorist incidents. Appropriations for these Acts by
the federal government could be reduced or eliminated altogether.
Any such reduction or elimination of federal funding, or any
reductions in state or local funding, could cause sales of our
products purchased by fire and police departments and medical and
emergency personnel to decline.
We may be subject to product liability claims, and insurance
coverage could be inadequate or unavailable to cover these
claims.
We
manufacture products used for protection from hazardous or
potentially lethal substances, such as chemical and biological
toxins, fire, viruses and bacteria. The products that we
manufacture are typically used in applications and situations that
involve high levels of risk of personal injury. Failure to use our
products for their intended purposes, failure to use our products
properly or the malfunction of our products could result in serious
bodily injury or death of the user. In such cases, we may be
subject to product liability claims arising from the design,
manufacture or sale of our products. If these claims are decided
against us, and we are found to be liable, we may be required to
pay substantial damages, and our insurance costs may increase
significantly as a result. We cannot assure you that our insurance
coverage would be sufficient to cover the payment of any potential
claim. In addition, we cannot assure you that this or any other
insurance coverage will continue to be available or, if available,
that we will be able to obtain it at a reasonable cost. Any
material uninsured loss could have a material adverse effect on our
financial condition, results of operations and cash
flows.
Environmental laws and regulations may subject us to significant
liabilities.
Our US
operations, including our manufacturing facilities, are subject to
federal, state and local environmental laws and regulations
relating to the discharge, storage, treatment, handling, disposal
and remediation of certain materials, substances and wastes. Any
violation of any of those laws and regulations could cause us to
incur substantial liability to the Environmental Protection Agency,
the state environmental agencies in any affected state or to any
individuals affected by any such violation. If hazardous substances
are released from or located on any of our properties, we could
incur substantial costs and damages. Any such liability could have
a material adverse effect on our financial condition and results of
operations.
Our directors and executive officers have the ability to exert
significant influence on our Company and on matters subject to a
vote of our stockholders.
As of
January 31, 2019, our directors and executive officers beneficially
owned or could vote approximately 6.5% of the outstanding shares of
our common stock. As a result of their ownership of common stock
and their positions in our Company, our directors and executive
officers are able to exert significant influence on our Company and
on matters submitted to a vote by our stockholders. In particular,
as of January 31, 2019, Christopher J. Ryan, our chief executive
officer, president and secretary and a director, beneficially owned
or votes approximately 5.3% of our common stock. The ownership
interests of our directors and executive officers, including Mr.
Ryan, could have the effect of delaying or preventing a change of
control of our Company that may be favored by our stockholders
generally.
Provisions in our restated certificate of incorporation and by-laws
and Delaware law could make a merger, tender offer or proxy contest
difficult.
Our
restated certificate of incorporation contains classified board
provisions, authorized preferred stock that could be utilized to
implement various “poison pill” defenses and a
stockholder authorized, but as yet unused, Employee Stock Ownership
Plan (“ESOP”), all of which may have the effect of
discouraging a takeover of Lakeland, which is not approved by our
board of directors. Further, we are subject to the antitakeover
provisions of Section 203 of the Delaware General Corporation Law,
which prohibit us from engaging in a “business
combination” with an “interested stockholder” for
a period of three years after the date of the transaction in which
the person became an interested stockholder, unless the business
combination is approved in the prescribed manner.
Acquisitions could be unsuccessful.
In the
future, subject to capital constraints, we may seek to acquire
selected safety products lines or safety-related businesses which
will complement our existing products. Our ability to acquire these
businesses is dependent upon many factors, including our
management’s relationship with the owners of these
businesses, many of which are small and closely held by individual
stockholders. In addition, we will be competing for acquisition and
expansion opportunities with other companies, many of which have
greater name recognition, marketing support and financial resources
than us, which may result in fewer acquisition opportunities for
us, as well as higher acquisition prices. There can be no assurance
that we will be able to identify, pursue or acquire any targeted
business and, if acquired, there can be no assurance that we will
be able to profitably manage additional businesses or successfully
integrate acquired business into our Company without substantial
costs, delays and other operational or financial
problems.
If we
proceed with additional acquisitions for cash, we may use a
substantial portion of our available line of credit (if available)
in order to consummate any such acquisition. We may also seek to
finance any such acquisition through debt or equity financings, and
there can be no assurance that such financings will be available on
acceptable terms or at all. If consideration for an acquisition
consists of equity securities, the stock held by our investors
could be diluted. If we borrow funds in order to finance an
acquisition, we may not be able to obtain such funds on terms that
are favorable to us. In addition, such indebtedness may limit our
ability to operate our business as we currently intend because of
restrictions placed on us under the terms of the indebtedness and
because we may be required to dedicate a substantial portion of our
cash flow to payments on the debt instead of to our operations,
which may place us at a competitive disadvantage.
Acquisitions
involve a number of special risks in addition to those mentioned
above, including the diversion of management’s attention to
the assimilation of the operations and personnel of the acquired
companies, the potential loss of key employees of acquired
companies, potential exposure to unknown liabilities, adverse
effects on our reported operating results and the amortization or
write-down of acquired intangible assets. We cannot assure you that
any acquisition by us will or will not occur, that if an
acquisition does occur that it will not materially and adversely
affect our results of operations or that any such acquisition will
be successful in enhancing our business. To the extent that we are
unable to manage growth efficiently and effectively or are unable
to attract and retain additional qualified management personnel,
our business, financial condition and results of operations could
be materially and adversely affected.
We may need additional funds, and if we are unable to obtain these
funds, we may not be able to expand or operate our business as
planned.
Our
operations require significant amounts of cash, and we may be
required to seek additional capital, whether from sales of equity
or by borrowing money, to fund acquisitions for the future growth
and development of our business or to fund our operations and
inventory, particularly in the event of a market
downturn.
A
number of factors could affect our ability to access future debt or
equity financing, including:
●
Our
financial condition, strength and credit rating;
●
The
financial markets’ confidence in our management team and
financial reporting;
●
General
economic conditions and the conditions in the homeland security and
Energy sectors; and
●
Capital
markets conditions.
Even if
available, additional financing may be more costly than our current
facility and may have adverse consequences. If additional funds are
raised through the incurrence of debt, we will incur increased debt
servicing costs and may become subject to additional restrictive
financial and other covenants. We can give no assurance as to the
terms or availability of additional capital. Although management
believes it currently has sufficient capital, if we do need
additional capital in the future and are unsuccessful, it could
reduce our net sales and materially adversely impact our earning
capability and financial position.
Risks Relating to Our Common Stock
The market price of our common stock may fluctuate
widely.
The
market price of our common stock could be subject to significant
fluctuations in response to quarter-to-quarter variations in our
operating results, announcements of new products or services by us
or our competitors and other events or factors. For example, a
shortfall in net sales or net income, or an increase in losses,
from levels expected by securities analysts or investors, could
have an immediate and significant adverse effect on the market
price of our common stock. Volume fluctuations that have
particularly affected the market prices of many micro and small
capitalization companies have often been unrelated or
disproportionate to the operating performance of these companies.
These fluctuations, as well as general economic and market
conditions, may adversely affect the market price for our common
stock.
Our common stock is an equity interest and therefore subordinated
to our indebtedness.
Payments of the
principal and interest under the notes issued under the loan
agreements entered into in connection with our senior financing are
secured by liens on, and security interests in, substantially all
of our and our subsidiaries’ present and after-acquired
assets. In the event of our liquidation, dissolution or winding up,
our common stock would rank below all debt and creditor claims
against us. As a result, holders of our common stock will not be
entitled to receive any payment or other distribution of assets
upon our liquidation, dissolution or winding up until after all of
our obligations to our debt holders and creditors have been
satisfied.
We are precluded from paying and do not anticipate paying any
dividends to our common stockholders in the near
future.
We are
prohibited from declaring or paying any dividends to our common
stockholders without the prior consent of our senior and junior
lenders. Further, we have not paid dividends on our common stock
since August 2006 and we do not anticipate, if permitted, paying
any dividends in the foreseeable future. Instead, we plan to retain
any earnings to maintain and expand our existing
operations.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We
believe that our owned and leased facilities are suitable for the
operations we conduct in each of them. Each manufacturing facility
is well maintained and capable of supporting higher levels of
production. The table below sets forth certain information about
our principal facilities.
|
Address
|
Annual Rent
|
Lease Expiration
|
Principal Activity
|
|
|
Lakeland Industries, Inc.
● 202
Pride Lane SW; and
● 3420
Valley Avenue; and
● 201
Pride Lane SW
Decatur, AL 35603
|
Owned
|
N/A
|
Administration
Manufacturing Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Protective Real Estate
59 Bury Court
Brantford, ON N3S 0A9 - Canada
|
Owned
|
N/A
|
Sales
Warehouse
|
|
|
|
|
|
|
Weifang Lakeland Safety Products Co., Ltd. Plant #1
No. 61 South Huaan Road,
AnQui City, Shandong Province, PRC 262100
|
Owned(1)
|
N/A
|
Administration
Manufacturing Warehouse
Sales
|
|
|
|
|
|
|
Industrias Lakeland S.A. de C.V.
Carretera a Santa Rita, Calle Tomas Urbina #1
Jerez de Garcia, Salinas, Zacatecas, Mexico
|
Owned
|
N/A
|
Administration
Manufacturing Warehouse
Sales
|
|
|
|
|
|
|
Industrias Lakeland S.A. de C.V.
Carretera a Santa Rita, Calle Tomas Urbina #1
Jerez de Garcia, Salinas, Zacatecas, Mexico
|
Owned
|
N/A
|
Land Only
|
|
|
|
|
|
|
Porto Rico Street, Lots 16/17/18
Granjas Rurais, Salvador
|
Owned
|
N/A
|
Land and building held for sale
|
|
|
|
|
|
|
Lakeland Industries, Inc. (Headquarters)
3555 Veterans Memorial Highway, Suite C
Ronkonkoma, NY 11779
|
$54,700
|
Month to month
|
Administration Sales
|
|
|
|
|
|
|
Lakeland Industries, Inc.
1701 4th Avenue SE
Decatur, AL 35603
|
$24,000
|
Month to month
|
Warehouse
|
|
|
|
|
|
|
Total
Warehouse, Inc.
3030
North Lamb Blvd, Ste 103
Las
Vegas, NV 89115
|
By case
|
Annual – auto renew
|
Warehouse
|
|
|
|
|
|
|
Safety
Pro, LLC
7101
North Loop East
Houston,
TX 77028
|
$63,120
|
Annual – auto renew
|
Warehouse
|
|
Address
|
Annual Rent
|
Lease Expiration
|
Principal Activity
|
|
|
|
|
|
|
Lakeland
Argentina, SRL
Cuba
4870 San Martin
Provincia
de
Buenos
Aires, Argentina
|
$78,500
|
11/30/2019
|
Administration
Manufacturing* Warehouse
Sales
|
|
|
|
|
|
|
Lakeland
Industries Chile Limitado
Roman
Spech 3283, Comunica
Quinta
Normal, Santago, Chile
|
$76,300
|
1/31/2020
|
Administration
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland (Beijing) Safety Products Co., Ltd.
Unit 503, Building B, Sinolight Plaza
No. 4 Wangjing Qiyang Road, Chaoyang District
Beijing 100102 PRC
|
$42,100
|
5/31/2019
|
Sales
|
|
|
|
|
|
|
Lakeland (Beijing) Safety Products Co., Ltd.
Unit 502, Building B, Sinolight Plaza
No. 4 Wangjing Qiyang Road, Chaoyang District
Beijing 100102 PRC
|
$20,000
|
5/31/2019
|
Sales
|
|
|
|
|
|
|
Lakeland (Beijing) Safety Products Co., Ltd.
Warehouse
3, Chaoyand Road, Tianmu Town,
Beichen
District, Tianjin, PRC
|
$44,000
|
8/31/2019
|
Warehouse
|
|
|
|
|
|
|
Lakeland (Beijing) Safety Products Co., Ltd.
Warehouse
3+, Chaoyand Road, Tianmu Town,
Beichen
District, Tianjin, PRC
|
$15,000
|
8/31/2019
|
Warehouse
|
|
|
|
|
|
|
Weifang Lakeland Safety Products Co., Ltd
Dasen Logistic Company, Shuangfeng Road,
Anqui City, Shandong Province, PRC 262100
|
$43,000
|
12/14/2019
|
Warehouse
|
|
|
|
|
|
|
Lakeland Glove and Safety Apparel Private, Ltd.
Plots 50, Noida Special Economic Zone
New Delhi, India
|
$2,200 (2)
|
11/13/2028
|
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Glove and Safety Apparel Private, Ltd.
Plots 81, Noida Special Economic Zone
New Delhi, India
|
$4,100 (2)
|
03/29/2024
|
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Glove and Safety Apparel Private, Ltd.
A-67, Sector 83
Noida, District-Gautam Budh Nagar, India
|
$13,000
|
3/15/2019
|
Manufacturing
Sales
|
|
Address
|
Annual Rent
|
Lease Expiration
|
Principal Activity
|
|
Art Prom, LLC
Varashilova Street 5/1,
Ust-Kamnogorsk, Kazakhstan, 070002
|
$1,100
|
12/31/2019
|
Manufacturing*
Warehouse
Sales
|
|
|
|
|
|
|
RussIndProtection, Ltd.
201, vlad. 4B, str.1, 38km, MKAD
Moscow, Russia 117574
|
$7,000
|
12/1/2019
|
Warehouse
Sales
|
|
|
|
|
|
|
SpecProtect LLC
192012, St. Petersburg, Obukhov Defense Ave.,
d. 271, lit, A
|
$600
|
1/31/2020
|
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Industries Europe Ltd.
Unit 9/10 Park 2, Main Road
New Port, East Yorkshire HU15 2RP
United Kingdom
|
Approximately $66,000
(varies with exchange rates)
|
March 2023 (with
8-year review
period from
4/2011
|
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland (Vietnam) Industries Co., Ltd.
Hemlet No.8, Xuan Trung Commune, Xuan Truong District, Nam Dinh
Province, Vietnam
|
$360,000
|
1/20/2022
|
Administration
Manufacturing
Warehouse
Sales
|
(1) We own the buildings in which we
conduct the majority of our manufacturing operations in China and
lease the land underlying the buildings from the Chinese
government. We have 28 years remaining under the leases with
respect to the AnQui City facilities.
(2) We
lease the underlying land from the SEZ, but we own the buildings on
Plots 50 & 51.
* A small amount of manufacturing is done locally, but most sales
are made in other Lakeland facilities.
Our
manufacturing facilities in Alabama, Mexico, China, Vietnam, India,
and Argentina contain equipment used for the design, development,
manufacture and sale of our products. Our other operations in
Canada, United Kingdom, Chile, Hong Kong, Russia, Poland, China and
Kazakhstan are primarily sales and warehousing operations receiving
goods for resale from our manufacturing facilities around the
world. We had $2.25 million and $1.99 million of net property and
equipment located in the US; $3.17 million and $1.92 million in
Asia; $2.14 million and $1.99 million in Mexico as of January 31,
2019 and 2018, respectively.
ITEM 3. LEGAL PROCEEDINGS
From
time to time, we are a party to litigation arising in the ordinary
course of our business. We are not currently a party to any
litigation or other legal proceedings that we believe could
reasonably be expected to have a material adverse effect on our
results of operations, financial condition or cash flows. See Note
12 related to legal matters in respect of our former subsidiary in
Brazil and its relation to the Company.
ITEM 4. MINE SAFETY DISCLOSURES
N/A
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our
common stock is currently traded on the Nasdaq Market under the
symbol “LAKE.” The following table sets forth for the
periods indicated the high and low closing sales prices for our
common stock as reported by the Nasdaq Market.
|
|
Price Range of
Common Stock
|
|
|
|
|
|
Fiscal
2019
|
|
|
|
First
Quarter
|
$13.90
|
$12.70
|
|
Second
Quarter
|
15.95
|
13.25
|
|
Third
Quarter
|
13.90
|
12.60
|
|
Fourth
Quarter
|
14.33
|
10.13
|
|
Fiscal
2018
|
|
|
|
First
Quarter
|
$11.10
|
$9.95
|
|
Second
Quarter
|
16.45
|
10.25
|
|
Third
Quarter
|
16.00
|
13.40
|
|
Fourth
Quarter
|
15.10
|
13.75
|
Holders
Holders
of our Common Stock, approximately 27 of record, are entitled to
one (1) vote for each share held on all matters submitted to a vote
of the stockholders. No cumulative voting with respect to the
election of directors is permitted by our Articles of
Incorporation. The Common Stock is not entitled to preemptive
rights and is not subject to conversion or redemption. Upon our
liquidation, dissolution or winding-up, the assets legally
available for distribution to stockholders are distributable
ratably among the holders of the Common Stock after payment of
liquidation preferences, if any, on any outstanding stock that may
be issued in the future having prior rights on such distributions
and payment of other claims of creditors. Each share of Common
Stock outstanding as of the date of this Annual Report is validly
issued, fully paid and nonassessable.
Dividend
Policy
In the
past, we have declared dividends in stock to our stockholders. We
may pay stock dividends in future years at the discretion of our
board of directors and consent of our lenders.
We have
never paid any cash dividends on our common stock, and we currently
intend to retain any future earnings for use in our business. The
payment and rate of future cash or stock dividends, if any, or
stock repurchase programs are subject to the discretion of our
board of directors and will depend upon our earnings, financial
condition, capital or contractual restrictions under our credit
facilities and other factors. In addition, the payment of cash
dividends is restricted by the terms of our current senior loan
agreement.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information
regarding securities authorized for issuance under the
Company’s equity compensation plans is contained in Part III,
Item 12 of this Report.
Stock
Repurchase Program
On July
19, 2016, the Company’s board of directors approved a stock
repurchase program under which the Company may repurchase up to
$2,500,000 of its outstanding common stock.
During
the fourth quarter of FY19, stock repurchases were as
follows:
|
Period
|
(a) Total number
of shares (or units) purchased
|
(b) Average
price paid per share (or unit)
|
(c) Total number
of shares (or units) purchased as part of publicly announced plans
or programs
|
(d) Maximum
number (or approximate dollar value) of shares (or units) that may
yet be purchased under the plans or programs
|
|
11/01/18 –
11/30/18
|
-----
|
$-----
|
-----
|
$2,500,000
|
|
12/19/18 –
12/31/18
|
29,469
|
$10.35
|
29,469
|
$2,200,000
|
|
01/02/19 –
01/31/19
|
76,179
|
$11.25
|
76,179
|
$1,300,000
|
|
Total
|
105,648
|
$10.99
|
105,648
|
$1,300,000
|
Registration
Statement
On
March 24, 2017, the Company filed a shelf registration statement on
Form S-3 which was declared effective by the SEC on April 11, 2017.
The shelf registration statement permits the Company to sell, from
time to time, up to an aggregate of $30 million of various
securities, including shares of common stock, shares of preferred
stock, debt securities, warrants to purchase common stock,
preferred stock, debt securities, and/or units, rights to purchase
common stock, preferred stock, debt securities, warrants and/or
units, units of two or more of the foregoing, or any combination of
such securities, not to exceed one-third of the Company’s
public float in any 12-month period. The public offering of common
stock effectuated by the Company in FY18 was pursuant to this
Registration Statement.
ITEM
6. SELECTED FINANCIAL DATA
The
following selected consolidated financial data as of and for our
FY19, FY18, FY17, FY16, and FY15 has been derived from our audited
consolidated financial statements. You should read the information
set forth below in conjunction with our “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
related notes included in this Form 10-K, and other data we have filed with
the U.S. Securities and Exchange Commission.
|
|
Summary
of Operations
Year
Ended January 31,
|
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
Net
sales from continuing operations
|
$99,011
|
$95,987
|
$86,183
|
$99,646
|
$93,419
|
|
Operating
profit from continuing operations
|
3,565
|
8,477
|
6,847
|
11,812
|
6,691
|
|
Income
from continuing operations before income taxes
|
3,481
|
8,343
|
6,273
|
10,907
|
2,898
|
|
Income
tax expense (benefit)
|
2,022
|
7,903
|
2,380
|
3,117
|
(8,188)
|
|
Net
income from continuing operations
|
1,459
|
440
|
3,893
|
7,790
|
11,086
|
|
Net
loss on discontinued operations, net of tax
|
-----
|
-----
|
-----
|
(3,936)
|
(2,687)
|
|
|
|
|
|
|
|
|
Earnings
per share from continuing operations - basic
|
$0.18
|
$0.06
|
$0.54
|
$1.09
|
$1.78
|
|
|
|
|
|
|
|
|
Earnings
per share from continuing operations – diluted
|
$0.18
|
$0.06
|
$0.53
|
$1.07
|
$1.75
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
Basic
|
8,111,458
|
7,638,264
|
7,257,553
|
7,171,965
|
6,214,303
|
|
Diluted
|
8,170,401
|
7,691,553
|
7,327,248
|
7,254,340
|
6,325,525
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
Current
assets
|
$75,470
|
$76,500
|
$60,086
|
$62,117
|
$68,635
|
|
Total
assets
|
94,723
|
94,531
|
84,554
|
88,260
|
93,208
|
|
Current
liabilities
|
10,334
|
10,379
|
12,331
|
19,958
|
26,222
|
|
Long-term
liabilities
|
1,161
|
1,312
|
716
|
786
|
3,730
|
|
Stockholders’
equity
|
83,228
|
82,840
|
71,507
|
67,516
|
63,256
|
*
Restated for discontinued operations
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of
Financial
Condition and Results of Operations
You should read the following summary together with the more
detailed business information and consolidated financial statements
and related notes that appear elsewhere in this Form 10-K and in
the documents that we incorporate by reference into this Form 10-K.
This document may contain certain “forward-looking”
information within the meaning of the Private Securities Litigation
Reform Act of 1995. This information involves risks and
uncertainties. Our actual results may differ materially from the
results discussed in the forward-looking statements.
Overview
For the
first half of the year (FY19), economic growth and investment
globally was relatively strong as the global economy continued its
recovery from the second half of FY 2018. In the second half
of FY19 we encountered headwinds due to threatened changes to U.S.
trade policies relative to several key markets in which we
manufacture and sell, specifically China and Mexico. In
Europe, uncertainty around Brexit saw customers less confident in
economic growth. This was reflected in the purchases and business
investment of many of our EEC end users. This in turn limited
growth opportunities in these markets while leading to more
aggressive pricing from the competition which had to be met.
Unfortunately during the second half of the fiscal year, global
talks between the US administration and China and the U.K and EU
became more contentious and less certain. In addition, in the
second half of FY19, Lakeland initiated a significant enterprise
resource planning (“ERP”) project in order to strengthen its
foundation for future growth globally. The result of this
investment was increased operationing expenses and some loss of
sales due to operational issues relating to the ERP
implementation.
On
December 22, 2017, new federal tax reform legislation was enacted
in the United States, resulting in significant changes from
previous tax law. The 2017 Tax Cuts and Jobs Act (the
“Tax Act”) reduced the federal corporate income tax
rate to 21% from 35% effective January 1, 2018. The Tax Act
requires us to recognize the effect of the tax law changes in the
period of enactment, such as determining the transition tax,
re-measuring our US deferred tax assets as well as reassessing the
net realizability of our deferred tax assets. The Company
completed this re-measurement and reassessment in the fiscal year
ended January 31, 2018. The rate change, along with certain
immaterial changes in tax basis resulting from the Tax Act,
resulted in a reduction of our net deferred tax asset to $7.6
million with related income tax expense of $5.1 million, thus
dramatically increasing our effective tax rate in the fiscal year
ended January 31, 2018. The Tax Act included the global intangible
low-taxed income (“GILTI”) provisions and the
base-erosion and anti-abuse tax (“BEAT”) provisions as
well, which were re-measured and reassessed by the Company in the
current fiscal year. Re-measurement and reassessment of the GILTI
tax as it is currently written resulted in a charge to tax expense
of $0.6 million in FY19. The BEAT provisions in the Tax Act
pertain to companies with average annual gross receipts of $500
million for the prior 3-year period and eliminate the deduction of
certain base-erosion payments made to related foreign corporations
and impose a minimum tax if greater than regular tax. Based on
current guidelines the Company does not expect the BEAT provision to have
an impact on U.S. tax expense.
The
personal protective equipment market continues to grow worldwide as
developing countries increasingly adopt the protection standards of
North America and Europe, and standards in the more developed
countries become more stringent and cover more types of workers.
Management believes Lakeland is uniquely positioned to take
advantage of these trends with its presence in many major and high
growth potential markets worldwide. However, management also
understands that significant investment in these markets is
required for the Company to realize its goals for growth in revenue
and income as our many markets continue to evolve and attract more
competition.
In
order to promote future improvements in operating income, cash
availability, and business outlook, the Company has more recently
made multiple investments in operations and organization that had
been deferred during the past few challenging years. Additional
personnel in sales and marketing have been hired worldwide in order
to increase penetration in existing markets and pursue new sales
channels. New equipment has been purchased to increase
manufacturing capacity and efficiency as well as to replace older
equipment. New manufacturing facilities in Vietnam and India
commenced production in FY19. New accounting and operations
software is being installed to improve processes, planning, and
access to sales, financial, and manufacturing data. New
technologies in fabrics and manufacturing are being explored.
Management believes the Company’s ability to compete for the
global opportunities in its industry are being
enhanced.
We
manufacture and sell a comprehensive line of industrial protective
clothing and accessories for the industrial and public protective
clothing market. Our products are sold globally by our in-house
sales teams, our customer service group, and authorized independent
sales representatives to a network of over 1,600 global
safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil,
chemical/petrochemical, automobile, steel, glass, construction,
smelting, cleanroom, janitorial, pharmaceutical, and high
technology electronics manufacturers, as well as scientific,
medical laboratories and the utilities industry. In addition, we
supply federal, state and local governmental agencies and
departments, such as fire and law enforcement, airport crash rescue
units, the Department of Defense, the Department of Homeland
Security and the Centers for Disease Control. Internationally, we
sell to a mixture of end users directly, and to industrial
distributors depending on the particular country and market. Sales
are made to more than 50 countries, the majority of which were into
China, the European Economic Community (“EEC”), Canada,
Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador,
India and Southeast Asia. For purposes of this Form 10-K, FY refers
to a fiscal year ended January 31; for example, FY19 refers to the
fiscal year ended January 31, 2019. In FY19 we had net sales of
$99.0 million and $96.0 million in FY18.
We have
operated facilities in Mexico since 1995 and in China since 1996.
Beginning in 1995, we moved the labor intensive sewing operation
for our limited use/disposable protective clothing lines to these
facilities. In FY19, we opened manufacturing facilities in Vietnam
and India. Our facilities and capabilities in China, Mexico,
Vietnam and India allow access to a less expensive labor pool than
is available in the United States of America and permit us to
purchase certain raw materials at a lower cost than they are
available domestically. As we have increasingly moved production of
our products to our facilities in Mexico, China, India and Vietnam,
we have seen improvements in the profit margins for these products.
Our net sales attributable to customers outside the United States
of America were $49.1 million and $45.5 million for the years ended
January 31, 2019 and 2018, respectively.
We
anticipate our R&D expenses to increase to $0.7 million in
FY20 from $0.2 million in FY19 and $0.3 million in FY18 as we
continue to develop vertical product lines for new markets and
expand production of existing product lines to our new
manufacturing facilities in Vietnam and India. Additional
R&D expenses will be incurred as we seek new raw material
sources nearer to our new manufacturing facilities.
Critical
Accounting Policies and Estimates
Revenue Recognition. Substantially all
the Company’s revenue is derived from product sales, which
consist of sales of the Company’s personal protective wear
products to distributors. The Company considers purchase orders to
be a contract with a customer. Contracts with customers are
considered to be short-term when the time between order
confirmation and satisfaction of the performance obligations is
equal to or less than one year, and virtually all of the
Company’s contracts are short-term. The Company recognizes
revenue for the transfer of promised goods to customers in an
amount that reflects the consideration to which the Company expects
to be entitled in exchange for those goods. The Company typically
satisfies its performance obligations in contracts with customers
upon shipment of the goods. Generally, payment is due from
customers within 30 to 90 days of the invoice date, and the
contracts do not have significant financing components. The Company
elected to account for shipping and handling activities as a
fulfillment cost rather than a separate performance obligation.
Shipping and handling costs associated with outbound freight are
included in operating expenses, and for the years ended in FY19 and
FY18 aggregated approximately $2.7 million and $2.2 million,
respectively. Taxes collected from customers relating to product
sales and remitted to governmental authorities are excluded from
revenue.
The
transaction price includes estimates of variable consideration,
related to rebates, allowances, and discounts that are reductions
in revenue. All estimates are based on the Company's historical
experience, anticipated performance, and the Company's best
judgment at the time the estimate is made. Estimates for variable
consideration are reassessed each reporting period and are included
in the transaction price to the extent it is probable that a
significant reversal of cumulative revenue recognized will not
occur upon resolution of uncertainty associated with the variable
consideration. All the Company’s contracts have a single
performance obligation satisfied at a point in time and the
transaction price is stated in the contract, usually as quantity
times price per unit.
The
Company has seven revenue generating reportable geographic segments
under ASC Topic 280 “Segment Reporting” and derives its
sales primarily from its limited use/disposable protective clothing
and secondarily from its sales of reflective clothing, high-end
chemical protective suits, firefighting and heat protective
apparel, reusable woven garments and gloves and arm guards. The
Company believes disaggregation of revenue by geographic region
best depicts the nature, amount, timing, and uncertainty of its
revenue and cash flows (see table below). Net sales by geographic
region and by product line are included below:
|
|
Years
Ended
January 31,
(in
millions of dollars)
|
|
|
|
|
|
External
Sales by region:
|
|
|
|
USA
|
$49.88
|
$50.45
|
|
Other
foreign
|
3.02
|
2.40
|
|
Europe
(UK)
|
9.42
|
9.07
|
|
Mexico
|
3.51
|
2.48
|
|
Asia
|
18.00
|
17.12
|
|
Canada
|
8.56
|
8.26
|
|
Latin
America
|
6.62
|
6.21
|
|
Consolidated
external sales
|
$99.01
|
$95.99
|
|
|
Years
Ended
January 31,
(in
millions of dollars)
|
|
|
|
|
|
External
Sales by product lines:
|
|
|
|
Disposables
|
$53.18
|
$51.56
|
|
Chemical
|
18.03
|
17.47
|
|
Fire
|
5.98
|
5.80
|
|
Gloves
|
3.22
|
3.12
|
|
Hi-Vis
|
6.99
|
11.26
|
|
Wovens
|
11.61
|
6.78
|
|
Consolidated
external sales
|
$99.01
|
$95.99
|
Accounts Receivable, Net. Trade accounts receivable are stated at the amount
the Company expects to collect. The Company maintains allowances
for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Company
recognizes losses when information available indicates that it is
probable that a receivable has been impaired based on criteria
noted above at the date of the consolidated financial statements,
and the amount of the loss can be reasonably estimated. Management
considers the following factors when determining the collectability
of specific customer accounts: Customer creditworthiness, past
transaction history with the customers, current economic industry
trends and changes in customer payment terms. Past due balances
over 90 days and other less creditworthy accounts are reviewed
individually for collectability. If the financial condition of the
Company’s customers were to deteriorate, adversely affecting
their ability to make payments, additional allowances would be
required. Based on management’s assessment, the Company
provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that
remain outstanding after the Company has used reasonable collection
efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable.
Inventories. Inventories include freight-in, materials, labor
and overhead costs and are stated at the lower of cost (on a
first-in, first-out basis) or net realized
value.
Goodwill. Goodwill represents the
future economic benefits arising from other assets acquired in a
business combination that are not individually identified and
separately recognized. Goodwill is evaluated for impairment at
least annually; however, this evaluation may be performed more
frequently when events or changes in circumstances indicate the
carrying amount may not be recoverable. Factors that the Company
considers important that could identify a potential impairment
include: significant changes in the overall business strategy and
significant negative industry or economic trends. Management
assesses whether it is more likely than not that goodwill is
impaired and, if necessary, compares the fair value of the
reporting unit to the carrying value. Fair value is generally
determined by management either based on estimating future
discounted cash flows for the reporting unit or by estimating a
sales price for the reporting unit based on multiple of earnings.
These estimates require the Company's management to make
projections that can differ from actual results.
Impairment of Long-Lived Assets.
The Company evaluates the carrying
value of long-lived assets to be held and used when events or
changes in circumstances indicate the carrying value may not be
recoverable. The Company measures any potential impairment on a
projected undiscounted cash flow method. Estimating future cash
flows requires the Company’s management to make projections
that can differ materially from actual results. The carrying value
of a long-lived asset is considered impaired when the total
projected undiscounted cash flows from the asset is less than its
carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the
long-lived asset. As of January 31, 2019, a non-cash impairment
charge was recorded to reflect the change in the carrying value
from $0.2 million to $0.0 million as the Company believes there is
no recoverable value of the asset held for sale previously on the
Company’s consolidated balance sheet.
Income Taxes. The Company is required to estimate its income
taxes in each of the jurisdictions in which it operates as part of
preparing the consolidated financial statements. This involves
estimating the actual current tax in addition to assessing
temporary differences resulting from differing treatments for tax
and financial accounting purposes. These differences, together with
net operating loss carryforwards and tax credits, are recorded as
deferred tax assets or liabilities on the Company’s
consolidated balance sheet. A judgment must then be made of the
likelihood that any deferred tax assets will be recovered from
future taxable income. A valuation allowance may be required to
reduce deferred tax assets to the amount that is more likely than
not to be realized. In the event the Company determines that it may
not be able to realize all or part of its deferred tax asset in the
future, or that new estimates indicate that a previously recorded
valuation allowance is no longer required, an adjustment to the
deferred tax asset is charged or credited to income in the period
of such determination.
The
Company recognizes tax positions that meet a “more likely
than not” minimum recognition threshold. If necessary, the
Company recognizes interest and penalties associated with tax
matters as part of the income tax provision and would include
accrued interest and penalties with the related tax liability in
the consolidated balance sheets.
Foreign Operations and Foreign
Currency Translation. The
Company maintains manufacturing operations in the People’s
Republic of China, Mexico, India, and Argentina and can access
independent contractors in China, Vietnam, Argentina, and Mexico.
It also maintains sales and distribution entities located in China,
Canada, the U.K., Chile, Argentina, Russia, Kazakhstan, India, and
Mexico. The Company is vulnerable to currency risks in these
countries. The functional currency for the United Kingdom
subsidiary is the Euro; the trading company in China, the RMB; the
Canadian Real Estate subsidiary, the Canadian dollar; and the
Russian operation, the Russian Ruble and the Kazakhstan operation
the Kazakhstan Tenge. All other operations have the US dollar as
its functional currency.
Pursuant
to US GAAP, assets and liabilities of the Company’s foreign
operations with functional currencies other than the US dollar, are
translated at the exchange rate in effect at the balance sheet
date, while revenues and expenses are translated at average rates
prevailing during the periods. Translation adjustments are reported
in accumulated other comprehensive loss, a separate component of
stockholders’ equity. Cash flows are also translated at
average translation rates for the periods, therefore amounts
reported on the consolidated statement of cash flows will not
necessarily agree with changes in the corresponding balances on the
consolidated balance sheet. Transaction gains and losses that arise
from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the
results of operations as incurred.
Fair Value of Financial Instruments. US
GAAP defines fair value, provides guidance for measuring fair value
and requires certain disclosures utilizing a fair value hierarchy
which is categorized into three levels based on the inputs to the
valuation techniques used to measure fair value. The following is a
brief description of those three levels:
Level
1: Observable inputs such as quoted prices
(unadjusted) in active markets for identical assets or
liabilities.
Level
2: Inputs other than quoted prices that are
observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not
active.
Level
3: Unobservable inputs that reflect
management’s own assumptions.
Foreign
currency forward and hedge contracts are recorded in the
consolidated balance sheets at their fair value as of the balance
sheet dates based on current market rates.
The
financial instruments of the Company classified as current assets
or liabilities, including cash and cash equivalents, accounts
receivable, short-term borrowings, borrowings under revolving
credit facility, accounts payable and accrued expenses, are
recorded at carrying value, which approximates fair value based on
the short-term nature of these instruments.
The
Company believes that the fair values of its long-term debt
approximates its carrying value based on the effective interest
rate compared to the current market rate available to the
Company.
Earnings Per Share
Basic
earnings per share are based on the weighted average number of
common shares outstanding without consideration of common stock
equivalents. Diluted earnings per share are based on the weighted
average number of common shares and common stock equivalents. The
diluted earnings per share calculation takes into account unvested
restricted shares and the shares that may be issued upon exercise
of stock options, reduced by shares that may be repurchased with
the funds received from the exercise, based on the average price
during the fiscal year.
Reclassifications
Certain
reclassifications have been made to the prior year’s
consolidated financial statements accounts payable and other
accrued expenses balances to conform to the current year
presentation. These reclassifications have no effect on the
accompanying consolidated financial statements.
Significant
Balance Sheet Fluctuation January 31, 2019, as Compared to January
31, 2018
Balance
Sheet Accounts. Cash decreased by $3.0 million and property
increased $2.0 million in FY19 as the Company optimized capital
expenditures in the year for the enterprise resource planning
(“ERP”) project, the set-up of manufacturing facilities
in Vietnam and India, the enhancement of IT infrastructure, and
planned equipment purchases in Mexico and China. The Company
experienced an increase in accounts receivables of $2.4 million due
to timing issues and a higher concentration of sales in the latter
part of the fourth quarter. Treasury stock increased $1.2 million
due to the Company’s implementation of a previously approved
stock buyback program in the fourth quarter.
Results
of Operations
The
following table sets forth our historical results
of continuing operations for the years and three-months ended
January 31, 2019 and 2018 as a percentage of our net sales from
operations.
|
|
For the
Three Months Ended
January
31,
(Unaudited)
|
For the
Year Ended
January
31,
|
|
|
|
|
|
|
|
Net
sales
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
|
Cost
of goods sold
|
72.3%
|
60.6%
|
65.8%
|
62.3%
|
|
Gross
profit
|
27.7%
|
39.4%
|
34.2%
|
37.7%
|
|
Operating
expenses
|
33.7%
|
34.8%
|
30.6%
|
28.9%
|
|
Operating
profit (loss)
|
(6.0)%
|
4.6%
|
3.6%
|
8.8%
|
|
Other
income, net
|
0.1%
|
0.1%
|
0.0%
|
0.0%
|
|
Interest
expense
|
(0.1)%
|
(0.1)%
|
(0.1)%
|
(0.2)%
|
|
Income
(loss) before tax
|
(6.0)%
|
4.6%
|
3.5%
|
8.7%
|
|
Income
tax expense (benefit)
|
1.6%
|
24.1%
|
2.0%
|
8.2%
|
|
Net
income (loss)
|
(7.6)%
|
(19.6)%
|
1.5%
|
0.5%
|
For purposes of the Management’s Discussion, the reference to
“Q” shall mean “Quarter.” Thus
“Q4” means the fourth quarter of the applicable fiscal
year.
Year
Ended January 31, 2019, Compared to the Year Ended January 31,
2018
Net Sales. Net
sales increased to $99.0 million for the year ended January 31,
2019 compared to $96.0 million for the year ended January 31, 2018,
an increase of 3.2%. Sales in the US were down $0.9 million or 1.6%
primarily due to several changes in the business environment for
two of our major customers as well as long lead times from our ERP
implementation, effective on August 1, 2018, which resulted in
order cancellations in the disposables, gloves and fire product
lines. We anticipate continued adverse effects, though to a lesser
degree, from ERP implementation through at least the second quarter
of FY20. Sales in China and to the Asia Pacific Rim increased $3.7
million or 7.1% primarily due to increased market penetration in
the nuclear and utilities industries. Canada sales increased
modestly by $0.3 million or 3.9% as some customers replenished
their stock in response to higher than forecasted demand at higher
price points. UK sales increased to $9.4 million or 3.5% mostly due
to price increases, a specific targeting of sales to distributors
in the eastern region of that continent, and as customers increased
stocking orders around Brexit uncertainties. Russia and Kazakhstan
sales combined had an increase of $1.3 million or 53.5% as that
region continues to be a growth market for the Company and Latin
America sales increased $0.6 million or 8.5% due to continuously
improving economies and as the Company is selling more fire
resistant (“FR”) products into the Chilean
market.
Gross
Profit. Gross profit
decreased $2.3 million, or 6.3%, to $33.9 million for the year
ended January 31, 2019, from $36.2 million for the year ended
January 31, 2018. Gross profit as a percentage of net sales
decreased from 37.7% for the year ended January 31, 2018 to 34.2%
for the year ended January 31, 2019. Major factors driving gross
margins were:
●
USA gross margins
decreased 5.0 percentage points due to increased expenses across
distribution and supply chain management associated with the
implementation of a new ERP system and other non-related planning
challenges, increased manufacturing expenses as more costly
capacity in the US was increased in order to cut lead times,
intercompany freight due to multiple rush shipments of intercompany
product, elevated payroll costs due to additional labor
requirements and overtime as the Company tried to cut lead times,
and additional rents associated with higher levels of inventory
partially offset by increased sales of higher margin FR products
into the pipeline industry and increased sales into the Cleanroom
market.
●
UK’s gross
margin increased 3.3 percentage points as a result of price
increases implemented in the first quarter and slightly offset by a
sales shift into lower margin products.
●
Canada gross margin
decreased 0.4 percentage points due to product mix.
●
Mexico gross margin
1.1 percentage points due to product mix.
●
Latin America gross
margin increased 1.1 percentage points as Chile’s sales were
negatively impacted by competitive pricing pressures and Argentina
experienced an increase in sales of higher margin FR garments due
to the continuing development of Vaca Muerta.
●
Other foreign
country gross margins decreased 6.3 percentage points as Russia
sales saw a customer shift from higher margin chemical garments to
disposable garments
Operating
Expense. . Operating
expenses increased 9.4% from $27.7 million for the year ended
January 31, 2018 to $30.3 million for the year ended January 31,
2019. Operating expenses as a percentage of net sales was 30.6% for
the year ended January 31, 2019 up from 28.9 % for the year ended
January 31, 2018. The main factors for the increase in operating
expenses are a $0.7 million increase to professional fees and
litigation reserves due to an accrual associated with labor claims
in Brazil (Note 12), a $0.8 million increase in sales salaries as
the Company continues to grow its sales force, a $0.4 million
increase in advertising promotions, a $0.4 million increase to
freight mostly due to additional expenses around the ERP
implementation in the USA, a $0.3 million increase to equity
compensation due to the implementation of the 2017 executive long
term incentive plan, a $0.2 million increase to rent expense
primarily associated with the Vietnam facility, a $0.5 million
increase to computer and office expense as the Company invests in
infrastructure, a $0.2 reduction to bad debt as the allowance was
reduced, and various smaller reductions in multiple
areas.
Operating Profit.
Operating profit decreased to a profit of $3.6 million for the year
ended January 31, 2019 down from $8.5 million for the year ended
January 31, 2018, due to the impact of the decline in profit
detailed above. Operating margins were 3.6% for the year ended
January 31, 2019, compared to 8.8% for the year ended January 31,
2018.
Interest Expense.
Interest expenses decreased to $0.1 million for the year ended
January 31, 2019 from $0.2 million for the year ended January 31,
2018 as the Company reduced borrowings in the year due to a public
offering executed in the year ended January 31,
2018.
Income Tax Expense.
Income tax expense consists of federal, state and foreign income
taxes. Income tax expense was $2.0 million for the year ended
January 31, 2019 and included $0.6 million associated with the
GILTI component of the Tax Act of 2017, as compared to an income
tax expense of $7.9 million for the year ended January 31, 2018.
All international
subsidiaries are impacted GILTI calculation. See “Risk
Factors” for the explanation for this significant decrease
over the comparison period.
Net Income.
Net income increased to $1.5 million for the year ended January 31,
2019 from $0.4 million for the year ended January 31, 2018. The
results for the comparison year ended January 31, 2018 are
primarily due to the change in the US tax law, as explained in
“Risk Factors”.
Fourth
Quarter Results
Net
sales and net income (loss) were $25.0 million and $(1.9) million,
respectively, for Q4 FY19, as compared to $25.2 million and $(4.9)
million, respectively, for Q4 FY18.
Factors
affecting Q4 FY19 results of operations included:
●
Continued cost
increases in our Chinese manufacturing operations with labor source
availability a concern.
●
Higher levels of
operating expenses associated with the ERP implementation;
including freight expenses and labor expenses.
●
Stronger volume
internationally due to increased market share in China and the
Pacific Rim in the nuclear and utilities industries, increased
traction in the Mexico market, and economic factors resulting in
job gains in the Energy sector.
●
The Company wrote
off Assets Held for Sale associated with the former Brazilian
operations for $0.2 million.
●
The Company accrued
an additional $1.2 million for anticipated legal expenses and
litigation reserves associated with the former Brazilian
operations.
●
Higher warehousing
expenses associated with higher inventory levels.
Liquidity and Capital Resources
As of
January 31, 2019, we had cash and cash equivalents of approximately
$12.8 million and working capital of $65.1 million. Cash and cash
equivalents decreased $3.0 million and working capital decreased
$1.0 million from January 31, 2018 as the Company optimized capital
expenditures in the year for the ERP project, the set-up of
manufacturing facilities in Vietnam and India, the enhancement of
IT infrastructure, and planned equipment purchases in Mexico and
China. International cash management is affected by local
requirements and movements of cash across borders can be slowed
down significantly.
Of the
Company’s total cash and cash equivalents of $12.8 million as
of January 31, 2019, cash held in Latin America of $0.7 million,
cash held in Russia and Kazakstan of $0.4 million, cash held in the
UK of $0.1 million, cash held in India of $0.1 million and cash
held in Canada of $1.4 million would not be subject to additional
US tax due to the change in the US tax law as a result of the
December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the
“Tax Act”). In the event the Company repatriated cash
from China, of the $4.3 million balance at January 31, 2019 there
would be an additional 10% withholding tax incurred in that
country. The Company has strategically employed a dividend plan
subject to declaration and certain approvals in which its Canadian
subsidiary sends dividends to the US in the amount of 100% of the
previous year’s earnings, the UK subsidiary sends dividends
to the US in the amount of 50% of the previous year’s
earnings, and the Weifang China subsidiary sends dividends to the
US in declared amounts of the previous year’s earnings. No
dividends were proposed by management or declared by our Board of
Directors for our China subsidiary in FY19.
Net cash provided
by operating activities of $1.8 million for the year ended January
31, 2019 was primarily due to net income of $1.5 million, non-cash
expenses of $1.7 million for depreciation and amortization and
stock compensation, and an increase in accrued expenses and other
liabilities of $0.9 million, offset in part by a $2.5 million
increase to accounts receivable due to a higher concentration of
sales in the latter part of the fourth quarter. Net cash used in
investing activities of $3.1 million for the year ended January 31,
2019 reflects purchases in property and equipment of $3.1 million
as the Company optimized capital expenditures in the year for the
ERP project, the set-up of manufacturing facilities in Vietnam and
India, the enhancement of IT infrastructure, and equipment
purchases in Mexico and China. Net cash used in financing
activities was $1.6 million for the year ended January 31, 2019,
was primarily due to a $1.2 million increase in treasury stock as
the Company purchased 105,648 shares of Treasury Stock under the
previously approved stock repurchase program.
Net cash provided
by operating activities of $0.6 million for the year ended January
31, 2018 exceeded net income of $0.4 million and was primarily due
to a $6.0 million decrease to deferred income taxes as a result of
The Tax Act enactment in the US, an $0.8 million impairment charge
to assets held for sale for management’s change in the
estimate of the fair value, and an increase of $1.8 million to
accounts payables, offset by an increase in inventories of $7.1
million as the Company prepares for increases in sales volume, an
increase in accounts receivable of $3.1 million due to sales volume
and timing of collections. Net cash used in investing activities of
$0.9 million was a result of equipment purchases and our ongoing
ERP implementation. Net cash provided by financing activities of
$5.6 million was due primarily to the Company’s public
offering in the third quarter of this fiscal year in which
approximately $10.1 million was raised, which was offset by the net
repayment of borrowings under our revolving credit facility of
approximately $4.9 million.
We
currently have one senior credit facility: $20 million revolving
credit facility which commenced May 10, 2017, of which we had $0
million of borrowings outstanding as of January 31, 2019, expiring
on May 10, 2020, at a current per annum rate of 3.48%. Maximum
availability in excess of amount outstanding at January 31, 2019
was $20.0 million. Our current credit facility requires, and any
future credit facilities may also require, that we comply with
specified financial covenants relating to fixed charge coverage
ratio and limits on capital expenditures and investments in foreign
subsidiaries. Our ability to satisfy these financial covenants can
be affected by events beyond our control, and we cannot guarantee
that we will meet the requirements of these covenants. These
restrictive covenants could affect our financial and operational
flexibility or impede our ability to operate or expand our
business. Default under our credit facilities would allow the
lenders to declare all amounts outstanding to be immediately due
and payable. Our primary lender, SunTrust Bank, has a security
interest in substantially all of our US assets and pledges of 65%
of the equity of the Company’s foreign subsidiaries. If our
lender declares amounts outstanding under the credit facility to be
due, the lenders could proceed against our assets. Any event of
default, therefore, could have a material adverse effect on our
business. We believe that our current availability under our senior
credit facility, coupled with our anticipated operating cash and
cash management strategy, is sufficient to cover our liquidity
needs for the next 12 months.
Stock Repurchase Program. On July 19,
2016, the Company’s board of directors approved a stock
repurchase program under which the Company may repurchase up to
$2,500,000 of its outstanding common stock. The Company has
repurchased 105,648 shares of stock under this program as of the
date of this filing which amounted to, $1,161,736, inclusive of
commissions.
Capital Expenditures. Our capital
expenditures through Q4 FY19 of $3.1 million principally relate to
capital purchases in the year for the ERP project, the set-up of
manufacturing facilities in Vietnam and India, the enhancement of
IT infrastructure, and planned equipment purchases in Mexico and
China. We anticipate FY20 capital expenditures to be approximately
$2.0 million as we continue with the ERP project currently in
process and continue to expand our manufacturing capacity in our
Vietnam and India operations.
Recent Accounting Pronouncements
The
Company considers the applicability and impact of all accounting
standards updates (“ASUs”). Management periodically
reviews new accounting standards that are issued.
New Accounting Pronouncements Recently Adopted
In May
2017, the Financial Accounting Standards Board (“FASB”)
issued ASU 2017-09, “Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting.”
The amendment amends the scope of modification accounting for
share-based payment arrangements, provides guidance on the types of
changes to the terms or conditions of share-based payment awards to
which an entity would be required to apply modification accounting
under ASC 718. For all entities, the ASU is effective for annual
reporting periods, including interim periods within those annual
reporting periods, beginning after December 15, 2017. Early
adoption is permitted, including adoption in any interim period.
The Company will apply the amendments in this update prospectively
to an award modified on or after February 1, 2018 and does not
expect that application of this guidance will have a material
impact on its consolidated financial statements and related
disclosures.
The
Company adopted ASU 2014-09, Revenue from Contracts with Customers
(Topic 606) effective February 1, 2018 using the retrospective
transition method. This new accounting standard outlines a single
comprehensive model to use in accounting for revenue arising from
contracts with customers. This standard supersedes existing revenue
recognition requirements and eliminates most industry-specific
guidance from US GAAP. The core principle of the new accounting
standard is to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. In addition, the adoption of
this new accounting standard resulted in increased disclosure,
including qualitative and quantitative disclosures about the
nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. Additionally, the Company
elected to account for shipping and handling activities as a
fulfillment cost rather than a separate performance obligation.
Adoption of this standard did not result in significant changes to
the Company’s accounting policies, business processes,
systems or controls, or have a material impact on the
Company’s financial position, results of operations and cash
flows or related disclosures. As such, prior period financial
statements were not recast.
New Accounting Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842),
which supersedes the existing guidance for lease accounting, Leases
(Topic 840). ASU 2016-02 requires lessees to recognize leases on
their balance sheets, and leaves lessor accounting largely
unchanged. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2018 and interim periods within
those fiscal years. Early application is permitted for all
entities. ASU 2016-02 requires a modified retrospective approach
for all leases existing at, or entered into after, the date of
initial application, with an option to elect to use certain
transition relief. In July 2018, the FASB issued ASU No. 2018-10,
“Codification Improvements
to Topic 842, Leases.” The amendments in ASU 2018-10
clarify, correct or remove inconsistencies in the guidance provided
under ASU 2016-02 related to sixteen specific issues identified.
Also in July 2018, the FASB issued ASU No. 2018-11
“Leases (Topic 842):
Targeted Improvements” which now allows entities the
option of recognizing the cumulative effect of applying the new
standard as an adjustment to the opening balance of retained
earnings in the year of adoption while continuing to present all
prior periods under previous lease accounting guidance. The
effective date and transition requirements for these two ASUs are
the same as the effective date and transition requirements as ASU
2016-02. While the Company continues to assess all potential
impacts of the standard, the Company currently believes the most
significant impact relates to recording right-to-use assets
and related lease liabilities on the consolidated balance
sheets.
The
new standard is effective for us on February 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. We expect to adopt the new standard on February 1, 2019
and use the effective date as our date of initial application.
Consequently, financial information will not be updated and the
disclosures required under the new standard will not be provided
for dates and periods before February 1, 2019.
The new standard
provides a number of optional practical expedients in transition.
We expect to elect the "package of practical expedients", which
permits us not to reassess under the new standard our prior
conclusions about lease identification, lease classification and
initial direct costs as well as the practical expedient pertaining
to land easements. We do not expect to elect the use-of-hindsight
practical expedient. The new
standard also provides practical expedients for an entity's ongoing
accounting. We currently expect to elect the short-term lease
recognition exemption for all leases that qualify. This means, for
those leases that qualify, we will not recognize ROU assets or
lease liabilities, and this includes not recognizing ROU assets or
lease liabilities for existing short-term leases of those assets in
transition. We also currently expect to elect the practical
expedient to not separate lease and non-lease components for all of
our leases.
We
expect that this standard will have a material effect on our
consolidated balance sheets, however, we do not expect a material
effect on our consolidated statements of operation, comprehensive
income, stockholders’ equity and cash flows.
While
we continue to assess all of the effects of adoption, we currently
believe the most significant effects relate to (1) the recognition
of new ROU assets and lease liabilities on our balance sheet for
our warehouse, office, and equipment operating leases; and (2)
providing significant new disclosures about our leasing
activities.
On
adoption, we currently expect to recognize additional operating
liabilities which includes the present value of the total amount
disclosed in "Note 12—Commitments and Contingencies", which
constitute the remaining minimum rental payments under current
leasing standards for our existing operating leases, discounted by
our incremental borrowing rate for borrowings of a similar duration
on a fully secured basis, with corresponding ROU assets of
approximately the same amount.
In
February 2018, the FASB issued ASU 2018-02, Income Statement
– Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects From Accumulated Other
Comprehensive Income,” which allows institutions to elect to
reclassify the stranded tax effects from AOCI to retained earnings,
limited only to amounts in AOCI that are affected by the tax reform
law. For public entities, the amendments are effective for annual
reporting periods beginning after December 15, 2018, including
interim reporting periods within that reporting period. For all
other entities, the amendments in this Update are effective for
annual reporting periods beginning after December 15, 2019,
including interim reporting periods within that reporting period.
The Company does not expect that adoption of this guidance will
have a material impact on its consolidated financial statements and
related disclosures.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
A
smaller reporting company is not required to provide the
information required by this Item and therefore, no disclosure is
required under Item 7A for the Company.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Index to Consolidated Financial Statements
|
|
|
|
|
Page
No.
|
|
Reports of Independent
Registered Public Accounting Firm
|
34-35
|
|
Consolidated
Statements of Operations for the Years Ended January 31, 2019 and
2018
|
36
|
|
Consolidated
Statements of Comprehensive Income for the Years Ended January 31,
2019 and 2018
|
37
|
|
Consolidated
Balance Sheets as of January 31, 2019 and 2018
|
38
|
|
Consolidated
Statements of Stockholders' Equity for the Years Ended January 31,
2019 and 2018
|
39
|
|
Consolidated
Statements of Cash Flows for the Years Ended January 31, 2019 and
2018
|
40
|
|
Notes
to Consolidated Financial Statements
|
41-65
|
|
|
|
Report of Independent
Registered Public Accounting
Firm
To the Board of
Directors and Stockholders of
Lakeland Industries, Inc.
Opinion on the Financial Statements
We have audited the
accompanying consolidated balance sheets of Lakeland Industries,
Inc. and Subsidiaries (collectively, the “Company”) as
of January 31, 2019 and 2018, and the related consolidated
statements of operations, comprehensive income, stockholders’
equity, and cash flows for each of the years in the two-year period
ended January 31, 2019, and the related notes (collectively
referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of January 31,
2019 and 2018, and the results of its operations and its cash flows
for each of the years in the two-year period ended January 31,
2019, in conformity with accounting principles generally accepted
in the United States of America.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over
financial reporting as of January 31, 2019, based on criteria
established in Internal
Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated April 16, 2019,
expressed an adverse opinion.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Friedman LLP
We
have served as the Company's auditor since
2016.
New York, New York
April 16,
2019
Report of
Independent Registered Public Accounting
Firm
To the Board of Directors and Stockholders
of
Lakeland Industries,
Inc.
Adverse Opinion on Internal Control over Financial
Reporting
We have
audited Lakeland Industries Inc. and subsidiaries’ (the
“Company’s”) internal control over financial
reporting as of January 31, 2019, based on criteria established in
Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In
our opinion, because of the effect of the material weaknesses
described in the following paragraph on the achievement of the
objectives of the control criteria, the Company has not maintained
effective internal control over financial reporting as of January
31, 2019, based on criteria established in Internal Control—Integrated Framework
(2013) issued by COSO.
A
material weakness is a control deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the Company’s annual or interim financial statements will
not be prevented or detected on a timely basis. The following
material weaknesses have been identified and included in
management’s assessment:
(i)
the Company did not
design, implement and consistently operate effective process-level
and information
technology general control (“ITGC”) controls
over revenue recognition;
(ii)
the Company did not
design, implement and consistently operate effective process-level,
ITGC and system
development lifecycle controls over the product costing and valuation process to
ensure the appropriate valuation of inventory at year-end;
and
(iii)
the Company did not
design, implement and consistently operate effective entity-level
monitoring and ITGC controls, including management review controls,
over the foreign locations and consolidated entity.
These
material weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2019
consolidated financial statements, and this report does not affect
our report dated April 16, 2019, on those consolidated financial
statements.
We do
not express an opinion or any other form of assurance on
management’s statements referring to any corrective actions
taken by the Company after the date of management’s
assessment.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets and the
related consolidated statements of operations, comprehensive
income, stockholders’ equity, and cash flows of the Company,
and our report dated April 16, 2019, expressed an unqualified
opinion.
Basis for Opinion
The
Company’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying “Item 9A - Management’s
Report on Internal Control over Financial Reporting”. Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/
Friedman LLP
New York,
New York
April 16,
2019
Lakeland
Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years
Ended January 31, 2019 and 2018
($000’s)
except share information
|
|
|
|
|
Net
sales
|
$99,011
|
$95,987
|
|
Cost of goods
sold
|
65,105
|
59,784
|
|
Gross
profit
|
33,906
|
36,203
|
|
Operating
expenses
|
30,341
|
27,726
|
|
Operating
profit
|
3,565
|
8,477
|
|
Other income
net
|
41
|
29
|
|
Interest
expense
|
(125)
|
(163)
|
|
Income before
taxes
|
3,481
|
8,343
|
|
Income tax
expense
|
2,022
|
7,903
|
|
Net
income
|
$1,459
|
$440
|
|
Net income per
common share:
|
|
|
|
Basic
|
$0.18
|
$0.06
|
|
Diluted
|
$0.18
|
$0.06
|
|
Weighted average
common shares outstanding:
|
|
|
|
Basic
|
8,111,458
|
7,638,264
|
|
Diluted
|
8,170,401
|
7,691,553
|
The accompanying notes are an integral part of these consolidated
financial statements.
Lakeland
Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended January 31,
2019 and 2018
($000)’s
|
|
|
|
|
Net
income
|
$1,459
|
$440
|
|
Other comprehensive
income (loss):
|
|
|
|
Cash flow
hedges
|
-----
|
(26)
|
|
Foreign currency
translation adjustments
|
(601)
|
757
|
|
Other comprehensive
income (loss)
|
(601)
|
731
|
|
Comprehensive
income
|
$858
|
$1,171
|
The accompanying notes are an integral part of these consolidated
financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 2019 and 2018
($000’s)
except share information
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
Cash and cash
equivalents
|
$12,831
|
$15,788
|
|
Accounts
receivable, net of allowance for doubtful accounts of $434 and $480
at January 31, 2019 and 2018, respectively
|
16,477
|
14,119
|
|
Inventories
|
42,365
|
42,919
|
|
Prepaid VAT and
other taxes
|
1,478
|
2,119
|
|
Other current
assets
|
2,319
|
1,555
|
|
Total current
assets
|
75,470
|
76,500
|
|
Property and
equipment, net
|
10,781
|
8,789
|
|
Assets held for
sale
|
-----
|
150
|
|
Deferred tax
assets
|
7,267
|
7,557
|
|
Prepaid VAT and
other taxes
|
176
|
310
|
|
Other
assets
|
158
|
354
|
|
Goodwill
|
871
|
871
|
|
|
$94,723
|
$94,531
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$6,214
|
$6,855
|
|
Accrued
compensation and benefits
|
1,137
|
1,771
|
|
Other accrued
expenses
|
2,825
|
1,384
|
|
Current maturity of
long-term debt
|
158
|
158
|
|
Short-term
borrowings
|
-----
|
211
|
|
Total current
liabilities
|
10,334
|
10,379
|
|
Long-term portion
of debt
|
1,161
|
1,312
|
|
Total
liabilities
|
11,495
|
11,691
|
|
Commitments and
contingencies
|
|
|
|
Stockholders’
equity
|
|
|
|
Preferred stock,
$0.01 par; authorized 1,500,000 shares (none issued)
|
-----
|
-----
|
|
Common stock, $0.01
par; authorized 10,000,000 shares,
Issued 8,475,929
and 8,472,640; outstanding 8,013,840 and 8,116,199 at January 31,
2019 and 2018, respectively
|
85
|
85
|
|
Treasury stock, at
cost;462,089 and 356,441 shares at January 31, 2019 and 2018,
respectively
|
(4,517)
|
(3,352)
|
|
Additional paid-in
capital
|
75,612
|
74,917
|
|
Retained
earnings
|
14,300
|
12,841
|
|
Accumulated other
comprehensive loss
|
(2,252)
|
(1,651)
|
|
Total stockholders'
equity
|
83,228
|
82,840
|
Total liabilities
and stockholders' equity
|
$94,723
|
$94,531
|
The accompanying notes are an integral part of these consolidated
financial statements
Lakeland Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended January 31, 2019 and 2018
|
|
Common Stock
|
Treasurey Stock
|
Additional Paid-in
|
Retained
|
Accumulated Other
Comprehensice
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31,
2017
|
7,620,215
|
$76
|
(356,441)
|
$(3,352)
|
$64,764
|
$12,401
|
$(2,382)
|
$71,507
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
-----
|
-----
|
-----
|
-----
|
-----
|
440
|
-----
|
440
|
|
Other comprehensive
income
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
731
|
731
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
Restricted stock
issued
|
43,675
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
|
Restricted Stock
Plan
|
-----
|
-----
|
-----
|
-----
|
424
|
-----
|
-----
|
424
|
|
Return of shares in lieu of payroll
tax withholding
|
-----
|
-----
|
-----
|
-----
|
(376)
|
-----
|
-----
|
(376)
|
|
Sale of common shares in a public
offering, net of issuance costs of approximately $1.0
million
|
808,750
|
9
|
-----
|
-----
|
10,105
|
-----
|
-----
|
10,114
|
|
Balance, January 31,
2018
|
8,472,640
|
$85
|
(356,441)
|
$(3,352)
|
$74,917
|
$12,841
|
$(1,651)
|
$82,840
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
-----
|
-----
|
-----
|
-----
|
-----
|
1,459
|
-----
|
1,459
|
|
Other comprehensive
loss
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
(601)
|
(601)
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
Restricted stock
issued
|
3,289
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
|
Restricted Stock
Plan
|
-----
|
-----
|
-----
|
-----
|
721
|
-----
|
-----
|
721
|
|
Return of shares in lieu of payroll
tax withholding
|
-----
|
-----
|
-----
|
-----
|
(26)
|
-----
|
-----
|
(26)
|
|
Treasuary stock purchased, inclusive
of commissions
|
-----
|
-----
|
(105,648)
|
(1,165)
|
-----
|
-----
|
-----
|
(1,165)
|
|
Balance, January 31,
2019
|
8,475,929
|
$85
|
(462,089)
|
$(4,517)
|
$75,612
|
$14,300
|
$(2,252)
|
$83,228
|
The accompanying notes are an integral part of these consolidated
financial statements.
Lakeland Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended January 31, 2019 and 2018
($000’s)
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
income
|
$1,459
|
$440
|
|
Adjustments to
reconcile net income to net cash provided by operating
activities
|
|
|
|
Provision for
(recovery of) doubtful accounts
|
(45)
|
63
|
|
Deferred income
taxes
|
290
|
5,957
|
|
Depreciation and
amortization
|
965
|
775
|
|
Stock based and
restricted stock compensation
|
744
|
424
|
|
Loss on disposal of
property and equipment
|
18
|
3
|
|
Impairment
write-down on assets held for sale
|
150
|
751
|
|
(Increase) decrease
in operating assets:
|
|
|
|
Accounts
receivable
|
(2,549)
|
(3,068)
|
|
Inventories
|
152
|
(6,992)
|
|
Prepaid VAT and
other taxes
|
641
|
(759)
|
|
Other current
assets
|
(560)
|
550
|
|
Increase (decrease)
in operating liabilities:
|
|
|
|
Accounts
payable
|
(372)
|
1,753
|
|
Accrued expenses
and other liabilities
|
892
|
860
|
|
Net cash used by
the sale of Brazil
|
-----
|
(109)
|
|
Net cash provided
by operating activities
|
1,785
|
648
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases
of property and equipment
|
(3,103)
|
(905)
|
|
Net cash used in
investing activities
|
(3,103)
|
(905)
|
|
Cash flows from
financing activities:
|
|
|
|
Net borrowings
(repayments) under revolving credit facility
|
-----
|
(4,865)
|
|
Loan repayments,
short-term
|
(206)
|
(147)
|
|
Loan
borrowings, short-term
|
175
|
101
|
|
Loan repayments,
long-term
|
(151)
|
(854)
|
|
Loan borrowings,
long-term
|
-----
|
1,575
|
|
UK borrowings
(repayments) under line of credit facility and invoice financing
facilities, net
|
(178)
|
31
|
|
Purchase of
Treasury Stock under stock repurchase program
|
(1,165)
|
-----
|
|
Shares returned to
pay employee taxes under restricted stock program
|
(26)
|
(376)
|
|
Proceeds
from public offering, net of issuance costs of approximately $1.0
million
|
-----
|
10,114
|
|
Net
cash (used in) provided by financing activities:
|
(1,551)
|
5,579
|
Effect of exchange
rate changes on cash and cash equivalents
|
(88)
|
101
|
|
Net increase in
cash and cash equivalents
|
(2,957)
|
5,423
|
|
Cash and cash
equivalents at beginning of year
|
15,788
|
10,365
|
Cash and cash
equivalents at end of year
|
$12,831
|
$15,788
|
|
|
$125
|
$163
|
|
Cash paid for
taxes
|
$1,667
|
$1,260
|
The accompanying notes are an integral part of these consolidated
financial statements.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business
Lakeland
Industries, Inc. and Subsidiaries (“Lakeland,” the
“Company,” “we,” “our” or
“us”), a Delaware corporation organized in April
1986,manufacture and sell a comprehensive line of industrial
protective clothing and accessories for the industrial and public
protective clothing market. Our products are sold globally by our
in-house sales teams, our customer service group, and authorized
independent sales representatives to a network of over 1,600
global safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil,
chemical/petrochemical, automobile, steel, glass, construction,
smelting, cleanroom, janitorial, pharmaceutical, and high
technology electronics manufacturers, as well as scientific,
medical laboratories and the utilities industry. In addition, we
supply federal, state and local governmental agencies and
departments, such as fire and law enforcement, airport crash rescue
units, the Department of Defense, the Department of Homeland
Security and the Centers for Disease Control. Internationally, we
sell to a mixture of end users directly, and to industrial
distributors depending on the particular country and market. Sales
are made to more than 50 countries, the majority of which were into
China, the European Economic Community (“EEC”), Canada,
Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador,
India and Southeast Asia. For purposes of this Form 10-K, FY refers
to a fiscal year ended January 31; for example, FY19 refers to the
fiscal year ended January 31, 2019
Basis
of Presentation
The
Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States of
America (“US GAAP”). The following is a description of
the Company’s significant accounting policies.
Summary of Significant Accounting Policies
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been
eliminated.
Use of Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with
US GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the balance
sheet date, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. It is reasonably possible that events could occur during
the upcoming year that could change such estimates.
Cash and Cash Equivalents
The
Company considers highly liquid temporary cash investments with
original maturities of three months or less to be cash equivalents.
Cash equivalents consist of money market funds.
Accounts Receivable,
Net. Trade accounts receivable are stated at the amount
the Company expects to collect. The Company maintains allowances
for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Company
recognizes losses when information available indicates that it is
probable that a receivable has been impaired based on criteria
noted above at the date of the consolidated financial statements,
and the amount of the loss can be reasonably estimated. Management
considers the following factors when determining the collectability
of specific customer accounts: Customer creditworthiness, past
transaction history with the customers, current economic industry
trends and changes in customer payment terms. Past due balances
over 90 days and other less creditworthy accounts are reviewed
individually for collectability. If the financial condition of the
Company’s customers were to deteriorate, adversely affecting
their ability to make payments, additional allowances would be
required. Based on management’s assessment, the Company
provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that
remain outstanding after the Company has used reasonable collection
efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories
include freight-in, materials, labor and overhead costs and are
stated at the lower of cost (on a first-in, first-out basis) or net
realized value.
Property and Equipment
Property and
equipment is stated at cost. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives
on a straight-line basis. Leasehold improvements and leasehold
costs are amortized over the term of the lease or service lives of
the improvements, whichever is shorter. The costs of additions and
improvements which substantially extend the useful life of a
particular asset are capitalized. Repair and maintenance costs are
charged to expense. When assets are sold or otherwise disposed of,
the cost and related accumulated depreciation or amortization are
removed from the account, and the gain or loss on disposition is
reflected in operating income.
Assets
held for sale are measured at the lower of carrying value or fair
value less cost to sell. Gains or losses are recognized for any
subsequent changes to fair value less cost to sell. However, gains
are limited to cumulative losses previously recognized. Assets
classified as held for sale are not depreciated.
The Company
capitalizes eligible costs to acquire or develop internal-use
software that are incurred subsequent to the preliminary project
stage. Capitalized costs related to internal-use software are
amortized using the straight-line method over the estimated useful
life of the assets, which is generally three
years.
Goodwill
Goodwill represents
the future economic benefits arising from other assets acquired in
a business combination that are not individually identified and
separately recognized. Goodwill is evaluated for impairment at
least annually; however, this evaluation may be performed more
frequently when events or changes in circumstances indicate the
carrying amount may not be recoverable. Factors that the Company
considers important that could identify a potential impairment
include: significant changes in the overall business strategy and
significant negative industry or economic trends. Management
assesses whether it is more likely than not that goodwill is
impaired and, if necessary, compares the fair value of the
reporting unit to the carrying value. Fair value is generally
determined by management either based on estimating future
discounted cash flows for the reporting unit or by estimating a
sales price for the reporting unit based on multiple of earnings.
These estimates require the Company's management to make
projections that can differ from actual results.
Impairment of Long-Lived Assets
The
Company evaluates the carrying value of long-lived assets to be
held and used when events or changes in circumstances indicate the
carrying value may not be recoverable. The Company measures any
potential impairment on a projected undiscounted cash flow method.
Estimating future cash flows requires the Company’s
management to make projections that can differ materially from
actual results. The carrying value of a long-lived asset is
considered impaired when the total projected undiscounted cash
flows from the asset is less than its carrying value. In that
event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the long-lived asset. As
of January 31, 2019, a non-cash impairment charge was recorded to
reflect the change in the carrying value from $0.2 million to $0.0
million as the Company believes there is no recoverable value of
the asset held for sale previously on the Company’s
consolidated balance sheet.
Revenue Recognition
Substantially all
the Company’s revenue is derived from product sales, which
consist of sales of the Company’s personal protective wear
products to distributors. The Company considers purchase orders to
be a contract with a customer. Contracts with customers are
considered to be short-term when the time between order
confirmation and satisfaction of the performance obligations is
equal to or less than one year, and virtually all of the
Company’s contracts are short-term. The Company recognizes
revenue for the transfer of promised goods to customers in an
amount that reflects the consideration to which the Company expects
to be entitled in exchange for those goods. The Company typically
satisfies its performance obligations in contracts with customers
upon shipment of the goods. Generally, payment is due from
customers within 30 to 90 days of the invoice date, and the
contracts do not have significant financing components. The Company
elected to account for shipping and handling activities as a
fulfillment cost rather than a separate performance obligation.
Shipping and handling costs associated with outbound freight are
included in operating expenses, and for the years ended in FY19 and
FY18 aggregated approximately $2.7 million and $2.2 million,
respectively.Taxes collected from customers relating to product
sales and remitted to governmental authorities are excluded from
revenue.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
transaction price includes estimates of variable consideration,
related to rebates, allowances, and discounts that are reductions
in revenue. All estimates are based on the Company's historical
experience, anticipated performance, and the Company's best
judgment at the time the estimate is made. Estimates for variable
consideration are reassessed each reporting period and are included
in the transaction price to the extent it is probable that a
significant reversal of cumulative revenue recognized will not
occur upon resolution of uncertainty associated with the variable
consideration. All the Company’s contracts have a single
performance obligation satisfied at a point in time and the
transaction price is stated in the contract, usually as quantity
times price per unit.
The
Company has seven revenue generating reportable geographic segments
under ASC Topic 280 “Segment Reporting” and derives its
sales primarily from its limited use/disposable protective clothing
and secondarily from its sales of reflective clothing, high-end
chemical protective suits, firefighting and heat protective
apparel, reusable woven garments and gloves and arm guards. The
Company believes disaggregation of revenue by geographic region
best depicts the nature, amount, timing, and uncertainty of its
revenue and cash flows (see table below). Net sales by geographic
region and by product line are included below:
|
|
Years
Ended
January 31,
(in
millions of dollars)
|
|
|
|
|
|
External
Sales by region:
|
|
|
|
USA
|
$49.88
|
$50.45
|
|
Other
foreign
|
3.02
|
2.40
|
|
Europe
(UK)
|
9.42
|
9.07
|
|
Mexico
|
3.51
|
2.48
|
|
Asia
|
18.00
|
17.12
|
|
Canada
|
8.56
|
8.26
|
|
Latin
America
|
6.62
|
6.21
|
|
Consolidated
external sales
|
$99.01
|
$95.99
|
|
|
Years
Ended
January 31,
(in
millions of dollars)
|
|
|
|
|
|
External
Sales by product lines:
|
|
|
|
Disposables
|
$53.18
|
$51.56
|
|
Chemical
|
18.03
|
17.47
|
|
Fire
|
5.98
|
5.80
|
|
Gloves
|
3.22
|
3.12
|
|
Hi-Vis
|
6.99
|
11.26
|
|
Wovens
|
11.61
|
6.78
|
|
Consolidated
external sales
|
$99.01
|
$95.99
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Costs
Advertising costs
are expensed as incurred and included in operating expenses on the
consolidated statement of operations. Advertising and co-op costs
amounted to $802,000 and $443,000 in FY19 and FY18, respectively,
net of a co-op advertising allowance received from a
supplier.
Stock-Based Compensation
The
Company records the cost of stock-based compensation plans based on
the fair value of the award on the grant date. For awards that
contain a vesting provision, the cost is recognized over the
requisite service period (generally the vesting period of the
equity award) which approximates the performance period. For awards
based on services already rendered, the cost is recognized
immediately.
Research and Development Costs
Research and
development costs include labor, equipment and materials costs and
are expensed as incurred and included in operating expenses.
Research and development expenses aggregated were approximately
$182,000 and $280,000 in FY19 and FY18, respectively.
Income Taxes
The
Company is required to estimate its income taxes in each of the
jurisdictions in which it operates as part of preparing the
consolidated financial statements. This involves estimating the
actual current tax in addition to assessing temporary differences
resulting from differing treatments for tax and financial
accounting purposes. These differences, together with net operating
loss carryforwards and tax credits, are recorded as deferred tax
assets or liabilities on the Company’s consolidated balance
sheet. A judgment must then be made of the likelihood that any
deferred tax assets will be recovered from future taxable income. A
valuation allowance may be required to reduce deferred tax assets
to the amount that is more likely than not to be realized. In the
event the Company determines that it may not be able to realize all
or part of its deferred tax asset in the future, or that new
estimates indicate that a previously recorded valuation allowance
is no longer required, an adjustment to the deferred tax asset is
charged or credited to income in the period of such
determination.
The
Company recognizes tax positions that meet a “more likely
than not” minimum recognition threshold. If necessary, the
Company recognizes interest and penalties associated with tax
matters as part of the income tax provision and would include
accrued interest and penalties with the related tax liability in
the consolidated balance sheets.
Foreign Operations and Foreign Currency Translation
The Company maintains manufacturing operations in
Mexico, India, Argentina, Vietnam and the People’s Republic
of China and can access independent contractors in China, Vietnam,
Argentina and Mexico. It also maintains sales and distribution
entities located in India, Canada, the U.K., Chile, China,
Argentina, Russia, Kazakhstan, Uruguay and Mexico. The Company is
vulnerable to currency risks in these countries. The
functional currency for the United Kingdom subsidiary is the Euro;
the trading company in China, the RMB; the Canadian Real Estate
subsidiary, the Canadian dollar; the Russian operation, the Russian
Ruble, and the Kazakhstan operation the Kazakhstan Tenge. All other
operations have the US dollar as its functional
currency.
Pursuant to US GAAP, assets and liabilities of the
Company’s foreign operations with functional currencies,
other than the US dollar, are translated at the exchange rate in
effect at the balance sheet date, while revenues and expenses are
translated at average rates prevailing during the periods.
Translation adjustments are reported in accumulated other
comprehensive loss, a separate component of stockholders’
equity. Cash flows are also translated at average translation rates
for the periods, therefore, amounts reported on the consolidated
statement of cash flows will not necessarily agree with changes in
the corresponding balances on the consolidated balance sheet.
Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations
as incurred. Foreign currency transaction (loss) gain
included in net income for the years ended January 31, 2019 and
2018, were approximately $(0.5) million and $1.1 million,
respectively.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
US GAAP
defines fair value, provides guidance for measuring fair value and
requires certain disclosures utilizing a fair value hierarchy which
is categorized into three levels based on the inputs to the
valuation techniques used to measure fair value.
The
following is a brief description of those three
levels:
Level
1: Observable inputs such as quoted prices
(unadjusted) in active markets for identical assets or
liabilities.
Level
2: Inputs other than quoted prices that are
observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not
active.
Level
3: Unobservable inputs that reflect
management’s own assumptions.
Foreign
currency forward and hedge contracts are recorded in the
consolidated balance sheets at their fair value as of the balance
sheet dates based on current market rates as further discussed in
Note 11.
The
financial instruments of the Company classified as current assets
or liabilities, including cash and cash equivalents, accounts
receivable, short-term borrowings, borrowings under revolving
credit facility, accounts payable and accrued expenses, are
recorded at carrying value, which approximates fair value based on
the short-term nature of these instruments.
The
Company believes that the fair values of its long-term debt
approximates its carrying value based on the effective interest
rate compared to the current market rate available to the
Company.
Earnings Per Share
Basic
earnings per share are based on the weighted average number of
common shares outstanding without consideration of common stock
equivalents. Diluted earnings per share are based on the weighted
average number of common shares and common stock equivalents. The
diluted earnings per share calculation takes into account unvested
restricted shares and the shares that may be issued upon exercise
of stock options, reduced by shares that may be repurchased with
the funds received from the exercise, based on the average price
during the fiscal year.
Reclassifications
Certain
reclassifications have been made to the prior year’s
consolidated financial statements accounts payable and other
accrued expenses balances to conform to the current year
presentation. These reclassifications have no effect on the
accompanying consolidated financial statements.
Recent Accounting Pronouncements
The
Company considers the applicability and impact of all accounting
standards updates (“ASUs”). Management periodically
reviews new accounting standards that are issued.
New
Accounting Pronouncements Recently Adopted
In May
2017, the Financial Accounting Standards Board (“FASB”)
issued ASU 2017-09, “Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting.”
The amendment amends the scope of modification accounting for
share-based payment arrangements, provides guidance on the types of
changes to the terms or conditions of share-based payment awards to
which an entity would be required to apply modification accounting
under ASC 718. For all entities, the ASU is effective for annual
reporting periods, including interim periods within those annual
reporting periods, beginning after December 15, 2017. Early
adoption is permitted, including adoption in any interim period.
The Company will apply the amendments in this update prospectively
to an award modified on or after February 1, 2018 and does not
expect that application of this guidance will have a material
impact on its consolidated financial statements and related
disclosures.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company adopted ASU 2014-09, Revenue from Contracts with Customers
(Topic 606) effective February 1, 2018 using the retrospective
transition method. This new accounting standard outlines a single
comprehensive model to use in accounting for revenue arising from
contracts with customers. This standard supersedes existing revenue
recognition requirements and eliminates most industry-specific
guidance from US GAAP. The core principle of the new accounting
standard is to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. In addition, the adoption of
this new accounting standard resulted in increased disclosure,
including qualitative and quantitative disclosures about the
nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. Additionally, the Company
elected to account for shipping and handling activities as a
fulfillment cost rather than a separate performance obligation.
Adoption of this standard did not result in significant changes to
the Company’s accounting policies, business processes,
systems or controls, or have a material impact on the
Company’s financial position, results of operations and cash
flows or related disclosures. As such, prior period financial
statements were not recast.
New Accounting Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842),
which supersedes the existing guidance for lease accounting, Leases
(Topic 840). ASU 2016-02 requires lessees to recognize leases on
their balance sheets, and leaves lessor accounting largely
unchanged. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2018 and interim periods within
those fiscal years. Early application is permitted for all
entities. ASU 2016-02 requires a modified retrospective approach
for all leases existing at, or entered into after, the date of
initial application, with an option to elect to use certain
transition relief. In July 2018, the FASB issued ASU No. 2018-10,
“Codification Improvements to Topic 842, Leases.” The
amendments in ASU 2018-10 clarify, correct or remove
inconsistencies in the guidance provided under ASU 2016-02 related
to sixteen specific issues identified. Also in July 2018, the FASB
issued ASU No. 2018-11 “Leases (Topic 842): Targeted
Improvements” which now allows entities the option of
recognizing the cumulative effect of applying the new standard as
an adjustment to the opening balance of retained earnings in the
year of adoption while continuing to present all prior periods
under previous lease accounting guidance. The effective date and
transition requirements for these two ASUs are the same as the
effective date and transition requirements as ASU 2016-02. While
the Company continues to assess all potential impacts of the
standard, the Company currently believes the most significant
impact relates to recording right-to-use assets and related
lease liabilities on the consolidated balance sheets.
The
new standard is effective for us on February 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. We expect to adopt the new standard on February 1, 2019
and use the effective date as our date of initial application.
Consequently, financial information will not be updated and the
disclosures required under the new standard will not be provided
for dates and periods before February 1, 2019.
The new
standard provides a number of optional practical expedients in
transition. We expect to elect the "package of practical
expedients", which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease
classification and initial direct costs as well as the practical
expedient pertaining to land easements. We do not expect to elect
the use-of-hindsight practical expedient. The new standard also
provides practical expedients for an entity's ongoing accounting.
We currently expect to elect the short-term lease recognition
exemption for all leases that qualify. This means, for those leases
that qualify, we will not recognize ROU assets or lease
liabilities, and this includes not recognizing ROU assets or lease
liabilities for existing short-term leases of those assets in
transition. We also currently expect to elect the practical
expedient to not separate lease and non-lease components for all of
our leases.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We
expect that this standard will have a material effect on our
consolidated balance sheets, however, we do not expect a material
effect on our consolidated statements of operation, comprehensive
income, stockholders’ equity and cash flows.
While
we continue to assess all of the effects of adoption, we currently
believe the most significant effects relate to (1) the recognition
of new ROU assets and lease liabilities on our balance sheet for
our warehouse, office, and equipment operating leases; and (2)
providing significant new disclosures about our leasing
activities.
On
adoption, we currently expect to recognize additional operating
liabilities which includes the present value of the total amount
disclosed in "Note 12—Commitments and Contingencies", which
constitute the remaining minimum rental payments under current
leasing standards for our existing operating leases, discounted by
our incremental borrowing rate for borrowings of a similar duration
on a fully secured basis, with corresponding ROU assets of
approximately the same amount.
In
February 2018, the FASB issued ASU 2018-02, Income Statement
– Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects From Accumulated Other
Comprehensive Income,” which allows institutions to elect to
reclassify the stranded tax effects from AOCI to retained earnings,
limited only to amounts in AOCI that are affected by the tax reform
law. For public entities, the amendments are effective for annual
reporting periods beginning after December 15, 2018, including
interim reporting periods within that reporting period. For all
other entities, the amendments in this Update are effective for
annual reporting periods beginning after December 15, 2019,
including interim reporting periods within that reporting period.
The Company does not expect that adoption of this guidance will
have a material impact on its consolidated financial statements and
related disclosures.
2.
INVENTORIES
Inventories consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$14,986
|
$14,767
|
|
Work-in-process
|
987
|
2,357
|
|
Finished
goods
|
26,392
|
25,795
|
|
|
$42,365
|
$42,919
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT, NET
Property and
equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
(000’s)
|
(000’s)
|
|
Machinery and
equipment
|
3-10
|
$5,070
|
$3,932
|
|
Furniture and
fixtures
|
3-10
|
316
|
328
|
|
Leasehold
improvements
|
|
1,496
|
1,217
|
|
Computer
equipment
|
3
|
2,669
|
2,184
|
|
Software
costs
|
3
|
1,187
|
-----
|
|
Land and building
(China)
|
20-30
|
1,764
|
1,764
|
|
Land and building
(Canada)
|
30
|
1,856
|
1,982
|
|
Land and buildings
(USA)
|
30
|
3,487
|
3,460
|
|
Land and buildings
(Mexico)
|
30
|
2,070
|
2,070
|
|
|
|
19,915
|
16,937
|
|
Less accumulated
depreciation and amortization
|
|
(9,134)
|
(8,907)
|
|
Assets held for
sale
|
|
-----
|
150
|
|
Construction-in-progress
|
|
-----
|
759
|
|
|
|
$10,781
|
$8,939
|
Depreciation and
amortization expense for FY19 and FY18 amounted to $965,451 and
$774,742, respectively.
During
FY19, conditions in Brazil, including the economy caused management
to believe that the Company’s assets held for sale in that
country should be analyzed for impairment. The analysis resulted in
an impairment write-down of $0.2 million for assets that have been
identified as held-for-sale by the Company. The write-down is
included in operating expenses in the Company’s FY19
consolidated statement of operations. The estimated fair value less
costs to sell of the assets written down in FY19, consisting
primarily of buildings and land, was approximately $0.0
million. Of the original approximately $1.1 million, the estimated
fair value less costs to sell of the assets held for sale at
January 31, 2019 is $0.0 million.
4. GOODWILL
On
August 1, 2005, the Company purchased Mifflin Valley, Inc., a
Pennsylvania manufacturer, the operations of which now comprise the
Company’s Reflective division. This acquisition resulted in
the recording of $0.9 million in goodwill in FY06. The Company
believes that there was no impairment of goodwill for the years
ended January 31, 2019 and 2018. This goodwill is included in the
US segment for reporting purposes.
5.
LONG-TERM DEBT
Revolving Credit Facility
On June
28, 2013, as amended on March 31, 2015 and June 3, 2015, Lakeland
Industries, Inc. and its wholly owned Canadian subsidiary, Lakeland
Protective Wear Inc. (collectively the “Borrowers”),
entered into a Loan and Security Agreement (the “AloStar Loan
Agreement”) with AloStar Business Credit, a division of
AloStar Bank of Commerce (“AloStar”). The AloStar Loan
Agreement provided the Borrowers with a $15 million revolving line
of credit (the “AloStar Credit Facility”), at a
variable interest rate based on LIBOR, with a first priority lien
on substantially all of the United States and Canada assets of the
Company, except for its Mexican plant and the Canadian
warehouse. After these amendments the maturity date of the
AloStar Credit Facility was extended to June 28, 2017 and the
minimum interest rate floor became 4.25% per annum. On May 10,
2017, the AloStar Loan Agreement was terminated, and the existing
balance due was repaid with the proceeds from a new loan agreement
with SunTrust Bank.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May
10, 2017, the Company entered into a Loan Agreement (the
“Loan Agreement”) with SunTrust Bank
(“Lender”). The Loan Agreement provides the Company
with a secured (i) $20.0 million revolving credit facility, which
includes a $5.0 million letter of credit sub-facility, and (ii)
$1,575,000 term loan with Lender. The Company may request from time
to time an increase in the revolving credit loan commitment of up
to $10.0 million (for a total commitment of up to $30.0 million).
Borrowing pursuant to the revolving credit facility is subject to a
borrowing base amount calculated as (a) 85% of eligible accounts
receivable, as defined, plus (b) an inventory formula amount, as
defined, minus (c) an amount equal to the greater of (i) $1,500,000
or (ii) 7.5% of the then current revolver commitment amount, minus
(d) certain reserves as determined by the Loan Agreement. The
credit facility matures on May 10, 2020 (subject to earlier
termination upon the occurrence of certain events of default as set
forth in the Loan Agreement). At the closing, the Company’s
existing financing facility with AloStar was fully repaid and
terminated using proceeds of the revolver in the amount of
approximately $3.0 million.
Borrowings under
the term loan and the revolving credit facility bear interest at an
interest rate determined by reference whether the loan is a base
rate loan or Eurodollar loan, with the rate election made by the
Company at the time of the borrowing or at any time the Company
elects pursuant to the terms of the Loan Agreement. The term loan
is payable in equal monthly principal installments of $13,125 each,
beginning on June 1, 2017, and on the first day of each succeeding
month, with a final payment of the remaining principal and interest
on May 10, 2020 (subject to earlier termination as provided in the
Loan Agreement). For that portion of the term loan that consists of
Eurodollar loans, the term loan shall bear interest at the LIBOR
Market Index Rate (“LIBOR”) plus 2.0% per annum, and
for that portion of the term loan that consists of base rate loans,
the term loan shall bear interest at the base rate then in effect
plus 1.0% per annum. All principal and unpaid accrued interest
under the revolving credit facility shall be due and payable on the
maturity date of the revolver. For that portion of the revolver
loan that consists of Eurodollar loans, the revolver shall bear
interest at LIBOR plus a margin rate of 1.75% per annum for the
first six months and thereafter between 1.5% and 2.0%, depending on
the Company’s “availability calculation” (as
defined in the Loan Agreement) and, for that portion of the
revolver that consists of base rate loans, the revolver shall bear
interest at the base rate then in effect plus a margin rate of
0.75% per annum for the first six months and thereafter between
0.50% and 1.0%, depending on the availability calculation. As of
the closing, the Company elected all borrowings under the Loan
Agreement to accrue interest at LIBOR which, as of that date, was
0.99500%. As such, the initial rate of interest for the revolver is
2.745% per annum and the initial rate of interest for the term loan
is 2.995% per annum. The Loan Agreement provides for payment of an
unused line fee of between 0.25% and 0.50%, depending on the amount
by which the revolving credit loan commitment exceeds the amount of
the revolving credit loans outstanding (including letters of
credit), which shall be payable monthly in arrears on the average
daily unused portion of the revolver. There was a $0 balance on the
revolver at January 31, 2019 and 2018.
The
Company agreed to maintain a minimum “fixed charge coverage
ratio” (as defined in the Loan Agreement) as of the end of
each fiscal quarter, commencing with the fiscal quarter ended July
31, 2017, of not less than 1.10 to 1.00 during the applicable
fiscal quarter, and agreed to certain negative covenants that are
customary for credit arrangements of this type, including
restrictions on the Company’s ability to enter into mergers,
acquisitions or other business combination transactions, conduct
its business, grant liens, make certain investments, incur
additional indebtedness, and make stock repurchases.
In
connection with the Loan Agreement, the Company entered into a
security agreement, dated May 10, 2017, with Lender pursuant to
which the Company granted to Lender a first priority perfected
security interest in substantially all real and personal property
of the Company.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Borrowings
in UK
On
December 31, 2014, the Company and Lakeland Industries Europe, Ltd,
(“Lakeland UK”), a wholly owned subsidiary of the
Company, amended the terms of its existing line of credit facility
with HSBC Bank to provide for (i) a one-year extension of the
maturity date of the existing financing facility to December 19,
2016, (ii) an increase in the facility limit from £1,250,000
(approximately USD $1.9 million, based on exchange rates at time of
closing) to £1,500,000 (approximately USD $2.3 million, based
on exchange rates at time of closing), and (iii) a decrease in the
annual interest rate margin from 3.46% to 3.0%. In addition,
pursuant to a letter agreement dated December 5, 2014, the Company
agreed that £400,000 (approximately USD $0.6 million, based on
exchange rates at time of closing) of the note payable by the UK
subsidiary to the Company shall be subordinated in priority of
payment to the subsidiary’s obligations to HSBC under the
financing facility. On December 31, 2016, Lakeland UK entered into
an extension of the maturity date of its existing facility with
HSBC Invoice Finance (UK) Ltd. to December 19, 2017. Other than the
extension of the maturity date and a small reduction of the service
charge from 0.9% to 0.85%, all other terms of the facility remained
the same. On September 4, 2017 the facility was amended to include
Algeria as an approved country. On December 4, 2017 the facility
was extended to March 31, 2018 for the next review period and, as
of March 9, 2019 the facility was extended to mature on March 31,
2020 with no additional changes to the terms. The balance under
this loan outstanding at Janaury 31, 2019 and January 31, 2018 was
USD $0.0 million and USD $0.2 million, respectively. The amount of
$0.4 million is due from HSBC, as of January 31, 2019, which is
included in other current assets on the accompanying consolidated
balance sheet as of January 31, 2019.
Canada
Loans
In
September 2013, the Company refinanced its loan with the
Development Bank of Canada (“BDC”) for a principal
amount of approximately $1.1 million in both Canadian dollars and
USD (based on exchange rates at time of closing). Such loan was for
a term of 240 months at an interest rate of 6.45% per annum with
fixed monthly payments of approximately USD $6,048 (CAD $8,169)
including principal and interest. It was collateralized by a
mortgage on the Company's warehouse in Brantford, Ontario. This
loan was paid in full on September 26, 2017.
Argentina
Loan
In
April 2015, Lakeland Argentina S.R.L. (“Lakeland
Argentina”), the Company’s Argentina subsidiary was
granted a $300,000 line of credit denominated in Argentine pesos,
pursuant to a standby letter of credit granted by the parent
company.
The
following three loans were made under the $300,000 facility stated
above:
On July
1, 2016, Lakeland Argentina and Banco de la Nación Argentina
(“BNA”) entered into an agreement for Lakeland
Argentina to obtain a loan in the amount of ARS 569,000
(approximately USD $38,000, based on exchange rates at time of
closing); such loan was for a term of one year at an interest rate
of 27.06% per annum. This agreement was paid in full prior to
January 31, 2018.
On May
19, 2017 Lakeland Argentina and BNA entered into an agreement for
Lakeland Argentina to obtain a loan in the amount of ARS $1.8
million (approximately USD $112,000, based on exchange rates at
time of closing); such loan is for a term of one year at an
interest rate of 20.0% per annum. This agreement was paid in full
in May 2018.
On
February 26, 2018 Lakeland Argentina and BNA entered into an
agreement for Lakeland Argentina to obtain a loan in the amount of
ARS $4.3 million (approximately USD $215,000, based on exchange
rates at time of closing); such loan is for a term of one year at
an interest rate of 32.0% per annum. This agreement was paid in
full in January 2019.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below
is a table to summarize the debt amounts above (in
000’s):
|
|
Short-Term
|
|
Current
Maturity of Long-term
|
|
|
|
|
|
|
|
|
|
Argentina
|
$-----
|
$31
|
$-----
|
$-----
|
$
|
$
|
|
UK
|
-----
|
180
|
-----
|
-----
|
-----
|
-----
|
|
USA
|
-----
|
-----
|
1,161
|
1,312
|
158
|
158
|
|
Totals
|
$-----
|
$211
|
$1,161
|
$1,312
|
$158
|
$158
|
Five-year Debt Payout Schedule
This
schedule reflects the liabilities as of January 31, 2019, and does
not reflect any subsequent event (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings in
USA
|
$1,319
|
$158
|
$1,161
|
$-----
|
$-----
|
$-----
|
$-----
|
|
Total
|
$1,319
|
$158
|
$1,161
|
$-----
|
$-----
|
$-----
|
$-----
|
Financial
instruments, which potentially subject the Company to concentration
of credit risk, consist principally of cash and cash equivalents,
and trade receivables. Concentration of credit risk with respect to
trade receivables is generally diversified due to the large number
of entities comprising the Company’s customer base and their
dispersion across geographic areas principally within the United
States. The Company routinely addresses the financial strength of
its customers and, as a consequence, believes that its receivable
credit risk exposure is limited. The Company does not require
customers to post collateral.
The
Company’s foreign financial depositories are Bank of America;
China Construction Bank; Bank of China; China Industrial and
Commercial Bank; HSBC (UK); Rural Credit Cooperative of Shandong;
Postal Savings Bank of China; Punjab National Bank; HSBC in India,
Argentina and UK; Raymond James in Argentina; TD Canada Trust;
Banco Itaú S.A., Banco Credito Inversione in Chile; Banco
Mercantil Del Norte SA in Mexico; ZAO KB Citibank Moscow in Russia,
and JSC Bank Centercredit in Kazakhstan. The Company monitors its
financial depositories by their credit rating which varies by
country. In addition, cash balances in banks in the United States
of America are insured by the Federal Deposit Insurance Corporation
subject to certain limitations. There was approximately $5.4
million total included in the U.S. bank accounts and approximately
$7.4 million total in foreign bank accounts as of January 31,
2019.
Major Customer
No
customer accounted for more than 10% of net sales during FY19 and
FY18.
Major Supplier
Our
largest supplier, Precision Fabrics Group, accounted for 7.63%, and
11% of total purchases in FY19 and FY18, respectively. There were
no other vendors over 10% for either FY19 and FY18.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS’ EQUITY
The
2017, 2015 and 2012 Stock Plans
On June
21, 2017, the stockholders of the Company approved the Lakeland
Industries, Inc. 2017 Equity Incentive Plan (the “2017
Plan”) at the Annual Meeting of Stockholders. The executive
officers and all other employees and directors of the Company,
including its subsidiaries are eligible to participate in the 2017
Plan. The 2017 Plan is administered by the Compensation Committee
of the Board of Directors (the “Committee”), except
that with respect to all non-employee directors, the Committee
shall be deemed to include the full Board. The 2017 Plan provides
for the grant of equity-based compensation in the form of stock
options, restricted stock, restricted stock units, performance
shares, performance units, or stock appreciation rights
(“SARS”).
The
2017 Plan also permits the grant of awards that qualify for
“performance-based compensation” within the meaning of
Section 162(m) of the U.S. Internal Revenue Code. The Committee has
the authority to determine the type of award, as well as the
amount, terms and conditions of each award, under the 2017 Plan,
subject to the limitations and other provisions of the 2017 Plan.
An aggregate of 360,000 shares of the Company’s common stock
are authorized for issuance under the 2017 Plan, subject to
adjustment as provided in the 2017 Plan for stock splits,
dividends, distributions, recapitalizations and other similar
transactions or events. If any shares subject to an award are
forfeited, expire, lapse or otherwise terminate without issuance of
such shares, such shares shall, to the extent of such forfeiture,
expiration, lapse or termination, again be available for issuance
under the 2017 Plan. The following table summarizes the unvested
shares granted on September 12, 2017 and June 7, 2018, which have
been made under the 2017 Plan.
|
|
Number of shares
awarded total
|
|
|
|
|
|
|
|
Employees
|
42,061
|
63,095
|
84,126
|
101,001
|
|
Non-Employee
Directors
|
14,414
|
21,622
|
28,829
|
34,595
|
|
Total
|
56,475
|
84,717
|
112,995
|
135,596
|
|
|
Value at grant date
(numbers below are rounded to the nearest $100)
|
|
|
|
|
|
|
|
Employees
|
$583,600
|
$875,400
|
$1,167,200
|
$1,401,300
|
|
Non-Employee
Directors
|
200,000
|
300,000
|
400,000
|
480,000
|
|
Total
|
$783,600
|
$1,175,400
|
$1,567,200
|
$1,881,300
|
Of the
total number of shares awarded at Maximum, there are an aggregate
of 112,995 shares underlying restricted stock awards and in
addition in the 2017 Plan there are 6,376 shares underlying awards
of stock appreciation rights with a base price of $13.80 per share.
These stock appreciation rights are classified as liability awards
and are remeasured at fair value each reporting period until the
award is settled. As of January 31, 2019, and 2018 the Company has
recorded a liability in the amount of $25,559, and $1,913,
respectively related to these stock appreciation
rights.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
actual number of shares of common stock of the Company, if any, to
be earned by the award recipients is determined over a full three
fiscal year performance period commencing on February 1, 2017 and
ending on January 31, 2021, based on the level of earnings before
interest, taxes, depreciation and amortization
(“EBITDA”) achieved by the Company over this period.
The EBITDA targets have been set for each of the Minimum, Target,
Maximum and Cap levels, at higher amounts for each of the higher
levels. The actual EBITDA amount achieved is determined by the
Committee and may be adjusted for items determined to be unusual in
nature or infrequent in occurrence, which items may include,
without limitation, the charges or costs associated with
restructurings of the Company or any subsidiary, discontinued
operations, and the cumulative effects of accounting
changes.
Under
the 2017 Plan, as described above, the Company awarded
performance-based restricted stock and stock appreciation rights to
eligible employees and directors. Such awards were at either
Minimum, Target, Maximum or Cap levels, based on three year EBITDA
targets.
The
Company recognizes expense related to performance-based restricted
share awards over the requisite performance period using the
straight-line attribution method based on the most probable outcome
(Minimum, Target, Maximum, Cap or Zero) at the end of the
performance period and the price of the Company’s common
stock price at the date of grant. The Company is recognizing
expense related to awards under the 2017 Plan at Maximum, including
SARS, and these expenses were $743,757 for the year ended January
31, 2019 and $143,010 for the year ended January 31,
2018.
The
2017 Plan is the successor to the Lakeland Industries, Inc. 2015
Stock Plan (the “2015 Plan”). The executive officers
and all other employees and directors of the Company and its
subsidiaries were eligible to participate in the 2015 Plan. The
2015 Plan authorized the issuance of awards of restricted stock,
restricted stock units, performance shares, performance units and
other stock-based awards. The 2015 Plan also permitted the grant of
awards that qualify for “performance-based
compensation” within the meaning of Section 162(m) of the
U.S. Internal Revenue Code. The aggregate number of shares of the
Company’s common stock that was issuable under the 2015 Plan
was 100,000 shares. Under the 2015 Plan, as of January 31, 2019,
there were 72,221 shares vested; of which 46,319 shares were issued
and 25,902 shares were returned to the Company to pay employee
taxes. As of January 31, 2019, there are no outstanding shares to
vest according to the terms of the 2015 Plan.
The
2015 Plan, was the successor to the Company’s 2012 Stock
Incentive Plan (the “2012 Plan”). The Company’s
2012 Plan authorized the issuance of up to a maximum of 310,000
shares of the Company’s common stock to employees and
directors of the Company and its subsidiaries in the form of
restricted stock, restricted stock units, performance shares,
performance units and other share-based awards. Under the 2012
Plan, as of January 31, 2019, the Company issued 293,887 fully
vested shares of common stock, and at January 31, 2019, there are
no outstanding shares to vest according to the terms of the 2012
Plan.
Under
the 2012 Plan and the 2015 Plan, the Company generally awarded
eligible employees and directors with either performance-based or
time-based restricted shares. Performance-based restricted shares
were awarded at either baseline (target), maximum or zero amounts.
The number of restricted shares subject to any award was not tied
to a formula or comparable company target ranges, but rather was
determined at the discretion of the Committee at the end of the
applicable performance period, which was two years under the 2015
Plan and had been three years under the 2012 Plan. The Company
recognized expense related to performance-based restricted share
awards over the requisite performance period using the
straight-line attribution method based on the most probable outcome
(baseline, maximum or zero) at the end of the performance period
and the price of the Company’s common stock price at the date
of grant.
As of
January 31, 2019, unrecognized stock-based compensation expense
totaled $955,075 pursuant to the 2017 Plan based on the maximum
performance award level. Such unrecognized stock-based compensation
expense totaled $521,593 for the 2017 Plan at the minimum
performance award level. The cost of these non-vested awards is
expected to be recognized over a weighted-average period of three
years for the 2017 Plan.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company recognized total stock-based compensation costs, which are
reflected in operating expenses:
|
|
|
|
|
|
|
|
2012
Plan
|
$-----
|
$206
|
|
2015
Plan
|
-----
|
197,284
|
|
2017
Plan
|
$721,111
|
225,162
|
|
|
721,111
|
422,652
|
|
|
|
|
Stock appreciation
rights (2017 Plan)
|
$22,646
|
$1,913
|
|
Total stock-based
compensation
|
$743,757
|
$424,565
|
|
Total income tax
benefit recognized for stock-based compensation
arrangements
|
$267,752
|
$153,203
|
|
Shares issued under
2017 and 2015 Stock Plans
|
Outstanding
Unvested Grants at Maximum at Beginning of FY19
|
|
Becoming Vested
during FY19
|
|
Outstanding
Unvested Grants at Maximum at End of
January
31,
2019
|
|
Restricted stock
grants – employees
|
42,291
|
41,835
|
-----
|
-----
|
84,126
|
|
Restricted stock
grants – non-employee directors
|
14,493
|
14,336
|
-----
|
-----
|
28,829
|
|
Retainer in stock
– non-employee directors
|
12,789
|
17,476
|
5,221
|
-----
|
25,044
|
|
Total
restricted stock
|
69,573
|
73,647
|
5,221
|
-----
|
137,999
|
|
|
|
|
|
|
|
|
Weighted average
grant date fair value
|
$13.63
|
$13.66
|
$10.19
|
-----
|
$13.77
|
Other Compensation Plans/Programs
Pursuant to the
Company’s restrictive stock program, all directors are
eligible to elect to receive any director fees in shares of
restricted stock in lieu of cash. Such restricted shares are
subject to a two-year vesting period. The valuation is based on the
stock price at the grant date and is amortized to expense over the
two-year period, which approximates the performance period. Since
the director is giving up cash for unvested shares, and is subject
to a vesting requirement, the amount of shares awarded is 133% of
the cash amount based on the grant date stock price. As of January
31, 2019, unrecognized stock-based compensation expense related to
these restricted stock awards totaled $0 for the 2015 Plan and
$55,765 for the 2017 Plan. The cost of these non-vested awards is
expected to be recognized over a two-year weighted-average period.
In addition, as of January 31, 2019, the Company issued 5,221
shares from the 2015 Plan and granted awards for up to an aggregate
of 25,044 shares for the 2017 Plan.
Stock Repurchase Program
On July
19, 2016, the Company’s board of directors approved a stock
repurchase program under which the Company may repurchase up to
$2,500,000 of its outstanding common stock. The Company has
repurchased 105,649 shares of stock under this program as of the
date of this filing which amounted to $1,161,736, inclusive of
commissions.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant
In
October 2014, the Company issued a five-year warrant that is
immediately exercisable to purchase up to 55,500 shares of the
Company’s common stock at an exercise price of $11.00 per
share. As of January 31, 2019 and 2018, the warrant to purchase up
to 55,500 shares remains outstanding.
Shelf Registration
On
March 24, 2017, the Company filed a shelf registration statement on
Form S-3 (File No. 333-216943) which was declared effective by the
SEC on April 11, 2017 (the “Shelf Registration
Statement”). The shelf registration statement permits the
Company to sell, from time to time, up to an aggregate of $30.0
million of various securities, including shares of common stock,
shares of preferred stock, debt securities, warrants to purchase
common stock, preferred stock, debt securities, and/or units,
rights to purchase common stock, preferred stock, debt securities,
warrants and/or units, units of two or more of the foregoing, or
any combination of such securities, not to exceed one-third of the
Company's public float in any 12-month period.
Public Offering
On
August 17, 2017, the Company entered into an underwriting agreement
(the “Underwriting Agreement”) with Roth Capital
Partners, LLC and Craig-Hallum Capital Group LLC, as underwriters
(collectively, the “Underwriters”), to issue and sell
725,000 shares of common stock, par value $0.01 per share
(“Common Stock”), of the Company at a public offering
price of $13.80 per share (the “Offering Price”) in a
firm commitment underwritten public offering. The underwriting
discount was $0.966 per share sold in the Offering. The Offering
with respect to the sale of the 725,000 shares of Common Stock
closed on August 22, 2017. Pursuant to the Underwriting Agreement,
the Underwriters had the option, exercisable for a period of
45-days after execution of the Underwriting Agreement, to purchase
up to an additional 108,750 shares of the Common Stock at the
Offering Price. In September 2017, the Underwriters exercised their
option to purchase 83,750 shares of Common Stock. The net proceeds
to the Company from the Offering, including the overallotment, were
approximately $10.1 million, after deducting underwriting discounts
and estimated offering expenses payable by the
Company.
The
offer and sale of shares of Common Stock in the Offering were
registered under the Securities Act of 1933, as amended, pursuant
to the Shelf Registration Statement. The offer and sale of the
shares of Common Stock in the Offering are described in the
Company’s prospectus constituting a part of the Shelf
Registration Statement, as supplemented by a final prospectus
supplement filed with the Commission on August 18,
2017.
8. INCOME TAXES
The
provision for income taxes is based on the following pretax income
(loss):
|
Domestic
and Foreign Pretax Income (Loss)
|
|
|
|
Domestic
|
$(1,116)
|
$7,480
|
|
Foreign
|
4,597
|
863
|
|
|
|
|
|
Total
|
$3,481
|
$8,343
|
|
Income
Tax Expense (Benefit)
|
|
|
|
Current:
|
|
|
|
Federal
|
$45
|
$600
|
|
State
and other taxes
|
20
|
20
|
|
Foreign
|
1,667
|
1,325
|
|
Total Current
Tax Expense
|
$1,732
|
$1,945
|
|
|
|
|
|
Deferred:
|
|
|
|
Domestic
|
$290
|
$5,955
|
|
Valuation
allowance-deferred tax asset
|
-----
|
3
|
|
Foreign
|
-----
|
-----
|
|
Total Deferred Tax
Expense
|
290
|
5,958
|
|
Total
Income Taxes
|
$2,022
|
$7,903
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a reconciliation of the effective income tax rate to
the Federal statutory rate:
|
|
|
|
|
Statutory
rate
|
21.00%
|
33.81%
|
|
State Income Taxes,
Net of Federal Tax Benefit
|
6.89
|
2.27
|
|
Adjustment to
Deferred
|
(0.92)
|
-----
|
|
Foreign Dividend
and Subpart F Income
|
-----
|
(17.19)
|
|
Transition Tax (net
of FTC from Transition Tax)
|
-----
|
26.53
|
|
Argentina Flow
Through Loss
|
1.37
|
0.38
|
|
GILTI
|
16.85
|
-----
|
|
Permanent
Differences
|
0.63
|
(1.32)
|
|
Valuation
Allowance-Deferred Tax Asset
|
(24.46)
|
0.34
|
|
Foreign Tax
Credit
|
24.46
|
|
|
Foreign Rate
Differential
|
20.16
|
|
|
Rate
Change
|
(5.63)
|
47.17
|
|
Other
|
(2.25)
|
2.74
|
|
Effective
Rate
|
58.09%
|
94.73%
|
The tax
effects of temporary cumulative differences which give rise to
deferred tax assets at January 31, 2019 and 2018 are summarized as
follows:
|
|
|
|
|
Deferred tax
assets:
|
|
|
|
Inventories
|
$849
|
$866
|
|
US tax loss
carryforwards, including work opportunity credit*
|
4,290
|
4,411
|
|
Accounts receivable
and accrued rebates
|
233
|
242
|
|
Accrued
compensation and other
|
314
|
190
|
|
India reserves - US
deduction
|
46
|
19
|
|
Equity based
compensation
|
299
|
126
|
|
Foreign tax credit
carry-forward
|
1,348
|
2,199
|
|
State and local
carry-forwards
|
1,116
|
1,017
|
|
Argentina timing
difference
|
32
|
37
|
|
Depreciation and
other
|
59
|
90
|
|
Amortization
|
(193)
|
(174)
|
|
Brazil
write-down
|
222
|
181
|
|
Allowance for Note
Receivable - Brazil
|
-----
|
552
|
|
Deferred tax
asset
|
8,615
|
9,756
|
|
Less valuation
allowance
|
1,348
|
2,199
|
|
Net deferred tax
asset
|
$7,267
|
$7,557
|
*The federal net operating loss (“NOL”) that is left
after FY19 will expire after 1/31/2034 (20 years from the generated
date of 1/31/2014). The credits will begin to expire after
1/31/2020 (10 years from the 1st carryover year generated date of
1/31/2010) and will fully expire after 1/31/2028.
The state NOLs will begin to expire after 1/31/2025 and will
continue to expire at various periods up until 1/31/2038 when they
will be fully expired. The states have a larger spread because some
only carryforward for 15 years and some allow 20
years.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Reform
On
December 22, 2017, new federal tax reform legislation was enacted
in the United States, resulting in significant changes from
previous tax law. The 2017 Tax Cuts and Jobs Act (the Tax
Act) reduces the federal corporate income tax rate to 21% from 35%
effective January 1, 2018. As a result of the Tax Act, we
applied a blended U.S. statutory federal income tax rate of 33.811%
in FY18. The Tax Act requires us to recognize the effect of
the tax law changes in the period of enactment, such as determining
the transition tax (see below), re-measuring our US deferred tax
assets as well as reassessing the net realizability of our deferred
tax assets. The Company completed this re-measurement and
reassessment in FY18. The rate change, along with certain
immaterial changes in tax basis resulting from the 2017 Tax Act,
resulted in a reduction of our net deferred tax asset to $7.6
million with related income tax expense of $5.1 million, thus
dramatically increasing our effective tax rate in the fiscal year
ended January 31, 2018. While the Tax Act provides for a modified
territorial tax system, beginning in 2018, it includes two new
U.S. tax base erosion provisions, the global intangible low-taxed
income (“GILTI”) provisions and the base-erosion and
anti-abuse tax (“BEAT”) provisions. The GILTI
provisions require the Company to include in its U.S. income tax
return foreign subsidiary earnings in excess of an allowable return
on the foreign subsidiary’s tangible assets. The proposed
regulations were not finalized as of January 31, 2019 and, as of this reporting date, remain
in the proposal stage. Due to this uncertainty, it is difficult to
predict the future impact, however, the Company does expect
that the GILTI income inclusion will result in significant U.S. tax
expense beginning in FY19. Re-measurement and reassessment
of the GILTI tax as it is currently written resulted in a charge to
tax expense of $0.6 million in FY19. The Company intends to account
for the GILTI tax in the period in which it is incurred. Though
this non-cash expense had a materially negative impact on FY19
earnings, the Tax Act also changes the taxation of foreign
earnings, and companies generally will not be subject to United
States federal income taxes upon the receipt of dividends from
foreign subsidiaries.
The
BEAT provisions in the Tax Act pertain to companies with average
annual gross receipts of $500 million for the prior 3-year period
and eliminate the deduction of certain base-erosion payments made
to related foreign corporations and impose a minimum tax if greater
than regular tax. Based on current guidelines the Company
does not expect
the BEAT provision to have an impact on U.S. tax
expense
Transition Tax
Upon
enactment, there was a one-time deemed repatriation tax on
undistributed foreign earnings and profits (the “transition
tax”). This tax was assessed on the U.S. Shareholder’s
share of the foreign corporation’s accumulated foreign
earnings and profits that were not previously been taxed.
Earnings in the form of cash and cash equivalents was taxed at a
rate of 15.5% and all other earnings and profits were taxed at a
rate of 8.0%. We recognized tax expense of $5,120,928 related
to the transition tax in 2017. However, foreign tax credits
were used in the amount of $5,120,928 to fully offset this
transition tax and the Company will not incur any cash outlay
related to this tax.
We
previously considered substantially all of the earnings in our
non-U.S. subsidiaries to be indefinitely reinvested outside the
U.S. and, accordingly, recorded no deferred income taxes on such
earnings. At this time, the applicable provisions of the Tax
Act have been fully analyzed and our intention with respect to
unremitted foreign earnings is to continue to indefinitely reinvest
outside the U.S. those earnings needed for working capital or
additional foreign investment. As stated above, GILTI is
recognized in the period it is incurred and is not considered with
regard to deferred income tax on unremitted E&P. All
international subsidiaries are impacted by GILTI
calculation.
Income Tax Audits
The
Company is subject to US federal income tax, as well as income tax
in multiple US state and local jurisdictions and a number of
foreign jurisdictions. Returns for the years since FY16 are still
open based on statutes of limitation only.
Chinese
tax authorities have performed limited reviews on all Chinese
subsidiaries as of tax years 2008 through 2015 with no significant
issues noted and we believe our tax positions are reasonably stated
as of January 31, 2019. Weifang Meiyang Products Co., Ltd.
(“Meiyang”), one of our Chinese operations, was changed
to a trading company from a manufacturing company in Q1 FY16 and
all direct workers and equipment were transferred from Meiyang to
Weifang Lakeland Safety Products Co., Ltd., (“WF”),
another entity of our Chinese operation thereby reducing our tax
exposure.
Lakeland Industries, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lakeland Protective
Wear, Inc., our Canadian subsidiary, is subject to Canadian federal
income tax, as well as income tax in the Province of Ontario.
Income tax returns for the 2014 fiscal year and subsequent years
are still within the normal reassessment period and open to
examination by tax authorities.
In
connection with the exit from Brazil (Note 12), the Company claimed
a worthless stock deduction which generated a tax benefit of
approximately USD $9.5 million, net of a USD $2.2 million valuation
allowance in FY16. While the Company and its tax advisors believe
that this deduction is valid, there can be no assurance that the
IRS will not challenge it and, if challenged, there is no assurance
that the Company will prevail.
As
mentioned above, it’s the Company’s intention is to
reinvest outside the US those earnings needed for working capital
or foreign investment. As a result of the transition tax, $5.0
million of foreign income was repatriated at the end of FY18.
However, the Company has no intention to repatriate earnings with
regards with GILTI.In the fiscal year
ended January 31, 2019, no dividends were declared. It is the
Company’s practice and intention to reinvest the earnings of
our non-US subsidiaries in their operations with the exception of
the dividend plan.
Change in Valuation
Allowance
We
record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. The valuation
allowance decreased approximately $0.9 million and $0.0 for the
years ended January 31, 2019 and 2018, respectively.
9.
EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted
earnings per share for the years ended January 31, 2019 and 2018 as
follows:
|
|
Years Ended January
31,
(000’s except
share information)
|
|
|
|
|
|
Numerator
|
|
|
|
Net
income
|
$1,459
|
$440
|
|
Denominator
|
|
|
|
Denominator for
basic earnings per share (weighted-average shares which reflect
362,840 shares in the treasury at January 31, 2019 and 356,441
shares in the treasury at January 31, 2018)
|
8,111,458
|
7,638,264
|
|
Effect of dilutive
securities from restricted stock plan and from dilutive effect of
stock options
|
58,943
|
53,289
|
|
Denominator for
diluted earnings per share (adjusted weighted average
shares)
|
8,170,401
|
7,691,553
|
|
Basic earnings per
share
|
$0.18
|
$0.06
|
|
Diluted earnings
per share
|
$0.18
|
$0.06
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.
BENEFIT PLANS
Defined Contribution Plan
Pursuant to the
terms of the Company’s 401(k) plan, substantially all US
employees over 21 years of age with a minimum period of service are
eligible to participate. The 401(k) plan is administered by the
Company and provides for voluntary employee contributions ranging
from 1% to 100% of the employee’s compensation. Beginning in
January 2016 the Company changed to a Safe Harbor tiered matching
plan equal to 100% of the first 1% of eligible participant’s
compensation contributed to the Plan and 50% of the next 5% of
eligible participant’s compensation contributed to the Plan
(maximum Company match 3.5% of salary) and totaled approximately
$209,100 and $198,000 in the years ended January 31, 2019 and 2018,
respectively.
11. DERIVATIVE INSTRUMENTS AND FOREIGN CURRENCY
EXPOSURE
The
Company is exposed to foreign currency risk. Management has
commenced a derivative instrument program to partially offset this
risk by purchasing forward contracts to sell the Canadian Dollar
and the Euro other than the cash flow hedge discussed below. Such
contracts are largely timed to expire with the last day of the
fiscal quarter, with a new contract purchased on the first day of
the following quarter, to match the operating cycle of the Company.
We designated the forward contracts as derivatives but not as
hedging instruments, with loss and gain recognized in current
earnings.
The
Company accounts for its foreign exchange derivative instruments by
recognizing all derivatives as either assets or liabilities at fair
value, which may result in additional volatility in current period
earnings or other comprehensive income, depending whether the
instrument was designated as a cash flow hedge, as a result of
recording recognized and unrecognized gains and losses from changes
in the fair value of derivative instruments.
We have
one type of derivatives to manage the risk of foreign currency
fluctuations.
We
entered into forward contracts with financial institutions to
manage our currency exposure related to net assets and liabilities
denominated in foreign currencies. Those forward contract
derivatives, not designated as hedging instruments, were generally
settled quarterly. Gain and loss on those forward contracts are
included in current earnings. There were no outstanding forward
contracts at January 31, 2019 or 2018.
12.
COMMITMENTS AND CONTINGENCIES
Certain
conditions may exist as of the date the consolidated financial
statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events
occur or fail to occur. The Company’s management and its
legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in
such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims, as
well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the
assessment of a contingency indicates that it is probable that a
material loss has been or is probable of being incurred and the
amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated
financial statements. If the assessment indicates that a
potentially material loss contingency is not probable, but is
reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, together with an estimate
of the range of possible loss if determinable and material, would
be disclosed.
Loss
contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee
would be disclosed.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s Exit from Brazil
On
March 9, 2015, Lakeland Brazil, S.A. changed its legal form to a
Limitada and changed its name to Lake Brasil Industria E Comercio
de Roupas E Equipamentos de Protecao Individual LTDA
(“Lakeland Brazil”).
Transfer
of Shares Agreement
On July
31, 2015 (the “Closing Date”), Lakeland and Lakeland
Brazil, completed a conditional closing of a Shares Transfer
Agreement (the “Shares Transfer Agreement”) with Zap
Comércio de Brindes Corporativos Ltda
(“Transferee”), a company owned by an existing Lakeland
Brazil manager, entered into on June 19, 2015. Pursuant to the
Shares Transfer Agreement, the Transferee has acquired all of the
shares of Lakeland Brazil owned by the Company. Pursuant to the
Shares Transfer Agreement, Transferee paid R$1.00 to the Company
and assumed all liabilities and obligations of Lakeland Brazil,
whether arising prior to, on or after the Closing Date. In order to
help enable Lakeland Brazil to have sufficient funds to continue to
operate for a period of at least two years following the Closing
Date, the Company provided funding to Lakeland Brazil in the
aggregate amount of USD $1,130,000, in cash, in the form of a
capital raise, on or prior to the Closing Date, and agreed to
provide an additional R$582,000 (approximately USD $188,000) (the
“Additional Amount”), in the form of a capital raise,
to be utilized by Lakeland Brazil to pay off certain specified
liabilities and other potential contingent liabilities. Pursuant to
the Shares Transfer Agreement, the Company paid R$992,000
(approximately USD $320,000) in cash, on July 1, 2015 and issued a
non-interest bearing promissory note for the payment to be due for
the Additional Amount (R$582,000) (approximately USD $188,000) on
the Closing Date which was paid to Lakeland Brazil in two (2)
installments of (i) R$288,300 (approximately USD $82,000) which was
paid on August 1, 2015, and (ii) R$294,500 (approximately USD
$84,000) on September 1, 2015. The closing of this agreement was
subject to Brazilian government approval of the shares transfer,
which was received in October 2015 (The “Final Closing
Date”).
Although the
Company formally completed the terms of the “Shares Transfer
Agreement”, pursuant to which our entire equity interest in
our former Brazilian subsidiary (“Lakeland Brazil”) was
transferred,during the fiscal year ended January 31, 2016, we may
continue to be exposed to certain liabilities arising in connection
with the operations of Lakeland Brazil, which was shut down in late
March 2019. The Company understands that under the laws of Brazil,
a parent company may be held liable for the liabilities of a former
Brazilian subsidiary in the event of fraud, misconduct, or under
various theories. In this respect, as regards labor claims, a
parent company could conceivably be held liable for the liabilities
of a former Brazilian subsidiary. Although the Company would have
the right of adversary system, full defense and due process, in
case of a potential litigation, there can be no assurance as to the
findings of the courts in Brazil.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan
Agreement with Transferee of Brazil Operations
The
Company had entered into a loan agreement (the “Loan
Agreement”) on December 11, 2015 with Lakeland Brazil for the
amount of R$8,584,012 (approximately USD $2.29 million) for the
purpose of providing funds necessary for Lakeland Brazil to settle
its largest outstanding VAT claim with the State of Bahia. The
Company determined that a reserve against the collection of this
loan in full was, prudent and recorded this charge in the fiscal
year ended January 31, 2016. The Company determined in the current
fiscal year ended January 31, 2019 this note would not be repaid
and therefore wrote it off in its entirety.
VAT
Tax Issues in Brazil
Value
Added Tax (“VAT”) in Brazil is charged at the state
level. We commenced operations in Brazil in May 2008 through the
acquisition of Lakeland Brazil. An audit performed on the VAT for
the 2007-2009 period was completed by the State of Bahia (state of
domicile for the Lakeland operations in
Brazil). In October 2010, the Company received four
claims for 2007-2009 from the State of Bahia, the largest of which
was for taxes of R$6.2 million (USD $2.3 million) and interest,
penalties and fees of R$8.3 million (USD $3.1 million), for a total
of R$14.6 million (USD $5.4 million). This large VAT claim
was settled in the fiscal year ended January 31, 2016 using funds
from the loan described above. Of other claims, our attorney
informed us that three claims totaling R$1.3 million (USD $0.5
million) excluding interest, penalties and fees of R$2.7 million
(USD $0.9 million) were likely to be successfully defended based on
state auditor misunderstanding.
Labor
Claims in Brazil
As
disclosed in our periodic filings with the SEC, we agreed to make
certain payments in connection with ongoing labor litigation
involving our former Brazilian subsidiary. While the vast
majority of these labor suits have been resolved, there are labor
cases that remain active and a civil case filed by a former officer
of our former Brazilian subsidiary, in which Lakeland was named as
a co-defendant.
The
first case was initially filed in 2010 claiming USD $100,000 owed
to plaintiff. This case is on its final appeal to the Brazilian
Supreme Court, having already been ruled upon in favor of Lakeland
three (3) times, most recently by the Labor Court Supreme Court.
The claimant having lost four (4) times previously, management
firmly believes that Lakeland will continue to prevail in this
case. A second case filed against Lakeland by a former
officer of Lakeland Brazil , was filed in Labor court in 2014
claiming Lakeland owed USD $300,000. The Labor court ruled
that the claimant’s case was outside of the scope of the
Labor court and the case was dismissed. The claimant is appealing
within the Labor court system. A third case filed by a former
Lakeland Brazil manager in 2014 was ruled upon in civil court and
awarded the claimant USD $100,000. Both the claimant and Lakeland
have appealed this decision. In the last case a former
officer of our former Brazilian subsidiary filed a claim seeking
approximately USD $700,000 that he alleges is due to him against an
unpaid promissory note. Lakeland has not been served with process
and no decision on the merits has been issued in this case yet.
Management firmly believes these claims to be without any merit and
does not anticipate a negative outcome resulting in significant
expense to us.
Lakeland Brazil may
face new labor lawsuits in the short term as a result of the
shutdown of its operations in March 2019. The Company has no
obligation under the Shares Transfer Agreement to make any
additional payments in connection with these potential new labor
lawsuits. The Company also understands that under the labor laws of
Brazil, a parent company may be held liable for the labor
liabilities of a former Brazilian subsidiary in the case of fraud,
misconduct, or under various theories.
Although the
Company would have the right of adversary system, full defense and
due process in case of a potential litigation, there can be no
assurance as to the findings of the courts of
Brazil.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There
are additional cases in Labor and Civil courts against Lakeland
Brazil in which Lakeland is not a party, and other outstanding
monetary alligations of Lakeland Brazil.
In
FY19, the Company recorded an accrual of $1.2 million for
professional fees and litigation reserves associated with labor
claims in Brazil. The accrual on the balance sheet at January 31,
2019 is $1.2 million.
General litigation contingencies
The
Company is involved in various litigation proceedings arising
during the normal course of business which, in the opinion of the
management of the Company, will not have a material effect on the
Company’s financial position, results of operations or cash
flows; however, there can be no assurance as to the ultimate
outcome of these matters. As of January 31, 2019, to the best of
the Company’s knowledge, there were no outstanding claims or
litigation, except for the labor contingencies in Brazil described
above.
Employment Contracts
The
Company has employment contracts expiring through fiscal year
ending January 31, 2020, with four principal officers. Pursuant to
such contracts, the Company is committed to aggregate annual base
remuneration of $890,000 and $175,417 for FY20 and FY21,
respectively.
Leases
Total
rental costs under all operating leases are summarized as
follows:
|
Year
ended January 31,
|
|
|
|
|
|
2019
|
$1,022,162
|
|
2018
|
$841,235
|
Minimum
annual rental commitments for the remaining term of the
Company’s noncancelable operating leases relating to
manufacturing facilities, office space and equipment rentals at
January 31, 2019, including lease renewals subsequent to year end,
are summarized as follows:
|
Year ending January 31,
|
|
|
|
|
2020
|
761,350
|
|
2021
|
446,494
|
|
2022
|
435,310
|
|
2023
|
313,633
|
|
2024
|
8,418
|
|
and
thereafter
|
8,944
|
|
Total
|
$1,974,149
|
13.
SEGMENT REPORTING
Domestic and
international sales from continuing operations are as follows in
millions of dollars:
|
|
|
|
|
|
|
|
Domestic
|
$49.88
|
50.38%
|
$50.45
|
52.55%
|
|
International
|
49.13
|
49.62%
|
$45.54
|
47.45%
|
|
Total
|
$99.01
|
100.00%
|
$95.99
|
100.00%
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We
manage our operations by evaluating each of our geographic
locations. Our US operations include a facility in Alabama
(primarily the distribution to customers of the bulk of our
products and the light manufacturing of our chemical, wovens,
reflective, and fire products). The Company also maintains one
manufacturing company in China (primarily disposable and chemical
suit production), a manufacturing facility in Mexico (primarily
disposable, reflective, fire and chemical suit production), a
manufacturing facility in Veitnam (primarily disposable production)
and a small manufacturing facility in India. Our China facilities
produce the majority of the Company’s products and China
generates a significant portion of the Company’s
international revenues. We evaluate the performance of these
entities based on operating profit, which is defined as income
before income taxes, interest expense and other income and
expenses. We have sales forces in the USA, Canada, Mexico, Europe,
Latin America, India, Russia, Kazakhstan and China, which sell and
distribute products shipped from the United States, Mexico, India
or China. The table below represents information about reported
segments for the years noted
therein:
|
|
|
|
|
|
|
|
|
|
|
|
USA
Operations
|
$54.72
|
$54.79
|
|
Other
foreign
|
5.52
|
3.85
|
|
Europe
(UK)
|
9.42
|
9.11
|
|
Mexico
|
4.90
|
3.87
|
|
Asia
|
56.36
|
52.63
|
|
Canada
|
8.58
|
8.26
|
|
Latin
America
|
7.05
|
6.50
|
|
Corporate
|
0.75
|
1.60
|
|
Less intersegment
sales
|
(48.29)
|
(44.62)
|
|
|
$99.01
|
$95.99
|
|
External
Sales
|
|
|
|
USA
Operations
|
$49.88
|
$50.45
|
|
Other
foreign
|
3.02
|
2.40
|
|
Europe
(UK)
|
9.42
|
9.07
|
|
Mexico
|
3.51
|
2.48
|
|
Asia
|
18.00
|
17.12
|
|
Canada
|
8.56
|
8.26
|
|
Latin
America
|
6.62
|
6.21
|
Consolidated
external sales
|
$99.01
|
$95.99
|
|
Intersegment
Sales
|
|
|
|
USA
Operations
|
$4.84
|
$4.34
|
|
Other
foreign
|
2.52
|
1.45
|
|
Europe
(UK)
|
-----
|
0.04
|
|
Mexico
|
1.38
|
1.39
|
|
Asia
|
38.35
|
35.51
|
|
Canada
|
0.02
|
-----
|
|
Latin
America
|
0.43
|
0.29
|
|
Corporate
|
0.75
|
1.60
|
Consolidated
intersegment sales
|
$48.29
|
$$44.62
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit
(Loss):
|
|
|
|
USA
Operations
|
$7.02
|
$10.15
|
|
Other
foreign
|
0.26
|
0.51
|
|
Europe
(UK)
|
0.20
|
0.16
|
|
Mexico
|
0.07
|
(0.02)
|
|
Asia
|
2.63
|
3.28
|
|
Canada
|
1.01
|
1.42
|
|
Latin
America
|
0.70
|
0.61
|
|
Corporate
|
(8.22)
|
(7.69)
|
|
Less intersegment
profit
|
(0.10)
|
0.06
|
Consolidated
operating profit (loss)
|
$3.57
|
$8.48
|
|
Depreciation and
Amortization Expense:
|
|
|
|
USA
Operations
|
$0.22
|
$0.12
|
|
Other
foreign
|
0.05
|
0.03
|
|
Europe
(UK)
|
0.01
|
0.01
|
|
Mexico
|
0.13
|
0.11
|
|
Asia
|
0.27
|
0.25
|
|
Canada
|
0.06
|
0.08
|
|
Latin
America
|
0.04
|
0.04
|
|
Corporate
|
0.22
|
0.18
|
|
Less
intersegment
|
(0.03)
|
(0.05)
|
|
Consolidated
depreciation and amortization expense
|
$0.97
|
$0.77
|
|
Interest
Expense:
|
|
|
|
Other
foreign
|
$-----
|
$-----
|
|
Europe
(UK)
|
0.01
|
0.01
|
|
Canada
|
-----
|
0.04
|
|
Latin
America
|
0.04
|
0.01
|
|
Corporate
|
0.08
|
0.10
|
|
Consolidated
interest expense
|
$0.13
|
$0.16
|
|
Income Tax Expense
(Benefit):
|
|
|
|
USA Operations
(shown in Corporate)
|
$-----
|
$-----
|
|
Other
foreign
|
-----
|
0.06
|
|
Europe
(UK)
|
0.03
|
0.05
|
|
Mexico
|
0.12
|
-----
|
|
Asia
|
1.04
|
0.60
|
|
Canada
|
0.23
|
0.40
|
|
Latin
America
|
0.26
|
0.21
|
|
Corporate
|
0.35
|
6.58
|
|
Less
intersegment
|
(0.01)
|
$-----
|
|
Consolidated income
tax expense (benefit)
|
$2.02
|
$7.90
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets:
*
|
|
|
|
USA
Operations
|
$67.26
|
$67.02
|
|
Other
foreign
|
1.54
|
1.29
|
|
Europe
(UK)
|
4.37
|
4.63
|
|
Mexico
|
5.00
|
4.69
|
|
Asia
|
39.52
|
31.59
|
|
Canada
|
7.47
|
6.07
|
|
Latin
America
|
7.42
|
12.09
|
|
Corporate
|
25.07
|
22.27
|
|
Less
intersegment
|
(62.93)
|
(55.12)
|
|
Consolidated
assets
|
$94.72
|
$94.53
|
|
Total Assets Less
Intersegment:*
|
|
|
|
USA
Operations
|
$29.76
|
$33.16
|
|
Other
foreign
|
2.85
|
2.73
|
|
Europe
(UK)
|
4.36
|
4.63
|
|
Mexico
|
5.13
|
4.84
|
|
Asia
|
20.97
|
16.97
|
|
Canada
|
6.64
|
5.27
|
|
Latin
America
|
5.27
|
5.59
|
|
Corporate
|
19.74
|
21.34
|
|
Consolidated
assets
|
$94.72
|
$94.53
|
|
Property and
Equipment (excluding asset held for sale at $0.2 million at January
31, 2018):
|
|
|
|
USA
Operations
|
$2.25
|
$1.99
|
|
Other
foreign
|
0.19
|
0.16
|
|
Europe
(UK)
|
0.01
|
0.03
|
|
Mexico
|
2.14
|
1.99
|
|
Asia
|
3.17
|
1.92
|
|
Canada
|
1.26
|
1.38
|
|
Latin
America
|
0.07
|
0.11
|
|
Corporate
|
1.62
|
1.18
|
|
Less
intersegment
|
0.07
|
0.03
|
|
Consolidated
long-lived assets
|
$10.78
|
$8.79
|
|
Capital
Expenditures:
|
|
|
|
USA
Operations
|
$0.01
|
$0.03
|
|
Other
foreign
|
0.07
|
0.14
|
|
Europe
(UK)
|
-----
|
-----
|
|
Mexico
|
0.28
|
0.06
|
|
Asia
|
1.64
|
0.12
|
|
Canada
|
0.03
|
-----
|
|
Latin
America
|
-----
|
-----
|
|
Corporate
|
1.07
|
0.56
|
|
Consolidated
capital expenditure
|
$3.10
|
$0.91
|
|
Goodwill:
|
|
|
|
USA
Operations
|
$0.87
|
$0.87
|
|
Consolidated
goodwill
|
$0.87
|
$0.87
|
Negative assets
reflect intersegment amounts eliminated in
consolidation
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In
connection with the preparation of this report, an evaluation was
carried out by certain members of Company management, with the
participation of the Chief Executive Officer (“CEO”)
and the Chief Financial Officer (“CFO”) of the
effectiveness of the Company’s disclosure controls and
procedures (as defined in Securities and Exchange
Commission’s (SEC) Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (“Exchange Act”)) as of
January 31, 2019. Disclosure controls and procedures are designed
to ensure that information required to be disclosed in reports
filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the
SEC’s rules and forms, and that such information is
accumulated and communicated to management, including the CEO and
the CFO, to allow timely decisions regarding required
disclosures.
Due to
material weaknesses in internal control over financial reporting
described below, management concluded that the Company’s
disclosure controls and procedures were not effective as of January
31, 2019. Notwithstanding the existence of these material
weaknesses, management believes that the consolidated financial
statements in this annual report filed on Form 10-K present, in all
material respects, the Company’s financial condition as
reported, in conformity with United States Generally Accepted
Accounting Principles (“GAAP”).
Management’s Report on Internal
Control over Financial Reporting
The
Company’s management is responsible for establishing and
maintaining effective internal control over financial reporting
(ICOFR), as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange
Act. Our internal control over financial reporting is a process,
under the supervision of the CEO and CFO, designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s financial
statements for external purposes in accordance with
GAAP.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
Management has
completed an assessment of the effectiveness of the company’s
internal control over financial reporting as of January 31, 2019,
based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). As a
result of this assessment, management has concluded controls were
not effective due to identified material weaknesses in
internal control over financial reporting. A material weakness is a
control deficiency, or a combination of deficiencies, in internal
control over financial reporting such that there is a reasonable
possibility that a material misstatement of the Company’s
annual or interim financial statements will not be prevented or
detected on a timely basis. The material
weaknesses identified are disclosed below:
(i)
Revenue Recognition. The Company did
not design, implement and consistently operate effective
process-level and information technology general control
(“ITGC”) controls over revenue
recognition;
(ii)
Inventory Valuation. The Company
did not design, implement and consistently operate effective
process-level, ITGC and system development lifecycle controls over
the product costing and valuation process to ensure the appropriate
valuation of inventory at year-end; and
(iii)
Monitoring Entity Level Controls. The
Company did not design, implement and consistently operate
effective entity-level monitoring and ITGC controls, including
management review controls, over the foreign locations and
consolidated entity.
As a
result of these material weaknesses, the Company’s
management has concluded that, as of January 31, 2019 the
Company’s internal control over financial reporting was not
effective based on the criteria in Internal Control –
Integrated Framework (2013) issued by the COSO.
Management
communicated the results of its assessment to the Audit Committee
of the Board of Directors. The Company’s independent
registered public accounting firm, Friedman, LLP, has expressed an
adverse opinion on our internal control over financial reporting as
of January 31, 2019 in the audit report that appears in Item 8 of
this Annual Report on Form 10-K.
Remediation Efforts
Management is
committed to the remediation of the material
weaknesses described above, as well as the continued
improvement of the Company’s internal control over financial
reporting. Management has identified and implemented, and continue
to implement, the actions described below to remediate the
underlying causes of the control deficiencies that gave rise to
the material weaknesses. Until the remediation efforts
described below, including any additional measures management
identifies as necessary, are completed, the material
weaknesses described above will continue to
exist.
To
address the material weakness associated with Revenue Recognition,
management has completed, or is in the process of:
■
implementing new
operational policies and procedures supporting pricing and sales
orders;
■
adding personnel to
eliminate segregation of duty deficiencies; and,
■
developing
enhancements to the Company’s systems and processes,
including data input controls, approval workflows, and review of
revenue transactions.
To
address the material weakness associated with inventory valuation,
management has completed, or is in the process of:
■
evaluating and
remediating inventory control design for bill of material
changes;
■
evaluating and
implementing consistent inventory valuation policies across all
subsidiaries;
■
establishing
standard costs within the enterprise resource planning system;
and,
■
educating control
owners concerning the principles and requirements of each
control.
To
address the material weakness associated with Financial Reporting
and Monitoring, management has completed, or is in the process
of:
■
developing and
documenting thresholds for monitoring controls to enhance precision
of review,
■
adding personnel to
allow for an additional level of review within the financial
reporting and monitoring functions; and,
■
developing
policies and procedures to ensure the control documentation
supports the operating effectiveness of the
control.
Relative to the
ITGC component that relates to all three of the material
weaknesses, management has completed, or is in the process
of:
■
engaging a
third-party firm which specializes in outsourced internal audit to
assist in the ITGC related remediation efforts;
■
conducting training
programs addressing ITGCs and policies, including educating control
owners concerning the principles and requirements of each control,
with a focus on those related to user access and change-management
over IT systems impacting financial reporting;
■
evaluating and
remediating IT control design for key areas such as Change
Management and Logical Access, or adding mitigating controls to
address risks associated with segregation of duties;
and,
■
developing control
documentation underlying ITGCs to promote knowledge transfer upon
personnel and function changes.
While
some of these measures have been completed as of the date of this
report, management has not completed and tested all the planned
corrective processes, enhancements, procedures and related
evaluation that necessary to determine whether the material
weaknesses have been fully remediated. Moreover, the
corrective actions and controls need to be in operation for a
sufficient period of time for management to conclude that the
control environment is operating effectively and has been
adequately tested by management. Accordingly, the material
weaknesses have not been fully remediated as of the date of
this report. As the Company continues its evaluation and
remediation efforts, management may modify the actions described
above or identify and take additional measures to address control
deficiencies. Management will continue to assess the effectiveness
of the remediation efforts in connection with its ongoing
evaluation of internal control over financial
reporting.
Changes in Internal Control over Financial Reporting
Other
than the remediation efforts described above, which were ongoing
during the last fiscal quarter ended January 31, 2019, there were
no other changes in the Company’s internal control over
financial reporting identified in management’s evaluation
pursuant to Rules 13a-15(f) and 15d-15(f) of the Exchange Act
during the quarter ended January 31, 2019 that materially affected,
or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None
The
information required by Part III: Item 10, Directors, Executive
Officers and Corporate Governance; Item 11, Executive Compensation;
Item 13, Certain Relationships and Related Transactions and
Director Independence; and Item 14, Principal Accountant Fees and
Services is included in and incorporated by reference to
Lakeland’s definitive proxy statement in connection with its
Annual Meeting of Stockholders scheduled to be held in June 2019,
to be filed with the Securities and Exchange Commission within 120
days following the end of Lakeland’s fiscal year ended
January 31, 2019. Information relating to the executive officers of
the Registrant appears under Item 1 of this report.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS
The
information regarding security ownership of certain beneficial
owners and management that is required to be included pursuant to
this Item 12 is included in and incorporated by reference to
Lakeland’s definitive proxy statement in connection with its
Annual Meeting of Stockholders scheduled to be held in June
2019.
Equity Compensation Plans
The
following sets forth information relating to Lakeland’s
equity compensation plans as of January 31, 2019:
|
|
Number of
securities to be issued upon exercise of outstanding options,
warrants and rights (1)
(a)
|
Weighted-average
exercise price per share of outstanding options, warrants and
rights
(b)
|
Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))(1)
(c)
|
|
Equity Compensation
plans approved by security holders
|
144,375
|
$13.77
|
215,625
|
|
Equity compensation
plans not approved by security holders
|
-----
|
-----
|
-----
|
|
Total
|
144,375
|
$13.77
|
215,625
|
(1)
The total reflected
in column (c) includes shares available for grant as any type of
equity award under our 2017 Equity Incentive Plan.
During the fourth
quarter of FY19, stock repurchases were as follows:
|
|
(a) Total number of
shares (or units) purchased
|
(b) Average price
paid per share (or unit)
|
(c) Total number of
shares (or units) purchased as part of publicly announced plans or
programs
|
(d) Maximum number
(or approximate dollar value) of shares (or units) that may yet be
purchased under the plans or programs
|
|
11/01/18 –
11/30/18
|
-----
|
$-----
|
-----
|
$2,500,000
|
|
12/19/18 –
12/31/18
|
29,469
|
$10.35
|
29,469
|
2,200,000
|
|
01/02/19 –
01/31/19
|
76,179
|
$11.25
|
76,179
|
1,300,000
|
|
Total
|
$105,648
|
$10.99
|
-----
|
$1,300,000
|
PA
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a.
(1) Financial
Statements - Covered by Report of Independent Registered Public
Accounting Firm
(A)
Consolidated
Statements of Operations for the years ended January 31, 2019 and
2018
(B)
Consolidated
Statements of Comprehensive Income for the years ended January 31,
2019 and 2018
(C)
Consolidated
Balance Sheets at January 31, 2019 and 2018
(D)
Consolidated
Statements of Stockholders’ Equity for the years ended
January 31, 2019 and 2018
(E)
Consolidated
Statements of Cash Flows for the years ended January 31, 2019 and
2018
(F)
Notes to
Consolidated Financial Statements
(4) Exhibits
– See (b) below
b.
Exhibits
|
Exhibit No.
|
|
Description
|
|
3.1
|
|
Restated
Certificate of Incorporation of Lakeland Industries, Inc., as
amended (incorporated by reference to Exhibit 3.2 of Lakeland
Industries, Inc.’s Form 10-Q filed December 7,
2011).
|
|
3.2
|
|
Amended
and Restated Bylaws of Lakeland Industries Inc., (incorporated by
reference to Exhibit 3.1 of Lakeland Industries, Inc.’s Form
8-K filed April 28, 2017).
|
|
4.1
|
|
2015
Stock Plan (incorporated by reference to Exhibit 4.1 of Lakeland
Industries, Inc. Registration Statement on Form S-8 filed July 24,
2015).
|
|
4.2
|
|
Lakeland
Industries, Inc. 2017 Equity Incentive Plan (incorporated by
reference to Exhibit 4.1 of Lakeland Industries, Inc.’s Form
8-K filed June 22, 2017).
|
|
4.3
|
|
Form of
Registration Rights Agreement, dated October 24, 2014, by and among
Lakeland Industries, Inc. and the several purchasers signatory
thereto (incorporated by reference to Exhibit 4.1 of Lakeland
Industries, Inc.’s Form 8-K filed October 24,
2014).
|
|
10.1
|
|
Employment
Agreement, dated April 16, 2010, between Lakeland Industries, Inc.
and Christopher J. Ryan (incorporated by reference to Exhibit 10.5
of Lakeland Industries, Inc. Form 10-K for the fiscal year ended
January 31, 2010, filed April 16, 2010).
|
|
10.2
|
|
Lakeland
Industries, Inc. Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.1 to Lakeland Industries, Inc. Form 8-K
filed June 29, 2012).
|
|
10.3
|
|
Lease
Agreement, dated April 4, 2011, between Wallingfen Park Limited, as
lessor, and Lakeland Industries, Inc., as lessee (incorporated by
reference to Exhibit 10.1 of Lakeland Industries, Inc. Form 10-Q
for fiscal quarter ended April 30, 2015).
|
|
10.4
|
|
Agreement for the
Purchase of Debts, dated January 29, 2013 between HSBC Invoice
Finance (UK) Limited and Lakeland Industries Europe Limited
(incorporated by reference to Exhibit 10.1 to Lakeland Industries,
Inc. Form 8-K filed February 25, 2013).
|
|
10.5
|
|
Fixed
Charge on Non-vesting Debts and Floating Charge, dated January 29,
2013 between HSBC Invoice Finance (UK) Limited and Lakeland
Industries Europe Limited (incorporated by reference to Exhibit
10.2 to Lakeland Industries, Inc. Form 8-K filed February 25,
2013).
|
|
Exhibit No.
|
|
Description
|
|
10.6
*
|
|
Standard
Terms & Conditions, dated May 15, 2018, for the debt provided
by between HSBC Invoice Finance (UK) Limited and Lakeland
Industries Europe Limited
|
|
10.7
|
|
Securities
Purchase Agreement, dated October 24, 2014, by and among Lakeland
Industries, Inc. and the several purchasers signatory thereto
(incorporated by reference to Exhibit 10.1 of Lakeland Industries,
Inc.’s Form 8-K filed October 24, 2014).
|
|
10.8
|
|
Warrant
to Purchase Common Stock, dated as of October 29, 2014, issued by
Lakeland Industries, Inc. to Craig-Hallum Capital Partners LLC
(incorporated by reference to Exhibit 10.1 of Lakeland Industries,
Inc.’s Form 8-K filed October 30, 2014).
|
|
10.9
|
|
Amendment
to Agreement for Purchase of Debts, dated effectively as of
December 3, 2014 between HSBC Invoice Finance (UK) Limited and
Lakeland Industries Europe Limited (incorporated by reference to
Exhibit 10.1 of Lakeland Industries, Inc.’s Form 8-K filed
December 8, 2014).
|
|
10.10
|
|
Letter
Agreement, dated December 5, 2014, between Lakeland Industries,
Inc. and HSBC Invoice Finance (UK) Ltd. (incorporated by reference
to Exhibit 10.2 of Lakeland Industries, Inc.’s Form 8-K filed
December 8, 2014).
|
|
10.11
|
|
Lease
Agreement, dated May 15, 2015, between J & L Property
Investors, LLC, as Landlord and Lakeland Industries, Inc., as
tenant (incorporated by reference to Exhibit 10.2 of Lakeland
Industries, Inc. Form 10-Q for fiscal quarter ended April 30,
2015).
|
|
10.12
|
|
Lease
Agreement, dated February 10, 2016, between Safety Pro, LLC, as
lessor and Lakeland Industries, Inc. as lessee (incorporated by
reference to Exhibit 10.55 of Lakeland Industries, Inc. Form 10-K
filed April 21, 2016).
|
|
10.13
|
|
Shares
Transfer Agreement, dated as of June 19, 2015, by and among
Lakeland Industries, Inc., Brasil Industria E Comercio de Roupas E
Equipamentos de Protecao Individual Ltda, Zap Comércio de
Brindes Corporativos Ltda and Jack Nemer (incorporated by reference
to Exhibit 10.1 of Lakeland Industries, Inc. Form 8-K filed June
25, 2015).
|
|
10.14
|
|
Employment
Agreement, dated July 12, 2018, between Charles D. Roberson and the
Company (incorporated by reference to Exhibit 10.1 of Lakeland
Industries, Inc. Form 10-Q filed September 10, 2018).
|
|
Exhibit No.
|
|
Description
|
|
10.15
|
|
Employment
Agreement, dated November 5, 2018, between Lakeland Industries,
Inc. and Teri W. Hunt (incorporated by reference to Exhibit 10.1 of
Lakeland Industries, Inc. Form 10-Q filed December 17,
2018).
|
|
10.16
|
|
Employment
Agreement, dated April 22, 2017 between Lakeland Industries, Inc.
and Daniel Edwards (incorporated by reference to Exhibit 10.26 of
Lakeland Industries, Inc.’s Form 10-K for fiscal year ended
January 31, 2017).
|
|
10.17
|
|
Amendment
to Agreement for Purchase of Debts, dated effectively as of
December 31, 2015 between Lakeland Industries Europe Ltd. and HSBC
Invoice Finance (UK) Limited (incorporated by reference to Exhibit
10.1 of Lakeland Industries, Inc.’s Form 8-K filed December
8, 2014).
|
|
10.18
|
|
Loan
Agreement dated May 10, 2017, by and between Lakeland Industries,
Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.1
of Lakeland Industries, Inc.’s Form 8-K filed May 16,
2017)
|
|
10.19
|
|
Security
Agreement, dated May 10, 2017, by and between Lakeland Industries,
Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.2
of Lakeland Industries, Inc.’s Form 8-K filed May 16,
2017)
|
|
10.20*
|
|
Lease
Agreement, dated December 1, 2018, between Tamash S.A., as lessor
and Lakeland Argentina S.R.L, as lessee
|
|
14.1*
|
|
Lakeland
Industries, Inc. Code of Ethics, as amended on September 29,
2017
|
|
21
|
|
Subsidiaries of Lakeland Industries, Inc. (wholly
owned) and jurisdictions of incorporation:Lakeland Protective Wear,
Inc.Ontario, CanadaLakeland Protective Real EstateOntario,
CanadaLaidlaw, Adams & Peck, Inc. and
SubsidiaryDelaware (Weifang Meiyang
Protective Products Co., Ltd.)An Qiu City, ShandongWeifang Lakeland
Safety Products Co., Ltd.An Qiu City, ShandongLakeland Gloves and
Safety Apparel Private Ltd.New Delhi, IndiaLakeland Industries
Europe Ltd.Cardiff, UKLakeland (Beijing) Safety Products, Co.,
Ltd.Beijing & Shanghai ChinaIndustrias Lakeland S.A. de
C.V.Zacatecas, MexicoLakeland Chile, LLCSantiago, ChileLakeland
Argentina, SRLBuenos Aires, ArgentinaArt Prom, LLCUst-Kamenogorsk,
KazakhstanRussIndProtection, Ltd.Moscow, RussiaSpecProtect
LimitedSt. Petersburg, RussiaLakeland (Hong Kong) Trading Co.,
Ltd.Hong KongIndian & Pan Pacific Sales LimitedHong
KongLakeland (Vietnam) Industries, Co., LtdNam Dinh, VietnamUruguay
Migliara, S.A.Montevideo, Uruguay
|
|
Exhibit No.
|
|
Description
|
|
23.1*
|
|
Consent
of Friedman LLP, Independent Registered Public Accounting
Firm
|
|
31.1*
|
|
Certification
of Christopher J. Ryan, Chief Executive Officer, President and
Secretary, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2*
|
|
Certification
of Teri W. Hunt, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32.1*
|
|
Certification
of Christopher J. Ryan, Chief Executive Officer, President and
Secretary, pursuant to Section 18 USC. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2*
|
|
Certification
of Teri W. Hunt, Chief Financial Officer, pursuant to Section 18
USC. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculations Document
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definitions Document
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Labels Document
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentations Document
|
|
*
|
|
Filed
herewith
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
LAKELAND
INDUSTRIES, INC.
|
|
|
|
|
|
|
|
Dated: April 16,
2019
|
By:
|
/s/ Christopher J. Ryan
|
|
|
|
|
Christopher J.
Ryan, |
|
|
|
|
Chief Executive
Officer and President |
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
A. John
Kreft
|
|
Chairman of the
Board |
|
April
16, 2019 |
| A. John
Kreft |
|
|
|
|
|
|
|
|
|
|
|
/s/
Christopher J.
Ryan
|
|
Chief Executive
Officer, President, |
|
April
16, 2019 |
| Christopher J.
Ryan |
|
Secretary and
Director |
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Teri W.
Hunt
|
|
Chief Financial
Officer |
|
April
16, 2019 |
| Teri W.
Hunt |
|
(Principal
Financial and Accounting Officer)
|
|
|
| |
|
|
|
|
|
/s/
Jeffrey
Schlarbaum |
|
Director
|
|
April 16,
2019
|
| Jeffrey
Schlarbaum |
|
|
|
|
| |
|
|
|
|
|
/s/
Thomas
McAteer |
|
Director
|
|
April 16,
2019
|
| Thomas
McAteer |
|
|
|
|
| |
|
|
|
|
|
/s/
James
Jenkins |
|
Director
|
|
April 16,
2019
|
| James
Jenkins |
|
|
|
|
