Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark
one)
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
quarterly period ended October
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
of incorporation)
|
|
(IRS
Employer Identification Number)
|
|
|
|
|
|
3555
Veterans Memorial Highway, Suite C, Ronkonkoma, New
York
|
|
11779
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(631) 981-9700
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Trading
Symbol(s)
|
Name of
each exchange on which registered
|
|
Common
Stock
|
LAKE
|
NASDAQ
|
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 and posted 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 such files).Yes ☒ No
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definition of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer ☐
|
Accelerated filer ☒
|
|
Non-accelerated
filer ☐
|
Smaller reporting company ☒
|
|
Emerging
growth company ☐
|
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes☐ No ☒
Indicate the number
of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date.
|
Class
|
Outstanding at
December 6, 2019
|
|
Common
Stock, $0.01 par value per share
|
8,006,829
shares
|
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-Q
The
following information of the Registrant and its subsidiaries is
submitted herewith:
PART I - FINANCIAL INFORMATION:
|
Item
1.
|
Financial
Statements (Unaudited)
|
Page
|
|
|
|
|
|
|
Introduction
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations Three and Nine Months Ended
October 31, 2019 and 2018
|
5
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Comprehensive Income Three and Nine
Months Ended October 31, 2019 and 2018
|
6
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets October 31, 2019
and January 31, 2019
|
7
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity Three and
Nine Months Ended October 31, 2019 and 2018
|
8
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows Nine Months Ended October 31,
2019 and 2018
|
9
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
10
|
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
29
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
35
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
35
|
|
|
|
|
|
|
PART II - OTHER INFORMATION:
|
|
|
|
|
|
|
Item
6.
|
Exhibits
|
36
|
|
|
|
|
|
|
Signature
Pages
|
37
|
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
PART I FINANCIAL
INFORMATION
Item 1. Financial Statements
Introduction
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-Q may contain certain forward-looking statements. When used
in this Form 10-Q or in any other presentation, statements which
are not historical in nature, including the words
“anticipate,” “estimate,”
“should,” “expect,” “believe,”
“intend,” “project” and similar
expressions, are intended to identify forward-looking statements.
They also include statements containing a projection of sales,
earnings or losses, capital expenditures, dividends, capital
structure or other financial terms.
The
forward-looking statements in this Form 10-Q are based upon our
management’s beliefs, assumptions and expectations of our
future operations and economic performance, taking into account the
information currently available to us. These statements are not
statements of fact. Forward-looking statements involve risks and
uncertainties, some of which are not currently known to us that may
cause our actual results, performance or financial condition to be
materially different from the expectations of future results,
performance or financial condition we express or imply in any
forward-looking statements. Some of the important factors that
could cause our actual results, performance or financial condition
to differ materially from expectations are:
●
our ability to
obtain additional funds, if necessary;
●
we are subject to
risk as a result of our international manufacturing
operations;
●
our results of
operations could be negatively affected by potential fluctuations
in foreign currency exchange rates;
●
we may be exposed
to continuing and other liabilities arising from our former
Brazilian operations.
●
the
implementation of our "Enterprise Resource Planning ("ERP") system
had, and may continue to have, an adverse effect on operating
results; in this connection, we incurred a net loss for the fourth
quarter of fiscal 2019 and increased operating expenses for the
first nine months of fiscal 2020;
●
in the fourth
quarter of fiscal 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 material weaknesses in our internal controls, our ability
to produce accurate and timely financial statements could be
impaired, and investors’ views of us could be
harmed;
●
we have
manufacturing and other operations in China which may be adversely
effected by tariff wars and other trade maneuvers;
●
We may be adversely
effected by the withdrawal of the United Kingdom from the European
Union
●
we deal in
countries where corruption is an obstacle;
●
we are exposed to
tax expense risk;
●
rapid technological
change could negatively affect sales of our products, inventory
levels and our performance;
●
we must estimate
customer demand because we do not have long-term commitments from
many of our customers, and errors in our estimates could negatively
impact our inventory levels and net sales;
●
our operations are
substantially dependent upon key personnel;
●
we rely on a
limited number of suppliers and manufacturers for specific fabrics,
and we may not be able to obtain substitute suppliers and
manufacturers on terms that are as favorable, or at all, if our
supplies are interrupted;
●
our inability to
protect our intellectual property;
●
cybersecurity
incidents could disrupt business operations, result in the loss of
critical and confidential information and adversely impact our
reputation and result of operations;
●
we face competition
from other companies, a number of which have substantially greater
resources than we do;
●
a substantial
amount of our sales are to foreign buyers, which exposes us to
additional risks;
●
environmental laws
and regulations may subject us to significant
liabilities;
●
our directors and
executive officers have the ability to exert significant influence
on us and on matters subject to a vote of our
stockholders;
●
our failure to
realize anticipated benefits from acquisitions, divestitures or
restructurings, or the possibility that such acquisitions,
divestitures or restructurings could adversely affect
us;
●
covenants in our
credit facilities may restrict our financial and operating
flexibility;
●
our ability to make
payments on our indebtedness and comply with the restrictive
covenants therein; and
●
the other factors
referenced in this Form 10-Q, including, without limitation, in the
sections entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and the
factors described under “Risk Factors” disclosed in our
fiscal 2019 Form 10-K.
We
believe these forward-looking statements are reasonable; however,
you should not place undue reliance on any forward-looking
statements, which are based on current expectations. Furthermore,
forward-looking statements speak only as of the date they are made.
We undertake no obligation to publicly update or revise any
forward-looking statements after the date of this Form 10-Q,
whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Form 10-Q might not occur.
We qualify any and all of our forward-looking statements entirely
by these cautionary factors.
LAKELAND INDUSTRIES, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($000’s
except for share and per share information)
|
|
Three Months
Ended
October
31,
|
Nine Months
Ended
October
31,
|
|
|
|
|
|
|
|
Net
sales
|
$27,464
|
$24,009
|
$79,620
|
$73,970
|
|
Cost of goods
sold
|
18,166
|
15,691
|
52,349
|
46,995
|
|
Gross
profit
|
9,298
|
8,318
|
27,271
|
26,975
|
|
Operating
expenses
|
7,464
|
7,305
|
23,114
|
21,898
|
|
Operating
profit
|
1,834
|
1,013
|
4,157
|
5,077
|
|
Other income
(expense), net
|
(9)
|
7
|
(33)
|
36
|
|
Interest
expense
|
(26)
|
(25)
|
(98)
|
(93)
|
|
Income before
taxes
|
1,799
|
995
|
4,026
|
5,020
|
|
Income tax
expense
|
653
|
494
|
1,950
|
1,634
|
|
Net
income
|
$1,146
|
$501
|
$2,076
|
$3,386
|
|
Net income per
common share:
|
|
|
|
|
|
Basic
|
$0.14
|
$0.06
|
$0.26
|
$0.42
|
|
Diluted
|
$0.14
|
$0.06
|
$0.26
|
$0.41
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
|
Basic
|
8,004,640
|
8,119,488
|
8,013,383
|
8,117,307
|
|
Diluted
|
8,035,929
|
8,186,130
|
8,044,159
|
8,174,560
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(UNAUDITED)
($000’s)
|
|
Three Months
Ended
October
31,
|
Nine Months
Ended
October
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$1,146
|
$501
|
$2,076
|
$3,386
|
|
Other comprehensive
loss:
|
|
|
|
|
|
Foreign currency
translation adjustments
|
(177)
|
(235)
|
(402)
|
(860)
|
|
Comprehensive
income
|
$969
|
$266
|
$1,674
|
$2,526
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000’s
except for share information)
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
Cash and cash
equivalents
|
$9,473
|
$12,831
|
|
Accounts
receivable, net of allowance for doubtful accounts of $602 and $434
at October 31, 2019 and January 31, 2019, respectively
|
17,413
|
16,477
|
|
Inventories
|
47,797
|
42,365
|
|
Prepaid VAT and
other taxes
|
1,316
|
1,478
|
|
Other current
assets
|
2,622
|
2,319
|
|
Total current
assets
|
78,621
|
75,470
|
|
Property and
equipment, net
|
10,233
|
10,781
|
|
Operating leases
right-of-use assets
|
2,482
|
-----
|
|
Deferred tax
assets
|
6,600
|
7,267
|
|
Prepaid VAT and
other taxes
|
176
|
176
|
|
Other
assets
|
121
|
158
|
|
Goodwill
|
871
|
871
|
|
Total
assets
|
$99,104
|
$94,723
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$6,246
|
$6,214
|
|
Accrued
compensation and benefits
|
1,699
|
1,137
|
|
Other accrued
expenses
|
3,227
|
2,825
|
|
Current maturity of
long-term debt
|
1,194
|
158
|
|
Current portion of
operating lease liabilities
|
254
|
-----
|
|
Total current
liabilities
|
12,620
|
10,334
|
|
Long-term
portion of debt
|
-----
|
1,161
|
|
Long-term
portion of operating lease liabilities
|
2,243
|
-----
|
|
Total noncurrent
liabilities
|
2,243
|
1,161
|
|
Total
liabilities
|
14,863
|
11,495
|
|
Commitments and
contingencies
|
|
|
|
Stockholders’
equity
|
|
|
|
Preferred stock,
$0.01 par; authorized 1,500,000 shares (none issued)
|
-----
|
-----
|
|
Common stock, $0.01
par; authorized 20,000,000 shares
issued 8,478,118
and 8,475,929; outstanding 8,006,829 and 8,013,840 shares at
October 31, 2019 and January 31, 2019, respectively
|
85
|
85
|
|
Treasury stock, at
cost; 471,289 and 462,089 shares at October 31, 2019 and January
31, 2019, respectively
|
(4,614)
|
(4,517)
|
|
Additional paid-in
capital
|
75,048
|
75,612
|
|
Retained
earnings
|
16,376
|
14,300
|
|
Accumulated other
comprehensive loss
|
(2,654)
|
(2,252)
|
|
Total stockholders'
equity
|
84,241
|
83,228
|
|
Total liabilities
and stockholders' equity
|
$99,104
|
$94,723
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(000’s
except for share information)
|
|
|
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31,
2018
|
8,472,640
|
$85
|
(356,441)
|
$(3,352)
|
$74,917
|
$12,841
|
$(1,651)
|
$82,840
|
|
Net income
|
-----
|
-----
|
-----
|
-----
|
-----
|
3,386
|
-----
|
3,386
|
|
Other comprehensive
loss
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
(860)
|
(860)
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
Restricted Stock Plan
|
3,289
|
-----
|
-----
|
-----
|
467
|
-----
|
-----
|
467
|
|
Balance, October 31,
2018
|
8,475,929
|
$85
|
(356,441)
|
$(3,352)
|
$75,384
|
$16,227
|
$(2,511)
|
$85,833
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31,
2018
|
8,472,640
|
$85
|
(356,441)
|
$(3,352)
|
$75,221
|
$15,726
|
$(2,275)
|
$85,405
|
|
Net income
|
-----
|
-----
|
-----
|
-----
|
-----
|
501
|
-----
|
501
|
|
Other comprehensive
loss
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
(236)
|
(236)
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Plan
|
3,289
|
-----
|
-----
|
-----
|
163
|
-----
|
-----
|
163
|
|
Balance, October 31,
2018
|
8,475,929
|
$85
|
(356,441)
|
$(3,352)
|
$75,384
|
$16,227
|
$(2,511)
|
$85,833
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31,
2019
|
8,475,929
|
$85
|
(462,089)
|
$(4,517)
|
$75,612
|
$14,300
|
$(2,252)
|
$83,228
|
|
Net income
|
-----
|
-----
|
-----
|
-----
|
-----
|
2,076
|
-----
|
2,076
|
|
Other comprehensive
loss
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
(402)
|
(402)
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Plan
|
2,189
|
-----
|
-----
|
-----
|
(559)
|
-----
|
-----
|
(559)
|
|
Returned of shares in lieu of
payroll tax withholding
|
-----
|
-----
|
-----
|
-----
|
(5)
|
-----
|
-----
|
(5)
|
|
Treasury stock purchased; inclusive
of commissions
|
-----
|
-----
|
(9,200)
|
(97)
|
-----
|
-----
|
-----
|
(97)
|
|
Balance, October 31,
2019
|
8,478,118
|
$85
|
(471,289)
|
$(4,614)
|
$75,048
|
$16,376
|
$(2,654)
|
$84,241
|
|
Balance, July 31,
2019
|
8,475,929
|
$85
|
(471,289)
|
$(4,614)
|
$75,361
|
$15,230
|
$(2,477)
|
$83,585
|
|
Net income
|
-----
|
-----
|
-----
|
-----
|
-----
|
1,146
|
-----
|
1,146
|
|
Other comprehensive
loss
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
(177)
|
(177)
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
Restricted Stock Plan and stock
options
|
2,189
|
-----
|
-----
|
-----
|
(308)
|
-----
|
-----
|
(308)
|
|
Returned of shares in lieu of
payroll tax withholding
|
-----
|
-----
|
-----
|
-----
|
(5)
|
-----
|
-----
|
(5)
|
|
Balance, October 31,
2019
|
8,478,118
|
$85
|
(471,289)
|
$(4,614)
|
$75,048
|
$16,376
|
$(2,654)
|
$84,241
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($000)’s
|
|
Nine Months
Ended
October
31,
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
income
|
$2,076
|
$3,386
|
|
Adjustments to
reconcile net income to net cash used in operating
activities
|
|
|
|
Provision for of
doubtful accounts
|
168
|
76
|
|
Deferred income
taxes
|
667
|
352
|
|
Depreciation and
amortization
|
1,267
|
642
|
|
Stock based and
restricted stock compensation
|
(583)
|
491
|
|
Loss on disposal of
property and equipment
|
(2)
|
14
|
|
Non-cash operating
lease expense
|
797
|
-----
|
|
(Increase) decrease
in operating assets
|
|
|
|
Accounts
receivable
|
(1,257)
|
(2,655)
|
|
Inventories
|
(5,584)
|
(4,121)
|
|
Prepaid VAT and
other taxes
|
162
|
148
|
|
Other current
assets
|
(355)
|
(1,284)
|
|
Increase (decrease)
in operating liabilities
|
|
|
|
Accounts
payable
|
67
|
1,019
|
|
Accrued expenses
and other liabilities
|
517
|
265
|
|
Operating lease
liabilities
|
(783)
|
-----
|
|
Net cash used in
operating activities
|
(2,843)
|
(1,667)
|
|
Cash flows used in
investing activities:
|
|
|
|
Purchases of
property and equipment
|
(689)
|
(2,227)
|
|
Cash flows from
financing activities:
|
|
|
|
Loan repayments,
short-term
|
(124)
|
(207)
|
|
Loan borrowings,
short-term
|
-----
|
208
|
|
Loan repayments,
long-term
|
-----
|
(118)
|
|
UK borrowings
(repayments) under line of credit facility, net
|
491
|
(11)
|
|
Purchase
of Treasury Stock under stock repurchase program
|
(97)
|
-----
|
|
Shares
returned to pay employee taxes under restricted stock
program
|
(5)
|
-----
|
|
Net cash provided
by (used in) financing activities
|
265
|
(128)
|
|
Effect of exchange
rate changes on cash and cash equivalents
|
(91)
|
(106)
|
|
Net decrease in
cash and cash equivalents
|
(3,358)
|
(4,128)
|
|
Cash and cash
equivalents at beginning of period
|
12,831
|
15,788
|
|
Cash and cash
equivalents at end of period
|
$9,473
|
$11,660
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash paid for
interest
|
$98
|
$93
|
|
Cash paid for
taxes
|
$1,202
|
$1,326
|
|
|
|
|
|
Noncash investing
and financing activities
|
|
|
|
Leased assets
obtained in exchange for operating lease liabilities
|
$3,218
|
$-----
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Lakeland
Industries, Inc. and Subsidiaries (“Lakeland,” the
“Company,” “we,” “our” or
“us”), a Delaware corporation organized in April 1986,
manufactures and sells a comprehensive line of safety garments and
accessories for the industrial protective clothing
market.
The
unaudited condensed consolidated financial statements included
herein have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission, and reflect all adjustments
(consisting of only normal and recurring adjustments) which are, in
the opinion of management, necessary to present fairly the
unaudited condensed consolidated financial information required
herein. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(“US GAAP”) have been condensed or omitted pursuant to
such rules and regulations. While we believe that the disclosures
are adequate to make the information presented not misleading, it
is suggested that these unaudited condensed consolidated financial
statements be read in conjunction with the consolidated financial
statements and the notes thereto included in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission for the
fiscal year ended January 31, 2019.
The
results of operations for the three and nine month periods ended
October 31, 2019 are not necessarily indicative of the results to
be expected for the full year.
In this
Form 10-Q, (a) “FY means fiscal year; thus for example, FY20
refers to the fiscal year ending January 31, 2020, (b)
“Q” refers to quarter; thus, for example, Q3 FY20
refers to the third quarter of the fiscal year ending January 31,
2020, (c) “Balance Sheet” refers to the unaudited
condensed consolidated balance sheet and (d) “Statement of
Operations” refers to unaudited condensed consolidated
statement of operations.
3.
Summary of Significant Accounting Policies
Principles of Consolidation
The
accompanying unaudited condensed 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 unaudited condensed
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.
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 below at the date of the unaudited condensed
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 estimated net
realizable value.
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.
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 three months ended
October 31, 2019 and 2018 aggregated approximately $0.9 million and
$0.6 million and $2.5 million and $2.1 million for the nine months
ended October 31, 2019 and 2018, 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:
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Three Months Ended
October 31,
(in millions of dollars)
|
Nine Months Ended
October 31,
(in millions of dollars)
|
|
|
|
|
|
|
|
External
Sales by region:
|
|
|
|
|
|
USA
|
$14.16
|
$11.82
|
$41.47
|
$37.54
|
|
Other
foreign
|
0.91
|
0.72
|
2.61
|
2.30
|
|
Europe
(UK)
|
2.38
|
2.22
|
7.24
|
7.35
|
|
Mexico
|
0.88
|
0.77
|
2.08
|
2.70
|
|
Asia
|
4.62
|
4.80
|
12.49
|
12.79
|
|
Canada
|
2.60
|
2.08
|
7.47
|
6.38
|
|
Latin
America
|
1.91
|
1.60
|
6.26
|
4.91
|
|
Consolidated
external sales
|
$27.46
|
$24.01
|
$79.62
|
$73.97
|
|
|
Three Months Ended
October 31,
(in millions of dollars)
|
Nine Months Ended
October 31,
(in millions of dollars)
|
|
|
|
|
|
|
|
External
Sales by product lines:
|
|
|
|
|
|
Disposables
|
$12.52
|
$12.74
|
$39.19
|
$40.88
|
|
Chemical
|
5.68
|
4.74
|
16.30
|
12.42
|
|
Fire
|
2.81
|
1.02
|
6.64
|
3.57
|
|
Gloves
|
0.74
|
0.77
|
2.33
|
2.30
|
|
Hi-Vis
|
2.20
|
1.83
|
6.04
|
5.46
|
|
Wovens
|
3.51
|
2.91
|
9.12
|
9.34
|
|
Consolidated
external sales
|
$27.46
|
$24.01
|
$79.62
|
$73.97
|
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
unaudited condensed 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 unaudited
condensed 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 unaudited condensed consolidated balance sheets. The Company
does not have any uncertain tax positions at October 31, 2019 or
January 31, 2019.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, Australia, 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 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 gains (losses) included in net income for the three
months ended October 31, 2019 and 2018 was approximately $0.0
million and $0.2 million and for the nine months ended October 31,
2019 and 2018 was approximately $0.2 million and $(0.4) million,
respectively.
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.
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 and warrants, reduced by shares that may be
repurchased with the funds received from the exercise, based on the
average price during the fiscal period.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Reclassifications
Certain
reclassifications have been made to the prior period financial
statements to conform to the current period presentation. These
reclassifications have no effect on the accompanying unaudited
condensed 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
February 2016, the Financial Accounting Standards Board
(“FASB”) established Topic 842, Leases, by issuing
Accounting Standards Update (“ASU”) No. 2016-02, which
requires lessees to recognize leases on-balance sheet and disclose
key information about leasing arrangements. Topic 842 was
subsequently amended by ASU No. 2018-01, Land Easement Practical
Expedient for Transition to Topic 842; ASU No. 2018-10,
Codification Improvements to Topic 842, Leases; and ASU No.
2018-11, Targeted Improvements. The new standard establishes a
right-of-use model (“ROU”) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases will be
classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income
statement. The new standard was effective 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. The Company adopted the new standard on
February 1, 2019 and used the effective date as the 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. The Company elects the ‘package of practical
expedients’, which permits the Company not to reassess under
the new standard prior conclusions about lease identification,
lease classification and initial direct costs. On adoption, the
Company recognized additional operating lease liabilities of
approximately $2.8 million with corresponding ROU assets of the
same amount based on the present value of the remaining minimum
rental payments under the prior leasing standard for existing
operating leases.
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 has adopted this guidance, which had no material impact
on its unaudited condensed consolidated financial statements and
related disclosures.
New Accounting Pronouncements Not Yet Adopted
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill
and Other (Topic 350), which includes provisions, intended to
simplify the test for goodwill impairment. The standard is
effective for annual periods beginning after December 15, 2019,
with early adoption permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company does not expect the adoption of this standard to have a
significant impact on its financial position and results of
operations.
No
other recently issued accounting pronouncements had or are expected
to have a material impact on the Company’s unaudited
condensed consolidated financial statements.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventories consist
of the following (in $000s):
|
|
|
|
|
|
|
|
|
Raw
materials
|
$17,230
|
$14,986
|
|
Work-in-process
|
441
|
987
|
|
Finished
goods
|
$30,126
|
26,392
|
|
|
$47,797
|
$42,365
|
We
lease real property, equipment and certain automobiles. The Company
made the accounting policy election to account for short-term
leases as described herein. Leases with an initial term of 12
months or less are not recorded on the balance sheet; we recognize
lease expense for these leases on a straight-line basis over the
lease term.
The
Company determines if a contract contains a lease at inception. US
GAAP requires that the Company’s leases be evaluated and
classified as operating or finance leases for financial reporting
purposes. The classification evaluation begins at the commencement
date and the lease term used in the evaluation includes the
non-cancellable period for which the Company has the right to use
the underlying asset, together with renewal option periods when the
exercise of the renewal option is reasonably certain and failure to
exercise such option would result in an economic penalty. All of
the Company’s real estate leases are classified as operating
leases.
Most of
our real estate leases include one or more options to renew, with
renewal terms that generally can extend the lease term for an
additional four to five years. The exercise of lease renewal
options is at the Company’s discretion. The Company evaluates
renewal options at lease inception and on an ongoing basis, and
includes renewal options that it is reasonably certain to exercise
in its expected lease terms when classifying leases and measuring
lease liabilities. Lease agreements generally do not require
material variable lease payments, residual value guarantees or
restrictive covenants.
Leases
recorded on the unaudited condensed consolidated balance sheet
consist of the following:
|
Leases
(000’s)
|
Classification
|
|
|
|
|
|
|
Assets
|
|
|
|
Operating lease
assets
|
Operating lease
right-of-use assets
|
$2,482
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Current portion of
operating lease liabilities
|
$254
|
|
Noncurrent
|
|
|
|
Operating
|
Long-term portion
of operating lease liabilities
|
2,243
|
|
Total Lease
Obligations
|
|
$2,497
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Lease cost
The
components of lease expense are included on the unaudited
condensed consolidated statement of operations as follows (in
000’s):
|
|
Classification
|
Three Months Ended
October 31, 2019
|
Nine Months Ended
October 31, 2019
|
|
Operating lease
cost
|
Cost of goods
sold
|
$53
|
$342
|
|
Operating
expenses
|
$269
|
$507
|
|
Short-term lease
cost
|
|
$444
|
$572
|
Maturity of Lease Liabilities
Maturity of lease
liabilities as of October 31, 2019 was as follows (in
$000’s):
|
Year ending
January 31,
|
|
|
Remainder of fiscal
year 2020
|
254
|
|
2021
|
955
|
|
2022
|
802
|
|
2023
|
686
|
|
2024
|
23
|
|
Thereafter
|
81
|
|
Total lease
payments
|
2,801
|
|
Less:
Interest
|
304
|
|
Present value of
lease liability
|
$2,497
|
(a)
Operating leases
payments include $34,000 related to options to extend lease terms
that are reasonably certain of being exercised and new leases
entered into during the quarter.
Weighted-average lease terms and discount rates are as
follows:
|
|
|
|
Weighted-average
remaining lease term (years)
|
|
|
Operating
leases
|
2.72
|
|
|
|
|
Weighted-average
discount rate
|
|
|
Operating
leases
|
5.83%
|
Supplemental cash
flow information related to leases for the nine months ended
October 31, 2019 were as follows (in 000’s):
Cash paid for
amounts included in the measurement of lease
liabilities;
|
Nine Months
Ended
October
31,
2019
|
|
Operating cash
flows from operating leases
|
$783
|
|
Leased assets
obtained in exchange for new operating lease
liabilities
|
$3,218
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Disclosures related to periods prior to adoption of ASU
2016-02
The
Company adopted ASU 2016-02 using a modified retrospective adoption
method at February 1, 2019 as noted in Note 3. "Recent Accounting
Pronouncements." As required, the following disclosure is provided
for periods prior to adoption. Minimum lease commitments as of
January 31, 2019 that have initial or remaining lease terms in
excess of one year are as follows:
Leases
Total
rental costs under all operating leases are summarized as follows
(in 000’s):
|
Year ended
January 31,
|
|
|
|
|
|
2019
|
$1,022
|
|
2018
|
$841
|
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 (in 000’s):
|
|
|
|
2020
|
$761
|
|
2021
|
447
|
|
2022
|
435
|
|
2023
|
314
|
|
2024
|
8
|
|
and
thereafter
|
9
|
|
Total
|
$1,974
|
Revolving Credit Facility
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).
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine 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 nine 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
was 2.745% per annum and the initial rate of interest for the term
loan was 2.995% per annum. At October 31, 2019, the rate of
interest on the revolver was 3.78% per annum and the rate of
interest on the term loan was 4.4% 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.
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.
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
October 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.
As of
October 31, 2019, the Company had no borrowings outstanding on the
letter of credit sub-facility, no borrowings outstanding under the
revolving credit facility, and $1.2 million outstanding on the term
loan.
On June
7, 2019 the Company received a waiver for certain compliance
provisions in the Loan Agreement. Pursuant to the waiver,
compliance with the “fixed charge coverage ratio” is
waived for the fiscal quarters ending April 30, 2019, July 31, 2019
and October 31, 2019 and testing of the “fixed charge
coverage ratio” will commence again for the fiscal quarter
ending January 31, 2020. Pursuant to the Waiver, the Company has
agreed to maintain “Availability” (as defined in the
Loan Agreement) of at least $10,000,000 for the period from May 31,
2019 through December 31, 2019.
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 December 4, 2017 the facility was extended to March
30, 2018 for the next review period and, as of March 9, 2019 the
facility was extended to mature on March 30, 2020 with no
additional changes to the terms. The balance under this loan
outstanding at October 31, 2019 and January 31, 2019 was USD $0.5
million and USD $0.0 million, respectively, and is included in
other accrued expenses on the accompanying unaudited condensed
consolidated balance sheets. The amount of $0.4 million due from
HSBC as of January 31, 2019 is included in Other Current Assets on
the accompanying unaudited condensed consolidated balance
sheet.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Below
is a table to summarize the debt amounts above (in
000’s):
|
|
|
|
Current
Maturity of
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
$1,194
|
$-----
|
$-----
|
$1,161
|
$-----
|
$158
|
|
UK
|
$494
|
-----
|
-----
|
-----
|
-----
|
-----
|
|
Totals
|
$1,688
|
$-----
|
$-----
|
$1,161
|
$-----
|
$158
|
Five-year
Debt Payout Schedule
This
schedule reflects the liabilities as of October 31, 2019, and does
not reflect any subsequent event (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings in
USA
|
$1,194
|
$1,194
|
$-----
|
$-----
|
$-----
|
$-----
|
$-----
|
|
Borrowing in the
UK
|
494
|
494
|
-----
|
-----
|
-----
|
-----
|
-----
|
|
Total
|
$1,688
|
$1,688
|
$-----
|
$-----
|
$-----
|
$-----
|
$-----
|
Credit
Risk
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 is approximately $1.3 million
total included in the US bank accounts and approximately $8.2
million total in foreign bank accounts as of October 31,
2019.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Major Customer
No
customer accounted for more than 10% of net sales during the three
and nine month periods ended October 31, 2019 and
2018.
Major Supplier
No
supplier accounted for more than 10% of purchases during the three
and nine month periods ended October 31, 2019 and
2018.
The
2017 Stock Plan
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 grants are
made by 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
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
|
35,863
|
53,796
|
71,728
|
86,125
|
|
Non-employee
Directors
|
14,414
|
21,622
|
28,829
|
34,595
|
|
Total
|
50,277
|
75,418
|
100,557
|
120,720
|
|
|
Value at grant
date (numbers below are rounded to the nearest $100)
|
|
|
|
|
|
|
|
Employees
|
$497,600
|
$746,400
|
$995,200
|
$1,194,900
|
|
Non-employee
Directors
|
200,000
|
300,000
|
400,000
|
480,000
|
|
Total
|
$697,600
|
$1,046,400
|
$1,395,200
|
$1,674,900
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2020, in the case of the 2017 grants, and
commencing on February 1, 2018 and ending on January 31, 2021, in
the case of the 2018 grants, 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.
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 began recognizing
expense, except as set forth below, related to awards under the
2017 Plan at Maximum award level, including SARS. During the period
ended October 31, 2019, the Company revised its estimate of the
2017 and 2018 grants that will be earned for the designated
performance period. Based on actual EBITDA achieved by the
Company to date, it was deemed improbable that such performance
would meet even the Minimum level required for such grants to vest,
including SARS. As a result, stock-based compensation expense
was adjusted to account for the change in estimate. The total
amount of previously recognized stock-based compensation
attributable to the 2017 and 2018 grants that has been reversed is
approximately $835,000, of which approximately $25,000 related to
the SARS.
The
Company recognized total stock-based compensation costs, net of the
above change in estimate, which are reflected in operating expenses
(in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
Plan
|
$(345)
|
$189
|
$(596)
|
$491
|
|
Total stock-based
compensation
|
$(345)
|
$189
|
$(596)
|
$491
|
Shares issued
under
2017 Stock
Plan
|
Outstanding
Unvested Grants at Maximum at Beginning of FY20
|
|
Becoming Vested
during FY20
|
|
Outstanding
Unvested Grants at Maximum at End of
October 31,
2019
|
|
Restricted stock
grants – employees
|
84,126
|
-----
|
-----
|
12,397
|
71,729
|
|
Restricted stock
grants – non-employee directors
|
28,829
|
-----
|
-----
|
-----
|
28,829
|
|
Retainer in stock
– non-employee directors
|
25,044
|
7,292
|
2,675
|
-----
|
29,661
|
|
Total
restricted stock
|
137,999
|
7,292
|
2,675
|
12,397
|
130,219
|
|
|
|
|
|
|
|
|
Weighted average
grant date fair value
|
$13.77
|
$11.63
|
$15.85
|
$13.87
|
$13.66
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 October
31, 2019, unrecognized stock-based compensation expense related to
these restricted stock awards totaled $41,766 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 October
31, 2019, the Company granted awards for up to an aggregate of
32,336 shares from the 2017 Plan.
Stock Options
During
the third quarter ending October 31, 2019 a stock option was
granted pursuant to the Company’s 2017 Equity Incentive Plan
in the amount of 24,900 shares at a a weighted-average exercise
price of $11.17 per share. Such shares will vest at 8,300 shares on
each of August 12, 2020, August 12, 2021 and August 12,
2022.
The
following table represents stock options granted, exercised and
forfeited during third quarter of FY20.
|
Stock
Options
|
|
Weighted Average
Exercise Price per Share
|
Weighted Average
Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at July
31, 2019
|
-----
|
$-----
|
-----
|
$-----
|
|
Granted during the
quarter ended October 31, 2019
|
24,900
|
$11.17
|
-----
|
-----
|
|
Outstanding at
October 31, 2019
|
24,900
|
$11.17
|
9.79
|
-----
|
|
Exercisable at
October 31, 2019
|
-----
|
$-----
|
-----
|
$-----
|
The
Company recognized approximately $13,000 of stock-based
compensation expense during the three and nine months ended October
31, 2019 associated with the grant of the stock option. As of
October 31, 2019 there is approixmatley $162,000 of unrecognized
stock-based compensation expense, to be expensed over approximately
three years.
The
Company estimates the fair value of each stock option award on the
grant date using the Black-Scholes option-pricing model. The
assumptions used to calculate the fair value of the options granted
during the period ended October 31, 2019 are as
follows:
|
|
|
|
|
|
|
Expected
volatility
|
53%
|
|
Expected life in
years
|
10
|
|
Expected dividend
yield
|
0.00%
|
|
Risk-free interest
rate
|
1.65%
|
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 114,848 shares of stock under this program as of the
date of this filing which amounted to $1,261,656, inclusive of
commissions. During the three month period ended October 31, 2019
the Company repurchased zero shares. At October 31, 2019, the
dollar value of remaining shares that may by repurchased under the
share repurchase program was $1,238,344.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Warrant
In
October 2014, the Company issued a five-year warrant that was
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 October 31, 2019, such warrant has
expired.
Authorized Shares
On
June 27, 2018, the Company filed with the Secretary of State of the
State of Delaware a Certificate of Amendment to the Company’s
Restated Certificate of Incorporation, increasing the number of
authorized shares from 11,500,000 to 21,500,000, of which
20,000,000 shares are of the Company’s common stock and
1,500,000 shares are of the Company’s preferred stock. The
Certificate of Amendment was deemed effective as of June 25, 2018.
The increase effected solely the number of authorized shares of
common stock.
Deferred Taxes and Valuation Allowance
The
Company records net deferred tax assets to the extent the Company
believes these assets will more likely than not be realized. The
valuation allowance was $1.3 million at October 31, 2019 and
January 31, 2019. The valuation allowance stayed the same for the
three and nine months ended October 31, 2019 and 2018,
respectively.
Tax Reform
On
December 22, 2017, 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 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. 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. The regulations were finalized as of June 14, 2019.
Re-measurement and reassessment of the GILTI tax as it is currently
written resulted in a charge to tax expense of $0.3 million and
$0.6 million for the three and nine months ended October 31, 2019,
respectively. 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 FY20 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.
Income Tax Expense
Income
tax expenses consists of federal, state and foreign income taxes.
Items impacting the effective rate are foreign income subject to US
tax (including Tax Reform impacts), tax rates in foreign
jurisdictions, US state income taxes, timing differences for tax
deductions for restricted stock vesting, company borrowing
structures, and other permanent tax differences.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table sets forth the computation of basic and diluted
earnings per share at October 31, 2019 and 2018 as
follows:
|
|
Three Months Ended
October 31,
|
Nine Months Ended
October 31,
|
|
|
(in $000s except share and per
share information)
|
|
|
2019
|
2018
|
2019
|
2018
|
|
Numerator:
|
|
|
|
|
|
Net
income
|
$1,146
|
$501
|
$2,076
|
$3,386
|
|
Denominator:
|
|
|
|
|
|
Denominator for
basic earnings per share (weighted-average shares which reflect
shares in the treasury, 471,289 and 356,441 for October 31, 2019
and 2018, respectively)
|
8,004,640
|
8,119,448
|
8,013,383
|
8,117,307
|
|
Effect of dilutive
securities from restricted stock plan and from dilutive effect of
warrants
|
31,289
|
66,682
|
30,776
|
57,253
|
|
Denominator for
diluted earnings per share (adjusted weighted average
shares)
|
8,035,929
|
8,186,130
|
8,044,159
|
8,174,560
|
|
Basic earnings per
share
|
$0.14
|
$0.06
|
$0.26
|
$0.42
|
|
Diluted earnings
per share
|
$0.14
|
$0.06
|
$0.26
|
$0.41
|
|
Warrants,
restricted stock, and stock options excluded from the computation
of diluted earnings per share because the effect of inclusion would
have been anti-dilutive
|
125,457
|
|
|
|
Labor and other contingencies 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 (“Lakeland
Brazil”). While the vast majority of these labor suits
have been resolved, there are two (2) labor cases that remain
active, and in which Lakeland was named as a
co-defendant.
The
first case was filed against Lakeland by a former officer of
Lakeland Brazil, 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 appealed within the Labor Court system,
which was dismissed by the Labor Court of Appeal on November 27,
2019. The claimant may still further appeal to the Superior Labor
Court.
The
second case was filed by a former Lakeland Brazil manager, in 2014,
was ruled upon in Labor Court and awarded the claimant USD
$100,000. Lakeland was removed by the court from the case in
February 2017 and no appeals were filed in respect to such removal.
Both the claimant and Lakeland Brazil have appealed the award and
The Labor Court of Appeal has ruled in favor of Lakeland Brazil to
annul the first decision and re-open the case. The claimant has
appealed from the latter decision to the Superior Labor Court,
which is yet to rule on the matter.
A
former officer of Lakeland Brazil also filed a civil claim seeking
approximately USD $700,000 that he alleges is due to him against an
unpaid promissory note. While Lakeland may be sought as a party,
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 Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Lakeland Brazil may
face new labor lawsuits in the short term as a result of the recent
commencement of the winding down of its operations in our first
quarter. In order to mitigate this risk, the management of Lakeland
Brazil has been proposing settlement agreements to employees
dismissed due to the winding down and to the extent possible
seeking confirmation of Labor Courts. The Company has no obligation
under the 2015 Shares Transfer Agreement pursuant to which
Agreement, the Company eliminated its interest in Lakeland Brazil
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.
There
are additional cases in Labor and Civil courts against Lakeland
Brazil in which Lakeland is not a party, and other outstanding
monetary allegations 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. During the nine months ending October 31, 2019
the Company recorded an additional expense of $0.4 million and paid
$1.4 million in professional fees and labor claims. The accrual on
the balance sheet at October 31, 2019 and January 31, 2019 is $0.2
million and $1.2 million, respectively.
Other 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 October 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.
Officer severance payment
The
Company entered into a separation agreement with a former officer
effective July 22, 2019 and recorded a severance charge of $260,000
in connection with this arrangement. The severance amount will be
paid through June 5, 2020 pursuant to the terms of the separation
agreement.
|
|
Three Months
Ended
October
31,
|
Nine Months
Ended
October
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$14.16
|
51.56%
|
$11.82
|
49.24%
|
$41.47
|
52.08%
|
$37.54
|
50.75%
|
|
International
|
13.30
|
48.44%
|
12.19
|
50.76%
|
38.15
|
47.92%
|
36.43
|
49.25%
|
|
Total
|
$27.46
|
100.00%
|
$24.01
|
100.00%
|
$79.62
|
100.00%
|
$73.97
|
100.00%
|
Domestic and
international sales from continuing operations are as follows in
millions of dollars:
The
Company manages its operations by evaluating each of its geographic
locations. The US operations include a facility in Alabama (primary
US distribution facility and 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 Vietnam (primarily
disposable products), a manufacturing facility in Argentina and a
small manufacturing facility in India. The China facilities produce
the majority of the Company’s products and China generates a
significant portion of the Company’s international revenues.
The Company evaluates the performance of these entities based on
operating profit, which is defined as income before income taxes,
interest expense and other income and expenses. The Company
maintains sales forces in North America South America, Europe, and
Asia, which sell and distribute products shipped from the United
States, Mexico, Argentina, China, India or Vietnam.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
table below represents information about reported segments for the
years noted therein:
|
|
Three Months
Ended
October
31,
(in millions of
dollars)
|
Nine Months
Ended
October
31,
(in millions of
dollars)
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
USA
|
$15.84
|
$13.00
|
$45.36
|
$41.07
|
|
Other
foreign
|
1.65
|
1.29
|
4.81
|
4.33
|
|
Europe
(UK)
|
2.38
|
2.22
|
7.24
|
7.35
|
|
Mexico
|
1.22
|
1.15
|
3.09
|
3.83
|
|
Asia
|
13.34
|
12.68
|
43.97
|
40.27
|
|
Canada
|
2.60
|
2.08
|
7.50
|
6.39
|
|
Latin
America
|
2.01
|
1.74
|
6.45
|
5.27
|
|
Corporate
|
-----
|
-----
|
-----
|
0.75
|
|
Less intersegment
sales
|
(11.58)
|
(10.15)
|
(38.80)
|
(35.29)
|
|
Consolidated
sales
|
$27.46
|
$24.01
|
$79.62
|
$73.97
|
|
External
Sales:
|
|
|
|
|
|
USA
|
$14.16
|
$11.82
|
$41.47
|
$37.54
|
|
Other
foreign
|
0.91
|
0.72
|
2.61
|
2.30
|
|
Europe
(UK)
|
2.38
|
2.22
|
7.24
|
7.35
|
|
Mexico
|
0.88
|
0.77
|
2.08
|
2.70
|
|
Asia
|
4.62
|
4.80
|
12.49
|
12.79
|
|
Canada
|
2.60
|
2.08
|
7.47
|
6.38
|
|
Latin
America
|
1.91
|
1.60
|
6.26
|
4.91
|
|
Consolidated
external sales
|
$27.46
|
$24.01
|
$79.62
|
$73.97
|
|
Intersegment
Sales:
|
|
|
|
|
|
USA
|
$1.68
|
$1.18
|
$3.89
|
$3.53
|
|
Other
foreign
|
0.74
|
0.57
|
2.20
|
2.02
|
|
Mexico
|
0.34
|
0.38
|
1.01
|
1.13
|
|
Asia
|
8.71
|
7.88
|
31.48
|
27.49
|
|
Canada
|
-----
|
-----
|
0.03
|
0.02
|
|
Latin
America
|
0.11
|
0.14
|
0.19
|
0.35
|
|
Corporate
|
-----
|
-----
|
-----
|
0.75
|
|
Consolidated
intersegment sales
|
$11.58
|
$10.15
|
$38.80
|
$35.29
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Three Months
Ended
October
31,
(in millions of
dollars)
|
Nine Months
Ended
October
31,
(in millions of
dollars)
|
|
|
|
|
|
|
|
Operating Profit
:
|
|
|
|
|
|
USA
|
$2.60
|
$1.66
|
$6.04
|
$6.45
|
|
Other
foreign
|
0.14
|
0.02
|
0.30
|
0.23
|
|
Europe
(UK)
|
0.02
|
0.03
|
(0.02)
|
0.21
|
|
Mexico
|
0.02
|
(0.03)
|
(0.39)
|
0.13
|
|
Asia
|
1.04
|
0.63
|
2.87
|
1.81
|
|
Canada
|
0.25
|
0.32
|
0.77
|
0.75
|
|
Latin
America
|
0.21
|
0.16
|
0.81
|
0.52
|
|
Corporate
|
(2.46)
|
(1.61)
|
(6.33)
|
(4.96)
|
|
Less intersegment
profit
|
0.01
|
(0.17)
|
0.11
|
(0.06)
|
|
Consolidated
operating profit
|
$1.83
|
$1.01
|
$4.16
|
$5.08
|
|
Depreciation and
Amortization Expense:
|
|
|
|
|
|
USA
|
$0.04
|
$0.03
|
$0.21
|
$0.09
|
|
Other
foreign
|
-----
|
-----
|
0.02
|
0.02
|
|
Europe
(UK)
|
-----
|
-----
|
-----
|
0.01
|
|
Mexico
|
0.04
|
0.03
|
0.12
|
0.09
|
|
Asia
|
0.14
|
0.04
|
0.40
|
0.19
|
|
Canada
|
0.03
|
0.02
|
0.08
|
0.05
|
|
Latin
America
|
0.01
|
0.01
|
0.03
|
0.03
|
|
Corporate
|
0.18
|
0.09
|
0.43
|
0.19
|
|
Less
intersegment
|
(0.01)
|
-----
|
(0.02)
|
(0.03)
|
|
Consolidated
depreciation & amortization expense
|
$0.43
|
$0.22
|
$1.27
|
$0.64
|
|
Interest
Expense:
|
|
|
|
|
|
Europe
(UK)
|
$-----
|
$-----
|
$0.01
|
$----
|
|
Latin
America
|
0.01
|
0.01
|
0.04
|
0.03
|
|
Corporate
|
0.02
|
0.02
|
0.05
|
0.06
|
|
Consolidated
interest expense
|
$0.03
|
$0.03
|
$0.10
|
$0.09
|
|
Income Tax
Expense:
|
|
|
|
|
|
Europe
(UK)
|
$0.01
|
$0.01
|
$0.01
|
0.05
|
|
Asia
|
0.16
|
0.29
|
0.67
|
0.80
|
|
Canada
|
0.10
|
0.02
|
0.32
|
0.17
|
|
Latin
America
|
-----
|
0.15
|
0.13
|
0.21
|
|
Corporate
|
0.38
|
0.05
|
0.81
|
0.39
|
|
Less
intersegment
|
-----
|
(0.03)
|
0.01
|
0.01
|
|
Consolidated income
tax expense
|
$0.65
|
$0.49
|
$1.95
|
$1.63
|
|
Capital
Expenditures:
|
|
|
|
|
|
USA (including
Corporate)
|
$(0.04)
|
$0.54
|
$0.28
|
$0.85
|
|
Other
foreign
|
0.01
|
0.36
|
0.02
|
1.13
|
|
Mexico
|
0.02
|
0.09
|
0.07
|
0.20
|
|
Asia
|
0.12
|
0.02
|
0.31
|
0.05
|
|
Latin
America
|
-----
|
-----
|
0.01
|
-----
|
|
Consolidated
capital expenditure
|
$0.11
|
$1.01
|
$0.69
|
$2.23
|
|
|
|
|
|
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
October
31,
2019
(in millions of
dollars)
|
January
31,
2019
(in millions of
dollars)
|
|
Total
Assets
|
|
|
|
USA
|
$31.05
|
$29.76
|
|
Other
foreign
|
3.57
|
2.85
|
|
Europe
(UK)
|
5.13
|
4.36
|
|
Mexico
|
5.45
|
5.13
|
|
Asia
|
23.31
|
20.97
|
|
Canada
|
6.00
|
6.64
|
|
Latin
America
|
5.46
|
5.27
|
|
Corporate
|
19.13
|
19.74
|
|
Consolidated
assets
|
$99.10
|
$94.72
|
|
Property and
Equipment
|
|
|
|
USA (including
Corporate)
|
$3.55
|
$3.87
|
|
Other
foreign
|
0.17
|
0.19
|
|
Europe
(UK)
|
-----
|
0.01
|
|
Mexico
|
2.10
|
2.14
|
|
Asia
|
3.10
|
3.17
|
|
Canada
|
1.18
|
1.26
|
|
Latin
America
|
0.05
|
0.07
|
|
Less
intersegment
|
0.08
|
0.07
|
|
Consolidated
property and equipment
|
$10.23
|
$10.78
|
|
Goodwill:
|
|
|
|
USA
|
$0.87
|
$0.87
|
|
Consolidated
goodwill
|
$0.87
|
$0.87
|
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This Form 10-Q 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. See
“SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS” at
the beginning of Part I, Item 1.
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 approximately
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, heavy and light industry, 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 US Food and Drug
Administration. 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.
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. Our facilities and capabilities outside the United
States allow access to a less expensive labor pool than is
available in the United States and permit us to purchase certain
raw materials at a lower cost than they are available domestically.
More recently we have initiated startup manufacturing operations in
Vietnam and India to offset increasing manufacturing costs in
China. This shift in manufacturing, and the redundant manufacturing
capability it provides, also serves to insulate the company from
the cost implications of bilateral trade disputes. Our China
operations will continue to manufacture primarily for the Chinese
market and other markets where duty advantages exist. Manufacturing
expansion is not only necessary to control rising costs, it is also
necessary for Lakeland to achieve its growth objectives. Our net
sales attributable to customers outside the United States were
$13.3 million and $12.2 million for the three months ended October
31, 2019 and 2018, respectively, and $38.2 and $36.4 for the nine
months ended October 31, 2019 and 2018, respectively.
Critical Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of
operations are based upon our unaudited condensed consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of our unaudited condensed consolidated
financial statements in conformity with accounting principles
generally accepted in the United States requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, net sales and expenses and disclosure of contingent
assets and liabilities. We base our estimates on the past
experience and on various other assumptions that we believe to be
reasonable under the circumstances, and we periodically evaluate
these estimates.
We
believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
unaudited condensed consolidated financial statements.
Revenue Recognition. Substantially all
of 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 three months ended
October 31, 2019 and 2018 aggregated approximately $0.9 million and
$0.6 million, respectively, and $2.5 million and $2.1 million for
the nine months ended October 31, 2019 and 2018, 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:
|
|
Three Months Ended
October 31,
(in millions of dollars)
|
Nine Months Ended
October 31,
(in millions of dollars)
|
|
|
|
|
|
|
|
External
Sales by geographic region:
|
|
|
|
|
|
USA
|
$14.16
|
$11.82
|
$41.47
|
$37.54
|
|
Other
foreign
|
0.91
|
0.72
|
2.61
|
2.30
|
|
Europe
(UK)
|
2.38
|
2.22
|
7.24
|
7.35
|
|
Mexico
|
0.88
|
0.77
|
2.08
|
2.70
|
|
Asia
|
4.62
|
4.80
|
12.49
|
12.79
|
|
Canada
|
2.60
|
2.08
|
7.47
|
6.38
|
|
Latin
America
|
1.91
|
1.60
|
6.26
|
4.91
|
|
Consolidated
external sales
|
$27.46
|
$24.01
|
$79.62
|
$73.97
|
|
|
Three Months Ended
October 31,
(in millions of dollars)
|
Nine Months Ended
October 31,
(in millions of dollars)
|
|
|
|
|
|
|
|
External
Sales by product lines:
|
|
|
|
|
|
Disposables
|
$12.52
|
$12.74
|
$39.19
|
$40.88
|
|
Chemical
|
5.68
|
4.74
|
16.30
|
12.42
|
|
Fire
|
2.81
|
1.02
|
6.64
|
3.57
|
|
Gloves
|
0.74
|
0.77
|
2.33
|
2.30
|
|
Hi-Vis
|
2.20
|
1.83
|
6.04
|
5.46
|
|
Wovens
|
3.51
|
2.91
|
9.12
|
9.34
|
|
Consolidated
external sales
|
$27.46
|
$24.01
|
$79.62
|
$73.97
|
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 below at the date of the unaudited
condensed 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.
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.
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 unaudited condensed 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 unaudited condensed 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 unaudited condensed consolidated balance sheets. The Company
does not have any uncertain tax positions at October 31, 2019 or
January 31, 2019.
Foreign Operations and Foreign Currency Translation. The
Company maintains manufacturing operations in the People’s
Republic of China, Mexico, Vietnam, 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, Mexico, Uruguay, Australia, and Vietnam. 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; 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.
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.
Recent Accounting Pronouncements
See
Note 3 in the unaudited condensed consolidated financial statements
for management’s periodic review of new accounting standards
that were issued.
Significant Balance Sheet Fluctuation October 31, 2019, As Compared
to January 31, 2019
Balance Sheet Accounts. Cash decreased by $3.4 million,
primarily as a result of a net increase in other working capital
elements. Accounts receivable increased $0.9 million and inventory
increased by $5.4 million in the nine months ended October 31,
2019. The increase in accounts receivable was due to the increases
in sales for the three months ended October 31, 2019. The increase
in inventory was due to the scale up of our Vietnam operations;
increased raw materials and finished goods (“FG”); to
catch up on remaining Gloves, Fire, and High Visability orders
delayed due to our ERP installation and increases in raw materials
and FG required to ramp up product of our new, high value utilities
product line at a major distributor. Accounts payable, accrued
compensation, and other accrued expenses increased $1.0 million due
to increased compensation accruals primarily due to timing of pay
dates and severance and an increase in borrowing in the
UK.
Three Months ended October 31, 2019, As Compared to the Three
Months Ended October 31, 2018
Net Sales. Net sales
increased to $27.5 million for the three months ended October 31,
2019 compared to $24.0 million for the three months ended October
31, 2018, an increase of 14.4%. Sales in the US were up $2.3
million or 19.5% primarily due to improved customer deliveries
enabling us to reduce high order backlogs. No other region had a
material change during the period.
Gross Profit. Gross
profit increased $1.0 million, or 11.8%, to $9.3 million for the
three months ended October 31, 2019, from $8.3 million for the
three months ended October 31, 2018. Gross profit as a percentage
of net sales decreased to 33.9% for the three-month period ended
October 31, 2019, from 34.6% for the three months ended October 31,
2018. Major factors impacting gross margins were:
●
Pricing promotions
in Asia in the quarter.
●
Manufacturing
curtailments to reduce inventory levels.
Operating expenses. Operating expenses increased 2.2% from
$7.3 million for the three months ended October 31, 2018 to $7.5
million for the three months ended October 31, 2019. Operating
expenses as a percentage of net sales was 27.1% for the three
months ended October 31, 2019, down from 30.4% for the three months
ended October 31, 2018. Operating expenses in the quarter included
increases in outgoing freight, compensation (including severance),
marketing, depreciation, and bad debt expenses, offset by decreases
in stock-based compensation due to a change in
estimate.
Operating Profit. Operating profit increased to $1.8 million
for the three months ended October 31, 2019 as compared to $1.0
million for the three months ended October 31, 2018, due to the
impacts detailed above. In connection with the 2018 restricted
stock grants, stock-based compensation expense was reversed in an
amount of $359,000 as a result of a change in estimate in the
number of shares expected to be earned under the performance
plan.
Interest Expense. Interest expense was $0.03 million for the
three months ended October 31, 2019, the same as the three months
ended October 31, 2018 as a result of very little borrowings during
each period.
Income Tax Expense. Income tax expense consists of
federal, state and foreign income taxes. Income tax expense was
$0.7 million for the three months ended October 31, 2019, as
compared to $0.5 million for the three months ended October 31,
2018. The increase is due to the increased provision of $0.3
million due to the re-measurement and reassessment of the GILTI
tax.
Net Income. Net Income was $1.1 million for the three
months ended October 31, 2019 compared to net income of $0.5
million for the three months ended October 31, 2018.
Nine Months ended October 31, 2019, As Compared to the Nine Months
Ended October 31, 2018
Net Sales. Net sales
increased to $79.6 million for the nine months ended October 31,
2019 as compared to $74.0 million for the nine months ended October
31, 2018, an increase of 7.6%. Sales in the US were up $3.9 million
or 10.5% primarily due to improved customer deliveries enabling us
to reduce high order backlogs carried over from the fourth quarter
of fiscal 2019. No other region had a material change during the
period.
Gross Profit. Gross
profit increased $0.3 million, or 1.1%, to $27.3 million for the
nine months ended October 31, 2019, from $27.0 million for the nine
months ended October 31, 2018. Gross profit as a percentage of net
sales decreased to 34.3% for the nine-month period ended October
31, 2019, from 36.5% for the nine months ended October 31, 2018.
Gross profits for the nine months ended October 31, 2019 were
adversely effected by inefficiencies in the first three months of
the period due to the Company’s recent conversion to an ERP
software system. Those inefficiencies resulted in increased freight
and labor expenses required to expedite shipments of materials and
customer orders. While many of these issues with the system
implementation have been resolved and the Company began to realize
the resulting benefits in the last part of the period, remediation
activities are continuing and we expect such adverse effects to
continue lessening, and ultimately yield improved financial
performance. Gross profit was also reduced due to pricing
promotions in the Asia market.
Operating expenses. Operating expenses increased 5.5% to
$23.1 million for the nine months ended October 31, 2019 from $21.9
million for the nine months ended October 31, 2018. Operating
expenses as a percentage of net sales was 29.0% for the nine months
ended October 31, 2019 down from 29.6% for the nine months ended
October 31, 2018. Factors contributing to the increase in operating
expenses are increases in freight out, marketing, legal fees,
compensation (including severance), and depreciation offset by a
decrease in stock-based compensation and currency fluctuations. In
connection with the 2017 and 2018 restricted stock grants,
stock-based compensation expense was reversed in an amount of
$835,000 as a result of a change in estimate in the number of
shares expected to be earned under the performance
plan.
Operating Profit . Operating profit decreased to $4.2
million for the nine months ended October 31, 2019 from of $5.1
million for the nine months ended October 31, 2018, due to the
impacts detailed above. Operating margins were 5.2% for the nine
months ended October 31, 2019, as compared to 6.9% for the nine
months ended October 31, 2018.
Interest Expense. Interest expense was $0.1 million for the
nine months ended October 31, 2019, the same as the nine months
ended October 31, 2018 as a result of very little borrowings for
each quarter
Income Tax Expense. Income tax expense consists of
federal, state and foreign income taxes. Income tax expense was
$2.0 million for the nine months ended October 31, 2019, as
compared to $1.6 million for the nine months ended October 31,
2018. The increase is due to the increased provision of $0.6
million due to the re-measurement and reassessment of the GILTI
tax.
Net Income. Net income was $2.0 million for the nine
months ended October 31, 2019 compared to net income of $3.4
million for the nine months ended October 31, 2018. The results for
nine months ended October 31, 2019 are primarily due to a reduction
in gross profit and an increase in operating expenses. See
“Significant Balance Sheet Fluctuations October 31, 2019, as
compared to January 31, 2019” above.
Liquidity and Capital Resources
As of
October 31, 2019, we had cash and cash equivalents of approximately
$9.5 million and working capital of approximately $66.0 million.
Cash and cash equivalents decreased $3.4 million and working
capital increased approximately $0.9 million from January 31, 2019.
As a result of the new lease standard, working capital decreased by
approximately $0.3 million as a result of the recognition of the
current portion of the operating lease liability as of October 31,
2019
Of the
Company’s total cash and cash equivalents of $9.5 million as
of October 31, 2019, cash held in the US of $1.3, cash held in
Latin America of $0.8 million, cash held in Russia and Kazakhstan
of $0.5 million, cash held in the UK of $0.1 million, cash held in
India of $0.1 million, cash held in Mexico of $0.8 million, cash
held in Vietnam of $0.5 million, and cash held in Canada of $0.8
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 $4.6 million
balance at October 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. There were no dividends declared in
the nine months ended October 31, 2019.
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).
Net
cash used in operating activities of $2.8 million for the nine
months ended October 31, 2019 was primarily due to non-cash
expenses of $1.3 million for depreciation and amortization, an
increase in accounts receivable of $1.3 million, an increase in
inventory of $5.6 million offset by an increase in accounts payable
and accrued expenses of $0.7 million. Net cash used in investing
activities of $0.7 million for the nine months ended October 31,
2019 reflects purchases of property and equipment. Net cash
provided by financing activities was $0.3 million for the nine
months ended October 31, 2019 and was primarily due to net
borrowings of $0.4 million offset by $0.1 million of Treasury Stock
purchases.
Stock Repurchase Program. On October 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 114,848
shares under this program as of the date of this filing. There were
no shares repurchased during the nine months period ended October
31, 2019. At October 31, 2019, the dollar value of remaining shares
that may by repurchased under the share repurchase program was
$1,238,344
Capital Expenditures. Our capital expenditures in the first
nine months of FY20 of $0.7 million is principally relate to
planned equipment purchases in Mexico, China and the U.S. We
anticipate FY20 capital expenditures to be approximately $1.2
million as we work to fully implement the ERP project currently in
process and continue to expand our manufacturing capacity in our
Vietnam and India operations.
Item
3.
Quantitative
and Qualitative Disclosures About Market Risk
As a
"smaller reporting company" as defined by Item 10 of Regulation
S-K, the Company is not required to provide this
information.
Item
4.
Controls
and Procedures
Evaluation of Disclosure Controls and Procedures
Our
disclosure controls and procedures (as defined in Rules 13a-15(e)
or 15d-15(e) under the Securities Exchange Act of 1934, as amended)
are designed to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time
periods specified in the rules and forms of the Securities and
Exchange Commission and to ensure that information required to be
disclosed is accumulated and communicated to management, including
our principal executive officer and principal financial officer,
with assistance from other members of management. We have reviewed
for the effectiveness of our disclosure controls and procedures as
of October 31, 2019 and, based on our evaluation, we have concluded
the disclosure controls and procedures were not effective as of
that date due to material weaknesses in internal control over
financial reporting that were disclosed in our Annual Report on
Form 10-K for the fiscal year ended January 31, 2019.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the
Exchange Act) that occurred during the third quarter of fiscal 2020
that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
Remediation
As
previously described in Part II, Item 9A of our Annual Report on
Form 10-K for the fiscal year ended January 31, 2019, we began
implementing a remediation plan to address the material weaknesses
mentioned above. The weaknesses will not be considered remediated,
until the applicable controls operate for a sufficient period of
time and management has concluded, through testing, that these
controls are operating effectively. We expect that the remediation
of these material weaknesses will be completed prior to the end of
fiscal 2020.
PART II. OTHER INFORMATION
Items
1, 1A, 3, 4 and 5 are not applicable
Exhibits:*
Filed herewith
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934
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Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934
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Certification
of Chief Executive Officer as adopted pursuant to Rule 13a-14(a)
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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Certification
of Principal Financial Officer as adopted pursuant to 18 U.S.C.
Section 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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101.INS
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XBRL
instance Document
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101.SCH
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XBRL
Taxonomy Extension Schema Document
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101.CAL
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XBRL
Taxonomy Extension Definitions Document
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101.DEF
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XBRL
Taxonomy Extension Labels Document
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101.LAB
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XBRL
Taxonomy Extension Labels Document
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101.PRE
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XBRL
Taxonomy Extension Presentations Document
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SIGNATURES
Pursuant
to the requirements 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.
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LAKELAND INDUSTRIES, INC.
(Registrant)
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Date:
December 9, 2019
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/s/ Christopher J. Ryan
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Christopher
J. Ryan,
Chief
Executive Officer, President and Secretary (Principal Executive
Officer and Authorized Signatory)
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Date:
December 9, 2019
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/s/ Allen E. Dillard
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Allen
E. Dillard,
(Principal
Financial Officer and Authorized Signatory)
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