LAKELAND INDUSTRIES INC - Quarter Report: 2008 April (Form 10-Q)

 

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

Delaware		13-3115216
(State of incorporation)		(IRS Employer Identification Number)
701 Koehler Avenue, Suite 7, Ronkonkoma, New York		11779
(Address of principal executive offices)		(Zip Code)

 

 

 

	Large accelerated filer 	Accelerated filer                    o
	Non-Accelerated filer    (Do not check if a smaller reporting company)	Smaller reporting company ý

Class		Outstanding at June 5, 2008
Common Stock, $0.01 par value per share		5,420,701

 

 

 

 

 

 

Item 1.	Financial Statements (unaudited):	Page
	Introduction	3
	Condensed Consolidated Balance Sheets April 30, 2008 and January 31, 2008	4
	Condensed Consolidated Statements of Income for the Three Months Ended April 30, 2008 and 2007	5
	Condensed Consolidated Statement of Stockholders' Equity –Three Months Ended April 30, 2008	6
	Condensed Consolidated Statements of Cash Flows –Three Months Ended April 30, 2008 and 2007	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II - OTHER INFORMATION:
Item 6.	Exhibits and Reports on Form 8-K	23
Signature Page		24

 

 

PART I -	FINANCIAL INFORMATION
Item 1.	Financial Statements:

 

 

 

 

·

Our ability to obtain fabrics and components from suppliers and manufacturers at competitive prices or prices that vary from quarter to quarter;

·

Risks associated with our international manufacturing and start up sales operations;

·

Potential fluctuations in foreign currency exchange rates;

·

Our ability to respond to rapid technological change;

·

Our ability to identify and complete acquisitions or future expansion;

·

Our ability to manage our growth;

·

Our ability to recruit and retain skilled employees, including our senior management;

·

Our ability to accurately estimate customer demand;

·

Competition from other companies, including some with greater resources;

·

Risks associated with sales to foreign buyers;

·

Restrictions on our financial and operating flexibility as a result of covenants in our credit facilitates;

·

Our ability to obtain additional funding to expand or operate our business as planned;

·

The impact of a decline in federal funding for preparations for terrorist incidents;

·

The impact of potential product liability claims;

·

Liabilities under environmental laws and regulations;

·

Fluctuations in the price of our common stock;

·

Variations in our quarterly results of operations;

·

The cost of compliance with the Sarbanes-Oxley Act of 2002 and rules and regulations relating to corporate governance and public disclosure;

·

The significant influence of our directors and executive officer on our company and on matters subject to a vote of our stockholders;

·

The limited liquidity of our common stock;

·

The other factors referenced in this 10-Q, including, without limitation, in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.”

ASSETS		April 30, 2008				January 31, 2008
		(Unaudited)
Current assets:
Cash		$	3,001,133			$	3,427,672
Accounts receivable, net of allowance for doubtful accounts of $35,000			17,374,429				14,927,666
at April 30, 2008 and $45,000 at January 31, 2008
Inventories, net of reserves of $554,800 at April 30, 2008 and $607,000			40,657,828				48,116,173
at January 31, 2008
Deferred income taxes			1,969,713				1,969, 713
Other current assets			2,400,845				1,828,210
Total current assets			65,403,948				70,269,434
Property and equipment, net of accumulated depreciation of			13,254,366				13,324,648
$7,415,000 at April 30, 2008 and $7,055,000 at January 31, 2008
Goodwill			871,297				871,297
Other assets			119,389				157,474
		$	79,649,000			$	84,622,853
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	3,753,874			$	3,312,696
Accrued expenses and other current liabilities			1,825,889				1,684,161
Total current liabilities			5,579,763				4,996,857
Construction loan			1,809,879				1,882,085
Borrowings under revolving credit facility			3,467,000				8,871,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par; authorized 1,500,000 shares
(none issued)
Common stock $.01 par; authorized 10,000,000 shares;
issued and outstanding 5,523,288 shares at April 30, 2008 and at
January 31, 2008			55,233				55,233
Less treasury stock, at cost, 93,167 shares at April 30, 2008 and 0 shares at      January 31, 2008			(1,083,963	)			-----
Additional paid-in capital			49,274,002				49,211,961
Other comprehensive income (loss)			12,157				(36,073	)
Retained earnings (1)			20,534,929				19,641,790
Stockholders' equity			68,792,358				68,872,911
		$	79,649,000			$	84,622,853

		THREE MONTHS ENDED
		April 30,
		2008				2007
Net sales		$	27,280,157			$	25,596,738
Cost of goods sold			20,601,559				20,221,780
Gross profit			6,678,598				5,374,958
Operating expenses			5,230,484				4,380,147
Operating profit			1,448,114				994,811
Interest and other income, net			30,074				43,060
Interest expense			(99,520	)			(53,608	)
Income before income taxes			1,378,668				984,263
Provision for income taxes			485,529				388,415
Net income		$	893,139			$	595,848
Net income per common share:
Basic		$	0.16			$	.11
Diluted		$	0.16			$	.11
Weighted average common shares outstanding:
Basic			5,487,260				5,521,824
Diluted			5,520,868				5,538,405

 

		THREE MONTHS ENDED
		April 30,
		2008				2007
Cash Flows from Operating Activities:
Net income		$	893,139			$	595,848
Adjustments to reconcile net income to net cash provided
by operating activities:
Stock based compensation			62,041				53,114
Reserve for doubtful accounts			(10,000	)			(23,000	)
Reserve for inventory obsolescence			(52,200	)			97,042
Depreciation and amortization			383,826				262,017
Deferred income tax			-----				(64,645	)
Changes in operating assets and liabilities:
Increase in accounts receivable			(2,436,763	)			(390,859	)
Decrease in inventories			7,510,545				336,645
Increase in other assets			(486,320	)			(672,682	)
Increase in accounts payable, accrued expenses and other liabilities			582,906				1,466,210
Net cash provided by operating activities			6,447,174				1,659,690
Cash Flows from Investing Activities:
Purchases of property and equipment			(313,544	)			(305,832	)
Net cash used in investing activities			(313,544	)			(305,832	)
Cash Flows from Financing Activities:
Purchases of stock under stock repurchase program			(1,083,963	)			-----
(Payments) borrowing under loan agreements			(5,476,206	)			298,000
Net cash (used in) provided by financing activities			(6,560,169	)			298,000
Net (decrease) increase in cash			(426,539	)			1,651,858
Cash and cash equivalents at beginning of period			3,427,672				1,906,557
Cash and cash equivalents at end of period		$	3,001,133			$	3,558,415

1.

Business

 

 

The condensed consolidated financial statements included herein have been prepared by us, without audit, 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 consolidated financial information required therein.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“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 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 year ended January 31, 2008.

 

 

 

 

 

 

		April 30,				January 31,
		2008				2008
Raw materials		$	20,603,056			$	25,035,569
Work-in-process			2,939,787				2,873,001
Finished Goods			17,114,985				20,207,603
		$	40,657,828			$	48,116,173

 

 

 

 

 

 

		Three Months Ended
		April 30,
		2008				2007
Numerator
Net Income		$	893,139			$	595,848
Denominator
Denominator for basic earnings per share			5,487,260				5,521,824
(Weighted-average shares which reflect 36,028 weighted average common shares in the treasury as a result of the stock repurchase program)
Effect of dilutive securities from restricted stock plan and from dilutive effect of stock options			33,608				16,581
Denominator for diluted earnings per share			5,520,868				5,538,405
(adjusted weighted average shares)
Basic earnings per share		$	.16			$	.11
Diluted earnings per share		$	.16			$	.11

 

 

At April 30, 2008, the balance outstanding under our five year revolving credit facility amounted to $3.5 million. In May 2008 the facility was increased from $25 million to $30 million (see Note 13). The credit facility is collateralized by substantially all of the assets of the Company. The credit facility contains financial covenants, including, but not limited to, fixed charge ratio, funded debt to EBIDTA ratio, inventory and accounts receivable collateral coverage ratio, with respect to which the Company was in compliance at April 30, 2008 and for the period then ended. The weighted average interest rate for the three month period ended April 30, 2008 was 3.53%.

 

 

We purchased 9.9% of our raw materials from one supplier during the three month period ended April 30, 2008. We normally purchase approximately 75% of our raw material from this suppler. We carried higher inventory levels throughout FY08 and limited our material purchases in Q1 of FY09. Such purchases have resumed at normal levels in Q2 FY09. We expect this relationship to continue for the foreseeable future. If required, similar raw materials could be purchased from other sources; however, our competitive position in the marketplace could be adversely affected.

 

 

Stock Options	Number of Shares	Weighted Average Exercise Price per Share	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 31, 2008	17,567	$13.48	2.65 years	8,618
Outstanding at April 30, 2008	17,567	$13.48	2.40 years	17,243
Exercisable at  April 30, 2008	17,567	$13.48	2.40 years	17,243

 

 

 

The Company recognized total stock-based compensation costs of $62,041 and $53,114 for the three months ended April 30, 2008 and 2007, respectively, all of which results from the 2006 Equity Incentive Plan.  These amounts are reflected in selling, general and administrative expenses.  The total income tax benefit recognized for stock-based compensation arrangements was $22,335 and $19,121 for the three months ended April 30, 2008 and 2007, respectively.

 

 

		Three Months Ended
		April 30,
		2008								2007
Domestic		$	23.2				84.9	%		$	23.2				90.5	%
International			4.1				15.1	%			2.4				9.5	%
Total		$	27.3				100	%		$	25.6				100	%

We manage our operations by evaluating each of our geographic locations. Our North American operations include our facilities in Decatur, Alabama (primarily the distribution to customers of the bulk of our products and the manufacture of our chemical, glove and disposable products), Celaya, Mexico (primarily disposable, glove and chemical suit production) St. Joseph, Missouri and Shillington, Pennsylvania (primarily woven products production). We also maintain three manufacturing facilities in China (primarily disposable and chemical suit production) and a glove manufacturing facility in New Delhi, India. Our China facilities and our Decatur, Alabama facility produce the majority of the Company’s products. The accounting policies of these operating entities are the same as those described in Note 1 to our  Annual Report on Form 10-K for the year ended January 31, 2008. We evaluate the performance of these entities based on operating profit which is defined as income before income taxes, interest expense and other income and expenses. We have  sales forces in Canada, Europe, Chile and China which sell and distribute products shipped from the United States, Mexico or China.

 

 

		Three Months Ended April 30, (in millions of dollars)
		2008				2007
Net Sales:
North America and other foreign		$	27.2			$	26.0
China			5.4				3.0
India			.1				.1
Less inter-segment sales			(5.4	)			(4.2	)
Consolidated sales		$	27.3			$	25.6
Operating Profit:
North America and other foreign		$	1.1			$	.8
China			.8				.4
India			(.2	)			(.1	)
Less inter-segment profit			(.2	)			(.1	)
Consolidated profit		$	1.5			$	1.0
Identifiable Assets (at Balance Sheet date):
North America and other foreign		$	63.8			$	63.2
China			11.4				9.0
India			4.4				4.3
Consolidated assets		$	79.6			$	76.5
Depreciation  and Amortization Expense:
North America and other foreign		$	.2			$	.2
China			.1				.1
India			.1				-----
Consolidated depreciation expense		$	.4			$	.3

 

 

In connection with the asset purchase agreement, dated August 1, 2005, between the Company and Mifflin Valley, Inc., the Company entered into a five year lease agreement with the seller (now an employee of the Company) to rent the manufacturing facility in Shillington, Pennsylvania owned by the seller at an annual rental of $57,504, or a per square foot rental of $3.25.  This amount was obtained prior to the acquisition from an independent appraisal of the fair market rental value per square feet.  In addition the Company has, starting January 1, 2006 rented a second 12,000 sq ft of warehouse space in Blandon, Pennsylvania from this employee, on a month to month basis, for the monthly amount of $3.00 per square foot.

 

 

 

The Company had one derivative instrument outstanding at April 30, 2008 which was treated as a cash flow hedge intended for forecasted purchases of merchandise by the Company’s Canadian subsidiary.  The Company had the same derivative instrument outstanding at April 30, 2007.  The change in the fair market value of the effective hedge portion of the foreign currency forward exchange contracts was an increase of $48,230 for the three month period ended April 30, 2008 and was recorded in other comprehensive income. It will be released into operations based on the timing of the sales of the underlying inventory.  The release to operations will be reflected in cost of products sold.  During the period ended April 30, 2008, the Company recorded an immaterial loss in cost of goods sold for the remaining portion of the foreign currency forward exchange contract that did not qualify for hedge accounting treatment.  The derivative instrument was in the form of a foreign currency “participating forward” exchange contract. The “participating forward” feature affords the Company full protection on the downside and the ability to retain 50% of any gains, in exchange for a premium at inception.  Such premium is built into the contract in the form of a different contract rate in the amount of $0.016.

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

 

At April 30, 2008 the Company had an outstanding loan balance of $3.467 million under its facility with Wachovia Bank, N.A. compared with $8.871 million at January 31, 2008.  Total stockholder’s equity decreased principally due to the stock repurchase program of $1.1 million initiated in Q1 FY09, offset by the net income for the period of $0.9 million.

 

o

$0.32 million additional freight out costs resulting from significantly higher prevailing carrier rates and higher volume.

o

$0.24 million in increased operating costs in China were the result of the large increase in direct international sales made by China, are now allocated to SG&A costs, previously allocated to cost of goods sold.

 

Income Tax Expense.  Income tax expenses consist of federal, state, and foreign income taxes.  Income tax expenses increased $.097 million, or 25.0%, to $.486 million for the three months April 30, 2008 from $.388 million for the three months ended April 30, 2007.  Our effective tax rates were 35.2% and 39.5% for the three months ended April 30, 2008 and 2007, respectively. Our effective tax rate for 2008 was impacted by higher statutory rates and a prior period adjustment for tax expense in China and some losses in India not eligible for tax credits. Such Indian losses increased the overall effective tax rate by approximately 2.0% and the China tax adjustment increased the effective tax rate by 2.7%. Without such items, the effective rate for the quarter ending April 30, 2008 would have been approximately 30.6%. The 2007 period was impacted by the $500,000 charge for the Mexico plant restructuring for which no tax credit was available. Without this $500,000 charge, the effective tax rate for the 2007 period would have been 26.1%.

Net Income.  Net income increased $.297 million, or 49.9% to $.893 million for the three months ended April 30, 2008 from $.596 million for the three months ended April 30, 2007. The increase in net income primarily resulted from an increase in sales, the one-time charge for the Mexico plant restructuring in the previous year, and favorable claim experience in our medical insurance program, offset by larger losses in India.

 

Net cash provided by operating activities of $6.4 million for the three months ended April 30, 2008 was due primarily to net income from operations of $0.9 million, an increase in accounts payable accrued expenses and other liabilities of $0.6 million, and a decrease in inventories of $7.5 million, offset by an increase in accounts receivable of $2.4 million. Net cash used in investing activities of $0.3 million in the three months ended April 30, 2008, was due to purchases of property and equipment.

 

 

 

The Company had one derivative instrument outstanding at April 30, 2008 and April 30, 2007 which was treated as a cash flow hedge intended for forecasted purchases of merchandise by the Company’s Canadian subsidiary.  The change in the fair market value of the effective hedge portion of the foreign currency forward exchange contracts was a gain of  $48,230, for the three month period ended April 30, 2008 and was recorded in other comprehensive (income) loss (see Note 12).  It will be released into operations based on the timing of the sales of the underlying inventory.  The release to operations will be reflected in cost of products sold.  During the period ended April 30, 2007, the Company recorded an immaterial loss in cost of goods sold for the remaining portion of the foreign currency forward exchange contract that did not qualify for hedge accounting treatment.  The derivative instrument was in the form of a foreign currency “participating forward” exchange contract. The “participating forward” feature affords the Company full protection on the downside and the ability to retain 50% of any gains, in exchange for a premium at inception.  Such premium is built into the contract in the form of a different contract rate in the amount of $0.0160.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 4.

Controls and Procedures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K:

 

Reports on Form 8-K:

 

a -

On February 6, 2008, the Company filed a Form 8-K under Item 5.02 relating to the contract renewal between Gary A. Pokrassa and Lakeland Industries, Inc. dated January 31, 2008.

 

b -

On February 19, 2008, the Company filed a Form 8-K under Item 8.01, relating to the letter of intent between Qualytextil, S.A. and Lakeland Industries, Inc.

 

c -

On February 21, 2008, the Company filed a Form 8-K under Item 1.01 relating to the amendment to the Company’s revolving line of credit with Wachovia Bank, N.A., dated February 15, 2008; and under Item 8.01 for the purpose of furnishing a press release announcing the Company’s Board of Directors authorized the repurchase of Lakeland’s outstanding stock.

 

d -

On March 19, 2008, the Company filed a Form 8-K under Item 8.01, for the purpose of furnishing a press release in connection with the notice it received from the Holtzman Opportunity Fund, L.P. that it intends to nominate two individuals for election to the Company’s Board of Directors. Also on March 19, 2008, the Company delivered a letter to its employees in connection with such stockholder’s notice

 

e -

On March 31, 2008, the Company filed a Form 8-K under Item 1.01 for the purpose of furnishing a press release announcing that on January 21, 2008, the Company entered into an exclusive product distribution agreement with Wesfarmers Industrial and Safety.

f -

On April 14, 2008, the Company filed a Form 8-K under Item 2.02 for the purpose of furnishing a press announcing the Company's FY 2008 financial results for the reporting period ended January 31, 2008.

 

g -

On April 16, 2008, the Company filed a Form 8-K under Item 8.01 for the purpose of furnishing a press release calling on Seymour Holtzman to withdraw his notice of nomination, dated March 17, 2008, in connection with the Company’s 2008 Annual Meeting of Stockholders, and terminate his proxy contest against the Company.

h -

On April 16, 2008, the Company filed a Form 8-K under Item 8.01 for the purpose of furnishing a press release confirming that it has received a notice from Seymour Holtzman withdrawing his notice of intent to nominate two individuals for election at Lakeland’s 2008 annual meeting of stockholders and advising Lakeland that he has no intent of nominating anyone for election as a director at the 2008 annual meeting.

 

 

 

 

 

 

	LAKELAND INDUSTRIES, INC.
	(Registrant)
Date:  June 9, 2008	/s/ Christopher J. Ryan
	Christopher J. Ryan,
	Chief Executive Officer, President,
	Secretary and General Counsel
	(Principal Executive Officer and Authorized Signatory)
Date: June 9, 2008	/s/Gary Pokrassa
	Gary Pokrassa,
	Chief Financial Officer
	(Principal Accounting Officer and Authorized Signatory)