LAKELAND INDUSTRIES INC - Quarter Report: 2018 July (Form 10-Q)
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 July
31, 2018
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)
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 and posted
on its corporate web site, if any, 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 and post such files).Yes ☒ No
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a nonaccelerated filer, 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 12-b-2 of the
Exchange Act. Check one.
|
Large accelerated filer ☐
|
Accelerated filer ☒
|
|
Non-accelerated
filer ☐ (Do not
check if a smaller reporting company)
|
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
12-b-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 September 7, 2018
|
|
Common
Stock, $0.01 par value per share
|
8,116,199
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
|
|
|
|
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|
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Introduction
|
3
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|
|
|
|
|
|
Condensed
Consolidated Statements of Operations
Three
and Six Months Ended July 31, 2018 and
2017
|
5
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|
|
|
|
|
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Condensed
Consolidated Statements of Comprehensive Income
Three
and Six Months Ended July 31, 2018 and
2017
|
6
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|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
|
July
31, 2018 and January 31,
2018
|
7
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
Six
Months Ended July 31, 2018 and
2017
|
8
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial
Statements
|
9
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|
|
|
|
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
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|
|
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|
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Item
3.
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Quantitative
and Qualitative Disclosures about Market
Risk
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31
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|
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|
Item
4.
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Controls
and
Procedures
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33
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|
PART II - OTHER INFORMATION:
|
|
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Item
6.
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Exhibits
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33
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|
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Signature
Pages
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34
|
2
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;
●
there is no
assurance that the new manufacturing facilities being built in
Vietnam and India will be successfully completed or run in a
profitable manner;
●
our results of
operations could be negatively affected by potential fluctuations
in foreign currency exchange rates;
●
we deal in
countries where corruption is an obstacle;
●
there is no
assurance that our disposition of our Brazilian subsidiary will be
entirely successful in that we may continue to be exposed to
certain liabilities in connection with the operations of such
company. In addition, while the Company’s tax advisors
believe that the worthless stock deduction taken by the Company in
connection therewith is valid, there can be no assurance that the
IRS will not challenge it and, if challenged, that the Company will
prevail.
●
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;
●
a significant
reduction in government funding for preparations for terrorist
incidents could adversely affect our net sales;
●
environmental laws
and regulations may subject us to significant
liabilities;
3
●
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;
●
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 2018 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.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($000’s
except for share and per share information)
|
|
Three Months
Ended
July
31,
|
Six
Months Ended
July
31,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Net
sales
|
$25,616
|
$23,909
|
$49,960
|
$46,870
|
|
Cost of goods
sold
|
16,465
|
15,219
|
31,304
|
29,623
|
|
Gross
profit
|
9,151
|
8,690
|
18,656
|
17,247
|
|
Operating
expenses
|
7,505
|
6,508
|
14,593
|
12,593
|
|
Operating
profit
|
1,646
|
2,182
|
4,063
|
4,654
|
|
Other income,
net
|
30
|
4
|
29
|
6
|
|
Interest
expense
|
(37)
|
(36)
|
(68)
|
(112)
|
|
Income
before taxes
|
1,639
|
2,150
|
4,024
|
4,548
|
|
Income tax
expense
|
622
|
308
|
1,139
|
996
|
|
Net
income
|
$1,017
|
$1,842
|
$2,885
|
$3,552
|
|
Net income per
common share:
|
|
|
|
|
|
Basic
|
$0.13
|
$0.25
|
$0.36
|
$0.49
|
|
Diluted
|
$0.12
|
$0.25
|
$0.35
|
$0.49
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
|
Basic
|
8,116,199
|
7,266,291
|
8,116,199
|
7,265,053
|
|
Diluted
|
8,177,135
|
7,280,050
|
8,168,758
|
7,316,876
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(UNAUDITED)
($000’s)
|
|
Three Months
Ended
July
31,
|
Six
Months Ended
July
31,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
|
|
|
|
|
|
Net
income
|
$1,017
|
$1,842
|
$2,885
|
$3,552
|
|
Other comprehensive
income (loss):
|
|
|
|
|
|
Cash flow
hedges
|
-----
|
(160)
|
-----
|
(202)
|
|
Foreign currency
translation adjustments
|
(422)
|
378
|
(624)
|
330
|
|
Other comprehensive
income (loss)
|
(422)
|
218
|
(624)
|
128
|
|
Comprehensive
income
|
$595
|
$2,060
|
$2,261
|
$3,680
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000’s
except for share information)
|
ASSETS
|
July
31,
|
January
31,
|
|
|
2018
|
2018
|
|
Current
assets
|
|
|
|
Cash and cash
equivalents
|
$14,933
|
$15,788
|
|
Accounts
receivable, net of allowance for doubtful accounts of $515 and $480
at July 31, 2018 and January 31, 2018, respectively
|
13,627
|
14,119
|
|
Inventories, net of
allowance of $2,463 and $2,422 at July 31, 2018 and January 31,
2018, respectively
|
46,358
|
42,919
|
|
Prepaid VAT
tax
|
2,759
|
2,119
|
|
Other current
assets
|
2,432
|
1,555
|
|
Total current
assets
|
80,109
|
76,500
|
|
Property and
equipment, net
|
9,524
|
8,789
|
|
Assets held for
sale
|
150
|
150
|
|
Deferred income
tax
|
7,253
|
7,557
|
|
Prepaid VAT and
other taxes
|
305
|
310
|
|
Other
assets
|
189
|
354
|
|
Goodwill
|
871
|
871
|
|
Total
assets
|
$98,401
|
$94,531
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$8,744
|
$7,057
|
|
Accrued
compensation and benefits
|
1,411
|
1,771
|
|
Other accrued
expenses
|
1,365
|
1,182
|
|
Current maturity of
long-term debt
|
158
|
158
|
|
Short-term
borrowings
|
85
|
211
|
|
Total current
liabilities
|
11,763
|
10,379
|
|
Long-term portion
of debt
|
1,233
|
1,312
|
|
Total
liabilities
|
12,996
|
11,691
|
|
Commitments and
contingencies
|
|
|
|
Stockholders’
equity
|
|
|
|
Preferred stock,
$0.01 par; authorized 1,500,000 shares (none issued)
|
-----
|
-----
|
|
Common stock, $.01
par; authorized 20,000,000 shares,
Issued 8,472,640
shares; outstanding 8,116,199 shares
|
85
|
85
|
|
Treasury stock, at
cost; 356,441 shares
|
(3,352)
|
(3,352)
|
|
Additional paid-in
capital
|
75,221
|
74,917
|
|
Retained
earnings
|
15,726
|
12,841
|
|
Accumulated other
comprehensive loss
|
(2,275)
|
(1,651)
|
|
Total stockholders'
equity
|
85,405
|
82,840
|
|
Total liabilities
and stockholders' equity
|
$98,401
|
$94,531
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
7
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($000)’s
|
|
For
the Six Months Ended
July
31,
|
|
|
|
2018
|
2017
|
|
Cash flows from
operating activities:
|
|
|
|
Net
income
|
$2,885
|
$3,552
|
|
Adjustments to
reconcile net income to net cash provided by operating
activities
|
|
|
|
Provision for
inventory obsolescence
|
41
|
11
|
|
Provision for
(recovery of) doubtful accounts
|
35
|
(187)
|
|
Deferred income
taxes
|
304
|
228
|
|
Depreciation and
amortization
|
428
|
385
|
|
Stock based and
restricted stock compensation
|
302
|
198
|
|
Loss on disposal of
property and equipment
|
5
|
-----
|
|
(Increase) decrease
in operating assets
|
|
|
|
Accounts
receivable
|
228
|
(2,786)
|
|
Inventories
|
(3,813)
|
1,571
|
|
Prepaid VAT
tax
|
(641)
|
29
|
|
Other current
assets
|
(809)
|
186
|
|
Increase (decrease)
in operating liabilities
|
|
|
|
Accounts
payable
|
1,818
|
3,171
|
|
Accrued expenses
and other liabilities
|
(107)
|
48
|
|
Net cash used by
the sale of Brazil
|
---
|
(95)
|
|
Net cash provided
by operating activities
|
676
|
6,311
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases of
property and equipment
|
(1,220)
|
(448)
|
|
Cash flows from
financing activities:
|
|
|
|
Net repayments
under revolving credit facility
|
-----
|
(4,865)
|
|
Loan repayments,
short-term
|
(153)
|
(56)
|
|
Loan borrowings,
short-term
|
208
|
101
|
|
Loan repayments,
long-term
|
(79)
|
(26)
|
|
Loan borrowings,
long-term
|
-----
|
1,575
|
|
UK borrowings
(repayments) under line of credit facility, net
|
(175)
|
193
|
|
Shares returned to
pay employee taxes under restricted stock program
|
-----
|
(19)
|
|
Net cash used in financing
activities
|
(199)
|
(3,097)
|
|
Effect of exchange
rate changes on cash and cash equivalents
|
(112)
|
57
|
|
Net increase
(decrease) in cash and cash equivalents
|
(855)
|
2,823
|
|
Cash and cash
equivalents at beginning of period
|
15,788
|
10,365
|
|
Cash and cash
equivalents at end of period
|
$14,933
|
$13,188
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash paid for
interest
|
$68
|
$112
|
|
Cash paid for
taxes
|
$806
|
$711
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
8
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Business
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.
2.
Basis
of Presentation
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, 2018.
The
results of operations for the three and six and month periods ended
July 31, 2018 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, FY19
refers to the fiscal year ending January 31, 2019, (b)
“Q” refers to quarter; thus, for example, Q2 FY19
refers to the second quarter of the fiscal year ending January 31,
2019, (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 the 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 in this
paragraph at the date of the consolidated financial statements, and
the amount of the loss can be reasonably estimated. Management
considers the following factors when determining the collectability
of specific customer accounts: Customer creditworthiness, past
transaction history with the customers, current economic industry
trends, and changes in customer payment terms. Past due balances
over 90 days and other less creditworthy accounts are reviewed
individually for collectability. If the financial condition of the
Company’s customers were to deteriorate, adversely affecting
their ability to make payments, additional allowances would be
required. Based on management’s assessment, the Company
provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that
remain outstanding after the Company has used reasonable collection
efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable.
Inventories, net
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
realizable value. Provision is made for slow-moving, obsolete or
unusable inventory.
9
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
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 July
31, 2018 and 2017 aggregated approximately $0.8 million and $0.6
million and $1.4 and $1.2 for the six months ended July 31, 2018
and 2017, 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,
such as 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 of 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 five 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:
10
|
|
Three
Months Ended
July
31,
(in
millions of dollars)
|
Six
Months Ended
July
31,
(in
millions of dollars)
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
External
Sales by geographic region:
|
|
|
|
|
|
USA
|
$13.36
|
$12.63
|
$25.71
|
$25.33
|
|
Other
foreign
|
4.84
|
4.38
|
9.20
|
8.08
|
|
Europe
(UK)
|
2.56
|
2.08
|
5.13
|
4.17
|
|
Mexico
|
0.82
|
0.58
|
1.93
|
1.15
|
|
China
|
4.04
|
4.24
|
7.99
|
8.14
|
|
Consolidated
external sales
|
$25.62
|
$23.91
|
$49.96
|
$46.87
|
|
|
Three
Months Ended
July
31,
(in
millions of dollars)
|
Six
Months Ended
July
31,
(in
millions of dollars)
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
External
Sales by product lines:
|
|
|
|
|
|
Disposables
|
$13.11
|
$12.36
|
$25.96
|
$24.52
|
|
Chemical
|
4.72
|
4.03
|
9.15
|
7.82
|
|
Fire
|
1.70
|
2.02
|
3.36
|
4.02
|
|
Gloves
|
0.85
|
0.82
|
1.65
|
1.56
|
|
Hi-Vis
|
1.97
|
2.11
|
3.64
|
3.88
|
|
Wovens
|
3.27
|
2.57
|
6.20
|
5.07
|
|
Consolidated
external sales
|
$25.62
|
$23.91
|
$49.96
|
$46.87
|
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 position at July 31, 2018 and
January 31, 2018.
Foreign Operations and Foreign Currency Translation
The Company maintains manufacturing operations in
the People’s Republic of China, Mexico, India, Vietnam, 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,
Mexico, India, Russia, and Kazakhstan. The Company is vulnerable to
currency risks in these countries. The functional currency
for the United Kingdom subsidiary is the Euro; the trading company
in China, the RMB; the Canadian Real Estate subsidiary, the
Canadian dollar; the Russian operation, the Russian Ruble; the
Kazakhstan operation, the Kazakhstan Tenge and the Vietnam
operation, the Vietnam Dong. All other operations have the US
dollar as its functional currency.
11
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
unaudited condensed consolidated
statement of cash flows will not necessarily agree with changes in
the corresponding balances on the unaudited condensed
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 losses included in net
income for the three months ended July 31, 2018 and 2017 was
approximately $0.4 million and $0.1 million and for the six months
ended July 31, 2018 and 2017 was approximately $0.7 million and
$0.5 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, reduced by shares that may be repurchased with
the funds received from the exercise, based on the average price
during the period.
Recent Accounting Pronouncements
The
Company considers the applicability and impact of all accounting
standards updates (“ASUs”). Management periodically
reviews new accounting standards that are issued.
New Accounting Pronouncements Recently Adopted
In May
2017, the Financial Accounting Standards Board (“FASB”)
issued ASU 2017-09, “Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting.”
The amendment amends the scope of modification accounting for
share-based payment arrangements, provides guidance on the types of
changes to the terms or conditions of share-based payment awards to
which an entity would be required to apply modification accounting
under ASC 718. For all entities, the ASU is effective for annual
reporting periods, including interim periods within those annual
reporting periods, beginning after December 15, 2017. Early
adoption is permitted, including adoption in any interim period.
The Company will apply the amendments in this update prospectively
to an award modified on or after February 1, 2018 and does not
expect that application of this guidance will have a material
impact on its unaudited condensed consolidated financial statements
and related disclosures.
As
disclosed in Revenue Recognition above, the Company adopted ASU
2014-09, Revenue from Contracts with Customers (Topic 606)
effective February 1, 2018 using the retrospective transition
method. This new accounting standard outlines a single
comprehensive model to use in accounting for revenue arising from
contracts with customers. This standard supersedes existing revenue
recognition requirements and eliminates most industry-specific
guidance from US GAAP. The core principle of the new accounting
standard is to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. In addition, the adoption of
this new accounting standard resulted in increased disclosure,
including qualitative and quantitative disclosures about the
nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. Additionally, the Company
elected to account for shipping and handling activities as a
fulfillment cost rather than a separate performance obligation.
Adoption of this standard did not result in significant changes to
the Company’s accounting policies, business processes,
systems or controls, or have a material impact on the
Company’s financial position, results of operations and cash
flows or related disclosures. As such, prior period financial
statements were not recast.
12
New Accounting Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842),
which supersedes the existing guidance for lease accounting, Leases
(Topic 840). ASU 2016-02 requires lessees to recognize leases on
their balance sheets, and leaves lessor accounting largely
unchanged. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2018 and interim periods within
those fiscal years. Early application is permitted for all
entities. ASU 2016-02 requires a modified retrospective approach
for all leases existing at, or entered into after, the date of
initial application, with an option to elect to use certain
transition relief. In July 2018, the FASB issued ASU No. 2018-10,
“Codification Improvements
to Topic 842, Leases.” The amendments in ASU 2018-10
clarify, correct or remove inconsistencies in the guidance provided
under ASU 2016-02 related to sixteen specific issues identified.
Also in July 2018, the FASB issued ASU No. 2018-11
“Leases (Topic 842):
Targeted Improvements” which now allows entities the
option of recognizing the cumulative effect of applying the new
standard as an adjustment to the opening balance of retained
earnings in the year of adoption while continuing to present all
prior periods under previous lease accounting guidance. The
effective date and transition requirements for these two ASUs are
the same as the effective date and transition requirements as ASU
2016-02. The Company is currently evaluating the impact of this new
standard on its unaudited
condensed consolidated financial statements but has
not determined the effects that the
adoption of the pronouncement may have on its unaudited condensed
consolidated financial statements and related
disclosures.
In
February 2018, the FASB issued ASU 2018-02, Income Statement
– Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects From Accumulated Other
Comprehensive Income,” which allows institutions to elect to
reclassify the stranded tax effects from AOCI to retained earnings,
limited only to amounts in AOCI that are affected by the tax reform
law. For public entities, the amendments are effective for annual
reporting periods beginning after December 15, 2018, including
interim reporting periods within that reporting period. For all
other entities, the amendments in this Update are effective for
annual reporting periods beginning after December 15, 2019,
including interim reporting periods within that reporting period.
The Company does not expect that adoption of this guidance will
have a material impact on its unaudited condensed consolidated financial
statements and related disclosures.
4. Inventories, net
Inventories, net
consist of the following (in $000s):
|
|
July
31, 2018
|
January 31,
2018
|
|
|
|
|
|
Raw
materials
|
$14,121
|
$14,767
|
|
Work-in-process
|
1,831
|
2,357
|
|
Finished
goods
|
30,406
|
25,795
|
|
|
$46,358
|
$42,919
|
13
5. Long-Term Debt
Revolving Credit Facility
On June
28, 2013, as amended on March 31, 2015 and June 3, 2015, the
Company and its wholly owned Canadian subsidiary, Lakeland
Protective Wear Inc. (collectively the “Borrowers”) ,
entered into a Loan and Security Agreement (the “AloStar Loan
Agreement”) with AloStar Business Credit, a division of
AloStar Bank of Commerce. The AloStar Loan Agreement provided the
Borrowers with a $15 million revolving line of credit (the
“AloStar Credit Facility”), at a variable interest rate
based on LIBOR, with a first priority lien on substantially all of
the United States and Canada assets of the Company, except for its
Mexican plant and the Canadian warehouse. After these
amendments the maturity date of the AloStar Credit Facility was
extended to June 28, 2017 and the minimum interest rate floor
became 4.25% per annum. On May 10, 2017, the AloStar Loan Agreement
was terminated, and the existing balance due was repaid with the
proceeds from a new loan agreement with SunTrust Bank.
On May
10, 2017, the Company entered into a Loan Agreement (the
“Loan Agreement”) with SunTrust Bank
(“Lender”). The Loan Agreement provides the Company
with a secured (i) $20.0 million revolving credit facility, which
includes a $5.0 million letter of credit sub-facility, and (ii)
$1,575,000 term loan with Lender. The Company may request from time
to time an increase in the revolving credit loan commitment of up
to $10.0 million (for a total commitment of up to $30.0 million).
Borrowing pursuant to the revolving credit facility is subject to a
borrowing base amount calculated as (a) 85% of eligible accounts
receivable, as defined, plus (b) an inventory formula amount, as
defined, minus (c) an amount equal to the greater of (i) $1,500,000
or (ii) 7.5% of the then current revolver commitment amount, minus
(d) certain reserves as determined by the Loan Agreement. The
credit facility matures on May 10, 2020 (subject to earlier
termination upon the occurrence of certain events of default as set
forth in the Loan Agreement). At the closing, the Company’s
AloStar Credit Facility was fully repaid and terminated using
proceeds of the revolver in the amount of approximately $3.0
million.
Borrowings under
the term loan and the revolving credit facility bear interest at an
interest rate determined by reference whether the loan is a base
rate loan or Eurodollar loan, with the rate election made by the
Company at the time of the borrowing or at any time the Company
elects pursuant to the terms of the Loan Agreement. The term loan
is payable in equal monthly principal installments of $13,125 each,
beginning on June 1, 2017, and on the first day of each succeeding
month, with a final payment of the remaining principal and interest
on May 10, 2020 (subject to earlier termination as provided in the
Loan Agreement). For that portion of the term loan that consists of
Eurodollar loans, the term loan shall bear interest at the LIBOR
Market Index Rate (“LIBOR”) plus 2.0% per annum, and
for that portion of the term loan that consists of base rate loans,
the term loan shall bear interest at the base rate then in effect
plus 1.0% per annum. All principal and unpaid accrued interest
under the revolver credit facility shall be due and payable on the
maturity date of the revolver. For that portion of the revolver
loan that consists of Eurodollar loans, the revolver shall bear
interest at LIBOR plus a margin rate of 1.75% per annum for the
first six months and thereafter between 1.5% and 2.0%, depending on
the Company’s “availability calculation” (as
defined in the Loan Agreement) and, for that portion of the
revolver that consists of base rate loans, the revolver shall bear
interest at the base rate then in effect plus a margin rate of
0.75% per annum for the first six months and thereafter between
0.50% and 1.0%, depending on the availability calculation. As of
the closing, the Company elected all borrowings under the Loan
Agreement to accrue interest at LIBOR which, as of that date, was
0.99500%. As such, the initial rate of interest for the revolver is
2.745% per annum and the initial rate of interest for the term loan
is 2.995% per annum. The Loan Agreement provides for payment of an
unused line fee of between 0.25% and 0.50%, depending on the amount
by which the revolving credit loan commitment exceeds the amount of
the revolving credit loans outstanding (including letters of
credit), which shall be payable monthly in arrears on the average
daily unused portion of the revolver. There were no borrowings
under the revolving credit facility outstanding as of July 31, 2018
or at January 31, 2018.
The
Company agreed to maintain a minimum “fixed charge coverage
ratio” (as defined in the Loan Agreement) as of the end of
each fiscal quarter, commencing with the fiscal quarter ended July
31, 2017, of not less than 1.10 to 1.00 during the applicable
fiscal quarter, and agreed to certain negative covenants that are
customary for credit arrangements of this type, including
restrictions on the Company’s ability to enter into mergers,
acquisitions or other business combination transactions, conduct
its business, grant liens, make certain investments, incur
additional indebtedness, and make stock repurchases.
In
connection with the Loan Agreement, the Company entered into a
security agreement, dated May 10, 2017, with Lender pursuant to
which the Company granted to Lender a first priority perfected
security interest in substantially all real and personal property
of the Company.
Borrowings
in UK
On
December 31, 2014, the Company and Lakeland Industries Europe, Ltd,
(“Lakeland UK”), a wholly owned subsidiary of the
Company, amended the terms of its existing line of credit facility
with HSBC Bank to provide for (i) a one-year extension of the
maturity date of the existing financing facility to December 19,
2016, (ii) an increase in the facility limit from £1,250,000
(approximately USD $1.9 million, based on exchange rates at time of
closing) to £1,500,000 (approximately USD $2.3 million, based
on exchange rates at time of closing), and (iii) a decrease in the
annual interest rate margin from 3.46% to 3.0%. In addition,
pursuant to a letter agreement dated December 5, 2014, the Company
agreed that £400,000 (approximately USD $0.6 million, based on
exchange rates at time of closing) of the note payable by the UK
subsidiary to the Company shall be subordinated in priority of
payment to the subsidiary’s obligations to HSBC under the
financing facility. On December 31, 2016, Lakeland UK entered into
an extension of the maturity date of its existing facility with
HSBC Invoice Finance (UK) Ltd. to December 19, 2017. Other than the
extension of the maturity date and a small reduction of the service
charge from 0.9% to 0.85%, all other terms of the facility remained
the same. On September 4, 2017 the facility was amended to include
Algeria as an approved country. On December 4, 2017 the facility
was extended to March 31, 2018 for the next review period and, as
of March 9, 2018 the facility was extended to mature on March 31,
2019 with no additional changes to the terms. The balance under
this loan outstanding at July 31, 2018 and January 31, 2018 was USD
$0.0 million and USD $0.2 million, respectively.
Canada
Loans
In
September 2013, the Company refinanced its loan with the
Development Bank of Canada (“BDC”) for a principal
amount of approximately $1.1 million in both Canadian dollars and
USD (based on exchange rates at time of closing). Such loan was for
a term of 240 months at an interest rate of 6.45% per annum with
fixed monthly payments of approximately USD $6,048 (CAD $8,169)
including principal and interest. It was collateralized by a
mortgage on the Company's warehouse in Brantford, Ontario. This
loan was paid in full on September 26, 2017.
14
Argentina
Loan
In
April 2015, Lakeland Argentina S.R.L. (“Lakeland
Argentina”), the Company’s Argentina subsidiary was
granted a $300,000 line of credit denominated in Argentine pesos,
pursuant to a standby letter of credit granted by the parent
company. The line of credit outstanding at July 31, 2018 was
approximately $85,000 as noted below.
The
following three loans were made under the $300,000 facility stated
above:
On July
1, 2016, Lakeland Argentina and Banco de la Nación Argentina
(“BNA”) entered into an agreement for Lakeland
Argentina to obtain a loan in the amount of ARS 569,000
(approximately USD $38,000, based on exchange rates at time of
closing); such loan was for a term of one year at an interest rate
of 27.06% per annum. This agreement was paid in full prior to
January 31, 2018.
On May
19, 2017 Lakeland Argentina and BNA entered into an agreement for
Lakeland Argentina to obtain a loan in the amount of ARS $1.8
million (approximately USD $112,000, based on exchange rates at
time of closing); such loan is for a term of one year at an
interest rate of 20.0% per annum. This agreement was paid in full
prior to July 31, 2018.
On
February 26, 2018 Lakeland Argentina and BNA entered into an
agreement for Lakeland Argentina to obtain a loan in the amount of
ARS $4.3 million (approximately USD $215,000, based on exchange
rates at time of closing); such loan is for a term of one year at
an interest rate of 32.0% per annum. The amount outstanding at July
31, 2018 was ARS $2.3 million (approximately USD $85,000) which is
included as short-term borrowings on the unaudited condensed
consolidated balance sheet.
Below
is a table to summarize the debt amounts above (in
000’s):
|
|
Short-Term
|
Long-term
|
Current
Maturity of Long-term
|
|||
|
|
7/31/2018
|
1/31/2018
|
7/31/2018
|
1/31/2018
|
7/31/2018
|
1/31/2018
|
|
Argentina
|
$85
|
$31
|
$-----
|
$-----
|
$-----
|
$-----
|
|
UK
|
-----
|
180
|
-----
|
-----
|
-----
|
-----
|
|
USA
|
-----
|
-----
|
1,233
|
1,312
|
158
|
158
|
|
Totals
|
$85
|
$211
|
$1.233
|
$1,312
|
$158
|
$158
|
Five-year
Debt Payout Schedule
This
schedule reflects the liabilities as of July 31, 2018, and does not
reflect any subsequent event (in 000’s):
|
|
Total
|
1
Year
or
less
|
2
Years
|
3
Years
|
4
Years
|
5
Years
|
After
5 Years
|
|
|
|
|
|
|
|
|
|
|
Borrowings in
USA
|
$1,391
|
$158
|
$158
|
$1,075
|
$----
|
$-----
|
$-----
|
|
Borrowings in
Argentina
|
85
|
85
|
-----
|
-----
|
-----
|
-----
|
-----
|
|
Total
|
$1,476
|
$243
|
$158
|
$1,075
|
$----
|
$-----
|
$-----
|
6.
Concentration of Risk
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. 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; 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,
JSC Bank Centercredit in Kazakhstan, and Vietnam Technological and
Commercial Joint-Stock Bank (Techcom Bank) in Vietnam. 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 $7.4 million total included in the US bank accounts
and approximately $7.5 million total in foreign bank accounts as of
July 31, 2018.
Major Customer
No
customer accounted for more than 10% of net sales during the three
and six month periods ended July 31, 2018 and 2017.
Major Supplier
No
supplier accounted for more than 10% of purchases during the three
and six month periods ended July 31, 2018 and 2017.
15
7. Stockholders’ Equity
The
2017, 2015 and 2012 Stock Plans
On June
21, 2017, the stockholders of the Company approved the Lakeland
Industries, Inc. 2017 Equity Incentive Plan (the “2017
Plan”) at the Annual Meeting of Stockholders. The executive
officers and all other employees and directors of the Company,
including its subsidiaries, are eligible to participate in the 2017
Plan. The 2017 Plan is administered by the Compensation Committee
of the Board of Directors (the “Committee”), except
that with respect to all non-employee directors, the Committee
shall be deemed to include the full Board. The 2017 Plan provides
for the grant of equity-based compensation in the form of stock
options, restricted stock, restricted stock units, performance
shares, performance units, or stock appreciation
rights.
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
|
|||
|
|
Minimum
|
Target
|
Maximum
|
Cap
|
|
Employees
|
42,061
|
63,095
|
84,126
|
101,001
|
|
Non-Employee
Directors
|
14,414
|
21,622
|
28,829
|
34,595
|
|
Total
|
56,475
|
84,717
|
112,955
|
135,596
|
|
|
Value at grant date
(numbers below are rounded to the nearest $100)
|
|||
|
|
Minimum
|
Target
|
Maximum
|
Cap
|
|
Employees
|
$583,600
|
$875,400
|
$1,167,200
|
$1,401,300
|
|
Non-Employee
Directors
|
200,000
|
300,000
|
400,000
|
480,000
|
|
Total
|
$783,600
|
$1,175,400
|
$1,567,200
|
$1,881,300
|
Of the
total number of shares awarded at Maximum, there are an aggregate
of 112,955 shares underlying restricted stock awards and in
addition in the 2017 Plan there are 6,376 shares underlying awards
of stock appreciation rights with a base price of $13.80 per share.
These stock appreciation rights are classified as liability awards
and are remeasured at fair value each reporting period until the
award is settled. As of July 31, 2018, and January 31, 2018, the
Company has recorded a liability in the amount of $0 and $1,913,
respectively, related to these stock appreciation
rights.
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 respect of the September 12, 2017
grants, and commencing on February 1, 2018 and ending on January
31, 2021 in respect of the June 7, 2018 grants, in each case, 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.
16
Under
the 2017 Plan, as described above, the Company awarded
performance-based restricted stock and stock appreciation rights to
eligible employees and directors. Such awards were at either
Minimum, Target, Maximum or Cap levels, based on three year EBITDA
targets. The Company recognizes expense related to
performance-based restricted share awards over the requisite
performance period using the straight-line attribution method based
on the most probable outcome (minimum, target, maximum, cap or
zero) at the end of the performance period and the price of the
Company’s common stock price at the date of grant. The
Company is recognizing expense related to awards under the 2017
Plan at Maximum and these expenses were $183,146 and $302,386 for
the three and six month periods ended July 31, 2018,
respectively.
The
2017 Plan is the successor to the Lakeland Industries, Inc. 2015
Stock Plan (the “2015 Plan”). The executive officers
and all other employees and directors of the Company and its
subsidiaries were eligible to participate in the 2015 Plan. The
2015 Plan authorized the issuance of awards of restricted stock,
restricted stock units, performance shares, performance units and
other stock-based awards. The 2015 Plan also permitted the grant of
awards that qualify for “performance-based
compensation” within the meaning of Section 162(m) of the US
Internal Revenue Code. The aggregate number of shares of the
Company’s common stock that was issuable under the 2015 Plan
was 100,000 shares. Under the 2015 Plan, as of July 31, 2018, there
were 67,000 shares vested; of which 43,029 shares were issued and
23,971 shares were returned to the Company to pay employee
taxes.
The
2015 Plan, was the successor to the Company’s 2012 Stock
Incentive Plan (the “2012 Plan”). The Company’s
2012 Plan authorized the issuance of up to a maximum of 310,000
shares of the Company’s common stock to employees and
directors of the Company and its subsidiaries in the form of
restricted stock, restricted stock units, performance shares,
performance units and other share-based awards. Under the 2012
Plan, as of July 31, 2018, the Company issued 293,887 fully vested
shares of common stock, and at July 31, 2018, there are no
outstanding shares to vest according to the terms of the 2012
Plan.
Under
the 2012 Plan and the 2015 Plan, the Company generally awarded
eligible employees and directors with either performance-based or
time-based restricted shares. Performance-based restricted shares
were awarded at either baseline (target), maximum or zero amounts.
The number of restricted shares subject to any award was not tied
to a formula or comparable company target ranges, but rather was
determined at the discretion of the Committee at the end of the
applicable performance period, which was two years under the 2015
Plan and had been three years under the 2012 Plan. The Company
recognized expense related to performance-based restricted share
awards over the requisite performance period using the
straight-line attribution method based on the most probable outcome
(baseline, maximum or zero) at the end of the performance period
and the price of the Company’s common stock price at the date
of grant.
As of
July 31, 2018, there was unrecognized stock-based compensation
expense of $1,277,496 pursuant to the 2017 Plan based on the
maximum performance award level. Such unrecognized stock-based
compensation expense totaled $628,162 for the 2017 Plan at the
minimum performance award level. The cost of these non-vested
awards is expected to be recognized over a weighted-average period
of three years for the 2017 Plan.
The
Company recognized total stock-based compensation costs, which are
reflected in operating expenses:
|
|
Three-Months
Ended
July
31,
|
Six-Months
Ended
July
31,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
2012
Plan
|
$-----
|
$-----
|
$-----
|
$206
|
|
2015
Plan
|
-----
|
98,642
|
-----
|
197,284
|
|
2017
Plan
|
$183,146
|
-----
|
$302,386
|
-----
|
|
Total stock-based
compensation
|
$183,146
|
$98,642
|
$302,386
|
197,490
|
|
Total income tax
benefit recognized for stock-based compensation
arrangements
|
$65,933
|
$35,511
|
$100,859
|
$71,096
|
17
|
Shares issued
under
2017 Stock
Plan
|
Outstanding Unvested
Grants at Maximum at Beginning of FY19
|
Granted
during
FY18
through July 31, 2018
|
Becoming Vested
during FY18 through July 31, 2018
|
Forfeited
during
FY18
through July 31, 2018
|
Outstanding Unvested
Grants at Maximum at End of
July
31, 2018
|
|
Restricted stock
grants – employees
|
42,291
|
41,835
|
-----
|
-----
|
84,126
|
|
Restricted stock
grants – non-employee directors
|
14,493
|
14,336
|
-----
|
-----
|
28,829
|
|
Retainer in stock
–
non-employee
directors
|
12,789
|
10,438
|
-----
|
-----
|
23,227
|
|
Total restricted
stock
|
69,573
|
66,609
|
-----
|
-----
|
136,182
|
|
|
|
|
|
|
|
|
Weighted average
grant date fair value
|
$13.63
|
$13.84
|
$-----
|
$-----
|
$13.73
|
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 July 31,
2018, unrecognized stock-based compensation expense related to
these restricted stock awards totaled $51,511 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 July
31, 2018 the Company granted awards for up to an aggregate of
18,006 shares for the 2017 Plan.
Stock Repurchase Program
On July
19, 2016, the Company’s board of directors approved a stock
repurchase program under which th Company may repurchase up to
$2,500,000 of its outstanding common stock. The Company has not
repurchased any stock under this program as of the date of this
filing.
Warrant
In
October 2014, the Company issued a five-year warrant that is
immediately exercisable to purchase up to 55,500 shares of the
Company’s common stock at an exercise price of $11.00 per
share. As of July 31, 2018 and January 31, 2018, the warrant to
purchase up to 55,500 shares remains outstanding.
Shelf Registration
On
March 24, 2017, the Company filed a shelf registration statement on
Form S-3 (File No. 333-216943) which was declared effective by the
SEC on April 11, 2017 (the “Shelf Registration
Statement”). The Shelf Registration Statement permits the
Company to sell, from time to time, up to an aggregate of $30.0
million of various securities, including shares of common stock,
shares of preferred stock, debt securities, warrants to purchase
common stock, preferred stock, debt securities, and/or units,
rights to purchase common stock, preferred stock, debt securities,
warrants and/or units, units of two or more of the foregoing, or
any combination of such securities.
Public Offering
On
August 17, 2017, the Company entered into an underwriting agreement
(the “Underwriting Agreement”) with Roth Capital
Partners, LLC and Craig-Hallum Capital Group LLC, as underwriters
(collectively, the “Underwriters”), to issue and sell
725,000 shares of common stock, par value $0.01 per share
(“Common Stock”), of the Company at a public offering
price of $13.80 per share (the “Offering Price”) in a
firm commitment underwritten public offering (the
“Offering”). The underwriting discount was $0.966 per
share sold in the Offering. The Offering with respect to the sale
of the 725,000 shares of Common Stock closed on August 22, 2017.
Pursuant to the Underwriting Agreement, the Underwriters had the
option, exercisable for a period of 45-days after execution of the
Underwriting Agreement, to purchase up to an additional 108,750
shares of the Common Stock at the Offering Price. In September
2017, the Underwriters exercised their option to purchase 83,750
shares of Common Stock. The net proceeds to the Company from the
Offering, including the overallotment, were approximately $10.1
million, after deducting underwriting discounts and estimated
offering expenses payable by the Company.
The
offer and sale of shares of Common Stock in the Offering have been
registered under the Securities Act of 1933, as amended, pursuant
to the Shelf Registration Statement. The offer and sale of the
shares of Common Stock in the Offering are described in the
Company’s prospectus constituting a part of the Shelf
Registration Statement, as supplemented by a final prospectus
supplement filed with the Commission on August 18,
2017.
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.
18
8. Income Taxes
Change in 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 $2.2 million at July 31, 2018 and
January 31, 2018.
Income Tax Expense
Income
tax expenses consist of federal, state and foreign income taxes.
The statutory rate is the US rate. Reconciling items to the
effective rate are foreign dividend income, foreign income subject
to US tax, tax deductions for restricted stock vesting, company
borrowing structures, and other permanent tax
differences.
Tax Reform
On
December 22, 2017, new federal tax reform legislation was enacted
in the United States, resulting in significant changes from
previous tax law. The 2017 Tax Cuts and Jobs Act (the Tax
Act) reduced the federal corporate income tax rate to 21% from 35%
effective January 1, 2018. As a result of the Tax Act, the
Company applied a blended US statutory federal income tax rate of
33.81% for the year ended January 31, 2018. The Tax Act requires
the Company to recognize the effect of the tax law changes in the
period of enactment, such as determining the transition tax (see
below), re-measuring the Company’s US deferred tax assets as
well as reassessing the net realizability of the Company’s
deferred tax assets. The Company completed this re-measurement
and reassessment in the most recently completed fiscal
year.
The
Company previously considered substantially all of the earnings in
their non-US subsidiaries to be indefinitely reinvested outside the
US and, accordingly, recorded no deferred income taxes on such
earnings. At this time, and until the Company fully analyzes
the applicable provisions of the Tax Act, the intention with
respect to unremitted foreign earnings is to continue to
indefinitely reinvest outside the US those earnings needed for
working capital or additional foreign investment. Apart from the
transition tax, any incremental deferred income taxes on the
unremitted foreign earnings and profits are not expected to be
material.
While
the Tax Act provides for a modified territorial tax system,
beginning in the fiscal year ending January 31, 2019, it
includes two new US 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 US income tax return foreign subsidiary earnings in excess of
an allowable return on the foreign subsidiary’s tangible
assets. The Company does not expect that the GILTI income
inclusion will result in significant US tax beginning in the
current fiscal year ending January 31, 2019. The BEAT
provisions in the Tax Act eliminates the deduction of certain
base-erosion payments made to related foreign corporations and
impose a minimum tax if greater than regular tax. The Company
does not expect that the BEAT provision will result in
significant US tax beginning in FY19. In addition,
the Company intends to account for the GILTI tax in the period in
which it is incurred, and therefore has not provided any
deferred tax impacts of GILTI in its unaudited condensed
consolidated financial statements for the quarter ended July 31,
2018.
9. Earnings Per Share
The
following table sets forth the computation of basic and diluted
earnings per share at July 31, 2018 and 2017 as
follows:
|
|
Three Months
Ended
July
31,
|
Six
Months Ended
July
31,
|
||
|
|
(in
$000s except share and per share information)
|
|||
|
|
2018
|
2017
|
2018
|
2017
|
|
Numerator:
|
$1.017
|
$1,842
|
$2,885
|
$3,552
|
|
Net
income
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator for
basic earnings per share
(weighted-average
shares which reflect 356,441 shares in the treasury)
|
8,116,199
|
7,266,291
|
8,116,199
|
7,265,053
|
|
Effect of dilutive
securities from restricted stock plan and from dilutive effect of
stock options
|
60,936
|
13,759
|
52,559
|
51,823
|
|
Denominator for
diluted earnings per share (adjusted weighted average
shares)
|
8,177,135
|
7,280,050
|
8,168,758
|
7,316,876
|
|
Basic earnings per
share
|
$0.13
|
$0.25
|
$0.36
|
$0.49
|
|
|
|
|
|
|
|
Diluted earnings
per share
|
$0.12
|
$0.25
|
$0.35
|
$0.49
|
|
|
|
|
|
|
10. Contingencies
Labor contingencies in Brazil
Lakeland and Lake
Brasil Industri E Comercio de Roupas E Equipamentos de Protecao
Individual LTDA (“Lakeland Brazil”), the
Company’s former subsidiary, are currently named in four
labor proceedings in Brazilian courts.
The
first case was initially filed in 2010 claiming US $100,000 owed to
plaintiff. This case is on its final appeal to the Brazilian
Supreme Court, having already been ruled upon in favor of Lakeland
three times, most recently by the Labor Court Supreme Court. The
claimant having lost four times previously, management firmly
believes that Lakeland will continue to prevail in this case. A
second case filed against Lakeland by a former principal in the
Brazilian Company purchased by Lakeland, was filed in Labor court
in 2014 claiming Lakeland owed US $300,000. The Labor court ruled
in the fiscal year ended January 31, 2018 that the claimant’s
case was outside of the scope of the Labor court and the case was
dismissed. The claimant is appealing within the Labor court system.
A third case filed by a former Lakeland Brazil manager in 2014 was
ruled upon in civil court and awarded the claimant US $100,000.
Both the claimant and Lakeland have appealed this decision.
In the last case a former employee of our former
Brazilian subsidiary filed a claim seeking approximately US
$700,000 that he alleges is due him against an unpaid promissory
note. Management firmly believes these claims to be without any
merit and does not anticipate a negative outcome resulting in
significant expense to us. The Company recorded a liability
totaling $150,000 in the fiscal year ended January 31, 2018 to
reflect this contingency. The accrual on the balance sheet at July
31, 2018 is $0.1 million.
19
General litigation contingencies:
The
Company is involved in various litigation proceedings arising
during the normal course of business which, in the opinion of the
management of the Company, will not have a material effect on the
Company’s financial position, results of operations or cash
flows; however, there can be no assurance as to the ultimate
outcome of these matters. As of July 31, 2018, to the best of the
Company’s knowledge, there were no outstanding claims or
litigation, except for the labor contingencies in Brazil described
above.
11. Segment
Reporting
|
|
Three Months
Ended
July
31,
|
Six
Months Ended
July
31,
|
||||||
|
|
2018
|
2017
|
2018
|
2017
|
||||
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$13.36
|
52.16%
|
$12.63
|
52.83%
|
$25.71
|
51.47%
|
$25.33
|
54.05%
|
|
International
|
12.26
|
47.84%
|
11.28
|
47.17%
|
24.25
|
48.53%
|
21.54
|
45.95%
|
|
Total
|
$25.62
|
100.00%
|
$23.91
|
100.00%
|
$49.96
|
100.00%
|
$46.87
|
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 their
geographic locations. The US operations include a facility in
Alabama (primarily the distribution to customers of the bulk of our
products and the light manufacturing of our chemical, wovens,
reflective, and fire products). The Company also maintains one
manufacturing company in China (primarily disposable and chemical
suit production), a manufacturing facility in Mexico (primarily
disposable, reflective, fire and chemical suit production), a
manufacturing facility in Vietnam (primarily disposable products),
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 the USA, Canada,
Mexico, Europe, Latin America, India, Russia, Kazakhstan and China,
which sell and distribute products shipped from the United States,
China, Mexico, India or Vietnam. The table below represents
information about reported segments for the years noted
therein:
20
|
|
Three Months
Ended
July
31,
(in
millions of dollars)
|
Six
Months Ended
July
31,
(in
millions of dollars)
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Net
Sales:
|
|
|
|
|
|
USA
|
$14.76
|
$13.90
|
$28.07
|
$27.30
|
|
Other
foreign
|
5.86
|
4.68
|
10.97
|
8.73
|
|
Europe
(UK)
|
2.56
|
2.08
|
5.13
|
4.21
|
|
Mexico
|
1.21
|
0.95
|
2.68
|
1.87
|
|
China
|
13.66
|
12.89
|
27.50
|
23.41
|
|
Corporate
|
0.39
|
0.11
|
0.75
|
0.53
|
|
Less intersegment
sales
|
(12.82)
|
(10.70)
|
(25.14)
|
(19.18)
|
|
Consolidated
sales
|
$25.62
|
$23.91
|
$49.96
|
$46.87
|
|
External
Sales:
|
|
|
|
|
|
USA
|
$13.36
|
$12.63
|
$25.71
|
$25.33
|
|
Other
foreign
|
4.84
|
4.38
|
9.20
|
8.08
|
|
Europe
(UK)
|
2.56
|
2.08
|
5.13
|
4.17
|
|
Mexico
|
0.82
|
0.58
|
1.93
|
1.15
|
|
China
|
4.04
|
4.24
|
7.99
|
8.14
|
|
Consolidated
external sales
|
$25.62
|
$23.91
|
$49.96
|
$46.87
|
|
Intersegment
Sales:
|
|
|
|
|
|
USA
|
$1.40
|
$1.27
|
$2.36
|
$1.97
|
|
Other
foreign
|
1.02
|
0.30
|
1.77
|
0.65
|
|
Europe
(UK)
|
-----
|
-----
|
-----
|
0.04
|
|
Mexico
|
0.39
|
0.37
|
0.75
|
0.72
|
|
China
|
9.62
|
8.65
|
19.51
|
15.27
|
|
Corporate
|
0.39
|
0.11
|
0.75
|
0.53
|
|
Consolidated
intersegment sales
|
$12.82
|
$10.70
|
$25.14
|
$19.18
|
|
Operating Profit
(Loss):
|
|
|
|
|
|
USA
|
$2.15
|
$2.52
|
$4.78
|
$4.78
|
|
Other
foreign
|
0.06
|
0.67
|
.62
|
1.10
|
|
Europe
(UK)
|
0.09
|
0.04
|
0.18
|
0.11
|
|
Mexico
|
0.08
|
0.01
|
0.21
|
0.04
|
|
China
|
0.93
|
0.58
|
1.51
|
1.55
|
|
Corporate
|
(1.56)
|
(1.72)
|
(3.35)
|
(3.10)
|
|
Less intersegment
profit (loss)
|
(0.10)
|
0.08
|
0.11
|
0.17
|
|
Consolidated
operating profit
|
$1.65
|
$2.18
|
$4.06
|
$4.65
|
|
Depreciation and
Amortization Expense:
|
|
|
|
|
|
USA
|
$0.03
|
$0.03
|
$0.06
|
$0.06
|
|
Other
foreign
|
0.07
|
0.03
|
0.11
|
0.07
|
|
Europe
(UK)
|
-----
|
-----
|
0.01
|
-----
|
|
Mexico
|
0.03
|
0.03
|
0.06
|
0.06
|
|
China
|
0.07
|
0.07
|
0.12
|
0.13
|
|
Corporate
|
0.05
|
0.05
|
0.10
|
0.09
|
|
Less
intersegment
|
(0.01)
|
(0.01)
|
(0.03)
|
(0.02)
|
|
Consolidated
depreciation & amortization expense
|
$0.24
|
$0.20
|
$0.43
|
$0.39
|
|
Interest
Expense:
|
|
|
|
|
|
Other
foreign
|
$0.02
|
$0.01
|
0.03
|
0.03
|
|
China
|
-----
|
-----
|
-----
|
-----
|
|
Corporate
|
0.02
|
0.02
|
0.04
|
0.08
|
|
Consolidated
interest expense
|
$0.04
|
$0.03
|
$0.07
|
$0.11
|
|
Income Tax
Expense:
|
|
|
|
|
|
Other
foreign
|
$0.12
|
$0.21
|
$0.21
|
$0.26
|
|
Europe
(UK)
|
0.02
|
0.03
|
0.04
|
0.04
|
|
China
|
0.36
|
0.09
|
0.51
|
0.38
|
|
Corporate
|
0.15
|
(0.04)
|
0.34
|
0.28
|
|
Less
intersegment
|
(0.03)
|
0.02
|
0.04
|
0.04
|
|
Consolidated income
tax expense
|
$0.62
|
$0.31
|
$1.14
|
$1.00
|
21
|
|
Six
Months Ended
July
31,
(in
millions of dollars)
|
|
|
Capital
Expenditures:
|
2018
|
2017
|
|
USA
|
$0.02
|
$0.01
|
|
Other
Foreign
|
0.71
|
-----
|
|
Mexico
|
0.11
|
0.03
|
|
China
|
0.03
|
0.06
|
|
India
|
0.06
|
0.02
|
|
Corporate
|
0.29
|
0.33
|
|
Consolidated
capital expenditures
|
$1.22
|
$0.45
|
|
|
July
31, 2018
(in
millions of dollars)
|
January 31,
2018
(in
millions of dollars)
|
|
Total
Assets:*
|
|
|
|
USA
|
$71.37
|
$67.02
|
|
Other
foreign
|
23.34
|
20.30
|
|
Europe
(UK)
|
4.49
|
4.63
|
|
Mexico
|
5.22
|
4.69
|
|
China
|
34.71
|
31.59
|
|
India
|
(0.78)
|
(0.85)
|
|
Corporate
|
17.76
|
22.27
|
|
Less
intersegment
|
(57.71)
|
(55.12)
|
|
Consolidated
assets
|
$98.40
|
$94.53
|
|
Total Assets Less
Intersegment:*
|
|
|
|
USA
|
$34.53
|
$33.16
|
|
Other
foreign
|
15.71
|
12.61
|
|
Europe
(UK)
|
4.49
|
4.63
|
|
Mexico
|
5.31
|
4.84
|
|
China
|
20.27
|
16.97
|
|
India
|
1.14
|
0.98
|
|
Corporate
|
16.95
|
21.34
|
|
Consolidated
assets
|
$98.40
|
$94.53
|
|
Property and
Equipment (excluding assets held for sale at $0.2
million):
|
|
|
|
USA
|
$1.95
|
$1.99
|
|
Other
foreign
|
2.06
|
1.50
|
|
Europe
(UK)
|
0.02
|
0.03
|
|
Mexico
|
2.04
|
1.99
|
|
China
|
1.81
|
1.92
|
|
India
|
0.18
|
0.15
|
|
Corporate
|
1.40
|
1.18
|
|
Less
intersegment
|
0.06
|
0.03
|
|
Consolidated
property and equipment
|
$9.52
|
$8.79
|
|
Goodwill:
|
|
|
|
USA
|
$0.87
|
$0.87
|
|
Consolidated
goodwill
|
$0.87
|
$0.87
|
*Negative assets
reflect intersegment amounts eliminated in
consolidation
22
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 safety garments and
accessories for the industrial and public protective clothing
market. Our products are sold by our in-house, regional sales
teams, our customer service group, and authorized independent sales
representatives to a network of over 1,200 North American safety
and mill supply distributors. These distributors in turn supply end
user industrial customers, such as integrated oil,
chemical/petrochemical, utilities, automobile, steel, glass,
construction, smelting, munition plants, janitorial,
pharmaceutical, mortuaries and high technology electronics
manufacturers, as well as scientific and medical laboratories. In
addition, we supply federal, state and local governmental agencies
and departments, such as fire and law enforcement, airport crash
rescue units, the Department of Defense, the Department of Homeland
Security and the Centers for Disease Control. Internationally,
sales are to a mixture of end users directly and to industrial
distributors depending on the particular country and market. Sales
are made to more than 40 countries, the bulk of which were into
China, European Economic Community (“EEC”), Canada,
Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador 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 in China and Mexico
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. Our China
operations will continue operations primarily manufacturing 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 $12.3 million and $11.3 million for the three
months ended July 31, 2018 and 2017 and $24.3 and $21.5 for the six
months ended July 31, 2018 and 2017, 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 July
31, 2018 and 2017 aggregated approximately $0.8 and $0.6 and for
the six months ended July 31, 2018 and 2017 and $1.5 million and
$1.2 million, respectively. Taxes collected from customers relating
to product sales and remitted to governmental authorities are
excluded from revenue.
The
transaction price includes estimates of variable consideration,
such as 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 of 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
time’s price per unit.
23
The
Company has five 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
July
31,
(in
millions of dollars)
|
Six
Months Ended
July
31,
(in
millions of dollars)
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Disposables
|
$13.11
|
$12.36
|
$25.96
|
$24.52
|
|
Chemical
|
4.72
|
4.03
|
9.15
|
7.82
|
|
Fire
|
1.70
|
2.02
|
3.36
|
4.02
|
|
Gloves
|
0.85
|
0.82
|
1.65
|
1.56
|
|
Hi-Vis
|
1.97
|
2.11
|
3.64
|
3.88
|
|
Wovens
|
3.27
|
2.57
|
6.20
|
5.07
|
|
Total
|
$25.62
|
$23.91
|
$49.96
|
$46.87
|
|
|
Three
Months Ended
July
31,
(in
millions of dollars)
|
Six
Months Ended
July
31,
(in
millions of dollars)
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
External
Sales:
|
|
|
|
|
|
USA
|
$13.36
|
$12.63
|
$25.71
|
$25.33
|
|
Other
foreign
|
4.84
|
4.38
|
9.20
|
8.09
|
|
Europe
(UK)
|
2.56
|
2.08
|
5.13
|
4.18
|
|
Mexico
|
0.82
|
0.58
|
1.93
|
1.15
|
|
China
|
4.04
|
4.24
|
7.99
|
8.12
|
|
Consolidated
external sales
|
$25.62
|
$23.91
|
$49.96
|
$46.87
|
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 in this paragraph at the date of the consolidated financial
statements, and the amount of the loss can be reasonably estimated.
Management considers the following factors when determining the
collectability of specific customer accounts: Customer
creditworthiness, past transaction history with the customers,
current economic industry trends and changes in customer payment
terms. Past due balances over 90 days and other less creditworthy
accounts are reviewed individually for collectability. If the
financial condition of the Company’s customers were to
deteriorate, adversely affecting their ability to make payments,
additional allowances would be required. Based on
management’s assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings and a credit to
a valuation allowance. Balances that remain outstanding after the
Company has used reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to
accounts receivable.
Inventories, net. 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. Provision is made
for slow-moving, obsolete or unusable
inventory.
24
Impairment of Long-Lived Assets.
The Company evaluates the carrying
value of long-lived assets to be held and used when events or
changes in circumstances indicate the carrying value may not be
recoverable. The Company measures any potential impairment on a
projected undiscounted cash flow method. Estimating future cash
flows requires the Company’s management to make projections
that can differ materially from actual results. The carrying value
of a long-lived asset is considered impaired when the total
projected undiscounted cash flows from the asset is less than its
carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the
long-lived asset. As of July 31, 2018, no impairment was recorded.
As of January 31, 2018, a non-cash impairment charge was recorded
to reflect the change in the carrying value of asset held for sale
from $0.9 million to $0.2 million as the Company believed this to
be the recoverable value of this asset held for sale on the
Company’s consolidated balance sheet.
Income Taxes. The Company is required to estimate its income
taxes in each of the jurisdictions in which it operates as part of
preparing the 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 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.
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,
Mexico, and India. The Company is vulnerable to currency risks in
these countries. The functional currency for the United
Kingdom subsidiary is the Euro; the trading company in China, the
RMB; the Canadian Real Estate subsidiary, the Canadian dollar; and
the Russian operation, the Russian Ruble; the Kazakhstan operation
the Kazakhstan Tenge and the Vietnam operation, the Vietnam Dong.
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 unaudited
condensed 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 July 31, 2018, As Compared to
January 31, 2018
Balance
Sheet Accounts. In the six months ended July 31, 2018, inventory
levels were increased by $3.5 million as the Company increased
stock on core items in the US and enhanced the in stock offerings
of FR products in anticipation of increased demand, other current
assets increased $0.9 million due to an increase in prepaid
expenses associated with the startup facility in Vietnam, and
accounts payable increased $1.7 million as the Company purchased
materials and began manufacturing product in Vietnam offset by a
decrease in cash of $0.9 million as a normal course of
business.
25
Three Months ended July 31, 2018, As Compared to the Three Months
Ended July 31, 2017
Net Sales. Net
sales increased to $25.6 million for the three months ended July
31, 2018 compared to $23.9 million for the three months ended July
31, 2017, an increase of 7.1%. Sales in the USA increased $1.1
million or 8.2% primarily in the disposables and wovens product
lines. Sales in China and to the Asia Pacific Rim increased $0.8
million or 6.1% mostly as a result of increased intercompany
demands as industrial activity continued to improve. Canada sales
decreased $0.2 million or 6.9% as compared to the prior
year’s period in which the wild fire response created
unusually high demand. UK sales increased $0.5 million or 22.9% as
new distributors in Europe continue to place initial stocking
orders. Russia and Kazakhstan sales combined increased $0.5 million
or 124.1% as we continue to gain customers in this region, and
Latin America sales increased $0.5 million or 29.9% as we continue
to see an overall increase in industrial activity in that
region.
Gross
Profit. Gross profit
increased $0.5 million, or 5.3%, to $9.2 million for the three
months ended July 31, 2018, from $8.7 million for the three months
ended July 31, 2017. Gross profit as a percentage of net sales
decreased to 35.7% for the three-month period ended July 31, 2018,
from 36.3% for the three months ended July 31, 2017. Major factors
driving gross margins were:
●
Disposables gross
margins decreased 5.6 percentage points due to a shift in product
mix to lower margin product as a result of customer demand in the
quarter.
●
Chemical gross
margin decreased by 12.8 percentage points primarily due to product
mix and partially offset by price increases on some products in the
first quarter.
●
Wovens gross
margins increased 16.4 percentage points as the Company continues
to increase sales of higher margin fire retardant
(“FR”) products into the pipeline industry and electric
utilities.
●
Reflective gross
margins increased 3.4 percentage points as a result of product
mix.
●
UK gross margins
increased 7.2 percentage points as a result of price increases
implemented in the quarter and as the Company exited targeted lower
margin business.
●
Argentina’s
gross margins increased 12.4 percentage points as a result of
increased sales into the FR product market
Operating expenses.
Operating expense increased 15.3% to $7.5 million for the three
months ended July 31, 2018 from $6.5 million for the three months
ended July 31, 2017. Operating expense as a percentage of net sales
was 29.3% for the three months ended July 31, 2018 up from 27.2%
for the three months ended July 31, 2017. The main factors for the
increase in operating expenses are a $0.2 million increase in
currency fluctuations primarily in Latin America, UK, and Canada,
$0.1 million increase in rent expense as a result of the new
manufacturing facility in Vietnam, a $0.1 million increase in bad
debt expense primarily in Latin America and Canada due to several
larger slow paying customers, a $0.1 million increase in equity
compensation, a $0.1 million increase in sales salaries as the
Company continues to ramp up sales efforts and expand the
international sales force, a $0.1 million increase in commissions
and a $0.1 million increase in freight out as a result of increased
volume, and a $0.1 million increase in computer expense as the
Company invests in IT infrastructure.
Operating Profit.
Operating profit decreased to a profit of $1.6 million for the
three months ended July 31, 2018 from $2.2 million for the three
months ended July 31, 2017 for the reasons noted above and as the
Company allocated resources to the implementation of a new ERP
system. Operating margins were 6.5% for the three months ended July
31, 2018, compared to 9.1% for the three months ended July 31,
2017.
Interest Expense.
Interest expense was relatively nominal for three months ended July
31, 2018 and for the three months ended July 31, 2017 as the
Company continues to hold borrowing to a minimum.
Income Tax
Expense. Income tax expense consists of federal, state
and foreign income taxes. Income tax expense was $0.6 million for
the three months ended July 31, 2018, as compared to $0.3 million
for the three months ended July 31, 2017. The increase in tax
expense is a result of the country of origin of profits and the
currency fluctuations in those countries as taxes are calculated
based on local statutory profits prior to translation, and to
income taxes now being paid in Argentina, offset in part by lower
USA tax rates.
Net Income.
Net income decreased to $1.0 million for the three months ended
July 31, 2018 from $1.8 million for the three months ended July 31,
2017. The results for three months ended July 31, 2018 are
primarily due to increases in operating expenses and a reduction to
gross margins as previously detailed and offset in part by an
increase in sales volume.
Six Months ended July 31, 2018, As Compared to the Six Months Ended
July 31, 2017
Net Sales. Net
sales increased to $50.0 million for the six months ended July 31,
2018 compared to $46.9 million for the six months ended July 31,
2017, an increase of 6.6%. Sales in the USA saw an increase of $1.0
million or 3.6%. Sales in China and to the Asia Pacific Rim
increased $4.1 million or 17.5% primarily due to increased
intercompany demands as industrial activity improved and several
larger customers began replacing depleted inventories. Canada sales
increased $0.2 million or 5.0% as that country continues to
experience an oil and gas turnaround requiring protective wear. UK
sales increased $0.9 million or 21.8% mostly due to initial
stocking orders from new distributors in Europe. Russia and
Kazakhstan sales combined increased $1.0 million or 113.7% as we
continue to gain customers in this region, and Latin America sales
increased $0.5 million or 15.4% as we continue to see an overall
increase in industrial activity in that region.
26
Gross
Profit. Gross profit
increased $1.4 million, or 8.2%, to $18.7 million for the six
months ended July 31, 2018, from $17.2 million for the six months
ended July 31, 2017. Gross profit as a percentage of net sales
increased to 37.3 % for the six month period ended July 31, 2018,
from 36.8% for the six months ended July 31, 2017. Major factors
driving gross margins were:
●
Chemical gross
margin increased by 3.0 percentage points primarily due to product
mix and as product price increases in some products were
implemented in the first quarter.
●
Wovens gross
margins increased 12.0 percentage points as the Company increased
sales of higher margin FR products into the pipeline
industry.
●
FR gross margins
decreased 5.8 percentage points due to the discounting of some
products as new standards are being implemented.
●
UK gross margins
increased 4.9 percentage points as a result of price increases
implemented in the first quarter, slightly offset by a sales shift
into lower margin products.
●
Canada’s
gross margins increased 2.3 percentage points as a result of
product mix and volume increases associated with an upsurge in the
oil and gas industry in the first quarter.
●
Argentina’s
gross margins increased 7.8 percentage points as a result of
increased sales into the FR product market
Operating expenses.
Operating expense increased 15.9% to $14.6 million for the six
months ended July 31, 2018 from $12.6 million for the six months
ended July 31, 2017. Operating expense as a percentage of net sales
was 29.3% for the six months ended July 31, 2018 up from 26.9% for
the six months ended July 31, 2017. The main factors for the
increase in operating expenses are a $0.4 million increase for
currency fluctuations primarily in Latin America, UK, Canada,
Russia and India, a $0.4 million increase in sales salaries as the
Company continues to ramp up sales efforts and expand the
international sales force, a $0.2 million increase in rent expense
as a result of the new manufacturing facility in Vietnam, a $0.2
million increase to freight out and a $0.1 million increase to
commissions as a result of increased sales volume, a $0.1 million
increase to professional fees associated with audit and tax work as
the Company worked through a change in filer status to accelerated
filer and a change in the US tax code, a $0.1 million increase in
equity compensation, and a $0.1 million increase to computer
expense as the Company continues to invest in
infrastructure.
Operating Profit.
Operating profit decreased to a profit of $4.1 million for the six
months ended July 31, 2018 from $4.7 million for the six months
ended July 31, 2017 was impacted by the expenses detailed above.
Operating margins were 8.2% for the six months ended July 31, 2018,
compared to 10.0% for the six months ended July 31,
2017.
Interest Expense.
Interest expense was relatively nominal for the six months ended
July 31, 2018 and for the six months ended July 31, 2017 as the
Company continues to hold borrowing to a minimum.
Income Tax
Expense. Income tax expense consists of federal, state
and foreign income taxes. Income tax expense was $1.1 million for
the six months ended July 31, 2018, as compared to $1.0 million for
the six months ended July 31, 2017. The increase in tax expense is
a result of the country of origin of profits and the currency
fluctuations in those countries as taxes are calculated based on
local statutory profits prior to US GAAP translation, and to income
taxes now being recorded in Argentina, offset in part by lower USA
tax rates.
Net Income.
Net income decreased to $2.9 million for the six months ended July
31, 2018 from $3.6 million for the six months ended July 31, 2017.
The results for six months ended July 31, 2018 are primarily due to
increases in operating expenses and lower gross profit margins
offset by higher sales volume than in the comparison
period.
Liquidity and Capital Resources
As of
July 31, 2018, we had cash and cash equivalents of approximately
$14.9 million and working capital of $68.3 million. Cash and cash
equivalents decreased $0.9 million and working capital increased
$2.2 million from January 31, 2018. International cash management
is affected by local requirements and movements of cash across
borders can be slowed down significantly.
Of the
Company’s total cash and cash equivalents of $14.9 million as
of July 31, 2018, cash held in Argentina and Chile of $0.5 million,
cash held in Russia of $0.2 million, cash held in the UK of $0.2
million, cash held in India of $0.1 million, cash held in Vietnam
of $0.2 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 Tax Act. In
the event that the Company repatriated cash from China, of the $5.0
million balance at July 31, 2018, 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. Dividends were declared for our
China subsidiary in FY18 in the amount of $5.0 million, as approved
by the Company’s board of directors in the fourth quarter,
after management and outside tax advisors evaluated the impact of
The Tax Act in the US and deemed the dividend distribution as
beneficial to the Company. There were no dividends declared in the
quarter ended July 31, 2018.
Net
cash provided by operating activities of $0.7 million for the three
months ended July 31, 2018 was primarily due to net income of $2.9
million and an increase to accounts payable of $1.8 million offset
by an increase in inventories of $3.8 million. Net cash used in
investing activities of $1.2 million was a result of equipment
purchases in Vietnam, Mexico, India, and China and capitalization
of phase one of the ERP project in the USA. Net cash used in
financing activities of $0.2 million was the result of small
changes in our borrowings and repayments in the UK and Argentina
and scheduled payments on the term loan in the US.
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 not
repurchased any stock under this program as of the date of this
filing.
27
Capital Expenditures. Our capital
expenditures in the second quarter of FY19 of $1.2 million
principally relate to additions to equipment in Vietnam and Mexico
and manufacturing equipment, computer systems and leasehold
improvements in the US. We anticipate FY19 capital expenditures to
be approximately $2.5 million as there is an Enterprise Resource
Planning (“ERP”) project in process and we are
expanding our manufacturing capacity to include Vietnam and India
operations.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Foreign Currency Risk
We are
exposed to changes in foreign currency exchange rates as a result
of our purchases and sales in other countries. To manage the
volatility relating to foreign currency exchange rates, we seek to
limit, to the extent possible, our non-US dollar denominated
purchases and sales.
Most of
our assembly arrangements with our foreign-based subsidiaries or
third-party suppliers require payment to be made in US dollars or
Renminbi (“RMB”). Any decrease in the value of the US
dollar or the Euro, in relation to foreign currencies, could
increase the cost of the services provided to us upon contract
expirations or supply renegotiations. There can be no assurance
that we will be able to increase product prices to offset any such
cost increases, and any failure to do so could have a material
adverse effect on our business, financial condition and results of
operations.
Our
primary risk from foreign currency exchange rate changes is
presently related to non-US dollar denominated sales in China,
Canada and Europe and, to a smaller extent, in South American
countries and in Russia. Our sales to customers in Canada are
denominated in Canadian dollars, in Europe in Euros and British
pounds, and in China in RMB and US dollars. If the value of the US
dollar increases relative to the Canadian dollar, the Pound, the
Euro, or the RMB then our net sales could decrease as our products
would be more expensive to these international customers because of
changes in rate of exchange. We manage the foreign currency risk
when appropriate through the use of rolling 90-day forward
contracts against the Canadian dollar and Euro and through cash
flow hedges in the US against the RMB and the Euro. We do not hedge
other currencies at this time. In the event that non-US dollar
denominated international purchases and sales grow, exposure to
volatility in exchange rates could have a material adverse impact
on our financial results.
Interest Rate Risk
We are
exposed to interest rate risk with respect to our credit
facilities, which have variable interest rates based upon the
London Interbank Offered Rate. At July 31, 2018, we had no
borrowings outstanding under our revolving credit facility . If the
interest rate applicable to our variable credit line (assuming full
borrowing of $20 million) rose 1% in the quarter ended July 31,
2018, our interest expense would have increased $0.2 million. At
July 31, 2018, there were no borrowings under this credit
line.
Tax Risks
We are
exposed to tax rate risk with respect to our deferred tax
asset.
Tax Reform
On
December 22, 2017, new federal tax reform legislation was enacted
in the United States, resulting in significant changes from
previous tax law. The 2017 Tax Cuts and Jobs Act (the Tax
Act) reduced the federal corporate income tax rate to 21% from 35%
effective January 1, 2018. As a result of the Tax Act, we
applied a blended US statutory federal income tax rate of 33.81%
for the year ended January 31, 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 (see below),
re-measuring our US deferred tax assets as well as reassessing the
net realizability of our deferred tax assets. The Company
completed this re-measurement and reassessment in the most recently
completed fiscal year. The rate change, along with certain
immaterial changes in tax basis resulting from the 2017 Tax Act,
resulted in a reduction of our net deferred tax asset to $7.6
million with related income tax expense of $5.1 million, thus
dramatically increasing our United States effective tax rate in the
fiscal year ended January 31, 2018 and reducing it in future
periods, including the period ended July 31, 2018.
Transition Tax
Upon
enactment of the Tax Act, there is a one-time deemed repatriation
tax on undistributed foreign earnings and profits (the
“transition tax”). This tax is assessed on the US
shareholder’s share of the foreign corporation’s
accumulated foreign earnings and profits that have not previously
been taxed. Earnings in the form of cash and cash equivalents
will be taxed at a rate of 15.5% and all other earnings and profits
will be taxed at a rate of 8.0%. We recognized tax expense of
approximately $5.1 million related to the transition tax in
2017. However, foreign tax credits were used of approximately
$5.1 million to fully offset this transition tax and the Company
will not incur any cash outlay related to this tax.
We
previously considered substantially all of the earnings in our
non-US subsidiaries to be indefinitely reinvested outside the US
and, accordingly, recorded no deferred income taxes on such
earnings. At this time, and until we fully analyze the
applicable provisions of the Tax Act, our intention with respect to
unremitted foreign earnings is to continue to indefinitely reinvest
outside the US those earnings needed for working capital or
additional foreign investment. Apart from the transition tax, any
incremental deferred income taxes on the unremitted foreign
earnings and profits are not expected to be material.
While
the Tax Act provides for a modified territorial tax system,
beginning in the fiscal year ending January 31, 2019, it
includes two new US 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 US income tax return foreign subsidiary earnings in excess of
an allowable return on the foreign subsidiary’s tangible
assets. The Company does not expect that the GILTI income
inclusion will result in significant US tax beginning in the
current fiscal year ending January 31, 2019. The BEAT
provisions in the Tax Act eliminates the deduction of certain
base-erosion payments made to related foreign corporations and
impose a minimum tax if greater than regular tax. The Company
does not expect that the BEAT provision will result in
significant US tax beginning in FY19. In addition, the
Company intends to account for the GILTI tax in the period in which
it is incurred, and therefore has not provided any
deferred tax impacts of GILTI in its unaudited condensed
consolidated financial statements for the quarter ended July 31,
2018.
28
We may be exposed to continuing and other liabilities arising from
our former Brazilian operations.
During
the fiscal year ended January 31, 2016 the Company formally
completed the terms of the “Shares Transfer Agreement”
and executed its exit from Brazil, but we may continue to be
exposed to certain liabilities arising in connection with the prior
operations of Lakeland Brazil. The Company understands that under
the laws of Brazil, a concept of fraudulent conveyance exists,
which may hold a parent company liable for the liabilities of a
former Brazilian subsidiary in the event some level of fraud or
misconduct is shown during the period that the parent company owned
the subsidiary. While the Company believes that there has been no
such fraud or misconduct relating to operations of and their exit
from Brazil, there can be no assurance that the courts of Brazil
will not make such a finding. The risk of exposure to the Company
continues to diminish as the former subsidiary continues to
operate, as the statute of limitations for claiming fraudulent
conveyance has now expired, as labor cases pre-dating the
expiration of the statute of limitations are concluded, except the
four open cases, so as to preclude any such finding, and as
pre-shares transfer agreement liabilities are satisfied. As the
former subsidiary has stayed in operation for a period of greater
than two years, the Company believes the risk of a finding of
fraudulent conveyance has virtually been eliminated.
As
disclosed in our periodic filings with the SEC, we agreed to make
certain payments in connection with ongoing labor litigation
involving our former Brazilian subsidiary. While the vast
majority of these labor suits have been resolved, there are four
which remain active. In one such case a former employee of our
former Brazilian subsidiary recently filed a counterclaim in the
action seeking approximately US $0.7 million that he purports to be
owed to him by our former Brazilian subsidiary under a purported
promissory note and alleges that we are liable for payment
therefore. Management firmly believes the counterclaim is
without merit, intends to vigorously defend our position, and does
not anticipate a negative outcome resulting in significant expense
to us.
Item
4. Controls and Procedures
Disclosure Controls and Procedures
We
conducted an evaluation, under the supervision and with the
participation of our management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), as of July 31,
2018. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based on their evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of July
31, 2018.
Changes in Internal Control over Financial Reporting
There
have been no changes that occurred during Lakeland's second quarter
of fiscal 2019 which materially affected, or are reasonably likely
to materially affect, the Company’s internal control over
financial reporting.
29
PART II. OTHER INFORMATION
Items
1, 1A, 2, 3, 4 and 5 are not applicable
Item 6. Exhibits:
|
Employment
Agreement, dated July 12, 2018, between Charles D. Roberson and the
Company
|
Exhibits:*
Filed herewith
|
31.1*
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2*
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1*
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2*
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
101.INS
|
XBRL
instance Document
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
|
101.CAL
|
XBRL
Taxonomy Extension Definitions Document
|
|
101.DEF
|
XBRL
Taxonomy Extension Labels Document
|
|
101.LAB
|
XBRL
Taxonomy Extension Labels Document
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentations Document
|
30
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.
|
|
LAKELAND INDUSTRIES, INC.
(Registrant)
|
|
|
|
|
|
|
|
Date:
September 10, 2018
|
/s/ Christopher J. Ryan
|
|
|
Christopher
J. Ryan,
Chief
Executive Officer, President and Secretary (Principal Executive
Officer and Authorized Signatory)
|
|
|
|
|
|
|
|
Date:
September 10, 2018
|
/s/ Teri W. Hunt
|
|
|
Teri W.
Hunt,
Chief
Financial Officer(Principal Accounting Officer and Authorized
Signatory)
|
31