UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Amendment No. 1)
(Mark one)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedJuly 31, 2020 | |
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. | ||
( |
Delaware | 13-3115216 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
202 Pride Lane SW, Decatur, AL | 35603 | |
(Address of | (Zip Code) |
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Commorn Stock | LAKE | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.Yesdays. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).Yes. Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitiondefinitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | ☒ |
Nonaccelerated filer | o | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’sregistrant’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
Common Stock, $0.01 par value per share | 7,979,902 Shares |
Explanatory Note
The sole purpose of this Amendment No. 1 to LAKELAND INDUSTRIES, INC.
No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q continues to speak as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way the disclosures made in the original Form 10-Q.
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-Q
The following information of the Registrant and its subsidiaries is submitted herewith:
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6 | |||||
| 2020 | 7 | ||||
8 | |||||
9 | |||||
10 | |||||
Management's Discussion and Analysis of Financial Condition and Results of Operations | 28 | ||||
35 | |||||
35 | |||||
36 | |||||
37 | |||||
| 2 | ||
| Table of Contents | ||
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:
· | we are subject to risk as a result of our international manufacturing operations; | |
· | a terrorism attack, other geopolitical crisis, or widespread outbreak of an illness or other health issue, such as the COVID 19 Coronavirus outbreak, could negatively impact our domestic and/or international operations; | |
· | the COVID 19 pandemic poses a threat to manufacturing capacity and could temporarily disrupt operations at our facilities; | |
· | as a result of the COVID 19 pandemic, a recession may result which would negatively affect our results of operations; | |
· | sales and operating profits for the six month period ended July 31, 2020 were positively effected by COVID 19 related demand; upon diminishment of this pandemic, we will no longer experience this effect; | |
· | our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates; | |
· | we may be exposed to continuing and other liabilities arising from our former Brazilian operations; | |
· | the implementation of our "Enterprise Resource Planning ("ERP") system had, and may in the future have, an adverse effect on operating results; | |
· | in fiscal 2020, we identified a material weakness in our internal controls over financial reporting; if we continue to fail maintaining proper and effective internal controls or are unable to remediate a material weakness in our internal controls, our ability to produce accurate and timely financial statements could be impaired, and investors’ views of us could be harmed; | |
· | we have manufacturing and other operations in China which may be adversely affected by tariff wars and other trade maneuvers; | |
· | we may be adversely affected by the withdrawal of the United Kingdom from the European Union; | |
· | our results of operations may vary widely from quarter to quarter; | |
· | some of our sales are to foreign buyers, which exposes us to additional risks; | |
· | we deal in countries where corruption is an obstacle; | |
· | we are exposed to tax expense risks; |
| 3 |
| Table of Contents |
· | covenants in our credit facilities may restrict our financial and operating flexibility; | |
· | because we do not have long-term commitments from many of our customers, we must estimate customer demand, and errors in our estimates could negatively impact our inventory levels and net sales; | |
· | we face competition from other companies, a number of which have substantially greater resources than we do; | |
· | our operations are substantially dependent upon key personnel; | |
· | technological change could negatively affect sales of our products and our performance; | |
· | 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 may be subject to product liability claims, and insurance coverage could be inadequate or unavailable to cover these claims; | |
· | environmental laws and regulations may subject us to significant liabilities; | |
· | our directors and executive officers have the ability to exert significant influence on us and on matters subject to a vote of our stockholders; | |
· | provisions in our restated certificate of incorporation and by-laws and Delaware law could make a merger, tender offer or proxy contest difficult; | |
· | acquisitions could be unsuccessful; | |
· | we may need additional funds, and if we are unable to obtain these funds, we may not be able to expand or operate our business as planned; | |
· | rapid technological change could negatively affect sales of our products, inventory levels and our performance; and | |
· | the other factors referenced in this Form 10-Q, including, without limitation, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the factors described under “Risk Factors” disclosed in our fiscal 2020 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 |
| Table of Contents |
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($000’s except for share and per share information)
Three Months Ended October 31, | Nine Months Ended October 31, | |||
2019 | 2018 | 2019 | 2018 | |
| Net sales | $27,464 | $24,009 | $79,620 | $73,970 |
| Cost of goods sold | 18,166 | 15,691 | 52,349 | 46,995 |
| Gross profit | 9,298 | 8,318 | 27,271 | 26,975 |
| Operating expenses | 7,464 | 7,305 | 23,114 | 21,898 |
| Operating profit | 1,834 | 1,013 | 4,157 | 5,077 |
| Other income (expense), net | (9) | 7 | (33) | 36 |
| Interest expense | (26) | (25) | (98) | (93) |
| Income before taxes | 1,799 | 995 | 4,026 | 5,020 |
| Income tax expense | 653 | 494 | 1,950 | 1,634 |
| Net income | $1,146 | $501 | $2,076 | $3,386 |
| Net income per common share: | ||||
| Basic | $0.14 | $0.06 | $0.26 | $0.42 |
| Diluted | $0.14 | $0.06 | $0.26 | $0.41 |
| Weighted average common shares outstanding: | ||||
| Basic | 8,004,640 | 8,119,488 | 8,013,383 | 8,117,307 |
| Diluted | 8,035,929 | 8,186,130 | 8,044,159 | 8,174,560 |
|
| Three Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net sales |
| $ | 35,021 |
|
| $ | 27,472 |
|
| $ | 80,603 |
|
| $ | 52,156 |
|
Cost of goods sold |
|
| 17,681 |
|
|
| 17,053 |
|
|
| 41,119 |
|
|
| 34,183 |
|
Gross profit |
|
| 17,340 |
|
|
| 10,419 |
|
|
| 39,484 |
|
|
| 17,973 |
|
Operating expenses |
|
| 7,606 |
|
|
| 7,781 |
|
|
| 17,380 |
|
|
| 15,650 |
|
Operating profit |
|
| 9,734 |
|
|
| 2,638 |
|
|
| 22,104 |
|
|
| 2,323 |
|
Other income (expense), net |
|
| 31 |
|
|
| 3 |
|
|
| 37 |
|
|
| (24 | ) |
Interest expense |
|
| (2 | ) |
|
| (38 | ) |
|
| (19 | ) |
|
| (72 | ) |
Income before taxes |
|
| 9,763 |
|
|
| 2,603 |
|
|
| 22,122 |
|
|
| 2,227 |
|
Income tax expense |
|
| 424 |
|
|
| 1,208 |
|
|
| 4,149 |
|
|
| 1,297 |
|
Net income |
| $ | 9,339 |
|
| $ | 1,395 |
|
| $ | 17,973 |
|
| $ | 930 |
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.17 |
|
| $ | 0.17 |
|
| $ | 2.25 |
|
| $ | 0.12 |
|
Diluted |
| $ | 1.16 |
|
| $ | 0.17 |
|
| $ | 2.23 |
|
| $ | 0.11 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 7,976,275 |
|
|
| 8,012,475 |
|
|
| 7,974,370 |
|
|
| 8,013,150 |
|
Diluted |
|
| 8,079,744 |
|
|
| 8,102,342 |
|
|
| 8,062,318 |
|
|
| 8,096,227 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
| Table of Contents |
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
($000’s)
Three Months Ended October 31, | Nine Months Ended October 31, | |||
2019 | 2018 | 2019 | 2018 | |
| Net income | $1,146 | $501 | $2,076 | $3,386 |
| Other comprehensive loss: | ||||
| Foreign currency translation adjustments | (177) | (235) | (402) | (860) |
| Comprehensive income | $969 | $266 | $1,674 | $2,526 |
|
| Three Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 9,339 |
|
| $ | 1,395 |
|
| $ | 17,973 |
|
| $ | 930 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 298 |
|
|
| (156 | ) |
|
| 9 |
|
|
| (225 | ) |
Comprehensive income |
| $ | 9,637 |
|
| $ | 1,239 |
|
| $ | 17,982 |
|
| $ | 705 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
| Table of Contents |
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000’s except for share information)
| ASSETS | October 31, | January 31, |
2019 | 2019 | |
| Current assets | ||
| Cash and cash equivalents | $9,473 | $12,831 |
| Accounts receivable, net of allowance for doubtful accounts of $602 and $434 at October 31, 2019 and January 31, 2019, respectively | 17,413 | 16,477 |
| Inventories | 47,797 | 42,365 |
| Prepaid VAT and other taxes | 1,316 | 1,478 |
| Other current assets | 2,622 | 2,319 |
| Total current assets | 78,621 | 75,470 |
| Property and equipment, net | 10,233 | 10,781 |
| Operating leases right-of-use assets | 2,482 | ----- |
| Deferred tax assets | 6,600 | 7,267 |
| Prepaid VAT and other taxes | 176 | 176 |
| Other assets | 121 | 158 |
| Goodwill | 871 | 871 |
| Total assets | $99,104 | $94,723 |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||
| Current liabilities | ||
| Accounts payable | $6,246 | $6,214 |
| Accrued compensation and benefits | 1,699 | 1,137 |
| Other accrued expenses | 3,227 | 2,825 |
| Current maturity of long-term debt | 1,194 | 158 |
| Current portion of operating lease liabilities | 254 | ----- |
| Total current liabilities | 12,620 | 10,334 |
| Long-term portion of debt | ----- | 1,161 |
| Long-term portion of operating lease liabilities | 2,243 | ----- |
| Total noncurrent liabilities | 2,243 | 1,161 |
| Total liabilities | 14,863 | 11,495 |
| Commitments and contingencies | ||
| Stockholders’ equity | ||
| Preferred stock, $0.01 par; authorized 1,500,000 shares (none issued) | ----- | ----- |
Common stock, $0.01 par; authorized 20,000,000 shares issued 8,478,118 and 8,475,929; outstanding 8,006,829 and 8,013,840 shares at October 31, 2019 and January 31, 2019, respectively | 85 | 85 |
| Treasury stock, at cost; 471,289 and 462,089 shares at October 31, 2019 and January 31, 2019, respectively | (4,614) | (4,517) |
| Additional paid-in capital | 75,048 | 75,612 |
| Retained earnings | 16,376 | 14,300 |
| Accumulated other comprehensive loss | (2,654) | (2,252) |
| Total stockholders' equity | 84,241 | 83,228 |
| Total liabilities and stockholders' equity | $99,104 | $94,723 |
|
| July 31, |
|
| January 31, |
| ||
|
| 2020 |
|
| 2020 |
| ||
ASSETS | ||||||||
Current assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 34,945 |
|
| $ | 14,606 |
|
Accounts receivable, net of allowance for doubtful accounts of $759 and $497 at July 31, 2020 and January 31, 2020, respectively |
|
| 20,243 |
|
|
| 17,702 |
|
Inventories |
|
| 43,087 |
|
|
| 44,238 |
|
Prepaid VAT and other taxes |
|
| 1,220 |
|
|
| 1,228 |
|
Other current assets |
|
| 4,214 |
|
|
| 2,033 |
|
Total current assets |
|
| 103,709 |
|
|
| 79,807 |
|
Property and equipment, net |
|
| 9,923 |
|
|
| 10,113 |
|
Operating leases right-of-use assets |
|
| 2,064 |
|
|
| 2,244 |
|
Deferred tax assets |
|
| 4,630 |
|
|
| 5,939 |
|
Prepaid VAT and other taxes |
|
| 332 |
|
|
| 333 |
|
Other assets |
|
| 93 |
|
|
| 98 |
|
Goodwill |
|
| 871 |
|
|
| 871 |
|
Total assets |
| $ | 121,622 |
|
| $ | 99,405 |
|
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 10,495 |
|
| $ | 7,204 |
|
Accrued compensation and benefits |
|
| 2,183 |
|
|
| 1,300 |
|
Other accrued expenses |
|
| 3,555 |
|
|
| 2,445 |
|
Current maturity of long-term debt |
| 0 |
|
|
| 1,155 |
| |
Current portion of operating lease liabilities |
|
| 887 |
|
|
| 835 |
|
Total current liabilities |
|
| 17,120 |
|
|
| 12,939 |
|
Long-term portion of operating lease liabilities |
|
| 1,145 |
|
|
| 1,414 |
|
Total liabilities |
|
| 18,265 |
|
|
| 14,353 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par; authorized 1,500,000 shares (none issued) |
| 0 |
|
| 0 |
| ||
Common stock, $0.01 par; authorized 20,000,000 shares Issued 8,489,144 and 8,481,665; outstanding 7,979,902 and 7,972,423 at July 31, 2020 and January 31, 2020, respectively |
|
| 85 |
|
|
| 85 |
|
Treasury stock, at cost; 509,242 shares |
|
| (5,023 | ) |
|
| (5,023 | ) |
Additional paid-in capital |
|
| 75,494 |
|
|
| 75,171 |
|
Retained earnings |
|
| 35,554 |
|
|
| 17,581 |
|
Accumulated other comprehensive loss |
|
| (2,753 | ) |
|
| (2,762 | ) |
Total stockholders' equity |
|
| 103,357 |
|
|
| 85,052 |
|
Total liabilities and stockholders' equity |
| $ | 121,622 |
|
| $ | 99,405 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
| Table of Contents |
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(000’s except for share information)
Common Stock | Treasury Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | ||||
Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Total | |
($000’s) | ($000’s) | ($000’s) | ($000’s) | ($000’s) | ($000’s) | |||
| Balance, January 31, 2018 | 8,472,640 | $85 | (356,441) | $(3,352) | $74,917 | $12,841 | $(1,651) | $82,840 |
| Net income | ----- | ----- | ----- | ----- | ----- | 3,386 | ----- | 3,386 |
| Other comprehensive loss | ----- | ----- | ----- | ----- | ----- | ----- | (860) | (860) |
| Stock-based compensation: | ||||||||
| Restricted Stock Plan | 3,289 | ----- | ----- | ----- | 467 | ----- | ----- | 467 |
| Balance, October 31, 2018 | 8,475,929 | $85 | (356,441) | $(3,352) | $75,384 | $16,227 | $(2,511) | $85,833 |
| Balance, July 31, 2018 | 8,472,640 | $85 | (356,441) | $(3,352) | $75,221 | $15,726 | $(2,275) | $85,405 |
| Net income | ----- | ----- | ----- | ----- | ----- | 501 | ----- | 501 |
| Other comprehensive loss | ----- | ----- | ----- | ----- | ----- | ----- | (236) | (236) |
| Stock-based compensation: | ||||||||
| Restricted Stock Plan | 3,289 | ----- | ----- | ----- | 163 | ----- | ----- | 163 |
| Balance, October 31, 2018 | 8,475,929 | $85 | (356,441) | $(3,352) | $75,384 | $16,227 | $(2,511) | $85,833 |
| Balance, January 31, 2019 | 8,475,929 | $85 | (462,089) | $(4,517) | $75,612 | $14,300 | $(2,252) | $83,228 |
| Net income | ----- | ----- | ----- | ----- | ----- | 2,076 | ----- | 2,076 |
| Other comprehensive loss | ----- | ----- | ----- | ----- | ----- | ----- | (402) | (402) |
| Stock-based compensation: | ||||||||
| Restricted Stock Plan | 2,189 | ----- | ----- | ----- | (559) | ----- | ----- | (559) |
| Returned of shares in lieu of payroll tax withholding | ----- | ----- | ----- | ----- | (5) | ----- | ----- | (5) |
| Treasury stock purchased; inclusive of commissions | ----- | ----- | (9,200) | (97) | ----- | ----- | ----- | (97) |
| Balance, October 31, 2019 | 8,478,118 | $85 | (471,289) | $(4,614) | $75,048 | $16,376 | $(2,654) | $84,241 |
| Balance, July 31, 2019 | 8,475,929 | $85 | (471,289) | $(4,614) | $75,361 | $15,230 | $(2,477) | $83,585 |
| Net income | ----- | ----- | ----- | ----- | ----- | 1,146 | ----- | 1,146 |
| Other comprehensive loss | ----- | ----- | ----- | ----- | ----- | ----- | (177) | (177) |
| Stock-based compensation: | ||||||||
| Restricted Stock Plan and stock options | 2,189 | ----- | ----- | ----- | (308) | ----- | ----- | (308) |
| Returned of shares in lieu of payroll tax withholding | ----- | ----- | ----- | ----- | (5) | ----- | ----- | (5) |
| Balance, October 31, 2019 | 8,478,118 | $85 | (471,289) | $(4,614) | $75,048 | $16,376 | $(2,654) | $84,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
|
|
| ||||||||||||||
|
| Common Stock |
|
| Treasury Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
|
| |||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Total |
| ||||||||
|
|
|
| ($000’s) |
|
|
|
| ($000’s) |
|
| ($000’s) |
|
| ($000’s) |
|
| ($000’s) |
|
| ($000’s) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, January 31, 2019 |
|
| 8,475,929 |
|
| $ | 85 |
|
|
| (462,089 | ) |
| $ | (4,517 | ) |
| $ | 75,612 |
|
| $ | 14,300 |
|
| $ | (2,252 | ) |
| $ | 83,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| - |
|
| 0 |
|
| - |
|
| 0 |
|
| 0 |
|
|
| 930 |
|
| 0 |
|
|
| 930 |
| ||||||
Other comprehensive loss |
| - |
|
| 0 |
|
| - |
|
| 0 |
|
| 0 |
|
| 0 |
|
|
| (225 | ) |
| �� | (225 | ) | ||||||
Stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Plan |
| - |
|
| 0 |
|
| - |
|
| 0 |
|
|
| (251 | ) |
| 0 |
|
| 0 |
|
|
| (251 | ) | ||||||
Treasury stock purchased, inclusive of commissions |
| - |
|
| 0 |
|
|
| (9,200 | ) |
|
| (97 | ) |
| 0 |
|
| 0 |
|
| 0 |
|
|
| (97 | ) | |||||
Balance, July 31, 2019 |
|
| 8,475,929 |
|
| $ | 85 |
|
|
| (471,289 | ) |
| $ | (4,614 | ) |
| $ | 75,361 |
|
| $ | 15,230 |
|
| $ | (2,477 | ) |
| $ | 83,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2019 |
|
| 8,475,929 |
|
| $ | 85 |
|
|
| (462,089 | ) |
| $ | (4,517 | ) |
| $ | 75,813 |
|
| $ | 13,835 |
|
| $ | (2,321 | ) |
| $ | 82,895 |
|
Net Income |
| — |
|
| 0 |
|
| — |
|
| 0 |
|
| 0 |
|
|
| 1,395 |
|
| — |
|
|
| 1,395 |
| ||||||
Other comprehensive income |
| — |
|
| 0 |
|
| — |
|
| 0 |
|
| — |
|
| 0 |
|
|
| (156 | ) |
|
| (156 | ) | ||||||
Stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock plan |
| — |
|
| — |
|
| — |
|
| — |
|
|
| (452 | ) |
| — |
|
| — |
|
|
| (452 | ) | ||||||
Treasury stock purchased, inclusive of commissions |
| - |
|
| 0 |
|
|
| (9,200 | ) |
|
| (97 | ) |
| — |
|
| — |
|
| — |
|
|
| (97 | ) | |||||
Balance, July 31, 2019 |
|
| 8,475,929 |
|
| $ | 85 |
|
|
| (471,289 | ) |
| $ | (4,614 | ) |
| $ | 75,361 |
|
| $ | 15,230 |
|
| $ | (2,477 | ) |
| $ | 83,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31, 2020 |
|
| 8,481,665 |
|
| $ | 85 |
|
|
| (509,242 | ) |
| $ | (5,023 | ) |
| $ | 75,171 |
|
| $ | 17,581 |
|
| $ | (2,762 | ) |
| $ | 85,052 |
|
Net Income |
| - |
|
| 0 |
|
| — |
|
| 0 |
|
| 0 |
|
|
| 17,973 |
|
| 0 |
|
|
| 17,973 |
| ||||||
Other comprehensive income |
| — |
|
| 0 |
|
| - |
|
| 0 |
|
| 0 |
|
| 0 |
|
|
| 9 |
|
|
| 9 |
| ||||||
Stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issued |
|
| 7,479 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||||
Restricted stock plan |
| — |
|
| 0 |
|
| - |
|
| 0 |
|
|
| 378 |
|
| 0 |
|
| 0 |
|
|
| 378 |
| ||||||
Return of shares in lieu of payroll withholding |
| — |
|
| — |
|
| — |
|
| 0 |
|
|
| (55 | ) |
| 0 |
|
| 0 |
|
|
| (55 | ) | ||||||
Balance, July 31, 2020 |
|
| 8,489,144 |
|
| $ | 85 |
|
|
| (509,242 | ) |
| $ | (5,023 | ) |
| $ | 75,494 |
|
| $ | 35,554 |
|
| $ | (2,753 | ) |
| $ | 103,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2020 |
|
| 8,485,517 |
|
| $ | 85 |
|
|
| (509,242 | ) |
| $ | (5,023 | ) |
| $ | 75,314 |
|
| $ | 26,215 |
|
| $ | (3,051 | ) |
| $ | 93,540 |
|
Net Income |
| — |
|
| 0 |
|
| — |
|
| 0 |
|
| 0 |
|
|
| 9,339 |
|
| 0 |
|
|
| 9,339 |
| ||||||
Other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
| 298 |
|
|
| 298 |
| ||||||
Stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issued |
|
| 3,627 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||||
Restricted stock plan |
| — |
|
| 0 |
|
| — |
|
| 0 |
|
|
| 215 |
|
| 0 |
|
| 0 |
|
|
| 215 |
| ||||||
Return of shares in lieu of payroll withholding |
| — |
|
| 0 |
|
| — |
|
| 0 |
|
|
| (35 | ) |
| 0 |
|
| 0 |
|
|
| (35 | ) | ||||||
Balance, July 31, 2020 |
|
| 8,489,144 |
|
| $ | 85 |
|
|
| (509,242 | ) |
| $ | (5,023 | ) |
| $ | 75,494 |
|
| $ | 35,554 |
|
| $ | (2,753 | ) |
| $ | 103,357 |
|
| 8 |
| Table of Contents |
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($000)’s
|
| Six Months Ended July 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income |
| $ | 17,973 |
|
| $ | 930 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
Provision for doubtful accounts |
|
| 262 |
|
|
| 25 |
|
Deferred income taxes |
|
| 1,309 |
|
|
| 302 |
|
Depreciation and amortization |
|
| 934 |
|
|
| 836 |
|
Stock based and restricted stock compensation |
|
| 409 |
|
|
| (251 | ) |
Loss on disposal of property and equipment |
|
| 9 |
|
| 0 |
| |
Non-cash operating lease expense |
|
| 469 |
|
|
| 527 |
|
(Increase) decrease in operating assets |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (2,843 | ) |
|
| (1,615 | ) |
Inventories |
|
| 1,178 |
|
|
| (7,171 | ) |
Prepaid VAT and other taxes |
|
| 7 |
|
|
| 355 |
|
Other current assets |
|
| (2,283 | ) |
|
| (146 | ) |
Increase (decrease) in operating liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
| 3,330 |
|
|
| 2,110 |
|
Accrued expenses and other liabilities |
|
| 2,083 |
|
|
| 797 |
|
Operating lease liabilities |
|
| (506 | ) |
|
| (527 | ) |
Net cash provided by (used in) operating activities |
|
| 22,331 |
|
|
| (3,828 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (740 | ) |
|
| (585 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowing under revolving credit facility |
| 0 |
|
|
| 332 |
| |
Loan repayments, short-term |
|
| (1,319 | ) |
| 0 |
| |
Loan borrowings, short-term |
|
| 158 |
|
| 0 |
| |
Loan repayments, long-term |
| 0 |
|
|
| (79 | ) | |
UK borrowings under line of credit facility, net |
| 0 |
|
|
| 544 |
| |
Purchase of Treasury Stock under stock repurchase program |
| 0 |
|
|
| (97 | ) | |
Shares returned to pay employee taxes under restricted stock program |
|
| (55 | ) |
| 0 |
| |
Net cash (used in) provided by financing activities |
|
| (1,216 | ) |
|
| 700 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (36 | ) |
|
| (62 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| 20,339 |
|
|
| (3,775 | ) |
Cash and cash equivalents at beginning of period |
|
| 14,606 |
|
|
| 12,831 |
|
Cash and cash equivalents at end of period |
| $ | 34,945 |
|
| $ | 9,056 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 19 |
|
| $ | 72 |
|
Cash paid for taxes |
| $ | 1,726 |
|
| $ | 931 |
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities |
|
|
|
|
|
|
|
|
Leased assets obtained in exchange for operating lease liabilities |
| $ | 289 |
|
| $ | 3,095 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Nine Months Ended October 31, | ||
2019 | 2018 | |
| Cash flows from operating activities: | ||
| Net income | $2,076 | $3,386 |
| Adjustments to reconcile net income to net cash used in operating activities | ||
| Provision for of doubtful accounts | 168 | 76 |
| Deferred income taxes | 667 | 352 |
| Depreciation and amortization | 1,267 | 642 |
| Stock based and restricted stock compensation | (583) | 491 |
| Loss on disposal of property and equipment | (2) | 14 |
| Non-cash operating lease expense | 797 | ----- |
| (Increase) decrease in operating assets | ||
| Accounts receivable | (1,257) | (2,655) |
| Inventories | (5,584) | (4,121) |
| Prepaid VAT and other taxes | 162 | 148 |
| Other current assets | (355) | (1,284) |
| Increase (decrease) in operating liabilities | ||
| Accounts payable | 67 | 1,019 |
| Accrued expenses and other liabilities | 517 | 265 |
| Operating lease liabilities | (783) | ----- |
| Net cash used in operating activities | (2,843) | (1,667) |
| Cash flows used in investing activities: | ||
| Purchases of property and equipment | (689) | (2,227) |
| Cash flows from financing activities: | ||
| Loan repayments, short-term | (124) | (207) |
| Loan borrowings, short-term | ----- | 208 |
| Loan repayments, long-term | ----- | (118) |
| UK borrowings (repayments) under line of credit facility, net | 491 | (11) |
| Purchase of Treasury Stock under stock repurchase program | (97) | ----- |
| Shares returned to pay employee taxes under restricted stock program | (5) | ----- |
| Net cash provided by (used in) financing activities | 265 | (128) |
| Effect of exchange rate changes on cash and cash equivalents | (91) | (106) |
| Net decrease in cash and cash equivalents | (3,358) | (4,128) |
| Cash and cash equivalents at beginning of period | 12,831 | 15,788 |
| Cash and cash equivalents at end of period | $9,473 | $11,660 |
| Supplemental disclosure of cash flow information: | ||
| Cash paid for interest | $98 | $93 |
| Cash paid for taxes | $1,202 | $1,326 |
| Noncash investing and financing activities | ||
| Leased assets obtained in exchange for operating lease liabilities | $3,218 | $----- |
Lakeland Industries, Inc. and Subsidiaries (“Lakeland,” the “Company,” “we,” “our” or “us”), a Delaware corporation organized in April 1986, manufacturesmanufacture and sellssell a comprehensive line of safety garmentsindustrial protective clothing and accessories for the industrial and public protective clothing market.
2.
The unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments (consisting of only normal and recurring adjustments) which are, in the opinion of management, necessary to present fairly the unaudited condensed consolidated financial information required herein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended January 31, 2019.
The results of operations for the three and ninesix month periods ended OctoberJuly 31, 20192020 are not necessarily indicative of the results to be expected for the full year.
In this Form 10-Q, (a) “FY“FY” means fiscal year; thus for example, FY20FY21 refers to the fiscal year ending January 31, 2020,2021, (b) “Q” refers to quarter; thus, for example, Q3 FY20Q2 FY21 refers to the thirdsecond quarter of the fiscal year ending January 31, 2020,2021, (c) “Balance Sheet” refers to the unaudited condensed consolidated balance sheet and (d) “Statement of Operations” refers to the unaudited condensed consolidated statement of operations.
3.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates and Assumptions
The preparation of
unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is reasonably possible that events could occur during the upcoming year that could change such estimates.Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company recognizes losses when information available indicates that it is probable that a receivable has been impaired based on criteria noted below at the date of the
unaudited condensed consolidated financial statements, and the amount of the loss can be reasonably estimated. Management considers the following factors when determining the collectability of specific customer accounts: Customer creditworthiness, past transaction history with the customers, current economic industry trends and changes in customer payment terms. Past due balances over 90 days and other less creditworthy accounts are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.| 10 |
| Table of Contents |
Inventories
Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or estimated net realizablerealized value.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value may not be recoverable. The Company measures any potential impairment on a projected undiscounted cash flow method. Estimating future cash flows requires the Company’s management to make projections that can differ materially from actual results. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset.
Revenue Recognition
Substantially all the Company’s revenue is derived from product sales, which consist of sales of the Company’s personal protective wear products to distributors. The Company considers purchase orders to be a contract with a customer. Contracts with customers are considered to be short-term when the time between order confirmation and satisfaction of the performance obligations is equal to or less than one year, and virtually all of the Company’s contracts are short-term. The Company recognizes revenue for the transfer of promised goods to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. The Company typically satisfies its performance obligations in contracts with customersand when the customer has obtained the benefit of the goods, which can occur upon shipment or delivery depending on the nature of the goods.our agreements. 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. Shippingobligation and handlingthese costs associated with outbound freight are included in operating expenses Shipping and handling costs for the three months ended OctoberJuly 31, 2020 and 2019, and 2018 aggregatedwere approximately $0.9 million and $0.6 million and $2.5$0.8 million, respectively, and for the six months ended July 31,2020 and 2019 were approximately $2.2 million and $2.1$1.6 million, for the nine months ended October 31, 2019 and 2018, respectively. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue.
The transaction price includes estimates of variable consideration, related to rebates, allowances, and discounts (primarily driven by volumes) that are reductions in revenue. All estimates are based on the Company's historical experience, anticipated performance, and the Company's best judgment at the time the estimate is made. Estimates for variable consideration are reassessed each reporting period and are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur upon resolution of uncertainty associated with the variable consideration. All the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as quantity times price per unit.
| 11 |
| Table of Contents |
The Company has seven revenue generating reportable geographic segments under ASC Topic 280 “Segment Reporting” and derives its sales primarily from its limited use/disposable protective clothing and secondarily from its sales of reflective clothing, high-end chemical protective suits, firefighting and heat protective apparel, reusable woven garments and gloves and arm guards. The Company believes disaggregation of revenue by geographic region best depicts the nature, amount, timing, and uncertainty of its revenue and cash flows (see table below). Net sales by geographic region and by product line are included below:
Three Months Ended October 31, (in millions of dollars) | Nine Months Ended October 31, (in millions of dollars) | |||
2019 | 2018 | 2019 | 2018 | |
| External Sales by region: | ||||
| USA | $14.16 | $11.82 | $41.47 | $37.54 |
| Other foreign | 0.91 | 0.72 | 2.61 | 2.30 |
| Europe (UK) | 2.38 | 2.22 | 7.24 | 7.35 |
| Mexico | 0.88 | 0.77 | 2.08 | 2.70 |
| Asia | 4.62 | 4.80 | 12.49 | 12.79 |
| Canada | 2.60 | 2.08 | 7.47 | 6.38 |
| Latin America | 1.91 | 1.60 | 6.26 | 4.91 |
| Consolidated external sales | $27.46 | $24.01 | $79.62 | $73.97 |
Three Months Ended October 31, (in millions of dollars) | Nine Months Ended October 31, (in millions of dollars) | |||
2019 | 2018 | 2019 | 2018 | |
| External Sales by product lines: | ||||
| Disposables | $12.52 | $12.74 | $39.19 | $40.88 |
| Chemical | 5.68 | 4.74 | 16.30 | 12.42 |
| Fire | 2.81 | 1.02 | 6.64 | 3.57 |
| Gloves | 0.74 | 0.77 | 2.33 | 2.30 |
| Hi-Vis | 2.20 | 1.83 | 6.04 | 5.46 |
| Wovens | 3.51 | 2.91 | 9.12 | 9.34 |
| Consolidated external sales | $27.46 | $24.01 | $79.62 | $73.97 |
Income Taxes
The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing the unaudited condensed consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carryforwards and tax credits, are recorded as deferred tax assets or liabilities on the Company’s unaudited condensed consolidated balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination.
The Company recognizes tax positions that meet a “more likely than not” minimum recognition threshold. If necessary, the Company recognizes interest and penalties associated with tax matters as part of the income tax provision and would include accrued interest and penalties with the related tax liability in the unaudited condensed consolidated balance sheets. The Company does not have any uncertain tax positions at OctoberJuly 31, 20192020 or January 31, 2019.
Stock-Based Compensation
The Company records the cost of stock-based compensation plans based on the fair value of the award on the grant date. For awards that contain a vesting provision, the cost is recognized over the requisite service period (generally the vesting period of the equity award) which approximates the performance period. For awards based on services already rendered, the cost is recognized immediately.
Foreign Operations and Foreign Currency Translation
The Company maintains manufacturing operations in Mexico, India, Argentina, Vietnam and the People’s Republic of China and can access independent contractors in China, Vietnam, Argentina and Mexico. It also maintains sales and distribution entities located in India, Canada, the U.K., Chile, China, Argentina, Russia, Kazakhstan, Uruguay Australia, and Mexico. The Company is vulnerable to currency risks in these countries.
Pursuant to US GAAP, assets and liabilities of the Company’s foreign operations with functional currencies, other than the US dollar, are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign currency transaction gains (losses)(loss) gain included in net income (loss) for the three months ended OctoberJuly 31, 2020 and 2019, were approximately $(0.3) million and 2018$0.1 million and for the six months ended July 31, 2020 and 2019 was approximately $0.0$(0.4) million and $0.2 million, and for the nine months ended October 31, 2019 and 2018 was approximately $0.2 million and $(0.4) million, respectively.
| 12 |
| Table of Contents |
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
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 January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), which includes provisions, intended to simplify the test for goodwill impairment. The standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption ofhas adopted this standard to have a significantguidance using prospective transition method, which had no material impact on its unaudited condensed consolidated financial positionstatements and resultsrelated disclosures.
New Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplying the Accounting for Income Taxes. The ASU removes certain exceptions for performing intra-period allocation and calculating income taxes in interim periods. It also simplifies the accounting for income taxes by requiring recognition of operations.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (LIBOR). This amendment provides for optional expedients and exceptions for applying generally accepted accounting principles to contracts and hedging relationships that are affected by LIBOR and other reference rates. The ASU generally allows for a hedge accounting to continue if the hedge was highly effective or met other standards prior to reference rate reform. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU is only available for a limited time, generally through December 31, 2022. Our debt agreement that utilizes LIBOR has not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt arrangements change to another accepted rate, we will utilize the relief available in this ASU.
No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s unaudited condensed consolidated financial statements.
Inventories consist of the following (in $000s):
October 31, 2019 | January 31, 2019 | |
| Raw materials | $17,230 | $14,986 |
| Work-in-process | 441 | 987 |
| Finished goods | $30,126 | 26,392 |
$47,797 | $42,365 |
|
| July 31, 2020 |
|
| January 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Raw materials |
| $ | 17,688 |
|
| $ | 16,709 |
|
Work-in-process |
|
| 956 |
|
|
| 670 |
|
Finished goods |
|
| 24,443 |
|
|
| 26,859 |
|
|
| $ | 43,087 |
|
| $ | 44,238 |
|
5.
We lease real property, equipment and certain automobiles. The Company made the accounting policy election to account for short-term leases as described herein. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
The Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty. All of the Company’s real estate leases are classified as operating leases.
Most of our real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term for an additional four to five years. The exercise of lease renewal options is at the Company’s discretion. The Company evaluates renewal options at lease inception and on an ongoing basis, and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
Leases recorded on the unaudited condensed consolidated balance sheet consist of the following:
|
| Classification |
| July 31, 2020 |
|
| January 31, 2020 |
| ||
|
|
|
|
|
|
|
|
| ||
Assets |
|
|
|
|
|
|
|
| ||
Operating lease assets |
| Operating lease right-of-use assets |
| $ | 2,064 |
|
| $ | 2,244 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
Operating |
| Current portion of operating lease liabilities |
|
| 887 |
|
|
| 835 |
|
Noncurrent |
|
|
|
|
|
|
|
|
|
|
Operating |
| Long-term portion of operating lease liabilities |
|
| 1,145 |
|
|
| 1,414 |
|
Total Lease Obligations |
|
|
| $ | 2,032 |
|
| $ | 2,249 |
|
14 | ||
The components of lease expense are included on the unaudited condensed consolidated statement of operations as follows (in 000’s):
| Classification | Three Months Ended October 31, 2019 | Nine Months Ended October 31, 2019 | |
| Operating lease cost | Cost of goods sold | $53 | $342 |
| Operating expenses | $269 | $507 | |
| Short-term lease cost | $444 | $572 |
|
| Three Months Ended July 31, 2020 |
|
| Six Months Ended July 31, 2020 |
| ||
Operating lease cost |
| $ | 267 |
|
| $ | 580 |
|
Short-term lease cost |
| $ | 149 |
|
| $ | 304 |
|
Maturity of Lease Liabilities
Maturity of lease liabilities as of OctoberJuly 31, 20192020 was as follows (in $000’s):
| Year ending January 31, | Operating Leases (a) |
| Remainder of fiscal year 2020 | 254 |
| 2021 | 955 |
| 2022 | 802 |
| 2023 | 686 |
| 2024 | 23 |
| Thereafter | 81 |
| Total lease payments | 2,801 |
| Less: Interest | 304 |
| Present value of lease liability | $2,497 |
For the 12 months ended July 31, |
| Operating Leases (a) |
| |
2021 |
| $ | 976 |
|
2022 |
|
| 776 |
|
2023 |
|
| 318 |
|
2024 |
|
| 21 |
|
2025 |
|
| 18 |
|
Thereafter |
|
| 108 |
|
Total lease payments |
| $ | 2,217 |
|
Less: Interest |
|
| (185 | ) |
Present value of lease liability |
| $ | 2,032 |
|
(a) | Operating lease payments include $72 related to options to extend lease terms that are reasonably certain of being exercised. |
Weighted-average lease terms and discount rates are as follows:
Weighted-average remaining lease term (years) |
| July 31, 2020 |
|
| January 31, 2020 |
| ||
Operating leases |
|
| 2.93 |
|
|
| 3.14 |
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
|
|
|
Operating leases |
|
| 6.19 | % |
|
| 5.87 | % |
Supplemental cash flow information related to leases for the ninethree months and six months ended OctoberJuly 31, 20192020 were as follows (in 000’s):
Cash paid for amounts included in the measurement of lease liabilities: |
| Three Months Ended July 31, 2020 |
|
| Six Months Ended July 31, 2020 |
| ||
Operating cash flows from operating leases |
| $ | 277 |
|
| $ | 580 |
|
Leased assets obtained in exchange for new operating lease liabilities |
| $ | 74 |
|
| $ | 289 |
|
| Table of Contents |
6. Other Current Assets
As of ASU 2016-02
|
| July 31, 2020 |
|
| January 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Prepaid maintenance contracts |
| $ | 259 |
|
| $ | 144 |
|
Prepaid insurance |
|
| 251 |
|
|
| 49 |
|
Prepaid material and supplies |
|
| 1,955 |
|
|
| 1,313 |
|
UK factoring (due from HSBC) |
|
| 1,250 |
|
|
| 113 |
|
Prepaid other |
|
| 499 |
|
|
| 414 |
|
|
| $ | 4,214 |
|
| $ | 2,033 |
|
The UK factoring account represents trade receivables collected on our behalf that have initial or remaining lease termsnot yet been conveyed to the Company by HSBC. The increase is due to the increase in excesssales in the EEC.
7. Other Accrued Expenses
As of one year are as follows:
| Year ended January 31, | Gross rental |
| 2019 | $1,022 |
| 2018 | $841 |
|
| July 31, 2020 |
|
| January 31, 2020 |
| ||
|
|
|
|
|
|
| ||
Other employee related costs, including employee benefits |
| $ | 211 |
|
| $ | 199 |
|
Freight expenses and material purchases |
|
| 1,266 |
|
|
| 673 |
|
Professional fees |
|
| 125 |
|
|
| 279 |
|
Sales commissions |
|
| 122 |
|
|
| 234 |
|
Other vendor accruals |
|
| 423 |
|
|
| 718 |
|
Income tax accrual |
|
| 1,408 |
|
|
| 342 |
|
|
| $ | 3,555 |
|
| $ | 2,445 |
|
Year ending January 31 | |
| 2020 | $761 |
| 2021 | 447 |
| 2022 | 435 |
| 2023 | 314 |
| 2024 | 8 |
| and thereafter | 9 |
| Total | $1,974 |
8. Long-Term Debt
Revolving Credit Facility
On May 10, 2017,June 25, 2020, the Company entered into a Loan Agreement (the “Loan Agreement”) with SunTrust Bank of America (“Lender”). The Loan Agreement provides the Company with a secured (i) $20.0$12.5 million revolving credit facility, which includes a $5.0 million letter of credit sub-facility, and (ii) $1,575,000 term loan with Lender.sub-facility. The Company may request from time to time an increase in the revolving credit loan commitment of up to $10.0$5.0 million (for a total commitment of up to $30.0$17.5 million). Borrowing pursuant to the revolving credit facility is subject to a borrowing base amount calculated as (a) 85%80% of eligible accounts receivable, as defined, plus (b) an50% of the value of acceptable 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 the Lender may establish for the amount of estimated exposure, as reasonably determined by the Loan Agreement.Lender from time to time, under certain interest rate swap contracts. The borrowing base limitation only applies during periods when the Company’s quarterly funded debt to EBITDA ratio, as defined, exceeds 2.00 to 1.00. The credit facility matureswill mature on May 10, 2020 (subject to earlier termination upon the occurrence of certain events of default as set forth in the Loan Agreement).
Borrowings under the term loan and the revolving credit facility bear interest at an interesta rate determined by reference whetherper annum equal to the loan is a base rate loan or Eurodollar loan, with the rate election made by the Company at the timesum 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 IndexDaily Floating Rate (“LIBOR”), plus 2.0% per annum, and for that portion125 basis points. LIBOR is subject to a floor 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.100 basis points. All outstanding principal and unpaid accrued interest under the revolving credit facility shall beis due and payable on the maturity datedate. On a one-time basis, and subject to there not existing an event of default, the Company may elect convert up to $5 million of the revolver. For that portionthen outstanding principal of the revolverrevolving credit facility to a term loan that consistsfacility with an assumed amortization of Eurodollar loans, the revolver shall bear interest at LIBOR plus a margin rate of 1.75% per annum for the first nine months and thereafter between 1.5% and 2.0%, depending on the Company’s “availability calculation” (as defined in the Loan Agreement) and, for that portion of the revolver that consists of base rate loans, the revolver shall bear interest at the base rate then in effect plus a margin rate of 0.75% per annum for the first nine months and thereafter between 0.50% and 1.0%, depending on the availability calculation. As of the closing, the Company elected all borrowings under the Loan Agreement to accrue interest at LIBOR which, as of that date, was 0.99500%. As such, the initial rate of interest for the revolver was 2.745% per annum15 years and the initialsame interest rate of interest forand maturity date as the term loan was 2.995% per annum. At October 31, 2019, the rate of interest on the revolver was 3.78% per annum and the rate of interest on the term loan was 4.4% per annum.revolving credit facility. The Loan Agreement provides for payment of an annual unused line of credit commitment fee, payable quarterly, of between 0.25% and 0.50%, dependingbased on the amount by whichdifference between the revolvingtotal credit loanline commitment exceeds the amount of the revolving credit loans outstanding (including letters of credit), which shall be payable monthly in arrears onand the average daily unused portionamount of credit outstanding under the revolver.
The Company made certain representations and warranties to the Lender in the Loan Agreement thethat are customary for credit arrangements of this type. 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.
| 16 |
| Table of Contents |
The Loan Agreement contains customary events of default that include, among other things (subject to any applicable cure periods and makemateriality qualifier), non-payment of principal, interest or fees, defaults under related agreements with the Lender, cross-defaults under agreements for other indebtedness, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgements and material adverse change. Upon the occurrence of an event of default, the Lender may terminate all loan commitments, declare all outstanding indebtedness owing under the Loan Agreement and related documents to be immediately due and payable, and may exercise its other rights and remedies provided for under the Loan Agreement.
In connection with the Loan Agreement, the Company entered into with the Lender (i) a security agreement dated June 25, 2020, pursuant to which the Company granted to the Lender a first priority perfected security interest in substantially all of the personal property and the intangibles of the Company, and (ii) a pledge agreement, dated June 25, 2020, pursuant to which the Company granted to the Lender a first priority perfected security interest in the stock repurchases.
As of OctoberJuly 31, 2019,2020, the Company had no borrowings outstanding on the letter of credit sub-facility and no borrowings outstanding under the revolving credit facility, andfacility.
Prior to the execution of the Loan Agreement with Bank of America, the Company repaid a $1.2 million term loan that was outstanding on the term loan.
Borrowings in UK
On December 31, 2014, the Company and Lakeland Industries Europe, Ltd, (“Lakeland UK”), a wholly owned subsidiary of the Company, amended the terms of its existing line of credit facility with HSBC Bank to provide for (i) a one-year extension of the maturity date of the existing financing facility to December 19, 2016, (ii) an increase in the facility limit from £1,250,000 (approximately USD $1.9 million, based on exchange rates at time of closing) to £1,500,000 (approximately USD $2.3 million, based on exchange rates at time of closing), and (iii) a decrease in the annual interest rate margin from 3.46% to 3.0%. In addition, pursuant to a letter agreement dated December 5, 2014, the Company agreed that £400,000 (approximately USD $0.6 million, based on exchange rates at time of closing) of the note payable by the UK subsidiary to the Company shall be subordinated in priority of payment to the subsidiary’s obligations to HSBC under the financing facility. On December 31, 2016, Lakeland UK entered into an extension of the maturity date of its existing facility with HSBC Invoice Finance (UK) Ltd. to December 19, 2017. Other than the extension of the maturity date and a small reduction of the service charge from 0.9% to 0.85%, all other terms of the facility remained the same. On December 4, 2017 the facility was extended to March 30,31, 2018 for the next review period and, as ofperiod. On March 9, 2019 the facility was extended to matureMarch 31, 2020 and on March 30,6, 2020 further extended to March 31, 2021 with no additional changes to the terms. The balanceThere were no borrowings outstanding under this loan outstandingfacility at Octobereither July 31, 20192020 or January 31, 2020. The amounts due from HSBC of USD $1.3 million and USD $0.1 million as of July 31, 2020 and January 31, 2019 was USD $0.5 million and USD $0.0 million,2020, respectively, and is included in other accrued expensescurrent assets on the accompanying unaudited condensed consolidated balance sheets. The
Borrowing in Argentina
On March 20, 2020 Lakeland Argentina and AP Partners entered into an agreement for Lakeland Argentina to obtain a loan in the amount of $0.4ARS $10 million due from HSBC as(approximately USD $158k, based on exchange rates at time of Januaryclosing); such loan is for a term of one year at an interest rate of 30% per annum. There was no outstanding balance at July 31, 2019 is included in Other Current Assets on the accompanying unaudited condensed consolidated balance sheet.
Short-Term | Long-term | Current Maturity of Long-term | ||||
October 31, | January 31, | October 31, | January 31, | October 31, | January 31, | |
2019 | 2019 | 2019 | 2019 | 2019 | 2019 | |
| USA | $1,194 | $----- | $----- | $1,161 | $----- | $158 |
| UK | $494 | ----- | ----- | ----- | ----- | ----- |
| Totals | $1,688 | $----- | $----- | $1,161 | $----- | $158 |
Total | 1 Year or less | 2 Years | 3 Years | 4 Years | 5 Years | After 5 Years | |
| Borrowings in USA | $1,194 | $1,194 | $----- | $----- | $----- | $----- | $----- |
| Borrowing in the UK | 494 | 494 | ----- | ----- | ----- | ----- | ----- |
| Total | $1,688 | $1,688 | $----- | $----- | $----- | $----- | $----- |
| 17 |
| Table of Contents |
9. 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 principally within the United States. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral.
The Company’s foreign financial depositories are Bank of America; China Construction Bank; Bank of China; China Industrial and Commercial Bank; HSBC (UK); Rural Credit Cooperative of Shandong; Postal Savings Bank of China; Punjab National Bank; HSBC in India, Argentina and UK; Raymond James in Argentina; TD Canada Trust; Banco Itaú S.A., Banco Credito Inversione in Chile; Banco Mercantil Del Norte SA in Mexico; ZAO KB Citibank Moscow in Russia, and JSC Bank Centercredit in Kazakhstan. The Company monitors its financial depositories by their credit rating which varies by country. In addition, cash balances in banks in the United States of America are insured by the Federal Deposit Insurance Corporation subject to certain limitations. There is approximately $1.3$11.3 million total included in the US bank accounts and approximately $8.2$23.6 million total in foreign bank accounts as of OctoberJuly 31, 2019.
Major Customer
No customer accounted for more than 10% of net sales during the three month and ninesix month periods ended OctoberJuly 31, 20192020 and 2018.
Major Supplier
No supplier accounted for more than 10% of purchases during the three month and ninesix month periods ended OctoberJuly 31, 20192020 and 2018.
10. Stockholders’ Equity
The 2017 Stock Plan
On June 21, 2017, the stockholders of the Company approved the Lakeland Industries, Inc. 2017 Equity Incentive Plan (the “2017 Plan”) at the Annual Meeting of Stockholders. The executive officers and all other employees and directors of the Company, including its subsidiaries, are eligible to participate in the 2017 Plan. The 2017 Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”), except that with respect to all non-employee directors, the grants are made byCommittee shall be deemed to include the full Board. The 2017 Plan provides for the grant of equity-based compensation in the form of stock options, restricted stock, restricted stock units, performance shares, performance units, or stock appreciation rights (“SARS”).
The 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 summarizestables summarize the unvested shares granted on September 12, 2017 and June 7, 2018, December 4, 2019 and April 9, 2020 which have been made under the 2017 Plan.
Number of shares awarded total | ||||
Minimum | Target | Maximum | Cap | |
| Employees | 35,863 | 53,796 | 71,728 | 86,125 |
| Non-employee Directors | 14,414 | 21,622 | 28,829 | 34,595 |
| Total | 50,277 | 75,418 | 100,557 | 120,720 |
Value at grant date (numbers below are rounded to the nearest $100) | ||||
Minimum | Target | Maximum | Cap | |
| Employees | $497,600 | $746,400 | $995,200 | $1,194,900 |
| Non-employee Directors | 200,000 | 300,000 | 400,000 | 480,000 |
| Total | $697,600 | $1,046,400 | $1,395,200 | $1,674,900 |
| 18 |
| Table of Contents |
Granted June 7, 2018
|
| Number of shares awarded total |
| |||||||||||||
|
| Minimum |
|
| Target |
|
| Maximum |
|
| Cap |
| ||||
Employees |
|
| 17,834 |
|
|
| 26,753 |
|
|
| 35,670 |
|
|
| 42,805 |
|
Non-Employee Directors |
|
| 7,168 |
|
|
| 10,752 |
|
|
| 14,336 |
|
|
| 17,204 |
|
Total |
|
| 25,002 |
|
|
| 37,505 |
|
|
| 50,006 |
|
|
| 60,009 |
|
|
| Value at grant date |
| |||||||||||||
|
| Minimum |
|
| Target |
|
| Maximum |
|
| Cap |
| ||||
Employees |
| $ | 248,800 |
|
| $ | 373,200 |
|
| $ | 497,600 |
|
| $ | 597,120 |
|
Non-Employee Directors |
|
| 100,000 |
|
|
| 150,000 |
|
|
| 200,000 |
|
|
| 240,000 |
|
Total |
| $ | 348,800 |
|
| $ | 523,200 |
|
| $ | 697,600 |
|
| $ | 837,120 |
|
Granted December 4, 2019 and Subsidiaries
|
| Number of shares awarded total |
| |||||||||
|
| Minimum |
|
| Target |
|
| Maximum |
| |||
Employees |
|
| 78,004 |
|
|
| 120,006 |
|
|
| 144,009 |
|
Non-Employee Directors |
|
| 27,664 |
|
|
| 42,560 |
|
|
| 51,072 |
|
Total |
|
| 105,668 |
|
|
| 162,566 |
|
|
| 195,081 |
|
|
| Value at grant date |
| |||||||||
|
| Minimum |
|
| Target |
|
| Maximum |
| |||
Employees |
| $ | 943,540 |
|
| $ | 1,451,600 |
|
| $ | 1,741,920 |
|
Non-Employee Directors |
|
| 338,000 |
|
|
| 520,000 |
|
|
| 624,000 |
|
Total |
| $ | 1,281,540 |
|
| $ | 1,971,600 |
|
| $ | 2,365,920 |
|
The Company recognized total stock-based compensation costs, which are reflected in operating expenses:
|
| Three Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
2017 Plan: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Restricted Stock Program |
| $ | 199 |
|
| $ | (452 | ) |
| $ | 349 |
|
| $ | (251 | ) |
Stock Options |
|
| 15 |
|
| — |
|
|
| 29 |
|
| — |
| ||
Other |
|
| 31 |
|
| — |
|
|
| 31 |
|
| — |
| ||
Total stock-based compensation |
| $ | 245 |
|
| $ | (452 | ) |
| $ | 409 |
|
| $ | (251 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit recognized for stock-based compensation arrangement |
| $ | 51 |
|
| $ | (95 | ) |
| $ | 86 |
|
| $ | (52 | ) |
| 19 |
| Table of Contents |
Restricted Stock Units
Under the 2017 Plan, as described above, the Company awarded performance-based and service based restricted stock units to eligible employees and directors. The following table summarizes the activity under the 2017 Plan for the quarter ended July 31, 2020. This table reflects the amount of awards granted at the maximum number of shares that would be issued if the Company were to achieve the maximum performance level under the December 2019 and April 2020 grants.
|
| Performance -Based |
|
| Service-Based |
|
| Total |
|
| Weighted Average Grant Date Fair Value |
| ||||
Outstanding at January 31, 2020 |
|
| 109,234 |
|
|
| 9,930 |
|
|
| 119,164 |
|
| $ | 10.33 |
|
Awarded |
|
| 69,591 |
|
|
| 6,326 |
|
|
| 75,917 |
|
| $ | 14.95 |
|
Vested |
| — |
|
| — |
|
| — |
|
| — |
| ||||
Forfeited |
| — |
|
| — |
|
| — |
|
| — |
| ||||
Outstanding at July 31, 2020 |
|
| 178,825 |
|
|
| 16,256 |
|
|
| 195,081 |
|
| $ | 12.13 |
|
The actual number of shares of Common Stock, if any, to be earned by the award recipient is determined over the three year performance measurement periods based on measures that include revenue growth, EBITDA margin, and free cash flow, retention and Board discretion for the December 4, 2019 and April 9, 2020 grants. The performance targets have been set for each of the Minimum, Target, and Maximum levels.The actual performance amount achieved is determined by the Board and may be adjusted for items determined to be unusual in nature or infrequent in occurrence, at the discretion of the Board.
The compensation cost is based on the fair value at the grant date, is recognized over the requisite performance/service period using the straight-line method, and is periodically adjusted for the probable number of shares to be awarded. The Company is recognizing expense related to the December 2019 and April 2020 grants under the 2017 Plan at Target, and these expenses were approximately $0.2 million for the three months and $0.3 for the six months ended July 31, 2020. As of July 31, 2020, unrecognized stock-based compensation expense totaled $1.5 million pursuant to the 2017 Plan based on outstanding awards under the Plan. This expense is expected to be recognized over of the next 2.5 years.
The following table reflects the amount of awards granted at the maximum number of shares that would be issued if the Company were to achieve the maximum performance level in relation to the June 2018 grants.
Shares issued under 2017 Plan |
| Outstanding Unvested Grants at Maximum at Beginning of FY21 |
|
| Granted during FY21 |
|
| Becoming Vested during FY21 |
|
| Forfeited during FY21 |
|
| Outstanding Unvested Grants at Maximum at End of July 31, FY21 |
| |||||
Restricted stock grants – employees |
|
| 35,670 |
|
| — |
|
| — |
|
| — |
|
|
| 35,670 |
| |||
Restricted stock grants – non-employee directors |
|
| 14,336 |
|
| — |
|
| — |
|
| — |
|
|
| 14,336 |
| |||
Total restricted stock |
|
| 50,006 |
|
| — |
|
| — |
|
| — |
|
|
| 50,006 |
| |||
Weighted average grant date fair value |
| $ | 13.95 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 13.95 |
|
| 20 |
| Table of Contents |
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 measurement period commencingbased on February 1, 2017measures that include Earnings Before Interest Taxes Depreciation and ending on JanuaryAmoritzation (“EBITDA”). As of July 31, 2020, in the case of the 2017 grants, and commencing on February 1, 2018 and ending on January 31, 2021, in the case of the 2018 grants, based on the level of earnings before interest, taxes, depreciation and amortization (“EBITDA”) achieved by the Company over this period. The EBITDA targets have been set for each of the Minimum, Target, Maximum and Cap levels, at higher amounts for each of the higher levels. The actual EBITDA amount achieved is determined by the Committee and may be adjusted for items determined to be unusual in nature or infrequent in occurrence, which items may include, without limitation, the charges or costs associated with restructurings of the Company or any subsidiary, discontinued operations, and the cumulative effects of accounting changes.
Stock Options
During the year ended January 31, 2020 a stock option was adjustedgranted pursuant to account for the changeCompany’s 2017 Equity Incentive Plan in estimate. The totalthe amount of previously recognized stock-based compensation attributable to24,900 shares at an exercise price of $11.17 per share. Such shares will vest at 8,300shares on each of August 12, 2020, August 12, 2021 and August 12, 2022.
The following table represents stock options granted, exercised and forfeited during the 2017 and 2018 grants that has been reversed is approximately $835,000, of which approximately $25,000 related to the SARS.
Stock Options |
| Number of Shares |
|
| Weighted Average Exercise Price per Share |
|
| Weighted Average Remaining Contractual Term (in years) |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at January 31, 2020 |
|
| 24,900 |
|
| $ | 11.17 |
|
|
| 9.53 |
|
| $ | — |
|
Granted |
| — |
|
| — |
|
| — |
|
| — |
| ||||
Outstanding at July 31, 2020 |
|
| 24,900 |
|
| $ | 11.17 |
|
|
| 9.04 |
|
| — |
| |
Exercisable at July 31, 2020 |
| — |
|
| $ | — |
|
| — |
|
| — |
| |||
The Company recognized totalapproximately $15,000 of stock-based compensation costs, netexpense during the quarter ended July 31, 2020 associated with the grant of the above change in estimate, which are reflected in operating expenses (in 000's):
Three Months Ended | Nine Months Ended | |||
October 31, | October 31 | |||
2019 | 2018 | 2019 | 2018 | |
| 2017 Plan | $(345) | $189 | $(596) | $491 |
| Total stock-based compensation | $(345) | $189 | $(596) | $491 |
Shares issued under 2017 Stock Plan | Outstanding Unvested Grants at Maximum at Beginning of FY20 | Granted during FY20 | Becoming Vested during FY20 | Forfeited during FY20 | Outstanding Unvested Grants at Maximum at End of October 31, 2019 |
| Restricted stock grants – employees | 84,126 | ----- | ----- | 12,397 | 71,729 |
| Restricted stock grants – non-employee directors | 28,829 | ----- | ----- | ----- | 28,829 |
| Retainer in stock – non-employee directors | 25,044 | 7,292 | 2,675 | ----- | 29,661 |
| Total restricted stock | 137,999 | 7,292 | 2,675 | 12,397 | 130,219 |
| Weighted average grant date fair value | $13.77 | $11.63 | $15.85 | $13.87 | $13.66 |
Other Compensation Plans/Programs
Pursuant to the Company’s restrictiverestricted 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 OctoberJuly 31, 2019,2020, unrecognized stock-based compensation expense related to these restricted stock awards totaled $41,766$13,148 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 OctoberJuly 31, 2019,2020, the Company issued 7,479 shares and has granted awards for up to an aggregate of 32,33614,330 shares fromunder the 2017 Plan.
| Stock Options | Number of Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value |
| Outstanding at July 31, 2019 | ----- | $----- | ----- | $----- |
| Granted during the quarter ended October 31, 2019 | 24,900 | $11.17 | ----- | ----- |
| Outstanding at October 31, 2019 | 24,900 | $11.17 | 9.79 | ----- |
| Exercisable at October 31, 2019 | ----- | $----- | ----- | $----- |
Stock Repurchase Program
On July 19, 2016, the Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $2,500,000 of its outstanding common stock. During the six months ended July 31, 2020, the Company did not repurchase any shares of its common stock. The Company has repurchased 114,848152,801 shares of stock under this program as of the date of this filing which amounted to $1,261,656,July 31, 2020 for $1,671,188 inclusive, of commissions. During the three month period ended October 31, 2019 the Company repurchased zero shares. At October 31, 2019, the dollar value of remaining shares that may by repurchased under the share repurchase program was $1,238,344.
Deferred Taxes and Valuation Allowance
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. The valuation allowance was $1.3 million at OctoberJuly 31, 20192020 and January 31, 2019. 2020.
The valuation allowance stayedfederal net operating loss (“NOL”) carryforwards as of July 31, 2020 were approximately $8.6 million before tax effects. If not utilized, the sameNOL generated from the January 31, 2015 tax year will expire after January 31, 2035, and the NOL generated after January 31, 2018 will be carried forward indefinitely.
| 21 |
| Table of Contents |
The state net operating loss (“NOL”) carryforwards as of July 31, 2020 were approximately $26.2 million before tax effects. The state NOLs with carry forward limitations will begin to expire after January 31, 2025 and will continue to expire at various periods up until January 31, 2039 when they will be fully expired. The states have a larger spread because some only carryforward for the three10 years and nine months ended Octobersome allow 20 years. The Georgia NOLs generated after January 31, 2019 and 2018 respectively.
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. The Tax Act requires us to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our US deferred tax assets as well as reassessing the net realizability of our deferred tax assets. The Company completed this re-measurement and reassessment in FY18. While the Tax Act provides for a modified territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The proposed regulations were not finalized as of January 31, 2019. The regulations were finalized as of June 14, 2019. Re-measurement and reassessmentassessment of the GILTI tax as it is currently written resulted in a charge to tax expense of $0.3$-1.5 million and $0.6$0.3 million for the three and ninesix months ended OctoberJuly 31, 2020 and 2019, respectively. On July 23, 2020, the GILTI regulations were modified with respect to the treatment of income subject to a high foreign tax rate and provided guidance on the treatment of these available exclusions. As a result of these modifications, the Company will be able to amend past tax returns and recapture certain NOLs previously utilized. As result of the recapture of these NOLs, the Company recorded an estimated tax benefit of $1.6 million for the three and six months ended July 31, 2020. The Company intends to account for the GILTI tax impact in the period in which it is incurred. Though this non-cash expense had(due to use of existing NOLs) has a materially negative impact on FY20 earnings, the Tax Act also changes the taxation of foreign earnings, and companies generally will not be subject to United States federal income taxes upon the receipt of dividends from foreign subsidiaries.
We previously considered substantially all of the earnings in our non-U.S. subsidiaries to be indefinitely reinvested outside the U.S. and, accordingly, recorded no deferred income taxes on such earnings. At this time, the applicable provisions of the Tax Act have been fully analyzed and our intention with respect to unremitted foreign earnings is to continue to indefinitely reinvest outside the U.S. those earnings needed for working capital or additional foreign investment. If all of these earnings were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to tax. Due to the timing and circumstances of the repatriation of such earnings, if any, it is not practical to determine the amount of funds subject to unrecognized deferred tax liability.
Income Tax Expense
Income tax expenses consists of federal, state and foreign income taxes. Items impacting the effective rate are state taxes, an adjustment for foreign income subject to US tax (including Tax Reform impacts), tax rates lower than the US statuatory tax rate, GILTI, and an adjustment to reflect the recapture of U.S. NOLs as a result of applying the GILTI high tax exclusion in foreign jurisdictions, US state income taxes, timing differences for tax deductions for restricted stock vesting, company borrowing structures,years FY19 and other permanent tax differences.
The following table sets forth the computation of basic and diluted earningsnet income per share at OctoberJuly 31, 20192020 and 20182019 as follows:
Three Months Ended October 31, | Nine Months Ended October 31, | |||
(in $000s except share and per share information) | ||||
2019 | 2018 | 2019 | 2018 | |
| Numerator: | ||||
| Net income | $1,146 | $501 | $2,076 | $3,386 |
| Denominator: | ||||
| Denominator for basic earnings per share (weighted-average shares which reflect shares in the treasury, 471,289 and 356,441 for October 31, 2019 and 2018, respectively) | 8,004,640 | 8,119,448 | 8,013,383 | 8,117,307 |
| Effect of dilutive securities from restricted stock plan and from dilutive effect of warrants | 31,289 | 66,682 | 30,776 | 57,253 |
| Denominator for diluted earnings per share (adjusted weighted average shares) | 8,035,929 | 8,186,130 | 8,044,159 | 8,174,560 |
| Basic earnings per share | $0.14 | $0.06 | $0.26 | $0.42 |
| Diluted earnings per share | $0.14 | $0.06 | $0.26 | $0.41 |
| Warrants, restricted stock, and stock options excluded from the computation of diluted earnings per share because the effect of inclusion would have been anti-dilutive | 125,457 | |||
|
| Three Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||||||||
|
| (in $000s except share and per share information) |
| |||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 9,339 |
|
| $ | 1,395 |
|
| $ | 17,973 |
|
| $ | 930 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share (weighted-average shares which exclude shares in the treasury, 509,242 at July 31, 2020 and 471.289 for July 31, 2019 |
|
| 7,976,275 |
|
|
| 8,012,475 |
|
|
| 7,974,370 |
|
|
| 8,013,150 |
|
Effect of dilutive securities from restricted stock plan |
|
| 103,469 |
|
|
| 89,867 |
|
|
| 87,948 |
|
|
| 83,077 |
|
Denominator for diluted net income per share (adjusted weighted average shares) |
|
| 8,079,744 |
|
|
| 8,102,342 |
|
|
| 8,062,318 |
|
|
| 8,096,227 |
|
Basic net income per share |
| $ | 1.17 |
|
| $ | 0.17 |
|
| $ | 2.25 |
|
| $ | 0.12 |
|
Diluted net income per share |
| $ | 1.16 |
|
| $ | 0.17 |
|
| $ | 2.23 |
|
| $ | 0.11 |
|
13. Contingencies
Labor and other contingencies in Brazil
As disclosed in our periodic filings with the SEC, we agreed to make certain payments in connection with ongoing labor litigation involving our former Brazilian subsidiary (“Lakeland Brazil”).subsidiary. While the vast majority of these labor suits have been resolved, there are two (2) labor cases that remain active and a civil case filed by a former officer of our former Brazilian subsidiary, in which Lakeland was named as a co-defendant.
The first case was initially filed in 2010 claiming USD $100,000 owed to plaintiff. This case is on its final appeal to the Brazilian Supreme Court, having already been ruled upon in favor of Lakeland three (3) times, most recently by the Labor Court Supreme Court. The claimant having lost three times previously, management firmly believes that Lakeland will continue to prevail in this case. A second case filed against Lakeland by a former officer of Lakeland Brazil, was filed in Labor Courtcourt in 2014 claiming Lakeland owed USD $300,000. The Labor Courtcourt ruled that the claimant’s case was outside of the scope of the Labor Courtcourt and the case was dismissed. The claimant appealed within the Labor Court system, whichdismissal, and this appeal was dismissed by the Labor Court of Appeal on November 27, 2019.also dismissed. The claimant may stillthen failed to timely bring a further appeal, to the Superior Labor Court.
Lakeland Brazil may face new labor lawsuits in the short term as a result of the recent commencement of the winding downshutdown of its operations in our first quarter. In order to mitigate this risk, the management of Lakeland Brazil has been proposing settlement agreements to employees dismissed due to the winding down and to the extent possible seeking confirmation of Labor Courts.March 2019. The Company has no obligation under the 2015 Shares Transfer Agreement pursuant to which Agreement, the Company eliminated its interest in Lakeland Brazil to make any additional payments in connection with these potential new labor lawsuits. The Company also understands that under the labor laws of Brazil, a parent company may be held liable for the labor liabilities of a former Brazilian subsidiary in the case of fraud, misconduct, or under various theories.
Although the Company would have the right of adversary system, full defense and due process in case of a potential litigation, there can be no assurance as to the findings of the courts of Brazil.
| 23 |
| Table of Contents |
There are additional cases in Labor and Civil courts against Lakeland Brazil in which Lakeland is not a party, and other outstanding monetary allegations of Lakeland Brazil.
The Company recorded an accrual of $1.2 millionhas provided for professional fees and litigation reserves associated with potential residual labor claims in Brazil. During the nine months ending October 31, 2019 the Company recorded an additional expense of $0.4 million and paid $1.4 million in professional fees and labor claims. The accrual on the balance sheet at OctoberJuly 31, 20192020 is $0.08million and at January 31, 20192020 is $0.2 million and $1.2 million, respectively.
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 October 31, 2019, to the best of the Company’s knowledge, there were no outstanding claims or litigation, except for the labor contingencies in Brazil described above.
14. Segment Reporting
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||
2019 | 2018 | 2019 | 2018 | |||||
| Domestic | $14.16 | 51.56% | $11.82 | 49.24% | $41.47 | 52.08% | $37.54 | 50.75% |
| International | 13.30 | 48.44% | 12.19 | 50.76% | 38.15 | 47.92% | 36.43 | 49.25% |
| Total | $27.46 | 100.00% | $24.01 | 100.00% | $79.62 | 100.00% | $73.97 | 100.00% |
We manage our operations by evaluating each of itsour geographic locations. TheOur US operations include a facility in Alabama (primary US(primarily the distribution facilityto 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), a manufacturing facility in Argentinaproduction) and a small manufacturing facility in India. TheOur China facilities produce the majority of the Company’s products and China generates a significant portion of the Company’s international revenues. The Company evaluatesWe evaluate the performance of these entities based on operating profit, which is defined as income before income taxes, interest expense and other income andgross profit less operating expenses. The Company maintainsWe have sales forces in Norththe USA, Canada, Mexico, Europe, Latin America, South America, Europe,India, Russia, Kazakhstan, Australia and Asia,China, which sell and distribute products shipped from the United States, Mexico, Argentina, China, India, Vietnam or Vietnam.
The table below represents information about reported segments for the years noted therein:
Three Months Ended October 31, (in millions of dollars) | Nine Months Ended October 31, (in millions of dollars) | |||
2019 | 2018 | 2019 | 2018 | |
| Net Sales: | ||||
| USA | $15.84 | $13.00 | $45.36 | $41.07 |
| Other foreign | 1.65 | 1.29 | 4.81 | 4.33 |
| Europe (UK) | 2.38 | 2.22 | 7.24 | 7.35 |
| Mexico | 1.22 | 1.15 | 3.09 | 3.83 |
| Asia | 13.34 | 12.68 | 43.97 | 40.27 |
| Canada | 2.60 | 2.08 | 7.50 | 6.39 |
| Latin America | 2.01 | 1.74 | 6.45 | 5.27 |
| Corporate | ----- | ----- | ----- | 0.75 |
| Less intersegment sales | (11.58) | (10.15) | (38.80) | (35.29) |
| Consolidated sales | $27.46 | $24.01 | $79.62 | $73.97 |
| External Sales: | ||||
| USA | $14.16 | $11.82 | $41.47 | $37.54 |
| Other foreign | 0.91 | 0.72 | 2.61 | 2.30 |
| Europe (UK) | 2.38 | 2.22 | 7.24 | 7.35 |
| Mexico | 0.88 | 0.77 | 2.08 | 2.70 |
| Asia | 4.62 | 4.80 | 12.49 | 12.79 |
| Canada | 2.60 | 2.08 | 7.47 | 6.38 |
| Latin America | 1.91 | 1.60 | 6.26 | 4.91 |
| Consolidated external sales | $27.46 | $24.01 | $79.62 | $73.97 |
| Intersegment Sales: | ||||
| USA | $1.68 | $1.18 | $3.89 | $3.53 |
| Other foreign | 0.74 | 0.57 | 2.20 | 2.02 |
| Mexico | 0.34 | 0.38 | 1.01 | 1.13 |
| Asia | 8.71 | 7.88 | 31.48 | 27.49 |
| Canada | ----- | ----- | 0.03 | 0.02 |
| Latin America | 0.11 | 0.14 | 0.19 | 0.35 |
| Corporate | ----- | ----- | ----- | 0.75 |
| Consolidated intersegment sales | $11.58 | $10.15 | $38.80 | $35.29 |
Three Months Ended October 31, (in millions of dollars) | Nine Months Ended October 31, (in millions of dollars) | |||
2019 | 2018 | 2019 | 2018 | |
| Operating Profit : | ||||
| USA | $2.60 | $1.66 | $6.04 | $6.45 |
| Other foreign | 0.14 | 0.02 | 0.30 | 0.23 |
| Europe (UK) | 0.02 | 0.03 | (0.02) | 0.21 |
| Mexico | 0.02 | (0.03) | (0.39) | 0.13 |
| Asia | 1.04 | 0.63 | 2.87 | 1.81 |
| Canada | 0.25 | 0.32 | 0.77 | 0.75 |
| Latin America | 0.21 | 0.16 | 0.81 | 0.52 |
| Corporate | (2.46) | (1.61) | (6.33) | (4.96) |
| Less intersegment profit | 0.01 | (0.17) | 0.11 | (0.06) |
| Consolidated operating profit | $1.83 | $1.01 | $4.16 | $5.08 |
| Depreciation and Amortization Expense: | ||||
| USA | $0.04 | $0.03 | $0.21 | $0.09 |
| Other foreign | ----- | ----- | 0.02 | 0.02 |
| Europe (UK) | ----- | ----- | ----- | 0.01 |
| Mexico | 0.04 | 0.03 | 0.12 | 0.09 |
| Asia | 0.14 | 0.04 | 0.40 | 0.19 |
| Canada | 0.03 | 0.02 | 0.08 | 0.05 |
| Latin America | 0.01 | 0.01 | 0.03 | 0.03 |
| Corporate | 0.18 | 0.09 | 0.43 | 0.19 |
| Less intersegment | (0.01) | ----- | (0.02) | (0.03) |
| Consolidated depreciation & amortization expense | $0.43 | $0.22 | $1.27 | $0.64 |
| Interest Expense: | ||||
| Europe (UK) | $----- | $----- | $0.01 | $---- |
| Latin America | 0.01 | 0.01 | 0.04 | 0.03 |
| Corporate | 0.02 | 0.02 | 0.05 | 0.06 |
| Consolidated interest expense | $0.03 | $0.03 | $0.10 | $0.09 |
| Income Tax Expense: | ||||
| Europe (UK) | $0.01 | $0.01 | $0.01 | 0.05 |
| Asia | 0.16 | 0.29 | 0.67 | 0.80 |
| Canada | 0.10 | 0.02 | 0.32 | 0.17 |
| Latin America | ----- | 0.15 | 0.13 | 0.21 |
| Corporate | 0.38 | 0.05 | 0.81 | 0.39 |
| Less intersegment | ----- | (0.03) | 0.01 | 0.01 |
| Consolidated income tax expense | $0.65 | $0.49 | $1.95 | $1.63 |
| Capital Expenditures: | ||||
| USA (including Corporate) | $(0.04) | $0.54 | $0.28 | $0.85 |
| Other foreign | 0.01 | 0.36 | 0.02 | 1.13 |
| Mexico | 0.02 | 0.09 | 0.07 | 0.20 |
| Asia | 0.12 | 0.02 | 0.31 | 0.05 |
| Latin America | ----- | ----- | 0.01 | ----- |
| Consolidated capital expenditure | $0.11 | $1.01 | $0.69 | $2.23 |
October 31, 2019 (in millions of dollars) | January 31, 2019 (in millions of dollars) | |
| Total Assets | ||
| USA | $31.05 | $29.76 |
| Other foreign | 3.57 | 2.85 |
| Europe (UK) | 5.13 | 4.36 |
| Mexico | 5.45 | 5.13 |
| Asia | 23.31 | 20.97 |
| Canada | 6.00 | 6.64 |
| Latin America | 5.46 | 5.27 |
| Corporate | 19.13 | 19.74 |
| Consolidated assets | $99.10 | $94.72 |
| Property and Equipment | ||
| USA (including Corporate) | $3.55 | $3.87 |
| Other foreign | 0.17 | 0.19 |
| Europe (UK) | ----- | 0.01 |
| Mexico | 2.10 | 2.14 |
| Asia | 3.10 | 3.17 |
| Canada | 1.18 | 1.26 |
| Latin America | 0.05 | 0.07 |
| Less intersegment | 0.08 | 0.07 |
| Consolidated property and equipment | $10.23 | $10.78 |
| Goodwill: | ||
| USA | $0.87 | $0.87 |
| Consolidated goodwill | $0.87 | $0.87 |
|
| Three Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||||||||
|
| (in millions of dollars) |
|
| (in millions of dollars) |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
USA Operations (including Corporate) |
| $ | 15.55 |
|
| $ | 15.62 |
|
| $ | 39.68 |
|
| $ | 29.51 |
|
Other foreign |
|
| 2.38 |
|
|
| 1.81 |
|
|
| 5.42 |
|
|
| 3.17 |
|
Europe (UK) |
|
| 4.16 |
|
|
| 2.48 |
|
|
| 7.17 |
|
|
| 4.87 |
|
Mexico |
|
| 0.91 |
|
|
| 0.96 |
|
|
| 2.73 |
|
|
| 1.87 |
|
Asia |
|
| 24.15 |
|
|
| 17.45 |
|
|
| 44.17 |
|
|
| 30.63 |
|
Canada |
|
| 2.40 |
|
|
| 2.40 |
|
|
| 6.71 |
|
|
| 4.90 |
|
Latin America |
|
| 3.10 |
|
|
| 2.69 |
|
|
| 5.64 |
|
|
| 4.44 |
|
Less intersegment sales |
|
| (17.63 | ) |
|
| (15.94 | ) |
|
| (30.92 | ) |
|
| (27.23 | ) |
Consolidated sales |
| $ | 35.02 |
|
| $ | 27.47 |
|
| $ | 80.60 |
|
| $ | 52.16 |
|
External Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Operations (including Corporate) |
| $ | 14.45 |
|
| $ | 14.44 |
|
| $ | 37.56 |
|
| $ | 27.31 |
|
Other foreign |
|
| 2.02 |
|
|
| 0.92 |
|
|
| 4.32 |
|
|
| 1.68 |
|
Europe (UK) |
|
| 4.16 |
|
|
| 2.48 |
|
|
| 7.17 |
|
|
| 4.87 |
|
Mexico |
|
| 0.61 |
|
|
| 0.59 |
|
|
| 1.98 |
|
|
| 1.20 |
|
Asia |
|
| 8.40 |
|
|
| 4.04 |
|
|
| 17.45 |
|
|
| 7.87 |
|
Canada |
|
| 2.40 |
|
|
| 2.37 |
|
|
| 6.71 |
|
|
| 4.87 |
|
Latin America |
|
| 2.98 |
|
|
| 2.63 |
|
|
| 5.41 |
|
|
| 4.36 |
|
Consolidated external sales |
| $ | 35.02 |
|
| $ | 27.47 |
|
| $ | 80.60 |
|
| $ | 52.16 |
|
Intersegment Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Operations (including Corporate) |
| $ | 1.10 |
|
| $ | 1.18 |
|
| $ | 2.12 |
|
| $ | 2.21 |
|
Other foreign |
|
| 0.36 |
|
|
| 0.89 |
|
|
| 1.10 |
|
|
| 1.47 |
|
Mexico |
|
| 0.30 |
|
|
| 0.37 |
|
|
| 0.75 |
|
|
| 0.67 |
|
Asia |
|
| 15.75 |
|
|
| 13.41 |
|
|
| 26.72 |
|
|
| 22.77 |
|
Canada |
| — |
|
|
| 0.03 |
|
| — |
|
|
| 0.03 |
| ||
Latin America |
|
| 0.12 |
|
|
| 0.06 |
|
|
| 0.23 |
|
|
| 0.08 |
|
Consolidated intersegment sales |
| $ | 17.63 |
|
| $ | 15.94 |
|
| $ | 30.92 |
|
| $ | 27.23 |
|
| 24 |
| Table of Contents |
|
| Three Months Ended July 31, |
|
| Six Months Ended July 31, |
| ||||||||||
|
| (in millions of dollars) |
|
| (in millions of dollars) |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Operating Profit (Loss): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
USA Operations (including Corporate) |
| $ | 1.36 |
|
| $ | 0.69 |
|
| $ | 5.70 |
|
| $ | (0.44 | ) |
Other foreign |
|
| 1.17 |
|
|
| 0.31 |
|
|
| 2.40 |
|
|
| 0.53 |
|
Europe (UK) |
|
| 1.14 |
|
|
| (0.05 | ) |
|
| 1.60 |
|
|
| (0.04 | ) |
Mexico |
|
| (0.20 | ) |
|
| (0.23 | ) |
|
| 0.02 |
|
|
| (0.41 | ) |
Asia |
|
| 4.96 |
|
|
| 1.59 |
|
|
| 9.47 |
|
|
| 1.82 |
|
Canada |
|
| 0.26 |
|
|
| 0.27 |
|
|
| 1.39 |
|
|
| 0.52 |
|
Latin America |
|
| 1.12 |
|
|
| 0.07 |
|
|
| 1.69 |
|
|
| 0.24 |
|
Less intersegment profit |
|
| (0.09 | ) |
|
| (0.01 | ) |
|
| (0.17 | ) |
|
| 0.10 |
|
Consolidated operating profit (loss) |
| $ | 9.73 |
|
| $ | 2.64 |
|
| $ | 22.10 |
|
| $ | 2.32 |
|
Depreciation and Amortization Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Operations(including Corporate) |
| $ | 0.20 |
|
| $ | 0.22 |
|
| $ | 0.42 |
|
| $ | 0.42 |
|
Other foreign |
|
| 0.01 |
|
|
| 0.02 |
|
|
| 0.02 |
|
|
| 0.02 |
|
Europe (UK) |
| — |
|
| — |
|
| — |
|
|
| 0.01 |
| |||
Mexico |
|
| 0.04 |
|
|
| 0.04 |
|
|
| 0.08 |
|
|
| 0.08 |
|
Asia |
|
| 0.18 |
|
|
| 0.12 |
|
|
| 0.36 |
|
|
| 0.25 |
|
Canada |
|
| 0.03 |
|
|
| 0.05 |
|
|
| 0.05 |
|
|
| 0.05 |
|
Latin America |
|
| 0.01 |
|
|
| 0.01 |
|
|
| 0.02 |
|
|
| 0.02 |
|
Less intersegment |
|
| 0.01 |
|
|
| (0.01 | ) |
|
| (0.02 | ) |
|
| (0.01 | ) |
Consolidated depreciation & amortization expense |
| $ | 0.48 |
|
| $ | 0.45 |
|
| $ | 0.93 |
|
| $ | 0.84 |
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Operations (including Corporate) |
| $ | — |
|
| $ | 0.02 |
|
| $ | 0.01 |
|
| $ | 0.03 |
|
Latin America |
| — |
|
|
| 0.02 |
|
|
| 0.01 |
|
|
| 0.04 |
| |
Consolidated interest expense |
| — |
|
| $ | 0.04 |
|
| $ | 0.02 |
|
| $ | 0.07 |
| |
Income Tax Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Operations (including Corporate) |
| $ | (0.84 | ) |
| $ | 0.57 |
|
| $ | 1.44 |
|
| $ | 0.44 |
|
Other foreign |
| — |
|
| — |
|
|
| 0.01 |
|
| — |
| |||
Europe (UK) |
|
| 0.19 |
|
|
| 0.01 |
|
|
| 0.27 |
|
|
| 0.01 |
|
Asia |
|
| 0.82 |
|
|
| 0.36 |
|
|
| 1.72 |
|
|
| 0.50 |
|
Canada |
|
| 0.07 |
|
|
| 0.17 |
|
|
| 0.38 |
|
|
| 0.22 |
|
Latin America |
|
| 0.23 |
|
|
| 0.11 |
|
|
| 0.39 |
|
|
| 0.13 |
|
Less intersegment |
|
| (0.05 | ) |
|
| (0.01 | ) |
|
| (0.06 | ) |
| — |
| |
Consolidated income tax expense |
| $ | 0.42 |
|
| $ | 1.21 |
|
| $ | 4.15 |
|
| $ | 1.30 |
|
| 25 |
| Table of Contents |
July 31, 2020 |
|
| January 31, 2020 |
| ||||
|
| (in millions of dollars) |
| |||||
Total Assets: * |
|
|
|
|
|
| ||
USA Operations (including Corporate) |
| $ | 89.29 |
|
| $ | 88.08 |
|
Other foreign |
|
| 3.23 |
|
|
| 1.69 |
|
Europe (UK) |
|
| 6.86 |
|
|
| 4.52 |
|
Mexico |
|
| 6.10 |
|
|
| 5.00 |
|
Asia |
|
| 57.13 |
|
|
| 44.22 |
|
Canada |
|
| 6.83 |
|
|
| 6.09 |
|
Latin America |
|
| 6.60 |
|
|
| 5.77 |
|
Less intersegment |
|
| (54.42 | ) |
|
| (55.96 | ) |
Consolidated assets |
| $ | 121.62 |
|
| $ | 99.41 |
|
Total Assets Less Intersegment:* |
|
|
|
|
|
|
|
|
USA Operations (including Corporate) |
| $ | 52.89 |
|
| $ | 49.94 |
|
Other foreign |
|
| 5.01 |
|
|
| 3.41 |
|
Europe (UK) |
|
| 6.85 |
|
|
| 4.52 |
|
Mexico |
|
| 6.08 |
|
|
| 5.16 |
|
Asia |
|
| 37.39 |
|
|
| 24.65 |
|
Canada |
|
| 6.81 |
|
|
| 6.07 |
|
Latin America |
|
| 6.59 |
|
|
| 5.66 |
|
Consolidated assets |
| $ | 121.62 |
|
| $ | 99.41 |
|
Property and Equipment: |
|
|
|
|
|
|
|
|
USA Operations (including Corporate) |
| $ | 3.13 |
|
| $ | 3.32 |
|
Other foreign |
|
| 0.18 |
|
|
| 0.15 |
|
Europe (UK) |
|
| 0.01 |
|
|
| 0.01 |
|
Mexico |
|
| 2.35 |
|
|
| 2.17 |
|
Asia |
|
| 3.02 |
|
|
| 3.19 |
|
Canada |
|
| 1.11 |
|
|
| 1.15 |
|
Latin America |
|
| 0.03 |
|
|
| 0.04 |
|
Less intersegment |
|
| 0.09 |
|
|
| 0.08 |
|
Consolidated long-lived assets |
| $ | 9.92 |
|
| $ | 10.11 |
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
USA Operations (including Corporate) |
| $ | 0.21 |
|
| $ | 0.25 |
|
Other foreign |
|
| 0.06 |
|
|
| 0.01 |
|
Europe (UK) |
| — |
|
|
| 0.01 |
| |
Mexico |
|
| 0.26 |
|
|
| 0.17 |
|
Asia |
|
| 0.11 |
|
|
| 0.58 |
|
Latin America |
|
| 0.10 |
|
|
| 0.01 |
|
Consolidated capital expenditure |
| $ | 0.74 |
|
| $ | 1.03 |
|
Goodwill: |
|
|
|
|
|
|
|
|
USA Operations |
| $ | 0.87 |
|
| $ | 0.87 |
|
Consolidated goodwill |
| $ | 0.87 |
|
| $ | 0.87 |
|
* Negative assets reflect intersegment amounts eliminated in consolidation | ||||||||
| 26 |
| Table of Contents |
|
| Three Months Ended July 31, (in millions of dollars) |
|
| Six Months Ended July 31, (in millions of dollars) |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
External Sales by product lines: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Disposables |
| $ | 23.78 |
|
| $ | 14.30 |
|
| $ | 54.99 |
|
| $ | 26.66 |
|
Chemical |
|
| 6.19 |
|
|
| 5.56 |
|
|
| 15.07 |
|
|
| 10.62 |
|
Fire |
|
| 1.67 |
|
|
| 2.43 |
|
|
| 3.12 |
|
|
| 3.83 |
|
Gloves |
|
| 0.54 |
|
|
| 0.84 |
|
|
| 1.32 |
|
|
| 1.59 |
|
High Visibility |
|
| 0.95 |
|
|
| 2.62 |
|
|
| 2.30 |
|
|
| 5.61 |
|
High Performance Wear |
|
| 0.53 |
|
|
| 0.43 |
|
|
| 0.82 |
|
|
| 0.66 |
|
Wovens |
|
| 1.36 |
|
|
| 1.29 |
|
|
| 2.98 |
|
|
| 3.19 |
|
Consolidated external sales |
| $ | 35.02 |
|
| $ | 27.47 |
|
| $ | 80.60 |
|
| $ | 52.16 |
|
| 27 |
| Table of Contents |
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; Response to COVID 19 Outbreak
We manufacture and sell a comprehensive line of industrial protective clothing and accessories for the industrial and public protective clothing market. Our products are sold globally by our in-house sales teams, our customer service group, and authorized independent sales representatives to a network of approximatelyover 1,600 global safety and industrial supply distributors. Our authorized distributors supply end users, such as integrated oil, chemical/petrochemical, automobile, steel, glass, construction, smelting, heavy and light industry, cleanroom, janitorial, pharmaceutical, and high technology electronics manufacturers, as well as scientific, medical laboratories and the utilities industry. In addition, we supply federal, state and local governmental agencies and departments, such as fire and law enforcement, airport crash rescue units, the Department of Defense, the Department of Homeland Security and the US Food and Drug Administration.Centers for Disease Control. Internationally, we sell to a mixture of end users directly, and to industrial distributors depending on the particular country and market. SalesIn addition to the United States, sales are made to more than 50 foreign countries, the majority of which were into China, the European Economic Community (“EEC”), Canada, Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador, India and Southeast Asia.
We have operated facilities in Mexico since 1995 and in China since 1996. Beginning in 1995, we moved the labor intensive sewing operation for our limited use/disposable protective clothing lines to these facilities. Our facilities and capabilities outside the United Statesin 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 startupadded manufacturing operations in Vietnam and India to offset increasing manufacturing costs in China. This shift inChina and further diversify our manufacturing and the redundant manufacturing capability it provides, also serves to insulate the company from the cost implications of bilateral trade disputes.capabilities. Our China operations will continue to manufacture 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 $13.3$20.6 million and $12.2$13.0 million for the three months ended OctoberJuly 31, 2020 and 2019, respectively.
The last two weeks of FY20 and 2018, respectively,the first six months of FY21 were dominated by response to the COVID 19 outbreak. The virus’ progression into a global pandemic will likely continue to impact our business throughout the entirety of FY21 and $38.2into the first half of FY22. In Q1 FY21, increased demand for our disposable and $36.4chemical lines, combined with our high inventory levels produced sales revenues beyond our sustainable manufacturing capacity on an annualized basis. We anticipate that COVID 19 related sales will continue for the nineremainder of FY21 and into the first half of FY22, however not at the levels experienced in the first half of FY21 as our inventory of applicable products has been depleted due to the high demand and we are limited to our maximum available manufacturing throughput until we can meaningfully increase sustainable manufacturing capacity. Our future sales would also be affected should there be an industry-wide shortage of necessary raw materials in the event of a new rise in COVID 19 cases; in this respect we did experience significant price increases for fabric during the first six months of FY21 and managed our available manufacturing capacity to meet customer demand at these higher prices. With the exception of our India export manufacturing operation, which did not qualify for “essential status” due to its export only restrictions, we have not experienced any manufacturing capacity issues due to inability to source raw materials, government quarantine, or shelter-in-place orders, or due to COVID 19 outbreaks in any of our factories, however there can be no assurance that this will continue to be the case. Potential headwinds to revenue as we emerge from pandemic sales include the possibility of a recession and consumer stockpiled inventories, as well as a decline in our oil and gas industrial sector that may temper demand within our regular markets in the second half of FY21.
Reference is made to “Risk Factors” in Part I, Item 1, of our Annual Report on Form 10-K for the fiscal year ended OctoberJanuary 31, 20192020. Offsetting these risks are changes to our sales environment, as a result of COVID 19, that we believe represent considerable upside to sales. We believe that once the pandemic subsides, there will likely be secondary government-based pandemic demand as governments around the world seek to replenish and 2018, respectively.
| 28 |
| Table of Contents |
Lakeland’s strategy for response to these “black swan” events is to remain focused on our long term growth strategies and tailor our response to these events so as to accelerate our strategic plans. We believe that focusing on our long-term growth strategy is also a solid strategy for minimizing the impact of any post-pandemic recession. In this particular case, our long-term strategy for revenue and margin improvement is to increase market penetration into markets that use higher value, higher margin products, that are recession resistant. Our manufacturing flexibility allows the Company to maximize the manufacture of disposable and chemical garments without degrading its ability to supply higher end, flame resistant and arc flash resistant garments. In order to maximize our response to pandemic demand, we have increased the daily working hours for our disposables and chemical manufacturing product lines, and we have significantly reduced the number of SKUs in these product lines in order to maximize efficiencies. This will have the effect of increasing throughput and reducing manufacturing costs to help mitigate any raw materials prices increases. Additionally, by focusing on a few core styles, we believe we can minimize the impact on inventory of any production over run when the pandemic subsides. SKU reduction also affords Lakeland the opportunity to discontinue any styles that have ceased being profitable due to pricing or sales volume We are not deviating from our growth strategy, rather we are looking to utilize the short-term, increased demand as a catylast to accelerate attainment of growth objectives.
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| 29 |
| Table of Contents |
The transaction price includes estimates of variable consideration related to rebates, allowances, and discounts that are reductions in revenue. All estimates are based on the Company's historical experience, anticipated performance, and the Company's best judgment at the time the estimate is made. Estimates for variable consideration are reassessed each reporting period and are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur upon resolution of uncertainty associated with the variable consideration. All the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as quantity timestime’s price per unit.
Three Months Ended October 31, (in millions of dollars) | Nine Months Ended October 31, (in millions of dollars) | |||
2019 | 2018 | 2019 | 2018 | |
| External Sales by geographic region: | ||||
| USA | $14.16 | $11.82 | $41.47 | $37.54 |
| Other foreign | 0.91 | 0.72 | 2.61 | 2.30 |
| Europe (UK) | 2.38 | 2.22 | 7.24 | 7.35 |
| Mexico | 0.88 | 0.77 | 2.08 | 2.70 |
| Asia | 4.62 | 4.80 | 12.49 | 12.79 |
| Canada | 2.60 | 2.08 | 7.47 | 6.38 |
| Latin America | 1.91 | 1.60 | 6.26 | 4.91 |
| Consolidated external sales | $27.46 | $24.01 | $79.62 | $73.97 |
Three Months Ended October 31, (in millions of dollars) | Nine Months Ended October 31, (in millions of dollars) | |||
2019 | 2018 | 2019 | 2018 | |
| External Sales by product lines: | ||||
| Disposables | $12.52 | $12.74 | $39.19 | $40.88 |
| Chemical | 5.68 | 4.74 | 16.30 | 12.42 |
| Fire | 2.81 | 1.02 | 6.64 | 3.57 |
| Gloves | 0.74 | 0.77 | 2.33 | 2.30 |
| Hi-Vis | 2.20 | 1.83 | 6.04 | 5.46 |
| Wovens | 3.51 | 2.91 | 9.12 | 9.34 |
| Consolidated external sales | $27.46 | $24.01 | $79.62 | $73.97 |
Accounts Receivable, Net.
Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company recognizes losses when information available indicates that it is probable that a receivable has been impaired based on criteria notedInventories.
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 netImpairment of Long-Lived Assets.
The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value may not be recoverable. The Company measures any potential impairment on a projected undiscounted cash flow method. Estimating future cash flows requires the Company’s management to make projections that can differ materially from actual results. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset.Income Taxes.
The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing theThe Company recognizes tax positions that meet a “more likely than not” minimum recognition threshold. If necessary, the Company recognizes interest and penalties associated with tax matters as part of the income tax provision and would include accrued interest and penalties with the related tax liability in the unaudited condensed consolidated balance sheets. The Company does not have any uncertain tax positions at October 31, 2019 or January 31, 2019.
| 30 |
| Table of Contents |
Foreign Operations and Foreign Currency Translation
. The Company maintains manufacturing operations in the People’s Republic of China, Mexico, Vietnam, India, and Argentina and can access independent contractors in China, Vietnam, Argentina, and Mexico. It also maintains sales and distribution entities located in China, Canada, the U.K., Chile, Argentina, Russia, Kazakhstan, India, Mexico, Uruguay, Australia, and Vietnam. The Company is vulnerable to currency risks in these countries. The functional currency for the United Kingdom subsidiary is the Euro; the trading company in China, the RMB; and the Russian operation, the Russian Ruble, and the Kazakhstan operation the Kazakhstan Tenge. All other operations have the US dollar as its functional currency.Pursuant to US GAAP, assets and liabilities of the Company’s foreign operations with functional currencies other than the US dollar, are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity. Cash flows are also translated at average translation rates for the periods, therefore amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Fair Value of Financial Instruments.
US GAAP defines fair value, provides guidance for measuring fair value and requires certain disclosures utilizing a fair value hierarchy which is categorized into three levels based on the inputs to the valuation techniques used to measure fair value. The following is a brief description of those three levels:Level 1: | Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
Level 2: | Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. | |
Level 3: | Unobservable inputs that reflect management’s own assumptions. |
Foreign currency forward and hedge contracts are recorded in the consolidated balance sheets at their fair value as quoted prices (unadjusted) in active markets for identical assets or liabilities.
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.
Significant Balance Sheet Fluctuation OctoberJuly 31, 2019, As2020, Compared to January 31, 2019
Cash decreasedincreased by $3.4$20.3 million, primarily as a result of increased profitability, improved accounts receivable collection efficiency, and a net increasedecrease in other working capital elements.inventory, offset by the payoff of the term loan outstanding at January 31, 2020. Accounts receivable increased $0.9 million and inventory increased by $5.4 million in the nine months ended October 31, 2019. The increase in accounts receivable was due to the increases in sales for the three months ended October 31, 2019. The increase in inventory wassales. Inventory decreased $1.2 million due to the scale up of our Vietnam operations; increased raw materials and finished goods (“FG”); to catch up on remaining Gloves, Fire, and High Visability orders delayed due to our ERP installation and increasesincrease in raw materials and FG required to ramp up product of our new, high value utilities product line at a major distributor.sales. Accounts payable, accrued compensation, and other accrued expenses increased $1.0$5.3 million. Capital expenditures for the three and six months ended July 31, 2020 were $0.6 million due to increased compensation accruals primarily due to timing of pay dates and severance and an increase in borrowing in the UK.
Three Months ended OctoberJuly 31, 2019, As2020, Compared to the Three Months Ended OctoberJuly 31, 2018
Reference is made to “Overview; Response to COVID 19 Outbreak” above which should be read in conjunction with this Section.
Net Sales
. Net sales increased to $35.0 million for the three months ended July 31, 2020 compared to $27.5 million for the three months ended| 31 |
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Gross Profit. Gross profit increased $6.9 million, or 66.4%, to $17.3 million for the three months ended OctoberJuly 31, 2018, an increase of 14.4%. Sales in the US were up $2.3 million or 19.5% primarily due to improved customer deliveries enabling us to reduce high order backlogs. No other region had a material change during the period.
· | Significant increases in volumes driven by COVID 19 demand. | |
· | Price increases described above. | |
· | Improved manufacturing efficiency in substantially all locations as we increased the number of hours per shift and number of days per week. | |
· | Increase in direct container sales. |
Operating expenses.
Operating Profit. Interest expense was $0.03Operating profit increased to $9.8 million for the three months ended OctoberJuly 31, 2019, the same as2020 from $2.6 million for the three months ended OctoberJuly 31, 20182019, due to the impacts detailed above. Operating margins were 27.8% for the three months ended July 31, 2020, as compared to 9.6% for the three months ended July 31, 2019
Interest Expense. Interest expense decreased slightly to $2 thousand for the three months ended July 31, 2020 from $0.04 million for the three months ended July 31, 2019 as a result of very little borrowings during each period.
Income Tax Expense
. Income tax expense consists of federal, state and foreign income taxes. Income tax expense wasNet Income.
NetSix Months ended OctoberJuly 31, 2019, As2020, Compared to the NineSix Months Ended OctoberJuly 31, 2018
Reference is made to “Overview; Response to COVID 19 Outbreak” above which should be read in conjunction with this Section.
Net Sales
. Net sales increased to| 32 |
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Gross Profit
.Gross profit increased· | Significant increases in volumes driven by COVID 19 demand. | |
· | Price increases described above. | |
· | Improved manufacturing efficiency in substantially all locations as we increased the number of hours per shift and number of days per week. | |
· | Reduction in SKUs led to increased run size that increased manufacturing throughput and improved efficiency. | |
· | Increase in direct container sales. | |
· | Sales of reserved inventory into COVID 19 applications. |
Operating expenses.
Operating Profit
. Operating profitInterest Expense
. Interest expenseIncome Tax Expense
. Income tax expense consists of federal, state and foreign income taxes. Income tax expense wasNet Income.
Net incomeLiquidity and Capital Resources
At July 31, 2019, we had2020, cash and cash equivalents ofwere approximately $9.5$34.9 million and working capital ofwas approximately $66.0$86.6 million. Cash and cash equivalents decreased $3.4increased $20.3 million and working capital increased approximately $0.9$19.7 million from January 31, 2019. As2020, due to increased profitability and a result of the new lease standard,focus on working capital decreased by approximately $0.3 million as a result of the recognition of the current portion of the operating lease liability as of October 31, 2019
Of the Company’s total cash and cash equivalents of $9.5$34.9 million as of OctoberJuly 31, 2019, cash held in the US of $1.3,2020, cash held in Latin America of $0.8$1.8 million, cash held in Russia and Kazakhstan of $0.5$1.3 million, cash held in the UK of $0.1$0.3 million, cash held in India of $0.1 million, cash held in Mexico of $0.8 million, cash held in Vietnam of $0.5$0.9 million and cash held in Canada of $0.8$2.7 million would not be subject to additional US tax due to the change in the US tax law as a result of the December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the “Tax Act”). In the event the Company repatriated cash from China, of the $4.6$15.5 million balance at OctoberJuly 31, 20192020 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. ThereNo dividends were no dividendsproposed by management or declared by our Board of Directors for our China subsidiary in the ninesix months ended OctoberJuly 31, 2019.
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Net cash used inprovided by operating activities of $2.8$22.3 million for the ninesix months ended OctoberJuly 31, 20192020 was primarily due to net income of $18.0 million, non-cash expenses of $1.3$2.7 million for deferred taxes, depreciation and amortization, an increasestock compensation, and a $1.0 million decrease in accounts receivable of $1.3 million, an increase in inventory of $5.6 million offset by an increase in accounts payable and accrued expenses of $0.7 million.net working capital accounts. Net cash used in investing activities of $0.7 million for the ninesix months ended OctoberJuly 31, 20192020 reflects planned purchases of planned investments in property and equipment. Net cash provided byused in financing activities was $0.3of $1.2 million for the ninesix months ended OctoberJuly 31, 2019 and2020, was primarily due to netthe repayment of a term loan under a previous credit facility as the Company transitioned to the new Loan Agreement with Bank of America described below.
The Company has a $12.5 million revolving credit facility with Bank of America which commenced June 25, 2020, and which will expire on June 25, 2025. This facility currently carries an interest rate of 2.3% per annum. There are no borrowings outstanding under this facility at July 31, 2020. Maximum availability under this facility at July 31, 2020 was approximately $12.5 million. Our current credit facility requires, and any future credit facilities may also require, that we comply with specified financial covenants relating to fixed charge coverage ratio and limits on capital expenditures and investments in foreign subsidiaries. Our ability to satisfy these financial covenants can be affected by events beyond our control, and we cannot guarantee that we will meet the requirements of $0.4 million offset by $0.1 millionthese covenants. These restrictive covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business. Default under our credit facilities would allow the lenders to declare all amounts outstanding to be immediately due and payable. Our primary lender, Bank of Treasury Stock purchases.
The Company has experienced increased sales and order activity as a result of the COVID 19 pandemic and may need to increase inventories in order to continue to respond to this increased demand. Additionally, the Company may accelerate investments in capacity expansion which may require significant capital expenditures. At this time the Company believes it has sufficient cash balances and other other capital to fund operations, working capital, and future capital expenditures on both a short-term and long-term basis.
Stock Repurchase Program.
OnCapital Expenditures.
Our capital expenditures| 34 |
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Item 3.
A smaller reporting company" as defined by Item 10 of Regulation S-K, the Companycompany is not required to provide the information required by this information.
Item 4.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive officer, and principal financial officer, with assistance from other members of management. We have reviewed for the effectiveness of our disclosureprocess controls and procedures as of OctoberJuly 31, 20192020 and, based on our evaluation, we have concluded that the disclosure controls and procedures were not effective as of that date due to the same material weaknessesweakness in internal control over financial reporting that werewas disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2019.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the thirdsecond quarter of fiscal 20202021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Remediation
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2019,2020, we began implementing a remediation plan to address the material weaknessesweakness mentioned above. The weaknessesweakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of thesethis material weaknessesweakness will be completed prior to the end of fiscal 2020.
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PART II. OTHER INFORMATION
Items 1, 1A, 2, 3, 4 and 5 are not applicable
Item 6.
Exhibits:* Filed herewith
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 |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LAKELAND INDUSTRIES, INC. (Registrant) | |||
Date: September 14, 2020 | /s/ Charles D. Roberson | ||
Charles D. Roberson, Chief Executive Officer, President and Secretary | |||
Date: September 14, 2020 | |||
/s/ Allen E. Dillard | |||
Allen E. Dillard, (Principal Financial Officer and Authorized Signatory) |
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