Lakeland Industries, Inc. (NASDAQ: LAKE) today announced financial results for its first quarter fiscal year 2011 ended April 30, 2010.
Financial Results Highlights and Recent Company Developments
- Revenue of $25.4 million in Q1FY11 at highest level in 6 quarters
- International expansion efforts drive non-US revenue growth and improved market share
- Revenues from outside the US were 39% of total in Q1FY11 as compared with 28% for Q1FY10
- International Growth
- Brazil acquisition added:
- $2.9 million of sales in Q1FY11
- Gross margin of 49.4% for Q1FY11
- Stage set for further market expansion with strategically positioned global manufacturing facilities and enhanced product lines
- Sales of disposable products in North America declined by 8% in Q1FY11 compared with prior year periods due to continued depressed economy, particularly in the automotive supply chain
- Despite weakness in US sales during Q1FY11, the US Glove Division increased sales by 61.7% over Q1FY10, driven by Indian glove product finally gaining traction
- Gross margin improves due to contributions from international operations
- Operating expenses increased largely due to:
- Additional SG&A in China resulting from $1.2 million increase in external sales from China
- Foreign exchange losses mainly from unhedged losses against the Euro in China
- Increased operating expenses in Brazil, largely sales personnel and related staff to support growth initiatives
- Effective inventory control and cash management initiatives resulted in $4.6 million reduction of bank debt at 4/30/10 from 1/31/10
- Cash position increased by 12% to $5.7 million at end of Q1FY11 from beginning of fiscal year
- New leadership for Brazil operations; VAT tax issue arises from dispute between two states
- Charge of $1.6 million has been taken as a result of VAT tax expense in Brazil relating to periods prior to the acquisition by Lakeland.
First Quarter Fiscal Year 2011 Financial Results
Net Sales. Net sales increased $1.4 million, or 5.8% to $25.4 million for the three months ended April 30, 2010, from $24.0 million for the three months ended April 30, 2009. The net increase was due to an increase of $3.1 million in foreign sales, offset by a $1.7 million decrease in domestic sales. External sales from China increased by $1.2 million, or 63.6% driven by sales to the new Australian distributor. Canadian sales increased by $0.5 million, or 37.6%, UK sales increased by $0.4 million or 51.5%, Chile sales increased by $0.1 million, or 19%. US domestic sales of disposables decreased by $1.1 million, chemical suit sales decreased by $0.4 million, wovens increased by $0.1 million, reflective sales decreased by $0.3 million and glove sales increased by $0.2 million. Sales in Brazil increased $0.3 million, an increase of 10.4%.
Gross profit increased $0.4 million or 6.5% to $6.4 million for the three months ended April 30, 2010, from $6.0 million for the three months ended April 30, 2009. Gross profit as a percentage of net sales increased to 25.2% for the three months ended April 30, 2010, from 25.1% for the three months ended April 30, 2009. Major factors driving the changes in gross margins were:
- Disposables gross margin declined by 3.5 percentage points in Q1 this year compared with Q1 last year. This decline was mainly due to higher priced raw materials and a very competitive pricing environment coupled with lower volume.
- Brazil’s gross margin was 49.4% in Q1 this year compared with 46.6% in Q1 last year. This increase was largely due to the volume provided by a larger bid contract this year.
- Continued gross losses of $0.1 million from India in Q1 FY11.
- Chemical division gross margin declined 5.7 percentage points resulting from lower volume and sales mix
- Canada gross margin increased 6.7 percentage points due to higher volume and favorable exchange rates.
Operating expenses increased $0.8 million, or 14.7% to $6.1 million for the three months ended April 30, 2010, from $5.3 million for the three months ended April 30, 2009. As a percentage of sales, operating expenses increased to 24.1% for the three months ended April 30, 2010 from 22.2% for the three months ended April 30, 2009. The $0.8 million increase in operating expenses in the three months ended April 30, 2010 as compared to the three months ended April 30, 2009 were comprised of:
- ($0.1) million in reduced officer salaries resulting from cost cut-backs, along with related reduction in payroll taxes and employee benefits.
- ($0.1) million reduction in professional and consulting fees resulting from cost cut backs.
- ($0.1) million reduction in equity compensation resulting from the 2009 restricted stock plan treated at the zero performance level for the time being.
- $0.1 million in increased sales commissions resulting from higher volume.
- $0.1 million miscellaneous increases.
- $0.1 million increase in the self insured medical insurance program resulting from unfavorable experience in the current year.
- $0.1 million in inventory contributions made to the Chilean earthquake relief effort.
- $0.1 million increase in Delaware Franchise Taxes. This is a result of the increase in total assets in prior years resulting from prior inventory buildup and the Brazil acquisition. It is anticipated the cost for this tax will be greatly reduced going forward.
- $0.2 million increase in foreign exchange costs resulting from unhedged losses against the Euro in China.
- $0.2 million in increased operating costs in China were the result of the large increase in direct international sales made by China that are now allocated to SG&A costs although previously allocated to cost of goods sold.
- $0.2 million of increased operating expenses in Brazil mainly resulting from increased sales personnel and support staff due to recent and anticipated growth.
. Operating profit decreased 57% to $0.3 million for the three months ended April 30, 2010 from $0.7 million for the three months ended April 30, 2009. Operating margins were 1.1% for the three months ended April 30, 2010 compared to 2.8% for the three months ended April 30, 2009. The lower operating profit and operating margin in the first quarter of fiscal 2011 are the result of higher gross profits offset by increased operating expenses which in large part reflect the Company’s international growth initiatives and foreign currency exchange rate costs.
. Interest expenses decreased by $0.1 million for the three months ended April 30, 2010 as compared to the three months ended April 30, 2009 due to lower borrowing levels outstanding.
Income Tax Expense
. Income tax expenses consist of federal, state, and foreign income taxes. Income tax expenses decreased $0.4 million, or 105%, to $0.0 million for the three months ended April 30, 2010 from $0.4 million for the three months ended April 30, 2009. The Company’s effective tax rate was 81.5% for the three months ended April 30 2009. The effective tax rate for Q1FY10 was affected by a $350,000 allowance against deferred taxes resulting from the India restructuring, losses in India and UK with no tax benefit, tax benefits in Brazil resulting from government incentives and goodwill write-offs, and credits to prior year’s taxes in the US not previously recorded. The Company’s effective tax rate for Q1 FY11 reflects goodwill write-offs in Brazil and tax benefits from India resulting from “check the box” in the U.S., and a $1.6 million charge for VAT tax expense in Brazil relating to periods prior to the acquisition by Lakeland in May 2008. It is important to note that any collections of further escrow monies, indemnification collections from the selling shareholders and any potential negligence suits against responsible third parties will be booked as profits negating this quarter’s write-off of $1.6 million
At the end of the first quarter, the Company recorded adjustments to its balance sheet relating to a VAT tax issue for its subsidiary in Brazil. These adjustments pertain to jurisdictional taxes paid from 2004-2009 occurring primarily prior to Lakeland’s acquisition of the business which have recently been audited and put into dispute by local Brazilian authorities. Through an amnesty payment program, Lakeland believes it will recoup a significant portion of taxes paid through credits against future taxes due. The Company also intends to offset taxes paid in the VAT tax reconciliation with funds set aside in escrow as part of the acquisition in May 2008 for contingencies such as this. To date, $0.55 million from the escrow has been released and Lakeland will file a claim against an additional amount of approximately $1 million. In accordance with GAAP, the Company has reflected the above items on its balance sheet as follows:
|| (R$ millions)
|| US$ millions
| Current assets
|| Prepaid taxes
| Current assets
|| Escrow received
| Current liabilities
|| Taxes due
| Non-current assets
|| Deferred taxes
| Long-term Liabilities
|| Taxes payable
There is an additional exposure for 2007-2009 in the amount of approximately $3.3 million. Lakeland intends to apply for amnesty and make any necessary payments upon the forthcoming amnesty periods imposed by the local Brazilian authorities.