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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-15535
LAKELAND INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3115216
(State of incorporation) (IRS Employer Identification Number)
711-2 Koehler Avenue, Ronkonkoma, New York 11779
(Address of principal executive offices)
(631) 981-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $.01 par value, outstanding at June 14, 2004 - 3,280,135 shares.
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-Q
The following information of the Registrant and its subsidiaries is
submitted herewith:
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements (unaudited):
Page
----
Introduction .........................................................................................1
Condensed Consolidated Balance Sheets - April 30, 2004 and January 31, 2004...........................2
Condensed Consolidated Statements of Income for the
Three Months Ended April 30, 2004 and 2003............................................................3
Condensed Consolidated Statement of Stockholders' Equity - Three Months Ended April 30, 2004..........4
Condensed Consolidated Statements of Cash Flows - Three Months Ended April 30, 2004
and 2003..............................................................................................5
Notes to Condensed Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................13
Item 4. Controls and Procedures..............................................................................14
PART II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.....................................................................14
Signature Page..................................................................................................15
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Introduction
CAUTIONARY STATEMENTS
This report may include "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are all statements other than
statements of historical fact included in this report, including, without
limitation, the statements under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position and liquidity, the Company's strategic
alternatives, future capital needs, development and capital expenditures
(including the amount and nature thereof), future net revenues, business
strategies, and other plans and objectives of management of the Company for
future operations and activities.
Forward-looking statements are based on certain assumptions and analyses
made by the Company in light of its experience and its perception of historical
trends, current conditions, expected future developments and other factors it
believes are appropriate under the circumstances. These statements are subject
to a number of assumptions, risks and uncertainties, and factors in the
Company's other filings with the Securities and Exchange Commission (the
"commission"), general economic and business conditions, the business
opportunities that may be presented to and pursued by the Company, changes in
law or regulations and other factors, many of which are beyond the control of
the Company. Readers are cautioned that these statements are not guarantees of
future performance, and the actual results or developments may differ materially
from those projected in any forward-looking statements. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
1
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS April 30, January 31,
2004 2004
(Unaudited)
Current assets:
Cash and cash equivalents .............................................. $ 2,773,608 $ 2,445,271
Accounts receivable, net of allowance for
doubtful accounts of $323,000 at April 30, 2004 and
at January 31, 2004 .................................................. 14,026,362 12,570,320
Inventories ............................................................ 27,488,454 26,265,807
Deferred income taxes .................................................. 790,272 790,272
Other current assets ................................................... 1,094,870 1,213,104
----------- -----------
Total current assets .......................................... 46,173,566 43,284,774
Property and equipment, net of accumulated
depreciation of $4,636,000 at April 30, 2004
and $4,511,000 January 31, 2003 ...................................... 5,038,296 3,921,308
Other assets ........................................................... 135,683 97,745
----------- -----------
$51,347,545 $47,303,827
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 3,979,830 $ 3,461,353
Current portion of long-term liabilities ............................... -- 16,784,781
Accrued expenses and other current liabilities ......................... 1,958,213 1,263,044
----------- -----------
Total current liabilities ......................................... 5,938,043 21,509,178
Borrowing under revolving credit facility .............................. 16,910,211 0
Other long-term liabilities ............................................ 529,647 517,147
Deferred income taxes .................................................. 250,532 250,532
Minority interest in Variable Interest Entities ........................ 1,266,807 --
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par; authorized
1,500,000 shares (none issued)
Common stock, $.01 par; authorized
10,000,000 shares; issued and outstanding
3,273,925shares at April 30, 2004
and at January 31, 2004 ........................................... 32,739 32,739
Additional paid-in capital ............................................. 11,862,461 11,862,461
Retained earnings ...................................................... 14,557,105 13,131,770
----------- -----------
Total stockholders' equity ........................................ 26,452,305 25,026,970
----------- -----------
$51,347,545 $47,303,827
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
April 30,
2004 2003
---- ----
Net Sales ................................................................. $ 26,838,023 $ 23,824,886
Cost of goods sold ........................................................ 20,858,591 19,729,070
------------ ------------
Gross profit .............................................................. 5,979,432 4,095,816
Operating expenses ........................................................ 3,586,720 2,623,162
------------ ------------
Operating profit .......................................................... 2,392,712 1,472,654
Other income, net ......................................................... 9,460 15,442
Interest expense .......................................................... (137,141) (137,796)
------------ ------------
Income before income taxes ................................................ 2,265,031 1,350,300
Provision for income taxes ................................................ 721,000 486,000
------------ ------------
Income before minority interest ........................................... 1,544,031 864,300
Minority interest in Net income of Variable Interest Entities ............. 118,696 --
------------ ------------
Net Income ................................................................ $ 1,425,335 $ 864,300
============ ============
Net income per common share*
Basic ............................................................ $ 0.44 $ 0.26
============ ============
Diluted .......................................................... $ 0.43 $ 0.26
============ ============
Weighted average common shares outstanding*
Basic ............................................................ 3,273,925 3,266,997
============ ============
Diluted .......................................................... 3,278,803 3,274,757
============ ============
The accompanying notes are an integral part of these financial statements.
*Adjusted for the 10% stock dividend to shareholders of record on July 31, 2003.
3
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three months ended April 30, 2004
Additional
Common stock paid-in Retained
Shares Amount capital earnings Total
------ ------ ------- -------- -----
Balance, January 31, 2004 3,273,925 $32,739 $11,862,461 $13,131,770 $25,026,970
Net income 1,425,335 1,425,335
--------- ------- ----------- ----------- -----------
Balance, April 30, 2004 3,273,925 $32,739 $11,862,461 $14,557,105 $26,452,305
========= ======= =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
April 30,
2004 2003
---- ----
Cash Flows from Operating Activities:
Net income ........................................................ $ 1,425,335 $ 864,300
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for bad debts ........................................ -- (74,000)
Depreciation and amortization .................................. 231,455 207,777
Minority interest in Net income of
Variable Interest Entities ..................................... 118,696
Decrease in accounts receivable ................................... (1,456,042) (2,855,924)
(Increase) decrease in inventories ................................ (1,222,647) 3,097,595
(Increase) decrease in other current assets ....................... 176,552 (204,717)
(Increase) in other assets ........................................ (37,798) (88,105)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities .................................. 1,139,514 961,258
----------- -----------
Net cash provided by operating
activities ...................................................... 375,065 1,908,184
----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment ............................... (153,417) (585,446)
----------- -----------
Net cash used in investing activities ............................. (153,417) (585,446)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options ........................... -- 9,750
Net borrowings (payments) under loan agreements ................... 106,689 (1,422,413)
----------- -----------
Net cash provided by (used in) financing activities ............... 106,689 (1,412,663)
----------- -----------
Net increase (decrease) in cash ................................... 328,337 (89,925)
Cash and cash equivalents at beginning of period .................. 2,445,271 1,474,135
----------- -----------
Cash and cash equivalents at end of period ........................ $ 2,773,608 $ 1,384,210
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware
corporation, organized in April 1982, manufactures and sells a comprehensive
line of safety garments accessories for the industrial protective clothing
market. The principal market for the Company's products is the United States. No
customer accounted for more than 10% of net sales during the three month periods
ended April 30, 2004 and 2003, respectively.
2. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect all adjustments which are, in
the opinion of management, necessary to present fairly the consolidated
financial information required therein. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted pursuant to such rules and regulations. While the Company
believes that the disclosures are adequate to make the information presented not
misleading, it is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended January 31, 2004.
The results of operations for the three-month periods ended April 30, 2004
and 2003, respectively, are not necessarily indicative of the results to be
expected for the full year.
3. Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Laidlaw, Adams &
Peck, Inc., and Subsidiary (MeiYang Protective Products Co. Ltd., a Chinese
Corporation), Lakeland Protective Wear, Inc. (a Canadian corporation), Weifang
Lakeland Safety Products, Co., Ltd. (a Chinese corporation), Qing Dao Maytung
Healthcare Co., Ltd. (a Chinese corporation), Lakeland Industries Europe Ltd. (a
British Corporation) and Lakeland de Mexico S.A. de C.V (a Mexican corporation).
All significant inter-company accounts and transactions have been eliminated.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". This interpretation provides guidance with respect
to the consolidation of certain entities, referred to as variable interest
entities, in which an investor is subject to a majority of the risk of loss from
the variable interest entity's activities, or is entitled to receive a majority
of the variable interest entity's residual returns. This interpretation also
provides guidance with respect to the disclosure of variable interest entities
in which an investor maintains an interest but is not required to consolidate.
The provisions of the interpretation are effective immediately for all variable
interest entities created after January 31, 2003, or in which we obtain an
interest after that date. In October 2003, the FASB issued a revision to this
pronouncement, FIN 46R, which clarified certain provisions and modified the
effective date from July 1, 2003 to March 15, 2004 for variable interest
entities created before February 1, 2003.
Effective February 1, 2004 the Company adopted this pronouncement. As a
result, certain entities which leased property to the Company and are owned by
related parties were determined to be Variable Interest Entities and have been
consolidated in the Company's April 30, 2004 quarterly financial statements.
This consolidation had no impact on the Company's net income and resulted in
increases in cash of $0.2 million, property and equipment, net of $1.2 million,
other liabilities of $0.1 million and minority interest of $1.3
6
million. Creditors, or beneficial interest holders, of the consolidated variable
interest entities have no recourse to the general credit of the Company.
4. Inventories:
Inventories consist of the following:
April 30, January 31,
2004 2004
---- ----
Raw materials ................... $10,657,102 $10,868,816
Work-in-process ................. 3,229,617 2,279,444
Finished Goods .................. 13,601,735 13,117,547
----------- -----------
$27,488,454 $26,265,807
=========== ===========
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 market.
5. Earnings Per Share:
Basic earnings per share are based on the weighted average number of
common shares outstanding without consideration of common stock equivalents.
Diluted earnings per share are based on the weighted average number of common
and common stock equivalents. The diluted earnings per share calculation takes
into account the shares that may be issued upon exercise of stock options,
reduced by the shares that may be repurchased with the funds received from the
exercise, based on the average price during the period.
The following table sets forth the computation of basic and diluted
earnings per share at April 30, adjusted, retroactively, for the 10% Stock
dividends to Shareholders on July 31, 2003 and 2002, respectively:
2004 2003
---- ----
Numerator
Net income $1,425,335 $ 864,300
========== =========
Denominator
Denominator for basic earnings per share
(Weighted-average shares) 3,273,925 3,266,997
Effect of dilutive securities:
Stock options 4,878 7,760
---------- ---------
Denominator for diluted earnings per share
(adjusted weighted-average shares) and
assumed conversions 3,278,803 3,274,757
========== =========
Basic earnings per share $ 0.44 $ 0.26
========== =========
Diluted earnings per share $ 0.43 $ 0.26
========== =========
Options to purchase 1,210 shares of the Company's common stock have been
excluded for the three months ended April 30, 2003, as their inclusion would be
antidilutive.
7
6. Revolving Credit Facility:
At April 30, 2004, the balance outstanding under the Company's $18 million
revolving credit facility amounted to $16,910,000. This credit facility, which
is subject to borrowings based on a percentage of eligible accounts receivable
and inventory, as defined, was set to expire on July 31, 2004, however, in May
2004 it was extended through July 31, 2005. Borrowings under the facility bear
interest at a rate per annum equal to LIBOR plus 2%. In January 2004, the
Company entered into a new 3-year $3 million revolving credit facility which
expires on January 31, 2007. Availability under this facility decreases from $3
million by $83,333 each month over the 3-year term and is also subject to the
borrowing base limitation discussed above in connection with the $18 million
revolving credit facility. Borrowings under this revolving credit facility bear
interest at LIBOR plus 2.5%. There were no borrowings outstanding under this
facility at April 30, 2004.The credit facilities are collateralized by
substantially all of the assets of the Company. The credit facilities contain
financial covenants, including, but not limited to, minimum levels of earnings
and maintenance of minimum tangible net worth and certain other ratios at all
times, with respect to which the Company was in compliance at April 30, 2004.
7. Major Supplier
The Company purchased approximately 77.2% of its raw materials from one
supplier under licensing agreements during the three-month period ended April
30, 2004. The Company expects this relationship to continue for the foreseeable
future. If required, similar raw materials could be purchased from other
sources; although, the Company's competitive position in the marketplace could
be adversely affected.
8. Stock Based Compensation
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). In compliance with SFAS
123, the Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans and does not
recognize compensation expense for its employee stock-based compensation plans.
The Company has also adopted the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Base Compensation - Transition and Disclosure." This
pronouncement requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. If the
Company had elected to recognize compensation expense based upon the fair value
at the date of grant for awards under these plans, consistent with the
methodology prescribed by SFAS 123, the effect on the Company's net income and
earnings per share as reported would be reduced for the quarters ended April 30,
2004 and 2003 to the pro forma amounts indicated below:
Three Months Ended April 30,
2004 2003
---- ----
Net income $ 1,425,335 $ 864,300
As reported
Less:
Option expense based on fair value method 43,554 18,924
----------- ----------
Pro forma $ 1,381,781 $ 845,376
=========== ==========
Basic earnings per common share
As reported $ 0.44 $ 0.26
Pro forma $ 0.42 $ 0.26
Diluted earnings per common share
As reported $ 0.43 $ 0.26
Pro forma $ 0.42 $ 0.26
8
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following assumptions for the
quarters ended April 30, 2004 and 2003: expected volatility of 72% and 64%,
respectively; risk-free interest rate of 3.6% and 2.93%, respectively; expected
dividend yield of 0.0%; and expected life of six years. All stock-based awards
were fully vested at April 30, 2004 and 2003. Earnings per share have been
adjusted to reflect the 10% stock dividends to stockholders of record as of July
31, 2003.
9. Revenue Recognition and Manufacturing Segment Data
The Company derives its sales primarily from its limited use/disposable
protective clothing and secondarily from its sales of high-end chemical
protective suits, fire fighting and heat protective apparel, gloves and arm
guards, and reusable woven garments. Sales are recognized when goods are shipped
at which time title and the risk of loss passes to the customer. Sales are
reduced for sales returns and allowances. Payment terms are generally net 30
days for United States sales and net 90 days for international sales. Domestic
and international sales are as follows:
Three Months Ended April 30,
2004 2003
Domestic $24,074,000 89.7% $21,234,000 89.1%
International 2,764,000 10.3% 2,591,000 10.9%
----------- ---- ----------- ----
Total $26,838,000 100% $23,825,000 100%
=========== ==== =========== ====
The Company manages its operations by evaluating its geographic locations.
The Company's North American operations include its facilities in Decatur,
Alabama (primarily disposables, chemical suit and glove production), Celaya,
Mexico (primarily disposable chemical suit and glove production) and St. Joseph,
Missouri (primarily woven products). The Company also maintains contract
manufacturing facilities in China (primarily disposable and chemical suit
production). The Company's China facilities and the Decatur, Alabama facility
produce the majority of the Company's products. The accounting policies of these
operating entities are the same as those described in Note 1 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2004. The Company
evaluates the performance of these entities based on operating profit which is
defined as income before income taxes, interest expense and other income and
expenses. The Company has a small sales force in Canada and Europe who
distribute products shipped from the United States. The table below represents
information about reported manufacturing segments for the three months noted
therein:
9
2004 2003
Net Sales:
North America $ 26,591,769 $ 24,203,704
China 2,348,449 856,359
Less intersegment sales (2,102,195) (1,235,177)
------------ ------------
Consolidated sales $ 26,838,023 $ 23,824,886
============ ============
Operating Profit:
North America $ 2,208,528 $ 1,479,220
China 239,184 (33,066)
Less intersegment profit (loss) 55,000 (26,500)
------------ ------------
Consolidated profit $ 2,392,712 $ 1,472,654
============ ============
Identifiable Assets:
North America $ 43,415,373 $ 35,172,402
China 7,932,172 7,650,332
------------ ------------
Consolidated assets $ 51,347,545 $ 42,822,734
============ ============
Depreciation and Amortization Expense:
North America $ 160,827 $ 130,741
China 70,628 77,036
------------ ------------
Consolidated depreciation expense $ 231,455 $ 207,777
============ ============
10. Effects of Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires that certain financial instruments that were accounted for as
equity under previous guidance, must now be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have any impact on our consolidated
financial statements for the three months ended April 30, 2004.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others-an Interpretation of FASB
10
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34."
This interpretation expands on the existing accounting guidance and disclosure
requirements for most guarantees, including indemnifications. It requires that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair value of the obligations it assumes under that guarantee
if that amount is reasonably estimable, and must disclose that information in
its interim and annual financial statements. The provisions for initial
recognition and measurement of the liability are to be applied on a prospective
basis to guarantees issued or modified on or after January 1, 2003. Our initial
adoption of this statement on January 1, 2003 did not have an impact on its
results of operations, financial position, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation provides guidance with respect
to the consolidation of certain entities, referred to as variable interest
entities ("VIE"), in which an investor is subject to a majority of the risk of
loss from the VIE's activities, or is entitled to receive a majority of the
VIE's residual returns. This interpretation also provides guidance with respect
to the disclosure of VIEs in which an investor maintains an interest but is not
required to consolidate. The provisions of the interpretation are effective
immediately for all VIEs created after January 31, 2003, or in which we obtain
an interest after that date. In October 2003, the FASB issued a revision to this
pronouncement, FIN 46R, which clarified certain provisions and modified the
effective date from July 1, 2003 to March 15, 2004 for variable interest
entities created before February 1, 2003. The Company has adopted this
pronouncement as of February 1, 2004.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits", to improve
financial statement disclosures for defined benefit plans. The company has
adopted SFAS No. 132 and disclosure requirements as described in Note 7 to the
Company's Annual Report on Form 10-K for the year ended January 31, 2004.
Interim disclosure of net pension costs are not material.
11. Subsequent Events
On May 5, 2004 the Company filed with the Securities and Exchange
Commission a registration statement on Form S-2 regarding the sale of 1,205,000
shares of the Company's common stock, including 105,000 shares to be sold by two
directors of the Company. Amendments to this Form S-2 were filed with the SEC on
May 25, 2004 and May 28, 2004.
11
Item 2. LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended April 30, 2004 Compared to the Three Months Ended April 30,
2003
Net Sales. Net sales increased $3.0 million, or 12.6%, to $26.8 million
for the three months ended April 30, 2004 from $23.8 million for the three
months ended April 30, 2003. The increase was due primarily to an increase in
our market share in our Tyvek(R)-based product lines. Increased sales were also
driven by an improving U.S. economy which increased demand for our products,
particularly in the industrial Tyvek(R) markets we serve, and increased demand
for our chemical protective suits and fire turnout gear for Homeland Security
purposes.
Gross Profit. Gross profit increased $1.9 million, or 46.0%, to $6.0
million for the three months ended April 30, 2004 from $4.1 million for the
three months ended April 30, 2003. Gross profit as a percent of net sales
increased to 22.3% for the three months ended April 30, 2004 from 17.2% for the
three months ended April 30, 2003, primarily because of cost reductions achieved
by shifting production of additional Tyvek(R) -based products and chemical suits
to China and Mexico. We have increasingly shifted production to these lower-cost
facilities.
Operating Expenses. Operating expenses increased $1.0 million, or 36.7%,
to $3.6 million for the three months ended April 30, 2004 from $2.6 million for
the three months ended April 30, 2003. As a percent of net sales, operating
expenses increased to 13.4% for the three months ended April 30, 2004 from 11.0%
for the three months ended April 30, 2003. The $1.0 million increase in
operating expenses in the three months ended April 30, 2004 compared to the
three months ended April 30, 2003 was principally due to increased expenses
corresponding to our increase in net sales.
Interest Expense. Interest expense remained constant at $0.1 million for
the three months ended April 30, 2004 and the three months ended April 30, 2003.
Income Tax Expense. Income tax expense consists of federal, state and
foreign income taxes. Income tax expense increased $0.2 million, or 48.4%, to
$0.7 million for the three months ended April 30, 2004 from $0.5 million for the
three months ended April 30, 2003. The increase was due to a relative increase
in our income recognized in the United States as compared to the income
recognized in China, where income tax rates are lower. Our effective tax rate
was 31.8% and 36.0% in the three months ended April 30, 2004 and 2003,
respectively. Our effective tax rate varied from the federal statutory rate of
34% due primarily to lower foreign tax rates.
Minority interest. Minority interest in net income of variable interest
entities increased to $0.1 million for the three months ended April 30, 2004 as
a result of our adoption on Interpretation No. 46R (FIN 46R), "Consolidation of
Variable Interest Entities," effective February 1, 2004. Subsequent to our
adoption of FIN 46R, we determined that certain entities from which we lease
real property and which are owned by related parties are variable interest
entities governed by FIN 46R. As a result, these entities have been consolidated
in our statement of income for the three months ended April 30, 2004.
Net Income. Net income increased $0.6 million, or 64.9%, to $1.4 million
for the three months ended April 30, 2004 from $0.9 million for the three months
ended April 30, 2003. The increase in net income was the result of an increase
in net sales and increased productivity as a result of shifts in production to
our China facilities, partially offset by an increase in costs and expenses due
to higher volumes of our products being sold.
Liquidity and Capital Resources
Cash Flows
As of April 30, 2004 we had cash and cash equivalents of $2.8 million and
working capital of $40.2 million, an increase of $0.3 million and $18.5 million,
respectively, from January 31, 2004. In May 2004, we extended the expiration
date of our $18 million revolving credit facility to July 31, 2005. The increase
in working capital at April 30, 2004 from January 31, 2004 was due primarily to
the classification of borrowings under this credit facility as long term as a
result of the extension of the expiration date. Such borrowings were
characterized as short term at January 31, 2004. Our primary sources of funds
for conducting our business activities have been from cash flow provided by
operations and borrowings under our credit facilities described below. We
require liquidity and working capital primarily to fund increases in inventories
and accounts receivable associated with our net sales and, to a lesser extent,
for capital expenditures.
Net cash provided by operating activities of $0.4 million for the three
months ended April 30,2004 was due primarily to net income from operations of
$1.4 million and an increase in accounts payable of $1.1 million, offset in
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part by an increase in inventories of $1.2 million and an increase in accounts
receivable of $1.5 million. Net cash provided by operating activities of $1.9
million for the three months ended April 30, 2003 was primarily attributable to
net income from operations of $1.0 million and a decrease in inventories of $3.1
million, offset in part by an increase in accounts payable of $1.0 million and
an increase in accounts receivable of $2.9 million.
Net cash used in investing activities of $0.2 million and $0.6 million in
the three months ended April 30, 2004 and 2003, respectively, was due to
purchases of property and equipment.
Net cash provided by financing activities of $0.1 million in the three
months ended April 30, 2004 and net cash used by financing activities of $1.4
million in the three months ended April 30, 2003 was primarily attributable to
borrowings and payments under our credit facilities.
Credit Facilities
We currently have two credit facilities:
o an $18 million revolving credit facility, of which we had
$16.9 million of borrowings outstanding as of April 30, 2004;
and
o a $3 million revolving credit facility (the availability of
which reduces incrementally over its 3-year term), of which we
had no borrowings outstanding as of April 30, 2004.
Our $18 million revolving credit facility permits us to borrow up to the
lower of $18 million and a borrowing base determined by reference to a
percentage of our eligible accounts receivable and inventory. Our $18 million
revolving credit facility now expires on July 31, 2005, and has therefore been
classified as a long-term liability on our balance sheet at April 30, 2004.
Borrowings under this revolving credit facility bear interest at the London
Interbank Offering Rate (LIBOR) plus 2% and were approximately $16.8 million at
January 31, 2004. As of April 30, 2004, we had $1.1 million of borrowing
availability under this revolving credit facility.
In January 2004, we entered into a new 3-year $3 million revolving credit
facility which expires on January 21, 2007. Availability under this facility
decreases from $3 million by $83,333 each month over the 3-year term and is also
subject to the borrowing base limitation discussed above in connection with our
$18 million revolving credit facility. Borrowings under this revolving credit
facility bear interest at LIBOR plus 2.5%. We did not have any borrowings
outstanding under this facility at April 30, 2004. As of April 30, 2004, we had
$2.8 million of borrowing availability under this revolving credit facility.
Our credit facilities require that we comply with specified financial
covenants relating to interest coverage, debt coverage, minimum consolidated net
worth, and earnings before interest, taxes, depreciation and amortization. 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 lenders have a security interest in
substantially all of our assets to secure the debt under our credit facilities.
As of April 30, 2004, we were in compliance with all covenants contained in our
credit facilities.
We believe that cash flow from operations along with borrowing
availability under our $3 million revolving credit facility and our $18 million
revolving credit facility will be sufficient to meet our currently anticipated
operating, capital expenditures and debt service requirements for at least the
next 12 months. Historically, we have been able to renew our primary credit
facility on acceptable terms, but there can be no assurance that such financing
will continue to be available after its current expiration or that any renewal
will be on terms as favorable as our current facility.
Capital Expenditures
Our capital expenditures principally relate to purchases of manufacturing
equipment, computer equipment, leasehold improvement and automobiles, as well as
payments related to the construction of our facilities in China. Our capital
spending plans for fiscal 2005 include the last payment on our 90,415 square
foot facility in Jiaozhou, China due to a construction company as payment for
the construction of this facility in 2004. Our facilities in China are not
encumbered by commercial bank mortgages and thus Chinese commercial mortgage
loans may be available with respect to these real estate assets if we need
additional liquidity. We expect our capital expenditures to be approximately
$1.1 million in fiscal 2005.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our market risk from that
disclosed in our Annual Report on Form 10-K for the fiscal year ended January
31, 2004.
Item 4. Controls and Procedures
The Company's chief executive officer and principal accounting officer
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, they have concluded that as of such date, our disclosure controls
and procedures are effective and designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable SEC rules and forms.
During the quarter ended April 30, 2004, there were no significant changes
in our internal controls over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting during fiscal 2005.
Item 6. Exhibits and Reports on Form 8-K:
a - None
b - On February 11, 2004, the company filed a Form 8-K, under
Item 5, relating to sales for the 4th Quarter of fiscal 2004.
On February 17, the Company furnished a Form 8-K for the
purpose of furnishing under Items 7 and 12 a press release
announcing results of operations for the Quarter ended October
31, 2003
On April 29, 2004, the Company furnished a Form 8-K for the
purpose of furnishing under Items 7 and 12 a press release
announcing results of operations for the 4th Quarter and year
ended January 31, 2004.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAKELAND INDUSTRIES, INC.
(Registrant)
Date: June 14, 2004 /s/ Christopher J. Ryan
----------------------------------------
Christopher J. Ryan,
Chief Executive Officer, President
Secretary and General Counsel
(Principle Executive Officer and
Authorized Signatory)
Date: June 14, 2004 /s/ James M. McCormick
-----------------------------
James M. McCormick,
Chief Financial Officer and Treasurer
(Principal Accounting Officer and
Authorized Signatory)
15