NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business
Lakeland
Industries, Inc. and Subsidiaries (“Lakeland,” the
“Company,” “we,” “our” or
“us”), a Delaware corporation organized in April 1986,
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 over 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, 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 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. Sales are made to more than 50
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. For purposes of this Form 10-K, FY refers to a fiscal year
ended January 31; for example, FY20 refers to the fiscal year ended
January 31, 2020.
Basis
of Presentation
The
Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States of
America (“US GAAP”). The following is a description of
the Company’s significant accounting policies.
Summary of Significant Accounting Policies
Principles of Consolidation
The
accompanying 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 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.
Cash and Cash Equivalents
The
Company considers highly liquid temporary cash investments with
original maturities of three months or less to be cash equivalents.
Cash equivalents consist of money market funds.
Accounts Receivable,
Net.
Trade accounts receivable are stated at the amount
the Company expects to collect. The Company maintains allowances
for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Company
recognizes losses when information available indicates that it is
probable that a receivable has been impaired based on criteria
noted above at the date of the consolidated financial statements,
and the amount of the loss can be reasonably estimated. Management
considers the following factors when determining the collectability
of specific customer accounts: Customer creditworthiness, past
transaction history with the customers, current economic industry
trends and changes in customer payment terms. Past due balances
over 90 days and other less creditworthy accounts are reviewed
individually for collectability. If the financial condition of the
Company’s customers were to deteriorate, adversely affecting
their ability to make payments, additional allowances would be
required. Based on management’s assessment, the Company
provides for estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances that
remain outstanding after the Company has used reasonable collection
efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 net
realizable value.
Property and Equipment
Property and
equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are provided for in
amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives on a straight-line
basis. Leasehold improvements and leasehold costs are amortized
over the term of the lease or service lives of the improvements,
whichever is shorter. The costs of additions and improvements which
substantially extend the useful life of a particular asset are
capitalized. Repair and maintenance costs are charged to expense.
When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the
account, and the gain or loss on disposition is reflected in
operating income.
Assets
held for sale are measured at the lower of carrying value or fair
value less cost to sell. Gains or losses are recognized for any
subsequent changes to fair value less cost to sell. However, gains
are limited to cumulative losses previously recognized. Assets
classified as held for sale are not depreciated.
Capitalized Software Costs
In
accordance with ASC 350-40, Internal-Use Software, The Company
capitalizes eligible costs to acquire or develop internal-use
software. Capitalized costs related to internal-use software are
amortized using the straight-line method over the estimated useful
life of the assets, which is generally three years.
Goodwill
Goodwill represents
the future economic benefits arising from other assets acquired in
a business combination that are not individually identified and
separately recognized. Goodwill is evaluated for impairment at
least annually; however, this evaluation may be performed more
frequently when events or changes in circumstances indicate the
carrying amount may not be recoverable. Factors that the Company
considers important that could identify a potential impairment
include: significant changes in the overall business strategy and
significant negative industry or economic trends. Management
assesses whether it is more likely than not that goodwill is
impaired and, if necessary, compares the fair value of the
reporting unit to the carrying value. Fair value is generally
determined by management either based on estimating future
discounted cash flows for the reporting unit or by estimating a
sales price for the reporting unit based on multiple of earnings.
These estimates require the Company's management to make
projections that can differ from actual results.
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.
During FY19, a non-cash impairment charge was recorded to reflect
the change in the carrying value from $0.2 million to $0.0 million
as the Company believed there was no receovable value of the asset
held for sale previously on the Company’s consolidated
balance sheet.
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 customers
upon shipment of the goods. Generally, payment is due from
customers within 30 to 90 days of the invoice date, and the
contracts do not have significant financing components. The Company
elected to account for shipping and handling activities as a
fulfillment cost rather than a separate performance obligation.
Shipping and handling costs associated with outbound freight are
included in operating expenses, and for the years ended in FY20 and
FY19 aggregated approximately $3.3 million and $2.7 million,
respectively. Taxes collected from customers relating to product
sales and remitted to governmental authorities are excluded from
revenue.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
times price per unit.
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 and
product line 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:
|
|
|
|
|
|
|
|
|
External Sales by
region:
|
|
|
USA
|
$55.89
|
$49.88
|
Other
foreign
|
3.66
|
3.02
|
Europe
(UK)
|
9.35
|
9.42
|
Mexico
|
2.82
|
3.51
|
Asia
|
18.15
|
18.00
|
Canada
|
9.64
|
8.56
|
|
8.30
|
6.62
|
Consolidated
external sales
|
$107.81
|
$99.01
|
|
|
|
|
|
|
|
|
|
External Sales by
product lines:
|
|
|
Disposables
|
$53.42
|
$53.18
|
Chemical
|
22.96
|
18.03
|
Fire
|
8.36
|
5.98
|
Gloves
|
3.12
|
3.22
|
Hi-Vis
|
7.75
|
6.99
|
Wovens
|
11.93
|
11.61
|
Consolidated
external sales
|
$107.81
|
$99.01
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Costs
Advertising costs
are expensed as incurred and included in operating expenses on the
consolidated statement of operations. Advertising and co-op costs
amounted to $1.0 million and $0.8 million in FY20 and FY19,
respectively, net of a co-op advertising allowance received from a
supplier.
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.
Research and Development Costs
Research and
development costs include labor, equipment and materials costs and
are expensed as incurred and included in operating expenses.
Research and development expenses aggregated were approximately
$0.2 million in FY20 and FY19, respectively.
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
consolidated financial statements. This involves estimating the
actual current tax in addition to assessing temporary differences
resulting from differing treatments for tax and financial
accounting purposes. These differences, together with net operating
loss carryforwards and tax credits, are recorded as deferred tax
assets or liabilities on the Company’s consolidated balance
sheet. A judgment must then be made of the likelihood that any
deferred tax assets will be recovered from future taxable income. A
valuation allowance may be required to reduce deferred tax assets
to the amount that is more likely than not to be realized. In the
event the Company determines that it may not be able to realize all
or part of its deferred tax asset in the future, or that new
estimates indicate that a previously recorded valuation allowance
is no longer required, an adjustment to the deferred tax asset is
charged or credited to income in the period of such
determination.
The
Company recognizes tax positions that meet a “more likely
than not” minimum recognition threshold. If necessary, the
Company recognizes interest and penalties associated with tax
matters as part of the income tax provision and would include
accrued interest and penalties with the related tax liability in
the consolidated balance sheets.
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.
The functional currency for the United Kingdom subsidiary is the
Euro; the trading company in China, the RMB; 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. Foreign currency transaction loss included in
net income for the years ended January 31, 2020 and 2019, were
approximately $0.4 million and $0.5 million,
respectively.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
There
were no foreign currency forward or hedge contracts at January 31,
2020 or January 31, 2019.
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.
Net Income Per Share
Net
income per share are based on the weighted average number of common
shares outstanding without consideration of common stock
equivalents. Diluted net income per share are based on the weighted
average number of common shares and common stock equivalents. The
diluted net income per share calculation takes into account
unvested restricted shares and the shares that may be issued upon
exercise of stock options, reduced by shares that may be
repurchased with the funds received from the exercise, based on the
average price during the fiscal year.
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
February 2016, the Financial Accounting Standards Board
(“FASB”) established Topic 842, Leases, by issuing
Accounting Standards Update (“ASU”) No. 2016-02, which
requires lessees to recognize leases on their balance sheets and
disclose key information about leasing arrangements. Topic 842 was
subsequently amended by ASU No. 2018-01, Land Easement Practical
Expedient for Transition to Topic 842; ASU No. 2018-10,
Codification Improvements to Topic 842, Leases; and ASU No.
2018-11, Targeted Improvements. The new standard establishes a
right-of-use model (“ROU”) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases will be
classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income
statement. The new standard was effective on February 1, 2019. A
modified retrospective transition approach is required, applying
the new standard to all leases existing at the date of initial
application. An entity may choose to use either (1) its effective
date or (2) the beginning of the earliest comparative period
presented in the financial statements as its date of initial
application. If an entity chooses the second option, the transition
requirements for existing leases also apply to leases entered into
between the date of initial application and the effective date. The
entity must also recast its comparative period financial statements
and provide the disclosures required by the new standard for the
comparative periods. The Company adopted the new standard on
February 1, 2019 and used the effective date as the date of initial
application. Consequently, financial information will not be
updated and the disclosures required under the new standard will
not be provided for dates and periods before February 1, 2019. The
new standard provides a number of optional practical expedients in
transition. The Company elects the ‘package of practical
expedients’, which permits the Company not to reassess under
the new standard prior conclusions about lease identification,
lease classification and initial direct costs. On adoption, the
Company recognized additional operating lease liabilities of
approximately $2.9 million with corresponding ROU assets of the
same amount based on the present value of the remaining minimum
rental payments under the prior leasing standard for existing
operating leases.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
February 2018, the FASB issued ASU 2018-02, Income Statement
– Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects From Accumulated Other
Comprehensive Income,” which allows institutions to elect to
reclassify the stranded tax effects from AOCI to retained earnings,
limited only to amounts in AOCI that are affected by the tax reform
law. For public entities, the amendments are effective for annual
reporting periods beginning after December 15, 2018, including
interim reporting periods within that reporting period. For all
other entities, the amendments in this Update are effective for
annual reporting periods beginning after December 15, 2019,
including interim reporting periods within that reporting period.
The Company has adopted this guidance, which had no material impact
on its consolidated financial statements and related
disclosures.
New Accounting Pronouncements Not Yet 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 of this standard to have a
significant impact on its financial position and results of
operations.
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 franchise
tax partially based on income as an income-based tax, requiring
reflection of enacted chages in tax laws in the interim period and
making improvements for income taxes related to employee stock
owernship plans. ASU 2019-12 is effective for fiscal years and
interim periods within those years, beginning after December 15,
2020. Early adoption is permitted, including adoption in any
interim period for which financial statements have not been issued.
The Company is currently evaluating the impact the standard will
have on its consolidated financial statements.
In
March 2020, the FASB issued ASU No. 2020-03, Codification
Improvements to Financial Instruments, which makes improvements to
financial instruments guidance. The standard is effective
immediately for certain amendments and for fiscal years beginning
after December 15, 2019. The implementation of this pronouncement
will not have a material impact on the Company’s consolidated
financial statements.
No
other recently issued accounting pronouncements had or are expected
to have a material impact on the Company’s consolidated
financial statements.
2.
INVENTORIES
Inventories consist
of the following (in $000s):
|
|
|
|
|
Raw
materials
|
$16,709
|
$14,986
|
Work-in-process
|
670
|
987
|
Finished
goods
|
26,859
|
26,392
|
|
$44,238
|
$42,365
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT, NET
Property and
equipment consists of the following:
|
|
|
|
|
|
|
|
(000’s)
|
(000’s)
|
Machinery and
equipment
|
|
$4,559
|
$5,070
|
Furniture and
fixtures
|
|
906
|
316
|
Leasehold
improvements
|
|
1,598
|
1,496
|
Computer
equipment
|
|
2,766
|
2,669
|
Software
costs
|
|
1,187
|
1,187
|
Land and
building
|
|
9,182
|
9,177
|
|
|
20,198
|
19,915
|
Less accumulated
depreciation and amortization
|
|
(10,176)
|
(9,134)
|
Construction-in-progress
|
|
91
|
-----
|
|
|
$10,113
|
$10,781
|
Depreciation and
amortization expense for FY20 and FY19 amounted to $1,645,477 and
$965,451, respectively.
4. GOODWILL
On
August 1, 2005, the Company purchased Mifflin Valley, Inc., a
Pennsylvania manufacturer, the operations of which now comprise the
Company’s Reflective division. This acquisition resulted in
the recording of $0.9 million in goodwill in FY06. The Company
believes that there was no impairment of goodwill for the years
ended January 31, 2020 and 2019. This goodwill is included in the
US segment for reporting purposes.
5.
LONG-TERM DEBT
Revolving Credit Facility
On May
10, 2017, the Company entered into a Loan Agreement (the
“Loan Agreement”) with SunTrust Bank
(“Lender”). The Loan Agreement provides the Company
with a secured (i) $20.0 million revolving credit facility, which
includes a $5.0 million letter of credit sub-facility, and (ii)
$1,575,000 term loan with Lender. The Company may request from time
to time an increase in the revolving credit loan commitment of up
to $10.0 million (for a total commitment of up to $30.0 million).
Borrowing pursuant to the revolving credit facility is subject to a
borrowing base amount calculated as (a) 85% of eligible accounts
receivable, as defined, plus (b) an inventory formula amount, as
defined, minus (c) an amount equal to the greater of (i) $1,500,000
or (ii) 7.5% of the then current revolver commitment amount, minus
(d) certain reserves as determined by the Loan Agreement. The
credit facility matures on May 10, 2020 (subject to earlier
termination upon the occurrence of certain events of default as set
forth in the Loan Agreement).
Borrowings under
the term loan and the revolving credit facility bear interest at an
interest rate determined by reference whether the loan is a base
rate loan or Eurodollar loan, with the rate election made by the
Company at the time of the borrowing or at any time the Company
elects pursuant to the terms of the Loan Agreement. The term loan
is payable in equal monthly principal installments of $13,125 each,
beginning on June 1, 2017, and on the first day of each succeeding
month, with a final payment of the remaining principal and interest
on May 10, 2020 (subject to earlier termination as provided in the
Loan Agreement). For that portion of the term loan that consists of
Eurodollar loans, the term loan shall bear interest at the LIBOR
Market Index Rate (“LIBOR”) plus 2.0% per annum, and
for that portion of the term loan that consists of base rate loans,
the term loan shall bear interest at the base rate then in effect
plus 1.0% per annum. All principal and unpaid accrued interest
under the revolving credit facility shall be due and payable on the
maturity date of the revolver. For that portion of the revolver
loan that consists of Eurodollar loans, the revolver shall bear
interest at LIBOR plus a margin rate of 1.75% per annum for the
first 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 annum and the initial rate of interest for the term
loan was 2.995% per annum. At January 31, 2020, the rate of
interest on the revolver was 3.8% per annum and the rate of
interest on the term loan was 3.3% per annum. The Loan Agreement
provides for payment of an unused line fee of between 0.25% and
0.50%, depending on the amount by which the revolving credit loan
commitment exceeds the amount of the revolving credit loans
outstanding (including letters of credit), which shall be payable
monthly in arrears on the average daily unused portion of the
revolver.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
connection with the Loan Agreement, the Company entered into a
security agreement, dated May 10, 2017, with Lender pursuant to
which the Company granted to Lender a first priority perfected
security interest in substantially all real and personal property
of the Company.
The
Company agreed to maintain a minimum “fixed charge coverage
ratio” (as defined in the Loan Agreement) as of the end of
each fiscal quarter, commencing with the fiscal quarter ended
October 31, 2017, of not less than 1.10 to 1.00 during the
applicable fiscal quarter, and agreed to certain negative covenants
that are customary for credit arrangements of this type, including
restrictions on the Company’s ability to enter into mergers,
acquisitions or other business combination transactions, conduct
its business, grant liens, make certain investments, incur
additional indebtedness, and make stock repurchases.
On June
7, 2019 the Company received a waiver for certain compliance
provisions in the Loan Agreement. Pursuant to the Waiver,
compliance with the “fixed charge coverage ratio” was
waived for the fiscal quarters ending April 30, 2019, July 31, 2019
and October 31, 2019 and testing of the “fixed charge
coverage ratio” commenced again for the fiscal quarter ending
January 31, 2020. Pursuant to the Waiver, the Company agreed to
maintain “Availability” (as defined in the Loan
Agreement) of at least $10,000,000 for the period from May 31, 2019
through December 31, 2019. At January 31, 2020 the Company was in
compliance with all provisions in the Loan Agreement.
As of
January 31, 2020, the Company had no borrowings outstanding on the
letter of credit sub-facility, no borrowings outstanding under the
revolving credit facility, and $1.2 million outstanding on the term
loan. As of January 31, 2019 the Company had no borrowings
outstanding on the letter of credit sub-facility, no borrowings
outstanding under the revolving credit facility, and $1.3 million
outstanding on the term loan. On April 10, 2020, the Company
prepaid the outstanding balance on the term loan. The Company is
currently negotiating with another prospective lender to provide a
revolving credit facility agreement which would replace the
existing agreement with SunTrust.
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
31, 2018 for the next review period. On March 9, 2019 the facility
was extended to March 31, 2020 and on March 6, 2020 further
extended to March 31, 2021 with no additional changes to the terms.
There were no borrowings outstanding under this facility at Janaury
31, 2020 and January 31, 2019. The amounts due from HSBC of USD
$0.1 million and USD $0.4 million as of January 31, 2020, and
January 31, 2019, respectively, is included in other current assets
on the accompanying consolidated balance sheets.
Below
is a table to summarize the debt amounts above (in
000’s):
|
|
|
Current Maturity of Long-term
|
|
|
|
|
|
|
|
USA
|
$-----
|
$-----
|
$-----
|
$1,161
|
$1,155
|
$158
|
Totals
|
$-----
|
$-----
|
$-----
|
$1,161
|
$1,155
|
$158
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Five-year Debt Payout Schedule
This
schedule reflects the liabilities as of January 31, 2020, and does
not reflect any subsequent event (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,155
|
$1,155
|
$-----
|
$-----
|
$-----
|
$-----
|
$-----
|
Total
|
$1,155
|
$1,155
|
$-----
|
$-----
|
$-----
|
$-----
|
$-----
|
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 was approximately $4.3
million total included in the U.S. bank accounts and approximately
$10.3 million total in foreign bank accounts as of January 31,
2020, of which $13.9 million was uninsured.
Major Customer
No
customer accounted for more than 10% of net sales during FY20 and
FY19.
Major Supplier
No
vendor accounted for more than 10% of purchases during FY20 and
FY19.
7. STOCKHOLDERS’ EQUITY
The 2017 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 Committee
shall be deemed to include the full Board. The 2017 Plan provides
for the grant of equity-based compensation in the form of stock
options, restricted stock, restricted stock units, performance
shares, performance units, or stock appreciation rights
(“SARS”).
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 tables summarize the unvested
shares granted on June 7, 2018 and December 4, 2019 which have been
made under the 2017 Plan.
Granted
June 7, 2018
|
Number of shares awarded total
|
|
|
|
|
|
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 (numbers below are rounded to the nearest
100)
|
|
|
|
|
|
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
|
Number of shares
awarded total
|
|
|
|
|
|
|
Employees
|
48,186
|
74,133
|
88,960
|
|
Non-Employee
Directors
|
16,360
|
25,168
|
30,204
|
|
Total
|
64,546
|
99,301
|
119,164
|
|
|
|
|
Value at grant date
(numbers below are rounded to the nearest $100)
|
|
|
|
|
|
|
Employees
|
$497,800
|
$765,800
|
$918,960 -
|
|
Non-Employee
Directors
|
169,000
|
260,000
|
312,000
|
|
Total
|
$666,800
|
$1,025,800
|
$1,230,960
|
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company recognized total stock-based compensation costs, which are
reflected in operating expenses:
|
|
|
|
|
2017
Plan:
|
|
|
|
$(443,441)
|
$721,111
|
|
27,577
|
-----
|
|
38,677
|
-----
|
|
$(377,187)
|
$721,111
|
|
|
|
Stock appreciation
rights
|
$(25,559)
|
$22,646
|
Total stock-based
compensation
|
$(402,746)
|
$743,757
|
Total income tax
benefit (expense) recognized for stock-based compensation
arrangements
|
$(85,577)
|
$267,752
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended January 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
grants.
|
|
|
|
Weighted Average
Grant Date Fair Value
|
Outstanding at
January 31, 2019
|
-
|
-
|
-
|
-
|
Awarded
|
109,234
|
9,930
|
119,164
|
$10.33
|
Vested
|
-
|
-
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
-
|
Outstanding at
January 31, 2020
|
109,234
|
9,930
|
119,164
|
$10.33
|
The
actual number of shares of common stock of the Company, if any, to
be earned by the award recipients is determined over a three year
performance measurement period based on measures that include
Earnings Before Interest Taxes Depreciation and Amoritzation
(“EBITDA”) with respect to the June 7, 2018 grant and
revenue growth, EBITDA margin, and cash flow for the December 4,
2019 grant. 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 grants under the 2017 Plan at Target,
and these expenses were approximately $153,000 for the year ended
January 31, 2020 As of January 31, 2020, unrecognized stock-based
compensation expense totaled $912,000 pursuant to the 2017 Plan
based on outstanding awards under the Plan. This expense is
expected to be recognized over approximately two
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
September 2017 and June 2018 grants
Shares issued under
2017
|
Outstanding
Unvested Grants at Maximum at Beginning of FY20
|
|
Becoming Vested
during
FY20
|
|
Outstanding
Unvested Grants at Maximum at End of
January
31,
FY20
|
Restricted stock
grants – employees
|
84,126
|
-----
|
-----
|
48,456
|
35,670
|
Restricted stock
grants – non-employee directors
|
28,829
|
-----
|
-----
|
14,493
|
14,336
|
Retainer in stock
– non-employee directors
|
25,044
|
7,292
|
7,568
|
----
|
24,768
|
Total
restricted stock
|
137,999
|
7,292
|
7,568
|
62,949
|
74,774
|
Weighted average
grant date fair value
|
13.77
|
10.44
|
14.72
|
13.82
|
11.53
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During
the year ended January 31, 2020, the Company revised its estimate
of grants that will be earned for certain performance periods
ending on or before January 31, 2021. Based on actual
performance achieved by the Company to date, grants issued on
September 12, 2017 expired on January 31, 2020. Also, based on
actual performance to date, it was deemed improbable that the
Company would meet even the performance level required for the June
7, 2018 grants to vest. As a result, stock-based compensation
expense was adjusted to account for this change in estimate.
The total amount of previously recognized stock-based compensation
attributable to those grants that has been reversed is
approximately $835,000.
Stock Options
During
the year ended January 31, 2020 a stock option was granted pursuant
to the Company’s 2017 Equity Incentive Plan in the amount of
24,900 shares at an exercise price of $11.17 per share. Such shares
will vest at 8,300 shares 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 year ended January 31, 2020.
|
|
Weighted Average
Exercise Price per Share
|
Weighted Average
Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
Outstanding at
January 31, 2019
|
-----
|
$-----
|
-----
|
$-----
|
Granted
|
24,900
|
$11.17
|
-----
|
-----
|
Outstanding at
January 31, 2020
|
24,900
|
$11.17
|
9.53
|
-----
|
Exercisable at
January 31, 2020
|
-----
|
$-----
|
-----
|
$-----
|
The
Company recognized approximately $26,000 of stock-based
compensation expense during the year ended January 31, 2020
associated with the grant of the stock option. As of January 31,
2020 there is approximately $149,000 of unrecognized stock-based
compensation expense.
The
Company estimates the fair value of each stock option award on the
grant date using the Black-Scholes option-pricing model. The
assumptions used to calculate the fair value of the options granted
during the year ended January 31, 2020 are as follows:
|
|
|
|
Expected
volatility
|
53%
|
Expected life in
years
|
10
|
Expected dividend
yield
|
0.00%
|
Risk-free interest
rate
|
1.65%
|
Other Compensation Plans/Programs
Pursuant to the
Company’s restricted 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 January
31, 2020, unrecognized stock-based compensation expense related to
these restricted stock awards totaled $30,087 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 January
31, 2020, the Company issued 7,568 shares and granted awards for up
to an aggregate of 24,768 shares under the 2017 Plan.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended
January 31, 2020, the Company repurchased 47,153 shares of stock,
for approximately $506,000, inclusive of commissons. The Company
has repurchased 152,801 shares of stock under this program as of
January 31, 2020 for $1,671,188, inclusive, of
commissions.
Warrant
In
October 2014, the Company issued a five-year warrant that is
immediately exercisable to purchase up to 55,500 shares of the
Company’s common stock at an exercise price of $11.00 per
share. During FY20, such warrant expired.
Shelf Registration
On
March 24, 2017, the Company filed a shelf registration statement on
Form S-3 (File No. 333-216943) which was declared effective by the
SEC on April 11, 2017 (the “Shelf Registration
Statement”). The shelf registration statement permits the
Company to sell, from time to time, up to an aggregate of $30.0
million of various securities, including shares of common stock,
shares of preferred stock, debt securities, warrants to purchase
common stock, preferred stock, debt securities, and/or units,
rights to purchase common stock, preferred stock, debt securities,
warrants and/or units, units of two or more of the foregoing, or
any combination of such securities, not to exceed, should the value
of our common stock held by non-affiliates be less than $75.0
million, one-third of the Company's public float in any 12-month
period.
8. INCOME TAXES
The
provision for income taxes is based on the following pretax income
(loss):
|
|
Domestic
and Foreign Pretax Income (Loss)
|
|
|
Domestic
|
$466
|
$(1,116)
|
Foreign
|
5,287
|
4,597
|
Total
|
$5,753
|
$3,481
|
|
|
|
|
|
Income
Tax Expense
|
|
|
Current:
|
|
|
Federal
|
$16
|
$45
|
State
and other taxes
|
38
|
20
|
Foreign
|
1,090
|
1,667
|
Total Current
Tax Expense
|
$1,144
|
$1,732
|
Deferred:
|
|
|
Domestic
|
$1,328
|
$290
|
Total
Income Taxes
|
$2,472
|
$2,022
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a reconciliation of the effective income tax rate to
the Federal statutory rate:
|
|
|
|
|
Statutory
rate
|
21.00%
|
21.00%
|
State Income Taxes,
Net of Federal Tax Benefit
|
4.47
|
6.89
|
Adjustment to
Deferred
|
0.70
|
(0.92)
|
Argentina Flow
Through Loss
|
(0.24)
|
1.37
|
GILTI
|
17.96
|
16.85
|
Permanent
Differences
|
2.47
|
0.63
|
Valuation
Allowance-Deferred Tax Asset
|
-----
|
(24.46)
|
Foreign Tax
Credit
|
-----
|
24.46
|
Foreign Rate
Differential
|
(3.51)
|
20.16
|
Rate
Change
|
0.20
|
(5.63)
|
Other
|
(0.08)
|
(2.25)
|
|
42.97%
|
58.09%
|
The tax
effects of temporary cumulative differences which give rise to
deferred tax assets at January 31, 2020 and 2019 are summarized as
follows:
|
|
|
|
|
Deferred tax
assets:
|
|
|
Inventories
|
$672
|
$849
|
US tax loss
carryforwards, including work opportunity credit*
|
3,524
|
4,290
|
Accounts receivable
and accrued rebates
|
247
|
233
|
Accrued
compensation and other
|
179
|
314
|
India reserves - US
deduction
|
45
|
46
|
Equity based
compensation
|
171
|
299
|
Foreign tax credit
carry-forward
|
1,348
|
1,348
|
State and local
carry-forwards
|
990
|
1,116
|
Argentina timing
difference
|
43
|
32
|
Depreciation and
other
|
55
|
59
|
Amortization
|
(206)
|
(193)
|
Brazil
write-down
|
220
|
222
|
Right-of-use
asset
|
549
|
-----
|
Operating Lease
Liability
|
(550)
|
-----
|
Deferred tax
asset
|
7,287
|
8,615
|
|
(1,348)
|
(1,348)
|
Net deferred tax
asset
|
$5,939
|
$7,267
|
*The federal net operating loss (“NOL”) generated from
the 01/31/2015 tax year that is left after FY20 of approximately
$16.0 million, will expire after 1/31/2035 and the NOL generated
after 01/31/2018 will be carried forward indefinitely. The credits
will begin to expire after 1/31/2020 (10 years from the 1st
carryover year generated date of 1/31/2010) and will fully expire
after 1/31/2028. At 1/31/2020, the Company had NOLs totaling
approximately $15.98 million.
The state NOLs with carry forward limitations will begin to expire
after 1/31/2025 and will continue to expire at various periods up
until 1/31/2039 when they will be fully expired. The states have a
larger spread because some only carryforward for 10 years and some
allow 20 years. The Georgia NOLs generated after 01/31/2018 can be
carried forward indefinitely. At 1/31/2020, the Company had state
NOLs totaling approximately $28.69 million.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Reform
On
December 22, 2017, 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
reassessment of the GILTI tax as it is currently written resulted
in a charge to tax expense of $1.0 million and $0.6 million in FY20
and FY19, respectively. The Company intends to account for the
GILTI tax in the period in which it is incurred. Though this
non-cash expense (due to available NOL’s) had 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.
The
BEAT provisions in the Tax Act pertain to companies with average
annual gross receipts of $500 million for the prior 3-year period
and eliminate the deduction of certain base-erosion payments made
to related foreign corporations and impose a minimum tax if greater
than regular tax. Based on current guidelines the Company
does not expect the BEAT provision to have an impact on
U.S. tax expense.
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. As stated above, GILTI is
recognized in the period it is incurred and is not considered with
regard to deferred income tax on unremitted E&P. All
international subsidiaries are impacted by GILTI
calculation.
Income Tax Audits
The
Company is subject to US federal income tax, as well as income tax
in multiple US state and local jurisdictions and a number of
foreign jurisdictions. Returns for the years since FY17 are still
open based on statutes of limitation only.
Chinese
tax authorities have performed limited reviews on all Chinese
subsidiaries as of tax years 2008 through 2018 with no significant
issues noted and we believe our tax positions are reasonably stated
as of January 31, 2020. Weifang Meiyang Products Co., Ltd.
(“Meiyang”), one of our Chinese operations, was changed
to a trading company from a manufacturing company in Q1 FY16 and
all direct workers and equipment were transferred from Meiyang to
Weifang Lakeland Safety Products Co., Ltd., (“WF”),
another entity of our Chinese operation thereby reducing our tax
exposure. The 2019 tax review will be performed before May 30, 2020
in China.
Lakeland Protective
Wear, Inc., our Canadian subsidiary, is subject to Canadian federal
income tax, as well as income tax in the Province of Ontario. The
normal reassessment period is four years from the date of
reassessment. The January 31, 2017 tax return was assessed on
September 13, 2017, so it and subsequent returns are within the
normal reassessment period and open to examination by tax
authorities.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
connection with the exit from Brazil (Note 12), the Company claimed
a worthless stock deduction which generated a tax benefit of
approximately USD $9.5 million, net of a USD $2.2 million valuation
allowance in FY16. While the Company and its tax advisors believe
that this deduction is valid, there can be no assurance that the
IRS will not challenge it and, if challenged, there is no assurance
that the Company will prevail.
As
mentioned above, it’s the Company’s intention is to
reinvest outside the US those earnings needed for working capital
or foreign investment. As a result of the transition tax, $5.0
million of foreign income was repatriated at the end of FY18.
However, the Company has no intention to repatriate earnings with
regards with GILTI. In the fiscal year
ended January 31, 2020, no dividends were declared. It is the
Company’s practice and intention to reinvest the earnings of
our non-US subsidiaries in their operations with the exception of
the dividend plan.
Change in Valuation Allowance
We
record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. The valuation
allowance did not change for the year ended January 31, 2020 and
decreased $0.9 for the year ended January 31, 2019.
9.
NET INCOME PER SHARE
The
following table sets forth the computation of basic and diluted net
income per share for the years ended January 31, 2020 and 2019 as
follows:
|
Years Ended
January 31,
(000’s
except share information)
|
|
|
|
Numerator
|
|
|
Net
income
|
$3,281
|
$1,459
|
Denominator
|
|
|
Denominator for
basic net income per share (weighted-average shares which reflect
509,242 shares in the treasury at January 31, 2020 and 462,089
shares in the treasury at January 31, 2019)
|
8,005,927
|
8,111,458
|
|
|
|
Effect of dilutive
securities from restricted stock plan and from dilutive effect of
stock options
|
31,092
|
58,943
|
|
|
|
Denominator for
diluted net income per share (adjusted weighted average
shares)
|
8,037,019
|
8,170,401
|
|
|
|
Basic net income
per share
|
$0.41
|
$0.18
|
Diluted net income
per share
|
$0.41
|
$0.18
|
10.
BENEFIT PLANS
Defined Contribution Plan
Pursuant to the
terms of the Company’s 401(k) plan, substantially all US
employees over 21 years of age with a minimum period of service are
eligible to participate. The 401(k) plan is administered by the
Company and provides for voluntary employee contributions ranging
from 1% to 100% of the employee’s compensation. Beginning in
January 2016 the Company changed to a Safe Harbor tiered matching
plan equal to 100% of the first 1% of eligible participant’s
compensation contributed to the Plan and 50% of the next 5% of
eligible participant’s compensation contributed to the Plan
(maximum Company match 3.5% of salary) and totaled approximately
$227,000 and $209,100 in the years ended January 31, 2020 and 2019,
respectively.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DERIVATIVE INSTRUMENTS AND FOREIGN CURRENCY
EXPOSURE
The
Company is exposed to foreign currency risk. Management has
commenced a derivative instrument program to partially offset this
risk by purchasing forward contracts to sell the Canadian Dollar
and the Euro other than the cash flow hedge discussed below. Such
contracts are largely timed to expire with the last day of the
fiscal quarter, with a new contract purchased on the first day of
the following quarter, to match the operating cycle of the Company.
We designated the forward contracts as derivatives but not as
hedging instruments, with loss and gain recognized in current
earnings.
The
Company accounts for its foreign exchange derivative instruments by
recognizing all derivatives as either assets or liabilities at fair
value, which may result in additional volatility in current period
earnings or other comprehensive income, depending whether the
instrument was designated as a cash flow hedge, as a result of
recording recognized and unrecognized gains and losses from changes
in the fair value of derivative instruments.
We have
one type of derivatives to manage the risk of foreign currency
fluctuations.
We
entered into forward contracts with financial institutions to
manage our currency exposure related to net assets and liabilities
denominated in foreign currencies. Those forward contract
derivatives, not designated as hedging instruments, were generally
settled quarterly. Gain and loss on those forward contracts are
included in current earnings. There were no outstanding forward
contracts at January 31, 2020 or 2019.
12.
COMMITMENTS AND CONTINGENCIES
Certain
conditions may exist as of the date the consolidated financial
statements are issued, which may result in a loss to the Company,
but which will only be resolved when one or more future events
occur or fail to occur. The Company’s management and its
legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in
such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims, as
well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the
assessment of a contingency indicates that it is probable that a
material loss has been or is probable of being incurred and the
amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated
financial statements. If the assessment indicates that a
potentially material loss contingency is not probable, but is
reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, together with an estimate
of the range of possible loss if determinable and material, would
be disclosed.
Loss
contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee
would be disclosed.
The Company’s Exit from Brazil
On
March 9, 2015, Lakeland Brazil, S.A. changed its legal form to a
Limitada and changed its name to Lake Brasil Industria E Comercio
de Roupas E Equipamentos de Protecao Individual LTDA
(“Lakeland Brazil”).
Transfer of Shares Agreement
On July
31, 2015 (the “Closing Date”), Lakeland and Lakeland
Brazil, completed a conditional closing of a Shares Transfer
Agreement (the “Shares Transfer Agreement”) with Zap
Comércio de Brindes Corporativos Ltda
(“Transferee”), a company owned by an existing Lakeland
Brazil manager, entered into on June 19, 2015. Pursuant to the
Shares Transfer Agreement, the Transferee has acquired all of the
shares of Lakeland Brazil owned by the Company. Pursuant to the
Shares Transfer Agreement, Transferee paid R$1.00 to the Company
and assumed all liabilities and obligations of Lakeland Brazil,
whether arising prior to, on or after the Closing Date. In order to
help enable Lakeland Brazil to have sufficient funds to continue to
operate for a period of at least two years following the Closing
Date, the Company provided funding to Lakeland Brazil in the
aggregate amount of USD $1,130,000 in cash, in the form of a
capital raise, on or prior to the Closing Date, and agreed to
provide an additional R$582,000 (approximately USD $188,000) (the
“Additional Amount”), in the form of a capital raise,
to be utilized by Lakeland Brazil to pay off certain specified
liabilities and other potential contingent liabilities. Pursuant to
the Shares Transfer Agreement, the Company paid R$992,000
(approximately USD $320,000) in cash, on July 1, 2015 and issued a
non-interest bearing promissory note for the payment to be due for
the Additional Amount (R$582,000) (approximately USD $188,000) on
the Closing Date which was paid to Lakeland Brazil in two (2)
installments of (i) R$288,300 (approximately USD $82,000) which was
paid on August 1, 2015, and (ii) R$294,500 (approximately USD
$84,000) on September 1, 2015. The closing of this agreement was
subject to Brazilian government approval of the shares transfer,
which was received in October 2015 (The “Final Closing
Date”).
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although the
Company formally completed the terms of the “Shares Transfer
Agreement”, pursuant to which our entire equity interest in
our former Brazilian subsidiary (“Lakeland Brazil”) was
transferred,during the fiscal year ended January 31, 2016, we may
continue to be exposed to certain liabilities arising in connection
with the operations of Lakeland Brazil, which was shut down in late
March 2019. The Company understands that under the laws of Brazil,
a parent company may be held liable for the liabilities of a former
Brazilian subsidiary in the event of fraud, misconduct, or under
various theories. In this respect, as regards labor claims, a
parent company could conceivably be held liable for the liabilities
of a former Brazilian subsidiary. 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 in Brazil.
Loan Agreement with Transferee of Brazil Operations
The
Company had entered into a loan agreement (the “Loan
Agreement”) on December 11, 2015 with Lakeland Brazil for the
amount of R$8,584,012 (approximately USD $2.29 million) for the
purpose of providing funds necessary for Lakeland Brazil to settle
its largest outstanding VAT claim with the State of Bahia. The
Company determined that a reserve against the collection of this
loan in full was, prudent and recorded this charge in the fiscal
year ended January 31, 2016. The Company determined during the
fiscal year ended January 31, 2019 this note would not be repaid
and therefore wrote it off in its entirety.
VAT Tax Issues in Brazil
Value
Added Tax (“VAT”) in Brazil is charged at the state
level. We commenced operations in Brazil in May 2008 through the
acquisition of Lakeland Brazil. An audit performed on the VAT for
the 2007-2009 period was completed by the State of Bahia (state of
domicile for the Lakeland operations in
Brazil). In October 2010, the Company received four
claims for 2007-2009 from the State of Bahia, the largest of which
was for taxes of R$6.2 million (USD $2.3 million) and interest,
penalties and fees of R$8.3 million (USD $3.1 million), for a total
of R$14.6 million (USD $5.4 million). This large VAT claim
was settled in the fiscal year ended January 31, 2016 using funds
from the loan described above. Of other claims, our attorney
informed us that three claims totaling R$1.3 million (USD $0.5
million) excluding interest, penalties and fees of R$2.7 million
(USD $0.9 million) were likely to be successfully defended based on
state auditor misunderstanding.
Labor Claims 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. While the vast
majority of these labor suits have been resolved, there are 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 four (4) 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 court in 2014
claiming Lakeland owed USD $300,000. The Labor court ruled
that the claimant’s case was outside of the scope of the
Labor court and the case was dismissed. The claimant is appealing
within the Labor court system. A third case filed by a former
Lakeland Brazil manager in 2014 was ruled upon in civil court and
awarded the claimant USD $100,000. Both the claimant and Lakeland
have appealed this decision. In the last case a former
officer of our former Brazilian subsidiary filed a claim seeking
approximately USD $700,000 that he alleges is due to him against an
unpaid promissory note. Lakeland has not been served with process
and no decision on the merits has been issued in this case yet.
Management firmly believes these claims to be without any merit and
does not anticipate a negative outcome resulting in significant
expense to us.
Lakeland Brazil may
face new labor lawsuits in the short term as a result of the
shutdown of its operations in March 2019. The Company has no
obligation under the Shares Transfer Agreement 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.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
In
FY19, the Company recorded an accrual of $1.2 million for
professional fees and litigaton reseres associated with labor
claims in Brazil. In FY20 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 January 31,
2020 and 2019 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 January 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.
Employment contracts
The
Company has employment contracts expiring through fiscal year
ending January 31, 2022, with two principal officers. Pursuant to
such contracts, the Company is committed to aggregate annual base
remuneration of $565,000 and $335,000 for FY21 and FY22,
respectively.
Officer severance payment
The
Company entered into a separation agreement with a former officer
effective July 22, 2019 and recorded a severance charge of $260,000
in connection with this arranagement. The severance amount will be
paid through June 5, 2020 pursuant to the terms of the separation
agreement.
Leases
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.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases
recorded on the consolidated balance sheet consist of the following
(in 000's):
|
Classification
|
|
Assets
|
|
|
Operating lease
assets
|
Operating lease
right-of-use assets
|
$2,244
|
|
|
Liabilities
|
|
|
Current
|
|
|
Operating
|
Current portion of
operating lease liabilities
|
$835
|
Noncurrent
|
|
|
Operating
|
Long-term portion
of operating lease liabilities
|
1,414
|
Total Lease
Obligations
|
|
$2,249
|
Lease cost
The
components of lease expense are included on the consolidated
statement of operations as follows (in 000’s):
|
Classification
|
Year
Ended
January
31,
2020
|
Operating lease
cost
|
Cost of goods
sold
|
$401
|
|
Operating
expenses
|
$691
|
Short-term lease
cost
|
|
$867
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturity of Lease Liabilities
Maturity of lease
liabilities as of January 31, 2020 was as follows (in
$000’s):
Year ending
January 31,
|
|
2021
|
$938
|
2022
|
775
|
2023
|
653
|
2024
|
23
|
2025
|
5
|
Thereafter
|
75
|
Total lease
payments
|
2,469
|
Less:
Interest
|
220
|
Present value of
lease liability
|
$2,249
|
(a)
Operating leases
payments include $263,000 related to options to extend lease terms
that are reasonably certain of being exercised and new leases
entered into during the year.
Weighted-average lease terms and discount rates are as
follows:
|
|
Weighted-average
remaining lease term (years)
|
|
Operating
leases
|
3.14
|
|
|
Weighted-average
discount rate
|
|
Operating
leases
|
5.87%
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental cash
flow information related to leases for the year ended January 31,
2020 were as follows (in 000’s):
Cash
paid for amounts included in the measurement of lease
liabilities;
|
Year
Ended
January
31,
2020
|
Operating cash
flows from operating leases
|
$1,035
|
Leased assets
obtained in exchange for new operating lease
liabilities
|
$3,180
|
13.
SEGMENT REPORTING
Domestic and
international sales from continuing operations are as follows in
millions of dollars:
|
|
|
|
|
Domestic
|
$55.89
|
51.84%
|
$49.88
|
50.38%
|
International
|
51.92
|
48.16%
|
49.13
|
49.62%
|
Total
|
$107.81
|
100.00%
|
$99.01
|
100.00%
|
We
manage our operations by evaluating each of our geographic
locations. Our US operations include a facility in Alabama
(primarily the distribution to customers of the bulk of our
products and the light manufacturing of our chemical, wovens,
reflective, and fire products). The Company also maintains one
manufacturing company in China (primarily disposable and chemical
suit production), a manufacturing facility in Mexico (primarily
disposable, reflective, fire and chemical suit production), a
manufacturing facility in Vietnam (primarily disposable production)
and a small manufacturing facility in India. Our China facilities
produce the majority of the Company’s products and China
generates a significant portion of the Company’s
international revenues. We evaluate the performance of these
entities based on operating profit, which is defined as income
before income taxes, interest expense and other income and
expenses. We have sales forces in the USA, Canada, Mexico, Europe,
Latin America, India, Russia, Kazakhstan and China, which sell and
distribute products shipped from the United States, Mexico, India
or China. The table below represents information about reported
segments for the years noted therein:
|
|
|
|
|
|
|
USA Operations
(including Coprorate)
|
$61.15
|
$55.47
|
Other
foreign
|
6.59
|
5.52
|
Europe
(UK)
|
9.35
|
9.42
|
Mexico
|
4.03
|
4.90
|
Asia
|
58.12
|
56.36
|
Canada
|
9.68
|
8.58
|
Latin
America
|
8.58
|
7.05
|
Less intersegment
sales
|
(49.69)
|
(48.29)
|
Consolidated
sales
|
$107.81
|
$99.01
|
External
Sales
|
|
|
USA Operations
(including Coprorate)
|
$55.89
|
$49.88
|
Other
foreign
|
3.66
|
3.02
|
Europe
(UK)
|
9.35
|
9.42
|
Mexico
|
2.82
|
3.51
|
Asia
|
18.15
|
18.00
|
Canada
|
9.64
|
8.56
|
Latin
America
|
8.30
|
6.62
|
Consolidated
external sales
|
$107.81
|
$99.01
|
Intersegment
Sales
|
|
|
USA Operations
(including Coprorate)
|
$5.25
|
$5.59
|
Other
foreign
|
2.95
|
2.52
|
Mexico
|
1.21
|
1.38
|
Asia
|
39.96
|
38.35
|
Canada
|
0.03
|
0.02
|
Latin
America
|
0.29
|
0.43
|
Consolidated
intersegment sales
|
$49.69
|
$48.29
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Operating Profit
(Loss):
|
|
|
USA Operations
(including Coprorate)
|
$0.44
|
$(1.20)
|
Other
foreign
|
0.46
|
0.26
|
Europe
(UK)
|
-----
|
0.20
|
Mexico
|
(0.84)
|
0.07
|
Asia
|
4.35
|
2.63
|
Canada
|
0.98
|
1.01
|
Latin
America
|
0.36
|
0.70
|
Less intersegment
profit
|
0.13
|
(0.10)
|
Consolidated
operating profit (loss)
|
$5.88
|
$3.57
|
Depreciation and
Amortization Expense:
|
|
|
USA
Operations
|
$0.87
|
$0.44
|
Other
foreign
|
0.03
|
0.05
|
Europe
(UK)
|
-----
|
0.01
|
Mexico
|
0.15
|
0.13
|
Asia
|
0.55
|
0.27
|
Canada
|
0.10
|
0.06
|
Latin
America
|
0.04
|
0.04
|
Less
intersegment
|
(0.09)
|
(0.03)
|
Consolidated
depreciation and amortization expense
|
$1.65
|
$0.97
|
Interest
Expense:
|
|
|
USA Operations
(including Coprorate)
|
$0.06
|
$0.08
|
Europe
(UK)
|
0.01
|
0.01
|
Latin
America
|
0.05
|
0.04
|
Consolidated
interest expense
|
$0.12
|
$0.13
|
Income Tax Expense
(Benefit):
|
|
|
USA Operations
(including Corporate)
|
$1.38
|
$0.35
|
Europe
(UK)
|
-----
|
0.03
|
Mexico
|
(0.12)
|
0.12
|
Asia
|
0.94
|
1.04
|
Canada
|
0.35
|
0.23
|
Latin
America
|
(0.08)
|
0.26
|
Less
intersegment
|
0.01
|
(0.01)
|
Consolidated income
tax expense (benefit)
|
$2.48
|
$2.02
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Total Assets:
*
|
|
|
USA
Operations
|
$88.08
|
$92.33
|
Other
foreign
|
1.69
|
1.54
|
Europe
(UK)
|
4.52
|
4.37
|
Mexico
|
5.00
|
5.00
|
Asia
|
44.22
|
39.52
|
Canada
|
6.09
|
7.47
|
Latin
America
|
5.77
|
7.42
|
Less
intersegment
|
(55.96)
|
(62.93)
|
Consolidated
assets
|
$99.41
|
$94.72
|
Total Assets Less
Intersegment:*
|
|
|
USA
Operations
|
$49.94
|
$49.50
|
Other
foreign
|
3.41
|
2.85
|
Europe
(UK)
|
4.52
|
4.36
|
Mexico
|
5.16
|
5.13
|
Asia
|
24.65
|
20.97
|
Canada
|
6.07
|
6.64
|
|
5.66
|
5.27
|
Consolidated
assets
|
$99.41
|
$94.72
|
Property and
Equipment:
|
|
|
USA
Operations
|
$3.32
|
$3.87
|
Other
foreign
|
0.15
|
0.19
|
Europe
(UK)
|
0.01
|
0.01
|
Mexico
|
2.17
|
2.14
|
Asia
|
3.19
|
3.17
|
Canada
|
1.15
|
1.26
|
Latin
America
|
0.04
|
0.07
|
|
0.08
|
0.07
|
Consolidated
long-lived assets
|
$10.11
|
$10.78
|
Capital
Expenditures:
|
|
|
USA Operations
(including Coprorate)
|
$0.25
|
$1.08
|
Other
foreign
|
0.01
|
0.07
|
Europe
(UK)
|
0.01
|
-----
|
Mexico
|
0.17
|
0.28
|
Asia
|
0.58
|
1.64
|
Canada
|
-----
|
0.03
|
|
0.01
|
-----
|
Consolidated
capital expenditure
|
$1.03
|
$3.10
|
Goodwill:
|
|
|
|
$0.87
|
$0.87
|
Consolidated
goodwill
|
$0.87
|
$0.87
|
*
Negative assets reflect intersegment amounts eliminated in
consolidaiton
|
14.
SUBSEQUENT EVENT
In
December 2019, a novel strain of coronavirus (COVID-10) surfaced.
The spread of COVID-10 around the world in the first quarter of
FY21 has caused significant volatility in U.S and international
markets. There is significant uncertainty around the breadth and
duration of business disruptions related to COVID-10 as well as its
impact on the U.S and international economies and,as such, the
Company is unable to determine if it will have a material impact to
its operations.