Full Press Release Details
Lakeland Industries, Inc. Reports Fiscal
Settlement Reached in Brazilian Arbitration
RONKONKOMA, NY - Septmeber 13, 2012
- Lakeland Industries, Inc. (NASDAQ: LAKE), a leading global manufacturer of industrial protective clothing for industry,
municipalities, healthcare and to first responders on the federal, state and local levels, today announced financial results for
its second quarter and first half of fiscal year 2013 ended July 31, 2012. For all periods, the prior year financial results have
been restated to reflect the Company's India glove manufacturing subsidiary as a discontinued operation. In this press release,
references to "FY" refer to the Company's fiscal year ended January 31; for example, FY13 refers to the fiscal
year ending January 31, 2013.
Financial Results Highlights and Recent
Company Developments
Settlement Agreement in Brazilian
Lakeland announced today that it has entered
into a settlement agreement (the "Settlement Agreement") along with its wholly-owned subsidiary, Lakeland Brasil S.A.
("Lakeland Brasil" and together with Lakeland, the "Company"), and two former officers (the "former
officers") of Lakeland Brasil which fully and finally resolves all alleged outstanding claims against the Company arising
from the arbitration proceeding in Brazil involving the Company and the former officers. As previously reported by the Company,
an arbitral award was issued in favor of the former officers in connection with the arbitration proceeding which arose out of the
acquisition by the Company in 2008 of Qualytextil, S.A., a company of which the former officers were owners.
On September 11, 2012, the Company and
the former officers entered into a settlement agreement (the "Settlement Agreement") which fully and finally resolves
all alleged outstanding claims against the Company arising from the arbitration proceeding. Pursuant to the Settlement Agreement,
the Company agreed to pay to the former officers an aggregate of approximately US$8.5 million (the "Settlement Amount")
over a period of six (6) years. The Settlement Amount is payable in combined Brazilian Reals and United States Dollars as follows:
(i) R$3 million (approximately US$1.5 million) was paid on the effective date of the Settlement Agreement, of which amount (A)
R$2.294 million (approximately US$1.15 million) in cash was released from the escrow account established in connection with the
Qualytextil, S.A. acquisition, and (B) R$706,000 (approximately US$350,000) was paid directly by the Company; (ii) R$2 million
(approximately US$1.0 million) is payable on or before December 31, 2012; and (iii) the balance of $6.0 million of the Settlement
Amount will be made in United States Dollars consisting of 24 consecutive quarterly installments of US$250,000 beginning on March
31, 2013. In the event the Company fails to pay the remainder of the Settlement Amount in accordance with terms of the Settlement
Agreement, the former officers will be entitled to seek payment by the Company of R$25,148,252.47 (approximately US$12,575,000),
less prior payments, which represents the original arbitral award inclusive of all taxes, expenses, interest and applicable adjustments;
this amount would be further adjusted for inflation, interest and penalties.
In addition, pursuant to the Settlement
Agreement, as additional security for payment of the Settlement Amount, Lakeland Brasil agreed to grant the former officers a second
mortgage interest on certain of its property in Brazil, which mortgage is expressly behind the lien securing the payment of tax
debts to a state within Brazil related to certain notices of tax assessment on such property. Lakeland also agreed to become a
co-obligor, in lieu of a guarantor, for payment of the Settlement Amount.
Previously, the Company recorded a current
liability of US$10,000,000 in respect of the arbitration proceeding. The Company has recorded a revised settlement liability at
net present value of $7.0 million, by applying a risk-free interest rate of 1.58% to discount the non-interest bearing payment
schedule. Together with estimated total fees for the settlement of $856,000, the total cost for the settlement is now estimated
at $7.9 million and a $2.1 million reduction in the $10 million charge taken at the first quarter of FY13 has been recorded.
The Company continues to strongly believe
that the Brazilian arbitration decision is inconsistent with the underlying facts. However, the Company entered into the Settlement
Agreement to eliminate the uncertainty, burden, risk, expense and distraction of further arbitration or litigation.
The Company further believes that its available
resources, together with additional outside funding through debt or equity financings or asset sales, will enable it to make timely
payment of the Settlement Amount and continue its operations on a viable basis. There can, however, be no assurance that such outside
funding will ultimately be obtained. The Company is continuing to work with Raymond James & Associates,
Inc. in its evaluation of a broad range of financial and strategic alternatives for the Company.
Due to the aforementioned ongoing developments,
the Company will not be conducting a conference call for the investment community to discuss second quarter fiscal year 2013 financial
Fiscal Year 2013 Financial Results
Net Sales. Net sales from continuing
operations decreased $2.3 million, or 9%, to $23.5 million for the three months ended July 31, 2012, from $25.8 million for the
three months ended July 31, 2011. The net decrease was due to a $4.5 million decrease in domestic sales. This reduction was partially
offset by a $1.8 million increase in foreign sales. US domestic sales of disposables decreased by $3.9 million, chemical suit sales
decreased by $0.2 million, wovens decreased by $0.1 million and reflective sales decreased by $0.5 million. The decrease in domestic
sales was mainly due to the loss of DuPont product sales and, to a lesser extent, a shortage of certain products that management
believes has been resolved (but may have continuing impact resulting from lost customers), and short-term operating inefficiencies
resulting from a relocation of facilities from St. Joseph, MO to Decatur, AL and Mexico which resulted in additional lost sales.
The sales team continues to make progress in converting customers from DuPont's Tyvek to Lakeland branded products. While
the Company's sales of Lakeland branded products show strong gains over the Lakeland branded product sales from the same
period in the prior year, it will take time to rebuild the lost sales volume, for which there can be no assurance.
Domestic sales in China and to the Asia
Pacific Rim remain strong with an increase of approximately $1.9 million or 23% for the second quarter of fiscal 2013 as compared
with the same period in the prior year. UK sales increased by $1.0 million, or 69%. Chile and Argentina sales increased by 37%,
and sales in Brazil increased by $0.7 million or 16.7%. The increase in foreign sales is primarily due to increases in sales of
high end chemical suits, FR (flame retardant) garments, and completion of some large contracts.
Gross Profit. Gross profit from
continuing operations decreased $0.7 million, or 8.6%, to $7.1 million for the three months ended July 31, 2012, from $7.8 million
for the three months ended July 31, 2011. Gross profit as a percentage of net sales was flat at 30% for the three months ended
July 31, 2012, from 30.2% for the three months ended July 31, 2011. Major factors driving the changes in gross margins were:
Operating Expenses. Operating expenses
from continuing operations were flat at $7 million for the three months ended July 31, 2012 and July 31, 2011. As a percentage
of sales, operating expenses increased to 29.7% for the three months ended July 31, 2012 from 27.0% for the three months ended
Operating Profit. Operating profit
from continuing operations decreased 81.6% to $0.2 million for the three months ended July 31, 2012, from $0.8 million for the
three months ended July 31, 2011. Operating margins were 0.6% for the three months ended July 31, 2012, compared to 3.2% for the
three months ended July 31, 2011.
Arbitration Judgment in Brazil. As
a result of the settlement of the Brazilian arbitration matter in September 2012 a positive adjustment of $2.1 million was recorded
in the second quarter of FY13.
Interest Expenses. Interest expenses
from continuing operations increased $0.1 million to $0.3 million for the three months ended July 31, 2012, from $0.1 million for
the three months ended July 31, 2011, due to higher borrowing levels outstanding. Higher borrowing levels generally relate to the
purchase of raw materials and carrying of inventory throughout the Company's expanded global footprint. In Brazil, the raw
material and product inventory being carried is unusually high due to the ongoing fulfillment of large bid orders to be delivered
in subsequent quarters of fiscal 2013.
Income Tax Expense. Income tax expenses
consist of federal, state and foreign income taxes. Income tax expenses decreased $0.1 million to $0.0 million for the three months
ended July 31, 2012, from $0.1 million for the three months ended July 31, 2011. The Company's effective tax rates were 1.7%
for the second quarter of FY13 and 13.4% for the second quarter of FY12. The effective tax rate for both periods varied from the
34% federal statutory rate primarily due to goodwill amortization in Brazil and tax loss benefits in the USA at higher rates than
China profits were taxed, certain losses in China which are carried forward and the arbitration settlement, which did not have
Net Income (Loss). Net income from
continuing operations increased $1.1 million to $1.6 million for the three months ended July 31, 20012, from $0.6 million for the
three months ended July 31, 2011, reflecting the $2.1 million adjustment due to the arbitration settlement in September 2012. Without
this adjustment, net loss would have been $(0.5) million, or $(0.09) per share.