Lakeland Industries Inc (LAKE) 2013 Q1 法說會逐字稿

Good afternoon, and welcome to the Lakeland Industries, Inc. first quarter fiscal-year 2013 conference call. All participants will be in listen-only mode. (Operator Instructions)

Please note, this event is being recorded. After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Before we begin, parties are reminded that statements made during this call contain forward-looking information within the meanings of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical facts, which reflect management's expectations regarding future events and operating performance, and speak only as of today, June 14, 2012.

Forward-looking statements are based on current assumptions and analysis made by the Company in light of its experience and its perceptions of historical trends, current conditions, expected future developments, and other factors it believes are appropriate under circumstances. These statements are subject to a number of assumptions, risks and uncertainties, and factored in the Company's filings with the Securities and Exchange Commission. General economic and business conditions, the business opportunities that may be presented to you and pursued by the Company, changes in law or regulations, and other factors, many of which are beyond the control of the Company.

Listeners 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 forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements.

At this time, I would like to introduce your host for this call, Lakeland Industries' President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Good afternoon to you all, and thank you for joining our fiscal 2013 first quarter financial results conference call. In the first three months of our fiscal-year 2013, we reported yet another quarter of significant improvement in our top-line performance for our international sales operations. This performance is driven by large bid orders received in Brazil, and continued improvement in our other high-growth markets in Latin America and Asia. International revenues from continuing operations as a percentage of consolidated sales increased to 59.2% in the first quarter of fiscal 2013 -- the highest level in the Company's history. Total international sales in the first quarter were a record $14.2 million, an increase of over 30% from $10.9 million in the same period of the prior year, and 34% higher than the fourth quarter of last year.

Our international growth does not come without challenges. One such challenge pertains to one of our most promising foreign businesses in Brazil. We operate in many foreign countries, including Brazil, where we believe our competitors see corruption or bribery as a normal part of doing business. It is important that our shareholders understand that Lakeland Industries is adamantly opposed to bribery. So, upon our entry into Brazil, we took what we felt were the necessary precautions. This, in addition to vigilant compliance with American laws, such as the Foreign Corrupt Practices Act and Sarbanes Oxley, and also with recently passed anti-corruption legislation in the UK.

If you read our SEC filings, you will see that we terminated two senior managers in Brazil two years ago, in large part due to corruption issues. This termination and related compensation matters led to an arbitration. As previously disclosed, the Company received notice of an unfavorable arbitration award in the arbitration proceeding in Brazil. Lakeland was ordered to pay to the former officers damages and other amounts totaling approximately $10 million.

As a result of the ruling, the Company is in default under its loan and security agreement with TD Bank, which allows TD Bank, at its option, to accelerate the loan. While we are in discussions with TD Bank about resolution of this matter, we continue to otherwise operate within the terms of the credit agreement while we work out a solution. However, no assurance can be given that we will be able to work out a satisfactory arrangement with TD Bank.

The Company has engaged Raymond James & Associates, Inc. to assist the Board of Directors in its evaluation of a broad range of financial strategic alternatives for the Company. We strongly believe that the arbitration decision is inconsistent with the underlying facts, and we are attempting to reverse all or part of the arbitral award. We believe that we have available resources including $4.7 million in cash and additional cash flows from operations, together with an additional outside funding through debt or equity financing or asset sales, which will enable us to satisfy the $10 million arbitration award. And enable us to meet our currently anticipated operating capital expenditure and debt service requirements for at least the next 12 months.

In addition, we have been working on supplemental strategies. To this end, we engaged the investment banking group of Raymond James & Associates to assist the Company's Board of Directors in evaluation of strategic alternatives to enhance shareholder value and strengthen our financial position, including a possible sale of all or part of the Company. Within the scope of services, Raymond James will advise on capitalization and financing options, potential restructuring of existing debt, and other transactional alternatives. Lakeland may enter into discussions with potential strategic industry and financial partners relating to an investment in the Company. However, there can be no assurance that any transaction of any kind will be consummated.

We firmly believe that the Company is increasingly being seen as a major global player in the industrial and safety garment industry, despite the investment community valuing our common shares well below book value. As evidence of this, we note that the Ansell Limited 13D filing with the SEC in December, which reported their purchase of 504,896 shares of the common stock of Lakeland, representing 9.66% of our outstanding shares. Ansell is a significant protective apparel industry participant that has a complementary product offering to that of Lakeland.

Since that time, the Company has further improved its financial position, which may be beneficial in light of the potential for the Brazilian arbitration award to be ruled against us. At the end of the first quarter, we had reduced our inventories by $3.4 million, and paid down our bank debt by $1.7 million net since the beginning of the fiscal year. These actions complement other previously announced initiatives, which include improvements to the Company's cost structure, reductions in overhead, and investments in sales and marketing to accelerate our top-line growth, both domestically and abroad.

We continue to make progress with our international diversification and growth strategy, while effectuating a turnaround for our domestic operations. In the US, our dependence on DuPont has been removed, including the elimination of related revenues from their product line. This will cause an imbalance in year-over-year comparisons for our domestic and consolidated revenues. But we are executing internationally, and this is clearly evident.

Total international sales in the first quarter were a record $14.2 million, an increase of over 30% from $10.9 million in the same period of the prior year, and 34% higher than the fourth quarter of last year. We have achieved a modest positive operating income in the first quarter as compared with a $1.4 million operating loss in the fourth quarter of last year. The turnaround in the US, along with continued growth internationally, will put us in a position to accelerate earnings and cash flow based on the leverage in our business model. Due to the timing of certain large shipments in Brazil and related revenue recognition, some of the benefits to our consolidated financial performance that we had anticipated would impact our first-quarter results will go into the second quarter.

In summary, we remain very optimistic for the progress and potential of our international operations. And at the same time, are taking action to maximize our overall profitability and financial strength, with our mission of enhancing shareholder value remaining a priority. That concludes my remarks; I will now pass the call over to our CFO, Gary Pokrassa, to provide a more detailed review of the Company's financial results for the first quarter.

Thank you, Chris. While Chris has provided an overview of some of our first-quarter results and operational developments, I'll provide a more detailed review of our consolidated financial results for the quarter. The financial results to be discussed reflect our business in India as a discontinued operation. Therefore, results from this business have been removed, and will not be included in our results from continuing operations. All prior periods have been restated to reflect the removal of the now-discontinued ops. Now I'll review the financial results for the first quarter of fiscal '13 ending April 30, 2012.

Consolidated net sales from continuing ops decreased $1.6 million, or 6.9%, to $24.0 million for the first quarter of this year compared to $25.6 million for the same period last year. The decrease is mainly due to a $5 million decrease in domestic sales, partially offset by increased sales on an aggregate basis from other foreign operations of $3.4 million. The net decrease in the US resulted primarily as a result of DuPont license termination. Q1 FY '13 international sales of $14.2 million versus $10.9 million in the year earlier, and $10.6 million in Q4 FY '12. Q1 FY '13 domestic sales were $9.8 million versus $14.7 million in the year-earlier period. Our net Q1 '13 sales breakdown is now 59.2% foreign and -- that's not right -- 41.8% domestic. This reflects record level of foreign sales in dollars and percent of consolidated sales.

On a year-over-year basis, increases in foreign sales grew to 28% increase in UK revenue, 86% growth combined Chile and Argentina. Canadian sales moving 19% lower due to the DuPont termination. Brazil sales increasing 28%, in part due to the beginning of shipments relating to large bid orders. And an increase in external sales to China by 45%. Net backlog in Brazil at the end of Q1 '13 was about $4.6 million.

Gross profit from continuing ops decreased $900,000, or 11.5%, to $7.3 million for the quarter ending April '12, from $8.3 million for the quarter ending last year. Gross profit as a percent of net sales decreased to $30.5 million from $32.3 million for the prior year. Major factors driving the changes in gross margins were a reduction in profitability for the wovens division, resulting from inventory write-down, shortages and disruption following the warehouse consolidation. Lower margins in chemical and reflective products due to volumes in large customer contracts, which were partially offset by higher margins in Brazil, and other high margins received for sales in other foreign locations.

Operating expenses from continuing ops increased $600,000, or 9% to $7.3 million, for the quarter ending April '12, from $6.7 million for the quarter ending April '11. As a percent of net sales, operating expenses increased to $30.4 million this year, down from $33.5 million in the fourth quarter of last year, due to higher sales volume in the current quarter and level spending patterns.

However, against Q1 FY '12, expense levels increased due to the following. We had $0.5 million increase in commissions, which were mainly for large bid orders in Brazil. $300,000 increase in sales and marketing staff salaries, and related marketing expense programs as part of the revitalized domestic growth strategies in the US. We had a decrease in medical benefits of about $100,000. That's favorable experience on the self-insured plan. And a decrease of $100,000 in admin payroll for the staff reductions.

Operating profit from continuing ops decreased by $1.6 million to break-even, from $1.6 million last year. But increased compared to a $1.4 million operating loss in Q4. Operating income or loss as a percentage of net sales was break-even for the quarter this year, down from 6.2% for the quarter ending a year ago. The profitability of the more developed foreign operating businesses was offset by operating losses from the US business as it implements its new sales and marketing strategy.

The Company's net loss from continuing ops was $10.1 million for the quarter ending April '12 as compared with net income from continued ops of $1.2 million for the same period last year. The decrease in net income primarily resulted from the $10 million arbitral award in Brazil, and loss in volume in the US resulting from the DuPont termination.

Earnings or loss per share EPS from continuing operations fully diluted first quarter this year was a loss of $1.94 compared to EPS of $0.24 last year. Weighted average shares used was 5,225,000 this year, 5,334,000 for the same period last year. Financial performance in the fourth quarter was negatively impacted by the aforementioned Brazil arbitration award. As a result of this, the Company is in default on its long-term debt. And also is in default of the minimum EBITDA covenant related to this bank debt facility. As such, this debt has been reclassified as a current liability.

At April '12, the Company had a cash balance of $4.7 million. And debt consisting primarily of bank debt of $13.1 million in the US, including term loans. And bank debt of $2.6 million in Brazil, and $1.5 million in Canada. Total bank debt was reduced by $1.7 million from the beginning of fiscal year to April of this year.

This brings us to cash flow and other balance sheet items. The Company generated $333,000 in cash flow from operating activities in Q1 this year. That's excluding the $10 million Brazil arbitration award. As compared with negative cash flow from ops in the prior-year period, that resulted from an increase in inventory of over $4 million last year. At the end of Q1 this year, we reduced inventory by $3.1 million to $42.3 million, down from $45.7 million from the beginning of the fiscal year.

The Company's book value per share is now $11.75. Therefore, our share price is trading at a significant discount to book value. Current ratio is 2.1 to 1 -- significantly lower than about the 7 to 1 we had before the $10 million arbitration award was added to current liabilities. Our working capital, which is reduced by the Brazil arbitration award, is $38.8 million, compared to our enterprise value from about $52 million.

And that concludes my formal remarks. I will turn it back to Chris.

Thank you, Gary. I will now turn over the call over to questions, to the operator for a Q&A session.

(Operator Instructions) Howard Halpern, Taglich Brothers.

What are the likely steps you are going to take to attempt to get that judgment reversed? And what type of legal expenses are we talking about in this current year for that?

All we can really do is pursue the remedies available to us under Brazilian law. The legal expenses will not be very great. Probably in the area of $30,000 in the next three or four months.

Okay. I know you got the letter about the judgment and then it was supposed to go for final review. Has that process taken effect yet?

Let me explain the process. What we got was a preliminary decision. It was not final. We have time to essentially appeal it into technical language as we filed a motion for clarification within a short time after receiving that notice. It was filed on June 14. That is still within the arbitration proceeding. The decision on that should be coming very shortly. It's supposed to be about a 30-day period on that. Once we have that, if that is still unfavorable, then we can appeal that in the formal court system.

Okay. Talking further about Brazil, is most, now, of the large contracts going to get fulfilled in Q2?

You mean from that backlog?

Yes.

Some of that will slide into Q3. Not all of it. Some of that will go into Q3. But we will have other orders coming in, too.

Okay. And what type of impact, if any, because I saw today that Petrobras put out what their plan through 2016 is, which seems significant that might have on your operations down in Brazil.

I'm sorry?

Petrobras put out their aggregate spending plan through 2013.

That's like a five-year capital budget. It's very difficult to translate that into our --.

And regarding, now, overall margins, now that you have some of the restructuring done in the US with the closing of the Missouri plant, we could expect that, based off of first-quarter results, a bump up in gross margin in Q2?

In the US. I'm not sure I would say that elsewhere. But the US margins should definitely be improved in Q2 over Q1, yes.

Okay. And can you talk about any traction you are gaining in the US? Have there been a number of wins of customers in the US from your sales force?

Yes. Since we revitalized the sales force and really started hiring a lot of in-house salespeople, we have had a couple of big wins. And, they will all be -- I'm not going to mention names but we picked up a customer who is basically giving us $2 million of additional business next year. And it will probably be about $0.5 million of business this year. We picked up another additional customer today who is going to be giving us $0.5 million of new business this coming 12 months. So we are getting some big wins here. Basically this is much like starting a new business. We hired a lot of new salesmen, we trained them on the product, and now they are beginning to really show results. And we are seeing a lot of big wins coming in on the domestic side of the business, being the USA.

And that will be relative to what the DuPont margins were, margin improvement?

Much better. In the US, that's night and day.

Okay. Just keep up the good work on the operations and keep it moving forward.

Brian Rafin, Morgan Dempsey Capital Management.

Give me a sense, maybe more from a philosophical standpoint, relative to the Brazilian decision? You talked about certainly the foreign corrupt practices law and all that. Do you get a sense that the type of anti-corruption legislation in the US is a different platform than maybe you should see in the emerging markets, say of Brazil? Is that one disadvantage for you guys?

No question about it. We put that in as a risk factor. No question it's an issue that we as an American company have to deal with. And as Chris said, our competitors in Brazil basically see corruption as a way of life. We have to deal with it. Basically that law ties our hands behind our back. Not that I'm saying it shouldn't be there, or I have a problem with it, but we are at a competitive disadvantage, yes.

Okay. And give a sense of maybe the legal process. Is this a grand jury process? Are you before just judges? Is this arbitration? Is there a panel of civilians? Or what is the makeup of this arbitration?

Brian, it's arbitration. It's not in the formal court system. It's an arbitration panel and it's made up of arbiters who are themselves judges, for the most part, and have a very distinguished legal background. The way it works is, each side selects its own arbiter and the two arbiters who were then selected by each party, then get together and select a third arbiter who is the leader of the panel. So it's a panel within an arbitration set up, basically.

I got you. And from alpha to omega, from beginning to end, how long was this process in arbitration, out of curiosity?

We first filed last October.

Okay last October. Okay. And then your sense of the appeals process in the Brazilian courts, are you the outsider, the big US company? Or do you feel that there is maybe in the formal court system, maybe a more fair chance of justice prevailing?

It's hard to predict. Coming out of the arbitration situation you can then appeal to a normal Brazilian court. And then you've got procedures that go on from there. And it's very difficult to predict what is going to happen. It would come down to a decision of a judge, yea or nay. And from there you go from one way or the other way. So it's like trying to explain what would be like a chess game for 20 moves.

Yes, okay. I understand. Does that at all, Chris, change your philosophy on looking at foreign acquisitions? You take the high road and you have to play by a different standard of rules. And then obviously if you got somebody from the standpoint of corruption that you terminate, it's got to make it pretty hard on your end. But does that at all forward cause you reservations from M&A deals cross border?

Yes, it does. And right now, we're not going to be considering any cross-border M&A deals. We're just going to really try to grow our current business. We are in all the key countries right now. And we've got a lot of room to grow in Russia, still a lot of room to grow in Argentina, Chile, even in China.

Okay. Let me ask, too. You guys, you focused, I think, the last several quarters on, we really have to be in emerging markets, we've got to be in international. And now, certainly in the US capital markets, the focus from a strategy, as well, it probably, for US companies, is safer to be at home. Are you seeing any more maybe focus or any more assurance on your side that maybe, as mature as the US markets are, that there might be some added value? You obviously did it with your national sales force. But are you changing your posture a little on the domestic focus?

Yes, we are because basically when DuPont cut us off last summer, we then turned around and hired a very good number of in-house salespeople. Almost probably double what we have now. And during that period we've been training them, we've been going out and introducing them to our customer base. We put all our materials together, product tools. In the US, we're expending a lot of money on sales operations and we are only just beginning to see the results with these, I explained a couple big wins. We only need 5 or 10 more wins like that and we've got $20 million of new business in this country.

Okay. What would be the headcount of your ramp up in sales? How many new sales guys might you have?

We have at least 10 new sales guys.

Okay. And then, relative to your success with certainly, I think, the Brazil navy, as well as the Brazil offshore oil, does that arbitration issue at all create an impairment to new business? Or is it just you got great product and there's not much of a recourse?

Most customers just look, saying -- are they going to be around to deliver the product. And the answer we can tell them is -- yes, we'll be around to deliver the product.

Okay. And then I'll just ask one more and get back in line. If you'll look at the spectrum of what you guys see globally, domestically from that $2 to $3 overlay plastic suit, upwards to your big, high-end fire protection hazmat $1,800 to $2,000, in that price spectrum, where are you seeing the best business? Or where are you seeing pockets of strength or reorders or that?

I think it's across the board, really.

Right. Basically right now most of our product lines are on the upswing, particularly in the United States. China is still growing like a weed. We are doing okay in Brazil. And it's really where we're going to see, I think -- for the last five years we've been losing $10 million a year business to DuPont. There's no more to lose. It's gone, it's zero. So now what we are going to see is really growth in the United States, which we haven't seen at all for five years. Every time we lost $10 million of business to DuPont in the United States, we gained $10 million of business internationally. What we're seeing now is the United States has bottomed out. We've rebuilt the sales force and we expect to see quite a gain in revenues in the US at pretty decent margins. Margins that are probably higher that -- you would have to go back to 2004 to see margins like that.

Okay. Can you put any maybe end market clarity, Chris, on the oil and gas, fire departments, general industrial? Is there any specific -- aerospace, defense, clean rooms? Anything that you can say this is certainly a pocket of strength?

In the United States or internationally?

I would say in the US or certainly international if it's different.

In the US the only real area that is weak is fire codes turnout gear. The municipalities do not have a lot of money. It's the overall pension plan thing that we just went through in Wisconsin. A lot of municipalities have public pension plans and they are finding them hard to finance. That's the only place we are seeing softness. Regular industry, the petrochemical companies are doing just fine. I guess they have to get down to about $35 a barrel before they start losing money.

Okay. All right, thanks, guys. I'll get back in line.

Doug Ruth, Lenox Financial Services.

Chris and Gary, I appreciate the effort and all the things you are going through for the shareholders. Is there any comment at all from Ansell? It seems like they may offer some commentary.

Even if there were, we couldn't say anything.

Okay. When do you expect some sort of update from TD Bank as far as what they will or will not do?

All I can tell you is that we are working diligently. They are cooperating with us and we're working together. But I can't offer any assurances on that. We speak to each other constantly.

Okay. In the past you had suggested that there may be additional orders coming from Brazil. Is there anything that you can tell us at this time?

We've got a lot of bids outstanding, Doug, but that's about it right now. We're hopeful that we'll get our share of those, and I'm confident we will. But right now there's a lot of bids outstanding. That's about it.

Okay. One of the things, I think, even though the US sales were way down for the quarter, you had said that one of the goals previously was to get a sequential improvement from Q1 versus Q4. I think you achieved that, is that correct?

Domestically, yes.

So, would we expect to see a sequential improvement in Q2 versus Q1 now?

Yes. In the top line, absolutely. In fact, in the bottom line, too. Certainly with a $10 million charge in Q1, I would certainly hope you'd see sequential improvement.

I'm talking about sequential improvement in the US domestic sales.

You should see that steadily for every quarter from now for the foreseeable future. Not spectacular but steady improvement sequentially.

Okay. So we hit the low point and then things should build some each quarter, is what you're saying?

Yes.

Are we done with the Missouri facility now? The move to Mexico, has that been completed?

It has been completed. We're still working out some kinks from the move. As I said, there were some disruptions and some shortages. We're still working through that. But the move itself has been completed.

And then have the warehouses been consolidated?

That's part of it. The move actually was in two parts. The production was moved to Mexico but all the inventory and the warehousing was moved to Alabama. And actually, Mexico, the disruption I'm talking about is in Alabama, not in Mexico.

And it's consolidating the inventory?

Yes.

Okay. And the Mexican manufacturing, is that working, the expansion? Are you happy with how that's been going?

Yes. I was down there a couple of weeks ago. I looked at the new facility and everything is running like a top down there. No problems at all. We have a great manager down there. They're just waiting to get the orders, quite frankly.

And how much of an improvement were there in sales -- can you quantify dollar-wise what the sales were in Argentina?

If you give me a minute, I can. Argentina sales were $700,000-and-some-odd. Between Argentina and Chile, it was about $1 million for the quarter.

And that's under circumstances which are quite difficult to operate under in Argentina.

Yes, the Argentine government seems bent on making things as difficult as possible. Which is taking a page from some of the other places we operate at.

The Argentine government is picking a fight with the world.

Okay. And what about the product expansion? With all the disruption are you able to spend some time on that?

Gary and I have been really involved a lot in this arbitration award but will probably get back to normal in a week or two now that Raymond James has picked up the slack.

Okay. And then also we had talked previously about the China expansion. Has that been tabled? Or are you able to move forward on that?

It will be done probably by September.

And when we would anticipate to hear something more from Raymond James, do you think?

It is hard to say.

It is hard to say that, Doug. They are working as rapidly as possible on due diligence and getting everything going. We are working on every possible front, is all I can tell you.

You folks are just doing a lot of really wonderful things. And what you've done internationally is very impressive and I'm grateful for that. And I believe that you'll get through this issue here.

Thank you, Doug. Thanks for your support.

You're welcome. That's the end of my questions.

Sam Yake, BGB Securities.

Yes, thanks for taking my questions. I'm just wondering, in general, when I think about -- I know you don't want to get specific -- but when I think about potentially marrying Lakeland with another industry, a larger industry competitor, could you just give some broad comments on what the potential synergies might be of such a combination? How would that help? I'm sure it would help you in many ways, if you have that kind of scale behind you and had a larger organization. Could you just give your general thoughts on what the synergies might be?

There certainly would be a sales synergy. If we were to combine with a larger company that had many more salespeople, particularly in the United States, the synergies would be significant in terms of growing our sales.

And do you think there might be -- there must be some cost synergies, too, then?

Probably. That's hard to say without knowing who the other party. How do you answer that.

Right. That's fair. One other thing. I remember, Chris, I think a few years ago you wrote a letter complaining about Sarbanes-Oxley, the cost of Section 404. And you said if it was up to you, you might go outside the US. I'm just wondering what are your costs of being a public company when you look at complying with SEC disclosures, director and officer liability insurance, all that stuff? What would the all-in ballpark number be just to be a public company?

If you're asking me, and Chris, the number is probably going to be a little different from each of us. And I suspect my number's probably going to be lower than his. But it's a few hundred thousand dollars.

Just a few hundred thousand?

Look, as far as an audit, yes, there's some things that the auditors would cut back. Even if we were a privately-held company, you still have a bank, you still need an audit. So you're going to save a little bit from an audit, not that much. Yes, you'd save your shareholder expenses, you'd save D&O insurance. A few hundred thousand, would be my guess.

A few hundred thousand. Okay. And then I had one final question. I'm an optimist, I always want to look at the glass half full. I hope like heck you get the arbitration award overturned, or at least dramatically reduced. But let's say you don't. Is there any tax benefit from that?

Unfortunately, not really. It's a payment -- it's possible to structure something in Brazil. It depends on how and where it is paid. If it's paid in the US, it's just an additional cost of the acquisition. And it goes in as part of your basis, basically. If it is paid in Brazil, then it adds to the goodwill. And we are already writing off the goodwill in Brazil over a five-year period for Brazil tax purposes. It depends. If it were in Brazil there might be some tax benefits. Right now the plan is most likely to pay it out of US, but we're not sure. Since that is the plan, I did not give any tax benefit at this point and it's a more conservative presentation.

Okay. Thanks so much and best of luck in the future.

(Operator Instructions) Brian Rafin.

Let me ask from the standpoint -- I'm just curious, with the $10 million arbitration, how much of that is levied as punitive damages, pain and suffering, versus something you'd actually get a monetary level of lost wages or whatever? I am just curious as to that $10 million figure?

It's basically contractual. The way we set up the agreement was, it's part of the supplemental purchase price. It goes back to that, to some provisions that were in that agreement. There's nothing punitive about it, other than the decision itself, which we think is punitive.

Okay. So you're saying like some earn-out provisions or whatever?

Sorry?

There were some earn-out provisions or ongoing to that, that are in that contractual? Or was it just salary based?

No, it was originally -- there's a small portion of salary, but it is 90% based on an earn-out. When we first structured the acquisition, there was an earn-out in that, and this was tied to the earn-out.

Okay. And then from your best guess, if you go into the appeal process in the courts, what might be D-Day for actually having to come up with that payment? Is it a lump-sum payment? Is it something that can be paid out in a scale or a series, serial funding? What's the sense of the payout?

That's the chess game. One could sit down and say -- let's settle this for 50% of the amount because you don't want to go to court again. It's impossible for us to tell you that now. Because each move, then there's five counter moves. It's really, really difficult to say at this early stage of the game how this is going to play out.

Okay. Are you seeing any cost pressures -- resins, anything as you get into 2012 here? Or maybe the delta change or will you use cost pressures plateauing, declining, decelerating? Give me a sense on the vector.

On product, on raw materials, no. We don't see any real price pressures. The problems we see are these rapid swings in currencies all over the world.

It's the foreign exchange rates that are like a roller coaster. It's gotten much worse.

Okay. And then maybe, Gary, what is your CapEx budget for the rest of the year?

Very low at this point. We shot our load last year with Brazil and Mexico. We've got about $1 million, which will be funded out of China, cash to build out a building in China. Not a new facility or an expansion. It's just to replace a leased facility where we are going off lease. We are essentially replacing existing space there. There will be a few hundred thousand dollars in Brazil. It back ended in Q3 or Q4. Just to start prepping the adjacent land that we bought, some minor work. Altogether, I think, even with the $1 million in China, all-in the last three quarters, no more than $2 million altogether.

Okay. And as you guys start to turn back to your time spent on this arbitration deal, what is the new product pipeline, your sense? Might you have any introductions of new products in later 2012 or is it more of a 2013 story?

Right now it is probably a 2013 story.

Okay. Give me a sense -- I asked, you said certainly you're seeing a pretty good upswing all across the board on industrials. Give me the sense of big quote activity. Would you say it is stable? Would you say it's stable but a lot of competitors? I am getting a sense of how you see, not maybe backlog or booked business but what you see in big quote activity.

Big quote activity is long-term. Because once you start providing somebody, one customer, $0.5 million or $2 million worth of stuff, it takes 9 to 18 months just to switch to a new vendor. But it's really long-term. When you get a $2 million contract like I spoke of, that's probably a good three or four years.

Okay. All right. That's fair. And then, you guys have talked in the past, obviously if we were to see any terrorist issues or whatever, you guys would be the flavor of the day. After the 9/11 situation, the Bush administration set up some of these depots for hazmat suits. You guys talked about those CBR suits. The glues and some of the seams begin aging. Are you seeing any Homeland Security stuff to replenish that? Or is that, like the administration, a dead issue?

No. In our chemical suit business, we're still seeing very, very good demand. Sales are growing, and margins are still very good. We haven't seen a real slowdown.

The chemical margins in the US is, by far, the highest margin business we have in the US.

Okay. So would it be a fair statement to say that the US government is still proactive to depoting those suits?

Yes, they are. We don't see a drop in demand at all. We're still selling. It's a mixture between government and industry. And industry has always bought more than the government. The government will just come in at odd times and then all of a sudden they will want $1 million or $2 million worth of stuff. You can never figure out. But we are not seeing, out of the chemical business, drop off at all. It's doing quite well.

Okay. All right. Thanks, guys. Keep up the faith. Good job.

John Curti, Singular Research.

The inventory write-downs that you spoke about in the wovens' business, how much was that?

Between $100,000 and $200,000.

And could you put that gross margin impact on a consolidated basis, the impact of it? You're talking about a decreasing 27 points in the division. How about on a consolidated Company-wide basis? How much of an impact?

It's magnified because it was all within a quarter, in a shorter period. Let me just think for a minute. It might have hit 1 point or 1.5 points, even, on the whole. Between 1 point and 1.5 points on the whole.

The delays in fulfilling some of the Brazilian contract you thought were going to be more skewed to the first quarter than the second, what caused that? And how much business are you likely to see in the second quarter? Or how much remains on those wins?

I said there is a backlog of $4.6 million. Most of that is the Navy job that we had been talking about all along. I'm not going to quote an exact number, but most of that number is still what remains on the Navy job. Which would go into Q2 and in Q3.

And you have bids outstanding for additional business with the Navy?

There's a number of bids in Brazil, yes.

I had a little problem hearing you on the Chile and Argentina combined revenues? Was that about $1 million?

About $1 million combined for the quarter, yes.

The drop in Canada, due to the --.

Canada sells the DuPont, or has sold the DuPont items, also. We had a license that covered North American sales which included Canada. So they are in the same boat we are. They haven't lost as much volume as we have. They had converted to Lakeland, more predominate Lakeland business, earlier than we had in the US so it didn't affect them quite as much. But it has dropped their business, yes.

Would you say that the first quarter volumes there probably represent the low point for Canada, as well?

Same thing. They're still selling off a little bit of inventory but they're pretty much out. After Q1, there's very minor, insignificant amounts left. There's very little, if any, DuPont product sales that will be forthcoming in Q2. Just a few residual inventory items, not much.

If, in fact, you were unsuccessful in overturning the arbitration judgment either at the arbitration level or in the courts, will that necessitate a write-down to the goodwill on the Brazilian business?

The answer to that is it depends on how we pay it. If we raise the funds out of the US and pay it out of the US, then it will have zero impact on Brazil. But it's entirely possible, one of our options is to raise the money in Brazil. Which, if we do might work better economically in terms of raising the funds but it would probably necessitate a goodwill write-down if I did that. That's not our plan but it is an option and we are looking into that.

And the declines in intangibles and goodwill in this quarter relative to fourth quarter, just the standard write-offs?

No write-offs at all, actually.

Or, not the write-offs, just the normal amortizations?

No amortization at all. Or, very insignificant. The drop you see is purely a result of the foreign exchange fluctuations from Brazil. That's mark to market. That's goodwill in Brazilian reals, which gets converted at the balance sheet rate every time we issue a report. And, as we have been saying, that rate has been a roller coaster.

Anything new to report on the status of the Indian operations? The discontinued operations there in terms of potential sale?

Yes. We are entertaining offers.

At this stage would any of those offers result in additional write-downs for the carrying value that you have on the books?

We're not sure. I wouldn't rule it out but not at this point, no.

Okay. If you were to have some, they would not be a major amount?

No, they wouldn't be a major amount. No.

The conversations you are having with TD Ameritrade, how long do you think --

TD Bank?

Yes TD Bank. How long do you think the negotiations are going to carry on before the bank pushes the issue?

It's hard to say and I wish I could answer that but I can't.

Is it somewhat contingent on what Raymond James comes up for, with you?

I think, yes, it's all inter-related. Each side is waiting to see what the other one does. We're dancing around a bit with each other. But they work with us. In the meantime, we're operating within our credit facility while we restructure ourselves.

That's it for now. Whatever I had has escaped me.

Brian Rafin at Morgan Dempsey Capital Management.

Yes, I just had a follow-up. Refresh us on the accretive margin impact of going from a DuPont product to your own product maybe at the gross margin line.

We're talking about in the US? The most recent sales of the DuPont products were those that were manufactured by DuPont and we purchased them as finished goods and simply resold them. The margins that we had on those, as Chris has been saying all along, we got really squeezed by them and were as little as 12%. The margins on our comparable branded products, which compete directly for the same application, are north of 25%.

Okay. And historically you had the DuPont sourcing relationship. I think you conveyed over time that DuPont handled the huge, major multinational's and you picked up a lot of the mom and pops. What is your ability to go after, now that you are no longer sequestered to, or no longer a single source to DuPont, what is your ability to go out and go elephant hunting to some of those bigger accounts?

Our hands are completely untied. And that's why, when I said we had a couple wins lately, those are those type of big wins.

Okay. All right. Thanks, guys. Appreciate it.

John Curti, Singular Research.

Yes, I wanted to know, in terms of potential fees for Raymond James, at least on an ongoing basis? Prior to any transaction, any kind of retainer or anything?

The retainer is modest. Any fees would be considered part of the transaction costs. If it's equity it would be just a reduction of the capital that we raise. If it's debt it would be capitalized and written off as additional interest over the term of the debt.

Okay. That's fine, thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Okay. We appreciate your participation in Lakeland's fiscal 2013 first-quarter financial results conference. As we are committed to delivering value to our shareholders, we believe Lakeland will continue to effectively manage its balance sheet, control expenses and execute its strategy for long-term growth.

Operator, I see Doug Ruth has come in. Kind of late, but tell Doug he's welcome.

My one question is, is there any way -- this payment, could it possibly go out, if we were going to have to pay this $10 million, could it go out for a 10-year time period? Is that something --?

Unlikely, but we will try and work out a settlement. Doing something like that is certainly on the table. That is part of the chess game that Chris talked about.

Okay. So it's anywhere from -- it's creative financing.

Exactly.

Thank you for answering that.

Okay. Thank you, all.

Thank you.

The conference is now concluded. Thank you are attending today's event. You may now disconnect.