Lakeland Industries, Inc.

Lakeland Industries, Inc.

$26.12
0.3 (1.16%)
NASDAQ Global Market
USD, US
Apparel - Manufacturers

Lakeland Industries, Inc. (LAKE) Q1 2013 Earnings Call Transcript

Published at 2012-06-14 00:00:00
Operator
Good afternoon, and welcome to the Lakeland Industries Inc. First Quarter Fiscal Year 2013 Conference Call. [Operator Instructions] Please note that this event is being recorded. [Operator Instructions] Before we begin, parties are reminded that statements made during this call contain forward-looking information within the meaning 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 the 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.
Christopher Ryan
Good afternoon to you all, and thank you for joining our fiscal 2013 first quarter financial results conference call. In the first 3 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 a 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 U.K. If you read our SEC filings, you will see that we terminated 2 senior managers in Brazil 2 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 options 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 and Associates Inc. to assist the Board of Directors in its evaluation of a broad range of financial and 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 finances 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 engage the investment banking group of Raymond James and Associates to assist the company's Board of Directors in evaluation of strategic alternatives to embrace share -- 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 our capitalization and financing options, potential restructuring of our existing debt and other transaction 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 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 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 investment 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 a effectuating a turnaround for our domestic operations. In the U.S., our dependence on DuPont has been removed, including the elimination of related revenues from their product lines. 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 U.S., 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 consolidating 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.
Gary Pokrassa
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 in 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 arm. I'll now review the financial results of 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% for the first quarter of this year compared to 25.6% for the same period last year. The increase 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 U.S. 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 of FY '12. Q1 FY '12 domestic sales were $9.8 million versus -- I'm sorry, Q1 FY '13 domestic sales of $9.8 million versus $14.7 million in the earlier period. Our -- at Q1 '13 sales breakdown is now $51.2 million foreign and $41.8 million 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 include a 28% increase in U.K. revenue, 86% growth combined in 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 related 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 USD $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% from 32.3% for the prior year. Major factors driving the changes in gross margins, or reduction in profitably for the Wovens Division resulting from inventory write-down shortages and disruption following a warehouse consolidation, lower margins for chemical and reflective products near the volumes of 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% for the quarter ending April '12 from 6.7% for the quarter ending April '11. As a percent of net sales, operating expenses increased to 30.4% this year, down from 33.5% 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 a $0.5 million increase in commissions, which were mainly for large bid orders in Brazil; $300,000 increase in sales and marketing spare salaries; and related marketing expenses programs as part of the revitalized domestic per the growth strategies in the U.S.; we had a decrease in medical benefits of about $100,000 less favorable experience on the self-insured plan; and a decrease of $100,000 in add and payroll from the staff reductions. Operating profit from continuing ops decreased by $1.6 million to breakeven, 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 breakeven for the quarter of this year, down from 6.2% to the quarter ending a year ago. The profitability of the more developed foreign operating businesses was offset by operating losses from the U.S. business as an influence in sales and marketing strategy. Company's net loss from continuing ops was $10.1 million for the quarter ending April '12, as compared with net income from continuing 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 U.S. resulting from the DuPont termination. Earnings or loss per share, EPS from continuing operation's 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 was 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 U.S., 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 about $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. That's $11.75 therefore our share price is trading at a significant discount to book value, the current ratio is 2.1:1, significantly lower than about 7:1 we had before the $10 million Arbitration Award was added to current liabilities. Our working capital, which is reduced by the Brazil Arbitration Award, was $38.8 million compared to our enterprise value of about $52 million. And that concludes my formal remarks. I'll turn it back to Chris.
Christopher Ryan
Thank you, Gary. I will now turn over the call over to questions, to the operator for the Q&A session.
Operator
[Operator Instructions] Our first question comes from Howard Halpern at Taglich Brothers.
Howard Halpern
What are the likely steps you're going to take to attempt to get that judgment reversed? And what type of legal expense is -- are we talking about in this current year for that?
Christopher Ryan
What we can really do is pursue the remedies available to us under Brazilian law. The legal expenses will not be very great. I mean, we're talking probably in the area of $30,000 in the next 3 or 4 months.
Howard Halpern
Okay. All right. And in part did that -- I know you all got the letter about the judgment and then it was supposed to go for final review. Has that process taken effect yet?
Christopher Ryan
Well, let me explain the process. What we got was a preliminary decision. It was not final. If I have to essentially peel it and in the technical languages we filed a motion for clarification within a short time after receiving that notice. It was filed on June 14. That's still within the arbitration proceeding. The decision on that should be coming very shortly. There's supposed to be about a 30-day period on that. Once we have that, then if that's still unfavorable, then we can appeal that in the formal court system.
Howard Halpern
Right. I guess, talking further about Brazil, is most now of the large contract going to get fulfilled in Q2?
Christopher Ryan
You mean from that backlog, yes?
Howard Halpern
Yes.
Christopher Ryan
So some of that will swap into Q3. Not all of it, though. Some of that will go into Q3. But we'll have other orders coming in too, then.
Howard Halpern
Okay. And what type of the impact, if any -- because I saw today that Petrobras put out with their lien through 2016 is -- which seems significant. Would that might have on your operations down in Brazil.
Christopher Ryan
I'm sorry the...
Howard Halpern
As Petrobras put out their aggregate spending plan through 2013...
Christopher Ryan
That's a capital -- that's like a 5-year capital budget. It's very difficult to translate that into our plan.
Howard Halpern
And regarding now, overall margins, I guess, now that you have some of the restructuring done in the U.S. with the closing of the Missouri plant, we could expect based off of first quarter results, a bump up in gross margin in Q2?
Christopher Ryan
In the U.S., I'm not sure I would say that elsewhere, but the U.S. margin should definitely be improved in Q2 over Q1, yes.
Howard Halpern
Okay. And can you talk about any traction you're gaining in the U.S.? Had there been any number of wins of customers in the U.S. from your sales force?
Christopher Ryan
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's basically giving us $2 million of additional business next year, and will probably be about $0.5 million of business this year. We picked up another additional customer today, who's 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're 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.
Howard Halpern
And that will be relative to what the DuPont margins were, margin improvement.
Christopher Ryan
Much better than in the U.S. Night and day.
Operator
Next question comes from Brian Rafn at Morgan Dempsey Capital Management.
Brian Rafn
Give me a sense, kind of the, maybe more from a philosophical standpoint, relative to the Brazilian decision. You talked about certainly the Foreign Corrupt Practice law and all that. Do you get a sense that the type of anticorruption legislation in the U.S. is a different platform than maybe you just see in the emerging markets, say at Brazil? Is that one disadvantage for you guys?
Gary Pokrassa
No question about it. We put that at in as a risk factor. It's no question. It's an issue that we, as an American company, has 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. And our hands -- 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.
Brian Rafn
Yes, okay. And then kind of give a sense of maybe the legal process. Is this a -- is it a grand jury process? Or before just judges? Is this arbitration? Is there a panel of civilians? Or what kind of is the makeup of this arbitration?
Gary Pokrassa
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. And the way it works is each side selects its own arbiter, and the 2 arbiters who are then selected by each party, can get together and select a third arbiter, who is the lead of the panel. So it's a panel within an arbitration set up basically.
Brian Rafn
I got you. And what from Alpha to Omega, from beginning to end, how long was this process in arbitration, out of curiosity.
Gary Pokrassa
We first filed back last October.
Brian Rafn
Okay, last October, okay. And then your sense of kind of the appeals process in the Brazilian courts, is that -- are you kind of the outsider, the big U.S. company? Or do you feel that there's maybe in the formal court system, maybe a more fair chance of justice prevailing?
Christopher Ryan
That's hard to predict. I mean, it's coming out of the arbitration situation, you can then appeal to a normal Brazilian court, okay? And then you've got procedures that go on from there. And it's very difficult to predict what's going to happen because each thing that would come down to a decision of a judge yea or nay, and from there you go one way or the other way. So it's like trying to explain what would be like a chess game, for 20 moves.
Brian Rafn
Yes, okay. No, I understand it. Does that at all, Chris, change your philosophy? I'm looking at foreign acquisitions, I mean you take the high road, and you have to play by a different standard of rules? And then, obviously, if you've got somebody from a standpoint of corruption that you terminate, it's going to make it pretty hard on your end. But does that at get all, forward, cause you reservations from M&A deals cross-border?
Christopher Ryan
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're 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.
Brian Rafn
Okay. Let me ask too, you guys, in your focus 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 U.S., capital markets, the focus from a strategy as well, it probably, for U.S. companies, is safer to be at home. Are you seeing anymore maybe focus or anymore assurance on your side that maybe there, as the notorious the U.S. markets are, that there might be some added value? You obviously there would be an international sales force. But are you changing your posture a little on the domestic focus?
Christopher Ryan
Yes, we are. Because basically, when DuPont cut us off last summer, we then turned around and hired a very good in-house salespeople, okay? 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. And so, in the U.S., we're spending a lot of money on sales operations, and we're only just beginning to see the results with these -- I explained a couple of big wins. I mean, we only needed 5 or 10 wins like that, and we've got $20 million of new business in this country.
Brian Rafn
How many -- what would be the headcount of your ramp-up in sales? How many new sales guys might you have?
Christopher Ryan
We have at least 10 new sales guys.
Brian Rafn
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've got great product and not much of a recourse?
Christopher Ryan
I guess most customers just look at saying, “well, are they going to be around to deliver the product?” And the answer we can tell them is yes, that we'll be around to deliver the product.
Brian Rafn
Okay. And then I'll just ask one more and get back in line. If you will kind of look at the spectrum of what you guys see globally, domestically from kind of that $2 to $3 overlay plastic suit to upwards to your big, high-end fire protection hazmat, $1,800 to $2,000, kind of in that price spectrum, where are you seeing the best business? Or where you're seeing pockets of strength or reorders of that?
Christopher Ryan
I think it's across-the-board, really, right. We're basically right now most of our product lines are on the upswing, particularly in the United States. In China it's still growing like a weed. We're doing okay in Brazil. And it's really where we're going to really see, I think -- for the last 5 years, we've been losing $10 million a year of business to DuPont. Well, there's no more to lose, it's gone, it's 0. So now, what we're going to see is really growth in the United States, which we haven't seen at all for 5 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 of revenues in the U.S., at pretty decent margins, margins that are probably higher than -- you'd have to go back to 2004 to see margins like that.
Brian Rafn
Okay. Can you put any, maybe end market clarity, Chris, on oil and gas, fire departments, general industrial? Is there any specific, aerospace defense, clean rooms, anything that you kind of say well, this is certainly a pocket of strength?
Christopher Ryan
In the United States or internationally?
Brian Rafn
Yes, I would say in the U.S. or certainly international, if it's different, so...
Christopher Ryan
In the U.S., the only real area that's weak is firecoats, turnout gear. The municipalities do not have a lot of money. It's the deal overall, I guess, pension plan thing that we just went through in Wisconsin. A lot of municipalities have public pension plans and they're finding them hard to finance. That's only the only place we're seeing softness. Regular industry, whether it's the oil, the petrochemical companies are doing just fine. I mean, I guess, they have to get down to about $35 a barrel before they start losing money.
Operator
Your next question comes from Doug Ruth of Lenox Financial Services.
Douglas Ruth
Is there any comment at all from Ansell? I mean, it seems like they might offer some commentary?
Christopher Ryan
Even if there were, we couldn't say anything.
Douglas Ruth
Okay. When do you expect some sort of update as from TD Bank as far as what they will or will not do?
Christopher Ryan
All I could tell you is that we're 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.
Douglas Ruth
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?
Christopher Ryan
We've got a lot of bids outstanding, Doug, but yes, that's about it right now. 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.
Douglas Ruth
Okay. One of the things, I think, even though the U.S. 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?
Christopher Ryan
Domestically, yes.
Douglas Ruth
Yes. So were there -- are you -- would we expect to see a sequential improvement in Q2 versus Q1 now?
Christopher Ryan
Yes. In the top line, absolutely, yes. But in the bottom line, too. It certainly, with a $10 million charge, I would certainly hope we'd see a sequential improvement.
Douglas Ruth
Well, I'm talking about sequential improvement in the U.S. domestic sales.
Christopher Ryan
I know. You should see that steadily every quarter from now on for the foreseeable future. Not spectacular, but steady improvement, sequentially.
Douglas Ruth
Okay. So we hit the low point, and then things are starting -- should build some each quarter, is what you're saying?
Christopher Ryan
Yes.
Douglas Ruth
And are you -- are we done with the Missouri facility now? Is that -- the move to Mexico, has that been completed?
Christopher Ryan
It has been completed. We're still working out some kinks from the move. And as I said, there were some disruptions and some shortages, we're still working through that, but the move itself has been completed.
Douglas Ruth
And then had the warehouses been consolidated?
Christopher Ryan
Well, that's part of it. The move actually was in 2 parts. The production was moved to Mexico, but all the inventory and the warehousing was moved to Alabama. And actually, Mexico doesn't have -- the disruption I'm talking about is in Alabama, not in Mexico.
Douglas Ruth
And it's consolidating the inventory?
Christopher Ryan
Yes, yes.
Douglas Ruth
And are you -- is it the Mexican manufacturing, is that working? The expansion, are you happy with how that's been going?
Christopher Ryan
Yes. I was down there a couple of weeks ago. I looked at the new facilities and everything's running like a top down there. I mean, no problems at all. We have a great manager down there. And they're just waiting to get the orders, quite frankly.
Douglas Ruth
And how much of an improvement were there in sale -- or are -- can you quantify, dollar wise what the sales were in Argentina?
Gary Pokrassa
Just give me a minute. Argentina sales were $700,000 and some odd thousand, Chile was between Argentina and Chile it's about $1 million for the quarter.
Christopher Ryan
And that's under circumstances which are quite difficult to operate under in Argentina.
Gary Pokrassa
The Argentine government seems bent on making things as difficult as possible, which is taking a page from some of the other places we have operate in.
Christopher Ryan
Yes, I mean the Argentine government is picking a fight with the world.
Douglas Ruth
Okay. And what about the product expansion? Are you -- with all the disruption, are you able to spend some time on that?
Christopher Ryan
Gary and I have been sort of really involved a lot in this Arbitration Award, but we'll probably get back to normal in a week or 2, now that Raymond James has picked up the slack.
Douglas Ruth
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?
Christopher Ryan
It'll be done, probably by September.
Douglas Ruth
And when would we anticipate to hear something more from Raymond James, do you think?
Christopher Ryan
It's hard to say.
Gary Pokrassa
It’s hard to say that, Doug. They’re working rapidly as possible on due diligence and on getting everything going, and we’re working on every possible front. That’s all I can tell you.
Operator
Next question comes from Sam Yake of BGB Securities.
Sam Yake
I'm just wondering, in general, when I think about it, 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 brought 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 had that kind of scale behind you, and had a larger organization. Could you just give your general thoughts on what the synergies might be?
Christopher Ryan
Now there certainly would be as sales synergy. If we were to combine with a larger company that had many more sales people, particularly in the United States, the synergies would be significant in terms of growing our sales.
Sam Yake
And then do you think there might be -- there must be some cost synergies too, then?
Christopher Ryan
Probably.
Gary Pokrassa
That's hard to say without knowing who -- the other party. How do you answer that?
Sam Yake
Right. That's fair. And then one other thing, I remember, Chris, I think few years ago, you wrote a letter complaining about Sarbanes-Oxley the cost to Section 404, and you said if it was up to you, you might go outside the U.S. I'm just wondering, what are your costs of being a public company, when you look at like complying with SEC disclosures, direct or an officer liability insurance, all that stuff. What would like the all-in ballpark number be just to be a public company?
Gary Pokrassa
If you ask me and Chris, the number's probably going to be a little bit 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.
Sam Yake
Just a few hundred thousand?
Gary Pokrassa
Well, look, it's -- as far as the audit, yes, there's some things that the auditors would cut back and even if we're a privately owned company, you still have a bank -- you still need an audit. So you're going to save a little bit from the audit, not that much. Yes, you'd save your shareholder expenses, you’d save D&O [ph] insurance. So a few hundred thousand would be my guess.
Sam Yake
A few hundred thousand. And then I have a final question. I'm kind of an optimist. I always want to look at the glass half-full. If -- I hope you like heck get the Arbitration Award overturned or at least dramatically reduced. But let's say you don't, is there any tax benefit from that?
Christopher Ryan
Unfortunately, not really. It's a payment. It's possible to structure something in Brazil. It depends on where and how it's paid. If it's made in the U.S., it's just an additional course of the acquisition, that goes in as part of your basis, basically. It's paid in Brazil, then it adds to the goodwill, and we're already writing off the goodwill in Brazil over a 5-year period for Brazil tax purposes. It depends. If we're in Brazil, there might be some tax benefits. I -- We are right now, the plan is most likely to pay it out of the U.S., but we're not sure. Since that's the plan, I did not give any tax benefit at this point, and it's a more conservative presentation.
Operator
[Operator Instructions] Your next question is a follow-up from Brian Rafn.
Brian Rafn
Let me ask from this standpoint, I'm just curious with the $10 million arbitration. How much of that is kind of levied, is kind of punitive damages, pain and suffering, versus something that you can actually get a monetary level of lost wages or whatever? I'm just curious at the $10 million figure.
Christopher Ryan
It's basically contractual. The way we set up the agreement was that -- as part of the supplemental purchase price, it goes back to that -- to some provisions that we're not in agreement. There's nothing putative about it other than the decision itself, which is -- we think is punitive [indiscernible]
Brian Rafn
Okay. [Audio Gap] were some earn-out provisions or whatever or were some earn-out provisions that are ongoing to that, [Audio Gap] contractual, or was just salary based?
Christopher Ryan
It was originally -- there's a small portion of salary, but it's most -- it's 90% based on an earn out. When we first structured the acquisition, there was an earn out in that and then this was tied to the earn out.
Brian Rafn
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 of serial funding? What's the sense of the payout?
Christopher Ryan
That, that's the chess game. I mean one could sit down and say, “let's settle this for half 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 5 countermoves. It's really, really difficult to say at this early stage of the game what -- how this is going to play out.
Brian Rafn
Okay. Are you guys seeing any cost pressures, resins, anything as you get into 2012 here? Or maybe the delta changed? Or will you see kind of cost pressures plateauing, declining, decelerating? Give me a sense on the vector?
Christopher Ryan
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.
Gary Pokrassa
It's the foreign exchange rates that are like a roller coaster, and it's gotten much worse.
Brian Rafn
Okay. And then maybe, Gary, what's your CapEx budget for the rest of year?
Gary Pokrassa
Very low at this point. We've shot our load last year with Brazil and Mexico, but we've got about $1 million, which will be funded out of China cash to build out a building in China, that's not a new facility or an expansion, it's just to replace a leased facility where we're going off lease so we have -- we're essentially replacing the existing space there. It will be a few hundred thousand dollars in Brazil, just to -- it's back ended in Q3 or Q4, just to start prepping the adjacent land that we bought with some minor works. Altogether, I think even with the $1 million in China, all in, in the last 3 quarters, somewhat $2 million altogether.
Brian Rafn
Okay. And as you guys start to turn back to your time spent on this arbitration deal? What's kind of 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?
Christopher Ryan
Right now, it's probably, very 2013 story.
Brian Rafn
Okay. And are -- give me a sense -- I kind of asked you said sort of you're seeing a pretty good upswing all across the board on industrials. Kind of give me the sense of big quota activity. Is it -- would you say it's stable? Would you say it's stable, but very -- lot of competitors? I'm getting a sense of how you see, not maybe backlog or book business, but what you see in big quota activity?
Christopher Ryan
Now big quota activity is long term. Because once you start providing somebody, one customer a $0.5 million or $2 million worth of stuff, it takes 9 months, 9 to 18 months, just to switch to a new vendor. It's really long term. When you get a $2 million contract like I spoke of, that's probably a good 3 or 4 years.
Brian Rafn
Okay. All right. That's fair. And then you guys have talked about in the past, obviously, if we were to see any terrorist issues or whatever you guys to be the flavor of the day, after the 911 situation, the Bush administration set up some of these depots for hazmat suits. You guys talked about all those kind of CBR suits, they don't -- they glues and some of the seams begin aging. And are you seeing any homeland security stuff to kind of replenish that? Or is that, like the administration, kind of a dead issue?
Christopher Ryan
Well, we're still -- in our chemicals suit business, we're still seeing very, very good demand. Sales are growing and margins are still very good. I mean we haven't seen a real slowdown.
Gary Pokrassa
The chemical margins in the U.S. is probably at --
Christopher Ryan
The highest we have.
Gary Pokrassa
Is by far the highest margin business we have in the U.S.
Brian Rafn
Okay. So would you -- would it be a fair statement to say that the U.S. government is still proactive to depot-ing those suits?
Christopher Ryan
Yes, they are. We don't see a drop in demand at all. I mean we're still selling, and it's a mixture between government and industry. And industry has always booked more than the government. Government would just come in, in odd times, and then all of a sudden they'll want $1 million or $2 million worth of stuff. You'll never figure it out. But we're not seeing the chemical business drop off at all. It's doing quite well.
Operator
Next question comes from John Curti at Cingular Research.
John Curti
The inventory write-downs that you spoke about in the wovens business, how much was that?
Gary Pokrassa
Between $100,000 and $200,000.
John Curti
And could you put that margin, gross margin impact on a consolidated basis, the impact of it, you're talking about a decreasing 27 points from the division. How about on a consolidated company wide basis? How much of a...
Gary Pokrassa
It's magnified, of course, it was all within the quarter in a shorter period. Let me just think for a minute. It might have hit for 1 point or 1.5 points even, on the whole. Might've been 1 point or 1.5 points as a whole.
John Curti
The delays in fulfilling some of the Brazilian contract that you thought were going to be were 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 that -- on those wins?
Gary Pokrassa
I said that there's a backlog of $4.6 million. That's -- mostly that is the Navy job that we have been talking all along. Most of -- I'm not going to quote the exact number, but most of that number is still what remains on the Navy job, which would go into Q2 and in Q3.
John Curti
And you have bids outstanding for additional business with the Navy?
Gary Pokrassa
There's a number of bids in Brazil, yes.
John Curti
I had a little problem hearing you on the Chile and Argentina combined revenues, was that about $1 million?
Gary Pokrassa
About $1 million combined for the quarter, yes.
John Curti
The drop in Canada due to the...
Christopher Ryan
Canada sales, the DuPont has sold the DuPont items also. We had a license that covered North American sales, which included Canada. So they're in the same boat we are. They haven't lost as much volume as we have. They've been -- they had converted to Lakeland, the more predominant Lakeland business earlier than we had in the U.S., so it didn't affect them quite as much, but it's -- it has dropped their business, yes.
John Curti
Would you say that first quarter volumes there probably represent the low point for Canada as well?
Christopher Ryan
Same thing. Same thing. They're still selling off a bit of inventory, but they're pretty much out. So after Q1, it's -- very minor, insignificant amounts left. There's very, very little, if any, DuPont product sales that will be forthcoming in Q2 or just a few residual inventory items, not that much.
John Curti
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?
Christopher Ryan
The answer to that is it depends on how we pay it, Doug. If we pay it -- if we raise the funds out of the U.S. and pay it out of the U.S., it will have 0 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's an option and we're looking into that.
John Curti
And the declines in intangibles and goodwill in this quarter, relative to fourth quarter just the standard write-offs...
Christopher Ryan
No write-offs at all actually, it's the...
John Curti
Not the write-offs, just the normal amortizations?
Christopher Ryan
No amortization at all. It's the -- very insignificant. The drop you see is purely the result of the foreign exchange fluctuations from Brazil. That's mark-to-market. It's -- that's goodwill in Brazilian reals, which gets converted at the balance sheet, the rate every time we issue a report. And as we've been saying, that rate has been a roller coaster.
John Curti
Anything new to report on the status of the Indian operations, discontinued operations there in terms of potential sale?
Christopher Ryan
Yes. We are entertaining offers.
John Curti
At this stage, would any of those offers result in additional write-downs for the carrying value that you have on the books?
Christopher Ryan
We're not sure.
Gary Pokrassa
I wouldn't rule it out, but not at this point, no.
John Curti
And if, okay, if you were to have some, they would not be a major amount?
Christopher Ryan
No, they wouldn't be a major amount. No.
John Curti
The conversations that you're having with TD Ameritrade, I mean how long do you think that...
Christopher Ryan
TD Bank.
John Curti
TD Bank, how long do you think the negotiations are going to carry on before the bank pushes the issue?
Christopher Ryan
That's hard to say, and I wish I can answer that, but I can't.
John Curti
Is it somewhat contingent upon what Raymond James comes up with -- comes up for, with you?
Christopher Ryan
I think, yes, it's all interrelated. I think each side is waiting to see what the other one does, and we're kind of dancing around a bit with each other. But they work with us, and in the meantime, we're operating within our credit facility while we restructure ourselves.
Operator
We have a question from Brian Rafn at Morgan Dempsey Capital Management.
Brian Rafn
Yes, I just have a follow-up. Give us -- refresh us on the -- kind of the accretive margin impact of going from a DuPont product to your own product, maybe at the gross margin line.
Gary Pokrassa
We're talking about in the U.S.? Most recent sales of our -- of the DuPont products were those that were manufactured by DuPont, and we purchase them as finished goods and simply resold them. The margins that we had on those, as Chris has been saying all along, we've got really squeezed by them and it was as little as 12%. The margins on our comparable branded products, which compete directly for the same application, are north of 25%.
Brian Rafn
Okay. And historically, you guys had that -- the DuPont sourcing relationship, and I think you kind of conveyed over time that DuPont kind of handled the huge major multinationals and you picked up a lot of mom and pops. What's your ability to go after, now that you're no longer sequestered to or no longer a single source to DuPont, what's your ability to go out and go elephant hunting to some of those bigger accounts?
Christopher Ryan
Our hands are completely untied. And that's why when I said we had a couple wins lately, those are those types of big wins.
Operator
Our next question comes from John Curti, Cingular Research.
John Curti
I wanted to know, in terms of potential fees at -- for Raymond James, on least on an ongoing basis, prior to any transactions, any kind of a retainer or anything...
Gary Pokrassa
The retainer is modest. But any fees would be considered part of the transaction cost. If it's equity, it would be just the reduction of the capital that we raised, if it's debt it would be capitalized and written off as a digital interest over the term of the debt.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Christopher Ryan
Okay. We appreciate your participation in Lakeland Fiscal 2013 First Quarter Financials 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 a strategy for our long-term growth.
Gary Pokrassa
Operator, I think that Doug Ruth has come in.
Douglas Ruth
My one question is, is there any way that I mean, this payment could 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...
Gary Pokrassa
Unlikely, but we'll try and work out a settlement. And that's -- doing something like that is certainly on the table then. That's part of the chess game that Chris talked about.
Douglas Ruth
So it's anywhere from -- I mean it's creative financing.
Gary Pokrassa
Exactly. Okay. Thank you, all.
Christopher Ryan
Thank you.
Operator
The conference has now concluded. Thank you for attending today's event. You may now disconnect.