Fulfilling Float for Lakeland

Lakeland Industries (NASDAQ:LAKE), a manufacturer of protective apparel used by firefighters, hazmat workers, and the military, reported strong earnings yesterday. Not as strong as the Street was hoping for, mind you, but strong nonetheless. The two analysts following the company were looking for, respectively, $0.26 and $0.31 in earnings per diluted share out of Lakeland, averaging to a "consensus estimate" of $0.29. Turns out, the consensus estimate and the optimistic analyst were both wrong. The conservative (that's our kind of analyst!) guy called it right -- $0.26 it was.

Interestingly, Lakeland appeared to earn more than that -- $0.27 per diluted share -- last year. Why is that interesting? Because according to the company's earnings announcement, net income increased 37%. At this point, investors who have seen this kind of thing before will now have envisioned bubbles arising from their foolcaps, captioned: "Aha! There's dilution afoot!"

And indeed there was, albeit not the bad kind. The reason that Lakeland's net earnings (the profits earned by the company as a whole) rose while its per-share earnings (the profit accruing to each individual slice of the corporate pie) fell was that last quarter, Lakeland conducted a secondary share offering of 1.3 million shares, diluting existing shareholders by 40%.

Which makes Lakeland an interesting study in why dilution is not always a bad thing. For share dilution comes in several flavors, ranging from bitter (stock options) to bland (stock splits) to semi-sweet (flotation for a market price, as in the case of this secondary offering). We've written plenty about stock option dilution and why it's injurious to outside shareholders (see this review of Lucent's (NYSE:LU) last quarter, for example). We've beaten the pony dead explaining why stock splits are non-events. But we've not written a whole lot about secondary offerings. So let's do that.

Using the traditional "pie" analogy, stock options take a pie and just cut it into tinier and tinier pieces. But a secondary offering does two things. Yes, it slices and dices. But before it does that, it makes the pie bigger -- by filling it up with delicious cash paid in exchange for the newly issued shares. (At least, it should. Not long ago, fellow Fool Roger Nusbaum described a secondary offering that Travelzoo (NASDAQ:TZOO) did at a 31% discount to market price.)

Lakeland, in contrast, placed its new shares at a much smaller discount -- about 4.5% -- and generated enough cash to pay down its debt, clean up its balance sheet, and ultimately leave it where it stands today -- with net cash over $10 million and a P/E of just 15. That's the kind of dilution an outside shareholder can live with.

Fool contributor Rich Smith owns no shares in any company mentioned in this article.