ang10q.htm
UNITED
STATES
SECURITIES
AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES
EXCHANGE ACT OF 1934
For
The
Quarterly Period Ended
|
Commission
File
|
July
28,
2007
|
Number
1-5674
|
ANGELICA
CORPORATION
(Exact
name of
registrant as specified in its charter)
MISSOURI
|
43-0905260
|
(State
or
other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
|
|
424
South
Woods Mill Road
|
|
CHESTERFIELD,
MISSOURI
|
63017
|
(Address
of
principal executive offices)
|
(Zip
Code)
|
(314)
854-3800
(Registrant's
telephone number, including area code)
Indicate
by check
mark whether the registrant (1) has filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past
90 days. Yes X No
___
Indicate
by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer
_ Accelerated
filer _X_ Non-accelerated filer
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the
Exchange Act). Yes
No _X_
The
number of
shares outstanding of registrant's Common Stock, par value $1.00 per share,
at August 31, 2007 was 9,586,941 shares.
ANGELICA
CORPORATION AND SUBSIDIARIES
JULY
28, 2007 FORM
10-Q QUARTERLY REPORT
Part
I. Financial Information:
Item
1. Condensed Financial Statements:
|
|
|
|
|
|
First
Half
Ended July 28, 2007 and July 29, 2006 (Unaudited)
|
2
|
|
|
|
|
and
January
27, 2007 (Unaudited)
|
3
|
|
|
|
|
Ended
July
28, 2007 and July 29, 2006 (Unaudited)
|
4
|
|
|
|
5-14
|
|
|
Item
2. Management's Discussion and Analysis
of
|
|
Financial
Condition and Results of Operations
|
15-21
|
|
|
Item
3. Quantitative and Qualitative
Disclosures
|
|
About
Market
Risk
|
22
|
|
|
|
22-23
|
|
|
Part
II. Other Information:
|
|
|
|
|
24
|
|
|
|
25
|
|
|
|
26
|
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands, except per share amounts)
|
|
Second
Quarter Ended
|
|
|
First
Half
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
28,
2007
|
|
|
July
29,
2006
|
|
|
July
28,
2007
|
|
|
July
29,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
107,576
|
|
|
$ |
105,286
|
|
|
$ |
215,353
|
|
|
$ |
212,292
|
|
Cost
of
services
|
|
|
(93,617 |
) |
|
|
(90,161 |
) |
|
|
(187,113 |
) |
|
|
(182,426 |
) |
Gross
profit
|
|
|
13,959
|
|
|
|
15,125
|
|
|
|
28,240
|
|
|
|
29,866
|
|
Selling,
general and administrative expenses
|
|
|
(13,712 |
) |
|
|
(13,433 |
) |
|
|
(27,110 |
) |
|
|
(27,845 |
) |
Amortization
of other acquired assets
|
|
|
(1,063 |
) |
|
|
(1,080 |
) |
|
|
(2,126 |
) |
|
|
(2,160 |
) |
Other
operating (loss) income, net
|
|
|
(29 |
) |
|
|
(54 |
) |
|
|
169
|
|
|
|
497
|
|
(Loss)
income
from operations
|
|
|
(845 |
) |
|
|
558
|
|
|
|
(827 |
) |
|
|
358
|
|
Interest
expense
|
|
|
(2,294 |
) |
|
|
(2,349 |
) |
|
|
(4,630 |
) |
|
|
(4,569 |
) |
Non-operating
income, net
|
|
|
171
|
|
|
|
438
|
|
|
|
433
|
|
|
|
382
|
|
Loss
before
income taxes
|
|
|
(2,968 |
) |
|
|
(1,353 |
) |
|
|
(5,024 |
) |
|
|
(3,829 |
) |
Income
tax
benefit
|
|
|
1,521
|
|
|
|
638
|
|
|
|
2,436
|
|
|
|
1,615
|
|
Net
loss
|
|
|
(1,447 |
) |
|
|
(715 |
) |
|
|
(2,588 |
) |
|
|
(2,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
$ |
(0.16 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share
|
|
$ |
(0.16 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.24 |
) |
The
accompanying
notes are an integral part of the consolidated financial
statements.
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands)
|
|
July
28,
|
|
|
January
27,
|
|
|
|
2007
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
1,118
|
|
|
$ |
6,254
|
|
Receivables,
less reserves of $1,324 and $848
|
|
|
61,157
|
|
|
|
56,874
|
|
Linens
in
service
|
|
|
50,761
|
|
|
|
50,902
|
|
Prepaid
expenses and other current assets
|
|
|
2,816
|
|
|
|
4,019
|
|
Total
Current
Assets
|
|
|
115,852
|
|
|
|
118,049
|
|
|
|
|
|
|
|
|
|
|
Property
and
Equipment
|
|
|
204,041
|
|
|
|
203,236
|
|
Less
--
accumulated depreciation
|
|
|
109,164
|
|
|
|
106,780
|
|
Total
Property and Equipment
|
|
|
94,877
|
|
|
|
96,456
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
49,259
|
|
|
|
49,259
|
|
Other
acquired assets
|
|
|
36,000
|
|
|
|
38,108
|
|
Cash
surrender value of life insurance
|
|
|
10,041
|
|
|
|
9,664
|
|
Deferred
income taxes
|
|
|
20,727
|
|
|
|
19,035
|
|
Miscellaneous
|
|
|
5,635
|
|
|
|
5,734
|
|
Total
Other
Assets
|
|
|
121,662
|
|
|
|
121,800
|
|
Total
Assets
|
|
$ |
332,391
|
|
|
$ |
336,305
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
1
|
|
|
$ |
96
|
|
Life
insurance policy loans
|
|
|
8,332
|
|
|
|
8,298
|
|
Accounts
payable
|
|
|
28,353
|
|
|
|
32,867
|
|
Accrued
wages
and other compensation
|
|
|
7,360
|
|
|
|
8,961
|
|
Deferred
compensation and pension liabilities
|
|
|
1,704
|
|
|
|
1,693
|
|
Deferred
income taxes
|
|
|
5,235
|
|
|
|
4,961
|
|
Other
accrued
liabilities
|
|
|
30,877
|
|
|
|
29,392
|
|
Total
Current
Liabilities
|
|
|
81,862
|
|
|
|
86,268
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt, less current maturities
|
|
|
90,300
|
|
|
|
85,300
|
|
Other
Long-Term Liabilities
|
|
|
14,662
|
|
|
|
17,191
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock,
$1 par value, authorized 20,000,000
|
|
|
|
|
|
|
|
|
shares,
issued: 9,567,188 and 9,518,688 shares
|
|
|
9,567
|
|
|
|
9,519
|
|
Capital
surplus
|
|
|
8,542
|
|
|
|
7,174
|
|
Retained
earnings
|
|
|
135,610
|
|
|
|
140,277
|
|
Accumulated
other comprehensive loss
|
|
|
(3,652 |
) |
|
|
(4,839 |
) |
Common
Stock
in treasury, at cost: 291,197 and 296,419 shares
|
|
|
(4,500 |
) |
|
|
(4,585 |
) |
Total
Shareholders' Equity
|
|
|
145,567
|
|
|
|
147,546
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
332,391
|
|
|
$ |
336,305
|
|
The
accompanying
notes are an integral part of the consolidated financial
statements.
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands)
|
|
First
Half
Ended
|
|
|
|
|
|
|
|
|
|
|
July
28,
2007
|
|
|
July
29,
2006
|
|
|
|
|
|
|
|
|
Cash
Flows
from Operating Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,588 |
) |
|
$ |
(2,214 |
) |
Non-cash
items included in net loss:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
7,191
|
|
|
|
7,457
|
|
Amortization
|
|
|
2,868
|
|
|
|
2,753
|
|
Deferred
income taxes
|
|
|
(2,286 |
) |
|
|
(1,615 |
) |
Cash
surrender value of life insurance
|
|
|
(559 |
) |
|
|
(766 |
) |
Gain
on
disposal of assets
|
|
|
(10 |
) |
|
|
(534 |
) |
Change
in
working capital components of continuing
|
|
|
|
|
|
|
|
|
operations
|
|
|
(6,599 |
) |
|
|
(2,513 |
) |
Other,
net
|
|
|
(895 |
) |
|
|
(42 |
) |
Net
cash
(used in) provided by operating activities of
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(2,878 |
) |
|
|
2,526
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows
from Investing Activities:
|
|
|
|
|
|
|
|
|
Expenditures
for property and equipment, net
|
|
|
(5,945 |
) |
|
|
(4,002 |
) |
Disposals
of
assets
|
|
|
72
|
|
|
|
2,271
|
|
Life
insurance premiums paid, net of death benefits received
|
|
|
(185 |
) |
|
|
341
|
|
Net
cash used
in investing activities of
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(6,058 |
) |
|
|
(1,390 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows
from Financing Activities:
|
|
|
|
|
|
|
|
|
Repayments
of
long-term debt
|
|
|
(58,595 |
) |
|
|
(52,068 |
) |
Borrowings
of
long-term debt
|
|
|
63,500
|
|
|
|
53,400
|
|
Repayments
of
life insurance policy loans
|
|
|
(8,298 |
) |
|
|
-
|
|
Borrowings
from life insurance policy loans
|
|
|
8,514
|
|
|
|
1,101
|
|
Dividends
paid
|
|
|
(2,079 |
) |
|
|
(2,071 |
) |
Exercise
of
stock options
|
|
|
770
|
|
|
|
236
|
|
Net
cash
provided by financing activities of
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
3,812
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows
from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Operating
cash flows
|
|
|
(12 |
) |
|
|
(323 |
) |
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
(5,136 |
) |
|
|
1,411
|
|
Balance
at
beginning of year
|
|
|
6,254
|
|
|
|
4,377
|
|
Balance
at
end of period
|
|
$ |
1,118
|
|
|
$ |
5,788
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Purchases
of
property and equipment included in
|
|
|
|
|
|
|
|
|
accounts
payable
|
|
$ |
190
|
|
|
$ |
-
|
|
Life
insurance death benefit proceeds used to repay life
|
|
|
|
|
|
|
|
|
insurance
policy loans
|
|
$ |
-
|
|
|
$ |
306
|
|
The
accompanying
notes are an integral part of the consolidated financial
statements.
SECOND
QUARTER AND
FIRST HALF ENDED
JULY
28, 2007 AND
JULY 29, 2006
NOTE
1. BASIS OF PRESENTATION
|
The
accompanying condensed consolidated financial statements are unaudited,
and these consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements and notes
thereto contained in the Company’s Annual Report on Form 10-K for the
fiscal year ended January 27, 2007 (fiscal 2006). It is management’s
opinion that all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results during
the
interim period have been included. All significant intercompany accounts
and transactions have been eliminated. The results of operations
for the
second quarter and first half ended July 28, 2007 and cash flows
for the
first half ended July 28, 2007 are not necessarily indicative of
the
results that will be achieved for the full fiscal year 2007. Cash
flows
related to operations that were discontinued prior to fiscal year
2006 are
segregated for reporting purposes in the Statement of Cash
Flows.
|
NOTE
2. SHARE-BASED PAYMENTS
|
The
Company
has various stock option and stock bonus plans that provide for the
granting of incentive stock options, non-qualified stock options,
restricted stock and performance awards to certain employees and
directors. Options and awards have been granted at or above the fair
market value at the date of grant, although certain plans allow for
awards
to be granted at a price below fair market value. Options vest over
periods ranging from six months to four years, and are exercisable
not
less than six months nor more than 10 years after the date of grant.
Restricted shares granted to non-employee directors generally vest
over
one to three years. Restricted shares granted to employees generally
represent performance-contingent awards that vest at the end of three
years upon the attainment of certain earnings performance goals,
with the
exception of certain retention awards granted in the third quarter
of
fiscal 2006 that vest over a ten year period upon the attainment
of
certain earnings performance goals.
|
The
Company
estimates the fair value of its option awards on the date of grant using the
Black-Scholes option pricing model. No options were granted in the second
quarter or first half ended July 28, 2007 or July 29, 2006. A summary of the
status of the Company’s stock option plans as of July 28, 2007, and changes for
the first half then ended is presented in the table below:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
Options
outstanding at January 28, 2007
|
|
|
581,850
|
|
|
$ |
21.49
|
|
|
|
6.4
|
|
|
$ |
3,496,000
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(48,500 |
) |
|
|
15.90
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,500 |
) |
|
|
32.88
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Options
outstanding at July 28, 2007
|
|
|
529,850
|
|
|
$ |
21.92
|
|
|
|
6.0
|
|
|
$ |
1,465,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at July 28, 2007
|
|
|
473,600
|
|
|
$ |
21.74
|
|
|
|
5.6
|
|
|
$ |
1,456,000
|
The
Company
determines the fair value of its restricted stock awards based on the market
price of its common stock on the date of grant. Restricted stock activity for
the first half ended July 28, 2007 was as follows:
|
|
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
Nonvested
at
January 28, 2007
|
|
|
296,269
|
|
|
$ |
19.70
|
Granted
|
|
|
79,157
|
|
|
|
26.67
|
Vested
|
|
|
(5,671 |
) |
|
|
21.96
|
Forfeited
|
|
|
(53,452 |
) |
|
|
21.53
|
Nonvested
at
July 28, 2007
|
|
|
316,303
|
|
|
$ |
21.09
|
Total
compensation
expense for all stock option and stock bonus plans during the second quarter
and
first half ended July 28, 2007 was $230,000 and $486,000, respectively (net
of
$121,000 and $256,000 related income tax benefit). During the second quarter
and
first half ended July 29, 2006, the Company recognized expense of $170,000
and
$370,000 for stock option and stock bonus plans, respectively (net of $105,000
and $228,000 related income tax benefit). The total compensation cost related
to
nonvested stock options and awards not yet recognized is currently expected
to
be a combined total of approximately $3,672,000. This cost is expected to be
recognized over a weighted average period of 4.1 years.
NOTE
3. NON-OPERATING INCOME, NET
In
the first half
of fiscal 2007, the Company recorded non-operating income of $433,000 which
consisted primarily of interest income earned on invested cash balances and
notes receivable.
In
the first half
of fiscal 2006, the Company recorded non-operating income of $382,000 which
included a $281,000 loss related to a natural gas derivative (see Note 9) offset
by interest income and a gain of $184,000 from the death benefit of a
Company-owned life insurance policy.
NOTE
4. INCOME TAXES
|
On
July 13,
2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB Statement No. 109” (FIN 48). The Company adopted
the provisions of FIN 48 on January 28, 2007, the first day of its
2007
fiscal year. The implementation of FIN 48 did not result in a cumulative
adjustment to the Company’s previously recorded liability for unrecognized
tax benefits, which amounted to $2,329,000 as of the date of adoption.
If
recognized, $2,217,000 of this amount would impact the Company’s effective
tax rate.
|
|
The
Company
recognizes interest and penalties accrued related to unrecognized
tax
benefits in its tax provision. Due to its net operating loss and
tax
credit carryforward position, the Company recognized no penalties
or
interest during the first half ended July 28, 2007 or July 29, 2006,
and
had no interest or penalties accrued as of July 28, 2007 or January
27,
2007.
|
|
The
Company
believes that it is reasonably possible that the total amount of
unrecognized tax benefits will significantly change within the next
12
months. The Company has certain tax return years subject to statutes
of
limitation which are anticipated to close within 12 months. Unless
challenged by tax authorities, the closure of those statutes of limitation
is expected to result in the recognition of uncertain tax positions
in the
amount of $2,217,000.
|
|
The
Company
is subject to taxation in the United States, and its tax years for
2003
through 2006 are subject to examination by the tax authorities. With
few
exceptions, the Company is no longer subject to U.S. federal, state
or
local examinations by tax authorities for years before
2003.
|
|
The
Company
recorded a tax benefit of $2,436,000 for the first half ended July
28,
2007. This benefit consisted of $1,731,000 based upon the Company’s
estimated effective tax rate of 34.3% for the year and $271,000 from
federal and state tax credits. Further, during the second quarter,
the
Company favorably settled an audit related to one of its former foreign
subsidiaries, Angelica International, Ltd., with Revenue Canada.
As a
result, the Company recognized an associated benefit of $434,000
in the
second quarter. The effective tax rate for the first half ended July
28,
2007, reflects the statutory tax rate adjusted for permanent items
and
state tax benefits, as applicable.
|
|
The
Company
has a federal net operating loss carryover of $36,551,000 which will
expire beginning in 2025; $3,554,000 of federal tax credit carryovers
which expire at various dates beginning in 2021 or have no expiration
date; $8,897,000 of state tax credit carryovers which expire at various
dates beginning in 2012 or have no expiration date; and various other
charitable contribution carryovers, tax credits and state net operating
loss carryovers.
|
NOTE
5. EARNINGS (LOSS) PER SHARE
Basic
earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of Common Stock outstanding during the period. Diluted
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of Common and Common equivalent shares
outstanding.
|
The
following
table reconciles weighted average shares outstanding to amounts used
to
|
|
calculate
basic and diluted earnings (loss) per share for the second quarter
and
first half ended July 28, 2007 and July 29, 2006 (shares in
thousands):
|
|
|
Second
Quarter Ended
|
|
|
First
Half
Ended
|
|
|
July
28,
|
|
|
July
29,
|
|
|
July
28,
|
|
|
July
29,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Weighted
Average Shares:
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
9,274
|
|
|
|
9,182
|
|
|
|
9,256
|
|
|
|
9,173
|
Effect
of
dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Average
shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjusted
for
dilutive effects
|
|
|
9,274
|
|
|
|
9,182
|
|
|
|
9,256
|
|
|
|
9,173
|
Potentially
dilutive securities of 57,000 and 73,000 shares were not included in the
calculation of weighted average shares outstanding for the second quarter and
first half ended July 28, 2007 as their effect is antidilutive on loss per
share
for these periods. Potentially dilutive securities of 34,000 and 41,000 shares
were not included in the calculation of weighted average shares outstanding
for
the second quarter and first half ended July 29, 2006, as their effect is
antidilutive on loss per share for those periods.
NOTE
6. GOODWILL AND OTHER ACQUIRED ASSETS
In
accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill
and Other
Intangible Assets,” the Company
performed its annual goodwill impairment test at the end of the third quarter
of
fiscal 2006 which resulted in no indication of impairment.
Other
acquired
assets consisted of the following (dollars in thousands):
|
|
July
28,
2007
|
|
|
January
27,
2007
|
|
|
|
Gross
|
|
|
|
|
|
Other
|
|
|
Gross
|
|
|
|
|
|
Other
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Acquired
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Acquired
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets,
net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
contracts
|
|
$ |
41,831
|
|
|
$ |
(12,416 |
) |
|
$ |
29,415
|
|
|
$ |
41,813
|
|
|
$ |
(10,984 |
) |
|
$ |
30,829
|
|
Non-compete
covenants
|
|
|
11,089
|
|
|
|
(4,504 |
) |
|
|
6,585
|
|
|
|
11,089
|
|
|
|
(3,810 |
) |
|
|
7,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
acquired assets
|
|
$ |
52,920
|
|
|
$ |
(16,920 |
) |
|
$ |
36,000
|
|
|
$ |
52,902
|
|
|
$ |
(14,794 |
) |
|
$ |
38,108
|
|
Aggregate
amortization expense for the first half ended July 28, 2007 and July 29, 2006
amounted to $2,126,000 and $2,160,000, respectively. Other acquired assets
are
scheduled to be fully amortized by fiscal year 2021 with corresponding annual
amortization expense estimated for each of the next five fiscal years as follows
(dollars in thousands):
2007 |
|
$ |
4,179 |
|
2008 |
|
|
3,826 |
|
2009 |
|
|
3,514 |
|
2010 |
|
|
3,051 |
|
2011 |
|
|
3,041 |
|
The
Company’s
long-term bank borrowings are financed through a $125,000,000 revolving credit
facility under a loan agreement that matures on November 30, 2010. Amounts
borrowed under the credit facility bear interest at a floating rate equal to
either (i) LIBOR plus a margin, or (ii) a Base Rate, defined as the higher
of
either (a) the Federal Funds Rate plus 0.50% or (b) the Prime Rate. The margin
for the LIBOR rate option is based on the Company’s ratio of “Funded
Indebtedness” to “EBITDA,” as each is defined in the loan agreement, and may
range from 1.5% to 2.0%. The LIBOR interest rate option may be selected for
periods of 1 to 3 months, 6 months or 12 months.
As
of July 28,
2007, there was $90,300,000 of outstanding debt under the credit facility,
secured by a first lien on all equipment, inventory, and accounts receivable,
and certain real estate. Of this amount, $88,500,000 bore interest at rates
ranging from 5.32% to 5.40% under LIBOR contracts, plus a margin (2.00% as
of
July 28, 2007), and $1,800,000 bore interest at 8.25%, the Prime Rate, as of
July 28, 2007. Furthermore, the Company had $13,401,000 outstanding in
irrevocable letters of credit as of July 28, 2007, which reduced the amount
available to borrow under the line of credit to $2,969,000 as of the end of
the
second quarter. As of July 28, 2007, the fee on the outstanding letters of
credit and unused funds was 2.0% and 0.25%, respectively.
The
Company is
subject to certain financial covenants under its loan agreement. One of these
covenants requires that the Company maintain a minimum consolidated net worth
of
$120,920,000 plus an aggregate amount equal to 50% of quarterly net income
beginning with the fourth quarter of fiscal 2005 (with no reduction for net
losses), and an asset coverage ratio of no less than 1 to 1. Other covenants
require the Company to maintain a minimum ratio of “EBITDA” to “Fixed Charges”
of no less than 1.15 to 1, and a maximum ratio of “Funded Indebtedness” to
“EBITDA” of no more than 3.5 to 1. The Company was in compliance with these loan
covenants as of July 28, 2007.
As
of July 28,
2007, there was $30,867,000 of life insurance policy loans outstanding. The
loans bore interest at a fixed rate of 8.0% or variable rates ranging from
5.7%
to 6.3%. The proceeds upon surrender of the policies will be reduced by the
amount of any loans outstanding, unless repaid by the Company prior to that
time. Of the total amount outstanding at July 28, 2007, approximately $8,332,000
is considered a current liability and is presented as such in the Condensed
Consolidated Balance Sheet. The remainder is netted against cash surrender
value
of life insurance in the Condensed Consolidated Balance Sheet as of July 28,
2007.
NOTE
8. RETIREMENT BENEFITS
The
Company has a
non-contributory defined benefit pension plan covering primarily all salaried
and hourly administrative non-union personnel who had met participation
requirements prior to September 1, 2004. The benefit formula is based on years
of service and compensation
during employment. The funding policy of the pension plan is in accordance
with
the requirements of the Employee Retirement Income Security Act of 1974. The
Company amended the pension plan, effective September 1, 2004, to freeze
participation in the plan. No employee shall become a participant in the pension
plan on or after that date.
The
net periodic pension expense
recognized in the second quarter and first half ended July 28, 2007 and July
29,
2006 was as follows:
|
|
Second
Quarter Ended
|
|
|
First
Half
Ended
|
|
|
|
July
28,
|
|
|
July
29,
|
|
|
July
28,
|
|
|
July
29,
|
|
(Dollars
in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Pension
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
86
|
|
|
$ |
113
|
|
|
$ |
172
|
|
|
$ |
226
|
|
Interest
cost
|
|
|
331
|
|
|
|
312
|
|
|
|
662
|
|
|
|
624
|
|
Expected
return on plan assets
|
|
|
(333 |
) |
|
|
(322 |
) |
|
|
(666 |
) |
|
|
(644 |
) |
Unrecognized
loss
|
|
|
17
|
|
|
|
17
|
|
|
|
34
|
|
|
|
34
|
|
Net
periodic
pension expense
|
|
$ |
101
|
|
|
$ |
120
|
|
|
$ |
202
|
|
|
$ |
240
|
|
NOTE
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The
Company entered
into an interest rate swap agreement with one of its lenders effective September
9, 2002. The swap agreement fixed the variable portion of the interest rate
(excluding a margin) at 3.58% on $10,000,000 of the outstanding debt under
the
Company’s revolving credit facility until the swap’s termination on May 30,
2007. The Company elected to apply cash flow hedge accounting for the interest
rate swap agreement in accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” Accordingly, the derivative was recorded as
an asset or liability at its fair value and the effective portion of changes
in
the fair value of the derivative, as measured quarterly, was reported in
accumulated other comprehensive income. The loss on the derivative included
in
accumulated other comprehensive loss in the second quarter ended July 28, 2007
and July 29, 2006 amounted to $15,000 and $9,000, respectively, net of tax;
and
$41,000 and $2,000 for the first half ended July 28, 2007 and July 29, 2006,
respectively, net of tax. The Company has recorded a current asset of $67,000
for the fair value of the derivative as of January 27, 2007.
Since
October 2005,
the Company has entered into natural gas futures contracts to fix the price
for
a portion of its future purchases of natural gas and reduce its exposure to
volatility in the cost of natural gas consumed by its service centers due to
fluctuations in the price on the New York Mercantile Exchange (NYMEX). For
fiscal years 2007, 2008 and 2009, these futures contracts are expected to hedge
approximately 70%, 58% and 33%, respectively, of the Company’s total
requirements for natural gas (measured at current usage rates). As of July
28,
2007, the weighted-average cost of natural gas under these contracts is $9.04
per decatherm. The Company has elected to apply cash flow hedge accounting
for
these derivatives in accordance with SFAS No. 133. Accordingly, the net (loss)
gain on the derivatives included in other comprehensive income (loss) for the
second quarter and first half ended July 28, 2007, amounted to $(383,000) and
$1,228,000, respectively, net of tax, and $(566,000) and $(902,000),
respectively, net of tax, for the second quarter and first half ended July
29,
2006, respectively. Prior to the second quarter of fiscal 2006, a portion of
the
Company’s natural gas derivatives were not considered a cash flow hedge for
accounting purposes. The change in fair value for these derivatives was included
in non-operating income for the first half ended July 29, 2006, and amounted
to
a loss of $281,000. The Company has recorded a current liability of $2,282,000
and $2,863,000 as of July 28, 2007 and January 27, 2007, respectively, and
a
long-term
liability
of $426,000 and $1,968,000 as of July 28, 2007 and January 27, 2007,
respectively, for the fair value of the derivatives. The Company estimates
that
$2,282,000 of unrealized losses included in accumulated other comprehensive
loss
before taxes as of July 28, 2007 will be reclassified to cost of services within
the next 12 months as natural gas is purchased for consumption in the service
centers.
In
addition to the
futures contracts, the Company has existing contracts as of July 28, 2007 for
the physical delivery of natural gas that fix the NYMEX cost of gas for
approximately 4% of its estimated natural gas purchase requirements in the
next
12 months, and that fix the basis cost of gas for approximately 83% of its
estimated natural gas purchase requirements in the next 12 months. Although
these contracts are considered derivative instruments, they meet the normal
purchases exclusion contained in SFAS No. 133, as amended by SFAS No. 138,
“Accounting for Certain Derivative Instruments and Certain Hedging Activities,”
and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and
Hedging Activities,” and are therefore exempted from the related accounting
requirements.
NOTE
10. COMPREHENSIVE LOSS
Comprehensive
loss,
consisting primarily of net loss and changes in the fair value of derivatives
(see Note 9), net of taxes, totaled $1,845,000 and $1,290,000 for the second
quarter ended July 28, 2007 and July 29, 2006, respectively; and $1,401,000
and
$3,118,000 for the first half ended July 28, 2007 and July 29, 2006,
respectively.
NOTE
11. COMMITMENTS AND CONTINGENCIES
Prior
to its sale
of the Life Uniform retail business segment to Healthcare Uniform Company,
Inc.
in fiscal 2004, the Company was a guarantor under certain Life Uniform store
lease agreements. These guarantees obligated the Company to make all payments
due under the leases until their expiration in the event of default of Life
Uniform. In connection with the sale of Life Uniform, the Company requested
consents, as required, from landlords to assign the store leases to Healthcare
Uniform Company. As a condition to such consents, certain landlords required
that the Company continue as a guarantor of the leases. Under the Company’s
agreement with Healthcare Uniform Company, these guarantees will only extend
until the end of each lease’s then current term. As of July 28, 2007, the
Company is secondarily obligated as a guarantor for 43 store lease agreements
and the estimated maximum potential amount of future payments the Company could
be required to make under these guarantees is $6,830,000. Although these
guarantees expire at various dates through fiscal year 2014, approximately
70%
of the estimated maximum potential future payments expire by the end of fiscal
year 2009. Also in connection with the sale of Life Uniform the Company received
an unsecured junior subordinated promissory note for approximately $4,000,000
of
the purchase price of its former retail business. The payment of this note
is
subordinated to the bank indebtedness which Healthcare Uniform Company incurred
in connection with its acquisition of Life Uniform. The Company is currently
carrying
the note on its balance sheet at $3,668,000, which reflects a discount of
$1,000,000 made on the note at the time of the sale accreted through July 28,
2007.
The
Company has
provided certain indemnities to the buyer in connection with the sale of Life
Uniform. Although indemnification claims are generally subject to an aggregate
limit of $6,000,000, the Company believes the likelihood of making any payments
for
indemnification
claims is remote and has reserved accordingly.
In
connection with
the March 2005 acquisition of Royal Institutional Services, Inc. and its
affiliate, The Surgi-Pack Corporation, a portion of the purchase price was
placed into escrow, with payment to the sellers contingent upon the occurrence
of certain events as specified in the purchase agreement. As of July 28, 2007,
$1,000,000 remained in escrow due the sellers in March 2015 upon compliance
with
the restrictive covenants.
The
Company carries
insurance policies on insurable risks with coverage and other terms that it
believes to be appropriate. The Company generally has self-insured retention
limits and has obtained fully-insured layers of coverage above such self-insured
retention limits. Accruals for self-insurance losses are made based on claims
experience. Liabilities for existing and unreported claims are accrued for
when
it is probable that future costs will be incurred.
The
Company faces a
possible exposure to outstanding workers’ compensation claims incurred prior to
fiscal 1999 that were sold to a former insurance carrier, in addition to
exposure for deposits with that carrier for claims incurred in fiscal years
1999, 2000 and 2001 that have not yet been resolved and for claims in excess
of
the deductible for fiscal years 1999, 2000, 2001 and 2002. This carrier is
experiencing financial difficulties and may be unable to fulfill its obligation
to pay these claims, which could have a material unfavorable impact on the
Company’s results of operations and financial condition if it is forced to
assume these liabilities. The Company estimates its possible exposure from
these
outstanding claims and deposits to be approximately $834,000 as of July 28,
2007.
A
significant
portion of the Company’s revenues is derived from operations in a limited number
of markets. Revenues generated from operations in California and Arizona
accounted for approximately 39% of revenues for the first half ended July 28,
2007. The Company also faces some significant risk and uncertainty to its
business operations related to the status of labor relations at its service
centers. Approximately 75% of the Company’s workforce is represented by one of
several unions. Collective bargaining agreements covering drivers associated
with four service centers will expire in fiscal 2007. A collective bargaining
agreement covering previously unorganized drivers at the Company’s Las Vegas,
Nevada depot is in the process of being negotiated. Collectively, these new
and
renewal agreements apply to approximately 1% of the Company’s total workforce.
Any work interruptions or stoppages that may result from the inability to reach
ratified agreements at any, some or all of these locations could have a material
adverse impact on the Company’s results of operations and financial
condition.
The
Company is a
party to various claims and legal proceedings which arose in the ordinary course
of its business. Although the ultimate disposition of these proceedings is
not
presently determinable, management does not believe that an adverse
determination in any or all of such proceedings will have a material adverse
effect upon the consolidated financial condition or operating results of the
Company.
NOTE
12. NEW ACCOUNTING PRONOUNCEMENTS
In
February 2006,
the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
Instruments” which amends SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and
Servicing
of
Financial Assets and Extinguishment of Liabilities.” SFAS No. 155 simplifies the
accounting for certain derivatives embedded in other financial instruments
by
allowing them to be accounted for as a whole if the holder elects to account
for
the whole instrument on a fair value basis. SFAS No. 155 also clarifies and
amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No.
155
is effective for the Company’s fiscal year ending January 26, 2008. Earlier
adoption is permitted, provided the Company has not yet issued financial
statements, including for interim periods, for that fiscal year. The Company
does not expect the adoption of SFAS No. 155 to have a material impact on its
consolidated financial statements.
In
June 2006, the
EITF reached a consensus on Issue No. 06-5, “Accounting for Purchases of Life
Insurance – Determining the Amount that Could Be Realized in Accordance with
FASB Technical Bulletin 85-4.” EITF 06-5 stipulates that the cash surrender
value and any additional amounts provided by the contractual terms of the
insurance policy that are realizable at the balance sheet date should be
considered in determining the amount that could be realized under the life
insurance policy. The consensus also provides additional guidance for
determining the amount to be realized, including the policy level for which
the
analysis should be performed, amounts excluded and measurement criteria.
Entities will have the option of applying the provisions of EITF 06-5 as a
cumulative effect adjustment to the opening balance of retained earnings or
retrospectively to all prior periods. EITF 06-5 is effective for the Company’s
fiscal year ending January 26, 2008. The Company does not expect that the
adoption of EITF 06-5 will have a material impact on its consolidated financial
statements.
In
September 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a
framework for measuring the fair value of assets and liabilities. This framework
is intended to provide increased consistency in how fair value determinations
are made under various existing accounting standards which permit, or in some
cases require, estimates of fair market value. SFAS No. 157 also expands
financial statement disclosure requirements about a company’s use of fair value
measurements, including the effect of such measures on earnings. SFAS No. 157
is
effective for the Company’s fiscal year ending January 31, 2009. The Company is
currently evaluating the impact SFAS No. 157 will have on its consolidated
financial statements.
In
September 2006,
the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans,” which amends SFAS No. 87, “Employers’
Accounting for Pension,” SFAS No. 88, “Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,”
SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than
Pension” and SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pension
and Other Postretirement Benefits.” SFAS No. 158 requires that employers
recognize on a prospective basis the funded status of their defined benefit
pension and other postretirement plans on their consolidated balance sheet
and
recognize as a component of other comprehensive income, net of tax, the gains
or
losses and prior service costs or credits that arise during the period but
are
not recognized as components of net periodic benefit cost. On January 27, 2007,
the Company adopted the recognition and disclosure provisions of SFAS No. 158,
and included the related cumulative effect adjustment in its consolidated
balance sheet for fiscal 2006. The statement also requires that employers
measure plan assets and obligations as of the date of their year-end financial
statements beginning with the Company’s fiscal year ending January 31, 2009. The
Company
currently
measures
its plan assets and obligations as of January 1. The Company has not yet
determined the impact that adopting this portion of SFAS No. 158 will have
on
its consolidated balance sheets.
In
February 2007,
the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Liabilities.” SFAS No. 159 provides companies with an option to report selected
financial assets and liabilities at fair value, with the objective to reduce
both the complexity in accounting for financial instruments and the volatility
in earnings caused by measuring related assets and liabilities differently.
SFAS
No. 159 is effective for the Company’s fiscal year ending January 31, 2009. The
Company has not yet determined the impact that adoption of SFAS No. 159 will
have on its consolidated financial statements.
NOTE
13. SUBSEQUENT EVENT
Subsequent
to the
end of its second quarter, the Company made the decision to sell or close
its
Edison, New Jersey service center. The service center had been underperforming
for some time and failed to make the progress management expected in the
second
quarter of fiscal 2007. While the Company expects to sell or close this facility
before the end of fiscal 2007, the exact timing has not been finalized, as
the
Company intends to fulfill its existing customer commitments, work to find
other
providers for customers no longer in its market area, and seek to accommodate
as
many employees as possible at its other locations, if the facility closes
versus
sells. Management is still evaluating which assets will be sold versus
transferred to other facilities and has not yet determined whether any
significant charges related to the sale or closure of this service center
will
be incurred.
SECOND
QUARTER AND
FIRST HALF ENDED JULY 28, 2007
COMPARED
WITH
SECOND
QUARTER AND
FIRST HALF ENDED JULY 29, 2006
General
Angelica
Corporation is a leading provider of outsourced linen management services to
the
healthcare industry in the United States. We offer comprehensive linen
management services to the U.S. healthcare industry, including hospitals,
long-term care facilities, surgery centers, medical clinics, and other medical
providers. Among the items that we clean and provide, on either a rental or
customer-owned basis, are bed linens, towels, gowns, scrubs, surgical linens
and
surgical packs, as well as mops, mats and other dust control products. To a
more
limited extent, we also provide linen management services to customers in the
hospitality business. Currently, we operate 29 laundry service centers and
serve
customers in 25 states.
Results
of
Operations
Second
Quarter
Ended July 28, 2007 Compared to Second Quarter Ended July 29,
2006
Second
quarter
fiscal 2007 revenues were $107.6 million, an increase of $2.3 million, or 2.2%,
compared with the same period in fiscal 2006. Organic growth contributed $2.5
million of the increase, representing an organic growth rate of 2.4%. The
current year organic growth rate included an approximate 4.6% improvement in
pricing, partially offset by a volume decline primarily related to a large
customer contract that was not renewed. The organic growth was partially offset
by a net reduction in revenues of $0.2 million related to acquisitions and
divestitures, primarily due to the sale of non-healthcare customer accounts
in
fiscal 2006. Total healthcare revenues increased 3.3% compared with the same
period in fiscal 2006.
Cost
of services of
$93.6 million in the second quarter of fiscal 2007 increased $3.4 million,
or
3.8%, from the same period last year. The principal factors for this increase
were continued operational difficulties at our Edison, New Jersey facility,
which negatively impacted the operations in the New York City/New Jersey area,
as well as increased linen costs. For the service centers in the New York
City/New Jersey area, total production and delivery expenses increased $2.5
million to 85.7% of revenues in the second quarter of fiscal 2007 from 69.5%
of
revenues in the second quarter of fiscal 2006 due to equipment failures and
management turnover. The $1.0 million favorable variance in these costs for
all
other service centers (excluding the service centers in the New York City/New
Jersey area) was a result of increased operating efficiencies and lower
operating volumes. In addition, total company linen amortization increased
$2.1
million
as a result
of increased linen purchases in fiscal 2006 to satisfy our 100% fill initiative
and higher quality linen and our first quarter fiscal 2006 accounting policy
change to increase the useful life of linens.
Gross
margin was
13.0% in the second quarter of fiscal 2007, a decrease from 13.3% reported
in
the first quarter of fiscal 2007 and 14.4% reported in the same period a year
ago for the reasons noted above. Gross profit from the service centers in the
New York City/New Jersey area declined $1.9 million in the second quarter of
fiscal 2007 from the same period in fiscal 2006 due to the factors mentioned
above. In the balance of the country, gross profit increased $0.8 million year
over year.
In
the second
quarter fiscal 2007, selling, general and administrative (SG&A) expenses
increased by $0.3 million from second quarter fiscal 2006 to $13.7 million,
or
12.7% of revenues, compared to 12.8% of revenues a year ago. The increase in
SG&A expenses resulted from $0.5 million of additional retirement
benefit accruals and severance costs related to recent staffing reductions;
$0.4
million in increased health insurance costs; $0.4 million related to the
settlement of civil litigation filed on behalf of former employees at our Long
Beach, California facility which was sold in December 2005, including dismissal
of multiple workers compensation claims that were filed on behalf of the same
individuals; and $0.2 million related to the settlement of a federal contract
audit and related professional fees. These increases were partially offset
by
the absence of prior year expenses of $1.3 million associated with our
operations process improvement implementation, the Board of Directors’ Special
Committee, and professional fees related to union contract negotiations,
litigation and financial consulting projects. Annualized salaries and benefits
totaling approximately $1.3 million were eliminated in the second quarter of
fiscal 2007 as part of a cost savings initiative.
Interest
expense of
$2.3 million in second quarter fiscal 2007 was a slight decrease from the same
period a year ago. The decrease resulted from lower interest rates, which
decreased from an average 7.4% per annum in the second quarter fiscal 2006
to an
average 7.0% per annum in the second quarter fiscal 2007.
We
recorded $0.2
million non-operating income in the second quarter of fiscal 2007, consisting
primarily of interest income. During the second quarter of fiscal 2006, we
recorded $0.4 million non-operating income, which included interest income
and a
$0.2 million gain from the death benefit of a Company-owned life insurance
policy.
For
the second
quarter of fiscal 2007, we recorded a tax benefit of $1.5 million compared
to
$0.6 million in the second quarter of fiscal 2006. The higher income tax benefit
in the current year quarter resulted from the increase in pretax loss for the
second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006,
as well as the favorable settlement of an audit with Revenue Canada related
to
our former foreign subsidiary, Angelica International, Ltd., during the second
quarter of fiscal 2007.
We
reported a net
loss of $1.4 million in the second quarter of fiscal 2007 compared with a net
loss of $0.7 million in the prior year quarter. The variance resulted primarily
from the operational difficulties at our Edison facility discussed
above.
First
Half
Ended July 28, 2007 Compared to First Half Ended July 29, 2006
Revenues
for the
first half of fiscal 2007 of $215.4 million represented an increase of 1.4%,
or
$3.1 million, from $212.3 million in the first half of fiscal 2006. Organic
growth contributed $3.6 million of the increase, representing an organic growth
rate of 1.7%. The current year organic growth rate resulted from an approximate
4.4% improvement in pricing, partially offset by a volume decline primarily
related to a large customer contract that was not renewed. The organic growth
was partially offset by a net reduction in revenues of $0.5 million related
to
acquisitions and divestitures, primarily due to the sale of non-healthcare
customer accounts in fiscal 2006. Total healthcare revenues increased 2.6%
compared with the same period in fiscal 2006.
In
the first half
of fiscal 2007, cost of services increased from the same period in fiscal 2006
by $4.7 million, or 2.6%, to $187.1 million. The principal factors for this
increase were the operating difficulties at Edison and increased linen costs
as
discussed in the preceding section. Total company production and delivery
expenses increased $1.7 million in the first half of fiscal 2007 from the first
half of fiscal 2006; however, the same costs for the service centers in the
New
York City/New Jersey area increased $4.9 million to 85.5% of revenues as
compared to 69.1% of revenues in the same period a year ago. The $3.2 million
favorable variance in these costs for all other service centers (excluding
the
service centers in the New York City/New Jersey area) was a result of increased
operating efficiencies and lower operating volumes. In addition, total company
linen amortization increased $3.2 million as a result of increased linen
purchases in fiscal 2006 to satisfy our 100% fill initiative and higher quality
linen and our first quarter fiscal 2006 accounting policy change to increase
the
useful life of linens.
Gross
margin was
13.1% in the first half of fiscal 2007, a decrease from 14.1% reported in the
same period a year ago for the reasons noted above. Gross profit from the
service centers in the New York City/New Jersey area declined $3.8 million
in
the first half of fiscal 2007 from the same period in fiscal 2006 due to the
factors mentioned above. In the balance of the country, gross profit increased
$2.2 million year over year.
For
the first half
of fiscal 2007, SG&A expenses decreased $0.7 million to 12.6% of revenues
from 13.1% of revenues in the same period a year ago. The decrease resulted
from
the absence of prior year expenses of $2.2 million associated with our
operations process improvement implementation, the Board of Directors’ Special
Committee, and professional fees related to union contract negotiations,
litigation and financial consulting projects, as well as $0.5 million in lower
incentive compensation accruals year over year. These decreases were partially
offset by current year increases of $0.6 million related to the settlement
of a
federal contract audit and legal fees for this settlement and other employee
matters, $0.5 million related to higher health insurance costs, $0.5
million related to additional retirement benefit accruals and severance
costs due to staffing reductions, and $0.4 million related to the settlement
of
civil litigation filed on behalf of former employees at our Long Beach,
California facility which was sold in December 2005, including dismissal of
multiple workers
compensation
claims
that were filed on behalf of the same individuals.
In
the first half
of fiscal 2007, we reported other operating income of $0.2 million consisting
primarily of insurance proceeds from a property insurance claim. Other operating
income of $0.5 million in the first half of fiscal 2006 reflected gains from
the
sale of two parcels of real estate.
Interest
expense
for the first half of fiscal 2007 increased slightly from fiscal 2006 to $4.6
million, a result of higher average borrowings.
We
recorded $0.4
million non-operating income in the first half of fiscal 2007, which consisted
primarily of interest income. During the first half of fiscal 2006, we recorded
$0.4 million non-operating income which included interest income and a $0.2
million gain from the death benefit of a Company-owned life insurance policy,
partially offset by a $0.3 million loss related to a natural gas
derivative.
For
the first half
of fiscal 2007, we recorded a tax benefit of $2.4 million compared to $1.6
million in the first half of fiscal 2006. The higher income tax benefit in
the
current year resulted from the increase in pretax loss and the favorable
settlement of an audit with Revenue Canada related to our former foreign
subsidiary, Angelica International, Ltd.
We
reported a net
loss of $2.6 million in the first half of fiscal 2007 compared with a net loss
of $2.2 million in the same period a year ago. The variance resulted primarily
from the operational difficulties at our Edison facility discussed above, offset
partially by the decrease in selling, general and administrative expenses
discussed above.
Financial
Condition
As
of July 28,
2007, working capital totaled $34.0 million and the current ratio
(i.e., the ratio of current assets to current liabilities) was 1.4 to
1, compared with $31.8 million and 1.4 to 1, respectively, at January 27, 2007.
The increase in working capital is primarily due to a higher balance in accounts
receivable and a lower balance in accounts payable as discussed
below.
Accounts
receivable
increased by $4.3 million in the first half of fiscal 2007, primarily due to
increased revenues, the transition of centralizing our cash applications and
collections process, and the conversion to a lockbox collection system. Prepaid
expenses and other current assets decreased $1.2 million in the first half
due
to the collection of a miscellaneous receivable and the normal amortization
of
prepaid items.
Accounts
payable
decreased by $4.5 million due to the timing of invoice payments near the quarter
end. Accrued wages and other compensation decreased $1.6 million from January
27, 2007, primarily due to incentive compensation that was accrued at year
end
and paid out in the first half of fiscal 2007. Other accrued liabilities
increased $1.5 million primarily due to higher accrued interest balances.
Long-term debt of $90.3 million as of July 28, 2007 was $5.0 million greater
than at January 27, 2007, reflecting
additional
borrowings from our credit facility to fund the higher working capital balance
discussed above. The $2.5 million decrease in other long-term liabilities
resulted from a decrease in the liability related to our natural gas hedges
and
first half contributions to our defined benefit pension plan. Our ratio of
total
debt to total capitalization as of July 28, 2007 was 38.3% compared to 36.7%
as
of January 27, 2007. Book value per share at the end of the second quarter
of
fiscal 2007 was $15.69, a decline from $16.00 as of January 27,
2007.
Liquidity
and
Capital Resources
Cash
flows from
operating activities of continuing operations decreased $5.4 million for the
first half ended July 28, 2007 compared with the same period a year ago. The
current year decline resulted primarily from the increase in working capital
and
pension plan contributions discussed above.
Cash
flows from
investing activities for the first half ended July 28, 2007 included capital
expenditures of $5.9 million. Cash flows from investing activities for the
first
half ended July 29, 2006 included capital expenditures of $4.0 million, net
proceeds of $2.3 million from the disposal of assets, and $0.5 million from
the
death benefit of a Company-owned life insurance policy, the gain on which was
recognized in the fourth quarter of fiscal 2005. We expect capital expenditures
to be approximately $15.0 million for fiscal 2007.
Cash
provided by
financing activities was $3.8 million in the first half of fiscal 2007
reflecting additional borrowings of $4.9 million under our loan agreement and
$0.2 million from life insurance policy loans, partially offset by dividend
payments of $2.1 million. In the first half of fiscal 2006, cash provided by
financing activities of $0.6 million reflected additional borrowings of $1.4
million under our loan agreement and $1.1 million from life insurance policy
loans, offset by dividend payments of $2.1 million. In addition, proceeds from
stock option exercises increased to $0.8 million in the first half of fiscal
2007 from $0.2 million in the same period a year ago.
As
of July 28,
2007, there was $90.3 million of debt outstanding under our credit facility.
Of
this amount, $88.5 million bore interest at rates ranging from 5.32% to 5.40%
under LIBOR contracts, plus a margin (2.00% at July 28, 2007), and $1.8 million
bore interest at 8.25%, the Prime Rate, as of July 28, 2007.
In
addition to
amounts due under our loan agreement, at the end of the second quarter fiscal
2007 there were $30.9 million of life insurance policy loans outstanding. The
proceeds of these loans, bearing interest at a fixed rate of 8.0% or variable
rates ranging from 5.7% to 6.3%, were used to pay down our revolving line of
credit in fiscal 2005 and 2006. On July 28, 2007, we also had $13.4 million
in
irrevocable letters of credit outstanding, which reduced the amount available
to
borrow under the loan agreement to $3.0 million.
We
are subject to
certain financial covenants under our loan agreement. One of the covenants
requires us to maintain a minimum consolidated net worth of $120.9
million
plus
an aggregate
amount equal to 50% of quarterly net income beginning with the fourth quarter
of
fiscal 2005 (with no reductions for net losses), and an asset coverage ratio
of
no less than 1 to 1. We are also required to maintain a minimum ratio of
“EBITDA” to “Fixed Charges” of no less than 1.15 to 1, and a maximum ratio of
“Funded Indebtedness” to “EBITDA” of no more than 3.5 to 1. We were in
compliance with these loan covenants as of July 28, 2007.
Management
believes
that our financial condition, operating cash flow and available sources of
external funds are sufficient to satisfy our requirements for debt service,
capital expenditures, dividends and working capital over the course of the
next
12 months. However, if we pursue a large acquisition, incur significant
expenditures for new facilities, or are unable to achieve our forecasted
operating results during the next twelve months, our forecasted cash flows
could
be negatively impacted requiring that we consider alternative funding sources
in
order to avoid violations of our loan covenants.
Recent
Accounting Pronouncements
On
July 13, 2006,
the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements in accordance with
FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax return.
Under
FIN 48, the impact of an uncertain income tax position on the income tax return
must be recognized at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant taxing authority. An uncertain income
tax
position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We adopted the provisions of FIN 48 on January 28, 2007,
the
first day of our 2007 fiscal year. The implementation of FIN 48 had no impact
on
our consolidated financial statements.
FORWARD-LOOKING
STATEMENTS
Any
forward-looking
statements made in this document reflect the Company's current views with
respect to future events and financial performance and are made pursuant to
the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties that may cause
actual results to differ materially from those set forth in these statements.
These potential risks and uncertainties include, but are not limited to,
competitive and general economic conditions, the ability to retain current
customers and to add new customers in competitive market environments,
competitive pricing in the marketplace, delays in the shipment of orders,
availability of labor at appropriate rates, availability and cost of energy
and
water supplies, the cost of workers' compensation and healthcare benefits,
the
ability to attract and retain key personnel, the ability of the Company to
recover its seller note and avoid future lease obligations as part of its sale
of its former Life Uniform division, the ability of the Company to execute
its
operational strategies, unusual or unexpected cash needs for operations or
capital transactions, the effectiveness of the Company’s initiatives to reduce
key operating costs as a percent of revenues, the ability to obtain financing
in
required amounts and at appropriate rates and terms, the ability to identify,
negotiate, fund, consummate and integrate acquisitions, and other factors which
may be identified in the Company's filings with the Securities and Exchange
Commission.
The
Company is
exposed to commodity price risk related to the use of natural gas in its laundry
service centers. The total cost of natural gas in the second quarter and first
half ended July 28, 2007 was approximately $6.2 million and $13.1 million,
respectively. To reduce the uncertainty of fluctuating energy prices, the
Company has entered into fixed-price contracts as of July 28, 2007 for
approximately 70% of its estimated natural gas purchase requirements in the
next
12 months. A hypothetical 10% increase in the cost of natural gas not covered
by
these contracts would result in a reduction of approximately $0.7 million in
annual pretax earnings.
The
Company is also
exposed to commodity price risk resulting from the consumption of gasoline
and
diesel fuel for delivery trucks. The total cost of delivery fuel in the second
quarter and first half ended July 28, 2007 was approximately $2.3 million and
$4.4 million, respectively. A hypothetical 10% increase in the cost of delivery
fuel would result in a decrease of approximately $0.9 million in annual pretax
earnings.
The
Company’s
exposure to interest rate risk relates primarily to its variable-rate revolving
debt agreement and life insurance policy loans. As of July 28, 2007, there
was
$90.3 million of outstanding debt under the credit facility that bore interest
at a rate equal to either (i) LIBOR plus a margin, or (ii) a Base Rate, defined
as the higher of (a) the Federal Funds Rate plus .50% or (b) the Prime Rate.
The
margin is based on the Company’s ratio of “Funded Indebtedness” to “EBITDA,” as
each is defined in the loan agreement. As of July 28, 2007, the margin was
2.00%. Of the $30.9 million in life insurance policy loans outstanding as of
July 28, 2007, a total of $25.1 million of these loans bore interest at variable
rates ranging from 5.7% to 6.3%. A hypothetical increase of 100 basis points
in
short-term interest rates applicable to the outstanding variable-rate debt
would
result in a reduction of approximately $1.2 million in annual pretax
earnings.
The
Company
maintains a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of the unaudited consolidated
financial statements and other disclosures included in this report. The
Company’s Board of Directors, operating through its Audit Committee which is
composed entirely of independent Directors, provides oversight to the financial
reporting process.
As
of the end of
the period covered by this report, the Company’s Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
Based upon their evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are
effective in ensuring that material information relating to the Company,
including its consolidated subsidiaries, is made known to them by others within
those entities in a timely manner, particularly during the period for which
this
quarterly report is being prepared. The Chief Executive Officer and Chief
Financial Officer also concluded based upon their evaluation that the Company’s
disclosure controls and procedures are effective in ensuring that the
information required to be disclosed by the Company in the reports that it
files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time
periods
specified
in the Securities and Exchange Commission’s rules and forms.
There
were no changes in the Company’s
internal control over financial reporting during the Company’s most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
(a)
|
See
Exhibit
Index on page 26.
|
Pursuant
to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
Angelica
Corporation
(Registrant)
Date: September
6,
2007
/s/ Stephen M.
O’Hara
Stephen
M.
O’Hara
Chairman,
President
and
Chief
Executive
Officer
/s/
James W.
Shaffer
James
W.
Shaffer
Vice
President and
Chief
Financial
Officer
(Principal
Financial Officer)
(Principal
Accounting Officer)
Exhibit
Number
Description
*Asterisk
indicates
exhibits filed herewith.
**Incorporated
by
reference from the document listed.
3.1
|
Restated
Articles of Incorporation of the Company, as currently in effect.
Filed as
Exhibit 3.1 to the Form 10-K for the fiscal year ended January 26,
1991.**
|
3.2
|
Amendment
to
Certificate of Designation, Preferences and Rights of Class B Series
2
Junior Participating Preferred Stock. Filed as Exhibit 3.1 to a current
report on Form 8-K on September 5,
2006.**
|
3.3
|
Current
By-Laws of the Company, as amended and restated. Filed as Exhibit
3.2 to
the Form 10-K for fiscal year ended January 27,
2007.**
|
4.1
|
Shareholder
Rights Plan dated August 25, 1998. Filed as Exhibit 1 to
Registration Statement on Form 8-A on August 28,
1998.**
|
4.2
|
Form
of
Amendment No. 1 to Rights Agreement, dated as of August 29, 2006,
between
Angelica Corporation and UMB Bank, N.A. Filed as Exhibit 4.1 to a
current
report on Form 8-K on September 5,
2006.**
|
4.3
|
Form
of
Amendment No. 2 to Rights Agreement, dated September 19, 2006, by
and
between Angelica Corporation and UMB Bank, N.A. Filed as Exhibit
4.1 to a
current report on Form 8-K on September 22,
2006.**
|
10.1
|
Letter
agreements dated May 23, 2007 relating to cash compensation for retainer
and other director compensation for Steel
directors.*
|
31.1
|
Section
302
Certification of Chief Executive
Officer.*
|
31.2
Section 302 Certification of Chief Financial Officer.*
32.1 Section
906 Certification of Chief Executive Officer.*
32.2 Section
906 Certification of Chief Financial Officer.*