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
|
April
26, 2008
|
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 May 30, 2008 was 9,551,680 shares.
ANGELICA
CORPORATION AND SUBSIDIARIES
TABLE
OF CONTENTS
APRIL
26, 2008 FORM 10-Q QUARTERLY REPORT
|
|
|
Page
Number
|
|
|
|
Reference
|
|
|
|
|
|
|
|
|
Part
I. Financial Information:
|
|
|
|
|
|
|
Item
1. Condensed Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income - First Quarter ended April 26, 2008 and
April 28, 2007 (Unaudited)
|
2
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets – April 26, 2008 and January 26, 2008
(Unaudited)
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows – First Quarter ended April 26, 2008
and April 28, 2007 (Unaudited)
|
4
|
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
5-15
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
|
16-20
|
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
21
|
|
|
|
|
|
Item
4. Controls and Procedures
|
21-22
|
|
|
|
|
Part
II. Other Information:
|
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
23
|
|
|
|
|
|
Item
6. Exhibits
|
23
|
|
|
|
|
|
Signatures
|
24
|
|
|
|
|
|
Exhibit
Index
|
25-26
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
First Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
April 26,
2008
|
|
|
April 28,
2007
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
109,704 |
|
|
$ |
107,777 |
|
Cost of
services
|
|
|
(90,838 |
) |
|
|
(93,496 |
) |
Gross
profit
|
|
|
18,866 |
|
|
|
14,281 |
|
Selling,
general and administrative expenses
|
|
|
(13,537 |
) |
|
|
(13,398 |
) |
Amortization
of other acquired assets
|
|
|
(951 |
) |
|
|
(1,063 |
) |
Other
operating income, net
|
|
|
338 |
|
|
|
198 |
|
Income from
operations
|
|
|
4,716 |
|
|
|
18 |
|
Interest
expense
|
|
|
(1,875 |
) |
|
|
(2,336 |
) |
Non-operating
income, net
|
|
|
169 |
|
|
|
262 |
|
Income (loss)
before income taxes
|
|
|
3,010 |
|
|
|
(2,056 |
) |
Income tax
(provision) benefit
|
|
|
(922 |
) |
|
|
915 |
|
Net
income (loss)
|
|
$ |
2,088 |
|
|
$ |
(1,141 |
) |
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$ |
0.22 |
|
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$ |
0.22 |
|
|
$ |
(0.12 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands)
|
|
April
26,
|
|
|
January
26,
|
|
|
|
2008
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
2,832 |
|
|
$ |
3,258 |
|
Receivables,
less reserves of $849 and $926
|
|
|
60,545 |
|
|
|
63,803 |
|
Linen
inventory
|
|
|
50,242 |
|
|
|
48,547 |
|
Deferred
income taxes
|
|
|
7,233 |
|
|
|
8,539 |
|
Prepaid
expenses and other current assets
|
|
|
7,633 |
|
|
|
6,540 |
|
Total Current
Assets
|
|
|
128,485 |
|
|
|
130,687 |
|
|
|
|
|
|
|
|
|
|
Property and
Equipment
|
|
|
208,811 |
|
|
|
198,048 |
|
Less --
accumulated depreciation
|
|
|
112,391 |
|
|
|
105,705 |
|
Total
Property and Equipment
|
|
|
96,420 |
|
|
|
92,343 |
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
49,259 |
|
|
|
49,259 |
|
Other
acquired assets, net
|
|
|
32,978 |
|
|
|
33,929 |
|
Cash
surrender value of life insurance
|
|
|
1,348 |
|
|
|
2,308 |
|
Deferred
income taxes
|
|
|
4,583 |
|
|
|
5,962 |
|
Miscellaneous
|
|
|
6,443 |
|
|
|
5,921 |
|
Total Other
Assets
|
|
|
94,611 |
|
|
|
97,379 |
|
Total
Assets
|
|
$ |
319,516 |
|
|
$ |
320,409 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
34,763 |
|
|
$ |
33,902 |
|
Accrued wages
and other compensation
|
|
|
6,824 |
|
|
|
6,186 |
|
Deferred
compensation and pension liabilities
|
|
|
1,650 |
|
|
|
1,650 |
|
Other accrued
liabilities
|
|
|
21,200 |
|
|
|
24,052 |
|
Total Current
Liabilities
|
|
|
64,437 |
|
|
|
65,790 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt, less current maturities
|
|
|
86,200 |
|
|
|
90,000 |
|
Other
Long-Term Liabilities
|
|
|
12,620 |
|
|
|
13,156 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
Common Stock,
$1 par value, authorized 20,000,000
|
|
|
|
|
|
|
|
|
shares,
issued: 9,576,138 and 9,572,938 shares
|
|
|
9,576 |
|
|
|
9,573 |
|
Capital
surplus
|
|
|
9,564 |
|
|
|
9,230 |
|
Retained
earnings
|
|
|
141,079 |
|
|
|
140,053 |
|
Accumulated
other comprehensive income (loss)
|
|
|
436 |
|
|
|
(2,947 |
) |
Common Stock
in treasury, at cost: 285,087 and 287,987 shares
|
|
|
(4,396 |
) |
|
|
(4,446 |
) |
Total
Shareholders' Equity
|
|
|
156,259 |
|
|
|
151,463 |
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
319,516 |
|
|
$ |
320,409 |
|
The accompanying
notes are an integral part of the consolidated financial
statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands)
|
|
First Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
April 26,
2008
|
|
|
April 28,
2007
|
|
|
|
|
|
|
|
|
Cash Flows
from Operating Activities:
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$ |
2,088 |
|
|
$ |
(1,141 |
) |
Non-cash
items included in income (loss) from continuing
operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,416 |
|
|
|
3,631 |
|
Amortization
|
|
|
1,294 |
|
|
|
1,454 |
|
Deferred
income taxes
|
|
|
922 |
|
|
|
(1,065 |
) |
Cash
surrender value of life insurance
|
|
|
(292 |
) |
|
|
(302 |
) |
Gain on
disposal of assets
|
|
|
(91 |
) |
|
|
(29 |
) |
Change in
working capital components of continuing
|
|
|
|
|
|
|
|
|
operations
|
|
|
2,825 |
|
|
|
(4,829 |
) |
Other,
net
|
|
|
261 |
|
|
|
(821 |
) |
Net cash
provided by (used in) operating activities of
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
10,423 |
|
|
|
(3,102 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows
from Investing Activities:
|
|
|
|
|
|
|
|
|
Expenditures
for property and equipment
|
|
|
(6,928 |
) |
|
|
(2,144 |
) |
Disposals of
assets
|
|
|
103 |
|
|
|
70 |
|
Life
insurance premiums paid, net
|
|
|
(143 |
) |
|
|
(144 |
) |
Net cash used
in investing activities of continuing operations
|
|
|
(6,968 |
) |
|
|
(2,218 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows
from Financing Activities:
|
|
|
|
|
|
|
|
|
Repayments of
long-term debt
|
|
|
(37,900 |
) |
|
|
(32,866 |
) |
Borrowings of
long-term debt
|
|
|
34,100 |
|
|
|
36,300 |
|
Repayments of
life insurance policy loans
|
|
|
(5,563 |
) |
|
|
(8,298 |
) |
Borrowings
from life insurance policy loans
|
|
|
6,815 |
|
|
|
8,514 |
|
Dividends
paid
|
|
|
(1,045 |
) |
|
|
(1,037 |
) |
Exercise of
stock options
|
|
|
49 |
|
|
|
658 |
|
Net cash
(used in) provided by financing activities of
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(3,544 |
) |
|
|
3,271 |
|
|
|
|
|
|
|
|
|
|
Cash Flows
from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Operating
cash flows
|
|
|
(337 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
Net decrease
in cash
|
|
|
(426 |
) |
|
|
(2,061 |
) |
Balance at
beginning of year
|
|
|
3,258 |
|
|
|
6,254 |
|
Balance at
end of period
|
|
$ |
2,832 |
|
|
$ |
4,193 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Purchases of
property and equipment included in
|
|
|
|
|
|
|
|
|
accounts
payable
|
|
$ |
1,610 |
|
|
$ |
219 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST
QUARTER ENDED APRIL 26, 2008
AND
APRIL 28, 2007
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
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 26, 2008 (fiscal 2007). 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 and cash
flows for the first quarter ended April 26, 2008 are not necessarily
indicative of the results that will be achieved for the full fiscal year
2008. Cash flows related to operations that were discontinued prior to
fiscal year 2007 are segregated for reporting purposes in the Condensed
Consolidated Statements of Cash
Flows.
|
|
New Accounting
Pronouncements
|
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (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, as originally issued, was effective for the Company’s
fiscal year ending January 31, 2009. However, on February 12, 2008, the FASB
issued Final FASB Staff Position FAS 157-2, “Effective Date of FASB Statement
No. 157,” which deferred the effective date of SFAS No. 157 for one year, as it
relates to certain nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). On January 27, 2008, the first day of
its 2008 fiscal year, the Company adopted the provisions of SFAS No. 157 as it
relates to financial assets and financial liabilities, and nonfinancial assets
and nonfinancial liabilities that are recognized or disclosed at fair value in
the financial statements on a recurring basis. The adoption of these provisions
had no impact on the Company’s consolidated financial statements. On February 1,
2009, the first day of the Company’s 2009 fiscal year, the standard will also
apply to all other fair value measurements. See Note 12, “Fair Value
Measurements,” for additional information.
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
Pensions” 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, and
as a result of the adoption of this measurement provision on January 27, 2008,
the Company recorded a reduction of $17,000 to retained earnings to reflect the
transition period of the new measurement date.
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. The Company adopted SFAS No. 159 on January 27,
2008, the first day of its 2008 fiscal year, but did not elect the fair value
measurement option for any of its financial assets or liabilities.
In June
2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for
Income Tax Benefits on Share-Based Payment Awards.” EITF 06-11 requires
companies to recognize a realized income tax benefit associated with dividends
or dividend equivalents paid on nonvested, equity-classified employee
share-based payment awards that are charged to retained earnings as an increase
to additional paid-in capital. EITF 06-11 will be applied prospectively to any
income tax benefits that result from dividends that are declared on or after
January 27, 2008. The adoption of EITF 06-11 did not have a material impact on
the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” This
statement amends SFAS No. 141 and provides revised guidance for recognizing and
measuring assets acquired and liabilities assumed in a business combination.
This statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination, and requires that transaction costs in a
business combination be expensed as incurred. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS No. 141R will impact our accounting for business
combinations completed on or after February 1, 2009.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” SFAS No. 161 amends and expands the disclosure requirements of
SFAS No. 133 with the intent to enable investors to better understand the
effects of derivative instruments and hedging
activities
on an entity’s financial condition, financial performance, and cash flows. This
statement is effective for financial statements, including those for interim
periods, which the Company issues on or after February 1, 2009. SFAS No. 161
will impact disclosures only and will not have an impact on the Company’s
consolidated financial condition, results of operations, or cash
flows.
In
April 2008, the FASB finalized Staff Position (FSP) No. 142-3, “Determination of
the Useful Life of Intangible Assets.” FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets.” The position is effective for the Company’s fiscal
year ending January 30, 2010, and interim periods within that fiscal year. The
Company is currently evaluating the impact of the adoption of FSP 142-3 on its
consolidated financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 categorizes sources of accounting
principles that are generally accepted in descending order of authority. This
statement is effective sixty days following the SEC’s approval of Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of
‘Present Fairly in Conformity with Generally Accepted Accounting Principles.'”
The Company is currently evaluating the potential impact, if any, of the
adoption of SFAS No. 162 on its consolidated financial statements.
NOTE
2. SHARE-BASED PAYMENTS
|
The
Company has various equity-based compensation 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. Certain of these plans provide that
stock options and/or stock grants that have not previously vested will
immediately vest in the event of a change of control transaction as
defined and determined under the terms of each
plan.
|
|
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
quarters ended
April 26, 2008 or April 28, 2007. A summary of the status of the Company’s
stock option plans as of April 26, 2008, and changes for the quarter 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 27, 2008
|
|
|
515,100 |
|
|
$ |
21.85 |
|
|
|
5.6 |
|
|
$ |
455,000 |
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,200 |
) |
|
|
15.27 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(500 |
) |
|
|
32.88 |
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(5,500 |
) |
|
|
22.09 |
|
|
|
|
|
|
|
|
|
Options
outstanding at April 26, 2008
|
|
|
505,900 |
|
|
$ |
21.88 |
|
|
|
5.4 |
|
|
$ |
409,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at April 26, 2008
|
|
|
449,650 |
|
|
$ |
21.68 |
|
|
|
5.0 |
|
|
$ |
409,000 |
|
|
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 quarter ended April 26, 2008 was as
follows:
|
|
|
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Nonvested at
January 27, 2008
|
|
|
301,045 |
|
|
$ |
21.09 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Vested
|
|
|
(3,213 |
) |
|
|
18.71 |
|
Forfeited
|
|
|
(56,757 |
) |
|
|
28.18 |
|
Nonvested at
April 26, 2008
|
|
|
241,075 |
|
|
$ |
19.62 |
|
|
Total
compensation expense charged to income for all stock option and stock
bonus plans during the quarters ended April 26, 2008 and April 28, 2007
was $214,000 and $243,000, respectively (net of $129,000 and $148,000
related income taxes). The total compensation cost related to nonvested
stock options and awards not yet recognized is currently expected to be a
combined total of approximately $2,536,000. This cost is expected to be
recognized over a weighted average period of 4.1 years. Restricted stock
awards comprise approximately $2,245,000 of the Company’s expected future
stock-based compensation expense, with the remainder related to stock
option awards.
|
NOTE
3. NON-OPERATING INCOME, NET
In the
first quarter of fiscal 2008 and 2007, the Company recorded non-operating income
of $169,000 and $262,000, respectively, which consisted primarily of interest
income earned on notes receivable.
NOTE
4. INCOME TAXES
|
The
Company recorded a tax provision of $922,000 for the first quarter ended
April 26, 2008. This expense consisted of $1,129,000 based upon the
Company’s estimated effective tax rate of 37.5% for the year and a benefit
of $207,000 from federal and state tax credits. The effective tax rate for
the first quarter ended April 26, 2008, reflects the statutory tax rate
adjusted for permanent items and state tax benefits, as
applicable.
|
|
The
Company adopted the provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes
– An Interpretation of FASB Statement No. 109” (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 gross unrecognized tax
benefits, which amounted to $2,333,000 as of the date of adoption. In the
third quarter of fiscal 2007, the statute of limitations on certain tax
return years expired. The expiration of those statutes of limitation
resulted in the recognition of uncertain tax positions in the amount of
$2,330,000 through the 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 quarters ended April 26, 2008 or April 28, 2007, and
had no interest or penalties accrued as of April 26, 2008 or January 26,
2008. Because both permanent and temporary items can be
considered uncertain tax positions, the Company has reflected its deferred
tax assets and liabilities on the basis of the more likely than not
standard required by FIN 48.
|
|
As
of the beginning of fiscal year 2008, the Company had $15,617,000 of
unrecognized tax benefits. If recognized, $11,000 of unrecognized tax
benefits would affect the effective tax rate. An estimate of changes to
the unrecognized tax benefits within 12 months of April 26, 2008 cannot be
made at this point.
|
|
The
Company is subject to taxation in the United States, and its tax years for
2004 through 2007 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
2004.
|
|
As
of the beginning of fiscal year 2008, the Company had a federal net
operating loss carryover of $43,674,000 which will expire beginning in
2025; $3,938,000 in federal tax credit carryovers which expire at various
dates beginning in 2021 or have no expiration date; $10,223,000 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. After
adjustment for uncertain tax positions identified in accordance with the
provisions of FIN 48, the Company’s net operating loss carryover for
financial reporting purposes has been reduced from $43,674,000 to
$6,694,000. This adjustment has no impact on the Company’s effective tax
rate.
|
NOTE
5. EARNINGS (LOSS) PER SHARE
Basic
net income (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 net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of Common and Common equivalent shares outstanding
using the treasury stock method.
The
following table reconciles weighted average shares outstanding to amounts used
to
calculate
basic and diluted net income (loss) per share for the first quarter ended April
26, 2008 and April 28, 2007 (shares in thousands):
|
|
First Quarter
Ended
|
|
|
|
April
26,
|
|
|
April
28,
|
|
|
|
2008
|
|
|
2007
|
|
Weighted
Average Shares:
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
9,287 |
|
|
|
9,239 |
|
Effect of
dilutive securities
|
|
|
22 |
|
|
|
-
|
|
Average
shares outstanding,
|
|
|
|
|
|
|
|
|
adjusted
for dilutive effects
|
|
|
9,309 |
|
|
|
9,239 |
|
NOTE
6. GOODWILL AND OTHER ACQUIRED ASSETS, NET
In
accordance with 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 2007 which resulted in no indication of
impairment.
Other
acquired assets, net consisted of the following (dollars in
thousands):
|
|
April 26,
2008
|
|
|
January 26,
2008
|
|
|
|
Gross
|
|
|
|
|
|
Other
|
|
|
Gross
|
|
|
|
|
|
Other
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Acquired
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Acquired
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets, net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
contracts
|
|
$ |
41,831 |
|
|
$ |
(14,433 |
) |
|
$ |
27,398 |
|
|
$ |
41,831 |
|
|
$ |
(13,792 |
) |
|
$ |
28,039 |
|
Non-compete
covenants
|
|
|
9,718 |
|
|
|
(4,138 |
) |
|
|
5,580 |
|
|
|
9,718 |
|
|
|
(3,828 |
) |
|
|
5,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
acquired assets
|
|
$ |
51,549 |
|
|
$ |
(18,571 |
) |
|
$ |
32,978 |
|
|
$ |
51,549 |
|
|
$ |
(17,620 |
) |
|
$ |
33,929 |
|
Aggregate
amortization expense for the first quarter ended April 26, 2008 and April 28,
2007 amounted to $951,000 and $1,063,000, 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):
2008
|
|
$ |
3,797 |
|
2009
|
|
|
3,508 |
|
2010
|
|
|
3,051 |
|
2011
|
|
|
3,041 |
|
2012
|
|
|
3,040 |
|
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
April 26, 2008, there was $86,200,000 of outstanding debt under the credit
facility, secured by a first lien on equipment, inventory, accounts receivable,
and certain real estate. Of this amount, $84,000,000 bore interest at rates
ranging from 2.71% to 2.90% under LIBOR contracts, plus a margin (2.0% as of
April 26, 2008), and $2,200,000 bore interest at 5.25%, the Prime Rate, as of
April 26, 2008. Furthermore, the Company had $11,506,000 outstanding in
irrevocable letters of credit as of April 26, 2008, which reduced the amount
available to borrow under the line of credit to $20,594,000. As of April 26,
2008, the fee on the outstanding letters of credit and unused funds was 2.50%
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 April 26, 2008.
As of
April 26, 2008, there was $31,578,000 of life insurance policy loans
outstanding. The loans bore interest at a fixed rate of 8.0% or variable rates
ranging from 5.8% to 6.2%. 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. The total amount borrowed is netted against cash surrender
value of life insurance in the Condensed Consolidated Balance Sheet as of April
26, 2008 and January 26, 2008.
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 so that no
employee shall become a participant in the pension plan on or after that
date.
The net periodic pension expense
recognized in the first quarter ended April 26, 2008 and April 28, 2007 was as
follows:
|
|
First Quarter
Ended
|
|
|
|
April
26,
|
|
|
April
28,
|
|
(Dollars in
thousands)
|
|
2008
|
|
|
2007
|
|
Pension
expense:
|
|
|
|
|
|
|
Service
cost
|
|
$ |
53 |
|
|
$ |
86 |
|
Interest
cost
|
|
|
345 |
|
|
|
331 |
|
Expected
return on plan assets
|
|
|
(364 |
) |
|
|
(333 |
) |
Unrecognized
loss
|
|
|
9 |
|
|
|
17 |
|
Net periodic
pension expense
|
|
$ |
43 |
|
|
$ |
101 |
|
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 first
quarter ended April 28, 2007 amounted to $26,000, net of tax.
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 2008, 2009 and 2010, these futures contracts are
expected to hedge approximately 58%, 32% and 12%, respectively, of the Company’s
total requirements for natural gas (measured at current usage rates). As of
April 26, 2008, the weighted-average cost of natural gas under these contracts
is $8.90 per decatherm. The Company has elected to apply cash flow hedge
accounting for these derivatives in accordance with SFAS No. 133. Accordingly,
the net gain on the derivatives included in accumulated other comprehensive
income (loss) for the quarter ended April 26, 2008, amounted to $3,384,000, net
of tax, and $1,611,000, net of tax, for the quarter ended April 28, 2007. The
Company has recorded a current asset (liability) of $2,637,000 and $(1,174,000)
as of April 26, 2008 and January 26, 2008, respectively, and a long-term asset
(liability) of $975,000 and $(361,000) as of April 26, 2008 and January 26,
2008, respectively, for the fair value of the derivatives. The Company estimates
that $2,637,000 of unrealized gains included in accumulated other comprehensive
income before taxes as of April 26, 2008 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
April 26, 2008 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 78% 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 INCOME
Comprehensive
income, consisting primarily of net income (loss) and changes in the fair value
of derivatives (see Note 9), net of taxes, totaled $5,472,000 and $444,000 for
the first quarter ended April 26, 2008 and April 28, 2007,
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 April 26, 2008,
the Company is secondarily obligated as a guarantor for 27 store lease
agreements and the estimated maximum potential amount of future payments the
Company could be required to make under these guarantees is $4,085,000. Although
these guarantees expire at various dates through fiscal year 2014, approximately
81% of the estimated maximum potential future payments expires by the end of
fiscal year 2010. 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 this note on its balance sheet at $3,818,000.
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 April
26, 2008, $1,000,000 remained in escrow and is 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.
A
significant portion of the Company’s revenues is derived from operations in a
limited number of markets. Revenues generated from operations in California
accounted for approximately 35% of revenues for the quarter ended April 26,
2008. 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 73% of the Company’s workforce is represented by one of
several unions. Collective bargaining agreements covering production workers at
ten service centers and drivers associated with four service centers expire in
fiscal 2008. Collective bargaining agreements covering production workers at
three of these service centers and drivers associated with two of these service
centers have been renegotiated and are in the process of being ratified and/or
finalized. Collectively, these expiring and renewed agreements apply to
approximately 26% of the Company’s total workforce. Any work interruptions or
shortages 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, most of which are covered by one or more
insurance policies which are subject to large deductibles. Although the ultimate
disposition of these proceedings is not presently determinable, management has
established reserves that it deems appropriate based on current facts and
circumstances of each case and 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. FAIR VALUE MEASUREMENTS
The
Company adopted the provisions of SFAS No. 157 as of January 27, 2008, the first
day of its 2008 fiscal year, for financial instruments. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value, and expands the
disclosure requirements about fair value measurements. SFAS No. 157 establishes
a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value. These tiers are as follows:
|
·
|
Level
1 Inputs – unadjusted quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access at the
measurement date.
|
|
·
|
Level
2 Inputs – inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly.
|
|
·
|
Level
3 Inputs – unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own
assumptions.
|
As of
April 26, 2008, the Company held natural gas derivative instruments that are
required to be measured at fair value on a recurring basis. The Company
currently does not have nonfinancial assets or nonfinancial liabilities that are
required to be measured at fair value on a recurring basis.
The
Company’s natural gas derivative instruments consist of natural gas futures
contracts
which
are traded on the New York Mercantile Exchange (NYMEX); therefore, the Company
has categorized these futures contracts as Level 1. All settlements from natural
gas futures contracts that are deemed “effective” as defined in SFAS 133 are
included in “Cost of services” in the period that the underlying natural gas is
consumed in the service centers. Any ineffectiveness associated with these
contracts, as defined in SFAS 133, is recorded in earnings immediately. See Note
9 for further information on the Company’s derivative instruments and hedging
activities. As of April 26, 2008, the Company has measured the fair value of its
natural gas derivative instrument asset as $3,612,000. For the quarter ended
April 26, 2008, the amount of loss included in Cost of services attributable to
the change in unrealized gains or losses relating to assets still held at April
26, 2008, was $112,000.
NOTE
13. SUBSEQUENT EVENT
On May
23, 2008, the Company announced the signing of a definitive merger agreement on
May 22, 2008 with a company formed by Lehman Brothers Merchant Banking Partners
IV L.P. to acquire the Company for $22.00 per share in cash. The transaction is
subject to approval by Angelica Corporation shareholders, the expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
and satisfaction of other customary closing conditions.
Item
2. Management’s Discussion and Analysis of Financial Condition
and
Results of Operations
FIRST
QUARTER ENDED APRIL 26, 2008
COMPARED
WITH
FIRST
QUARTER ENDED APRIL 28, 2007
FORWARD-LOOKING
STATEMENTS
Any
forward-looking statements made in this document reflect our 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, our ability to recover our seller
note and avoid future lease obligations as part of our sale of our former Life
Uniform division, our ability to execute our operational strategies, unusual or
unexpected cash needs for operations or capital transactions, the effectiveness
of our 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, costs and expenses that may result from efforts associated with
the pending sale of the Company (including those that may be caused by having
management’s full attention distracted by that process as well as unfavorable
consequences that could result from a failure to complete the sale), and other
factors which may be identified from time to time in our filings with the
Securities and Exchange Commission.
Overview
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 28 laundry service centers in
fifteen states and serve customers in 25 states.
In the
fourth quarter of fiscal 2007, we closed and sold our Edison, New Jersey service
center. The service center had been underperforming for some time, and the Board
reached the decision to close or sell the facility after it failed to make the
progress
management
expected in the first half of fiscal 2007.
As
previously announced, the Board of Directors authorized Morgan Joseph & Co.,
Inc. to pursue strategic alternatives for the Company, including a possible
sale. The Board reached this decision after taking into consideration: 1) the
challenges we face in executing our strategy as a public company; 2) the added
expense associated with being a relatively small public company; and 3) the
desire of certain significant shareholders that the Company explore a
sale.
On May
23, 2008, we announced the signing of a definitive merger agreement on May 22,
2008 with a company formed by Lehman Brothers Merchant Banking Partners IV L.P.
to acquire the Company for $22.00 per share in cash. The transaction is subject
to approval by Angelica Corporation shareholders, the expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and
satisfaction of other customary closing conditions.
Results of
Operations
First
quarter fiscal 2008 revenues were $109.7 million, an increase of $1.9 million
compared with the same period in fiscal 2007. Organic growth contributed $2.0
million of the increase, representing an organic growth rate of 1.9%.
Approximately $3.7 million of revenues in the first quarter of fiscal 2007 were
generated from our Edison, New Jersey facility. Total healthcare revenues
increased 2.5% compared with the same period in fiscal 2007.
Cost of
services of $90.8 million in the first quarter of fiscal 2008 decreased by $2.7
million, or 2.8%, from the same period last year. The closure of the Edison, New
Jersey service center in December 2007 resulted in a reduction of expenses from
the first quarter of fiscal 2007 to the first quarter of fiscal 2008 of
approximately $4.9 million. The $2.2 million increase in these costs for all
other service centers excluding Edison resulted primarily from the effect that
rising oil prices has had on diesel fuel and certain other supplies used in our
daily operations and increased spending on repairs and maintenance.
Gross
profit increased from $14.3 million in the first quarter of fiscal 2007 to $18.9
million in the first quarter of fiscal 2008 for the reasons noted above.
Included in the prior year amount is an operating loss from the Edison service
center of approximately $1.7 million. Gross margin was 17.2% in the first
quarter of fiscal 2008, an increase from the 13.3% reported in the same period a
year ago.
In the
first quarter fiscal 2008, selling, general and administrative (SG&A)
expenses increased slightly from the first quarter fiscal 2007 to $13.5 million,
but decreased as a percentage of revenues to 12.3%, compared to 12.4% of
revenues a year ago. The current year amounts include $0.4 million of costs
incurred related to the pending sale of the Company.
We
reported other operating income of $0.3 million and $0.2 million in the first
quarter of fiscal 2008 and 2007, respectively, both of which consisted primarily
of proceeds from property insurance claims.
Interest
expense in the first quarter of fiscal 2008 decreased by $0.5 million to $1.9
million as a result of lower interest rates. Interest rates decreased from an
average 7.4% in the first quarter of fiscal 2007 to an average 5.6% in the first
quarter of fiscal 2008.
We
recorded $0.2 million and $0.3 million of non-operating income during the first
quarter of fiscal 2008 and fiscal 2007, respectively, which consisted primarily
of interest income from a note receivable.
For the
first quarter of fiscal 2008, we recorded a tax provision of $0.9 million
compared to a benefit of $0.9 million in the first quarter of fiscal 2007. The
variance resulted from the recognition of pretax income in the current quarter
as compared to a pretax loss for the first quarter of fiscal 2007.
We
reported net income of $2.1 million in the first quarter of fiscal 2008 compared
with a net loss of $1.1 million in the prior year quarter. The variance resulted
primarily from the increase in gross profit, partially offset by higher selling,
general and administrative expenses and tax provision as discussed
above.
Financial
Condition
As of
April 26, 2008, working capital totaled $64.0 million and the current ratio
(i.e., the ratio of
current assets to current liabilities) was 2.0 to 1, compared with $64.9 million
and 2.0 to 1, respectively, at January 26, 2008. The decrease in working capital
is primarily due to a reduction in accounts receivable as explained
below.
Accounts
receivable decreased by $3.3 million in the first quarter of fiscal 2008 as a
result of improved collections. Days sales outstanding in receivables decreased
from 51 days at the end of fiscal 2007 to 47 days at the end of the first
quarter of fiscal 2008. Prepaid expenses and other current assets increased by
$1.1 million primarily due to the recognition of a $2.6 million current asset
related to our natural gas hedge contracts, which was a liability at the end of
fiscal 2007 when the market price of natural gas was lower than our hedged
prices. This increase was partially offset by the reclassification of certain
remaining equipment from our Edison, New Jersey facility, which was classified
as a current asset at the end of fiscal 2007, to property and equipment in the
first quarter of fiscal 2008 as these items were transferred to and put into use
at other service centers.
Accounts
payable increased by $0.9 million due to the timing of invoice payments near the
quarter end. Accrued wages and other compensation increased $0.6 million from
January 26, 2008, as a result of higher incentive compensation accruals. Other
accrued liabilities decreased by $2.9 million in the first quarter of fiscal
2008, primarily due to the natural gas hedge contracts discussed above which
were recorded as a $1.2 million
liability
at the end of fiscal 2007, lower accrued interest due to the timing of payments,
and a decrease in insurance reserves. Long-term debt of $86.2 million as of
April 26, 2008 was $3.8 million less than at January 26, 2008, as an increase in
results of operations, improved accounts receivable collections and additional
borrowings of life insurance policy loans allowed us to pay down our credit
facility. Our ratio of total debt to total capitalization as of April 26, 2008
was 35.6% compared to 37.3% as of January 26, 2008. Book value per share at the
end of first quarter fiscal 2008 was $16.82, an increase from $16.31 as of
January 26, 2008.
Liquidity and Capital
Resources
Cash
flow provided by operating activities of continuing operations increased $13.5
million for the quarter ended April 26, 2008 compared with the same period a
year ago. The current year increase primarily resulted from the increase in net
income and positive cash flow from the changes in working capital components
discussed above.
Cash
flows from investing activities for the quarter ended April 26, 2008 included
capital expenditures of $6.9 million as compared to $2.1 million in the first
quarter of fiscal 2007. The increase in capital expenditures is due to the
installation of new tunnel washers in two of our facilities and the costs
associated with opening our new Pittsburg, California facility which
is planned to be completed in the second quarter of fiscal 2008. We expect
fiscal 2008 capital expenditures to be approximately $15.0 million of new
expenditures plus $3.0-$4.0 million of carryover expenditures from fiscal 2007,
including the completion of the Pittsburg facility.
Cash
used in financing activities was $3.5 million in the first quarter of fiscal
2008 reflecting the payment of $3.8 million under our loan agreement and
dividend payments of $1.0 million, partially offset by $1.3 million in
additional borrowings from life insurance policy loans. In the first quarter of
fiscal 2007, cash provided by financing activities of $3.3 million reflected
additional borrowings of $3.5 million under our loan agreement and $0.2 million
from life insurance policy loans. In addition, proceeds from stock option
exercises decreased to less than $0.1 million in the first quarter of fiscal
2008 from $0.7 million in the first quarter of fiscal 2007.
As of
April 26, 2008, there was $86.2 million outstanding debt under our credit
facility. Of this amount, $84.0 million bore interest at rates ranging from
2.71% to 2.90% under LIBOR contracts, plus a margin (2.0% at April 26, 2008),
and $2.2 million bore interest at 5.25%, the Prime Rate, as of April 26,
2008.
In
addition to amounts due under our loan agreement, at the end of the first
quarter there was $31.6 million of life insurance policy loans outstanding
bearing interest at a fixed rate of 8.0% or variable rates ranging from 5.8% to
6.2%. On April 26, 2008, we also had $11.5 million in irrevocable letters of
credit outstanding, which reduced the amount available to borrow under the loan
agreement to $20.6 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 debt covenants as of April 26, 2008.
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.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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 first quarter
ended April 26, 2008, was approximately $6.5 million. To reduce the uncertainty
of fluctuating energy prices, the Company has entered into fixed-price contracts
as of April 26, 2008, for approximately 55% 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 $1.1 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 first quarter ended April 26, 2008, was approximately $2.8 million. A
hypothetical 10% increase in the cost of delivery fuel would result in a
decrease of approximately $1.1 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 April 26, 2008,
there was $86.2 million of outstanding debt under the credit facility that bear
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 April 26, 2008, the
margin was 2.0%. Of the $31.6 million in life insurance policy loans outstanding
as of April 26, 2008, a total of $25.5 million of these loans bore interest at
variable rates ranging from 5.8% to 6.2%. 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 $1.1 million in annual pretax
earnings.
Item 4. Controls and
Procedures
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.
PART
II. OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
following table sets forth information with respect to shares of our common
stock that we purchased during the three fiscal months ended April 26,
2008.
Period
|
Total
Number
of
Shares
Purchased
(a)
|
|
Average
Price
Paid
Per
Share
|
|
Total
Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Programs
|
|
Maximum
Number
of
Shares That
May
Yet Be
Purchased
Under
the
Programs
|
|
|
Jan.
27, 2008 – Feb. 23, 2008
|
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
|
Feb.
24, 2008 – Mar. 22, 2008
|
|
|
|
313
|
|
$
|
17.10
|
|
—
|
|
|
—
|
|
|
|
Mar.
23, 2008 – Apr. 26, 2008
|
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
|
Total
|
|
|
|
313
|
|
$
|
17.10
|
|
—
|
|
|
—
|
|
|
(a)
|
The
shares purchased were restricted stock withheld for the payment of
withholding taxes upon vesting of restricted
stock.
|
(a)
|
See
Exhibit Index on page 25.
|
SIGNATURES
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: June
5, 2008
|
/s/ Stephen M.
O’Hara
|
|
Stephen
M. O’Hara
|
|
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
INDEX
Exhibit
|
|
|
Number
|
|
Description
|
|
|
*Asterisk
indicates exhibits filed herewith.
|
|
|
**Incorporated
by reference from the document listed.
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger, dated as of May 22, 2008, by and among Angelica
Corporation, Clothesline Holdings, Inc. and Clothesline Acquisition
Corporation. Filed as Exhibit 2.1 to a current report on Form 8-K on May
23, 2008.**
|
|
|
|
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.**
|
|
|
|
4.4
|
|
Form
of Amendment No. 3 to Rights Agreement, dated May 22, 2008, by and between
Angelica Corporation and Computershare Trust Company, N.A. Filed as
Exhibit 4.1 to a current report on Form 8-K on May 23,
2008.**
|
|
|
|
4.5
|
|
Letter
agreement between Computershare Trust Company, N.A., UMB Bank, N.A. and
Angelica Corporation, dated as of November 20, 2007, acknowledging
acceptance of Computershare Trust Company, N.A. as successor Rights Agent
under the Shareholder Rights Plan. Filed as Exhibit 4.4 to the Form 10-Q
for the fiscal quarter ended October 27, 2007.**
|
|
|
|
10.1
|
|
Guarantee
Letter, dated as of May 22, 2008, from Lehman Brothers Merchant Banking
Partners IV L.P. in favor of Angelica Corporation. Filed as
Exhibit 10.1 to a current report on Form 8-K on May 23,
2008.**
|
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.*
|
26