==============================================================================
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 29, 2006 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 September 1, 2006 was 9,501,704 shares.
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ANGELICA CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
JULY 29, 2006 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements:
Consolidated Statements of Income - Second Quarter and
First Half Ended July 29, 2006 and July 30, 2005
(Unaudited) 2
Consolidated Balance Sheets - July 29, 2006
and January 28, 2006 (Unaudited) 3
Consolidated Statements of Cash Flows - First Half
ended July 29, 2006 and July 30, 2005 (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4. Controls and Procedures 25-26
PART II. OTHER INFORMATION:
Item 6. Exhibits 27
Signatures 28
Exhibit Index 29
CONSOLIDATED STATEMENTS OF INCOME
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands, except per share amounts)
Second Quarter Ended First Half Ended
----------------------- -----------------------
July 29, July 30, July 29, July 30,
2006 2005 2006 2005
----------------------- -----------------------
CONTINUING OPERATIONS:
Textile service revenues $105,286 $105,218 $ 212,292 $205,699
Cost of textile services (90,161) (91,559) (182,426) (176,505)
-------- -------- --------- --------
Gross profit 15,125 13,659 29,866 29,194
Selling, general and administrative expenses (13,433) (12,828) (27,845) (25,341)
Amortization of other acquired assets (1,080) (1,042) (2,160) (1,841)
Other operating (expense) income, net (54) 682 497 630
-------- -------- --------- --------
Income from operations 558 471 358 2,642
Interest expense (2,349) (1,756) (4,569) (2,906)
Non-operating income, net 438 258 382 797
-------- -------- --------- --------
(Loss) income from continuing operations
before income taxes (1,353) (1,027) (3,829) 533
Income tax benefit (provision) 638 304 1,615 (117)
-------- -------- --------- --------
(Loss) income from continuing operations (715) (723) (2,214) 416
-------- -------- --------- --------
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of
tax benefit of $0, $49, $0 and $93 - (211) - (330)
-------- -------- --------- --------
Net (loss) income $ (715) $ (934) $ (2,214) $ 86
======== ======== ========= ========
BASIC (LOSS) EARNINGS PER SHARE:
(Loss) income from continuing operations $ (0.08) $ (0.08) $ (0.24) $ 0.05
Loss from discontinued operations - (0.02) - (0.04)
-------- -------- --------- --------
Net (loss) income $ (0.08) $ (0.10) $ (0.24) $ 0.01
======== ======== ========= ========
DILUTED (LOSS) EARNINGS PER SHARE:
(Loss) income from continuing operations $ (0.08) $ (0.08) $ (0.24) $ 0.04
Loss from discontinued operations - (0.02) - (0.03)
-------- -------- --------- --------
Net (loss) income $ (0.08) $ (0.10) $ (0.24) $ 0.01
======== ======== ========= ========
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
July 29, January 28,
2006 2006
-------- -----------
ASSETS
------
Current Assets:
Cash and cash equivalents $ 5,788 $ 4,377
Receivables, less reserves of $1,726 and $994 57,214 58,151
Linens in service 46,785 43,785
Assets held for sale 4,012 1,573
Prepaid expenses and other current assets 1,637 2,029
-------- --------
Total Current Assets 115,436 109,915
-------- --------
Property and Equipment 199,654 202,927
Less -- accumulated depreciation 100,648 96,634
-------- --------
Total Property and Equipment 99,006 106,293
-------- --------
Other:
Goodwill 49,259 49,259
Other acquired assets 39,940 42,470
Deferred income taxes 17,351 15,389
Cash surrender value of life insurance 1,390 1,941
Miscellaneous 6,112 6,161
-------- --------
Total Other Assets 114,052 115,220
-------- --------
Total Assets $328,494 $331,428
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 246 $ 319
Accounts payable 33,627 37,229
Accrued wages and other compensation 7,573 7,037
Deferred compensation and pension liabilities 2,977 2,977
Deferred income taxes 3,114 3,321
Other accrued liabilities 33,297 30,535
-------- --------
Total Current Liabilities 80,834 81,418
-------- --------
Long-Term Debt, less current maturities 86,501 85,096
Other Long-Term Liabilities 15,984 15,366
Shareholders' Equity:
Common Stock, $1 par value, authorized 20,000,000
shares, issued: 9,503,413 and 9,471,538 shares 9,503 9,472
Capital surplus 8,345 7,189
Retained earnings 136,520 140,805
Accumulated other comprehensive loss (3,457) (2,553)
Unamortized restricted stock (3,962) (2,841)
Common Stock in treasury, at cost: 78,920 and 169,415 shares (1,774) (2,524)
-------- --------
Total Shareholders' Equity 145,175 149,548
-------- --------
Total Liabilities and Shareholders' Equity $328,494 $331,428
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
First Half Ended
---------------------------------
July 29, 2006 July 30, 2005
------------- -------------
Cash Flows from Operating Activities:
(Loss) income from continuing operations $ (2,214) $ 416
Non-cash items included in (loss) income from continuing operations:
Depreciation 7,457 7,564
Amortization 2,753 2,511
Deferred income taxes (1,615) 902
Cash surrender value of life insurance (766) (594)
Gain on sale of assets (534) (610)
Change in working capital components of continuing
operations, net of businesses acquired/disposed of (2,513) (5,939)
Other, net (42) (488)
-------- --------
Net cash provided by operating activities of
continuing operations 2,526 3,762
-------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (4,002) (11,019)
Cost of businesses and assets acquired - (49,967)
Disposals of assets 2,271 145
Life insurance premiums paid, net of death benefits received 341 (211)
-------- --------
Net cash used in investing activities of continuing operations (1,390) (61,052)
-------- --------
Cash Flows from Financing Activities:
Repayments of long-term debt (52,068) (81,910)
Borrowings of long-term debt 53,400 117,400
Borrowings from life insurance policy loans 1,101 22,988
Debt issuance costs - (192)
Dividends paid (2,071) (2,021)
Exercise of stock options 236 1,276
-------- --------
Net cash provided by financing activities of
continuing operations 598 57,541
-------- --------
Cash Flows from Discontinued Operations:
(Restated - See Note 1)
Operating cash flows (323) (183)
Investing cash flows - (336)
Net increase (decrease) in cash and cash equivalents 1,411 (268)
Balance at beginning of year 4,377 926
-------- --------
Balance at end of period $ 5,788 $ 658
======== ========
Supplemental cash flow information:
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.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER AND FIRST HALF ENDED
JULY 29, 2006 AND JULY 30, 2005
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements are
unaudited, and these consolidated 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 28, 2006 (fiscal
2005). 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 second
quarter and first half ended July 29, 2006 are not necessarily
indicative of the results that will be achieved for the full fiscal
year 2006.
Restated Consolidated Statements of Cash Flows
----------------------------------------------
Subsequent to the issuance of its unaudited consolidated financial
statements for the quarter and first half ended July 30, 2005,
management of the Company determined that the cash flows associated
with discontinued operations should not have been presented as a
single line item within the Consolidated Statements of Cash Flows. As
a result, in the fourth quarter of fiscal 2005, the Company changed
the presentation of cash flows from discontinued operations to
present separate disclosure of the cash flows from operating,
investing, and financing activities.
Linens in Service
-----------------
The Company reviews the linen amortization period of its linens in
service on an ongoing basis. In order to satisfy its initiative to
provide customers with 100% order fill rates the Company has
purchased a significant amount of additional linens, which results in
linens being washed less often and therefore lasting longer. As a
result, the Company determined that the actual useful life of its
linens was longer than the estimated useful life previously used for
amortization purposes in the Company's financial statements and,
effective April 30, 2006, the first day of the Company's 2006 second
fiscal quarter, changed its estimate of the average useful life from
60 weeks to 63 weeks to reflect the estimated periods during which
these linens will remain in service. The effect of this change was to
reduce 2006 second quarter linen amortization expense by $299,000,
decrease net loss by $212,000 and decrease basic and diluted loss per
share by $0.02.
Reclassifications
-----------------
Certain amounts in the prior period have been reclassified to conform
to current period presentation.
5
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. A total of 1,975,000 shares have been
authorized to be issued under all such plans. 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 four years except for
those granted in fiscal 2004 and 2005 which vest in six months, and
are exercisable not less than six months or 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.
Effective January 29, 2006, the first day of fiscal 2006, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised
2004) "Share-Based Payment" (SFAS 123(R)) using the modified
prospective method of adoption, which does not require restatement of
prior periods. Under the modified prospective method, the Company is
required to record compensation expense for all awards granted after
the date of adoption and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption, net
of an estimate of expected forfeitures. Under SFAS 123(R),
compensation expense is based on the estimated fair values of stock
options and restricted stock determined on the date of grant and is
recognized over the related vesting period. For
performance-contingent restricted stock, if it is determined that the
performance contingency will not be satisfied, any previously
recognized compensation expense is reversed in the period such
determination is made. As of January 17, 2006, the Board of Directors
approved the accelerated vesting of 64,334 unvested stock options.
The exercise price of these options was greater than the market price
of the underlying stock on the date of modification. By accelerating
the vesting of these options, approximately $173,000 and $43,000 of
compensation expense will not be incurred in fiscal years 2006 and
2007, respectively. The adoption of SFAS No. 123(R) did not have a
material impact on the consolidated financial statements.
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 29, 2006 was
as follows:
Weighted
Average Grant
Shares Date Fair Value
------------------------------------------------------------------------------
Nonvested at January 29, 2006 141,972 $25.64
Granted 123,042 16.98
Vested (6,473) 22.73
Forfeited (17,336) 23.69
------------------------------------------------------------------------------
Nonvested at July 29, 2006 241,205 $21.44
==============================================================================
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 29, 2006.
For the first half ended July 30, 2005, the Company granted 106,000
options with a weighted average fair value of $6.94, using the
Black-Scholes
6
model and the following assumptions: risk-free interest rate of
4.04%; expected dividend yield of 3.8%; volatility of 31.4% and
expected lives of nine to ten years. The risk-free interest rate was
based on external data while all other assumptions were determined
based on the Company's historical experience with stock options.
Activity in the Company's stock option plans for the first half ended
July 29, 2006 was as follows:
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Shares Exercise Price Term (Years) Value
-----------------------------------------------------------------------------------------------------------------
Options outstanding at January 29, 2006 813,675 $21.77 6.1
Granted - -
Exercised (18,075) 13.99
Forfeited (24,075) 28.74
Expired (127,000) 20.38
-----------------------------------------------------------------------------------------------------------------
Options outstanding at July 29, 2006 644,525 $22.00 6.7 $667,000
=================================================================================================================
Options exercisable at July 29, 2006 628,000 $22.14 6.7 $666,000
=================================================================================================================
Cash proceeds, tax benefits and intrinsic value related to total
stock options exercised during the second quarter and first half of
2006 and 2005 were as follows:
Second Quarter Ended First Half Ended
------------------------ -----------------------------
July 29, July 30, July 29, July 30,
2006 2005 2006 2005
-------- -------- -------- ----------
Proceeds from stock options exercised $162,000 $781,000 $253,000 $1,414,000
Tax benefits related to stock options exercised $ - $365,000 $ - $ 665,000
Intrinsic value of stock options exercised $ 39,000 $949,000 $109,000 $1,728,000
The Company did not realize a tax benefit related to the exercise of
stock options in the second quarter or first half of fiscal 2006 as
there was no taxable income for the benefit to offset.
Prior to March 24, 2006, the Company generally issued shares from
treasury stock to satisfy restricted stock awards and stock option
exercises. Effective on this date, the Company began issuing new
shares to satisfy such awards and exercises.
Total compensation expense charged to income for all stock option and
stock bonus plans during the second quarter and first half ended July
29, 2006 was $170,000 and $370,000, respectively (net of $105,000 and
$228,000 related income tax benefit). During the second quarter and
first half ended July 30, 2005, the Company recognized $293,000 and
$536,000 of expense for restricted stock and performance-based
awards, respectively, net of $61,000 and $151,000 related income tax
benefit. The total compensation expense related to nonvested stock
options and awards not yet recognized is currently expected to be a
combined total of approximately $2,703,000. This cost is expected to
be recognized over a weighted average period of 2.3 years.
Substantially all of the Company's current
7
quarter and expected future stock-based compensation expense is
related to restricted stock awards.
Prior to the adoption of SFAS 123(R), the Company measured
compensation expense for stock-based compensation plans using the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and followed the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." Accordingly, no compensation expense was
recognized for stock-based compensation plans other than for
restricted stock and performance-based awards. Had compensation
expense for stock-based compensation plans for the second quarter and
first half ended July 30, 2005 been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would
approximate the following pro forma amounts:
Second First Half
Quarter Ended Ended
July 30, July 30,
(Dollars in thousands, except per share amounts) 2005 2005
----------------------------------------------------------------------------------------------
Net (loss) income:
As reported $ (934) $ 86
Add: stock-based employee compensation expense
included in net income, net of tax 293 536
Deduct: stock-based employee compensation
expense determined under fair-value based
method for all awards, net of tax (769) (1,331)
------- -------
Pro forma net loss $(1,410) $ (709)
======= =======
Basic (loss) earnings per share:
As reported $ (0.10) $ 0.01
Pro forma (0.16) (0.08)
Diluted (loss) earnings per share:
As reported $ (0.10) $ 0.01
Pro forma (0.16) (0.08)
NOTE 3. ACQUISITIONS
On March 21, 2005, the Company acquired one hundred percent of the
issued and outstanding shares of common stock and warrants of Royal
Institutional Services, Inc. and its affiliate, The Surgi-Pack
Corporation (together "Royal"). The total purchase price of
$45,179,000 was paid in cash, plus an additional $713,000 of related
acquisition costs, and was funded through long-term borrowings. The
net assets acquired consisted primarily of working capital, leasehold
interests in two operating facilities and the related equipment,
customer contracts and goodwill.
The results of operations of Royal are included in the Company's
Consolidated Statements of Income since the date of acquisition on
March 21, 2005. Unaudited pro forma consolidated textile service
revenues for the first half ended July 30, 2005, assuming the
8
Royal acquisition had been completed as of the beginning of the
period, totaled $212,490,000, and unaudited pro forma consolidated
income from continuing operations amounted to $260,000 or $0.03 per
diluted share. These pro forma amounts are not necessarily indicative
of the consolidated results of operations that would have occurred
had this acquisition been made at the beginning of fiscal 2005.
NOTE 4. NON-OPERATING INCOME, NET
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 12) offset by interest income and a
gain of $184,000 from the death benefit of a Company-owned life
insurance policy.
In the first half of fiscal 2005, the Company recorded non-operating
income of $797,000 which included $360,000 from the second cash
distribution received in connection with the liquidation of the
parent company of an issuer of life insurance policies owned by the
Company following its demutualization in 2000. These distributions
did not affect the life insurance policies or their cash surrender
value. The Company does not anticipate any further significant
distributions from this liquidation.
Non-operating income, net, also includes interest earned on invested
cash balances and notes receivable.
NOTE 5. INCOME TAXES
The Company recorded a tax benefit of $1,615,000 from continuing
operations for the first half ended July 29, 2006 consisting of
$1,116,000, based upon the Company's estimated effective tax rate of
29.1% for the year, and a tax benefit of $499,000 from federal and
state tax credits. The effective tax rate of 29.1% on income from
continuing operations for the first half ended July 29, 2006,
reflects the statutory tax rate adjusted for permanent items and
state tax benefits, as applicable.
Management has established accruals for tax contingencies for
exposures associated with tax deductions and return filing positions
which may be challenged. The ultimate disposition of any of these
items is not expected to have a material impact on the Company's
financial condition but may be material to the period of resolution.
The tax contingency accruals are reviewed quarterly and adjusted as
necessary in light of changing circumstances.
The Company has a federal net operating loss carryover of $29,286,000
which will expire beginning in 2025; $2,885,000 in federal tax credit
carryover which expires at various dates beginning in 2022;
$7,919,000 of state tax credit carryover which expires 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.
In assessing the adequacy of the deferred tax assets, the Company
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The Company
considers projected future taxable income and tax planning strategies
in making this assessment.
9
NOTE 6. 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 29, 2006, the
Company is secondarily obligated as a guarantor for 61 store lease
agreements and the estimated maximum potential amount of future
payments the Company could be required to make under these guarantees
is $9,930,000. Although these guarantees expire at various dates
through fiscal year 2014, approximately 66% of the estimated maximum
potential future payments expires by the end of fiscal year 2008.
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 Royal acquisition (see Note 3), 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 29, 2006, $2,050,000
remained in escrow. Of this amount, $1,000,000 is due the sellers in
March 2015 upon compliance with the restrictive covenants. The
sellers are also scheduled to receive $1,000,000 in March 2007 absent
indemnification claims. The remaining $50,000 relates to the March
2006 general indemnification payment which is being held in escrow
pending a potential indemnification claim.
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 $1,230,000 as of July 29, 2006.
The Company faces some significant risk and uncertainty to its business
operations related to the status of labor relations at its service
centers. Approximately 80% of the Company's workforce is represented
by one of several unions. In May 2006, the Company and UNITE HERE
reached agreement on and renewed collective bargaining agreements
covering service centers in Colton and San Diego, California, and
covering several service centers in the Los Angeles, California area.
In addition, the Company and UNITE HERE have reached agreement on
collective bargaining agreements at seven service centers that were
organized in the last half of fiscal 2005; these agreements were
ratified by the membership and finalized or were in the
10
process of being finalized as of the end of the second quarter of
fiscal 2006. Late in the second quarter fiscal 2006, the Company and
UNITE HERE negotiated a renewal agreement for the Company's service
center in Rockmart, Georgia. That agreement has been ratified by the
employees and is in the process of being finalized. Collectively,
these new and renewal agreements apply to approximately 34% of the
Company's workforce. At four other service centers, collective
bargaining agreements covering production employees are scheduled to
expire in late fiscal 2006. These contracts apply to approximately
21% of the Company's 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 7. DISCONTINUED OPERATIONS
During the third quarter of fiscal 2005, the Company made the
decision to close its Columbia, Illinois service center and exit the
St. Louis market. The service center's customer contracts, personal
property and real estate were sold prior to the end of fiscal 2005.
The results of operations and cash flows for the service center are
segregated and reported as discontinued operations for all periods
presented in this report.
NOTE 8. ASSETS HELD FOR SALE
In the second quarter of fiscal 2006, the Company transferred all of
the customer accounts from its Rio Vista service center to other
service centers within its Los Angeles market area. The Company is
pursuing a sale of the Rio Vista real estate and accordingly those
assets, along with other equipment items held for sale, are presented
as Assets Held for Sale in the Consolidated Balance Sheets.
NOTE 9. (LOSS) EARNINGS PER SHARE
Basic (loss) earnings per share is computed by dividing net (loss)
income by the weighted average number of shares of Common Stock
outstanding during the period. Diluted (loss) earnings per share is
computed by dividing net (loss) income by the weighted average number
of Common and Common equivalent shares outstanding.
11
The following table reconciles weighted average shares outstanding to
amounts used to calculate basic and diluted (loss) earnings per share
for the second quarter and first half ended July 29, 2006 and July
30, 2005 (shares in thousands):
Second Quarter Ended First Half Ended
--------------------------- -------------------------
July 29, July 30, July 29, July 30,
2006 2005 2006 2005
-------- -------- -------- --------
Weighted Average Shares:
Average shares outstanding 9,182 9,072 9,173 9,052
Effect of dilutive securities - - - 263
----- ----- ----- -----
Average shares outstanding,
adjusted for dilutive effects 9,182 9,072 9,173 9,315
===== ===== ===== =====
Potentially dilutive securities of 34,000, 41,000 and 246,000 shares
were not included in the calculation of weighted average shares
outstanding for the second quarter and first half ended July 29, 2006
and the second quarter ended July 30, 2005, respectively, as their
effect is antidilutive on loss per share for these periods.
NOTE 10. GOODWILL AND OTHER ACQUIRED ASSETS
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 2005 which resulted in no
indication of impairment.
Other acquired assets consisted of the following (dollars in
thousands):
July 29, 2006 January 28, 2006
---------------------------------------- ----------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
Amount Amortization Assets, net Amount Amortization Assets, net
-------- ------------ ----------- -------- ------------ -----------
Customer contracts $41,724 $ (9,756) $31,968 $42,094 $ (8,290) $33,804
Non-compete covenants 11,089 (3,117) 7,972 11,089 (2,423) 8,666
------- -------- ------- ------- -------- -------
Other acquired assets $52,813 $(12,873) $39,940 $53,183 $(10,713) $42,470
======= ======== ======= ======= ======== =======
Aggregate amortization expense for the first half ended July 29, 2006
and July 30, 2005 amounted to $2,160,000 and $1,841,000,
respectively. Other acquired assets are scheduled to be fully
amortized by fiscal year 2020 with corresponding annual amortization
expense estimated for each of the next five fiscal years as follows
(dollars in thousands):
2006 $4,281
2007 4,165
2008 3,813
2009 3,504
2010 3,038
12
NOTE 11. LONG TERM DEBT
The Company's long-term bank borrowings are financed through a
$150,000,000 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 2.0% to 2.75%. The LIBOR interest rate
option may be selected for periods of 1 to 3 months, 6 months or 12
months. The Company has fixed the interest rate on $10,000,000 of the
credit facility borrowings with an interest rate swap agreement that
extends through May 2007.
As of July 29, 2006, there was $86,500,000 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, $10,000,000 bore interest at a fixed rate of 3.58% pursuant
to the interest rate swap agreement plus the LIBOR margin under the
credit facility, which was 2.75% as of July 29, 2006. Of the
remaining debt, $70,000,000 bore interest at rates ranging from 5.37%
to 5.56% under LIBOR contracts, plus a margin (2.75% as of July 29,
2006), and $6,500,000 bore interest at 8.25%, the Prime Rate, as of
July 29, 2006. Furthermore, the Company had $13,414,000 outstanding
in irrevocable letters of credit as of July 29, 2006, which reduced
the amount available to borrow under the line of credit to
$14,500,000. As of July 29, 2006, the fee on the outstanding letters
of credit and unused funds was 2.75% and 0.375%, 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 1 to 1. Other covenants require the Company
to maintain a minimum ratio of "EBITDA" to "Fixed Charges" of no less
than 1.05 to 1, increasing to 1.15 to 1 effective October 31, 2006,
and a maximum ratio of "Funded Indebtedness" to "EBITDA" of no more
than 4.0 to 1, decreasing to 3.5 to 1 effective January 31, 2010. An
amendment to the loan agreement was executed on July 28, 2006 that
modified certain definitions related to the financial covenants. The
Company was in compliance with these loan covenants as of July 29,
2006.
As of July 29, 2006, there was $29,972,000 of life insurance policy
loans outstanding. The loans bear interest at a fixed rate of 8.0% or
variable rates ranging from 5.4% to 5.8%. 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 Consolidated Balance Sheet as of July 29, 2006 and
January 28, 2006.
NOTE 12. 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 fixes 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 has elected to apply cash flow hedge accounting for the
interest rate swap agreement in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and
13
Hedging Activities." Accordingly, the derivative is 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,
is reported in accumulated other comprehensive income. The (loss)
gain on the derivative included in accumulated other comprehensive
loss in the second quarter ended July 29, 2006 and July 30, 2005
amounted to $(9,000) and $35,000, respectively, net of tax; and
$(2,000) and $89,000 in the first half ended July 29, 2006 and July
30, 2005, respectively, net of tax. The Company has recorded a
long-term asset of $160,000 and $165,000 for the fair value of the
derivative as of July 29, 2006 and January 28, 2006, respectively.
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). These futures
contracts combined are expected to hedge approximately 56% of the
Company's total requirements for natural gas (measured at current
usage rates) for 2006 and 2007 fiscal years, and approximately 36%
and 15% of the Company's natural gas requirements, respectively, in
2008 and 2009. As of July 29, 2006, the weighted-average cost of
natural gas under these contracts for the remainder of their term is
$9.75 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 on the derivatives included in accumulated
other comprehensive loss for the second quarter and first half ended
July 29, 2006, amounted to $566,000 and $902,000, respectively, net
of tax. 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 market value for
these derivatives was included in non-operating income, net for the
first half ended July 29, 2006, and amounted to a loss of $281,000.
The Company has recorded a current liability of $1,440,000 and
$914,000 as of July 29, 2006 and January 28, 2006, respectively, and
a long-term liability of $1,190,000 and $340,000 as of July 29, 2006
and January 28, 2006, respectively for the fair value of the
derivatives. The Company estimates that $1,301,000 of unrealized
losses included in accumulated other comprehensive loss before taxes
as of July 29, 2006 will be reclassified to cost of textile 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 29, 2006 for the physical delivery of natural
gas that fix the NYMEX cost of gas for approximately 3% of its
estimated natural gas purchase requirements in the next 12 months,
and that fix the basis cost of gas for approximately 80% 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 13. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income, consisting primarily of net (loss)
income and changes in the fair value of derivatives (see Note 12),
net of taxes, totaled $(1,290,000) and $(899,000) for the second
quarter ended July 29, 2006 and July 30, 2005, respectively; and
14
$(3,118,000) and $175,000 for the first half ended July 29, 2006 and
July 30, 2005, respectively.
NOTE 14. 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 29, 2006 and July 30, 2005 was as follows:
Second Quarter Ended First Half Ended
------------------------ -----------------------
July 29, July 30, July 29, July 30,
(Dollars in thousands) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------
Pension expense:
Service cost $ 113 $ 105 $ 226 $ 210
Interest cost 312 317 624 634
Expected return on plan assets (322) (333) (644) (666)
Amortization of prior service cost - 5 - 10
Recognized actuarial loss 17 - 34 -
------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 120 $ 94 $ 240 $ 188
======================================================================================================
NOTE 15. NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No.
154 replaces APB Opinion No. 20, "Accounting Changes," and SFAS No.
3, "Reporting Accounting Changes in Interim Financial Statements,"
and changes the requirements for the accounting for and reporting of
a voluntary change in accounting principle. This statement requires
retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect
of the change, instead of including in net income of the period of
the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005.
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
15
provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is
effective for all financial instruments acquired, issued or subject
to a remeasurement event occurring in fiscal years beginning after
September 15, 2006. 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 FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which clarifies the accounting
for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109, "Accounting for Income
Taxes." FIN 48 provides guidance on the financial statement
recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosures, and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of this standard on its consolidated
financial statements.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST HALF ENDED JULY 29, 2006
COMPARED WITH
SECOND QUARTER AND FIRST HALF ENDED JULY 30, 2005
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, dental offices, 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 30 laundry service centers and serve
customers in 23 states.
Critical Accounting Policy - Linens in Service
----------------------------------------------
We review our policy for amortizing linens in service on an ongoing basis.
In order to satisfy our initiative to provide customers with 100% order fill
rates we have purchased a significant amount of additional linens, which
results in linens being washed less often and therefore lasting longer. As a
result, we determined that the actual useful life of our linens was longer
than the estimated useful life previously used for amortization purposes in
our financial statements and, effective April 30, 2006, the first day of our
2006 second fiscal quarter, changed the estimate of the average useful life
from 60 weeks to 63 weeks to reflect the estimated periods during which
these linens will remain in service. The effect of this change was to reduce
2006 second quarter linen amortization expense by $0.3 million, decrease net
loss by $0.2 million and decrease basic and diluted loss per share by $0.02.
Results of Operations
---------------------
Second Quarter Ended July 29, 2006 Compared to Second Quarter Ended July 30,
2005
Second quarter fiscal 2006 textile service revenues were $105.3 million, a
slight increase of $0.1 million, or 0.1%, compared with the same period in
fiscal 2005. Organic growth from net new business additions and price
increases contributed $3.3 million of the second quarter increase,
representing an organic growth rate of 3.7%, while fiscal 2005 acquisitions
contributed $1.4 million of the increase. These increases were substantially
offset by the loss of $4.6 million of revenues due to the sale of
non-healthcare customer accounts in fiscal 2005 and 2006.
17
Cost of textile services of $90.2 million in the second quarter of fiscal
2006 decreased $1.4 million, or 1.5%, from the same year ago period. The
current quarter decline consisted primarily of the following:
o Merchandise cost decreased from 17.7% of revenues in the second quarter
of fiscal 2005 to 17.3% in the second quarter of fiscal 2006, or $0.5
million. Increased revenues and higher targeted inventory ratios
resulted in increased linen purchases and related amortization expense,
but were more than offset by the revised useful life of new linens
discussed above and higher revenue per pound, decreasing total
merchandise costs as a percent of revenues.
o Production labor and fringe benefit costs decreased $0.6 million to
34.5% of revenues in the second quarter fiscal 2006 versus 35.0% in the
prior year quarter. The decline resulted primarily from lower workers
compensation expenses of $0.4 million, reflecting our safety
initiatives and favorable claims experience, as well as the absence of
prior year labor strike contingency expenses and costs associated with
the closure of our Vallejo facility.
o Operating supplies and other production expenses declined $0.9 million
to 8.0% of revenues in the second quarter fiscal 2006, from 8.9% in the
second quarter of fiscal 2005, due to a reduction in pounds processed
primarily from the sale of non-healthcare accounts, lower insurance
expenses and the absence of certain service center security expenses
related to the prior year union corporate campaign.
o Delivery expenses decreased $0.1 million from the second quarter of
fiscal 2005 to the second quarter of fiscal 2006, resulting primarily
from lower labor costs and reduced workers compensation expenses.
Partially offsetting these declines were higher energy prices which
increased delivery fuel by $0.4 million to 2.2% of revenues in the
second quarter of fiscal 2006 from 1.8% in the prior year quarter.
o The preceding favorable variances were partially offset by increased
utility expense of $0.9 million in the second quarter of fiscal 2006
from the same period a year ago. Higher energy prices increased natural
gas expense by $1.2 million to $6.2 million in the second quarter.
Decreases in other utilities partially offset the higher energy prices
and resulted from a reduction in pounds processed, negotiated water and
sewer credits, and efficiencies realized from our operations process
improvement implementation.
Gross margin percentage has increased sequentially to 14.4% in the second
quarter fiscal 2006 from 13.8% and 10.6% in the first quarter fiscal 2006
and the fourth quarter fiscal 2005, respectively. The current quarter gross
margin of 14.4% is up from 13.0% in the 2005 second quarter, reflecting our
revenue pricing improvements combined with the favorable expense variances
discussed above.
In the second quarter fiscal 2006, selling, general and administrative
expenses increased by $0.6 million over second quarter fiscal 2005 to $13.4
million, or 12.8% of revenues, compared to 12.2% of revenues a year ago. The
increase in SG&A expenses resulted primarily from consulting fees of $0.6
million related to our operations process improvement implementation and
legal and shareholder relation expenses of $0.3 million associated with the
Board of Directors' Special Committee. In
18
addition, we incurred professional fees of $0.4 million related to union
contract negotiations, litigation and financial consulting projects, and
experienced higher bad debt expense of $0.2 million. These increases were
partially offset by the absence of prior year second quarter expenses of
$1.0 million associated with the corporate union campaign and our evaluation
of alternatives to our then existing debt structure. On August 30, 2006, we
entered into a settlement agreement with certain major shareholders with
respect to the issues for which the Special Committee was organized. As part
of the settlement, the Special Committee was disbanded.
Amortization expense of other acquired assets increased by $0.1 million, or
3.7%, to $1.1 million in the second quarter of fiscal 2006, reflecting the
impact of intangible assets acquired in the third quarter of fiscal 2005.
In the second quarter of fiscal 2006, we reported other operating expense of
$0.1 million related to asset disposal activities compared with income of
$0.7 million in the second quarter fiscal 2005 primarily from a gain on the
divestiture of non-healthcare business.
Interest expense in second quarter fiscal 2006 increased by $0.6 million to
$2.3 million. The increase resulted primarily from higher interest rates,
which increased from an average 5.4% in the second quarter fiscal 2005 to an
average 7.4% in the second quarter fiscal 2006.
We recorded $0.4 million non-operating income during the second quarter of
fiscal 2006, which included a $0.2 million gain from the death benefit of a
Company-owned life insurance policy. During the second quarter of fiscal
2005, we recorded non-operating income of $0.3 million, consisting primarily
of interest income.
For the second quarter of fiscal 2006, we recorded an income tax benefit of
$0.6 million compared to a benefit of $0.3 million in the second quarter of
fiscal 2005. This higher benefit is due primarily to a higher pretax loss for
the second quarter of fiscal 2006.
Although gross profit was up $1.5 million in the second quarter fiscal 2006
from the second quarter fiscal 2005, the loss from continuing operations
remained consistent at $0.7 million, primarily due to increased SG&A
expenses and interest expense and the absence of prior year gain on
divestiture of non-healthcare business, as discussed above.
First Half Ended July 29, 2006 Compared to First Half Ended July 30, 2005
Textile service revenues for the first half fiscal 2006 of $212.3 million
represented an increase of 3.2% from $205.7 million in the first half of
fiscal 2005. Fiscal 2005 acquisitions contributed $9.7 million of the
revenue increase, offset mostly by the loss of $9.2 million of revenues due
to the sale of non-healthcare customer accounts in fiscal 2005 and 2006.
Organic growth from net new business and price increases was 3.4%, adding
$6.1 million of revenue.
19
In the first half of fiscal 2006, cost of textile services increased from
the same period in fiscal 2005 by $5.9 million, or 3.4%, to $182.4 million,
due partially to our higher revenue level. In addition, higher energy prices
resulted in a combined increase in natural gas and delivery fuel cost of
$3.5 million from the first half of fiscal 2005 to the first half of fiscal
2006, increasing from 6.7% of revenues to 8.1% of revenues. A union strike
at our Colton, California facility led to increased labor expenses of
approximately $0.4 million, while recently negotiated union benefits at two
other California facilities have increased by approximately $0.3 million
year over year.
For the first half of fiscal 2006, selling, general and administrative
expenses increased $2.5 million to 13.1% of revenues from 12.3% of revenues
in the same period a year ago. The increase in SG&A expenses resulted
primarily from consulting fees of $1.3 million related to our operations
process improvement implementation and legal and shareholder relation
expenses of $0.6 million associated with the Board of Directors' Special
Committee. In addition, we incurred professional fees of $0.3 million
related to financial consulting projects and experienced higher bad debt
expense of $0.3 million. Legal expenses related to union activity and
litigation decreased by $0.3 million year over year. In addition, the first
half fiscal 2005 included $0.4 million associated with our evaluation of
alternatives to our then existing debt structure. On August 30, 2006, we
entered into a settlement agreement with certain major shareholders with
respect to the issues for which the Special Committee was organized. As part
of the settlement, the Special Committee was disbanded.
Amortization expense increased by $0.3 million to $2.2 million in the first
half of fiscal 2006, reflecting the impact of intangible assets acquired
during fiscal 2005.
In the first half fiscal 2006, we reported other operating income of $0.5
million, reflecting gains from the sale of two parcels of real estate,
compared to other operating income of $0.6 million in the first half of
fiscal 2005, primarily from the divestiture of non-healthcare business.
Interest expense for the first half of fiscal 2006 increased $1.7 million to
$4.6 million. The increase resulted from a combination of higher interest
rates and higher average borrowings. Interest rates increased from an
average 5.0% in the first half of fiscal 2005 to an average 7.3% in the
first half of fiscal 2006. Higher average debt levels for the first half of
fiscal 2006 reflected the impact of March 2005 acquisition borrowings.
We recorded $0.4 million non-operating income in the first half of fiscal
2006, 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. During the first half of
fiscal 2005, we recorded non-operating income of $0.8 million, which
included a $0.4 million distribution from the liquidation of the parent
company of the issuer of life insurance policies we own and interest income.
For the first half of fiscal 2006, we recorded a tax benefit of $1.6 million
compared to income tax expense of $0.1 million in the first half of fiscal
2005. The tax benefit is due to a pretax loss in the first half of fiscal
2006 as compared to pretax income in the same period a year ago.
20
We reported a loss from continuing operations of $2.2 million in the
first half of fiscal 2006, compared to income of $0.4 million in the first
half of fiscal 2005. The decrease resulted from the combination of higher
prices for natural gas and delivery fuel, higher professional fees and
higher interest expense, as discussed above. These increases were partially
offset by the increase in textile service revenues resulting from prior year
acquisitions and current year organic growth.
Net income for the first half of fiscal 2005 included a loss from
discontinued operations of $0.3 million related to our Columbia, Illinois
service center which was sold in the prior year.
Financial Condition
-------------------
As of July 29, 2006, working capital totaled $34.6 million and the current
ratio (i.e., the ratio of current assets to current liabilities) was 1.4 to
1, compared with $28.5 million and 1.4 to 1, respectively, at January 28,
2006. The increase in working capital reflects a higher balance of linens in
service and the net book value of the assets held for sale from our Rio
Vista service center, as discussed below.
Accounts receivable decreased by $0.9 million in the first half fiscal 2006,
due primarily to the collection of a miscellaneous receivable in the first
quarter of fiscal 2006. Linens in service increased by $3.0 million as a
result of a significant injection of linens into the system to increase our
customer order fill rates and the related change in estimated useful life
from 60 to 63 weeks, as explained above under "Critical Accounting Policy -
Linens in Service".
In the second quarter of fiscal 2006, we transferred all of the customer
accounts from our Rio Vista service center to other service centers within
our Los Angeles market area. We are currently pursuing a sale of the Rio
Vista real estate and accordingly those assets, along with other equipment
items currently held for sale, are presented as assets held for sale in the
consolidated balance sheets.
Accounts payable decreased by $3.6 million as higher payable balances at the
beginning of the year were paid down to more normal levels. The higher
balances at January 28, 2006, were attributable to higher in-transit
payments and the timing of certain invoices. The decline in accounts payable
was partially offset by a $2.8 million increase in other accrued liabilities
reflecting higher accrued interest and insurance reserves as well as changes
in the fair value of our natural gas derivatives. Long-term debt of $86.5
million as of July 29, 2006 was $1.4 million greater than at January 28,
2006 due to the timing and availability of cash receipts at the end of the
quarter. Our ratio of total debt to total capitalization as of July 29, 2006
was 37.4% compared to 36.4% as of January 28, 2006. Book value per share at
the end of second quarter fiscal 2006 was $15.40, a decline from $16.08 as
of January 28, 2006.
21
Liquidity and Capital Resources
-------------------------------
Cash flow provided by operating activities of continuing operations
decreased $1.2 million for the first half ended July 29, 2006 compared with
the same period a year ago. The current year decline resulted primarily from
a pretax loss of $3.8 million in the first half of fiscal 2006 compared with
pretax income of $0.5 million in the comparable period of the prior year.
Partially offsetting the income decline was a favorable change in working
capital components of $2.6 million, excluding income tax changes, as the
prior year amount reflected a significant increase in working capital
subsequent to acquisition activity in fiscal year 2005.
Cash flows from investing activities for the first half ended July 29, 2006,
included capital expenditures of $4.0 million, down from the prior year
period as we implement best practices systemwide before expending
discretionary capital expenditures. In the first half of fiscal 2006, we
received 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. Cash
flows from investing activities for the first half ended July 30, 2005
included $50.0 million of cost of businesses acquired, including cash paid
for Royal Institutional Services, Inc. ("Royal") and the final payment of
$3.6 million for the fiscal year 2004 acquisition of the Duke University
Health System laundry.
Cash provided by financing activities was $0.6 million in the first half of
fiscal 2006 reflecting 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 the first half of fiscal 2005, cash
provided by financing activities of $57.5 million reflected the net proceeds
of $58.5 million from bank debt and life insurance policy loans, used
primarily to fund the prior year acquisition of Royal and capital
expenditures. In addition, proceeds from stock option exercises decreased
from $1.3 million in the first half of fiscal 2005 to $0.2 million in the
first half of fiscal 2006.
As of July 29, 2006, there was $86.5 million of debt outstanding under our
credit facility. Of this amount, $10.0 million bears interest at a fixed
rate of 3.58% pursuant to an interest rate swap agreement plus a margin
under the credit facility (2.75% as of July 29, 2006). Of the remaining
debt, $70.0 million bore interest at rates ranging from 5.37% to 5.56% under
LIBOR contracts, plus a margin (2.75% at July 29, 2006), and $6.5 million
bore interest at 8.25%, the Prime Rate, as of July 29, 2006.
In addition to amounts due under our loan agreement, at the end of the
second quarter fiscal 2006 there was $30.0 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 5.4% to 5.8%, were used to pay
down our revolving line of credit in fiscal 2005 and 2006. On July 29, 2006,
we also had $13.4 million in irrevocable letters of credit outstanding,
which reduced the amount available to borrow under the loan agreement to
$14.5 million.
We are subject to certain financial covenants under our loan agreement. The
covenants require us to maintain a minimum consolidated net worth of $120.9
million plus an
22
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 not less than 1 to 1. We are also required to
maintain a minimum ratio of "EBITDA" to "Fixed Charges" of no less than 1.05
to 1, increasing to 1.15 to 1 effective October 31, 2006, and a maximum
ratio of "Funded Indebtedness" to "EBITDA" of no more than 4.0 to 1,
decreasing to 3.5 to 1 effective January 31, 2010. We were in compliance
with these loan covenants as of July 29, 2006.
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 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
--------------------------------
Effective January 29, 2006, the first day of fiscal 2006, we adopted
Statement of Financial Accounting Standards No. 123 (revised 2004)
"Share-Based Payment" (SFAS 123(R)) using the modified prospective method of
adoption, which does not require restatement of prior periods. Under the
modified prospective method, we are required to record compensation expense
for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption, net of an estimate of expected forfeitures. Under SFAS 123(R),
compensation expense is based on the estimated fair values of stock options
and restricted stock determined on the date of grant and is recognized over
the related vesting period. For performance-contingent restricted stock, if
it is determined that the performance contingency will not be satisfied, any
previously recognized compensation expense is reversed in the period such
determination is made. As of January 17, 2006, the Board of Directors
approved the accelerated vesting of 64,334 unvested stock options. The
exercise price of these options was greater than the market price of the
underlying stock on the date of modification. By accelerating the vesting of
these options, approximately $0.2 million and $0.1 million of compensation
expense will not be incurred in fiscal years 2006 and 2007, respectively.
Substantially all of the Company's current quarter and expected future
stock-based compensation expense is related to restricted stock awards. The
adoption of SFAS No. 123(R) did not have a material impact on our
consolidated financial statements. The total compensation expense related to
nonvested stock options and awards not yet recognized is currently expected
to be a combined total of approximately $2.7 million. This cost is expected
to be recognized over a weighted average period of 2.3 years.
23
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.
24
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
second quarter and first half ended July 29, 2006 was approximately $6.2
million and $12.7 million, respectively. To reduce the uncertainty of
fluctuating energy prices, the Company has entered into fixed-price
contracts as of July 29, 2006 for approximately 64% 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 $0.9 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 29, 2006
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 29, 2006, there was $86.5 million of outstanding debt under the
credit facility, of which $10.0 million bore interest at a fixed rate of
3.58% (plus a margin) under an interest rate swap agreement entered into by
the Company with one of its lenders to moderate the exposure. Amounts
borrowed under the credit facility in excess of the $10.0 million covered by
the interest rate swap agreement 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 29, 2006, the margin was 2.75%. Of the
$30.0 million in life insurance policy loans outstanding as of July 29,
2006, a total of $24.1 million of these loans bore interest at variable
rates ranging from 5.4% to 5.8%. A hypothetical increase of 100 basis points
in short-term interest rates applicable to the outstanding variable-rate
debt not covered by the interest rate swap agreement would result in a
reduction of approximately $1.0 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
25
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.
26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
-----------------
(a) See Exhibit Index on page 29.
27
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: September 7, 2006 /s/ Stephen M. O'Hara
-----------------------
Stephen M. O'Hara
Chairman and
Chief Executive Officer
/s/ James W. Shaffer
------------------------------
James W. Shaffer
Vice President and Chief
Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
28
EXHIBIT INDEX
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.*
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.**
10.1 First Amendment to Second amended and Restated Loan Agreement,
effective July 28, 2006, among Angelica Corporation, LaSalle Bank
National Association as Administrative Agent, and LaSalle and other
Lenders. Filed as Exhibit 10.1 to a current report on Form 8-K on
August 1, 2006.**
10.2 Settlement Agreement dated August 30, 2006, by and between Angelica
Corporation, Steel Partners L.L.C. and Steel Partners II, L.P.
Filed as Exhibit 10.1 to a current report on Form 8-K on September
5, 2006.**
10.3 Settlement Agreement dated August 30, 2006, by and between Angelica
Corporation, Pirate Capital LLC, Jolly Roger Fund LP and Jolly
Roger Offshore Fund LTD. Filed as Exhibit 10.2 to a current report
on Form 8-K on September 5, 2006.**
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.*
29