(b) |
|
Portion of $23,247 restructuring and other charges taken in third quarter of
fiscal 1998. Effect on net income per share is a reduction of $1.57.
|
This information should be read in
conjunction with the consolidated financial statements and notes thereto appearing
elsewhere in this report.
7
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ANALYSIS OF FISCAL 2003
CONTINUING OPERATIONS COMPARED TO 2002
Income from continuing operations
before extraordinary item in fiscal 2003 of $11.0 million increased 575.6 percent from the
prior year, on a 3.8 percent increase in combined sales and revenues to $363.4 million. On
a per share basis, income from continuing operations before extraordinary item amounted to
$1.27 ($1.25 diluted) in fiscal 2003 versus $.19 in fiscal 2002, an increase of 568.4
percent. Fiscal 2002 results included restructuring and other charges of $3.8 million
after-tax or $.44 per share, discussed below and in Note 2. In fiscal 2003, both of the
Company’s continuing business segments, Textile Services and Life Uniform, posted
growth in sales and revenues as well as operating earnings increases.
As discussed in Note 3, the Company
incurred an extraordinary loss of $4.4 million net of tax in the second quarter of fiscal
2003 as a result of a prepayment penalty paid in connection with the complete refinancing
of the Company’s debt following the sale of the Manufacturing and Marketing segment.
Including this extraordinary loss of $.51 per share ($.50 diluted), per share earnings
from continuing operations were $.76 ($.75 diluted) compared with $.19 in fiscal 2002, an
increase of 300.0 percent.
As discussed below and in Note 4, the
Company recorded an after-tax loss of $6.7 million in fiscal 2003 on the disposal of the
discontinued Manufacturing and Marketing segment, in addition to the $24.0 million loss on
disposal in fiscal 2002. Combining continuing and discontinued operations and the
extraordinary loss, the Company had a net loss of $.01 per share in fiscal 2003 compared
with a net loss of $2.64 per share ($2.62 diluted) in fiscal 2002.
Revenues of the Textile Services
segment in fiscal 2003 were $271.3 million, an increase of $12.2 million or 4.7 percent
from the prior year. Net new business additions (new business installed less lost
business) remained strong in fiscal 2003, although slightly below the record level in
fiscal 2002. The sale of the Denver, Colorado plant in fiscal 2003 negatively affected
revenues by $2.2 million, offset in part by an acquisition of selected assets and textile
linen management services of a hospital-owned laundry in Macon, Georgia. Sales at Life
Uniform increased 1.3 percent to $92.2 million from $91.0 million a year ago. Same-store
sales increased 3.8 percent in fiscal 2003 compared with a 4.3 percent decrease in fiscal
2002, although the increase in the fourth quarter of fiscal 2003 was the smallest of the
year at 1.9 percent amid softening retail demand. Sales from this segment’s catalogue
and e-commerce distribution channels contributed an increase of 62.9 percent to $5.2
million. Life Uniform’s sales were negatively affected by approximately $5.0 million
resulting from having 38 fewer stores in operation at the end of this year compared with
last year.
Gross profit percentage of combined
sales to revenues of 28.2 percent in fiscal 2003 was improved over the 26.1 percent in the
prior year. In the Textile Services segment, gross margins benefited from excellent
control of linen expense and other production costs, offset to some extent by
significantly higher workers’ compensation costs. As a result of the gross margin and
revenue improvements, operating earnings of this segment increased 16.9 percent in fiscal
2003. Fiscal 2003 earnings also included a gain on the sale of the Denver, Colorado plant
of $.5 million reported in net other operating income. At Life Uniform, gross margins
improved in both the stores and the catalogue/e-commerce operation. Operating earnings of
this segment were $2.9 million in fiscal 2003 compared with an operating loss of $.8
million in fiscal 2002 (excluding restructuring and other charges), the result of the
improved gross margins, closing of restructured and other unprofitable stores as well as
the higher sales levels.
Selling, general and administrative
expenses increased 8.7 percent in fiscal 2003, representing 23.3 percent of combined sales
and revenues compared with 22.3 percent in fiscal 2002. The increase was due mainly to
filling several new sales and administrative positions at Textile Services, higher
incentive compensation as a result of improved operating results, and increased employee
healthcare costs. Interest expense decreased $4.8 million in fiscal 2003 to $2.6 million
resulting from the lower debt level and lower interest rates following the aforementioned
debt refinancing. The effective tax rate on income from continuing operations of 28.0
percent in fiscal 2003 is higher than the 9.0 percent tax rate last year due to the impact
of permanent differences on the relatively low level of income in fiscal 2002.
8
ANALYSIS OF FISCAL 2002
CONTINUING OPERATIONS COMPARED TO 2001
Combined sales and revenues in fiscal
2002 were $350.1 million, an increase of $14.8 million or 4.4 percent from the prior year.
Textile Services segment revenues increased 6.8 percent, from $242.6 million to $259.1
million. For the second consecutive year, this segment generated a record amount of net
new business additions. Sales at Life Uniform declined 1.8 percent, from $92.7 million to
$91.0 million. Same-store sales in fiscal 2002 decreased by 4.3 percent, the result of a
weak retail market during the last three quarters of the year. The largest sales decline
occurred in the segment’s hospitality business, which the Company decided to exit as
part of its restructuring plan. Sales in the catalogue and e-commerce distribution
channels increased to $3.2 million in fiscal 2002 from $1.0 million in fiscal 2001, but
the increase was more than offset by the decline in sales from the retail stores.
The gross profit percent to combined
sales and revenues in fiscal 2002 was 26.1 percent, up slightly from 25.9 percent in the
prior year. An increase in gross margins in the Textile Services segment more than offset
a decrease in gross margins at Life Uniform. Gross margins in the Textile Services segment
were positively affected by better pricing, continuing improvements in plant productivity
and linen cost management and effective management of energy costs. As a result, earnings
in this segment rose 29.0 percent in fiscal 2002 from the prior year. In the Life Uniform
segment, gross margins and earnings were negatively affected by the restructuring and
other charges discussed below. Excluding the restructuring charges, gross margins at Life
Uniform were up slightly in fiscal 2002, and earnings for the segment declined from $2.5
million in fiscal 2001 to a loss of $.8 million in fiscal 2002.
Selling, general and administrative
expenses increased $4.1 million or 5.6 percent in fiscal 2002 compared with fiscal 2001.
This also represented an increase as a percentage of combined sales and revenues to 22.3
percent in fiscal 2002 from 22.0 percent in the prior year. The increase was due primarily
to increased selling expenses and incentive compensation payments in the Textile Services
segment and a full year of expenses relating to catalogue operations at Life Uniform in
fiscal 2002. Interest expense decreased in fiscal 2002 to $7.4 million from $8.1 million
in fiscal 2001 due to prepayment during the year of $25 million of debt that was
originally due to be paid in December, 2001. The Company’s overall effective tax rate
for fiscal 2002 was 36.0 percent compared with 37.0 percent in the prior year. The
effective rate for continuing operations in fiscal 2002 was 9.0 percent due to the high
amount of permanent differences in relation to the low level of income in that year. This
compares with a rate of 33.0 percent for continuing operations in fiscal 2001.
FINANCIAL CONDITION
At the end of fiscal 2003, the
Company had working capital of $61.3 million and a current ratio of 2.2 to 1 compared with
$47.0 million and 1.4 to 1 at the end of fiscal 2002. Receivables increased $1.8 million
in the year, although receivable days outstanding improved by three days from 46 to 43
following a six-day improvement in the prior year. Deferred income tax assets declined
$9.6 million in fiscal 2003 due mainly to the reversal of temporary differences related to
the loss on disposal of the discontinued Manufacturing and Marketing segment. The decrease
in current liabilities in fiscal 2003 reflects the repayment of notes payable to insurance
companies and bank debt in conjunction with the sale of the Manufacturing and Marketing
segment, discussed further below. Other accrued liabilities decreased $9.6 million in
fiscal 2003 due primarily to the payment of liabilities for severance, lease termination
and closing costs associated with the sale of the Manufacturing and Marketing segment, and
a reduction in income taxes payable due to the loss on disposal of the discontinued
segment.
The Consolidated Balance Sheets as of
January 25, 2003 and January 26, 2002 reflect the segregation of the net assets
of the discontinued Manufacturing and Marketing segment at their estimated net realizable
value. Net current assets of the discontinued segment consist primarily of accounts
receivable and inventory. Net noncurrent assets of the discontinued segment, mostly
property and equipment, were completely disposed of or written off as of January 25,
2003.
LIQUIDITY AND CAPITAL
RESOURCES
Cash flow provided by operating
activities of continuing operations in fiscal 2003 was $23.9 million versus $13.8 million
in the prior year. The increase was due in part to higher income from continuing
operations and the reduction in deferred tax assets noted above. An increase in accounts
payable and other accrued liabilities also provided cash flow of $2.8 million compared
with a decrease or use of cash of $4.5 million last year, but was
9
partially offset by the
increase in receivables. Net cash used in investing activities of continuing operations
increased $1.6 million to $16.0 million in fiscal 2003 resulting from Textile
Services’ acquisition of assets of the hospital-owned laundry in Macon, Georgia,
partially offset by proceeds from the sale of its Denver, Colorado plant. The $35.2
million increase in cash flow used in financing activities of continuing operations in
fiscal 2003 reflects the complete refinancing of the Company’s debt discussed below.
Cash provided by discontinued operations of $45.2 million in fiscal 2003 reflects the net
proceeds from the liquidation of assets of the Manufacturing and Marketing segment,
primarily inventory, less payment of certain sale-related liabilities.
Due to the writedown of assets and
related loss on disposal of the Manufacturing and Marketing segment recorded in the fourth
quarter of fiscal 2002, the Company was not in compliance with a minimum net worth
covenant contained in a loan agreement at that time. As a result, all of the notes to
insurance companies and bank were reclassified to current liabilities as of
January 26, 2002. In the first quarter of fiscal 2003, temporary waivers of the
covenant violation were received from the affected lenders. In the second quarter of
fiscal 2003, the Company repaid $54.4 million of existing debt (plus a prepayment penalty
of $6.7 million) using proceeds from the sale of the Manufacturing and Marketing segment
and $22.5 million of borrowings from a new $70.0 million unsecured revolving credit
facility with three banks. As a result of the refinancing, the Company significantly
reduced its cost of borrowing to rates less than half of those previously, and lowered the
ratio of total debt to total capitalization to 13.0 percent as of January 25, 2003
from 33.9 percent a year earlier. The unused portion of the credit line is expected to be
utilized to fund growth in continuing operations, including acquisitions, and for working
capital needs.
Management believes that the
Company’s financial condition is such that internal and external resources are
sufficient and available to satisfy the Company’s present and future requirements for
debt service, capital expenditures, acquisitions, dividends and working capital.
DISCONTINUED OPERATIONS
In January 2002, the Company’s
Board of Directors approved a plan to discontinue the Manufacturing and Marketing segment.
At that time, the assets of the segment were written down and a net loss on disposal of
$24.0 million was recorded based on the estimated net realizable value from the pending
sale of the business, as well as estimates of the cost of disposal and transition. During
fiscal 2003, the sale and transition of the business to the buyers was completed and the
assets of the segment were substantially liquidated. An additional after-tax loss on
disposal of $6.7 million was recorded in fiscal 2003 to reflect the actual value received
upon ultimate disposition of the segment’s assets, including actual costs of
disposition and transition. Of this amount, $6.1 million was due to a reduction in the
value of the inventories realized. As of January 25, 2003, the remaining assets of
the segment of $2.2 million, primarily accounts receivable and inventory, are expected to
be fully realized in fiscal 2004.
Operating results of the
Manufacturing and Marketing segment prior to its discontinuation are included in the
Consolidated Statements of Income as net (loss) income from operations of discontinued
segment for all periods presented. This business was adversely affected in fiscal 2002 by
weakness in the economy during the year and by the aftermath of the September 2001
terrorist attacks on sales to certain market segments, such as lodging, food service,
gaming and recreation.
RESTRUCTURING ACTIVITIES
In the fourth quarter of fiscal 2002,
the Company developed plans to close 27 underperforming stores which collectively lost $.9
million in fiscal 2002 and exit the hospitality line of business in the Life Uniform
segment. At that time, the Company recorded restructuring and other charges of $4.2
million before tax relating to these activities. During fiscal 2003, the Company closed 25
of the 27 Life Uniform stores included in the plan of restructuring and liquidated the
hospitality (non-healthcare) line of inventory. In the fourth quarter of fiscal 2003,
Management decided that the remaining two stores included in the restructuring plan would
not be closed, and reversed $.3 million of the restructuring charge related to these two
stores. As of January 25, 2003, there was $1.3 million of restructuring reserve remaining
for lease termination costs that are being negotiated for 14 of the Life Uniform stores
closed in fiscal 2003. Although Management believes the remaining restructuring reserve is
adequate, there is a risk that the Company will be unable to terminate the leases of the
closed stores for the amounts reserved, which could result in additional costs.
10
CRITICAL ACCOUNTING
POLICIES
The Company’s significant
accounting policies are more fully described in Note 1 to the consolidated financial
statements. Certain of these policies as discussed below require the application of
significant judgment by Management in selecting appropriate assumptions for calculating
amounts to record in the consolidated financial statements. By their nature, these
judgments are subject to an inherent degree of uncertainty.
Inventories and Linens
in Service
Substantially all of the
Company’s inventories are finished goods held for resale in Life Uniform’s
retail stores and catalogue/e-commerce operation. These inventories are stated at the
lower of the Company’s cost or fair market value, net of a reserve for inventory
shrinkage based upon a percentage of sales. Inventory costs are determined principally by
the use of the retail inventory method. Linens in service represent the unamortized cost
of textile and linen products purchased for service in the Textile Services segment.
Linens in service are amortized on a straight-line basis over their expected useful lives
of one to two years.
Self-Insurance
Liabilities
The Company self-insures liabilities
for non-union employee medical coverage and liabilities for casualty insurance claims,
including workers’ compensation, general liability and vehicle liability, up to
certain levels. The Company purchases insurance coverage for large claims over the
self-insured retention levels. In fiscal 2000, the Company negotiated a buyout of all
casualty claims occurring prior to February 1, 1999. The liability for casualty
claims as of January 25, 2003 includes losses for claims that occurred since the
buyout date. Self-insurance liabilities are developed using actuarial methods and
h