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| SGC > SEC Filings for SGC > Form 10-Q on 24-Oct-2008 | All Recent SEC Filings |
24-Oct-2008
Quarterly Report
Certain matters discussed in this Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we "believe," "anticipate," "expect" or words of similar import. Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited, to the following: general economic conditions in the areas of the United States in which the Company's customers are located; changes in the healthcare, resort and commercial industries where uniforms and service apparel are worn; the impact of competition; the availability of manufacturing materials, and other factors described in the Company's filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the estimates that we have made. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting estimates are those that we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying judgments and uncertainties used to make them and the likelihood that materially different estimates would be reported under different conditions or using different assumptions is as follows:
Allowance for Losses on Accounts Receivable
These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. An additional impairment in value of one percent of net accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $192,000.
Inventories
Inventories are stated at the lower of cost or market value. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Goodwill Impairment
The Company has approximately $1,617,000 of goodwill on its balance sheet related to its largest reporting unit. The Company reviews this goodwill for impairment at least on an annual basis. The Company completed its most recent valuation in the fourth quarter of 2007. These reviews of fair value involve judgment and estimates of discount rates, transaction multiples and future cash flows for the reporting unit that may be impacted by future sales and operating results for the reporting unit, market conditions and economic conditions. The Company analyzed various discount rates, transaction multiples and cash flows for the reporting unit. We believe that we have made reasonable estimates and judgments in determining that our goodwill has not been impaired. However, if there is a material change in the assumptions used in our determination of fair value or if there is a material change in the conditions or circumstances influencing fair value, we could be required to recognize a material impairment charge.
Insurance
The Company self-insures for certain obligations related to health insurance programs. The Company also purchases stop-loss insurance policies to protect it from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. The Company's estimates consider historical claim experience and other factors. The Company's liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Company's ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.
The Company's pension obligations are determined using estimates including those related to discount rates, asset values and changes in compensation. The discount rates used are determined based on the Moody's rating on AA bonds with maturity of 20 years and beyond. This rate was selected as the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date taking into account the nature and duration of the benefit obligations of the plan using high-quality fixed-income investments currently available (rated AA or better) and expected to be available during the period to maturity of the benefits. The 8.0% expected return on plan assets was determined based on historical long-term investment returns as well as future expectations given target investment asset allocations and current economic conditions. The 4.5% rate of compensation increase represents the long-term assumption for expected increases in salaries among continuing active participants accruing benefits under the plans. Interest rates and pension plan valuations may vary significantly based on worldwide economic conditions and asset investment decisions.
Income Taxes
The Company is required to estimate and record income taxes payable for federal and state jurisdictions in which the Company operates. This process involves estimating actual current tax expense and assessing temporary differences resulting from differing accounting treatment between tax and book that result in deferred tax assets and liabilities. In addition, accruals are also estimated for federal and state tax matters for which deductibility is subject to interpretation. Taxes payable and the related deferred tax differences may be impacted by changes to tax laws, changes in tax rates and changes in taxable profits and losses. Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in the total liability for unrecognized tax benefits under FIN No. 48.
Share-based Compensation
We adopted Statement of Financial Accounting Standards No. 123 (revised 2004) ("FAS No. 123(R)") on January 1, 2006. FAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. This statement revises FAS No. 123, and supersedes Accounting Principles Board (APB) Opinion 25. Share-based compensation expense that was recorded in 2007 and 2006 includes the compensation expense for the share-based payments granted in those years. In our share-based compensation strategy we utilize a combination of stock options and stock appreciation rights ("SARS") that fully vest on the date of grant. Therefore, the fair value of the options and SARS granted is recognized as expense on the date of grant. We used the Black-Scholes-Merton valuation model to value any share-based compensation under FAS No. 123(R). Option valuation methods, including Black-Scholes-Merton, require the input of assumptions including the risk free interest rate, dividend rate, expected term and volatility rate. The Company determines the assumptions to be used based upon current economic conditions. The impact of changing any of the individual assumptions by 10% would not have a material impact on the recorded expense.
Results of Operations
Net sales increased 0.7% from $30,391,919 for the three months ended September 30, 2007 to $30,613,175 for the three months ended September 30, 2008. Net sales increased 7.4% from $89,043,720 for the nine months ended September 30, 2007 to $95,595,090 for the nine months ended September 30, 2008. The increases in sales in the three and nine-month periods are primarily attributed to several large new customer uniform programs that were distributed in the current periods offset by softer demand from existing customers.
Cost of goods sold, as a percentage of sales, approximated 67.1% for the three months ended September 30, 2008 compared to 67.3% for the three months ended September 30, 2007. Cost of goods sold, as a percentage of sales, approximated 66.9% for the nine months ended September 30, 2008 compared to 67.1% for the nine months ended September 30, 2007. The decrease as a percentage of sales in the three-month period is primarily attributed to an increase in direct product costs as a percentage of sales of (0.1%) offset by the impact of more efficient operations in our value added services area and spreading our overhead over higher sales (0.3%). The decrease in the nine-month period is primarily attributed to an increase in direct product costs as a percentage of sales of (0.6%) offset by the impact of more efficient operations in our value added services area and spreading our overhead over higher sales (0.8%). The Company's gross margins may not be comparable with other entities, since some entities include all of the cost related to their distribution network in cost of goods sold. As disclosed in Note 1 to the Condensed Consolidated Financial Statements, the Company includes a portion of the costs associated with its distribution network in selling and administrative expenses. The amounts included in selling and administrative expenses for the three-month periods ended September 30, 2008 and 2007, respectively, were $1,773,629 and $1,747,638. The amounts included in selling and administrative expenses for the nine-month periods ending September 30, 2008 and 2007, respectively, were $5,591,519 and $5,491,545.
Interest expense of $68,511 for the three-month period ended September 30, 2008 decreased from $79,367 for the similar period ended September 30, 2007. Interest expense of $249,861 for the nine-month period ended September 30, 2008 decreased from $255,840 for the similar period ended September 30, 2007.
The Company's effective tax rate for the three months ended September 30, 2008 was 35.4% versus 20.1% for the three months ended September 30, 2007. The Company's effective tax rate for the nine months ended September 30, 2008 was 37.8% versus 27.9% for the nine months ended September 30, 2007. The increase in the effective tax rate for the three-month period is attributed primarily to an audit by the Internal Revenue Service completed during the third quarter of 2007 which had a favorable impact reducing the 2007 third quarter effective tax rate (9.0%), a decrease in the benefit from expiring statutes of limitations relative to uncertain tax positions (2.0%), the impact of a reduction in tax exempt interest income (0.5%), an increase in the effective rate for state income taxes (0.5%), and increased provisions for uncertain tax positions in the current period of (1.5%). The increase in the effective tax rate for the nine-month period is attributed primarily to the favorable impact of an audit by the Internal Revenue Service completed during the third quarter of 2007 (4.6%), a decrease in the benefit from expiring statutes of limitations relative to uncertain tax positions (1.9%), the impact of a reduction in tax exempt interest income (0.7%), an increase in the effective rate for state income taxes (0.5%), and increased provisions for uncertain tax positions in the current period of (2.2%).
Liquidity and Capital Resources
Accounts receivable and other current assets decreased 0.1% from $22,195,580 on December 31, 2007 to $22,172,895 as of September 30, 2008 due primarily to lower sales in the current quarter in comparison to the fourth quarter of 2007.
Inventories decreased 1.8% from $46,463,662 on December 31, 2007 to $45,630,943 as of September 30, 2008 as we have continued to focus our efforts on inventory reduction.
Accounts payable decreased 18.4% from $6,635,412 on December 31, 2007 to $5,411,924 on September 30, 2008 primarily due to lower inventory purchases as we have continued to focus on inventory reduction.
Other current liabilities increased 28.4% from $2,549,680 on December 31, 2007 to $3,273,196 on September 30, 2008 primarily due to increased accruals for salaries and wages due to the timing of the end of the respective periods.
Other long-term liabilities increased 5.3% from $603,000 on December 31, 2007 to $635,000 on September 30, 2008 as a result of an increase in the accruals for uncertain tax positions.
Cash and cash equivalents decreased by $550,616 from $769,715 on December 31, 2007 to $219,099 as of September 30, 2008. The Company generated $5,815,098 in cash from operating activities, and utilized $1,663,597 in investing activities primarily related to net fixed asset additions of $1,990,167 which were offset by proceeds from sale of assets held for sale of $234,000, and used $4,702,117 in financing activities. Financing activities included the payment of cash dividends as discussed below, net proceeds from long-term debt of $328,676, offset by the reacquisition of the Company's common stock of $2,386,114. The Company is in full compliance with all terms, conditions and covenants of the various credit agreements.
In the foreseeable future, the Company will continue its ongoing capital expenditure program designed to maintain and improve its facilities. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions.
During the nine months ended September 30, 2008 and 2007, respectively, the Company paid cash dividends of approximately $2,674,000 and $2,691,000. The Company reacquired 256,152 shares of its common stock in the nine-month period ended September 30, 2008 at a total cost of $2,386,114. The Company did not reacquire any shares of its common stock in the nine-month period ended September 30, 2007. The Company anticipates that it will continue to pay dividends and that it will repurchase and retire additional shares of its common stock in the future as financial conditions permit.
The Company believes that its cash flow from operating activities together with other capital resources and funds from credit sources will be adequate to meet all of its funding requirements for the remainder of the year and for the foreseeable future.
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