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| SGC > SEC Filings for SGC > Form 10-Q on 24-Jul-2009 | All Recent SEC Filings |
24-Jul-2009
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, including those described in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. 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, 2008. 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 $160,000.
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.
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.
Pensions
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 for the Company's pension plans were determined based on the Citigroup Pension Yield Curve. 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% 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.
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. Federal income taxes are not provided on that portion of unremitted earnings of foreign subsidiaries that are expected to be reinvested indefinitely. 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
The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) ("FAS No. 123R") on January 1, 2006. FAS No. 123R 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 2009 and 2008 includes the compensation expense for the share-based payments granted in those years. In the Company's 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. The Company used the Black-Scholes-Merton valuation model to value any share-based compensation under FAS No. 123R. 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
The current economic environment in the United States remains very challenging. A significant number of companies, including many of our customers, have closed locations, reduced headcount or both. Additionally, voluntary employee turnover has been reduced significantly. Fewer available jobs coupled with less attrition resulted in decreased demand for our uniforms and service apparel. Additionally, customers are being more cost conscious and are delaying purchases of new uniforms whenever possible. As a result of these factors, net sales decreased 21.2% from $31,699,285 for the three months ended June 30, 2008 to $24,971,523 for the three months ended June 30, 2009 and net sales decreased 25.1% from $64,981,915 for the six months ended June 30, 2008 to $48,687,617 for the six months ended June 30, 2009.
As a result of these significant declines in our revenue, we have implemented aggressive cost reduction initiatives to limit the impact on our results of operations. These initiatives are aimed at eliminating nonessential positions, streamlining our existing processes and shifting administrative positions to our Central American subsidiary when possible. As a result of these initiatives, we have eliminated approximately $3.8 million in payroll and related benefits on an annual basis. These specific initiatives were started during the first quarter of 2009 and are expected to produce total payroll related savings during fiscal 2009 of approximately $2.9 million. These initiatives are in addition to prior year staff reductions. While we believe that we have implemented appropriate cost reduction measures to address the current economic environment, if weak economic conditions continue, it could have a material adverse effect on our revenues and results of operations.
Cost of goods sold, as a percentage of sales, approximated 66.8% for the three months ended June 30, 2009 compared to 66.4% for the three months ended June 30, 2008. Cost of goods sold, as a percentage of sales, approximated 67.8% for the six months ended June 30, 2009 compared to 66.8% for the six months ended June 30, 2008. The increases as a percentage of sales in the three and six-month periods are primarily attributed to the significant reductions in net sales outpacing the reductions in overhead included within cost of sales. 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 June 30, 2009 and 2008, respectively, were $1,545,552 and $1,824,634. The amounts included in selling and administrative expenses for the six-month periods ending June 30, 2009 and 2008, respectively, were $3,231,130 and $3,817,890.
Interest expense of $24,936 for the three-month period ended June 30, 2009 decreased 67.7% from $77,209 for the similar period ended June 30, 2008. Interest expense of $64,713 for the six-month period ended June 30, 2009 decreased 64.3% from $181,350 for the similar period ended June 30, 2008. The decrease in the three and six-month periods ended June 30, 2009 is attributed to the reduction in outstanding borrowings in the current periods.
The Company's effective tax rate for the three months ended June 30, 2009 was 31.3% versus 38.6% for the three months ended June 30, 2008. The Company's effective tax rate for the six months ended June 30, 2009 was 37.7% versus 38.8% for the six months ended June 30, 2008. The decrease in the three month rates are attributed primarily to a benefit for untaxed foreign income (8.5%), an increased accrual for uncertain tax positions (1.0%) in the current period, and the increase from the impact of permanent differences between book and tax basis earnings (0.2%) as a result of share-based compensation and other items. The decrease in the six month rates are attributed primarily to a benefit for untaxed foreign income (8.5%), an increased accrual for uncertain tax positions (5.1%) in the current period and the increase from the impact of permanent differences between book and tax basis earnings related to share-based compensation (1.1%), and other items (1.2%).
Liquidity and Capital Resources
Accounts receivable and other current assets decreased 9.0% from $20,054,629 on December 31, 2008 to $18,246,222 as of June 30, 2009 primarily as a result of the significant reduction in net sales.
Inventories decreased 18.7% from $43,410,146 on December 31, 2008 to $35,282,883 as of June 30, 2009 as a result of inventory reduction measures implemented by management in anticipation of the lower expected net sales.
Accounts payable increased 2.3% from $4,626,789 on December 31, 2008 to $4,730,988 on June 30, 2009. This increase is inconsistent with the significant reduction in inventories discussed above due to the fact that the Company pays for a significant portion of its inventory purchases at the time the goods are shipped from its suppliers. As a result, a large portion of these purchases are never reflected in accounts payable balances.
Other current liabilities decreased 7.0% from $2,518,956 on December 31, 2008 to $2,342,173 on June 30, 2009 primarily due to lower accruals for customer rebates due to lower sales volume.
Cash and cash equivalents increased by $5,500,998 from $133,152 on December 31, 2008 to $5,634,150 as of June 30, 2009. The Company generated $11,374,943 in cash from operating activities, and used $5,873,953 in financing activities. Financing activities included the payment of cash dividends as discussed below and net repayments of long-term debt of $4,029,604 and the reacquisition of the Company's common stock of $213,668.
The Company has a $15,000,000 revolving credit facility with Wachovia Bank, which matures on June 30, 2010. At the option of the Company, any outstanding balance on the agreement at that date will convert to a one-year term loan. As of June 30, 2009, the Company had no outstanding balance on its revolving credit facility. The available balance under the credit facility is reduced, however, by its outstanding letters of credit. As of June 30, 2009, the Company had approximately $85,000 outstanding under letters of credit. Interest on the revolving credit facility is payable at LIBOR plus 0.60% based upon the one-month LIBOR rate for U.S. dollar based borrowings (1.51% at June 30, 2009). The Company pays an annual commitment fee of 0.15% on the average unused portion of the commitment. The Company is in full compliance with all terms, conditions and covenants of its revolving credit facility.
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 six months ended June 30, 2009 and 2008, respectively, the Company paid cash dividends of $1,630,681 and $1,801,346. The Company reacquired 30,802 and 191,803 shares of its common stock at a total cost of $213,668 and $1,745,038 in the six-month periods ended June 30, 2009 and June 30, 2008, respectively. 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.
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