TEXTILE SERVICES IMAGE APPAREL INNOVATION VALUE
Angelica Corporation
424 South Woods Mill Road
Suite 300
Angelica [Logo] Chesterfield, Missouri 63017 3406
Tel: 314.854.3800
Fax: 314.854.3890
November 15, 2001
Dear Fellow Shareholder:
Third quarter earnings per share of $.21 were slightly less than $.23 per
share in the third quarter last year. Our largest segment, Textile Services,
recorded impressive revenue and earnings increases; however, these were
insufficient to counter the economic weakness affecting both the
Manufacturing and Marketing and the Life Retail Stores segments. Given the
very weak economic conditions existing in many of the market segments that
we serve, exacerbated by the senseless acts of terrorism our country
experienced in the past two months, the results achieved are a testimony to
the hard work done by the management teams in each of our business segments.
Combined sales and textile service revenues were $119,078,000 in the third
quarter compared with $118,277,000 in the same period last year, an increase
of 0.7 percent. Pretax income was $2,819,000 versus $3,165,000 last year,
and net income decreased 9.5 percent to $1,805,000 from $1,994,000 in last
year's third quarter. For the first three quarters of this fiscal year,
combined sales and textile service revenues increased 2.9 percent to
$355,553,000 compared with $345,469,000 last year. Pretax income was
$6,482,000 compared with $8,536,000 for the comparable period last year. Net
income decreased 22.9 percent to $4,149,000 from $5,378,000 in the prior
year period, and earnings per share for the three quarters were $.48
compared with $.62 last year.
As was the case in the second quarter, the Textile Services segment had a
very strong quarter in terms of revenues and especially earnings. These
increases were achieved despite some revenue losses at non-healthcare
customers as a result of the weak economy. Revenues in this segment
increased 6.8 percent to $65,336,000 compared with $61,159,000 in the third
quarter last year. Operating earnings increased 52.7 percent in the quarter
to $4,785,000 compared with $3,133,000 last year. In comparing the first
three quarters of this year to last, revenues have increased by $13,899,000
or 7.6 percent, and earnings have increased by $2,999,000 or 26.4 percent.
Plant productivity increases, continued improvement in linen management plus
more efficient use of energy propelled strong earnings increases from
satisfactory revenue gains. As stated in a previous report to you, we intend
to reinvest in this segment and have received approval from the Board of
Directors to build a new laundry processing facility in the southwestern
part of the United States. Paul Anderegg, Textile Services President, and Ed
Ryan, Executive Vice President of Marketing, and the rest of the management
team of this segment are to be complimented on the impressive turnaround
they have led.
In the third quarter, the Manufacturing and Marketing segment's sales
(before intersegment sales) declined 7.2 percent to $36,260,000 compared
with $39,057,000 last year. Operating earnings fell to $514,000 compared
with $2,000,000 in the same quarter last year, a decline of 74.3 percent.
Despite these disappointing results, it should be noted that the management
team reduced expenses considerably in the third quarter relative to the
run-rate for the first half of the year. On an annualized basis, operating
expenses and cost of sales reductions exceed $5,000,000. Another positive
factor was the reduction in segment inventories to $68,239,000, down from
$74,923,000 at the beginning of this year. It has been a painful year for
the management team of Angelica Image Apparel, the domestic operations of
Manufacturing and Marketing. However, the weak economic conditions,
beginning in the fourth quarter of last year and intensifying as the new
year unfolded, made cost reduction actions absolutely necessary. Had it not
been for some strong sales and marketing efforts to add new customers, sales
levels would have fallen even further than they did. Many of the market
segments served by Manufacturing and Marketing have been severely affected
by current business conditions, and the outlook for the remainder of the
year is guarded as well. While the fourth quarter
www.angelica-corp.com
may be challenging for the Canadian operations too, because of their focus
on lodging, they have had impressive sales and earnings increases in the
first three quarters compared to last year. Helen Loader, President of the
Canadian operations, and her management team continue to maintain market
leadership in the premium and upscale lodging markets. Undoubtedly, the
string of earnings increases the Manufacturing and Marketing segment has
achieved in each of the preceding three fiscal years will not be continued
this year.
The lack of consumer confidence currently prevalent in our country that is
negatively affecting apparel retailers generally caused a 6.6 percent
same-store sales decline at Life Retail in the third quarter, the second
quarterly decline in a row. Fortunately, we did have excellent increases in
our catalogue and e-commerce sales as customers chose to "call-in and
log-on" as opposed to "coming in" to retail locations. Overall, third
quarter sales declined 3.8 percent to $23,930,000 compared with $24,876,000
last year. This segment had operating earnings of $812,000 compared with
$1,248,000 in last year's third quarter. The current quarter's earnings
compared favorably to the loss of $712,000 incurred in the second quarter
this year. Gross margins have continued to improve, reflecting "fresher"
merchandise in the stores and fewer markdowns. Life added three stores
shortly after quarter end as a consequence of an opportunistic acquisition
in the Las Vegas, NV marketplace and currently has a total of 287 stores.
During the quarter, we prepaid all of the $25,000,000 of long-term debt due
at the end of December. We used $13,000,000 of cash and $12,000,000 from a
three-year bank loan to pay down this debt. Interest costs in the second
half of the year will be reduced by $384,000, offset by less interest income
as a result of less invested cash and lower investment rates. We are also
pleased that total inventories, which were higher than we would have liked
at the beginning of the year, have been reduced by $7,594,000 as of the end
of the third quarter.
The segment management teams and the corporate management team are hard at
work developing our new three-year strategic plan. I must admit that the
crystal ball is pretty cloudy for all of us. All indications are that it
will be a number of months before any economic recovery begins. Fortunately,
a high percentage of Angelica's activities are centered in the healthcare
services industry, one that is less affected by reduction in travel and
cutbacks in consumer spending. During this planning process we are
critically evaluating the structural changes that are occurring in each of
our business segments. We continue to evaluate alternative ways of adding
shareholder value, recognizing that the world of business has been changed
inexorably forever and that some proven practices of the past are no longer
applicable. Making changes to practices that are now ineffective and
inefficient is a long process and an arduous task, but it must be
accomplished. We are committed to making these changes while minimizing
risks as much as feasible. We realize that many of the dislocations that
will occur are unavoidable, but they still must be implemented with
sensitivity for our associates and customers.
I must, once again, reduce our earnings expectations for the year. It now
appears that we will earn between $.55 and $.60 per share. I do believe,
however, that the steps we are taking will put us in excellent position to
earn significantly more than this in the next fiscal year, with increases in
the years following that.
Respectfully submitted,
/s/ Don W. Hubble
Don W. Hubble
Chairman, President and Chief Executive Officer
CONSOLIDATED STATEMENTS OF INCOME
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands, except per share amounts)
Third Quarter Ended Three Quarters Ended
------------------------------- ------------------------------
October 27, October 28, October 27, October 28,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Textile service revenues $ 65,336 $ 61,159 $195,669 $181,770
Net sales 53,742 57,118 159,884 163,699
-------- -------- -------- --------
119,078 118,277 355,553 345,469
-------- -------- -------- --------
Cost of textile services 51,294 49,201 154,086 145,017
Cost of goods sold 33,315 33,967 97,748 98,619
-------- -------- -------- --------
84,609 83,168 251,834 243,636
-------- -------- -------- --------
Gross profit 34,469 35,109 103,719 101,833
-------- -------- -------- --------
Selling, general and
administrative expenses 29,415 29,760 90,816 86,850
Interest expense 1,792 2,060 5,839 6,221
Other expense, net 443 124 582 226
-------- -------- -------- --------
31,650 31,944 97,237 93,297
-------- -------- -------- --------
Income before income taxes 2,819 3,165 6,482 8,536
Provision for income taxes 1,014 1,171 2,333 3,158
-------- -------- -------- --------
Net income $ 1,805 $ 1,994 $ 4,149 $ 5,378
======== ======== ======== ========
Basic and diluted earnings per share * $ 0.21 $ 0.23 $ 0.48 $ 0.62
======== ======== ======== ========
Dividends per common share $ 0.08 $ 0.08 $ 0.24 $ 0.40
======== ======== ======== ========
Comprehensive income, consisting of net income and foreign currency
translation adjustments, totaled $1,692 and $1,779 for the quarters ended
October 27, 2001 and October 28, 2000, respectively; and $3,982 and $5,019
for the three quarters ended October 27, 2001 and October 28, 2000,
respectively.
Certain amounts in the prior year have been reclassified to conform to
current year presentation.
For fiscal year 2002, the effective tax rate was adjusted downward from 37.0
percent to 36.0 percent to reflect lower actual state tax expense levels.
<FN>
* Based upon weighted average number of common and common equivalent shares
outstanding of 8,698,908 and 8,698,133 for fiscal periods of 2002 and 2001,
respectively.
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
October 27, January 27,
2001 2001
----------- -----------
ASSETS
- ------
Current Assets:
Cash and short-term investments $ 10,019 $ 20,311
Receivables, less reserve of $3,496 and $2,581 54,923 54,983
Inventories:
Raw material 20,469 27,223
Work in progress 3,055 5,895
Finished goods 60,726 58,726
--------- ---------
84,250 91,844
Linens in service 32,457 32,846
Prepaid expenses and other current assets 6,747 5,733
--------- ---------
Total Current Assets 188,396 205,717
--------- ---------
Property and Equipment 211,706 204,146
Less -- reserve for depreciation 125,504 119,026
--------- ---------
86,202 85,120
--------- ---------
Goodwill 5,024 5,341
Other acquired assets 1,483 2,659
Cash surrender value of life insurance 23,174 22,628
Miscellaneous 2,688 4,819
--------- ---------
32,369 35,447
--------- ---------
Total Assets $ 306,967 $ 326,284
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 6,854 $ 27,841
Accounts payable 21,151 27,445
Accrued expenses 26,364 25,982
--------- ---------
Total Current Liabilities 54,369 81,268
--------- ---------
Long-Term Debt, less current maturities 67,219 60,963
Other Long-Term Obligations 18,480 19,734
Shareholders' Equity:
Preferred Stock:
Class A, Series 1, $1 stated value,
authorized 100,000 shares, outstanding: None -- --
Class B, authorized 2,500,000 shares, outstanding: None -- --
Common Stock, $1 par value, authorized 20,000,000
shares, issued: 9,471,538 9,472 9,472
Capital surplus 4,196 4,196
Retained earnings 169,740 168,677
Accumulated other comprehensive income (2,147) (1,980)
Common Stock in treasury, at cost: 863,539 and 929,070 (14,362) (16,046)
--------- ---------
166,899 164,319
--------- ---------
Total Liabilities and Shareholders' Equity $ 306,967 $ 326,284
========= =========
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
Three Quarters Ended
----------------------------
October 27, October 28,
2001 2000
----------- -----------
Cash Flows from Operating Activities:
Net income $ 4,149 $ 5,378
Non-cash items included in net income:
Depreciation 9,435 9,857
Amortization of acquisition costs 1,578 1,782
Change in working capital components,
net of businesses acquired/disposed of 855 (2,488)
Other, net 331 687
-------- --------
Net cash provided by operating activities 16,348 15,216
-------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (10,517) (7,353)
Cost of businesses acquired (125) --
Disposals of businesses and property 302 5,474
-------- --------
Net cash used in investing activities (10,340) (1,879)
-------- --------
Cash Flows from Financing Activities:
Long-term debt repayments (26,731) (1,989)
Proceeds from issuance of long-term debt 12,000 --
Dividends paid (2,062) (3,469)
Repurchase of stock -- (822)
Other, net 493 (315)
-------- --------
Net cash used in financing activities (16,300) (6,595)
-------- --------
Net (decrease) increase in cash and short-term investments (10,292) 6,742
Balance at beginning of year 20,311 15,651
-------- --------
Balance at end of period $ 10,019 $ 22,393
======== ========
Supplemental cash flow information:
Income taxes paid $ 4,292 $ 4,642
Interest paid $ 5,282 $ 5,488
- -----------------------------------------------------------------------------
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, availability of
non-domestic image apparel contractors to manufacture and deliver at an
appropriate cost and in a timely manner, the ability to attract and retain
key personnel, unusual or unexpected cash needs for operations or capital
transactions, and other factors which may be identified in the Company's
filings with the Securities and Exchange Commission.
- -----------------------------------------------------------------------------
BUSINESS SEGMENT INFORMATION
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
Third Quarter Ended Three Quarters Ended
---------------------------- --------------------------
October 27, October 28, October 27, October 28,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Sales and textile service revenues:
Textile Services $ 65,336 $ 61,159 $195,669 $181,770
Manufacturing and Marketing 36,260 39,057 111,057 114,071
Retail Sales 23,930 24,876 68,607 69,521
Intersegment sales (6,448) (6,815) (19,780) (19,893)
-------- -------- -------- --------
$119,078 $118,277 $355,553 $345,469
======== ======== ======== ========
Earnings:
Textile Services $ 4,785 $ 3,133 $ 14,356 $ 11,357
Manufacturing and Marketing 514 2,000 2,047 5,251
Retail Sales 812 1,248 39 1,938
Interest, corporate expenses and other, net (3,292) (3,216) (9,960) (10,010)
-------- -------- -------- --------
$ 2,819 $ 3,165 $ 6,482 $ 8,536
======== ======== ======== ========
Depreciation and amortization:
Textile Services $ 2,408 $ 2,374 $ 7,190 $ 7,122
Manufacturing and Marketing 416 557 1,232 1,626
Retail Sales 668 703 1,999 2,187
Corporate 179 229 592 704
-------- -------- -------- --------
$ 3,671 $ 3,863 $ 11,013 $ 11,639
======== ======== ======== ========
SUMMARY FINANCIAL POSITION DATA
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands, except ratios, shares and per share amounts)
Three Quarters Ended
-----------------------------
October 27, October 28,
2001 2000
----------- -----------
Working capital $ 134,027 $ 150,701
Current ratio 3.5 to 1 3.9 to 1
Long-term debt $ 67,219 $ 86,276
Shareholders' equity $ 166,899 $ 164,184
Percent long-term debt to debt and equity 28.7% 34.4%
Equity per common share $ 19.39 $ 19.11
Common shares outstanding 8,607,999 8,592,268