Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Certain statements, other than
statements of historical fact, included in this Quarterly Report including,
without limitation, the statements under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” are, or may be deemed to be,
forward-looking statements that involve significant risks and uncertainties, and
accordingly, there is no assurance that these expectations will be correct.
These expectations are based upon many assumptions that the registrant believes
to be reasonable, but such assumptions ultimately may prove to be materially
inaccurate or incomplete, in whole or in part and, therefore, undue reliance
should not be placed on them. Several factors which could cause actual results
to differ materially from those discussed in such forward-looking statements
include, but are not limited to: availability and pricing of goods purchased
from international suppliers, successful integration of acquired companies,
unusual weather patterns which could affect domestic demand for the registrant’s
products, pricing policies of competitors, the ability to attract and retain
employees in key positions and uncertainties and changes in general economic
conditions. The words “believe,” “expect”, “anticipate”, “should”, “could” and
other expressions that indicate future events and trends identify
forward-looking statements. All subsequent forward-looking statements
attributable to the registrant or persons acting on its behalf are expressly
qualified in their entirety.
Sales
Sales by Segment
$(000)
|
Quarter
|
Year-to-Date
|
|
2007
|
2006
|
2007
|
2006
|
|
Work gloves and protective wear
|
8,838
|
8,810
|
26,667
|
26,376
|
|
Pet supplies
|
1,323
|
1,377
|
5,268
|
5,142
|
|
Promotional & specialty
products
|
3,343
|
3,061
|
7,901
|
7,480
|
|
Total sales
|
13,504
|
13,248
|
39,836
|
38,998
|
Total
revenues for the three months ended September 29, 2007 increased $256,000, or
1.9%, from the comparable quarter in 2006. This increase was primarily
attributable to product line expansion in the Company’s promotional and
specialty products segment.
Third
quarter sales in the Company’s work gloves and protective wear segment were
comparable to last year. Consumer sales were down approximately 10% as some
large orders for winter gloves received in September last year have not been
repeated. Third quarter sales in the domestic industrial market were up 3.5%
with the addition of some new customers and the completion of backorders from
the previous quarter. Also, Boss Canada sales increased $252,000 with the addition
of Canadawide Safety Inc., during the second quarter.
Third
quarter sales in the promotional and specialty products segment increased
$282,000, or 9.2%. This increase was from non-balloon products as the Company
continues to expand its product line.
11
In the pet supplies segment, third
quarter sales declined 3.9% due in part to a decrease in sales to a large
customer. On a year-to-date basis these sales have been made up by other
accounts. During the past year, the largest customer in this segment has
initiated a direct import program on high volume styles under which the Company
acts as agent in the purchase of goods. This arrangement is beneficial in
maintaining an important customer relationship, but has resulted in lower
selling prices and margins for this customer.
For the
nine months ended September 29, 2007, consolidated revenues increased 2.1%
compared to the same period in 2006. The work gloves and protective wear segment
is up 1.1% with increased sales of CAT
®
branded product and
additional Boss Canada sales as a result of the Canadawide acquisition. Sales
growth of 5.6% in the promotional and specialty products segment also
contributed to the year-to-date results, with new product sales providing the
bulk of this sales growth. Also contributing to the overall growth was a 2.5%
increase in the pet supplies segment with the addition of new customers and an
expanded product line.
The
Company is starting to experience production and shipping delays from China on
certain products in the work gloves and protective wear segment. Management
anticipates these product supply problems may have an adverse effect on sales in
the upcoming quarter and into next year. The Company hopes to alleviate potential shortages by obtaining alternative sources of supply in other
countries or from other vendors. The promotional and specialty products segment
is still anticipating the normal seasonal increase due to fall sports related
activity. Sales in the pet supplies segment generally decline during the third
and fourth quarters when pet owners reduce outside activities.
Cost of
Sales
Cost
of Sales by Segment
$(000)
|
Quarter
|
Year-to-Date
|
|
2007
|
2006
|
2007
|
2006
|
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
|
Work gloves and protective wear
|
6,677
|
75.5%
|
6,707
|
76.1%
|
20,368
|
76.4%
|
20,507
|
77.7%
|
|
Pet supplies
|
1,043
|
78.8%
|
1,132
|
82.2%
|
3,996
|
75.9%
|
4,179
|
81.3%
|
|
Promotional & specialty products
|
2,178
|
65.2%
|
1,955
|
63.9%
|
5,431
|
68.7%
|
5,028
|
67.2%
|
|
Total cost of sales
|
9,898
|
73.3%
|
9,794
|
73.9%
|
29,795
|
74.8%
|
29,714
|
76.2%
|
Cost of sales as a percentage of
sales for the three months ended September 29, 2007 improved 0.6 percentage
points from the prior year. In the work gloves and protective wear segment,
margins improved by 0.6 percentage points due primarily to price increases put
into place at the end of last year and strategic volume purchases of certain key
styles at lower costs.
Margins
in the pet supplies segment improved by 3.4 percentage points due to better
pricing, as a result of last year’s price increase, lower freight costs and
lower warehousing costs. During the first quarter of 2007, the Company
consolidated its two pet businesses, Warren Pet and Boss Pet, into a single
facility in Cleveland, Ohio. The Company anticipates that this facility
consolidation will continue to produce cost savings for the pet supplies
segment. Margins in the promotional and specialty products segment decreased 1.3
percentage points as a result of the product mix. Some of the newer products
introduced in this segment have a lower margin than traditional balloon
merchandise.
For the
nine-month period ended September 29, 2007, cost of sales as a percentage of
sales improved 1.4 percentage points from the prior year. The major reasons for
the improved margin are the price increases put into place last year that are
being realized now and the consolidation of the two pet facilities. The changed
product mix in the promotional and specialty products segment partially offset
the other margin improvements.
12
Costs in the work gloves and
protective wear segment remain volatile, with the Company expecting significant
cost increases on certain goods, particularly leather gloves and those
constructed of petroleum based and latex raw materials. Management will attempt
to pass such cost increases through to customers to maintain margins, though
competitive pressures could make this difficult.
Operating Expenses
Operating Expenses
by Segment $(000)
|
Quarter
|
Year-to-Date
|
|
2007
|
2006
|
2007
|
2006
|
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
|
Work gloves and protective wear
|
1,844
|
20.9%
|
1,763
|
20.0%
|
5,583
|
20.9%
|
5,486
|
20.8%
|
|
Pet supplies
|
209
|
15.8%
|
228
|
16.6%
|
728
|
13.8%
|
813
|
15.8%
|
|
Promotional & specialty products
|
562
|
16.8%
|
481
|
15.7%
|
1,648
|
20.9%
|
1,438
|
19.2%
|
|
Corporate and other
|
262
|
-
|
239
|
-
|
792
|
-
|
733
|
-
|
|
Total operating expenses
|
2,877
|
21.3%
|
2,711
|
20.5%
|
8,751
|
22.0%
|
8,470
|
21.7%
|
Operating
expenses during the third quarter of 2007 increased $166,000 compared to the
corresponding period in 2006. For the nine-month period ended
September 29, 2007, consolidated operating expenses increased $281,000. Most of
the increase is in administration expense, caused by additional payroll at
Galaxy and increased bonus accruals at Boss corporate.
Earnings (Loss) From Operations
Operating Income (Loss)
by Segment $(000)
|
Quarter
|
Year-to-Date
|
|
2007
|
2006
|
2007
|
2006
|
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
|
Work gloves and protective wear
|
317
|
3.6%
|
340
|
3.9%
|
716
|
2.7%
|
383
|
1.5%
|
|
Pet supplies
|
71
|
5.4%
|
17
|
1.2%
|
544
|
10.3%
|
150
|
2.9%
|
|
Promotional & specialty products
|
603
|
18.0%
|
625
|
20.4%
|
822
|
10.4%
|
1,014
|
13.6%
|
|
Corporate and other
|
(262)
|
-
|
(239)
|
-
|
(792)
|
-
|
(733)
|
-
|
|
Total operating income (loss)
|
729
|
5.4%
|
743
|
5.6%
|
1,290
|
3.2%
|
814
|
2.1%
|
On a
consolidated basis, the Company generated operating income of $729,000 for the
third quarter of 2007, down slightly from the same quarter in 2006. Lower gross
margin in the promotional and specialty products segment along with increased
operating expenses in the work gloves and protective wear segment and the
promotional and specialty products segment caused this decline.
On a year-to-date basis, the Company
generated income from operations of $1,290,000 through September 29, 2007,
compared to $814,000 for the comparable period in 2006. Improved margins in the
work gloves and protective wear segment and the pet supplies segment were
partially offset by lower margins in the promotional and specialty products
segment.
13
Other Income and (Expense)
The Company incurred
$82,000 in interest expense during the third quarter of 2007, compared to
$91,000 during the third quarter of 2006. For the nine months ended September
29, 2007, interest expense was $223,000 compared to $328,000 for the same period
last year. During 2007, the Company’s operating profits combined with better
inventory management, resulted in the Company being able to retain a favorable
cash balance instead of borrowing on its line of credit as it has done in prior
years. Reduced borrowing results in reduced interest expense.
Taxes
During 2007, the Company recorded an
income tax expense of $273,000 for the third quarter and $465,000 for the first
9 months of the year based on current federal and estimated average state income
tax rates. The federal income tax portion of the tax provision is a non-cash
expense, because the Company has substantial net operating loss carry forwards
for federal income tax purposes resulting from losses in prior years.
Liquidity and Capital
Resources
Operating activities provided
$1,546,000 in cash during the nine months ended September 29, 2007, compared to
$2,103,000 in 2006. This favorable cash performance for 2007 was primarily
attributable to increased profitability, reductions in accounts receivable and
increases in accounts payable. The major portion of the favorable 2006
performance was a $1,994,000 reduction in inventory.
Investing activities used $625,000
during the nine months ended September 29, 2007, compared to $196,000 during the
comparable period in 2006. $337,000 of cash was used to purchase Canadawide by
Boss Canada. Additional capital expenditures for the first nine months of 2007
consisted primarily of facility improvements resulting from consolidation of the
pet supplies segment into its new facilities in Cleveland and some information
technology enhancements at the promotional and specialty products segment. The
Company expects minimal capital investment in the fourth quarter.
Financing
activities provided $164,000 for the first nine months of 2007. The Company
borrowed $364,000 on a term loan in connection with the acquisition of
Canadawide and made total payments of $287,000 in addition to receiving $87,000
from the exercise of stock options. There are currently no borrowings against
the US or Canadian lines of credit.
As of
September 29, 2007 the Company had $2,260,000 in cash and the entire $7,000,000
revolving line of credit is available for borrowing. The Company was in
compliance with its credit facility loan covenants as of September 29, 2007.
Management believes the Company’s cash on hand and availability under the credit
facility should provide ample liquidity for the Company’s expected working
capital and operating needs.
14
Item 4. CONTROLS AND PROCEDURES
As of the
end of the period covered by this report, the Company conducted an evaluation,
under the supervision and with the participation of the principal executive
officer and principal financial officer, 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 (the “Exchange Act”)). Based on this evaluation, the
principal executive officer and principal financial officer concluded that the
Company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company’s internal control over financial
reporting during the Company’s most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting
.