UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 1-13495
MAC-GRAY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE |
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04-3361982 |
(State or other jurisdiction incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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404 WYMAN STREET, SUITE 400 |
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WALTHAM, MASSACHUSETTS |
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02451-1212 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (781) 487-7600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer o |
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Accelerated Filer x |
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Non-Accelerated Filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 6, 2013, 14,647,638 shares of common stock of the registrant, par value $.01 per share, were outstanding.
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
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December 31, |
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March 31, |
| ||
|
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2012 |
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2013 |
| ||
Assets |
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|
|
|
| ||
Current assets: |
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|
|
|
| ||
Cash and cash equivalents |
|
$ |
14,328 |
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$ |
14,836 |
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Trade receivables, net of allowance for doubtful accounts |
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5,835 |
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5,158 |
| ||
Inventory of finished goods, net |
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1,284 |
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2,172 |
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Deferred income taxes |
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1,148 |
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1,148 |
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Prepaid facilities management rent and other current assets |
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9,476 |
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9,964 |
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Total current assets |
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32,071 |
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33,278 |
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Property, plant and equipment, net |
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129,947 |
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132,448 |
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Goodwill |
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57,737 |
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57,643 |
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Intangible assets, net |
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169,640 |
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168,588 |
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Prepaid facilities management rent and other assets |
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12,014 |
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12,090 |
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Total assets |
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$ |
401,409 |
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$ |
404,047 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Current portion of long-term debt and capital lease obligations |
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$ |
1,201 |
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$ |
1,154 |
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Trade accounts payable |
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9,189 |
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8,895 |
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Accrued facilities management rent |
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20,930 |
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21,584 |
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Accrued expenses and other current liabilities |
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13,677 |
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13,057 |
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Total current liabilities |
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44,997 |
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44,690 |
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Long-term debt and capital lease obligations |
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190,969 |
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191,436 |
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Deferred income taxes |
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46,770 |
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46,385 |
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Other liabilities |
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1,386 |
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1,386 |
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Total liabilities |
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284,122 |
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283,897 |
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Commitments and contingencies (Note 6) |
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Stockholders equity: |
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Preferred stock ($.01 par value, 5 million shares authorized, no shares issued or outstanding) |
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|
|
|
| ||
Common stock ($.01 par value, 30 million shares authorized, 14,516,074 issued and outstanding at December 31, 2012, and 14,613,980 issued and outstanding at March 31, 2013) |
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145 |
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146 |
| ||
Additional paid in capital |
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89,706 |
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90,801 |
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Accumulated other comprehensive loss |
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(130 |
) |
(1 |
) | ||
Retained earnings |
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27,566 |
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29,204 |
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Total stockholders equity |
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117,287 |
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120,150 |
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Total liabilities and stockholders equity |
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$ |
401,409 |
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$ |
404,047 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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March 31, |
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2012 |
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2013 |
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Revenue: |
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Laundry facilities management revenue |
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$ |
80,305 |
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$ |
78,792 |
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Commercial laundry equipment sales |
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3,931 |
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2,801 |
| ||
Total revenue |
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84,236 |
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81,593 |
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Cost of revenue: |
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Cost of laundry facilities management revenue |
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54,966 |
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54,056 |
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Depreciation and amortization |
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10,437 |
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10,623 |
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Cost of commercial laundry equipment sales |
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3,197 |
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2,334 |
| ||
Total cost of revenue |
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68,600 |
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67,013 |
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Gross margin |
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15,636 |
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14,580 |
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Operating expenses: |
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General and administration |
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6,692 |
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4,527 |
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Sales and marketing |
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2,878 |
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3,310 |
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Depreciation and amortization |
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201 |
|
195 |
| ||
Incremental costs of proxy contests |
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83 |
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57 |
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(Gain) loss on sale of assets, net |
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14 |
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(34 |
) | ||
Total operating expenses |
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9,868 |
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8,055 |
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Income from operations |
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5,768 |
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6,525 |
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Interest expense, including the change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs |
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3,342 |
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1,665 |
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Loss on early extinguishment of debt |
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3,762 |
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Income (loss) before provision for income taxes |
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(1,336 |
) |
4,860 |
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Income tax expense (benefit) |
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(569 |
) |
1,942 |
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Net income (loss) |
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(767 |
) |
2,918 |
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Other comprehensive gain, net of tax: |
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|
|
|
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Unrealized gain on derivative instruments |
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138 |
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129 |
| ||
Comprehensive income (loss) |
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$ |
(629 |
) |
$ |
3,047 |
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Earnings (loss) per share basic |
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$ |
(0.05 |
) |
$ |
0.20 |
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Earnings (loss) per share diluted |
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$ |
(0.05 |
) |
$ |
0.19 |
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Weighted average common shares outstanding - basic |
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14,375 |
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14,543 |
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Weighted average common shares outstanding - diluted |
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14,375 |
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15,018 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)
(In thousands, except share data)
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Accumulated |
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Common Stock |
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Additional |
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Other |
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Number |
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Paid In |
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Comprehensive |
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Comprehensive |
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Retained |
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of shares |
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Value |
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Capital |
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Loss |
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Income |
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Earnings |
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Total |
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Balance, December 31, 2012 |
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14,516,074 |
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$ |
145 |
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$ |
89,706 |
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$ |
(130 |
) |
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$ |
|
27,566 |
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$ |
117,287 |
| |
Net income |
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|
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$ |
2,918 |
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2,918 |
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$ |
2,918 |
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Other comprehensive income: |
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|
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Unrealized gain on derivative instrument and reclassification, net of tax of $79 (Note 3) |
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|
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|
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129 |
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129 |
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$ |
129 |
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Comprehensive income |
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|
|
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$ |
3,047 |
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Options Exercised |
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5,000 |
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49 |
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$ |
49 |
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Stock issuance - Employee |
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Stock Purchase Plan |
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10,326 |
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120 |
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|
|
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$ |
120 |
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Stock compensation expense |
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|
|
|
|
601 |
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|
|
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$ |
601 |
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Dividends paid, $.0875 per share |
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|
|
|
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(1,279 |
) |
$ |
(1,279 |
) | ||||||
Stock grants |
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82,580 |
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1 |
|
325 |
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|
|
|
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(1 |
) |
$ |
325 |
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Balance, March 31, 2013 |
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14,613,980 |
|
$ |
146 |
|
$ |
90,801 |
|
$ |
(1 |
) |
|
|
$ |
|
29,204 |
|
$ |
120,150 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
MAC-GRAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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Three months ended |
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|
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2012 |
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2013 |
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Cash flows from operating activities: |
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|
|
|
| ||
Net income (loss) |
|
$ |
(767 |
) |
$ |
2,918 |
|
Adjustments to reconcile net income to net cash flows provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
10,638 |
|
10,818 |
| ||
Amortization of deferred financing costs |
|
176 |
|
90 |
| ||
Loss on early extinguishment of debt |
|
1,220 |
|
|
| ||
Increase (decrease) in allowance for doubtful accounts and lease reserves |
|
(28 |
) |
11 |
| ||
Gain (loss) on disposition of assets |
|
14 |
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(34 |
) | ||
Stock grants |
|
351 |
|
325 |
| ||
Gain on change in fair value of interest rate derivatives |
|
(89 |
) |
(181 |
) | ||
Gain on change in fair value of fuel commodity derivatives |
|
(250 |
) |
(53 |
) | ||
Increase (decrease) in deferred income taxes |
|
4 |
|
(224 |
) | ||
Non-cash stock compensation |
|
644 |
|
601 |
| ||
(Increase) decrease in accounts receivable |
|
(114 |
) |
666 |
| ||
Increase in inventory |
|
(497 |
) |
(888 |
) | ||
Increase in prepaid facilities management rent and other assets |
|
(703 |
) |
(1,434 |
) | ||
Decrease in accounts payable, accrued facilities management rent, accrued expenses and other liabilities |
|
(4,117 |
) |
(568 |
) | ||
Net cash flows provided by operating activities |
|
6,482 |
|
12,047 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
|
(7,734 |
) |
(8,677 |
) | ||
Payments for acquisitions |
|
|
|
(2,018 |
) | ||
Proceeds from sale of assets |
|
36 |
|
34 |
| ||
Net cash flows used in investing activities |
|
(7,698 |
) |
(10,661 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Payments on capital lease obligations |
|
(362 |
) |
(341 |
) | ||
Payment on senior notes |
|
(100,000 |
) |
|
| ||
Payments on secured revolving credit facility |
|
(106,473 |
) |
(19,547 |
) | ||
Borrowings on secured revolving credit facility |
|
230,797 |
|
20,120 |
| ||
Payments on secured term credit facility |
|
(18,750 |
) |
|
| ||
Proceeds from exercise of stock options |
|
163 |
|
49 |
| ||
Proceeds from issuance of common stock |
|
140 |
|
120 |
| ||
Debt acquisition costs |
|
(1,497 |
) |
|
| ||
Cash dividend paid |
|
(876 |
) |
(1,279 |
) | ||
Repurchase of common stock |
|
(2,000 |
) |
|
| ||
Net cash flows provided by (used in) financing activities |
|
1,142 |
|
(878 |
) | ||
|
|
|
|
|
| ||
Increase (decrease) in cash and cash equivalents |
|
(74 |
) |
508 |
| ||
Cash and cash equivalents, beginning of period |
|
13,881 |
|
14,328 |
| ||
Cash and cash equivalents, end of period |
|
$ |
13,807 |
|
$ |
14,836 |
|
Supplemental disclosure of non-cash investing and financing activities:
During the three months ended March 31, 2012 and 2013, the Company acquired various assets under capital lease agreements totaling $0 and $188, respectively.
During the three months ended March 31, 2013, the Company acquired an entity in a purchase business combination. The fair value of the net assets acquired and goodwill amounted to $2,737 with $2,018 paid in cash and $719 incurred as a liability in the form of a future cash payment.
The accompanying notes are an integral part of these condensed consolidated financial statements.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The unaudited interim condensed consolidated financial statements do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of the management of Mac-Gray Corporation (the Company or Mac-Gray,) the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal, recurring adjustments), which are necessary to present fairly the Companys financial position, the results of its operations, and its cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the Companys 2012 audited consolidated financial statements filed with the Securities and Exchange Commission in its Annual Report on Form 10-K for the year ended December 31, 2012. The results for interim periods are not necessarily indicative of the results to be expected for the full year.
The Company generates the majority of its revenue from card and coin-operated laundry equipment located in 44 states throughout the United States, as well as the District of Columbia. The Companys principal client base is the multi-unit housing market, which consists of apartments, condominium units, colleges and universities. The Company also sells and services commercial laundry equipment to commercial laundromats, multi-housing properties and institutions. The majority of the Companys purchases of laundry equipment are from one supplier.
2. Long-Term Debt
On February 29, 2012, the Company entered into an Amended and Restated Senior Secured Credit Agreement. The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the Revolver). The 2012 Credit Agreement matures on February 28, 2017. The 2012 Credit Agreement also provides for Swingline Loans of up to $10,000 (the Swingline Loans) and any Swingline Loans will reduce the borrowings available under the Revolver. Subject to certain terms and conditions, the 2012 Credit Agreement gives the Company the option to increase the Revolver or establish one or more new term loans, provided that the aggregate commitments under the 2012 Credit Agreement cannot exceed $350,000. The 2012 Credit Agreement is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries as well as a pledge by the Company of all the capital stock of its subsidiaries. Outstanding indebtedness under the 2012 Credit Agreement bears interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate plus an applicable percentage, ranging from 1.75% to 2.75% per annum (currently 2.50%), determined by reference to our consolidated total leverage ratio, and (ii) in the case of base rate loans and swingline loans, the higher of (a) the federal funds rate plus 0.50%, (b) the annual rate of interest announced by Bank of America, N.A. as its prime rate, or (c) for each day, the floating rate of interest equal to LIBOR for a one month term quoted for such date (the highest of which is defined as the Base Rate), plus, in each case, an applicable percentage, ranging from 0.75% to 1.75% per annum (currently 1.50%), determined by reference to our consolidated total leverage ratio.
The Company pays a commitment fee equal to a percentage of the actual daily-unused portion of the Revolver under the 2012 Credit Agreement. This percentage is determined quarterly by reference to the Companys consolidated total leverage ratio and ranges between 0.25% per annum and 0.50% per annum (currently 0.35%). For purposes of the calculation of the commitment fee, letters of credit are considered usage under the Revolver, but swingline loans are not considered usage under the Revolver.
The 2012 Credit Agreement includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and incurring indebtedness, and requires that the Company maintain certain financial ratios. The most significant financial ratios that the Company is required to maintain include a consolidated total leverage ratio of not greater than 3.75 to 1.00 (3.50 to 1.00 as of December 31, 2013 and thereafter) and a consolidated cash flow coverage ratio of not less than 1.20 to 1.00. The Company was in compliance with all financial covenants at March 31, 2013.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
2. Long-Term Debt (continued)
During the first quarter of 2012, the Company incurred deferred financing costs of $1,497 associated with the 2012 Credit Agreement and wrote off unamortized deferred financing costs of $133 associated with the Companys 2008 credit facility.
As of March 31, 2013, there was $190,318 outstanding under the Revolver and $1,380 in outstanding letters of credit. The available balance under the Revolver was $58,302 at March 31, 2013. The average interest rates on the borrowings outstanding under the prior credit agreement and the 2012 Credit Agreement at March 31, 2012 and 2013 were 4.00% and 3.68%, respectively, including the applicable spread paid to the banks and the effect of the interest rate swap agreements tied to the debt (see Note 3 for discussion on Fair Value Measurements).
On August 16, 2005, the Company issued senior unsecured notes in the amount of $150,000 with the fixed interest rate of 7.625%. On October 21, 2011, the Company redeemed $50,000 of the senior notes by utilizing $51,271 of availability under its 2008 credit facility. The Company paid a premium of $1,271 as well as interest accrued through the date of redemption and wrote off unamortized deferred financing costs of $623 associated with this redemption. On March 30, 2012, the Company redeemed the remaining $100,000 of the senior notes by utilizing $103,495 of availability under the 2012 Credit Agreement and paying a premium of $2,542 as well as interest accrued through the date of redemption. The Company wrote off the remaining $1,087 of unamortized deferred financing costs associated with this redemption.
Interest expense associated with the Companys long term debt for the three months ended March 31, 2013 and 2012 is comprised of the following:
|
|
Three months ended |
| ||||
|
|
March 31, |
| ||||
|
|
2012 |
|
2013 |
| ||
|
|
|
|
|
| ||
Interest expense |
|
$ |
3,255 |
|
$ |
1,756 |
|
Change in the fair value of non-hedged interest rate derivative instruments |
|
(89 |
) |
(181 |
) | ||
Amortization of deferred financing costs |
|
176 |
|
90 |
| ||
Interest expense, including change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs |
|
$ |
3,342 |
|
$ |
1,665 |
|
Capital lease obligations are comprised primarily of the Companys fleet of vehicles which totaled $2,425 and $2,272 at December 31, 2012 and March 31, 2013, respectively.
Required payments under the Companys long-term debt and capital lease obligations are as follows:
|
|
Amount |
| |
2013 (nine months) |
|
$ |
902 |
|
2014 |
|
831 |
| |
2015 |
|
321 |
| |
2016 |
|
209 |
| |
2017 |
|
190,327 |
| |
Thereafter |
|
|
| |
|
|
$ |
192,590 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
2. Long-Term Debt (continued)
The Company historically has not needed sources of financing other than its internally generated cash flow and revolving credit facilities to fund its working capital, capital expenditures, and smaller acquisitions. As a result, the Company anticipates that its cash flow from operations and revolving credit facilities will be sufficient to meet its anticipated cash requirements for at least the next twelve months.
3. Fair Value Measurements
The Company has adopted accounting guidance regarding fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entitys own assumptions.
The following table summarizes the basis used to measure certain financial assets and financial liabilities at fair value on a recurring basis in the balance sheet:
|
|
|
|
Basis of Fair Value Measurments |
| ||||||||
|
|
Balance at |
|
Quoted |
|
Significant |
|
Significant |
| ||||
Interest rate swap derivative financial instruments (included in accrued expenses) |
|
$ |
18 |
|
$ |
|
|
$ |
18 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fuel commodity derivatives (included in current assets) |
|
$ |
16 |
|
$ |
|
|
$ |
|
|
$ |
16 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
3. Fair Value Measurements (continued)
The Company has entered into standard International Swaps and Derivatives Association (ISDA) interest rate swap agreements (Swap Agreements) to manage the interest rate associated with its debt. At March 31, 2013, the interest rate Swap Agreements effectively convert $45,000 of the Companys variable rate debt to a long-term fixed rate. Under these agreements the Company receives a variable rate of LIBOR plus a markup and pays a fixed rate. The Company recognized a non-cash unrealized gain of $388 and $390 for the three months ended March 31, 2013 and 2012, respectively, on the interest rate Swap Agreements as a result of the change in the fair value.
On September 23, 2011 the Company entered into a fuel commodity derivative to manage the fuel cost of its fleet of vehicles. The derivative was effective January 1, 2012 and expired December 31, 2012. On September 19, 2012 the Company entered into an additional fuel commodity derivative. The derivative is effective January 1, 2013 and expires December 31, 2013. The derivative has a monthly notional amount of 80 thousand gallons from January 1, 2013 through December 31, 2013 for a total notional amount of 960 thousand gallons. The Company has a put price of $3.26 per gallon and a strike price of $3.90 per gallon. The Company recognized a non-cash unrealized gain of $53 and $250 for the three months ended March 31, 2013 and 2012, respectively, on these fuel commodity derivatives as a result of the change in the fair value.
The fair value of these interest rate derivatives are based on quoted prices for similar instruments from a commercial bank and are considered a Level 2 item. The fuel commodity derivative is based on market assumptions and quoted pricing and is considered a Level 3 item.
The fuel commodity derivative activity for the three months ended March 31, 2013 is as follows:
Balance, December 31, 2012 |
|
$ |
(37 |
) |
Realized gains |
|
|
| |
Unrealized gains |
|
53 |
| |
Settlements |
|
|
| |
Balance, March 31, 2013 |
|
$ |
16 |
|
The Company determines the fair value of the amount outstanding under its 2012 Credit Facility using Level 2 inputs. The fair value of the 2012 Credit Agreement at March 31, 2013 approximates carrying value.
During the first quarter of 2012, as a result of the senior note redemption (Note 3), the Company no longer qualified for hedge accounting treatment on its only effective interest rate swap agreement. Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost is being reclassified as an earnings charge through the maturity date of the derivative. This charge to interest expense, when combined with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $207 for the three months ended March 31, 2013 compared to $301 for the three months ended March 31, 2012, respectively. The remaining balance of $1 associated with these interest rate swap agreements and included in Accumulated Other Comprehensive Loss will be charged to interest expense through the maturity date of the interest rate swap agreements on April 1, 2013.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(In thousands, except share data)
3. Fair Value Measurements (continued)
The table below outlines the details of each remaining interest rate Swap Agreement:
|
|
|
|
Notional |
|
Notional |
|
|
|
|
| ||
|
|
Original |
|
Amount |
|
Amount |
|
|
|
|
| ||
Date of |
|
Notional |
|
Fixed/ |
|
March 31, |
|
Expiration |
|
Fixed |
| ||
Origin |
|
Amount |
|
Amortizing |
|
2013 |
|
Date |
|
Rate |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
May 8, 2008 |
|
$ |
45,000 |
|
Amortizing |
|
$ |
25,000 |
|
Apr 1, 2013 |
|
3.78 |
% |
May 8, 2008 |
|
$ |
40,000 |
|
Amortizing |
|
$ |
21,000 |
|
Apr 1, 2013 |
|
3.78 |
% |
In accordance with the interest rate Swap Agreements and on a quarterly basis, interest expense is calculated based on the floating 90-day LIBOR and the fixed rate. If interest expense, as calculated, is greater based on the 90-day LIBOR, the financial institution pays the difference to the Company. If interest expense, as calculated, is greater based on the fixed rate, the Company pays the difference to the financial institution.
Depending on fluctuations in the LIBOR, the Companys interest rate exposure and its related impact on interest expense and net cash flow may increase or decrease. The counterparty to the interest rate Swap
Agreements exposes the Company to credit loss in the event of non-performance; however, non-performance is not anticipated given the counterpartys creditworthiness.
The tables below display the impact the Companys derivative instruments had on the Condensed Consolidated Balance Sheets as of December 31, 2012 and March 31, 2013 and the Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2013.
Fair Values of Derivative Instruments
|
|
Liability Derivatives |
| ||||||||
|
|
December 31, 2012 |
|
March 31, 2013 |
| ||||||
|
|
Balance Sheet |
|
Fair Value |
|
Balance Sheet |
|
Fair Value |
| ||
|
|
|
|
|
|
|
|
|
| ||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||
Interest rate contracts |
|
Accrued expenses |
|
$ |
|
|
Accrued expenses |
|
$ |
|
|
Interest rate contracts |
|
Other liabilites |
|
|
|
Other liabilites |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||
Interest rate contracts |
|
Accrued expenses |
|
406 |
|
Accrued expenses |
|
18 |
| ||
Fuel commodity derivatives |
|
Accrued expenses |
|
37 |
|
Current Assets |
|
(16 |
) | ||
|
|
|
|
|
|
|
|
|
| ||
Total derivatives |
|
|
|
$ |
443 |
|
|
|
$ |
2 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
3. Fair Value Measurements (continued)
The Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income
for the three months ended March 31, 2012 and 2013
|
|
|
|
|
|
Amount of Loss |
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
Location of Loss |
|
Reclassified from |
|
|
|
|
|
|
| ||||||||||||
|
|
Amount of Loss Recognized |
|
Reclassified from |
|
Accumulated OCI into |
|
|
|
Location of |
|
Amount of Gain or (Loss) |
| ||||||||||||
Derivatives in |
|
in OCI on Derivative |
|
Accumulated |
|
Income (Effective |
|
Derivatives Not |
|
Gain or (Loss) |
|
Recognized in Income on |
| ||||||||||||
Net Investment |
|
(Effective Portion) |
|
OCI into Income |
|
Portion) |
|
Designated as |
|
Recognized in |
|
Derivative |
| ||||||||||||
Hedging |
|
March 31, |
|
(Effective |
|
March 31, |
|
Hedging |
|
Income on |
|
March 31, |
| ||||||||||||
Relationships |
|
2012 |
|
2013 |
|
Portion) |
|
2012 |
|
2013 |
|
Instruments |
|
Derivative |
|
2012 |
|
2013 |
| ||||||
Interest rate contracts: |
|
|
|
|
|
Interest expense, including the change in the fair value of non-hedged derivative instruments: |
|
|
|
|
|
Interest rate contracts: |
|
Interest expense, including the change in the fair value of non-hedged derivative instruments: |
|
|
|
|
| ||||||
Unrealized |
|
$ |
(67 |
) |
$ |
|
|
Unrealized |
|
$ |
(301 |
) |
$ |
(207 |
) |
|
|
Unrealized |
|
$ |
390 |
|
$ |
388 |
|
Realized |
|
(162 |
) |
|
|
Realized |
|
(162 |
) |
|
|
|
|
Realized |
|
(293 |
) |
(398 |
) | ||||||
Total |
|
$ |
(229 |
) |
$ |
|
|
Total |
|
$ |
(463 |
) |
$ |
(207 |
) |
|
|
Total |
|
$ |
97 |
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fuel commodity derivatives: |
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
Fuel commodity derivatives: |
|
Cost of revenue: |
|
|
|
|
| ||||||
Unrealized |
|
$ |
|
|
$ |
|
|
Unrealized |
|
$ |
|
|
$ |
|
|
|
|
Unrealized |
|
$ |
250 |
|
$ |
53 |
|
Realized |
|
|
|
|
|
Realized |
|
|
|
|
|
|
|
Realized |
|
13 |
|
|
| ||||||
Total |
|
$ |
|
|
$ |
|
|
Total |
|
$ |
|
|
$ |
|
|
|
|
Total |
|
$ |
263 |
|
$ |
53 |
|
4. Acquisition
On March 1, 2013, the Company acquired the assets of a laundry facilities management business in the southeastern region of the United States for total consideration of $2,737. A payment of $2,018 was made at closing and the balance to be paid within nine months if certain conditions are met. The acquisition has been reflected in the accompanying condensed consolidated financial statements from the date of the acquisition and has been accounted for as a business combination. The preliminary allocation of the purchase price is as follows: contract rights $1,893, equipment $644, non-compete agreement $100 and goodwill $100. The ultimate purchase price allocation is subject to the finalization of the asset values as of the date of acquisition. The operating results of the business are included in the accompanying unaudited condensed consolidated statements of income and comprehensive income from the date of acquisition. Pro forma results of the acquired company are not included as they have been deemed immaterial to the Company.
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
5. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following:
|
|
As of December 31, 2012 |
| |||||||
|
|
Cost |
|
Accumulated |
|
Net Book Value |
| |||
|
|
|
|
|
|
|
| |||
Goodwill |
|
$ |
57,737 |
|
|
|
$ |
57,737 |
| |
|
|
$ |
57,737 |
|
|
|
$ |
57,737 |
| |
Intangible assets: |
|
|
|
|
|
|
| |||
Trade name |
|
$ |
14,050 |
|
$ |
|
|
$ |
14,050 |
|
Non-compete agreements |
|
2,277 |
|
2,272 |
|
5 |
| |||
Contract rights |
|
228,783 |
|
75,372 |
|
153,411 |
| |||
Distribution rights |
|
1,623 |
|
946 |
|
677 |
| |||
Deferred financing costs |
|
1,796 |
|
299 |
|
1,497 |
| |||
|
|
$ |
248,529 |
|
$ |
78,889 |
|
$ |
169,640 |
|
|
|
As of March 31, 2013 |
| |||||||
|
|
Cost |
|
Accumulated |
|
Net Book Value |
| |||
|
|
|
|
|
|
|
| |||
Goodwill |
|
$ |
57,643 |
|
|
|
$ |
57,643 |
| |
|
|
$ |
57,643 |
|
|
|
$ |
57,643 |
| |
Intangible assets: |
|
|
|
|
|
|
| |||
Trade Name |
|
$ |
14,050 |
|
$ |
|
|
$ |
14,050 |
|
Non-compete agreements |
|
2,377 |
|
2,276 |
|
101 |
| |||
Contract rights |
|
230,646 |
|
78,252 |
|
152,394 |
| |||
Distribution rights |
|
1,623 |
|
987 |
|
636 |
| |||
Deferred financing costs |
|
1,796 |
|
389 |
|
1,407 |
| |||
|
|
$ |
250,492 |
|
$ |
81,904 |
|
$ |
168,588 |
|
Estimated future amortization expense of intangible assets consists of the following:
2013 (nine months) |
|
$ |
9,100 |
|
2014 |
|
12,128 |
| |
2015 |
|
12,118 |
| |
2016 |
|
12,118 |
| |
2017 |
|
11,684 |
| |
Thereafter |
|
96,616 |
| |
|
|
$ |
153,764 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
5. Goodwill and Intangible Assets (continued)
Amortization expense of intangible assets for the three months ended March 31, 2012 and 2013 was $3,105 and $3,015, respectively.
Intangible assets primarily consist of various non-compete agreements, and contract rights recorded in connection with acquisitions. The deferred financing costs were incurred in connection with our senior secured credit facility and our senior notes and are amortized from five to ten years. The non-compete agreements are amortized using the straight-line method over the life of the agreements, which range from five to fifteen years. Contract rights are amortized using the straight-line method over fifteen to twenty years. The life assigned to acquired contracts is based on several factors, including: (i) the historical renewal rate of the contract portfolio for the most recent years prior to the acquisition, (ii) the number of years the average contract has been in the contract portfolio, (iii) the overall level of client satisfaction within the contract portfolio, and (iv) our ability to maintain comparable renewal rates in the future. The contract rights acquired are aggregated for purposes of calculating their fair value upon acquisition due to the fact that there are thousands of individual contracts in each market. No single contract accounts for more than 2% of the revenue of any acquired portfolio and the contracts are homogeneous. The fair values of acquired portfolios are established based upon discounted cash flows generated by the acquired contracts. The fair values of the contracts are allocated to asset groups, comprised of the Companys geographic markets, based on an estimate of relative fair value.
6. Commitments and Contingencies
The Company is involved in various litigation proceedings arising in the normal course of business. In the opinion of management, the Companys ultimate liability, if any, under pending litigation would not materially affect its financial condition or the results of its operations or cash flows.
7. Earnings Per Share
|
|
Three months ended |
| ||||
|
|
March 31, |
| ||||
|
|
2012 |
|
2013 |
| ||
|
|
|
|
|
| ||
Net income (loss) |
|
$ |
(767 |
) |
$ |
2,918 |
|
|
|
|
|
|
| ||
Weighted average number of common shares outstanding - basic |
|
14,375 |
|
14,543 |
| ||
Effect of dilutive securities: |
|
|
|
|
| ||
Stock options and restricted stock units |
|
|
|
475 |
| ||
Weighted average number of common shares outstanding - diluted |
|
14,375 |
|
15,018 |
| ||
|
|
|
|
|
| ||
Earnings (loss) per share - basic |
|
$ |
(0.05 |
) |
$ |
0.20 |
|
Earnings (loss) per share - diluted |
|
$ |
(0.05 |
) |
$ |
0.19 |
|
For the three months ended March 31, 2012, 643,000 shares of potential common stock related to stock options and restricted stock units would have been included in the diluted earnings per share calculation had the Company
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
7. Earnings Per Share (continued)
recorded net income in the quarter. Additionally, 11,000 shares of potential common stock related to stock options and restricted stock units would have been excluded from the calculation of dilutive shares even if the company reported net income because the inclusion of such shares would have been anti-dilutive.
There were 1,008,000 shares under option plans that were excluded from the computation of diluted earnings per share for the three months ended March 31, 2013, due to their anti-dilutive effects.
8. Stock Compensation
During the three months ended March 31, 2013, grants of options for 360,756 shares were issued by the Company. The grant-date fair values of employee share options and similar instruments are estimated using the Black-Scholes option-pricing model. The fair values of the stock options granted were estimated using the following components:
Weighted average fair value of options at grant date |
|
$4.09 |
|
Risk free interest rates |
|
0.95% - 1.01% |
|
Pre-vest forfeiture rates |
|
0.00% |
|
Expected life |
|
7 years |
|
Expected volatility |
|
41.085% - 41.181% |
|
Dividend Yield |
|
2% - 3.6% |
|
During the three months ended March 31, 2013, the Company granted restricted stock units covering 42,587 shares of stock with a fair market value on date of grant of $12.26 per share. The restricted stock units vest in one year subject to the achievement of certain performance objectives established by the Compensation Committee of the Board of Directors at the beginning of the fiscal year. In addition, the Company granted 65,533 restricted stock units that give the grantee the option to settle the award in cash or in shares of common stock. These restricted stock units are subject to the same performance criteria as the previously mentioned restricted stock awards. These awards are remeasured at their fair value at the end of each reporting period and recorded as a liability in accrued expenses. The awards had a fair market value of $12.80 per share at March 31, 2013.
For the three months ended March 31, 2013, the Company incurred stock compensation expense of $769. The allocation of stock compensation expense is consistent with the allocation of the participants salaries and other compensation expenses.
At March 31, 2013, options for 639,749 shares and 168,986 restricted shares have been granted but have not yet vested.
Compensation expense related to unvested options and restricted shares will be recognized in the following years:
2013 (nine months) |
|
$ |
2,285 |
|
2014 |
|
1,177 |
| |
2015 |
|
600 |
| |
2016 |
|
44 |
| |
|
|
$ |
4,106 |
|
MAC-GRAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
9. Income Taxes
The following table presents the income tax expense and the effective income tax rates for the three months ended March 31, 2012 and 2013:
|
|
March 31, |
| ||||
|
|
2012 |
|
2013 |
| ||
|
|
|
|
|
| ||
Income tax expense (benefit) |
|
$ |
(569 |
) |
$ |
1,942 |
|
Effective tax rate |
|
43 |
% |
40 |
% | ||
The effective income tax rate on operations is based upon the estimated income for the year and adjustments, if any, resulting from tax audits or other tax contingencies.
The changes in the effective tax rates for the three months ended March 31, 2012 and 2013 are the result of the relative impact of permanent differences due to changes in estimated pretax annual profits.
At March 31, 2013, the uncertain tax positions recognized by the Company in the consolidated financial statements were not material.
10. New Accounting Pronouncements
In February 2013, the FASB issued new guidance which requires disclosure of information about significant reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. This guidance became effective for the company in 2013. Adoption of this standard, which is related to disclosure only, did not have an impact on the companys consolidated financial position, results of operations or cash flows.
No other new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the Consolidated Financial Statements.
11. Payment of dividends
The Companys Board of Directors declared a quarterly dividend of $0.0875 per share which was paid on March 29, 2013 to stockholders of record at the close of business on March 15, 2013.
12. Repurchase of Common Stock
On December 21, 2011, the Companys Board of Directors authorized a share repurchase program under which the Company is authorized to purchase up to an aggregate of $2,000 of its common stock. The Company repurchased 133,333 shares during the first quarter of 2012 under the plan for a total cash outlay of $2,000, thereby completing the repurchase program.
13. Subsequent Events
On April 5, 2013 the Companys Board of Directors voted to terminate the Companys shareholder rights plan with American Stock Transfer & Trust Company, LLC (AST), as of the close of business April 8, 2013. In order to effect the termination, the Company and AST entered into an Amendment and Termination of Shareholder Rights Agreement, dated as of April 8, 2013, which caused the rights to purchase Series A Junior Participating Cumulative Preferred Stock issued pursuant to the Shareholder Rights Agreement, dated as of June 8, 2009, by and between the Company and AST, to expire as of April 8, 2013.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Additional statements identified by words such as will, likely, may, believe, expect, anticipate, intend, seek, designed, develop, would, future, can, could, outlook and other expressions that are predictions of or indicate future events and trends and which do not relate to historical matters, also identify forward-looking statements. These forward-looking statements reflect our current views about future events and financial performance. Investors should not rely on forward-looking statements because they are subject to a variety of factors that could cause actual results to differ materially from our expectations. Factors that could cause or contribute to such differences include, but are not limited to, the following:
· debt service requirements under our existing and future indebtedness;
· availability of cash flow to finance capital expenditures;
· our ability to renew laundry leases with our clients;
· competition in the laundry facilities management industry;
· our ability to maintain relationships with our suppliers;
· our ability to maintain adequate internal controls over financial reporting;
· our ability to consummate acquisitions and successfully integrate the businesses we acquire;
· increases in multi-unit housing sector apartment vacancy rates and condominium conversions;
· our ability to protect our intellectual property and proprietary rights and create new technology;
· our ability to retain our key personnel and attract and retain other highly skilled employees;
· decreases in the value of our intangible assets;
· our ability to comply with current and future environmental regulations;
· actions of our controlling stockholders;
· provisions of our charter and bylaws that could discourage takeovers;
· those factors discussed under Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 and our other filings with the Securities and Exchange Commission (SEC).
Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations or financial condition. In view of these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
In this Quarterly Report on Form 10-Q, unless the context suggests otherwise, references to the Company, Mac-Gray, we, us, our and similar terms refer to Mac-Gray Corporation and its subsidiaries. We own or license several registered and unregistered trademarks, including Mac-Gray®, Web®, Hof, Automatic
Laundry Company, Intelligent Laundry®, LaundryView®, LaundryLinx, PrecisionWash, TechLinx, VentSnake, LaundryAudit, e-issues, Change Point® , The Campus Clothes Line®, Digital Laundry is here. ®, Life Just Got Easier®, and The Laundry Room Experts® .
Overview
Mac-Gray Corporation was founded in 1927 and re-incorporated in Delaware in 1997. Since its founding, Mac-Gray has grown to become the second largest laundry facilities management contractor in the United States. Through our portfolio of card and coin-operated laundry equipment located in laundry facilities across the country, we provide laundry convenience to residents of multi-unit housing, such as apartment buildings, condominiums, colleges and universities, public housing complexes, and hotels and motels in 44 states and the District of Columbia. Based on our ongoing survey of colleges and universities, we believe we are the largest provider of such services to the college and university market in the United States.
Our business model is built on a stable demand for laundry services, combined with long-term leases, strong client relationships, a broad client base, and predictable capital needs. For the three months ended March 31, 2013, our total revenue was $81,593. Approximately 97% of our total revenue for the three month period was generated by our facilities management business. We generate facilities management revenue primarily by entering into long-term leases with property owners or property management companies for the exclusive right to install and maintain laundry equipment in common area laundry rooms within their properties in exchange for a negotiated portion of the revenue we collect. As of March 31, 2013, approximately 83% of our installed equipment base was located in laundry facilities subject to long-term leases, which have a weighted average remaining term of approximately five years. Our capital costs are typically incurred in connection with new or renewed leases, and include investments in laundry equipment and card and coin-operated systems, incentive payments to property owners or property management companies, and expenses to refurbish laundry facilities. Our capital costs consist primarily of a large number of relatively small amounts, which are associated with our entry into or renewal of leases. Our capital needs other than for laundry leases are not significant. Accordingly, our capital needs are predictable and largely within our control. For the three months ended March 31, 2013, we incurred $8,677 of capital expenditures. In addition, we made incentive payments of $1,007 in the three months ended March 31, 2013 to property owners and property management companies in connection with obtaining our lease arrangements.
Through our commercial equipment sales and services business, we generate revenue by selling commercial laundry equipment. For the three months ended March 31, 2013, our commercial laundry equipment sales business generated approximately 3% of our total revenue, and 3% of our gross margin. We anticipate that tight credit markets for our clients will continue to challenge our ability to maintain and grow our revenue from laundry equipment sales.
Our current priorities include: (i) continuing to reduce funded debt, thereby improving debt leverage ratios and reducing interest expense, (ii) increase revenue, (iii) maintaining capital expenditures at the levels needed to sustain and grow the business, (iv) increasing facilities management operating efficiencies in all markets, (v) improving the profitability of individual laundry facilities management accounts that come up for contract renewal, and (vi) continuing to look for acquisitions that complement our current footprint. One of the key challenges we face is maintaining and expanding our client base in a competitive industry. Approximately 8% to 10% of our laundry room leases are up for renewal each year. Within any given geographic area, Mac-Gray may compete with local independent operators, regional operators and multi-region operators as well as property owners and property management companies who self-operate their laundry facilities. We devote substantial resources to our sales efforts and are focused on continued innovation in order to distinguish us from our competitors.
On February 25, 2013, our Board of Directors declared a dividend of $0.0875 per share which was paid on March 29, 2013 to stockholders of record at the close of business on March 15, 2013.
On March 1, 2013, we acquired a laundry facilities management business in the southeastern region of the United States for total consideration of $2,737.
On April 5, 2013 the Companys Board of Directors voted to terminate the Companys shareholder rights plan with American Stock Transfer & Trust Company, LLC (AST), as of the close of business April 8, 2013. In order to effect the termination, the Company and AST entered into an Amendment and Termination of Shareholder Rights Agreement, dated as of April 8, 2013, which caused the rights to purchase Series A Junior Participating Cumulative Preferred Stock issued pursuant to the Shareholder Rights Agreement, dated as of June 8, 2009, by and between the Company and AST, to expire as of April 8, 2013.
Results of Operations (Dollars in thousands)
Three months ended March 31, 2013 compared to three months ended March 31, 2012.
The information presented below for the three months ended March 31, 2013 and 2012 is derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this report:
|
|
For the three months ended March 31, |
| |||||||||
|
|
|
|
|
|
Increase |
|
% |
| |||
|
|
2012 |
|
2013 |
|
(Decrease) |
|
Change |
| |||
Laundry facilities management revenue |
|
$ |
80,305 |
|
$ |
78,792 |
|
$ |
(1,513 |
) |
-2 |
% |
Commercial laundry equipment sales revenue |
|
3,931 |
|
2,801 |
|
(1,130 |
) |
-29 |
% | |||
Total revenue |
|
$ |
84,236 |
|
$ |
81,593 |
|
$ |
(2,643 |
) |
-3 |
% |
Revenue
Total revenue decreased by $2,643, or 3%, to $81,593 for the three months ended March 31, 2013 compared to $84,236 for the three months ended March 31, 2012.
Laundry facilities management revenue. Laundry facilities management revenue decreased by $1,513, or 2%, to $78,792 for the three months ended March 31, 2013 compared to $80,305 for the three months ended March 31, 2012. The decrease in revenue in the three months ended March 31, 2013 compared to the same period in the prior year is attributable, in part, to there being one additional operating day due to 2012 being a leap year. We have also reduced our portfolio of equipment by a small number as compared to the first quarter of 2012, primarily in unprofitable and less profitable locations, which also has resulted in reduced revenue. The reduced revenue is mitigated by the cumulative impact of our vend price management initiatives, same location usage increases, and new equipment placements in locations with anticipated higher usage than in the locations we have eliminated.
Commercial laundry equipment sales. Revenue in the commercial laundry equipment sales business decreased by $1,130, or 29%, to $2,801 for the three months ended March 31, 2013 compared to $3,931for the three months ended March 31, 2012. Sales in the commercial laundry equipment sales business are sensitive to the strength of the local economy, the availability and cost of financing to small businesses, consumer confidence, and local permitting and therefore, tend to fluctuate significantly from period to period. Also in 2012 we chose to exit certain geographic areas that were not sufficiently profitable.
Cost of revenue
|
|
For the three months ended March 31, |
| |||||||||
|
|
|
|
|
|
Increase |
|
% |
| |||
|
|
2012 |
|
2013 |
|
(Decrease) |
|
Change |
| |||
Cost of laundry facilities management revenue |
|
$ |
54,966 |
|
$ |
54,056 |
|
$ |
(910 |
) |
-2 |
% |
Depreciation and amortization related to operations |
|
10,437 |
|
10,623 |
|
186 |
|
2 |
% | |||
Cost of commercial laundry equipment sales |
|
3,197 |
|
2,334 |
|
(863 |
) |
-27 |
% | |||
Total cost of revenue |
|
$ |
68,600 |
|
$ |
67,013 |
|
$ |
(1,587 |
) |
-2 |
% |
Cost of laundry facilities management revenue. Cost of laundry facilities management revenue includes rent paid to clients as well as those costs associated with installing and servicing equipment and costs of collecting, counting, and depositing facilities management revenue. Cost of laundry facilities management revenue decreased by $910, or 2%, to $54,056 for the three months ended March 31, 2013 as compared to $54,966 for
the three months ended March 31, 2012. As a percentage of laundry facilities management revenue, cost of laundry facilities management revenue was 68.6% and 68.4% for the three months ended March 31, 2013 and 2012, respectively. Laundry facilities management rent decreased by 2% for the three months ended March 31, 2013 compared to the corresponding period in 2012, directly attributable to the changes in facilities management revenue. Laundry facilities management rent as a percentage of laundry facilities management revenue was 48.4 % and 48.6 % for the three months ended March 31, 2013 and 2012, respectively. Laundry facilities management rent can be affected by new and renewed laundry leases and by other factors such as the amount of incentive payments and laundry room betterments invested in new or renewed laundry leases. As we vary the amount invested in a facility, the laundry facilities management rent, as a function of laundry facilities management revenue, can vary. Other costs of laundry facilities management revenue increased by $19, or less than 1%, to $15,952 for the three months ended March 31, 2013 compared to $15,933 for the three months ended March 31, 2012. A significant percentage of other costs of laundry facilities management revenue are fixed costs which do not fluctuate with changes in revenue.
Depreciation and amortization related to operations. Depreciation and amortization related to operations increased by $186, or 2%, to $10,623 for the three months ended March 31, 2013 as compared to $10,437 for the three months ended March 31, 2012. The increase in depreciation and amortization for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 is attributable to an increase in our capital spending on new and renegotiated accounts beginning in 2012 compared to the two prior years, where we closely managed capital investment in light of the uncertain economy. We expect to continue to increase our capital spending and expect depreciation expense to continue to increase.
Cost of laundry equipment sales. Cost of commercial laundry equipment sales consists primarily of the cost of laundry equipment, parts and supplies sold, as well as salaries, warehousing and distribution expenses. Cost of commercial laundry equipment sales decreased by $863, or 27%, to $2,334 for the three months ended March 31, 2013 as compared to $3,197 for the three months ended March 31, 2012. As a percentage of sales, cost of product sold was 83% and 81% for the three months ended March 31, 2013 and 2012. The change in cost of sales for the three months ended March 31, 2013 compared to the same period ending March 31, 2012 is a direct result of the change in revenue, product mix and price increases by the manufacturer which we were unable to fully pass on to our customers. Operating expenses were essentially unchanged in total.
Operating expenses
General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs. General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs decreased by $1,765, or 18%, to $8,089 for the three months ended March 31, 2013 as compared to $9,854 for the three months ended March 31, 2012. As a percentage of total revenue, these expenses were 10% and 12% for the three months ended March 31, 2013 and 2012, respectively. The decrease in expenses for the three months ended March 31, 2013 compared to the same period in 2012 is primarily related to a decrease in legal costs partially offset by an increase in marketing and sales related costs.
Gain on sale of assets
The gain of $34 and a loss of $14 for the three months ended March 31, 2013 and 2012, respectively, are from the sale of vehicles and other fixed assets in the normal course of business.
Income from operations
Income from operations increased by $757, or 13%, to $6,525, for the three months ended March 31, 2013 compared to $5,768 for the three months ended March 31, 2012 due primarily to the cumulative effect of the reasons discussed above.
Interest expense, including the change in the fair value of non-hedged derivative instruments and amortization of deferred financing costs
Interest expense, including the change in the fair value of non-hedged derivative instruments and amortization of deferred financing costs, decreased by $1,677, or 50%, to $1,665 for the three months ended March 31,
2013, as compared to $3,342 for the three months ended March 31, 2012. This decrease for the three months ended March 31, 2013 was primarily attributable to interest savings as a result of retiring our 7.625% fixed rate senior notes by utilizing our 2012 Credit Agreement at lower interest rates. Interest expense, excluding the change in fair value of non-hedged derivative instruments and amortization of deferred financing costs, was $1,756 and $3,255 for the three months ended March 31, 2013 and 2012, respectively, a decrease of $1,499, or 46%. Interest expense, excluding the change in fair value of non-hedged derivative instruments and amortization of deferred financing costs, includes interest paid or (received) in connection with our derivative instruments. This amounted to $398 and $455 for the three months ended March 31, 2013 and 2012, respectively.
Interest expense associated with the companys long term debt is comprised of the following:
|
|
Three months ended |
| ||||
|
|
March 31, |
| ||||
|
|
2012 |
|
2013 |
| ||
|
|
|
|
|
| ||
Interest expense |
|
$ |
3,255 |
|
$ |
1,756 |
|
Change in the fair value of non-hedged interest rate derivative instruments |
|
(89 |
) |
(181 |
) | ||
Amortization of deferred financing costs |
|
176 |
|
90 |
| ||
Interest expense, including change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs |
|
$ |
3,342 |
|
$ |
1,665 |
|
During the first quarter of 2012, the Company no longer qualified for hedge accounting treatment for its only effective interest rate swap agreement. Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost is being reclassified as an earnings charge through the maturity date of the derivative. This charge to interest expense, when combined with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $207 for the three months ended March 31, 2013 compared to $301 for the three and three months ended March 31, 2012. The remaining balance of $1 associated with these interest rate swap agreements and included in Accumulated Other Comprehensive Loss will be charged to interest expense through the maturity date of the interest rate swap agreements on April 1, 2013.
Loss on early extinguishment of debt
Loss on early extinguishment of debt amounted to $3,762 for the three months ended March 31, 2012 and includes the premium of $2,542 we incurred for the early redemption of our senior unsecured notes and $1,087 of unamortized deferred financing costs associated with the redemption. We also wrote off $133 of unamortized deferred financing costs associated with our 2008 credit facility.
Income tax expense (benefit)
Income tax expense increased by $2,511 to $1,942 for the three months ended March 31, 2013 compared to the income tax benefit of $569 for the three months ended March 31, 2012. The increase in the three months is the result of the increase in pre-tax income to $4,860 for the three months ended March 31, 2013, compared to the pre-tax loss of $1,336 for the three months ended March 31, 2012. The effective tax rate decreased to 40.0% for the three months ended March 31, 2013, compared to 42.6% for the same period in 2012. The change in the effective rate for the three months ended March 31, 2013 compared to the effective tax rate for the three months ended March 31, 2012 is the result of the change in permanent tax differences as a percentage of pretax income.
Net income (loss)
As a result of the foregoing, net income increased by $3,685 to $2,918 for the three months ended March 31, 2013 compared to a loss of $767 for the same period ended March 31, 2012.
Seasonality
We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived from the college and university market represented approximately 15% of our total laundry facilities management revenue. Academic facilities management and rental revenues are derived substantially during the school year in the first, second and fourth calendar quarters. Conversely, our operating and capital expenditures have historically been higher during the third calendar quarter when we install a large amount of equipment while colleges and universities are generally on summer break.
Liquidity and Capital Resources (Dollars in thousands)
We believe that we can satisfy our working capital requirements and funding of capital needs with internally generated cash flow and, as necessary, borrowings from our revolving credit facility described below. Capital expectations for the year ending December 31, 2013, including contract incentive payments, are currently expected to be between $36,000 and $39,000. In the three months ended March 31, 2013, spending on capital expenditures was $8,677 and spending on contract incentives was $1,007. The capital expenditures for 2013 are primarily composed of laundry equipment installed in connection with new client leases and the renewal of existing leases.
We historically have not needed sources of financing other than our internally generated cash flow and revolving credit facilities to fund our working capital, capital expenditures and smaller acquisitions. As a result, we anticipate that our cash flow from operations and revolving credit facilities will be sufficient to meet our anticipated cash requirements for at least the next twelve months.
Our current long-term liquidity needs are principally the repayment of borrowings under our 2012 Credit Agreement. We are unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our long-term debt when it comes due. We anticipate that we will need to refinance some portion of this indebtedness when it reaches maturity. We cannot make any assurances that such financing would be available on reasonable terms, if at all.
For the three months ended March 31, 2013, our source of cash was primarily from operating activities. Our primary uses of cash for the three months ended March 31, 2013 were the purchase of new laundry equipment, payment for an acquisition, and the payment of dividends. We anticipate that we will continue to use cash flows provided by operating activities to finance working capital needs, debt service, and capital expenditures.
On February 29, 2012, we entered into an Amended and Restated Senior Secured Credit Agreement. The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the Revolver). The 2012 Credit Agreement matures on February 28, 2017. The 2012 Credit Agreement also provides for Swingline Loans of up to $10,000 (the Swingline Loans) and any Swingline Loans will reduce the borrowings available under the Revolver. Subject to certain terms and conditions, the 2012 Credit Agreement gives the Company the option to increase the Revolver or establish one or more new term loans, provided that the aggregate commitments under the 2012 Credit Agreement cannot exceed $350,000. The 2012 Credit Agreement is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries as well as a pledge by the Company of all the capital stock of its subsidiaries. Outstanding indebtedness under the 2012 Credit Agreement bears interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate plus an applicable percentage, ranging from 1.75% to 2.75% per annum (currently 2.50%), determined by reference to our consolidated total leverage ratio, and (ii) in the case of base rate loans and swingline loans, the higher of (a) the federal funds rate plus 0.50%, (b) the annual rate of interest announced by Bank of America, N.A. as its prime rate, or (c) for each day, the floating rate of interest equal to LIBOR for a one month term quoted for such date (the highest of which is defined as the Base Rate), plus, in each case, an applicable percentage, ranging from 0.75% to 1.75% per annum(currently 1.50%), determined by reference to our consolidated total leverage ratio.
We pay a commitment fee equal to a percentage of the actual daily-unused portion of the Revolver under the 2012 Credit Agreement. This percentage is determined quarterly by reference to our consolidated total leverage ratio and will range between 0.25% per annum and 0.50% per annum (currently 0.35%). For purposes of the calculation of the commitment fee, letters of credit are considered usage under the Revolver, but swingline loans are not considered usage under the Revolver.
The 2012 Credit Agreement includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and incurring indebtedness, and requires that the Company maintain certain financial ratios. The most significant financial ratios that we are required to maintain include a consolidated total leverage ratio of not greater than 3.75 to 1.00 (3.50 to 1.00 as of December 31, 2013 and thereafter) and a consolidated cash flow coverage ratio of not less than 1.20 to 1.00. We were in compliance with all financial covenants at March 31, 2013.
As of March 31, 2013, there was $190,318 outstanding under the Revolver and $1,380 in outstanding letters of credit. The available balance under the Revolver was $58,302 at March 31, 2013. The average interest rates on the borrowings outstanding under the prior credit agreement and the 2012 Credit Agreement at March 31, 2013 and 2012 were 3.68% and 4.00%, respectively, including the applicable spread paid to the banks and the effect of the interest rate swap agreements tied to the debt (see Note 4 for discussion on Fair Value Measurements).
On October 21, 2011, we redeemed $50,000 of our 7.625% senior notes by utilizing $51,271 of availability under our prior credit facility. On March 30, 2012, we redeemed the remaining $100,000 of our senior notes by utilizing $103,495 of availability under the 2012 Credit Agreement.
Operating Activities
For the three months ended March 31, 2013 and 2012, net cash flows provided by operating activities were $12,047 and $6,482, respectively. Cash flows from operations consists primarily of facilities management revenue and equipment sales, offset by the cost of facilities management revenues, cost of product sold, and general, administration, sales and marketing expenses. The most significant changes to cash flows for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 are an increase in net income, a decrease in accounts receivable, and a smaller decrease in accounts payable, accrued facilities management rent, accrued expenses and other liabilities primarily attributable to a change in accrued interest in the current period as compared to a year ago due to the redemption of our senior notes. The increase in operating activities is partially offset by a larger increase in prepaid facilities management rent and other assets primarily attributable to an increase in incentive advances to our route clients as part of the execution of new and renegotiated contracts as well as a non-cash loss on early extinguishment of debt in the first quarter of 2012.
Investing Activities
For the three months ended March 31, 2013 and 2012, net cash flows used in investing activities were $10,661and $7,698, respectively. Capital expenditures for the three months ended March 31, 2013 were $8,677 for the acquisition of laundry equipment and $2,018 for an acquisition. Capital expenditures for the three months ended March 31, 2012 were $7,734 primarily for the acquisition of laundry equipment for new and renewed lease locations.
Financing Activities
For the three months ended March 31, 2013 and 2012, net cash flows from financing activities were ($878) and $1,142, respectively. Cash flows used in financing activities consist of changes in long term debt and the payments of dividends as well as, in 2012, the repurchase of common stock and debt acquisition costs.
Contractual Obligations
A summary of our contractual obligations and commitments related to our outstanding long-term debt and future minimum lease payments related to our vehicle fleet, warehouse rent and facilities management rent as of March 31, 2013 is as follows:
|
|
|
|
Interest on |
|
|
|
|
|
|
|
|
| ||||||
Fiscal |
|
Long-term |
|
variable rate |
|
Facilites rent |
|
Capital lease |
|
Operating lease |
|
|
| ||||||
Year |
|
debt |
|
debt (1) |
|
commitments |
|
commitments |
|
commitments |
|
Total |
| ||||||
2013(nine months) |
|
$ |
|
|
$ |
5,253 |
|
$ |
11,197 |
|
$ |
902 |
|
$ |
2,606 |
|
$ |
19,958 |
|
2014 |
|
|
|
7,004 |
|
12,398 |
|
831 |
|
3,372 |
|
$ |
23,605 |
| |||||
2015 |
|
|
|
7,004 |
|
9,428 |
|
321 |
|
2,972 |
|
$ |
19,725 |
| |||||
2016 |
|
|
|
7,004 |
|
7,961 |
|
209 |
|
1,284 |
|
$ |
16,458 |
| |||||
2017 |
|
190,318 |
|
1,167 |
|
6,143 |
|
9 |
|
841 |
|
$ |
198,478 |
| |||||
Thereafter |
|
|
|
|
|
14,561 |
|
|
|
|
795 |
|
$ |
15,356 |
| ||||
Total |
|
$ |
190,318 |
|
$ |
27,432 |
|
$ |
61,688 |
|
$ |
2,272 |
|
$ |
11,870 |
|
$ |
293,580 |
|
(1) Represents interest on the outstanding balance on our 2012 Credit Agreement. Our average interest rate was 3.68% at March 31, 2013.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We are exposed to a variety of risks, including changes in interest rates on some of our borrowings and the change in fuel prices. In the normal course of our business, we manage our exposure to these risks as described below. We do not engage in trading market-risk sensitive instruments for speculative purposes.
Interest rates
The table below provides information about our debt obligations that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair market value of long-term debt approximates book value at March 31, 2013.
(in thousands) |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
Thereafter |
|
Total |
| |||||||
Variable rate |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
190,318 |
|
$ |
|
|
$ |
190,318 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
3.68 |
% |
|
|
3.68 |
% | |||||||
We have entered into standard International Swaps and Derivatives Association interest rate swap agreements to manage the interest rate associated with our debt. At March 31, 2013, the interest rate Swap Agreements effectively convert $45,000 of our variable rate debt to a long-term fixed rate. Under these agreements, we receive a variable rate of LIBOR plus a markup and pay a fixed rate. We recognized a non-cash unrealized gain of $388 and $390 for the three months ended March 31, 2013 and 2012, respectively, on the interest rate swap agreements as a result of the change in the fair value.
On September 23, 2011, we entered into a fuel commodity derivative to manage the fuel cost on our fleet of vehicles. The derivative was effective January 1, 2012 and expired December 31, 2012. On September 19, 2012 we entered into an additional fuel commodity derivative. The derivative is effective January 1, 2013 and expires December 31, 2013. The derivative has a monthly notional amount of 80 thousand gallons from January 1, 2013 through December 31, 2013 for a total notional amount of 960 thousand gallons. We have a put price of $3.26 per gallon and a strike price of $3.90 per gallon. We recognized a non-cash unrealized gain of $53 and $250 for the three months ended March 31, 2013 and 2012, respectively, on these fuel commodity derivatives as a result of the change in the fair value.
The fair values of these interest rate derivatives are based on quoted prices for similar instruments from a commercial bank and are considered to be Level 2 items. The fuel commodity derivative is based on market assumptions and a quoted price from the counter party and is considered a Level 3 item.
During the first quarter of 2012, as a result of our senior note redemption, we no longer qualified for hedge accounting treatment on our only effective interest rate swap agreement. Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost is being reclassified as an earnings charge through the maturity date of the derivative. This charge to interest expense, when combined
with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $207 for the three months ended March 31, 2013 compared to $301 for the three months ended March 31, 2012, respectively. The remaining balance of $1 associated with these interest rate swap agreements and included in Accumulated Other Comprehensive Loss will be charged to interest expense through the maturity date of the interest rate swap agreements on April 1, 2013.
The table below outlines the details of each remaining interest rate Swap Agreement:
|
|
|
|
Notional |
|
Notional |
|
|
|
|
| ||
|
|
Original |
|
Amount |
|
Amount |
|
|
|
|
| ||
Date of |
|
Notional |
|
Fixed/ |
|
March 31, |
|
Expiration |
|
Fixed |
| ||
Origin |
|
Amount |
|
Amortizing |
|
2013 |
|
Date |
|
Rate |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
May 8, 2008 |
|
$ |
45,000 |
|
Amortizing |
|
$ |
25,000 |
|
Apr 1, 2013 |
|
3.78 |
% |
May 8, 2008 |
|
$ |
40,000 |
|
Amortizing |
|
$ |
21,000 |
|
Apr 1, 2013 |
|
3.78 |
% |
In accordance with the interest rate Swap Agreements and on a quarterly basis, interest expense is calculated based on the floating 90-day LIBOR and the fixed rate. With regard to our floating to fixed rate interest rate swap agreements, if interest expense, as calculated, is greater based on the 90-day LIBOR, the financial institution pays the difference to us. If interest expense, as calculated, is greater based on the fixed rate we pay the difference to the financial institution.
Depending on fluctuations in the LIBOR, our interest rate exposure and the related impact on interest expense and net cash flow may increase or decrease. The counter party to the interest rate Swap Agreements exposes us to credit loss in the event of non-performance; however, non-performance is not anticipated. The fair value of an interest rate Swap Agreement is the estimated amount that we would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter party. At March 31, 2013, the fair value of the interest rate Swap Agreements was a liability of $18. This amount has been included in accrued expenses on the condensed consolidated balance sheets.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation was carried out by our management, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, our chief executive officer and chief financial officer concluded that these disclosure controls and procedures were effective as of March 31, 2013 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
Changes in internal controls. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, except to the extent previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors. The risks described in our annual report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
3.1 |
|
Amended and Restated Certificate of Incorporation (1) |
3.2 |
|
Amendment No. 1 to Amended and Restated Certificate of Incorporation (2) |
4.1 |
|
Amendment and Termination of Shareholder Rights Agreement between Mac-Gray Corporation and American Stock Transfer Company, dated as of April 8, 2013 (3) |
4.2 |
|
Mac-Gray Corporation Long Term Incentive Plan (4)*** |
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (4) |
31.2 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (4) |
32.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (5) |
101 |
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The following financial statements from the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Stockholders Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) related notes, tagged as blocks of text. (5) |
*** Management compensatory plan or arrangement
(1) Previously filed as an exhibit to Mac-Grays Registration Statement on Form S-1filed on August 14, 1997 (File No. 333-33669).
(2) Previously filed as an exhibit to Mac-Grays Form 10-K filed on March 14, 2011.
(3) Previously filed as an exhibit to Mac-Grays Form 8-K filed on April 8, 2013.
(4) Filed herewith.
(5) Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.
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MAC-GRAY CORPORATION |
May 10, 2013 |
/s/ Michael J. Shea |
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Michael J. Shea |
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Executive Vice President, Chief |
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Financial Officer and Treasurer |
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(On behalf of registrant and as principal |
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financial officer) |
Exhibit 4.2
MAC-GRAY CORPORATION
LONG TERM INCENTIVE PLAN
(Amended and Restated as of March 13, 2013)
1. Purpose. This Plan is intended to create incentives for certain executive officers and key employees of the Company and any Subsidiary to allow the Company to attract and retain in its employ persons who will contribute to the future success of the Company. It is further the intent of the Company that awards made under this Plan be used to achieve the twin goals of (i) aligning executive incentive compensation with increases in stockholder value over the long term, and (ii) using equity compensation as a tool to retain executive officers and key employees. In furtherance of the goals, it is the intention of the Company that, except in limited circumstances, fifty percent (50%) of each award made under this Plan will be made in the form of restricted stock units and the remaining fifty percent (50%) in the form of stock options. Additional awards of restricted stock units only may be made for Annual Excess Awards.
2. Definitions. Capitalized terms not otherwise defined herein shall have the meanings set forth below:
2.1 Annual Target Award shall mean, for any Participant, a percentage of his or her base salary in effect at the beginning of the Fiscal Year or at the time of grant of such award, as the Committee shall determine in its discretion.
2.2 Annual Excess Award shall mean, for any Participant, a percentage of his or her Annual Target Award.
2.3 Committee shall mean those members of the Compensation Committee of the Board of Directors of the Company who are non-employee directors as such term is defined under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended.
2.4 Company shall mean Mac-Gray Corporation.
2.5 Effective Date shall mean February 27, 2006.
2.6 Fiscal Year shall mean the fiscal year of the Company, which is the 12-month period ending December 31 of each year.
2.7 Participant shall mean any executive officer or key employee recommended by the Chief Executive Officer and approved by the Committee pursuant to Section 4 to participate herein.
2.8 Performance Measure shall mean, for any Fiscal Year, the specific performance measure determined by the Committee for such Fiscal Year based on one or more of the following criteria (which shall be applicable to the organizational level specified by the Committee, including, but not limited to, the Company or any Subsidiary, a division, an
operating unit or a business segment of the Company or any Subsidiary, or any combination of the foregoing): (i) earnings before interest, taxes, depreciation and amortization, with or without adjustments for interest expense, capital expenditures and non-recurring, non-operating or extraordinary items, including on a per share basis; (ii) return on equity, assets, capital or investment; (iii) changes in the market price of the Stock; (iv) economic value-added; (v) total stockholder returns; (vi) earnings (loss), including on a per share basis; (vii) revenue or sales, (viii) cost savings or realization of synergies; (ix) pre-tax or after-tax profit levels; (x) leverage or other financial ratios, (xi) market share.
2.9 Plan shall mean the Mac-Gray Corporation Long Term Incentive Plan, as amended from time to time.
2.10 Stock shall mean the common stock, par value $.01 per share, of the Company.
2.11 Subsidiary shall mean any corporation or other entity in which the Company has a controlling interest, either directory or indirectly.
3. Administration. The Committee shall have sole discretionary power to determine the Performance Measure(s), their target amounts and their relative weighting each year, to determine the vesting schedule for Annual Target Awards and Annual Excess Awards, to interpret the provisions of this Plan, to administer and make all decisions and exercise all rights of the Company with respect to this Plan. The Committee shall have final authority to apply the provisions of the Plan and determine, in its sole discretion, the amount of the Annual Target Awards and Annual Excess Awards for Participants hereunder and shall also have the exclusive discretionary authority to make all other determinations (including, without limitation, the interpretation and construction of the Plan and the determination of relevant facts) regarding the entitlement to benefits hereunder and the amount of benefits to be paid from the Plan. The Committees exercise of this discretionary authority shall at all times be in accordance with the terms of the Plan and shall be entitled to deference upon review by any court, agency or other entity empowered to review its decision, and shall be enforced provided that it is not arbitrary, capricious or fraudulent.
4. Eligibility. For each Fiscal Year, those executive officers and key employees recommended by the Chief Executive Officer and approved by the Committee shall be Participants. The selection of an individual to be a Participant in any one Fiscal Year does not entitle the individual to be a Participant in any other Fiscal Year.
5. Annual Target Awards and Annual Excess Awards. The Committee shall determine the Annual Target Award and Annual Excess Award for each Participant. It is expected that 50 percent of the value of the Annual Target Award shall be awarded annually in the form of stock options and 50 percent of the value of the Annual Target Award shall be awarded annually in the form of restricted stock units. It is expected that 100 percent of the value of the Annual Excess Award shall be awarded annually in the form of restricted stock units. Value for this purpose shall mean (a) in the case of stock options, the Black-Scholes value of such stock options, and (b) in the case of restricted stock units, the number of units subject to the award multiplied by the average closing price of the Stock for the ten trading days immediately preceding the award date. Stock options shall have an exercise price equal to the fair market value of the Stock on the date of grant and shall become exercisable over a three-year period, at the rate of 331/3 percent each year, subject to continued employment of the Participant by the Company or a Subsidiary. Up to 331/3 percent of the restricted stock units subject to an award shall become vested following each Fiscal Year on the date (the Vesting Date) on which the Committee makes a determination regarding the achievement of the Performance Measures for such Fiscal Year, subject to continued employment of the Participant by the Company or a Subsidiary. The actual number of restricted stock units issued in respect of Annual Target Awards and Annual Excess Awards that will vest on a particular Vesting Date will depend on the percentage of each Performance Measure the Company achieved for the relevant Fiscal Year based on a vesting schedule determined by the Committee and included in the relevant restricted stock unit agreements.
The Committee shall review the Companys audited financial statements promptly after their preparation each year to determine the percentage of each Performance Measure that was achieved for purposes of the Plan. The Committee shall have full discretion to modify the target amount for any Performance Measure for any Fiscal Year at any time, including without limitation to take into account any acquisitions or other corporate transactions occurring during such Fiscal Year. If on any Vesting Date all or some of the restricted stock units subject to an award do not vest because the applicable Performance Measure is not achieved at the requisite level, then such unvested restricted stock units shall be forfeited.
In view of the Chief Executive Officers significant ownership position in the Stock, he shall have the right, with respect to any award of restricted stock units, to elect to have such restricted stock units settled in cash rather than in Stock. Further, with respect to any award of restricted stock units to a Participant other than the Chief Executive Officer and provided that such Participant is then in compliance with any applicable stock ownership guidelines (as such compliance is determined by the Committee in its discretion), such Participant shall have the right to elect to have such restricted stock units settled in cash rather than in Stock (an Election Right). The Chief Executive Officer or such other Participant that is entitled to an Election Right, as the case may be, may make such election to have an award of restricted stock units settled in cash at any time within fifteen (15) days following the grant date of such award, provided that Participants other than the Chief Executive Officer that make the election for an award of restricted stock units in respect of the Annual Target Award or Annual Excess Award for a particular Fiscal Year must make the election for all restricted stock units granted to such Participant in respect of the Annual Target Award and Annual Excess Award for such Fiscal Year. If an election to have an award settled in cash is timely made with respect to an award, such award will be settled in cash on each applicable Vesting Date with the payment amount equal to the aggregate number of restricted stock units that vest on such Vesting Date multiplied
by the closing price of the Stock on such Vesting Date. If no such election is timely made with respect to an award, such award will be settled in Stock.
6. Forfeiture. Unless otherwise determined by the Committee, a Participant whose employment with the Company terminates for any reason prior to fulfilling the vesting requirements for his or her stock options and restricted stock units hereunder shall forfeit all rights to his or her stock options and restricted stock units that remain unvested on his or her termination date.
7. Amendment or Termination of Plan. The Compensation Committee may amend or terminate this Plan at any time or from time to time; provided, however, that no such amendment or termination shall, without the written consent of the Participants, in any material adverse way affect the rights of a Participant with respect to benefits earned prior to the date of amendment or termination.
8. Limitation of Companys Liability. Subject to its obligation to make payments as provided for hereunder, neither the Company nor any person acting on behalf of the Company shall be liable for any act performed or the failure to perform any act with respect to this Plan, except in the event that there has been a judicial determination of willful misconduct on the part of the Company or such person. The Company is under no obligation to fund any of the payments required to be made hereunder in advance of their actual payment or to establish any reserves with respect to this Plan. Any benefits which become payable hereunder shall be paid from the general assets of the Company. No Participant, or his or her beneficiary or beneficiaries, shall have any right, other than the right of an unsecured general creditor, against the Company in respect of the benefits to be paid hereunder.
9. Withholding of Tax. Anything to the contrary notwithstanding, all payments required to be made by the Company hereunder shall be subject to the withholding of such amounts as the Company reasonably may determine that it is required to withhold pursuant to applicable federal, state or local law or regulation. Withholding can be made in the form of Stock up to the minimum withholding amount.
10. Assignability. Except as otherwise provided by law, no benefit hereunder shall be assignable, or subject to alienation, garnishment, execution or levy of any kind, and any attempt to cause any benefit to be so subject shall be void.
11. No Contract for Continuing Services. This Plan shall not be construed as creating any contract for continued services between the Company and any Participant and nothing herein contained shall give any Participant the right to be retained as an employee of the Company.
12. Governing Law. This Plan shall be construed, administered, and enforced in accordance with the laws of the Commonwealth of Massachusetts.
13. Non-Exclusivity. The Plan does not limit the authority of the Company, the Committee, or any subsidiary of the Company, to grant awards or authorize any other compensation under any other plan or authority, including, without limitation, awards or other compensation based on the same Performance Measures used under the Plan. In addition, executives not selected to participate in the Plan may participate in other plans of the Company.
Exhibit 31.1
MAC-GRAY CORPORATION
CERTIFICATION PURSUANT TO SECTION 302 OF
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Stewart G. MacDonald, Jr., Chief Executive Officer, certify that:
1. I have reviewed this report on Form 10-Q of Mac-Gray Corporation (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: |
May 10, 2013 |
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/s/ Stewart G. MacDonald, Jr. |
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Stewart G. MacDonald, Jr. | ||
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Chief Executive Officer | |||
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(Principal Executive Officer) |
Exhibit 31.2
MAC-GRAY CORPORATION
CERTIFICATION PURSUANT TO SECTION 302 OF
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Michael J. Shea, Chief Financial Officer and Treasurer, certify that:
1. I have reviewed this report on Form 10-Q of Mac-Gray Corporation (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: |
May 10, 2013 |
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/s/ Michael J. Shea |
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Michael J. Shea | ||
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Chief Financial Officer and Treasurer | |||
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(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2013 (the Report), of Mac-Gray Corporation (the Company) each of the undersigned, as the Chief Executive Officer and Chief Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
· the Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the Exchange Act); and
· the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (Item 601(b)(32)) promulgated under the Securities Act of 1933, as amended (the Securities Act), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
Dated: |
May 10, 2013 |
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/s/ Stewart G. MacDonald, Jr. |
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Name: Stewart G. MacDonald, Jr. |
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Title: Chief Executive Officer |
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Dated: |
May 10, 2013 |
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/s/ Michael J. Shea |
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|
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Name: Michael J. Shea |
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|
Title: Chief Financial Officer |
Earnings Per Share (Details) (USD $)
In Thousands, except Share data, unless otherwise specified |
3 Months Ended | |
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Mar. 31, 2013
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Mar. 31, 2012
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|
Earnings Per Share | ||
Net income (loss) | $ 2,918 | $ (767) |
Weighted average number of common shares outstanding - basic | 14,543,000 | 14,375,000 |
Effect of dilutive securities: | ||
Stock options and restricted stock units (in shares) | 475,000 | |
Weighted average number of common shares outstanding - diluted | 15,018,000 | 14,375,000 |
Earnings (loss) per share - basic (in dollars per share) | $ 0.20 | $ (0.05) |
Earnings (loss) per share - diluted (in dollars per share) | $ 0.19 | $ (0.05) |
Potential common stock related to stock options and restricted stock units included in the diluted earnings per share | 643,000 | |
Shares under option plans that were excluded from the computation of diluted earnings per share due to their anti-dilutive effects | 1,008,000 | 11,000 |
Fair Value Measurements (Details 4) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
Dec. 31, 2012
|
---|---|---|
Fair value of Derivative Instruments | ||
Fair value of derivatives | $ 2 | $ 443 |
Interest rate contracts | Accrued expenses | Derivatives not designated as hedging instruments
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||
Fair value of Derivative Instruments | ||
Fair value of derivatives | 18 | 406 |
Fuel commodity derivatives | Accrued expenses | Derivatives not designated as hedging instruments
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||
Fair value of Derivative Instruments | ||
Fair value of derivatives | 37 | |
Fuel commodity derivatives | Current Assets | Derivatives not designated as hedging instruments
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||
Fair value of Derivative Instruments | ||
Fair value of derivatives | $ (16) |
Stock Compensation (Tables)
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3 Months Ended | |||||||||||||||||||||||||
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Mar. 31, 2013
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Stock Compensation | ||||||||||||||||||||||||||
Schedule of components used to estimate fair values of the stock options granted |
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Schedule of compensation expense related to unvested options and restricted shares |
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Payment of dividends (Details) (USD $)
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0 Months Ended | 3 Months Ended |
---|---|---|
Mar. 29, 2013
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Mar. 31, 2013
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|
Payment of dividends | ||
Dividends declared, per share (in dollars per share) | $ 0.0875 | $ 0.0875 |
Goodwill and Intangible Assets (Details 2) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
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Mar. 31, 2012
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Estimated future amortization expense of intangible assets | ||
2013 (nine months) | $ 9,100 | |
2014 | 12,128 | |
2015 | 12,118 | |
2016 | 12,118 | |
2017 | 11,684 | |
Thereafter | 96,616 | |
Total | 153,764 | |
Amortization expense of intangible assets | $ 3,015 | $ 3,105 |
Long-Term Debt
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3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2013
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Long-Term Debt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-Term Debt | 2. Long-Term Debt
On February 29, 2012, the Company entered into an Amended and Restated Senior Secured Credit Agreement. The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the “Revolver”). The 2012 Credit Agreement matures on February 28, 2017. The 2012 Credit Agreement also provides for Swingline Loans of up to $10,000 (the “Swingline Loans”) and any Swingline Loans will reduce the borrowings available under the Revolver. Subject to certain terms and conditions, the 2012 Credit Agreement gives the Company the option to increase the Revolver or establish one or more new term loans, provided that the aggregate commitments under the 2012 Credit Agreement cannot exceed $350,000. The 2012 Credit Agreement is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries as well as a pledge by the Company of all the capital stock of its subsidiaries. Outstanding indebtedness under the 2012 Credit Agreement bears interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate plus an applicable percentage, ranging from 1.75% to 2.75% per annum (currently 2.50%), determined by reference to our consolidated total leverage ratio, and (ii) in the case of base rate loans and swingline loans, the higher of (a) the federal funds rate plus 0.50%, (b) the annual rate of interest announced by Bank of America, N.A. as its “prime rate,” or (c) for each day, the floating rate of interest equal to LIBOR for a one month term quoted for such date (the highest of which is defined as the “Base Rate”), plus, in each case, an applicable percentage, ranging from 0.75% to 1.75% per annum (currently 1.50%), determined by reference to our consolidated total leverage ratio.
The Company pays a commitment fee equal to a percentage of the actual daily-unused portion of the Revolver under the 2012 Credit Agreement. This percentage is determined quarterly by reference to the Company’s consolidated total leverage ratio and ranges between 0.25% per annum and 0.50% per annum (currently 0.35%). For purposes of the calculation of the commitment fee, letters of credit are considered usage under the Revolver, but swingline loans are not considered usage under the Revolver.
The 2012 Credit Agreement includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and incurring indebtedness, and requires that the Company maintain certain financial ratios. The most significant financial ratios that the Company is required to maintain include a consolidated total leverage ratio of not greater than 3.75 to 1.00 (3.50 to 1.00 as of December 31, 2013 and thereafter) and a consolidated cash flow coverage ratio of not less than 1.20 to 1.00. The Company was in compliance with all financial covenants at March 31, 2013.
During the first quarter of 2012, the Company incurred deferred financing costs of $1,497 associated with the 2012 Credit Agreement and wrote off unamortized deferred financing costs of $133 associated with the Company’s 2008 credit facility.
As of March 31, 2013, there was $190,318 outstanding under the Revolver and $1,380 in outstanding letters of credit. The available balance under the Revolver was $58,302 at March 31, 2013. The average interest rates on the borrowings outstanding under the prior credit agreement and the 2012 Credit Agreement at March 31, 2012 and 2013 were 4.00% and 3.68%, respectively, including the applicable spread paid to the banks and the effect of the interest rate swap agreements tied to the debt (see Note 3 for discussion on Fair Value Measurements).
On August 16, 2005, the Company issued senior unsecured notes in the amount of $150,000 with the fixed interest rate of 7.625%. On October 21, 2011, the Company redeemed $50,000 of the senior notes by utilizing $51,271 of availability under its 2008 credit facility. The Company paid a premium of $1,271 as well as interest accrued through the date of redemption and wrote off unamortized deferred financing costs of $623 associated with this redemption. On March 30, 2012, the Company redeemed the remaining $100,000 of the senior notes by utilizing $103,495 of availability under the 2012 Credit Agreement and paying a premium of $2,542 as well as interest accrued through the date of redemption. The Company wrote off the remaining $1,087 of unamortized deferred financing costs associated with this redemption.
Interest expense associated with the Company’s long term debt for the three months ended March 31, 2013 and 2012 is comprised of the following:
Capital lease obligations are comprised primarily of the Company’s fleet of vehicles which totaled $2,425 and $2,272 at December 31, 2012 and March 31, 2013, respectively.
Required payments under the Company’s long-term debt and capital lease obligations are as follows:
The Company historically has not needed sources of financing other than its internally generated cash flow and revolving credit facilities to fund its working capital, capital expenditures, and smaller acquisitions. As a result, the Company anticipates that its cash flow from operations and revolving credit facilities will be sufficient to meet its anticipated cash requirements for at least the next twelve months. |