MINNESOTA | 41-0449530 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(do not check if a smaller reporting company) |
2
ITEM 1. | FINANCIAL STATEMENTS |
April 2, | July 3, | |||||||
2011 | 2010 | |||||||
(In thousands) | (Unaudited) | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 21,838 | $ | 8,774 | ||||
Accounts receivable, less allowance for doubtful
accounts of $3,193 and $3,118 |
91,301 | 82,754 | ||||||
Inventories, net |
145,797 | 126,325 | ||||||
Other current assets |
15,702 | 21,279 | ||||||
Total current assets |
274,638 | 239,132 | ||||||
Property, Plant and Equipment, net |
188,576 | 194,988 | ||||||
Goodwill |
329,475 | 323,055 | ||||||
Other Assets |
61,305 | 56,693 | ||||||
Total assets |
$ | 853,994 | $ | 813,868 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 34,779 | $ | 25,944 | ||||
Accrued expenses |
71,506 | 71,478 | ||||||
Deferred income taxes |
3,978 | 3,557 | ||||||
Current maturities of long-term debt |
812 | 1,023 | ||||||
Total current liabilities |
111,075 | 102,002 | ||||||
Long-Term Debt, net of Current Maturities |
145,346 | 160,398 | ||||||
Deferred Income Taxes |
1,524 | 1,242 | ||||||
Accrued Income Taxes Long Term |
13,144 | 10,113 | ||||||
Other Noncurrent Liabilities |
77,797 | 73,217 | ||||||
Stockholders Equity |
||||||||
Common stock, $0.50 par value |
9,356 | 9,292 | ||||||
Additional paid-in capital |
11,138 | 8,009 | ||||||
Retained earnings |
465,266 | 444,986 | ||||||
Accumulated other comprehensive income |
19,348 | 4,609 | ||||||
Total stockholders equity |
505,108 | 466,896 | ||||||
Total liabilities and stockholders equity |
$ | 853,994 | $ | 813,868 | ||||
3
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
April 2, | March 27, | April 2, | March 27, | |||||||||||||
(In thousands, except per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Revenues |
||||||||||||||||
Rental operations |
$ | 192,828 | $ | 185,606 | $ | 566,287 | $ | 572,585 | ||||||||
Direct sales |
17,515 | 13,339 | 48,537 | 40,851 | ||||||||||||
Total revenues |
210,343 | 198,945 | 614,824 | 613,436 | ||||||||||||
Operating Expenses |
||||||||||||||||
Cost of rental operations |
130,857 | 130,038 | 383,316 | 402,906 | ||||||||||||
Cost of direct sales |
13,169 | 9,664 | 36,592 | 30,255 | ||||||||||||
Selling and administrative |
50,364 | 45,289 | 144,264 | 142,197 | ||||||||||||
Total operating expenses |
194,390 | 184,991 | 564,172 | 575,358 | ||||||||||||
Income from Operations |
15,953 | 13,954 | 50,652 | 38,078 | ||||||||||||
Interest expense |
2,958 | 3,275 | 8,011 | 10,675 | ||||||||||||
Income before Income Taxes |
12,995 | 10,679 | 42,641 | 27,403 | ||||||||||||
Provision for income taxes |
5,029 | 3,642 | 17,032 | 9,932 | ||||||||||||
Net Income |
$ | 7,966 | $ | 7,037 | $ | 25,609 | $ | 17,471 | ||||||||
Basic weighted average number
of shares outstanding |
18,364 | 18,305 | 18,343 | 18,300 | ||||||||||||
Basic Earnings per Common Share |
$ | 0.43 | $ | 0.38 | $ | 1.40 | $ | 0.95 | ||||||||
Diluted weighted average number
of shares outstanding |
18,448 | 18,361 | 18,446 | 18,339 | ||||||||||||
Diluted Earnings per Common Share |
$ | 0.43 | $ | 0.38 | $ | 1.39 | $ | 0.95 | ||||||||
Dividends per share |
$ | 0.095 | $ | 0.075 | $ | 0.285 | $ | 0.225 | ||||||||
4
For the Nine Months Ended | ||||||||
April 2, | March 27, | |||||||
(In thousands) | 2011 | 2010 | ||||||
Operating Activities: |
||||||||
Net income |
$ | 25,609 | $ | 17,471 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities |
||||||||
Depreciation and amortization |
28,232 | 30,014 | ||||||
Other adjustments |
3,919 | (3,350 | ) | |||||
Changes in current operating items |
(4,791 | ) | 9,319 | |||||
Other assets and liabilities |
(3,952 | ) | 754 | |||||
Net cash provided by operating activities |
49,017 | 54,208 | ||||||
Investing Activities: |
||||||||
Property, plant and equipment additions, net |
(15,465 | ) | (12,249 | ) | ||||
Divestitures of business assets, net |
| 21,670 | ||||||
Net cash (used for)/provided by investing activities |
(15,465 | ) | 9,421 | |||||
Financing Activities: |
||||||||
Payments of long-term debt |
(763 | ) | (7,434 | ) | ||||
Payments of revolving credit facilities, net |
(14,500 | ) | (54,210 | ) | ||||
Cash dividends paid |
(5,327 | ) | (4,185 | ) | ||||
Net issuance of common stock, primarily under stock option plans |
259 | 7 | ||||||
Purchase of common stock |
(342 | ) | (388 | ) | ||||
Net cash used for financing activities |
(20,673 | ) | (66,210 | ) | ||||
Increase/(Decrease) in Cash and Cash Equivalents |
12,879 | (2,581 | ) | |||||
Effect of Exchange Rates on Cash |
185 | (94 | ) | |||||
Cash and Cash Equivalents: |
||||||||
Beginning of period |
8,774 | 13,136 | ||||||
End of period |
$ | 21,838 | $ | 10,461 | ||||
5
1. | Basis of Presentation for Interim Financial Statements |
The Consolidated Condensed Financial Statements included herein, except for the July 3, 2010
balance sheet, which was derived from the audited Consolidated Financial Statements for the
fiscal year ended July 3, 2010, have been prepared by us, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In our opinion, the
accompanying unaudited Consolidated Condensed Financial Statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly our financial
position as of April 2, 2011, and the results of our operations for the three and nine
months ended and our cash flows for the nine months ended April 2, 2011 and March 27, 2010.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been
condensed or omitted pursuant to such rules and regulations, although we believe that the
disclosures herein are adequate to make the information presented not misleading. It is
suggested that these Consolidated Condensed Financial Statements be read in conjunction with
the Consolidated Financial Statements and the notes thereto included in our latest report on
Form 10-K. |
The results of operations for the three and nine month periods ended April 2, 2011 and March
27, 2010 are not necessarily indicative of the results to be expected for the full year. We
have evaluated subsequent events through the date of filing this form 10-Q and have found
none that require recognition or disclosure. |
Critical accounting policies are defined as the most important and pervasive accounting
policies used, areas most sensitive to material changes from external factors and those that
are reflective of significant judgments and uncertainties. See Note 1 to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 3,
2010 for additional discussion of the application of these and other accounting policies. |
||
Inventories |
Inventories consist of new goods and rental merchandise in service. New goods are stated at
the lower of first-in, first-out (FIFO) cost or market, net of any reserve for obsolete or
excess inventory. Merchandise placed in service to support our rental operations is
amortized into cost of rental operations over the estimated useful lives of the underlying
inventory items, primarily on a straight-line basis, which results in a matching of the cost
of the merchandise with the weekly rental revenue generated by the merchandise. Estimated
lives of rental merchandise in service range from six months to three years. In
establishing estimated lives for merchandise in service, management considers historical
experience and the intended use of the merchandise. |
We review the estimated useful lives of our in-service merchandise on a periodic basis.
During the fourth quarter of 2010, we completed an analysis of certain in-service
merchandise which resulted in the estimated useful lives for the merchandise being modified
to better reflect the estimated periods in which the merchandise will remain in service.
The effect of the change in estimate in fiscal year 2010 and the first three quarters of
fiscal year 2011 was not material. |
We estimate our reserves for inventory obsolescence by periodically examining our inventory
to determine if there are indicators that carrying values exceed the net realizable value.
Experience has shown that significant indicators that could require the need for additional
inventory write-downs include the age of the inventory, anticipated demand for our products,
historical inventory usage, revenue trends and current economic conditions. We believe that
adequate reserves for inventory obsolescence have been made in the Consolidated Financial
Statements; however, in the future, product lines and customer requirements may change,
which could result in additional inventory write-downs. |
6
Revenue Recognition |
||
Our rental operations business is largely based on written service agreements whereby we
agree to pick-up soiled merchandise, launder and return it to our customers. The service
agreements generally provide for weekly billing upon completion of the laundering process
and delivery to the customer. Accordingly, we recognize revenue from rental operations in
the period in which the services are provided. Revenue from rental operations also includes
billings to customers for lost or damaged uniforms and replacement fees for non-personalized
merchandise that is lost or damaged. Direct sale revenue is recognized in the period in
which the product is shipped. Total revenues do not include sales tax as we consider
ourselves a pass-through conduit for collecting and remitting sales taxes. |
During the fourth quarter of fiscal year 2010, we changed our business practices regarding
the replacement of certain in-service towel and linen inventory and accordingly, we modified
our revenue recognition policy related to the associated replacement fees. This revenue,
which had historically been deferred and recognized over the estimated useful life of the
associated in-service inventory, is now recognized upon billing. For the nine months ended
April 2, 2011, the effect of this change increased revenue and income from operations by
$5.9 million, net income by $3.7 million and basic and diluted earnings per common share by
$0.20. The change did not have a material impact on revenues, income
from operations or net income for the three months ended April 2, 2011. |
2. | Contingent Liabilities |
Environmental Matters |
We are currently involved in several environmental-related proceedings by certain
governmental agencies, which relate primarily to allegedly operating certain facilities in
noncompliance with required permits. In addition to these proceedings, in the normal course
of our business, we are subject to, among other things, periodic inspections by regulatory
agencies. We continue to dedicate substantial operational and financial resources to
environmental compliance, and we remain fully committed to operating in compliance with all
environmental laws and regulations. As of April 2, 2011 and July 3, 2010, we had reserves
of approximately $1.7 million and $3.2 million, respectively, related to various
environmental-related matters. Expense for these matters for the three and nine months
ended April 2, 2011 and March 27, 2010 was not material. |
We cannot predict the ultimate outcome of any of these matters with certainty and it is
possible that we may incur additional losses in excess of established reserves. However, we
believe the possibility of a material adverse effect on our results of operations or
financial position is remote. |
3. | Fair Value Measurements |
GAAP defines fair value, establishes a framework for measuring fair value and establishes
disclosure requirements about fair value measurements. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. We considered
non-performance risk when determining fair value of our derivative financial instruments.
The fair value hierarchy prescribed under GAAP contains the following three levels: |
Level 1 unadjusted quoted prices that are available in active markets for the identical
assets or liabilities at the measurement date. |
Level 2 other observable inputs available at the measurement date, other than quoted
prices included in Level 1, either directly or indirectly, including: |
7
Level 3 unobservable inputs that cannot be corroborated by observable market data and
reflect the use of significant management judgment. These values are generally determined
using pricing models for which the assumptions utilize managements estimates of market
participant assumptions. |
We have not transferred any items between fair value levels during fiscal year 2011. In
addition, we valued our level 2 assets and liabilities by reference to information provided
by independent third parties for similar assets and liabilities in active markets. |
The following table summarizes the balances of assets and liabilities measured at fair value
on a recurring basis as of April 2, 2011 and July 3, 2010: |
As of April 2, 2011 | ||||||||||||
Fair Value Measurements Using Inputs Considered as | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Other assets: |
||||||||||||
Non-qualified, non-contributory retirement
plan assets |
$ | | $ | 10.3 | $ | 10.3 | ||||||
Non-qualified deferred compensation plan assets |
21.4 | | 21.4 | |||||||||
Total assets |
$ | 21.4 | $ | 10.3 | $ | 31.7 | ||||||
Accrued expenses: |
||||||||||||
Derivative financial instruments |
$ | | $ | 2.4 | $ | 2.4 | ||||||
Total liabilities |
$ | | $ | 2.4 | $ | 2.4 | ||||||
As of July 3, 2010 | ||||||||||||
Fair Value Measurements Using Inputs Considered as | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Other assets: |
||||||||||||
Non-qualified, non-contributory retirement
plan assets |
$ | | $ | 9.6 | $ | 9.6 | ||||||
Non-qualified deferred compensation plan assets |
16.9 | | 16.9 | |||||||||
Total assets |
$ | 16.9 | $ | 9.6 | $ | 26.5 | ||||||
Accrued expenses: |
||||||||||||
Derivative financial instruments |
$ | | $ | 5.2 | $ | 5.2 | ||||||
Total liabilities |
$ | | $ | 5.2 | $ | 5.2 | ||||||
We do not have any level 3 assets or liabilities, and the fair value of cash, trade
receivables and borrowings under the various credit agreements approximates the amounts
recorded. |
4. | Derivative Financial Instruments |
All derivative financial instruments are recognized at fair value and are recorded in the
Other current assets or Accrued expenses line items in the Consolidated Condensed
Balance Sheets. The accounting for changes in the fair value of a derivative financial
instrument depends on whether it has been designated and qualifies as a hedging relationship
and on the type of the hedging relationship. For those derivative financial instruments that
are designated and qualify as hedging instruments, we designate the hedging instrument
(based on the exposure being hedged) as cash flow hedges. We do not have any derivative
financial instruments that have been designated as either a fair value hedge or a hedge of a
net investment in a foreign operation. Cash flows associated with derivative financial
instruments are classified in the same category as the cash flows hedged in the Consolidated
Condensed Statements of Cash Flows. |
8
In the ordinary course of business, we are exposed to market risks. We utilize derivative
financial instruments to manage interest rate risk, and periodically energy cost price risk
and foreign exchange risk. Interest rate swap contracts are entered into to manage interest
rate risk associated with our fixed and variable rate debt. Futures contracts on energy
commodities are periodically entered into to manage the price risk associated with
forecasted purchases of gasoline and diesel fuel used in our rental operations. We
designate interest rate swap contracts as cash flow hedges of the interest expense related
to variable rate debt and futures contracts on energy commodities as cash flow hedges of
forecasted purchases of gasoline and diesel fuel. |
For derivative financial instruments that are designated and qualify as cash flow hedges,
the effective portion of the gain or loss on the derivative financial instrument is reported
as a component of Accumulated other comprehensive income and reclassified into the
Consolidated Condensed Statements of Operations in the same line item associated with the
forecasted transaction and in the same period as the expenses from the cash flows of the
hedged items are recognized. We perform an assessment at the inception of the hedge and on
a quarterly basis thereafter, to determine whether our derivatives are highly effective in
offsetting changes in the value of the hedged items. Any change in the fair value resulting
from hedge ineffectiveness is immediately recognized as income or expense. |
We use interest rate swap contracts to limit exposure to changes in interest rates and to
manage the total debt that is subject to variable and fixed interest rates. The interest
rate swap contracts we utilize modify our exposure to interest rate risk by converting
variable rate debt to a fixed rate without an exchange of the underlying principal amount.
Approximately 72% of our outstanding variable rate debt had its interest payments modified
using interest rate swap contracts as of April 2, 2011. |
As of April 2, 2011, none of our anticipated gasoline and diesel fuel purchases are hedged. |
We do not engage in speculative transactions or fair value hedging nor do we hold or issue
financial instruments for trading purposes. |
We do not have any material assets related to derivatives as of April 2, 2011 and July 3,
2010. |
We do have liabilities associated with derivatives, and the following table summarizes the
classification and fair value of the interest rate swap agreements and fuel commodity
futures contracts, which have been designated as cash flow hedging instruments: |
Liability Derivatives Fair Value | ||||||||||||
Relationship: | Balance Sheet Classification: | April 2, 2011 | July 3, 2010 | |||||||||
Interest rate swap contracts |
Accrued expenses | $ | 2.4 | $ | 5.0 | |||||||
Fuel commodity futures contracts |
Accrued expenses | | 0.2 | |||||||||
Total derivatives designated as cash flow hedging instruments | $ | 2.4 | $ | 5.2 | ||||||||
As of April 2, 2011 and July 3, 2010, all derivative financial instruments were designated
as hedging instruments. |
For our interest rate swap contracts that qualify for cash flow hedge designation, the
related gains or losses on the contracts are deferred as a component of accumulated other
comprehensive income or loss (net of related income taxes) until the interest expense on the
related debt is recognized. As the interest expense on the hedged debt is recognized, the
other comprehensive income or loss is reclassified to Interest expense. Of the $1.8
million net loss deferred in accumulated other comprehensive income as of April 2, 2011, a
$1.5 million loss is expected to be reclassified to interest expense in the next twelve
months. |
As of April 2, 2011, we had interest rate swap contracts to pay fixed rates of interest and
to receive variable rates of interest based on the three-month London Interbank Offered Rate
(LIBOR) on $85.0 million notional amount, none of which are forward starting interest rate
swap contracts. Of the $85.0 million notional amount, $45.0 million matures in 12 months,
$25.0 million matures in 13-24 months and $15.0 million matures in 25-36 months. The
average rate on the $85.0 million of interest rate swap contracts was 4.0% as of April 2,
2011. These interest rate swap contracts are highly effective cash flow hedges and
accordingly, gains or losses on any ineffectiveness was not material to any period. |
9
The following tables summarize the amount of gain or loss recognized in accumulated other
comprehensive income or loss and the classification and amount of gains or losses
reclassified from accumulated other comprehensive income or loss into the Consolidated
Condensed Statements of Operations for the three and nine months ended April 2, 2011 and
March 27, 2010 related to derivative financial instruments used in cash flow hedging
relationships: |
Amount of Gain or (Loss) Recognized in Accumulated | ||||||||||||||||
Other | ||||||||||||||||
Comprehensive Income (Loss) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
April 2, | March 27, | April 2, | March 27, | |||||||||||||
Relationship: | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest rate swap contracts |
$ | | $ | (0.6 | ) | $ | (0.5 | ) | $ | (1.8 | ) | |||||
Fuel commodity futures contracts |
| | | (0.1 | ) | |||||||||||
Total derivatives designated as cash flow
hedging instruments |
$ | | $ | (0.6 | ) | $ | (0.5 | ) | $ | (1.9 | ) | |||||
Amount of Gain or (Loss) Reclassified From | ||||||||||||||||||
Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||
to Consolidated Statements of Operations | ||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
Statement of Operations | April 2, | March 27, | April 2, | March 27, | ||||||||||||||
Relationship: | Classification: | 2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest rate swap contracts |
Interest expense | $ | (1.0 | ) | $ | (0.9 | ) | $ | (2.4 | ) | $ | (2.7 | ) | |||||
Interest rate swap contracts |
Selling and Administrative | | (0.1 | ) | | (0.1 | ) | |||||||||||
Fuel commodity futures contracts |
Cost of rental operations | | | (0.1 | ) | | ||||||||||||
Total derivatives designated as
cash flow hedging instruments |
$ | (1.0 | ) | $ | (1.0 | ) | $ | (2.5 | ) | $ | (2.8 | ) | ||||||
The following table summarizes the amount of gain or loss recognized in the consolidated
statement of operations for the three and nine months ended April 2, 2011 and March 27, 2010
related to derivative financial instruments not designated as hedging instruments. |
Amount of Gain or (Loss) | ||||||||||||||||||
Recognized in Consolidated Statement of Operations | ||||||||||||||||||
Statement of Operations | Three Months Ended | Nine Months Ended | ||||||||||||||||
Relationship: | Classification: | April 2, 2011 | March 27, 2010 | April 2, 2011 | March 27, 2010 | |||||||||||||
Interest rate swap
contracts |
Selling and Administrative | $ | | $ | (0.3 | ) | $ | | $ | (0.3 | ) | |||||||
5. | Exit, Disposal and Related Activities |
We continuously monitor our operations and related cost structure to ensure that our
resource levels are appropriate and from time to time take various actions to ensure that
these resources are utilized in the most efficient manner. These actions may consist of
facility closures, divestitures, expansions and increases or decreases in staffing levels. |
During the first quarter of fiscal year 2010, we aligned our workforce and cost structure to
better match our revenue levels. As a result, we reduced selected administrative, regional
and corporate headcount, divested an unprofitable operation and recorded approximately $1.4
million in associated severance costs in the Selling and administrative line item in the
financial statements of our United States operating segment. |
In the second quarter of fiscal year 2010, we sold all of the customer lists and certain
assets related to our U.S. Cleanroom operations. In addition, we disposed of a non-core
linen operation at one of our production facilities. As a result of these transactions,
including the associated asset impairment charges, we recognized a net gain of $1.2 million
in the Selling and administrative line in the Consolidated Condensed Statements of
Operations. |
10
In the third quarter of fiscal year 2010, we sold a portion of the customer list and certain
assets related to a non-core linen operation and refined our estimates related to the
disposition of our Cleanroom operations. As a result of these transactions, including the
associated impairment charges, we recognized a net gain of $2.5 million in the Selling and
administrative line in the Consolidated Condensed Statements of Operations. |
There was no exit, disposal or related activities in fiscal year 2011. |
6. | Income Taxes |
Our effective tax rate increased to 39.9% in the first three quarters of fiscal 2011 from
36.2% in the same period of fiscal 2010. The current year tax rate is higher than our
statutory tax rate primarily due to the write-off of deferred tax assets associated with
equity compensation, adjustments resulting from the final calculation and filing of our
annual income tax return, offset by the decrease in tax reserves for uncertain tax positions
due to the expiration of certain tax statutes. The prior year tax rate was lower than our
statutory rate due to the adjustment of deferred tax liabilities related to Canada, the
enactment of a provincial tax rate reduction and the favorable tax treatment on the sale of
certain assets, offset by the write-off of deferred tax assets associated with equity based
compensation. |
7. | Per Share Data |
Basic earnings per common share was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings per common
share was computed similarly to the computation of basic earnings per share, except that the
denominator is increased for the assumed exercise of dilutive options using the treasury
stock method and non-vested restricted stock. |
Three Months Ended | Nine Months Ended | |||||||||||||||
April 2, | March 27, | April 2, | March 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted average number of common shares outstanding
used in computation of basic earnings per share |
18.4 | 18.3 | 18.3 | 18.3 | ||||||||||||
Weighted average effect of non-vested restricted stock
grants and assumed exercise of options |
| 0.1 | 0.1 | | ||||||||||||
Shares used in computation of diluted earnings per share |
18.4 | 18.4 | 18.4 | 18.3 | ||||||||||||
We excluded potential common shares related to our outstanding equity compensation
grants of 1.4 million and 1.5 million for the three months ended April 2, 2011 and March 27,
2010, respectively, and 1.3 million and 1.8 million for the nine months ended April 2, 2011
and March 27, 2010, respectively, from the computation of diluted earnings per share.
Inclusion of these shares would have been anti-dilutive. |
8. | Comprehensive Income |
For the three and nine month periods ended April 2, 2011 and March 27, 2010, the components
of comprehensive income were as follows: |
Three Months Ended | Nine Months Ended | |||||||||||||||
April 2, | March 27, | April 2, | March 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 8.0 | $ | 7.0 | $ | 25.6 | $ | 17.5 | ||||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustments, net of tax |
4.2 | 1.7 | 12.7 | 13.4 | ||||||||||||
Derivative financial instruments (loss) recognized, net of tax |
| (0.6 | ) | (0.5 | ) | (1.9 | ) | |||||||||
Derivative
financial instruments loss reclassified, net of tax |
1.0 | 1.0 | 2.5 | 2.8 | ||||||||||||
Total comprehensive income |
$ | 13.2 | $ | 9.1 | $ | 40.3 | $ | 31.8 | ||||||||
11
9. | Inventories |
The components of inventory as of April 2, 2011 and July 3, 2010 are as follows: |
April 2, 2011 | July 3, 2010 | |||||||
Raw materials |
$ | 10.8 | $ | 7.5 | ||||
Work in process |
1.0 | 0.5 | ||||||
Finished goods |
49.5 | 49.0 | ||||||
New goods |
$ | 61.3 | $ | 57.0 | ||||
Merchandise in service |
$ | 84.5 | $ | 69.3 | ||||
Total inventories |
$ | 145.8 | $ | 126.3 | ||||
10. | Goodwill and Intangible Assets |
United States | Canada | Total | ||||||||||
Balance as of July 3, 2010 |
$ | 259.7 | $ | 63.4 | $ | 323.1 | ||||||
Foreign currency translation and other |
0.2 | 6.2 | 6.4 | |||||||||
Balance as of April 2, 2011 |
$ | 259.9 | $ | 69.6 | $ | 329.5 | ||||||
Other intangible assets, which are included in Other assets on the Consolidated
Condensed Balance Sheet, are as follows: |
April 2, 2011 | July 3, 2010 | |||||||
Customer contracts |
$ | 115.6 | $ | 114.0 | ||||
Accumulated amortization |
(97.0 | ) | (91.7 | ) | ||||
Net customer contracts |
$ | 18.6 | $ | 22.3 | ||||
Non-competition agreements |
$ | 11.2 | $ | 11.1 | ||||
Accumulated amortization |
(11.1 | ) | (10.8 | ) | ||||
Net non-competition agreements |
$ | 0.1 | $ | 0.3 | ||||
The customer contracts include the combined value of the written service agreements and
the related customer relationship. Other intangible assets are amortized over a weighted
average life of approximately 11 years. |
Amortization expense was $4.2 million and $4.6 million for the nine months ended April 2,
2011 and March 27, 2010, respectively. Estimated amortization expense for each of the next
five fiscal years based on the intangible assets as of April 2, 2011 is as follows: |
2011 remaining |
$ | 1.3 | ||
2012 |
5.0 | |||
2013 |
3.9 | |||
2014 |
2.7 | |||
2015 |
1.9 | |||
2016 |
1.4 | |||
12
11. | Long-Term Debt |
We have a $300.0 million, unsecured revolving credit facility with a syndicate of banks,
which expires on July 1, 2012. Borrowings in U.S. dollars under this credit facility will,
at our election, bear interest at (a) the adjusted London Interbank Offered Rate (LIBOR)
for specified interest periods plus a margin, which can range from 2.25% to 3.25%,
determined with reference to our consolidated leverage ratio or (b) a floating rate equal to
the greatest of (i)
JPMorgans prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBOR
for a one month interest period plus 1.00%, plus, in each case, a margin determined with
reference to our consolidated leverage ratio. Base rate loans will, at our election, bear
interest at (i) the rate described in clause (b) above or (ii) a rate to be agreed upon by
us and JPMorgan. Borrowings in Canadian dollars under the credit facility will bear
interest at the greater of (a) the Canadian Prime Rate and (b) the LIBOR for a one month
interest period on such day (or if such day is not a business day, the immediately preceding
business day) plus 1.00%. |
As of April 2, 2011, borrowings outstanding under the revolving credit facility were $50.0
million. The unused portion of the revolver may be used for general corporate purposes,
acquisitions, share repurchases, dividends, working capital needs and to provide up to $50.0
million in letters of credit. As of April 2, 2011, letters of credit outstanding against
the revolver totaled $8.6 million and primarily relate to our property and casualty
insurance programs. No amounts have been drawn upon these letters of credit. Availability
of credit under this facility requires that we maintain compliance with certain covenants.
In addition, there are certain restricted payment limitations on dividends or other
distributions, including share repurchases. The covenants under this agreement are the most
restrictive when compared to our other credit facilities. The following table illustrates
compliance with regard to the material covenants required by the terms of this facility as
of April 2, 2011: |
Required | Actual | |||||||
Maximum Leverage Ratio (Debt/EBITDA) |
3.50 | 1.48 | ||||||
Minimum Interest Coverage Ratio (EBITDA/Interest Expense) |
3.00 | 10.27 | ||||||
Minimum Net Worth |
$ | 314.8 | $ | 505.1 |
Our maximum leverage ratio and minimum interest coverage ratio covenants are calculated
by adding back non-cash charges, as defined in our debt agreement. |
Advances outstanding as of April 2, 2011 bear interest at a weighted average all-in rate of
2.56% (LIBOR plus 2.25%) for the Eurocurrency rate loans and an all-in rate of 3.25% (Lender
Prime Rate) for overnight base rate loans. We also pay a fee on the unused daily balance of
the revolving credit facility based on a leverage ratio calculated on a quarterly basis. At
April 2, 2011 this fee was 0.25% of the unused daily balance. |
We have $75.0 million of variable rate unsecured private placement notes. The notes bear
interest at 0.60% over LIBOR and are scheduled to mature on June 30, 2015. The notes do not
require principal payments until maturity. Interest payments are reset and paid on a
quarterly basis. As of April 2, 2011, the outstanding balance of the notes was $75.0
million at an all-in rate of 0.91% (LIBOR plus 0.60%). |
We maintain an accounts receivable securitization facility whereby the lender will make
loans to us on a revolving basis. On September 29, 2010, we completed the Second Amended and
Restated Loan Agreement. The primary purpose of entering into the Loan Agreement and
replacing the prior loan agreement was to (i) make conforming changes in connection with the
previously disclosed reduction of the facility limit to $40.0 million effective July 1,
2010; (ii) make available an amount not exceeding $15.0 million under the facility for the
issuance of letters of credit (subject to the aggregate $40.0 million facility limit); and
(iii) add three of our subsidiaries as parties to the related intercompany receivables sale
agreement to increase the borrowing base. Under the above stated amendment, we will now pay
interest at a rate per annum equal to a margin of 0.85%, plus the average annual interest
rate for such commercial paper. In addition, this facility is subject to customary fees for
the issuance of letters of credit and any unused portion of the facility. Under this
facility, and customary with transactions of this nature, our eligible accounts receivable
are sold to a consolidated subsidiary. |
As of April 2, 2011, there was $20.0 million outstanding under this loan agreement at an
all-in interest rate of 1.14%. Additionally, $15.0 million of letters of credit were
outstanding under this facility on this date, primarily related to our property and casualty
insurance programs. The facility expires on September 26, 2012. |
See Note 4 to the Consolidated Condensed Financial Statements for details of our interest
rate swap and hedging activities related to our outstanding debt. |
13
12. | Share-Based Compensation |
We grant share-based awards, including restricted stock and options to purchase our common
stock. Stock options are granted to employees and directors for a fixed number of shares
with an exercise price equal to the fair value of the shares at the date of grant.
Share-based compensation is recognized in the Consolidated Condensed Statements of
Operations on a straight-line basis over the requisite service period. The amortization of
share-based compensation reflects estimated forfeitures adjusted for actual forfeiture
experiences. We review our estimated forfeiture rates on an annual basis. As share-based
compensation expense is recognized, a deferred tax asset is recorded that represents an
estimate of the future tax deduction from the exercise of stock options or release of
restrictions on the restricted stock. At the time share-based awards are exercised,
cancelled, expire or restrictions lapse, we recognize adjustments to income tax expense.
Total compensation expense related to share-based awards was $0.9 million and $1.2 million
for the three months ended April 2, 2011 and March 27, 2010, respectively, and $3.3 million
and $3.5 million for the nine months ended April 2, 2011 and March 27, 2010, respectively.
The number of options exercised and restricted stock vested since July 3, 2010 was 0.1
million shares. |
13. | Employee Benefit Plans |
On December 31, 2006, we froze our pension and supplemental executive retirement plans. |
The components of net periodic pension cost for these plans for the three months ended April
2, 2011 and March 27, 2010 are as follows: |
Supplemental Executive | ||||||||||||||||
Pension Plan | Retirement Plan | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
April 2, 2011 | March 27, 2010 | April 2, 2011 | March 27, 2010 | |||||||||||||
Interest cost |
$ | 0.9 | $ | 0.9 | $ | 0.2 | $ | 0.2 | ||||||||
Expected return on assets |
(0.7 | ) | (0.7 | ) | | | ||||||||||
Amortization of net loss |
0.5 | 0.2 | | | ||||||||||||
Net periodic pension cost |
$ | 0.7 | $ | 0.4 | $ | 0.2 | $ | 0.2 | ||||||||
The components of net periodic pension cost for these plans for the nine months ended April
2, 2011 and March 27, 2010 are as follows: |
Supplemental Executive | ||||||||||||||||
Pension Plan | Retirement Plan | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
April 2, 2011 | March 27, 2010 | April 2, 2011 | March 27, 2010 | |||||||||||||
Interest cost |
$ | 2.8 | $ | 2.7 | $ | 0.5 | $ | 0.5 | ||||||||
Expected return on assets |
(2.3 | ) | (2.3 | ) | | | ||||||||||
Amortization of net loss |
1.5 | 0.8 | | | ||||||||||||
Net periodic pension cost |
$ | 2.0 | $ | 1.2 | $ | 0.5 | $ | 0.5 | ||||||||
14. | Segment Information |
We have two operating segments, United States (includes the Dominican Republic and
Ireland operations) and Canada, which have been identified as components of our
organization that are reviewed by our Chief Executive Officer to determine resource
allocation and evaluate performance. Each operating segment derives revenues from the
branded work apparel and facility services industry. During the three and nine months
ended April 2, 2011, and for the same periods of the prior fiscal year, no single
customer accounted for more than 2.0% of our total revenues. Substantially all of our
customers are in the United States, Canada and Ireland. |
14
Income from operations includes the impact of an intercompany management fee charged to
Canada, which is self-eliminated in the total income from operations below. This
intercompany management fee was approximately $2.1
million and $2.4 million for the three months ended April 2, 2011 and March 27, 2010,
respectively and $6.5 million and $7.3 million for the nine months ended April 2, 2011
and March 27, 2010, respectively. |
We evaluate performance based on income from operations. Financial information by
segment for the three and nine month periods ended April 2, 2011 and March 27, 2010 is
as follows: |
United | ||||||||||||||||
For the Three Months Ended | States | Canada | Elimination | Total | ||||||||||||
Third Quarter Fiscal Year 2011: |
||||||||||||||||
Revenues |
$ | 172.7 | $ | 37.6 | $ | | $ | 210.3 | ||||||||
Income from operations |
12.3 | 3.7 | | 16.0 | ||||||||||||
Total assets |
784.4 | 147.6 | (78.0 | ) | 854.0 | |||||||||||
Depreciation and amortization
expense |
8.0 | 1.4 | | 9.4 | ||||||||||||
Third Quarter Fiscal Year 2010: |
||||||||||||||||
Revenues |
$ | 163.0 | $ | 35.9 | $ | | $ | 198.9 | ||||||||
Income from operations |
7.9 | 6.1 | | 14.0 | ||||||||||||
Total assets |
759.5 | 138.8 | (78.8 | ) | 819.5 | |||||||||||
Depreciation and amortization
expense |
8.3 | 1.4 | | 9.7 | ||||||||||||
United | ||||||||||||||||
For the Nine Months Ended | States | Canada | Elimination | Total | ||||||||||||
Fiscal Year 2011: |
||||||||||||||||
Revenues |
$ | 508.2 | $ | 106.6 | $ | | $ | 614.8 | ||||||||
Income from operations |
40.6 | 10.1 | | 50.7 | ||||||||||||
Total assets |
784.4 | 147.6 | (78.0 | ) | 854.0 | |||||||||||
Depreciation and amortization
expense |
24.3 | 3.9 | | 28.2 | ||||||||||||
Fiscal Year 2010: |
||||||||||||||||
Revenues |
$ | 505.5 | $ | 107.9 | $ | | $ | 613.4 | ||||||||
Income from operations |
26.4 | 11.7 | | 38.1 | ||||||||||||
Total assets |
759.5 | 138.8 | (78.8 | ) | 819.5 | |||||||||||
Depreciation and amortization
expense |
25.7 | 4.3 | | 30.0 | ||||||||||||
15. | Stock Repurchase |
As of April 2, 2011, we have a $175.0 million share repurchase program which was originally
authorized by our Board of Directors in May 2007 for $100.0 million and increased to $175.0
million in May 2008. We did not repurchase any shares under this program in fiscal year
2010, nor have we made any repurchases this fiscal year. We have approximately $57.9
million remaining under this authorization. |
16. | Restricted Stock Unit Withholdings |
We issue restricted stock units as part of our equity incentive plans. Upon vesting, the
participant may elect to have shares withheld to pay the minimum statutory tax withholding
requirements. Although shares withheld are not issued, they are treated as common stock
repurchases in our financial statements as they reduce the number of shares that would have
been issued upon vesting. |
15
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
16
Three Months | Nine Months | Percentage | ||||||||||||||||||||||
Ended | Ended | Change | ||||||||||||||||||||||
Three Months | Nine Months | |||||||||||||||||||||||
April 2, | March 27, | April 2, | March 27, | FY 2011 | FY 2011 | |||||||||||||||||||
2011 | 2010 | 2011 | 2010 | vs. FY 2010 | vs. FY 2010 | |||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Rental operations |
91.7 | % | 93.3 | % | 92.1 | % | 93.3 | % | 3.9 | % | (1.1 | )% | ||||||||||||
Direct sales |
8.3 | 6.7 | 7.9 | 6.7 | 31.3 | 18.8 | ||||||||||||||||||
Total revenues |
100.0 | 100.0 | 100.0 | 100.0 | 5.7 | 0.2 | ||||||||||||||||||
Expenses: |
||||||||||||||||||||||||
Cost of rental operations |
67.9 | 70.1 | 67.7 | 70.4 | 0.6 | (4.9 | ) | |||||||||||||||||
Cost of direct sales |
75.2 | 72.4 | 75.4 | 74.1 | 36.3 | 20.9 | ||||||||||||||||||
Total cost of sales |
68.5 | 70.2 | 68.3 | 70.6 | 3.1 | (3.1 | ) | |||||||||||||||||
Selling and administrative |
23.9 | 22.8 | 23.5 | 23.2 | 11.2 | 1.5 | ||||||||||||||||||
Income from operations |
7.6 | 7.0 | 8.2 | 6.2 | 14.3 | 33.0 | ||||||||||||||||||
Interest expense |
1.4 | 1.6 | 1.3 | 1.7 | (9.7 | ) | (25.0 | ) | ||||||||||||||||
Income before income taxes |
6.2 | 5.4 | 6.9 | 4.5 | 21.7 | 55.6 | ||||||||||||||||||
Provision for income taxes |
2.4 | 1.8 | 2.8 | 1.6 | 38.1 | 71.5 | ||||||||||||||||||
Net income |
3.8 | % | 3.5 | % | 4.2 | % | 2.8 | % | 13.2 | % | 46.6 | % | ||||||||||||
17
18
19
Required | Actual | |||||||
Maximum Leverage Ratio (Debt/EBITDA) |
3.50 | 1.48 | ||||||
Minimum Interest Coverage Ratio (EBITDA/Interest Expense) |
3.00 | 10.27 | ||||||
Minimum Net Worth |
$ | 314.8 | $ | 505.1 |
20
21
22
23
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
ITEM 4. | CONTROLS AND PROCEDURES |
24
ITEM 1. | LEGAL PROCEEDINGS |
ITEM 1A. | RISK FACTORS |
25
ITEM 6. | EXHIBITS |
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|||
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
26
G&K SERVICES, INC. (Registrant) |
||||
Date: May 6, 2011 | By: | /s/ Jeffrey L. Wright | ||
Jeffrey L. Wright | ||||
Executive Vice President, Chief Financial
Officer and Director (Principal Financial Officer) |
||||
By: | /s/ Thomas J. Dietz | |||
Thomas J. Dietz | ||||
Vice President and Controller (Principal Accounting Officer) |
27
1. | I have reviewed this quarterly report on Form 10-Q of G&K Services, Inc.; |
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 officer 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: |
5. | The registrants other certifying officer 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): |
By: | /s/ Douglas A. Milroy | |||
Douglas A. Milroy, Chief Executive Officer and Director | ||||
(Principal Executive Officer) |
1. | I have reviewed this quarterly report on Form 10-Q of G&K Services, Inc.; |
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 officer 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: |
5. | The registrants other certifying officer 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): |
By: | /s/ Jeffrey L. Wright | |||
Jeffrey L. Wright, Executive Vice
President, Chief Financial Officer and Director |
||||
(Principal Financial Officer) |
By: | /s/ Douglas A. Milroy | |||
Douglas A. Milroy, Chief Executive Officer and Director | ||||
(Principal Executive Officer) |
By: | /s/ Jeffrey L. Wright | |||
Jeffrey L. Wright, Executive Vice President, Chief Financial Officer and Director | ||||
(Principal Financial Officer) |
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