UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2012
Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA | 41-0449530 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
5995 OPUS PARKWAY
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices and zip code)
Registrants telephone number, including area code (952) 912-5500
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 þ No ¨
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 þ No ¨
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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | þ | |||
Non-accelerated filer | ¨ (do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
Common Stock, par value $0.50 per share, outstanding
January 28, 2013 was 19,224,634 shares
G&K Services, Inc.
Form 10-Q
2
FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
December 29, 2012 |
June 30, | |||||||
(In thousands) |
(Unaudited) | 2012 | ||||||
ASSETS |
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Current Assets |
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Cash and cash equivalents |
$ | 23,715 | $ | 19,604 | ||||
Accounts receivable, less allowance for doubtful accounts of $3,473 and $2,666 |
98,636 | 93,064 | ||||||
Inventories, net |
174,441 | 178,226 | ||||||
Other current assets |
11,621 | 12,239 | ||||||
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Total current assets |
308,413 | 303,133 | ||||||
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Property, Plant and Equipment, net |
195,387 | 187,840 | ||||||
Goodwill |
336,746 | 325,336 | ||||||
Other Assets |
61,516 | 57,422 | ||||||
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Total assets |
$ | 902,062 | $ | 873,731 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Accounts payable |
$ | 37,565 | $ | 41,358 | ||||
Accrued expenses |
65,232 | 69,902 | ||||||
Deferred income taxes |
8,735 | 8,439 | ||||||
Current maturities of long-term debt |
23,815 | 206 | ||||||
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Total current liabilities |
135,347 | 119,905 | ||||||
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Long-Term Debt, net of Current Maturities |
196,500 | 218,018 | ||||||
Deferred Income Taxes |
14,321 | 5,473 | ||||||
Accrued Income Taxes |
11,478 | 11,339 | ||||||
Pension Withdrawal Liability |
23,550 | 23,562 | ||||||
Other Noncurrent Liabilities |
91,385 | 92,375 | ||||||
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Total liabilities |
472,581 | 470,672 | ||||||
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Stockholders Equity |
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Common stock, $0.50 par value |
9,592 | 9,450 | ||||||
Additional paid-in capital |
27,921 | 20,447 | ||||||
Retained earnings |
388,934 | 371,267 | ||||||
Accumulated other comprehensive income |
3,034 | 1,895 | ||||||
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Total stockholders equity |
429,481 | 403,059 | ||||||
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Total liabilities and stockholders equity |
$ | 902,062 | $ | 873,731 | ||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
December 29, | December 31, | December 29, | December 31, | |||||||||||||
(In thousands, except per share data) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Revenues |
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Rental operations |
$ | 207,852 | $ | 196,832 | $ | 411,311 | $ | 390,833 | ||||||||
Direct sales |
21,322 | 20,232 | 40,291 | 35,954 | ||||||||||||
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Total revenues |
229,174 | 217,064 | 451,602 | 426,787 | ||||||||||||
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Operating Expenses |
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Cost of rental operations |
141,768 | 136,350 | 280,440 | 269,937 | ||||||||||||
Cost of direct sales |
15,554 | 16,252 | 29,887 | 28,167 | ||||||||||||
Selling and administrative |
48,996 | 47,508 | 98,871 | 96,254 | ||||||||||||
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Total operating expenses |
206,318 | 200,110 | 409,198 | 394,358 | ||||||||||||
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Income from Operations |
22,856 | 16,954 | 42,404 | 32,429 | ||||||||||||
Interest expense |
1,111 | 1,607 | 2,147 | 3,260 | ||||||||||||
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Income before Income Taxes |
21,745 | 15,347 | 40,257 | 29,169 | ||||||||||||
Provision for income taxes |
8,524 | 5,881 | 15,142 | 11,410 | ||||||||||||
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Net Income |
$ | 13,221 | $ | 9,466 | $ | 25,115 | $ | 17,759 | ||||||||
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Basic Earnings per Common Share |
$ | 0.69 | $ | 0.51 | $ | 1.32 | $ | 0.96 | ||||||||
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Diluted Earnings per Common Share |
$ | 0.68 | $ | 0.51 | $ | 1.30 | $ | 0.95 | ||||||||
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Weighted average number of shares outstanding, basic |
18,841 | 18,493 | 18,761 | 18,462 | ||||||||||||
Weighted average number of shares outstanding, diluted |
19,099 | 18,660 | 19,024 | 18,635 | ||||||||||||
Dividends declared per share |
$ | 0.195 | $ | 0.130 | $ | 0.390 | $ | 0.260 | ||||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
December 29, | December 31, | December 29, | December 31, | |||||||||||||
(In thousands) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Net income |
$ | 13,221 | $ | 9,466 | $ | 25,115 | $ | 17,759 | ||||||||
Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustments |
(1,489 | ) | 2,708 | (306 | ) | (6,617 | ) | |||||||||
Pension benefit liabilities |
581 | | 1,162 | | ||||||||||||
Derivative financial instruments gain (loss) recognized |
403 | (71 | ) | 130 | (71 | ) | ||||||||||
Derivative financial instruments loss reclassified |
73 | 231 | 153 | 596 | ||||||||||||
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Total other comprehensive income (loss), net of tax |
(432 | ) | 2,868 | 1,139 | (6,092 | ) | ||||||||||
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Total comprehensive income |
$ | 12,789 | $ | 12,334 | $ | 26,254 | $ | 11,667 | ||||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Six Months Ended | ||||||||
December 29, | December 31, | |||||||
(In thousands) |
2012 | 2011 | ||||||
Operating Activities: |
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Net income |
$ | 25,115 | $ | 17,759 | ||||
Adjustments to reconcile net income to net cash provided by operating activities - |
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Depreciation and amortization |
16,066 | 17,153 | ||||||
Deferred income taxes |
5,588 | 5,257 | ||||||
Share-based compensation |
2,673 | 2,128 | ||||||
Changes in current operating items, exclusive of acquisitions |
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Accounts receivable and prepaid expenses |
(3,512 | ) | (3,679 | ) | ||||
Inventories |
6,038 | (13,312 | ) | |||||
Accounts payable and other accrued expenses |
(9,341 | ) | (1,011 | ) | ||||
Other |
(1,786 | ) | (6,516 | ) | ||||
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Net cash provided by operating activities |
40,841 | 17,779 | ||||||
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Investing Activities: |
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Property, plant and equipment additions, net |
(17,952 | ) | (18,025 | ) | ||||
Acquisition of business, net of cash |
(18,663 | ) | | |||||
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Net cash used for investing activities |
(36,615 | ) | (18,025 | ) | ||||
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Financing Activities: |
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Payments of long-term debt |
(184 | ) | (402 | ) | ||||
Proceeds from (Payments on) revolving credit facilities, net |
2,275 | (3,900 | ) | |||||
Cash dividends paid |
(7,447 | ) | (4,891 | ) | ||||
Net issuance of common stock, under stock option plans |
5,677 | 799 | ||||||
Purchase of common stock |
(734 | ) | (614 | ) | ||||
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Net cash used for financing activities |
(413 | ) | (9,008 | ) | ||||
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Increase (Decrease) in Cash and Cash Equivalents |
3,813 | (9,254 | ) | |||||
Effect of Exchange Rates on Cash |
298 | (123 | ) | |||||
Cash and Cash Equivalents: |
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Beginning of period |
19,604 | 22,974 | ||||||
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End of period |
$ | 23,715 | $ | 13,597 | ||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share data)
(Unaudited)
1. Basis of Presentation for Interim Financial Statements
The Condensed Consolidated Financial Statements of G&K Services, Inc. (the Company or G&K) as set forth in this quarterly report have been prepared pursuant to the rules and regulations of the U. S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. Our accounting policies are described in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (fiscal 2012). Management is responsible for the unaudited Condensed Consolidated Financial Statements included in this document. The Condensed Consolidated Financial Statements included in this document are unaudited but, in the opinion of management, include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of our financial position as of December 29, 2012, and the results of our operations for the three and six months ended December 29, 2012 and December 31, 2011 and our cash flows for the six months ended December 29, 2012 and December 31, 2011.
The results of operations for the three and six month periods ended December 29, 2012 and December 31, 2011 are not necessarily indicative of the results to be expected for the full year. We have evaluated subsequent events and have found none that require recognition or disclosure.
This Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and notes included in our fiscal 2012 Annual Report on Form 10-K.
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, and we are involved in the remediation of various properties which we own. 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 December 29, 2012 and June 30, 2012, we had reserves of approximately $1.5 million and $1.2 million, respectively, related to various pending environmental-related matters. There was approximately $0.5 million of expense for these matters for the three and six months ended December 29, 2012, respectively. There was no expense for these matters for the three and six month periods ended December 31, 2011.
Legal Matters
Recently, the United States Office of Federal Contract Compliance Programs, or OFCCP, has, as part of routine audits, commenced a review of certain of our employment practices. The OFCCP has issued a Notice of Violation to one of our facilities and audits of four other facilities, where the OFCCP claims there are similar alleged violations, are ongoing. We have been engaged in conversations with the OFCCP and believe that our practices are lawful and without bias. Currently, no proceeding with respect to this matter has been commenced, and, in any event, we do not believe that any resolution of this matter will have a material adverse effect on our results of operations or financial position.
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.
7
3. New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board issued new guidance on the presentation of other comprehensive income. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders equity and requires an entity to present either one continuous statement of net income and other comprehensive income or in two separate, but consecutive, statements. We adopted this guidance in the first quarter of fiscal 2013. Refer to the Condensed Consolidated Statements of Comprehensive Income.
4. Fair Value Measurements
Generally accepted accounting principles (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:
-quoted prices for similar assets or liabilities in active markets;
-quoted prices for identical or similar assets in non-active markets;
-inputs other than quoted prices that are observable for the asset or liability; and
-inputs that are derived principally from or corroborated by other observable market data.
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 do not have any level 3 assets or liabilities and we have not transferred any items between fair value levels during the first two quarters of fiscal years 2012 or 2013.
The following tables summarize the assets and liabilities measured at fair value on a recurring basis as of December 29, 2012 and June 30, 2012:
As of December 29, 2012 | ||||||||||||
Fair Value Measurements Using Inputs Considered as | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Other assets: |
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Money market mutual funds |
$ | 3.1 | $ | | $ | 3.1 | ||||||
Equity and fixed income mutual funds |
21.6 | | 21.6 | |||||||||
Cash surrender value of life insurance policies |
| 13.3 | 13.3 | |||||||||
Derivative financial instruments |
| 0.6 | 0.6 | |||||||||
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Total assets |
$ | 24.7 | $ | 13.9 | $ | 38.6 | ||||||
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Accrued expenses: |
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Derivative financial instruments |
$ | | $ | 1.6 | $ | 1.6 | ||||||
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Total liabilities |
$ | | $ | 1.6 | $ | 1.6 | ||||||
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8
As of June 30, 2012 | ||||||||||||
Fair Value Measurements Using Inputs Considered as | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Other assets: |
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Money market mutual funds |
$ | 3.2 | $ | | $ | 3.2 | ||||||
Equity and fixed income mutual funds |
18.9 | | 18.9 | |||||||||
Cash surrender value of life insurance policies |
| 13.0 | 13.0 | |||||||||
Derivative financial instruments |
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Total assets |
$ | 22.1 | $ | 13.0 | $ | 35.1 | ||||||
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Accrued expenses: |
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Derivative financial instruments |
$ | | $ | 1.4 | $ | 1.4 | ||||||
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Total liabilities |
$ | | $ | 1.4 | $ | 1.4 | ||||||
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The cash surrender value of life insurance policies are primarily investments established to fund the obligations of the companys non-qualified, non-contributory retirement plan. The money market, equity and fixed income mutual funds are investments established to fund the obligations of the companys non-qualified deferred compensation plan.
The following tables summarize the fair values of assets and liabilities that are recorded at historical cost as of December 29, 2012 and June 30, 2012:
As of December 29, 2012 | ||||||||||||
Fair Value Measurements Using Inputs Considered as | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Cash and cash equivalents |
$ | 23.7 | $ | | $ | 23.7 | ||||||
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Total assets |
$ | 23.7 | $ | | $ | 23.7 | ||||||
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Current maturities of long-term debt |
$ | | $ | 23.8 | $ | 23.8 | ||||||
Long-term debt, net of current maturities |
| 196.5 | 196.5 | |||||||||
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Total liabilities |
$ | | $ | 220.3 | $ | 220.3 | ||||||
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As of June 30, 2012 | ||||||||||||
Fair Value Measurements Using Inputs Considered as | ||||||||||||
Level 1 | Level 2 | Total | ||||||||||
Cash and cash equivalents |
$ | 19.6 | $ | | $ | 19.6 | ||||||
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Total assets |
$ | 19.6 | $ | | $ | 19.6 | ||||||
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Current maturities of long-term debt |
$ | | $ | 0.2 | $ | 0.2 | ||||||
Long-term debt, net of current maturities |
| 218.0 | 218.0 | |||||||||
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Total liabilities |
$ | | $ | 218.2 | $ | 218.2 | ||||||
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The fair value of our long-term debt approximates its book value and is based on the amount that would be paid to transfer the liability to a credit-equivalent market participant at the measurement date.
5. Derivative Financial Instruments
In the ordinary course of business, we are exposed to market risks. We utilize derivative financial instruments to manage interest rate risk and 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 or by locking in the benchmark interest rate on forecasted issuances of fixed rate debt without an exchange of the underlying principal amount. We designate interest rate swap contracts as cash flow hedges of the interest expense related to variable and fixed rate debt.
9
All derivative financial instruments are recognized at fair value and are recorded in the Other current assets or Accrued expenses line items in the Condensed Consolidated Balance Sheets.
For derivative financial instruments that are designated and qualify as cash flow hedges, the effective portion of the change in fair value on the derivative financial instrument is reported as a component of Accumulated other comprehensive income and reclassified into the Interest expense line item in the Condensed Consolidated Statements of Operations 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 do not have any derivative financial instruments that have been designated as either a fair value hedge, a hedge of a net investment in a foreign operation, or that are held for trading or speculative purposes. Cash flows associated with derivative financial instruments are classified in the same category as the cash flows hedged in the Condensed Consolidated Statements of Cash Flows.
Approximately 6.8% of our outstanding variable rate debt had its interest payments modified using interest rate swap contracts at December 29, 2012.
As of December 29, 2012 and June 30, 2012, we had $1.6 million and $1.4 million, respectively, of liabilities on interest rate swap contracts that are classified as Accrued expenses in the Condensed Consolidated Balance Sheets and $0.6 million and $0.0 million, respectively, of assets on interest rate swaps that are classified as Other assets in the Condensed Consolidated Balance Sheets. Of the $0.6 million net loss deferred in accumulated other comprehensive income as of December 29, 2012, a $0.4 million net loss is expected to be reclassified to interest expense in the next twelve months.
As of December 29, 2012 and June 30, 2012, all derivative financial instruments were designated as hedging instruments.
As of December 29, 2012, 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 $160.0 million notional amount, $145.0 million of which are forward starting interest rate swap contracts. Of the $160.0 million notional amount, $15.0 million matures in the next 12 months, $75.0 million matures in 25-36 months and $70.0 million matures after 60 months. The average rate on the $160.0 million of interest rate swap contracts was 1.73% as of December 29, 2012. These interest rate swap contracts are highly effective cash flow hedges and accordingly, gains or losses on any ineffectiveness were not material to any period.
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 Condensed Consolidated Statements of Operations for the three and six months ended December 29, 2012 and December 31, 2011 related to derivative financial instruments used in cash flow hedging relationships:
Relationship: |
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) |
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Three Months Ended | Six Months Ended | |||||||||||||||
December 29, 2012 |
December 31, 2011 |
December 29, 2012 |
December 31, 2011 |
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Interest rate swap contracts |
$ | 0.4 | $ | (0.1 | ) | $ | 0.1 | $ | (0.1 | ) | ||||||
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Total derivatives designated as cash flow hedging instruments |
$ | 0.4 | $ | (0.1 | ) | $ | 0.1 | $ | (0.1 | ) | ||||||
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10
Relationship: |
Statement of Operations Classification: |
Amount of Loss Reclassified From Accumulated Other Comprehensive Income (Loss) to Consolidated Statements of Operations |
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Three Months Ended | Six Months Ended | |||||||||||||||||
December 29, 2012 |
December 31, 2011 |
December 29, 2012 |
December 31, 2011 |
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Interest rate swap contracts |
Interest expense | $ | (0.1 | ) | $ | (0.2 | ) | $ | (0.2 | ) | $ | (0.6 | ) | |||||
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Total derivatives designated as cash flow hedging instruments |
$ | (0.1 | ) | $ | (0.2 | ) | $ | (0.2 | ) | $ | (0.6 | ) | ||||||
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6. Income Taxes
Our effective tax rate decreased to 37.6% in the six months ended December 29, 2012 from 39.1% in the six months ended December 31, 2011. The tax rate for the prior period was higher than the current period primarily due to the write-off of deferred tax assets associated with equity compensation in the prior period and a decrease in reserves for uncertain tax positions due to resolution of a tax contingency during the current period.
7. Earnings Per Share
Accounting Standards Codification (ASC) 260-10-45, Participating Securities and the Two-Class Method (ASC 260-10-45), addresses whether awards granted in unvested share-based payment transactions that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and therefore are included in computing earnings per share under the two-class method. Participating securities are securities that may participate in dividends with common stock and the two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and other shareholders, based on their respective rights to receive dividends. Certain restricted stock awards granted under our Equity Plans are considered participating securities as these awards receive non-forfeitable dividends at the same rate as common stock.
The computations of our basic and diluted earnings per share are set forth below:
Three Months Ended | Six Months Ended | |||||||||||||||
December 29, | December 31, | December 29, | December 31, | |||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Basic earnings per share: |
||||||||||||||||
Net income |
$ | 13.2 | $ | 9.5 | $ | 25.1 | $ | 17.8 | ||||||||
Less: Income allocable to participating securities |
(0.2 | ) | | (0.4 | ) | | ||||||||||
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Earnings available to common stockholders |
$ | 13.0 | $ | 9.5 | $ | 24.7 | $ | 17.8 | ||||||||
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Weighted average shares outstanding, basic |
18.8 | 18.5 | 18.8 | 18.5 | ||||||||||||
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Earnings per share, basic |
$ | 0.69 | $ | 0.51 | $ | 1.32 | $ | 0.96 | ||||||||
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Diluted earnings per share: |
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Earnings available to common stockholders |
$ | 13.0 | $ | 9.5 | $ | 24.7 | $ | 17.8 | ||||||||
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Weighted average shares outstanding, basic |
18.8 | 18.5 | 18.8 | 18.5 | ||||||||||||
Weighted average effect of non-vested restricted stock grants and assumed exercise of stock options |
0.3 | 0.2 | 0.2 | 0.1 | ||||||||||||
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Weighted average shares outstanding, diluted |
19.1 | 18.7 | 19.0 | 18.6 | ||||||||||||
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Earnings per share, diluted |
$ | 0.68 | $ | 0.51 | $ | 1.30 | $ | 0.95 | ||||||||
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11
We excluded potential common shares related to our outstanding equity compensation grants of 0.6 million and 1.3 million for the three months ended December 29, 2012 and December 31, 2011, respectively, and 0.5 million and 1.3 million for the six months ended December 29, 2012 and December 31, 2011, respectively, from the computation of diluted earnings per share. Inclusion of these shares would have been anti-dilutive.
8. Inventories
The components of inventory as of December 29, 2012 and June 30, 2012 are as follows:
December 29, 2012 |
June 30, 2012 |
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Raw Materials |
$ | 12.4 | $ | 14.8 | ||||
Work in Process |
1.7 | 1.6 | ||||||
Finished Goods |
56.4 | 57.9 | ||||||
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New Goods |
70.5 | 74.3 | ||||||
Merchandise in Service |
103.9 | 103.9 | ||||||
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Total Inventories |
$ | 174.4 | $ | 178.2 | ||||
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9. Goodwill and Intangible Assets
Goodwill by segment is as follows:
United States | Canada | Total | ||||||||||
Balance as of June 30, 2012 |
$ | 259.3 | $ | 66.0 | $ | 325.3 | ||||||
Acquisitions |
10.0 | | 10.0 | |||||||||
Foreign currency translation and other |
(0.1 | ) | 1.5 | 1.4 | ||||||||
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Balance as of December 29, 2012 |
$ | 269.2 | $ | 67.5 | $ | 336.7 | ||||||
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The goodwill within the United States segment has been reduced by $107.0 million of accumulated impairment losses. There were no impairment losses recorded in the three and six month periods ended December 29, 2012 and December 31, 2011.
Other intangible assets, which are included in Other assets on the Condensed Consolidated Balance Sheets, are as follows:
December 29, 2012 |
June 30, 2012 |
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Customer contracts |
$ | 118.1 | $ | 114.9 | ||||
Accumulated amortization |
(105.0 | ) | (102.5 | ) | ||||
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Net Customer Contracts |
$ | 13.1 | $ | 12.4 | ||||
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The customer contracts include the combined value of the written service agreements and the related customer relationship. Customer contracts are amortized over a weighted average life of approximately 12 years.
Amortization expense was $2.2 million and $2.5 million for the six months ended December 29, 2012 and December 31, 2011, respectively. Estimated amortization expense for each of the next five fiscal years based on the intangible assets as of December 29, 2012 is as follows:
2013 remaining |
$ | 1.8 | ||
2014 |
2.9 | |||
2015 |
2.2 | |||
2016 |
1.6 | |||
2017 |
1.4 | |||
2018 |
0.6 |
12
10. Long-Term Debt
Debt as of December 29, 2012 and June 30, 2012 includes the following:
December 29, 2012 | June 30, 2012 | |||||||
Borrowings under unsecured revolving credit facility |
$ | 121.5 | $ | 114.4 | ||||
Borrowings under unsecured variable rate notes |
75.0 | 75.0 | ||||||
Borrowings under secured variable rate loans |
23.8 | 28.6 | ||||||
Other debt arrangements including capital leases |
| 0.2 | ||||||
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220.3 | 218.2 | |||||||
Less current maturities |
(23.8 | ) | (0.2 | ) | ||||
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Total long-term debt |
$ | 196.5 | $ | 218.0 | ||||
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We have a $250.0 million, five-year unsecured revolving credit facility with a syndicate of banks, which expires on March 7, 2017. Borrowings in U.S. dollars under this credit facility, at our election, bear interest at (a) adjusted LIBOR for specified interest periods plus a margin, which can range from 1.00% to 2.00%, 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 (a) the Canadian deposit offered rate plus 0.10% for specified interest periods plus a margin determined with reference to our consolidated leverage ratio or (b) a floating rate equal to the greater of (i) the Canadian prime rate and (ii) the Canadian deposit offered rate for a one month interest period plus 1.00%, plus, in each case, a margin determined with reference to our consolidated leverage ratio.
As of December 29, 2012, borrowings outstanding under the revolving credit facility were $121.5 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 December 29, 2012, letters of credit outstanding against the revolver totaled $0.6 million and primarily related 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.
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 December 29, 2012:
Required | Actual | |||||||
Maximum Leverage Ratio (Debt/EBITDA) |
3.50 | 2.14 | ||||||
Minimum Interest Coverage Ratio (EBITDA/Interest Expense) |
3.00 | 23.23 | ||||||
Minimum Net Worth |
$ | 379.6 | $ | 429.5 |
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 December 29, 2012 bear interest at a weighted average all-in rate of 1.74%. 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 December 29, 2012 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 December 29, 2012, the outstanding balance of the notes was $75.0 million at an all-in rate of 0.96%.
13
We maintain a $50.0 million accounts receivable securitization facility, which expires on September 27, 2013. Under the terms of the facility, we pay interest at a rate per annum equal to a margin of 0.76%, plus LIBOR. The facility is subject to customary fees for the issuance of letters of credit and any unused portion of the facility. As is customary with transactions of this nature, our eligible accounts receivable are sold to a consolidated subsidiary. As of December 29, 2012, there was $23.8 million outstanding under this loan agreement at an all-in interest rate of 0.97% and $26.2 million of letters of credit were outstanding, primarily related to our property and casualty insurance programs.
See Note 5, Derivative Financial Instruments of the Notes to the Condensed Consolidated Financial Statements for details of our interest rate swap and hedging activities related to our outstanding debt.
11. 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 Condensed Consolidated 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 experience. Forfeiture rates are reviewed 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 $1.1 million and $0.9 million for the three months ended December 29, 2012 and December 31, 2011 and $2.7 million and $2.1 million for the six months ended December 29, 2012 and December 31, 2011, respectively. The number of options exercised and restricted stock vested since June 30, 2012, was 0.3 million shares.
On August 23, 2012, our Chief Executive Officer was granted a performance based restricted stock award (the Performance Award). The Performance Award has both a financial performance component and a service component. The Performance Award has a target level of 100,000 restricted shares, a maximum award of 150,000 restricted shares and a minimum award of 50,000 restricted shares, subject to attainment of financial performance goals and service conditions. Since the company has not yet achieved the threshold performance amount, none of these shares are considered outstanding in the diluted earnings per share calculation as of December 29, 2012.
12. Employee Benefit Plans
Defined Benefit Pension Plan
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 December 29, 2012 and December 31, 2011 are as follows:
Pension Plan | Supplemental Executive Retirement Plan |
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Three Months Ended | Three Months Ended | |||||||||||||||
December 29, 2012 |
December 31, 2011 |
December 29, 2012 |
December 31, 2011 |
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Interest cost |
$ | 0.9 | $ | 0.9 | $ | 0.1 | $ | 0.2 | ||||||||
Expected return on assets |
(1.1 | ) | (1.0 | ) | | | ||||||||||
Amortization of net loss |
0.9 | 0.4 | 0.1 | | ||||||||||||
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Net periodic pension cost |
$ | 0.7 | $ | 0.3 | $ | 0.2 | $ | 0.2 | ||||||||
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14
The components of net periodic pension cost for these plans for the six months ended December 29, 2012 and December 31, 2011 are as follows:
Pension Plan | Supplemental Executive Retirement Plan |
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Six Months Ended | Six Months Ended | |||||||||||||||
December 29, 2012 |
December 31, 2011 |
December 29, 2012 |
December 31, 2011 |
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Interest cost |
$ | 1.8 | $ | 1.9 | $ | 0.3 | $ | 0.4 | ||||||||
Expected return on assets |
(2.1 | ) | (2.0 | ) | | | ||||||||||
Amortization of net loss |
1.7 | 0.8 | 0.2 | | ||||||||||||
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Net periodic pension cost |
$ | 1.4 | $ | 0.7 | $ | 0.5 | $ | 0.4 | ||||||||
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During fiscal year 2013, we contributed approximately $3.5 million to the pension plan.
Multi-Employer Pension Plans
We participate in a number of union sponsored, collectively bargained multi-employer pension plans (MEPPs). We record the required cash contributions to the MEPPs as an expense in the period incurred and a liability is recognized for any contributions due and unpaid, consistent with the accounting for defined contribution plans. In addition, we are responsible for our proportional share of any unfunded vested benefits related to the MEPPs. However, under applicable accounting rules, we are not required to record a liability until we withdraw from the plan or when it becomes probable that a withdrawal will occur.
Central States MEPP
In the third quarter of fiscal year 2012, we concluded negotiations with a union to discontinue our participation in the Central States Southeast and Southwest Areas Pension Fund (Central States MEPP) for two of our locations. In addition, we also closed two redundant branch facilities that participated in the Central States MEPP. In the first quarter of fiscal 2013, we successfully concluded negotiations to discontinue participation at two additional locations. We continue to participate in the Central States MEPP at one remaining location, although, subject to our good faith bargaining obligations, we believe it is probable that we will also withdraw from the Central States MEPP at this location, thus completely discontinuing our participation in the Central States MEPP.
Employers accounting for MEPPs (ASC 715-80) provides that a withdrawal liability should be recorded if circumstances that give rise to an obligation become probable and estimable. As a result of the actions noted above, in the third quarter of fiscal year 2012, we recorded a pre-tax charge of $24.0 million. This charge included the estimated discounted actuarial value of the total withdrawal liability, incentives for union participants and other related costs that had been incurred. We expect to pay the withdrawal liability over a period of 20 years. The amount of the withdrawal liability recorded is based on the best information available and is subject to change based on revised MEPP information received periodically from the union sponsors, the discount rate used to calculate the liability, and other factors. These potential changes could have a material impact on our results of operations and financial condition.
Other MEPPs
A partial or full withdrawal from a MEPP may be triggered by circumstances beyond our control. As evidenced by the negotiations above, we could also trigger the liability by successfully negotiating with a union to discontinue participation in the MEPP. If a future withdrawal from a plan occurs, we will record our proportional share of any unfunded vested benefits in the period in which the withdrawal occurs.
The ultimate amount of the withdrawal liability assessed by the MEPPs is impacted by a number of factors, including, among other things, investment returns, benefit levels, interest rates, financial difficulty of other participating employers in the plan and our continued participation with other employers in the MEPPs, each of which could impact the ultimate withdrawal liability.
We continue to actively participate in several other MEPPs, for which we have not recorded a withdrawal liability. Based upon the most recent plan data available from the trustees managing these MEPPs, our share of the undiscounted, unfunded vested benefits for these MEPPs is estimated to be $3.0 million to $4.0 million as of December 29, 2012.
15
13. 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 uniform and facility services programs. During the three and six months ended December 29, 2012, and for the same periods of the prior fiscal year, no single customers transactions accounted for more than 2.0% of our total revenues. Substantially all of our customers are in the United States and Canada.
The income from operations for each segment includes the impact of an intercompany management fee assessed by the United States segment to the Canada segment and is self-eliminated in the total income from operations below. This intercompany management fee was approximately $1.9 million and $2.0 million for the three months ended December 29, 2012 and December 31, 2011, respectively and $3.8 million and $4.0 million for the six months ended December 29, 2012 and December 31, 2011, respectively.
We evaluate performance based on income from operations. Financial information by segment for the three and six month periods ended December 29, 2012 and December 31, 2011 is as follows:
For the Three Months Ended |
United States |
Canada | Elimination | Total | ||||||||||||
Second Quarter Fiscal Year 2013: |
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Revenues |
$ | 189.0 | $ | 40.2 | $ | | $ | 229.2 | ||||||||
Income from operations |
18.1 | 4.8 | | 22.9 | ||||||||||||
Total assets |
830.4 | 159.6 | (87.9 | ) | 902.1 | |||||||||||
Depreciation and amortization expense |
6.7 | 1.3 | | 8.0 | ||||||||||||
Second Quarter Fiscal Year 2012: |
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Revenues |
$ | 179.5 | $ | 37.6 | $ | | $ | 217.1 | ||||||||
Income from operations |
12.9 | 4.1 | | 17.0 | ||||||||||||
Total assets |
796.4 | 143.9 | (80.1 | ) | 860.2 | |||||||||||
Depreciation and amortization expense |
7.1 | 1.3 | | 8.4 |
For the Six Months Ended |
United States |
Canada | Elimination | Total | ||||||||||||
Fiscal Year 2013: |
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Revenues |
$ | 374.4 | $ | 77.2 | $ | | $ | 451.6 | ||||||||
Income from operations |
34.3 | 8.1 | | 42.4 | ||||||||||||
Total assets |
830.4 | 159.6 | (87.9 | ) | 902.1 | |||||||||||
Depreciation and amortization expense |
13.5 | 2.6 | | 16.1 | ||||||||||||
Fiscal Year 2012: |
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Revenues |
$ | 353.0 | $ | 73.8 | $ | | $ | 426.8 | ||||||||
Income from operations |
25.4 | 7.0 | | 32.4 | ||||||||||||
Total assets |
796.4 | 143.9 | (80.1 | ) | 860.2 | |||||||||||
Depreciation and amortization expense |
14.6 | 2.6 | | 17.2 |
14. Share Repurchase
As of December 29, 2012, 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 had no repurchases for the three and six months ended December 29, 2012 and December 31, 2011. As of December 29, 2012, we had approximately $57.9 million remaining under this authorization.
16
15. Acquisitions
In the second quarter of fiscal 2013, we completed an acquisition in our rental operations business. The results of the acquired business have been included in our Condensed Consolidated Financial Statements since the date of acquisition. The acquisition extends our rental operations footprint into five of the top 100 North American markets which we did not previously serve. The acquisition-date fair value of the consideration transferred totaled $18.6 million, which consisted entirely of cash.
The following table summarizes the estimated fair values of the assets acquired at the acquisition date. We are in the process of obtaining third-party valuations of certain intangible and tangible assets; thus, the provisional measurements of intangible assets, goodwill and certain tangible assets are subject to change.
Accounts receivable and inventory |
$ | 2.3 | ||
Property, plant and equipment |
3.5 | |||
Customer lists |
2.8 | |||
Goodwill |
10.0 | |||
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Net assets acquired |
$ | 18.6 | ||
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The $2.8 million that was assigned to customer lists is subject to a weighted-average useful life of approximately 8 years. The $10.0 million of goodwill has been assigned to the U.S. Rental operations reporting unit within the United States operating segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of the acquired business. All of the goodwill is expected to be deductible for income tax purposes.
The pro forma effects of this acquisition, had it been acquired at the beginning of the fiscal year, was not material. The amount of revenue related to the acquired business that has been included in our Condensed Consolidated Statements of Operations for the three and six months ended December 29, 2012 was approximately $1.0 million. The amount of earnings, after deducting integration costs and the related interest on the additional borrowings, was not material during the period.
17
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Overview
G&K Services, Inc., founded in 1902 and headquartered in Minnetonka, Minnesota, is a service-focused market leader of branded uniform and facility services programs. We deliver value to our customers by enhancing their image and brand, and by promoting workplace safety, security and cleanliness. We accomplish this by providing high quality branded work apparel programs, and a variety of facility products and services including floor mats, towels, mops and restroom hygiene products.
Over the past three years we have made broad-based improvements to our business, by pursuing a strategy which included four key elements: focusing on customer satisfaction; improving day-to-day execution; increasing our focus on cost management; and addressing underperforming locations and assets. Executing this strategy has led to significant improvements in our financial results. We have delivered solid organic revenue growth, expanded operating margins and produced strong cash flows.
We believe it is healthy for a company to regularly evaluate and adjust, as appropriate, its strategy. In fiscal 2013, we modified our strategy, building on the improvements made over the past three years to drive further performance gains. Our approach has four parts:
1. | Keep our customer promise |
2. | Improve how we target customers |
3. | Drive operational excellence |
4. | Strengthen our high performing team |
To measure the progress of our strategy we have established two primary financial objectives, which include achieving operating income margin of 10% and return on invested capital (ROIC) of 10%. We define ROIC as adjusted net operating income after tax, divided by the sum of total debt less cash plus stockholders equity. Our goal is to achieve these two financial targets by the end of our fiscal year 2014. In the second quarter, we achieved the first of these two targets by achieving a 10% operating income margin. We are also focused on maximizing free cash flow, which we define as net cash provided by operating activities less investments in property, plant and equipment.
Our industry continues to consolidate as many family-owned, local operators and regional companies have been acquired by larger providers. Historically, we have participated in this consolidation with an acquisition strategy focused on expanding our geographic presence and/or expanding our local market share in order to further leverage our existing production facilities. We remain active in evaluating quality acquisitions that would strengthen our business. During the three months ended December 29, 2012 we made one small acquisition. The pro forma effect of this acquisition, had it been acquired at the beginning of each fiscal year, was not material. The total purchase consideration was $18.6 million. The total purchase price exceeded the estimated fair value of assets acquired and liabilities assumed by $10.0 million.
Over the past year our results have been adversely impacted by rising prices for commodities, especially cotton, polyester and crude oil. This has contributed to the significant increase in merchandise costs. We expect merchandise costs as a percentage of rental revenue to gradually moderate throughout fiscal year 2013.
Critical Accounting Policies
Our significant accounting policies are described in Note 1, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. The accounting policies used in preparing our interim fiscal year 2013 Condensed Consolidated Financial Statements are the same as those described in our Annual Report.
The discussion of the financial condition and results of operations are based upon the Condensed Consolidated Financial Statements, which have been prepared in conformity with United States generally accepted accounting principles (GAAP). As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.
18
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 estimates. We believe our critical accounting policies are those related to:
| Revenue recognition |
| Employee benefit plans |
| Income taxes |
| Share based payments |
| Derivative financial instruments |
| Inventories |
| Goodwill and intangible assets |
Results of Operations
The percentage relationships to revenues of certain income and expense items for the three and six month periods ended December 29, 2012 and December 31, 2011, and the percentage changes in these income and expense items between periods are presented in the following table:
Three Months Ended |
Six Months Ended |
Percentage Change |
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December 29, 2012 |
December 31, 2011 |
December 29, 2012 |
December 31, 2011 |
Three Months FY 2013 vs. FY 2012 |
Six Months FY 2013 vs. FY 2012 |
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Revenues: |
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Rental operations |
90.7 | % | 90.7 | % | 91.1 | % | 91.6 | % | 5.6 | % | 5.2 | % | ||||||||||||
Direct sales |
9.3 | 9.3 | 8.9 | 8.4 | 5.4 | 12.1 | ||||||||||||||||||
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Total revenues |
100.0 | 100.0 | 100.0 | 100.0 | 5.6 | 5.8 | ||||||||||||||||||
Expenses: |
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Cost of rental operations |
68.2 | 69.3 | 68.2 | 69.1 | 4.0 | 3.9 | ||||||||||||||||||
Cost of direct sales |
72.9 | 80.3 | 74.2 | 78.3 | (4.3 | ) | 6.1 | |||||||||||||||||
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Total cost of sales |
68.6 | 70.3 | 68.7 | 69.8 | 3.1 | 4.1 | ||||||||||||||||||
Selling and administrative |
21.4 | 21.9 | 21.9 | 22.6 | 3.1 | 2.7 | ||||||||||||||||||
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Income from operations |
10.0 | 7.8 | 9.4 | 7.6 | 34.8 | 30.8 | ||||||||||||||||||
Interest expense |
0.5 | 0.7 | 0.5 | 0.8 | (30.9 | ) | (34.1 | ) | ||||||||||||||||
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Income before income taxes |
9.5 | 7.1 | 8.9 | 6.8 | 41.7 | 38.0 | ||||||||||||||||||
Provision for income taxes |
3.7 | 2.7 | 3.4 | 2.7 | 44.9 | 32.7 | ||||||||||||||||||
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Net income |
5.8 | % | 4.4 | % | 5.6 | % | 4.2 | % | 39.7 | % | 41.4 | % | ||||||||||||
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|
Three months ended December 29, 2012 compared to three months ended December 31, 2011
Revenues. Total revenue in the second quarter of fiscal 2013 increased 5.6% to $229.2 million from $217.1 million in the second quarter of fiscal 2012.
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Rental revenue increased $11.0 million, or 5.6% in the second quarter of fiscal 2013 compared to the same period of the prior fiscal year. Our organic rental growth rate was 4.5% compared to 6.0% in the same period of the prior fiscal year. The decline in the organic growth rate from the prior year was primarily due to a decrease in new account sales and a slight deterioration in the number of uniform wearers at existing customers, offset by continued improved execution related to merchandise recovery billings, uniform preparation services, and increased customer usage of non-garment products and pricing. Our organic rental growth rate is calculated using rental revenue, adjusted to exclude the impact of foreign currency exchange rate changes, divestitures and acquisitions compared to prior-period results. We believe that the organic rental revenue reflects the growth of our existing rental business and is, therefore, useful in analyzing our financial condition and results of operations. The impact of foreign currency exchange rates added approximately 0.6% to our rental operations growth rate, while acquisitions added approximately 0.5%.
Direct sale revenue increased 5.4% to $21.3 million in the second quarter of fiscal 2013 compared to $20.2 million in the same period of fiscal 2012. The increase in direct sales was primarily driven by additional uniform purchases by existing customers.
Cost of Rental. Cost of rental operations, which includes merchandise, production and delivery expenses, increased 4.0% to $141.8 million in the second quarter of fiscal 2013 from $136.4 million in the same period of fiscal 2012. As a percentage of rental revenue, our gross margin from rental operations increased to 31.8% in the second quarter of fiscal 2013 from 30.7% in the same period of fiscal 2012. The improvement in rental gross margin was primarily due to the favorable impact of fixed costs absorbed over a higher revenue base, continued improvements in production and delivery productivity, lower depreciation expense and lower natural gas and health insurance costs. These favorable variances were partially offset by a continued and expected increase in merchandise costs and higher workers compensation costs. The increase in merchandise costs was driven by increased raw material costs, increased merchandise requirements to support new account growth and new customer additions, and a mix shift to higher cost specialty garments.
Cost of Direct Sales. Cost of direct sales decreased to $15.6 million in the second quarter of fiscal 2013 from $16.3 million in the same period of fiscal 2012. Gross margin from direct sales increased to 27.1% in the second quarter of fiscal 2013 from 19.7% in the same quarter of fiscal 2012. The lower margin in the prior year period was due to higher product costs, increased mix of lower margin business and program launch costs associated with several new accounts. The current period included improvements resulting from increased sales of higher margin products and lower distribution costs due to improved productivity.
Selling and Administrative. Selling and administrative expenses increased 3.1% to $49.0 million in the second quarter of fiscal 2013 from $47.5 million in the same period of fiscal 2012. As a percentage of total revenues, selling and administrative expenses decreased to 21.4% in the second quarter of fiscal 2013 from 21.9% in the second quarter of fiscal 2012. The decrease was due to effective cost control as we leveraged fixed costs over a higher revenue base, a decrease in depreciation and amortization expense and lower sales commissions. These improvements were partially offset by higher incentive compensation expense, additional environmental remediation costs and higher bad debt expense.
Interest Expense. Interest expense was $1.1 million in the second quarter of fiscal 2013, a decrease from the $1.6 million reported in the same period of fiscal 2012. The decreased interest expense was due to lower average interest rates and a reduction in the amortization of debt closing costs resulting from the renewal of our unsecured revolving credit facility and the maturity of certain interest rate swap agreements. These decreases were partially offset by higher average debt balances.
Provision for Income Taxes. Our effective tax rate increased to 39.2% in the second quarter of fiscal 2013 from 38.3% in the same period of fiscal 2012. The current period tax rate was higher than the prior period tax rate primarily due to higher tax expense on foreign earnings in the current period.
Six months ended December 29, 2012 compared to six months ended December 31, 2011
Revenues. Total revenue for the first six months of fiscal 2013 increased 5.8% to $451.6 million compared to $426.8 million for the same period in the prior fiscal year.
Rental revenue increased $20.5 million, or 5.2% in the first six months of fiscal 2013 compared to the same period of the prior fiscal year. Our organic rental growth rate was 5.0% compared to 5.5% in the same period of the prior fiscal year. The decline in the organic growth rate from the prior year was primarily due to a decrease in new account sales and a slight deterioration in the number of uniform wearers at existing customers, offset by continued improved execution related to merchandise recovery billings, uniform preparation services, and increased customer usage of non-garment products and pricing. The impact of foreign currency exchange rates added approximately 0.2% to our rental operations growth rate, while acquisitions added approximately 0.3%.
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Direct sale revenue increased 12.1% to $40.3 million in the first six months of fiscal 2013 compared to $36.0 million in the same period of fiscal 2012. This increase was primarily driven by several large new accounts and additional uniform purchases by existing customers.
Cost of Rental. Cost of rental operations, which includes merchandise, production and delivery expenses, increased 3.9% to $280.4 million in the first six months of fiscal 2013 from $269.9 million in the same period of fiscal 2012. As a percentage of rental revenue, our gross margin from rental sales increased to 31.8% in the first six months of fiscal 2013 from 30.9% in the same period of fiscal 2012. The improvement in rental gross margin was primarily due to the favorable impact of fixed costs absorbed over a higher revenue base, continued improvements in production and delivery productivity, lower depreciation expense and lower natural gas and health insurance costs. These favorable variances were partially offset by a continued and expected increase in merchandise costs and higher workers compensation costs. The increase in merchandise costs was driven by increased raw material costs, increased merchandise requirements to support new account growth and new customer additions, and a mix shift to higher cost specialty garments.
Cost of Direct Sales. Cost of direct sales increased to $29.9 million in the first six months of fiscal 2013 from $28.2 million in the same period of fiscal 2012. Gross margin from direct sales increased to 25.8% in the first six months of fiscal 2013 from 21.7% reported in the same period of fiscal 2012. The lower margin in the prior year period was due to higher product costs, increased mix of lower margin business and program launch costs associated with several new accounts. The current period benefited from increased sales of higher margin products and lower distribution costs due to improved productivity.
Selling and Administrative. Selling and administrative expenses increased 2.7% to $98.9 million in the first six months of fiscal 2013 from $96.3 million in the same period of fiscal 2012. As a percentage of total revenues, selling and administrative expenses decreased to 21.9% in the first six months of fiscal 2013 from 22.6% in the same period of fiscal 2012. The decrease was due to effective cost control as we leveraged fixed costs over a higher revenue base, a decrease in depreciation and amortization expense, lower sales commissions and lower group health insurance costs. These improvements were partially offset by higher incentive compensation expense and higher bad debt expense.
Interest Expense. Interest expense was $2.1 million in the first six months of fiscal 2013, a decrease from the $3.3 million in the same period of fiscal 2012. The decreased interest expense was due to lower average interest rates and a reduction in the amortization of debt closing costs resulting from the renewal of our unsecured revolving credit facility and the maturity of certain interest rate swap agreements. These decreases were partially offset by higher average debt balances.
Provision for Income Taxes. Our effective tax rate decreased to 37.6% in the six months ended December 29, 2012 from 39.1% in the six months ended December 31, 2011. The tax rate for the prior period was higher than the current period primarily due to the write-off of deferred tax assets associated with equity compensation in the prior period and a decrease in reserves for uncertain tax positions due to resolution of a tax contingency during the current period.
Liquidity, Capital Resources and Financial Condition
Our primary sources of cash are net cash flows from operations and borrowings under our debt arrangements. Primary uses of cash are working capital needs, payments on indebtedness, capital expenditures, acquisitions, dividends and general corporate purposes.
Working capital at December 29, 2012 was $173.1 million, a $10.1 million decrease from $183.2 million at June 30, 2012. The decrease in working capital is primarily due to the reclassification of the debt outstanding under our accounts receivable securitization facility to current from long-term and a decrease in new goods inventory, partially offset by an increase in accounts receivable due to increased revenue and a slight deterioration in the days sales outstanding and a decrease due to the timing of accounts payable disbursements.
Operating Activities. Net cash provided by operating activities was $40.8 million in the first six months of fiscal 2013 and $17.8 million in the same period of fiscal 2012. The increase was due to improvements in working capital, higher net income and lower contributions to our pension plan, partially offset by higher tax payments in the current year.
Investing Activities. Net cash used for investing activities was $36.6 million in the first six months of fiscal 2013 and $18.0 million in the same period of fiscal 2012. The increase was due to an acquisition in the second quarter of fiscal 2013, which totaled $18.6 million.
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Financing Activities. Cash used for financing activities was $0.4 million in the first six months of fiscal 2013 compared to $9.0 million in fiscal 2012. The decreased use of cash was primarily due to the acquisition in the second quarter of fiscal 2013, partially offset by higher debt payments as a result of stronger cash flow. During the first six months of fiscal 2013 and 2012, we paid dividends of $7.4 million and $4.9 million, respectively.
We have a $250.0 million, five-year unsecured revolving credit facility with a syndicate of banks, which expires on March 7, 2017. Borrowings in U.S. dollars under this credit facility, 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 1.00% to 2.00%, 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 (a) the Canadian deposit offered rate plus 0.10% for specified interest periods plus a margin determined with reference to our consolidated leverage ratio or (b) a floating rate equal to the greater of (i) the Canadian prime rate and (ii) the Canadian deposit offered rate for a one month interest period plus 1.00%, plus, in each case, a margin determined with reference to our consolidated leverage ratio.
As of December 29, 2012, borrowings outstanding under the revolving credit facility were $121.5 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 December 29, 2012, letters of credit outstanding against the revolver totaled $0.6 million and primarily related 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.
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 December 29, 2012:
Required | Actual | |||||||
Maximum Leverage Ratio (Debt/EBITDA) |
3.50 | 2.14 | ||||||
Minimum Interest Coverage Ratio (EBITDA/Interest Expense) |
3.00 | 23.23 | ||||||
Minimum Net Worth |
$ | 379.6 | $ | 429.5 |
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 December 29, 2012 bear interest at a weighted average all-in rate of 1.74%. 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 December 29, 2012 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 December 29, 2012, the outstanding balance of the notes was $75.0 million at an all-in rate of 0.96%.
We maintain a $50.0 million accounts receivable securitization facility, which expires on September 27, 2013. Under the terms of the facility, we pay interest at a rate per annum equal to a margin of 0.76%, plus LIBOR. The facility is subject to customary fees for the issuance of letters of credit and any unused portion of the facility. As is customary with transactions of this nature, our eligible accounts receivable are sold to a consolidated subsidiary. As of December 29, 2012, there was $23.8 million outstanding under this loan agreement at an all-in interest rate of 0.97% and $26.2 million of letters of credit were outstanding, primarily related to our property and casualty insurance programs.
See Note 5, Derivative Financial Instruments of the Notes to the Condensed Consolidated Financial Statements for details of our interest rate swap and hedging activities related to our outstanding debt.
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Cash Obligations. Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under the revolving credit facility, capital lease obligations and rent payments required under operating leases with initial or remaining terms in excess of one year.
At December 29, 2012, we had approximately $127.9 million of available capacity under our revolving and accounts receivable credit facilities. Our revolving credit facility contributes all of the liquidity as our accounts receivable securitization facility is fully utilized. We anticipate that cash flows from operations and our available capacity under our revolving credit facility will be sufficient to satisfy our cash commitments, including payment of the $23.8 million of debt due in the next 12 months, and capital requirements for fiscal 2013. We estimate that capital expenditures in fiscal 2013 will be approximately $35-$40 million.
Off Balance Sheet Arrangements
At December 29, 2012, we had $26.8 million of stand-by letters of credit that were issued and outstanding, primarily in connection with our property and casualty insurance programs. No amounts have been drawn upon these letters of credit.
Pension Obligations
Pension expense is recognized on an accrual basis over the employees approximate service periods. Pension expense is generally independent of funding decisions or requirements. We recognized expense for our defined benefit pension plan of $0.7 million and $0.3 million in the second quarter of fiscal 2013 and 2012, respectively. At June 30, 2012, the fair value of our pension plan assets totaled $53.8 million.
Effective January 1, 2007, we froze our defined benefit pension plan and related supplemental executive retirement plan. Future growth in benefits has not occurred beyond this date.
Multi-Employer Pension Plans
We participate in a number of union sponsored, collectively bargained multi-employer pension plans (MEPPs). We record the required cash contributions to the MEPPs as an expense in the period incurred and a liability is recognized for any contributions due and unpaid, consistent with the accounting for defined contribution plans. In addition, we are responsible for our proportional share of any unfunded vested benefits related to the MEPPs. However, under applicable accounting rules, we are not required to record a liability until we withdraw from the plan or when it becomes probable that a withdrawal will occur.
Central States MEPP
In the third quarter of fiscal year 2012, we concluded negotiations with a union to discontinue our participation in the Central States Southeast and Southwest Areas Pension Fund (Central States MEPP) for two of our locations. In addition, we also closed two redundant branch facilities that participated in the Central States MEPP. In the first quarter of fiscal 2013, we successfully concluded negotiations to discontinue participation at two additional locations. We continue to participate in the Central States MEPP at one remaining location, although, subject to our good faith bargaining obligations, we believe it is probable that we will also withdraw from the Central States MEPP at this location, thus completely discontinuing our participation in the Central States MEPP.
Employers accounting for MEPPs (ASC 715-80) provides that a withdrawal liability should be recorded if circumstances that give rise to an obligation become probable and estimable. As a result of the actions noted above, in the third quarter of fiscal year 2012, we recorded a pre-tax charge of $24.0 million. This charge included the estimated discounted actuarial value of the total withdrawal liability, incentives for union participants and other related costs that had been incurred. We expect to pay the withdrawal liability over a period of 20 years. The amount of the withdrawal liability recorded is based on the best information available and is subject to change based on revised MEPP information received periodically from the union sponsors, the discount rate used to calculate the liability, and other factors. These potential changes could have a material impact on our results of operations and financial condition.
Other MEPPs
A partial or full withdrawal from a MEPP may be triggered by circumstances beyond our control. As evidenced by the negotiations above, we could also trigger the liability by successfully negotiating with a union to discontinue participation in the MEPP. If a future withdrawal from a plan occurs, we will record our proportional share of any unfunded vested benefits in the period in which the withdrawal occurs.
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The ultimate amount of the withdrawal liability assessed by the MEPPs is impacted by a number of factors, including, among other things, investment returns, benefit levels, interest rates, financial difficulty of other participating employers in the plan and our continued participation with other employers in the MEPPs, each of which could impact the ultimate withdrawal liability.
We continue to actively participate in several other MEPPs, for which we have not recorded a withdrawal liability. Based upon the most recent plan data available from the trustees managing these MEPPs, our share of the undiscounted, unfunded vested benefits for these MEPPs is estimated to be $3.0 million to $4.0 million as of December 29, 2012.
Litigation
We are involved in a variety of legal actions relating to personal injury, employment, environmental and other legal matters that arise in the normal course of business. In addition, we are party to certain additional legal matters described in Part II Item 1. Legal Proceedings of this report.
Cautionary Statements Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. Forward-looking statements may be identified by words such as estimates, anticipates, projects, plans, expects, intends, believes, seeks, could, should, may and will or the negative versions thereof and similar expressions and by the context in which they are used. Such statements are based upon our current expectations and speak only as of the date made. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ from those set forth in or implied by this Quarterly Report on Form 10-Q. Factors that might cause such a difference include, but are not limited to, the possibility of greater than anticipated operating costs, lower sales volumes, the performance and costs of integration of acquisitions or assumption of unknown liabilities in connection with acquisitions, fluctuations in costs of materials and labor, costs and possible effects of union organizing or other union activities, strikes, loss of key management, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, failure to achieve and maintain effective internal controls for financial reporting required by the Sarbanes-Oxley Act of 2002, the initiation or outcome of litigation or government investigation, higher than assumed sourcing or distribution costs of products, the disruption of operations from catastrophic events, disruptions in capital markets, the liquidity of counterparties in financial transactions, changes in federal and state tax laws, economic uncertainties and the reactions of competitors in terms of price and service. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made except as required by law. Additional information concerning potential factors that could affect future financial results is included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates. We use financial instruments such as interest rate swap agreements, to manage interest rate risk on our variable rate debt. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts, calculated by reference to an agreed upon notional principal amount. Interest rate swap agreements are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The estimated exposure considers the mitigating effects of interest rate swap agreements outstanding at December 29, 2012 on the change in the cost of variable rate debt. The current fair market value of all outstanding contracts at December 29, 2012 was an unrealized loss of $1.0 million.
We performed an analysis to measure the sensitivity of our interest expense to changes in market interest rates for forecasted debt levels and interest rate swaps. The base rate used for the sensitivity analysis for variable rate debt and interest rate swaps is the three month LIBOR market interest rates at December 29, 2012. The credit spread is included in the base rate used in the analysis. The two scenarios include measuring the sensitivity to interest expense with an immediate 50 basis point change in market interest rates and the impact of a 50 basis point change distributed evenly throughout the year. Based on the forecasted average debt level, outstanding interest rate swaps and current market interest rates, the forecasted annual interest expense is $4.5 million. The scenario with an immediate 50 basis point change would increase or decrease forecasted interest expense by $0.7 million or 15.1%. The scenario that distributes the 50 basis point change evenly would increase or decrease forecasted interest expense by $0.4 million or 9.5%.
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Energy Cost Risk
We are subject to market risk exposure related to changes in energy costs. To manage this risk, from time to time we have utilized derivative financial instruments to mitigate the impact of gasoline and diesel cost volatility on our future financial results. As of December 29, 2012, we have no outstanding derivative financial instruments related to gasoline and diesel fuel, however, we may utilize them to manage cost volatility in the future.
We performed an analysis to measure the sensitivity of our energy costs to changes in the prices of unleaded gasoline and diesel fuel. The analysis used gasoline and diesel prices at December 29, 2012 and forecasted purchases over the next twelve months. For each one percentage point increase or decrease in gasoline and diesel prices under these assumptions, our gasoline and diesel costs would change by approximately $0.2 million.
Production costs at our plants are also subject to fluctuations in natural gas costs. To reduce our exposure to changes in natural gas prices, we utilize natural gas supply contracts in the normal course of business. These contracts meet the definition of normal purchase and, therefore, are not considered derivative instruments for accounting purposes.
Foreign Currency Exchange Risk
Our material foreign subsidiaries are located in Canada. The assets and liabilities of these subsidiaries are denominated in the Canadian dollar and, as such, are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Results of operations are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities are recorded as a component of stockholders equity and are included in the Accumulated other comprehensive income line item of the Condensed Consolidated Balance Sheets. Gains and losses from foreign currency transactions are included in results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Form 10-Q. Based on their evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal controls over financial reporting that occurred during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
The U.S. Environmental Protection Agency (U.S. EPA) previously identified certain alleged air and waste-related deficiencies with respect to the operations at our facility located in South Chicago, Illinois. We have responded to the U.S. EPA and will continue to work cooperatively to resolve this matter.
Recently, the United States Office of Federal Contract Compliance Programs, or OFCCP, has, as part of routine audits, commenced a review of certain of our employment practices. The OFCCP has issued a Notice of Violation to one of our facilities and audits of four other facilities, where the OFCCP claims there are similar alleged violations, are ongoing. We have been engaged in conversations with the OFCCP and believe that our practices are lawful and without bias. Currently, no proceeding with respect to this matter has been commenced, and, in any event, we do not believe that any resolution of this matter will have a material adverse effect on our results of operations or financial position.
We cannot predict the ultimate outcome of any of these or other similar 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 condition is remote.
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In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended June 30, 2012, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial could have a material adverse affect on our business, financial condition and/or operating results.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
a. | Exhibits |
10.1 | Form of Terms of Employee Restricted Stock Grant Revised August 2012. |
10.2 | Form of Terms of Non-Qualified Employee Stock Option Revised August 2012. |
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. |
101 | Financial statements from the quarterly report on Form 10-Q of G&K Services, Inc. for the quarter ended December 29, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
G&K SERVICES, INC. | ||||||
(Registrant) | ||||||
Date: February 1, 2013 | 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) |
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Exhibit 10.1
G&K SERVICES, INC.
RESTATED EQUITY INCENTIVE PLAN (2010)
TERMS OF EMPLOYEE
RESTRICTED STOCK GRANT (Revised August 2012)
Pursuant to a letter (the Grant Letter) addressed and delivered to you from G&K Services, Inc. (the Company), and subject to your acceptance in accordance with paragraph 1 below, the Compensation Committee (the Committee) of the Companys Board of Directors has granted you restricted shares of Class A Common Stock, $0.50 par value per share, of the Company (the Stock) pursuant to the terms of the G&K Services, Inc. Restated Equity Incentive Plan (2010) (the Plan). A copy of the Plan is enclosed herewith. The terms of your Stock are governed by the provisions of the Plan generally and the specific terms set forth below. Your Grant Letter and this statement of terms are your Award Agreement under the Plan. In the event of any conflict or inconsistency between the terms set forth below and the provisions of the Plan, the provisions of the Plan shall govern and control.
1. | Grant of Stock |
Subject to your acceptance in accordance with this paragraph 1, the Company grants you the aggregate number of shares of Stock set forth in the Grant Letter, in accordance with the Plan. To accept the Stock, you must, within 14 days of the Grant Date, log into your account at http://www.cpushareownerservices.com/cpuportal/index.jsp and select the Acknowledge Grant button associated with your grant. Upon such acceptance, the Stock shall be issued of record in your name in book-entry form, without stock certificates, and shall be registered on the books of the Company maintained by the Companys transfer agent.
2. | Rights of Employee |
Upon the acceptance and issuance of the Stock, you will become a shareholder with respect to the Stock and shall have all of the rights of a shareholder with respect to such Stock, including the right to vote such Stock and to receive all dividends and other distributions paid with respect to such Stock; provided, however, that such Stock shall be subject to the restrictions set forth in paragraph 3 below.
3. | Restrictions |
You agree that at all times prior to the vesting of the Stock as contemplated by paragraph 4 below:
a) | You will not sell, transfer, pledge, hypothecate or otherwise encumber the Stock; and |
b) | If your employment with the Company is voluntarily or involuntarily terminated for any reason whatsoever, or you violate the terms of any confidentiality agreement, non-solicitation covenant or covenant not to compete, however delineated, subject to paragraph 4 below, you will, for no consideration, forfeit and transfer to the Company all shares of Stock that remain subject to the restrictions set forth in this paragraph 3. |
c) | Subject to the lapse of the restrictions set forth in subparagraphs (a) and (b) of this paragraph 3, the Stock registered on the books of the Company maintained by the Companys transfer agent shall bear such restrictive notations and be subject to such stop transfer instructions as the Company shall deem necessary or appropriate in light of such restrictions. |
4. | Lapse of Restrictions |
a) | Except as set forth in subparagraph 4(b) and 4(c) below, the restrictions set forth in paragraph 3 above shall lapse with respect to one-fifth of the Stock on the one year anniversary of the Grant Date set forth in the Grant Letter, and one-fifth of the Stock on each of the next four successive anniversaries of such date (each individually a Vesting Date). In the event that you cease to be an employee of the Company prior to any Vesting Date, the Stock scheduled to vest on such Vesting Date, and all Stock scheduled to vest in the future, shall not vest and all rights to and under such non-vested Stock will terminate. |
b) | If at the time that you terminate employment with the Company you have attained the age of 60 and have completed at least five years of continuous service with the Company, then the restrictions set forth in paragraph 3 above shall lapse with respect to that portion of the Stock that is not yet vested as set forth in subparagraph 4(a) above in two substantially equal installments, the first installment to vest on the first anniversary of your retirement date, as established by the Company, and the second installment to vest on the second anniversary of your retirement date. |
c) | If you should die or terminate employment as a result of a disability while you are an employee of the Company or any of its subsidiaries, then the restrictions set forth in paragraph 3 above shall lapse on the date of death or termination of employment. For purposes hereof, you will be considered to have a disability if you have physical, mental or emotional limits caused by a current sickness or injury and, due to these limits, you are not able to perform, on a full-time basis, the major duties of your own job with or without reasonable accommodation (e.g., if you are required, on average, to work more than 40 hours per week, you will not be considered to have a disability if you are able to perform the major duties of your employment for 40 hours per week); you will not be considered to have a disability if you perform any work for wage or profit, and the loss of a professional or occupational license will not, in and of itself, constitute a disability. |
d) | Within 30 days after the date that the restrictions set forth in subparagraphs (a) and (b) of paragraph 3 have lapsed with respect to shares of Stock and such shares have become vested, free and clear of all restrictions, except as provided in the Plan, the Company shall instruct its transfer agent to remove any restrictive notations and stop transfer instructions placed on the Stock register in connection with such restrictions. |
5. | Copy of Plan |
By the accepting the Stock, you acknowledge receipt of a copy of the Plan, the terms and conditions of which are hereby incorporated herein by reference and made a part hereof by reference as if set forth in full.
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6. | Administration |
The agreement and understanding regarding the Stock shall at all times be subject to the terms and conditions of the Plan. The Committee shall have the sole and complete discretion with respect to all matters reserved to it by the Plan and decisions of the Committee with respect thereto and to the terms set forth herein shall be final and binding upon you. In the event of any conflict between the provisions set forth herein and those set forth in the Plan, the provisions of the Plan shall govern and control.
7. | Continuation of Employment |
The agreement and understanding regarding the Stock shall not confer upon you, and shall not be construed to confer upon you, any right to continue in the employ of the Company for any period of time, and shall not limit the rights of the Company in its sole discretion, to terminate your employment at any time, with or without cause, for any reason or no reason, or to change your assignment or rate of compensation.
8. | Withholding of Tax |
To the extent that the receipt of the Stock, the lapse of any restrictions thereon, or your attainment of age 60 with at least five years of continuous service results in income to you for federal or state income tax purposes, you shall deliver to the Company at the time of such receipt, lapse, or attainment, as the case may be, such amount of money or shares of unrestricted Stock, as permitted by the Plan, as the Company may require to meet its withholding obligation under applicable tax laws or regulations, and, if you fail to do so, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to you any tax required to be withheld by reason of such resulting compensation income, including accelerating lapse restrictions with respect to a sufficient number of shares of Stock to cover withholding obligations.
9. | Section 83(b) Election |
You understand that you (and not the Company) shall be responsible for your own federal, state, local or foreign tax liability and any of your other tax consequences that may arise as a result of the transactions contemplated herein. You shall rely solely on the determinations of your tax advisors or your own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters. You understand that Section 83 of the Internal Revenue Code of 1986, as amended (the Code), taxes as ordinary income the difference between the amount paid for the Stock and the fair market value of the Stock as of the date restrictions on the Stock lapse. In this context, restriction includes, without limitation, the vesting restrictions set forth in paragraph 3 hereof. You understand that you may elect to be taxed at the time the Award of restricted Stock is made rather than when and as the restrictions on the Stock lapse or expire by filing an election under Section 83(b) of the Code with the Internal Revenue Service within thirty (30) days from the Grant Date, as defined in your Grant Letter. In the event you file an election under Section 83(b) of the Code, such election shall contain all information required under the applicable treasury regulation(s) and you shall deliver a copy of such election to the Company contemporaneously with filing such election with the Internal Revenue Service. YOU ACKNOWLEDGE THAT IT IS YOUR SOLE RESPONSIBILITY AND NOT THE COMPANYS TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF YOU REQUEST THAT THE COMPANY OR ITS REPRESENTATIVES MAKE THIS FILING ON YOUR BEHALF.
3
10. | Further Assurances |
By accepting the Stock discussed herein, you agree to execute such papers, agreements, assignments, or documents of title as may be necessary or desirable to effect the purposes described herein and carry out its provisions.
11. | Governing Law |
The agreement and understanding regarding the Stock, and its interpretation and effect, shall be governed by the laws of the State of Minnesota applicable to contracts executed and to be performed therein.
12. | Amendments |
Except as provided in the Plan, this Award Agreement may be amended only by a written agreement executed by the Company and you.
13. | Entire Agreement |
The provisions set forth herein and those contained in the Grant Letter and the Plan embody the entire agreement and understanding between you and the Company with respect to the matters covered herein, in the Grant Letter and in the Plan, and such provisions may only be modified pursuant to a written agreement signed by the party to be charged.
4
Exhibit 10.2
G&K SERVICES, INC.
RESTATED EQUITY INCENTIVE PLAN (2010)
TERMS OF NON-QUALIFIED
EMPLOYEE STOCK OPTION (Revised August 2012)
Pursuant to a letter (the Grant Letter) addressed and delivered to you from G&K Services, Inc. (the Company), and subject to your acceptance in accordance with paragraph 1 below, the Compensation Committee (the Committee) of the Companys Board of Directors has granted you a non-qualified stock option (the Option) pursuant to the terms of the G&K Services, Inc. Restated Equity Incentive Plan (2010) (the Plan). A copy of the Plan is enclosed herewith. The terms of your Option are governed by the provisions of the Plan generally and the specific terms set forth below. Your Grant Letter and this statement of terms are your Award Agreement under the Plan. In the event of any conflict or inconsistency between the terms set forth below and the provisions of the Plan, the provisions of the Plan shall govern and control.
1. | Number of Shares Subject to the Option. Upon your acceptance of the Option, the Option entitles you to purchase all or any part of the aggregate number of shares of Class A Common Stock of the Company (the Common Stock) set forth in the Grant Letter as G&K Stock Option shares, in accordance with the Plan. To accept the Option, you must, within 14 days of the Grant Date, log into your account at http://www.cpushareownerservices.com/cpuportal/index.jsp and select the Acknowledge Grant button associated with your grant. |
2. | Purchase Price. The purchase price of each share of Common Stock covered by the Option shall be the Exercise Price set forth in the Grant Letter. |
3. | Exercise and Vesting of Option. |
(a) | The Option is exercisable only to the extent that all, or any portion thereof, has vested. Except as provided in subparagraph 3(b) and paragraph 4 below, the Option shall vest in three (3) equal installments, such installments to begin on the first anniversary of the Grant Date set forth in the Grant Letter and continuing on each of the next two anniversaries thereof (each individually, a Vesting Date) until the Option is fully vested. In the event that you cease to be an employee of the Company prior to any Vesting Date, that portion of the Option scheduled to vest on such Vesting Date, and all portions of the Option scheduled to vest in the future, shall not vest and all rights to and under such non-vested portions of the Option will terminate. |
(b) | In the event your employment is terminated as a result of a qualified retirement from the Company as defined in subparagraph 4(e) below, then the Option shall become exercisable with respect to that portion that is not yet vested (as set forth in subparagraph 3(a) above) in two substantially equal installments, the first installment to vest on the first anniversary of your retirement date, as established by the Committee, and the second installment on the second anniversary of your retirement date. |
4. | Term of Option. |
(a) | To the extent vested, and except as otherwise provided herein or in the Plan, no Option is exercisable after the expiration of ten (10) years from the Grant Date (such date to be hereinafter referred to as the Expiration Date). |
(b) | In the event your employment is terminated for any reason other than death, disability or qualified retirement (and other than for cause or voluntary on your part and without written consent of the Company in a situation that is not a qualified retirement), the Option shall be exercisable by you (to the extent that you shall have been entitled to do so at the termination of your employment) at any time within three (3) months after such termination of employment, but in no event later than the Expiration Date. In the event of any termination of your employment that is either (i) for cause or (ii) voluntary on your part and without the written consent of the Company (other than a qualified retirement), the Option, to the extent not theretofore exercised, shall forthwith terminate. |
(c) | In the event of your death while you are an employee of the Company or any of its subsidiaries or within three (3) months after termination of employment (other than for cause, qualified retirement or voluntary on your part and without written consent of the Company), the Option may be exercised (to the extent that you shall have been entitled to do so at the date of death) by the person to whom the Option is transferred by will or the applicable laws of descent and distribution at any time within twelve (12) months after the date of death, but in no event later than the Expiration Date. |
(d) | In the event your employment is terminated by the Company as a result of a disability (other than a qualified retirement), the Option shall be exercisable by you (to the extent that you shall have been entitled to do so at the termination of your employment) at any time within twelve (12) months after such termination of employment, but in no event later than the Expiration Date. For purposes of this Option, you will be considered to have a disability if you have physical, mental or emotional limits caused by a current sickness or injury and, due to these limits, you are not able to perform, on a full-time basis, the major duties of your own job with or without reasonable accommodation (e.g., if you are required, on average, to work more than 40 hours per week, you will not be considered to have a disability if you are able to perform the major duties of your employment for 40 hours per week); you will not be considered to have a disability if you perform any work for wage or profit, and the loss of a professional or occupational license will not, in and of itself, constitute a disability. |
2
(e) | In the event your employment is terminated as a result of a qualified retirement from the Company, the Option shall be exercisable by you (to the extent the Option is vested on the date of your retirement or becomes vested in accordance with subparagraph 3(b) above) at any time within the three (3) year period following the date of such qualified retirement, but in no event later than the Expiration Date. For purposes of this Option, your retirement from the Company shall be considered a qualified retirement if such retirement is voluntary and, at the time of such retirement, you are at least 60 years of age and have been employed by the Company on a continuous basis for a period of at least five years. In the event of your death during the time period that the Option is vested and exercisable (or becomes vested and is exercisable), the Option may be exercised (to the extent that you shall have been entitled to exercise the Option on the date it is exercised) by the person to whom the Option is transferred by will or the applicable laws of descent and distribution. |
5. | Method of Exercise. Subject to the terms and conditions set forth herein and in the Plan, the Option may be exercised, in whole or in part, by logging into your account at http://www.cpushareownerservices.com/cpuportal/index.jsp or calling 1-866-4GK-SERV and specifying the number of shares to be purchased and by paying in full the Purchase Price for the number of shares of Common Stock with respect to which the Option is exercised. Subject to the provisions of the Plan, such Purchase Price shall be paid in cash and/or in shares of Common Stock of the Company or other property. In addition, you shall, on or about notification to you of the amount due, pay promptly an amount sufficient to satisfy applicable federal, state and local tax requirements. In the event the Option shall be exercised by any person other than you, such notice shall be accompanied by appropriate proof of the right of such person to exercise the Option. The Company has no obligation to deliver shares or cash upon exercise of the Option until all applicable withholding taxes have been paid or provided for payment and until such shares are qualified for delivery under such laws and regulations as may be deemed by the Company to be applicable thereto. Prior to the issuance of shares of Common Stock upon the exercise of the Option, you will have no rights as a shareholder. |
6. | Non Transferability. No stock Option may be transferred, pledged or assigned otherwise than by will or the laws of descent and distribution. An Option may be exercised, during your lifetime, only by you, or by your guardian or legal representative. Any attempted assignment, transfer, pledge, hypothecation, or other disposition of the Option contrary to the provisions of the Plan or the provisions hereof, and the levy of any execution, attachment, or similar process upon the Option, will be null and void and without effect. |
7. | Reservation of Right to Terminate Employment. Your employment, subject to the provisions of any agreement between you and the Company, shall be at the pleasure of the Board of Directors of the Company or other employing corporation, and nothing contained herein shall restrict any right of the Company or any other employing corporation to terminate your employment at any time, with or without cause. |
3
8. | Adjustment. In the event that the number of shares of Common Stock shall be increased or decreased through a reorganization, reclassification, combination of shares, stock split, reverse stock split, spin-off, stock dividend, or otherwise, then the Option shall be appropriately adjusted by the Committee, in number of shares or Purchase Price or both to reflect such increase or decrease. In the event of a dividend in kind or distribution (other than normal cash dividends) to shareholders of the Company, then the price, number of shares, other terms or a combination of the foregoing with respect to the Option shall be equitably adjusted in order to prevent dilution or enlargement of your rights under the Plan, in such manner as determined by the Committee in its sole discretion. In the event there shall be any other change in the number or kind of outstanding shares of Common Stock, or any stock or other securities into which such shares of Common Stock shall have been changed, or for which it shall have been exchanged, whether by reason of a merger, consolidation or otherwise, then the Committee shall, in its sole discretion, determine the appropriate adjustment, if any, to be effected. |
9. | Withholding. Pursuant to the provisions of the Plan, and as described in greater detail therein, the Company will have the right to withhold from any payments made in connection with the Option, or to collect as a condition of payment or delivery, any taxes required by law to be withheld. |
10. | Further Assurances. By accepting the Option, you agree to execute such papers, agreements, assignments, or documents of title as may be necessary or desirable to effect the purposes described herein and carry out its provisions. |
11. | Third Party Beneficiaries. Nothing contained herein is intended or shall be construed as conferring upon or giving to any person, firm or corporation other than you and the Company any rights or benefits. |
12. | Entire Understanding. The provisions set forth herein and those contained in the Grant Letter and the Plan embody the entire agreement and understanding between you and the Company with respect to the matters covered herein, in the Grant Letter and in the Plan, and such provisions may only be modified pursuant to a written agreement signed by the party to be charged. |
13. | Governing Law. The agreement and understanding regarding the Option, and its interpretation and effect, shall be governed by the laws of the State of Minnesota applicable to contracts executed and to be performed therein. |
14. | Amendments. Except as otherwise provided in the Plan, this Award Agreement may be amended only by a written agreement executed by the Company and you. |
4
EXHIBIT 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
I, Douglas A. Milroy, certify that:
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: |
(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 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 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): |
(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: February 1, 2013
By: | /s/ Douglas A. Milroy | |||||
Douglas A. Milroy, Chief Executive Officer and Director | ||||||
(Principal Executive Officer) |
EXHIBIT 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
I, Jeffrey L. Wright, certify that:
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: |
(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 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 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): |
(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: February 1, 2013
By: | /s/ Jeffrey L. Wright | |
Jeffrey L. Wright, Executive Vice President, Chief Financial Officer and Director | ||
(Principal Financial Officer) |
EXHIBIT 32.1
G&K SERVICES, INC.
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
In connection with the quarterly report of G&K Services, Inc. (the Company) on Form 10-Q for the period ended December 29, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report), Douglas A. Milroy, Chief Executive Officer and Director of the Company, certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 1, 2013
By: | /s/ Douglas A. Milroy | |
Douglas A. Milroy, Chief Executive Officer and Director | ||
(Principal Executive Officer) |
EXHIBIT 32.2
G&K SERVICES, INC.
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
In connection with the quarterly report of G&K Services, Inc. (the Company) on Form 10-Q for the period ended December 29, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report), Jeffrey L. Wright, Executive Vice President, Chief Financial Officer and Director of the Company, certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 1, 2013
By: |
/s/ Jeffrey L. Wright | |
Jeffrey L. Wright, Executive Vice President, Chief Financial Officer and Director | ||
(Principal Financial Officer) |
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Earnings Per Share - Additional Information (Detail)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Dec. 29, 2012
|
Dec. 31, 2011
|
Dec. 29, 2012
|
Dec. 31, 2011
|
|
Shares excluded from computation of diluted earnings per share | 0.6 | 1.3 | 0.5 | 1.3 |
Acquisitions - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended |
---|---|---|
Dec. 29, 2012
Markets
Acquisition
|
Dec. 29, 2012
|
|
Business Acquisition [Line Items] | ||
Number of acquisitions completed in rental operations business | 1 | |
Acquisition North American markets | 5 | |
Top North American markets | 100 | |
Effective date of acquisition | Nov. 26, 2012 | |
Cash paid for acquisition | $ 18.6 | $ 18.6 |
Customer lists acquired | 2.8 | 2.8 |
Weighted-average useful life | 8 years | |
Goodwill acquired | 10.0 | 10.0 |
Goodwill expected to be deductible for income taxes | 10.0 | 10.0 |
Amount of revenue related to acquired business | 1.0 | 1.0 |
United States [Member]
|
||
Business Acquisition [Line Items] | ||
Goodwill acquired | $ 10.0 | $ 10.0 |
Share-Based Compensation - Additional Information (Detail) (USD $)
In Millions, except Share data, unless otherwise specified |
3 Months Ended | 6 Months Ended | |||||
---|---|---|---|---|---|---|---|
Dec. 29, 2012
|
Dec. 31, 2011
|
Dec. 29, 2012
|
Dec. 31, 2011
|
Aug. 23, 2012
Target [Member]
|
Aug. 23, 2012
Maximum [Member]
|
Aug. 23, 2012
Minimum [Member]
|
|
Compensation Related Costs Share Based Payments Disclosure [Line Items] | |||||||
Total compensation expense related to share-based awards | $ 1.1 | $ 0.9 | $ 2.7 | $ 2.1 | |||
Number of options exercised and restricted stock vested | 300,000 | ||||||
Number of shares of performance based restricted stock award | 100,000 | 150,000 | 50,000 | ||||
Number of shares of the performance based restricted stock award considered outstanding in diluted earnings per share | 0 | 0 |
Acquisitions - Summary of Estimated Fair Values of Assets (Detail) (USD $)
In Millions, unless otherwise specified |
Dec. 29, 2012
|
---|---|
Business Acquisition [Line Items] | |
Accounts receivable and inventory | $ 2.3 |
Property, plant and equipment | 3.5 |
Customer lists | 2.8 |
Goodwill | 10 |
Net assets acquired | $ 18.6 |
Long-Term Debt - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
6 Months Ended |
---|---|
Dec. 29, 2012
|
|
Line of Credit Facility [Line Items] | |
Description of interest rate on credit facility | Borrowings in U.S. dollars under this credit facility, at our election, bear interest at (a) adjusted LIBOR for specified interest periods plus a margin, which can range from 1.00% to 2.00%, determined with reference to our consolidated leverage ratio or (b) a floating rate equal to the greatest of (i) JPMorgan's 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 (a) the Canadian deposit offered rate plus 0.10% for specified interest periods plus a margin determined with reference to our consolidated leverage ratio or (b) a floating rate equal to the greater of (i) the Canadian prime rate and (ii) the Canadian deposit offered rate for a one month interest period plus 1.00%, plus, in each case, a margin determined with reference to our consolidated leverage ratio. |
Unsecured private placement notes [Member]
|
|
Line of Credit Facility [Line Items] | |
Interest rate spread on notes | 0.60% |
Outstanding balance, notes | 75.0 |
Long-term debt description of rate | The notes bear interest at 0.60% over LIBOR |
Long-term debt maturities | Jun. 30, 2015 |
Periodic payment description | The notes do not require principal payments until maturity |
Interest rate on notes | 0.96% |
Long-term debt, notes | 75.0 |
Unsecured revolving credit facility [Member]
|
|
Line of Credit Facility [Line Items] | |
Revolving credit facility | 250.0 |
Debt facility expiration date | Mar. 07, 2017 |
Term of unsecured revolving credit | 5 years |
Borrowings outstanding under the revolving credit facility | 121.5 |
Letters of credit sub-limit | 50.0 |
Outstanding letters of credit | 0.6 |
Interest rate | 1.74% |
Fee payment on unused credit balances, percentage | 0.25% |
Unsecured revolving credit facility [Member] | Condition A in US Dollars [Member]
|
|
Line of Credit Facility [Line Items] | |
Description of interest rate on credit facility | The adjusted LIBOR for specified interest periods plus a margin, which can range from 1.00% to 2.00%, determined with reference to our consolidated leverage ratio |
Unsecured revolving credit facility [Member] | Condition A in US Dollars [Member] | Minimum [Member]
|
|
Line of Credit Facility [Line Items] | |
Interest rate spread on notes | 1.00% |
Unsecured revolving credit facility [Member] | Condition A in US Dollars [Member] | Maximum [Member]
|
|
Line of Credit Facility [Line Items] | |
Interest rate spread on notes | 2.00% |
Unsecured revolving credit facility [Member] | Condition B-ii in US Dollars [Member]
|
|
Line of Credit Facility [Line Items] | |
Description of interest rate on credit facility | Federal funds rate plus 0.50% |
Interest rate spread on notes | 0.50% |
Unsecured revolving credit facility [Member] | Condition B-iii in US Dollars [Member]
|
|
Line of Credit Facility [Line Items] | |
Description of interest rate on credit facility | 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. |
Interest rate spread on notes | 1.00% |
Unsecured revolving credit facility [Member] | Condition A in Canadian Dollars [Member]
|
|
Line of Credit Facility [Line Items] | |
Description of interest rate on credit facility | The Canadian deposit offered rate plus 0.10% for specified interest periods plus a margin determined with reference to our consolidated leverage ratio. |
Interest rate spread on notes | 0.10% |
Unsecured revolving credit facility [Member] | Condition B-ii in Canadian Dollars [Member]
|
|
Line of Credit Facility [Line Items] | |
Description of interest rate on credit facility | The Canadian deposit offered rate for a one month interest period plus 1.00%, plus, in each case, a margin determined with reference to our consolidated leverage ratio. |
Interest rate spread on notes | 1.00% |
Secured Revolving Credit Facility [Member]
|
|
Line of Credit Facility [Line Items] | |
Revolving credit facility | 50.0 |
Debt facility expiration date | Sep. 27, 2013 |
Description of interest rate on credit facility | We pay interest at a rate per annum equal to a margin of 0.76%, plus LIBOR. |
Interest rate spread on notes | 0.76% |
Borrowings outstanding under the revolving credit facility | 23.8 |
Outstanding letters of credit | 26.2 |
Interest rate | 0.97% |
Fair Value Measurements - Summary of Assets and Liabilities at Fair Value (Detail) (USD $)
In Millions, unless otherwise specified |
Dec. 29, 2012
|
Jun. 30, 2012
|
---|---|---|
Fair Value Inputs Assets Liabilities Quantitative Information [Line Items] | ||
Cash and cash equivalents | $ 23.7 | $ 19.6 |
Total assets | 23.7 | 19.6 |
Current maturities of long-term debt | 23.8 | 0.2 |
Long-term debt, net of current maturities | 196.5 | 218.0 |
Total liabilities | 220.3 | 218.2 |
Level 1 [Member]
|
||
Fair Value Inputs Assets Liabilities Quantitative Information [Line Items] | ||
Cash and cash equivalents | 23.7 | 19.6 |
Total assets | 23.7 | 19.6 |
Current maturities of long-term debt | 0 | 0 |
Long-term debt, net of current maturities | 0 | 0 |
Total liabilities | 0 | 0 |
Level 2 [Member]
|
||
Fair Value Inputs Assets Liabilities Quantitative Information [Line Items] | ||
Cash and cash equivalents | 0 | 0 |
Total assets | 0 | 0 |
Current maturities of long-term debt | 23.8 | 0.2 |
Long-term debt, net of current maturities | 196.5 | 218.0 |
Total liabilities | $ 220.3 | $ 218.2 |
Inventories (Tables)
|
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 29, 2012
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Components of Inventory | The components of inventory as of December 29, 2012 and June 30, 2012 are as follows:
|
Employee Benefit Plans - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Sep. 29, 2012
Location
|
Mar. 31, 2012
Location
|
Dec. 29, 2012
Location
|
|
Multiemployer Plans [Line Items] | |||
Location to discontinue our participation in Central States MEPP | 2 | 2 | |
Redundant branch facilities closed | 2 | ||
Remaining location participating in Central States MEPP | 1 | ||
Period of payment of withdrawal liability | 20 years | ||
Pension withdrawal and associated expenses | $ 24.0 | ||
Multi-Employer Pension Plans [Member] | Minimum [Member]
|
|||
Multiemployer Plans [Line Items] | |||
Estimated share of undiscounted, unfunded vested benefits under all the MEPPs | 3.0 | ||
Multi-Employer Pension Plans [Member] | Maximum [Member]
|
|||
Multiemployer Plans [Line Items] | |||
Estimated share of undiscounted, unfunded vested benefits under all the MEPPs | 4.0 | ||
Pension Plan [Member]
|
|||
Multiemployer Plans [Line Items] | |||
Employer contribution for pension plan | 3.5 |
Goodwill and Intangible Assets - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Dec. 29, 2012
|
Dec. 31, 2011
|
Dec. 29, 2012
|
Dec. 31, 2011
|
|
Goodwill And Intangible Assets [Line Items] | ||||
Impairment losses recorded | $ 0 | $ 0 | $ 0 | $ 0 |
Weighted average life of amortized intangible assets | 12 years | |||
Amortization expense | 2.2 | 2.5 | ||
United States [Member]
|
||||
Goodwill And Intangible Assets [Line Items] | ||||
Accumulated impairment losses | $ 107.0 | $ 107.0 |
Income Taxes - Additional Information (Detail)
|
6 Months Ended | |
---|---|---|
Dec. 29, 2012
|
Dec. 31, 2011
|
|
Effective tax rate | 37.60% | 39.10% |
Segment Information - Financial Information by Segment (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Dec. 29, 2012
|
Dec. 31, 2011
|
Dec. 29, 2012
|
Dec. 31, 2011
|
Jun. 30, 2012
|
|
Schedule Of Geographical Segments [Line Items] | |||||
Revenues | $ 229,174 | $ 217,064 | $ 451,602 | $ 426,787 | |
Income from operations | 22,856 | 16,954 | 42,404 | 32,429 | |
Total assets | 902,062 | 860,200 | 902,062 | 860,200 | 873,731 |
Depreciation and amortization expense | 8,000 | 8,400 | 16,066 | 17,153 | |
United States [Member]
|
|||||
Schedule Of Geographical Segments [Line Items] | |||||
Revenues | 189,000 | 179,500 | 374,400 | 353,000 | |
Income from operations | 18,100 | 12,900 | 34,300 | 25,400 | |
Total assets | 830,400 | 796,400 | 830,400 | 796,400 | |
Depreciation and amortization expense | 6,700 | 7,100 | 13,500 | 14,600 | |
Canada [Member]
|
|||||
Schedule Of Geographical Segments [Line Items] | |||||
Revenues | 40,200 | 37,600 | 77,200 | 73,800 | |
Income from operations | 4,800 | 4,100 | 8,100 | 7,000 | |
Total assets | 159,600 | 143,900 | 159,600 | 143,900 | |
Depreciation and amortization expense | 1,300 | 1,300 | 2,600 | 2,600 | |
Elimination [Member]
|
|||||
Schedule Of Geographical Segments [Line Items] | |||||
Revenues | 0 | 0 | 0 | 0 | |
Income from operations | 0 | 0 | 0 | 0 | |
Total assets | (87,900) | (80,100) | (87,900) | (80,100) | |
Depreciation and amortization expense | $ 0 | $ 0 | $ 0 | $ 0 |
Long-Term Debt - Material Covenants Required by Terms of This Facility (Detail) (USD $)
In Millions, unless otherwise specified |
6 Months Ended |
---|---|
Dec. 29, 2012
|
|
Line of Credit Facility [Line Items] | |
Maximum Leverage Ratio (Debt/EBITDA), Required | 3.50 |
Minimum Interest Coverage Ratio (EBITDA/Interest Expense), Required | 3.00 |
Minimum Net Worth, Required | $ 379.6 |
Maximum Leverage Ratio (Debt/EBITDA), Actual | 2.14 |
Minimum Interest Coverage Ratio (EBITDA/Interest Expense), Actual | 23.23 |
Minimum Net Worth, Actual | $ 429.5 |
New Accounting Pronouncements
|
6 Months Ended | ||
---|---|---|---|
Dec. 29, 2012
|
|||
New Accounting Pronouncements |
In June 2011, the Financial Accounting Standards Board issued new guidance on the presentation of other comprehensive income. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity and requires an entity to present either one continuous statement of net income and other comprehensive income or in two separate, but consecutive, statements. We adopted this guidance in the first quarter of fiscal 2013. Refer to the Condensed Consolidated Statements of Comprehensive Income. |