form10q-2q2012.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  WASHINGTON, D.C. 20549

FORM 10-Q

x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
     
   
For the quarterly period ended February 25, 2012
     
   
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
     
   
For the transition period from ________________ to ________________

Commission file number:  001-08504

UNIFIRST CORPORATION
(Exact name of Registrant as Specified in Its Charter)

Massachusetts
 
04-2103460
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
     
68 Jonspin Road, Wilmington, MA
 
01887
(Address of Principal Executive Offices)
 
(Zip Code)

 (978) 658-8888
(Registrant’s Telephone Number, Including Area Code)

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   ü        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   ü        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.

Large accelerated filer   ü       Accelerated filer            Smaller Reporting Company           Non-accelerated filer     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes            No   ü 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of outstanding shares of UniFirst Corporation Common Stock and Class B Common Stock at March 30, 2012 were 15,051,774 and 4,885,277, respectively.

 
 

 

UniFirst Corporation
Quarterly Report on Form 10-Q
For the Quarter ended February 25, 2012

Table of Contents
     
   
     
   
     
Consolidated Statements of Income for the Thirteen and Twenty-Six Weeks ended February 25, 2012 and February 26, 2011
   
     
Consolidated Balance Sheets as of February 25, 2012 and August 27, 2011
   
     
Consolidated Statements of Cash Flows for the Twenty-Six Weeks ended February 25, 2012 and February 26, 2011
   
     
   
     
   
     
   
     
   
     
   
     
Item 1 – Legal Proceedings
   
     
Item 1A – Risk Factors
   
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
   
     
Item 3 – Defaults Upon Senior Securities
   
     
Item 4 – Mine Safety Disclosures
   
     
Item 5 – Other Information
   
     
   
     
   
     
Exhibit Index
   
     
Certifications
   
   
   
   
   



 
 

 

PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

UniFirst Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)

   
Thirteen weeks ended
   
Twenty-six weeks ended
   
February 25,
 
February 26,
 
February 25,
February 26,
(In thousands, except per share data)
   
2012
     
2011
     
2012
   
2011
 
                               
Revenues
 
$
309,959
   
$
278,595
   
$
622,984
 
$
551,685
 
                               
Operating expenses:
                             
Cost of revenues (1)
   
201,437
     
176,233
     
396,576
   
339,468
 
Selling and administrative expenses (1)
   
61,197
     
58,614
     
120,321
   
113,797
 
Depreciation and amortization
   
16,489
     
16,075
     
32,897
   
31,577
 
 Total operating expenses
   
279,123
     
250,922
     
549,794
   
484,842
 
                               
Income from operations
   
30,836
     
27,673
     
73,190
   
66,843
 
                               
Other (income) expense:
                             
Interest expense
   
555
     
2,202
     
1,128
   
4,405
 
Interest income
   
 (749
)
   
(654
)
   
(1,380
)
 
(1,236
)
Exchange rate (gain) loss
   
(56
)
   
(219
)
   
571
   
(391
)
 Total other (income) expense
   
(250
)
   
1,329
     
319
   
2,778
 
                               
Income before income taxes
   
31,086
     
26,344
     
72,871
   
64,065
 
Provision for income taxes
   
11,890
     
10,067
     
27,873
   
24,024
 
                               
Net income
 
$
19,196
   
$
16,277
   
$
44,998
 
$
40,041
 
                               
Income per share – Basic:
                             
Common Stock
 
$
1.01
   
0.86
   
$
2.38
 
$
2.12
 
Class B Common Stock
 
$
0.81
   
0.69
   
$
1.90
 
$
1.70
 
                               
Income per share – Diluted:
                             
Common Stock
 
$
0.96
   
$
0.82
   
$
2.26
 
$
2.02
 
                               
Income allocated to – Basic:
                             
Common Stock
 
$
15,081
   
$
12,750
   
$
35,341
 
$
31,356
 
Class B Common Stock
 
$
3,765
   
$
3,218
   
$
8,832
 
$
7,921
 
                               
Income allocated to – Diluted:
                             
Common Stock
 
$
18,863
   
$
15,983
   
$
44,213
 
$
39,314
 
                               
Weighted average number of shares outstanding – Basic:
                             
Common Stock
   
14,873
     
14,778
     
14,856
   
14,766
 
Class B Common Stock
   
4,640
     
4,661
     
4,640
   
4,662
 
                               
Weighted average number of shares outstanding – Diluted:
                             
Common Stock
   
19,605
     
19,528
     
19,575
   
19,503
 
                               
Dividends per share:
                             
Common Stock
 
$
0.0375
   
$
0.0375
   
$
0.0750
 
$
0.0750
 
Class B Common Stock
 
$
0.0300
   
$
0.0300
   
$
0.0600
 
$
0.0600
 

(1) Exclusive of depreciation on the Company’s property, plant and equipment and amortization of its intangible assets.


The accompanying notes are an integral part of these
Consolidated Financial Statements.

 
 
 

 


UniFirst Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

(In thousands, except share data)
 
February 25,
2012
   
August 27,
2011(a)
 
Assets
           
Current Assets:
           
Cash and cash equivalents
  $ 59,346     $ 48,812  
Receivables, less reserves of $6,658 and $4,201, respectively
    139,563       128,377  
Inventories
    77,539       76,460  
Rental merchandise in service
    136,523       126,536  
Prepaid and deferred income taxes
    7,298       11,358  
Prepaid expenses
    6,812       3,647  
                 
Total current assets
    427,081       395,190  
                 
Property, plant and equipment:
               
Land, buildings and leasehold improvements
    349,672       346,738  
Machinery and equipment
    408,275       393,530  
Motor vehicles
    136,075       129,762  
                 
 Total property, plant and equipment
    894,022       870,030  
Less -- accumulated depreciation
    493,313       474,963  
                 
 Total property, plant and equipment, net
    400,709       395,067  
                 
Goodwill
    288,119       288,249  
Customer contracts, net
    53,079       57,890  
Other intangible assets, net
    2,439       3,015  
Other assets
    2,246       2,109  
 Total assets
  $ 1,173,673     $ 1,141,520  
                 
Liabilities and shareholders' equity
               
Current liabilities:
               
Current maturities of long-term debt
  $ 4,565     $ 20,133  
Accounts payable
    54,198       56,064  
Accrued liabilities
    76,741       76,630  
                 
Total current liabilities
    135,504       152,827  
                 
Long-term liabilities:
               
Long-term debt, net of current maturities
    100,164       100,163  
Accrued liabilities
    42,011       39,698  
Accrued and deferred income taxes
    51,169       50,890  
                 
Total long-term liabilities
    193,344       190,751  
                 
Commitments and contingencies (Note 9)
               
Shareholders' equity:
               
Preferred stock, $1.00 par value; 2,000,000 shares authorized; no shares issued and outstanding
           
Common Stock, $0.10 par value; 30,000,000 shares authorized; 15,050,524 and 14,987,371 issued and outstanding, respectively
    1,505       1,499  
Class B Common Stock, $0.10 par value; 20,000,000 shares authorized; 4,885,277 and 4,887,777 issued and outstanding, respectively
    488       488  
Capital surplus
    39,197       33,588  
Retained earnings
    796,108       752,530  
Accumulated other comprehensive income
    7,527       9,837  
                 
Total shareholders' equity
    844,825       797,942  
                 
 Total liabilities and shareholders’ equity
  $ 1,173,673     $ 1,141,520  

(a) Derived from audited financial statements
 
The accompanying notes are an integral part of these
Consolidated Financial Statements.

 
 
 

 
 
UniFirst Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

Twenty-six weeks ended
(In thousands)
 
February 25,
2012
   
February 26,
2011
 
Cash flows from operating activities:
           
Net income
  $ 44,998     $ 40,041  
Adjustments to reconcile net income to cash provided by operating activities:
               
  Depreciation
    27,550       26,574  
  Amortization of intangible assets
    5,347       5,003  
  Amortization of deferred financing costs
    119       133  
  Share-based compensation
    3,701       3,492  
  Accretion on environmental contingencies
    316       341  
  Accretion on asset retirement obligations
    316       295  
  Deferred income taxes
    362       5,620  
  Changes in assets and liabilities, net of acquisitions:
               
     Receivables
    (11,698 )     (17,538 )
     Inventories
    (1,348 )     (10,602 )
     Rental merchandise in service
    (10,246 )     (10,165 )
     Prepaid expenses
    (3,169 )     (1,292 )
     Accounts payable
    (1,699 )     (2,138
     Accrued liabilities
    1,891       3,798  
     Prepaid and accrued income taxes
    4,006       (10,941 )
Net cash provided by operating activities
    60,446       32,621  
                 
Cash flows from investing activities:
               
  Acquisition of businesses, net of cash acquired
          (16,326 )
  Capital expenditures
    (34,275 )     (31,191 )
  Other
    (464 )     35  
Net cash used in investing activities
    (34,739 )     (47,482 )
                 
Cash flows from financing activities:
               
  Proceeds from long-term debt
    38,910        
  Payments on long-term debt
    (54,325 )     (1,102 )
  Proceeds from exercise of Common Stock options
    1,914       1,009  
  Payment of cash dividends
    (1,418 )     (1,414 )
Net cash used in financing activities
    (14,919 )     (1,507 )
                 
Effect of exchange rate changes
    (254 )     2,597  
                 
Net increase (decrease) in cash and cash equivalents
    10,534       (13,771 )
Cash and cash equivalents at beginning of period
    48,812       121,258  
                 
Cash and cash equivalents at end of period
  $ 59,346     $ 107,487  


The accompanying notes are an integral part of these
Consolidated Financial Statements.



 
 

 

UniFirst Corporation and Subsidiaries
Notes to Consolidated Financial Statements

1. Basis of Presentation

These Consolidated Financial Statements of UniFirst Corporation (the “Company”) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the information furnished reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period.

It is suggested that these Consolidated Financial Statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 27, 2011. There have been no material changes in the accounting policies followed by the Company during the current fiscal year. Results for an interim period are not indicative of any future interim periods or for an entire fiscal year.

2. Recent Accounting Pronouncements
 
In May 2011, the FASB issued updated accounting guidance to amend existing requirements for fair value measurements and disclosures.  The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed.  It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity.  The guidance is effective for interim and annual financial periods beginning after December 15, 2011.  The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.
 
In June 2011, the FASB issued updated accounting guidance that improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity.  The amendments to the existing standard require that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendments to the existing standard do not change the current option for presenting components of other comprehensive income (“OCI”) gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements.  Additionally, the standard does not affect the calculation or reporting of earnings per share.  This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2011 and is to be applied retrospectively, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.
 
In September 2011, the FASB issued updated guidance intended to simplify how entities, both public and nonpublic, test for goodwill and impairment.  This guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  Also, the guidance improves the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test.  This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.
 
In September 2011, the FASB issued updated guidance applicable to nongovernmental employers that participate in multiemployer pension and other postretirement benefit plans. The revised accounting rules will require enhanced disclosures relating to an employer’s participation in a multiemployer pension plan, but more limited disclosures for multiemployer plans that provide postretirement benefits other than pensions. This guidance is effective for fiscal years ending after December 15, 2011, with early adoption permitted.  The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.
 
In December 2011, the FASB issued updated guidance that requires companies with financial instruments and derivative instruments that are offset on the balance sheet or subject to a master netting arrangement to provide additional disclosures regarding the instrument’s impact on a company’s financial position.  This guidance is effective for interim and annual fiscal periods beginning on or after January 1, 2013.  The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.
 
3. Acquisitions
 
During the twenty-six weeks ended February 25, 2012, the Company acquired no businesses. Whenever the Company acquires a business, consistent with current accounting guidance, the results of operations of the acquisition are included in the Company’s consolidated financial results from the date of the acquisition.

4. Fair Value Measurements

US GAAP 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.

The fair value hierarchy prescribed under US GAAP contains three levels as follows:

  Level 1 –  
Quoted prices in active markets for identical assets or liabilities.

  Level 2 –  
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

  Level 3 –  
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

All financial assets or liabilities that are measured at fair value on a recurring basis (at least annually) have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.  The assets or liabilities measured at fair value on a recurring basis are summarized in the table below (in thousands):

   
As of February 25, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
Assets:
                       
Cash equivalents
  $ 40,563     $     $     $ 40,563  
     Total
  $ 40,563     $     $     $ 40,563  
                                 
The Company’s cash equivalents listed above represent money market securities and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Company does not adjust the quoted market price for such financial instruments.

5. Derivative Instruments and Hedging Activities

In January 2008, the Company entered into an interest rate swap agreement to manage its exposure to interest rate movements and the related effect on its variable rate debt. The Company concluded that the interest rate swap met the criteria to qualify as a cash flow hedge under US GAAP. Accordingly, the Company reflected all changes in the fair value of the swap agreement in accumulated other comprehensive income, a component of shareholders’ equity. The swap agreement, with a notional amount of $100.0 million, matured on March 14, 2011. The Company paid a fixed rate of 3.51% and received a variable rate tied to the three month LIBOR rate.

As of February 25, 2012 and August 27, 2011, there were no fair value amounts recorded by the Company related to this agreement as it matured on March 14, 2011.  As of February 25, 2012, we had no outstanding derivative instruments.

The Company recorded any realized gains or losses from its interest rate swap as an adjustment to interest expense in its Consolidated Statements of Income.  For the thirteen weeks ended February 26, 2011, the Company reclassified a loss from accumulated other comprehensive income into interest expense totaling $0.8 million.  For the twenty-six weeks ended February 26, 2011, the Company reclassified a loss from accumulated other comprehensive income into interest expense totaling $1.6 million.

6. Employee Benefit Plans

Defined Contribution Retirement Savings Plan

The Company has a defined contribution retirement savings plan with a 401(k) feature for all eligible employees not under collective bargaining agreements. The Company matches a portion of the employee’s contribution and can make an additional contribution at its discretion. Contributions charged to expense under the plan for the thirteen weeks ended February 25, 2012 and February 26, 2011 were $2.9 million and $2.6 million, respectively. Contributions charged to expense under the plan for the twenty-six weeks ended February 25, 2012 and February 26, 2011 were $5.8 million and $5.2 million, respectively.

Pension Plans and Supplemental Executive Retirement Plans

The Company maintains an unfunded Supplemental Executive Retirement Plan for certain eligible employees of the Company, a non-contributory defined benefit pension plan covering union employees at one of its locations, and a frozen pension plan the Company assumed in connection with its acquisition of Textilease Corporation in fiscal 2004. The amount charged to expense related to these plans for both the thirteen weeks ended February 25, 2012 and February 26, 2011 was $0.5 million. The amounts charged to expense related to these plans for the twenty-six weeks ended February 25, 2012 and February 26, 2011 were $1.1 million and $1.0 million, respectively.

7. Net Income Per Share

The Company calculates net income per share in accordance with US GAAP, which requires the Company to allocate income to its unvested participating securities as part of its earnings per share (“EPS”) calculations.  The following table sets forth the computation of basic earnings per share using the two-class method for amounts attributable to the Company’s shares of Common Stock and Class B Common Stock (in thousands, except per share data):


   
Thirteen weeks ended
   
Twenty-six weeks ended
 
   
February 25,
   
February 26,
   
February 25,
   
February 26,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income
  $ 19,196     $ 16,277     $ 44,998     $ 40,041  
                                 
Allocation of net income for Basic:
                               
Common Stock
  $ 15,081     $ 12,750     $ 35,341     $ 31,356  
Class B Common Stock
    3,765       3,218       8,832       7,921  
Unvested participating shares
    350       309       825       764  
    $ 19,196     $ 16,277     $ 44,998     $ 40,041  
                                 
Weighted average number of shares for Basic:
                               
Common Stock
    14,873       14,778       14,856       14,766  
Class B Common Stock
    4,640       4,661       4,640       4,662  
Unvested participating shares
    394       408       396       410  
      19,907       19,847       19,892       19,838  
                                 
Earnings per share for Basic:
                               
Common Stock
  $ 1.01     $ 0.86     $ 2.38     $ 2.12  
Class B Common Stock
  $ 0.81     $ 0.69     $ 1.90     $ 1.70  
                                 

For diluted EPS, the Company is required to calculate diluted EPS for Common Stock using the more dilutive of the following two methods:

 
 
The treasury stock method; or
 
 
 
The two-class method assuming a participating security is not exercised or converted.
 
For the thirteen and twenty-six weeks ended February 25, 2012, the Company’s diluted EPS assumes the conversion of all vested Class B Common Stock into Common Stock and uses the two-class method for its unvested participating shares as follows (in thousands, except per share data):

   
Thirteen weeks
   
Twenty-six weeks
 
   
ended February 25, 2012
   
ended February 25, 2012
 
   
Earnings
               
Earnings
             
   
to Common
   
Common
         
to Common
   
Common
       
   
shareholders
   
Shares
   
EPS
   
shareholders
   
Shares
   
EPS
 
                                     
As reported - Basic
  $ 15,081       14,873     $ 1.01     $ 35,341       14,856     $ 2.38  
                                                 
Add: effect of dilutive potential common shares
                                               
Share-based awards
          92                     79          
Class B Common Stock
    3,765       4,640               8,832       4,640          
                                                 
Add: Undistributed earnings allocated to
                                               
unvested participating shares
    337                     799                
                                                 
Less: Undistributed earnings reallocated to
                                               
unvested participating shares
    (320 )                   (759 )              
                                                 
Diluted EPS – Common Stock
  $ 18,863       19,605     $ 0.96     $ 44,213       19,575     $ 2.26  

Share-based awards that would result in the issuance of 17,454 and 16,369 shares of Common Stock were excluded from the calculation of diluted earnings per share for the thirteen and twenty-six weeks ended February 25, 2012, respectively, because they were anti-dilutive.

For the thirteen and twenty-six weeks ended February 26, 2011, the Company’s diluted EPS assumes the conversion of all vested Class B Common Stock into Common Stock and uses the two-class method for its unvested participating shares as follows (in thousands, except per share data):

   
Thirteen weeks
   
Twenty-six weeks
 
   
ended February 26, 2011
   
ended February 26, 2011
 
   
Earnings
               
Earnings
             
   
to Common
   
Common
         
to Common
   
Common
       
   
shareholders
   
Shares
   
EPS
   
shareholders
   
Shares
   
EPS
 
                                     
As reported - Basic
  $ 12,750       14,778     $ 0.86     $ 31,356       14,766     $ 2.12  
                                                 
Add: effect of dilutive potential common shares
                                               
Share-based awards
          89                     75          
Class B Common Stock
    3,218       4,661               7,921       4,662          
                                                 
Add: Undistributed earnings allocated to
                                               
unvested participating shares
    295                     737                
                                                 
Less: Undistributed earnings reallocated to
                                               
unvested participating shares
    (280 )                   (700 )              
                                                 
Diluted EPS – Common Stock
  $ 15,983       19,528     $ 0.82     $ 39,314       19,503     $ 2.02  

Share-based awards that would result in the issuance of 19,197 and 127,780 shares of Common Stock were excluded from the calculation of diluted earnings per share for the thirteen and twenty-six weeks ended February 26, 2011, respectively, because they were anti-dilutive.

8. Asset Retirement Obligations

The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company continues to depreciate, on a straight-line basis, the amount added to property, plant and equipment and recognizes accretion expense in connection with the discounted liability over the various remaining lives which range from approximately one to thirty-two years.

A reconciliation of the Company’s asset retirement liability is as follows (in thousands):

   
February 25,
2012
 
Beginning balance as of August 27, 2011
  $ 9,488  
Accretion expense
    316  
Ending balance as of February 25, 2012
  $ 9,804  

Asset retirement obligations are included in long-term accrued liabilities in the accompanying Consolidated Balance Sheet.

9. Commitments and Contingencies

The Company and its operations are subject to various federal, state and local laws and regulations governing, among other things, the generation, handling, storage, transportation, treatment and disposal of hazardous waste and other substances. In particular, industrial laundries use and must dispose of detergent waste water and other residues, and, in the past used perchloroethylene and other dry cleaning solvents.  The Company is attentive to the environmental concerns surrounding the disposal of these materials and has, through the years, taken measures to avoid their improper disposal. In the past, the Company has settled, or contributed to the settlement of, actions or claims brought against the Company relating to the disposal of hazardous materials and there can be no assurance that the Company will not have to expend material amounts to remediate the consequences of any such disposal in the future.

US GAAP requires that a liability for contingencies be recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. The Company regularly consults with attorneys and outside consultants in its consideration of the relevant facts and circumstances before recording a contingent liability. Changes in enacted laws, regulatory orders or decrees, management’s estimates of costs, insurance proceeds, participation by other parties, the timing of payments and the input of outside consultants and attorneys based on changing legal or factual circumstances could have a material impact on the amounts recorded for environmental and other contingent liabilities.

Under environmental laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on, or in, or emanating from, such property, as well as related costs of investigation and property damage. Such laws often impose liability without regard to whether the owner or lessee knew of, or was responsible for the presence of such hazardous or toxic substances. There can be no assurances that acquired or leased locations have been operated in compliance with environmental laws and regulations or that future uses or conditions will not result in the imposition of liability upon the Company under such laws or expose the Company to third-party actions such as tort suits. The Company continues to address environmental conditions under terms of consent orders negotiated with the applicable environmental authorities or otherwise with respect to sites located in or related to Woburn, Massachusetts, Somerville, Massachusetts, Springfield, Massachusetts, Uvalde, Texas, Stockton, California, three sites related to former operations in Williamstown, Vermont, as well as sites located in Goldsboro, North Carolina, Wilmington, North Carolina and Landover, Maryland.

The Company has accrued certain costs related to the sites described above as it has been determined that the costs are probable and can be reasonably estimated. The Company continues to implement mitigation measures and to monitor environmental conditions at the Somerville, Massachusetts site. The Company also has potential exposure related to an additional parcel of land (the "Central Area") related to the Woburn, Massachusetts site discussed above. Currently, the consent decree for the Woburn site does not define or require any remediation work in the Central Area. The United States Environmental Protection Agency (the "EPA") has provided the Company and other signatories to the consent decree with comments on the design and implementation of groundwater and soil remedies at the Woburn site and investigation of environmental conditions in the Central Area.  The Company, and other signatories, have implemented and proposed to do additional work at the Woburn site but many of the EPA’s comments remain to be resolved.  The Company has accrued costs to perform certain work responsive to EPA's comments.  In addition, in April 2011, the Company received a request from the EPA under the Clean Air Act for information regarding its handling of and operations with respect to the laundering of soiled towels.  The Company has responded to this request.

The Company routinely reviews and evaluates sites that may require remediation and monitoring and determines its estimated costs based on various estimates and assumptions. These estimates are developed using its internal sources or by third party environmental engineers or other service providers. Internally developed estimates are based on:

 
 
Management’s judgment and experience in remediating and monitoring the Company’s sites;
 
 
 
Information available from regulatory agencies as to costs of remediation and monitoring;
 
 
 
The number, financial resources and relative degree of responsibility of other potentially responsible parties (PRPs) who may be liable for remediation and monitoring of a specific site; and
 
 
 
The typical allocation of costs among PRPs.

There is usually a range of reasonable estimates of the costs associated with each site. The Company’s accruals reflect the amount within the range that constitutes its best estimate. Where it believes that both the amount of a particular liability and the timing of the payments are reliably determinable, the Company adjusts the cost in current dollars using a rate of 3% for inflation until the time of expected payment and discounts the cost to present value using current risk-free interest rates.  As of February 25, 2012, the risk-free interest rates utilized by the Company ranged from 2.0% to 3.1%.

For environmental liabilities that have been discounted, the Company includes interest accretion, based on the effective interest method, in selling and administrative expenses on the Consolidated Statements of Income.  The changes to the Company’s environmental liabilities for the twenty-six weeks ended February 25, 2012 are as follows (in thousands):

   
February 25, 2012
 
Beginning balance as of August 27, 2011
  $ 18,368  
Costs incurred for which reserves have been provided
    (694 )
Insurance proceeds received
    137  
Interest accretion
    316  
Change in discount rates
    760  
         
Balance as of February 25, 2012
  $ 18,887  

Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of February 25, 2012, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below.

(In thousands)
 
2012
   
2013
   
2014
   
2015
   
2016
   
Thereafter
   
Total
 
Estimated costs – current dollars
  $ 3,641     $ 2,366     $ 1,766     $ 919     $ 766     $ 12,386     $ 21,844  
                                                         
Estimated insurance proceeds
        (22 )     (173 )     (159 )     (173 )     (159 )     (1,893 )     (2,579 )
                                                         
Net anticipated costs
  $ 3,619     $ 2,193     $ 1,607     $ 746     $ 607     $ 10,493     $ 19,265  
                                                         
Effect of inflation
                                                    7,301  
Effect of discounting
                                                    (7,679 )
                                                         
Balance as of February 25, 2012
                                                  $ 18,887  

Estimated insurance proceeds are primarily received from an annuity received as part of a legal settlement with an insurance company. Annual proceeds of approximately $0.3 million are deposited into an escrow account which funds remediation and monitoring costs for three sites related to former operations in Williamstown, Vermont. Annual proceeds received but not expended in the current year accumulate in this account and may be used in future years for costs related to this site through the year 2027. As of February 25, 2012, the balance in this escrow account, which is held in a trust and is not recorded in the Company’s Consolidated Balance Sheet, was approximately $3.0 million. Also included in estimated insurance proceeds are amounts the Company is entitled to receive pursuant to legal settlements as reimbursements from three insurance companies for estimated costs at the site in Uvalde, Texas.

The Company’s nuclear garment decontamination facilities are licensed by the Nuclear Regulatory Commission (“NRC”), or, in certain cases, by the applicable state agency, and are subject to regulation by federal, state and local authorities. There can be no assurance that such regulation will not lead to material disruptions in the Company’s garment decontamination business.

From time to time, the Company is also subject to legal proceedings and claims arising from the conduct of its business operations, including litigation related to charges for certain ancillary services on invoices, personal injury claims, customer contract matters, employment claims and environmental matters as described above.

While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits and environmental contingencies, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts accrued or covered by insurance, will not have a material adverse effect on the consolidated financial position and/or results of operations of the Company. It is possible, however, that future financial position or results of operations for any particular period could be materially affected by changes in the Company’s assumptions or strategies related to these contingencies or changes out of the Company’s control.

10. Income Taxes

The Company’s effective income tax rate was 38.3% for both the thirteen and twenty-six weeks ended February 25, 2012 as compared to 38.2% and 37.5% for the thirteen and twenty-six weeks ended February 26, 2011, respectively.  The increase in the effective income tax rate for the twenty-six weeks ended February 25, 2012 was due to the fact that the 2011 rate benefited from the reversal of tax contingency reserves related to the resolution of certain state tax audits.  The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense which is consistent with the recognition of these items in prior reporting periods.  During the twenty-six weeks ended February 25, 2012, there were no material changes in the amount of unrecognized tax benefits or the amount accrued for interest and penalties.

U.S. and Canadian federal income tax statutes have lapsed for filings up to and including fiscal years 2007 and 2004, respectively. With a few exceptions, the Company is no longer subject to state and local income tax examinations for periods prior to fiscal 2006.  The Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change significantly in the next 12 months.

11. Long-Term Debt

On May 5, 2011, the Company entered into a $250.0 million unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks, which matures on May 4, 2016.  Under the Credit Agreement, the Company is able to borrow funds at variable interest rates based on, at the Company’s election, the Eurodollar rate or a base rate, plus in each case a spread based on the Company’s consolidated funded debt ratio.  Availability of credit requires compliance with certain financial and other covenants, including a maximum consolidated funded debt ratio and minimum consolidated interest coverage ratio as defined in the Credit Agreement.  The Company tests its compliance with these financial covenants on a fiscal quarterly basis. At February 25, 2012, the interest rates applicable to the Company’s borrowings under the Credit Agreement would be calculated as LIBOR plus 100 basis points at the time of the respective borrowing.  As of February 25, 2012, the Company had no outstanding borrowings, letters of credit amounting to $43.2 million and $206.8 million available for borrowing under the Credit Agreement.

Prior to May 5, 2011, the Company had a $225.0 million unsecured revolving credit agreement (the “Prior Credit Agreement”) with a syndicate of banks, which was scheduled to mature on September 13, 2011.  In connection with the Company's entry into the Credit Agreement, the Company terminated the Prior Credit Agreement.

On September 14, 2006, the Company issued $100.0 million of floating rates notes (“Floating Rate Notes”) pursuant to a Note Purchase Agreement (“2006 Note Agreement”).  The Floating Rate Notes mature on September 14, 2013, bear interest at LIBOR plus 50 basis points and may be repaid at face value two years from the date of issuance.

As of February 25, 2012, the Company was in compliance with all covenants under the Credit Agreement and the 2006 Note Agreement.

12. Other Comprehensive Income

The components of other comprehensive income are as follows (in thousands):

   
Thirteen weeks ended
   
Twenty-six weeks ended
 
   
February 25,
   
February 26,
   
February 25,
   
February 26,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income
  $ 19,196     $ 16,277     $ 44,998     $ 40,041  
Other comprehensive income, net of tax:
                               
Foreign currency translation adjustments
    5,088       3,907       (2,310 )     6,798  
Interest rate swap
          461             917  
                                 
Comprehensive income
  $ 24,284     $ 20,645     $ 42,688     $ 47,756  

13. Segment Reporting

Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Company’s chief executive officer. The Company has six operating segments based on the information reviewed by its chief executive officer: US Rental and Cleaning, Canadian Rental and Cleaning, Manufacturing (“MFG”), Corporate, Specialty Garments Rental and Cleaning (“Specialty Garments”) and First Aid. The US Rental and Cleaning and Canadian Rental and Cleaning operating segments have been combined to form the US and Canadian Rental and Cleaning reporting segment, and as a result, the Company has five reporting segments.

The US and Canadian Rental and Cleaning reporting segment purchases, rents, cleans, delivers and sells, uniforms and protective clothing and non-garment items in the United States and Canada.  The laundry locations of the US and Canadian Rental and Cleaning reporting segment are referred to by the Company as “industrial laundries” or “industrial laundry locations.”

The MFG operating segment designs and manufactures uniforms and non-garment items solely for the purpose of providing these goods to the US and Canadian Rental and Cleaning reporting segment. MFG revenues are generated when goods are shipped from the Company’s manufacturing facilities, or its subcontract manufacturers, to other Company locations. These revenues are recorded at a transfer price which is typically in excess of the actual manufacturing cost. Products are carried in inventory and subsequently placed in service and amortized at this transfer price. On a consolidated basis, intercompany revenues and income are eliminated and the carrying value of inventories and rental merchandise in service is reduced to the manufacturing cost.  Income before income taxes from MFG net of the intercompany MFG elimination offsets the merchandise amortization costs incurred by the US and Canadian Rental and Cleaning reporting segment as the merchandise costs of this reporting segment are amortized and recognized based on inventories purchased from MFG at the transfer price which is above the Company’s manufacturing cost.

The Corporate operating segment consists of costs associated with the Company’s distribution center, sales and marketing, information systems, engineering, materials management, manufacturing planning, finance, budgeting, human resources, other general and administrative costs and interest expense. The revenues generated from the Corporate operating segment represent certain direct sales made by the Company directly from its distribution center. The products sold by this operating segment are the same products rented and sold by the US and Canadian Rental and Cleaning reporting segment. In the table below, no assets or capital expenditures are presented for the Corporate operating segment because no assets are allocated to this operating segment in the information reviewed by the chief executive officer. However, depreciation and amortization expense related to certain assets are reflected in income from operations and income before income taxes for the Corporate operating segment. The assets that give rise to this depreciation and amortization are included in the total assets of the US and Canadian Rental and Cleaning reporting segment as this is how they are tracked and reviewed by the Company.  The majority of expenses accounted for within the Corporate segment relate to costs of the US and Canadian Rental and Cleaning segment, with the remainder of the costs relating to the Specialty Garment and First
Aid segments.

The Specialty Garments operating segment purchases, rents, cleans, delivers and sells, specialty garments and non-garment items primarily for nuclear and cleanroom applications. The First Aid operating segment sells first aid cabinet services and other safety supplies.

The Company refers to the US and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as its “core laundry operations,” which is included as a subtotal in the following tables (in thousands):


 
US and
               
 
Canadian
     
Subtotal
       
 
Rental and
 
Net Interco
 
Core Laundry
Specialty
     
Thirteen weeks ended
Cleaning
MFG
MFG Elim
Corporate
Operations
Garments
First Aid
Total
 
                                                 
February 25, 2012
                                               
Revenues
$
273,742
 
$
34,992
 
$
(34,992
)
$
3,505
 
$
277,247
 
$
23,501
 
$
9,211
 
$
309,959
 
                                                 
Income (loss) from operations
$
35,038
 
$
11,018
 
$
(67
)
$
(18,540
)
$
27,449
 
$
2,576
 
$
811
 
$
30,836
 
                                                 
Interest (income) expense, net
$
(528
)
$
 
$
 
$
334
 
$
(194
)
$
 
$
 
$
(194
)
                                                 
Income (loss) before taxes
$
35,546
 
$
10,915
 
$
(67
)
$
(18,901
)
$
27,493
 
$
2,782
 
$
811
 
$
31,086
 
                                                 
 
                                               
February 26, 2011
                                               
Revenues
$
244,306
 
$
34,880
 
$
(34,880
)
$
2,562
 
$
246,868
 
$
23,516
 
$
8,211
 
$
278,595
 
                                                 
Income (loss) from operations
$
32,802
 
$
11,567
 
$
(1,739
)
$
(19,552
)
$
23,078
 
$
3,728
 
$
867
 
$
27,673
 
                                                 
Interest (income) expense, net
$
(604
)
$
 
$
 
$
2,152
 
$
1,548
 
$
 
$
 
$
1,548
 
                                                 
Income (loss) before taxes
$
33,396
 
$
11,516
 
$
(1,739
)
$
(21,705
)
$
21,468
 
$
4,009
 
$
867
 
$
26,344
 

 
US and
               
 
Canadian
     
Subtotal
       
 
Rental and
 
Net Interco
 
Core Laundry
Specialty
     
Twenty-six weeks ended
Cleaning
MFG
MFG Elim
Corporate
Operations
Garments
First Aid
Total
 
 
                                               
February 25, 2012
                                               
Revenues
$
542,952
 
$
76,378
 
$
(76,378
)
$
6,568
 
$
549,520
 
$
53,769
 
$
19,695
 
$
622,984
 
                                                 
Income (loss) from operations
$
78,769
 
$
22,500
 
$
(99
)
$
(38,739
)
$
62,431
 
$
9,142
 
$
1,617
 
$
73,190
 
                                                 
Interest (income) expense, net
$
(1,107
)
$
 
$
 
$
855
 
$
(252
)
$
 
$
 
$
(252
)
                                                 
Income (loss) before taxes
$
79,865
 
$
22,518
 
$
(99
)
$
(39,603
)
$
62,681
 
$
8,573
 
$
1,617
 
$
72,871
 
                                                 
 
                                               
February 26, 2011
                                               
Revenues
$
480,498
 
$
72,585
 
$
(72,585
)
$
5,061
 
$
485,559
 
$
49,327
 
$
16,799
 
$
551,685
 
                                                 
Income (loss) from operations
$
74,986
 
$
25,448
 
$
(6,798
)
$
(36,144
)
$
57,492
 
$
7,757
 
$
1,594
 
$
66,843
 
                                                 
Interest (income) expense, net
$
(1,113
)
$
 
$
 
$
4,282
 
$
3,169
 
$
 
$
 
$
3,169
 
                                                 
Income (loss) before taxes
$
76,083
 
$
25,345
 
$
(6,798
)
$
(40,422
)
$
54,208
 
$
8,263
 
$
1,594
 
$
64,065
 

14. Subsequent Events

On March 27, 2012, the Company entered into a settlement related to environmental litigation.  As a result of the settlement, the Company expects to recognize a pre-tax gain in its fiscal third quarter of approximately $6.7 million.   Such gain consists of contingent amounts previously received but not recognized into income as well as amounts that the Company expects to receive in the third quarter.
 
 
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR FOR FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and any documents incorporated by reference contain forward looking statements within the meaning of the federal securities laws.  Forward looking statements contained in this Quarterly Report on Form 10-Q and any documents incorporated by reference are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.  Forward looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “could,” “should,” “may,” “will,” or the negative versions thereof, and similar expressions and by the context in which they are used.  Such forward looking statements are based upon our current expectations and speak only as of the date made.  Such statements are highly dependent upon a variety of risks, uncertainties and other important factors that could cause actual results to differ materially from those reflected in such forward looking statements.  Such factors include, but are not limited to, uncertainties caused by the continuing adverse worldwide economic conditions, uncertainties regarding our ability to consummate and successfully integrate acquired businesses, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, our ability to compete successfully without any significant degradation in our margin rates, seasonal fluctuations in business levels, our ability to preserve positive labor relationships and avoid becoming the target of corporate labor unionization campaigns that could disrupt our business, the effect of currency fluctuations on our results of operations and financial condition, our dependence on third parties to supply us with raw materials, any loss of key management or other personnel, increased costs as a result of any future changes in federal or state laws, rules and regulations or governmental interpretation of such laws, rules and regulations, uncertainties regarding the price levels of natural gas, electricity, fuel and labor, the impact of adverse economic conditions and the current tight credit markets on our customers and such customers’ workforces, the level and duration of workforce reductions by our customers, the continuing increase in domestic healthcare costs, demand and prices for our products and services, rampant criminal activity and instability in Mexico where our principal garment manufacturing plants are located, additional professional and internal costs necessary for compliance with recent and proposed future changes in Securities and Exchange Commission, New York Stock Exchange and accounting rules, strikes and unemployment levels, our efforts to evaluate and potentially reduce internal costs, economic and other developments associated with the war on terrorism and its impact on the economy, general economic conditions and other factors described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 27, 2011 and in other filings with the Securities and Exchange Commission.  We undertake no obligation to update any forward looking statements to reflect events or circumstances arising after the date on which such statements are made.
 
Business Overview

UniFirst Corporation, together with its subsidiaries, hereunder referred to as “we”, “our”, the “Company”, or “UniFirst”, is one of the largest providers of workplace uniforms and protective clothing in the United States.  We design, manufacture, personalize, rent, clean, deliver, and sell a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks, aprons and specialized protective wear, such as flame resistant and high visibility garments.  We also rent industrial wiping products, floor mats, facility service products and other non-garment items, and provide first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies.

We serve businesses of all sizes in numerous industry categories. Typical customers include automobile service centers and dealers, delivery services, food and general merchandise retailers, food processors and service operations, light manufacturers, maintenance facilities, restaurants, service companies, soft and durable goods wholesalers, transportation companies, and others who require employee clothing for image, identification, protection or utility purposes. We also provide our customers with restroom supplies, including air fresheners, paper products and hand soaps.

At certain specialized facilities, we also decontaminate and clean work clothes that may have been exposed to radioactive materials and service special cleanroom protective wear. Typical customers for these specialized services include government agencies, research and development laboratories, high technology companies and utilities operating nuclear reactors.

We continue to expand into additional geographic markets through acquisitions and organic growth.  We currently service over 240,000 customer locations in the United States, Canada and Europe from 214 customer service, distribution and manufacturing facilities.
 
As discussed and described in Note 13 to the Consolidated Financial Statements, we have five reporting segments: US and Canadian Rental and Cleaning, Manufacturing (“MFG”), Corporate, Specialty Garments Rental and Cleaning (“Specialty Garments”) and First Aid. We refer to the laundry locations of the US and Canadian Rental and Cleaning reporting segment as “industrial laundries” or “industrial laundry locations”, and to the US and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our “core laundry operations.”

Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in conformity with United States generally accepted accounting principles (“US 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.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, the most important and pervasive accounting policies used and areas most sensitive to material changes from external factors. See Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 27, 2011 for additional discussion of the application of these and other accounting policies.

Results of Operations

The following table presents certain selected financial data, including the percentage of revenues represented by each item, for the thirteen and twenty-six weeks ended February 25, 2012 and the thirteen and twenty-six weeks ended February 26, 2011.  Cost of revenues presented in the table below include merchandise costs related to the amortization of rental merchandise in service and direct sales as well as labor and other production, service and delivery costs associated with operating our industrial laundries, Specialty Garments facilities, First Aid locations and our distribution center. Selling and administrative costs include costs related to our sales and marketing functions as well as general and administrative costs associated with our corporate offices and operating locations including information systems, engineering, materials management, manufacturing planning, finance, budgeting, and human resources.

   
Thirteen weeks ended
   
Twenty-six weeks ended
 
(In thousands, except percentages)
 
February 25, 2012
   
%
of Rev.
   
February 26, 2011
   
%
of Rev.
   
% Change
   
February 25, 2012
   
%
of Rev.
   
February 26, 2011
   
%
of Rev.
   
% Change
 
                                                             
Revenues
  $ 309,959       100.0 %   $ 278,595       100.0 %     11.3 %   $ 622,984       100.0 %   $ 551,685       100.0 %     12.9 %
                                                                                 
Operating expenses:
                                                                               
Cost of revenues (1)
    201,437       65.0       176,233       63.3       14.3       396,576       63.7       339,468       61.5       16.8  
Selling and administrative expenses (1)
    61,197       19.7       58,614       21.0       4.4       120,321       19.3       113,797       20.6       5.7  
Depreciation and amortization
    16,489       5.3       16,075       5.8       2.6       32,897       5.3       31,577       5.7       4.2  
    Total operating expenses
    279,123       90.1       250,922       90.1       11.2       549,794       88.3       484,842       87.9       13.4  
                                                                                 
Income from operations
    30,836       9.9       27,673       9.9       11.4       73,190       11.7       66,843       12.1       9.5  
                                                                                 
Other (income) expense
    (250 )     -0.1       1,329       0.5       -118.8       319       0.1       2,778       0.5       -88.5  
                                                                                 
Income before income taxes
    31,086       10.0       26,344       9.5       18.0       72,871       11.7       64,065       11.6       13.7  
Provision for income taxes
    11,890       3.8       10,067       3.6       18.1       27,873       4.5       24,024       4.4       16.0  
                                                                                 
Net income
  $ 19,196       6.2 %   $ 16,277       5.8 %     17.9 %   $ 44,998       7.2 %   $ 40,041       7.3 %     12.4 %

 (1) Exclusive of depreciation on our property, plant and equipment and amortization on our intangible assets.

General

We derive our revenues through the design, manufacture, personalization, rental, cleaning, delivering, and selling of a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks and aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent industrial wiping products, floor mats, facility service products, other non-garment items, and provide first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies.  We have five reporting segments: US and Canadian Rental and Cleaning, Manufacturing (“MFG”), Corporate, Specialty Garments Rental and Cleaning (“Specialty Garments”) and First Aid. We refer to the US and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our “core laundry operations.”

Cost of revenues includes merchandise costs related to the amortization of rental merchandise in service and direct sales as well as labor and other production, service and delivery costs, and distribution costs associated with operating our core laundry operations, Specialty Garments facilities, and First Aid locations. Selling and administrative costs include costs related to our sales and marketing functions as well as general and administrative costs associated with our corporate offices and operating locations including information systems, engineering, materials management, manufacturing planning, finance, budgeting, and human resources.

As part of our recent revenue growth, we have been experiencing increased merchandise costs.  This increase has been primarily due to our increased investment in merchandise to the levels needed to support our growing wearer base.  During fiscal 2009 and early fiscal 2010, our results of operations benefited from our utilization of used garments that our customers returned to us as a result of reductions in their workforces. Since fiscal 2010, we have put significantly more new garments into service to meet the day-to-day needs of our existing wearer base.  In addition, increased new account sales, including some larger national accounts, have also required us to make a large initial investment in merchandise. The increased merchandise cost is also the result of strong growth in our flame resistant and high visibility product lines.  This growth is the result of increased oil and natural gas exploration as well as tighter regulations that have caused uniform wearers in a number of industries to convert to these more protective garments.  In addition to a higher number of new garments being placed in service to support our customer base, we have also been impacted by higher fabric prices in our overall merchandise costs. We expect the increase in merchandise costs to continue throughout fiscal 2012, which will have a negative effect on our margins throughout this period.
 
The price of fuel and energy needed to run our vehicles and equipment is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns, limits on refining capacities, natural disasters and environmental concerns. As discussed below, the recent increases in fuel costs have had a negative impact on our delivery and production costs.  Further increases in fuel costs could impact our results going forward.

The current worldwide economic weakness and uncertainty as well as high unemployment rates in the U.S. and Canada may negatively impact our revenues and operating performance in fiscal 2012 and beyond due to the impact on spending plans and employment levels of our customers and sales prospects.
 
On March 27, 2012, we entered into a settlement related to environmental litigation.  As a result of the settlement, we expect to recognize a pre-tax gain in our fiscal third quarter of approximately $6.7 million.   Such gain consists of contingent amounts previously received but not recognized into income as well as amounts that we expect to receive in the third quarter.  We anticipate this gain will positively impact our third quarter earnings by approximately $0.21 per diluted common share.

 
 

 


Thirteen weeks ended February 25, 2012 compared with thirteen weeks ended February 26, 2011

Revenues

   
February 25,
   
February 26,
   
Dollar
   
Percent
 
(In thousands, except percentages)
 
2012
   
2011
   
Change
   
Change
 
                         
   Core Laundry Operations
  $ 277,247     $ 246,868     $ 30,379       12.3 %
   Specialty Garments
    23,501       23,516       (15 )     -0.1  
   First Aid
    9,211       8,211       1,000       12.2  
Consolidated total
  $ 309,959     $ 278,595     $ 31,364       11.3 %

For the thirteen weeks ended February 25, 2012, our consolidated revenues increased by $31.4 million from the comparable period in fiscal 2011, or 11.3%.  This increase was primarily driven by a $30.4 million increase in revenues in our core laundry operations.  Core laundry revenues increased to $277.2 million for the thirteen weeks ended February 25, 2012 from $246.9 million for the comparable period of 2011, or 12.3%. This increase was primarily attributable to positive organic growth of 11.2%.  Organic growth is comprised of new sales, additions to our existing customer base and price increases, offset by lost accounts and reductions to our existing customer base. Our positive organic growth rate in our core laundry operations was accompanied by positive acquisition related growth of 1.2% offset by the effect of unfavorable fluctuations in the Canadian foreign exchange rate, which accounted for a 0.1% decrease in revenue for the thirteen weeks ended February 25, 2012 compared to the same period in fiscal 2011.

Specialty Garments’ revenues were $23.5 million for both the second quarter of fiscal 2012 and fiscal 2011. First Aid revenues increased by $1.0 million, or 12.2%, for the thirteen weeks ended February 25, 2012 as compared to the same period in fiscal 2011 as a result of better performance from the segment’s wholesale distribution and pill packaging operations.
 
Cost of Revenues

Cost of revenues increased as a percentage of revenues from 63.3%, or $176.2 million, for the thirteen weeks ended February 26, 2011, to 65.0%, or $201.4 million, for the thirteen weeks ended February 25, 2012. This increase was primarily the result of an increase in overall merchandise costs as a percentage of revenues in our core laundry operations. These higher costs were partially offset by lower payroll, energy and other production costs as a percentage of revenues in our core laundry operations, primarily due to the strong revenue growth this segment experienced in the thirteen weeks ended February 25, 2012.

Selling and Administrative Expense

Our selling and administrative expense decreased as a percentage of revenues to 19.7%, or $61.2 million, for the thirteen weeks ended February 25, 2012, from 21.0%, or $58.6 million, for the thirteen weeks ended February 26, 2011.  This decrease was primarily due to lower payroll, payroll-related and other general and administrative costs as a percentage of revenues primarily due to the strong revenue growth we experienced in the thirteen weeks ended February 25, 2012.

Depreciation and Amortization

Our depreciation and amortization expense was $16.5 million, or 5.3% of revenues, for the thirteen weeks ended February 25, 2012 compared to $16.1 million, or 5.8% of revenues, for the thirteen weeks ended February 26, 2011. Depreciation and amortization expense increased due to capital expenditure and acquisition activity in earlier periods but decreased as a percentage of revenues due to the strong revenue growth we experienced in the thirteen weekd ended February 25, 2012.

Income from Operations

For the thirteen weeks ended February 25, 2012 and February 26, 2011, changes in our revenues and costs as discussed above resulted in the following changes in our income from operations:

   
February 25,
   
February 26,
   
Dollar
   
Percent