NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, 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 29, 2013
("fiscal
2013
"). 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
September 28, 2013
, and the results of our operations for the
three months ended
September 28, 2013
and
September 29, 2012
and our cash flows for the
three months ended
September 28, 2013
and
September 29, 2012
.
The results of operations for the
three month periods ended
September 28, 2013
and
September 29, 2012
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
2013
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. As of
September 28, 2013
and
June 29, 2013
, we had reserves of approximately
$1,800
and
$1,700
, respectively, related to these matters. There was
$283
of expense for these matters for the
three months ended September 28, 2013
. There was
no
expense for these matters for the
three month period ended
September 29, 2012
.
Legal Matters
The United States Office of Federal Contract Compliance Programs, or OFCCP, is, as part of routine audits, conducting a review of certain of our employment practices. The OFCCP has issued a Notice of Violations to
one
of our facilities and audits of
nine
other facilities, where the OFCCP may claim 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. We have signed a Conciliation Agreement resolving the Notice of Violations mentioned above. Beyond that, no proceedings with respect to these matters have been commenced. While we cannot predict the ultimate outcome of these matters with certainty and it is possible that we may incur additional losses in excess of established reserves, we believe the possibility of a material adverse effect on our results of operations or financial position is remote.
See
Note 13, "Employee Benefit Plans"
of the Notes to the Consolidated Condensed Financial Statements for information regarding disputed amounts related to our withdrawal from the Central States Southeast and Southwest Areas Pension Fund.
3. New Accounting Pronouncements
In February 2013, the FASB issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification. The updated guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company's adoption of this guidance in the first quarter of fiscal 2014 resulted in a change in the presentation of the Notes to the Consolidated Condensed Financial Statements and did not have any effect on the Company's results of operations or financial position.
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 management’s 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 quarter of
fiscal years
2013
or
2014
.
The following tables summarize the assets and liabilities measured at fair value on a recurring basis as of
September 28, 2013
and
June 29, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 28, 2013
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Total
|
Other assets:
|
|
|
|
|
|
Money market mutual funds
|
$
|
3,283
|
|
|
$
|
—
|
|
|
$
|
3,283
|
|
Equity and fixed income mutual funds
|
26,247
|
|
|
—
|
|
|
26,247
|
|
Cash surrender value of life insurance policies
|
—
|
|
|
13,660
|
|
|
13,660
|
|
Total assets
|
$
|
29,530
|
|
|
$
|
13,660
|
|
|
$
|
43,190
|
|
Accrued expenses:
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
1,310
|
|
|
$
|
1,310
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
1,310
|
|
|
$
|
1,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 29, 2013
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Total
|
Other assets:
|
|
|
|
|
|
Money market mutual funds
|
$
|
2,964
|
|
|
$
|
—
|
|
|
$
|
2,964
|
|
Equity and fixed income mutual funds
|
23,811
|
|
|
—
|
|
|
23,811
|
|
Cash surrender value of life insurance policies
|
—
|
|
|
13,377
|
|
|
13,377
|
|
Total assets
|
$
|
26,775
|
|
|
$
|
13,377
|
|
|
$
|
40,152
|
|
Accrued expenses:
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
1,136
|
|
|
$
|
1,136
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
1,136
|
|
|
$
|
1,136
|
|
The cash surrender value of life insurance policies are primarily investments established to fund the obligations of the company's non-qualified, non-contributory supplemental executive retirement plan (SERP). The money market, equity
and fixed income mutual funds are investments established to fund the obligations of the company’s non-qualified deferred compensation plan.
The following tables summarize the fair values of assets and liabilities that are recorded at historical cost as of
September 28, 2013
and
June 29, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 28, 2013
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash and cash equivalents
|
$
|
35,587
|
|
|
$
|
—
|
|
|
$
|
35,587
|
|
Total assets
|
$
|
35,587
|
|
|
$
|
—
|
|
|
$
|
35,587
|
|
Current maturities of long-term debt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt, net of current maturities
|
—
|
|
|
181,600
|
|
|
181,600
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
181,600
|
|
|
$
|
181,600
|
|
|
|
|
|
|
|
|
As of June 29, 2013
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash and cash equivalents
|
$
|
38,590
|
|
|
$
|
—
|
|
|
$
|
38,590
|
|
Total assets
|
$
|
38,590
|
|
|
$
|
—
|
|
|
$
|
38,590
|
|
Current maturities of long-term debt
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
18
|
|
Long-term debt, net of current maturities
|
—
|
|
|
175,000
|
|
|
175,000
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
175,018
|
|
|
$
|
175,018
|
|
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. These interest rate swap contracts 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.
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 interest expense is recognized. Cash payments or receipts are included in "Net cash provided by operating activities" in the Condensed Consolidated Statements of Cash Flows in the same period as the cash is settled. 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
91.9%
of our outstanding variable rate debt had its interest payments modified using interest rate swap contracts at
September 28, 2013
.
As of
September 28, 2013
and
June 29, 2013
, we had
$1,310
and
$1,136
, respectively, of liabilities on interest rate swap contracts that are classified as "Accrued expenses" in the Condensed Consolidated Balance Sheets. Of the
$918
net gain deferred in accumulated other comprehensive income as of
September 28, 2013
, a
$308
loss is expected to be reclassified to interest expense in the next twelve months.
As of
September 28, 2013
and
June 29, 2013
, all derivative financial instruments were designated as hedging instruments.
As of
September 28, 2013
, 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"), all of which mature in
13
-
24
months. The
average rate on the
$75,000
of interest rate swap contracts was
1.25%
as of
September 28, 2013
. 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.
6. Income Taxes
Our effective tax rate
increased
to
38.2%
in the
three months ended
September 28, 2013
from
35.7%
in the
three months ended
September 29, 2012
. The tax rate for the prior period is lower than the current quarter due to a decrease of approximately
$400
in reserves for uncertain tax positions due to resolution of a tax contingency during the prior year quarter.
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
|
|
September 28,
2013
|
|
September 29,
2012
|
Basic earnings per share (shares in thousands):
|
|
|
|
Net income
|
$
|
13,821
|
|
|
$
|
11,894
|
|
Less: Income allocable to participating securities
|
(181
|
)
|
|
(175
|
)
|
Net income available to common stockholders
|
$
|
13,640
|
|
|
$
|
11,719
|
|
Weighted average shares outstanding, basic
|
19,429
|
|
|
18,681
|
|
Basic earnings per common share
|
$
|
0.70
|
|
|
$
|
0.63
|
|
Diluted earnings per share (shares in thousands):
|
|
|
|
Net income available to common stockholders
|
$
|
13,640
|
|
|
$
|
11,719
|
|
Weighted average shares outstanding, basic
|
19,429
|
|
|
18,681
|
|
Weighted average effect of non-vested restricted stock grants and assumed exercise of stock options
|
407
|
|
|
268
|
|
Weighted average shares outstanding, diluted
|
19,836
|
|
|
18,949
|
|
Diluted earnings per common share
|
$
|
0.69
|
|
|
$
|
0.62
|
|
We excluded potential common shares related to our outstanding equity compensation grants of
94,000
and
537,000
for the three months ended
September 28, 2013
and
September 29, 2012
, 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
September 28, 2013
and
June 29, 2013
are as follows:
|
|
|
|
|
|
|
|
|
|
September 28,
2013
|
|
June 29,
2013
|
Raw Materials
|
$
|
12,292
|
|
|
$
|
11,583
|
|
Work in Process
|
2,129
|
|
|
1,846
|
|
Finished Goods
|
44,906
|
|
|
44,156
|
|
New Inventories
|
59,327
|
|
|
57,585
|
|
Merchandise In Service
|
111,468
|
|
|
107,421
|
|
Total Inventories
|
$
|
170,795
|
|
|
$
|
165,006
|
|
We review the estimated useful lives of our in-service inventory assets on a periodic basis or when trends in our business indicate that the useful lives for certain products might have changed. During the fourth quarter of fiscal year 2013, we completed an analysis of certain in-service inventory assets which resulted in the estimated useful lives for these assets being extended to better reflect the estimated periods in which the assets will remain in service. The effect of the change in estimate increased income from operations by
$2,273
, net income by
$1,435
and basic and diluted earnings per common share by
$0.07
for the
three months ended
September 28, 2013
. In addition, the "Inventories, net" line item of the Consolidated Condensed Balance Sheets increased by approximately
$2,273
during the
three months ended September 28, 2013
and
$4,878
on a cumulative basis.
9. Goodwill and Intangible Assets
Goodwill by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Total
|
Balance as of June 29, 2013
|
$
|
270,306
|
|
|
$
|
64,087
|
|
|
$
|
334,393
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation and other
|
6
|
|
|
1,234
|
|
|
1,240
|
|
Balance as of September 28, 2013
|
$
|
270,312
|
|
|
$
|
65,321
|
|
|
$
|
335,633
|
|
There were no impairment losses recorded in the
three month periods ended
September 28, 2013
and
September 29, 2012
.
Other intangible assets, which are included in "Other assets" on the Condensed Consolidated Balance Sheets, are as follows:
|
|
|
|
|
|
|
|
|
|
September 28,
2013
|
|
June 29,
2013
|
Customer contracts and non-competition agreements
|
$
|
126,331
|
|
|
$
|
125,996
|
|
Accumulated amortization
|
(118,240
|
)
|
|
(117,149
|
)
|
Net
|
$
|
8,091
|
|
|
$
|
8,847
|
|
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
11
years.
Amortization expense was
$772
and
$1,181
for the
three months ended
September 28, 2013
and
September 29, 2012
, respectively. Estimated amortization expense for each of the next five fiscal years based on the intangible assets as of
September 28, 2013
is as follows:
|
|
|
|
|
2014 remaining
|
$
|
1,866
|
|
2015
|
1,926
|
|
2016
|
1,368
|
|
2017
|
1,166
|
|
2018
|
383
|
|
2019
|
149
|
|
10. Long-Term Debt
Debt as of
September 28, 2013
and
June 29, 2013
includes the following:
|
|
|
|
|
|
|
|
|
|
September 28, 2013
|
|
June 29, 2013
|
Borrowings under $250M Revolver
|
$
|
6,600
|
|
|
$
|
—
|
|
Borrowings under $75M Variable Rate Notes
|
75,000
|
|
|
75,000
|
|
Borrowings under $100M Fixed Rate Notes
|
100,000
|
|
|
100,000
|
|
Capital leases and other
|
—
|
|
|
18
|
|
|
181,600
|
|
|
175,018
|
|
Less current maturities
|
—
|
|
|
(18
|
)
|
Total long-term debt
|
$
|
181,600
|
|
|
$
|
175,000
|
|
We have a
$250,000
, unsecured revolving credit facility ("$250M Revolver") with a syndicate of banks, which expires on
March 7, 2017
. Borrowings in U.S. dollars under this credit facility generally bear interest at the adjusted London Interbank Offered Rate ("
LIBOR
") for specified interest periods plus a margin, which can range from
1.00%
to
2.00%
, depending on our consolidated leverage ratio. Additionally, we have access to a swingline facility under this line of credit as well as alternative base rate borrowings that are priced based on an agreed upon baseline rate plus a spread determined by the same consolidated leverage ratio.
As of
September 28, 2013
, borrowings outstanding under the revolving credit facility were
$6,600
at a rate of LIBOR plus a margin of
1.25%
. 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
$50,000
in letters of credit. As of
September 28, 2013
, letters of credit outstanding under this facility totaled
$636
and primarily related to our property and casualty insurance programs. No amounts have been drawn upon these letters of credit. We pay a fee on the unused daily balance of the revolving credit facility based on a leverage ratio calculated on a quarterly basis. At
September 28, 2013
this fee was
0.20%
of the unused daily balance.
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
September 28, 2013
:
|
|
|
|
|
|
|
|
|
|
Required
|
|
Actual
|
Maximum Leverage Ratio (Debt/EBITDA)
|
3.50
|
|
|
1.58
|
|
Minimum Interest Coverage Ratio (EBITDA/Interest Expense)
|
3.00
|
|
|
24.40
|
|
Minimum Net Worth
|
$
|
379,836
|
|
|
$
|
480,426
|
|
Our maximum leverage ratio and minimum interest coverage ratio covenants are calculated by adding back certain non-cash charges, as defined in our debt agreement.
Borrowings outstanding as of
September 28, 2013
under this facility bear interest at a weighted average all-in rate of
2.12%
.
On
April 12, 2013
, we amended this facility to remove the minimum net worth covenant. However, this change is not effective until the earlier of
June 30, 2015
or the date of full repayment of the
$75,000
variable rate unsecured private placement notes.
We have
$75,000
of variable rate unsecured private placement notes ("$75M Variable Rate Notes") bearing 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
September 28, 2013
, the outstanding balance of the notes was
$75,000
at an all-in rate of
0.87%
.
On September 27, 2013 we amended and restated our
$50,000
accounts receivable securitization facility ("$50M A/R Line"), which expires on
September 27, 2016
. Under the terms of the facility, we pay interest at a rate per annum equal to LIBOR plus a margin of
0.75%
. The facility is subject to customary fees, including a rate per annum equal to
0.80%
, for the issuance of letters of credit and
0.26%
for 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
September 28, 2013
, there were
no
borrowings outstanding under this securitization and
$26,225
of letters of credit were outstanding, primarily related to our property and casualty insurance programs.
We have
$100,000
of fixed rate unsecured senior notes ("$100M Fixed Rate Notes") with
$50,000
of the notes bearing interest at a fixed interest rate of
3.73%
per annum maturing
April 15, 2023
and
$50,000
of the notes bearing interest at a fixed interest rate of
3.88%
per annum maturing
April 15, 2025
. Interest on the notes is payable semiannually. As of
September 28, 2013
the outstanding balance of the notes was
$100,000
at an all-in rate of
3.81%
.
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. Other Noncurrent Liabilities
Other noncurrent liabilities as of
September 28, 2013
and
June 29, 2013
included the following:
|
|
|
|
|
|
|
|
|
|
September 28, 2013
|
|
|
June 29, 2013
|
|
Pension plan liability
|
$
|
11,233
|
|
|
$
|
12,159
|
|
Executive deferred compensation plan liability
|
29,625
|
|
|
26,775
|
|
Supplemental executive retirement plan liability
|
14,717
|
|
|
14,826
|
|
Workers' compensation liability
|
14,990
|
|
|
15,374
|
|
Other liabilities
|
3,921
|
|
|
4,161
|
|
Total other noncurrent liabilities
|
$
|
74,486
|
|
|
$
|
73,295
|
|
12. Share-Based Compensation
We grant share-based awards, including restricted stock and options to purchase our common stock. Stock options are granted to employees and directors for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. Share-based compensation is recognized in the 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
$1,851
and
$1,554
for the three months ended
September 28, 2013
and
September 29, 2012
, respectively. The number of options exercised and restricted stock vested since
June 29, 2013
, was
169,000
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.
13. 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
September 28, 2013
and
September 29, 2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Supplemental Executive
Retirement Plan
|
|
Three Months Ended
|
|
Three Months Ended
|
|
September 28,
2013
|
|
September 29,
2012
|
|
September 28,
2013
|
|
September 29,
2012
|
Interest cost
|
$
|
992
|
|
|
$
|
935
|
|
|
$
|
189
|
|
|
$
|
172
|
|
Expected return on assets
|
(1,159
|
)
|
|
(1,057
|
)
|
|
—
|
|
|
—
|
|
Amortization of net loss
|
409
|
|
|
828
|
|
|
36
|
|
|
100
|
|
Net periodic pension cost
|
$
|
242
|
|
|
$
|
706
|
|
|
$
|
225
|
|
|
$
|
272
|
|
During the first quarter of fiscal year
2014
, we contributed approximately
$975
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.
Employer's 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. 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 and other factors. These potential changes could have a material impact on our results of operations and financial condition.
Central States Southeast and Southwest Areas Pension Fund -
Beginning in fiscal year 2012, we commenced negotiations with several of our union locals to discontinue our participation in the Central States Southeast and Southwest Areas Pension Fund ("Central States Fund"). We were ultimately successful and withdrew our participation in the Central States Fund in stages as various union contracts expired. Specifically, we partially withdrew from the Central States Fund in calendar year 2012 and finalized our withdrawal in calendar year 2013. As of June 29, 2013 we recorded an aggregate discounted estimated withdrawal liability of
$21,700
. We intended to make total payments of
$32,400
over a
20
year period.
Subsequently, on September 19, 2013 we received two demands for payment of withdrawal liability, or payment demands, from the Central States Fund relating to our partial and complete withdrawals. The payment demands calculate the aggregate withdrawal liability to be
$56,000
payable over
20 years
, or
$35,100
on an estimated discounted present value basis.
We do not agree with the Central States Fund's payment demands and plan to vigorously contest this matter. Most importantly, we believe that, in calculating our withdrawal amount, the Central States Fund has not given us appropriate credit for our partial withdrawal payments as required by applicable law and regulations. We plan to contest the payment demands in accordance with the Central States Fund's rules and applicable law, which require that we file a request for review of the payment demands with the Central States Fund followed by arbitration, all of which can be later contested by either us or the Central States Fund in federal court. We cannot offer any assurance that we will be successful, and ultimate resolution of this matter may have a material effect on our results of operations in the period of resolution, however it is not expected to have a material effect on our financial condition or liquidity.
Separately, based on information received, as of September 28, 2013, we updated our previously recorded estimated withdrawal liability, using the same methodology previously used by us. Specifically, we have assumed aggregate payments of
$34,500
over
20 years
, using a discount rate of
5.25%
, resulting in an estimated discounted present value of
$23,500
. This amount represents our current best estimate of our aggregate withdrawal liability. We consider this appropriate based on our interpretation of the plan document and the related statutory requirements. As a result, in addition to
$113
of accretion expense related to the previously recorded liability, we recorded an additional discounted estimated withdrawal liability of
$1,687
in the
three months ended September 28, 2013
. Moving forward, we do not anticipate that our estimated discounted withdrawal liability will change, except, depending on the outcome, in connection with resolution of the payment demands received from the Central States Fund and reductions in the outstanding withdrawal liability as payments are made. In addition, except in the case of a mass withdrawal or failure of the Central States Plan, we are no longer subject to fluctuations in the unfunded status of the plan caused by such things as investment returns, discount or mortality rates and various other assumptions.
Other MEPPs -
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 aggregate share of the undiscounted, unfunded vested benefits for these MEPPs is estimated to be
$4,000
to
$5,500
as of
September 28, 2013
.
A partial or full withdrawal from a MEPP may be triggered by circumstances beyond our control or could be triggered by successfully negotiating with a union to discontinue participation in the MEPP. If a future withdrawal from a plan occurs, we will record our estimated discounted 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.
14. Segment Information
We have
two
operating segments, United States (includes the Dominican Republic and Ireland operations) and Canada, which have been identified as components of our organization that are reviewed by our Chief Executive Officer to determine resource allocation and evaluate performance. Each operating segment derives revenues from the branded uniform and facility services programs. During the
three months ended
September 28, 2013
, and for the same
period
of the prior fiscal year, no single customer's 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
$2,000
and
$1,875
for the three months ended
September 28, 2013
and
September 29, 2012
.
We evaluate performance based on income from operations. Financial information by segment for the
three month periods ended
September 28, 2013
and
September 29, 2012
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
United
States
|
|
Canada
|
|
Elimination
|
|
Total
|
First Quarter Fiscal Year 2014:
|
|
|
|
|
|
|
|
Revenues
|
$
|
193,272
|
|
|
$
|
36,021
|
|
|
$
|
—
|
|
|
$
|
229,293
|
|
Income from operations
|
21,003
|
|
|
2,929
|
|
|
—
|
|
|
23,932
|
|
Total assets
|
842,207
|
|
|
164,095
|
|
|
(98,060
|
)
|
|
908,242
|
|
Depreciation and amortization expense
|
6,529
|
|
|
1,102
|
|
|
—
|
|
|
7,631
|
|
First Quarter Fiscal Year 2013:
|
|
|
|
|
|
|
|
Revenues
|
$
|
185,454
|
|
|
$
|
36,974
|
|
|
$
|
—
|
|
|
$
|
222,428
|
|
Income from operations
|
16,207
|
|
|
3,341
|
|
|
—
|
|
|
19,548
|
|
Total assets
|
808,314
|
|
|
157,378
|
|
|
(85,310
|
)
|
|
880,382
|
|
Depreciation and amortization expense
|
6,738
|
|
|
1,318
|
|
|
—
|
|
|
8,056
|
|
15. Share Repurchase
As of
September 28, 2013
, we have a
$175,000
share repurchase program which was originally authorized by our Board of Directors in May 2007 for
$100,000
and increased to
$175,000
in May 2008. We repurchased
40,219
shares totaling
$2,183
for the
three months ended
September 28, 2013
. There were
no
repurchases for the
three months ended
September 29, 2012
. As of
September 28, 2013
, we had
$55,654
remaining under this authorization.
16. Other Comprehensive Income
Changes in accumulated other comprehensive income, net of tax, for
three months ended
September 28, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 28, 2013
|
|
Foreign currency translation adjustment
|
|
Pension benefit liabilities
|
|
Losses on derivative financial instruments
|
|
Total
|
Accumulated other comprehensive income (loss) as of June 29, 2013
|
$
|
24,093
|
|
|
$
|
(15,650
|
)
|
|
$
|
946
|
|
|
$
|
9,389
|
|
Other comprehensive income (loss) before reclassifications
|
2,684
|
|
|
—
|
|
|
(109
|
)
|
|
2,575
|
|
Reclassifications from net accumulated other comprehensive income
|
—
|
|
|
283
|
|
|
81
|
|
|
364
|
|
Net current period other comprehensive income (loss)
|
2,684
|
|
|
283
|
|
|
(28
|
)
|
|
2,939
|
|
Accumulated other comprehensive income at September 28, 2013
|
$
|
26,777
|
|
|
$
|
(15,367
|
)
|
|
$
|
918
|
|
|
$
|
12,328
|
|
Amounts reclassified from accumulated other comprehensive income for the
three months ended
September 28, 2013
were as follows:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 28, 2013
|
|
Losses on derivative financial instruments:
|
|
|
Interest rate swap contracts
|
$
|
129
|
|
(a)
|
Total, pre-tax
|
129
|
|
|
Tax benefit
|
(48
|
)
|
|
Total, net of tax
|
81
|
|
|
Pension benefit liabilities:
|
|
|
Amortization of net loss
|
453
|
|
(b)
|
Total, pre-tax
|
453
|
|
|
Tax benefit
|
(170
|
)
|
|
Total, net of tax
|
283
|
|
|
Total amounts reclassified, net of tax
|
$
|
364
|
|
|
|
|
|
(a) Included in interest expense.
|
|
|
(b) Included in the computation of net periodic pension cost, which is included in cost of rental operations, cost of direct sales and selling and administrative. This amount includes a pension plan which is not included in the net periodic pension cost in Note 13 because it is individually immaterial. See Note 13 for details regarding the pension plans.
|
|
17. Acquisitions
In the second quarter of fiscal year 2013, we completed an acquisition in our rental operations business. The results of the acquired business have been included in our 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
$18,488
, which consisted entirely of cash.
The proforma effects of this acquisition, had it been acquired at the beginning of fiscal year 2013, 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 months ended
September 28, 2013
was approximately
$2,500
and the impact to net income was immaterial.