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 May 26, 2007

 

 

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from ________________ to ________________

 

Commission file number: 1-8504

 

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 x       No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

 

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

 

Yes o       No x

 

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 June 29, 2007 were 14,335,024 and 4,937,449, respectively.


 

UniFirst Corporation

Quarterly Report on Form 10-Q

For the Quarter ended May 26, 2007

 

Table of Contents

 

 

 

Part I – FINANCIAL INFORMATION

 

 

 

 

 

Item 1 - Financial Statements

 

 

 

 

 

Consolidated Statements of Income for the thirteen weeks and thirty-nine weeks ended May 26, 2007 and May 27, 2006

 

 

 

 

 

Consolidated Balance Sheets as of May 26, 2007 and August 26, 2006

 

 

 

 

 

Consolidated Statements of Cash Flows for the thirty-nine weeks ended May 26, 2007 and May 27, 2006

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

Item 4 - Controls and Procedures

 

 

 

 

 

Part II – OTHER INFORMATION

 

 

 

 

 

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 – Submission of Matters to a Vote of Security Holders

 

 

 

 

 

Item 5 – Other Information

 

 

 

 

 

Item 6 - Exhibits

 

 

 

 

 

Signatures

 

 

 

 

 

Exhibit Index

 

 

 

 

 

Certifications

 

 

Ex-31.1 Section 302 Certification of CEO

 

 

Ex-31.2 Section 302 Certification of CFO

 

 

Ex-32.1 Section 906 Certification of CEO

 

 

Ex-32.2 Section 906 Certification of CFO

 

 


 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

UniFirst Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 26,

 

 

 

May 27,

 

 

 

May 26,

 

 

 

May 27,

 

(In thousands, except share and per share data)

 

 

2007

 

 

 

2006

 

 

 

2007

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

229,849

 

 

$

211,938

 

 

$

674,593

 

 

$

613,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (1)

 

 

144,257

 

 

 

134,383

 

 

 

427,366

 

 

 

392,881

 

Selling and administrative expenses (1)

 

 

48,659

 

 

 

45,710

 

 

 

147,490

 

 

 

132,935

 

Depreciation and amortization

 

 

12,322

 

 

 

11,515

 

 

 

35,726

 

 

 

33,725

 

 

 

 

205,238

 

 

 

191,608

 

 

 

610,582

 

 

 

559,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

24,611

 

 

 

20,330

 

 

 

64,011

 

 

 

53,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

3,226

 

 

 

2,996

 

 

 

9,546

 

 

 

7,991

 

Interest income

 

 

(451

)

 

 

(419

)

 

 

(1,455

)

 

 

(1,150

)

 

 

 

2,775

 

 

 

2,577

 

 

 

8,091

 

 

 

6,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

21,836

 

 

 

17,753

 

 

 

55,920

 

 

 

47,049

 

Provision for income taxes

 

 

8,153

 

 

 

6,835

 

 

 

21,531

 

 

 

18,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,683

 

 

$

10,918

 

 

$

34,389

 

 

$

28,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per share – Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

$

0.75

 

 

0.63

 

 

$

1.88

 

 

$

1.65

 

Class B Common Stock

 

$

0.60

 

 

0.50

 

 

$

1.51

 

 

$

1.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per share – Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

$

0.71

 

 

$

0.57

 

 

$

1.78

 

 

$

1.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding – Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

14,333

 

 

 

9,814

 

 

 

14,320

 

 

 

9,726

 

Class B Common Stock

 

 

4,937

 

 

 

9,429

 

 

 

4,939

 

 

 

9,515

 

 

 

 

19,270

 

 

 

19,243

 

 

 

19,259

 

 

 

19,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding – Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

19,371

 

 

 

19,311

 

 

 

19,347

 

 

 

19,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

$

0.0375

 

 

$

0.0375

 

 

$

0.1125

 

 

$

0.1125

 

Class B Common Stock

 

$

0.0300

 

 

$

0.0300

 

 

$

0.0900

 

 

$

0.0900

 

 

(1) Exclusive of depreciation and amortization

 

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)

 

 

 

May 26,

2007

 

 

August 26,

2006 (a)

 

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

11,234

 

$

8,302

 

Receivables, less reserves of $4,622 and $3,653, respectively

 

 

 

97,602

 

 

86,549

 

 

Inventories

 

 

 

39,040

 

 

36,469

 

 

Rental merchandise in service

 

 

 

84,174

 

 

85,875

 

 

Prepaid and deferred income taxes

 

 

 

10,628

 

 

10,046

 

 

Prepaid expenses

 

 

 

2,340

 

 

1,672

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

 

245,018

 

 

228,913

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

 

 

Land, buildings and leasehold improvements

 

 

 

281,644

 

 

269,696

 

 

Machinery and equipment

 

 

 

299,587

 

 

284,619

 

 

Motor vehicles

 

 

 

94,521

 

 

84,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

675,752

 

 

638,453

 

 

Less -- accumulated depreciation

 

 

 

342,321

 

 

319,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

333,431

 

 

318,903

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

224,417

 

 

211,489

 

 

Customer contracts and other intangible assets, net

 

 

 

62,958

 

 

64,022

 

 

Other assets

 

 

 

7,487

 

 

6,375

 

 

 

 

 

$

873,311

 

$

829,702

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Current maturities of long-term obligations

 

 

$

558

 

$

613

 

 

Accounts payable

 

 

 

41,358

 

 

43,003

 

 

Accrued liabilities

 

 

 

85,742

 

 

80,580

 

 

Accrued income taxes

 

 

 

 

 

3,041

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

 

127,658

 

 

127,237

 

 

 

 

 

 

 

 

 

 

 

 

Long-term obligations, net of current maturities

 

 

 

217,553

 

 

209,922

 

 

Deferred income taxes

 

 

 

40,102

 

 

39,998

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

 

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; 14,335,024 and 14,306,799 issued and outstanding, respectively

 

 

 

1,433

 

 

1,431

 

 

Class B Common Stock, $0.10 par value; 20,000,000 shares authorized; 4,937,449 and 4,940,849 issued and outstanding, respectively

 

 

 

494

 

 

494

 

 

Capital surplus

 

 

 

15,766

 

 

14,497

 

 

Retained earnings

 

 

 

463,815

 

 

431,481

 

 

Accumulated other comprehensive income

 

 

 

6,490

 

 

4,642

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders' equity

 

 

 

487,998

 

 

452,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

873,311

 

$

829,702

 

 

 

(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)

 

Thirty-nine weeks ended

 

 

May 26,

 

 

 

May 27,

 

(In thousands)

 

 

2007

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

34,389

 

 

$

28,635

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

30,461

 

 

 

29,114

 

Stock-based compensation

 

 

641

 

 

 

495

 

Amortization of intangible assets

 

 

5,265

 

 

 

4,611

 

Amortization of deferred financing costs

 

 

1,095

 

 

 

521

 

Accretion on asset retirement obligations

 

 

325

 

 

 

302

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Receivables

 

 

(10,683

)

 

 

(8,764

)

Inventories

 

 

(2,571

)

 

 

1,889

 

Rental merchandise in service

 

 

3,245

 

 

 

(12,457

)

Prepaid expenses

 

 

(668

)

 

 

(677

)

Accounts payable

 

 

(1,645

)

 

 

3,645

 

Accrued liabilities

 

 

4,771

 

 

 

593

 

Accrued and deferred income taxes

 

 

(3,271

)

 

 

(5,045

)

Net cash provided by operating activities

 

 

61,354

 

 

 

42,862

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(23,113

)

 

 

(34,080

)

Capital expenditures

 

 

(43,103

)

 

 

(35,216

)

Other

 

 

1,222

 

 

 

160

 

Net cash used in investing activities

 

 

(64,994

)

 

 

(69,136

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from long-term obligations

 

 

111,659

 

 

 

43,050

 

Payments on long-term obligations

 

 

(104,083

)

 

 

(16,032

)

Payments of deferred financing costs

 

 

(1,179

)

 

 

 

Proceeds from exercise of Common Stock options

 

 

382

 

 

 

141

 

Payment of cash dividends

 

 

(2,055

)

 

 

(1,956

)

Net cash provided by financing activities

 

 

4,724

 

 

 

25,203

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes

 

 

1,848

 

 

 

2,656

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

2,932

 

 

 

1,585

 

Cash and cash equivalents at beginning of period

 

 

8,302

 

 

 

4,704

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

11,234

 

 

$

6,289

 

 

 

The accompanying notes are an integral part of these

consolidated financial statements.

 

 

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

(Amounts in thousands, except per share and common stock options data)

 

1. Summary of Significant Accounting Policies

 

Business Description

 

UniFirst Corporation (the “Company”) is one of the largest providers of workplace uniforms and protective clothing in the United States. The Company designs, manufactures, personalizes, rents, cleans, delivers, and sells 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. The Company also rents industrial wiping products, floor mats, facility service products and other non-garment items, and provides first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies.

 

The Company serves 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. The Company also provides its customers with restroom supplies, including air fresheners, paper products and hand soaps.

 

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

 

As discussed and described in Note 9 to the consolidated financial statements, the Company has five reporting segments, US and Canadian Rental and Cleaning, Manufacturing (“MFG”), Specialty Garments Rental and Cleaning (“Specialty Garments”), First Aid and Corporate. The operations of the US and Canadian Rental and Cleaning reporting segment are referred to by the Company as its “industrial laundry operations” and the locations related to this reporting segment are referred to as “industrial laundries”. The Company refers to the US and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as its “core laundry operations”.

 

Interim Financial Information

These consolidated financial statements have been prepared by the Company 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 generally accepted accounting principles 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 26, 2006. Results for an interim period are not indicative of any future interim periods or for an entire fiscal year.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany balances and transactions are eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates are based on historical information, current trends, and information available from other sources. Actual results could differ from these estimates.

 

Fiscal Year

 

The Company’s fiscal year ends on the last Saturday in August. For financial reporting purposes, fiscal 2007 will have 52 weeks, as did fiscal 2006.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash in banks and bank short-term investments with maturities of less than ninety days.

 

Financial Instruments

 

The Company’s financial instruments, which may expose the Company to concentrations of credit risk, include cash and cash equivalents, receivables, accounts payable, notes payable and long-term obligations. Each of these financial instruments is recorded at cost, which approximates its fair value.

 

Revenue Recognition and Allowance for Doubtful Accounts

 

The Company recognizes revenue from rental operations in the period in which the services are provided. Direct sales revenue is recognized in the period in which the product is shipped. Management judgments and estimates are used in determining the collectability of accounts receivable and evaluating the adequacy of the allowance for doubtful accounts. The Company considers specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances as part of its evaluation. Changes in estimates are reflected in the period they become known. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Material changes in its estimates may result in significant differences in the amount and timing of bad debt expense recognition for any given period.

 

Inventories and Rental Merchandise in Service

 

Inventories are stated at the lower of cost or market value, net of any reserve for excess and obsolete inventory. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to customers or used in rental operations. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company uses the first-in, first-out (“FIFO”) method to value its inventories, which primarily consist of finished goods.

 

Rental merchandise in service is amortized on a straight-line basis over the estimated service lives of the merchandise, which range from 6 to 36 months. In establishing estimated lives for merchandise in service, management considers historical experience and the intended use of the merchandise. Material differences may result in the amount and timing of operating profit for any period if management makes significant changes to these estimates.

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for maintenance and repairs are expensed as incurred, while expenditures for renewals and betterments are capitalized. The Company provides for depreciation on the straight-line method based on the following estimated useful lives:

 

Buildings

30-40 years

Leasehold improvements

Shorter of useful life

or term of lease

Machinery and equipment

3-10 years

Motor vehicles

3-5 years

 

In accordance with Statements of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, including property and equipment, are evaluated for impairment whenever events and circumstances indicate an asset may be impaired. There have been no material impairments of property and equipment in the thirty-nine weeks ended May 26, 2007 or the year ended August 26, 2006.

 

Goodwill and Other Intangible Assets

 

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized. SFAS No. 142 requires that companies test goodwill for impairment on an annual basis. Management completes its annual impairment test in the fourth quarter of each fiscal year. In addition, SFAS No. 142 also requires that companies test goodwill if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit to which goodwill is assigned below its carrying amount. The Company’s evaluation considers changes in the operating environment, competitive information, market trends, operating performance and cash flow modeling. There have been no impairments of goodwill in the thirty-nine weeks ended May 26, 2007, or the year ended August 26, 2006. Future events could cause management to conclude that impairment indicators exist and that goodwill or other intangibles associated with previously acquired businesses are impaired. Any resulting impairment loss could have a material impact on the Company’s financial condition and results of operations.  

 

Definite-lived intangible assets are amortized over useful lives, which are based on management estimates of the period that the assets will generate revenue. Definite-lived intangible assets are also evaluated for impairment in accordance with SFAS No. 144. There have been no impairments of definite-lived intangible assets in the thirty-nine weeks ended May 26, 2007, or the year ended August 26, 2006.

 

Environmental and Other Contingencies

 

The Company is subject to legal proceedings and claims arising from the conduct of its business operations, including environmental matters, personal injury, customer contract matters and employment claims. Accounting principles generally accepted in the United States require 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 to ensure that all of the relevant facts and circumstances are considered before a contingent liability is recorded. The Company records accruals for environmental and other contingencies based on enacted laws, regulatory orders or decrees, the Company’s estimates of costs, insurance proceeds, participation by other parties, the timing of payments, and the input of outside consultants and attorneys.

 

The estimated liability for environmental contingencies has been discounted using risk-free interest rates ranging from 4% to 5% over periods ranging from ten to thirty years. The estimated current costs, net of legal settlements with insurance carriers, have been adjusted for the estimated impact of inflation at 3% per year. 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. Refer to Note 5 of these consolidated financial statements for additional discussion and analysis.

 

Asset Retirement Obligations

 

The Company follows the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations, which generally applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Under this accounting method, 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 has recognized as a liability the present value of the estimated future costs to decommission its nuclear laundry facilities in accordance with the provisions of SFAS No. 143. The Company depreciates, on a straight-line basis, the amount added to property and equipment and recognizes accretion expense in connection with the discounted liability over the various remaining lives which range from approximately four to twenty-five years.

 

The estimated liability has been based on historical experience in decommissioning nuclear laundry facilities, estimated useful lives of the underlying assets, external vendor estimates as to the cost to decommission these assets in the future, and federal and state regulatory requirements. The estimated current costs have been adjusted for the estimated impact of inflation at 3% per year. The liability has been discounted using credit-adjusted risk-free rates that range from approximately 3% to 7%. Revisions to the liability could occur due to changes in the Company’s estimated useful lives of the underlying assets, estimated dates of decommissioning, changes in decommissioning costs, changes in federal or state regulatory guidance on the decommissioning of such facilities, or other changes in estimates. Changes due to revised estimates will be recognized by adjusting the carrying amount of the liability and the related long-lived asset if the assets are still in service, or charged to expense in the period if the assets are no longer in service.

 

Insurance

 

The Company is self-insured for certain obligations related to health, workers’ compensation, vehicles and general liability programs. The Company also purchases stop-loss insurance policies to protect itself from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for events that have occurred, but have not been reported. The Company’s estimates consider historical claims experience and other factors. The Company’s liabilities are based on estimates, and, while the Company believes that its accruals are adequate, the ultimate liability may be significantly different from the amounts recorded. Changes in claims experience, the Company’s ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.

 

Supplemental Executive Retirement Plan and other Pension Plans

 

The Company accounts for its Supplemental Executive Retirement Plan and other pension plans in accordance with SFAS No. 87, Employer’s Accounting for Pensions. Under SFAS No. 87, pension expense is recognized on an accrual basis over employees’ estimated service periods. Pension expense calculated under SFAS No. 87 is generally independent of funding decisions or requirements.

 

The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions. Pension expense increases as the expected rate of return on pension plan assets decreases. Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in the Company’s pension plans will impact the Company’s future pension expense and liabilities. The Company cannot predict with certainty what these factors will be in the future.

 

Income Taxes

 

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes are provided for temporary differences between the amounts recognized for income tax and financial reporting purposes at currently enacted tax rates. The Company computes income tax expense by jurisdiction based on its operations in each jurisdiction.

 

The Company is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves for probable exposures.

 

The Company’s effective income tax rate was 37.3% and 38.5% for the thirteen and thirty-nine weeks ended May 26, 2007, respectively, as compared to 38.5% and 39.1% for the thirteen and thirty-nine weeks ended May 27, 2006, respectively. The decrease for the thirteen weeks ended May 26, 2007, was due to a revision in the Company’s estimated effective tax rate for fiscal 2007. The decrease in the effective income tax rate for the thirty-nine weeks ended May 27, 2006 was primarily due to the accrual of $0.3 million of tax reserves relating to tax exposures identified by the Company in fiscal 2006.

 

Net Income Per Share

 

The Company computes net income per share under the provisions of SFAS No. 128, Earnings per Share, and Emerging Issues Task Force (“EITF”) Issue No. 03-6, Participating Securities and Two — Class Method under FASB Statement No. 128, ‘Earnings per Share’. EITF Issue No. 03-6 requires that income per share for each class of common stock be calculated assuming 100% of the Company’s earnings are distributed as dividends to each class of common stock based on their respective dividend rights, even though the Company does not anticipate distributing 100% of its earnings as dividends. The Common Stock of the Company has a 25% dividend preference over the Class B Common Stock. The effective result is that the basic earnings per share for the Common Stock will be 25% greater than the basic earnings per share of the Class B Common Stock.

 

The Class B Common Stock may be converted at any time on a one-for-one basis into Common Stock at the option of the holder of the Class B Common Stock. Diluted earnings per share for the Company’s Common Stock assumes the conversion of all the Company’s Class B Common Stock into Common Stock and the exercise of outstanding stock options under the Company’s stock based employee compensation plans.

 

The following table shows how net income is allocated using this method:

 

 

 

 

 

Thirteen weeks ended

 

 

Thirty-nine weeks ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 26,

 

 

May 27,

 

 

May 26,

 

 

May 27,

 

 

 

 

 

2007

 

 

2006

 

 

2007

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to shareholders

 

 

$

13,683

 

$

10,918

 

$

34,389

 

$

28,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income for Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

$

10,727

 

$

6,173

 

$

26,952

 

$

16,064

 

Class B Common Stock

 

 

 

2,956

 

 

4,745

 

 

7,437

 

 

12,571

 

 

 

 

$

13,683

 

$

10,918

 

$

34,389

 

$

28,635

 

 

The diluted earnings per share calculation assumes the conversion of all the Company’s Class B Common Stock into Common Stock, so no allocation of earnings to Class B Common Stock is required.

 

The following table illustrates the weighted average number of Common and Class B Common shares outstanding during the thirteen and thirty-nine weeks ended May 26, 2007 and May 27, 2006 which are utilized in the calculation of earnings per share:

 

 

 

 

 

Thirteen weeks ended

 

 

Thirty-nine weeks ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 26,

 

 

May 27,

 

 

May 26,

 

 

May 27,

 

 

 

 

 

2007

 

 

2006

 

 

2007

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of Common shares — Basic

 

 

 

14,333

 

 

9,814

 

 

14,320

 

 

9,726

 

Add: effect of dilutive potential common shares — employee Common Stock options

 

 

 

101

 

 

68

 

 

88

 

 

74

 

Add: effect assuming conversion of Class B Common shares into Common Stock

 

 

 

4,937

 

 

9,429

 

 

4,939

 

 

9,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of Common shares — Diluted

 

 

 

19,371

 

 

19,311

 

 

19,347

 

 

19,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of Class B Common shares — Basic

 

 

 

4,937

 

 

9,429

 

 

4,939

 

 

9,515

 

 

Stock options to purchase 7,500 shares of Common Stock were not included in the calculation of diluted earnings per share for the thirteen and thirty-nine weeks ended May 26, 2007 because they were anti-dilutive. Stock options to purchase 70,900 shares of Common Stock were not included in the calculation of diluted earnings per share for the thirteen and thirty-nine weeks ended May 27, 2006 because they were anti-dilutive.

 

Stock Based Compensation

 

The Company adopted an incentive stock option plan (the “Plan”) in November 1996 and has reserved 800,000 shares of Common Stock for issue under the Plan. All options issued to management are approved by the Board of Directors and are granted on the date of approval. All options issued to the Company’s Board of Directors are approved by the Board of Directors and are granted on the date three days subsequent to the annual shareholders' meeting. All options are exercisable at a price equal to the fair market value of the Company’s Common Stock on the date of grant.

 

Options granted prior to fiscal 2003 are subject to a proportional four-year vesting schedule and expire eight years from the grant date. Beginning in fiscal 2003, option grants are subject to a five-year cliff-vesting schedule under which options become vested or exercisable after five years from date of grant and expire ten years after the grant date.

 

Effective August 28, 2005, the Company adopted SFAS No. 123(r), Share-Based Payment, under the modified prospective method as described in SFAS No. 123(r). The fair value recognition provisions of this statement require that the share-based compensation cost be measured at the grant date based on the value of the award and be recognized as expense over the requisite service period, which is generally the vesting period. Under the modified prospective transition method, compensation expense recognized in subsequent periods includes compensation expense for all stock-based payments granted subsequent to the Company’s adoption of SFAS 123(r) and for all stock-based payments granted prior to August 28, 2005, but which were not yet fully vested as of that date, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123.

 

Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends, share price volatility and the amount of share-based awards that are expected to be forfeited. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

 

Compensation expense for all option grants, whether proportional four-year vesting or five-year cliff vesting, is recognized ratably over the related vesting period. Certain options were granted during fiscal 2007, 2006 and 2005 to outside directors of the Company, which were fully vested upon grant and expire eight years after the grant date. Compensation expense related to the fiscal 2007 and 2006 grants was recognized on the date of grant. Stock-based compensation, as accounted for under SFAS 123(r), has been recorded in the consolidated statement of operations in operating costs and selling and administrative expenses for all periods presented.

 

For the thirteen and thirty-nine weeks ended May 26, 2007 there were 4,550 and 24,825 shares of Common Stock issued as a result of the exercise of Common Stock options, respectively. For the thirteen and thirty-nine weeks ended May 27, 2006 there were 5,900 and 8,775 shares of Common Stock issued as a result of the exercise of Common Stock options, respectively.

 

Foreign Currency Translation

 

The functional currency of UniFirst’s foreign operations is the local country’s currency. Transaction gains and losses, including gains and losses on intercompany transactions, are included in selling and administrative expenses in the accompanying consolidated statements of income. Assets and liabilities of operations outside the United States are translated into U.S. dollars using period-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during each month of the fiscal period. The effects of foreign currency translation adjustments are included in shareholders’ equity as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets.

 

The Company reported in selling and administrative expenses, net foreign currency transaction (losses) gains totaling $(0.1) million and $0.0 million for the thirteen and thirty-nine weeks ended May 26, 2007, respectively, and foreign currency transaction gains totaling $0.5 million and $0.3 million for the thirteen and thirty-nine weeks ended May 27, 2006, respectively.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform with current year presentation. These reclassifications did not impact current or historical net income or shareholders’ equity.

 

Recent Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits an entity to measure certain financial assets and financial liabilities at fair value. Under SFAS No. 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 also establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity's election on its earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and the Company is currently evaluating the impact it will have on its consolidated financial statements.

 

On September 29, 2006, the Financial Accounting Standards Board issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS No. 87, 88, 106 and 132(r), which requires the Company to: (1) recognize in its statement of financial position the over-funded or under-funded status of its defined benefit postretirement plan measured as the difference between the fair value of plan assets and the benefit obligation, (2) recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period but pursuant to FAS 87 and 106 are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and defined benefit plan obligations as of the date of its statement of financial position, (4) disclose additional information in the notes to financial statements about certain effects on net periodic benefit cost in the upcoming fiscal year that arise from delayed recognition of the actuarial gains and losses and the prior service costs and credits, and (5) recognize as an adjustment to the opening balance of retained earnings, net of tax, any transition asset or transition obligation remaining from the initial application of FAS 87 or 106. This standard is effective for fiscal years ending after December 15, 2006, and the Company does not expect adoption of this standard will have a material impact on its consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years and must be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact it will have on its consolidated financial statements.

 

On July 13, 2006, the Financial Accounting Standards Board issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109, which fundamentally changes the way that the Company will be required to treat its uncertain tax positions for financial accounting purposes. FIN No. 48 prescribes rules regarding how the Company should recognize, measure and disclose in its financial statements tax positions that were taken or will be taken on the Company’s tax return that are reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in an increase in a liability for income taxes payable, or a reduction in a deferred tax asset or an increase in a deferred tax liability. This interpretation is effective for fiscal years beginning after December 15, 2006, and the Company is currently evaluating the impact it will have on its consolidated financial statements.

 

2. Acquisitions

During the thirty-nine weeks ended May 26, 2007, the Company completed 16 acquisitions with an aggregate purchase price of approximately $19.7 million. The Company also made approximately $3.4 million in additional payments associated with prior year acquisitions. The results of operations of these acquisitions have been included in the Company’s consolidated financial results since their respective acquisition dates. None of these acquisitions was significant, individually or in the aggregate, in relation to the Company’s consolidated financial results and, therefore, pro forma financial information has not been presented.

 

3. 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 May 26, 2007 and May 27, 2006 were $2.3 and $1.9 million, respectively. Contributions charged to expense under the plan for the thirty-nine weeks ended May 26, 2007 and May 27, 2006 were $6.9 and $6.3 million, respectively.

 

Supplemental Executive Retirement Plan and Other Pension 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 amounts charged to expense related to these plans for the thirteen weeks ended May 26, 2007 and May 27, 2006 were $0.4 million and $0.4 million, respectively. The amounts charged to expense related to these plans for the thirty-nine weeks ended May 26, 2007 and May 27, 2006 were $1.1 million and $1.3 million, respectively.

 

4. Asset Retirement Obligations

 

The Company accounts for its asset retirement obligations under the provisions of SFAS No. 143, which generally applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Accordingly, 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 and equipment and recognizes accretion expense in connection with the discounted liability over the various remaining lives which range from approximately four to thirty years.

 

The Company has recognized as a liability the present value of the estimated future costs to decommission its nuclear laundry facilities. The estimated liability is based on historical experience in decommissioning nuclear laundry facilities, estimated useful lives of the underlying assets, external vendor estimates as to the cost to decommission these assets in the future, and federal and state regulatory requirements. The estimated current costs have been adjusted for the estimated impact of inflation at 3% per year. The liability has been discounted using credit-adjusted risk-free rates that range from approximately 3% to 7%. Revisions to the liability could occur due to changes in the Company’s estimated useful lives of the underlying assets, estimated dates of decommissioning, changes in decommissioning costs, changes in federal or state regulatory guidance on the decommissioning of such facilities, or other changes in estimates. Changes due to revised estimates will be recognized by adjusting the carrying amount of the liability and the related long-lived asset if the assets are still in service, or charged to expense in the period if the assets are no longer in service.

 

The change in the Company’s decommissioning liability for the thirty-nine weeks ended May 26, 2007 is as follows:

 

Beginning balance as of August 26, 2006

 

 

$

6,998

 

Accretion expense

 

 

 

325

 

Ending balance as of May 26, 2007

 

 

$

7,323

 

 

As of May 26, 2007, the $7.3 million asset retirement obligation is included in accrued liabilities in the accompanying consolidated balance sheet.

 

5. 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. 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.

 

Accounting principles generally accepted in the United States require 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 to ensure that all of the relevant facts and circumstances are considered, before a contingent liability is recorded. 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 a number of additional locations that it acquired as part of its acquisition of Textilease Corporation in September 2003.

 

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 is in the early stages of investigating environmental conditions at the Somerville, Massachusetts site. The full nature and extent of those conditions, and of the remedial solutions that may be employed to address them, have not yet been determined. In the interim, as the investigation proceeds, the Company is implementing measures to mitigate potential impacts in the vicinity of the 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 order for the Woburn, Massachusetts site discussed above does not define or require any remediation work in the Central Area. The Company has not accrued for this contingency as the Company believes, at this time, the liability is not probable and the amount of such contingent liability cannot be reasonably estimated.

 

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 risk-free rates of interest ranging from 4% to 5%.

 

For environmental liabilities that have been discounted, the Company includes interest accretion, based on the effective interest method, in operating costs on the consolidated statements of income. The changes to the Company’s environmental liabilities for the thirty-nine weeks ended May 26, 2007 are as follows:

 

Beginning balance as of August 26, 2006

 

 

$

10,858

 

Costs incurred for which reserves have been provided

 

 

 

(1,470

)

Insurance proceeds received

 

 

 

90

 

Interest accretion

 

 

 

424

 

Change in estimate of liability

 

 

 

1,587

 

Balance as of May 26, 2007

 

 

$

11,489

 

 

In the second quarter of fiscal 2007, the Company increased its environmental reserves by $1.6 million related to preliminary results of the ongoing site investigation at one of its environmental exposure sites.

 

Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of May 26, 2007, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below.

 

Fiscal year ended August

 

2007

 

2008

 

2009

 

2010

 

2011

 

Thereafter

 

 

Total

 

Estimated costs – current dollars

$

3,027

 

2,324

 

1,347

 

942

 

1,012

 

9,541

 

$

18,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated insurance proceeds

 

(176

)

(266

)

(266

)

(274

)

(266

)

(3,874

)

 

(5,122

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net anticipated costs

$

2,851

 

2,058

 

1,081

 

668

 

746

 

5,667

 

$

13,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Inflation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,550

 

Effect of Discounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,132

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of May 26, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

$

11,489

 

 

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 May 26, 2007, the balance in this escrow account, which is held in a trust and is not recorded on the Company’s consolidated balance sheet, was approximately $2.2 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 or results of operation of the Company. It is possible, however, that the Company’s financial position or results of operations for any particular future 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.

 

6. Long-Term Obligations

 

Prior to September 13, 2006, the Company had a $125.0 million unsecured revolving credit agreement (“Credit Agreement”), with a syndicate of banks, which, prior to its amendment, matured on September 2, 2007. Loans under the Credit Agreement bore interest at floating rates which varied based on the Company’s funded debt ratio. Under the Credit Agreement, the Company borrowed funds at variable interest rates based on the Eurodollar rate or the bank’s prime rate, as selected by the Company. Availability of credit required compliance with certain financial and other covenants, as defined in the Credit Agreement. On September 13, 2006, the Company amended its Credit Agreement. This new agreement (“Amended Credit Agreement”) matures on September 13, 2011 and allows for maximum outstanding borrowings of $225.0 million. Under the Amended Credit Agreement, the Company continues to be able to borrow funds at variable interest rates based on the Eurodollar rate or the bank’s prime rate, as selected by the Company. Availability of credit requires compliance with certain amended financial and other covenants, including a maximum funded debt ratio and minimum interest coverage as defined in the Amended Credit Agreement.

 

On June 14, 2004, the Company issued $165.0 million of fixed and floating rate notes pursuant to a Note Purchase Agreement (“Note Agreement”). Under the Note Agreement, the Company issued $75.0 million of notes with a seven year term (June 2011) bearing interest at 5.27% (“Fixed Rate Notes”). The Company also issued $90.0 million of floating rate notes that were due in ten years (June 2014) (“Floating Rate Notes”). Of the Floating Rate Notes, $75.0 million bore interest at LIBOR plus 70 basis points and were able to be repaid at face value two years from the date of issuance. The remaining $15.0 million of Floating Rate Notes bore interest at LIBOR plus 75 basis points and were repaid at face value in September 2005.

 

On September 14, 2006, the Company issued $100.0 million of floating rate notes (“2006 Floating Rate Notes”) pursuant to a Note Purchase Agreement (“2006 Note Agreement”). The proceeds from the issuance of the 2006 Floating Rate Notes were used to first repay the $75.0 million of outstanding Floating Rate Notes and then to pay down outstanding amounts under the Amended Credit Agreement. The 2006 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 May 26, 2007, the Company was in compliance with all covenants under the Note Agreement, 2006 Note Agreement and the Amended Credit Agreement.

 

7. Shareholders’ Equity

 

The Company has two classes of common stock: Common Stock and Class B Common Stock. Each share of Common Stock is entitled to one vote, is freely transferable, and is entitled to a cash dividend equal to 125% of any cash dividend paid on each share of Class B Common Stock. Each share of Class B Common Stock is entitled to ten votes and can be converted to Common Stock on a share-for-share basis. However, until converted to Common Stock, Class B Common shares are not freely transferable.

 

For the thirty-nine weeks ended May 26, 2007, there were 3,400 shares of Class B Common Stock converted to Common Stock. For the thirty-nine weeks ended May 27, 2006, there were 222,042 shares of Class B Common Stock converted to Common Stock.

 

8. Comprehensive Income

 

The components of comprehensive income are as follows:

 

 

 

 

Thirteen weeks ended

 

 

 

Thirty-nine weeks ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 26,

 

 

 

May 27,

 

 

 

May 26,

 

 

 

May 27,

 

 

 

 

2007

 

 

 

2006

 

 

 

2007

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,683

 

 

$

10,918

 

 

$

34,389

 

 

$

28,635

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

3,485

 

 

 

1,040

 

 

 

1,848

 

 

 

2,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

17,168

 

 

$

11,958

 

 

$

36,237

 

 

$

31,291

 

 

9. Segment Reporting

 

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial reports issued to stockholders. 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, as defined under SFAS No. 131, 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 to other Company locations. These revenues are recorded at a transfer price which is typically in excess of the actual manufacturing cost. The transfer price is determined by management and may not necessarily represent the fair value of the products manufactured. 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 as 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 clean room 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 table:

 

 

US and

 

 

 

 

 

 

 

 

Canadian

 

 

 

Subtotal

 

 

 

 

Rental and

 

Net Interco

 

Core Laundry

Specialty

 

 

Thirteen weeks ended

Cleaning

MFG

MFG Elim

Corporate

Operations

Garments

First Aid

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 26, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

201,295

 

$

22,965

 

$

(22,965

)

$

1,965

 

$

203,260

 

$

18,272

 

$

8,317

 

$

229,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

29,027

 

$

7,908

 

$

(1,295

)

$

(14,295

)

$

21,345

 

$

3,006

 

$

260

 

$

24,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (income)  expense, net

$

(463

)

$

 

$

 

$

3,238

 

$

2,775

 

$

 

$

 

$

2,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

$

29,490

 

$

7,908

 

$

(1,295

)

$

(17,533

)

$

18,570

 

$

3,006

 

$

260

 

$

21,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 27, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

186,910

 

$

19,390

 

$

(19,390

)

$

1,350

 

$

188,260

 

$

15,453

 

$

8,225

 

$

211,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

27,219

 

$

6,414

 

$

(623

)

$

(14,253

)

$

18,757

 

$

834

 

$

739

 

$

20,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (income)  expense, net

$

(387

)

$

 

$

 

$

2,964

 

$

2,577

 

$

 

$

 

$

2,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

$

27,606

 

$

6,414

 

$

(623

)

$

(17,217

)

$

16,180

 

$

834

 

$

739

 

$

17,753

 

 

 

US and

 

 

 

 

 

 

 

 

Canadian

 

 

 

Subtotal

 

 

 

 

Rental and

 

Net Interco

 

Core Laundry

Specialty

 

 

Thirty-nine weeks ended

Cleaning

MFG

MFG Elim

Corporate

Operations

Garments

First Aid

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 26, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

596,801

 

$

65,980

 

$

(65,980

)

$

5,973

 

$

602,774

 

$

48,376

 

$

23,443

 

$

674,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

84,094

 

$

22,603

 

$

(3,569

)

$

(45,508

)

$

57,620

 

$

5,501

 

$

890

 

$

64,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (income)  expense, net

$

(1,394

)

$

 

$

 

$

9,485

 

$

8,091

 

$

 

$

 

$

8,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

$

85,488

 

$

22,603

 

$

(3,569

)

$

(54,993

)

$

49,529

 

$

5,501

 

$

890

 

$

55,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 27, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

546,441

 

$

52,973

 

$

(52,973

)

$

4,319

 

$

550,760

 

$

40,000

 

$

22,671

 

$

613,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

76,917

 

$

17,643

 

$

131

 

$

(42,612

)

$

52,079

 

$

454

 

$

1,357

 

$

53,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (income)  expense, net

$

(1,185

)

$

 

$

 

$

8,026

 

$

6,841

 

$

 

$

 

$

6,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

$

78,102

 

$

17,643

 

$

131

 

$

(50,638

)

$

45,238

 

$

454

 

$

1,357

 

$

47,049

 

 

The Company’s long-lived assets as of May 26, 2007 and August 26, 2006, revenues for the periods ended May 26, 2007 and May 27, 2006, and income before income taxes for the periods ended May 26, 2007 and May 27, 2006 were attributed to the following countries:

 

 

 

 

 

May 26,

2007

 

 

August 26,

2006

 

 

 

 

 

 

 

 

 

 

Long-lived assets

 

 

 

 

 

 

 

 

United States

 

 

$

589,991

 

$

564,493

 

Europe, Canada, and Mexico (1)

 

 

 

38,302

 

 

36,296

 

 

 

 

$

628,293

 

$

600,789

 

 

 

 

 

Thirteen weeks ended

 

 

Thirty-nine weeks ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 26,

 

 

May 27,

 

 

May 26,

 

 

May 27,

 

 

 

2007

 

 

2006

 

 

2007

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

209,319

 

$

192,703

 

$

615,547

 

$

562,657

 

Europe, Canada, and Mexico (1)

 

20,530

 

 

19,235

 

 

59,046

 

 

50,774

 

 

$

229,849

 

$

211,938

 

$

674,593

 

$

613,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

19,302

 

$

15,046

 

$

47,395

 

$

39,889

 

Europe, Canada, and Mexico (1)

 

2,534

 

 

2,707

 

 

8,525

 

 

7,160

 

 

$

21,836

 

$

17,753

 

$

55,920

 

$

47,049

 

 

 

(1)

No country accounts for greater than 10% of total long-lived assets or revenues.

 

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

 

(Amounts in thousands, except per share and common stock options data)

 

SAFE HARBOR FOR FORWARD LOOKING STATEMENTS

 

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 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, uncertainties regarding the price levels of natural gas, electricity, fuel and labor, the impact of negative economic conditions on our customers and such customers’ workforce, the continuing increase in domestic healthcare costs, demand and prices for our products and services, additional professional and internal costs necessary for compliance with recent and proposed future changes in Securities and Exchange Commission (including the Sarbanes-Oxley Act of 2002), 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 and general economic conditions. We undertake no obligation to update any forward looking statements to reflect events or circumstances arising after the date on which they 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 work wear 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 clean room 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 nearly 200,000 customer locations in 46 states and Canada from 189 customer service, distribution and manufacturing facilities. In addition, the Specialty Garments business also provides nuclear decontamination services in Europe.

 

As discussed and described in Note 9 to the consolidated financial statements, we have five reporting segments: US and Canadian Rental and Cleaning, Manufacturing (MFG), Corporate, Specialty Garments and First Aid. We refer to the laundry locations of the US and Canadian Rental and Cleaning reporting segment as our “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.”

 

Results of Operations

 

The amounts of revenues and certain expense items, as a percentage of revenue, for the thirteen and thirty-nine weeks ended May 26, 2007 and May 27, 2006, and the percentage changes in revenues and certain expense items as a percentage of total revenues between these periods are presented in the following table.

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 26, 2007

 

% of Rev.

 

 

May 27, 2006

 

% of Rev.

 

% Change

 

 

 

May 26, 2007

 

% of Rev.

 

 

May 27, 2006

 

% of

Rev.

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

229,849

 

100.0

%

$

211,938

 

100.0

%

8.5

%

 

$

674,593

 

100.0

%

$

613,431

 

100.0

%

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (1)

 

144,257

 

62.8

 

 

134,383

 

63.4

 

7.3

 

 

 

427,366

 

63.4

 

 

392,881

 

64.0

 

8.8

 

Selling and administrative expenses (1)

 

48,659

 

21.2

 

 

45,710

 

21.6

 

 

6.5

 

 

 

147,490

 

21.9

 

 

132,935

 

21.7

 

 

10.9

 

Depreciation and amortization

 

12,322

 

5.4

 

 

11,515

 

5.4

 

7.0

 

 

 

35,726

 

5.3

 

 

33,725

 

5.5

 

5.9

 

 

 

205,238

 

89.3

 

 

191,608

 

90.4

 

7.1

 

 

 

610,582

 

90.5

 

 

559,541

 

91.2

 

9.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

24,611

 

10.7

 

 

20,330

 

9.6

 

21.1

 

 

 

64,011

 

9.5

 

 

53,890

 

8.8

 

18.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income)

 

2,775

 

1.2

 

 

2,577

 

1.2

 

7.7

 

 

 

8,091

 

1.2

 

 

6,841

 

1.1

 

18.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

21,836

 

9.5

 

 

17,753

 

8.4

 

23.0

 

 

 

55,920

 

8.3

 

 

47,049

 

7.7

 

18.9

 

Provision for income taxes

 

8,153

 

3.5

 

 

6,835

 

3.2

 

19.3

 

 

 

21,531

 

3.2

 

 

18,414

 

3.0

 

16.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

13,683

 

6.0

%

$

10,918

 

5.2

%

25.3

%

 

$

34,389

 

5.1

%

$

28,635

 

4.7

%

20.1

%

 

(1) Exclusive of depreciation and amortization

 

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 provides 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.”

 

Operating costs 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 May 2007 compared to thirteen weeks ended May 2006

 

Revenues

 

 

 

May 26,

 

 

May 27,

 

 

Dollar

 

Percent

 

(In thousands, except percentages)

 

2007

 

 

2006

 

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Laundry Operations

$

203,260

 

$

188,260

 

$

15,000

 

8.0

%

Specialty Garments

 

18,272

 

 

15,453

 

 

2,819

 

18.2

 

First Aid

 

8,317

 

 

8,225

 

 

92

 

1.1

 

Consolidated total

$

229,849

 

$

211,938

 

$

17,911

 

8.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

For the thirteen weeks ended May 26, 2007, our consolidated revenues increased by $17.9 million from the comparable period in fiscal 2006, or 8.5 %. This increase was primarily due to organic growth, which accounted for a 6.3% increase in revenue. The remaining increase of 2.2% was attributable to incremental acquisition-related revenues. The core laundry operation’s revenues increased in the thirteen weeks ended May 26, 2007 by 8.0% compared to the comparable period ended May 27, 2006. This increase was due to organic growth of 5.5% and acquisition-related growth of 2.5%. Revenues from Specialty Garments and First Aid increased 18.2% and 1.1%, respectively. The increase in Specialty Garments revenue was primarily attributable to increased activity with the segment’s Canadian and European customers.

 

Operating costs

 

Operating costs decreased as a percentage of revenues from 63.4%, or $134.4 million, for the thirteen weeks ended May 27, 2006, to 62.8%, or $144.3 million, for the thirteen weeks ended May 26, 2007. This decrease was primarily driven by our strong revenue growth and modest reductions in energy costs and production costs as a percentage of revenues. These decreases were partially offset by higher merchandise costs in our core laundry operations as a percentage of revenues as compared to the thirteen weeks ended May 27, 2006.

 

Selling and administrative expenses

 

Selling and administrative expenses decreased as a percentage of revenues to 21.2%, or $48.7 million, for the thirteen weeks ended May 26, 2007, from 21.6 %, or $45.7 million, for the comparable period in fiscal 2006. This decrease was primarily driven by our strong revenue growth and decreases in other Corporate and administrative costs as a percentage of revenues.

 

Depreciation and amortization

 

For the thirteen weeks ended May 26, 2007, depreciation and amortization expense increased to $12.3 million from $11.5 million for the comparable period in 2006. The increase in depreciation and amortization expense was due to capital expenditures and acquisitions activity. However, depreciation and amortization expense was 5.4% of revenues for the thirteen weeks ended May 26, 2007, which was consistent as a percent of revenues with the comparable period in 2006.

 

Income from Operations

 

For the thirteen weeks ended May 26, 2007 and May 27, 2006, the revenue growth in our core laundry operations and Specialty Garments, as well as the change in our costs, discussed above, resulted in the following changes in our income from operations:

 

 

 

May 26,

 

 

May 27,

 

 

Dollar

 

Percent

 

 

(In thousands, except percentages)

 

2007

 

 

2006

 

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Laundry Operations

$

21,345

 

$

18,757

 

$

2,588

 

13.8

%

 

Specialty Garments

 

3,006

 

 

834

 

 

2,172

 

260.4

 

 

First Aid

 

260

 

 

739

 

 

(479

)

-64.8

 

 

Consolidated total

$

24,611

 

$

20,330

 

$

4,281

 

21.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income)

 

Other expense (income), which includes interest expense and interest income, was $2.8 million and $2.6 million for the thirteen weeks ended May 26, 2007 and May 27, 2006, respectively. This increase was due to an increase in our average debt outstanding during the period. The average debt outstanding in the thirteen weeks ended May 26, 2007 was $214.1 million as compared to $198.5 million during the thirteen weeks ended May 27, 2006. For both periods, other expense (income) was 1.2% of revenues.

 

Provision for income taxes

 

The Company’s effective income tax rate was 37.3% for the thirteen weeks ended May 26, 2007 as compared to 38.5% for the comparable period ended May 27, 2006. The decrease for the thirteen weeks ended May 26, 2007, was due to a revision in the Company’s estimated effective tax rate for fiscal 2007.

 

Thirty-nine weeks ended May 2007 compared to thirty-nine weeks ended May 2006

 

Revenues

 

 

 

May 26,

 

 

May 27,

 

 

Dollar

 

Percent

 

(In thousands, except percentages)

 

2007

 

 

2006

 

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Laundry Operations

$

602,774

 

$

550,760

 

$

52,014

 

9.4

%

Specialty Garments

 

48,376

 

 

40,000

 

 

8,376

 

20.9

 

First Aid

 

23,443

 

 

22,671

 

 

772

 

3.4

 

Consolidated total

$

674,593

 

$

613,431

 

$

61,162

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

For the thirty-nine weeks ended May 26, 2007, our consolidated revenues increased by $61.2 million from the comparable period in fiscal 2006, or 10.0%. This increase was primarily due to organic growth, which accounted for a 7.5 % increase in revenue. The remaining increase of 2.5% was attributable to incremental acquisition-related revenues. The core laundry operation’s revenues increased in the thirty-nine weeks ended May 26, 2007 by 9.4 % compared to the comparable period ended May 27, 2006. This increase was due to organic growth of 6.7% and acquisition-related growth of 2.7%. Revenues from Specialty Garments and First Aid increased 20.9% and 3.4%, respectively. The increase in Specialty Garments revenue can primarily be attributed to increased activity with the segment’s Canadian and European customers.

 

Operating costs

 

Operating costs decreased as a percentage of revenues from 64.0%, or $392.9 million, for the thirty-nine weeks ended May 27, 2006, to 63.4%, or $427.4 million, for the thirty-nine weeks ended May 26, 2007. This decrease was primarily driven by our strong revenue growth and modest reductions in energy costs, production costs, and delivery payroll costs as a percentage of revenues. These decreases were partially offset by higher merchandise costs in our core laundry operations as a percentage of revenues as compared to the thirty-nine weeks ended May 27, 2006.

 

Selling and administrative expenses

 

Our selling and administrative expenses increased to $147.5 million, or 21.9% of revenues, for the thirty-nine weeks ended May 26, 2007 from $132.9 million, or 21.7% of revenues, for the thirty-nine weeks ended May 27, 2006. The increase in selling and administrative expenses as a percentage of revenues was primarily due to a $1.6 million increase in our environmental reserves as well as $0.7 million in severance expense related to the departure of one of our senior executives, both affecting our core laundry operations. This increase was slightly offset by decreases in other Corporate and administrative costs as a percentage of revenues.

 

Depreciation and amortization

 

Our depreciation and amortization expense increased to $35.7 million for the thirty-nine weeks ended May 26, 2007 from $33.7 million for the thirty-nine weeks ended May 27, 2006. The increase in depreciation and amortization expense was due to capital expenditures and acquisitions activity. As a percentage of revenues, however, depreciation and amortization expense decreased to 5.3% for the thirty-nine weeks ended May 26, 2007 from 5.5% for the comparable period in 2006.

 

Income from Operations

 

For the thirty-nine weeks ended May 26, 2007 and May 27, 2006, the revenue growth in our core laundry operations and Specialty Garments, as well as the change in our costs, discussed above, resulted in the following changes in our income from operations:

 

 

 

May 26,

 

 

May 27,

 

 

Dollar

 

Percent

 

 

(In thousands, except percentages)

 

2007

 

 

2006

 

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Laundry Operations

$

57,620

 

$

52,079

 

$

5,541

 

10.6

 

%

Specialty Garments

 

5,501

 

 

454

 

 

5,047

 

1,111.7

 

 

First Aid

 

890

 

 

1,357

 

 

(467

)

-34.4

 

 

Consolidated total

$

64,011

 

$

53,890

 

$

10,121

 

18.8

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income)

 

Other expense (income), which includes interest expense and interest income, was $8.1 million for the thirty-nine weeks ended May 26, 2007, or 1.2% of revenues, as compared with $6.8 million for the thirty-nine weeks ended May 27, 2006, or 1.1% of revenues. This increase was due to an increase in interest expense of $1.5 million, attributable to an increase in our average debt outstanding during the period as well as higher interest rates affecting our variable rate debt. The average debt outstanding in the thirty-nine weeks ended May 26, 2007 was $214.8 million as compared to $190.2 million during the thirty-nine weeks ended May 27, 2006.

 

Provision for income taxes

 

The Company’s effective income tax rate was 38.5% and 39.1% for the thirty-nine weeks ended May 26, 2007 and May 27, 2006, respectively. The decrease in the effective income tax rate was primarily due to $0.3 million of tax reserves accrued in the thirty-nine weeks ended May 27, 2006 relating to tax exposures identified by the Company.

 

Liquidity and Capital Resources

 

General. As of May 26, 2007, we had cash and cash equivalents of $11.2 million and working capital of $117.4 million. We believe that current cash and cash equivalent balances, cash generated from operations and amounts available under our Amended Credit Agreement (defined below) will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months.

 

Sources and uses of cash. During the thirty-nine weeks ended May 26, 2007, we generated cash from operating activities of $61.4 million, resulting primarily from net income of $34.4 million, amounts charged for depreciation and amortization of $35.7 million, an increase in accrued liabilities of $4.8 million, and a decrease in rental merchandise in service of $3.2 million, offset by increases in accounts receivable of $10.7 million, inventories of $2.6 million, and prepaid expenses of $0.7 million, and decreases in accounts payable of $1.6 million, and accrued and deferred income taxes of $3.3 million. We used our cash to, among other things, fund $43.1 million in capital expenditures and fund the acquisitions of businesses of approximately $23.1 million. Our long-term debt increased by approximately $7.6 million as a result of $111.7 million of borrowings offset by $104.1 million of repayments during the thirty-nine weeks ended May 26, 2007.

 

Long-term debt and borrowing capacity. On September 13, 2006, the Company amended its Credit Agreement. This new agreement (“Amended Credit Agreement”) matures on September 13, 2011 and allows for maximum outstanding borrowings of $225.0 million. Under the Amended Credit Agreement, the Company continues to be able to borrow funds at variable interest rates based on the Eurodollar rate or the bank’s prime rate, as selected by the Company. Availability of credit requires compliance with certain amended financial and other covenants.

 

On September 14, 2006, the Company issued $100.0 million of floating rate notes (“2006 Floating Rate Notes”) pursuant to a Note Purchase Agreement (“2006 Note Agreement”). The proceeds from the issuance of the 2006 Floating Rate Notes were used to first repay $75.0 million of outstanding Floating Rate Notes and then to pay down outstanding amounts under the Amended Credit Agreement. The 2006 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.

 

Commitments and Contingencies

 

We 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 wastes and other substances. In particular, industrial laundries currently use and must dispose of detergent waste water and other residues, and, in the past, used perchloroethylene and other dry cleaning solvents. We are attentive to the environmental concerns surrounding the disposal of these materials and have, through the years, taken measures to avoid their improper disposal. Over the years, we have settled, or contributed to the settlement of, actions or claims brought against us relating to the disposal of hazardous materials and there can be no assurance that we will not have to expend material amounts to remediate the consequences of any such disposal in the future.

 

Accounting principles generally accepted in the United States require 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. We regularly consult with attorneys and outside consultants to ensure that all of the relevant facts and circumstances are considered, before a contingent liability is recorded. 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 our Company under such laws or expose our Company to third party actions such as tort suits. We continue 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 in Williamstown, Vermont, as well as a number of additional locations that we acquired as part of our acquisition of Textilease Corporation in September 2003.

 

We are in the early stages of investigating environmental conditions at the Somerville, Massachusetts site. The full nature and extent of those conditions, and of the remedial solutions that may be employed to address them, have not yet been determined. In the interim, as the investigation proceeds, we are implementing measures to mitigate potential impacts in the vicinity of the site. We also have potential exposure related to an additional parcel of land (the ‘‘Central Area’’) related to the Woburn, Massachusetts site discussed above. Currently, the consent order for the Woburn, Massachusetts site discussed above does not define or require any remediation work in the Central Area. We have not accrued for this contingency as we believe, at this time, the liability is not probable and the amount of such contingent liability cannot be reasonably estimated.

 

We routinely review and evaluate sites that may require remediation and monitoring and determine our estimated costs based on various estimates and assumptions. These estimates are developed using our 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. We generally use the amount within the range that constitutes our best estimate. When we believe that both the amount of a particular liability and the timing of the payments are reliably determinable, we adjust the cost in current dollars using a rate of 3% for inflation until the time of expected payment and discount the cost to present value using risk-free interest rates ranging from 4% to 5%.

 

For environmental liabilities that have been discounted, we include interest accretion, based on the effective interest method, in operating costs on the consolidated statements of income. The changes to our environmental liabilities for the thirty-nine weeks ended May 26, 2007 are as follows:

 

Beginning balance as of August 26, 2006

 

 

$

10,858

 

Costs incurred for which reserves have been provided

 

 

 

(1,470

)

Insurance proceeds received

 

 

 

90

 

Interest accretion

 

 

 

424

 

Change in estimate of liability

 

 

 

1,587

 

Balance as of May 26, 2007

 

 

$

11,489

 

 

In the second quarter of fiscal 2007, we increased our environmental reserves by $1.6 million related to preliminary results of the ongoing site investigation at one of our environmental exposure sites.

 

Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of May 26, 2007, for the next five fiscal years and thereafter as measured in current dollars, are reflected below.

 

Fiscal year ended August

 

2007

 

2008

 

2009

 

2010

 

2011

 

Thereafter

 

 

Total

 

Estimated costs – current dollars

$

3,027

 

2,324

 

1,347

 

942

 

1,012

 

9,541

 

$

18,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated insurance proceeds

 

(176

)

(266

)

(266

)

(274

)

(266

)

(3,874

)

 

(5,122

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net anticipated costs

$

2,851

 

2,058

 

1,081

 

668

 

746

 

5,667

 

$

13,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Inflation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,550

 

Effect of Discounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,132

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of May 26, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

$

11,489

 

 

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 May 26, 2007, the balance in this escrow account, which is held in a trust and is not recorded on our consolidated balance sheet, was approximately $2.2 million. Also included in estimated insurance proceeds are amounts we are entitled to receive pursuant to legal settlements as reimbursements from three insurance companies for estimated costs at the site in Uvalde, Texas.

 

Our 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 our garment decontamination business.

 

From time to time, we are 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, we believe 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 our consolidated financial position or results of operation. It is possible, however, that future financial position or results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.

 

Recent Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits an entity to measure certain financial assets and financial liabilities at fair value. Under SFAS No. 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 also establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity's election on its earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and we are currently evaluating the impact it will have on our consolidated financial statements.

 

On September 29, 2006, the Financial Accounting Standards Board issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS No. 87, 88, 106 and 132(r), which requires a company to: (1) recognize in its statement of financial position the over-funded or under-funded status of its defined benefit postretirement plan measured as the difference between the fair value of plan assets and the benefit obligation, (2) recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period but pursuant to FAS 87 and 106 are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and defined benefit plan obligations as of the date of its statement of financial position, (4) disclose additional information in the notes to financial statements about certain effects on net periodic benefit cost in the upcoming fiscal year that arise from delayed recognition of the actuarial gains and losses and the prior service costs and credits, and (5) recognize as an adjustment to the opening balance of retained earnings, net of tax, any transition asset or transition obligation remaining from the initial application of FAS 87 or 106. This standard is effective for fiscal years ending after December 15, 2006, and we do not expect adoption of this standard will have a material impact on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years and must be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. We are currently evaluating the impact it will have on our consolidated financial statements.

 

On July 13, 2006, the Financial Accounting Standards Board issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109, which fundamentally changes the way that we will be required to treat our uncertain tax positions for financial accounting purposes. FIN No. 48 prescribes rules regarding how we should recognize, measure and disclose in our financial statements tax positions that were taken or will be taken on our tax return that are reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in an increase in a liability for income taxes payable, or a reduction in a deferred tax asset or an increase in a deferred tax liability. This interpretation is effective for fiscal years beginning after December 15, 2006, and we are currently evaluating the impact it will have on our consolidated financial statements.

 

Critical Accounting Policies and Estimates

 

We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Use of Estimates

 

The preparation of our financial statements is in conformity with accounting principles generally accepted in the United States, which requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. The actual results could differ from our estimates.

 

Foreign Currency Translation

 

The functional currency of our foreign operations is the local country’s currency. Transaction gains and losses, including gains and losses on our intercompany transactions, are included in selling and administrative expenses, in the accompanying consolidated statements of income. Assets and liabilities of operations outside the United States are translated into U.S. dollars using period-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during each month of the fiscal year. The effects of foreign currency translation adjustments are included in shareholders’ equity as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets.

 

Revenue Recognition and Allowance for Doubtful Accounts

 

We recognize revenue from rental operations in the period in which the services are provided. Direct sale revenue is recognized in the period in which the services are performed or when the product is shipped. Our judgment and estimates are used in determining the collectability of accounts receivable and evaluating the adequacy of the allowance for doubtful accounts. We consider specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances as part of our evaluation. Changes in our estimates are reflected in the period they become known. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Material changes in our estimates may result in significant differences in the amount and timing of bad debt expense recognition for any given period.

 

Inventories and Rental Merchandise in Service

 

Our inventories are stated at the lower of cost or market value, net of any reserve for excess and obsolete inventory. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to our customers or used in our rental operations. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than the amount we projected, additional inventory write-downs may be required. We use the first-in, first-out (“FIFO”) method to value our inventories, which primarily consist of finished goods.

 

Rental merchandise in service is being amortized on a straight-line basis over the estimated service lives of the merchandise, which range from 6 to 36 months. In establishing estimated lives for merchandise in service, our management considers historical experience and the intended use of the merchandise. Material differences may result in the amount and timing of operating profit for any period if we make significant changes to our estimates.

 

Goodwill, Intangibles and Other Long-Lived Assets

 

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized. SFAS No. 142 requires that companies test goodwill for impairment on an annual basis. In addition, SFAS No. 142 also requires that companies test goodwill if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit to which goodwill is assigned below its carrying amount. Our evaluation considers changes in the operating environment, competitive information, market trends, operating performance and cash flow modeling. We complete our annual impairment test in the fourth quarter of each fiscal year and there have been no impairments of goodwill in fiscal 2007 or 2006. Future events could cause us to conclude that impairment indicators exist and that goodwill or other intangibles associated with previously acquired businesses are impaired. Any resulting impairment loss could have a material impact on our financial condition and results of operations.

 

Property and equipment and definite-lived intangible assets are depreciated or amortized over their useful lives. Useful lives are based on our estimates of the period that the assets will generate revenue. Long-lived assets are evaluated for impairment whenever events and circumstances indicate an asset may be impaired. There were no material impairments of property and equipment or definite-lived intangible assets in fiscal 2007 or 2006.

 

Insurance

 

We self-insure for certain obligations related to health, workers’ compensation, vehicles and general liability programs. We also purchase stop-loss insurance policies to protect ourselves from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for events that have occurred, but have not been reported. Our estimates consider historical claim experience and other factors. Our liabilities are based on our estimates, and, while we believe that our accruals are adequate, the ultimate liability may be significantly different from the amounts recorded. Changes in our claim experience, our ability to settle claims or other estimates and judgments we use could have a material impact on the amount and timing of expense for any given period.

 

Environmental and Other Contingencies

 

We are subject to legal proceedings and claims arising from the conduct of our business operations, including environmental matters, personal injury, customer contract matters and employment claims. Accounting principles generally accepted in the United States require 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. We regularly consult with our attorneys and outside consultants to ensure that all of the relevant facts and circumstances are being considered, before a contingent liability is recorded. We record accruals for environmental and other contingencies based on enacted laws, regulatory orders or decrees, our estimates of costs, insurance proceeds, participation by other parties, the timing of payments, and the input of our attorneys and outside consultants.

 

The estimated liability for environmental contingencies has been discounted using risk-free interest rates ranging from 4% to 5% over periods ranging from ten to thirty years. The estimated current costs, net of legal settlements with insurance carriers, have been adjusted for the estimated impact of inflation at 3% per year. Changes in enacted laws, regulatory orders or decrees, our estimates of costs, insurance proceeds, participation by other parties, the timing of payments and the input of our attorneys and outside consultants based on changing legal or factual circumstances could have a material impact on the amounts recorded for our environmental and other contingent liabilities. Refer to Note 5 of the consolidated financial statements for additional discussion and analysis.

 

Asset Retirement Obligations

 

We follow the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations, which generally applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Under this accounting method, we recognize 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.

 

We have recognized as a liability the present value of the estimated future costs to decommission our nuclear laundry facilities in accordance with the provisions of SFAS No. 143. We depreciate, on a straight-line basis, the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the various remaining lives which range from approximately four to twenty-five years.

 

Our estimated liability has been based on historical experience in decommissioning nuclear laundry facilities, estimated useful lives of the underlying assets, external vendor estimates as to the cost to decommission these assets in the future, and federal and state regulatory requirements. The estimated current costs have been adjusted for the estimated impact of inflation at 3% per year. The liability has been discounted using credit-adjusted risk-free rates that range from approximately 3% to 7%. Revisions to the liability could occur due to changes in the estimated useful lives of the underlying assets, estimated dates of decommissioning, changes in decommissioning costs, changes in federal or state regulatory guidance on the decommissioning of such facilities, or other changes in estimates. Changes due to revisions in our estimates will be recognized by adjusting the carrying amount of the liability and the related long-lived asset if the assets are still in service, or charged to expense in the period if the assets are no longer in service.

 

Pensions

 

The calculation of pension expense and the corresponding liability requires us to use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate. Changes in our assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions. Pension expense increases as the expected rate of return on pension plan assets decreases. Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our pension plans will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.

 

Income Taxes

 

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes are provided for temporary differences between the amounts recognized for income tax and financial reporting purposes at currently enacted tax rates. We compute income tax expense by jurisdiction based on our operations in each jurisdiction.

 

We are periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated reserves for probable exposures, in accordance with SFAS No. 5, Accounting for Contingencies.

 

Seasonality

 

Historically, our revenues and operating results have varied from quarter to quarter and are expected to continue to fluctuate in the future. These fluctuations have been due to a number of factors, including: general economic conditions in the Company’s markets; the timing of acquisitions and of commencing start-up operations and related costs; the effectiveness of integrating acquired businesses and start-up operations; the timing of nuclear plant outages; capital expenditures; seasonal rental and purchasing patterns of our customers; and price changes in response to competitive factors. In addition, our operating results historically have been lower during the second and fourth fiscal quarters than during the other quarters of the fiscal year. The operating results for any historical quarter are not necessarily indicative of the results to be expected for an entire fiscal year or any other interim periods.

 

Effects of Inflation

 

In general, management believes that its results of operations are not dependent on moderate changes in the inflation rate. Historically, we have been able to manage the impacts of more significant changes in inflation rates through its customer relationships, customer agreements that generally provide for price increases consistent with the rate of inflation, and continued focus on improvements of operational productivity.

 

Significant changes in energy costs, specifically natural gas and gasoline, could materially affect our results of operations and financial condition.

 

Contractual Obligations and Other Commercial Commitments

 

As of May 26, 2007, there were no material changes in the Company's contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended August 26, 2006.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Currency Exchange Risk

 

We have determined that all of our foreign subsidiaries operate primarily in local currencies that represent the functional currencies of the subsidiaries. All assets and liabilities of our foreign subsidiaries are translated into U.S. dollars using the exchange rate prevailing at the balance sheet date. The effect of exchange rate fluctuations on the translation of assets and liabilities are recorded as a component of shareholders’ equity. Income and expense accounts are translated at average exchange rates during the year. As such, our financial condition and operating results are affected by fluctuations in the value of the U.S. dollar as compared to currencies in foreign countries. Revenues denominated in currencies other than the U.S. dollar represented approximately 9% of total consolidated revenues for the thirteen and thirty-nine weeks ended May 26, 2007 and total assets denominated in currencies other than the U.S. dollar represented approximately 8% of total consolidated assets as of May 26, 2007. If exchange rates had changed by 10% from the actual rates in effect during the thirteen and thirty-nine weeks ended May 26, 2007, our revenues for the thirteen and thirty-nine weeks ended would have changed by approximately $2.1 million and $5.9 million, respectively, and assets as of May 26, 2007 would have changed by approximately $7.1 million.

 

We do not operate a hedging program to mitigate the effect of a significant rapid change in the value of the Canadian Dollar, Euro, British Pound, or Mexican Peso as compared to the U.S. dollar. Any gains or losses resulting from foreign currency transactions, including exchange rate fluctuations on intercompany accounts, are reported as transaction gains (losses) in selling and administrative expenses. The intercompany payables and receivables are denominated in Canadian Dollars, Euros, British Pounds and Mexican Pesos. During the thirteen weeks ended May 26, 2007, transaction losses included in selling and administrative expenses were approximately $0.1 million. During the thirty-nine weeks ended May 26, 2007 transaction gains included in selling and administrative expenses were approximately $0.0 million. If the exchange rates had changed by 10% during the thirteen and thirty-nine weeks ended May 26, 2007, we would have recognized exchange gains (losses) in other income (expense) of approximately $0.1 million and $0.2 million, respectively.

 

Interest Rate Sensitivity

 

We are exposed to market risk from changes in interest rates which may adversely affect our financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, we manage exposures through our regular operating and financing activities. We are exposed to interest rate risk primarily through borrowings under our $225.0 million Amended Credit Agreement with a syndicate of banks and our $100.0 million of Floating Rate Notes which were issued to a group of insurance companies pursuant to a Note Purchase Agreement. Under both agreements, the Company borrows funds at variable interest rates based on the Eurodollar rate or LIBOR rates. If the LIBOR and Eurodollar rates fluctuated by 10% from the actual rates in effect during the thirteen and thirty-nine weeks ended May 26, 2007, interest expense would have fluctuated by approximately $0.2 million and $0.6 million from the interest expense recognized for the thirteen and thirty-nine weeks ended May 26, 2007, respectively.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures. As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company required to be disclosed by the Company in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. We continue to review our disclosure controls and procedures, and our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the our systems evolve with our business.

 

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during our third fiscal quarter ended May 26, 2007 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to legal proceedings and claims arising from the conduct of our business operations, including personal injury, customer contract, employment claims and environmental matters as described in the consolidated financial statements above. We maintain insurance coverage providing indemnification against the majority of such claims, and we do not expect that we will sustain any material loss as a result thereof. Refer to Note 5, “Commitments and Contingencies,” of the consolidated financial statements for further discussion.

 

ITEM 1A. RISK FACTORS

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 26, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

*

 

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

*

 

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

**

 

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

**

 

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

*

 

Filed herewith

 

 

**

 

Furnished herewith


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

July 3, 2007

UniFirst Corporation

 

 

By:  

/s/ Ronald D. Croatti

 

Ronald D. Croatti

 

President and Chief Executive Officer 

 

 

 

 

 

 

 

 

July 3, 2007

UniFirst Corporation

 

 

By:  

/s/ John B. Bartlett  

 

John B. Bartlett 

 

Senior Vice President and Chief Financial Officer 


 

EXHIBIT INDEX

 

*

 

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

*

 

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

**

 

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

**

 

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

*

 

Filed herewith

 

 

**

 

Furnished herewith