Table Of Contents

 

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended November 28, 2015
	OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________

 

Commission file number: 001-08504

 

UNIFIRST CORPORATION

(Exact name of Registrant as Specified in Its Charter)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☑     No ☐  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☑     No ☐

 

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

 

Large accelerated filer     ☑

Accelerated filer     ☐

Smaller Reporting Company     ☐

Non-accelerated filer     ☐

           

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

 

Yes ☐     No ☑

 

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 December 31, 2015 were 15,271,579 and 4,854,519, respectively. 

 

 

UniFirst Corporation

Quarterly Report on Form 10-Q

For the Quarter ended November 28, 2015

 

Table of Contents

Part I – FINANCIAL INFORMATION
Item 1 – Financial Statements
Consolidated Statements of Income for the Thirteen Weeks ended November 28, 2015 and November 29, 2014
Consolidated Statements of Comprehensive Income for the Thirteen Weeks ended November 28, 2015 and November 29, 2014
Consolidated Balance Sheets as of November 28, 2015 and August 29, 2015
Consolidated Statements of Cash Flows for the Thirteen Weeks ended November 28, 2015 and November 29, 2014
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 – Mine Safety Disclosures
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

 

Consolidated Statements of Income

UniFirst Corporation and Subsidiaries

(Unaudited)

 

 

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

 

 

 

The accompanying notes are an integral part of these

Consolidated Financial Statements.

 

 

Consolidated Statements of Comprehensive Income

UniFirst Corporation and Subsidiaries

(Unaudited)

 

 

  

The accompanying notes are an integral part of these

Consolidated Financial Statements.

 

 

Consolidated Balance Sheets

UniFirst Corporation and Subsidiaries

(Unaudited)

 

 

(a)

Derived from audited financial statements

 

 

The accompanying notes are an integral part of these

Consolidated Financial Statements

 

 

Consolidated Statements of Cash Flows

UniFirst Corporation and Subsidiaries

(Unaudited)

 

 

 

The accompanying notes are an integral part of these

Consolidated Financial Statements.

 

 

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

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

 

SAFE HARBOR FOR FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q and any documents incorporated by reference contain forward looking statements within the meaning of the federal securities laws. Forward looking statements contained in this Quarterly Report on Form 10-Q and any documents incorporated by reference are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “could,” “should,” “may,” “will,” or the negative versions thereof, and similar expressions and by the context in which they are used. Such forward looking statements are based upon our current expectations and speak only as of the date made. Such statements are highly dependent upon a variety of risks, uncertainties and other important factors that could cause actual results to differ materially from those reflected in such forward looking statements. Such factors include, but are not limited to, our ability to compete successfully without any significant degradation in our margin rates, uncertainties caused by the continuing adverse worldwide economic conditions and their impact on our customers’ businesses and workforce levels, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, any adverse outcome of pending or future contingencies or claims, uncertainties regarding our ability to consummate and successfully integrate acquired businesses, our ability to preserve positive labor relationships and avoid becoming the target of corporate labor unionization campaigns that could disrupt our business, the continuing increase in domestic healthcare costs, including the ultimate impact of the Affordable Care Act, our retention of customers and renewal of customer contracts, uncertainties regarding the price levels of natural gas, electricity, fuel and labor, the negative effect on our business from sharply depressed oil prices, fluctuation on our revenue and net income from our specialty garments segment, the effect of currency fluctuations on our results of operations and financial condition, rampant criminal activity and instability in Mexico where our principal garment manufacturing plants are located, the impact on our goodwill and intangibles that might result from adverse financial and economic changes, our ability to properly and efficiently design, construct, implement and operate our new customer relationship management (“CRM”) computer system, interruptions or failures of our information technology systems, including as a result of cyber-attacks, failure to comply with other state and federal regulations that might result in penalties or costs, seasonal and quarterly fluctuations in business levels, any loss of key management or other personnel, our dependence on third parties to supply us with raw materials, increased costs as a result of any future changes in federal or state laws, rules and regulations or governmental interpretation of such laws, rules and regulations, demand and prices for our products and services, economic and other developments associated with the war on terrorism and its impact on the economy, general economic conditions and other factors described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 29, 2015 and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update any forward looking statements to reflect events or circumstances arising after the date on which such statements are made.

 

Business Overview

 

UniFirst Corporation, together with its subsidiaries, hereunder referred to as “we”, “our”, the “Company”, or “UniFirst”, is one of the largest providers of workplace uniforms and protective 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 and sell industrial wiping products, floor mats, facility service products and other non-garment items, and provide restroom and cleaning supplies and 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 and cleaning supplies, including air fresheners, paper products and hand soaps.

 

At certain specialized facilities, we also decontaminate and clean work clothes and other items that may have been exposed to radioactive materials and service special cleanroom protective wear and facilities. 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 more than 275,000 customer locations in the United States, Canada and Europe from more than 225 customer service, distribution and manufacturing facilities.

 

As discussed and described in Note 14 to the Consolidated Financial Statements, we have five reporting segments: US and Canadian Rental and Cleaning, Manufacturing (“MFG”), Corporate, Specialty Garments Rental and Cleaning (“Specialty Garments”) and First Aid. We refer to the laundry locations of the US and Canadian Rental and Cleaning reporting segment as “industrial laundries” or “industrial laundry locations”, and to the US and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our “Core Laundry Operations.”

 

Critical Accounting Policies and Estimates

 

The discussion of our financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in conformity with United States generally accepted accounting principles (“US GAAP”). As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

 

 

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, the most important and pervasive accounting policies used and areas most sensitive to material changes from external factors. See Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 29, 2015 for additional discussion regarding our application of these and other accounting policies.

 

Results of Operations

 

The following table presents certain selected financial data, including the percentage of revenues represented by each item, for the thirteen weeks ended November 28, 2015 and November 29, 2014.

 

		Thirteen weeks ended
(In thousands, except percentages)		November 28, 2015				% of Revenues				November 29, 2014				% of Revenues				% Change
Revenues		$	373,384				100.0	%		$	370,361				100.0	%			0.8	%
Operating expenses:
Cost of revenues (1)			222,603				59.6				219,353				59.2				1.5
Selling and administrative expenses (1)			72,749				19.5				72,382				19.5				0.5
Depreciation and amortization			19,738				5.3				18,037				4.9				9.4
Total operating expenses			315,090				84.4				309,772				83.6				1.7
Income from operations			58,294				15.6				60,589				16.4				-3.8
Other (income) expense			(64	)			0.0				(245	)			-0.1				-73.9
Income before income taxes			58,358				15.6				60,834				16.4				-4.1
Provision for income taxes			22,468				6.0				23,421				6.3				-4.1
Net income		$	35,890				9.6	%		$	37,413				10.1	%			-4.1	%

 

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

 

General

 

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

 

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

 

We have a substantial number of plants and conduct a significant portion of our business in energy producing regions in the U.S and Canada. The price of oil has declined dramatically over the past year. This decline has directly affected our customers in the oil industry, as they have curtailed their level of operations, and has had a corresponding effect on our customers in businesses which service or supply the oil industry as well as our customers in unrelated businesses located in areas which had benefited from the economic expansion generated by the robust growth driven by the higher oil prices in prior years. As a result, our organic growth has been impacted by elevated headcount reductions in our wearer base as well as increased lost accounts, which will also have an impact on organic growth throughout fiscal 2016. On the other hand, we have benefited from lower costs of the gasoline used to fuel our vehicles and the natural gas used to operate our plants. Since there are substantial uncertainties regarding the extent, timing and effect of lower oil prices, it is difficult to quantify the positive and negative impacts on our future financial results from lower oil prices. Nevertheless, we believe that if oil prices remain depressed that the benefits from lower energy costs will be outweighed by the revenues and profits we continue to lose as a result of the cutbacks by our customers in the oil industry and other affected businesses.

 

 

The cost of healthcare that we provide to our employees has grown over the last few years at a rate in excess of our revenue growth and as a result, has negatively impacted our operating results. In fiscal 2015, the Affordable Care Act (“ACA”) required us to modify one of the healthcare plans we provided to our employees. In addition, we will incur additional costs related to ACA transitional reinsurance fees that will be paid in fiscal years 2016 and 2017. There remains considerable uncertainty as to the impact of the ACA on our healthcare costs, including the effect of the plan modifications on the behavior of our employees as well as the potential for increased enrollment in our plans. Although uncertainty exists, we anticipate that our future operating results will continue to be further adversely impacted by increasing healthcare costs.  

 

We are currently undertaking a company-wide initiative to update our customer relationship management systems. As of November 28, 2015, we have capitalized $45.3 million related to our CRM project (“Unity 20/20”). Although we will not deploy this system in fiscal 2016, our future operating results will be impacted by the eventual depreciation of our Unity 20/20 investment. In addition, our results from operations are being affected by higher costs related to additional investments in our IT infrastructure, including headcount, to help support Unity 20/20 as well as other technology initiatives.

 

A portion of our sales is derived from international markets, including Canada. Revenues denominated in currencies other than the U.S. dollar represented approximately 8.1% and 9.0% of total consolidated revenues for the thirteen weeks ended November 28, 2015 and November 29, 2014, respectively. The operating results of our international subsidiaries are translated into U.S. dollars and such results are affected by movements in foreign currencies relative to the U.S. dollar. In addition, fluctuations in the Canadian dollar may have an effect on the margins of our Canadian business because a weaker Canadian dollar will increase the cost of merchandise and other operational inputs that are sourced from outside of Canada. Our operating results in future years could be negatively impacted by any devaluation, as compared to the U.S. dollar, of the Canadian dollar or any of the currencies of the other countries in which we operate.

 

In January 2015, we entered into sixteen forward contracts to exchange Canadian dollars (“CAD”) for U.S. dollars at fixed exchange rates in order to manage our exposure related to certain forecasted CAD denominated sales of one of our subsidiaries. The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries each fiscal quarter, beginning in the third fiscal quarter of 2015 and continuing through the second fiscal quarter of 2019. In total, we will sell approximately 31.0 million CAD at an average Canadian-dollar exchange rate of 0.7825 over these quarterly periods. We concluded that the forward contracts met the criteria to qualify as a cash flow hedge under US GAAP. Accordingly, we have reflected all changes in the fair value of the forward contracts in accumulated other comprehensive (loss) income, a component of shareholders’ equity. Upon the maturity of each foreign exchange forward contract, the gain or loss on the contract will be recorded as an adjustment to revenues.

 

As of November 28, 2015, we had forward contracts with a notional value of approximately 23.5 million CAD outstanding and recorded the fair value of the contracts of $0.7 million in other long-term assets and a corresponding gain in accumulated other comprehensive (loss) income of $0.4 million, which was recorded net of tax. During the thirteen weeks ended November 28, 2015, we reclassified $0.1 million from accumulated other comprehensive (loss) income to revenue, related to the derivative financial instruments. The gain in accumulated other comprehensive (loss) income as of November 28, 2015 is expected to be reclassified to revenues prior to its maturity on February 22, 2019.

 

Thirteen weeks ended November 28, 2015 compared with thirteen weeks ended November 29, 2014

 

Revenues 

 

		November 28,				November 29,				Dollar				Percent
(In thousands, except percentages)		2015				2014				Change				Change
Core Laundry Operations		$	335,037			$	335,847			$	(810	)			-0.2	%
Specialty Garments			26,770				22,476				4,294				19.1
First Aid			11,577				12,038				(461	)			-3.8
Consolidated total		$	373,384			$	370,361			$	3,023				0.8	%

 

For the thirteen weeks ended November 28, 2015, our consolidated revenues increased by $3.0 million from the comparable period in fiscal 2015, or 0.8%. Core Laundry Operations’ revenues decreased to $335.0 million for the thirteen weeks ended November 28, 2015 from $335.8 million for the comparable period of fiscal 2015, or 0.2%. Excluding the negative effect of a weaker Canadian dollar of 1.2%, as well as the positive effect of acquisitions of 0.6%, organic growth was 0.4%. Organic growth consists primarily of new sales, price increases, and net changes in the wearer levels at our existing customers, offset by lost accounts. Organic growth in the first quarter of fiscal 2016 was negatively affected by reductions at customers that directly or indirectly support oil or other energy production as well as higher lost accounts throughout fiscal 2015 and the first quarter of fiscal 2016.

 

Specialty Garments’ revenues increased to $26.8 million in the first fiscal quarter of 2016 from $22.5 million in the comparable period of fiscal 2015, an increase of $4.3 million or 19.1%. This increase was primarily the result of increased revenues from the segment’s U.S and Canadian nuclear decontamination operations. This segment’s results are often affected by the timing and length of its customers’ power reactor outages as well as its project-based activities. First Aid revenues decreased to $11.6 million in the first quarter of 2016 from $12.0 million in the comparable period of fiscal 2015, a decrease of $0.5 million or 3.8%. This decrease was primarily due to the timing of certain orders in the segment’s wholesale distribution and pill packaging business.

 

 

Cost of Revenues

 

For the thirteen weeks ended November 28, 2015, cost of revenues increased to 59.6% of revenues, or $222.6 million, from 59.2% of revenues, or $219.4 million, for the thirteen weeks ended November 29, 2014. This was due to higher merchandise amortization, payroll, payroll-related and other production costs which increased as a percent of revenues primarily due to the slow revenue growth, discussed above. These higher costs were partially offset by lower fuel costs associated with our fleet of delivery vehicles and lower natural gas costs compared to the prior year.

 

Selling and Administrative Expense

 

Selling and administrative expenses were 19.5% of revenues, for both the thirteen weeks ended November 28, 2015 and November 29, 2014. During the thirteen weeks ended November 28, 2015, we had higher payroll costs as well as higher costs related to IT infrastructure investments which were offset by lower legal expenses and payroll-related costs compared to the prior year.

 

Depreciation and Amortization

 

Our depreciation and amortization expense was $19.7 million, or 5.3% of revenues, for the thirteen weeks ended November 28, 2015 compared to $18.0 million, or 4.9% of revenues, for the thirteen weeks ended November 29, 2014. The increase in depreciation and amortization expense was due to capital expenditure and acquisition activity in earlier periods.

 

Income from Operations

 

For the thirteen weeks ended November 28, 2015 and November 29, 2014, changes in our revenues and costs as discussed above resulted in the following changes in our income from operations:

 

		November 28,				November 29,				Dollar				Percent
(In thousands, except percentages)		2015				2014				Change				Change
Core Laundry Operations		$	52,972			$	56,873			$	(3,901	)			-6.9	%
Specialty Garments			4,286				2,268				2,018				89.0
First Aid			1,036				1,448				(412	)			-28.4
Consolidated total		$	58,294			$	60,589			$	(2,295	)			-3.8	%

 

Other (Income) Expense

 

Other (income) expense, which includes interest expense, interest income and exchange rate loss (gain), was $0.1 million of income in the thirteen weeks ended November 28, 2015 compared to income of $0.2 million in the thirteen weeks ended November 29, 2014. This decrease was due to unfavorable foreign currency fluctuations which resulted in an exchange rate loss of approximately $0.5 million in the thirteen weeks ended November 28, 2015 compared to an exchange rate loss of $0.4 million in the comparable period of fiscal 2015.

 

Provision for Income Taxes

 

Our effective income tax rate was 38.5% for both the thirteen weeks ended November 28, 2015 and November 29, 2014.

 

Liquidity and Capital Resources

 

General 

 

Cash and cash equivalents totaled $311.5 million as of November 28, 2015, an increase of $35.0 million from August 29, 2015 when the amount totaled $276.6 million. Our working capital was $513.3 million as of November 28, 2015 compared to $477.7 million as of August 29, 2015. In addition, we generated $57.6 million and $226.9 million in cash from operating activities in the thirteen weeks ended November 28, 2015 and the full fiscal year ended August 29, 2015, respectively. We believe that our current cash and cash equivalent balances, our cash generated from future operations and amounts available under our Credit Agreement (defined below) will be sufficient to meet our current anticipated working capital and capital expenditure requirements for at least the next 12 months. We expect to replace the Credit Agreement prior to its maturity with a new revolving line of credit on appropriate terms.

 

We have accumulated $56.6 million in cash outside the United States that is expected to be invested indefinitely in our foreign subsidiaries. If these funds were distributed to the U.S. in the form of dividends, we would likely be subject to additional U.S. income taxes. However, we do not believe that any resulting taxes payable would have a material impact on our liquidity.

 

Cash flows provided by operating activities have historically been the primary source of our liquidity. We generally use these cash flows to fund most, if not all, of our operations, capital expenditure and acquisition activities as well as dividends on our common stock. We may also use cash flows provided by operating activities, as well as proceeds from loans payable and long-term debt, to fund growth and acquisition opportunities, as well as other cash requirements.

 

 

Cash Provided by Operating Activities

 

Cash provided by operating activities for the thirteen weeks ended November 28, 2015 was $57.6 million, an increase of $4.8 million from the comparable period in the prior year when cash provided by operating activities was $52.8 million. This net increase was driven by an increase in cash flows of $4.9 million generated by changes in working capital primarily due to the timing of our accounts payable and prepaid expenses.

 

Cash Used in Investing Activities

 

Cash used in investing activities for the thirteen weeks ended November 28, 2015 was $20.9 million, a decrease of $7.3 million from the comparable period in the prior year when cash used in investing activities was $28.2 million. The net decrease in cash used in investing activities was primarily driven by a decrease in cash outflows of $10.8 million for the acquisition of businesses. This decrease was offset by an increase in cash outflows of $3.6 million for capital expenditures during the thirteen weeks ended November 28, 2015 compared to the same period in the prior year.

 

Cash (Used in) Provided by Financing Activities

 

Cash used in financing activities for the thirteen weeks ended November 28, 2015 was $1.1 million compared to cash used in financing activities of $0.5 million for the thirteen weeks ended November 29, 2014. This change was primarily due to a decrease in proceeds received from exercise of common stock options.

 

Long-Term Debt and Borrowing Capacity

 

On May 5, 2011, we entered into a $250.0 million unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks, which matures on May 4, 2016. Under the Credit Agreement, we are able to borrow funds at variable interest rates based on, at our election, the Eurodollar rate or a base rate, plus in each case a spread based on our consolidated funded debt ratio. Availability of credit requires compliance with certain financial and other covenants, including a maximum consolidated funded debt ratio and minimum consolidated interest coverage ratio as defined in the Credit Agreement. We test our compliance with these financial covenants on a fiscal quarterly basis. At November 28, 2015, the interest rates applicable to our borrowings under the Credit Agreement would be calculated as LIBOR plus 75 basis points at the time of the respective borrowing. As of November 28, 2015, we had no outstanding borrowings, letters of credit amounting to $53.0 million and $197.0 million available for borrowing under the Credit Agreement. We expect to replace the Credit Agreement prior to its maturity with a new revolving line of credit on appropriate terms.

 

As of November 28, 2015, we were in compliance with all covenants under the Credit Agreement.

 

Derivative Instruments and Hedging Activities

 

In January 2015, we entered into sixteen forward contracts to exchange Canadian dollars (“CAD”) for U.S. dollars at fixed exchange rates in order to manage our exposure related to certain forecasted CAD denominated sales of one of our subsidiaries. The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries each fiscal quarter, beginning in the third fiscal quarter of 2015 and continuing through the second fiscal quarter of 2019. In total, we will sell approximately 31.0 million CAD at an average Canadian-dollar exchange rate of 0.7825 over these quarterly periods. We concluded that the forward contracts met the criteria to qualify as a cash flow hedge under US GAAP. Accordingly, we have reflected all changes in the fair value of the forward contracts in accumulated other comprehensive (loss) income, a component of shareholders’ equity. Upon the maturity of each foreign exchange forward contract, the gain or loss on the contract will be recorded as an adjustment to revenues.

 

As of November 28, 2015, we had forward contracts with a notional value of approximately 23.5 million CAD outstanding and recorded the fair value of the contracts of $0.7 million in other long-term assets and a corresponding gain in accumulated other comprehensive (loss) income of $0.4 million, which was recorded net of tax. During the thirteen weeks ended November 28, 2015, we reclassified $0.1 million from accumulated other comprehensive (loss) income to revenue, related to the derivative financial instruments. The gain in accumulated other comprehensive (loss) income as of November 28, 2015 is expected to be reclassified to revenues prior to its maturity on February 22, 2019.

 

Commitments and Contingencies

 

We are subject to various federal, state and local laws and regulations governing, among other things, air emissions, wastewater discharges, and 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.

 

US GAAP requires that a liability for contingencies be recorded when it is probable that a liability has been incurred 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 in our consideration of the relevant facts and circumstances before recording a contingent liability. Changes in enacted laws, regulatory orders or decrees, our estimates of costs, risk-free interest rates, insurance proceeds, participation by other parties, the timing of payments, the input of our attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for our 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 or otherwise negotiated with the applicable environmental authorities with respect to sites located in or related to Woburn, Massachusetts, Somerville, Massachusetts, Springfield, Massachusetts, Uvalde, Texas, Stockton, California, three sites related to former operations in Williamstown, Vermont, as well as sites located in Goldsboro, North Carolina, Wilmington, North Carolina and Landover, Maryland.

 

We have accrued certain costs related to the sites described above as it has been determined that the costs are probable and can be reasonably estimated. We have potential exposure related to a parcel of land (the “Central Area”) related to the Woburn, Massachusetts site discussed above. Currently, the consent decree for the Woburn site does not define or require any remediation work in the Central Area. The United States Environmental Protection Agency (the “EPA”) has provided us and other signatories to the consent decree with comments on the design and implementation of groundwater and soil remedies at the Woburn site and investigation of environmental conditions in the Central Area. We, and other signatories, have implemented and proposed to do additional work at the Woburn site but many of the EPA’s comments remain to be resolved. We have accrued costs to perform certain work responsive to EPA’s comments. We are also in discussions with EPA concerning its invoices for oversight costs with respect to the Woburn site and the Central Area. We have implemented mitigation measures and continue to monitor environmental conditions at the Somerville, Massachusetts site.

 

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 our 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. In accordance with US GAAP, our accruals represent the amount within the range that we believe is the best estimate or the low end of a range of estimates if no point within the range is a better 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 current risk-free interest rates. As of November 28, 2015, the risk-free interest rates we utilized ranged from 2.2% to 3.0%.

 

For environmental liabilities that have been discounted, we include interest accretion, based on the effective interest method, in selling and administrative expenses on the Consolidated Statements of Income. The changes to the amounts of our environmental liabilities for the thirteen weeks ended November 28, 2015 are as follows (in thousands):

 

		November 28, 2015
Beginning balance as of August 29, 2015		$	23,307
Costs incurred for which reserves have been provided			(341	)
Insurance proceeds			8
Interest accretion			167
Change in discount rates			(148	)
Balance as of November 28, 2015		$	22,993

  

 

Anticipated payments and insurance proceeds relating to currently identified environmental remediation liabilities as of November 28, 2015, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below. 

 

(In thousands)		2016				2017				2018				2019				2020				Thereafter				Total
Estimated costs – current dollars		$	7,072			$	1,829			$	1,476			$	1,309			$	1,361			$	12,493			$	25,540
Estimated insurance proceeds			(151	)			(173	)			(159	)			(173	)			(159	)			(1,293	)			(2,108	)
Net anticipated costs		$	6,921			$	1,656			$	1,317			$	1,136			$	1,202			$	11,200			$	23,432
Effect of inflation																											7,422
Effect of discounting																											(7,861	)
Balance as of November 28, 2015																										$	22,993

 

Estimated insurance proceeds are primarily received from an annuity received as part of our 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 our 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 November 28, 2015, the balance in this escrow account, which is held in a trust and is not recorded in our Consolidated Balance Sheet, was approximately $3.2 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. We also have nuclear garment decontamination facilities in the United Kingdom and the Netherlands. These facilities are licensed and regulated by the respective country’s applicable federal agency. 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 our business operations, including personal injury claims, customer contract matters, employment claims and environmental matters as described above.

 

While it is impossible for us 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 covered by insurance have been properly accrued in accordance with accounting principles generally accepted in the United States. It is possible, however, that the future financial position and/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.

 

Off-Balance Sheet Arrangements

 

As of November 28, 2015, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission Regulation S-K.

 

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 our markets; the timing of acquisitions and of commencing start-up operations and related costs; our effectiveness in 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, we believe that our 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 our customer relationships, customer agreements that generally provide for price increases consistent with the rate of inflation, and continued focus on improvements of operational productivity.

 

Contractual Obligations and Other Commercial Commitments

 

As of November 28, 2015, there were no material changes in our contractual obligations that were disclosed in our Annual Report on Form 10-K for the year ended August 29, 2015.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued updated accounting guidance for revenue recognition, which they have subsequently modified. This modified update provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. This guidance will be effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and will be required to be applied retrospectively (full or modified), with early adoption permitted. Accordingly, the standard will be effective for us on August 26, 2018. We are currently evaluating the adoption method we will apply and the impact that this guidance will have on our financial statements and related disclosures. 

 

 

In February 2015, the FASB issued updated accounting guidance on consolidation requirements. This update changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Accordingly, the standard will be effective for us on August 28, 2016. We expect that adoption of this guidance will not have a material impact on our financial statements.

 

In April 2015, the FASB issued updated guidance on the presentation of debt issuance costs. This update changes the guidance with respect to presenting such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Accordingly, the standard will be effective for us on August 28, 2016. We expect that adoption of this guidance will not have a material impact on our financial statements.

 

In May 2015, the FASB issued updated guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. This guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, and is to be applied retrospectively to all periods presented, with early adoption permitted. Accordingly, the standard will be effective for us on August 28, 2016. We expect that adoption of this guidance will not have a material impact on our financial statements.

 

In July 2015, the FASB issued updated guidance which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value. Subsequent measurement is unchanged for inventory measured using last-in, first-out or the retail inventory method. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, and is to be applied prospectively, with early adoption permitted. Accordingly, the standard will be effective for us on August 27, 2017. We expect that adoption of this guidance will not have a material impact on our financial statements.

 

In September 2015, the FASB issued updated guidance that requires an entity to recognize adjustments made to provisional amounts that are identified in a business combination in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, and is to be applied prospectively, with early adoption permitted. Accordingly, the standard will be effective for us on August 28, 2016. We expect that adoption of this guidance will not have a material impact on our financial statements.

 

In November 2015, the FASB issued updated guidance on the presentation of deferred income taxes. This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and is to be applied prospectively, and may also be applied retrospectively to all periods presented, with early adoption permitted. Accordingly, the standard will be effective for us on August 27, 2017. We expect that adoption of this guidance will not have a material impact on our financial statements.

 

 

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 such 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. Revenues and expenses are translated at the average exchange rates in effect during each month of the fiscal 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 8.1% of total consolidated revenues for the thirteen weeks ended November 28, 2015, and total assets denominated in currencies other than the U.S. dollar represented approximately 8.5% and 8.9% of total consolidated assets at November 28, 2015 and August 29, 2015, respectively. If exchange rates had increased or decreased by 10% from the actual rates in effect during the thirteen weeks ended and as of November 28, 2015, our revenues and assets for the thirteen weeks ended and as of November 28, 2015 would have increased or decreased by approximately $3.0 million and $13.5 million, respectively.

 

In January 2015, we entered into sixteen forward contracts to exchange Canadian dollars (“CAD”) for U.S. dollars at fixed exchange rates in order to manage our exposure related to certain forecasted CAD denominated sales of one of our subsidiaries. The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries each fiscal quarter, beginning in the third fiscal quarter of 2015 and continuing through the second fiscal quarter of 2019. In total, we will sell approximately 31.0 million CAD at an average Canadian-dollar exchange rate of 0.7825 over these quarterly periods. We concluded that the forward contracts met the criteria to qualify as a cash flow hedge under US GAAP. Accordingly, we have reflected all changes in the fair value of the forward contracts in accumulated other comprehensive (loss) income, a component of shareholders’ equity. Upon the maturity of each foreign exchange forward contract, the gain or loss on the contract will be recorded as an adjustment to revenues.

 

As of November 28, 2015, we had forward contracts with a notional value of approximately 23.5 million CAD outstanding and recorded the fair value of the contracts of $0.7 million in other long-term assets and a corresponding gain in accumulated other comprehensive (loss) income of $0.4 million, which was recorded net of tax. During the thirteen weeks ended November 28, 2015, we reclassified $0.1 million from accumulated other comprehensive (loss) income to revenue, related to the derivative financial instruments. The gain in accumulated other comprehensive (loss) income as of November 28, 2015 is expected to be reclassified to revenues prior to its maturity on February 22, 2019.

 

Other than the forward contracts, discussed above, we do not operate a hedging program to mitigate the effect of a significant change in the value of our foreign subsidiaries functional currencies, which include the Canadian dollar, euro, British pound, Mexican peso and Nicaraguan cordoba, as compared to the U.S. dollar. Any losses or gains resulting from unhedged foreign currency transactions, including exchange rate fluctuations on intercompany accounts are reported as transaction losses (gains) in our other (income) expense. The intercompany payables and receivables are denominated in Canadian dollars, euros, British pounds, Mexican pesos and Nicaraguan cordobas. During the thirteen weeks ended November 28, 2015, transaction losses included in other (income) expense were approximately $0.5 million. If the exchange rates had changed by 10% during the thirteen weeks ended November 28, 2015, we would have recognized transaction gains or losses of approximately $0.9 million.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (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 and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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 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 the first quarter of fiscal year 2016 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 current conduct of our business operations, including personal injury, customer contract, employment claims and environmental matters as described in our Consolidated Financial Statements. We maintain insurance coverage providing indemnification against many of such claims, and we do not expect that we will sustain any material loss as a result thereof. Refer to Note 10, “Commitments and Contingencies,” to the Consolidated Financial Statements, as well as Item 1A. Risk Factors below, for further discussion.

 

ITEM 1A. RISK FACTORS

 

To our knowledge, there have been no material changes in the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 29, 2015. 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 29, 2015, 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. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

*		31.1 Rule 13a-14(a)/15d-14(a) Certification of Ronald D. Croatti
*		31.2 Rule 13a-14(a)/15d-14(a) Certification of Steven S. Sintros
**		32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**		32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101 The following materials from UniFirst Corporation’s Quarterly Report on Form 10-Q for the quarter ended November 28, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.

 

 

*		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.

 

 

 

		UniFirst Corporation
January 7, 2016	By:	/s/ Ronald D. Croatti Ronald D. Croatti President and Chief Executive Officer
January 7, 2016	By:	/s/ Steven S. Sintros Steven S. Sintros Senior Vice President and Chief Financial Officer

 

 

EXHIBIT INDEX

 

*		31.1 Rule 13a-14(a)/15d-14(a) Certification of Ronald D. Croatti
*		31.2 Rule 13a-14(a)/15d-14(a) Certification of Steven S. Sintros
**		32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**		32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101 The following materials from UniFirst Corporation’s Quarterly Report on Form 10-Q for the quarter ended November 28, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.

 

 

*

Filed herewith

 

**

Furnished herewith