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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 quarter ended Commission File
November 30, 2002 Number 1-8504
UNIFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2103460
(State of Incorporation) (IRS Employer ID Number)
68 Jonspin Road
Wilmington, Massachusetts 01887
(Address of principal executive offices)
Registrant's telephone number: (978) 658-8888
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The number of outstanding shares of UniFirst Corporation Common Stock and Class
B Common Stock as of January 6, 2003 were 8,962,379 and 10,205,144 respectively.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIFIRST CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except per share data) November 30, August 31, November 24,
2002 2002 2001
----------- ---------- -----------
Assets
Current assets:
Cash and cash equivalents $ 484 $ 4,333 $ 9,260
Receivables, less reserves of $2,953, $2,687, and
$3,752, respectively 63,384 54,587 61,148
Inventories 21,860 24,807 22,769
Rental merchandise in service 59,401 56,047 54,972
Prepaid expenses 586 315 295
----------- ---------- -----------
Total current assets 145,715 140,089 148,444
----------- ---------- -----------
Property and equipment:
Land, buildings and leasehold improvements 214,182 208,000 199,733
Machinery and equipment 230,952 229,692 218,361
Motor vehicles 64,019 60,925 57,087
----------- ---------- -----------
509,153 498,617 475,181
Less - accumulated depreciation 238,759 229,621 211,660
----------- ---------- -----------
270,394 268,996 263,521
----------- ---------- -----------
Goodwill and other assets, net 85,601 85,750 84,946
----------- ---------- -----------
$ 501,710 $ 494,835 $ 496,911
=========== ========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 2,710 $ 1,406 $ 1,637
Notes payable 1,299 1,195 1,318
Accounts payable 28,703 17,012 16,622
Accrued liabilities 55,389 53,331 56,136
Accrued and deferred income taxes 2,015 1,457 12,972
----------- ---------- -----------
Total current liabilities 90,116 74,401 88,685
----------- ---------- -----------
Long-term obligations, net of current maturities 70,259 83,690 92,594
Deferred income taxes 27,004 27,004 23,926
----------- ---------- -----------
Shareholders' equity:
Preferred stock, $1.00 par value; 2,000,000
Shares authorized; none issued -- -- --
Common stock, $.10 par value; 30,000,000
shares authorized; shares issued 10,556,234, 10,555,109,
and 10,523,034, respectively 1,055 1,055 1,052
Class B Common stock, $.10 par value; 20,000,000
Shares authorized; shares issued and outstanding
10,205,144, 10,205,144, and 10,232,344, respectively 1,021 1,021 1,024
Treasury stock, 1,595,055, 1,535,055, and 1,535,000, shares,
at cost (26,005) (24,756) (24,755)
Capital surplus 12,519 12,503 12,438
Retained earnings 329,373 323,595 306,303
Accumulated other comprehensive loss (3,632) (3,678) (4,356)
----------- ---------- -----------
Total shareholders' equity 314,331 309,740 291,706
----------- ---------- -----------
$ 501,710 $ 494,835 $ 496,911
=========== ========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
UNIFIRST CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Thirteen Thirteen
weeks ended weeks ended
(In thousands, except per share data) November 30, November 24,
2002 2001
------------ ------------
Revenues $ 149,179 $ 142,625
------------ ------------
Costs and expenses:
Operating costs 88,290 85,193
Selling and administrative expenses 36,299 34,195
Depreciation and amortization 9,884 9,148
------------ ------------
134,473 128,536
------------ ------------
Income from operations 14,706 14,089
------------ ------------
Other expense (income):
Interest expense 1,094 1,616
Interest income (268) (374)
Interest rate swap (income) expense (209) 534
------------ ------------
617 1,776
------------ ------------
Income before income taxes 14,089 12,313
Provision for income taxes 5,424 4,679
------------ ------------
Income before cumulative effect of accounting change 8,665 7,634
Cumulative effect of accounting change (net of income tax benefit
of $1,404 and $0) 2,242 --
------------ ------------
Net income $ 6,423 $ 7,634
============ ============
Weighted average number of shares outstanding --
basic 19,218 19,220
============ ============
Weighted average number of shares outstanding --
diluted 19,271 19,250
============ ============
Earnings Per Weighted Average Common Share - Basic
Income before cumulative effect of accounting change $ 0.45 $ 0.40
Cumulative effect of accounting change (0.12) --
------------ ------------
Net income $ 0.33 $ 0.40
============ ============
Earnings Per Weighted Average Common Share - Diluted
Income before cumulative effect of accounting change $ 0.45 $ 0.40
Cumulative effect of accounting change (0.12) --
------------ ------------
Net income $ 0.33 $ 0.40
============ ============
Cash Dividends per Share:
Common Stock $ 0.0375 $ 0.0375
Class B Common Stock $ 0.0300 $ 0.0300
The accompanying notes are an integral part of these condensed consolidated
financial statements.
FORM 10-Q
UNIFIRST CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Thirteen Thirteen
weeks ended weeks ended
(In thousands) November 30, November 24,
2002 2001
------------ ------------
Cash flows from operating activities:
Net Income $ 6,423 $ 7,634
Adjustments:
Cumulative effect of accounting change, net 2,242 --
Depreciation 8,522 7,902
Amortization of other assets 1,362 1,246
Accretion 75 --
Interest rate swap (income) expense (209) 534
Changes in assets and liabilities:
Receivables (8,798) (5,855)
Inventories 2,947 (37)
Rental merchandise in service (3,355) 1,568
Prepaid expenses (270) (21)
Accounts payable 11,690 (2,862)
Accrued liabilities (2,376) 394
Accrued and deferred income taxes 1,964 1,108
Deferred income taxes -- 328
------------ ------------
Net cash provided by operating activities 20,217 11,939
------------ ------------
Cash flows from investing activities:
Capital expenditures (8,998) (6,100)
Increase in other assets (1,167) (1,044)
------------ ------------
Net cash used in investing activities (10,165) (7,144)
------------ ------------
Cash flows from financing activities:
Increase in debt 104 --
Reduction of debt (12,127) (590)
Repurchase of common stock (1,249) --
Proceeds from exercise of stock options 16 --
Cash dividends (645) (644)
------------ ------------
Net cash used in financing activities (13,901) (1,234)
------------ ------------
Net increase (decrease) in cash (3,849) 3,561
Cash at beginning of period 4,333 5,699
------------ ------------
Cash at end of period $ 484 $ 9,260
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
UNIFIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 2002
1. Summary Of Critical and Significant Accounting Policies
Business Description
UniFirst Corporation (the "Company") is a leading company in the garment service
business. The Company designs, manufactures, personalizes, rents, cleans,
delivers and sells a variety of superior quality occupational garments, career
apparel and imagewear programs to businesses of all kinds. It also services
industrial wiper towels, floor mats and other non-garment items and provides
first aid cabinet services and other safety supplies. The Company also
decontaminates and cleans, in separate facilities, garments which may have been
exposed to radioactive materials.
Interim Financial Information
These condensed 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 to a fair statement of results for
the interim period. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes,
thereto, included in the Company's latest annual report on Form 10-K. 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. All assets and liabilities of
foreign subsidiaries are translated into U.S. dollars using the exchange rate
prevailing at the balance sheet date, while income and expense accounts are
translated at average exchange rates during the year.
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. Actual results could differ from those estimates.
Fiscal Year
The Company's fiscal year ends on the last Saturday in August. For financial
reporting purposes, fiscal 2003 will have 52 weeks, while fiscal 2002 had 53
weeks.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period.
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 differences may result in the amount and timing of bad debt
expense recognition for any given period if management makes different judgments
or utilizes different estimates.
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. Judgements 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 last-in, first-out (LIFO) method to value a significant portion of its
inventories. Substantially all inventories represent 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 24 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 different judgments or utilizes different
estimates.
Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation on the straight-line method based on the following estimated useful
lives:
Buildings 30-40 years
Leasehold improvements Term of lease
Machinery and equipment 3-10 years
Motor vehicles 3-5 years
Expenditures for maintenance and repairs are expensed as incurred. Expenditures
for renewals and betterments are capitalized.
Goodwill and Other Intangible Assets
Customer contracts are amortized over periods of eight to fifteen years.
Restrictive covenants are amortized over the terms of the respective
non-competition agreements, which range from two to fifteen years. The Company
does not amortize goodwill in accordance with the provisions of Statement of
Financial Accounting Standards "SFAS" No. 142.
Income Taxes
Deferred income taxes are provided for temporary differences between amounts
recognized for income tax and financial reporting purposes at currently enacted
tax rates.
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. Based
on the Company's evaluation of current tax positions, the Company believes they
have appropriately accrued for probable exposures.
Net Income Per Share
Basic and diluted net income per share is calculated using the weighted average
number of common and dilutive potential common shares outstanding during the
year. A total of 53 and 30 dilutive potential common shares have been included
in the weighted average number of common and dilutive potential common shares
outstanding for the thirteen weeks ended November 30, 2002 and November 24,
2001, respectively.
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 and accrued liabilities. Each of these financial instruments is
recorded at cost, which approximates its fair value.
Insurance
The Company self-insures for certain obligations related to health and workers'
compensation programs. The Company also purchases stop-loss insurance policies
to protect it from catastrophic losses. Judgements and estimates are used in
determining the potential value associated with reported claims and for losses
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 the accrual for loss is
adequate, the ultimate liability may be in excess of or less than the amounts
recorded. Changes in claim 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.
Environmental and Other Contingencies
The Company is subject to legal proceedings and claims related to environmental
matters arising from the conduct of their business operations, including
personal injury, customer contract matters, employment claims, and environmental
matters. 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 and the timing of payments,
and the input of outside consultants and attorneys. Changes in enacted laws,
regulatory orders or decrees, management's estimates of costs, insurance
proceeds, participation by other parties and the timing of payments, and the
input of outside consultants and attorneys could have a material impact on the
amounts recorded for environmental and other contingent liabilities.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
Comprehensive Income
The components of comprehensive income for the thirteen week periods ended
November 30, 2002 and November 24, 2001 were as follows:
Thirteen Thirteen
weeks ended weeks ended
(in thousands) November 30, November 24,
2002 2001
------------ ------------
Net income $ 6,423 $ 7,634
Other comprehensive income (loss):
Foreign currency translation adjustments (13) (615)
Change in fair value of derivative
instruments, net 59 (214)
------------ ------------
Comprehensive income $ 6,469 $ 6,805
============ ============
2. Asset Retirement Obligations
Effective September 1, 2002, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 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 the new accounting method, the Company
now 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.
As of September 1, 2002, the Company 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 adoption of SFAS No. 143
resulted in a cumulative charge of $2.2 million, net of tax benefit of $1.4
million, related to the change in accounting principle, the recognition of a
discounted asset retirement obligation of $5.3 million, and an increase of $2.4
million to the carrying value of the related long-lived assets. The Company will
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 one to thirty 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 3.00% - 7.25%
over one to thirty years. Revisions to the liability could occur due to changes
in the Company's 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 increasing or decreasing the carrying amount
of the liability and the carrying amount of the related long-lived asset.
The pro forma effects of the application of SFAS No. 143 as if the Statement had
been adopted on August 26, 2001 (instead of September 1, 2002) are not material
and, therefore, have not been presented.
A reconciliation of the Company's liability for the thirteen weeks ended
November 30, 2002, is as follows (in thousands):
Upon adoption at September 1, 2002 $ 5,310
Accretion expense 75
---------
Balance at November 30, 2002 $ 5,385
=========
As of November 30, 2002, the $5.4 million asset retirement obligation is
included in accrued liabilities in the accompanying condensed consolidated
balance sheet.
3. Derivative Instruments and Hedging Activities
The Company has entered into interest rate swap agreements to manage its
exposure to movements in interest rates on its variable rate debt. The Company
accounts for these agreements in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The swap agreements are cash
flow hedges and are used to manage exposure to interest rate movement by
effectively changing the variable rate to a fixed rate. Such instruments are
matched with the underlying borrowings. SFAS No. 133 eliminates special hedge
accounting if a swap agreement does not meet certain criteria, thus requiring
the Company to reflect all changes in the fair value of the swap agreement in
earnings in the period of change.
In October 1999, the Company entered into an interest rate swap agreement with a
bank, notional amount $40,000, maturing October 13, 2004. The Company pays a
fixed rate of 6.38% and receives a variable rate tied to the three month LIBOR
rate. As of November 30, 2002 the applicable variable rate was 1.78%. On
October 15, 2002, the bank had the option to terminate the swap agreement
without further obligation to make payments to the Company. The bank did not
exercise this option. This swap agreement does not meet the required criteria as
defined in SFAS No. 133 to use special hedge accounting. Accordingly, the
Company has recorded, in the interest rate swap expense (income) line item of
its consolidated statement of income, income of $209 for the thirteen weeks
ended November 30, 2002 and charges of $534 for the thirteen weeks ended
November 24, 2001 for the changes in the fair value of the swap agreement.
In June 2001, the Company entered into a second interest rate swap agreement
with a bank, notional amount $20,000, maturing June 5, 2003. The Company pays a
fixed rate of 4.69% and receives a variable rate tied to the three month LIBOR
rate. As of November 30, 2002 the applicable variable rate was 1.80%. This swap
agreement meets the required criteria as defined in SFAS No. 133 to use special
hedge accounting. Accordingly, the Company has recorded, through other
comprehensive income (loss), income of $59, net of tax of $37 for the thirteen
weeks ended November 30, 2002 and a charge of $162, net of tax of $108 for the
thirteen weeks ended November 24, 2001, for the change in the fair value of the
swap agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 30, 2002
Critical Accounting Policies and 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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The Company believes the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. 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 differences may result in the
amount and timing of bad debt expense recognition for any given period if
management makes different judgments or utilizes different estimates.
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. Judgements 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 last-in, first-out (LIFO) method to value a significant portion of its
inventories. Substantially all inventories represent 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 24 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 different judgments or utilizes different estimates.
Insurance
The Company self-insures for certain obligations related to health and workers'
compensation programs. The Company also purchases stop-loss insurance policies
to protect it from catastrophic losses. Judgments and estimates are used in
determining the potential value associated with reported claims and for losses
that have occurred, but have not been reported. The Company's estimates consider
historical claim experience and other factors. The Company's liabilities are
based on estimates, and, while the Company believes that the accrual for loss is
adequate, the ultimate liability may be in excess of or less than the amounts
recorded. Changes in claim
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.
Environmental and Other Contingencies
The Company is subject to legal proceedings and claims related to environmental
matters arising from the conduct of their business operations, including
personal injury claims, customer contract matters, employment claims, and
environmental matters. 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 and the
timing of payments, and the input of outside consultants and attorneys. Changes
in enacted laws, regulatory orders or decrees, management's estimates of costs,
insurance proceeds, participation by other parties and the timing of payments,
and the input of outside consultants and attorneys could have a material impact
on the amounts recorded for environmental and other contingent liabilities.
Income Taxes
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 reserves for probable exposures. Based on the
Company's evaluation of current tax positions, the Company believes they have
appropriately accrued for probable exposures.
Asset Retirement Obligations
Effective September 1, 2002, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 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 the new accounting method, the Company
now 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.
As of September 1, 2002, the Company 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 adoption of SFAS No. 143
resulted in a cumulative charge of $2.2 million, net of tax benefit of $1.4
million, related to the change in accounting principle, the recognition of a
discounted asset retirement obligation of $5.3 million, and an increase of $2.4
million to the carrying value of the related long-lived assets. The Company will
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 one to thirty years.
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 3.00% - 7.25% over one to thirty years. Revisions to
the liability could occur due to changes in the Company's 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 increasing
or decreasing the carrying amount of the liability and the carrying amount of
the related long-lived asset.
RESULTS OF OPERATIONS
Thirteen Weeks Ended November 30, 2002 Compared with Thirteen Weeks Ended
November 24, 2001
Revenues. Revenues for the thirteen weeks ended November 30, 2002 increased $6.6
million or 4.6% to $149.2 million as compared with $142.6 million for the
thirteen weeks ended November 24, 2001. This increase can be attributed to
increased revenue from the UniTech garment services business (3.2%), and growth
from existing operations, acquisitions, and price increases in the core uniform
rental business (1.4%).
Operating Costs. Operating costs increased to $88.3 million for the thirteen
weeks ended November 30, 2002 as compared with $85.2 million for the thirteen
weeks ended November 24, 2001. As a percentage of revenues, operating costs
decreased to 59.2% from 59.7% for these periods, primarily due to a reduction in
merchandise costs resulting from the Company's transition of its manufacturing
operations to Mexico.
Selling and Administrative Expenses. The Company's selling and administrative
expenses increased to $36.3 million, or 24.3% of revenues, for the thirteen
weeks ended November 30, 2002 as compared with $34.2 million, or 24.0% of
revenues, for the thirteen weeks ended November 24,2001. The increase is
attributable to increases in healthcare costs and increased marketing costs due
to sales force expansion.
Depreciation and Amortization. The Company's depreciation and amortization
expense increased to $9.9 million, or 6.6% of revenues, for the thirteen weeks
ended November 30, 2002 as compared with $9.1 million, or 6.4% of revenues, for
the thirteen weeks ended November 24, 2001. The increase was due primarily to
capital expenditures and the completion and placement into service of the
Company's second manufacturing plant in Mexico.
Other expense (income). Net other expense (interest and interest rate swap
(income) expense less interest income) was $0.6 million, or 0.4% of revenues,
for the thirteen weeks ended November 30, 2002 as compared with $1.8 million,
or 1.2% of revenues, for the thirteen weeks ended November 24, 2001. The
decrease in net other expense is primarily attributable to lower interest rates
and continued debt reduction. The decrease in net other expense was also a
result of changes in the fair value of the Company's $40 million notional
amount interest rate swap agreement. The Company recognized $0.2 million of
income for the thirteen weeks ended November 30, 2002 as compared with
$0.5 million of expense for the thirteen weeks ended November 24, 2001.
Provision for Income Taxes. The Company's effective income tax rate was 38.5%
for the thirteen weeks ended November 30, 2002, as compared to 38.0% for the
thirteen weeks ended November 24, 2001. The primary reason for the increase is
higher state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Shareholders' equity at November 30, 2002 was $314.3 million, or 81.2% of total
capitalization.
During the thirteen weeks ended November 30, 2002, net cash provided by
operating activities ($20.2 million) was primarily used for capital expenditures
($9.0 million) and net debt repayment ($12.0 million).
As of November 30, 2002, the Company had $0.5 million in cash and cash
equivalents and $36.7 million available on its $125 million unsecured line of
credit with a syndicate of banks. The Company believes its generated cash from
operations and its borrowing capacity will adequately cover its foreseeable
capital requirements.
SEASONALITY
Historically, the Company's 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
the Company's customers; and price changes in response to competitive factors.
In addition, the Company's 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
Inflation has had the effect of increasing the reported amounts of the Company's
revenues and costs. The Company uses the last-in, first-out (LIFO) method to
value a significant portion of inventories. This method tends to reduce the
amount of income due to inflation included in the Company's results of
operations. The Company believes that, through increases in its prices and
productivity improvements, it has been able to recover increases in costs and
expenses attributable to inflation.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
Forward looking statements contained in this quarterly report are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995 and
are highly dependent upon a variety of important factors that could cause actual
results to differ materially from those reflected in such forward looking
statements. Such factors include uncertainties regarding the transfer of the
Company's manufacturing operations to new facilities in Mexico, the Company's
ability to consummate and successfully integrate acquired businesses,
uncertainties regarding any existing or newly-discovered expenses and
liabilities related to environmental compliance and remediation, the Company's
ability to compete successfully without any significant degradation in its
margin rates, seasonal fluctuations in business levels, uncertainties regarding
the price levels of natural gas, electricity and fuel, uncertainties arising
from the war on terrorism and its impact on the economy and general economic
conditions. When used in this quarterly report, the words "intend,"
"anticipate," "believe," "estimate," and "expect" and similar expressions as
they relate to the Company are included to identify such forward looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange Risk
Management has determined that all of the Company's foreign subsidiaries operate
primarily in local currencies that represent the functional currencies of the
subsidiaries. All assets and liabilities of foreign subsidiaries are translated
into U.S. dollars using the exchange rate prevailing at the balance sheet date,
while income and expense accounts are translated at average exchange rates
during the year. As such, the Company's operating results are affected by
fluctuations in the value of the U.S. dollar as compared to currencies in
foreign countries, as a result of the Company's transactions in these foreign
markets. The Company does not operate a hedging program to mitigate the effect
of a significant rapid change in the value of the Canadian Dollar, Euro or
Mexican Peso as compared to the U.S. dollar. If such a change did occur, the
Company would have to take into account a currency exchange gain or loss in the
amount of the change in the U.S. dollar denominated balance of the amounts
outstanding at the time of such change. While the Company does not believe such
a gain or loss is likely, and would not likely be material, there can be no
assurance that such a loss would not have an adverse material effect on the
Company's results of operations or financial condition.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities. The
Company is exposed to interest rate risk primarily through its borrowings under
its $125,000 unsecured line of credit with a syndicate of banks. Under the line
of credit, the Company may borrow funds at variable interest rates based on the
Eurodollar rate or the bank's money market rate, as selected by the Company. As
of November 30, 2002, the Company's outstanding debt approximates its carrying
value.
ITEM 4. CONTROLS AND PROCEDURES
As required by the new Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the date of this quarterly report (the "Evaluation
Date"), the Company carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in its reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. In connection with the new rules, the Company
currently is in the process of further reviewing and documenting its disclosure
controls and procedures, including its internal controls and procedures for
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.
There were no significant changes in internal controls or other factors that
could significantly affect these controls subsequent to the Evaluation Date.
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
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 of the
undersigned thereunto duly authorized.
UniFirst Corporation
Date: January 14, 2003 By: /s/ Ronald D. Croatti
------------------------
Ronald D. Croatti
President and Chief Executive Officer
Date: January 14, 2003 By: /s/ John B. Bartlett
------------------------
John B. Bartlett
Senior Vice President
and Chief Financial Officer
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald D. Croatti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UniFirst
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: January 14, 2003
By: /s/ Ronald D.Croatti
------------------------------
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John B. Bartlett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UniFirst
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: January 14, 2003
By: /s/ John B. Bartlett
------------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)