1 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 May 26, 2001 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 [ ] The number of outstanding shares of the registrant's Common Stock and Class B Common Stock as of July 2, 2001 were 8,976,634 and 10,243,744 respectively. 2 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) * Condensed from audited financial statements The accompanying notes are an integral part of these condensed consolidated financial statements.
(In thousands, except per share data) May 26, August 26, May 27, 2001 2000* 2000 - ----------------------------------------------------------------------------------------- Assets Current assets: Cash $ 8,302 $ 7,137 $ 1,850 Receivables 58,210 54,015 55,958 Inventories 22,880 27,598 24,551 Rental merchandise in service 61,885 59,256 58,359 Prepaid expenses 296 299 218 - ----------------------------------------------------------------------------------------- Total current assets 151,573 148,305 140,936 - ----------------------------------------------------------------------------------------- Property and equipment: Land, buildings and leasehold improvements 199,567 194,619 193,228 Machinery and equipment 217,355 205,883 202,644 Motor vehicles 57,630 53,535 53,606 - ----------------------------------------------------------------------------------------- 474,552 454,037 449,478 Less - accumulated depreciation 208,949 191,704 188,930 - ----------------------------------------------------------------------------------------- 265,603 262,333 260,548 - ----------------------------------------------------------------------------------------- Other assets 84,888 89,512 91,104 - ----------------------------------------------------------------------------------------- $ 502,064 $ 500,150 $ 492,588 ========================================================================================= Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 1,900 $ 1,903 $ 1,544 Notes payable 1,315 1,118 2,374 Accounts payable 13,070 19,718 16,692 Accrued liabilities 57,913 47,170 50,867 Accrued and deferred income taxes 12,966 12,294 12,411 - ----------------------------------------------------------------------------------------- Total current liabilities 87,164 82,203 83,888 - ----------------------------------------------------------------------------------------- Long-term obligations, net of current maturities 111,000 124,735 121,093 Deferred income taxes 22,760 22,040 21,025 - ----------------------------------------------------------------------------------------- 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; issued 10,499,634 shares 1,051 1,050 1,050 Class B Common stock, $.10 par value; 20,000,000 shares authorized; issued and outstanding 10,243,744 shares 1,025 1,026 1,026 Treasury stock, 1,535,000 shares, at cost (24,755) (20,049) (20,049) Capital surplus 12,438 12,438 12,438 Retained earnings 294,205 278,676 274,372 Accumulated other comprehensive income (2,824) (1,969) (2,255) - ----------------------------------------------------------------------------------------- Total shareholders' equity 281,140 271,172 266,582 - ----------------------------------------------------------------------------------------- $ 502,064 $ 500,150 $ 492,588 ========================================================================================= 3 FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) The accompanying notes are an integral part of these condensed consolidated financial statements.
Thirty-nine Thirty-nine Thirteen Thirteen weeks ended weeks ended weeks ended weeks ended (In thousands, except per share data) May 26, May 27, May 26, May 27, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------- Revenues $ 418,196 $ 396,570 $ 140,625 $ 134,497 - ------------------------------------------------------------------------------------------------------- Costs and expenses: Operating costs 259,375 248,265 87,268 83,742 Selling and administrative expenses 94,638 93,492 31,749 31,481 Depreciation and amortization 27,734 25,652 9,277 8,576 - ------------------------------------------------------------------------------------------------------- 381,747 367,409 128,294 123,799 - ------------------------------------------------------------------------------------------------------- Income from operations 36,449 29,161 12,331 10,698 - ------------------------------------------------------------------------------------------------------- Other expense (income): Interest expense 7,440 5,356 2,336 1,898 Interest income (871) (234) (289) (69) Interest rate swap expense 1,678 -- 33 -- - ------------------------------------------------------------------------------------------------------- 8,247 5,122 2,080 1,829 - ------------------------------------------------------------------------------------------------------- Income before income taxes 28,202 24,039 10,251 8,869 Provision for income taxes 10,717 9,135 3,895 3,370 - ------------------------------------------------------------------------------------------------------- Net income $ 17,485 $ 14,904 $ 6,356 $ 5,499 ======================================================================================================= Weighted average number of shares outstanding -- basic 19,413 19,672 19,256 19,664 ======================================================================================================= Weighted average number of shares outstanding -- diluted 19,421 19,672 19,274 19,664 ======================================================================================================= Net income per share - basic & diluted $ 0.90 $ 0.76 $ 0.33 $ 0.28 ======================================================================================================= 4 FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) The accompanying notes are an integral part of these condensed consolidated financial statements.
Thirty-Nine Thirty-Nine weeks ended weeks ended (In thousands) May 26, May 27, 2001 2000 - ---------------------------------------------------------------------------------------- Cash flows from operating activities: Net Income $ 17,485 $ 14,904 Adjustments: Depreciation 22,453 20,715 Amortization of other assets 5,281 4,937 Interest rate swap expense 1,678 -- Changes in assets and liabilities, net of acquisitions: Receivables (4,340) (4,203) Inventories 4,497 3,530 Rental merchandise in service (2,783) (2,630) Prepaid expenses 2 (19) Accounts payable (6,486) (1,036) Accrued liabilities 9,093 4,215 Accrued and deferred income taxes 717 4,669 Deferred income taxes 750 346 - ---------------------------------------------------------------------------------------- Net cash provided by operating activities 48,347 45,428 - ---------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisition of businesses, net of cash acquired -- (5,358) Capital expenditures (26,140) (39,158) Increase in other assets (855) (5,008) - ---------------------------------------------------------------------------------------- Net cash used in investing activities (26,995) (49,524) - ---------------------------------------------------------------------------------------- Cash flows from financing activities: Increase in debt 831 11,074 Reduction of debt (14,356) (2,592) Repurchase of common stock (4,706) (3,466) Cash dividends (1,956) (1,982) - ---------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (20,187) 3,034 - ---------------------------------------------------------------------------------------- Net increase (decrease) in cash 1,165 (1,062) Cash at beginning of period 7,137 2,912 - ---------------------------------------------------------------------------------------- Cash at end of period $ 8,302 $ 1,850 ======================================================================================== Supplemental disclosure of cash flow information: Interest paid $ 5,888 $ 5,077 Income taxes paid 9,325 4,139 ======================================================================================== 5 FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTY-NINE WEEKS ENDED MAY 26, 2001 1. 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 should 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. 2. From time to time, the Company is subject to legal proceedings and claims arising from the conduct of its business operations, including legal proceedings and claims relating to personal injury, customer contract, employment and environmental matters. In the opinion of management, such proceedings and claims are not likely to result in losses which would have a material adverse effect upon the financial position or results of operations of the Company. 3. The components of comprehensive income for the thirty-nine and thirteen week periods ended May 26, 2001 and May 27, 2000 were as follows: 4. 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 107,800 dilutive shares have been included in the weighted average number of common and dilutive potential common shares outstanding for the thirty-nine and thirteen weeks ended May 26, 2001. 5. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended ("SFAS 133"), establishes standards for accounting and reporting derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. Effective August 27, 2000, the Company adopted SFAS 133. The Company has entered into interest rate swap agreements to manage its exposure to movements in interest rates on its variable rate debt. 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 underlying borrowings. SFAS 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. Since the Company's current swap agreement does not meet the required criteria necessary to use special hedge accounting, the Company recorded a $33 thousand charge, for the quarter ended May 26, 2001, through other expense, as a result of the change in the fair value of the swap agreement.
Thirty-nine Thirty-nine Thirteen Thirteen weeks ended weeks ended weeks ended weeks ended (in thousands) May 26, May 27, May 26, May 27, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------- Net income $17,485 $14,904 $6,356 $5,499 Other comprehensive income: Foreign currency translation adjustments (855) (307) 74 (844) ------------------------------------------------------- Comprehensive income $16,630 $14,597 $6,430 $4,655 ======================================================= 6 6. The Company has restated the results of its operations for the first two quarters of fiscal 2001 due to the adoption of SFAS No. 133. As previously disclosed, the Company has an interest rate swap agreement with a bank with a notional amount of $40 million and a fixed pay rate of 6.38%. This agreement matures on October 13, 2004, but allows the bank to terminate the agreement on October 15, 2002. SFAS No. 133 requires that any changes in the agreement's fair market value be reflected in earnings in the period of the change. The adoption of this accounting standard has resulted in a fiscal 2001 year-to-date charge of $1.7 million, which is reflected on the Condensed Consolidated Statements of Income in the Other expense (income) section. This reduced earnings per share by $.01 and $.04 in the first and second quarters, respectively. 7 FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE THIRTY-NINE WEEKS ENDED MAY 26, 2001 RESULTS OF OPERATIONS THIRTY-NINE WEEKS OF FISCAL 2001 COMPARED WITH THIRTY-NINE WEEKS OF FISCAL 2000 Revenues. Revenues for the first thirty-nine weeks of fiscal 2001 increased $21.6 million or 5.5% to $418.2 million as compared with $396.6 million for the first thirty-nine weeks of fiscal 2000. This increase can be attributed to growth from existing operations (4.2%), price increases (1.0%) and acquisitions (0.3%). Growth from existing operations was primarily from the conventional uniform rental business (3.3%) and from the nuclear garment services business (0.9%). The increase in revenues from acquisitions resulted from one acquisition made in fiscal 2000. Operating Costs. Operating costs increased to $259.4 million for the first thirty-nine weeks of fiscal 2001 as compared with $248.3 million for the same period of fiscal 2000. As a percentage of revenues, operating costs decreased to 62.0% from 62.6% for these periods, primarily due to lower merchandise costs resulting from improved product utilization, offset somewhat by significant increases in energy related costs such as natural gas, electricity and fuel. Selling and Administrative Expenses. The Company's selling and administrative expenses increased to $94.6 million, or 22.6% of revenues, for the first thirty-nine weeks of fiscal 2001 as compared with $93.5 million, or 23.6% of revenues, for the same period in fiscal 2000. These costs were favorably impacted by a $1.1 million settlement received in the first quarter of fiscal 2001 from a lawsuit related to the Company's nuclear garment services business. Excluding this settlement, these expenses would have been $95.7 million, or 22.9% of revenues, for the first thirty-nine weeks of fiscal 2001. Depreciation and Amortization. The Company's depreciation and amortization expense increased to $27.7 million or 6.6% of revenues for the first thirty-nine weeks of fiscal 2001, comparable to $25.7 million or 6.5% of revenues for the same period in fiscal 2000. Other Expense (Income). Net interest expense (interest expense less interest income) was $6.6 million, or 1.6% of revenues, for the first thirty-nine weeks of fiscal 2001 as compared with $5.1 million, or 1.3% of revenues, for the same period in fiscal 2000. This increase is primarily attributable to higher interest rates during the first thirty-nine weeks of fiscal 2001, offset somewhat by higher interest income resulting from charges to customers for overdue receivable balances. Interest rate swap expense was $1.7 million, or 0.4% of revenues, for the first thirty-nine weeks of fiscal 2001 due to the implementation of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. See Note 6 for a further discussion of the impact of this change. Income Taxes. The Company's effective income tax rate was 38.0% for both the first thirty-nine weeks of fiscal 2001 and the first thirty-nine weeks of fiscal 2000. 8 THIRTEEN WEEKS ENDED MAY 26, 2001 COMPARED TO THIRTEEN WEEKS ENDED MAY 27, 2000 Revenues. Fiscal 2001 third quarter revenues increased $6.1 million or 4.6% to $140.6 million as compared with $134.5 million for the fiscal 2000 third quarter. This increase can be attributed to growth from existing operations (3.3%), price increases (1.0%) and acquisitions (.3%). Growth from existing operations was primarily from the conventional uniform rental business (2.7%) and from the nuclear garment services business (0.6%). The increase in revenues from acquisitions resulted from one acquisition made in fiscal 2000. Operating Costs. Operating costs increased to $87.3 million for the third quarter of fiscal 2001 as compared with $83.7 million for the same period of fiscal 2000. As a percentage of revenues, operating costs decreased to 62.1% from 62.3% for these periods primarily due to lower merchandise costs, resulting from improved product utilization, offset somewhat by significant increases in energy related costs such as natural gas, electricity and fuel. Selling and Administrative Expenses. The Company's selling and administrative expenses increased to $31.7 million, or 22.6% of revenues, for the third quarter of fiscal 2001, comparable to $31.5 million, or 23.4% of revenues, for the same period in fiscal 2000. Depreciation and Amortization. The Company's depreciation and amortization expense increased to $9.3 million, or 6.6% of revenues, for the third quarter of fiscal 2001, comparable to $8.6 million, or 6.4% of revenues, for the same period in fiscal 2000. Other Expense (Income). Net interest expense (interest expense less interest income) was $2.0 million, or 1.5% of revenues, for the third quarter of fiscal 2001 as compared with $1.8 million, or 1.4% of revenues, for the same period in fiscal 2000. This increase is primarily attributable to higher interest rates in the fiscal 2001 third quarter, offset somewhat by higher interest income resulting from charges to customers for overdue receivable balances. Interest rate swap expense was $33.0 thousand for the third quarter of fiscal 2001 due to the implementation of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. See Note 6 for a further discussion of the impact of this change. Income Taxes. The Company's effective income tax rate was 38.0% for both the third quarter of fiscal 2001 and the third quarter of fiscal 2000. 9 LIQUIDITY AND CAPITAL RESOURCES Shareholders' equity at May 26, 2001 was $281.1 million, or 71.3% of total capitalization. During the thirty-nine weeks ended May 26, 2001 net cash provided by operating activities ($48.3 million) was primarily used for capital expenditures ($26.1 million), debt repayment ($14.4 million), repurchase of common stock ($4.7 million) and dividends ($2.0 million). The Company had $8.3 million in cash and $51.3 million available on its $170 million unsecured line of credit with a syndicate of banks as of May 26, 2001. 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 facilities 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, control of the Company by the Croatti family 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. 10 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. In fiscal 2000 the Company entered into an interest rate swap agreement with a bank, notional amount $40 million, maturing October 13, 2004. The Company pays a fixed rate of 6.38% and receives a variable rate tied to the LIBOR rate. As of May 26, 2001 the variable rate was 4.76%. On October 15, 2002, the bank has the option to terminate the swap agreement without further obligation to make payments to the Company. See Note 6 for a discussion of the fair market value of the Company's interest rate swap agreement. The Company is exposed to interest rate risk primarily through its borrowings under its $170 million 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 May 26, 2001 and May 27, 2000, the fair market value of the Company's outstanding debt approximates its carrying value. 11 PART II - OTHER INFORMATION FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES 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 /s/ RONALD D. CROATTI ------------------------- Ronald D. Croatti President and Chief Executive Officer Date: July 10, 2001 /s/ JOHN B. BARTLETT ------------------------ John B. Bartlett Senior Vice President and Chief Financial Officer