NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. Summary of Significant Accounting Policies
Nature of Business
G&K Services, Inc., founded in 1902 and headquartered in Minnetonka, Minnesota, is a service-focused market leader of branded uniform and facility services programs. We deliver value to our customers by enhancing their image and brand, and by promoting workplace safety, security and cleanliness. We accomplish this by providing high quality branded work apparel programs, and a variety of facility products and services including floor mats, towels, mops and restroom hygiene products. We also manufacture certain work apparel garments that are used to support our garment rental and direct purchase programs. We have
two
operating segments, United States (includes the Dominican Republic and Ireland operations) and Canada, which have been identified as components of our organization that are reviewed by our Chief Executive Officer to determine resource allocation and evaluate performance.
Basis of Presentation
Our Consolidated Financial Statements include the accounts of G&K Services, Inc. and all subsidiaries in which we have a controlling financial interest. Intercompany transactions and accounts are eliminated in consolidation.
Our fiscal year ends on the Saturday nearest June 30. All references herein to "
2013
", "
2012
" and "
2011
", refer to the fiscal years ended
June 29, 2013
,
June 30, 2012
and
July 2, 2011
, respectively. Fiscal years
2013
,
2012
and
2011
consisted of 52 weeks.
We have evaluated subsequent events and have found none that require recognition or disclosure.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts and disclosures reported therein. Due to the inherent uncertainty involved in making estimates, actual results could differ from our estimates.
Reclassifications
As of June 29, 2013, we reclassified certain incentive compensation, group health insurance and other compensation and benefit related accrued expenses in the June 30, 2012 Consolidated Balance Sheets to conform to the current year presentation. The line items impacted were "Accrued expenses - Compensation and employee benefits" and "Accrued expenses - Other." These reclassifications had no impact on previously reported current liabilities, total liabilities or stockholders' equity. The following table summarizes the changes to originally reported amounts in the fiscal year 2012 Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
Reclassifications
|
|
As Reclassified
|
Accrued expenses:
|
|
|
|
|
|
Compensation and employee benefits
|
28,377
|
|
|
14,791
|
|
|
43,168
|
|
Other
|
41,525
|
|
|
(14,791
|
)
|
|
26,734
|
|
Total accrued expenses
|
69,902
|
|
|
—
|
|
|
69,902
|
|
Cash and Cash Equivalents
We consider all investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are recorded net of an allowance for expected losses. The allowance, recognized as an amount equal to anticipated future write-offs, is based on the age of outstanding balances, analysis of specific accounts, historical bad debt experience and current economic trends. We generally write-off uncollectible accounts receivable after all avenues of collection have been exhausted. The methodology used to determine the allowance for doubtful accounts has been consistently applied for all periods presented.
Inventories
Inventories consist of new goods and rental merchandise in service. New goods are stated at the lower of first-in, first-out (FIFO) cost or market, net of any reserve for obsolete or excess inventory. Merchandise placed in service to support our rental operations is amortized into cost of rental operations over the estimated useful lives of the underlying inventory items, primarily on a straight-line basis, which results in a matching of the cost of the merchandise with the weekly rental revenue generated by the merchandise. Estimated lives of rental merchandise in service range from
six months
to
four years
. In establishing estimated lives for merchandise in service, management considers historical experience and the intended use of the merchandise.
We review the estimated useful lives of our in-service inventory assets on a periodic basis or when trends in our business indicate that the useful lives for certain products might have changed. During the fourth quarter of fiscal year 2013, we completed an analysis of certain in-service inventory assets which resulted in the estimated useful lives for these assets being extended to better reflect the estimated periods in which the assets will remain in service. The effect of the change in estimate in fiscal year 2013 increased income from operations by
$2,605
, net income by
$1,655
and basic and diluted earnings per common share by
$0.09
.
We estimate our reserves for inventory obsolescence by examining our inventory to determine if there are indicators that carrying values exceed the net realizable value. Significant factors that could indicate the need for additional inventory write-downs include the age of the inventory, anticipated demand for our products, historical inventory usage, revenue trends and current economic conditions. We believe that adequate reserves for inventory obsolescence have been made in the Consolidated Financial Statements; however, in the future, product lines and customer requirements may change, which could result in an increase in obsolete inventory reserves or additional inventory impairments.
During the fourth quarter of fiscal year 2013, we recorded additional inventory reserves of
$3,611
related to the restructuring of our Direct Sale businesses, and an evaluation of the recoverability of certain inventory. See
Note 9, "Restructuring and Impairment Charges"
of the Notes to the Consolidated Financial Statements for additional details.
The components of inventories as of
June 29, 2013
and
June 30, 2012
are as follows:
|
|
|
|
|
|
|
|
|
|
June 29, 2013
|
|
June 30, 2012
|
Raw Materials
|
$
|
11,583
|
|
|
$
|
14,759
|
|
Work in Process
|
1,846
|
|
|
1,640
|
|
Finished Goods
|
44,156
|
|
|
57,943
|
|
New Inventories
|
57,585
|
|
|
74,342
|
|
Merchandise In Service
|
107,421
|
|
|
103,884
|
|
Total Inventories
|
$
|
165,006
|
|
|
$
|
178,226
|
|
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is generally computed using the straight-line method over the following estimated useful lives:
|
|
|
|
Life
(Years)
|
Automobiles and trucks
|
3 to 8
|
Machinery and equipment
|
3 to 10
|
Buildings
|
20 to 33
|
Building improvements
|
10
|
Costs of significant additions, renewals and betterments, including external and certain internal computer software development costs, are capitalized. When an asset is sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the gain or loss on disposition is reflected in earnings. Repair and maintenance costs are charged to operating expense when incurred. Depreciation expense for fiscal years
2013
,
2012
and
2011
was
$28,112
,
$29,014
and
$32,003
, respectively and includes amortization of assets recorded under capital leases.
Environmental Costs
We accrue various environmental related costs, which consist primarily of estimated clean-up costs, fines and penalties, when it is probable that we have incurred a liability and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, we accrue the minimum estimated amount. This accrued amount reflects our assumptions regarding the nature of the remedy and the outcome of discussions with regulatory agencies. Changes in the estimates on which the accruals are based, including unanticipated government enforcement actions, or changes in environmental regulations, could result in higher or lower costs. Accordingly, as investigations and other actions proceed, it is likely that adjustments to our accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on our results of operations or cash flows in a given period. We cannot predict the ultimate outcome of any of these matters with certainty and it is possible that we may incur additional losses in excess of established reserves. However, we believe the possibility of a material adverse effect on our results of operations or financial position is remote.
Accruals for environmental liabilities are included in the "Accrued expenses - Other" line item in the Consolidated Balance Sheets. Environmental costs are capitalized if they extend the life of the related property, increase its capacity and/or mitigate or prevent future contamination. The cost of operating and maintaining environmental control equipment is charged to expense in the period incurred.
For additional information see
Note 13, "Commitments and Contingencies"
of the Notes to the Consolidated Financial Statements.
Goodwill and Intangible Assets
The cost of acquisitions in excess of the fair value of the underlying net assets is recorded as goodwill. Non-competition agreements that limit the seller from competing with us for a fixed period of time and acquired customer contracts are stated at cost less accumulated amortization and are amortized over the terms of the respective agreements or estimated average life of an account, which ranges from
five
to
twenty years
.
We test goodwill for impairment in the fourth quarter of each fiscal year or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired. We have determined that the reporting units for our goodwill impairment review are our operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available, and for which segment management regularly reviews the operating results. Based on this analysis, we have identified
three
reporting units within our operating segments as of the
fiscal year 2013
testing date. Our reporting units are U.S. Rental operations, Canadian Rental operations and Direct Sales operations. The associated goodwill balances were
$270,306
,
$64,087
and
$0
, respectively, at
June 29, 2013
. There have been no changes to our reporting units or in the allocation of goodwill to each respective reporting unit in
fiscal years 2013, 2012 or 2011
.
The goodwill impairment test is performed using a two-step process. In the first step, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit, including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. In the second step, we determine the implied fair value of the reporting unit's goodwill which is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The implied fair value is compared to the carrying amount and if the carrying amount of the reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized for the excess.
We used a market valuation approach to determine the fair value of each reporting unit for our annual impairment test in the fourth quarter of fiscal 2013, 2012 and 2011. The results of this test indicated that the estimated fair value exceeded the carrying value of our goodwill by more than
50%
for our U.S. Rental and Canadian Rental reporting units for all fiscal years and therefore no impairment existed. All goodwill associated with our Direct Sales reporting unit had been previously impaired and written off.
Long-lived assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. During the fourth quarter of fiscal year 2013, we recorded an impairment loss related to customer contracts totaling
$1,626
. See
Note 9, "Restructuring and Impairment Charges"
of the Notes to the Consolidated
Financial Statements for details on the impairment. There were no impairment charges for intangible assets in fiscal years 2012 or 2011.
As of
June 29, 2013
, cumulative goodwill impairment losses total
$107,000
. Of this amount,
$100,000
was associated with our U.S. Rental operations and
$7,000
was related to our Direct Sales operations.
Retirement Plan Assets
Retirement plan assets consist of equity and fixed income investment funds, common stock and life insurance contracts, which are stated at their fair value. For additional information see
Note 12, "Employee Benefit Plans"
of the Notes to the Consolidated Financial Statements.
Foreign Currency
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the period-end exchange rates. Income statement accounts are translated using the average exchange rates prevailing during the year. Translation adjustments are reflected within "Accumulated other comprehensive income" in stockholders' equity. Gains and losses from foreign currency transactions are included in net earnings for the period and were not material in
fiscal years 2013, 2012 or 2011
.
Revenue Recognition
Our rental operations business is largely based on written service agreements whereby we agree to pick-up soiled merchandise, launder and then deliver clean uniforms and other related products. The service agreements generally provide for weekly billing upon completion of the laundering process and delivery to the customer. Accordingly, we recognize revenue from rental operations in the period in which the services are provided. Revenue from rental operations also includes billings to customers for lost or damaged uniforms and replacement fees for non-personalized merchandise that is lost or damaged. Direct sale revenue is recognized in the period in which the product is shipped. Total revenues do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting sales tax.
During the fourth quarter of fiscal year 2010, we changed our business practices regarding the replacement of certain lost or damaged in-service towel and linen inventory. Transactions entered into prior to the fourth quarter of 2010 included the potential for future adjustments to our customer billings, including, in some cases, refunds for a number of items, including actual experience of lost or damaged goods. For these transactions, we did not meet all of the requirements for revenue recognition at the time of our initial billing because our fees were not fixed or determinable and collectability was not reasonably assured, as evidenced by subsequent adjustments, including refunds in certain cases. As a result, we deferred the revenue for these transactions until such time as we could determine that the fees were no longer subject to adjustment or refund and were fixed and determinable and collectability was reasonably assured.
Beginning in the fourth quarter of 2010, our invoicing for lost and damaged in-service towel and linen inventory (replacement fees) is no longer subject to adjustment or refund. For these transactions, revenue is recognized at the time of billing when service performance and delivery of the in service inventory to the customer occurs because the fee is fixed and determinable and collectability is reasonably assured.
As a result of the change described above, we began to immediately recognize revenue related to all new invoicing for lost and damaged in service towel and linen inventory. In addition, during the three month periods ended July 3, 2010, October 2, 2010 and January 1, 2011, we continued to recognize and earn revenue (legacy revenue) associated with the refundable fees that had been collected prior to the change in business practices. As a result, we had a dual, non-recurring revenue stream occurring in these periods. As of January 1, 2011, all deferred revenue previously recorded prior to the change in business practices had either been earned or refunded to the customers. For fiscal year 2011, the effect of this change in business practice increased revenue and income from operations by
$5,929
, net income by
$3,698
and basic and diluted earnings per common share by
$0.20
. There were no comparable amounts recognized in fiscal years 2012 or 2013.
Insurance
We carry large deductible insurance policies for certain obligations related to health, workers' compensation, auto and general liability programs. These deductibles range from
$350
to
$750
. Estimates are used in determining the potential liability associated with reported claims and for losses that have occurred, but have not been reported. Management estimates generally consider historical claims experience, escalating medical cost trends, expected timing of claim payments and actuarial analyses provided by third parties. Changes in the cost of medical care, our ability to settle claims and the present value estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.
Income Taxes
Provisions for federal, state, and foreign income taxes are calculated based on reported pre-tax earnings and current tax law. Significant judgment is required in determining income tax provisions and evaluating tax positions. We periodically assess our liabilities and contingencies for all periods that are currently open to examination or have not been effectively settled based on the most current available information. If it is not more likely than not that our tax position will be sustained, we record our best estimate of the resulting tax liability and any applicable interest and penalties in the Consolidated Financial Statements.
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using statutory rates in effect for the year in which the differences are expected to reverse. We present the tax effects of these deferred tax assets and liabilities separately for each major tax jurisdiction. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that the changes are enacted. We record valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the asset may not be realized. We evaluate our deferred tax assets and liabilities on a periodic basis. We believe that we have adequately provided for our future income tax obligations based upon current facts, circumstances and tax law.
Derivative Financial Instruments
In the ordinary course of business, we are exposed to market risks. We utilize derivative financial instruments to manage interest rate risk and manage the total debt that is subject to variable and fixed interest rates. These interest rate swap contracts modify our exposure to interest rate risk by converting variable rate debt to a fixed rate or by locking in the benchmark interest rate on forecasted issuances of fixed rate swap contracts as cash flow hedges of the interest related to variable and fixed rate debt.
All derivative financial instruments are recognized at fair value and are recorded in the "Other current assets" or "Accrued expenses - Other" line items in the Consolidated Balance Sheets.
For derivative financial instruments that are designated and qualify as cash flow hedges, the effective portion of the change in fair value on the derivative financial instrument is reported as a component of "Accumulated other comprehensive income" and reclassified into the "Interest expense" line item in the Consolidated Statements of Operations in the same period as the expenses from the cash flows of the hedged items are recognized. Cash payments or receipts are included in "Net cash provided by operating activities" in the Consolidated Statements of Cash Flows in the same period as the cash is settled. We perform an assessment at the inception of the hedge and on a quarterly basis thereafter, to determine whether our derivatives are highly effective in offsetting changes in the value of the hedged items. Any change in the fair value resulting from hedge ineffectiveness is immediately recognized as income or expense.
We do not engage in speculative transactions or fair value hedging nor do we hold or issue financial instruments for trading purposes.
Share-based Payments
We grant share-based awards, including restricted stock and options to purchase our common stock. Stock options are granted to employees and directors for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. Share-based compensation is recognized in the Consolidated Statements of Operations on a straight-line basis over the requisite service period. The amortization of share-based compensation reflects estimated forfeitures adjusted for actual forfeiture experience. Forfeiture rates are reviewed on an annual basis. As share-based compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from the exercise of stock options or release of restrictions on the restricted stock. At the time share-based awards are exercised, cancelled, expire or restrictions lapse, we recognize adjustments to income tax expense. See
Note 10, "Stockholders' Equity"
of the Notes to the Consolidated Financial Statements for further details.
New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance on the presentation of other comprehensive income. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity and requires an entity to present either one continuous statement of net income and other comprehensive income or in two separate, but consecutive, statements. The Company's adoption of this guidance in the first quarter of fiscal year 2013, resulted in a change in the presentation of the Company's consolidated financial statements but did not have any effect on the Company's results of operations or financial position.
In February 2013, the FASB issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification. The updated guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. This new guidance will be effective for us in the first quarter of fiscal 2014 and will not have any effect on the Company's results of operations or financial position.
2. Acquisitions
In the second quarter of fiscal year 2013, we completed an acquisition in our rental operations business. The results of the acquired business have been included in our Consolidated Financial Statements since the date of acquisition. The acquisition extends our rental operations footprint into
five
of the top
100
North American markets which we did not previously serve. The acquisition date fair value of the consideration transferred totaled
$18,488
, which consisted entirely of cash.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the acquisition date.
|
|
|
|
|
Accounts receivable and inventory
|
$
|
2,206
|
|
Property, plant and equipment
|
3,291
|
|
Customer lists
|
2,250
|
|
Accrued expenses
|
(253
|
)
|
Goodwill
|
10,994
|
|
Net assets acquired
|
$
|
18,488
|
|
The
$2,250
that was assigned to customer lists is subject to a weighted-average useful life of approximately
8 years
. The
$10,994
of goodwill has been assigned to the U.S. Rental operations reporting unit within the United States operating segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of the acquired business. All of the goodwill is expected to be deductible for income tax purposes.
The proforma effects of this acquisition, had it been acquired at the beginning of the fiscal year, was not material. The amount of revenue related to the acquired business that has been included in our Consolidated Statements of Operations for fiscal year 2013 was
$5,831
. The amount of earnings, after deducting integration costs and the related interest on the additional borrowings, was not material during the period.
3. Goodwill and Intangible Assets
Goodwill by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Total
|
Balance as of July 2, 2011
|
$
|
258,738
|
|
|
$
|
69,481
|
|
|
$
|
328,219
|
|
Acquisitions
|
666
|
|
|
—
|
|
|
666
|
|
Foreign currency translation and other
|
(43
|
)
|
|
(3,506
|
)
|
|
(3,549
|
)
|
Balance as of June 30, 2012
|
$
|
259,361
|
|
|
$
|
65,975
|
|
|
$
|
325,336
|
|
Acquisitions
|
10,994
|
|
|
—
|
|
|
10,994
|
|
Foreign currency translation and other
|
(49
|
)
|
|
(1,888
|
)
|
|
(1,937
|
)
|
Balance as of June 29, 2013
|
$
|
270,306
|
|
|
$
|
64,087
|
|
|
$
|
334,393
|
|
There were no impairment losses recorded in
fiscal year 2013
or
fiscal year 2012
.
Other intangible assets, which are included in "Other assets" on the Consolidated Balance Sheet, are as follows:
|
|
|
|
|
|
|
|
|
|
June 29, 2013
|
|
June 30, 2012
|
Customer contracts and non-competition agreements
|
$
|
125,996
|
|
|
$
|
126,018
|
|
Accumulated amortization
|
(117,149
|
)
|
|
(113,583
|
)
|
Net
|
$
|
8,847
|
|
|
$
|
12,435
|
|
The customer contracts include the combined value of the written service agreements and the related customer relationship. Customer contracts are amortized over a weighted average life of approximately
11 years
.
Amortization expense was
$4,063
,
$4,968
and
$5,597
for
fiscal years 2013, 2012 and 2011
, respectively. Estimated amortization expense for each of the next five fiscal years based on the intangible assets as of
June 29, 2013
is as follows:
|
|
|
|
|
2014
|
$
|
2,626
|
|
2015
|
1,922
|
|
2016
|
1,367
|
|
2017
|
1,165
|
|
2018
|
383
|
|
4. Long-Term Debt
Debt as of
June 29, 2013
and
June 30, 2012
includes the following:
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Borrowings under $250M Revolver
|
$
|
—
|
|
|
$
|
114,400
|
|
Borrowings under $75M Variable Rate Notes
|
75,000
|
|
|
75,000
|
|
Borrowings under $50M A/R Line
|
—
|
|
|
28,600
|
|
Borrowings under $100M Fixed Rate Notes
|
100,000
|
|
|
—
|
|
Capital leases and other
|
18
|
|
|
224
|
|
|
175,018
|
|
|
218,224
|
|
Less current maturities
|
(18
|
)
|
|
(206
|
)
|
Total long-term debt
|
$
|
175,000
|
|
|
$
|
218,018
|
|
We have a
$250,000
, unsecured revolving credit facility ("$250M Revolver") with a syndicate of banks, which expires on
March 7, 2017
. Borrowings in U.S. dollars under this credit facility generally bear interest at the adjusted London Interbank Offered Rate ("
LIBOR
") for specified interest periods plus a margin, which can range from
1.00%
to
2.00%
, depending on our consolidated leverage ratio. Additionally, we have access to a swingline facility under this line of credit as well as alternative base rate borrowings that are priced based on an agreed upon baseline rate plus a spread determined by the same consolidated leverage ratio.
As of
June 29, 2013
, there were
no
borrowings outstanding under this facility. The unused portion of this facility may be used for general corporate purposes, acquisitions, share repurchases, dividends, working capital needs and to provide up to
$50,000
in letters of credit. As of
June 29, 2013
letters of credit outstanding under this facility totaled
$636
and primarily related to our property and casualty insurance programs. No amounts have been drawn upon these letters of credit. We pay a fee on the unused daily balance of this facility based on a leverage ratio calculated on a quarterly basis. At
June 29, 2013
this fee was
0.20%
of the unused daily balance.
Availability of credit under this facility requires that we maintain compliance with certain covenants.
The covenants under this agreement are the most restrictive when compared to our other credit facilities. The following table illustrates compliance with the material covenants required by the terms of this facility as of
June 29, 2013
:
|
|
|
|
|
|
|
|
|
|
Required
|
|
Actual
|
Maximum Leverage Ratio (Debt/EBITDA)
|
3.50
|
|
|
1.60
|
|
Minimum Interest Coverage Ratio (EBITDA/Interest Expense)
|
3.00
|
|
|
25.91
|
|
Minimum Net Worth
|
$
|
377,808
|
|
|
$
|
467,008
|
|
Our maximum leverage ratio and minimum interest coverage ratio covenants are calculated by adding back certain non-cash charges, as defined in our debt agreement.
On April 12, 2013, we amended this facility to remove the minimum net worth covenant. However, this change is not effective until the earlier of June 30, 2015 or the date of full repayment of the
$75,000
variable rate unsecured private placement notes.
We have
$75,000
of variable rate unsecured private placement notes ("$75M Variable Rate Notes") bearing interest at
0.60%
over LIBOR and are scheduled to mature on
June 30, 2015
. The notes do not require principal payments until maturity. Interest payments are reset and paid on a quarterly basis. As of
June 29, 2013
, the outstanding balance of the notes was
$75,000
at an all-in rate of
0.88%
. As mentioned above, we have a minimum net worth covenant, which could limit the amount of dividends and share repurchases in any given period.
We maintain a
$50,000
accounts receivable securitization facility ("$50M A/R Line"), which expires on
September 27, 2013
. Under the terms of the facility, we pay interest at a rate per annum equal to a margin of
0.76%
, plus LIBOR. The facility is subject to customary fees for the issuance of letters of credit and any unused portion of the facility. As is customary with transactions of this nature, our eligible accounts receivable are sold to a consolidated subsidiary. As of
June 29, 2013
there were
no
borrowings outstanding under this securitization facility and there were
$26,225
of letters of credit outstanding, primarily related to our property and casualty insurance programs.
On April 15, 2013, we issued
$100,000
of fixed rate unsecured senior notes ("$100M Fixed Rate Notes") through a private placement transaction. We issued
$50,000
of the notes with a fixed interest rate of
3.73%
per annum maturing
April 15, 2023
and
$50,000
of the notes with a fixed interest rate of
3.88%
per annum maturing on
April 15, 2025
. Interest on the notes is payable semiannually. As of
June 29, 2013
, the outstanding balance of the notes was
$100,000
at an all-in rate of
3.81%
.
The unsecured senior notes contain customary covenants, including, without limitation, covenants limiting priority indebtedness and liens. There is also a make-whole provision, as well as restrictions on mergers, consolidations, sales of assets and transactions with affiliates.
The proceeds were used to refinance existing floating rate debt under our unsecured revolving credit facility and accounts receivable securitization facility.
See
Note 6, "Derivative Financial Instruments"
of the Notes to the Consolidated Financial Statements for details of our interest rate swap and hedging activities related to our outstanding debt.
The credit facilities, loan agreements, fixed rate notes and variable rate notes contain various restrictive covenants that, among other matters, require us to maintain a minimum stockholders’ equity and a maximum leverage ratio. These debt arrangements also contain customary representations, warranties, covenants and indemnifications. At
June 29, 2013
, we were in compliance with all debt covenants.
The following table summarizes payments due on long-term debt, including capital leases, as of
June 29, 2013
for the next five fiscal years and thereafter:
|
|
|
|
|
2014
|
$
|
18
|
|
2015
|
—
|
|
2016
|
75,000
|
|
2017
|
—
|
|
2018 and thereafter
|
100,000
|
|
5. Fair Value Measurements
Generally accepted accounting principles (GAAP) defines fair value, establishes a framework for measuring fair value and establishes disclosure requirements about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We considered non-performance risk when determining fair value of our derivative financial instruments. The fair value hierarchy prescribed under GAAP contains the following three levels:
Level 1 — unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
Level 2 — other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
-quoted prices for similar assets or liabilities in active markets;
-quoted prices for identical or similar assets in non-active markets;
-inputs other than quoted prices that are observable for the asset or liability; and
-inputs that are derived principally from or corroborated by other observable market data.
Level 3 — unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Except for assets included in our pension portfolio, we do not have any level 3 assets or liabilities and we have not transferred any items between fair value levels during
fiscal year 2013
. See
Note 12, "Employee Benefit Plans"
for additional information regarding our pension plan assets.
The following tables summarize the assets and liabilities measured at fair value on a recurring basis as of
June 29, 2013
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 29, 2013
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Total
|
Other assets:
|
|
|
|
|
|
Money market mutual funds
|
$
|
2,964
|
|
|
$
|
—
|
|
|
$
|
2,964
|
|
Equity and fixed income mutual funds
|
23,811
|
|
|
—
|
|
|
23,811
|
|
Cash surrender value of life insurance policies
|
—
|
|
|
13,377
|
|
|
13,377
|
|
Total assets
|
$
|
26,775
|
|
|
$
|
13,377
|
|
|
$
|
40,152
|
|
Accrued expenses:
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
1,136
|
|
|
$
|
1,136
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
1,136
|
|
|
$
|
1,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Total
|
Other assets:
|
|
|
|
|
|
Money market mutual funds
|
$
|
3,185
|
|
|
$
|
—
|
|
|
$
|
3,185
|
|
Equity and fixed income mutual funds
|
18,851
|
|
|
—
|
|
|
18,851
|
|
Cash surrender value of life insurance policies
|
—
|
|
|
12,971
|
|
|
12,971
|
|
Total assets
|
$
|
22,036
|
|
|
$
|
12,971
|
|
|
$
|
35,007
|
|
Accrued expenses:
|
|
|
|
|
|
Derivative financial instruments
|
$
|
—
|
|
|
$
|
1,432
|
|
|
$
|
1,432
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
1,432
|
|
|
$
|
1,432
|
|
The cash surrender value of life insurance policies are primarily investments established to fund the obligations of the company's non-qualified, non-contributory supplemental executive retirement plan (SERP). The money market, equity and fixed income mutual funds are investments established to fund the company’s non-qualified deferred compensation plan.
The following tables summarize the fair value of assets and liabilities that are recorded at historical cost as of
June 29, 2013
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 29, 2013
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash and cash equivalents
|
$
|
38,590
|
|
|
$
|
—
|
|
|
$
|
38,590
|
|
Total assets
|
$
|
38,590
|
|
|
$
|
—
|
|
|
$
|
38,590
|
|
Current maturities of long-term debt
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
18
|
|
Long-term debt, net of current maturities
|
—
|
|
|
175,000
|
|
|
175,000
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
175,018
|
|
|
$
|
175,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash and cash equivalents
|
$
|
19,604
|
|
|
$
|
—
|
|
|
$
|
19,604
|
|
Total assets
|
$
|
19,604
|
|
|
$
|
—
|
|
|
$
|
19,604
|
|
Current maturities of long-term debt
|
$
|
—
|
|
|
$
|
206
|
|
|
$
|
206
|
|
Long-term debt, net of current maturities
|
—
|
|
|
218,018
|
|
|
218,018
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
218,224
|
|
|
$
|
218,224
|
|
The fair value of our long-term debt approximates its book value and is based on the amount that would be paid to transfer the liability to a credit-equivalent market participant at the measurement date.
6. Derivative Financial Instruments
We use interest rate swap contracts to limit exposure to changes in interest rates and manage the total debt that is subject to variable and fixed interest rates. The interest rate swap contracts we utilize modify our exposure to interest rate risk by converting variable rate debt to a fixed rate without an exchange of the underlying principal amount. All of our outstanding variable rate debt had its interest payments modified using interest rate swap contracts at
June 29, 2013
.
We do not have any derivative financial instruments that have been designated as either a fair value hedge, a hedge of net investment in a foreign operation, or that are held for trading or speculative purposes. As of June 29, 2013, none of our anticipated gasoline and diesel fuel purchases are hedged. Cash flows associated with derivative financial instruments are classified in the same category as the cash flows hedged in the Consolidated Statements of Cash Flows.
During fiscal year 2013, we entered into and subsequently terminated
$70,000
of interest rate swap contracts that had been utilized to lock in the benchmark interest rate for the
$100,000
of fixed rate unsecured senior notes that were issued on April 15, 2013 through a private placement transaction. The termination of the interest rate swap coincided with the formal agreement of the fixed rate of interest that will be paid on the debt. We recognized gains of
$1,681
in accumulated other comprehensive income related to termination of the interest rate swap agreements. Amounts in accumulated other comprehensive income will be reclassified into interest expense over the term of the underlying debt. See
Note 4, "Long-Term Debt"
of the Notes to the Consolidated Financial Statements for additional information on the debt issuance.
As of
June 29, 2013
and
June 30, 2012
, we had
$1,136
and
$1,432
, respectively, of liabilities on interest rate swap contracts that are classified as "Accrued expenses" in the Consolidated Balance Sheets. Of the
$946
net gain deferred in accumulated other comprehensive income as of
June 29, 2013
, a
$288
loss is expected to be reclassified to interest expense in the next twelve months.
As of
June 29, 2013
and
June 30, 2012
, all derivative financial instruments were designated as hedging instruments.
As of
June 29, 2013
, we had interest rate swap contracts to pay fixed rates of interest and to receive variable rates of interest based on the three-month London Interbank Offered Rate ("LIBOR"), all of which mature in
25
-
36 months
. The average rate on the
$75,000
of interest rate swap contracts was
1.25%
as of
June 29, 2013
. These interest rate swap contracts are highly effective cash flow hedges and accordingly, gains or losses on any ineffectiveness were not material to any period.
7. Other Noncurrent Liabilities
Other noncurrent liabilities as of
June 29, 2013
and
June 30, 2012
included the following:
|
|
|
|
|
|
|
|
|
|
June 29, 2013
|
|
|
June 30, 2012
|
|
Pension plan liability
|
$
|
12,159
|
|
|
$
|
34,237
|
|
Executive deferred compensation plan liability
|
26,775
|
|
|
22,036
|
|
Supplemental executive retirement plan liability
|
14,826
|
|
|
16,875
|
|
Workers' compensation liability
|
15,374
|
|
|
15,462
|
|
Other liabilities
|
4,161
|
|
|
3,765
|
|
Total other noncurrent liabilities
|
$
|
73,295
|
|
|
$
|
92,375
|
|
8. Earnings Per Share
Accounting Standards Codification (ASC) 260-10-45, Participating Securities and the Two-Class Method ("ASC 260-10-45"), addresses whether awards granted in unvested share-based payment transactions that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and therefore are included in computing earnings per share under the two-class method. Participating securities are securities that may participate in dividends with common stock and the two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and other shareholders, based on their respective rights to receive dividends. Certain restricted stock awards granted under our Equity Plans are considered participating securities as these awards receive non-forfeitable dividends at the same rate as common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years
|
|
2013
|
|
2012
|
|
2011
|
Basic earnings per share:
|
|
|
|
|
|
Net income
|
$
|
46,720
|
|
|
$
|
24,147
|
|
|
$
|
33,160
|
|
Less: Income allocable to participating securities
|
(710
|
)
|
|
—
|
|
|
—
|
|
Net income available to common stockholders
|
$
|
46,010
|
|
|
$
|
24,147
|
|
|
$
|
33,160
|
|
Weighted average shares outstanding, basic
|
18,970
|
|
|
18,494
|
|
|
18,355
|
|
Basic earnings per common share
|
$
|
2.43
|
|
|
$
|
1.31
|
|
|
$
|
1.81
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
46,010
|
|
|
$
|
24,147
|
|
|
$
|
33,160
|
|
Weighted average shares outstanding, basic
|
18,970
|
|
|
18,494
|
|
|
18,355
|
|
Weighted average effect of non-vested restricted stock grants and assumed exercise of stock options
|
322
|
|
|
237
|
|
|
142
|
|
Weighted average shares outstanding, diluted
|
19,292
|
|
|
18,731
|
|
|
18,497
|
|
Diluted earnings per common share
|
$
|
2.38
|
|
|
$
|
1.29
|
|
|
$
|
1.79
|
|
We excluded potential common shares related to our outstanding equity compensation grants of
99
;
498
and
1,189
from the computation of diluted earnings per share for fiscal years
2013
,
2012
and
2011
, respectively. Inclusion of these shares would have been anti-dilutive.
9. Restructuring and Impairment Charges
In the fourth quarter of fiscal year 2011, we implemented plans to close or divest
three
facilities and incurred a charge of
$1,663
associated with these plans. This charge was recorded in the “Selling and administrative” line item of our Consolidated Statements of Operations.
There were no material restructuring or impairment charges in fiscal year 2012.
In the fourth quarter of fiscal year 2013, we closed
one
of our rental facilities and restructured our direct sale business. The rental facility had become redundant as a result of the acquisition we made earlier in the fiscal year. In addition, we made the decision to transition our GKdirect Catalog business to a third-party catalog offering and outsource the fulfillment operations. This change resulted in the discontinuance of certain product offerings and the establishment of
$1,445
of lower of cost or market reserves to reduce the carrying amount of inventory to its estimated net realizable value. In addition, we incurred charges for equipment write-downs and severance related to the closure of the distribution center. Also, as part of our annual fourth quarter impairment test and recent changes in our GKdirect Program business, we identified certain impairment indicators that required us to perform an assessment of the recoverability of the long-lived assets related to the business. As part of this assessment, we determined that the carrying value of certain long-lived assets exceeded their fair values. The estimated fair values were determined using a discounted cash flow approach. This analysis resulted in the impairment of certain long-lived assets, including computer software, customer contracts and other property and equipment. Finally, the changes to our GKdirect Program business noted above resulted in an evaluation of the recoverability of related inventory. As part of this evaluation we established
$2,166
of additional reserves to reduce inventory to its net realizable value based on our updated business plan.
The following table identifies the major components of the fiscal year 2013 fourth quarter charges restructuring and impairment charges and the corresponding income statement line items:
|
|
|
|
|
|
Asset
|
Statement of Operations Classification:
|
Amount
|
Inventory
|
Cost of direct sales
|
$
|
3,611
|
|
Property, plant and equipment
|
Selling and administrative
|
1,985
|
|
Customer contracts
|
Selling and administrative
|
1,626
|
|
Computer software
|
Selling and administrative
|
1,704
|
|
Other costs
|
Selling and administrative
|
907
|
|
Total restructuring and impairment charges
|
|
9,833
|
|
10. Stockholders' Equity
We issue Class A shares of our stock, and each share is entitled to one vote and is freely transferable.
As of
June 29, 2013
, we have a
$175,000
share repurchase program which was originally authorized by our Board of Directors in May 2007 for
$100,000
and increased to
$175,000
in May 2008. We may repurchase shares from time to time in the open market, privately negotiated or other transactions in accordance with applicable federal securities laws. The timing and the amount of the repurchases will be determined by us based on our evaluation of market conditions, share price and other factors. Under the program we did not repurchase any shares in
fiscal years 2013, 2012 or 2011
. As of
June 29, 2013
, we had approximately
$57,900
remaining under this authorization.
We issue restricted stock units as part of our equity incentive plans. Upon vesting, the participant may elect to have shares withheld to pay the minimum statutory tax withholding requirements. Although shares withheld are not issued, they are reflected as common stock repurchases in our Consolidated Statements of Cash Flows, as they reduce the number of shares that would have been issued upon vesting.
Share-Based Payment Plans
On November 4, 2010, our shareholders approved the G&K Services, Inc. Restated Equity Incentive Plan (2010) ("Restated Plan"). This plan restates our 2006 Equity Incentive Plan ("2006 Plan") approved by shareholders at our November 16, 2006 annual meeting. The total number of authorized shares under the Restated Plan is
3,000
(
2,000
under the 2006 Plan and an additional
1,000
under the Restated Plan). Only
1,000
of the awards granted under the Restated Plan can be stock appreciation rights, restricted stock, restricted stock units, deferred stock units or stock. As of
June 29, 2013
,
803
equity awards were available for grant.
The Restated Plan allows us to grant share-based awards, including restricted stock and options to purchase our common stock, to our key employees and non-employee directors. Stock options are granted for a fixed number of shares with an exercise price equal to the fair market value of the shares at the date of grant. Exercise periods for the stock options are generally limited to a maximum of
10 years
and a minimum of
one year
and generally vest over
three years
. Restricted stock grants to employees generally vest over
five years
. We issue new shares upon the grant of restricted stock or exercise of stock options.
On April 3, 2012, the board of directors declared a
$6.00
per share special cash dividend to be paid on April 27, 2012, to shareholders of record at the close of business on April 13, 2012. When public companies pay significant cash dividends, the price of the common stock typically decreases by an amount equal to the special cash dividend on the ex-dividend date. Therefore, on March 30, 2012, in anticipation of the special cash dividend, the Compensation Committee and the Board of Directors approved amendments to our 1998 Stock Option and Compensation Plan and our Restated Equity Incentive Plan (2010) to require an equitable adjustment to all outstanding stock option awards in the case of a special or extraordinary cash dividend. Since the amendments were made in contemplation of the special cash dividend, additional share-based compensation expense of
$2,095
was recognized in fiscal year 2012. In addition, we will recognize an additional
$690
over the remaining requisite service period of the unvested stock options. Following the dividend declaration on April 3, 2012 to preserve the intrinsic value for option holders, the board also approved, pursuant to the terms of the amended plans, an adjustment to the exercise price (equivalent to the special dividend) for all outstanding non-qualified options. This adjustment did not result in any additional incremental compensation expense as the aggregate fair value, aggregate intrinsic value and the ratio of the exercise price to the market price were approximately equal immediately before and after the adjustment.
Compensation cost for share-based compensation plans is recognized on a straight-line basis over the requisite service period of the award. The share-based compensation reflects estimated forfeitures adjusted for actual forfeiture experience. We review our estimated forfeiture rates on an annual basis. The amount of compensation cost, including the additional amounts related to the
amendment of the plans noted above, that has been recognized in the Consolidated Statements of Operations was
$5,001
,
$6,037
and
$4,175
for
fiscal years 2013, 2012 and 2011
, respectively. As share-based compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from the exercise of stock options or release of restrictions on the restricted stock. At the time share-based awards are exercised, cancelled, expire or restrictions lapse, we recognize adjustments to income tax expense. The total income tax benefit recognized in the Consolidated Statements of Operations for share-based compensation arrangements was
$1,709
,
$2,124
and
$1,430
for
fiscal years 2013, 2012 and 2011
, respectively. No amount of share-based compensation expense was capitalized during the periods presented.
On August 23, 2012, our Chief Executive Officer was granted a performance based restricted stock award (the "Performance Award"). The Performance Award has both a financial performance component and a service component. The Performance Award has a target level of
100
restricted shares, a maximum award of
150
restricted shares and a minimum award of
50
restricted shares, subject to attainment of financial performance goals and service conditions.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model using the assumptions noted in the following table. Expected volatility is based on the historic volatility of our stock. We use historical data to estimate option exercises and employee terminations within the valuation model. The expected term of the options granted is derived from historical data and represents the period of time that options granted are expected to be outstanding. The risk free interest rate for each option is the interpolated market yield on a U.S. Treasury bill with a term comparable to the expected term of the granted stock option.
|
|
|
|
|
|
|
|
For the Fiscal Years
|
|
2013
|
|
2012
|
|
2011
|
Expected share price volatility
|
27.49% - 28.99%
|
|
27.50% - 29.15%
|
|
24.18% - 25.34%
|
Weighted average volatility
|
28.34%
|
|
28.46%
|
|
24.84%
|
Expected dividend yield
|
2.43% - 2.44%
|
|
1.45% - 1.95%
|
|
1.14% - 2.00%
|
Expected term (in years)
|
5 - 6
|
|
5 - 6
|
|
5 - 6
|
Risk free rate
|
0.62% - 0.92%
|
|
0.82% - 1.27%
|
|
1.41% - 1.72%
|
A summary of stock option activity under our plans as of
June 29, 2013
, and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Exercise Prices
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
|
Outstanding at June 30, 2012
|
1,594
|
|
|
$
|
25.68
|
|
|
|
|
|
Granted
|
191
|
|
|
32.07
|
|
|
|
|
|
Exercised
|
(714
|
)
|
|
28.56
|
|
|
|
|
|
Forfeited or expired
|
(19
|
)
|
|
19.04
|
|
|
|
|
|
Outstanding at June 29, 2013
|
1,052
|
|
|
$
|
25.01
|
|
|
6.17
|
|
$
|
23,757
|
|
Exercisable at June 29, 2013
|
674
|
|
|
$
|
25.21
|
|
|
4.90
|
|
$
|
15,098
|
|
The weighted-average fair value of stock options on the date of grant during
fiscal years 2013, 2012 and 2011
was
$6.35
,
$6.10
and
$3.81
, respectively. The total intrinsic value of stock options exercised was
$7,643
,
$665
and
$184
for
fiscal years 2013, 2012 and 2011
, respectively.
We received proceeds from the exercise of stock options of
$19,997
,
$2,757
and
$615
in
fiscal years 2013, 2012 and 2011
, respectively.
A summary of the status of our non-vested shares of restricted stock as of
June 29, 2013
and changes during the year ended
June 29, 2013
, is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date Fair Value
|
Non-vested at June 30, 2012
|
306
|
|
|
$
|
25.41
|
|
Granted
|
105
|
|
|
32.62
|
|
Vested
|
(103
|
)
|
|
28.12
|
|
Forfeited
|
(13
|
)
|
|
23.49
|
|
Non-vested at June 29, 2013
|
295
|
|
|
$
|
27.12
|
|
As of
June 29, 2013
, there was
$9,906
of total unrecognized compensation expense related to non-vested share-based compensation arrangements. That expense is expected to be recognized over a weighted-average period of
3.0 years
. The total fair value of restricted shares vested during the fiscal years ended
2013
,
2012
and
2011
was
$2,911
,
$3,078
and
$2,508
, respectively.
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years
|
|
2013
|
|
2012
|
|
2011
|
Foreign currency translation
|
$
|
24,093
|
|
|
$
|
30,552
|
|
|
$
|
37,727
|
|
Pension benefit liabilities
|
(15,650
|
)
|
|
(27,759
|
)
|
|
(14,177
|
)
|
Derivative financial instruments
|
946
|
|
|
(898
|
)
|
|
(1,504
|
)
|
Accumulated other comprehensive income
|
$
|
9,389
|
|
|
$
|
1,895
|
|
|
$
|
22,046
|
|
11. Income Taxes
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
2013
|
|
2012
|
|
2011
|
Current:
|
|
|
|
|
|
Federal
|
$
|
16,325
|
|
|
$
|
3,250
|
|
|
$
|
(1,447
|
)
|
State and local
|
3,413
|
|
|
1,163
|
|
|
949
|
|
Foreign
|
5,653
|
|
|
4,854
|
|
|
4,861
|
|
|
25,391
|
|
|
9,267
|
|
|
4,363
|
|
Deferred
|
1,059
|
|
|
2,775
|
|
|
17,612
|
|
Provision for Income Taxes
|
$
|
26,450
|
|
|
$
|
12,042
|
|
|
$
|
21,975
|
|
The following table reconciles the United States statutory income tax rate with our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
2013
|
|
2012
|
|
2011
|
United States statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal tax benefit
|
3.8
|
|
|
2.8
|
|
|
2.7
|
|
Foreign earnings taxed at different rates
|
(0.4
|
)
|
|
(2.8
|
)
|
|
1.1
|
|
Change in tax contingency reserve
|
(1.7
|
)
|
|
2.8
|
|
|
0.4
|
|
Share-based compensation
|
—
|
|
|
0.1
|
|
|
0.6
|
|
Disposition of subsidiary
|
—
|
|
|
(3.8
|
)
|
|
—
|
|
Permanent differences and other, net
|
(0.6
|
)
|
|
(0.8
|
)
|
|
0.1
|
|
Effective income tax rate
|
36.1
|
%
|
|
33.3
|
%
|
|
39.9
|
%
|
The change in tax contingency reserve in fiscal year 2013 was the result of the expiration of certain statutes and the favorable resolution of other tax matters, offset by reserve additions during the year. The change in the tax contingency reserve in fiscal year 2012 was the result of reserve additions related to a Canadian transfer pricing assessment which is being appealed, offset by the expiration of certain statutes. The change in the tax contingency reserve in fiscal year 2011 was the result of the expiration of certain statutes and the favorable resolution of other tax matters, offset by reserve additions during the year.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Years
|
2013
|
|
2012
|
Deferred tax liabilities:
|
|
|
|
Inventory
|
$
|
(18,190
|
)
|
|
$
|
(20,699
|
)
|
Depreciation
|
(18,819
|
)
|
|
(20,182
|
)
|
Intangibles
|
(44,757
|
)
|
|
(40,944
|
)
|
Derivative financial instruments
|
(563
|
)
|
|
—
|
|
Other
|
(2,707
|
)
|
|
(14
|
)
|
Total deferred tax liabilities
|
(85,036
|
)
|
|
(81,839
|
)
|
Deferred tax assets:
|
|
|
|
Compensation and employees benefits
|
44,577
|
|
|
47,367
|
|
Accruals and reserves
|
9,208
|
|
|
13,127
|
|
Share-based payments
|
3,778
|
|
|
5,645
|
|
Derivative financial instruments
|
—
|
|
|
552
|
|
Other
|
5,293
|
|
|
5,955
|
|
Gross deferred tax assets
|
62,856
|
|
|
72,646
|
|
Less valuation allowance
|
(3,876
|
)
|
|
(4,719
|
)
|
Total deferred tax assets
|
58,980
|
|
|
67,927
|
|
Net deferred tax liabilities
|
$
|
(26,056
|
)
|
|
$
|
(13,912
|
)
|
The deferred tax assets include
$4,298
and
$4,844
related to state net operating loss carry-forwards which expire
between fiscal year 2013 and fiscal year 2033
, and
$391
and
$363
related to foreign net operating loss carry-forwards at
June 29, 2013
and
June 30, 2012
, respectively.
We recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. The valuation allowance of
$3,876
and
$4,719
at
June 29, 2013
and
June 30, 2012
, respectively, relates to state net operating loss carry-forwards and foreign net operating loss carry-forwards.
We have foreign tax credit carry-forwards of
$435
, generated during fiscal year 2011, which expire in fiscal year
2021
. We have determined that
no
valuation allowance is necessary as of
June 29, 2013
.
We have not provided U.S. income taxes and foreign withholding taxes on undistributed earnings from our foreign subsidiaries of approximately
$57,300
and
$59,100
as of
June 29, 2013
and
June 30, 2012
, respectively. These earnings are considered to be indefinitely reinvested in the operations of such subsidiaries. It is not practicable to estimate the amount of tax that may be payable upon distribution.
We continue to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. Net tax-related interest and penalties were immaterial for the years reported. As of
June 29, 2013
and
June 30, 2012
, we had
$1,620
and
$1,784
, respectively, of accrued interest and penalties related to uncertain tax positions, of which
$1,353
and
$1,373
would favorably affect our effective tax rate in any future periods, if recognized.
We file income tax returns in the United States, Canada, Ireland and multiple state jurisdictions. We have substantially concluded on all U.S. Federal and Canadian income tax examinations through fiscal years 2010 and 2004, respectively. With few exceptions, we are no longer subject to state and local income tax examinations prior to fiscal year 2009.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
Fiscal Years
|
2013
|
|
2012
|
Beginning balance
|
$
|
11,328
|
|
|
$
|
14,157
|
|
Tax positions related to current year:
|
|
|
|
Gross increase
|
1,550
|
|
|
2,068
|
|
Gross decrease
|
—
|
|
|
—
|
|
Tax positions related to prior years:
|
|
|
|
Gross increase
|
170
|
|
|
1,605
|
|
Gross decrease
|
(161
|
)
|
|
(3,599
|
)
|
Settlements
|
(2,147
|
)
|
|
(47
|
)
|
Lapses in statutes of limitations
|
(1,402
|
)
|
|
(2,856
|
)
|
Ending balance
|
$
|
9,338
|
|
|
$
|
11,328
|
|
As of
June 29, 2013
and
June 30, 2012
, the total amount of unrecognized tax benefits was
$9,338
and
$11,328
, respectively, of which
$2,665
and
$3,683
would favorably affect the effective tax rate, if recognized. We are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.
12. Employee Benefit Plans
Pension Plan and Supplemental Executive Retirement Plan
We have a noncontributory defined benefit pension plan (the "Pension Plan") covering substantially all employees who were employed as of July 1, 2005, except certain employees who are covered by union-administered plans. Benefits are based on the number of years of service and each employee’s compensation near retirement. We make annual contributions to the Pension Plan consistent with federal funding requirements.
Annual benefits under the Supplemental Executive Retirement Plan ("SERP") are based on years of service and individual compensation near retirement. We have purchased life insurance contracts and other investments that could be used to fund the retirement benefits under this plan. The value of these insurance contracts and investments as of
June 29, 2013
and
June 30, 2012
were
$10,796
and
$10,518
, respectively, and are included in the "Other noncurrent assets" line item in the Consolidated Balance Sheets.
We froze our Pension Plan and SERP effective January 1, 2007. Future growth in benefits will not occur beyond this date.
Applicable accounting standards require that the Consolidated Balance Sheet reflect the funded status of the pension and postretirement plans. The funded status of the plan is measured as the difference between the plan assets at fair value and the projected benefit obligation. We have recognized the aggregate of all under-funded plans within other noncurrent liabilities. Expected contributions to the plan over the next 12 months that exceed the fair value of plan assets are reflected in accrued liabilities. The measurement date of the plan assets coincides with our fiscal year end.
Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in "Accumulated other comprehensive income" in our Consolidated Balance Sheets. The difference between actual amounts and estimates based on actuarial assumptions will be recognized in other comprehensive income in the period in which they occur.
The estimated amortization from accumulated other comprehensive income into net periodic benefit cost during fiscal year
2014
is
$1,779
which is related primarily to net actuarial losses.
Obligations and Funded Status at
June 29, 2013
and
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
SERP
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year
|
$
|
88,029
|
|
|
$
|
67,766
|
|
|
$
|
17,576
|
|
|
$
|
14,436
|
|
Service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest cost
|
3,738
|
|
|
3,807
|
|
|
688
|
|
|
774
|
|
Actuarial loss/(gain)
|
(12,852
|
)
|
|
18,560
|
|
|
(2,057
|
)
|
|
3,008
|
|
Benefits paid
|
(2,157
|
)
|
|
(2,104
|
)
|
|
(659
|
)
|
|
(642
|
)
|
Projected benefit obligation, end of year
|
$
|
76,758
|
|
|
$
|
88,029
|
|
|
$
|
15,548
|
|
|
$
|
17,576
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
$
|
53,792
|
|
|
$
|
45,359
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
4,881
|
|
|
2,164
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
8,083
|
|
|
8,373
|
|
|
659
|
|
|
642
|
|
Benefits paid
|
(2,157
|
)
|
|
(2,104
|
)
|
|
(659
|
)
|
|
(642
|
)
|
Fair value of plan assets, end of year
|
$
|
64,599
|
|
|
$
|
53,792
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status-net amount recognized
|
$
|
(12,159
|
)
|
|
$
|
(34,237
|
)
|
|
$
|
(15,548
|
)
|
|
$
|
(17,576
|
)
|
Amounts recognized in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
SERP
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Accrued benefit liability
|
$
|
(12,159
|
)
|
|
$
|
(34,237
|
)
|
|
$
|
(15,548
|
)
|
|
$
|
(17,576
|
)
|
Net amount recognized
|
$
|
(12,159
|
)
|
|
$
|
(34,237
|
)
|
|
$
|
(15,548
|
)
|
|
$
|
(17,576
|
)
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
SERP
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Accumulated other comprehensive loss/(gain) related to:
|
|
|
|
|
|
|
|
Unrecognized net actuarial losses/(gains)
|
$
|
(16,817
|
)
|
|
$
|
18,818
|
|
|
$
|
(2,458
|
)
|
|
$
|
2,917
|
|
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with an accumulated benefit obligation in excess of plan assets were
$76,758
,
$76,758
and
$64,599
, respectively, as of
June 29, 2013
and
$88,029
,
$88,029
and
$53,792
, respectively, as of
June 30, 2012
. No pension plans had plan assets in excess of accumulated benefit obligations at
June 29, 2013
or
June 30, 2012
.
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
SERP
|
|
2013
|
|
2012
|
|
2011
|
|
2013
|
|
2012
|
|
2011
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
3,738
|
|
|
3,807
|
|
|
3,697
|
|
|
688
|
|
|
774
|
|
|
711
|
|
Expected return on assets
|
(4,227
|
)
|
|
(3,905
|
)
|
|
(3,124
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net loss
|
3,312
|
|
|
1,482
|
|
|
2,048
|
|
|
401
|
|
|
92
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
2,823
|
|
|
$
|
1,384
|
|
|
$
|
2,621
|
|
|
$
|
1,089
|
|
|
$
|
866
|
|
|
$
|
711
|
|
Assumptions
The following weighted average assumptions were used to determine benefit obligations for the plans at
June 29, 2013
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
SERP
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Discount rate
|
5.25
|
%
|
|
4.30
|
%
|
|
5.00
|
%
|
|
4.00
|
%
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The following weighted average assumptions were used to determine net periodic benefit cost for the plans for the years ended
June 29, 2013
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
SERP
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Discount rate
|
4.30
|
%
|
|
5.70
|
%
|
|
4.00
|
%
|
|
5.50
|
%
|
Expected return on plan assets
|
7.50
|
|
|
7.75
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
N/A
|
|
|
N/A
|
|
Plan Assets
The asset allocations in the pension plan at
June 29, 2013
and
June 30, 2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Target Asset
Allocations
|
|
Actual Asset
Allocations
|
|
2013
|
|
2013
|
|
2012
|
International equity
|
8 - 18%
|
|
|
13.6
|
%
|
|
10.8
|
%
|
Large cap equity
|
20 - 40
|
|
|
31.2
|
|
|
31.7
|
|
Small cap equity
|
3 - 13
|
|
|
8.1
|
|
|
6.9
|
|
Absolute return strategy funds
|
10 - 20
|
|
|
15.8
|
|
|
13.7
|
|
Fixed income
|
20 - 30
|
|
|
22.9
|
|
|
27.4
|
|
Long/short equity fund
|
5 - 15
|
|
|
8.4
|
|
|
9.5
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Our committee, assisted by outside consultants, evaluates the objectives and investment policies concerning our long-term investment goals and asset allocation strategies. Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. To develop the expected long-term rate of return on asset assumptions, we consider the historical returns and future expectations of returns for each asset class, as well as the target asset allocation and investment goals of the pension portfolio. This resulted in the selection of
7.25%
expected return on plan assets for
fiscal year 2014
and
7.50%
expected return on plan assets for
fiscal year 2013
. The investment goals are (1) to meet or exceed the assumed actuarial rate of return over the long term within reasonable and prudent levels of risk, and (2) to preserve the real purchasing power of assets to meet future obligations. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Pension plan assets for our qualified pension plans are held in a trust for the benefit of the plan participants and are invested in a diversified portfolio of equity investments, fixed income investments, hedge funds and cash. Risk targets are established and monitored against acceptable ranges. All investment policies and procedures are designed to ensure that the plans' investments are in compliance with the Employee Retirement Income Security Act. Guidelines are established defining permitted investments within each asset class.
During fiscal year 2012, we conducted a study to assess an asset-liability strategy. The results of this study emphasized the importance of managing the volatility of pension assets relative to pension liabilities while still achieving a competitive investment return, achieving diversification between and within various asset classes, and managing other risks. In order to reduce the volatility between the value of pension assets and liabilities, we have established a "glide path approach" whereby we will increase the allocation to fixed income investments as our funded status increases. We regularly review our actual asset allocation and periodically rebalance the investments to the targeted allocation when considered appropriate. Target allocation ranges are guidelines, not limitations, and occasionally due to market conditions and other factors actual asset allocation may vary above or below a target.
The implementation of the investment strategy discussed above is executed through a variety of investment structures such as: direct share, common/collective trusts, or registered investment companies. Valuation methodologies differ for each of these structures. The valuation methodologies used for these investment structures are as follows:
Common and Preferred Stock, and Registered Investment Companies
: Investments are valued at the closing price reported on the active market on which the individual securities are traded.
Common/Collective Trusts (CCT)
: Investments in a collective investment vehicle are valued at their daily or monthly net asset value (NAV) per share or the equivalent. NAV per share or the equivalent is used for fair value purposes as a practical expedient. NAVs are calculated by the investment manager or sponsor of the fund. Certain of the CCT's represent investments in hedge funds or funds of hedge funds as well as other commingled equity funds. The classification level of these CCT's within the fair value hierarchy is determined by our ability to redeem the investment at net asset value in the near term of the measurement date. Investments in the underlying CCT's are not valued using quoted prices in active markets. Therefore no investments are classified as Level 1. All investments in CCT's that are redeemable at the net asset value reported by the investment managers within
90 days
of the fiscal year end are classified as Level 2. All investments in the underlying CCT's that are not redeemable at the net asset value reported by the investment managers of the CCT's within
90 days
of the fiscal year end because of a lock-up period or gate, but may be redeemed at a future date, are classified as Level 3.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table presents the pension plan investments using the fair value hierarchy discussed in
Note 5, "Fair Value Measurements"
of the Notes to the Consolidated Financial Statements, as of
June 29, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Interest-bearing cash
|
$
|
776
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
776
|
|
Receivable from common/collective trusts
|
1,744
|
|
|
—
|
|
|
—
|
|
|
1,744
|
|
Common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common/collective trusts
|
—
|
|
|
5,244
|
|
|
4,093
|
|
|
9,337
|
|
Registered investment companies
|
52,742
|
|
|
—
|
|
|
—
|
|
|
52,742
|
|
Total
|
$
|
55,262
|
|
|
$
|
5,244
|
|
|
$
|
4,093
|
|
|
$
|
64,599
|
|
The following table presents the pension plan investments using the fair value hierarchy discussed in
Note 5, "Fair Value Measurements"
of the Notes to the Consolidated Financial Statements, as of
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Interest-bearing cash
|
$
|
597
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
597
|
|
Common stock
|
5,575
|
|
|
—
|
|
|
—
|
|
|
5,575
|
|
Common/collective trusts
|
—
|
|
|
4,060
|
|
|
12,132
|
|
|
16,192
|
|
Registered investment companies
|
31,428
|
|
|
—
|
|
|
—
|
|
|
31,428
|
|
Total
|
$
|
37,600
|
|
|
$
|
4,060
|
|
|
$
|
12,132
|
|
|
$
|
53,792
|
|
The following table presents a reconciliation of Level 3 assets held during the years ended
June 29, 2013
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Balance at beginning of the year
|
$
|
12,132
|
|
|
$
|
—
|
|
Realized gains
|
(708
|
)
|
|
—
|
|
Net unrealized gains
|
736
|
|
|
207
|
|
Net purchases, issuances and settlements
|
(8,067
|
)
|
|
7,693
|
|
Reclassifications
|
—
|
|
|
4,232
|
|
Balance at end of the year
|
$
|
4,093
|
|
|
$
|
12,132
|
|
We expect to contribute
$1,241
to our pension plan and
$722
to the SERP in
fiscal year 2014
.
Future changes in plan asset returns, assumed discount rates and various other factors related to our pension plan will impact our future pension expense and liabilities. We cannot predict the impact of these changes in the future and any changes may have a material impact on our results of operations and financial position.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
SERP
|
2014
|
$
|
2,181
|
|
|
$
|
722
|
|
2015
|
2,319
|
|
|
750
|
|
2016
|
2,468
|
|
|
773
|
|
2017
|
2,694
|
|
|
822
|
|
2018
|
2,984
|
|
|
895
|
|
2019 and thereafter
|
18,940
|
|
|
5,080
|
|
Multi-Employer Pension Plans
We participate in a number of union sponsored, collectively bargained multi-employer pension plans ("MEPPs"). Benefits generally are based on a fixed amount for each year of service, and, in many cases, are not negotiated with contributing employers or in some cases even known by contributing employers. None of our collective bargaining agreements require that a minimum contribution be made to the MEPPs. We record the required cash contributions to the MEPPs as an expense in the period incurred and a liability is recognized for any contributions due and unpaid, consistent with the accounting for defined contribution plans. In addition, we are responsible for our proportional share of any unfunded vested benefits related to the MEPPs. However, under the applicable accounting rules, we are not required to record a liability until we withdraw from the plan or when it becomes probable that a withdrawal will occur.
The risks of participating in U.S. multi-employer pension plans are different from single-employer pension plans in the following aspects:
|
|
•
|
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
•
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
•
|
If we stop participating in some of the multi-employer pension plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
Central States MEPP -
In the third quarter of fiscal year 2012, we concluded negotiations with a union to discontinue our participation in the Central States Southeast and Southwest Areas Pension Fund ("Central States MEPP") for
two
of our locations and also closed
two
redundant branch facilities that participated in the Central States MEPP. During fiscal year 2013, we successfully concluded negotiations to discontinue participation at the remaining
three
locations and have submitted a formal notice of withdrawal from the plan. As a result of these actions, we have completely discontinued our participation in the Central States MEPP.
Employer's accounting for MEPPs (ASC 715-80) provides that a withdrawal liability should be recorded if circumstances that give rise to an obligation become probable and estimable. As a result of the actions noted above, in the third quarter of fiscal year 2012, we recorded a pre-tax charge of
$24,004
. This charge included the discounted actuarial value of the total estimated withdrawal liability, incentives for union participants and other related costs that had been incurred. We expect to pay the withdrawal liability over a period of
20 years
. In the fourth quarter of fiscal year 2013, we completed our negotiation with the final location and we received updated information related to our withdrawal liability. As a result, we recorded an additional withdrawal liability of
$1,000
. The amount of the withdrawal liability recorded is based on the best information available and is subject to change based on revised information received periodically from the union sponsors and other factors. These potential changes could have a material impact on our results of operations and financial condition.
Other MEPPs -
In fiscal year 2011, local union members at
two
locations voted to decertify their respective unions. The decertification resulted in a partial withdrawal from the associated MEPP and we recorded a charge of
$1,010
.
As of
June 29, 2013
, we continue to participate in several other MEPPs, for which we have not recorded a withdrawal liability. Based upon the most recent plan data available from the trustees managing these MEPPs, our share of the undiscounted, unfunded vested benefits for these MEPPs is estimated to be
$4,000
to
$5,500
.
A partial or full withdrawal from a MEPP may be triggered by circumstances beyond our control. As evidenced by the negotiations above, we could also trigger the liability by successfully negotiating with a union to discontinue participation in the MEPP. If a future withdrawal from the plan occurs, we will record our estimated discounted share of any unfunded vested benefits in the period in which the withdrawal occurs.
The ultimate amount of the withdrawal liability assessed by the MEPPs is impacted by a number of factors, including, among other things, investment returns, benefit levels, interest rates, financial difficulty of other participating employers in the plan and our continued participation with other employers in the MEPPs, each of which could impact the ultimate withdrawal liability.
Our participation in these plans for the year ended
June 29, 2013
, is outlined in the following tables. All information in the tables is as of December 31 of the relevant year unless otherwise stated. The "EIN-PN" column provides the Employer Identification Number ("EIN") and the Plan Number ("PN"), if applicable. Unless otherwise noted, the most recent Pension Protection Act ("PPA") zone status available in 2012 and 2011 is for the plan’s year ending at December 31, 2012, and December 31, 2011, respectively. The zone status is based on information that we received from the plan. Among other factors, generally, plans in critical status ("red zone") are less than
65 percent
funded, plans in endangered or seriously endangered status ("yellow zone" or "orange zone", respectively) are less than
80 percent
funded, and plans at least
80 percent
funded are said to be in the "green zone." The "FIP/RP status pending/implemented" column indicates plans for which a financial improvement plan ("FIP") or a rehabilitation plan ("RP") is either pending or has been implemented by the trustees of each plan. Information related to the impact of utilization of extended amortization periods on zone status is either not available or not obtainable without undue cost and effort. There have been no significant changes that affect the comparability of
2013
,
2012
or
2011
contributions.
The following two tables contain information about the material MEPPs we participate in.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIN - PN
|
|
Pension Protection Act zone
status
|
|
G&K Services 5% of total plan
contributions
|
|
FIP/RP status
pending/implemented
|
Pension fund
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Central States Southeast and Southwest Areas Pension Fund
|
36-6044243 - 001
|
|
Red
|
|
Red
|
|
No
|
|
No
|
|
Implemented
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions of G&K
Services for fiscal years
|
|
Surcharge
imposed
|
|
Expiration date of
collective bargaining
agreements
|
|
Total collective
bargaining
agreements
|
Pension fund
|
2013
|
|
2012
|
|
2011
|
|
Central States Southeast and Southwest Areas Pension Fund
|
$
|
313
|
|
|
$
|
873
|
|
|
$
|
938
|
|
|
No
|
|
|
|
|
|
Other Funds
|
$
|
466
|
|
|
$
|
409
|
|
|
$
|
427
|
|
|
No
|
|
1/31/2014 to 7/31/2014
|
|
6
|
|
Total G&K Services contributions to U.S. multi-employer pension plans
|
$
|
779
|
|
|
$
|
1,282
|
|
|
$
|
1,365
|
|
|
|
|
|
|
|
At the date the financial statements were issued, Forms 5500 were generally not available for the plan years ending in 2012.
Our Canadian subsidiaries participate in three multi-employer retirement funds known as the Ontario United Food and Commercial Workers Pension Plan, the Ontario Teamsters Multi Local Pension Trust Fund and the Regime Complementaire de Retrait De L'Industry du Camionnage (Region de Montreal) (the Quebec plan), collectively referred to as the Canadian MEPPs. Plan information for the Canadian MEPPs is not publicly available. These plans provide monthly retirement payments on the basis of the credits earned by the participating employees. For the Ontario plans, in the event that the plans are underfunded, the monthly benefit amount can be reduced by the trustees of the plan and G&K Services is not responsible for the underfunded status of the plan, which operates in a jurisdiction that does not require withdrawing employers to pay a withdrawal liability or other penalty. For the Quebec plan, employers can be held liable for unfunded liabilities and solvency deficiencies and accrued benefits cannot be reduced if there is a deficit unless the employer is insolvent. With respect to G&K's exposure to the Quebec plan, the most recent actuarial valuation as of December 31, 2010 indicates a surplus of approximately
14.5%
. The collective bargaining agreements require contributions on the basis of hours worked. Total contributions to the Canadian MEPPs were
$823
,
$787
and
$843
in
fiscal years 2013, 2012 and 2011
, respectively.
401(k) Plan
All full-time non-union and certain union, U.S. employees are eligible to participate in a 401(k) plan. Employee contributions are invested, at the employees' direction, among a variety of investment alternatives. Participants may transfer amounts into and out of the investment alternatives at any time. Participants receive a matching contribution of
100%
of the first
3%
of the participant's contributed pay plus
50%
of the next
2%
of the participant’s contributed pay. The matching contributions under the 401(k) plan vest immediately. We incurred matching contribution expense of
$5,236
,
$4,844
and
$5,428
in
fiscal years 2013, 2012 and 2011
, respectively.
Executive Deferred Compensation Plan
Under the Executive Deferred Compensation Plan ("DEFCO Plan"), we match a portion of designated employees' contributions. Employee contributions along with the company match are invested, at the employees' direction, among a variety of investment alternatives. Participants may transfer amounts into and out of the investment alternatives at any time. Eligible participants receive a matching contribution of
50%
of the first
10%
of the participant's contributed pay plus an additional
2.5%
of the participant's eligible pay. Our expense associated with the DEFCO Plan was
$1,169
,
$1,191
and
$1,055
in
fiscal years 2013, 2012 and 2011
, respectively. The accumulated benefit obligation of
$26,775
as of
June 29, 2013
and
$22,036
as of
June 30, 2012
is included in "Other noncurrent liabilities" in the accompanying Consolidated Balance Sheets. We have purchased investments, including stable income and stock index managed funds, based on investment elections made by the employees, which may be used to fund the retirement benefits. The investments are recorded at estimated fair value based on quoted market prices and are included in "Other noncurrent assets" in the accompanying Consolidated Balance Sheets. Offsetting unrealized gains and losses are included in income on a current basis. At
June 29, 2013
and
June 30, 2012
, the estimated fair value of the investments was
$26,775
and
$22,036
, respectively.
13. Commitments and Contingencies
We are involved in a variety of legal actions relating to personal injury, employment, environmental and other legal matters arising in the normal course of business, including, without limitation, those described below.
Environmental Matters
We are currently involved in several environmental-related proceedings by certain governmental agencies, which relate primarily to allegedly operating certain facilities in noncompliance with required permits. In addition to these proceedings, in the normal course of our business, we are subject to, among other things, periodic inspections by regulatory agencies, and we are involved in the remediation of various properties which we own. We continue to dedicate substantial operational and financial resources to environmental compliance, and we remain fully committed to operating in compliance with all environmental laws and regulations. As of
June 29, 2013
and
June 30, 2012
, we had reserves of approximately
$1,700
and
$1,200
respectively, related to these matters. There was
$330
of expense for these matters for
fiscal year 2013
and
no
expense for
fiscal year 2012
.
The U.S. Environmental Protection Agency ("U.S. EPA") previously identified certain alleged air, water and waste-related deficiencies with respect to the operations at our facility located in Justice, Illinois. We have responded to the U.S. EPA and will continue to work cooperatively to resolve this matter.
Legal Matters
The U.S. Department of Labor's Office of Federal Contract Compliance Programs, or OFCCP, is, as part of its routine audit cycle, reviewing certain of our employment practices. We have entered into discussions with the OFCCP to resolve alleged violations at
one
of our facilities. We expect that resolution of these violations at this facility will result in the entry by us and the OFCCP into a Conciliation Agreement, pursuant to which, among other things, we will make payments of back wages and, to a lesser extent, interest, to certain current and former employees. The aggregate amount of these payments is expected to be within reserved amounts. We currently have audits at an additional
nine
facilities where the OFCCP may claim similar violations. We have been engaged in conversations with the OFCCP and believe that our practices are lawful and nondiscriminatory. Currently, no formal legal proceedings with respect to these matters have been commenced, and, in any event, we do not believe that any resolution of these matters will have a material adverse effect on our results of operations or financial position.
We cannot predict the ultimate outcome of any of these matters with certainty and it is possible that we may incur additional losses in excess of established reserves. However, we believe the possibility of a material adverse effect on our results of operations or financial position is remote.
Leases
We lease certain facilities and equipment for varying periods. Most facility leases contain renewal options from
one
to
five years
. Management expects that in the normal course of business, leases will be renewed or replaced by other leases.
The following is a schedule as of
June 29, 2013
of future minimum base rental payments for operating leases that had initial or remaining lease terms in excess of one year:
|
|
|
|
|
|
Operating Leases
|
2014
|
$
|
23,432
|
|
2015
|
18,445
|
|
2016
|
14,404
|
|
2017
|
10,890
|
|
2018
|
6,752
|
|
2019 and thereafter
|
11,751
|
|
Total minimum lease payments
|
$
|
85,674
|
|
Total rent expense for operating leases, including those with terms of less than one year, was
$30,858
in
fiscal year 2013
,
$31,708
in
fiscal year 2012
and
$30,890
in
fiscal year 2011
.
14. Segment Information
We have
two
operating segments, United States (includes the Dominican Republic and Ireland Operations) and Canada, which have been identified as components of our organization that are reviewed by our Chief Executive Officer to determine resource allocation and evaluate performance. Each operating segment derives revenues from the branded uniform and facility services programs. No single customer's transactions accounted for more than
2.0%
of our total revenues. Substantially all of our customers are in the United States and Canada.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see
Note 1, "Summary of Significant Accounting Policies"
of the Notes to the Consolidated Financial Statements). Corporate expenses are allocated to the segments based on segment revenue. We evaluate performance based on income from operations.
The income from operations for each segment includes the impact of an intercompany management fee assessed by the United States segment to the Canada segment and is self-eliminated in the total income from operations below. The annual intercompany management fee was
$7,873
,
$7,277
and
$8,009
for
fiscal years 2013, 2012 and 2011
, respectively.
Financial information by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
Canada
|
|
Elimination
|
|
Total
|
2013
|
|
|
|
|
|
|
|
Revenues
|
$
|
752,882
|
|
|
$
|
154,846
|
|
|
$
|
—
|
|
|
$
|
907,728
|
|
Income from operations
|
60,173
|
|
|
17,861
|
|
|
—
|
|
|
78,034
|
|
Interest expense
|
4,864
|
|
|
—
|
|
|
—
|
|
|
4,864
|
|
Total assets
|
831,860
|
|
|
161,675
|
|
|
(96,249
|
)
|
|
897,286
|
|
Capital expenditures-net
|
31,113
|
|
|
4,411
|
|
|
—
|
|
|
35,524
|
|
Depreciation and amortization expense
|
27,050
|
|
|
5,125
|
|
|
—
|
|
|
32,175
|
|
Income tax expense
|
22,146
|
|
|
4,304
|
|
|
—
|
|
|
26,450
|
|
2012
|
|
|
|
|
|
|
|
Revenues
|
$
|
719,162
|
|
|
$
|
150,775
|
|
|
$
|
—
|
|
|
$
|
869,937
|
|
Income from operations
|
26,157
|
|
|
16,114
|
|
|
—
|
|
|
42,271
|
|
Interest expense
|
6,082
|
|
|
—
|
|
|
—
|
|
|
6,082
|
|
Total assets
|
803,388
|
|
|
151,783
|
|
|
(81,440
|
)
|
|
873,731
|
|
Capital expenditures-net
|
26,056
|
|
|
7,970
|
|
|
—
|
|
|
34,026
|
|
Depreciation and amortization expense
|
28,738
|
|
|
5,245
|
|
|
—
|
|
|
33,983
|
|
Income tax expense
|
2,365
|
|
|
9,677
|
|
|
—
|
|
|
12,042
|
|
2011
|
|
|
|
|
|
|
|
Revenues
|
$
|
684,879
|
|
|
$
|
143,982
|
|
|
$
|
—
|
|
|
$
|
828,861
|
|
Income from operations
|
51,709
|
|
|
13,666
|
|
|
—
|
|
|
65,375
|
|
Interest expense
|
10,209
|
|
|
31
|
|
|
—
|
|
|
10,240
|
|
Total assets
|
793,863
|
|
|
146,703
|
|
|
(74,646
|
)
|
|
865,920
|
|
Capital expenditures-net
|
17,847
|
|
|
2,823
|
|
|
—
|
|
|
20,670
|
|
Depreciation and amortization expense
|
32,392
|
|
|
5,208
|
|
|
—
|
|
|
37,600
|
|
Income tax expense
|
18,171
|
|
|
3,804
|
|
|
—
|
|
|
21,975
|
|