UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to          

COMMISSION FILE NUMBER 1-13495

MAC-GRAY CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	04-3361982
(State or other jurisdiction incorporation or organization)	(I.R.S. Employer Identification No.)
404 WYMAN STREET, SUITE 400
WALTHAM, MASSACHUSETTS	02451-1212
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (781) 487-7600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

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

Large Accelerated Filer o	Accelerated Filer x
Non-Accelerated Filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of August 5, 2013, 14,708,456 shares of common stock of the registrant, par value $.01 per share, were outstanding.

INDEX

PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
		Condensed Consolidated Balance Sheets at December 31, 2012 and June 30, 2013	3
		Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2013	4
		Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2013	5
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2013	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
	Item 4.	Controls and Procedures	28
PART II	OTHER INFORMATION
	Item 1A.	Risk Factors	28
	Item 6.	Exhibits	28
	Signature		30

2

Item 1.Financial Statements

MAC-GRAY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share data)

	December 31,			June 30,
	2012			2013
Assets
Current assets:
Cash and cash equivalents	$	14,328		$	13,626
Trade receivables, net of allowance for doubtful accounts	5,835			3,457
Inventory of finished goods, net	1,284			2,707
Deferred income taxes	1,148			1,148
Prepaid facilities management rent and other current assets	9,476			11,347
Total current assets	32,071			32,285
Property, plant and equipment, net	129,947			139,049
Goodwill	57,737			58,087
Intangible assets, net	169,640			166,816
Prepaid facilities management rent and other assets	12,014			13,169
Total assets	$	401,409		$	409,406
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	1,201		$	1,557
Trade accounts payable	9,189			12,061
Accrued facilities management rent	20,930			19,941
Accrued expenses and other current liabilities	13,677			15,580
Total current liabilities	44,997			49,139
Long-term debt and capital lease obligations	190,969			191,982
Deferred income taxes	46,770			45,657
Other liabilities	1,386			1,384
Total liabilities	284,122			288,162
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock ($.01 par value, 5 million shares authorized, no shares issued or outstanding)	—			—
Common stock ($.01 par value, 30 million shares authorized, 14,516,074 issued and outstanding at December 31, 2012, and 14,658,485 issued and outstanding at June 30, 2013)	145			147
Additional paid in capital	89,706			92,012
Accumulated other comprehensive loss	(130		)	—
Retained earnings	27,566			29,085
Total stockholders’ equity	117,287			121,244
Total liabilities and stockholders’ equity	$	401,409		$	409,406

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

MAC-GRAY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
Revenue:
Laundry facilities management revenue	$	74,639		$	75,563		$	154,944		$	154,355
Commercial laundry equipment sales	3,188			3,658			7,119			6,459
Total revenue	77,827			79,221			162,063			160,814
Cost of revenue:
Cost of laundry facilities management revenue	53,274			53,678			108,240			107,734
Depreciation and amortization	10,393			10,729			20,830			21,352
Cost of commercial laundry equipment sales	2,651			2,933			5,848			5,267
Total cost of revenue	66,318			67,340			134,918			134,353
Gross margin	11,509			11,881			27,145			26,461
Operating expenses:
General and administration	4,511			4,841			11,203			9,368
Sales and marketing	2,785			2,902			5,663			6,212
Depreciation and amortization	209			181			410			376
Incremental costs of proxy contests	294			713			377			770
Gain on sale of assets, net	(54		)	(121		)	(40		)	(155		)
Total operating expenses	7,745			8,516			17,613			16,571
Income from operations	3,764			3,365			9,532			9,890
Interest expense, including the change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs	1,962			1,288			5,304			2,953
Loss on early extinguishment of debt	—			54			3,762			54
Income before provision for income taxes	1,802			2,023			466			6,883
Income tax expense	750			811			181			2,753
Net income	1,052			1,212			285			4,130
Other comprehensive gain, net of tax:
Unrealized gain on derivative instruments	182			1			320			130
Comprehensive income	$	1,234		$	1,213		$	605		$	4,260
Earnings per share — basic	$	0.07		$	0.08		$	0.02		$	0.28
Earnings per share — diluted	$	0.07		$	0.08		$	0.02		$	0.27
Weighted average common shares outstanding - basic	14,365			14,643			14,370			14,593
Weighted average common shares outstanding - diluted	15,055			15,251			15,050			15,149

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

MAC-GRAY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands, except share data)

						Accumulated
	Common Stock			Additional		Other
	Number			Paid In		Comprehensive			Comprehensive		Retained
	of shares	Value		Capital		Loss			Income		Earnings			Total
Balance, December 31, 2012	14,516,074	$	145	$	89,706	$	(130	)			$	27,566		$	117,287
Net income	—	—		—		—			$	4,130	4,130			$	4,130
Other comprehensive income:
Unrealized gain on derivative instrument and reclassification, net of tax of $79 (Note 3)	—	—		—		130			130		—			$	130
Comprehensive income									$	4,260
Options Exercised	48,601	1		464		—					—			$	465
Stock issuance - Employee
Stock Purchase Plan	10,326	—		120		—					—			$	120
Stock compensation expense	—	—		1,363		—					—			$	1,363
Dividends paid, $.175 per share	—	—		—		—					(2,562		)	$	(2,562	)
Stock grants	83,484	1		359		—					(49		)	$	311
Balance, June 30, 2013	14,658,485	$	147	$	92,012	$	—				$	29,085		$	121,244

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

MAC-GRAY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	Six months ended June 30,
	2012			2013
Cash flows from operating activities:
Net income	$	285		$	4,130
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization	21,240			21,728
Amortization of deferred financing costs	266			178
Loss on early extinguishment of debt	1,220			54
Decrease in allowance for doubtful accounts and lease reserves	(43		)	(13		)
Gain on disposition of assets	(40		)	(155		)
Stock grants	381			311
Gain on change in fair value of interest rate derivatives	(235		)	(196		)
Loss on change in fair value of fuel commodity derivatives	24			9
Decrease in deferred income taxes	(687		)	(941		)
Non-cash stock compensation	1,365			1,363
Decrease in accounts receivable	2,155			2,391
Increase in inventory	(1,120		)	(1,423		)
Increase in prepaid facilities management rent and other assets	(2,211		)	(4,820		)
Increase (decrease) in accounts payable, accrued facilities management rent, accrued expenses and other liabilities	(5,628		)	3,571
Net cash flows provided by operating activities	16,972			26,187
Cash flows from investing activities:
Capital expenditures	(15,460		)	(19,839		)
Payments for acquisitions	—			(3,963		)
Proceeds from sale of assets	92			189
Net cash flows used in investing activities	(15,368		)	(23,613		)
Cash flows from financing activities:
Payments on capital lease obligations	(690		)	(763		)
Payment on senior notes	(100,000		)	—
Payments on secured revolving credit facility	(137,490		)	(43,554		)
Borrowings on secured revolving credit facility	259,132			43,397
Payments on secured term credit facility	(18,750		)	—
Proceeds from exercise of stock options	234			465
Proceeds from issuance of common stock	140			120
Debt acquisition and amendment costs	(1,497		)	(379		)
Cash dividend paid	(1,752		)	(2,562		)
Repurchase of common stock	(2,000		)	—
Net cash flows used in financing activities	(2,673		)	(3,276		)
Decrease in cash and cash equivalents	(1,069		)	(702		)
Cash and cash equivalents, beginning of period	13,881			14,328
Cash and cash equivalents, end of period	$	12,812		$	13,626

Supplemental disclosure of non-cash investing and financing activities:

During the six months ended June 30, 2012 and 2013, the Company acquired various assets under capital lease agreements totaling $325 and $2,289, respectively.

During the six months ended June 30, 2013, the Company acquired the assets of certain laundry facilities management businesses.  The fair value of the net assets acquired and goodwill amounted to $4,682 with $3,963 paid in cash and $719 incurred as a liability in the form of a future cash payment.

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The unaudited interim condensed consolidated financial statements do not include all information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of the management of Mac-Gray Corporation (the “Company” or “Mac-Gray,”) the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal, recurring adjustments), which are necessary to present fairly the Company’s financial position, the results of its operations, and its cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s 2012 audited consolidated financial statements filed with the Securities and Exchange Commission in its Annual Report on Form 10-K for the year ended December 31, 2012. The results for interim periods are not necessarily indicative of the results to be expected for the full year.

The Company generates the majority of its revenue from card and coin-operated laundry equipment located in 44 states throughout the United States, as well as the District of Columbia. The Company’s principal client base is the multi-unit housing market, which consists of apartments, condominium units, colleges and universities. The Company also sells and services commercial laundry equipment to commercial laundromats, multi-housing properties and institutions. The majority of the Company’s purchases of laundry equipment are from one supplier.

2. Long-Term Debt

On February 29, 2012, the Company entered into an Amended and Restated Senior Secured Credit Agreement. On May 17, 2013, the Company entered into Amendment No. 1 to the Amended and Restated Senior Secured Credit Agreement (as amended, the “ 2012 Credit Agreement”).  The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the “Revolver”).  The 2012 Credit Agreement matures on May 17, 2018.  The 2012 Credit Agreement also provides for Swingline Loans of up to $10,000 (the “Swingline Loans”) and any Swingline Loans will reduce the borrowings available under the Revolver.  Subject to certain terms and conditions, the 2012 Credit Agreement gives the Company the option to increase the Revolver or establish one or more new term loans, provided that the aggregate commitments under the 2012 Credit Agreement cannot exceed $350,000.  The 2012 Credit Agreement is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries as well as a pledge by the Company of all the capital stock of its subsidiaries.  Outstanding indebtedness under the 2012 Credit Agreement bears interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate plus an applicable percentage, ranging from 1.25% to 2.00% per annum (currently 1.75%), determined by reference to our consolidated total leverage ratio, and (ii) in the case of base rate loans and swingline loans, the higher of (a) the federal funds rate plus 0.50%, (b) the annual rate of interest announced by Bank of America, N.A. as its “prime rate,” or (c) for each day, the floating rate of interest equal to LIBOR for a one month term quoted for such date (the highest of which is defined as the “Base Rate”), plus, in each case, an applicable percentage, ranging from 0.25% to 1.00% per annum (currently 0.75%), determined by reference to our consolidated total leverage ratio.

The Company pays a commitment fee equal to a percentage of the actual daily-unused portion of the Revolver under the 2012 Credit Agreement. This percentage is determined quarterly by reference to the Company’s consolidated total leverage ratio and ranges between 0.25% per annum and 0.40% per annum (currently 0.30%).  For purposes of the calculation of the commitment fee, letters of credit are considered usage under the Revolver, but swingline loans are not considered usage under the Revolver.

The 2012 Credit Agreement includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and incurring indebtedness, and requires that the Company maintain certain financial ratios.  The most significant financial ratios that the Company is required to maintain include a consolidated total leverage ratio of not greater than 3.75 to 1.00 (3.50 to 1.00 as of December 31, 2013 and thereafter) and a consolidated cash flow coverage ratio of not less than 1.20 to 1.00.  The Company was in compliance with all financial covenants at June 30, 2013.

7

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

2. Long-Term Debt (continued)

During the first quarter of 2012, the Company incurred deferred financing costs of $1,497 associated with the 2012 Credit Agreement and wrote off unamortized deferred financing costs of $133 associated with the Company’s 2008 credit facility.

During the second quarter of 2013, the Company incurred deferred financing costs of $379 and wrote off unamortized deferred financing costs of $54 associated with Amendment No. 1 to the 2012 Credit Agreement.

As of June 30, 2013, there was $189,588 outstanding under the Revolver and $1,380 in outstanding letters of credit. The available balance under the Revolver was $59,032 at June 30, 2013. The average interest rates on the borrowings outstanding under the 2012 Credit Agreement at June 30, 2012 and 2013 were 3.67% and 2.01%, respectively, including the applicable spread paid to the banks and, for 2012, the effect of the interest rate swap agreements tied to the debt (see Note 3 for discussion on Fair Value Measurements).

On August 16, 2005, the Company issued senior unsecured notes in the amount of $150,000 with the fixed interest rate of 7.625%. On October 21, 2011, the Company redeemed $50,000 of the senior notes by utilizing $51,271 of availability under its 2008 credit facility, as amended. The Company paid a premium of $1,271 as well as interest accrued through the date of redemption and wrote off unamortized deferred financing costs of $623 associated with this redemption.  On March 30, 2012, the Company redeemed the remaining $100,000 of the senior notes by utilizing $103,495 of availability under the 2012 Credit Agreement and paying a premium of $2,542 as well as interest accrued through the date of redemption.  The Company wrote off the remaining $1,087 of unamortized deferred financing costs associated with this redemption.

Interest expense associated with the Company’s long term debt for the three and six months ended June 30, 2012 and 2013 is comprised of the following:

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2013			2012			2013
Interest expense	$	2,018		$	1,215		$	5,273		$	2,971
Change in the fair value of non-hedged interest rate derivative instruments	(146		)	(15		)	(235		)	(196		)
Amortization of deferred financing costs	90			88			266			178
Interest expense, including change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs	$	1,962		$	1,288		$	5,304		$	2,953

Capital lease obligations are comprised primarily of the Company’s fleet of vehicles which totaled $2,425 and $3,951at December 31, 2012 and June 30, 2013, respectively.

8

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

2. Long-Term Debt (continued)

Required payments under the Company’s long-term debt and capital lease obligations are as follows:

	Amount
2013 (six months)	$	831
2014	1,324
2015	816
2016	714
2017	266
Thereafter	189,588
	$	193,539

The Company historically has not needed sources of financing other than its internally generated cash flow, revolving credit facilities, and senior notes to fund its working capital, capital expenditures, and smaller acquisitions. The Company anticipates that its cash flow from operations and revolving credit facilities will be sufficient to meet its anticipated cash requirements for at least the next twelve months.

3.  Fair Value Measurements

The Company has adopted accounting guidance regarding fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1:  Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:  Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions.

The following table summarizes the basis used to measure certain financial assets and financial liabilities at fair value on a recurring basis in the balance sheet:

9

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

3.  Fair Value Measurements (continued)

			Basis of Fair Value Measurments
	Balance at June 30, 2013		Quoted Prices In Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fuel commodity derivatives (included in current liabilities)	$	46	$	—	$	—	$	46

The Company entered into standard International Swaps and Derivatives Association (“ISDA”) interest rate swap agreements (“Swap Agreements”) to manage the interest rate associated with its debt. The interest rate Swap Agreements matured on April 1, 2013. Under these agreements the Company received a variable rate of LIBOR plus a markup and paid a fixed rate.  The Company recognized a non-cash unrealized gain of $18 and $440 for the three months ended June 30, 2013 and 2012, respectively, and a non-cash unrealized gain of $406 and $830 for the six months ended June 30, 2013 and 2012, respectively, on the interest rate Swap Agreements as a result of the change in the fair value.

On September 23, 2011 the Company entered into a fuel commodity derivative to manage the fuel cost of its fleet of vehicles. The derivative was effective January 1, 2012 and expired December 31, 2012.  On September 19, 2012 the Company entered into an additional fuel commodity derivative. The derivative is effective January 1, 2013 and expires December 31, 2013.  The derivative has a monthly notional amount of 80 thousand gallons from January 1, 2013 through December 31, 2013 for a total notional amount of 960 thousand gallons. The Company has a put price of $3.26 per gallon and a strike price of $3.90 per gallon. The Company recognized a non-cash unrealized loss of $62 and $274 for the three months ended June 30, 2013 and 2012, respectively, and a non-cash unrealized loss of $9 and $24 for the six months ended June 30, 2013 and 2012, respectively, on these fuel commodity derivatives as a result of the change in the fair value.

The fair value of the fuel commodity derivative is based on market assumptions and quoted pricing and is considered a Level 3 item.

The fuel commodity derivative activity for the six months ended June 30, 2013 is as follows:

Balance, December 31, 2012	$	(37	)
Realized gains	—
Unrealized losses	(9		)
Settlements	—
Balance, June 30, 2013	$	(46	)

10

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

3.  Fair Value Measurements (continued)

The Company determines the fair value of the amount outstanding under its 2012 Credit Facility using Level 2 inputs. The fair value of the 2012 Credit Agreement at June 30, 2013 approximates carrying value.

During the first quarter of 2012, as a result of the senior note redemption (Note 2), the Company no longer qualified for hedge accounting treatment on its only effective interest rate swap agreement.  Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost was reclassified as an earnings charge through the maturity date of the derivative.  This charge to interest expense, when combined with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $3 and $210 for the three and six months ended June 30, 2013 compared to $294 and $595 for the three and six months ended June 30, 2012, respectively.

The tables below display the impact the Company’s derivative instruments had on the Condensed Consolidated Balance Sheets as of December 31, 2012 and June 30, 2013 and the Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2012 and 2013.

Fair Values of Derivative Instruments

	Liability Derivatives
	December 31, 2012			June 30, 2013
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments:
Fuel commodity derivatives	Accrued expenses	$	37	Accrued expenses	$	46

11

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share data)

3.  Fair Value Measurements (continued)

The Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income for the three months ended June 30, 2012 and 2013

Derivatives in Net Investment Hedging Relationships	Amount of Loss Recognized in OCI on Derivative (Effective Portion)				Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)						Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
	June 30,					June 30,								June 30,
	2012		2013			2012			2013					2012			2013
Interest rate contracts:					Interest expense, including the change in the fair value of non-hedged derivative instruments:							Interest rate contracts:	Interest expense, including the change in the fair value of non-hedged derivative instruments:
Unrealized	$	—	$	—	Unrealized	$	(294	)	$	(3	)		Unrealized	$	440		$	18
Realized	—		—		Realized	—			—				Realized	(442		)	—
Total	$	—	$	—	Total	$	(294	)	$	(3	)		Total	$	(2	)	$	18
Fuel commodity derivatives:					Cost of revenue:							Fuel commodity derivatives:	Cost of revenue:
Unrealized	$	—	$	—	Unrealized	$	—		$	—			Unrealized	$	(274	)	$	(62	)
Realized	—		—		Realized	—			—				Realized	20			—
Total	$	—	$	—	Total	$	—		$	—			Total	$	(254	)	$	(62	)

12

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In thousands, except share data)

3.   Fair Value Measurements (continued)

The Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2012 and 2013

Derivatives in Net Investment Hedging Relationships		Amount of Loss Recognized in OCI on Derivative (Effective Portion)					Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)							Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		June 30,						June 30,									June 30,
		2012			2013			2012			2013						2012			2013
Interest rate contracts:							Interest expense, including the change in the fair value of non-hedged derivative instruments:								Interest rate contracts:	Interest expense, including the change in the fair value of non-hedged derivative instruments:
Unrealized	$		(67	)	$	—	Unrealized	$	(595	)	$	(210		)		Unrealized	$	830		$	406
Realized	(162			)	—		Realized	(162		)	—					Realized	(734		)	(398		)
Total	$		(229	)	$	—	Total	$	(757	)	$	(210		)		Total	$	96		$	8
Fuel commodity derivatives:							Cost of revenue:								Fuel commodity derivatives:	Cost of revenue:
Unrealized	$		—		$	—	Unrealized	$	—		$	—				Unrealized	$	(24	)	$	(9	)
Realized	—				—		Realized	—			—					Realized	33			—
Total	$		—		$	—	Total	$—			$		—			Total	$	9		$	(9	)

4.  Acquisitions

During 2013, the Company acquired the assets of certain laundry facilities management businesses for total consideration of $4,682. Payments totaling $3,963 were made at the closings and the balance for one of the acquisitions is to be paid within nine months if certain conditions are met. The acquisitions have been reflected in the accompanying condensed consolidated financial statements from the dates of the acquisitions and have been accounted for as business combinations.  The preliminary allocations of the total purchase price of the acquisitions are as follows: contract rights $2,797, equipment $1,065, non-compete agreement $170 and goodwill $650. The ultimate purchase price allocations are subject to the finalization of the asset values as of the date of the acquisitions.  The operating results of the businesses are included in the accompanying unaudited condensed consolidated statements of income and comprehensive income from the dates of acquisitions.  Pro forma results of the acquired companies are not included as they have been deemed immaterial to the Company.

13

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In thousands, except share data)

5.  Goodwill and Intangible Assets

Goodwill and intangible assets consist of the following:

	As of December 31, 2012
	Cost		Accumulated Amortization		Net Book Value
Goodwill	$	57,737			$	57,737
	$	57,737			$	57,737
Intangible assets:
Trade name	$	14,050	$	—	$	14,050
Non-compete agreements	2,277		2,272		5
Contract rights	228,783		75,372		153,411
Distribution rights	1,623		946		677
Deferred financing costs	1,796		299		1,497
	$	248,529	$	78,889	$	169,640

	As of June 30, 2013
	Cost		Accumulated Amortization		Net Book Value
Goodwill	$	58,087			$	58,087
	$	58,087			$	58,087
Intangible assets:
Trade Name	$	14,050	$	—	$	14,050
Non-compete agreements	2,087		1,923		164
Contract rights	231,520		81,158		150,362
Distribution rights	1,623		1,027		596
Deferred financing costs	1,672		28		1,644
	$	250,952	$	84,136	$	166,816

14

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In thousands, except share data)

5.  Goodwill and Intangible Assets (continued)

Estimated future amortization expense of intangible assets consists of the following:

2013 (six months)	$	6,086
2014	12,168
2015	12,158
2016	12,158
2017	11,998
Thereafter	97,454
	$	152,022

Amortization expense of intangible assets for the six months ended June 30, 2012 and 2013 was $6,116 and $6,054, respectively.

Intangible assets primarily consist of various non-compete agreements, and contract rights recorded in connection with acquisitions. The deferred financing costs were incurred in connection with our senior secured credit facility and our senior notes and are amortized from five to ten years. The non-compete agreements are amortized using the straight-line method over the life of the agreements, which range from five to fifteen years. Contract rights are amortized using the straight-line method over fifteen to twenty years. The life assigned to acquired contracts is based on several factors, including:  (i) the historical renewal rate of the contract portfolio for the most recent years prior to the acquisition, (ii) the number of years the average contract has been in the contract portfolio, (iii) the overall level of client satisfaction within the contract portfolio, and (iv) our ability to maintain comparable renewal rates in the future. The contract rights acquired are aggregated for purposes of calculating their fair value upon acquisition due to the fact that there are thousands of individual contracts in each market. No single contract accounts for more than 2% of the revenue of any acquired portfolio and the contracts are homogeneous. The fair values of acquired portfolios are established based upon discounted cash flows generated by the acquired contracts.  The fair values of the contracts are allocated to asset groups, comprised of the Company’s geographic markets, based on an estimate of relative fair value.

6.  Commitments and Contingencies

The Company is involved in various litigation proceedings arising in the normal course of business.  In the opinion of management, the Company’s ultimate liability, if any, under pending litigation would not materially affect its financial condition or the results of its operations or cash flows.

15

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In thousands, except share data)

7. Earnings Per Share

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2013		2012		2013
Net income	$	1,052	$	1,212	$	285	$	4,130
Weighted average number of common shares outstanding - basic	14,365		14,643		14,370		14,593
Effect of dilutive securities:
Stock options and restricted stock units	690		608		680		556
Weighted average number of common shares outstanding - diluted	15,055		15,251		15,050		15,149
Earnings per share - basic	$	0.07	$	0.08	$	0.02	$	0.28
Earnings per share - diluted	$	0.07	$	0.08	$	0.02	$	0.27

There were 924,000 and 587,000 shares under option plans that were excluded from the computation of diluted earnings per share for the three months ended June 30, 2013 and 2012, and 860,000 and 530,000 shares under option plans that were excluded from the computation of diluted earnings per share for the six months ended June 30, 2013 and 2012, respectively due to their anti-dilutive effects.

8.  Stock Compensation

During the three months ended June 30, 2013, grants of options for 10,000 shares were issued by the Company.  The grant-date fair values of employee share options and similar instruments are estimated using the Black-Scholes option-pricing model.  The fair values of the stock options granted were estimated using the following components:

Weighted average fair value of options at grant date	$	4.33
Risk free interest rates	1.39		%
Pre-vest forfeiture rates	0.00		%
Expected life	6 years
Expected volatility	40.50		%
Dividend Yield	2.5		%

During the three months ended June 30, 2013, the Company granted restricted stock units covering 21,510 shares of stock with a fair market value on date of grant of $13.95 per share.  The restricted stock units vest over three years.

For the three and six months ended June 30, 2013, the Company incurred stock compensation expense of $1,001, and $1,770, respectively. The allocation of stock compensation expense is consistent with the allocation of the participants’ salaries and other compensation expenses.

16

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In thousands, except share data)

8.  Stock Compensation (continued)

At June 30, 2013, options for 627,000 shares and 138,000 restricted shares have been granted but have not yet vested.

Compensation expense related to unvested options and restricted shares will be recognized in the following years:

2013 (six months)	$	1,544
2014	1,190
2015	661
2016	85
	$	3,480

9.  Income Taxes

The following table presents the income tax expense and the effective income tax rates for the three and six months ended June 30, 2012 and 2013:

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2013			2012			2013
Income tax expense	$	750		$	811		$	181		$	2,753
Effective tax rate	42		%	40		%	39		%	40		%

The effective income tax rate on operations is based upon the estimated income for the year and adjustments, if any, resulting from tax audits or other tax contingencies.

The changes in the effective tax rates for the three and six months ended June 30, 2012 and 2013 are the result of the relative impact of permanent differences due to changes in estimated pretax annual profits.

At June 30, 2013, the uncertain tax positions recognized by the Company in the consolidated financial statements were not material.

10.  New Accounting Pronouncements

In February 2013, the FASB issued new guidance which requires disclosure of information about significant reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. This guidance became effective for the company in 2013. Adoption of this standard, which is related to disclosure only, did not have an impact on the company’s consolidated financial position, results of operations or cash flows.

No other new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the Consolidated Financial Statements.

17

MAC-GRAY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In thousands, except share data)

11.  Payment of dividends

The Company’s Board of Directors declared quarterly dividends of $0.0875 per share payable on April 1, 2013 and July 1, 2013 to stockholders of record at the close of business on March 15, 2013 and June 17, 2013, respectively.  Dividends were paid prior to June 30, 2013 and have been reflected in the current financial statements.

12.  Repurchase of Common Stock

On December 21, 2011, the Company’s Board of Directors authorized a share repurchase program under which the Company is authorized to purchase up to an aggregate of $2,000 of its common stock. The Company repurchased 133,333 shares during the first quarter of 2012 under the plan for a total cash outlay of $2,000, thereby completing the repurchase program.

13. Subsequent Events

The Company has reviewed subsequent events and concluded that no material subsequent events have occurred that are not accounted for in the accompanying financial statements or disclosed in the accompanying notes.

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains, in addition to historical information, forward-looking statements that involve risks and uncertainties.  Additional statements identified by words such as “will,” “likely,” “may,” “believe,” “expect,” “anticipate,” “intend,” “seek,” “designed,” “develop,” “would,” “future,” “can,” “could,” “outlook” and other expressions that are predictions of or indicate future events and trends and which do not relate to historical matters, also identify forward-looking statements.  These forward-looking statements reflect our current views about future events and financial performance.  Investors should not rely on forward-looking statements because they are subject to a variety of factors that could cause actual results to differ materially from our expectations.  Factors that could cause or contribute to such differences include, but are not limited to, the following:

·            debt service requirements under our existing and future indebtedness;

·            availability of cash flow to finance capital expenditures;

·            our ability to renew laundry leases with our clients;

·            competition in the laundry facilities management industry;

·our ability to maintain relationships with our suppliers;

·our ability to maintain adequate internal controls over financial reporting;

·our ability to consummate acquisitions and successfully integrate the businesses we acquire;

·            increases in multi-unit housing sector apartment vacancy rates and condominium conversions;

·            our ability to protect our intellectual property and proprietary rights and create new technology;

·            our ability to retain our key personnel and attract and retain other highly skilled employees;

·            decreases in the value of our intangible assets;

·            our ability to comply with current and future environmental regulations;

·            actions of our controlling stockholders;

·            provisions of our charter and bylaws that could discourage takeovers; and

·those factors discussed under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 and our other filings with the Securities and Exchange Commission (“SEC”).

Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations or financial condition.  In view of these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

In this Quarterly Report on Form 10-Q, unless the context suggests otherwise, references to the “Company,” “Mac-Gray,” “we,” “us,” “our” and similar terms refer to Mac-Gray Corporation and its subsidiaries.  We own or license several registered and unregistered trademarks, including Mac-Gray®, Web®, Hof™, Automatic Laundry Company™, Intelligent Laundry®, LaundryView®, LaundryLinx™, PrecisionWash™, TechLinx™, VentSnake™, LaundryAudit™, e-issues™, Change Point® , The Campus Clothes Line®, Digital Laundry is here. ®, Life Just Got Easier®, and The Laundry Room Experts® .

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Overview

Mac-Gray Corporation was founded in 1927 and re-incorporated in Delaware in 1997. Since its founding, Mac-Gray has grown to become the second largest laundry facilities management contractor in the United States.  Through our portfolio of card and coin-operated laundry equipment located in laundry facilities across the country, we provide laundry convenience to residents of multi-unit housing, such as apartment buildings, condominiums, colleges and universities, public housing complexes, and hotels and motels in 44 states and the District of Columbia.  Based on our ongoing survey of colleges and universities, we believe we are the largest provider of such services to the college and university market in the United States.

Our business model is built on a stable demand for laundry services, combined with long-term leases, strong client relationships, a broad client base, and predictable capital needs.  For the three and six months ended June 30, 2013, our total revenue was $79,221 and $160,814, respectively. Approximately 95% of our total revenue for the three and six month period was generated by our facilities management business.  We generate facilities management revenue primarily by entering into long-term leases with property owners or property management companies for the exclusive right to install and maintain laundry equipment in common area laundry rooms within their properties in exchange for a negotiated portion of the revenue we collect. As of June 30, 2013, approximately 83% of our installed equipment base was located in laundry facilities subject to long-term leases, which have a weighted average remaining term of approximately five years.  Our capital costs are typically incurred in connection with new or renewed leases, and include investments in laundry equipment and card and coin-operated systems, incentive payments to property owners or property management companies, and expenses to refurbish laundry facilities.  Our capital costs consist primarily of a large number of relatively small amounts, which are associated with our entry into or renewal of leases. Our capital needs other than for laundry leases are not significant.  Accordingly, our capital needs are predictable and largely within our control.  For the three and six months ended June 30, 2013, we incurred $11,162 and $19,839 of capital expenditures, respectively. In addition, we made incentive payments of $2,078 and $3,085 in the three and six months ended June 30, 2013 to property owners and property management companies in connection with obtaining our lease arrangements.

Through our commercial equipment sales and services business, we generate revenue by selling commercial laundry equipment.  For the three and six months ended June 30, 2013, our commercial laundry equipment sales business generated approximately 5% of our total revenue, and 6% and 5% of our gross margin, respectively. We anticipate that tight credit markets for our clients will continue to challenge our ability to maintain and grow our revenue from laundry equipment sales.

Our current priorities include: (i) continuing to reduce funded debt, thereby improving debt leverage ratios and reducing interest expense, (ii) increase revenue, (iii) maintaining capital expenditures at the levels needed to sustain and grow the business, (iv) increasing facilities management operating efficiencies in all markets, (v) improving the profitability of individual laundry facilities management accounts that come up for contract renewal, and (vi) continuing to look for acquisitions that complement our current footprint.  One of the key challenges we face is maintaining and expanding our client base in a competitive industry. Approximately 8% to 10% of our laundry room leases are up for renewal each year.  Within any given geographic area, Mac-Gray may compete with local independent operators, regional operators and multi-region operators as well as property owners and property management companies who self-operate their laundry facilities. We devote substantial resources to our sales efforts and are focused on continued innovation in order to distinguish us from our competitors.

Our Board of Directors declared quarterly dividends of $0.0875 per share payable on April 1, 2013 and July 1, 2013 to stockholders of record at the close of business on March 15, 2013 and June 17, 2013, respectively. All dividends were paid prior to June 30, 2013 and have been reflected in the current financial statements.

On April 5, 2013 the Company’s Board of Directors voted to terminate the Company’s shareholder rights plan with American Stock Transfer & Trust Company, LLC (“AST”), as of the close of business April 8, 2013.  In order to effect the termination, the Company and AST entered into an Amendment and Termination of Shareholder Rights Agreement, dated as of April 8, 2013, which caused the rights to purchase Series A Junior Participating Cumulative Preferred Stock issued pursuant to the Shareholder Rights Agreement, dated as of June 8, 2009, by and between the Company and AST, to expire as of April 8, 2013.

On February 29, 2012, we entered into an Amended and Restated Senior Secured Credit Agreement. On May 17, 2013, we entered into Amendment No. 1 to the Amended and Restated Senior Secured Credit Agreement (as

20

amended, the “2012 Credit Agreement”).  The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the “Revolver”).

On March 1, 2013, we acquired a laundry facilities management business in the southeastern region of the United States for total consideration of $2,737.

On May 2, 2013, we acquired a laundry facilities management business in the southwestern region of the United States for total consideration of $1,326.

On June 28, 2013 we acquired a laundry facility in the northeastern region of the United States for total consideration of $619.

Results of Operations (Dollars in thousands)

Three and six months ended June 30, 2013 compared to three and six months ended June 30, 2012.

The information presented below for the three and six months ended June 30, 2013 and 2012 is derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this report:

	For the three months ended June 30,
					Increase		%
	2012		2013		(Decrease)		Change
Laundry facilities management revenue	$	74,639	$	75,563	$	924	1	%
Commercial laundry equipment sales revenue	3,188		3,658		470		15	%
Total revenue	$	77,827	$	79,221	$	1,394	2	%

	For the six months ended June 30,
					Increase			%
	2012		2013		(Decrease)			Change
Laundry facilities management revenue	$	154,944	$	154,355	$	(589	)	0	%
Commercial laundry equipment sales revenue	7,119		6,459		(660		)	-9	%
Total revenue	$	162,063	$	160,814	$	(1,249	)	-1	%

Revenue

Total revenue increased by $1,394, or 2%, to $79,221 for the three months ended June 30, 2013 compared to $77,827 for the three months ended June 30, 2012. Total revenue decreased by $1,249, or 1%, to $160,814 for the six months ended June 30, 2013 compared to $162,063 for the six months ended June 30, 2012.

Laundry facilities management revenue.  Laundry facilities management revenue increased by $924, or 1%, to $75,563 for the three months ended June 30, 2013 compared to $74,639 for the three months ended June 30, 2012. Laundry facilities management revenue decreased by $589, or less than 1%, to $154,355 for the six months ended June 30, 2013 compared to $154,944 for the six months ended June 30, 2012. The increase in revenue for the three months ended June 30, 2013 compared to the three months ended June 30, 2013 is attributable to the cumulative impact of our vend price management initiatives, same location usage increases, and new equipment placements. The decrease in revenue in the six month ended June 30, 2013 compared to the same period in the prior year is attributable, in part, to there being one additional operating day due to 2012 being a leap year. We have also reduced our portfolio of equipment by a small number as compared to the comparable period in 2012, primarily in unprofitable and less profitable locations, which also has resulted in reduced revenue. The reduced revenue was mitigated in part by our vend price management initiatives.

21

Commercial laundry equipment sales.  Revenue in the commercial laundry equipment sales business increased by $470, or 15%, to $3,658 for the three months ended June 30, 2013 compared to $3,188 for the three months ended June 30, 2012. Revenue in the commercial laundry equipment sales business decreased by $660, or 9%, to $6,459 for the six months ended June 30, 2013 compared to $7,119 for the six months ended June 30, 2012. Sales in the commercial laundry equipment sales business are sensitive to the strength of the local economy, the availability and cost of financing to small businesses, consumer confidence, and local permitting and therefore, tend to fluctuate significantly from period to period.

Cost of revenue

	For the three months ended June 30,
					Increase		%
	2012		2013		(Decrease)		Change
Cost of laundry facilities management revenue	$	53,274	$	53,678	$	404	1	%
Depreciation and amortization related to operations	10,393		10,729		336		3	%
Cost of commercial laundry equipment sales	2,651		2,933		282		11	%
Total cost of revenue	$	66,318	$	67,340	$	1,022	2	%

	For the six months ended June 30,
					Increase			%
	2012		2013		(Decrease)			Change
Cost of laundry facilities management revenue	$	108,240	$	107,734	$	(506	)	0	%
Depreciation and amortization related to operations	20,830		21,352		522			3	%
Cost of commercial laundry equipment sales	5,848		5,267		(581		)	-10	%
Total cost of revenue	$	134,918	$	134,353	$	(565	)	0	%

Cost of laundry facilities management revenue.  Cost of laundry facilities management revenue includes rent paid to clients as well as those costs associated with installing and servicing equipment and costs of collecting, counting, and depositing facilities management revenue. Cost of laundry facilities management revenue increased by $404, or 1%, to $53,678 for the three months ended June 30, 2013 as compared to $53,274 for the three months ended June 30, 2012. Cost of laundry facilities management revenue decreased by $506, or less than 1%, to $107,734 for the six months ended June 30, 2013 as compared to $108,240 for the six months ended June 30, 2012.  As a percentage of laundry facilities management revenue, cost of laundry facilities management revenue was 71% for the three months ended June 30, 2013 and 2012, and 70% for the six months ended June 30, 2013 and 2012. Laundry facilities management rent increased by 1%, or $267, to $37,457 for the three months ended June 30, 2013, compared to $37,190 for the three months ended June 30, 2012.  Laundry facilities management rent decreased by 1%, or $661, to $75,561 for the six months ended June 30, 2013 compared to$76,222 for the six months ended June 30, 2012, directly attributable to the changes in facilities management revenue. Laundry facilities management rent as a percentage of laundry facilities management revenue was 49.6 % and 49.8 % for the three months ended June 30, 2013 and 2012, respectively, and 48.9 % and 49.2 % for the six months ended June 30, 2013 and 2012, respectively. Laundry facilities management rent can be affected by new and renewed laundry leases and by other factors such as the amount of incentive payments and laundry room betterments invested in new or renewed laundry leases. As we vary the amount invested in a facility, the laundry facilities management rent, as a function of laundry facilities management revenue, can vary. Other costs of laundry facilities management revenue increased by $137, or 1%, to $16,221 for the three month ended June 30, 2013 compared to $16,084 for the three months ended June 30, 2012. Other costs of laundry facilities management revenue increased by $155, or less than 1%, to $32,173 for the six month ended June 30, 2013 compared to $32,018 for the six months ended June 30, 2012.  A significant percentage of other costs of laundry facilities management revenue are fixed costs which do not fluctuate with changes in revenue.

Depreciation and amortization related to operations.  Depreciation and amortization related to operations increased by $336, or 3%, to $10,729 for the three months ended June 30, 2013 as compared to $10,393 for the three months ended June 30, 2012. Depreciation and amortization related to operations increased by $522, or 3%, to $21,352 for the six months ended June 30, 2013 as compared to $20,830 for the six months ended June 30, 2012. The increase in depreciation and amortization for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012 is attributable to an increase in our capital spending on new and renegotiated accounts beginning in 2012 compared to the two prior years, where we closely managed capital

22

investment in light of the uncertain economy. We expect to continue to increase our capital spending and expect depreciation expense to continue to increase.

Cost of laundry equipment sales.  Cost of commercial laundry equipment sales consists primarily of the cost of laundry equipment, parts and supplies sold, as well as salaries, warehousing and distribution expenses.  Cost of commercial laundry equipment sales increased by $282, or 11%, to $2,933 for the three months ended June 30, 2013 as compared to $2,651 for the three months ended June 30, 2012. Cost of commercial laundry equipment sales decreased by $581, or 10%, to $5,267 for the six months ended June 30, 2013 as compared to $5,848 for the six months ended June 30, 2012. As a percentage of sales, cost of product sold was 80% and 83% for the three months ended June 30, 2013 and 2012, and 82% for the six months ended June 30, 2013 and 2012. The change in cost of sales for the three and six months ended June 30, 2013 compared to the same period ending June 30, 2012 is a direct result of the change in revenue, product mix and price increases by the manufacturer.  Operating expenses were essentially unchanged in total.

Operating expenses

General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs.  General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs increased by $838, or 11%, to $8,637 for the three months ended June 30, 2013 as compared to $7,799 for the three months ended June 30, 2012. General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs decreased by $927, or 5%, to $16,726 for the six months ended June 30, 2013 as compared to $17,653 for the six months ended June 30, 2012. As a percentage of total revenue, these expenses were 11% and 10% for the three months ended June 30, 2013 and 2012, respectively, and 10% and 11% for the six months ended June 30, 2013 and 2012, respectively. The increase in expenses for the three months ended June 30, 2013 compared to the same period in 2012 is primarily related to an increase in costs related to our 2013 proxy contest as well as an increase in marketing related costs. The decrease in expenses for the six months ended June 30, 2013 compared to the same period in 2012 is primarily related to a decrease in legal costs partially offset by an increase in marketing and sales related costs.

Gain on sale of assets

The gains of $121 and of $54 for the three months ended June 30, 2013 and 2012, respectively, and the gains of $155 and of $40 for the six months ended June 30, 2013 and 2012, respectively, are from the sale of vehicles and other fixed assets in the normal course of business.

Income from operations

Income from operations decreased by $399 or 11%, to $3,365, for the three months ended June 30, 2013 compared to $3,764 for the three months ended June 30, 2012 and increased by $358, or 4%, to $9,890 for the six months ended June 30, 2013 compared to $9,532 for the six months ended June 30, 2012 due primarily to the cumulative effect of the reasons discussed above.

Interest expense, including the change in the fair value of non-hedged derivative instruments and amortization of deferred financing costs

Interest expense, including the change in the fair value of non-hedged derivative instruments and amortization of deferred financing costs, decreased by $674, or 34%, to $1,288 for the three months ended June 30, 2013, as compared to $1,962 for the three months ended June 30, 2012. Interest expense, including the change in the fair value of non-hedged derivative instruments and amortization of deferred financing costs, decreased by $2,351, or 44%, to $2,953 for the six months ended June 30, 2013, as compared to $5,304 for the six months ended June 30, 2012. This decrease in interest expense for the three and six months ended June 30, 2013 was primarily the result of retiring our 7.625% fixed rate senior notes by utilizing our 2012 Credit Agreement at lower interest rates as well reduced pricing under our 2012 credit agreement and the maturity of our interest rate derivatives. Interest expense, excluding the change in fair value of non-hedged derivative instruments and amortization of deferred financing costs, was $1,215 and $2,018 for the three months ended June 30, 2013 and 2012, respectively, a decrease of $803, or 40%.  Interest expense, excluding the change in fair value of non-hedged derivative instruments and amortization of deferred financing costs, was $2,971and $5,273 for the six months ended June 30, 2013 and 2012,

23

respectively, a decrease of $2,302, or 44%. Interest expense, excluding the change in fair value of non-hedged derivative instruments and amortization of deferred financing costs, includes interest paid in connection with our derivative instruments through their maturity date. This amounted to $0 and $442 for the three months ended June 30, 2013 and 2012, respectively, and $398 and $897 for the six months ended June 30, 2013 and 2012, respectively.

Interest expense associated with the company’s long term debt is comprised of the following:

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2013			2012			2013
Interest expense	$	2,018		$	1,215		$	5,273		$	2,971
Change in the fair value of non-hedged interest rate derivative instruments	(146		)	(15		)	(235		)	(196		)
Amortization of deferred financing costs	90			88			266			178
Interest expense, including change in fair value of non-hedged interest rate derivative instruments and amortization of deferred financing costs	$	1,962		$	1,288		$	5,304		$	2,953

During the first quarter of 2012, as a result of the senior note redemption (Note 2), the Company no longer qualified for hedge accounting treatment on its only effective interest rate swap agreement.  Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost was reclassified as an earnings charge through the maturity date of the derivative.  This charge to interest expense, when combined with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $3 and $210 for the three and six months ended June 30, 2013 compared to $294 and $595 for the three and six months ended June 30, 2012, respectively.

Loss on early extinguishment of debt

Loss on early extinguishment of debt amounted to $3,762 for the six months ended June 30, 2012 and includes the premium of $2,542 we incurred for the early redemption of our senior unsecured notes and $1,087 of unamortized deferred financing costs associated with the redemption. We also wrote off $133 of unamortized deferred financing costs associated with our 2008 credit facility. Loss on early extinguishment of debt amounted to $54 for the six months ended June 30, 2013 which consists of a write off of unamortized deferred financing costs associated with Amendment No. 1 to the 2012 Credit Agreement.

Income tax expense

Income tax expense increased by $61 to $811 for the three months ended June 30, 2013 compared to $750 for the three months ended June 30, 2012. Income tax expense increased by $2,572 to $2,753 for the six months ended June 30, 2013 compared to $181 for the six months ended June 30, 2012. The increase in the three months is the result of the increase in pre-tax income to $2,023 for the three months ended June 30, 2013, compared to the $1,802 for the three months ended June 30, 2012.  The increase in the six months is the result of the increase in pre-tax income to $6,883 for the six months ended June 30, 2013, compared to the $466 for the six months ended June 30, 2012.  The effective tax rate decreased to 40% for the three months ended June 30, 2013, compared to 42% for the same period in 2012. The effective tax rate increased to 40% for the six months ended June 30, 2013, compared to 39% for the same period in 2012. The change in the effective rate for the three and six month ended June 30, 2013 compared to the effective tax rate for the three and six months ended June 30, 2012 is the result of the change in permanent tax differences as a percentage of pretax income.

Net income

As a result of the foregoing, net income increased by $160 to $1,212 for the three months ended June 30, 2013 compared to $1,052 for the same period ended June 30, 2012.  Net income increased by $3,845 to $4,130 for the six months ended June 30, 2013 compared to $285 for the same period ended June 30, 2012

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Seasonality

We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived from the college and university market represented approximately 15% of our total laundry facilities management revenue. Academic facilities management and rental revenues are derived substantially during the school year in the first, second and fourth calendar quarters. Conversely, our operating and capital expenditures have historically been higher during the third calendar quarter when we install a large amount of equipment while colleges and universities are generally on summer break.

Liquidity and Capital Resources (Dollars in thousands)

We believe that we can satisfy our working capital requirements and funding of capital needs with internally generated cash flow and, as necessary, borrowings from our revolving credit facility described below. Capital expectations for the year ending December 31, 2013, including contract incentive payments, are currently expected to be between $36,000 and $39,000.  In the six month ended June 30, 2013, spending on capital expenditures was $19,839 and spending on contract incentives was $3,085. The capital expenditures for 2013 are primarily composed of laundry equipment installed in connection with new client leases and the renewal of existing leases.

We historically have not needed sources of financing other than our internally generated cash flow and revolving credit facilities to fund our working capital, capital expenditures and smaller acquisitions. As a result, we anticipate that our cash flow from operations and revolving credit facilities will be sufficient to meet our anticipated cash requirements for at least the next twelve months.

Our current long-term liquidity needs are principally the repayment of borrowings under our 2012 Credit Agreement. We are unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our long-term debt when it comes due. We anticipate that we will need to refinance some portion of this indebtedness when it reaches maturity.  We cannot make any assurances that such financing would be available on reasonable terms, if at all.

For the three and six month ended June 30, 2013, our source of cash was primarily from operating activities. Our primary uses of cash for the three and six month ended June 30, 2013 were the purchase of new laundry equipment, payment for an acquisition, and the payment of dividends. We anticipate that we will continue to use cash flows provided by operating activities to finance working capital needs, debt service, and capital expenditures.

On February 29, 2012, we entered into an Amended and Restated Senior Secured Credit Agreement. On May 17, 2013, we entered into Amendment No. 1 to the Amended and Restated Senior Secured Credit Agreement (as amended, the “2012 Credit Agreement”).  The 2012 Credit Agreement provides for borrowings up to $250,000 under a revolving credit facility (the “Revolver”).  The 2012 Credit Agreement matures on May 17, 2018.  The 2012 Credit Agreement also provides for Swingline Loans of up to $10,000 (the “Swingline Loans”) and any Swingline Loans will reduce the borrowings available under the Revolver.  Subject to certain terms and conditions, the 2012 Credit Agreement gives the Company the option to increase the Revolver or establish one or more new term loans, provided that the aggregate commitments under the 2012 Credit Agreement cannot exceed $350,000.  The 2012 Credit Agreement is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries as well as a pledge by the Company of all the capital stock of its subsidiaries.  Outstanding indebtedness under the 2012 Credit Agreement bears interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate plus an applicable percentage, ranging from 1.25% to 2.00% per annum (currently 1.75%), determined by reference to our consolidated total leverage ratio, and (ii) in the case of base rate loans and swingline loans, the higher of (a) the federal funds rate plus 0.50%, (b) the annual rate of interest announced by Bank of America, N.A. as its “prime rate,” or (c) for each day, the floating rate of interest equal to LIBOR for a one month term quoted for such date (the highest of which is defined as the “Base Rate”), plus, in each case, an applicable percentage, ranging from 0.25% to 1.00% per annum (currently 0.75%), determined by reference to our consolidated total leverage ratio.

We pay a commitment fee equal to a percentage of the actual daily-unused portion of the Revolver under the 2012 Credit Agreement. This percentage is determined quarterly by reference to the Company’s consolidated total leverage ratio and ranges between 0.25% per annum and 0.40% per annum (currently 0.30%).  For purposes of the calculation of the commitment fee, letters of credit are considered usage under the Revolver, but swingline loans are not considered usage under the Revolver.

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The 2012 Credit Agreement includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and incurring indebtedness, and requires that we maintain certain financial ratios.  The most significant financial ratios that we are required to maintain include a consolidated total leverage ratio of not greater than 3.75 to 1.00 (3.50 to 1.00 as of December 31, 2013 and thereafter) and a consolidated cash flow coverage ratio of not less than 1.20 to 1.00.  We were in compliance with all financial covenants at June 30, 2013.

As of June 30, 2013, there was $189,588 outstanding under the Revolver and $1,380 in outstanding letters of credit. The available balance under the Revolver was $59,032 at June 30, 2013. The average interest rates on the borrowings outstanding under the 2012 Credit Agreement at June, 2013 and 2012 were 2.01% and 3.67%, respectively, including the applicable spread paid to the banks and, for 2012, the effect of the interest rate swap agreements tied to the debt (see Note 3 for discussion on Fair Value Measurements).

On October 21, 2011, we redeemed $50,000 of our 7.625% senior notes by utilizing $51,271 of availability under our prior credit facility. On March 30, 2012, we redeemed the remaining $100,000 of our senior notes by utilizing $103,495 of availability under the 2012 Credit Agreement.

Operating Activities

For the six month ended June 30, 2013 and 2012, net cash flows provided by operating activities were $26,187 and $16,972, respectively. Cash flows from operations consists primarily of facilities management revenue and equipment sales, offset by the cost of facilities management revenues, cost of product sold, and general, administration, sales and marketing expenses. The most significant changes to cash flows for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 are an increase in net income, an increase in accounts payable, accrued facilities management rent, accrued expenses and other liabilities offset in part by an increase in prepaid facilities management rent and other assets. The increase in accounts payable, accruals and other liabilities is reflective of increased equipment purchases and an increase in the provision for taxes. The increase in prepaid facilities management rent and other assets is attributable to an increase in incentive advances to our route clients as part of the execution of new and renegotiated contracts. .

Investing Activities

For the six months ended June 30, 2013 and 2012, net cash flows used in investing activities were $23,613 and $15,368, respectively.  Capital expenditures for the six month ended June 30, 2013 were $19,839 for the acquisition of laundry equipment and $3,963 for acquisitions. Capital expenditures for the six months ended June, 2012 were $15,460 primarily for the acquisition of laundry equipment for new and renewed lease locations.

Financing Activities

For the six month ended June 30, 2013 and 2012, net cash flows used in financing activities were $3,276 and $2,673, respectively. Cash flows used in financing activities consist of changes in long term debt, the payments of dividends, and debt acquisition costs as well as, in 2012, the repurchase of common stock.

Contractual Obligations

A summary of our contractual obligations and commitments related to our outstanding long-term debt and future minimum lease payments related to our vehicle fleet, warehouse rent and facilities management rent as of June 30, 2013 is as follows:

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			Interest on
Fiscal	Long-term		variable rate		Facilites rent		Capital lease		Operating lease
Year	debt		debt (1)		commitments		commitments		commitments		Total
2013(six months)	$	—	$	1,905	$	9,907	$	831	$	1,727	$	14,370
2014	—		3,811		16,979		1,324		3,356		$	25,470
2015	—		3,811		13,784		816		3,042		$	21,453
2016	—		3,811		11,083		714		2,354		$	17,962
2017	—		3,811		7,898		266		1,927		$	13,902
Thereafter	189,588		1,587		26,076		—		3,962		$	221,213
Total	$	189,588	$	18,736	$	85,727	$	3,951	$	16,368	$	314,370

(1)Represents interest on the outstanding balance on our 2012 Credit Agreement. Our average interest rate was 2.01% at June 30, 2013.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT

MARKET RISK

We are exposed to a variety of risks, including changes in interest rates on some of our borrowings and the change in fuel prices. In the normal course of our business, we manage our exposure to these risks as described below. We do not engage in trading market-risk sensitive instruments for speculative purposes.

Interest rates

The table below provides information about our debt obligations that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair market value of long-term debt approximates book value at June 30, 2013.

(in thousands)	2013		2014		2015		2016		2017		Thereafter			Total
Variable rate	$	—	$	—	$	—	$	—	$	—	$	189,588		$	189,588
Average interest rate	—		—		—		—		—		2.01		%	2.01		%

We had entered into standard International Swaps and Derivatives Association interest rate swap agreements to manage the interest rate associated with our debt. The interest rate Swap Agreements matured on April 1, 2013. Under these agreements, we received a variable rate of LIBOR plus a markup and paid a fixed rate. We recognized a non-cash unrealized gain of $18 and $440 for the three months ended June 30, 2013 and 2012, respectively, and a non-cash unrealized gain of $406 and $830 for the six months ended June 30, 2013 and 2012, respectively, on the interest rate swap agreements.

On September 23, 2011, we entered into a fuel commodity derivative to manage the fuel cost on our fleet of vehicles. The derivative was effective January 1, 2012 and expired December 31, 2012.  On September 19, 2012 we entered into an additional fuel commodity derivative. The derivative is effective January 1, 2013 and expires December 31, 2013.  The derivative has a monthly notional amount of 80 thousand gallons from January 1, 2013 through December 31, 2013 for a total notional amount of 960 thousand gallons. We have a put price of $3.26 per gallon and a strike price of $3.90 per gallon. We recognized a non-cash unrealized loss of $62 and $274 for the three months ended June 30, 2013 and 2012, respectively, and a non- cash unrealized loss of $9 and $24 for the six months ended June 30, 2013 and 2012, respectively, on these fuel commodity derivatives as a result of the change in the fair value.

The fair value of the fuel commodity derivative is based on market assumptions and a quoted price from the counter party and is considered a Level 3 item.

During the first quarter of 2012, as a result of our senior note redemption, we no longer qualified for hedge accounting treatment on our only effective interest rate swap agreement.  Accordingly, the amount included in Accumulated Other Comprehensive Loss at the time hedge accounting was lost was reclassified as an earnings charge through April 1, 2013, the maturity date of the derivative.  This charge to interest expense, when combined with an interest rate swap agreement that previously lost hedge accounting treatment, amounted to $3 and $210 for

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the three and six months ended June 30, 2013 compared to $294 and $595 for the three and six months ended June 30, 2012, respectively.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.  As of the end of the period covered by this report, an evaluation was carried out by our management, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based upon that evaluation, our chief executive officer and chief financial officer concluded that these disclosure controls and procedures were effective as of June 30, 2013 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in internal controls.  In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1A.                Risk Factors

There have been no material changes in our risk factors from those disclosed in Part 1, Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, except to the extent previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors. The risks described in our annual report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 6. Exhibits

3.1	Amended and Restated Certificate of Incorporation (1)
3.2	Amendment No. 1 to Amended and Restated Certificate of Incorporation (2)
3.3	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Mac-Gray Corporation (3)
3.4	Amended and Restated By-laws of Mac-Gray Corporation (4)
3.5	Amendment No. 1 to Amended and Restated By-laws of Mac-Gray Corporation (5)
3.6	Amendment No. 2 to Amended and Restated By-laws of Mac-Gray Corporation (6)
4.1	Amendment and Termination of Shareholder Rights Agreement between Mac-Gray Corporation and American Stock Transfer & Trust Company, dated as of April 8, 2013 (7)
4.2	Certificate of Elimination of Series A Junior Participating Cumulative Preferred Stock of Mac-Gray Corporation, dated as of April 8, 2013 (7)
10.1	Amendment No. 1 to the Amended and Restated Senior Secured Credit Agreement, dated as of May 17, 2013, among Mac-Gray Corporation, Mac-Gray Services, Inc., the lenders party thereto and Bank of America, N.A., as administrative agent (8)
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (9)
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (9)
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (9)
101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) related notes, tagged as blocks of text. (10)

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(1) Previously filed as an exhibit to Mac-Gray’s Registration Statement on Form S-1filed on August 14, 1997 (File No. 333-33669).

(2)  Previously filed as an exhibit to Mac-Gray’s Form 10-K filed on March 14, 2011.

(3)  Previously filed as an exhibit to Mac-Gray’s Form 8-K filed on June 5, 2013.

(4)  Previously filed as an exhibit to Mac-Gray’s Form 8-K filed on November 7, 2008.

(5)  Previously filed as an exhibit to Mac-Gray’s Form 8-K/A filed on October 29, 2010.

(6)  Previously filed as an exhibit to Mac-Gray’s Form 8-K filed on June 27, 2013.

(7)  Previously filed as an exhibit to Mac-Gray’s Form 8-K filed on April 8, 2013.

(8)  Previously filed as an exhibit to Mac-Gray’s Form 8-K filed on May 20, 2013.

(9) Filed herewith.

(10) Furnished herewith.

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SIGNATURE

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

	MAC-GRAY CORPORATION
August 9, 2013	/s/ Michael J. Shea
	Michael J. Shea
	Executive Vice President, Chief
	Financial Officer and Treasurer
	(On behalf of registrant and as principal
	financial officer)

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