UniFirst Corporation — Q3 Fiscal 2013 Form 10-Q
Reporting period: Thirteen weeks ended May 25, 2013; year-to-date comparison covers the thirty-nine weeks ended May 25, 2013. Comparisons are to the corresponding periods ended May 26, 2012. UniFirst provides uniform and protective-clothing rental, cleaning and sales services, along with specialty garment and first-aid services.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | 39 weeks FY2013 | 39 weeks FY2012 |
|---|---|---|---|---|
| Revenue | $335.8 million | $320.9 million | $1,002.6 million | $943.9 million |
| Operating income | $45.8 million | $42.7 million | $138.6 million | $115.9 million |
| Operating margin | 13.6% | 13.3% | 13.8% | 12.3% |
| Net income | $28.7 million | $27.5 million | $86.1 million | $72.5 million |
| Diluted EPS, Common Stock | $1.43 | $1.37 | $4.29 | $3.63 |
| Cash from operating activities | Not separately provided | Not separately provided | $139.5 million | $106.8 million |
Year-to-date revenue grew 6.2%, operating income 19.7%, and net income 18.9%. Cost of revenues declined to 61.6% of revenue from 63.5%; selling and administrative expense was 19.4% versus 19.0%, and depreciation and amortization was 5.1% versus 5.3%. The effective tax rate increased to 38.3% from 37.1% year to date; management attributed the increase mainly to prior-year state tax reserve reversals and $0.4 million of current-year nondeductible compensation tax expense.
Liquidity, debt and cash flows
- At May 25, 2013, cash and cash equivalents were $175.6 million, working capital was $297.9 million, and total assets were $1,334.8 million.
- Cash from operations of $139.5 million funded $81.1 million of capital expenditures, including $16.4 million for the customer-service systems project, and approximately $2.0 million of acquisitions. Cash increased by $55.5 million from the fiscal-year opening balance.
- Balance-sheet loans payable and current maturities of long-term debt were $110.7 million; long-term debt was $0.2 million. The company reported no revolving-credit borrowings, with $202.7 million available under its $250 million revolver after letters of credit. It was in compliance with debt covenants.
- $100 million of floating-rate notes mature September 14, 2013. Management was evaluating repayment or refinancing and said either approach was not expected to adversely affect financial condition; repayment could use cash and, if needed, the revolver.
Business changes, outlook and risks
- Core laundry operations revenue increased 5.9% in Q3 and 7.6% year to date. Management cited organic growth, new-account sales, price adjustments and higher merchandise-related charges. Core laundry operating income rose 11.3% in Q3 and 26.9% year to date.
- Specialty Garments revenue fell 10.0% in Q3 and 7.5% year to date, primarily following completion of two large reactor rebuild projects; weaker European results also affected the year-to-date comparison. First Aid revenue increased 11.2% in Q3 and 5.6% year to date.
- Prior-year Q3 and year-to-date comparisons included an approximately $6.7 million gain from an environmental-litigation settlement. Excluding that gain, management said selling and administrative expense as a share of revenue was lower in the current periods.
- No specific full-year revenue or earnings guidance is provided. Management stated that cash, expected operating cash generation and available revolver capacity should meet anticipated working-capital and capital-expenditure needs for at least the next 12 months.
- Environmental remediation liabilities were $18.4 million at period-end. Potential outcomes remain subject to estimation uncertainty; the company also received EPA notices of violation concerning Clean Air Act matters and is addressing them.
- UniFirst received an indemnification demand from New England Compounding Center (NECC) related to limited cleaning services and later a subpoena in the related multidistrict litigation. The company considered NECC’s claims without merit, but stated that loss was neither probable nor remote and that it could not estimate a potential loss.
- Other disclosed risks include energy and labor costs, economic conditions and customer employment levels, seasonality, foreign-currency exposure, acquisition integration, and regulation of nuclear-garment decontamination operations. Foreign-currency translation losses reduced other comprehensive income; the company does not hedge this exposure.
Important facts for investors to verify
- How the $100 million notes due in September 2013 were ultimately repaid or refinanced and the resulting effect on cash and debt.
- Whether core laundry growth and improved operating margins continued, particularly given the decline in Specialty Garments activity.
- Any material change in environmental remediation estimates, EPA matters or the NECC claim and related insurance coverage.
- Capital spending and progress on the customer-service systems project, alongside cash conversion and working-capital trends.