UniFirst Corporation — Q1 FY2011 Form 10-Q
Reporting period: Thirteen weeks ended November 27, 2010; comparisons are with the thirteen weeks ended November 28, 2009. UniFirst provides uniform and protective-clothing rental, cleaning and sales, along with specialty garment and first-aid services.
Financial performance
| Metric | Q1 FY2011 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $273.1 million | $256.2 million | +6.6% |
| Operating income | $39.2 million | $40.4 million | -3.1% |
| Operating margin | 14.3% | 15.8% | -1.5 percentage points |
| Net income | $23.8 million | $23.6 million | +0.8% |
| Net margin | 8.7% | 9.2% | -0.5 percentage points |
| Diluted EPS, common stock | $1.20 | $1.21 | -0.8% |
| Cash from operations | $27.2 million | $47.5 million | -42.8% |
Cost of revenues rose to 59.8% of revenue from 58.2%; selling and administrative expense was 20.2% versus 20.1%. Management attributed cost pressure mainly to merchandise costs, fuel and production payroll, partly offset by lower healthcare and other insurance costs. The effective tax rate declined to 37.0% from 39.5%, primarily following resolution of state tax audits and a lower state tax provision.
Core laundry revenue grew 5.7%, including 4.2% organic growth, 1.2% acquisition-related growth and 0.3% favorable currency impact. Specialty Garments revenue rose 12.8%, largely reflecting nuclear outage timing and higher direct sales; First Aid revenue rose 14.3%. Operating income declined in core laundry operations (-2.8%) and Specialty Garments (-12.7%), while First Aid operating income increased 72.3% from a comparatively small base.
Cash, liquidity and debt
- Cash and cash equivalents were $133.3 million at November 27, 2010, up from $121.3 million at August 28, 2010. Working capital was $200.7 million.
- Operating cash flow was $27.2 million; investing activities used $15.2 million, including $12.3 million of capital expenditures and a $2.2 million acquisition. Financing activities used $1.1 million, primarily dividends and debt payments.
- Reported current maturities of long-term obligations were $80.8 million and long-term debt was $100.3 million. The company had no revolver borrowings, $38.8 million of letters of credit and $186.2 million of availability under its $225 million revolving facility.
- The $75 million fixed-rate notes bearing 5.27% mature in June 2011, and the revolving credit agreement matures in September 2011. The company was evaluating refinancing alternatives and said it expected refinancing to be satisfactory; it stated it could use cash reserves to repay the notes if it did not refinance. It reported compliance with debt covenants.
- A $100 million interest-rate swap, with a 3.51% fixed payment and variable receipt, matures March 14, 2011. A $0.5 million after-tax loss in accumulated other comprehensive income was expected to be reclassified to interest expense before maturity.
Outlook, risks and notable items
No numerical earnings or revenue guidance was provided. Management said cash, operating cash generation and available revolver capacity should meet anticipated working-capital and capital-spending needs for at least 12 months. It noted that challenging economic conditions and customer workforce reductions continued to weigh on wearer levels. The filing also identifies seasonality, energy and labor costs, competition, acquisitions, currency exposure, labor relations and nuclear-facility regulation as risks.
Environmental remediation liabilities were $17.8 million, down from $19.0 million at fiscal year-end; the quarter included a $0.8 million benefit from discount-rate changes. The company disclosed ongoing matters at several sites and a new Maryland notice requiring investigation of potential contamination at its Landover facility. It said unaccrued or uninsured contingencies were not expected to materially affect consolidated financial position or results, while acknowledging estimates and outcomes could change. Other litigation includes customer, personal injury and employment matters.
The quarter’s cash generation was lower than the prior-year period, reflecting working-capital investment, including a $17.3 million increase in receivables and increased inventory and rental merchandise in service. Revenue growth did not translate into higher operating income, principally due to cost pressure. The company reported no material changes to its previously disclosed risk factors or contractual obligations.
Important facts for investors to verify
- Progress and terms of refinancing the September 2011 revolver and repayment or refinancing of the June 2011 fixed-rate notes.
- Whether core laundry organic growth and customer wearer levels remain resilient amid economic conditions.
- Whether merchandise, fuel and payroll costs continue to pressure operating margins.
- Cash conversion and working-capital trends, especially receivables, inventories and rental merchandise investment.
- Potential changes in environmental remediation exposure, including the Landover investigation and Woburn-related work.
- Timing and impact of nuclear reactor outages on Specialty Garments revenue and earnings.