UniFirst Corporation — Q3 FY2012 Form 10-Q
Business and period: UniFirst provides uniform and protective-clothing rental, cleaning, delivery and sales, along with specialty garment and first-aid services. This unaudited report covers the 13 weeks ended May 26, 2012, and year-to-date results for the 39 weeks ended that date; comparisons are with the corresponding 2011 periods. Amounts below are in millions unless noted.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | 39 weeks FY2012 | 39 weeks FY2011 |
|---|---|---|---|---|
| Revenue | $320.9 (+10.1%) | $291.6 | $943.9 (+11.9%) | $843.3 |
| Operating income | $42.7 (+46.5%) | $29.1 | $115.9 (+20.7%) | $96.0 |
| Operating margin | 13.3% | 10.0% | 12.3% | 11.4% |
| Net income | $27.5 (+49.0%) | $18.4 | $72.5 (+23.9%) | $58.5 |
| Net margin | 8.6% | 6.3% | 7.7% | 6.9% |
| Diluted EPS, common stock | $1.37 | $0.93 | $3.63 | $2.94 |
Revenue and cost drivers: Core laundry operations grew 11.5% in Q3 and 12.6% year to date, with organic growth of 10.9% and 11.4%, respectively. Q3 Specialty Garments revenue fell 4.3%, partly reflecting the timing of customer reactor outages; First Aid revenue rose 17.7%. Year-to-date revenue increased in both segments. Q3 cost of revenues declined to 63.1% of revenue from 63.5%, aided by lower payroll, energy and production costs relative to sales. Year-to-date cost of revenues rose to 63.5% from 62.2%, primarily because of higher merchandise costs. Selling and administrative expense benefited from a settlement gain described below.
Cash flow and liquidity: Operating cash flow for the 39 weeks was $106.8, up from $56.0 in 2011. Capital expenditures were $59.3, versus $49.4; investing cash use was $59.8, versus $67.3, which included $17.3 of prior-year business acquisitions. Financing cash use was $15.6, including $55.8 of debt repayments and $40.4 of new borrowing. Cash increased by $30.0 to $78.8. Working capital was $309.4. Management said cash, operating cash generation and available credit should meet anticipated working-capital and capital-expenditure needs for at least 12 months.
Debt and balance sheet: Debt totaled approximately $104.6, including $4.5 current and $100.2 long term; cash exceeded debt by about $25.8. No revolver borrowings were outstanding; $206.5 of the $250.0 revolving facility was available after $43.5 of letters of credit. The $100.0 floating-rate notes mature September 14, 2013. The company reported covenant compliance. Total assets were $1,204.4 and shareholders’ equity was $869.1 at May 26, 2012.
Material changes, outlook and risks
- Settlement: A March 27 environmental-litigation settlement generated a $6.7 gain recorded as a reduction of selling and administrative expense in Q3, adding approximately $0.21 to diluted common EPS. Excluding the gain, Q3 selling and administrative expense was 20.5% of revenue, versus 20.9% in the prior-year quarter.
- Merchandise and margins: Management expected merchandise costs to continue weighing on margins during fiscal 2012. Drivers included investment in new garments for a growing wearer base and new accounts, growth in flame-resistant and high-visibility products, and higher fabric prices. Strong sales growth helped leverage payroll, energy and other operating costs.
- Other commentary: Management cited worldwide economic weakness and unemployment as possible pressures on customer employment and spending. It also noted exposure to fuel and energy costs, labor, seasonality, foreign exchange, customer demand, and nuclear-facility regulation. No specific numerical earnings or revenue guidance is provided in the filing.
- Environmental matters: The recorded environmental liability was $19.3 at May 26, 2012. Estimated net anticipated remediation costs were $19.1, after estimated insurance proceeds, with timing and amounts subject to assumptions, discount rates, recoveries and regulatory developments. The company identified several remediation sites and unresolved EPA comments concerning the Woburn site; it had also responded to an EPA information request regarding laundering soiled towels. Management said liabilities beyond amounts accrued or insured were not expected to materially affect consolidated financial position or results, while noting outcomes could change.
- Currency and controls: Foreign-currency-denominated revenue was about 9% of consolidated revenue. The company did not hedge foreign subsidiary translation exposure; Q3 transaction losses were approximately $0.5. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of Q3 earnings growth reflects the one-time $6.7 environmental settlement gain, versus underlying operating performance?
- Whether merchandise costs continue to rise faster than revenue and affect margins, particularly beyond the quarter.
- Progress on organic growth, customer retention and segment trends, including Specialty Garments’ outage-related volatility.
- Environmental remediation exposure, the $19.3 recorded liability, insurance recoveries and developments at Woburn and other sites.
- Capital expenditure and rental-merchandise investment requirements, cash generation, and the 2013 maturity of the $100.0 floating-rate notes.
- Exposure to economic conditions, energy and labor costs, foreign exchange and regulatory changes; the filing reports no material change to previously disclosed risk factors.