UniFirst Corporation — Q2 FY2012 Form 10-Q
Reporting period: Thirteen weeks ended February 25, 2012; year-to-date figures cover the twenty-six weeks ended that date. Comparisons are with the corresponding periods ended February 26, 2011. UniFirst provides uniform and protective-clothing rental, cleaning, sales, and related services, as well as specialty garment and first-aid services.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | 26 weeks FY2012 | 26 weeks FY2011 |
|---|---|---|---|---|
| Revenue | $310.0m | $278.6m | $623.0m | $551.7m |
| Income from operations | $30.8m | $27.7m | $73.2m | $66.8m |
| Operating margin | 9.9% | 9.9% | 11.7% | 12.1% |
| Net income | $19.2m | $16.3m | $45.0m | $40.0m |
| Diluted EPS, common stock | $0.96 | $0.82 | $2.26 | $2.02 |
| Net margin | 6.2% | 5.8% | 7.2% | 7.3% |
- Revenue growth: Q2 revenue rose 11.3%; year-to-date revenue increased 12.9%. Core laundry operations grew 12.3% in Q2 and 13.2% year to date, primarily from organic growth (11.2% and 11.6%, respectively), with additional acquisition-related growth. Q2 Specialty Garments revenue was essentially flat; First Aid revenue increased 12.2%.
- Profitability and margins: Q2 operating income rose 11.4%, while year-to-date operating income increased 9.5%. Cost of revenues grew faster than revenue: it rose to 65.0% of revenue in Q2 from 63.3%, and to 63.7% year to date from 61.5%. Management cited merchandise costs and, year to date, higher fuel costs. Lower selling and administrative expense as a share of revenue partly offset these pressures.
- Cash flow: First-half operating cash flow was $60.4m, versus $32.6m in the prior-year period. Investing used $34.7m, including $34.3m of capital expenditures; financing used $14.9m, including $15.4m of net debt repayments. Cash increased $10.5m to $59.3m.
- Liquidity and debt: Working capital was $291.6m. The balance sheet showed $104.7m of total debt, including $100.2m long term and $4.6m current. The company had no revolver borrowings, $43.2m of letters of credit, and $206.8m available under its $250m revolving facility. It reported compliance with debt covenants. The $100m floating-rate notes mature in September 2013; the revolver matures in May 2016.
- Other balance-sheet items: Total assets were $1,173.7m and shareholders’ equity was $844.8m at February 25, 2012. Cash included $49.0m held outside the United States that management expected to keep invested abroad.
Changes versus the comparable period
- Revenue and net income increased in both the quarter and first half, but the first-half operating margin declined 0.4 percentage points and net margin declined 0.1 points.
- Merchandise investment increased to support a growing wearer base, new accounts, and expansion of flame-resistant and high-visibility products. Management also reported higher fabric prices. These pressures lifted cost of revenues as a percentage of sales.
- Lower interest expense improved results: the prior-year period included higher net interest expense, partly associated with debt repaid in June 2011 and the interest-rate swap that matured in March 2011.
- First-half revenue growth included acquisition-related growth of 1.6% in core laundry operations; no businesses were acquired during the first half of FY2012.
Outlook, risks, and unusual items
- Management expected merchandise costs to continue increasing through FY2012, negatively affecting margins. Recent fuel-cost increases had also raised delivery and production costs; further increases could pressure results.
- Management said cash, operating cash generation, and available credit were expected to cover anticipated working-capital and capital-expenditure needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- On March 27, 2012, UniFirst reached an environmental-litigation settlement and expected to recognize an approximately $6.7m pretax gain in fiscal Q3, equivalent to about $0.21 per diluted common share. The gain includes contingent amounts previously received but not recognized and amounts expected in Q3.
- Environmental remediation liabilities were $18.9m at February 25, 2012. The company identifies potential exposure at multiple sites and notes that changing estimates, regulatory requirements, insurance recoveries, or other parties’ participation could materially affect recorded amounts. It also disclosed an EPA information request concerning laundering of soiled towels and unresolved EPA comments relating to the Woburn site.
- Other stated risks include weak economic conditions and customer employment levels, energy and labor costs, foreign-exchange movements, seasonality, competition and margins, labor relations, and regulation of nuclear-garment decontamination facilities. The company reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether organic growth and new-account additions continue to offset customer losses, and how much growth is acquisition-related.
- Whether merchandise and fuel-cost inflation persists and further pressures cost of revenue and operating margins.
- Cash conversion and the scale and returns of capital expenditures, particularly investment in rental merchandise.
- The timing and final net cash effect of the $6.7m environmental-settlement gain, and any changes to the $18.9m remediation liability.
- Debt repayment and available revolving-credit capacity, including covenant compliance and the September 2013 note maturity.
- Foreign-currency exposure: non-U.S.-dollar revenue was approximately 9% of consolidated revenue, and the company did not operate a hedging program for its foreign subsidiaries’ functional currencies.