UniFirst Corporation — Q3 FY2015 Form 10-Q
Business context and period: The unaudited quarter covered 13 weeks ended May 30, 2015; year-to-date figures cover 39 weeks. UniFirst provides uniform and workwear rental, cleaning, sales and related services, with five reporting segments. It reported over 275,000 customer locations across the U.S., Canada and Europe.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | 39 weeks FY2015 | 39 weeks FY2014 |
|---|---|---|---|---|
| Revenue | $365.6m | $352.2m | $1,097.4m | $1,042.9m |
| Operating income | $52.4m | $49.5m | $154.5m | $145.9m |
| Operating margin | 14.3% | 14.0% | 14.1% | 14.0% |
| Net income | $32.5m | $30.9m | $95.4m | $91.1m |
| Diluted EPS, Common Stock | $1.61 | $1.53 | $4.72 | $4.52 |
- Quarterly revenue rose 3.8%; year-to-date revenue rose 5.2%. Core Laundry Operations revenue increased 4.6% in the quarter and 6.1% year to date. Management reported core organic growth of 4.7% and 6.2%, respectively, excluding acquisitions and currency impacts as described in the filing.
- Cost of revenue declined as a share of sales to 60.7% for the quarter and 60.6% year to date, chiefly from lower fuel and natural gas costs. Selling and administrative expense increased to 19.8% and 20.2% of revenue, respectively, reflecting IT investment, legal costs and, year to date, higher environmental reserves.
- Cash from operations was $158.4m for the 39 weeks, versus $132.3m a year earlier. Investing used $103.2m, including $82.3m of capital expenditures and $19.8m for acquisitions. Financing used $3.3m. Cash increased $43.9m to $235.7m.
- At May 30, 2015, working capital was $454.9m; current assets were $643.8m and current liabilities $188.9m. Total debt was $3.4m, all current; there was no long-term debt. The company had no revolving-credit borrowings, $53.6m of letters of credit and $196.4m available under its $250m facility. It was covenant-compliant. The facility matures May 4, 2016.
- Cash dividends per share were unchanged year over year: $0.0375 per quarter for Common Stock and $0.0300 for Class B Common Stock.
Material changes and operating developments
- Core Laundry growth benefited from new account sales and annual price adjustments, partly offset by lower wearer counts and more lost accounts, especially among customers affected by reduced oil-sector activity.
- Specialty Garments revenue declined 6.4% in the quarter and 7.6% year to date, due to currency effects and, year to date, reduced North American reactor business. First Aid revenue increased 5.6% and 8.7%, respectively.
- Four acquisitions were completed during the 39-week period for aggregate consideration of approximately $19.8m; they were not material individually to consolidated results.
- Foreign-currency translation and other comprehensive losses were significant year to date: comprehensive income was $76.9m versus $89.0m, despite higher net income. Foreign currency translation adjustments were a $16.8m loss.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said depressed oil prices had contributed to customer workforce reductions and lost accounts and could weigh on organic growth through the rest of FY2015 and into FY2016. Lower fuel and natural gas costs provided an offset, but management expected lost revenue and profit to outweigh energy savings if oil prices remained depressed.
- Management expects healthcare costs to continue pressuring results; ACA plan changes and transitional reinsurance fees add uncertainty and expense. IT infrastructure spending continues. The Unity 20/20 CRM project had $40.0m capitalized at quarter-end; deployment was not expected in FY2015, and future depreciation will affect results.
- Environmental liabilities were $22.0m at May 30, 2015, up from $19.8m at fiscal year-end. The company added $3.4m of environmental reserves during the 39 weeks, principally for expected costs near its Somerville site and lower discount rates. Actual remediation obligations could differ, and additional costs may be material.
- The NECC-related settlement was final: insurers paid the full $30.5m settlement, and releases and an injunction bar claims against UniFirst relating to the matter. The filing also notes other legal, environmental and regulatory exposures, including possible disruption to nuclear garment decontamination operations.
- Sixteen Canadian-dollar forward contracts hedge forecast revenue through FY2019. About C$27.8m of notional remained outstanding; the contracts had a $0.6m liability fair value and a $0.4m after-tax loss in accumulated other comprehensive income.
- Other stated risks include foreign-exchange movements, customer and economic conditions, labor relations, energy and healthcare costs, acquisition integration, and IT-system or cybersecurity disruptions. Management said liquidity should be adequate for anticipated working capital and capital spending for at least 12 months.
Most important facts for investors to verify
- Whether core organic growth, wearer counts and account retention hold up amid ongoing oil-region customer cutbacks.
- Whether higher selling and administrative costs—including legal, environmental, healthcare and CRM-related spending—continue to pressure margins.
- The timing, cash cost and estimation sensitivity of environmental remediation obligations, particularly at Somerville and Woburn.
- Capital expenditure and acquisition spending relative to operating cash generation, and the status and terms of refinancing the credit facility ahead of its May 2016 maturity.
- Future currency impacts and the effect of Canadian-dollar hedges on reported revenue.