UniFirst Corporation — Q2 FY2014 Form 10-Q
Reporting period: Thirteen weeks ended March 1, 2014; year-to-date figures cover the twenty-six weeks ended that date. Comparisons are against the corresponding periods ended February 23, 2013. UniFirst provides uniform rental, cleaning and related workplace services, with additional manufacturing, specialty garment and first-aid operations. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 FY2014 | Q2 FY2013 | 26 weeks FY2014 | 26 weeks FY2013 |
|---|---|---|---|---|
| Revenue | $344.0 | $334.3 | $690.7 | $666.9 |
| Operating income | $40.7 | $42.9 | $96.4 | $92.8 |
| Operating margin | 11.8% | 12.8% | 14.0% | 13.9% |
| Net income | $25.6 | $26.6 | $60.1 | $57.4 |
| Diluted EPS, Common Stock | $1.27 | $1.33 | $2.98 | $2.86 |
| Operating cash flow | — | $109.1 | $92.5 |
- Q2 revenue rose 2.9%, while operating income fell 5.0% and net income fell 3.7%. Q2 cost of revenues increased to 62.7% of revenue from 62.3%; selling and administrative expense rose to 20.3% from 19.7%.
- For the first half, revenue increased 3.6%, operating income 3.8%, and net income 4.7%. Net margin was 8.7%, compared with 8.6%.
- First-half cash used in investing was $44.4, including $44.1 of capital expenditures. Operating cash flow less capital expenditures was approximately $65.0.
- At March 1, 2014, cash and equivalents were $157.2; current assets were $524.1 and current liabilities $173.4, producing working capital of $350.7. The current ratio was approximately 3.0.
- Debt was approximately $9.1, including current maturities and long-term debt. UniFirst had no revolver borrowings, $49.7 of letters of credit outstanding and $200.3 available under its $250.0 revolving credit facility; it reported covenant compliance.
Changes, operating drivers and management outlook
- Core Laundry Operations revenue grew 3.8% in Q2 and 4.9% year to date. Management cited stronger new-account sales and annual price adjustments; comparisons were affected by a prior-year large-customer buyout and a weaker Canadian dollar. Excluding specified comparison effects and acquisitions, Core Laundry growth was 4.3% for Q2 and 4.7% year to date.
- Specialty Garments revenue declined 9.7% in Q2 and 11.1% year to date, mainly from reduced U.S. and Canadian power-reactor business. First Aid revenue increased 2.9% and 2.1%, respectively.
- First-half cash declined $40.2, primarily reflecting repayment at maturity of $100.0 of floating-rate notes in September 2013. The notes were repaid from cash reserves; lower interest expense followed.
- Two acquisitions were completed in the first half for aggregate consideration of approximately $0.7; they were not significant to consolidated results.
- Management said cash, future operating cash flows and revolver availability should meet anticipated working-capital and capital-expenditure needs for at least 12 months. The filing provides no specific revenue or earnings guidance.
- Management expects healthcare costs to rise, including costs from Affordable Care Act plan changes and transitional reinsurance fees in fiscal 2015–2017. The Unity 20/20 CRM project had $31.3 capitalized; deployment was expected to begin in the second half of fiscal 2015, with training, deployment and higher depreciation costs anticipated.
Risks, contingencies and unusual items
- Environmental remediation liabilities were $19.6 at March 1, 2014. Identified sites include Woburn and Somerville, Massachusetts, and other locations. The EPA was reviewing Woburn remediation matters; the company was also negotiating potential penalties over alleged Clean Air Act permitting violations at seven New England facilities.
- In the NECC litigation concerning the contaminated-drug outbreak, UniFirst reported claims or demand letters relating to approximately 300 patients as of March 28, 2014. Insurers issued reservation-of-rights letters. Management could not estimate potential losses and stated that uncovered liability could be material.
- Foreign-currency movements, particularly weakness in the Canadian dollar, adversely affected revenue. The company did not hedge foreign-currency exposure; 9.7% of first-half revenue was denominated in currencies other than the U.S. dollar.
- Other disclosed risks include fuel and energy prices, customer employment and economic conditions, labor and healthcare costs, seasonal fluctuations, nuclear-facility regulation, and CRM implementation. Management noted that second and fourth fiscal quarters have historically been weaker.
Investor verification points
- Review whether Core Laundry growth and pricing offset Q2 margin pressure, and whether Specialty Garments’ reactor-related weakness persists.
- Track environmental remediation spending and EPA permitting discussions, including any change in the $19.6 recorded liability.
- Monitor NECC claim developments, insurer coverage and any ability to estimate exposure.
- Assess the effect of healthcare and energy costs and the timing and expense of Unity 20/20 deployment.
- Confirm cash generation, capital spending and borrowing capacity after the $100.0 note repayment.