UniFirst Corporation — Q2 FY2015 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended February 28, 2015; comparisons are with the periods ended March 1, 2014. Unaudited. Unless stated otherwise, financial amounts are in millions of dollars.
Business context
UniFirst provides uniform and protective-workwear rental, cleaning, delivery and sales, along with facility supplies, specialty garment services and first-aid products. Its reporting segments are Core Laundry Operations, Specialty Garments and First Aid. It serves more than 275,000 customer locations in the U.S., Canada and Europe.
Financial performance
| Metric | 13 weeks ended Feb. 28, 2015 | 13 weeks ended Mar. 1, 2014 | 26 weeks ended Feb. 28, 2015 | 26 weeks ended Mar. 1, 2014 |
|---|---|---|---|---|
| Revenue | $361.5 | $344.0 | $731.8 | $690.7 |
| Operating income | $41.6 | $40.7 | $102.1 | $96.4 |
| Net income | $25.4 | $25.6 | $62.9 | $60.1 |
| Diluted EPS, Common Stock | $1.26 | $1.27 | $3.11 | $2.98 |
| Operating margin | 11.5% | 11.8% | 14.0% | 14.0% |
| Net margin | 7.0% | 7.5% | 8.6% | 8.7% |
- Quarterly revenue rose 5.1%; Core Laundry Operations grew 6.0%, including 6.1% organic growth. First-half revenue increased 6.0%, with Core Laundry up 6.8% and 7.0% organic growth.
- Quarterly operating income grew 2.0%, while net income declined 0.8%. For the first half, operating income rose 6.0% and net income rose 4.6%.
- Cost of revenues improved to 61.9% of revenue in the quarter from 62.7%, and to 60.6% for the half from 61.3%, primarily from lower fuel costs; first-half results also benefited from lower production payroll costs. Selling and administrative expense rose to 21.4% of quarterly revenue from 20.3%, and to 20.4% for the half from 19.6%.
- Quarterly segment revenue: Core Laundry Operations $332.1 million, up 6.0%; Specialty Garments $18.7 million, down 8.6%; First Aid $10.7 million, up 3.4%. Specialty Garments weakness reflected reduced North American reactor work and currency effects; First Aid’s first-half growth was 10.4%.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $107.0 million, versus $109.1 million a year earlier. Investing used $60.8 million, including $45.5 million of capital expenditures and $15.1 million for acquisitions. Financing provided $1.6 million.
- At February 28, 2015, cash and cash equivalents were $231.5 million, working capital was $445.7 million, and total assets were $1.491 billion. Management said cash, future operating cash flow and available credit should cover anticipated working capital and capital spending for at least 12 months.
- There were no revolver borrowings; $53.2 million of letters of credit left $196.8 million available under the $250 million credit facility, which matures May 4, 2016. The company reported compliance with its covenants. Balance-sheet debt consisted of $5.6 million of loans payable and current maturities, with no long-term debt reported.
- Cash increased $39.7 million from August 30, 2014. The company held $58.0 million of cash outside the U.S., intended for indefinite investment in foreign subsidiaries.
Material changes, outlook and risks
- Quarterly selling and administrative costs included a $3.6 million increase in environmental reserves, mainly related to expected costs near the planned Somerville transit station. Environmental liabilities totaled $22.5 million at quarter-end, up from $19.8 million at fiscal year-end.
- UniFirst reported hundreds of lawsuits related to New England Compounding Center (NECC). Under a February 2015 agreement, insurers would pay the full $30.5 million settlement. The agreement depends on bankruptcy-court confirmation of the plan and releases that are not adversely changed; $30 million is to remain in escrow pending appeals. If the agreement fails, litigation could resume, and uninsured or underinsured exposure could be material.
- Management said sustained low oil prices could reduce business from oil-sector customers and related markets; it expects this revenue and profit risk to outweigh lower fuel and plant-energy costs. The filing noted early reductions in wearer counts among customers linked to energy production.
- Healthcare costs have grown faster than revenue. Required plan changes and ACA transitional reinsurance fees are expected to add costs, though the amount is uncertain. The company also projected higher fiscal 2015 merchandise amortization as a percentage of revenue following increased garment placements in fiscal 2014.
- Foreign currency movements, particularly the Canadian dollar, reduced revenue by 1.0% in the quarter and 0.8% in the first half. The company entered into 16 Canadian-dollar forward contracts covering approximately CAD 31.0 million through fiscal Q2 2019; the recorded fair-value loss was $0.6 million.
- UniFirst had capitalized $39.4 million on its Unity 20/20 customer relationship management project and did not anticipate deployment in fiscal 2015; continued investment and eventual depreciation are expected. Other risks cited include seasonality, labor and energy costs, competition, acquisition integration, IT disruption and environmental remediation.
- No quantified earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year performance and that results are affected by seasonality and timing of customer and reactor activity.
Most important facts for investors to verify
- Whether Core Laundry organic growth and customer wearer counts remain resilient as low oil prices affect energy-linked customers.
- Whether the NECC settlement receives the required confirmation and survives appeals with the agreed releases intact.
- Whether environmental remediation estimates, including Somerville and Woburn exposures, require further reserve increases.
- How healthcare expense, merchandise amortization and CRM investment affect future operating margins and cash flows.
- Whether currency movements and the Canadian-dollar hedges materially affect reported revenue and comprehensive income.