UniFirst Corporation (UNF) — FY2013 Form 10-K
Reporting period: Fiscal year ended August 31, 2013. Fiscal 2013 included 53 weeks, with a 14-week fourth quarter; fiscal 2012 included 52 weeks. The filing is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context and financial performance
UniFirst provides uniform and protective-clothing rental, cleaning, delivery and sales, along with facility services and first-aid supplies. Its largest business is U.S. and Canadian rental and cleaning. It served more than 250,000 customer locations and operated 225 customer-service, distribution and manufacturing facilities.
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,355.5 million | $1,256.3 million | +7.9% |
| Income from operations | $186.2 million | $151.1 million | +23.2% |
| Operating margin | 13.7% | 12.0% | +1.7 percentage points |
| Net income | $116.7 million | $95.0 million | +22.8% |
| Diluted EPS, common stock | $5.81 | $4.76 | +22.1% |
| Operating cash flow | $211.6 million | $159.4 million | +$52.2 million |
| Capital expenditures | $103.5 million | $74.5 million | +$29.0 million |
Cost of revenue declined to 61.7% of revenue from 63.5%, lifting the implied gross margin before selling and administrative costs and depreciation to 38.3% from 36.5%. Net margin was 8.6%, compared with 7.6%. The effective tax rate increased to 37.8% from 37.0%.
Fourth quarter: Revenue was $352.9 million, income before tax $48.1 million, net income $30.6 million and diluted common-stock EPS $1.52. Prior-year fourth-quarter revenue was $312.4 million, net income $22.5 million and diluted EPS $1.13. FY2013’s fourth quarter had one additional week, so the reported comparison is not on equal-length periods.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $197.5 million at year-end, up from $120.1 million; working capital was $302.5 million. Current assets were $561.4 million and current liabilities $258.9 million.
- Reported debt was $111.4 million, including $100 million of floating-rate notes due in September 2013. The notes were repaid at maturity on September 14, 2013 using cash on hand. At August 31, the company had no revolving-credit borrowings, $47.1 million of letters of credit and $202.9 million available under its $250 million revolving facility, maturing in 2016.
- Management said cash, operating cash flow and available credit were expected to cover anticipated working-capital and capital needs for at least 12 months. Fiscal 2014 capital expenditures were projected at $90–$100 million, including continued investment in the customer relationship management system.
- Fiscal 2013 operating cash flow was $211.6 million; investing activities used $134.2 million, including $103.5 million of capital spending and $30.7 million for seven acquisitions. The company paid $2.9 million of cash dividends.
Changes, outlook and management commentary
- Core Laundry Operations revenue rose 9.2% to $1,214.4 million; management cited 6.9% organic growth, 0.3% acquisition-related growth and approximately 2.0% growth from the extra fiscal week. New account sales, price adjustments, merchandise-recovery charges and flame-resistant products contributed. Lower wearer levels at existing customers, reflecting persistent unemployment, were a partial offset.
- Specialty Garments revenue fell 5.9% to $96.7 million and operating income declined 21.7%, primarily following completion of two large reactor-rebuild projects in FY2012. First Aid revenue rose 7.9% to $44.5 million, with improved performance across its operations.
- Operating margin improvement reflected lower merchandise, energy and payroll costs as a share of revenue in Core Laundry Operations and lower bad-debt expense. FY2012 selling and administrative expense included a $6.7 million environmental-litigation settlement gain; excluding that gain, the company said selling and administrative costs declined as a share of revenue in FY2013.
- No specific revenue or earnings guidance was provided. Management cautioned that economic conditions, customer employment and spending, competition and energy costs could affect FY2014 results. Fiscal results are seasonal; historically the second and fourth quarters have been lower than the first and third. Nuclear-service revenue varies with plant outages and refueling schedules.
Risks, contingencies and unusual items
- Environmental exposure: Recorded environmental liabilities were $19.7 million at August 31, 2013. Identified net anticipated remediation costs, before inflation and discounting adjustments, were $21.5 million. The company reported EPA Clean Air Act notices concerning permits at seven New England facilities and said penalties were probable but not reasonably estimable. Additional Woburn-site work and potential Central Area exposure remain unresolved.
- NECC matter: UniFirst received an indemnification demand related to limited monthly cleanroom cleaning services for New England Compounding Center. The company considered the demand without merit, but said potential loss was neither probable nor remote and could not be reasonably estimated. It had not been named in the lawsuits as of the filing date, but anticipated possible claims; insurance discussions were ongoing.
- Other risks include competition and customer retention, economic weakness and workforce reductions among customers, fuel and energy prices, currency movements, labor relations, acquisitions and integration, Mexico operating and security conditions, and successful implementation of the new CRM system. Nuclear-facility regulation may disrupt specialty operations.
- Foreign-currency translation reduced comprehensive income; the company reported a $6.1 million translation loss in FY2013. It did not operate a hedging program for foreign-currency exposure. Goodwill and intangible assets had no impairment recorded in FY2013.
Important facts for investors to verify
- How much FY2013 growth and earnings improvement persists after adjusting for the extra week and the prior-year environmental settlement gain.
- Whether core organic growth, wearer levels, pricing and customer retention remain favorable, and whether Specialty Garments stabilizes after project-related revenue declines.
- Actual FY2014 capital spending and the cost, timing and operational effects of the CRM implementation.
- Developments in environmental remediation and EPA permitting matters, including whether penalties or additional Central Area work become estimable.
- Any NECC-related claims, insurance coverage and potential exposure, which the filing said could not be estimated.
- Cash and debt after the September 2013 note repayment, and whether liquidity remains consistent with management’s stated 12-month outlook.
- Control and governance implications of the Croatti family’s approximately 76.9% of combined voting power, despite owning approximately 26.2% of outstanding shares.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.