UniFirst Corporation — Form 10-Q Summary
Business context and period: UniFirst provides uniform and protective-clothing rental, cleaning, delivery and sales, along with specialty garment and first-aid services. This unaudited report covers the 13 weeks ended November 24, 2012 (first quarter fiscal 2013); comparisons are with the 13 weeks ended November 26, 2011. The company reported five segments and served more than 240,000 customer locations.
Financial performance
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $332.6 million | $313.0 million | +6.2% |
| Operating income | $50.0 million | $42.4 million | +18.0% |
| Operating margin | 15.0% | 13.5% | +1.5 percentage points |
| Net income | $30.8 million | $25.8 million | +19.2% |
| Diluted EPS | $1.54 | $1.30 | +$0.24 |
| Operating cash flow | $56.2 million | $30.7 million | +$25.5 million |
| Capital expenditures | $25.1 million | $14.0 million | +$11.1 million |
Cost of revenues declined to 60.6% of revenue from 62.3%, while selling and administrative expense rose to 19.3% from 18.9%. The effective tax rate was 39.0%, versus 38.3%. Comprehensive income was $31.1 million, compared with $18.4 million, reflecting a much smaller foreign-currency translation loss in the prior-year quarter.
Liquidity and debt: At November 24, 2012, cash and cash equivalents were $152.7 million and working capital was $266.8 million. The balance sheet reported $108.8 million of current loans payable and current maturities and $0.2 million of long-term debt. The company said it had no revolver borrowings, $43.7 million of letters of credit and $206.3 million available under its $250 million revolving facility, maturing May 2016. The $100 million floating-rate notes mature in September 2013. UniFirst reported covenant compliance. Cash increased $32.5 million during the quarter.
Material changes and management commentary
- Core laundry operations revenue grew 8.2%, with organic growth of 8.0%; favorable Canadian currency movements contributed 0.2%. Core operating income increased 27.3% to $44.5 million.
- Specialty Garments revenue fell 7.9% to $27.9 million and operating income fell 28.3% to $4.7 million. Management cited slower starts in European and cleanroom operations and the completion of two large reactor rebuild projects in the prior quarter. First Aid revenue declined 3.4% to $10.1 million.
- Management attributed improved cost of revenues as a percentage of sales largely to strong core growth and lower payroll, energy and other production costs relative to revenue. Selling and administrative costs increased partly because of higher payroll-related costs.
- No acquisitions were completed in the quarter. Capital spending increased; management said cash, future operating cash flow and available credit should fund anticipated working-capital and capital-expenditure needs for at least 12 months. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Environmental remediation liabilities were $19.9 million at quarter-end. Sites include locations in Massachusetts, Texas, California, Vermont, North Carolina and Maryland. Management noted that estimates could change with regulatory, legal, insurance and other developments.
- On December 31, 2012, after quarter-end, UniFirst received an indemnification demand from New England Compounding Center related to limited monthly cleaning services at parts of its cleanroom. UniFirst said it believes the claims lack merit, notified its insurer and could not estimate the outcome or potential loss.
- Management cited continuing economic uncertainty, customer employment and wearer levels, fuel and energy prices, labor costs and relations, competition, currency fluctuations, Mexico-related instability, and the timing of specialty customer projects as risks. Results are seasonal and may vary between quarters.
- Foreign-currency-denominated revenue was approximately 8.7% of consolidated revenue. The company did not hedge currency exposure. Management estimated a 10% exchange-rate movement would change quarterly revenue by about $2.9 million and assets by about $14.2 million; a 10% change in relevant interest rates would affect quarterly interest expense by less than $0.1 million.
Important facts for investors to verify
- Whether core laundry organic growth and margin improvement continue, and whether Specialty Garments and First Aid recover.
- Repayment or refinancing plans for the $100 million notes due September 2013 and changes in revolver availability, cash and covenant headroom.
- Future capital expenditure levels and the conversion of operating cash flow into sustained free cash flow.
- Changes in environmental remediation estimates and the outcome, insurance coverage and potential exposure associated with the NECC demand.
- Exposure to customer employment trends, energy and labor costs, currency movements, and seasonal or project-related variability.