UniFirst Corporation — Q3 FY2011 Form 10-Q
Business context and reporting period
The quarter ended May 28, 2011 (13 weeks); year-to-date covers 39 weeks. UniFirst rents, cleans, manufactures and sells workwear and related workplace products, and provides specialty garment and first-aid services. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions.
Financial performance and position
- Revenue: Q3 revenue was $291.6 million, up 11.6% year over year; 39-week revenue was $843.3 million, up 9.4%. Core laundry operations grew 10.6% in Q3 and 8.3% year to date. Management attributed core growth to organic growth, acquisitions and favorable Canadian currency effects.
- Profit and margins: Q3 operating income was $29.1 million versus $32.1 million; operating margin was 10.0% versus 12.3%. Net income was $18.4 million versus $19.3 million, and diluted common-stock EPS was $0.93 versus $0.98. For 39 weeks, operating income was $96.0 million versus $101.6 million, operating margin was 11.4% versus 13.2%, net income was $58.5 million versus $59.1 million, and diluted EPS was $2.94 versus $3.03.
- Costs: Cost of revenues rose to 63.5% of revenue in Q3 from 60.7%, and to 62.2% year to date from 60.3%. Higher merchandise and fuel costs were primary pressures. Selling and administrative expense was 20.9% of Q3 revenue versus 21.0%; depreciation and amortization was 5.6% versus 6.1%.
- Cash flow: Operating cash flow was $56.0 million for 39 weeks, down from $99.8 million. Working-capital uses included increases in rental merchandise in service ($25.7 million), receivables ($20.4 million) and inventory ($18.8 million). Capital expenditures were $49.4 million; business acquisitions used $17.3 million. Cash declined $12.3 million to $109.0 million.
- Liquidity and debt: Working capital was $221.7 million. At May 28, cash was $109.0 million and debt carrying amounts totaled approximately $180.4 million, including $50.2 million current maturities. A new $250 million unsecured revolving facility matures in May 2016; no borrowings were outstanding at quarter-end, $39.2 million of letters of credit were issued and $210.8 million remained available. The company reported covenant compliance. Subsequent to quarter-end, $75 million of fixed-rate notes matured and were repaid using about $45 million of cash and $30 million drawn under the facility.
- Other metrics: The effective tax rate was 35.2% for Q3 and 36.8% year to date; the year-to-date rate declined from 38.0%, partly due to resolved state tax audits and lower Canadian tax rates. Seven acquisitions were completed year to date for approximately $17.3 million.
Material changes versus prior comparable periods
- Revenue growth did not translate into higher operating profit: Q3 operating income fell 9.2% and year-to-date operating income fell 5.5%, reflecting cost-of-revenue pressure.
- Core laundry operating income declined 14.1% in Q3 and 9.5% year to date. Specialty Garments and First Aid operating income increased in both periods.
- Operating cash flow decreased substantially year over year, while capital spending increased to $49.4 million from $37.3 million for the comparable 39 weeks.
- Q3 core laundry organic growth was 8.7%; year-to-date organic growth was 6.5%. Acquisition-related growth was 1.4% in each comparison, with favorable currency effects also contributing.
Outlook, commentary, risks and unusual items
- Management expected elevated merchandise costs to continue at least through the remainder of fiscal 2011 and said higher fuel and energy costs could continue to pressure results. Drivers included new garments placed in service to support wearer growth, initial outfitting of new accounts, increased use of higher-cost flame-resistant garments, and rising cotton and oil-based fabric prices. No numerical earnings or revenue guidance was provided.
- Management said cash, operating cash generation and available credit were expected to cover anticipated working-capital and capital-expenditure needs for at least 12 months.
- Environmental remediation liabilities were $16.9 million at May 28, 2011. The filing describes multiple remediation sites and ongoing investigation at Landover, Maryland; actual costs could differ from estimates. Management did not expect unaccrued or uninsured contingencies in aggregate to materially harm consolidated results or financial position, while noting that future periods could be affected.
- Other disclosed risks include economic and customer employment conditions, energy and labor costs, acquisition integration, competition and margins, labor relations, foreign-currency movements, regulatory requirements and nuclear-facility licensing. Approximately 9% of revenue was denominated in non-U.S. currencies; the company did not maintain a currency hedging program.
- The $100 million interest-rate swap matured in March 2011. The filing identifies no material changes to previously disclosed contractual obligations or risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether revenue growth can offset continued merchandise, fuel, energy and delivery-cost inflation, particularly in core laundry margins.
- Whether the marked decline in operating cash flow reflects temporary investment in receivables, inventory and rental merchandise or a persistent working-capital trend.
- Debt and liquidity after the June 2011 note repayment, including future borrowing needs, interest costs and covenant headroom.
- Performance and integration of the seven acquisitions, alongside organic growth and segment-level profitability.
- Changes in estimated environmental remediation costs, insurance recoveries and regulatory exposure at identified sites.