UniFirst Corporation — Q3 FY2014 Form 10-Q
Reporting period: Thirteen weeks ended May 31, 2014; year-to-date results cover thirty-nine weeks. Comparisons are with the periods ended May 25, 2013. Amounts are in U.S. dollars.
Business context
UniFirst provides uniform and protective-clothing rental, cleaning and sales, along with facility services, specialty garment services and first-aid supplies. It reported five segments: US and Canadian Rental and Cleaning, Manufacturing, Corporate, Specialty Garments and First Aid.
Financial performance and liquidity
| Metric | Q3 FY2014 | Q3 FY2013 | 39 weeks FY2014 | 39 weeks FY2013 |
|---|---|---|---|---|
| Revenue | $352.2m | $335.8m | $1,042.9m | $1,002.6m |
| Operating income | $49.5m | $45.8m | $145.9m | $138.6m |
| Operating margin | 14.0% | 13.6% | 14.0% | 13.8% |
| Net income | $30.9m | $28.7m | $91.1m | $86.1m |
| Net margin | 8.8% | 8.6% | 8.7% | 8.6% |
| Diluted EPS, Common Stock | $1.53 | $1.43 | $4.52 | $4.29 |
- Q3 revenue rose 4.9%; management cited 4.8% organic growth in Core Laundry Operations, excluding currency and acquisition effects. YTD revenue rose 4.0%; excluding the prior-year large customer buyout, management said growth would have been 4.3%.
- Q3 cost of revenues improved to 61.5% of revenue from 62.0%, while selling and administrative expense held at 19.3%. For the 39 weeks, cost of revenues was 61.4% versus 61.6%; selling and administrative expense was 19.5% versus 19.4%.
- Operating cash flow for the 39 weeks was $132.3m, down from $139.5m. Capital expenditures were $74.5m, compared with $81.1m. Cash and cash equivalents were $151.0m at May 31, down $46.5m from August 31, 2013. Working capital was $371.7m.
- Balance-sheet debt was approximately $9.5m, compared with $111.4m at August 31, 2013. UniFirst had no revolver borrowings, $49.6m of letters of credit and $200.4m available under its $250m revolving facility; it reported covenant compliance. The $100m floating-rate notes were repaid at maturity in September 2013.
- Quarterly dividends were unchanged at $0.0375 per Common share and $0.0300 per Class B share.
Material changes and management commentary
- Core Laundry Operations drove growth. Specialty Garments revenue increased 4.9% in Q3, but declined 5.6% year to date, reflecting lower reactor outage business in the comparable year-to-date period. First Aid revenue fell 3.4% in Q3 and was essentially flat year to date.
- Core Laundry operating income increased 10.3% in Q3 and 8.9% year to date. Specialty Garments and First Aid operating income declined year to date by 26.1% and 36.1%, respectively.
- Management cited lower merchandise and plant costs as a benefit to Q3 cost of revenues, partly offset by higher healthcare claims and energy costs. Higher legal and environmental expense contributed to year-to-date selling and administrative cost growth.
- No quantitative earnings or revenue guidance is provided. Management said current cash, future operating cash generation and revolver availability should cover anticipated working capital and capital expenditure needs for at least the next 12 months.
- Management expects higher employee healthcare costs, including ACA plan changes and transitional reinsurance fees in fiscal 2015–2017. The Unity 20/20 CRM project had $34.3m capitalized by May 31; deployment was expected to begin in the second half of fiscal 2015, bringing training, deployment and higher depreciation costs.
Risks, contingencies and unusual items
- Environmental remediation liability was $20.0m at May 31, 2014. The company described ongoing work at multiple sites and noted estimates may change with regulatory developments, costs, insurance recoveries and other parties’ participation.
- UniFirst was named in or received demands relating to approximately 475 patients in litigation connected to New England Compounding Center (NECC), as of June 30, 2014. Insurers issued reservation-of-rights letters; mediation was to be attempted. The company said loss was neither probable nor remote and that it could not reasonably estimate potential losses; uninsured liability could be material.
- Foreign currency movements reduced revenue by 0.5% in Q3 and 0.6% year to date. Management also identified exposure to economic conditions, customer employment levels, energy and labor costs, seasonality, labor relations, regulatory requirements and information-technology disruption.
- The company reported no material changes to internal control over financial reporting and said disclosure controls were effective. It adopted updated comprehensive revenue-recognition guidance only in the future, effective for UniFirst on August 27, 2017; its impact was still under evaluation.
Important facts for investors to verify
- Whether Core Laundry’s organic growth and margin improvement persist, and whether weakness in Specialty Garments and First Aid continues.
- Developments in NECC litigation, insurance coverage and any change in the company’s ability to estimate or accrue a potential loss.
- Environmental remediation costs and recoveries, particularly changes to the Woburn and Somerville matters.
- Actual healthcare and ACA costs, and the timing, total investment and operating impact of Unity 20/20 deployment.
- Cash conversion and capital spending trends, including the effect of working-capital timing and the company’s use of available credit.