UniFirst Corporation — Q2 FY2013 Form 10-Q
Reporting period: Quarter ended February 23, 2013 (13 weeks); year-to-date period covers 26 weeks. Comparisons are with the periods ended February 25, 2012. Amounts are in U.S. dollars; financial figures below are in millions unless noted.
Business context and results
UniFirst provides workplace uniforms and protective clothing, rental and laundry services, specialty garment services, and first-aid and safety supplies. It reported five segments, with core laundry operations comprising U.S. and Canadian Rental and Cleaning, Manufacturing, and Corporate.
| Metric | Q2 FY2013 | Q2 FY2012 | First half FY2013 | First half FY2012 |
|---|---|---|---|---|
| Revenue | $334.3 | $310.0 | $666.9 | $623.0 |
| Operating income | $42.9 | $30.8 | $92.8 | $73.2 |
| Operating margin | 12.8% | 9.9% | 13.9% | 11.7% |
| Net income | $26.6 | $19.2 | $57.4 | $45.0 |
| Net margin | 8.0% | 6.2% | 8.6% | 7.2% |
| Diluted EPS, Common Stock | $1.33 | $0.96 | $2.86 | $2.26 |
Revenue increased 7.9% in the quarter and 7.0% year to date. Core laundry revenue grew 8.8% and 8.5%, respectively; management attributed organic growth, excluding acquisitions and currency, to new sales, customer additions, price increases, and higher charges for lost or damaged merchandise and garment make-up and emblem services. A customer buyout added 0.8 percentage points to quarterly organic growth and 0.4 points for the first half.
Cash flow, liquidity and debt
- First-half operating cash flow was $92.5, versus $60.4 a year earlier. Capital expenditures were $50.8, compared with $34.3; acquisitions used $1.6. Cash after capital expenditures was approximately $41.8, versus $26.2 in the prior-year period.
- Cash and cash equivalents were $163.3 at February 23, 2013, up from $120.1 at August 25, 2012. Working capital was $285.0.
- Current debt and loans payable were $110.7 and long-term debt was $0.2, compared with total debt of approximately $107.0 at fiscal year-end. The $100.0 million floating-rate notes mature September 14, 2013; the filing says UniFirst was evaluating repayment or refinancing. The balance-sheet reclassification reflects the approaching maturity.
- The $250.0 million revolving facility matures May 4, 2016. No borrowings were outstanding; $47.0 of letters of credit left $203.0 available. UniFirst reported compliance with debt covenants.
- Management said cash, expected operating cash flow, and available credit should meet anticipated working-capital and capital-expenditure needs for at least 12 months. $58.1 of cash held abroad was expected to remain invested in foreign subsidiaries.
Changes, outlook and risks
Operating performance improved substantially: first-half operating income rose 26.9% and net income rose 27.6%. Cost of revenue fell to 62.3% of revenue for the quarter and 61.5% year to date, from 65.0% and 63.7%, respectively, mainly reflecting lower merchandise, energy, payroll, and other production costs as a share of revenue in core laundry. Selling and administrative expense was 19.7% of quarterly revenue, unchanged year over year, and 19.5% year to date versus 19.3%. Specialty Garments weakened: first-half revenue declined 6.1% and operating income declined 34.6%, partly due to completed reactor rebuild projects and weaker European results. First Aid revenue increased year to date by 2.6%.
No numerical full-year guidance was provided. Management cited continuing economic uncertainty and customer employment levels as potential pressures on revenue and operating performance. Other disclosed risks include energy and labor cost changes, seasonality and reactor-outage timing, currency movements, acquisition integration, and environmental and other legal contingencies. Foreign-currency revenue was about 8.7% of consolidated revenue; the company did not hedge foreign-subsidiary translation exposure. A 10% exchange-rate change would have changed first-half revenue by an estimated $5.8 and period-end assets by $13.8.
Environmental remediation liabilities were $18.6 at February 23, 2013; estimates depend on remediation costs, insurance recoveries, responsible-party participation, and timing. Separately, NECC demanded indemnification related to limited monthly cleaning services at its facilities. UniFirst said it considered the claim without merit, had notified insurers, and could not estimate potential losses; it assessed a loss as neither probable nor remote.
Investor facts to verify
- How the $100.0 million floating-rate notes due September 2013 were ultimately repaid or refinanced, and the effect on cash and borrowing capacity.
- Whether core laundry organic growth and improved cost ratios persisted beyond the reported quarter, including the contribution from the customer buyout and price adjustments.
- Specialty Garments’ recovery prospects given project timing, reactor outages, and weaker European operations.
- Changes in environmental remediation estimates and the status, insurance coverage, and potential exposure related to the NECC demand.
- Cash-flow conversion and capital spending needs, given first-half capital expenditures increased year over year.