UniFirst Corporation — Q1 FY2012 Form 10-Q
Business context and period: UniFirst provides uniform and protective-clothing rental, cleaning, delivery and sales, along with specialty garment and first-aid services. The unaudited quarter comprised the 13 weeks ended November 26, 2011; comparisons are with the 13 weeks ended November 27, 2010. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $313.0 | $273.1 | +14.6% |
| Operating income | $42.4 | $39.2 | +8.1% |
| Operating margin | 13.5% | 14.3% | -0.8 percentage points |
| Income before taxes | $41.8 | $37.7 | +10.8% |
| Net income | $25.8 | $23.8 | +8.6% |
| Net margin | 8.2% | 8.7% | -0.5 percentage points |
| Diluted EPS, Common Stock | $1.30 | $1.20 | +8.3% |
| Operating cash flow | $30.7 | $27.2 | +$3.5 |
Core laundry operations revenue rose 14.1% to $272.3 million, including 12.1% organic growth, 1.9% acquisition-related growth and 0.1% favorable currency impact. Specialty Garments revenue increased 17.3% to $30.3 million; First Aid revenue increased 22.1% to $10.5 million.
Cost of revenues increased to 62.3% of revenue from 59.8%, chiefly due to higher merchandise costs and fuel costs. Selling and administrative expense fell to 18.9% of revenue from 20.2%, and depreciation and amortization declined to 5.2% of revenue from 5.7%. The effective tax rate rose to 38.3% from 37.0%; the prior-year rate benefited from reversals of state tax contingency reserves. Net interest income in the current quarter, versus net interest expense in the prior period, reflected debt repayment and the expiration of an interest-rate swap; foreign-exchange losses partly offset that benefit.
Cash, liquidity and debt
Cash and cash equivalents were $54.1 million at November 26, 2011, up from $48.8 million at August 27, 2011. Working capital was $269.8 million. Operating cash flow of $30.7 million funded $14.0 million of capital expenditures and contributed to debt repayment; financing cash flow was a net use of $8.8 million. Cash increased $5.3 million during the quarter.
Total reported debt was approximately $111.7 million, including $11.5 million of current maturities and $100.2 million of long-term debt. Under the $250 million revolving credit facility maturing in May 2016, the company had $7.0 million drawn, $43.2 million in letters of credit and $199.8 million available. The $100 million floating-rate notes mature in September 2013. UniFirst reported compliance with debt covenants. It also disclosed $44.9 million of cash held outside the U.S. and expected to be invested indefinitely in foreign subsidiaries; repatriation would likely incur additional U.S. income taxes.
Outlook, risks and contingencies
- Management expected higher merchandise costs to continue during fiscal 2012 and negatively affect margins, reflecting garment investment to support growth, strong demand for protective garments and higher fabric prices. Recent fuel-cost increases also pressured delivery and production costs; further increases could affect results.
- Management said economic weakness and high unemployment could hurt customer spending and employment, weighing on revenue and operating performance. Results are subject to seasonality, including variation in customer purchasing and rental patterns and the timing of nuclear-plant outages.
- Environmental remediation liabilities were $19.3 million at quarter-end. The company identified multiple remediation sites and potential exposure in the Woburn, Massachusetts Central Area; EPA comments on site remedies and investigations remained unresolved. The company had responded to an EPA information request concerning laundering of soiled towels. Management cautioned that estimates, regulatory developments, insurance recoveries and other parties’ participation could change liabilities.
- Management believed contingencies beyond accrued amounts or insurance would not materially harm consolidated financial position or results, but said future periods could be affected by changing assumptions or circumstances. Other exposures include litigation and regulation of nuclear garment decontamination facilities.
- No numerical full-year revenue or earnings guidance was provided. Management said available cash, operating cash generation and credit availability should cover anticipated working-capital and capital-expenditure needs for at least 12 months.
Most important facts to verify
- Whether strong organic core-laundry growth continues and whether it converts into improved operating margins.
- The trajectory of merchandise, fabric and fuel costs and their effect on margins during fiscal 2012.
- Environmental remediation estimates, insurance recoveries and the outcome of EPA matters, particularly at Woburn.
- Cash generation, capital spending and debt repayment, including the use and availability of revolving credit and the treatment of overseas cash.
- Quarter-to-quarter seasonality and foreign-currency exposure; 9% of quarterly revenue was denominated in currencies other than the U.S. dollar, and the company did not hedge foreign-subsidiary currency exposure.