UniFirst Corporation — Q1 FY2015 Form 10-Q
Business context and period: UniFirst provides workplace uniforms, protective clothing, laundry and facility services, specialty garment services, and first-aid supplies. The quarter covered 13 weeks ended November 29, 2014; comparisons are with the 13 weeks ended November 30, 2013. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $370.4 million | $346.7 million | +6.8% |
| Operating income | $60.6 million | $55.6 million | +8.9% |
| Net income | $37.4 million | $34.5 million | +8.6% |
| Diluted EPS, Common Stock | $1.85 | $1.71 | +8.2% |
| Operating margin | 16.4% | 16.0% | +0.4 percentage points |
| Net margin | 10.1% | 9.9% | +0.2 percentage points |
- Cost of revenues declined to 59.2% of revenue from 60.0%; selling and administrative expense rose to 19.5% from 18.9%, reflecting higher NECC-related legal and CRM project costs.
- Operating cash flow was $52.8 million, down from $68.6 million, primarily due to a $19.8 million unfavorable working-capital change, partly offset by higher earnings.
- Investing cash outflow was $28.2 million, including $17.5 million in capital expenditures and $10.8 million for acquisitions. Financing cash outflow was $0.5 million. Cash increased $21.2 million to $213.0 million.
- At November 29, 2014, working capital was $426.7 million. Current assets were $620.4 million and current liabilities $193.7 million.
- Debt and borrowing: no revolver borrowings; $53.2 million of letters of credit and $196.8 million of availability under the $250 million revolver, which matures May 2016. The balance sheet reports $6.1 million of current loans payable/current maturities and no long-term debt. The company stated it was covenant-compliant.
Material changes and segment results
- Core Laundry Operations revenue increased 7.6% to $335.8 million, including 7.8% organic growth, supported by new account sales and annual price adjustments. Segment operating income rose 8.6% to $56.9 million.
- Specialty Garments revenue fell 8.0% to $22.5 million, mainly due to reduced U.S. and Canadian power-reactor business; operating income decreased 17.8% to $2.3 million.
- First Aid revenue increased 17.4% to $12.0 million, and operating income increased to $1.4 million from $0.5 million, reflecting stronger sales.
- Two acquisitions were completed for approximately $10.8 million in aggregate. They were not significant enough to require pro forma results.
- Other comprehensive loss was $7.6 million, largely from $6.3 million of foreign-currency translation losses and $1.3 million of pension-related losses; comprehensive income was $29.8 million versus $34.3 million.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management said cash, operating cash generation and revolver availability should meet anticipated working-capital and capital-expenditure needs for at least 12 months.
- Management warned that prolonged low oil prices could reduce demand from energy-sector customers and related businesses, potentially outweighing fuel-cost savings. Healthcare costs, energy prices, customer employment and spending, competition, labor relations, acquisitions, foreign exchange and IT execution were also cited as risks.
- Management expects higher merchandise amortization as a percentage of revenue in FY2015 as more garments are placed in service. The CRM initiative, Unity 20/20, had $39.7 million capitalized; deployment was not anticipated during FY2015, and future depreciation and ongoing implementation costs are expected.
- NECC litigation: claims or demands related to approximately 665 patients were reported as of January 5, 2015. Mediation did not produce a settlement; discussions resumed. Insurers issued reservation-of-rights letters. The company said potential loss was neither probable nor remote, but it could not reasonably estimate a loss range; uninsured or excess liability could be material.
- Environmental remediation liabilities were accrued at $20.0 million. Estimated net future remediation costs were $20.1 million, before the effects of inflation and discounting; exposure and estimates may change. The filing identifies multiple sites and unresolved EPA matters.
- Foreign-currency movements reduced quarterly revenue by approximately 0.7%; transaction losses were about $0.4 million. The company does not hedge foreign-currency exposures.
Important facts for investors to verify
- Whether core organic growth and margin improvement persist, particularly if low oil prices weaken energy-related demand.
- Developments in NECC litigation, settlement prospects, insurance coverage and any eventual loss estimate.
- Changes in environmental remediation obligations, insurance recoveries and unresolved regulatory matters.
- CRM project spending, timing and execution, and the expected impact of future depreciation and garment amortization.
- Working-capital trends and operating cash flow, which declined year over year despite higher net income.