UniFirst Corporation (NYSE: UNF) — FY2014 Form 10-K
Reporting period: Fiscal year ended August 30, 2014 (52 weeks). The filing also reports unaudited fourth-quarter results. Fiscal 2013 had 53 weeks, including a 14-week fourth quarter, so year-over-year comparisons are affected by the extra week.
Business context
UniFirst provides workplace uniform and protective-clothing rental, cleaning, delivery and sales, along with facility, first-aid and specialized nuclear and cleanroom services. It served more than 260,000 customer locations from 226 facilities. Approximately 90% of FY2014 revenue came from Core Laundry Operations; Specialty Garments and First Aid contributed approximately 7% and 3%, respectively.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1,394.9 million | $1,355.5 million |
| Operating income / margin | $193.3 million / 13.9% | $186.2 million / 13.7% |
| Net income / net margin | $119.9 million / 8.6% | $116.7 million / 8.6% |
| Diluted EPS, Common Stock | $5.95 | $5.81 |
| Cash from operating activities | $194.6 million | $211.6 million |
| Capital expenditures | $91.8 million | $103.5 million |
| Cash and cash equivalents at year-end | $191.8 million | $197.5 million |
| Working capital at year-end | $398.2 million | $296.4 million |
| Notes payable and long-term debt | $7.9 million | $111.4 million |
FY2014 cost of revenue was 61.5% of sales, versus 61.7% in FY2013; selling and administrative expense was 19.5%, versus 19.4%. The effective tax rate rose to 38.6% from 37.8%. The company reported $2.1 million of net other income, including $0.8 million of interest expense and $3.1 million of interest income.
Fourth quarter: Revenue was $352.0 million, pretax income $47.7 million, tax provision $18.8 million, net income $28.9 million and diluted Common Stock EPS $1.43. In Q4 FY2013, revenue was $352.9 million, pretax income $48.1 million, net income $30.6 million and diluted EPS $1.52. The prior-year quarter had an extra week.
Liquidity and debt: The company had no borrowings under its $250 million revolving credit agreement at year-end, with $200.4 million available after $49.6 million of letters of credit. It repaid $100 million of floating-rate notes at maturity in September 2013. Management said cash, future operating cash flow and available credit should cover anticipated working-capital and capital-expenditure needs for at least 12 months.
Changes versus prior period
- Revenue increased 2.9% reported; excluding the estimated effect of FY2013’s extra week, management reported growth of 4.8%. Core Laundry Operations grew 3.7% reported and 5.7% excluding the extra week, including 5.2% organic growth and 1.1% acquisition-related growth.
- Core Laundry operating income rose 6.8% to $182.3 million. Specialty Garments revenue fell 5.4% and operating income fell 31.9%, largely due to reduced U.S. and Canadian reactor business. First Aid revenue fell 1.2% reported, while operating income declined 23.1%.
- Operating margin improved by 0.2 percentage points, principally reflecting lower Core Laundry merchandise amortization as a share of revenue. Higher legal costs contributed to a slight increase in selling and administrative expense as a share of revenue.
- Operating cash flow declined $17.0 million, primarily due to lower deferred-tax cash benefits and higher working-capital investment, including inventories and rental merchandise in service. Cash used in investing fell to $94.2 million, including $3.6 million for acquisitions; financing used $104.3 million, principally reflecting debt repayment.
Outlook, risks and unusual items
- No specific numerical FY2015 revenue or earnings guidance is provided. Management cited uncertain economic conditions and customer employment levels as potential headwinds.
- Management expected higher merchandise amortization as a percentage of revenue in FY2015 because garment placements had increased to serve existing wearers. It also expected healthcare costs to rise due to Affordable Care Act plan changes and transitional reinsurance fees in FY2015–FY2017.
- The company had capitalized $36.4 million for its Unity 20/20 CRM initiative. Management did not anticipate deployment during FY2015; future periods will include depreciation of the investment. The project had experienced delays.
- UniFirst was named in claims relating to the New England Compounding Center outbreak involving approximately 650 patients as of October 17, 2014. A mediation did not produce a settlement. The company said loss was neither probable nor remote, but it could not estimate a potential loss range; insurers had issued reservation-of-rights letters. Uninsured or excess liability could be material.
- Environmental remediation liabilities were accrued at $19.8 million. Exposure includes multiple sites, including Woburn and Somerville, Massachusetts; actual costs could exceed accruals. Nuclear-facility regulation, shutdowns and decommissioning costs also create uncertainty.
- Other cited risks include competition and pricing pressure, fuel and energy costs, foreign-exchange movements, labor and healthcare costs, customer retention, Mexico security conditions, and information-technology disruption. Foreign-currency revenue was 9.8% of total; the company did not hedge currency exposure.
- The family of the controlling shareholders held approximately 76.7% of combined voting power. The company reported no goodwill or other intangible-asset impairment in FY2014.
Important facts for investors to verify
- Review the FY2013 extra-week adjustment when assessing reported growth, particularly Q4 comparisons.
- Track Core Laundry organic growth, wearer levels, customer retention and pricing, alongside continued weakness in Specialty Garments and First Aid.
- Monitor the NECC litigation, insurance coverage and any change in the company’s ability to estimate or accrue potential losses.
- Assess environmental remediation and nuclear-facility decommissioning estimates against actual payments and regulatory developments.
- Follow FY2015 merchandise amortization, healthcare costs and Unity 20/20 spending and implementation progress.
- Confirm cash-flow conversion, capital spending, available revolver capacity and the effect of foreign exchange on reported results.
Ernst & Young LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of August 30, 2014.