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UNF > SEC Filings for UNF > Form 10-Q on 4-Apr-2013All Recent SEC Filings

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Form 10-Q for UNIFIRST CORP


4-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR FOR FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and any documents incorporated by reference contain forward looking statements within the meaning of the federal securities laws. Forward looking statements contained in this Quarterly Report on Form 10-Q and any documents incorporated by reference are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward looking statements may be identified by words such as "estimates," "anticipates," "projects," "plans," "expects," "intends," "believes," "seeks," "could," "should," "may," "will," or the negative versions thereof, and similar expressions and by the context in which they are used. Such forward looking statements are based upon our current expectations and speak only as of the date made. Such statements are highly dependent upon a variety of risks, uncertainties and other important factors that could cause actual results to differ materially from those reflected in such forward looking statements. Such factors include, but are not limited to, uncertainties caused by the continuing adverse worldwide economic conditions, uncertainties regarding our ability to consummate and successfully integrate acquired businesses, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, any adverse outcome of pending or future contingencies or claims, our ability to compete successfully without any significant degradation in our margin rates, seasonal fluctuations in business levels, our ability to preserve positive labor relationships and avoid becoming the target of corporate labor unionization campaigns that could disrupt our business, the effect of currency fluctuations on our results of operations and financial condition, our dependence on third parties to supply us with raw materials, any loss of key management or other personnel, increased costs as a result of any future changes in federal or state laws, rules and regulations or governmental interpretation of such laws, rules and regulations, uncertainties regarding the price levels of natural gas, electricity, fuel and labor, the impact of adverse economic conditions and the current tight credit markets on our customers and such customers' workforces, the level and duration of workforce reductions by our customers, the continuing increase in domestic healthcare costs, demand and prices for our products and services, rampant criminal activity and instability in Mexico where our principal garment manufacturing plants are located, our ability to properly and efficiently design, construct, implement and operate our new CRM computer system, additional professional and internal costs necessary for compliance with recent and proposed future changes in Securities and Exchange Commission, New York Stock Exchange and accounting rules, strikes and unemployment levels, our efforts to evaluate and potentially reduce internal costs, economic and other developments associated with the war on terrorism and its impact on the economy, general economic conditions and other factors described under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended August 25, 2012 and in other filings with the Securities and Exchange Commission. We undertake no obligation to update any forward looking statements to reflect events or circumstances arising after the date on which such statements are made.

Business Overview

UniFirst Corporation, together with its subsidiaries, hereunder referred to as "we", "our", the "Company", or "UniFirst", is one of the largest providers of workplace uniforms and protective clothing in the United States. We design, manufacture, personalize, rent, clean, deliver, and sell a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks, aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent industrial wiping products, floor mats, facility service products and other non-garment items, and provide first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies.

We serve businesses of all sizes in numerous industry categories. Typical customers include automobile service centers and dealers, delivery services, food and general merchandise retailers, food processors and service operations, light manufacturers, maintenance facilities, restaurants, service companies, soft and durable goods wholesalers, transportation companies, and others who require employee clothing for image, identification, protection or utility purposes. We also provide our customers with restroom supplies, including air fresheners, paper products and hand soaps.

At certain specialized facilities, we also decontaminate and clean work clothes that may have been exposed to radioactive materials and service special cleanroom protective wear. Typical customers for these specialized services include government agencies, research and development laboratories, high technology companies and utilities operating nuclear reactors.

We continue to expand into additional geographic markets through acquisitions and organic growth. We currently service over 240,000 customer locations in the United States, Canada and Europe from 219 customer service, distribution and manufacturing facilities.

As discussed and described in Note 11 to the Consolidated Financial Statements, we have five reporting segments: US and Canadian Rental and Cleaning, Manufacturing ("MFG"), Corporate, Specialty Garments Rental and Cleaning ("Specialty Garments") and First Aid. We refer to the laundry locations of the US and Canadian Rental and Cleaning reporting segment as "industrial laundries" or "industrial laundry locations", and to the US and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our "core laundry operations."


Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in conformity with United States generally accepted accounting principles ("US GAAP"). As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, the most important and pervasive accounting policies used and areas most sensitive to material changes from external factors. See Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 25, 2012 for additional discussion of the application of these and other accounting policies.

Results of Operations

The following table presents certain selected financial data, including the percentage of revenues represented by each item, for the thirteen and twenty-six weeks ended February 23, 2013 and the thirteen and twenty-six weeks ended February 25, 2012. Cost of revenues presented in the table below include merchandise costs related to the amortization of rental merchandise in service and direct sales as well as labor and other production, service and delivery costs associated with operating our industrial laundries, Specialty Garments facilities, First Aid locations and our distribution center. Selling and administrative costs include costs related to our sales and marketing functions as well as general and administrative costs associated with our corporate offices and operating locations including information systems, engineering, materials management, manufacturing planning, finance, budgeting, and human resources.

                                             Thirteen weeks ended                                                Twenty-six weeks ended
(In thousands,          February        % of        February        % of          %          February        % of        February        % of          %
except percentages)     23, 2013         Rev.       25, 2012        Rev.        Change       23, 2013        Rev.        25, 2012         Rev.       Change

Revenues               $   334,306       100.0 %   $   309,959       100.0 %        7.9 %   $   666,875       100.0 %   $   622,984       100.0 %        7.0 %

Operating expenses:
Cost of revenues (1)       208,421        62.3         201,437        65.0          3.5         409,972        61.5         396,576        63.7          3.4
Selling and
administrative
expenses (1)                65,817        19.7          61,197        19.7          7.5         130,105        19.5         120,321        19.3          8.1
Depreciation and
amortization                17,179         5.1          16,489         5.3          4.2          33,950         5.1          32,897         5.3          3.2
Total operating
expenses                   291,417        87.2         279,123        90.1          4.4         574,027        86.1         549,794        88.3          4.4

Income from
operations                  42,889        12.8          30,836         9.9         39.1          92,848        13.9          73,190        11.7         26.9

Other (income)
expense                       (326 )      -0.1            (250 )      -0.1         30.4            (793 )      -0.1             319         0.1       -348.6

Income before income
taxes                       43,215        12.9          31,086        10.0         39.0          93,641        14.0          72,871        11.7         28.5
Provision for income
taxes                       16,573         5.0          11,890         3.8         39.4          36,239         5.4          27,873         4.5         30.0

Net income             $    26,642         8.0 %   $    19,196         6.2 %       38.8 %   $    57,402         8.6 %   $    44,998         7.2 %       27.6 %

(1) Exclusive of depreciation on our property, plant and equipment and amortization on our intangible assets.

General

We derive our revenues through the design, manufacture, personalization, rental, cleaning, delivering, and selling of a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks and aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent industrial wiping products, floor mats, facility service products, other non-garment items, and provide first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies. We have five reporting segments, US and Canadian Rental and Cleaning, Manufacturing ("MFG"), Corporate, Specialty Garments Rental and Cleaning ("Specialty Garments"), and First Aid. We refer to the US and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our "core laundry operations."

Cost of revenues include merchandise costs related to the amortization of rental merchandise in service and direct sales as well as labor and other production, service and delivery costs, and distribution costs associated with operating our core laundry operations, Specialty Garments facilities, and First Aid locations. Selling and administrative costs include costs related to our sales and marketing functions as well as general and administrative costs associated with our corporate offices and operating locations including information systems, engineering, materials management, manufacturing planning, finance, budgeting, and human resources.


The price of fuel and energy needed to run our vehicles and equipment is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns, limits on refining capacities, natural disasters and environmental concerns. Future increases in fuel costs could impact our results going forward.

The current worldwide economic uncertainty may negatively impact our revenues and operating performance in fiscal 2013 and beyond due to the impact on spending plans and employment levels of our customers and sales prospects. Throughout fiscal 2012 and into fiscal 2013, U.S. and Canadian unemployment rates remained high, which had a negative effect on wearer levels and, as a result, on our business.

Thirteen weeks ended February 23, 2013 compared with thirteen weeks ended

February 25, 2012

Revenues

                                         February 23,       February 25,        Dollar         Percent
(In thousands, except percentages)           2013               2012            Change         Change

Core Laundry Operations                 $      301,629     $      277,247     $   24,382             8.8 %
Specialty Garments                              22,593             23,501           (908 )          -3.9
First Aid                                       10,084              9,211            873             9.5
Consolidated total                      $      334,306     $      309,959     $   24,347             7.9 %

For the thirteen weeks ended February 23, 2013, our consolidated revenues increased by $24.3 million from the comparable period in fiscal 2012, or 7.9%. This increase was due to a $24.4 million increase in revenues from our core laundry operations. Core laundry operations' revenues increased to $301.6 million for the thirteen weeks ended February 23, 2013 from $277.2 million for the comparable period of fiscal 2012, or 8.8%. Excluding the effect of acquisitions and a stronger Canadian dollar, core laundry operations' revenues grew primarily due to organic growth of 8.3%, which is comprised of new sales, additions to our existing customer base and price increases offset by lost accounts and reductions to our existing customer base. Organic growth benefited from solid new account sales. In addition, certain annual price adjustments also contributed to the revenue growth during the quarter. Our revenues continue to benefit from higher charges for lost and damaged merchandise as well as higher garment make-up and emblem charges compared to a year ago. Core laundry operations' revenues were positively impacted during our second fiscal quarter of 2013 by a customer buyout that increased organic growth by 0.8%.

Specialty Garments' revenues decreased to $22.6 million in the second fiscal quarter of 2013 from $23.5 million in the comparable period of 2012, a decrease of 3.9%. This decrease was primarily the result of the completion of two large power reactor rebuild projects in the fourth quarter of fiscal 2012. This segment's results are often affected by the timing and length of its customers' power reactor outages as well as its project-based activities. First Aid revenues increased by $0.9 million, or 9.5%, for the thirteen weeks ended February 23, 2013 as compared to the same period in fiscal 2012 as a result of improved performance from the segment's wholesale distribution and pill packaging operations.

Cost of Revenues

For the thirteen weeks ended February 23, 2013, cost of revenues decreased to 62.3% of revenues, or $208.4 million, from 65.0% of revenues, or $201.4 million, for the thirteen weeks ended February 25, 2012. This decrease was primarily due to lower merchandise, energy, payroll, and other production costs as a percentage of revenues in our core laundry operations, primarily due to the strong revenue growth this segment experienced in the thirteen weeks ended February 23, 2013. These lower costs as a percentage of revenues were partially offset by an increase in cost of revenues for the Specialty Garments' segment as a percentage of revenues due to the revenue contraction that segment experienced during the quarter.

Selling and Administrative Expense

For both the thirteen weeks ended February 23, 2013 and February 25, 2012, our selling and administrative expenses were 19.7% of revenues, or $65.8 million and $61.2 million, respectively. We benefited from lower payroll costs as a percentage of revenues due to the strong growth experienced during the second quarter of fiscal 2013, however, this benefit was offset by higher payroll-related costs.

Depreciation and Amortization

Our depreciation and amortization expense was $17.2 million, or 5.1% of revenues, for the thirteen weeks ended February 23, 2013 compared to $16.5 million, or 5.3% of revenues, for the thirteen weeks ended February 25, 2012. The increase in depreciation and amortization expense was due to capital expenditure and acquisition activity in earlier periods.


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