Jun 27, 2012
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Steve Sintros, Chief Financial Officer.
Please go ahead, sir.
Steven Sintros
Thank you, and welcome to the UniFirst Corporation conference call to review our third quarter results for fiscal 2012 and to discuss our expectations going forward.
Steven Sintros
I'm Steven Sintros, UniFirst's Chief Financial Officer. Joining me is Ronald Croatti, UniFirst's President and Chief Executive Officer.
Steven Sintros
Before I turn the call over to Ron, I would like to give a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend and similar expressions that indicate future events and trends identify forward-looking statements.
Actual results may differ materially from those anticipated depending on a variety of factors, including, but not limited to, the continued availability of credit and the performance of the capital markets; the performance of acquisitions; fluctuations in the costs of materials, fuel and labor; and the outcome of pending and future litigation and environmental matters. I refer you to our discussion of these points in our most recent 10-K filing with the Securities and Exchange Commission.
Now, I will turn the call over to Ron Croatti for his comments.
Ronald Croatti
Thank you, Steve. I'd like to welcome everyone joining us for the financial review for the UniFirst third quarter fiscal 2012.
Steve will cover the details in a moment, but first, here's a recap.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
$320.9 million, a 10.1% increase over the $291.6 million reported for the same period in 2011. The primary influences came from steady revenue growth from our core laundry operations and from our First Aid & Safety division, with each setting new revenue records for the quarter.
Net income for the third quarter benefited from the strong revenue performance, also setting a new UniFirst record at $27.5 million, a 49% increase over the $18.4 million reported a year ago. These results include the impact of a $6.7 million gain recognized by the company during the quarter as the result of some environmental litigation settlement.
Steve will provide you with more details.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
As many of you know, our core laundry operations make up the majority of UniFirst's total business. Our laundry has improved revenues by 11.5% and operating income, excluding the impact of the $6.7 million gain, by 31.4% over 2011 third quarter.
Our Specialty Garments segment, which includes nuclear cleaning operations, reported a 4.3% third quarter revenue dip from the same period in 2011, as well as 11.5% decline in operating income when compared to last year. And like our core laundry, our First Aid & Safety segment reported solid revenue and operating income increases for the quarter, reporting 17.7% and 44.7% improvements, respectively, when compared to the same quarter in 2011.
We are very pleased with the results of our third quarter and our first 9 months of fiscal 2012. We remain optimistic about finishing out the year strong in all business units.
And I think it's important to note that our company's recent gains have been achieved without the assistance of any true uniform wearer growth in the market. In fact, we have seen -- we haven't seen any significant uniform wearer increases since before the downturn that began in 2008.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
Over the past year, our markets have continued to improve slowly from the depths of the recession, as evidenced by the stabilization in our customer wearer adds over reductions. Until we start seeing national employment change consistently in the neighborhood of about 300,000 jobs per month, we don't expect to benefit from any dramatic improvements in our traditional uniform rental opportunities.
We also continued to experience ongoing cost increases in several areas of our core operations, so we maintain our top and bottom line momentum by continuing to focus on what we do best and what is within our control.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
We continued to expertly service and demonstrate UniFirst's value to our current customer base, while continuing committing to our new sales efforts, both on local and national account levels, and we'll continue controlling our spend to invest only in projects that benefit our customers and bring measurable return on investment.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
In support of the service area, we recently completed development of UniFirst's new service certification program for all team partners who directly interact with customers. Whether new hires or long-tenured personnel, all service staff are now required to complete this new comprehensive certification programs that better prepare them to consistently excel at customer service at all levels, at all times.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
As far as long-term goals in the service area, as we mentioned in our last webcast, we have launched our Unity 2020 development project that will overhaul the company's CRM service systems over the next 2 years. The Unity 2020 initiative will further improve overall operational efficiencies company-wide.
It'll provide new online access and reporting features for customers who desire more accountability and a visibility control over their uniform program. It will include flexible proprietary technologies to assist our sales reps, service managers and customer service reps deliver new levels of service to our customers.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
In the sales area, our reps will continue driving our organic growth price by specifically targeting healthy growing industries by approaching both current uniform users and all programmers alike and by effectively communicating the bottom line value UniFirst delivers to its customers.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
Our PR and marketing efforts will also continue to positively impact sales by further increasing UniFirst's name recognition and brand awareness in the markets we service.
I am happy to report that despite a difficult economic environment for the fiscal period, UniFirst revenues for the third quarter of 2012 set a new record
In the business acquisition area, we remain actively in pursuing any complementary business that makes good sense for UniFirst. We truly believe that by managing our operations and our spending carefully, by our team partners maintaining their unrelenting focus on customer service and retention, putting our sales teams companywide, effectively communicating the UniFirst's value proposition, and by our UniFirst managers following our founding principles based on respect for others, we'll continue our historic track record of success.
In a few months, we expect to be reporting solid growth for the fiscal year. And with that, I'll turn it back over to Steve for his comments.
Steven Sintros
Thanks, Ron. Revenues for the quarter, as Ron discussed, were $320.9 million, up 10.1% from $291.6 million for the third quarter a year ago.
Net income was $27.5 million, or $1.37 per diluted common share, compared to the third quarter of fiscal 2011 when net income was $18.4 million or $0.93 per diluted common share. The results from the third quarter include the impact of a settlement the company entered into in March 2012 related to environmental litigation.
This settlement resulted in a $6.7 million gain, which was recorded as a reduction to selling and administrative expense. The gain positively impacted earnings by diluted common share by $0.21 and consists of amounts previously received but not recognized into income, as well as amounts the company received in the third quarter.
Excluding this gain, net income was $23.2 million or $1.16 per diluted common share, up 26.1% from the prior year. Core laundry revenues grew 11.5% overall and 10.9% organically for the quarter.
The calculation of organic growth, as always, excludes the impact of acquisitions, which contributed 0.9% and a slightly weaker Canadian dollar, which negatively impacted revenues 0.3%. Core laundry revenues continue to benefit from strong local and national account sales.
In addition, certain annual price adjustments, as well as the overall improvement in the pricing environment, contributed to the revenue growth during the year.
Steven Sintros
Wearer additions versus reductions were slightly negative during the quarter but slightly positive year-to-date. Our revenues also continue to benefit from strong growth in our flame resistant and high visibility product lines, in addition to higher charges for lost and damaged merchandise and higher garment make up and emblem charges compared to a year ago.
Excluding the impact of the $6.7 million gain, the operating margin for the core laundry operations increased to 10.5% during the quarter, up from 8.9% in 2011. The increase in adjusted operating margins for this segment was due to improved operating leverage as a result of the strong revenue growth.
Production costs, depreciation, energy, as well as overall selling and administrative costs were lower as a percentage of revenue as compared to a year ago.
Steven Sintros
Overall, energy costs for the quarter were 5.6% compared to 6.4% in the third quarter of 2011. Both fuel for our fleet of delivery vehicles, as well as natural gas costs, were lower as a percentage of revenues.
The positive impact of these items more than offset the effect of merchandise amortization, which continues to be higher as a percentage of revenues. The increased merchandise cost during the quarter is primarily the result of the continued strong growth in our flame resistant and high visibility product lines.
In addition, the margin during the quarter was impacted by costs incurred related to the companywide initiative to update our CRM systems, as Ron discussed.
Steven Sintros
Revenue for the Specialty Garment segment, which consists of our nuclear decontamination and cleanroom operations was $29.3 million for the third quarter, down from a record $30.6 million in fiscal 2011. As a result of the revenue decline, income from operations for this segment also decreased to $5 million in the quarter compared to $5.7 million a year earlier.
As we've discussed previously, this segment's revenues and profits can fluctuate from quarter-to-quarter based on the seasonal timing of power reactor outage activity, as well as the mix of products and services that we provide to our customers. Year-to-date, this segment's revenues and operating income are up 3.9% and 5.4%, respectively.
Steven Sintros
First Aid segment revenues increased 17.7% to a record $10.5 million in the quarter compared to $8.9 million in the same quarter a year ago. Income from operations for this segment increased 44.7% to a record $1.4 million from $0.9 million in 2011.
The top and bottom line growth for this segment are the result of improved performances from both it's pill packaging and van operations during the quarter.
Steven Sintros
The comparison of net income for the quarter also benefited from a decrease in interest expense of $1.1 million compared to the third quarter of fiscal 2011. The decrease in interest expense is due to the expiration of an interest rate swap in March 2011, as well as the repayment of $75 million in private placement notes that came due in June 2011.
The effective income tax rate for the quarter of fiscal 2012 and 2011 was 35.2%. The effective income tax rate in both periods was positively impacted by the reduction of tax contingency reserves as a result of statute expirations.
The company expected it's effective income tax rate for the fourth quarter to be approximately 38%. Our balance sheet and overall financial position continued to be very strong.
At the end of the third quarter, the company had $78.8 million of cash and cash equivalents on hand, up from $48.8 million at the end of fiscal 2011. Of the cash and cash equivalents on hand, $48.8 million is in Canada and intended for investments outside the United States.
Steven Sintros
As of the quarter end, total debt was $104.6 million and total debt as a percentage of capital was 10.7%, both down from $120.3 million and 13.1%, respectively, at the end of fiscal 2011. During the first 9 months of the year, cash provided from operating activities was $106.8 million, up 90.9% from $56 million for the same period a year ago.
As expected, the increase was primarily due to higher net income, as well as lower working capital cash outflows. We continue to expect working capital cash outflows to be lower over the remainder of the year compared to a year ago.
Capital expenditures for the first 9 months of fiscal 2012 were $59.3 million. We estimate capital expenditures for the full year will be between $75 million and $80 million.
As we discussed in the prior quarter, the higher capital expenditure levels are partially result of costs related to our CRM systems project.
Steven Sintros
Although we did not complete any acquisitions during the quarter, we continue to evaluate targets. Acquisitions continue to be an integral part of our short and long-term strategic objectives.
Steven Sintros
Based on the strength of our results year-to-date, as well as our outlook for the fourth quarter, we are raising our full year fiscal 2012 guidance. We now project fiscal 2012 revenues to be between $1.252 billion and $1.257 billion and diluted earnings per share to be between $4.60 and $4.70.
Just to be clear, the earnings guidance includes the impact of the $0.21 gain recognized in the third quarter that I discussed earlier. Embedded in this guidance is also the assumption that the core laundry operations revenues will grow between 7% and 8% during the fourth quarter.
This also assumes relatively flat wearer levels during the fourth quarter, as we have not seen to date any strong indications of a real positive or negative trend. This completes our prepared remarks, and we'll now be happy to any answer any questions you may have.
Operator
[Operator Instructions] And now our first question comes from the line of John Healy.
Matt Madej
This is actually Matt Madej calling in for John Healey. I was hoping maybe you guys could give us your thoughts on what you're thinking about growth opportunities.
Where are you seeing the biggest contributors of growth, and where do you see the largest potential?
Ronald Croatti
All right. Matt, this is Ron.
Basically, I think we've been experiencing some great growth in the energy sector, and we're also experiencing some growth in the healthcare sector. And I would think that the healthcare sector will continue.
The energy sector, with oil dropping, could be questionable long-term, but healthcare will always be a good growth opportunity for the company.
Matt Madej
Okay, great. And then just a quick follow-up to that.
In terms of flame resistant garments, where do you guys think we are in terms of industry adoption, and how do you guys think about the growth potential for that garment type?
Ronald Croatti
Well, I think -- this is Ron, again, Matt. I think the growth potential is out there as long as the oil prices are high.
I think part of the issue is a lot of the gas, or natural gas opportunities, with gas being low, right now they're punching the wells but they're really not extruding the natural gas because of the recent rate. I think the natural gas prices will eventually come up and that will still provide a good opportunity.
Operator
Our next question comes from the line of Chris McGinnis.
Chris McGinnis
I just wanted to ask, just the growth that you are seeing, can you just maybe dig into that a little bit more? I know you don't want to comment on pricing itself, but maybe can you put in a couple buckets of what's the main drivers in maybe ancillary services?
If you could just dig a little bit deeper into that.
Steven Sintros
Yes, Chris, this is Steve. I mean, we've been talking over the course of the year.
It's really been the accumulation of really a number of things: our large -- strong local account sales, strong national account sales. Clearly, we've been doing more on the national account side over the last 12 months to 24 months, really, than we have previously.
It's hard to really pinpoint to say local account sales is the biggest piece versus national accounts versus pricing versus flame resistant garments, because it's really all of those things in accumulation of them. Ron, I don't know if you want to add to that, but it's really been all those things.
Ronald Croatti
No, I think Steve's right on. There's not one big thing, it's a lot of little things just moving along.
Steven Sintros
But I'll just to add to that, Chris, we talked about, and we're kind of foreshadowing this with a little bit lower growth expectations in the fourth quarter, that some of the impact of the price adjustments that came out of the higher cotton prices a year ago starting to annualize and are going to make comparisons a little tougher.
Chris McGinnis
Sure, understood. Can you just maybe talk a little bit about the price environment with the seemingly -- the economy itself maybe slowing here, how is the price being perceived and the ability to pass that on right now?
Ronald Croatti
This is Ron, Chris. Basically, we've seen pricing stabilize at the local level.
I think the national account level is still pretty competitive, but most companies right now, they absorb the price increase we put through last fall. And things seem to be running very well.
Steven Sintros
I think you hit the nail on the head though. As long as the economy stays stable, that will continue.
If we start to fall back down, like we did a few years ago, that's when things became more challenging on the price side.
Chris McGinnis
Sure. And then just lastly, can you just maybe talk about new accounts in the quarter, how much of a percent that was of the growth.
Steven Sintros
We don't break out the different pieces, Chris, but like we said it was a contributing factor. New accounts is always the largest contributing factor to our growth, and I'd say it's similar to what its been in the past, but we're not going to get down into the details.
Chris McGinnis
Sure. Sorry, I meant just what was up year-over-year?
Was it -- usually you give like a 40% or 50% number, typically.
Steven Sintros
I'm sorry. Yes, new account growth was at similar levels to what it was a year ago.
Operator
Our next question comes from the line of Justin Hauke.
Justin Hauke
I guess I wanted to ask -- the last couple of questions have been about the revenue side, but on the profit side, even adjusted for the gain this quarter, your operating margins were above 11%. And seemingly, I think that's against still a pretty tough headwind from your garment costs.
And I guess just trying to think about as we look into '13, how your margin trends can look, especially as some of that amortization hit falls off?
Steven Sintros
Yes, I don't think we're ready to really guide specifically, but we'll give you some directional information. It's our goal to get the margin back to 13%, coming through these periods of high amortization, and we're really trending towards that.
And I think that will continue. I think the merchandise will start to moderate and continue to moderate through 2013.
What energy prices do and some of those other things, will clearly have an impact as well, but I think we feel pretty good about being able to hold the margins where they are and maybe even improve them a little bit if the merchandise continues to fall.
Justin Hauke
What was the -- last quarter, I think it was a 250 basis point year-over-year headwind, what was it this quarter?
Steven Sintros
It was about 1.7% this quarter, but trending down.
Justin Hauke
I'm sorry?
Steven Sintros
It's trending down.
Justin Hauke
Trending down, okay. And then I guess my other question, and I feel like we ask this every quarter but I'm going to ask it again, just on the balance sheet, you're essentially at a net cash position here.
I think this was your strongest free cash flow quarter in several years. Just any thoughts there on kind of what you're thinking, anything new versus the past?
Ronald Croatti
I think, Justin, what we've seen in the last couple of months is a pick up in acquisitions. So I think we'll be spending some money on some acquisitions in the short-term.
As far as anything else, I think we're just looking at acquisitions, that's what we're building towards.
Operator
Our next question comes from the line of Joe Box.
Joe Box
I just wanted to actually follow-up on Justin's question. So in terms of acquisitions, it sounds like you might be willing to do something that is adjacent to the core laundry business.
Can you maybe just expand on that and note or just comment on some of the potential deals that you're seeing out there without being too specific?
Steven Sintros
Yes, I don't think we were specifically making a comment to that effect. I think we have seen -- I think Ron's comment was more to say that we're seeing a pick up of acquisition activity and interest from sellers in the laundry business.
So his comment wasn't particular to ancillary or adjacent industries, although we always do kind of keep our eyes open for adjacent industries. So I'm not sure if his comment was specifically towards that.
I don't know if you want to add to that, Ron.
Ronald Croatti
No, no. It's focused towards the laundry business.
Joe Box
Okay, great. That clarification is helpful.
Steve, you mentioned that there was a lower adequate metric in the quarter. I guess, was that change driven by any weakness in the energy market due to lower energy prices or has the weakness been more broad based?
Steven Sintros
More broad based. What I will say is that in previous quarters, some of the areas that caused us to be positive was related to energy, and some of that slowed down a little.
Energy -- our energy markets are still positive but maybe not to the extent that they were 6 months ago.
Joe Box
What are your customers saying in terms of future hiring in this market?
Ronald Croatti
I think we're finding our customers being very conservative.
Joe Box
Okay, fair enough. Just a question on your CRM system.
Can you maybe just give us any color on implementation costs and timing of the rollout? And then Ron, earlier you mentioned some benefits that would be for the customer, but can you just comment on any potential savings that might be generated for UniFirst or any revenue growth opportunity?
Steven Sintros
Sure, this is Steve. We mentioned in the last webcast that the overall cost of the project was in the $30 million to $35 million range, and that they would be incurred throughout fiscal 2013 and into early 2014.
And it's really that kind of early to mid 2014 timeframe when we'd be working on the deployment of the technology. As far as the benefits go, as you mentioned, Ron mentioned some for the customer.
There's a number of administrative and kind of time-saving type improvements that will come from the further integrated system and help with overall administrative costs and the flow of information. So I think there's some hard savings we're targeting on the internal costs side.
That combined with, I think, benefits to the customers and the potential to improve overall customer service, hopefully reduce customer turn. You know it's really where we're targeting the return from the system.
Joe Box
Okay. And then obviously earlier you were mentioning a 13% margin target, would this system potentially put you north of that 13% target?
Steven Sintros
I'm not sure when the 13% margin target came up. I think, longer-term, I think that's something we will shoot toward, we may have referenced that in the past.
I think this system will help achieve that, yes. I think it's going to provide us a foundation for the next 5 to 10 years to leverage the business as well as we can.
Obviously, there's a number of other things that need to happen to achieve that level of margin, including taking some of our underperforming operations and adding market share and density to those markets, either through acquisition or additional sales, to get the margins in those parts of the country or markets up toward our average. And I think that will naturally help the margin, but the system will provide us the foundation.
Operator
Our next question comes from the line of Andrew Steinerman.
Molly McGarrett
This is Molly McGarrett for Andrew. Going back to merchandise amortization, it looks like it's decelerating, or the growth is decelerating year-over-year.
I was wondering when you'd expect that to stabilize. Whether we could expect that in the fourth quarter or not until beginning of fiscal '13.
Steven Sintros
I guess it depends on what you mean by stabilize. We're starting to look at 2013 and see what our merchandise projections are.
In the fourth quarter, it will still be year-over-year headwind. My estimation is, at some point next year, that will completely flatten out.
But I'm not ready to say exactly what that point is yet.
Molly McGarrett
Okay. And then I'm not sure if you parsed it out this way, but looking at the impact of the flame resistant, the higher cost garments you're putting in place, if you remove those garments from the merchandise costs, would there still be a headwind?
I'm just trying to get a sense of what their impact is on merchandise growth, overall.
Steven Sintros
Yes, right now that is making up the bulk of the headwind during the quarter.
Operator
[Operator Instructions] Our next question comes from the line of Kevin Steinke.
Kevin Steinke
Steve, I think last quarter you talked about SG&A as a percent of revenue trending back towards the 20% type level in the near-term as it did this quarter, and is that kind of your expectation for fiscal 2013, as well as the spending on the CRM system progresses, or any more color on the SG&A front?
Steven Sintros
Yes, I think that's a pretty good level where we're at right now. I think we'll try to hold that level.
There will be some costs along the way related to the CRM project, but I think my comments still hold.
Operator
Mr. Sintros, there are no further questions at this time.
Ronald Croatti
All right. We'd like to thank you, all, again for the interest in our company and look forward to speaking to you in the fall when we're reporting our UniFirst fourth quarter and our full year results for fiscal 2012.
Thank you and have a great day.
Operator
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.