Oct 23, 2013
Executives
Steven S. Sintros - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance Ronald D.
Croatti - Chairman, Chief Executive Officer and President
Analysts
Justin P. Hauke - Robert W.
Baird & Co. Incorporated, Research Division John M.
Healy - Northcoast Research Christopher McGinnis - Sidoti & Company, LLC Kevin M. Steinke - Barrington Research Associates, Inc., Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the UniFirst Corporation conference call.
[Operator Instructions] I will now like to turn the conference over to Steve Sintros, Chief Financial Officer with UniFirst Corporation. Please go ahead, sir.
Steven S. Sintros
Thank you, and welcome to the UniFirst Corporation conference call to review our fourth quarter and full year results for fiscal 2013, and to discuss our expectations going forward. I'm Steven Sintros, UniFirst's Chief Financial Officer.
Joining me today is Ronald Croatti, UniFirst's President and Chief Executive Officer. This call will be on a listen-only mode until we complete our prepared remarks.
Now 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 future 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 legal and environmental matters. I refer you to our discussion of these risk factors in our most recent 10-K and 10-Q filings with the Securities and Exchange Commission.
Now I will turn the call over to Ron Croatti for his comments.
Ronald D. Croatti
Thank you, Steve, and welcome to the review of UniFirst's fourth quarter and full year results for fiscal 2013. Our numbers were released earlier today, and I am pleased to report that they showed another year of record financial results for our company.
We continue to grow our operations, gain market share, reached in existing and new geographic areas, exploited more vertical market opportunities, add products to our core service offering and built upon the ongoing strength of our organization. It should be noted upfront that fiscal year 2013 had 53 weeks of operations compared to last year's traditional 52 weeks.
So the impact of our financial results is about 2% on reported company growth. Steve will go over the fourth quarter and full year numbers in detail, as well as our guidance for fiscal 2014, but here's a rundown of our fiscal 2013 performance.
Our fiscal 2013 UniFirst revenues were a new record, $1,356,000,000, or a 7.9% increase from the 2012 $1,256,000,000. Net income also climbed to a new high of $116.7 million, up 22.8% from last year's $95 million.
I'd like to thank our entire management team, our thousands of Team Partners throughout North America and Europe for the continued dedication to UniFirst, to unwavering commitment to our customers, who fully understand and acknowledge that in the end, it's our people that allow UniFirst to grow, and that allows us to continue to lead our industry of customer service and product quality. Our Core Laundry Operations, which make up about 90% of UniFirst's overall business, reported 9.2% year-over-year revenue increase to $1,214,000,000 in 2013, setting a new revenue record for the segment.
Excluding the extra week of operations, the Core Laundry grew at 7.2% for the year. The revenue improvement was primarily a result of solid new account sales, both by our professional field and National Account reps; continued growth in flame resistant and the high visibility safety markets; sustained improvement in collections of ancillary charges; positive customer pricing and a slight improvement in customer retention.
Operating income for our Laundry has also set a new fiscal year record, increased by 28% to $170.7 million in 2013 when compared to 2012. The improvement was largely a reflection of a strong revenue growth for the year, coupled with improved productivity and cost controls from our field operations as well as moderating merchandise amortization.
Meanwhile, our Specialty Garment business, which provides workwear, safety products, related services to the nuclear and cleanroom industry, reported a dip in revenues and operating income when compared to fiscal 2012, dropping off 5.9% and 20.7%, respectively. As many of you know, the nature of this big [ph] business is very cyclical, most notably on the nuclear side.
So fluctuations such as these are not uncommon. As such, we expect this segment to begin showing more positive performance trending as the result of the nuclear division benefiting from scheduled reactor projects in the years to come.
And cleanroom division continues to gain market share in the specialized ultra cleaning industries it serves. But for fiscal 2014, we expect another down year for the Specialty Garments segment.
Steve will elaborate more with more details. And like our Core Laundry business, our First Aid operations made up of route-based first aid services, pharmaceutical pill packaging, wholesale operations, reported record-setting revenues and operating results.
For 2013, First Aid revenues increased 7.9%, while operating income improved 14.6% over 2012. We expect this segment to continue performing well in 2014, capitalizing on the expanded industrial distribution partnerships, its wider product and service offering, its growing route-based first aid supply business.
Hence pharmaceutical packaging and wholesale operations that continue to grow by providing private label OTC medications to an increased number of retail chain stores and specialty distributors. So as we look ahead to UniFirst Corporation's expected performance for the coming year, we're optimistic about the outlook and expect another year of solid growth for 2014, although not quite to the level achieved over the past 2 years, that's because of several factors.
For example, the economy is forecast to remain lackluster at best, and employment growth is expected to remain slow. And as I mentioned in the past, until we start seeing national employment gains consistently in the neighborhood of 300,000 jobs per month, we don't expect to benefit from any dramatic improvements in our traditional uniform rental opportunities.
We also continue to be challenged by strong competition and price pressures on the new sales side and by leveling off in the increased demand of the flame resistant apparel. As these safety garments tend to be priced higher than the traditional uniforms, they can have a measurable effect on our top line.
And as much, we'll be required to maintain maximum efficiencies in the delivery of all our top-notch customer services and we'll need to continue upholding our strict cost controls on the operations side. Nevertheless, we believe the indicators and our historic track record still favor a positive performance in the coming year.
We'll continue to succeed, and we've done in recent years, on effectively executing our corporate-wide Vista [ph] 20/20 strategic growth plan as well as the individual business plans that each of our local operations develop and follow in line with our corporate goals. These important planned documents our financial targets and the strategies needed to achieve them.
Our Vista [ph] plan also reflects our determined commitment to achieve both service excellence, quality of new sales as the key driver to organic growth. And as always, we consider any business acquisitions that meet the criteria consistent with our goals.
As for the long-term goals service area, we continue with the development of Unity 20/20 project that is now overhauling the company's entire CRM and service systems. Although not exactly completed -- I'm sorry, although not expected to be completed in 2014, the Unity 20/20 initiative will ultimately provide UniFirst with a competitive edge by maximizing overall operational efficiencies company-wide and providing our array of new servicing options for our customers.
And to help maintain our leadership position in products and service quality, we continue to focus on our ISO 9001:2008 certification programs for individual service operations as an integral component of continuous improvement in quality assurance plans. We are looking forward to many challenges that lie ahead and hope to report new financial milestones for our company at fiscal year 2014.
And for the same time, we expect to continue producing both short- and long-term returns for our shareholders. And with that, let me turn it back over to our Chief Financial Officer, Steve Sintros, for more details and the outlook ahead.
Steven S. Sintros
Thank you, Ron. Revenues for the fourth quarter were $352.9 million, up 13% from $312.4 million a year ago.
Net income was $30.6 million or $1.52 per diluted share, compared to $22.5 million or $1.13 per diluted share reported in the fourth quarter of fiscal 2012. As a reminder, as Ron mentioned, the fourth quarter, as well as the full fiscal year, included an extra week of operations compared to fiscal 2012, as fiscal 2013 was a 53-week year for the company.
The extra week in fiscal 2013 accounted for revenue growth of approximately 8.1% and 2% compared to the fourth quarter and full year of fiscal 2012, respectively. Full year revenues were $1.356 billion, up 7.9% from $1.256 billion in fiscal 2012.
Net income per diluted share for the full year was $5.81 compared to $4.76 from the same period a year ago. Full year results in fiscal 2012 included the positive effect of a settlement related to environmental litigation, which resulted in a $6.7 million pretax gain in the third quarter of 2012.
The gain was recorded as a reduction of selling and administrative expenses. Diluted earnings per share for fiscal 2012 adjusted to eliminate the effect of the gain were $4.55.
Fiscal 2013 diluted earnings per share increased 27.7% compared to the adjusted earnings from a year ago. Fourth quarter revenues in our Core Laundry Operations were $320.4 million, up 13.8% from those reported in the prior year's fourth quarter.
Excluding the impact of the extra week of operations, acquisitions and a slightly weaker Canadian dollar, revenues grew 5.3%. Acquisitions accounted for growth during the quarter, of 0.6%, primarily related to the acquisition of a 2-plant operation in South Carolina that we completed during the quarter.
The company's revenues continued to benefit from solid new account sales. In addition, certain annual price adjustments as well as higher collections of merchandise recovery charges also contributed to the revenue growth during the quarter.
Wearer additions versus reductions were negative in the fourth quarter and remain negative year-to-date. We continued to see relative weakness in the economy in the industry that traditionally employ uniformed workers.
Employers remain hesitant to take on additional costs, including adding to headcounts. We believe the uncertainty around the adoption of the Affordable Care Act continues to contribute to employers' hesitancy to add full-time workers.
Core Laundry operating margin for the quarter was 14.2% compared to 12.3% a year ago. The increase in the quarterly operating margin was primarily the result of lower merchandise amortization, plant labor and bad debt expense as a percentage of revenues compared to the prior year.
These positive comparisons were partially offset by higher health care claims and other payroll-related costs as a percentage of revenues. The results of operations for our Core Laundry business for both the fourth quarter and fiscal -- of fiscal 2013 and 2012 benefited from reductions in reserves for workers compensation and other insurance-related liabilities of approximately $2.3 million and $1.9 million, respectively, due to changes in third party actuarial estimates.
Energy costs for both the fourth quarter of fiscal 2013 and 2012 were 5.2%. Our operating results continue to benefit from improvements in some of our underperforming laundry plants.
These gains, as well as strong execution in our plant operations, as well as in the collection of merchandise recovery charges, had helped our overall margins throughout fiscal 2013. Revenues from our Specialty Garments segment, which consists of nuclear decontamination and cleanroom operations, were $19.9 million in the quarter, up slightly from $19.7 million in the quarter -- same quarter of fiscal 2012.
This segment had income from operations for the quarter of $1 million, compared to a loss from operations of $0.7 million in the same quarter a year ago. The improvement in profitability was primarily the result of several nonrecurring expense items in the fourth quarter of fiscal 2012.
For the full year, this segment's revenues and operating income were down 5.9% and 21.7%, respectively. This decline is primarily due to the completion of 2 major projects in the latter part of 2012.
This segment's European operations also suffered from the shutdown of several nuclear power reactors in Germany. In addition, a number of outages scheduled for this year have been delayed or have not materialized at the levels expected.
First Aid segment revenues increased 14.2% to $12.5 million in the quarter, compared to $11 million in the same quarter a year ago. Revenues benefited from an extra week of operations, which accounted for growth of approximately 8% during the quarter.
Income from operations for this segment decreased to $1.1 million in the quarter from $1.4 million in 2012. The decrease in operating income was primarily due to an inventory adjustment recorded during the fourth quarter of 2013.
For the full year, First Aid revenues were up 7.9% and operating income was up 14.6%. The effective income tax rate for the fourth quarter of fiscal 2013 and 2012 was 36.5%.
We expect our full year fiscal 2014 effective income tax rate to be approximately 38.25%. UniFirst continues to maintain a solid balance sheet and financial position.
Cash and cash equivalents at the end of the quarter totaled $197.5 million, up from $120.1 million at the end of fiscal 2012. Of this amount, $61.4 million has been accumulated by our foreign subsidiaries and is intended for future investments outside the United States.
Cash provided by operating activities for fiscal 2013 was $211.6 million, up 30.8% compared to $161.7 million for fiscal 2012. The improved cash flows were primarily the result of higher earnings as well as lower cash flows related to merchandise and service investments.
In addition, the company's cash position also benefited from a change in tax regulations impacting the timing of deductions allowable for certain merchandise and service. During September 2013, the company utilized existing cash on hand to pay down $100 million in private placement notes that came due.
The company continues to have significant capacity under its existing bank line of credit to continue funding acquisition activity or other capital allocation options as necessary. Capital expenditures for fiscal 2013 were $103.5 million.
The higher capital expenditure level is partially the result of costs related to our Unity 20/20 CRM systems project. Year-to-date, we have capitalized $20.8 million related to this project.
In addition, this year's expenditures to date include the purchase of a building for a new laundry plant in the first quarter, as well as costs related to 2-plant reconstruction projects. We continue to invest in plant updates, expansions and automation that will allow us to achieve our long-term strategic objectives.
We expect capital expenditures in fiscal 2014 to be between $90 million and $100 million as we will continue to spend additional capital on our Unity 20/20 technology initiative. During the fiscal year, the company expended $30.7 million on acquisitions of businesses, primarily in our Core Laundry Operations.
The majority of the amount expended related to 1 acquisition in South Carolina. This acquisition added 2 laundry plants in our already -- to our already strong presence in the Carolinas.
We are excited to bring on another strong operator into the UniFirst family and for the synergies we feel will be created with our existing operations. We also continue to look for additional acquisition targets as acquisitions remain an integral part of our overall growth strategy.
At this time, we would like to provide our initial outlook regarding our operating results for fiscal 2014, which began on September 1. We expect that revenues for fiscal 2014 will be between $1.372 billion and $1.385 billion, and full year diluted earnings per share will be between $5.60 and $5.85.
As a reminder, fiscal 2014 will be a 52-week year for the company compared to fiscal 2013, which was a 53-week year. The negative comparison of 1 less week of operations will have the impact of reducing our year-over-year revenues by approximately 2%.
Excluding the impact of the work week differential, acquisitions, foreign exchange rate fluctuations, as well as the customer buyout we recognized in our second quarter, we project organic growth for our Core Laundry Operations to be approximately 4% in 2014. The midpoint of our earnings projections assumes an operating margin for our Core Laundry Operations, a few tenths below the full year 2013 level of 14.1%.
We also wanted to highlight that we anticipate revenues and profits from our Specialty Garments segment to be down approximately 9% and 15%, respectively, compared to fiscal 2013 as a result of less power reactor outage activity and other projects compared to fiscal 2013. Looking further ahead, early indications are that the second half of fiscal 2015 and beyond will bring substantial new revenues for this segment, as large new power reactor projects are scheduled with existing customers.
As always, we will continue to update you throughout the year on our expectations for this segment's results, which we have discussed in the past can be difficult to forecast. We also would like to take this opportunity to update you on 2 items that will have an impact on UniFirst over the next couple of years.
The first is the project of our Unity 20/20 CRM systems initiative. We currently don't anticipate beginning deployment of this new system to our locations until fiscal 2015.
The increased expense to our operations in fiscal 2015 will be primarily the result of depreciation of our investment in the new system that we currently estimate will be between $5 million and $6 million, once fully deployed. We also expect to incur certain nonrecurring costs associated with the training and deployment effort associated with our new system.
It is unclear at this point how much these costs will be incurred during fiscal 2014 versus 2015. And as a result, we have not included an estimate of these costs in our current guidance.
We are very excited about the impact of this new system and what it will have on our overall customer service levels, as well as the efficiency of our operations. We will continue to keep you updated on the timing and progress of this initiative in the upcoming quarters.
The second item is to provide you an update on the status of the Affordable Care Act as it relates to UniFirst. Currently, the company has obtained a waiver that will allow its existing health care coverage to remain intact through August 2014.
As a result, we do not expect any significant financial impact from the Act on our fiscal 2014 results. The company feels strongly about providing affordable health care for our employees and intends to continue its long practice of doing so.
As we move throughout the year, we will continue to update investors on the potential financial impact the full adoption of the Affordable Care Act may have on our future years. This completes our prepared remarks, and we'll now be happy to answer any questions you may have.
Operator
[Operator Instructions] Our first question comes from the line of Justin Hauke with Robert W. Baird.
Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division
So I guess I had a question on the top line guidance, the revenue guidance for '14. You're talking about 4% organic growth, and it looks like you did an acquisition that adds maybe another 2% on top of that.
You've got the weekday -- the work week adjustment that takes away 2%. But I guess I'm surprised why the guidance is only up 1% to 2% when it would seem like it should be a little higher with the organic growth that you're expecting.
Steven S. Sintros
I think the one flaw in your numbers there, Justin, is that the acquisition will be about 1% on next year's growth.
Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division
About 1%?
Steven S. Sintros
Yes. That's the biggest difference, I think, in the numbers you gave.
Overall, at the mid to higher end of our range, the Core Laundry's growth will be about 5% total, which, without the acquisition, would be about 4%. We also have a little bit of a headwind from the Canadian exchange rate built in there as well.
Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division
Okay. Okay, and that's helpful.
And then I guess on the CRM investments, and I appreciate you giving those numbers on it, can you just -- I want to make sure that I understood them correctly. It sounds like the margin drag from the increased D&A in 2014 is $5 million to $6 million, or is that the drag once it goes live in 2015?
I just wanted to clarify that first.
Steven S. Sintros
Yes. That's the latter.
So what we basically said was that in '14, we'll continue the development and testing of the system, but when we start deploying it in, hopefully, early '15, that's when the depreciation of divestment will start. And that deployment will occur throughout '15.
It's not going to be a single-date deployment. And so that $5 million to $6 million is kind of the projected full year depreciation number once it's fully deployed.
So that being said, it probably won't have that full impact on '15 either, but we were just trying to signal the level of the investment and the depreciation once fully deployed. So as we get closer and we have a better idea of the timing, we can narrow that and provide some additional color.
Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division
Got it. Okay.
And then I guess my last one here for now is, I guess I'm a little surprised on the decision to use cash to pay off the debt rather than refinancing it. It sounds like that's a decision you made in September.
Any updated thoughts on the balance sheet, and what you're thinking about in terms of the firm's overall capitalization and kind of the capacity that you have here?
Steven S. Sintros
Yes. I think, Justin, I guess just to start on the pay down.
As I mentioned, we still have significant borrowing capacity under our line of credit. So I think we still have the ability to make moves from a capital allocation perspective as necessary.
And we, obviously, continue to generate a significant amount of cash despite higher capital expenditure levels than normal. So I think we still feel we have that flexibility.
And the fact we paid it off in September doesn't keep us from making moves as we move forward.
Operator
Our next question comes from the line of John Healy with Northcoast.
John M. Healy - Northcoast Research
Wanted to see if you guys could give us a little bit of an update in terms of how the trends, in terms of 1Q, like any thought in terms of how September and maybe the first couple of weeks of October have trended relative to the end of the fiscal year?
Ronald D. Croatti
John, this is Ron. We have really not seen any significant change.
As we've said in our webcast, our adds versus reductions of wearers is still slightly negative for the first month. So we're not seeing the jobs.
And we're actually seeing the energy sector down in the Texas area, actually slowing down. So we're forecasting basically that we're going to be slightly negative all year long.
John M. Healy - Northcoast Research
Okay. And I wanted to ask, I know the fire and the protective garments have been a nice benefit to you and the industry for maybe the last 2 years or so.
And it sounds like you're a little bit cautious on that opportunity maybe going forward. And I was wondering if you could kind of help us size how big of a business that's become for you, and how much that's contributed to the growth rate, and maybe what inning you think we're in, in terms of that opportunity?
Steven S. Sintros
Well, I think a couple of different things, John. As far as what we're seeing, and Ron mentioned we're seeing some slowdown in that, we're still growing higher than our average from that product line.
But 2 years ago, the growth in that product line was 30%, 40%. Now I know that doesn't mean that much to you without knowing how big that is, and I don't have that number in front of me to be honest with you.
But it's more of a slowdown to the annual year-over-year impact than it is that it's shutting down. It's still a strong part of the business in that part of the country in particular.
The other thing that you have to keep in mind, it's not only new account growth, but there were several accounts over the last 2 years that converted from standard garments to flame-resistant garments, which are at a higher price. And so we were able to reap the benefits in our growth from that.
But I don't think it's wrong to say that our overall growth was helped 2 or 3 points from flame-resistant garments when we were growing 10%, 11% during 2011 and '12.
John M. Healy - Northcoast Research
Okay. Now that's incredibly helpful.
And I just wanted to ask a little bit of a philosophical question here. When I look at your company and your margins are record high.
You guys have outperformed the industry in terms of growth. Now your balance sheet is completely clean.
And it sounds like you guys are signaling that you'd like to make acquisitions if you can find good businesses at reasonable price. And when I think about this industry -- I mean we haven't seen -- I know M&A has picked a little bit in the last maybe couple of quarters, but we're still not seeing a lot of activity there.
So if we go through 2014 without a big pickup in terms of the M&A scenario, how do you see deploying your cash flow? I mean, how do you think about that?
Ronald D. Croatti
Well, this is Ron. I think, number one, we believe that the acquisitions are out there.
We're talking to them. It's just that we got to convince them that now is the right time.
But short of using the funds for acquisitions and reinvesting in the business, we would certainly look at stock buyback probably.
Operator
Our next question comes from the line of Chris McGinnis with Sidoti & Company.
Christopher McGinnis - Sidoti & Company, LLC
Can you just talk maybe a little more in depth on the -- you talked about the pricing on the newer contracts being a little bit more competitive. Is that a pickup from last quarter or is it just kind of the continuation we've seen just kind of over the last year, I think?
Ronald D. Croatti
I think, Chris, we've seen a little more competitive pricing in the National Account arena than we did over the last 3 years. That's all I really can tell you.
It seemed to pick up. The street [ph] business seems to be pretty consistent, but the National Account arena has gotten a little more competitive.
Christopher McGinnis - Sidoti & Company, LLC
And is that from, if you don't mind me asking, is that from the larger competitors or is it smaller competitors?
Steven S. Sintros
Yes. I think, Chris, really the National Accounts were really -- when we bid on those accounts, it's really with one of our handful of large competitors.
So it's really from the large competitors side that we're seeing some pricing on the National Accounts that is becoming increasingly competitive.
Operator
Our next question comes from the line of Kevin Steinke with Barrington Research.
Kevin M. Steinke - Barrington Research Associates, Inc., Research Division
Steve, on your last conference call, third quarter call, you'd talked about your outlook being impacted by higher-than-expected investments in new merchandise and service, and that you were going to kind of monitor that closely. Just wondering what sort of trends you're seeing there, and if that is also related to the competitive front?
Steven S. Sintros
I think that, that can be and has been related to the competitive front from some perspective. I will say during the fourth quarter, it moderated a little bit compared to what I was seeing toward the second half of the third quarter.
It's still an area of variability for our guidance in any year as far as how much investment we're going to need to make and merchandise. I think we've said in the past that a large percentage of our merchandise investments for existing accounts, I think a lot of people equated to new accounts, which it certainly is a factor.
But you're right, the competitive environment does impact merchandise investments from time to time, and it's something we're continuing to watch. So maybe a little bit better result in the fourth quarter than maybe I was indicating in the third, but something we're closely watching as the year starts here.
Operator
Our next question is a follow-up question from the line of Justin Hauke with Robert W. Baird.
Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division
Just one more quick one. Ron, you talked a little bit about new product lines in your prepared remarks.
And I guess just curious if there was anything you could elaborate there in terms of what's new and kind of what your thinking is on that side.
Ronald D. Croatti
Yes. It's in the facility services area, primarily, we're in the chemical distribution, and we found that our customers have a need for such a product.
So we're very positive about that and we're trying to roll it out region by region.
Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division
And I guess how much of your business is carrying chemicals? Now how many -- maybe a percentage of routes?
Ronald D. Croatti
I can't give you that number.
Steven S. Sintros
It's relatively early, Justin. We kind of put together the program, and we're starting to roll it out.
We've had some large customers that adopt the program. But that number is a relatively low number right now as far as the penetration of that product.
Operator
[Operator Instructions] And there are no further questions over the phone line at this time.
Ronald D. Croatti
All right. Well, we'd like to thank you all for the interest in UniFirst, and we reiterate that we're pleased with our fiscal 2013 financial results, and that we're cautiously optimistic for the outlook of fiscal 2014, and we look forward to talking to you again in January when we're reporting our first quarter for fiscal 2014.
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 line.