UniFirst Corporation (UNF) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the UniFirst Corporation First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Steve Sintros, Chief Financial Officer for UniFirst Corporation. Please go ahead, sir.

Thank you, and welcome to the UniFirst Corporation conference call to review our first quarter results for fiscal 2013 and to discuss our expectations going forward. I'm Steven Sintros, UniFirst's Chief Financial Officer. Joining me 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 and 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 filings with the Securities and Exchange Commission. Now I will turn the call over to Ron for his comments.

Thank you, Steve. I'd like to welcome everyone joining us for the financial review of UniFirst's first quarter fiscal 2013. Steve will cover all the details in a moment, but I'll first provide a recap. UniFirst's revenues for the first quarter of fiscal 2013 set a new record at $332.6 million, a 6.2% increase over the $313 million reported for the same period in 2012. Net income for the quarter was also a new UniFirst high at $30.8 million, a 19.2% increase over the $25.8 million reported a year ago. These new financial records were obtained primarily from quality organic growth resulting from our core laundry operations, which includes solid new account sales and were achieved despite the ongoing economic challenges in each of the markets we service. Our core laundry operations, which account for the majority of UniFirst's business, improved quarterly revenues by 8.2% and operating income by 27.3% over 2012. Meanwhile, our Specialty Garments segment, which includes specialized nuclear and cleanroom laundry and ancillary services, reported a 7.9% revenue dip, a 28.3% drop-off in operating income for the quarter when compared to the same period in 2012. As mentioned in our last webcast, we're anticipating a down year for this business unit, partially due to the completion of a sizable nuclear reactor project in the fourth quarter of fiscal 2012. Cyclical by nature, long-term nuclear projects such as these traditionally produce significant revenues but only for a limited period of time. And finally, our First Aid & Safety segment also reported a slight revenue and operating income dip when compared to the record set of results for the same quarter a year ago. Overall, we are pleased with our first quarter numbers for 2013, and we stand confident that UniFirst is strategically positioned to meet both our fiscal year and long-term fiscal goals -- financial goals. As we look ahead to the balance of 2013, we expect our core laundry operations to continue finding new ways and innovative ways to maintain continuous improvement delivery of our core services. This in turn will help our route sales reps install additional product lines in our customer base so that we consistently add the type of UniFirst value that differentiates us from competitors. Likewise, we foresee our Specialty Garments segment expanding upon its niche product and service offering to nuclear cleanroom communities, while focusing on increasing market share in Canada and in Europe to replace the revenue stream that I mentioned were lost in fiscal 2012. And we expect our first aid group capital plans [ph] on the great momentum they established over the last year, providing first aid cabinets, medication, safety supplies to companies, wholesalers, suppliers and are sold in private label brands, and offering new value-added safety training classes to businesses of all types. What's common to all our operations and serves as the springboard for UniFirst's ongoing financial success is our customer focus, our fiscally conservative business philosophy, which is shared among our more than 200 company locations throughout the U.S., Canada and Europe. When all is said and done, it's our 11,000 Team Partners who implement these operational philosophies and represent the key drivers of UniFirst's ongoing success. Their dedication to delivery, proactive, responsive customer service, and value-rich product offering to our clients is second to none in the industry. So I'd like to thank them for all their collective efforts and in helping pave our path to success in fiscal 2013 and also our path to becoming a $2 billion company. And as our managers continue effectively execute our long-term strategic business plan, Vision 2020, with promises to be -- ongoing unsettled economic political environment, UniFirst would continue to provide returns to our shareholders. And with that, I'll turn it back over to Chief Financial Officer, Steve Sintros, for more details.

Thanks, Ron. First quarter revenues were $332.6 million, up 6.2% from $313 million a year ago. Net income for the quarter was $30.8 million or $1.54 per diluted share, up 19.2% compared to $25.8 million or $1.30 per diluted share. First quarter revenues in the core laundry operations were $294.6 million, up 8.2% from those reported in fiscal 2012 first quarter. Excluding the effect of the stronger Canadian dollar, revenues grew 8% organically. The company's revenues continue to benefit from solid new account sales. In addition, certain annual price adjustments also contributed to the revenue growth during the quarter. Our revenues also continued 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. Wearer additions versus reductions were flat in the first quarter, which was not very encouraging since historically, the first quarter is typically our best quarter for wearer growth. This segment's income from operations increased 27.3% quarter-to-quarter. The operating margin expanded to 15.1% from 12.8% in the first quarter of fiscal 2012. Increased profitability resulted from overall improved operating margin leverage that came with our strong revenue growth. Expenses related to plant operations, depreciation and overall selling and administrative outlays were all lower as a percentage of revenue compared to the prior year. Better operating results from some of our underperforming locations also contributed to the segment's improved operating margin for the quarter. It continues to be a primary focus of ours to improve the results of these underperforming locations, and the impact of these efforts are beginning to materialize in our overall results. Lower energy cost as a percentage of revenue has also contributed to this segment's improved operating margin. Energy cost for the quarter were 5.1% compared to 5.5% a year ago. Both fuel for our fleet of delivery vehicles, as well as natural gas costs, were lower compared to the same quarter a year ago as a percentage of revenues. Last quarter, we discussed how overall merchandise amortization has begun to moderate and that for fiscal 2013, we expected that merchandise amortization would have a neutral impact on operating margins compared to fiscal 2012. During the first quarter, merchandise amortization was flat as a percentage of revenues compared to the same quarter a year ago. This better-than-expected trend in the first quarter now has us anticipating a small overall margin benefit related to merchandise for the remainder of the year. Revenues for the Specialty Garments segment, which consists of nuclear decontamination and cleanroom operations, were $27.9 million for the first quarter of fiscal 2013, down 7.9% from $30.3 million in the first quarter of fiscal 2012. This segment had income from operations for the quarter of $4.7 million, down from $6.6 million in the same quarter a year ago. As we discussed last quarter, we expect a down year for this segment due partially to the completion of 2 large power reactor rebuild projects during the fourth quarter of fiscal 2012. Also contributing to the first quarter decline was a slower start to the year for this segment's European and cleanroom operations. First Aid segment revenues decreased 3.4% to $10.1 million in the quarter compared to $10.5 million in the same quarter a year ago. Income from operations for this segment decreased slightly to $0.7 million from $0.8 million in 2012. The decrease in revenues and profits for this segment are primarily the result of the timing of certain orders for its pill packaging operations. The comparison of net income quarter-to-quarter also benefited from exchange rate gains of $0.2 million in the first quarter of fiscal 2013 compared to exchange rate losses of $0.6 million a year ago. The effective income tax rate for the first quarter was 39% compared to 38.3% for the first quarter of fiscal 2012. We expect our full year effective income tax rate to be approximately 38% for fiscal 2013. Our balance sheet and overall financial position continue to be very strong. At the end of the first quarter, the company had $152.7 million of cash and cash equivalents on hand, up from $120.1 million at the end of fiscal 2012. Of this amount, $59.7 million has been accumulated by our foreign subsidiaries and intended for future investments outside the United States. As of the quarter end, total debt was $109 million and total debt as a percentage of capital was 10.5%. For the first quarter, cash provided from operating activities was $56.2 million, up 83.2% from $30.7 million for the same period a year ago. The increase was primarily due to higher net income as well as lower working capital cash outflows as anticipated. Capital expenditures for the first quarter of fiscal 2013 were $25.1 million. The higher capital expenditure level is partially a result of costs related to our Unity 20/20 CRM systems project. During the quarter, we capitalized $5.5 million related to this project. In addition, this quarter's expenditures included the purchase of a building for a new laundry plant, as well as costs related to 2 plant reconstruction projects. We expect capital expenditures for fiscal 2013 to be approximately $90 million. We continue to invest in plant updates, expansions and automation that will allow us to complete our long-term strategic objectives. Although we did not complete any acquisitions during the first quarter, we continue to evaluate 8 targets, as acquisitions remain an integral part of our plans to grow market share, as well as expand our overall operating margin. Due to the strength of our first quarter and current outlook, we are raising our full year guidance. We currently project that our revenues for fiscal 2013 will be between $1.335 billion and $1.348 billion. We also project that our income per diluted common share for fiscal 2013 will be between $5.10 and $5.25. The stronger-than-expected start to the year on the top line, as well as moderating merchandise and energy cost all contribute to our improved outlook, as did improved results from some of our historically underperforming laundry plants. We do want to note that our revised guidance assumes slowing organic growth rate that average approximately 5.5% at the midpoint of our guidance for the remainder of the year. We also would like to remind you that fiscal 2013 will be a 53-week year compared to a 52-week year in fiscal 2012. This nuance in our fiscal calendar will have the impact of increasing revenues and operating income approximately 2% compared to fiscal 2012. The extra week will fall in our fourth fiscal quarter. Finally, we want to mention a matter that will be included in our 10-Q to be filed later today. As you know, we have provided various services to a number of cleanroom customers for many years. One of our customers was New England Compounding Center of Massachusetts, which is the compounding pharmacy involved in the sale of tainted medicine, allegedly resulting in the highly publicized fungal meningitis outbreak. On December 31, 2012, we received a letter from counsel from NECC demanding among other things that we indemnify NECC regarding claims made against it, including those related to the tainted medicine. This demand relates to a limited once-a-month cleaning service we provided to portions of NECC's cleanroom facilities. We have notified our insurer of this claim. Based on the information currently available, we are unable to reasonably assess the ultimate outcome of this matter. We can say that we are not in any way responsible for NECC's day-to-day operations, its overall facility cleanliness or the integrity of the products they produce. Therefore, based on our review to date of this matter, we believe NECC's claims are unfounded and without merit. Although this is in the very early stages of this matter, we felt in the spirit of transparency that it would be prudent to share this information with you at this time. We complete this -- this completes our prepared remarks, and we'd now be happy to answer any questions you may have.

[Operator Instructions] Our first question comes from the line of Andrew Steinerman with JPMorgan.

I just wanted to verify and you were very specific about what drove the margin expansion here, but 15.0 operating margin is the highest margin UniFirst has experienced in a long time, and I know first quarter is a seasonally favored quarter versus fourth sequentially. But I want to make sure that there wasn't any one time items particularly on the gross margin line that are not sustainable. And given the start to the year at kind of 15%, what do you see as kind of a new normal operating margin in terms of kind of annual target?

Just to address a couple parts of your question, the guidance kind of assumes about 12.5% at the midpoint for fiscal 2012. There are no...

'13, right?

Excuse me, '13. There are no real onetime items, Andrew, to the positive in the first quarter that are artificially kind of driving up the margin. Energy costs have been lower. I didn't mention, but health care claims were fairly moderate in the first quarter and those tend to fluctuate, and so those are some of the things that could continue to pressure margins as we go forward. As far as the new norm, I think we have made progress to increasing that norm above what we had said previously as being closer to 11% to now maybe closer to 12%. We still have some work to do with these underperforming locations. And with the slowing growth that we're anticipating, we expect that to kind of pressure things as well. I think as we look into years beyond 2013, particularly '14 and '15 related to the Unity CRM project we had -- have discussed, when we go live with that project, some of the transitioning costs as well as ultimately the depreciation of the system itself will pressure the margins in the near term during that period of time during implementation. So that's just something to keep an eye on.

That makes total sense. And then also the assumption for modest deceleration through the year, is that conservatism or something that you've already observed?

As far as the organic growth you're talking about?

Right. So why assume moderate deceleration in organic growth to 5.5% for the remainder of the year? Is that management conservatism after a strong first quarter? Or is that something you've already observed as we've entered the second quarter?

I think we are starting to see a little weakness in the wearer levels. Although our sales remain fairly strong, I think we're starting to annualize some really strong periods, not only from a sales perspective, but from a pricing perspective based on the tail end of the impact of the higher cotton prices. We've done well with pricing over the course of the last year. We expect that to moderate, and are seeing it start to moderate, as cotton prices have come down and energy prices have come down. It usually takes a little while for that to kind of fully impact us, but we do expect and are starting to see some of that impact.

Great. And Steve, when you say pricing moderate as you anniversary, you mean up less, you don't mean down, right?

That's correct.

Our next question comes from the line of Andrew Wittmann with Robert W. Baird.

Wanted to dig a little bit more into the margin profile. Steve, just to be clear on the Unity system going live, it sounds like at least in the initial 3 years, the -- or the depreciation charges you'll be taking against that should be more than the operational benefit that you get and at least in the first couple of years, is that correct?

Yes, I think that's probably fair in the -- it will be a phased implementation as well. Right now, our plan is kind of second half of fiscal 2014 to be in that deployment, and I think that is fair to say based on some of the deployment training costs and transition costs, plus the depreciation going live that will precede the benefits that we'll get out of the system as it becomes fully implemented and adopted across the country.

Got it. And then 2014 will also be bringing more health care related costs? Can you give us kind of where you guys are both from a strategic thought process on that one, Ron? And then as a financial, try to just give us some guidelines about how we should be thinking about that as we move into 2014?

Well, as we look at the health care impact, Andrew, we're kind of following the Walmarts of the world. We have the exemption we put in place till September 2014, and we're kind of looking at the other fellows, what they're going to be doing to give us a good direction at this point.

And just to add that, because of the timing of our fiscal year and our benefit plan year, we're a little bit on the tail end of the adoption of the new regulations. So we have a little more time than calendar year companies to fully adopt. At this point, as Ron have kind of alluded to, we really don't have something we can share with you financially. I think there'll be a number of alternatives available to us and modifications we'll need to make. I think we'll need to balance those from a financial standpoint and what's right for our employees, and we're still in the early stages of evaluating that.

Okay. So basically, status quo for a little bit longer than some of your peers. So that really from a strategic point of view, you'll be able to -- you have a little bit longer to basically react to see what they're doing competitively so that you're not at a disadvantage. Is that a fair way to think about it, Ron?

I think so, yes.

Yes.

Okay. And then just in terms of some of the -- just trying to break down the organic growth rate here. I'm kind of curious as to -- clearly, pricing was part of it, but no programmers versus competitive wins. I know, Ron, in the past, you said you've been having some success with national accounts, does that continue to be an outsized portion of your wins? Or can you just give us some texture?

I think we're basically running at about a 50-50 split right now.

With no programmers...

And have no programmers versus programmers. National accounts, you win some, you lose some. I mean, I would say it's no more than usual.

I think it's probably a little less than it was a year ago. I think when we made some of those comments over the last year or 2, it had become proportionally a larger percentage of our wins and our percentage of national accounts had increased. I think now we continue to have wins, as Ron alludes to, but in the current period, and that's part of the reason I think some of the deceleration of the organic growth is maybe not as many big wins as the year ago.

Got it. And then does that mean sales productivity was higher this year than last year? It seems like it's been at a pretty higher rate for a while, but is it accelerating further?

Sales productivity goes up basically almost every year, maybe $1 a man of how we measure it. We always look for it to go up. It goes up very, very gradual.

And then just retention rates, Ron, how's retention been? Can you give us some view on that?

They're about the same, about the same.

Our next question comes from the line of John Healy with Northcoast Research.

I wanted to ask about the underperforming locations a little bit more. I was wondering if you could give us some further color there in terms of how you think about the tiers of the locations, maybe where your A-plus locations are in terms of margin, size and maybe how many locations you guys are focused on? And what's a realistic level that some of this underperforming locations could get to over maybe a year or 2?

Yes. John, this is Steve. On that question, I mean the locations really sit on kind of a bell curve of profitability. We're not going to define kind of really what that range is, but we have 75 laundry plants and over 100 branches that are associated with those plants. But when you look at the 75 plants, I think like any other bell curve, you have 10 or 15 on the higher end, 10 or 15 on the low end and a bunch in the middle. And the ones in the lower end can be on the lower end for a number of different reasons: lack of market share, maybe the mix of business that had been sold over the years hasn't been the most profitable, management issues from time to time. So those are all the things we look at to kind of push the needle on the lower end, and we always talk about acquisitions. Those are really areas that we are focused to try to build that market share as well. But there are things you can do from a management and execution perspective, as well as trying to improve the pricing profile in those markets to improve those operations. And we've really started to see some traction, particularly in the quarter when looking at the year-over-year impact. It had more than an insignificant impact on the profit growth of the core laundry business during the quarter, which is why we mentioned it.

So if you look at...

It's a continual process. I mean when you look at where we're going in the future, those ones that are at the higher-margin are always pressured as well from competition and so on. So it's a continued give-and-take.

So I guess when you look at those underperforming locations, is it -- are there more issues with what I would say operations? Or is it that, hey, we just need to get these routes bigger, we need to get more revenue to the laundry facility? What's the -- where does the emphasis need to be for those underperforming locations?

It's primarily market share, route density and book of business as Ron said. Our mix of business, pricing profile of the business and part of that depends on our kind of status in that market and how -- what our share is, and so that's -- those are the primary things. There's always management and execution issues that we need to follow up on, but those are the primary things.

Got you. And I wanted to ask a question about competition a bit. We've seen some moderation in some of your input costs and maybe the wearer levels and growth within existing customers start to stabilize a bit. Are you seeing any visible signs of increased competition either from similar size peers or larger peers or some of the smaller guys out there?

I don't think it's changed, John, over the last 6 months. It's a competitive business, always will be, and there's always a pocket of a rogue general manager some place. It really hasn't changed.

Our next question comes from the line of Chris McGinnis with Sidoti & Company.

I guess first off, I know the market hasn't changed too much or at least kind of the outlook, but you did mention that I think the add-stops or the increased wearers were a little bit weaker than you typically see. Do you think that's just -- I guess can you give a little bit more feedback on what you think is driving that?

Yes, I'll start and then Ron can add to it. I think part of it, Chris, is that we've been getting tremendous strength from a couple of regions in the country from a wearer perspective over the last year on the protective garment wearers and the energy impact of oil and natural gas exploration and things related to that, which we've talked quite a bit about in the last years. I think in the last year, that strength has masked some general weakness in the overall markets, and some of that business is starting to flatten out a little bit after its real strong growth. It still continues to go strong, but maybe not on a sequentially as great level. And I think that's showing that there's still some weakness out there. So I think that's part of what we're seeing come through.

All right. And then second, I think, Ron, you mentioned that you're considering adding more products. Can you maybe just expand on that? What's out there to kind of continue to grow the product offering and [indiscernible] a little bit more?

I think we're looking stronger at the bathroom service line, the paper, the soap, the air freshener, maybe some chemical dispensing to add to those ancillary products into our existing accounts. Remember, we're the garment company -- we're 65% garment, and most of the industry is 50-50. So we have not done as good a job as we should have do, getting the ancillary products into our customers.

Great. And then maybe if you could just touch on the acquisition environment, if there's -- if anything's changed or just kind of the level that's out there?

Well, we have looked at 8 acquisitions in the last 6 months. Obviously, some of them didn't make sense. Some of them did make sense, but pricing is still an issue. Sellers got expectations that are in the telephone number range when they shouldn't be. That's number one. You would think that with the tax change, it would have drove more guys to make the decision, but it did not. So all I can say is expectations got to come down to the true value of the business.

Our next question comes from the line of Joe Box with KeyBanc Capital Markets.

Steve, despite SG&A ticking up a bit in the quarter, it looks like incremental operating margins came in at about 39%, which based on my model, that's pretty much the highest number going back to 2005. I guess with merchandise amortization not a headwind anymore, is it reasonable to see a 30% plus incremental over the next couple of quarters as maybe you go up against some easier margin comps?

Yes, I think our overall guidance assumes a little bit less than that, Joe. I think that merchandise, although it -- just to clarify my comment, we do anticipate it being a year-over-year small benefit in the quarters remaining for the year. It still is sequentially ticking slightly higher, just not at the rate of a year ago. So I think our guidance assumes not quite that level of growth quarter-to-quarter as the year progresses based on some of the things we said, but maybe not that far off.

Okay, great. And I think you also talked about making some investments in plant updates and that included some automation. Can you just elaborate on maybe what some of those investments are? And maybe give us a sense for what inning you're at in terms of just rolling these investments out across the system?

Well, the automation, obviously, the first one we're dealing with is this Unity 20/20 program CRM system that's going to automate the route sales group. The second thing in the plants, all the plants are computerized washroom, 1 attendant, maybe 2 attendants at the most. So they're pretty well established. We have no equipment in the wash alleys under 20 years old. In other words, everything is modern, computerized. Some of our competitors are running stuff, 30, 40 years old. These sortation systems, we continually automate. We have over 45 plants now with automated sortation systems and our stock room system, what we call SMS [ph], is unique to us. That's in every one of the plants to benefit the used garments. So we just continually roll from plant to plant, updating and getting efficiencies.

Yes, I think also -- go ahead, Joe.

I was just going to say it sounds like it's mostly on the sorting side then? It...

No, not really. The sorting is the garment side. The flat good side is a lot of -- what do you want to call it? Labor involved. We work to eliminate with certain types of new equipment coming in and chipping the mat [ph].

Can you -- I mean, I hear you -- that you earlier just said that there's some benefit from improving some of these underperforming locations. Can you maybe just talk to what the gross margin improvement was just as a function of some of these new investments as opposed to just typical operating leverage that you might have had in the quarter?

I guess related specifically to the underperforming operations, more of it was kind of operating leverage than specific improvements in the technology or automation. We really don't have the growth, I guess, in the quarter broken out in that manner. And I think it's just a continual process where we continue to make these investments and look to make improvements in the operating profile of these plants based on the technology that's available and as we're deploying the capital. So I probably don't have a more granular answer than that for you.

Management changes.

Okay, that's fine. And one last question, then I'll turn it over. Can you maybe just talk to where you stand on the capacity front both at the plant and delivery level and maybe how much more operating leverage there could be there before you need to make some more investments?

Capacity, we're basically a 1.5 shift operation. So we certainly have that additional capacity, hour wise. That's number one. On the route side, we're constantly putting new routes on. As the business grows, you have to put new routes on. That just goes with it, and we use that Roadnet UPS software to route our routes and our customers find it very effective.

Part of that underperforming location, plan to improve those locations is to -- those locations typically have a lot of capacity on the routes, and those are the locations we need to try to fill in business and improve the density and capacity of those locations. In general, Ron's right. I think we continue to run 1.5 shifts at most plants. You will notice -- well, I mentioned in my comments about capital expenditures that there are a couple of plants that we're rebuilding and enlarging because they're in strong markets where it makes sense to make that investment for the future. It's really a plant-by-plant evaluation.

Our next question comes from the line of Nate Brochmann with William Blair.

This is Diana Rashkow, filling in for Nate today. Just wanted to ask a question in terms of your growth with existing customers. Are you seeing success there with the ancillary product lines that you mentioned earlier, the kind of the bathroom services ones that you're looking at adding or is that success in other products? Just hoping you could elaborate there a little bit.

Well, we run what we call power routes, it's -- run 3 or 4 times a year where we focus on a product line and use the puppy dog theory of sales. Try it, you like it, it's free, and then if you like it, we'll put it on your invoice. And we have increased our bathroom service position a little bit, and we want to continue to do that.

Okay. And then one little more just housekeeping question. I think on the last call, the guidance that you guys had laid out assumed somewhere between 10% or 20% decline in Specialty Garments revenue. Is that still what you're expecting?

Yes, I think it was 10% on the revenue and 20% on the profit. I think we're still feeling like that's an appropriate outlook for the rest of the year.

Okay. And is there anything in terms of the cadence of the revenue in that segment that we should know of? Is it stronger in any particular quarter in terms of the outlook for outages and...

Yes, I mean, historically, it's always been the first and third quarter are the strongest quarters, and we don't anticipate that changing this year. I guess I'd probably also add that the second quarter might be a little bit better than the fourth, but those are the 2 weaker quarters of the 4.

[Operator Instructions] Our next question is a follow-up from the line Andrew Wittmann with Robert Baird.

Just wanted to dig in a little bit into the cash. Steve, in the quarter, working capital, I think, was a big success. Inventory looks like down a day. Payables up a few days here. Are we operating at new levels here in terms of what's possible and in terms of working capital? Or was there some just timing that really benefited this quarter?

Yes, I think when you look at the accruals and the payables, Andrew, that there's definitely some timing in there that's not a sustainable new level. I think the merchandise you saw for the first time actually was a benefit in the quarter, amortization exceeding, new garments infused into the process and that helped the cash flow. So I think on the inventory and merchandise side, we may expect some continued benefits as the year goes on, but on the payables and accruals, it will kind of normalize.

Okay, sounds good. And then just, Ron, strategically, with this cash balance that you've been able to burn here, I think we saw broadly as you look at the market, you saw a lot of companies that had excess cash come out with special dividends even more, common in some more closely held companies. You guys elected to not do that. You haven't -- you've talked about share repurchase, but we don't have one yet. Just kind of curious as to where you're thinking the capital could go if it needs to go anywhere and where your priorities rest today as you think about that.

Our priorities are still on the acquisition side. We certainly discuss the stock buyback from time to time. It's not out of -- it may be in our future. That's probably the best way to answer you.

When you look at the acquisition environment today, you kind of mentioned the pricing, are there any material trades that are out there that you could use to understand what the level of pricing is today where things are trading? And who's setting those prices, is it strategic buyers or are we looking at financial buyers out there in the market?

No, I think it's just ownership living in the past.

Yes, I think these sellers, they look at some transactions that were done historically in the industry and try to hang their hat on multiples that were paid in certain situations that don't apply to every business based on not only the mix of their business, but the quality of the contracts, the pricing, the market, all the things we look at when we look at an acquisition. I think a lot of these family-owned businesses, like I said, hang their hat on historical transactions at the high end of what was maybe paid over the years by whether it be us or other competitors. And when it comes to the point in their life that they're ready to investigate a sale, that's kind of their starting point, and it usually takes a while to bring them down off of that. And as Ron said, we were surprised that the tax situation didn't force their hand a little bit more. But we will say that a lot of these sellers didn't end up selling. And so I think there's still an opportunity out there and one we continue to pursue.

When investors look at the size and the scale of some of those opportunities that are out there, I mean, it appears that there's several hundred millions dollars of capacity on your balance sheet today. I mean, is that a realistic amount of capital that could be deployed in acquisitions that are even being contemplated? Or is there kind of enough capital for acquisitions and even if you could do what you reasonably would like to do or expect to do that there's still even excess capital after that?

I mean, I think that's a difficult question in that there is a handful of fairly sizable regional players out there that from time to time could come into play and that we'd likely be interested in, and so I think that really -- the question or the answer really hinges on the availability of some of those potential players that we, from time to time, look at. Short of that, a lot of the smaller, 1- or 2-, 3-location operations, the answer to your question is that there probably is room for some of those and other deployment of capital opportunities.

I'm showing no further questions at this time.

Okay. We'd like to thank everyone for joining us this morning to review our UniFirst first quarter results for fiscal 2013. We look forward to speaking with you again in March. We'll be reporting on our second quarter and 6-month numbers. Have a great rest of your day and a happy, healthy new year. Thank you.

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.