UniFirst Corporation (NYSE: UNF) — FY2020 Form 10-K
Reporting period: Fiscal year ended August 29, 2020; the requested fourth quarter was the 13 weeks ended that date. Fiscal 2020 had 52 weeks, compared with 53 weeks in fiscal 2019, including a 14-week fourth quarter. Figures below are in U.S. dollars.
Business context and reporting period
UniFirst provides workplace uniform and protective-wear rental, cleaning, delivery and sales, alongside facility, first-aid and specialized cleanroom and nuclear garment services. It served more than 300,000 customer locations from 260 facilities and employed approximately 14,000 people. About 89% of FY2020 revenue came from Core Laundry Operations; Specialty Garments contributed 7.4% and First Aid 3.9%.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,804.2 million | $1,809.4 million |
| Operating income / margin | $172.7 million / 9.6% | $232.0 million / 12.8% |
| Net income / margin | $135.8 million / 7.5% | $179.1 million / 9.9% |
| Diluted EPS, Common Stock | $7.13 | $9.33 |
| Cash from operating activities | $286.7 million | $282.1 million |
- Fourth quarter: Revenue was $428.6 million versus $479.6 million in the prior-year quarter; net income was $31.6 million versus $46.0 million. Quarterly income before taxes was $43.0 million. The prior-year quarter was one week longer.
- FY2020 cost of revenue rose 2.3% to $1,164.9 million, or 64.6% of revenue versus 63.0%. Selling and administrative expense increased 8.1% to $361.8 million, or 20.1% of revenue versus 18.5%.
- Cash, cash equivalents and short-term investments were $474.8 million at year-end, up $89.5 million. Investing activities used $157.6 million, including acquisitions and capital expenditures of $116.7 million; financing activities used $41.1 million.
- No borrowings were outstanding. The $250 million revolving facility had $179.2 million available after $70.8 million of letters of credit. It matured April 11, 2021; the company said it expected to replace it before maturity.
- Total assets were $2.20 billion and shareholders’ equity was $1.74 billion. Current assets were $969.3 million and current liabilities $210.1 million.
Material changes versus comparable periods
- FY2020 revenue declined 0.3%; management attributed the Core Laundry decline primarily to pandemic-related customer closures and reduced wearer levels, as well as the extra week in FY2019. A $20.1 million direct sale partly offset the decline.
- Core Laundry Operations operating income fell 29.6% to $150.0 million. Management cited weaker rental revenue and resulting cost-structure pressure, higher merchandise amortization, employee compensation, bad-debt and casualty-claim costs, and safety-supply costs.
- First Aid revenue grew 15.0%, reflecting wholesale distribution performance and higher COVID-related demand for safety and personal protective equipment. Specialty Garments revenue was nearly flat; operating income rose to $17.8 million from $14.1 million.
- Operating income and net income fell more sharply than revenue. FY2019 included a $21.1 million gain from settlement with the former CRM-system contractor and a $3.0 million environmental-litigation settlement gain; these were not FY2020 operating gains.
- FY2020 included eight acquisitions for aggregate purchase consideration of approximately $41.3 million. The company also repurchased approximately 118,000 common shares for $21.7 million and paid $15.7 million in dividends.
Outlook, risks and unusual items
- No numerical FY2021 revenue or earnings guidance was provided. Management said pandemic effects remained highly uncertain and it could not reasonably estimate their full future impact. It believed cash, operating cash generation and available credit would meet anticipated working-capital and capital-expenditure needs for at least 12 months.
- Management reported that FY2020’s second-half revenue was significantly affected by customer closures and restricted operations; many customers remained below pre-pandemic activity. Supply disruptions, including for sanitizer and masks, had moderated somewhat but continued.
- Principal risks include further pandemic disruption to customers, suppliers or company facilities; labor and healthcare-cost inflation; competition and customer retention; energy-sector exposure; foreign-exchange movements; and execution of the multiyear CRM project. The company had capitalized $22.6 million for the new CRM project as of year-end; a prior CRM project had resulted in a $55.8 million impairment in FY2017.
- Environmental liabilities were accrued at $30.7 million, up from $27.7 million. Exposures include sites in Woburn and Somerville, Massachusetts; estimates may change as regulatory comments, remediation requirements and transit-authority reimbursement demands are resolved. Nuclear-laundry decommissioning liabilities were $13.9 million.
- The company reported no goodwill impairment in FY2020, including after interim testing prompted by COVID-related lower cash-flow projections and a market-capitalization decline. Further deterioration could require a future impairment.
- Ernst & Young issued an unqualified opinion on the financial statements and internal controls. The filing identifies self-insurance accruals and environmental contingencies as critical audit matters.
Important facts for investors to verify
- Whether customer activity and wearer counts recover, and how any renewed restrictions affect quarterly revenue and margins.
- Replacement and terms of the revolving credit facility before its April 2021 maturity.
- Environmental reserve adequacy, including Woburn and Somerville developments, and any changes to remediation costs.
- Progress, total future spending and operational benefits of the new CRM system.
- Whether operating margins recover after the prior-year settlement gains and pandemic-related cost pressures.
- Future cash allocation among capital expenditures, acquisitions, dividends and share repurchases.