UniFirst Corporation (UNF) — Q1 FY2020 Form 10-Q
Business context and period. UniFirst provides workplace uniforms and protective clothing, rental and laundry services, specialty garment services, and first-aid and safety supplies. This unaudited quarter covers the 13 weeks ended November 30, 2019; comparisons are with the 13 weeks ended November 24, 2018. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $465.4 million | $438.6 million | +6.1% |
| Operating income | $60.1 million | $50.4 million | +19.2% |
| Operating margin | 12.9% | 11.5% | +1.4 percentage points |
| Net income | $48.2 million | $38.3 million | +25.9% |
| Diluted EPS | $2.52 | $1.99 | +26.6% |
| Operating cash flow | $52.4 million | $32.3 million | +62.6% |
- Cost of revenues was 62.2% of revenue, down from 63.2%; selling and administrative expenses were 19.5%, versus 19.6%. Net margin was 10.4%, versus 8.7%.
- Revenue by service type: Core Laundry Operations $416.3 million (+6.6%); Specialty Garments $33.4 million (-3.0%); First Aid $15.7 million (+15.2%). Management attributed Core Laundry growth primarily to new-account sales and fewer lost accounts; First Aid growth reflected wholesale distribution performance. Specialty Garments was affected by lower nuclear outage activity, partly offset by cleanroom growth.
- Cash, cash equivalents and short-term investments totaled $356.6 million at quarter-end, down $28.8 million from August 31, 2019. Investing used $68.2 million, including $39.3 million for acquisitions and $29.0 million of capital expenditures; financing used $13.5 million, including $10.0 million of share repurchases.
- No revolver borrowings were outstanding. Of the $250 million unsecured credit facility, $179.2 million was available after $70.8 million of letters of credit; the company reported compliance with covenants. Management said available cash, future operating cash flow and credit availability should cover anticipated working capital and capital expenditures for at least 12 months.
- Total assets were $2.12 billion and shareholders’ equity was $1.68 billion at November 30, 2019. Current assets were $902.5 million and current liabilities $197.6 million. The filing reports no outstanding borrowings under the credit facility.
Material changes and notable items
- Three acquisitions were completed for approximately $39.4 million, including a Missouri industrial laundry business acquired for $38.5 million. Preliminary purchase accounting allocated $23.3 million to goodwill and $10.8 million to intangibles for the Missouri acquisition.
- Net cash provided by operations increased year over year, reflecting higher net income and a prior-year employee bonus payment, partly offset by a $3.0 million environmental-litigation settlement cash receipt in the prior-year quarter.
- The effective tax rate declined to 22.1% from 26.2%, including a $1.3 million benefit from releasing tax reserves and a $0.7 million discrete benefit related to stock-option exercises. These benefits supported the reported net-income increase.
- Quarterly dividends were raised to $0.25 per Common share and $0.20 per Class B share, from $0.1125 and $0.09, respectively. UniFirst repurchased 50,600 Common shares at an average $197.11 per share; approximately $59.5 million remained under the $100 million authorization at quarter-end.
- Adoption of the new lease standard on September 1, 2019 resulted in recognition of right-of-use assets and lease liabilities. The company reported $47.7 million of right-of-use assets and $45.6 million of lease liabilities at quarter-end; adoption did not materially affect income or cash flows.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or margin guidance. Management expects labor costs to rise in fiscal 2020, citing minimum-wage increases and wage pressure in a low-unemployment environment.
- Management cited energy and fuel prices, labor costs, economic conditions and customer workforce levels, competition and customer retention, acquisitions and integration, foreign exchange, and the performance of Specialty Garments as factors that could affect results. The company also noted risks relating to its CRM system project, information technology and cybersecurity, and supply costs.
- Environmental remediation remains a significant contingency. The recorded environmental liability was $28.3 million at November 30, 2019, with potential exposure across multiple sites and uncertainty around regulatory requirements, estimates, insurance recoveries and timing. Estimated net anticipated costs in current dollars were $27.2 million before inflation and discounting adjustments. Management cautioned that changes in assumptions or circumstances could materially affect future results.
- The company also disclosed legal claims arising in the ordinary course, including employment, personal injury, customer-contract and environmental matters, and regulatory oversight of nuclear garment decontamination facilities. It stated that recorded contingencies were considered properly accrued but future financial results could be affected by changes in estimates or external developments.
- Forward-looking statements are subject to risks; the company said there had been no material changes to the risk factors in its FY2019 Form 10-K. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects organic customer growth versus acquisitions, pricing, revenue adjustments and timing effects.
- Whether operating-margin gains persist as labor costs rise and energy and other input costs change.
- The sustainability of earnings growth after the quarter’s tax-reserve release and stock-option-related tax benefit.
- Acquisition integration, purchase-accounting assumptions and the returns generated on acquisition and capital spending.
- Environmental liability estimates, developments at the Woburn and Somerville sites, and the adequacy and timing of insurance recoveries.
- Cash deployment, the increased dividend, share repurchases, and credit-facility availability and maturity in April 2021.