UniFirst Corporation (UNF) — Q3 Fiscal 2019 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended May 25, 2019; comparisons are with the periods ended May 26, 2018. Financial amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Business context
UniFirst provides workplace uniforms and protective clothing, including rental, cleaning, delivery and sales services, as well as specialty garment and first-aid services. It serves more than 300,000 customer locations in the U.S., Canada and Europe.
Key financial metrics
| Metric | 13 weeks ended May 25, 2019 | 13 weeks ended May 26, 2018 | 39 weeks ended May 25, 2019 | 39 weeks ended May 26, 2018 |
|---|---|---|---|---|
| Revenue | $453.7m | $427.4m | $1,329.8m | $1,262.4m |
| Operating income | $60.2m | $47.1m | $173.1m | $141.0m |
| Net income | $47.2m | $36.4m | $133.1m | $128.9m |
| Diluted EPS, Common Stock | $2.46 | $1.85 | $6.93 | $6.39 |
| Operating margin | 13.3% | 11.0% | 13.0% | 11.2% |
Revenue grew 6.2% in the quarter and 5.3% year to date. Approximate gross margin was 38.3% in the quarter versus 37.5%, but 36.9% year to date versus 37.7%. Quarter net margin was approximately 10.4% versus 8.5%; year-to-date net margin was approximately 10.0% versus 10.2%.
For the first 39 weeks, operating cash flow was $199.4m, compared with $167.3m. Investing cash use was $90.3m, including $88.2m of capital expenditures; financing cash use was $28.8m. Cash, cash equivalents and short-term investments were $349.4m at May 25, up $78.9m from August 25, 2018. Working capital was $687.6m.
Total assets were $1,981.3m and total liabilities were $371.6m. The company had no revolver borrowings; $71.8m of letters of credit left $178.2m available under its $250m credit facility, which matures April 11, 2021. It reported compliance with all covenants.
Material changes versus prior comparable periods
- Quarter operating income rose 27.9%; year-to-date operating income rose 22.8%. Selling and administrative expense fell 8.3% year to date, partly reflecting unusual gains and accounting changes described below.
- Core Laundry Operations revenue rose 5.5% in the quarter and 4.7% year to date. Management reported 5.8% quarterly organic growth and 4.6% year-to-date organic growth, excluding specified currency and acquisition effects.
- Specialty Garments revenue grew 9.6% in the quarter and 13.4% year to date; acquisitions contributed substantially to year-to-date growth. First Aid revenue grew 16.6% in the quarter, helped by geographic expansion and acquisitions.
- Year-to-date cost of revenues increased 6.7%, faster than revenue, and its share of revenue rose to 63.1% from 62.3%. Management cited higher merchandise and service-and-delivery payroll costs in Core Laundry, and acquisition-related costs and claims in Specialty Garments.
- Year-to-date net income increased only 3.3%, while the prior-year comparison included a $20.2m net tax benefit related to U.S. tax reform. The 2019 year-to-date effective tax rate was 24.8%, versus 10.7% in 2018.
Outlook, management commentary, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management said cash balances, expected operating cash generation and available credit should meet anticipated working-capital and capital-expenditure needs for at least the next 12 months.
- Management expects labor costs to rise during the remainder of fiscal 2019 due to minimum-wage increases and wage pressure. It also warned that continuing healthcare-cost increases may weigh on results. Energy prices affect both operating costs and demand from customers and related industries.
- Fiscal 2019 year-to-date results include a $21.1m gain recorded as a reduction of selling and administrative expense from a CRM contractor settlement, including a $13.0m cash payment and forgiveness of amounts owed. The company also recorded a $3.0m gain from an environmental litigation settlement. A new CRM project remains underway; $7.9m had been capitalized by May 25, 2019.
- Adoption of the new revenue standard increased year-to-date net income by $2.9m, primarily through capitalization and amortization of contract costs; the company said adoption did not affect operating cash flow. Comparative periods were not restated.
- Environmental remediation liabilities were $25.8m. Exposure remains subject to uncertainty, including unresolved EPA comments at the Woburn site and a transit authority reimbursement demand and regulatory audit related to Somerville. Management cautioned that estimates and reserves may change and future costs could be material.
- Other disclosed risks include seasonality and nuclear outage timing, customer retention and economic conditions, foreign-exchange movements, labor relations, energy costs, acquisition integration, and IT-system disruption. The company reported no material changes to the risk factors in its latest annual report.
- The board authorized up to $100m of share repurchases in January 2019. Through May 25, the company repurchased 144,500 shares for $21.0m; the quarter’s average repurchase price was $147.47 per share.
Important facts for investors to verify
- How much of operating-income growth is sustainable after adjusting for the CRM settlement, environmental settlement and revenue-standard adoption effects.
- Whether Core Laundry organic growth and Specialty Garments performance persist, and how acquisitions contribute to growth and margins.
- Whether cost pressures—especially merchandise, labor, healthcare and workers’ compensation—continue to offset revenue growth.
- Potential changes in environmental remediation estimates, including Woburn and Somerville matters, and the timing and amount of related cash payments.
- Capital allocation priorities, including remaining repurchase authorization, dividend payments, capital expenditures and liquidity needs.
- The balance-sheet and expense effects of adopting lease accounting in fiscal 2020; the filing identifies $47.1m of operating-lease commitments at August 25, 2018 and says the impact was still being evaluated.