UniFirst Corporation — Q3 FY2018 Form 10-Q
Reporting period: Thirteen weeks ended May 26, 2018; year-to-date period covers 39 weeks. Comparisons are with the corresponding periods ended May 27, 2017. Dollar amounts are in millions unless noted.
Business context and results
UniFirst provides uniform and protective-workwear rental, cleaning, manufacturing and sales, along with specialty garment and first-aid services. It serves more than 300,000 customer locations in the U.S., Canada and Europe.
| Metric | Q3 FY2018 | Q3 FY2017 | 39 weeks FY2018 | 39 weeks FY2017 |
|---|---|---|---|---|
| Revenue | $427.4 | $409.8 | $1,262.4 | $1,187.4 |
| Operating income | $47.1 | $38.8 | $141.0 | $120.7 |
| Operating margin | 11.0% | 9.5% | 11.2% | 10.2% |
| Net income | $36.4 | $24.4 | $128.9 | $75.1 |
| Net margin | 8.5% | 5.9% | 10.2% | 6.3% |
| Diluted Common Stock EPS | $1.85 | $1.19 | $6.39 | $3.68 |
Cash flow, liquidity and capital allocation
- Year-to-date operating cash flow was $167.3, up from $155.8. Investing used $126.1, including $88.9 of capital expenditures and $38.5 for acquisitions. Financing used $150.4, principally reflecting the $146.0 share repurchase. Cash flow from operations less capital expenditures was approximately $78.4.
- Cash, cash equivalents and short-term investments were $238.5 at May 26, down $111.3 from August 26, 2017. Working capital was $539.3, versus $636.4.
- No revolver borrowings were outstanding. Of the $250.0 credit facility, $172.2 remained available after $77.8 of letters of credit; the company reported compliance with covenants. Management said cash, future operating cash flows and available credit should cover anticipated working-capital and capital-expenditure needs for at least 12 months.
- On March 27, the company repurchased 1.178 million shares from the Croatti family for $146.0, at $124 per share. The quarterly dividend was raised to $0.1125 per Common share and $0.09 per Class B share, subject to quarterly board approval.
Changes versus prior year and management commentary
- Quarterly revenue rose 4.3%; year-to-date revenue rose 6.3%. Core Laundry Operations revenue increased 3.3% in the quarter and 5.1% year to date. Management estimated core organic growth of 1.9% for the quarter and 3.8% year to date, excluding acquisitions and currency effects.
- Specialty Garments revenue rose 14.1% for the quarter and 20.9% year to date, mainly from increased nuclear-customer outages and project activity and cleanroom growth. First Aid revenue rose 10.7% and 14.1%, respectively.
- Operating income increased 21.4% for the quarter and 16.8% year to date. Quarterly selling and administrative expense fell as a share of revenue; the prior-year comparison included $5.4 of accelerated stock compensation for former CEO Ronald Croatti. Depreciation and amortization increased, mainly due to capital expenditures placed in service.
- Quarterly cost of revenue was 62.5% of sales versus 62.4%; year-to-date it improved to 62.3% from 62.6%. Management cited higher payroll and energy costs, partly offset by lower merchandise costs and workers’ compensation expense year to date.
- The year-to-date effective tax rate fell to 10.7% from 38.9%, primarily due to U.S. tax reform. A provisional net tax benefit of $20.2 included a $22.7 deferred-tax remeasurement benefit, partly offset by a $2.5 transition-tax charge. The accounting estimates were not final; quarterly effective tax rates were 23.9% versus 38.1%.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management cited solid new-account sales but higher lost accounts in quarterly core organic growth. Results may fluctuate with economic conditions, customer wearer levels, energy prices, labor and healthcare costs, seasonality, acquisitions, and the timing of nuclear outages. Other risks include currency movements, competition, integration of acquisitions, and the performance of the new CEO.
Environmental remediation liabilities were $24.5 at May 26, with identified sites including Woburn and Somerville, Massachusetts. Potential costs and reserves may change as regulatory comments, remediation estimates, insurance recoveries and other circumstances evolve. The company also disclosed ordinary-course legal claims and risks of disruption to its regulated nuclear garment-decontamination business. U.S. tax-reform estimates remain provisional.
Most important facts for investors to verify
- Whether core organic growth, particularly new-account sales relative to lost accounts, sustains or improves.
- How much of the earnings increase reflects recurring operating performance versus the $20.2 provisional tax benefit and prior-year accelerated stock compensation.
- Cash generation and liquidity after the $146.0 repurchase, higher dividend, capital spending and acquisitions.
- Any changes in environmental remediation exposure, especially at Woburn and Somerville, and progress in finalizing tax-reform accounting.
- Execution and integration of acquisitions, and the effect of labor, healthcare, energy and currency costs on margins.