UniFirst Corporation — FY2017 Form 10-K
Business context and reporting period. UniFirst provides uniform and protective-clothing rental, cleaning, delivery and sales, alongside facility, first-aid and specialty garment services. This annual filing covers the 52 weeks ended August 26, 2017; fiscal Q4 is included. Core Laundry Operations generated about 91% of revenue. The company completed six acquisitions, including Arrow Uniform, acquired for approximately $118.7 million in September 2016.
Financial performance and liquidity
- Revenue: $1.591 billion, up 8.4% from $1.468 billion. Core Laundry Operations revenue rose 8.5%; acquisitions contributed an estimated 5.4 percentage points, while organic growth was 3.1%. Specialty Garments revenue increased 7.4% and First Aid increased 7.1%.
- Profit and margins: Operating income was $110.3 million (6.9% of revenue), down 45.2% from $201.2 million (13.7%). Net income was $70.2 million versus $125.0 million; diluted EPS was $3.44 versus $6.17. Fiscal 2017 results included a $55.8 million non-cash CRM impairment charge and $5.4 million of accelerated share-based compensation expense related to the former CEO’s death.
- Costs: Cost of revenue increased to 62.5% of revenue from 61.3%; selling and administrative expense rose to 21.5% from 19.4%. The comparison was also affected by a $15.9 million environmental litigation settlement gain recorded in fiscal 2016.
- Cash flow and investment: Operating cash flow was $218.3 million, up from $207.6 million. Investing activities used $233.0 million, including the Arrow acquisition; capital expenditures were $108.6 million. Cash, cash equivalents and short-term investments declined $14.0 million to $349.8 million.
- Liquidity and debt: Working capital was $636.4 million, versus $625.0 million. The company had no borrowings outstanding and had $183.8 million available under its $250 million revolving credit facility after $66.2 million of letters of credit. Shareholders’ equity was $1.453 billion; total liabilities were $365.9 million.
- Margins and other measures: Income before taxes was $115.1 million; the effective tax rate was 39.0%. Depreciation and amortization totaled $88.9 million. The company paid annual dividends of $0.15 per Common share and $0.12 per Class B share.
Material changes versus the prior year
- Revenue growth reflected Arrow and other acquisitions as well as 3.1% organic Core Laundry growth. Management said energy-sector customer headcount cuts, lost accounts and weaker new sales weighed on organic growth, though wearer levels in energy-dependent markets had begun to stabilize.
- Operating income fell sharply, mainly due to the CRM impairment, higher Arrow operating costs, increased employee healthcare, workers’ compensation and auto claims, higher energy costs, and the absence of the prior-year environmental settlement gain.
- Cash from operations increased, but acquisition spending and capital expenditures drove investing cash outflows substantially higher. Cash and short-term investments decreased from $363.8 million.
- Following Chairman, CEO and President Ronald D. Croatti’s death in May 2017, Steven S. Sintros became CEO and President effective July 31, while continuing as CFO and principal accounting officer pending appointment of a successor CFO.
Outlook, risks and contingencies
- Management said existing cash, future operating cash flow and credit availability should be sufficient for anticipated working-capital and capital-expenditure needs for at least 12 months. No quantified revenue or earnings guidance was provided.
- Management expected fiscal 2018 operating margins to be pressured by continued spending on the CRM and other technology initiatives, and expected labor costs to rise because of minimum-wage increases and wage pressures. The company was still evaluating its path forward after determining the current CRM version was not probable to be completed and placed in service; $4.1 million of capitalized costs remained, primarily for software licenses with alternative uses.
- Environmental remediation remains a significant uncertainty. Accrued environmental liabilities were $25.4 million, with estimated net anticipated costs of $25.6 million before inflation and discounting effects. Sites include Woburn and Somerville, Massachusetts; the EPA’s Woburn comments remain partly unresolved, and the Somerville work is subject to a state audit and transit-authority reimbursement demands.
- Other key risks include competition and customer retention; economic conditions and exposure to energy-producing regions; healthcare, wage, fuel and energy costs; nuclear outage volatility and regulatory oversight; foreign exchange and Mexico operating risks; acquisition integration; CRM/IT execution and cyber risk; and potential environmental, legal, labor and tax liabilities. The company reported $4.2 million of reserved uncertain tax positions.
- The company had $128.0 million of undistributed foreign-subsidiary earnings treated as indefinitely reinvested, and $59.5 million of cash outside the United States. Repatriation could trigger additional taxes.
Important facts for investors to verify
- Underlying operating performance excluding the $55.8 million CRM impairment, the $5.4 million accelerated compensation expense, and the fiscal 2016 $15.9 million settlement gain.
- Arrow’s contribution to organic growth, cost of revenue and operating margins, and whether integration delivers expected benefits.
- The replacement plan, expected spending and timetable for the CRM system, and any operational effects of the project’s delays.
- Changes in environmental remediation estimates, especially the Woburn and Somerville matters, and whether current accruals remain adequate.
- Progress in CEO/CFO succession, future labor and healthcare costs, and the company’s ability to sustain cash generation, capital investment and dividends.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The internal-control assessment excluded Arrow, which represented less than 1% of assets and approximately 3% of fiscal 2017 revenue.