UniFirst Corporation — Q1 Fiscal 2017 Form 10-Q
Reporting period: Thirteen weeks ended November 26, 2016; comparisons are with the thirteen weeks ended November 28, 2015. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and results
UniFirst provides workplace uniforms and protective wear, rental and laundry services, facility supplies, specialty garment services, and first aid products. It serves more than 300,000 customer locations across the U.S., Canada, and Europe. Its reporting segments include Core Laundry Operations, Specialty Garments, and First Aid.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $386.1 | $373.4 | +3.4% |
| Operating income | $45.8 | $58.3 | -21.5% |
| Net income | $28.2 | $35.9 | -21.4% |
| Diluted EPS, common stock | $1.38 | $1.78 | Down |
| Operating margin | 11.9% | 15.6% | Down 3.7 percentage points |
| Net margin | 7.3% | 9.6% | Down 2.3 percentage points |
Financial position, cash flow, and liquidity
- Cost of revenues rose 7.3% to $238.8 million and increased to 61.8% of revenue from 59.6%, implying gross margins of approximately 38.2% and 40.4%, respectively. Selling and administrative expenses increased 9.2% to $79.4 million; depreciation and amortization increased 12.2% to $22.1 million.
- Operating cash flow was $63.5 million, versus $57.6 million a year earlier. Investing cash outflow was $138.3 million, principally reflecting the Arrow acquisition; capital expenditures were $18.2 million. Financing cash outflow was $0.4 million.
- Cash and cash equivalents were $286.1 million at quarter-end, down $77.7 million from August 27, 2016. Working capital was $553.2 million. Total assets were $1.725 billion, total liabilities $335.0 million, and shareholders’ equity $1.390 billion.
- No revolver borrowings were outstanding. Of the $250 million revolving facility, $58.0 million was committed to letters of credit and $192.0 million remained available. UniFirst reported compliance with its covenants. Management said cash, operating cash generation, and available credit should cover anticipated working capital and capital expenditure needs for at least 12 months.
- The company paid $0.724 million in cash dividends during the quarter. Long-term debt was not outstanding at November 26, 2016.
Material changes and management commentary
- Core Laundry Operations revenue increased 5.0% to $351.8 million; acquisitions contributed 4.4 percentage points and organic growth was 0.6%. Arrow Uniform, acquired September 19, 2016, contributed to the acquisition growth. Its operating costs were significantly higher as a percentage of revenue than those of the remaining Core Laundry business, weighing on margins.
- Specialty Garments revenue fell 16.5% to $22.4 million, with operating income down 73.1% to $1.2 million. The filing notes results in this business can vary with nuclear reactor outage timing and project activity. First Aid revenue increased 2.9% to $11.9 million.
- Management attributed weaker organic growth to reduced customer headcounts and lost accounts linked to depressed oil prices and related regional economic weakness; it expected fiscal 2016 headcount reductions to continue to pressure organic growth in fiscal 2017. Lower fuel and natural gas costs provided a partial offset, but management said the negative effects outweighed those benefits.
- Higher merchandise, payroll, and production costs, slow organic growth, increased administrative and technology costs, and Arrow-related amortization contributed to lower operating income. Selling and administrative expenses also reflected higher stock compensation, including a CEO restricted-stock grant.
- Operating cash flow included a $12.5 million cash receipt in September from an environmental-litigation settlement. The related $15.9 million gain had been recorded in Q4 FY2016 as a reduction of selling and administrative expenses; the filing says the Q1 cash-flow benefit was partly offset by lower net income.
Risks, contingencies, and unusual items
- Environmental remediation liabilities were reported at $24.5 million at November 26, 2016. The company faces ongoing remediation and monitoring at multiple sites, including Woburn and Somerville, Massachusetts; potential costs and reserves may change. EPA comments at Woburn remain unresolved, and a Massachusetts agency is auditing remediation work at Somerville.
- Other risks discussed include labor and healthcare cost increases, minimum-wage and overtime rule changes, foreign-currency movements, energy-sector weakness, customer retention, acquisition integration, seasonal and quarterly fluctuations, and information-technology system implementation and cyber risks.
- UniFirst had capitalized $50.5 million for its Unity 20/20 CRM project and said continued technology investment and eventual depreciation would affect results. The system had not yet been deployed.
- Foreign-currency translation reduced other comprehensive income by $5.1 million during the quarter. The company reported a $0.5 million transaction loss and uses CAD forward contracts for certain forecast sales; other foreign-currency exposure is not hedged through a broader program.
- No material changes to the previously disclosed risk factors or contractual obligations were reported. The filing did not provide specific earnings or revenue guidance.
Important facts for investors to verify
- Whether Arrow’s integration, customer retention, and operating margins improve from the initially higher cost levels disclosed.
- Whether Core Laundry organic growth strengthens, given the reported 0.6% rate and continuing energy-market and customer-headcount pressures.
- Whether margin compression persists as labor, merchandise, healthcare, technology, and acquired-business costs evolve.
- Whether environmental remediation estimates and related insurance recoveries change, particularly for the Woburn and Somerville matters.
- How the Unity 20/20 deployment, related investment, and future depreciation affect operating costs and execution risk.