UniFirst Corporation (NYSE: UNF) — FY2019 Form 10-K
Reporting period: Fiscal year ended August 31, 2019. FY2019 included 53 weeks, including a 14-week fourth quarter; FY2018 included 52 weeks. Amounts are in U.S. dollars.
Business context
UniFirst provides workplace uniforms and protective clothing through rental, cleaning, delivery and direct-sale programs, alongside facility and first-aid services. It served more than 300,000 customer locations from over 260 facilities. Core Laundry Operations generated 89.3% of FY2019 revenue; Specialty Garments, including nuclear and cleanroom services, contributed 7.3%; First Aid contributed 3.4%.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1.809 billion | $1.696 billion |
| Operating income / margin | $232.0 million / 12.8% | $182.4 million / 10.8% |
| Net income / net margin | $179.1 million / 9.9% | $163.9 million / 9.7% |
| Diluted EPS, Common Stock | $9.33 | $8.21 |
| Cash from operations | $282.1 million | $230.1 million |
| Capital expenditures, including software | $119.8 million | $112.7 million |
Revenue increased 6.7%. Core Laundry Operations grew 6.1%, including 3.8% organic growth, 2.0% from the additional fiscal week and 0.3% from acquisitions. Specialty Garments grew 12.1%; First Aid grew 11.1%. Cost of revenue rose to 63.0% of revenue from 62.3%, primarily reflecting higher merchandise and service-and-delivery payroll costs in Core Laundry and acquisition-related merchandise costs and claims in Specialty Garments.
Fourth-quarter revenue was $479.6 million versus $434.1 million in the prior-year quarter; net income was $46.0 million versus $35.0 million, and diluted Common Stock EPS was $2.40 versus $1.81. The comparison is affected by the extra week in FY2019.
Liquidity, debt and capital allocation
Cash, cash equivalents and short-term investments were $385.3 million at year-end, up from $270.5 million. Current assets were $913.8 million and current liabilities were $189.8 million. The company reported no outstanding borrowings and no notes payable or long-term debt. Its $250 million revolving credit facility, maturing April 2021, had $178.2 million available after $71.8 million of letters of credit; the company reported covenant compliance. Management said available cash, operating cash flow and credit capacity should cover anticipated working capital and capital needs for at least 12 months.
FY2019 investing cash use was $124.3 million and financing cash use was $41.5 million. The company repurchased 197,150 shares for $30.5 million during the year under its $100 million authorization. Total liabilities were $406.1 million and shareholders’ equity was $1.641 billion.
Material changes, outlook and unusual items
- Operating income increased 27.2%; Core Laundry Operations’ operating income rose 30.2%. Lower corporate expenses contributed, including a $21.1 million gain from settling a dispute with the contractor on the prior CRM project. The gain included $13.0 million in cash, forgiven amounts owed and hardware and maintenance services valued at $0.8 million.
- The company also recorded a $3.0 million gain from an environmental litigation settlement. These gains make reported earnings less representative of recurring operations.
- The effective tax rate rose to 24.7% from 12.5%; FY2018 included a $20.1 million net tax benefit related to the Tax Cuts and Jobs Act. FY2019 included a $2.5 million transition-tax charge.
- Management expected labor costs to rise in FY2020 due to minimum-wage increases and wage pressure in a low-unemployment environment. It did not provide a specific FY2020 revenue or earnings forecast.
- A new, multiyear CRM implementation was underway; $10.7 million had been capitalized by year-end. The prior CRM effort had been impaired by $55.8 million in FY2017. Execution and customer-service disruption remain risks.
- After year-end, UniFirst completed an approximately $38.2 million asset acquisition in September 2019. On October 23, 2019, it announced a quarterly dividend increase to $0.25 per Common share and $0.20 per Class B share, subject to Board approval each quarter.
- Environmental remediation liabilities were $27.7 million at year-end; estimates could change as investigations, regulatory discussions and site work progress. Other material risks include self-insurance claims, nuclear-facility outages and regulation, labor and energy costs, competition, foreign exchange, and operating and cyber risks.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Self-insurance accruals and environmental contingencies were identified as critical audit matters.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating performance versus the CRM and environmental settlement gains, and the extra fiscal week?
- Whether higher payroll, merchandise and claims costs continue to pressure Core Laundry and Specialty Garments margins.
- Progress, total cost and operational impact of the replacement CRM project.
- Potential changes to environmental remediation costs, particularly at the Woburn and Somerville sites, and adequacy of the $27.7 million accrual.
- Cash deployment, including the post-year-end acquisition, repurchases and increased dividend, relative to capital needs and credit-facility maturity.