UniFirst Corporation — Q1 FY2019 Form 10-Q
Reporting period: Thirteen weeks ended November 24, 2018; comparative period ended November 25, 2017. UniFirst provides uniform and workwear rental, cleaning and sales, along with specialty garment and first-aid services. Figures below are in U.S. dollars.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $438.6 million | $415.8 million | +5.5% |
| Gross profit | $161.5 million | $162.1 million | -0.4% |
| Gross margin | 36.8% | 39.0% | -2.2 percentage points |
| Operating income / margin | $50.4 million / 11.5% | $51.9 million / 12.5% | Income -2.9% |
| Net income / margin | $38.3 million / 8.7% | $34.2 million / 8.2% | +12.0% |
| Diluted EPS | $1.99 | $1.67 | +19.2% |
| Operating cash flow | $32.3 million | $47.6 million | -32.3% |
| Capital expenditures | $23.3 million | $19.0 million | Higher |
Revenue growth was led by Core Laundry Operations, up 4.5%, and Specialty Garments, up 21.2%; First Aid revenue increased 0.5%. Core Laundry organic growth was 4.1%, excluding estimated acquisition contribution of 0.7% and a 0.3% adverse currency effect. Specialty Garments growth included estimated 11.3% acquisition contribution, as well as increased Canadian nuclear outages and project work and cleanroom growth.
Cost of revenues rose 9.2%, faster than sales. Management cited higher production, service and delivery payroll and merchandise costs in Core Laundry; Specialty Garments also had higher production, merchandise, workers’ compensation and auto-claim costs. Selling and administrative expenses fell 1.8%, partly due to a $3.0 million environmental litigation settlement gain, lower healthcare claims, CRM-related labor capitalization, and deferred commissions under the new revenue standard. Depreciation and amortization increased 10.6% to $25.1 million.
Liquidity, debt and capital
Cash, cash equivalents and short-term investments were $276.5 million at November 24, 2018, versus $270.5 million at August 25, 2018. Working capital was $632.7 million. Operating cash flow was lower year over year, primarily due to a one-time employee bonus, increased merchandise placed in service and higher sales-tax receivables; the $3.0 million environmental settlement receipt partly offset the decline.
UniFirst had no revolver borrowings under its $250 million unsecured credit facility, which matures April 11, 2021. Letters of credit of $71.4 million left $178.6 million available; the company reported compliance with covenants. Management said existing cash, expected operating cash flow and available credit should cover anticipated working-capital and capital-expenditure needs for at least 12 months. Quarterly dividends declared were $0.1125 per Common share and $0.09 per Class B share.
Material changes, outlook and notable items
- Net income and EPS increased despite lower operating income and margin; the lower effective tax rate—26.2% versus 35.5%—primarily reflected U.S. tax reform. Accounting for the Act remained provisional and subject to refinement.
- Adoption of the new revenue standard on August 26, 2018 produced a $39.4 million opening retained-earnings increase for capitalized contract costs. For Q1, it increased reported net income by $0.7 million and diluted EPS by $0.04 versus historical guidance; it had no effect on operating cash flow. Prior-year results were not restated.
- On January 2, 2019, the board authorized up to $100 million of share repurchases. Timing and amount are discretionary and may be funded with cash or revolver capacity.
- A December 28, 2018 CRM-contractor settlement is expected to generate a $20.3 million gain in the quarter ending February 23, 2019, including a $13.0 million cash payment and forgiveness of amounts owed. The filing also reports a new multiyear CRM implementation project; $3.8 million had been capitalized by quarter-end.
- No quantified full-year financial guidance was provided. Management expected fiscal 2019 labor costs to rise due to minimum-wage increases and wage pressure; healthcare costs were also expected to continue pressuring results. Results are subject to seasonality, including nuclear outage timing and customer activity.
- Environmental remediation liabilities were $24.8 million. Exposure spans multiple sites; EPA comments and Somerville transit-authority reimbursement demands remain matters of uncertainty. Management cautioned that changes in estimates or circumstances could materially affect future results. Other risks include energy and labor costs, customer retention, foreign currency, regulatory matters, nuclear-service disruptions, and CRM execution.
Most important facts for investors to verify
- Whether revenue growth and Core Laundry organic growth persist, and how much future growth depends on acquisitions and Specialty Garments outage/project timing.
- Whether labor, merchandise and other service costs continue to outpace revenue growth and pressure gross and operating margins.
- Whether operating cash flow recovers after the one-time bonus and working-capital movements, while capital spending remains elevated.
- The final tax-reform accounting and the sustainability of the effective tax rate.
- Recognition and cash collection of the CRM settlement gain, progress and spending on the replacement CRM project, and any repurchases under the new authorization.
- Changes in environmental remediation estimates, especially Woburn and Somerville exposures, and any material developments in other legal or regulatory contingencies.