UniFirst Corporation (NYSE: UNF) — FY2018 Form 10-K
Business context and reporting period. UniFirst provides uniform rental, cleaning, delivery and sales, protective clothing, facility supplies, and first-aid services. Its fiscal year ended August 25, 2018 and consisted of 52 weeks. The filing also reports unaudited fourth-quarter results; this is an annual filing, not a quarterly report.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1.696 billion | $1.591 billion |
| Operating income | $182.4 million | $110.3 million |
| Operating margin | 10.8% | 6.9% |
| Net income | $163.9 million | $70.2 million |
| Net margin | 9.7% | 4.4% |
| Diluted EPS, Common Stock | $8.21 | $3.44 |
| Operating cash flow | $230.1 million | $218.3 million |
| Capital expenditures | $112.7 million | $108.6 million |
Revenue rose 6.6%. Core Laundry Operations organic growth was 4.5%, excluding estimated acquisition growth of 1.0% and a 0.2% favorable currency impact. Cost of revenue declined to 62.3% of revenue from 62.5%; selling and administrative expense declined to 21.3% from 21.5%. Improvement in operating income was substantially affected by the absence of FY2017’s $55.8 million CRM-system impairment charge.
Cash, cash equivalents and short-term investments totaled $270.5 million, down from $349.8 million; working capital was $586.3 million. The company had no outstanding borrowings under its $250 million revolving credit facility, with $186.1 million available after $63.9 million of letters of credit. It reported compliance with facility covenants. Total assets were $1.843 billion and shareholders’ equity was $1.465 billion.
FY2018 investing cash outflow was $153.9 million, including $42.7 million for acquisitions; financing cash outflow was $152.9 million, principally the $146.0 million share repurchase. The annual dividend per share increased to $0.30 for Common Stock and $0.24 for Class B Common Stock, versus $0.15 and $0.12, respectively, in FY2017.
Material changes and unusual items
- The Tax Cuts and Jobs Act produced a reported $20.1 million net tax benefit, contributing to a 12.5% effective tax rate versus 39.0% in FY2017. The company’s tax accounting remained provisional; it recorded a $22.6 million deferred-tax remeasurement benefit partly offset by a $2.5 million transition-tax charge.
- A $7.2 million one-time employee cash bonus related to tax reform reduced diluted EPS by $0.25.
- On March 27, 2018, UniFirst repurchased 1.105 million Class B shares and 73,000 Common shares from the Croatti family for $146.0 million, at $124 per share. The company said the transaction was accretive to EPS; estimated FY2018 diluted EPS benefit was $0.20.
- Nine acquisitions were completed during FY2018 for approximately $41.8 million in aggregate purchase price.
- Fourth-quarter FY2018 revenue was $434.1 million and net income was $35.0 million. The comparable FY2017 quarter had revenue of $403.6 million and a net loss of $4.9 million, including the $55.8 million CRM impairment.
Outlook, management commentary and risks
The filing gives no specific FY2019 revenue or earnings guidance. Management expects labor costs to rise in FY2019 due to minimum-wage increases and wage pressure in a low-unemployment environment. It also identifies healthcare costs, energy prices and economic conditions in energy-producing regions as factors that could affect costs and customer wearer levels. Management stated that cash, future operating cash flow and available credit should meet anticipated working-capital and capital-expenditure needs for at least 12 months.
The prior CRM project was abandoned after the FY2017 impairment; UniFirst is developing a new system and warns that implementation failure or delays could disrupt operations and customer service. Other material risks include competition and customer retention, acquisition integration, environmental remediation, regulation or shutdowns affecting nuclear-service facilities, foreign-exchange exposure, labor availability and costs, cybersecurity and IT interruptions, and tax-law uncertainty.
Environmental liabilities accrued were $25.5 million. Identified environmental remediation costs, net of estimated insurance proceeds and stated in current dollars, were $26.2 million before inflation and discounting adjustments; actual costs could exceed reserves. The company also reported $13.7 million of nuclear-facility asset-retirement obligations. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Key investor verification points
- Assess underlying earnings growth separately from the tax benefit, the prior-year CRM impairment, the employee bonus and the share repurchase.
- Review progress, budget and implementation risks for the replacement CRM system.
- Track environmental reserve adequacy, including unresolved Woburn and Somerville matters and potential additional remediation.
- Evaluate acquisition contributions and integration, alongside organic growth and wearer-level trends.
- Monitor labor, healthcare, fuel and energy costs, and their effect on margins and cash generation.
- Confirm tax-reform accounting estimates and the implications of foreign earnings and cash held outside the United States.