UniFirst Corporation — Q3 FY2017 Form 10-Q
Reporting period: Thirteen weeks ended May 27, 2017; year-to-date figures cover the thirty-nine weeks ended May 27, 2017. Comparisons are with the corresponding periods ended May 28, 2016, unless stated otherwise. Amounts are in U.S. dollars.
Business context and results
UniFirst provides uniform and protective-wear rental, cleaning and sales, along with facility services, specialty garment services and first aid products. It operates in the United States, Canada and Europe. The quarter’s growth included the acquisition of Arrow Uniform, completed in September 2016.
| Metric | Q3 FY2017 | Q3 FY2016 | 39 weeks FY2017 | 39 weeks FY2016 |
|---|---|---|---|---|
| Revenue | $409.8m | $367.8m | $1,187.4m | $1,104.3m |
| Operating income | $38.8m | $47.9m | $120.7m | $144.4m |
| Operating margin | 9.5% | 13.0% | 10.2% | 13.1% |
| Net income | $24.4m | $30.1m | $75.1m | $89.5m |
| Net margin | 5.9% | 8.2% | 6.3% | 8.1% |
| Diluted EPS, Common Stock | $1.19 | $1.49 | $3.68 | $4.43 |
Cash flow, liquidity and debt
- Year-to-date cash from operating activities was $155.8m, versus $161.1m a year earlier. The filing attributes the decrease primarily to higher receivables.
- Year-to-date investing cash outflow was $204.5m, including $124.5m for acquisitions and $80.5m in capital expenditures. Financing cash outflow was $1.4m.
- Cash and cash equivalents were $312.7m at May 27, 2017, down from $363.8m at August 27, 2016. Working capital was $585.0m.
- No borrowings were outstanding under the $250m revolving credit facility; $183.8m remained available after $66.2m of letters of credit. UniFirst reported compliance with its covenants.
- Management said cash, expected operating cash flow and available credit should meet anticipated working-capital and capital-expenditure needs for at least the next 12 months.
Material changes and management commentary
- Revenue rose 11.4% in the quarter and 7.5% year to date. Core Laundry Operations revenue grew 10.8% and 8.0%, respectively. Management estimated acquisitions contributed 6.2% of quarterly growth and 5.4% of year-to-date growth; organic growth was 4.8% and 2.6%, respectively.
- Profitability declined despite higher revenue. Cost of revenues increased to 62.4% of quarterly revenue from 61.2%; selling and administrative expense increased to 22.7% from 20.3%. Management cited Arrow’s higher cost ratio, employee healthcare claims, workers’ compensation and auto claims, energy costs, and higher payroll and technology spending.
- Stock compensation expense related to a restricted-stock grant to the former CEO was $6.5m for the quarter and $8.8m year to date; $5.4m reflected accelerated vesting tied to performance conditions.
- Specialty Garments quarterly revenue increased 24.0%, with results affected by nuclear plant outage timing and project activity. First Aid quarterly revenue increased 3.1%.
- CEO and Chairman Ronald D. Croatti died on May 24, 2017. An Executive Management Committee was appointed to lead the company temporarily while the Board seeks a new CEO; CFO Steven S. Sintros was named committee administrative chair. On July 6, he was appointed principal executive officer for filing certifications.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management noted that energy-market weakness had affected customer wearer levels and lost accounts, though trends in energy-dependent North American markets had begun to stabilize. Lower fuel and natural-gas costs provided some offset.
- Healthcare costs, minimum-wage changes and potential overtime-rule changes may pressure labor costs. Seasonality, customer demand, energy and labor prices, currency movements, acquisitions and specialty-segment activity may affect results.
- The Unity 20/20 CRM project had $56.7m of capitalized costs and faced repeated delays plus significant code stability and performance issues. Completion timing and costs were uncertain; unsuccessful implementation could disrupt operations and customer service and could result in impairment of capitalized costs.
- Environmental remediation liabilities were $24.5m at May 27, 2017. The company identified multiple sites and noted unresolved EPA comments at Woburn and uncertainty regarding a Somerville transit-authority reimbursement demand and a state audit. Actual costs may differ from estimates.
- Foreign-currency exposure remains; non-U.S.-dollar revenues were 7.4% of quarterly revenue and 7.3% year to date. Forward contracts hedged approximately C$11.1m of forecast sales at period end.
- The filing reports no material changes to previously disclosed contractual obligations, no off-balance-sheet arrangements and no material changes to risk factors other than the CRM-system and key-management risks described above.
Most important facts for investors to verify
- Whether Arrow integration improves operating margins, given revenue growth alongside lower operating income and margin.
- CRM project remediation plan, remaining costs, implementation timetable and possible impairment exposure.
- CEO succession and the effectiveness of interim leadership following Mr. Croatti’s death.
- Changes in organic growth, customer retention and wearer levels, particularly in energy-dependent markets.
- Environmental reserve adequacy and developments at Woburn, Somerville and other remediation sites.
- Whether healthcare, claims, energy and labor cost pressures persist or ease.