UniFirst Corporation — Q3 Fiscal 2016 Form 10-Q
Reporting period: Thirteen weeks ended May 28, 2016; year-to-date figures cover the thirty-nine weeks ended that date. Financial statements are unaudited. UniFirst provides uniform and workwear rental, cleaning, sales, and related services, with five reporting segments.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Revenue | $367.8 million | $365.6 million | $1,104.3 million | $1,097.4 million |
| Operating income | $47.9 million | $52.4 million | $144.4 million | $154.5 million |
| Operating margin | 13.0% | 14.3% | 13.1% | 14.1% |
| Net income | $30.1 million | $32.5 million | $89.5 million | $95.4 million |
| Diluted EPS, Common Stock | $1.49 | $1.61 | $4.43 | $4.72 |
Revenue grew 0.6% in both the quarter and year to date, while operating income fell 8.5% and 6.5%, respectively. Net income declined 7.2% in the quarter and 6.1% year to date. Cost of revenues rose to 61.2% of quarterly revenue from 60.7%; year to date it was 61.3%, versus 60.6%. Net margin was 8.2% in the quarter versus 8.9%, and 8.1% year to date versus 8.7%.
For the 39 weeks, operating cash flow was $161.1 million, compared with $158.4 million. Investing activities used $83.0 million, including $72.1 million of capital expenditures and $10.9 million for acquisitions; financing activities used $7.3 million. Cash increased $71.0 million from fiscal year-end to $347.6 million. Working capital was $566.3 million, versus $477.7 million at August 29, 2015.
At May 28, 2016, UniFirst had no borrowings under its $250 million unsecured revolving credit facility; $52.6 million of letters of credit left $197.4 million available. The facility matures April 11, 2021, and the company reported covenant compliance. Total liabilities were $301.4 million and shareholders’ equity was $1,329.6 million.
Material changes and management commentary
- Core Laundry Operations revenue increased 1.1% in Q3, with reported organic growth of 1.0%; year-to-date revenue rose 0.2%, with organic growth of 0.6%. Management said oil-sector and related customer workforce reductions and lost accounts continued to weigh on growth; it expects elevated headcount reductions to affect organic growth into fiscal 2017.
- Specialty Garments revenue fell 6.9% in Q3 but increased 6.4% year to date, reflecting increased North American power-reactor business over the year-to-date period. First Aid revenue grew 4.6% in Q3 and 1.8% year to date.
- Management attributed cost pressure to payroll, production, healthcare, merchandise amortization, and higher bad-debt expense, including concerns about customers in energy-related industries. Lower fuel and natural-gas costs partly offset the increases.
- Healthcare costs have outpaced revenue growth; the company expects further pressure from healthcare costs and anticipates higher fiscal 2017 labor costs from minimum-wage increases and expanded overtime eligibility. Management was evaluating the latter’s impact.
- The company had capitalized $48.0 million for its Unity 20/20 customer relationship management system as of May 28, 2016. It said the system would not be deployed in fiscal 2016 and that future results would reflect depreciation of the investment and ongoing IT-support costs.
- Two acquisitions were completed during the 39 weeks for aggregate purchase consideration of approximately $14.1 million; they were not significant enough to require pro forma financial information.
Outlook, risks, and contingencies
No quantified earnings or revenue guidance was provided. Management said cash on hand, future operating cash flow, and available credit should cover anticipated working-capital and capital-expenditure needs for at least 12 months. It noted that lower oil prices have hurt customer activity and organic growth overall, despite reducing fuel and plant-energy costs.
Environmental remediation is a significant contingency: accrued environmental liabilities were $23.6 million at May 28, 2016. Matters include multiple remediation sites, unresolved EPA comments and a settlement in principle subject to government approval concerning Woburn, and potential changes to Somerville-related costs and reserves. The filing warns that estimates and future financial effects could change. Other risks include foreign-currency movements, customer retention, competition and margins, labor relations and costs, healthcare, energy prices, acquisitions, technology implementation and cybersecurity, and seasonal fluctuations. Management reported no material change to the risk factors in its fiscal 2015 Form 10-K.
Most important facts for investors to verify
- Whether organic growth and customer retention stabilize, particularly among energy-sector and energy-dependent customers.
- Whether labor, healthcare, bad-debt, and other operating-cost increases continue to compress margins.
- Environmental exposures and reserve assumptions, including Woburn and Somerville developments and the timing of remediation payments.
- Progress, remaining cost, deployment timing, and eventual depreciation of the $48.0 million Unity 20/20 investment.
- Credit-facility availability and covenant compliance, plus the impact of currency movements and specialty-garment outage timing on results.