UniFirst Corporation — Q1 FY2016 Form 10-Q
Reporting period: Thirteen weeks ended November 28, 2015; comparable period ended November 29, 2014. UniFirst provides workplace uniforms, protective wear, laundry and facility services, specialty garment services, and first-aid supplies.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $373.4 million | $370.4 million | +0.8% |
| Operating income | $58.3 million | $60.6 million | -3.8% |
| Operating margin | 15.6% | 16.4% | -0.8 percentage points |
| Net income | $35.9 million | $37.4 million | -4.1% |
| Diluted EPS, Common Stock | $1.78 | $1.85 | Lower |
| Operating cash flow | $57.6 million | $52.8 million | +$4.8 million |
| Capital expenditures | $21.0 million | $17.5 million | Higher |
Cost of revenues rose to 59.6% of revenue from 59.2%; depreciation and amortization increased 9.4% to $19.7 million. The effective tax rate was 38.5% in both periods. Cash and cash equivalents were $311.5 million at quarter-end, versus $276.6 million at August 29, 2015; working capital was $513.3 million. Total liabilities were $308.7 million and shareholders’ equity was $1.277 billion.
Segments and material changes
- Core Laundry Operations revenue was $335.0 million, down 0.2%; excluding a 1.2% negative currency effect and a 0.6% acquisition benefit, organic growth was 0.4%. Segment operating income declined 6.9% to $53.0 million.
- Specialty Garments revenue increased 19.1% to $26.8 million, primarily from U.S. and Canadian nuclear decontamination operations; operating income rose to $4.3 million from $2.3 million.
- First Aid revenue declined 3.8% to $11.6 million, mainly due to order timing; operating income declined 28.4% to $1.0 million.
- Consolidated revenue growth did not translate into higher earnings: slower growth and higher merchandise amortization, payroll, production costs, and depreciation weighed on margins. Lower fuel and natural-gas costs partly offset these increases.
Operating cash flow increased mainly due to working-capital timing, particularly accounts payable and prepaid expenses. Investing cash outflow was $20.9 million, including $21.0 million of capital expenditures and a small acquisition. Financing cash outflow was $1.1 million, including $0.7 million of dividends.
Liquidity, outlook, risks and unusual items
- The company had no outstanding borrowings under its $250 million revolving credit facility; $53.0 million of letters of credit were outstanding and $197.0 million was available. It was in covenant compliance. The facility matures May 4, 2016, and management expected to replace it before maturity.
- Management said cash, future operating cash flow, and available credit should cover anticipated working-capital and capital-expenditure needs for at least 12 months. The filing provides no specific earnings or revenue guidance.
- Management expected depressed oil prices to continue affecting customer activity, wearer levels, lost accounts, and organic growth through FY2016; lower fuel and plant-energy costs partly offset the impact, but management believed lost revenue and profit could outweigh those savings if low prices persisted.
- Healthcare costs have outpaced revenue growth; management anticipated further adverse effects, including ACA-related costs. The company had capitalized $45.3 million for its Unity 20/20 customer-relationship-management project, which it said would not be deployed in FY2016; related investment and eventual depreciation are expected to affect results.
- Foreign-currency-denominated revenue was 8.1% of total. Canadian-dollar forward contracts had a 23.5 million CAD notional value and $0.7 million fair value; the company recognized $0.1 million in revenue from reclassification during the quarter.
- Environmental remediation liabilities were $23.0 million at quarter-end. Potential costs may change with regulatory requirements, estimates, insurance recoveries, and other parties’ contributions. The company identified multiple remediation sites and unresolved EPA comments and oversight-cost discussions concerning Woburn, Massachusetts.
- Other disclosed risks include customer retention and contract renewals, energy and labor costs, competition, currency movements, acquisition integration, nuclear-facility regulation, seasonality, and IT-system implementation or disruption. Management reported no material change to the prior annual report’s risk factors.
Important facts for investors to verify
- Whether core-laundry organic growth and customer retention improve amid oil-sector weakness and elevated lost accounts.
- Whether operating-margin pressure from labor, merchandise amortization, IT investment, and depreciation eases, and how healthcare costs develop.
- Replacement terms and availability of the revolving credit facility before its May 2016 maturity.
- Progress, deployment timing, and remaining costs of Unity 20/20.
- Potential changes to environmental remediation estimates, especially Woburn exposure, and the timing and collectability of insurance proceeds.
- Whether Specialty Garments’ strong quarter is repeatable given the timing of reactor outages and project-based work.