UniFirst Corporation — Q2 FY2020 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended February 29, 2020, compared with periods ended February 23, 2019. UniFirst provides uniform and workwear rental, laundering, sales, specialty garment services, and first-aid and safety supplies.
Financial results
| Metric | Q2 FY2020 | Q2 FY2019 | 26 weeks FY2020 | 26 weeks FY2019 |
|---|---|---|---|---|
| Revenue | $464.6m | $437.5m | $930.0m | $876.0m |
| Operating income | $44.1m | $62.4m | $104.2m | $112.9m |
| Operating margin | 9.5% | 14.3% | 11.2% | 12.9% |
| Net income | $34.7m | $47.6m | $82.9m | $85.9m |
| Diluted EPS, common stock | $1.82 | $2.48 | $4.34 | $4.46 |
| Operating cash flow | — | $136.9m | $128.7m |
Q2 revenue grew 6.2%; six-month revenue also increased 6.2%. Q2 net income fell 27.2%, and six-month net income fell 3.5%. Cost of revenue was 64.9% of sales in Q2 versus 64.4% a year earlier; selling and administrative expense rose to 20.0% of sales from 15.6%.
Core Laundry Operations revenue grew 4.5% in Q2, including 3.6% organic growth and 0.8% acquisition growth; Specialty Garments grew 21.0% and First Aid 23.2%. For the first half, Core Laundry organic growth was 4.8%, with 0.8% from acquisitions.
Cash, debt, and capital allocation
- Cash, cash equivalents and short-term investments were $395.3m at February 29, 2020, versus $385.3m at August 31, 2019.
- Operating cash flow was $136.9m; investing cash outflow was $103.1m, including $41.0m net cash for acquisitions and $62.3m of capital expenditures. Financing cash outflow was $24.0m, including $14.2m of share repurchases and $6.6m of dividends.
- No revolver borrowings were outstanding. Of the $250m unsecured facility, $179.2m was available after $70.8m of letters of credit. The facility matures April 11, 2021; the company reported covenant compliance.
- Management said existing cash, expected operating cash flow, and credit availability were expected to cover anticipated working capital and capital expenditures for at least 12 months, while cautioning there was no assurance.
- The quarterly dividend was increased to $0.25 per common share and $0.20 per Class B share. The company repurchased 71,100 common shares in the first half.
Performance drivers and unusual items
- Management attributed revenue growth mainly to Core Laundry, strong new-account sales, and fewer lost accounts; First Aid also benefited from wholesale distribution and geographic expansion. Specialty Garments results can vary with reactor outages and project timing.
- Q2 operating income declined partly because prior-year selling and administrative expense benefited from a $21.1m CRM-contractor settlement gain. First-half comparison also included a prior-year $3.0m environmental-litigation settlement gain. The filing also identifies higher production and service payroll costs as a pressure on Q2 Core Laundry margins; lower energy costs partly offset them.
- The company completed eight acquisitions in the first half for approximately $41.3m, including a Missouri laundry business acquired for $38.8m.
- Environmental remediation liabilities were $29.4m. The company cited multiple remediation sites, unresolved EPA comments concerning the Woburn site, and a transit authority reimbursement demand related to Somerville. Actual costs could differ from estimates.
Outlook and principal risks
The filing provides no quantified earnings or revenue guidance. COVID-19 was identified as a material and rapidly developing risk; the company said it had caused some business disruption, but it could not predict the extent or duration of financial effects. Customer closures or reduced activity, workforce disruptions, supplier constraints, and restrictions on company facilities could affect sales, costs, service, and cash flow. Energy-price declines, particularly in energy-dependent markets, were also expected by management to have an overall negative business impact. Other disclosed exposures include labor and healthcare costs, foreign exchange, environmental remediation, and acquisition integration. The company said it remained permitted to operate in its jurisdictions as of the filing, but future restrictions were uncertain.
Investor verification points
- Assess how COVID-19 developments after February 29 affected customer activity, operations, cash flow, and the company’s ability to maintain service.
- Separate underlying operating trends from the prior-year CRM and environmental settlement gains when comparing margins and earnings.
- Review the pace and returns of acquisitions and capital spending, alongside share repurchases and the increased dividend.
- Track changes in the $29.4m environmental reserve, insurance recoveries, and potential costs at the identified sites.
- Monitor revolver maturity and availability, covenant compliance, and the adequacy of liquidity under adverse conditions.