UniFirst Corporation — FY2016 Form 10-K
Business context and reporting period: UniFirst provides uniform and workwear rental, cleaning, delivery and sales, alongside specialty garment, first-aid and facility services. The fiscal year ended August 27, 2016 and comprised 52 weeks. Core Laundry Operations generated approximately 91% of revenue; Specialty Garments and First Aid contributed approximately 6% and 3%, respectively.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1,468.0 million | $1,456.6 million | +0.8% |
| Income from operations | $201.2 million | $200.4 million | +0.4% |
| Operating margin | 13.7% | 13.8% | -0.1 percentage point |
| Net income | $125.0 million | $124.3 million | +0.6% |
| Diluted EPS, Common Stock | $6.17 | $6.15 | +0.3% |
| Cash from operating activities | $207.6 million | $226.9 million | -$19.3 million |
| Capital expenditures | $98.2 million | $101.2 million | -$2.9 million |
Net margin was 8.5%, unchanged from FY2015. Operating cash flow less capital expenditures was approximately $109.4 million, a derived measure. Revenue growth was modest: Core Laundry Operations grew 0.5%, Specialty Garments 4.3%, and First Aid 1.4%. Core Laundry organic growth was 0.7%, after excluding a 0.7% adverse currency impact and a 0.5% acquisition benefit.
Cost of revenue rose to 61.3% of revenue from 60.7%, reflecting higher merchandise amortization, payroll, healthcare and other production costs; lower fuel and natural-gas costs partly offset these pressures. Selling and administrative expense declined to 19.4% of revenue from 20.2%, substantially helped by a $15.9 million environmental-litigation settlement gain and lower legal costs. Depreciation and amortization increased to $81.6 million from $77.1 million.
Liquidity, debt and capital
Cash and cash equivalents were $363.8 million at year-end, up from $276.6 million. Working capital was $625.0 million, compared with $477.7 million. The company reported no loans payable or long-term debt outstanding; its $250 million unsecured revolving facility had $197 million available after $53 million of letters of credit. The facility matures April 11, 2021, and UniFirst reported compliance with its covenants. Management believed cash, future operating cash flows and available credit would cover anticipated working capital and capital expenditure needs for at least 12 months.
Cash used in investing activities was $114.7 million, including $98.2 million of capital expenditures and $16.6 million for acquisitions. Cash used in financing activities was $5.6 million. FY2016 dividends were $0.15 per Common share and $0.12 per Class B share. A $122 million all-cash acquisition of Arrow Uniform closed on September 19, 2016, after year-end; it acquired substantially all of Arrow’s assets and virtually none of its liabilities.
Material changes, outlook and risks
- Operating environment: Management said weak U.S. and European growth and oil-sector customer cutbacks harmed FY2016 results. Reduced wearer counts, lost accounts and weaker new sales in energy-related markets are expected to continue affecting organic growth into FY2017. Lower fuel and natural-gas prices provided some cost relief, but management said customer cutbacks outweighed that benefit.
- Cost outlook: Management expects healthcare costs to continue pressuring results and anticipates higher FY2017 labor costs from minimum-wage changes and expanded overtime eligibility. No numerical revenue or earnings guidance is provided in the supplied filing text.
- Unusual item: The fourth-quarter environmental settlement generated a $15.9 million pretax gain, recorded as a reduction to selling and administrative expense, and increased diluted EPS by $0.48. A significant portion of settlement funds was received in September 2016, so it did not all contribute to FY2016 operating cash flow.
- Environmental exposure: Recorded environmental liabilities were $26.7 million at year-end, up from $23.3 million. Estimated net anticipated remediation costs in current dollars were $25.9 million before the effects of inflation and discounting. Significant uncertainties remain at multiple sites, including Woburn and Somerville, Massachusetts; actual costs could exceed accruals.
- Technology and other execution risks: The Unity 20/20 CRM project had experienced significant delays; $47.9 million had been capitalized and the system was not yet in service. Failure or further delay could disrupt operations, and eventual depreciation will affect results. Other risks include competition, labor and healthcare cost inflation, currency movements, customer retention, energy-market weakness, nuclear-facility regulation and outages, and environmental or other claims.
- Other obligations: Contractual cash obligations totaled $85.3 million, including retirement-plan benefits, nuclear-facility asset-retirement obligations and operating leases. The company also had $3.7 million of reserved uncertain tax positions for which settlement timing could not be reliably estimated.
- Controls and audit: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Key facts for investors to verify
- Whether underlying Core Laundry growth and operating margins improve after excluding the $15.9 million settlement benefit and considering the ongoing energy-market effects.
- Arrow’s post-acquisition contribution, integration costs and returns relative to its $122 million purchase price.
- Updates to environmental accruals, remediation schedules and unresolved EPA or transit-authority matters, particularly at Woburn and Somerville.
- Unity 20/20 implementation timing, remaining investment, and the impact of future depreciation and any further delays.
- FY2017 labor, healthcare, currency and customer-wearer trends, as well as the company’s ability to maintain liquidity and covenant headroom.