UNIFIRST CORP annual report, FY2015

Full document

UniFirst Corporation — FY2015 Form 10-K

Business context and reporting period: UniFirst provides uniform and protective-clothing rental, cleaning, delivery and sales, alongside facility services, first aid and specialized nuclear and cleanroom garment services. The fiscal year ended August 29, 2015 and comprised 52 weeks. Fiscal 2014 also comprised 52 weeks.

Financial performance

  • Revenue: $1.457 billion, up 4.4% from $1.395 billion. Core Laundry Operations revenue increased 5.0%; management reported 5.2% organic growth after excluding a 0.9% negative currency effect and a 0.7% acquisition contribution. Specialty Garments revenue declined 4.3% to $87.5 million; First Aid grew 6.5% to $46.8 million.
  • Profit and margins: Operating income was $200.4 million, up 3.7%, with operating margin of 13.8% versus 13.9%. Net income was $124.3 million, up 3.6%; net margin was 8.5% versus 8.6%. Diluted EPS was $6.15 versus $5.95. The effective tax rate was 38.2% versus 38.6%.
  • Costs: Cost of revenue fell to 60.7% of revenue from 61.5%, helped by lower fuel, natural gas and payroll-related costs, partly offset by higher merchandise amortization. Selling and administrative expense rose to 20.2% of revenue from 19.5%, reflecting higher legal costs, IT investment and environmental reserves. Depreciation and amortization increased to $77.1 million.
  • Cash flow and investment: Operating cash flow was $226.9 million, up from $194.6 million. Investing cash outflow was $124.3 million, including $101.2 million of capital expenditures and $22.4 million for acquisitions. Approximate operating cash flow less capital expenditures was $125.8 million.
  • Liquidity and debt: Cash and equivalents were $276.6 million, up from $191.8 million; working capital was $477.7 million. Loans payable were $1.4 million, with no long-term debt. The $250 million revolving facility had $197.1 million available after $52.9 million of letters of credit; it matured May 4, 2016, and the company expected to replace it. The company reported compliance with its covenants.
  • Balance sheet: Total assets were $1.533 billion and shareholders’ equity was $1.242 billion. Cash held outside the United States was $54.7 million and was expected to remain invested in foreign subsidiaries.
  • Fiscal fourth quarter: Revenue was $359.2 million versus $352.0 million in Q4 2014; net income was $28.9 million versus $28.9 million. Diluted EPS was $1.43 in both quarters.

Changes versus the prior year

  • Core Laundry Operations drove growth, benefiting from new account sales and annual price adjustments. Lower wearer counts at customers tied directly or indirectly to energy production and higher lost accounts partly offset those gains.
  • Specialty Garments revenue continued to contract, primarily due to reduced North American reactor business and currency effects; First Aid revenue recovered, supported by wholesale distribution and pill packaging.
  • Operating income increased, but operating margin edged down as selling and administrative costs grew faster than revenue. Foreign-exchange losses rose to $1.6 million from $0.3 million.
  • Operating cash flow improved, while investing outflows increased with higher acquisition spending and capital expenditures. The prior-year financing outflow had included repayment of $100 million of notes; FY2015 financing outflow was $6.3 million.

Outlook, risks and unusual items

  • Outlook: No numeric FY2016 revenue or earnings guidance is provided. Management expected depressed oil prices to weigh on FY2016 organic growth through customer headcount reductions, more lost accounts and fewer new sales. It also expected healthcare costs to continue pressuring results; additional Affordable Care Act reinsurance fees were due in FY2016 and FY2017.
  • CRM investment: The company had capitalized $39.3 million on its Unity 20/20 CRM project. It was not deployed in FY2015 and had experienced significant delays versus its original timetable. Continuing IT investment affected current results; future depreciation will affect results after deployment.
  • Environmental exposure: Accrued environmental liabilities were $23.3 million, up from $19.8 million. FY2015 included $4.5 million of revisions in estimates and an additional $3.0 million of expense versus the prior year. Sites include Woburn and Somerville, Massachusetts; EPA matters and possible additional remediation costs remain. Management cautioned that recorded accruals may not cover ultimate costs.
  • NECC settlement: In February 2015, insurers paid the full $30.5 million settlement relating to claims involving New England Compounding Center. The settlement was final, and releases and an injunction barred related claims against UniFirst.
  • Other risks: Key exposures include competition and pricing, customer employment levels and retention, fuel and energy costs, foreign exchange, healthcare and labor costs, environmental remediation, nuclear-facility regulation and outage timing, Mexico operating conditions, and IT or cyber disruptions. Nuclear garment decommissioning obligations were accrued at $12.4 million.
  • Seasonality and controls: Results historically tend to be lower in the second and fourth fiscal quarters. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.

Investor verification priorities

  • Track organic growth, wearer counts, customer losses and new sales, especially among energy-related customers.
  • Assess whether cost pressures—healthcare, legal, environmental and IT—continue to outpace revenue growth and weigh on margins.
  • Verify Unity 20/20 deployment timing, remaining implementation costs and subsequent depreciation.
  • Review environmental accrual assumptions, EPA developments at Woburn, Somerville transit-related costs and actual remediation payments.
  • Confirm renewal of the revolving credit facility before its May 2016 maturity and monitor available borrowing capacity.
  • Monitor Canadian-dollar exposure and the effectiveness of the forward contracts, as well as Specialty Garments’ reactor outage-driven variability.