UniFirst Corporation — Q3 FY2020 Form 10-Q
Reporting period: Third quarter (13 weeks) ended May 30, 2020; year-to-date (39 weeks) ended May 30, 2020. Comparatives are the periods ended May 25, 2019. UniFirst provides uniform rental, cleaning and related workplace services, specialty garments, and first-aid and safety products.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | 39 weeks FY2020 | 39 weeks FY2019 |
|---|---|---|---|---|
| Revenue | $445.5 million | $453.7 million | $1,375.5 million | $1,329.8 million |
| Operating income | $27.7 million | $60.2 million | $131.9 million | $173.1 million |
| Operating margin | 6.2% | 13.3% | 9.6% | 13.0% |
| Net income | $21.3 million | $47.2 million | $104.2 million | $133.1 million |
| Diluted EPS, Common Stock | $1.12 | $2.46 | $5.46 | $6.93 |
| Operating cash flow | Not separately presented | Not separately presented | $205.4 million | $199.4 million |
- Q3 revenue fell 1.8%, while year-to-date revenue rose 3.4%. Q3 Core Laundry Operations revenue declined 2.8%; First Aid increased 26.0%, chiefly from COVID-related demand for safety and protective equipment. Specialty Garments declined 3.1% in Q3.
- Q3 cost of revenues rose 8.3% to $303.2 million and increased to 68.1% of revenue from 61.7%. Management cited lower rental volumes, merchandise amortization, costs on a large direct sale, temporary employee compensation, bad debt, and employee safety supplies.
- Year-to-date selling and administrative expense increased 12.2% to $272.0 million. The comparison reflects prior-year gains of $21.1 million from a CRM contractor settlement and $3.0 million from environmental litigation; higher indirect taxes also contributed.
- Q3 effective tax rate was 21.8% versus 23.5%; year-to-date rate was 22.8% versus 24.8%. Lower rates primarily reflected releases of tax reserves and tax benefits from stock appreciation rights exercises.
Cash, liquidity and capital
- Cash, cash equivalents and short-term investments were $421.3 million at May 30, 2020, up from $385.3 million at August 31, 2019. Current assets were $925.5 million and current liabilities $196.2 million.
- Year-to-date operating cash flow was $205.4 million. Investing used $132.0 million, including $91.2 million of capital expenditures and $41.1 million for acquisitions; financing used $36.3 million, including $21.7 million in share repurchases and $11.2 million in dividends.
- No revolver borrowings were outstanding. Of the $250 million unsecured revolving facility, $179.2 million was available after $70.8 million of letters of credit. The company was covenant-compliant; the facility matures April 11, 2021. The filing reports no other outstanding debt.
- Operating lease liabilities totaled $43.3 million in present value. The company adopted lease accounting in September 2019, recognizing right-of-use assets and lease liabilities.
- During the 39-week period UniFirst completed eight acquisitions for approximately $41.3 million, including a Missouri industrial laundry business. It also repurchased 117,767 shares year to date.
Material developments, outlook and risks
- Management said COVID-19 significantly reduced Q3 revenue as many customers closed or operated at reduced capacity, with wearer reductions at customers that remained open. Some customers had reopened, but sales remained below pre-pandemic levels; renewed restrictions could further affect operations. Supply disruptions for hand sanitizer and masks had moderated somewhat.
- A $20.1 million direct sale and increased protective-equipment sales partly offset weaker rental revenue. The direct sale also carried higher associated costs.
- Management said available cash, expected operating cash flow and undrawn credit capacity should meet anticipated working-capital and capital needs for at least 12 months, while cautioning that pandemic effects’ extent and duration could not be predicted. No numerical earnings or revenue guidance was provided.
- Goodwill was not impaired in the May 30 interim assessment, but management noted that forecasts and valuation depend on uncertain pandemic impacts, market capitalization, discount rates and other assumptions.
- Environmental remediation liabilities were $29.9 million. Matters include multiple remediation sites, unresolved EPA comments concerning the Woburn site, and a transit authority reimbursement demand related to the Somerville site; estimates and reserves may change. The filing also describes ordinary-course legal claims and regulatory risks for nuclear garment decontamination.
- Other cited risks include customer and supplier disruption, labor and healthcare costs, energy-price exposure, foreign exchange, acquisitions and integration, and potential facility restrictions. The company reported no material changes to other previously disclosed risk factors.
Most important facts to verify
- Whether customer reopenings restore rental volumes and margins, and whether COVID-related closures or supply disruptions recur.
- Underlying cash generation and capital-spending needs, including acquisition spending, dividends and repurchases.
- Availability and renewal or replacement of the revolving facility before its April 2021 maturity.
- Changes in environmental remediation estimates, insurance recoveries, and the Woburn and Somerville matters.
- Goodwill valuation assumptions and the continuing cost and implementation progress of the CRM project.