UniFirst Corporation — Fiscal 2018 First Quarter
Reporting period: Thirteen weeks ended November 25, 2017, compared with the thirteen weeks ended November 26, 2016. UniFirst provides uniform and protective-wear rental, cleaning, sales and related services, plus specialty garment and first-aid services.
Financial results
| Metric | Q1 FY2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $415.8 million | $386.1 million | +7.7% |
| Operating income | $51.9 million | $45.8 million | +13.4% |
| Operating margin | 12.5% | 11.9% | +0.6 percentage points |
| Net income | $34.2 million | $28.2 million | +21.2% |
| Net margin | 8.2% | 7.3% | +0.9 percentage points |
| Diluted EPS, common stock | $1.67 | $1.38 | Up |
| Operating cash flow | $47.6 million | $63.5 million | Down $15.9 million |
| Capital expenditures | $19.0 million | $18.2 million | Up |
Revenue growth included 6.2% growth in Core Laundry Operations, 27.2% in Specialty Garments and 13.8% in First Aid. Core Laundry organic growth was 4.5%, excluding estimated acquisition contribution of 1.3% and a 0.4% benefit from the stronger Canadian dollar. Cost of revenues declined to 61.0% of revenue from 61.8%; selling and administrative expense rose to 21.0% from 20.6%.
Net income included $1.6 million of discrete tax benefits from adoption of share-based payment accounting guidance. The effective tax rate was 35.5%, versus 38.8% a year earlier. Basic EPS was $1.77 for common stock and $1.42 for Class B shares; dividends per share were unchanged at $0.0375 and $0.0300, respectively.
Balance sheet and liquidity
- Cash, cash equivalents and short-term investments were $374.0 million at November 25, 2017, up from $349.8 million at fiscal year-end.
- Working capital was $674.7 million, compared with $636.4 million at August 26, 2017.
- Total liabilities were $359.2 million and shareholders’ equity was $1.486 billion. The company had no revolver borrowings; $172.4 million remained available after $77.6 million of letters of credit. It was in compliance with credit covenants.
- Cash from operations fell year over year, principally because the prior-year quarter included a $12.5 million environmental-litigation settlement receipt and the current quarter had inventory-related cash use.
- Investing cash use was $21.4 million, versus $138.3 million in the prior-year quarter, which included the Arrow Uniform acquisition. Current-quarter acquisitions totaled approximately $2.7 million.
Management commentary, outlook and risks
Management said current cash, expected operating cash generation and available credit should cover anticipated working capital and capital expenditures for at least 12 months. No specific earnings or revenue guidance was provided. Management expected the Tax Cuts and Jobs Act, enacted December 22, 2017, to have a substantially favorable net effect in future quarters; its impact had not yet been fully evaluated. The company held $56.6 million of cash outside the United States and expected it to remain invested in foreign subsidiaries.
Management cited higher healthcare and service payroll costs, selling and administrative payroll, legal and environmental contingency costs, and expected fiscal 2018 wage pressure from minimum-wage increases and a low-unemployment environment. Risks include energy-market exposure and its effects on customer activity and operating costs, foreign-exchange movements, labor and healthcare costs, acquisition integration, customer retention, nuclear-facility regulation, and environmental remediation and litigation. The recorded environmental liability was $25.4 million; management noted that estimates and reserves could change. The company also disclosed unresolved EPA comments and potential uncertainty around remediation work at Woburn, Massachusetts, and reimbursement demands and a regulatory audit concerning its Somerville, Massachusetts site.
There were no material changes to the risk factors in the prior annual report. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth and margin improvement continue, especially in Core Laundry Operations, and how Specialty Garments’ project and outage timing affects results.
- How much of reported earnings growth reflects the $1.6 million discrete tax benefit, and the eventual net financial impact of the Tax Cuts and Jobs Act.
- Drivers of lower operating cash flow and future working-capital and capital-spending requirements.
- Changes in environmental reserves, remediation timing, insurance recoveries and outcomes of the Woburn and Somerville matters.
- Exposure to labor, healthcare, energy and foreign-exchange costs, as well as progress integrating acquisitions.