UniFirst Corporation — Fiscal 2017 Second-Quarter Form 10-Q
Business context and period: UniFirst provides uniform and protective-workwear rental, cleaning, sales and related facility, specialty garment and first-aid services. This unaudited report covers the 13 weeks ended February 25, 2017, and the first 26 weeks of fiscal 2017; comparisons are with the corresponding 2016 periods. Amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | 13 weeks ended Feb. 25, 2017 | 13 weeks ended Feb. 27, 2016 | 26 weeks ended Feb. 25, 2017 | 26 weeks ended Feb. 27, 2016 |
|---|---|---|---|---|
| Revenue | $391.4 | $363.1 | $777.5 | $736.5 |
| Operating income | $36.1 | $38.2 | $81.9 | $96.5 |
| Operating margin | 9.2% | 10.5% | 10.5% | 13.1% |
| Net income | $22.5 | $23.5 | $50.7 | $59.4 |
| Diluted EPS, common stock | $1.10 | $1.16 | $2.49 | $2.94 |
| Operating cash flow | Not stated for the quarter | $114.7 | $105.5 |
- Quarterly revenue rose 7.8%, while operating income fell 5.4% and net income fell 4.2%. For the first half, revenue rose 5.6%, but operating income declined 15.1% and net income 14.6%.
- Cost of revenues rose to 63.7% of revenue in the quarter from 63.3%, and to 62.8% for the first half from 61.4%. Selling and administrative expense rose to 21.7% from 20.8% in the quarter and to 21.1% from 20.1% for the first half.
- At February 25, cash and cash equivalents were $313.5, down $50.3 from fiscal year-end; working capital was $573.2, down from $625.0. Total assets were $1,761.5 and shareholders’ equity was $1,417.4.
- First-half operating cash flow was $114.7; investing cash outflow was $163.5, including the Arrow acquisition, and financing cash outflow was $0.7. Capital expenditures were $43.0.
- No long-term debt was outstanding. The $250.0 revolving credit facility had $183.8 available after $66.2 of letters of credit; the company reported covenant compliance. The current ratio was approximately 4.6x, based on reported current assets and current liabilities.
Material changes and management commentary
- Core Laundry Operations revenue increased 8.2% in the quarter and 6.6% for the first half. Management attributed growth to acquisitions, principally Arrow Uniform, completed September 19, 2016 for approximately $118.3; acquisitions contributed 5.6% to quarterly Core Laundry growth and 5.0% to first-half growth. Organic growth was 2.2% and 1.4%, respectively.
- Arrow’s costs of revenues were significantly higher as a percentage of revenue than those of the remaining Core Laundry business. Management also cited higher production payroll, other production costs and energy costs. Higher administrative payroll, legal and technology costs, including CRM investment, also weighed on margins. Some quarterly cost pressure was offset by lower healthcare costs and lower merchandise amortization as a share of revenue.
- Specialty Garments revenue increased 6.5% in the quarter but decreased 6.5% for the first half, reflecting the timing and length of customer reactor outages and project activity. First Aid revenue was nearly flat in the quarter and up 1.3% for the first half.
- Management said energy-market customer wearer levels had begun to stabilize, but prior customer workforce reductions and lost accounts continued to affect organic growth. It stated that the adverse effect of lower oil prices on customer activity continued to outweigh the benefit of lower fuel and natural-gas costs.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Management expected cash, future operating cash generation and available credit to meet anticipated working-capital and capital-expenditure needs for at least the next 12 months.
- Management expects employee healthcare costs to continue pressuring results and said fiscal 2017 labor costs could rise from minimum-wage increases and possible changes to overtime rules. Other identified risks include acquisition integration and retention of Arrow customers, competition and margin pressure, foreign-exchange movements, energy and labor costs, customer demand, CRM implementation, IT disruption or cyberattacks, and seasonality.
- The company had capitalized $53.5 of costs for its Unity 20/20 CRM project; the system had not yet been deployed. Future results will include depreciation of the investment.
- Environmental remediation liabilities were $24.7 at February 25, 2017. The company described continuing remediation and regulatory matters at multiple sites, including unresolved EPA comments and potential exposure at Woburn and reimbursement demands and an agency audit relating to Somerville. Management cautioned that estimates and reserves may change.
- A $15.9 environmental-litigation settlement gain was recorded in fiscal 2016’s fourth quarter, not the current quarter; $12.5 of cash related to it was received in September 2016. The filing says this receipt contributed to first-half operating cash flow.
- The Arrow purchase-price allocation remained provisional for certain acquired assets and liabilities. The acquisition added $51.2 of goodwill and $40.3 of customer contracts in the initial allocation.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its most recent Form 10-K.
Most important facts for investors to verify
- Whether Arrow’s operating costs and margins improve as integration proceeds, and whether the acquisition supports durable organic growth.
- Whether operating-margin deterioration continues as wage, energy, healthcare and administrative costs rise.
- Whether Core Laundry organic growth improves as energy-dependent customer wearer levels stabilize, and how Specialty Garments’ outage timing affects results.
- Whether the environmental reserve adequately reflects unresolved site, regulatory and reimbursement matters, particularly at Woburn and Somerville.
- How CRM spending, eventual deployment and depreciation affect cash requirements and reported earnings.
- Whether acquisition spending and other investment needs can be funded while preserving the company’s cash position and covenant headroom.