UniFirst Corporation — Q2 FY2016 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended February 27, 2016; comparative periods ended February 28, 2015. Unaudited. UniFirst provides uniform and protective-wear rental, cleaning, manufacturing and related services, alongside specialty-garment and first-aid businesses.
Key financial results
Amounts in millions of dollars, except per-share data. Year-over-year changes are approximate.
| Metric | Q2 FY2016 | Q2 FY2015 | First half FY2016 | First half FY2015 |
|---|---|---|---|---|
| Revenue | $363.1 | $361.5 | $736.5 | $731.8 |
| Operating income | $38.2 | $41.6 | $96.5 | $102.1 |
| Operating margin | 10.5% | 11.5% | 13.1% | 14.0% |
| Net income | $23.5 | $25.4 | $59.4 | $62.9 |
| Net margin | 6.5% | 7.0% | 8.1% | 8.6% |
| Diluted EPS, common stock | $1.16 | $1.26 | $2.94 | $3.11 |
- Revenue increased 0.5% in Q2 and 0.6% in the first half, while net income declined 7.7% and 5.5%, respectively. Cost of revenue rose to 63.3% of revenue in Q2 from 61.9%, and to 61.4% in the first half from 60.6%.
- Q2 Core Laundry Operations revenue declined 0.2%; reported organic growth was 0.5%, including the effects of currency and acquisitions. First-half Core Laundry revenue declined 0.2%, while organic growth excluding acquisitions and weaker Canadian currency was 0.4%.
- Specialty Garments revenue grew 9.6% in Q2 and 14.8% in the first half; First Aid revenue grew 5.1% and 0.4%, respectively. Specialty results can fluctuate with nuclear-reactor outages and project timing.
Cash flow, balance sheet and debt
- First-half operating cash flow was $105.5 million versus $107.0 million. Investing cash outflow was $44.0 million, including $44.0 million of capital expenditures; financing cash outflow was $1.5 million. Cash increased $58.4 million to $335.0 million.
- At February 27, 2016, working capital was $557.4 million; total assets were $1.594 billion, total liabilities $294.1 million and shareholders’ equity $1.300 billion. The company reported $277,000 of loans payable and no revolving-credit borrowings.
- The $250 million unsecured revolver matures May 4, 2016. Letters of credit used $53 million, leaving $197 million available; UniFirst was covenant-compliant and said it was finalizing an amendment and extension expected to be executed in Q3 FY2016.
- Management said available cash, future operating cash flow and the credit facility should cover anticipated working-capital and capital-expenditure needs for at least 12 months. Cash held outside the U.S. was $56.2 million and expected to remain invested in foreign subsidiaries.
Management commentary, outlook and risks
- Management attributed weaker margins mainly to higher merchandise amortization, healthcare claims, payroll and other production costs, with limited revenue growth also affecting expense ratios. Lower vehicle fuel and plant natural-gas costs partly offset these pressures.
- Lower oil prices reduced activity among oil-sector customers and related businesses, contributing to wearer reductions and lost accounts; management expected this pressure to continue through FY2016 and said it outweighed energy-cost savings. Rising healthcare costs, including Affordable Care Act-related costs, were also expected to weigh on results.
- The company had capitalized $46.8 million on its Unity 20/20 customer-relationship-management project. Deployment was not expected in FY2016; ongoing IT investment and eventual depreciation could affect future results.
- Environmental remediation remains a material uncertainty. The recorded environmental liability was $23.8 million, with identified net anticipated costs of $23.3 million before inflation and discounting. EPA matters at the Woburn site, including the Central Area, remain unresolved. Changes in estimates, other parties’ participation, insurance or regulatory requirements could affect costs.
- Other disclosed risks include foreign-exchange movements, customer retention and contract renewals, labor and energy costs, acquisitions and integration, IT-system disruption or cyberattacks, and regulatory exposure. The filing gives no specific earnings or revenue guidance; it cautions that quarterly results are seasonal and not necessarily indicative of full-year results.
- Other notable items: the company adopted deferred-tax presentation guidance prospectively, classifying deferred taxes as noncurrent; prior periods were not adjusted. No material changes to previously disclosed risk factors or contractual obligations were reported. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether the revolving-credit amendment and extension was completed before the May 4, 2016 maturity, and on what terms.
- Whether Core Laundry organic growth and customer wearer levels stabilized, particularly in oil- and energy-linked markets.
- Whether cost pressures—especially healthcare, merchandise amortization and labor—continued to compress operating margins.
- Whether Unity 20/20 remained on schedule and within budget, and how future deployment and depreciation affect expenses.
- Whether environmental remediation estimates or EPA requirements changed, particularly for Woburn and Somerville.
- How Specialty Garments’ outage- and project-driven revenue, foreign-currency exposure and the cash-generation outlook developed.