UNIFIRST CORPORATION SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any documents incorporated by reference may contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements contained in this Quarterly Report on Form 10-Q and any documents incorporated by reference are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "estimates," "anticipates," "projects," "plans," "expects," "intends," "believes," "seeks," "could," "should," "may," "will," "strategy," "objective," "assume," "strive," or the negative versions thereof, and similar expressions and by the context in which they are used. Such forward-looking statements are based upon our current expectations and speak only as of the date made. Such statements are highly dependent upon a variety of risks, uncertainties and other important factors that could cause actual results to differ materially from those reflected in such forward-looking statements. Such factors include, but are not limited to, uncertainties caused by adverse economic conditions, including, without limitation, as a result of extraordinary events or circumstances such as the COVID-19 pandemic, and their impact on our customers' businesses and workforce levels, disruptions of our business and operations, including limitations on, or closures of, our facilities, or the business and operations of our customers or suppliers in connection with extraordinary events or circumstances such as the COVID-19 pandemic, uncertainties regarding our ability to consummate and successfully integrate acquired businesses, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, any adverse outcome of pending or future contingencies or claims, our ability to compete successfully without any significant degradation in our margin rates, seasonal and quarterly fluctuations in business levels, our ability to preserve positive labor relationships and avoid becoming the target of corporate labor unionization campaigns that could disrupt our business, the effect of currency fluctuations on our results of operations and financial condition, our dependence on third parties to supply us with raw materials, which such supply could be severely disrupted as a result of extraordinary events or circumstances such as the COVID-19 pandemic, any loss of key management or other personnel, increased costs as a result of any changes in federal or state laws, rules and regulations or governmental interpretation of such laws, rules and regulations, uncertainties regarding the price levels of natural gas, electricity, fuel and labor, the negative effect on our business from sharply depressed oil and natural gas prices, including, without limitation, as a result of extraordinary events or circumstances such as the COVID-19 pandemic, the continuing increase in domestic healthcare costs, increased workers' compensation claim costs, increased healthcare claim costs, including as a result of extraordinary events or circumstances such as the COVID-19 pandemic, our ability to retain and grow our customer base, demand and prices for our products and services, fluctuations in our Specialty Garments business, instability inMexico andNicaragua where our principal garment manufacturing plants are located, our ability to properly and efficiently design, construct, implement and operate a new customer relationship management ("CRM") computer system, interruptions or failures of our information technology systems, including as a result of cyber-attacks, additional professional and internal costs necessary for compliance with any changes inSecurities and Exchange Commission ,New York Stock Exchange and accounting rules, strikes and unemployment levels, our efforts to evaluate and potentially reduce internal costs, economic and other developments associated with the war on terrorism and its impact on the economy, the impact of foreign trade policies and tariffs or other impositions on imported goods on our business, results of operations and financial condition, general economic conditions, our ability to successfully implement our business strategies and processes, including our capital allocation strategies and the other factors described under "Item 1A. Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year endedAugust 31, 2019 and in our other filings with theSecurities and Exchange Commission , including, without limitation, under "Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.
Business Overview
UniFirst Corporation , together with its subsidiaries, hereunder referred to as "we", "our", the "Company", or "UniFirst", is one of the largest providers of workplace uniforms and protective work wear clothing inthe United States . We design, manufacture, personalize, rent, clean, deliver, and sell a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks, aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent and sell industrial wiping products, floor mats, facility service products and other non-garment items, and provide restroom and cleaning supplies and first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies. We serve businesses of all sizes in numerous industry categories. Typical customers include automobile service centers and dealers, delivery services, food and general merchandise retailers, food processors and service operations, light manufacturers, maintenance facilities, restaurants, service companies, soft and durable goods wholesalers, transportation companies, and others who require employee clothing for image, identification, protection or utility purposes. We also provide our customers with restroom and cleaning supplies, including air fresheners, paper products and hand soaps. 23 -------------------------------------------------------------------------------- At certain specialized facilities, we also decontaminate and clean work clothes and other items that may have been exposed to radioactive materials and service special cleanroom protective wear and facilities. Typical customers for these specialized services include government agencies, research and development laboratories, high technology companies and utilities operating nuclear reactors. We continue to expand into additional geographic markets through acquisitions and organic growth. We currently service over 300,000 customer locations inthe United States ,Canada andEurope from over 260 customer service, distribution and manufacturing facilities. As mentioned and described in Note 16 to our Consolidated Financial Statements, we have five reporting segments:U.S. and Canadian Rental and Cleaning, MFG, Corporate, Specialty Garments and First Aid. We refer to the laundry locations of theU.S. and Canadian Rental and Cleaning reporting segment as "industrial laundries" or "industrial laundry locations", and to theU.S. and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our "Core Laundry Operations."
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in conformity withUnited States generally accepted accounting principles ("U.S. GAAP"). As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, the most important and pervasive accounting policies used and areas most sensitive to material changes from external factors. The critical accounting estimates that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedAugust 31, 2019 .
COVID-19 Assessment
An outbreak of a novel strain of coronavirus (COVID-19) has occurred in a number of countries, includingthe United States ,Canada and the European countries in which we operate. Developments have been occurring rapidly with respect to the spread of COVID-19 and its impact on human health and businesses. New and changing government actions to address the COVID-19 pandemic have been occurring on a daily basis. We have been closely monitoring the COVID-19 pandemic and its impacts and potential impacts on our business. However, because developments with respect to the spread of COVID-19 and its impacts have been occurring so rapidly and because of the unprecedented nature of the pandemic, we are unable to predict the extent and duration of the adverse financial impact of COVID-19 on our business, financial condition and results of operations. National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including, without limitation, by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limit operations or people to stay at home. Although we have been permitted to continue to operate in all of the jurisdictions in which we operate, including in jurisdictions that have mandated the closure of certain businesses and we expect to be permitted to continue to operate under any orders or other restrictions imposed by any government authorities in the future, there is no assurance that we will be permitted to operate under every future government order or other restriction and in every location. If we were to be subject to government orders or other restrictions on the operation of our business, we may be required to limit our operations at, or close, certain locations in the future. Any such limitations or closures could have a material adverse impact on our ability to service our customers and on our business, financial condition and results of operations. In particular, any limitations on, or closures of, our manufacturing facilities inMexico orNicaragua , or our distribution center inOwensboro, Kentucky , could have a material adverse impact on our ability to manufacture products and service customers and could have a material adverse impact on our business, financial condition and results of operations. The COVID-19 pandemic has caused certain disruptions to our business and operations and could cause material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, our suppliers and their manufacturers. Depending on the extent and duration of all of the above-described effects on our business and operations and the business and operations of our suppliers, our costs could increase, including our costs to address the health and safety of personnel, our ability to 24
-------------------------------------------------------------------------------- obtain products or services from suppliers may be adversely impacted, our ability to service certain customers could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected. In addition, depending on the extent and duration of the COVID-19 pandemic, we may be subject to significant increases in healthcare costs in the event that a significant number of our personnel become infected with COVID-19 and require medical treatment. As a result, any significant increases in healthcare costs as a result of COVID-19 or otherwise could have a material adverse impact on our business, financial condition and results of operations. In addition, the COVID-19 pandemic has caused, and may in the future continue to cause, disruptions, and in some cases severe disruptions, to the business and operations of our customers as a result of quarantines, worker absenteeism as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions. Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity, which has, as a result, adversely impacted our business, may continue to adversely impact our business and may in the future materially adversely affect our business, financial condition and results of operations. There can be no assurance that any decrease in sales resulting from the COVID-19 pandemic will be offset by increased sales in the future. The COVID-19 pandemic has also resulted in material adverse economic conditions that are impacting, and may continue to impact, our business and the businesses of our suppliers and customers. Some analysts have predicted that such material adverse economic conditions may result in a severe economic recession. Although the extent and duration of the impact of the COVID-19 pandemic on our business and operations and the business and operations of our customers remain uncertain, the continued spread of COVID-19, the imposition of related public health measures and travel, health-related, business and other restrictions and the resulting materially adverse economic conditions may materially adversely impact our business, financial condition, results of operations and cash flows. We remain focused on the safety and well-being of our team partners and on the service of our customers. We will continuously review and assess the rapidly-changing COVID-19 pandemic and its impacts on our customers, our suppliers and our business so that we can seek to address the impacts on our business and service our customers. As ofFebruary 29, 2020 , our cash, cash equivalents, and short-term investments were$395.3 million , and we had access to$179.2 million of borrowing capacity under our$250 million unsecured revolving credit facility, which we believe will help us manage the impacts of the COVID-19 pandemic on our business and address related liquidity needs. Please see "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations.
Results of Operations
The following table presents certain selected financial data, including the
percentage of revenues represented by each item, for the thirteen and twenty-six
weeks ended
Thirteen weeks ended Twenty-six weeks ended
% of % of % % of % of %
(In thousands, except percentages)
Revenues February 23, 2019 Revenues Change
Revenues $ 464,600 100.0 % $ 437,485 100.0 % 6.2 % $ 929,998 100.0 % $ 876,035 100.0 % 6.2 %
Operating expenses:
Cost of revenues (1) 301,422 64.9 281,672 64.4 7.0 590,738 63.5 558,721 63.8 5.7
Selling and administrative
expenses (1) 93,080 20.0 68,321 15.6 36.2 183,608 19.7 154,280 17.6 19.0
Depreciation and
amortization 25,971 5.6 25,046 5.7 3.7 51,430 5.5 50,162 5.7 2.5
Total operating expenses 420,473 90.5 375,039 85.7 12.1 825,776 88.8 763,163 87.1 8.2
Operating income 44,127 9.5 62,446 14.3 (29.3 ) 104,222 11.2 112,872 12.9 (7.7 )
Other income, net (1,636 ) (0.4 ) (949 ) (0.2 ) 72.4 (3,469 ) (0.4 ) (2,482 ) (0.3 ) 39.8
Income before
income taxes 45,763 9.8 63,395 14.5 (27.8 ) 107,691 11.6 115,354 13.2 (6.6 )
Provision for
income taxes 11,083 2.4 15,789 3.6 (29.8 ) 24,769 2.7 29,428 3.4 (15.8 )
Net income $ 34,680 7.5 % $ 47,606 10.9 % (27.2 )% $ 82,922 8.9 % $ 85,926 9.8 % (3.5 )%
25
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(1) Exclusive of depreciation on our property, plant and equipment and
amortization on our intangible assets.
General
We derive our revenues through the design, manufacture, personalization, rental, cleaning, delivering, and selling of a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks and aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent industrial wiping products, floor mats, facility service products, other non-garment items, and provide restroom and cleaning supplies and first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies. We have five reporting segments,U.S. and Canadian Rental and Cleaning, MFG, Specialty Garments, First Aid and Corporate. We refer to theU.S. and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our "Core Laundry Operations." Cost of revenues include the amortization of rental merchandise in service and merchandise costs related to direct sales as well as labor and other production, service and delivery costs and distribution costs associated with operating our Core Laundry Operations, Specialty Garments facilities and First Aid locations. Selling and administrative costs include costs related to our sales and marketing functions as well as general and administrative costs associated with our corporate offices, non-operating environmental sites and operating locations including information systems, engineering, materials management, manufacturing planning, finance, budgeting and human resources. We have a substantial number of plants and conduct a significant portion of our business in energy producing regions in theU.S. andCanada . In general, we are relatively more dependent on business in these regions than are many of our competitors. For example, the dramatic decrease in oil prices beginning in 2014 directly affected our customers in the oil industry as they curtailed their level of operations, which had a corresponding effect on our customers in businesses which service or supply the oil industry as well as our customers in unrelated businesses located in areas which had benefited from the economic expansion generated by the robust growth driven by the higher oil prices in prior years. As a result, our organic growth in periods following this dramatic decrease in oil prices was negatively impacted by elevated headcount reductions in our wearer base as well as increased lost accounts. Recent trends indicate that the precipitous decline in energy prices will have a significant negative impact on wearer levels at existing customers in our North American energy-dependent markets. Our operating results are also directly impacted by the costs of the gasoline used to fuel our vehicles and the natural gas used to operate our plants. While it is difficult to quantify the positive and negative impacts on our financial results from changes in energy prices, we believe that the significant decrease in oil and natural gas prices we are currently experiencing will have an overall negative impact on the business.
Our results of operations may also be adversely impacted by the decline in the Canadian exchange rate.
Our business is subject to various state and federal regulations, including employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements, healthcare insurance mandates and other laws and regulations that impact our labor costs. We expect that our labor costs will rise in fiscal 2020 as a result of increases in state and local minimum wage levels as well as the overall impact of wage pressure as the result of a low unemployment environment. OnOctober 23, 2019 , we announced that we would be raising our quarterly dividend to$0.25 per share for Common Stock and to$0.20 per share for Class B Common Stock, up from$0.1125 and$0.09 per share, respectively. The amount and timing of any future dividend payment is subject to the approval of the Board of Directors each quarter. OnJanuary 2, 2019 , our Board of Directors approved a share repurchase program authorizing the Company to repurchase from time to time up to$100.0 million of its outstanding shares of Common Stock. Repurchases made under the program, if any, will be made in either the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will depend on a variety of factors, including economic and market conditions, the Company stock price, corporate liquidity requirements and priorities, applicable legal requirements and other factors. The share repurchase program will be funded using the Company's available cash or capacity under its credit agreement and may be suspended or discontinued at any time. As ofFebruary 29, 2020 , the Company had repurchased a total of 268,250 shares for an average price per share of$166.71 under the share repurchase program. During the thirteen and twenty-six weeks endedFebruary 29, 2020 , the Company repurchased 20,500 and 71,100 shares for an average price per share of$206.34 and$199.77 respectively. During the thirteen and twenty-six weeks endedFebruary 23, 2019 , the Company repurchased 45,000 shares for an average price per share of$139.57 . During fiscal 2017, we recorded a pre-tax non-cash impairment charge of$55.8 million once it was determined that it was not probable that the version of the CRM system that was being developed would be completed and placed into service. OnDecember 28 , 26
-------------------------------------------------------------------------------- 2018, we entered into a settlement agreement with our lead contractor for the version of the CRM system with respect to which we recorded the impairment charge. As part of the settlement agreement, we recorded in the thirteen weeks endedFebruary 23, 2019 a total gain of$21.1 million as a reduction of selling and administrative expenses, which includes our receipt of a one-time cash payment in the amount of$13.0 million as well as the forgiveness of amounts previously due the contractor. We also received hardware and related maintenance service with a fair value of$0.8 million as part of the settlement. In our fourth fiscal quarter of 2018, we initiated a multiyear CRM project to further develop, implement and deploy a third-party application we licensed. This new solution is intended to improve functionality, capability and information flow as well as increase automation in servicing our customers. As ofFebruary 29, 2020 , we have capitalized$17.3 million related to our new CRM project.
Thirteen weeks ended
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