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Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session [Operator Instructions].
I would now like to turn the conference over to Steven Sintros, President and Chief Executive Officer. Please go ahead.
Thank you, and good morning. I'm Steve Sintros, UniFirst's President and Chief Executive Officer. Joining me today is Shane O'Connor, Senior Vice President and Chief Financial Officer. We'd like to welcome you to UniFirst Corporation's conference call to review our second quarter results for fiscal year 2019 and to discuss our expectations going forward.
This call will be on a listen-only mode until we complete our prepared remarks, but first a brief disclaimer. This conference call may contain forward-looking statements that reflect the company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words, anticipate, optimistic, believe, estimate, expect, intend and similar expressions that indicate future events and trends identify forward-looking statements. Actual future results may differ materially from those anticipated depending on a variety of risk factors. I refer you to the discussion of these risk factors in our most recent 10-K and 10-Q filings with the Securities and Exchange Commission.
I'm happy to report that UniFirst's second quarter of fiscal 2019 produced solid results for both our company and our shareholders. Overall, revenues achieved a new record high for the second quarter at $437.5 million, up 4.3% from the same period last year. On the profit side, fully diluted earnings per share for the quarter came in lower at $2.48 per share compared to $2.85 reported for the same quarter a year ago. However, it should be noted that both period's earnings were positively affected by significant one-time events. The 2018 second quarter earnings per share was strengthened by the financial impact of the U.S. tax reform, while the 2019 quarterly earnings per share was aided by a settlement with our previously contractor for our CRM systems development project.
Shane will provide you with further details on these two non-recurring items in a moment. Excluding these items, adjusted operating income for the second quarter was $41.3 million, down slightly from $42 million we reported in the same quarter in 2018. Both our revenues and profit performances for the quarter came in ahead of our internal expectations. As always, I'd like to sincerely thank all of our thousands of employee team partners throughout North America, Central America and Europe for their continued loyalty to our customers and to our company as a whole, loyalty that helps us achieve solid financial results.
As our team partners drive our successes, we will continue to focus our efforts on strengthening our customer focused family culture company wide. All designed towards creating an engaged and motivated workforce that is empowering committed to providing exemplary customer service. As we look to the remainder of the year, we will continue to count on our core laundry operations to drive the vast majority of UniFirst on growing revenue growth. We are encouraged by the strong performance of our sales organization with new account sales totals for the first six months of this year, exceeding last year's record levels.
In addition, customer retention has been marginally favorable compared to a year ago. While we continue to expect to be challenged by higher payroll levels and merchandise over the remainder of the year, we continue to aggressively focus on managing our costs across our laundry locations without sacrificing service levels to our customers. Our ability to execute on this plan will allow us to continue producing solid results and fuel our investments in our team partners, our technology and our overall service infrastructure to ultimately achieve the overall objective of being universally recognized as the best service provider in our industry. Finally, as we discussed on our last earnings call, our strong balance sheet and healthy cash flow position will continue to allow us the opportunity to further invest in strategic growth drivers, while simultaneously pursuing opportunities to deploy capital and create additional value to our shareholders.
And with that, I'd like to turn it over to Shane, who will provide additional details on our quarterly results and our outlook for the remainder of fiscal 2019.
Thanks Steve. Revenues in our second quarter of 2019 were $437.5 million, up 4.3% from $419.3 million a year ago. Operating income increased by 48.9% to $62.4 million from $42 million in the prior year period and net income for the quarter decreased to $47.6 million or $2.48 per diluted share from $58.4 million or $2.85 per diluted share in the second quarter of 2018. Our operating income and net income both benefited from a pretax gain of $21.1 million in the second quarter of fiscal 2019. This gain related to a settlement we entered into with a lead contractor for the version of the CRM system, which we recorded a $55.8 million impairment charge for in fiscal 2017. This settlement included the receipt of a one-time cash payment in the amount of $13 million, the forgiveness of amounts previously due to contractor, as well as the receipt of certain hardware and related maintenance.
The quarterly net income and EPS comparisons were affected by uneven tax rates. Our effective tax rate in the second quarter of 2019 was 24.9% compared to a negative provision for income taxes in the second quarter of 2018. The prior year period tax rate was significantly impacted by the tax reform that was enacted on December 22, 2017, which resulted in a one-time benefit to our provisions for income taxes of $20.1 million. This benefit was largely due to a one-time revaluation of our U.S. net deferred tax liability.
Excluding the impact of the CRM-related settlements and the onetime tax reform benefit I just discussed, our adjusted operating income in the second quarter of fiscal 2019 was $41.3 million compared to $42 million in the prior year period. Adjusted net income for the quarter was $32 million or $1.67 per diluted share compared to $38.2 million or $1.87 per diluted share in the year ago period.
The decline in adjusted net income and diluted earnings per share was primarily due to a lower adjusted effective tax rate in the second quarter and fiscal 2018. The EPS decline was limited by the effect of share repurchases we have made over the last 12 months, which resulted in 6% fewer diluted shares outstanding this year compared to a year ago. Our Core Laundry Operations, which makes up approximately 90% of UniFirst total business, reported revenues for the quarter of $394.4 million, up 4.1% from the revenues achieved during last year second quarter.
Adjusting for the estimated effect of acquisitions, as well as the impact of a weaker Canadian dollar, our Core Laundry organic revenue growth was 4%. During the quarter, our organic growth continued to benefit from solid new account sales, slightly improved customer retention, as well as the impact of certain price adjustments and increases in merchandise recovery charge. Core Laundry operating income was $59.1 million for the quarter, up from $38.1 million in the prior year period. The segment's operating margin, which was positively impacted by the CRM related settlement, was 15% compared to 10% in the second quarter of fiscal 2018. Excluding the impact of the CRM related settlements, the adjusted Core Laundry operating margin decreased from 10% in the second quarter fiscal 2018 to 9.6%. This decrease was primarily due to higher production and service payroll costs, as well as higher merchandise amortization as a percentage of revenues.
These items were perfectly offset by lower health care claims, as well as the capitalization of sales commission costs due to our adoption of new accounting guidance in the first quarter fiscal 2019. In addition, energy costs decreased to 4.3% of revenues in the second quarter of 2019, down from 4.4% a year ago.
During our quarter, the segment's operating income also benefited from the capitalization of internal labor costs for our new CRM project. However, these were largely offset by increased non-capitalized consulting costs that we incurred for the project and other technology related initiatives; revenues from our Specialty Garments segments, which deliver specialized nuclear decontamination and clean room products and services, increased by 10.1% to $29.7 million in the second quarter. This increase was primarily due to the benefit of acquisitions in fiscal 2018, which increased quarterly revenues by 10.8%. Segment's operating income was $2.2 million compared to $2.8 million in a year ago period. As we've mentioned in the past, this segment's results can vary significantly from period-to-period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services.
Specialty Garments' operating margin decreased 7.5% from 10.4% in the prior year period, primarily due to higher costs related to its 2018 acquisitions, as well as higher production payroll, merchandise amortization and casualty claims expense as a percentage of revenues. Our first-aid segment reported revenues and operating income of $13.3 million and $1.1 million respectively for the quarter, which were relatively consistent with the segment's performance in the prior year period. We continued to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $335.3 million at the end of our second quarter of fiscal 2019. This balance represents an increase of $64.8 million from the end of our prior fiscal year.
Cash provided by operating activities for the first half of the year was $128.7 million, an increase of $9.7 million from the first half of the prior year when cash provided by operating activities was $118.9 million. This increase was primarily due to cash received of $13 million in the second quarter of fiscal 2019 from the CRM -related settlements, as well as $3 million received related to the settlement of environmental litigation in the first quarter of fiscal 2019. These amounts were partially offset by the payout of the previously announced $7.2 million one-time bonus to our employees in September of 2018.
For the first half of fiscal 2019, capital expenditures totaled $52.2 million as we continued to invest in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives. During the quarter, we capitalized $2.3 million related to our new CRM project, which consisted of both consulting costs and capitalized internal labor costs. At this time, we now expect full-year capital expenditures to be approximately $115 million, down from the originally anticipated $130 million. This decrease is primarily due to slower than anticipated progress on a couple of large building projects.
During the second quarter of fiscal 2019, we repurchased 45,000 common shares at an average share price of $139.57. Although, our acquisition activity in the first half of fiscal 2019 was nominal, we continue to look for and aggressively pursue additional targets as acquisitions remain an integral part of our overall growth strategy. I'd like to take this opportunity to provide an update on our outlook for fiscal 2019. We now expect that our fiscal 2019 revenues will be between $1.785 billion and $1.795 billion.
As we previously mentioned, during the quarter both our operating income and net income, exceeded our expectations. Based on these better-than-expected results, as well as the inclusion of the CRM-related settlements, we now expect our full-year diluted earnings per share will be between $7.65 and $7.90. The impact of the stronger than anticipated quarterly results on our revised outlook was tempered by an increase to our forecasted merchandise amortization for the second half of fiscal 2019 due to the continued merchandise investments we've had to make to support our new sales, as well as our existing customer base. We also now expect that our effective tax rate for 2019 will be approximately 25.6%. This guidance for fiscal 2019 includes one extra week of operations, compared to fiscal 2018 due to the timing of our fiscal calendar and assumes no future share repurchases.
This concludes our prepared remarks. And we would be happy to answer any questions that you might have.
Thank you [Operator Instructions]. Our first question comes from the line of Andrew Steinerman with JP Morgan. Please proceed with your question.
Steve, you talked about sales performance being strong in the second quarter. Do you sense that the third quarter, the current quarter organic revenue growth will be similar or better than the second quarter? And did the winter season at all hold up selling?
Our guidance over the second half of the year has the organic growth right around that 4% range at the midpoint. So, I think the strong sales performance from last year continues into this year. I think we marginally beat last year's record level. So, it continues to be a key portion of that organic growth rate that we experienced in the second quarter and that we're projecting. So I don't think it will be much higher but at the same levels, which were a little bit better than we have projected. As far as the other impacts, we did not have any particularly unusual impacts from the winter season.
Our next question comes from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.
Just want to build on the last one a little bit different way. Steve, when you look at the guidance raise, obviously, net of the one-time item. And you beat consensus away at least here and said in your press release that you beat your internal plan. I'm just trying to understand of the guidance raise. How much of that was due to the quarter being better than expected versus your view on the balance of the year being better than expected, recognizing you mentioned a couple of things in your guidance comments. So I thought you could just tie that out for us so that we can have a sense of how you're thinking about the rest of the year?
Yes, I think as we look at the rest of the year. I mean, I think certainly the quarter was better than some of our internal projections. I think the places where we did a little bit better were on the revenue side. Obviously, Shane mentioned the healthcare beat, which is something that we often have trouble pegging very accurately quarter-to-quarter. Other than that, I think there were some beats along the lines and some miscellaneous expenses we've been working to control. But the overall key drivers of payroll and merchandise that we referenced early in the year continue to be there. And I would say payroll impacted us about as expected and merchandise probably impacted us, or did impact us a little more negatively than expected.
So as we look to the remainder of the year again, I think that some of the beat from the current quarter, at least as far as our internal expectations is being tempered by what continues to be accelerating merchandise. We continue to work to control payrolls and improve the revenues where we can. I think the merchandise is the one area that, as you know, how our merchandise amortization works. The die is mostly cast on how our merchandising amortization is going to look over the next quarter or so and that project higher than what we have. Some of the beats in the quarter like on the healthcare, we have not carried forward to the third and fourth quarter. So that probably tampered some of the back half at least compared to the second quarter as well.
I think maybe for my next question, I wanted to just get an update here on your CRM implementation. You haven't given us a lot of details other than what's happening on this one. Can you maybe, as you're moving into this and getting a better sense of what it's all going to entail. Can you give us your new estimate for total cost on that one? And maybe more importantly even the timing as to when you think you can go live?
And any thoughts that you'd have on the depreciation expense that's going to be associated with this once you do go live?
So I can give you a little bit of additional color, but I probably won't give you every component that you just asked for. Right now, we're working toward an eventual go-live and rollout but we have not begun a rollout of that new system just yet. As far as the cost estimate and I don't have those numbers in front of me, but the one Shane had referenced previously when we first introduced this new iteration of this initiative, I think are still holding pretty well. At this point, I will not be communicating when we will be going live with that system as I'm sure you can appreciate based on our last endeavor. We want to be pretty confident to that timeline before we introduce it publicly and that's probably something or another quarter or so away from being able to communicate publicly. I will say anecdotally, or not anecdotally but qualitatively that the process is going well and that we're optimistic about the progress we're making and we will be able to provide some more clear guidance as we get into our year-end discussions.
And then I'm just going to step back and I guess ask a bigger picture question here. And just want to get your sense here about UniFirst's overall competitive positioning today, obviously, the large transactions that have happened the couple of years, these questions have been asked and asked, but wanted to get your sense of now that those transactions are becoming more integrated at your competitors. How you're positioned competitively and certainly recognizing here that your margins, while better than expected here still on a historical basis, aren't really where they've been at your own company. So I just want to get your sense on where you guys stand today relative to competition and your ability to maintain or gain share, as well as your overall profitability profile versus your peers? And how you think that'll stacks up when the rubber meets the road?
I think we feel we're still doing a good job of gaining some share against some of our larger competitors. We talked about a lot of investments and initiatives that we're doing to continue to improve and shore up our service to make sure it's as strong as it can be. But we do feel we can continue to win in this market. And I think our results are proving as such in terms of our wins versus losses versus a lot of our competitors in the market. You talked about the consolidation and the operating environment out there today. I would say it’s largely unchanged from a year ago. Certainly from three or four years ago, we are seeing the dynamic change with having less competitors in the market, but at the end of the day we can try to stay more internally focused.
And so we're doing a good job of providing the service at the levels that we know we're capable of doing that we can win business and be competitive. So I think we still feel like that those opportunities are there and that the investments we're making will provide for margin expansion opportunities in the future as we improve some of our technology, automation and efficiencies. So we feel that that game plan is sound and that we're executing toward that. And similar to your question about the technology initiative, we still have some work to be done but we feel like we're making good progress.
[Operator Instructions] Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.
What are you guys expecting for specialty, your specialty business for the back half of the year? I have in my notes here that you were, I think initially maybe expecting that to be down a little bit in the full year? I don't know if that's right. What are you expecting for this business?
Tim, when we take a look at specialty coming off of 2018. 2018 was historically a very, very strong year as our nuclear segment continued to penetrate some of this larger Canadian customers, as well as got some benefit from its European business as well. We were anticipating that nuclear was going to be relatively flat this year compared to the prior year. And at this point in time -- or the second quarter was stronger than we had originally anticipated. So we do expect at least from the top-line perspective that our Specialty Garments segment is going to be nominally ahead of the prior year. However, from a profitability perspective and you've been able to see it, at least in the second quarter of this year. And we know that the profitability of that segment can vary depending upon the projects that it's got going. We do expect that the profitability of that segment will be backward slightly compared to the prior year.
I think just moving on to the margins, I think just in the Core Laundry business. It benefited from lower healthcare costs and adoption new accounting standards. And there are some negative impacts like higher payroll and merchandise amortization. I'm just wondering if you can just remind me how much of these things -- how much were into these things [Technical Difficulty]?
So you're talking about the quarter compared to the prior year. If we take a look at the…
Yes...
So, if we take a look at the quarter compared to the prior year and adjusted -- I guess, this year adjusted to exclude the CRM settlement our operating margin in our core went from 10%, down to 9.6%, so about 40 basis points. About half a point was attributable to both merchandise -- about 50 basis points is attributable to both merchandise, as well as our payroll costs as we had guided. Previously we expected those to be up. Our healthcare claims was about 50 basis points of benefit as well. And then our sales commissions, as well as related selling payroll also provided us a benefit as well.
So that 50 basis points each from merchandise and payroll were on a combined basis?
That's for each.
And lastly you talked about what's driving revenue growth, and you mentioned new account sales. I am just wondering if new account sales, how is that trending relative to last couple of quarters? How much of that is driving organic growth? Thank you.
I think as I alluded to before, last year was a very strong new sales year, the best we'd ever done by about 10%, 12% on the new sales side. And so that has driven some momentum into this year. And for the first two quarters, we are somewhat ahead of the first six months of 2018, not to the same extent that '18 was over '17. So we're ahead of what was a very strong year and that is helping the momentum. I think we mentioned merchandise recovery charges being higher as well. I mean, like always with our growth, it's all the components. And this year, I'd say it is all the components, a little bit better retention, better new sales, better extra charges, performance are all contributing to the organic growth coming in a little bit ahead of our expectations.
There appears to be no further questions at this time.
Okay, thank you very much. I want to thank everyone for joining us today to review UniFirst's second quarter call. We look forward to speaking with you again in June when we expect to be reporting our third quarter results. Thank you and have a great day.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.