UniFirst Corporation — Q2 FY2022 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended February 26, 2022; unaudited. Comparative periods ended February 27, 2021. UniFirst provides workplace uniforms and protective wear, rental and laundry services, specialty garment services, and first-aid and safety supplies.
Key financial results
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Revenue | $486.7m | $449.8m | $972.9m | $896.6m |
| Operating income | $22.6m | $40.7m | $67.4m | $96.7m |
| Operating margin | 4.6% | 9.0% | 6.9% | 10.8% |
| Net income | $18.5m | $32.6m | $52.2m | $74.5m |
| Diluted EPS, Common Stock | $0.97 | $1.71 | $2.75 | $3.91 |
For the first half, operating cash flow was $44.9m, versus $128.0m a year earlier. Capital expenditures, including capitalized software, were $60.2m; acquisitions used $42.3m. Cash flow after capital expenditures was negative $15.3m, compared with positive $61.2m in the prior-year first half. Cash, cash equivalents and short-term investments were $425.9m at period end, down from $512.9m at August 28, 2021. Total liabilities were $513.6m and shareholders’ equity was $1,899.0m.
Debt and liquidity: No revolver borrowings were outstanding. The $175m revolving facility had $67.6m of letters of credit and $107.4m available; the company reported compliance with its covenants. The facility matures March 26, 2026.
Material changes and drivers
- Revenue increased 8.2% in Q2 and 8.5% in the first half. Core Laundry Operations revenue rose 8.7% and 8.9%, respectively; management attributed growth to customer reopenings, sales, retention, and passing some cost increases to customers. Q2 organic growth for Core Laundry Operations was 8.0%, adjusted for acquisitions and currency.
- Profitability fell despite revenue growth. Q2 cost of revenues rose 12.2%, faster than revenue, and increased from 64.4% to 66.7% of revenue. Selling and administrative expense rose 20.4%, to 23.1% of revenue from 20.8%. For the first half, operating income declined 30.3% and net income declined 30.0%.
- Management cited merchandise amortization normalizing from pandemic-depressed levels, large national-account installations, higher energy and casualty costs, wage inflation, and increased payroll, healthcare, travel, stock compensation, and CRM/ERP/branding costs as margin pressures.
- Eight acquisitions were completed in the first half for an aggregate purchase price of approximately $43.7m. Acquisition cash outflow, net of cash acquired, was $42.3m.
- First-half cash flow from operations declined amid lower profitability, higher receivables, inventories and rental merchandise in service, and lower accrued liabilities. The accrued-liability decrease included payment of $12.2m of deferred Social Security and Medicare taxes; the remaining $12.1m was expected to be paid by calendar year-end 2022.
Outlook, risks and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management said inflation had negatively affected margins and expected continued pressure in future periods, while noting that customer relationships and contractual price increases have historically helped address inflation.
- Management considered current cash, future operating cash generation and revolver availability sufficient for anticipated working capital and capital expenditure needs for at least the next 12 months, while cautioning that there could be no assurance.
- Risks highlighted include inflation and higher fuel, natural gas, electricity and labor costs; supply-chain disruption; customer demand and retention; COVID-19 or new variants; acquisitions and integration; foreign-exchange movements; environmental remediation; labor relations; and IT or cyber interruptions. The company said pandemic-related adverse effects and supply disruptions had recently declined, but could recur.
- Environmental liabilities were $31.4m at February 26, 2022. Matters include sites in Woburn and Somerville, Massachusetts; EPA comments and unresolved remediation issues remain at Woburn. The company cautioned that estimates and reserves may change and future contingencies could materially affect a period’s results.
- The Q2 effective tax rate was 19.0%, down from 22.7%, and the first-half rate was 22.7%, down from 24.0%; management attributed the decreases primarily to releases of tax reserves. Foreign-exchange losses also weighed on other income versus the prior-year period.
- The quarterly dividend had been increased to $0.30 per Common share and $0.24 per Class B share. First-half stock repurchases totaled $14.8m; $87.3m remained under the repurchase authorization at period end.
Important facts for investors to verify
- Whether pricing and organic growth can offset inflation, wage, energy and merchandise-amortization pressures and restore operating margins.
- Whether operating cash flow improves as working capital, inventory and rental merchandise levels normalize, and whether the remaining deferred payroll taxes are paid as expected.
- Acquisition integration, purchase-price allocations and the returns on the eight businesses acquired.
- Potential changes to the $31.4m environmental liability, including outcomes at Woburn and Somerville and the transit-authority reimbursement matter.
- Cash deployment among acquisitions, capital investment, dividends and repurchases, alongside available revolver capacity and covenant compliance.