UniFirst Corporation (UNF) — Q3 FY2023 Form 10-Q
Reporting period: 13 weeks ended May 27, 2023; year-to-date figures cover 39 weeks. Comparisons are with the periods ended May 28, 2022. Amounts below are in U.S. dollars.
Business context
UniFirst provides uniform rental, laundering and sales, workplace supplies, specialty garment services, and first-aid and safety services. It serves more than 300,000 customer locations. Its reporting areas include Core Laundry Operations, Specialty Garments, and First Aid.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | 39 weeks FY2023 | 39 weeks FY2022 |
|---|---|---|---|---|
| Revenue | $576.7 million | $511.5 million | $1,661.2 million | $1,484.4 million |
| Operating income | $33.4 million | $33.7 million | $97.5 million | $101.1 million |
| Operating margin | 5.8% | 6.6% | 5.9% | 6.8% |
| Net income | $24.3 million | $25.1 million | $76.0 million | $77.2 million |
| Diluted EPS, Common Stock | $1.29 | $1.33 | $4.06 | $4.07 |
| Operating cash flow | Not separately stated | Not separately stated | $142.8 million | $88.8 million |
Revenue rose 12.7% in Q3 and 11.9% year to date. Cost of revenues was 65.8% of revenue in Q3 versus 65.4% a year earlier, and 66.4% year to date versus 65.3%; corresponding gross margins were 34.2%, 34.6%, 33.6%, and 34.7%. Net margin was 4.2% in Q3 versus 4.9%, and 4.6% year to date versus 5.2%.
Core Laundry Operations revenue increased 11.5% in Q3, driven by 7.8% organic growth, 4.4% acquisition-related growth, and a 0.7% adverse currency effect. Year-to-date Core Laundry revenue grew 11.0%. Specialty Garments revenue increased 19.9% in Q3 and First Aid revenue increased 25.8%. Despite higher sales, Core Laundry operating income declined 20.6% in Q3 and 16.2% year to date. Specialty Garments operating income improved; First Aid recorded a small Q3 operating loss and a $1.6 million year-to-date operating loss.
Q3 costs reflected inflation-related merchandise expense, $4.0 million higher healthcare claims, and approximately $1.3 million of legal-matter costs. Year-to-date selling and administrative expense also included higher Key Initiative spending and $2.7 million of Clean acquisition costs. Year-to-date other income benefited from higher interest income on cash and investments; the effective tax rate was 27.2% for Q3 and 25.7% year to date.
Liquidity, debt and capital allocation
- At May 27, 2023, cash and cash equivalents were $59.3 million and short-term investments were $10.0 million, down from $376.4 million of cash at August 27, 2022. Total current assets were $813.0 million; current liabilities were $258.9 million.
- Year-to-date operating cash flow was $142.8 million. Investing cash outflow was $439.8 million, including $306.2 million for acquisitions and $124.1 million of capital expenditures. Financing cash outflow was $20.2 million, including $16.5 million in dividends.
- The company paid approximately $299.1 million, net of cash acquired, for Clean Uniform in March 2023. It borrowed and repaid $80.0 million under its revolving credit facility during the quarter. At quarter-end it had no borrowings, $66.5 million of letters of credit, and $208.5 million of remaining availability under its $275 million facility, maturing in March 2026. It reported compliance with all covenants.
- The quarterly dividend had been raised to $0.31 per Common share and $0.248 per Class B share. No shares were repurchased in the 39-week period; $63.6 million remained under the repurchase authorization.
Management stated that cash, future operating cash flow, and available credit should be sufficient for anticipated working capital and capital expenditure needs for at least the next 12 months, while noting there can be no assurance.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said inflation has pressured margins, particularly through energy and labor costs, and may continue to do so. It cited recession risk, interest rates, supply-chain and labor pressures, and customer demand as factors that could affect results.
- The Clean acquisition added $19.8 million of revenue from its March 13 closing through May 27. The purchase-price allocation is preliminary; the company expects tax benefits of approximately $40 million over time from the tax-basis step-up.
- Management reported a previously identified material weakness in internal control over financial reporting involving CRM-system user access and the revenue/accounts-receivable process. Disclosure controls were therefore deemed ineffective. Management expected remediation by fiscal year-end 2023, subject to testing and sufficient operating time.
- Environmental remediation liabilities were $30.0 million at quarter-end. The company disclosed an $84.7 million Mexican tax assessment relating to fiscal 2016, including surcharges, fines and penalties. It is appealing the assessment, says a loss is neither probable nor remote, and cannot reasonably estimate a potential loss range.
- Other risks include uncertainty around environmental sites and legal claims, regulation of nuclear garment decontamination, and seasonal and project-timing variability in Specialty Garments. The filing identifies no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether organic growth and pricing can offset inflation and restore Core Laundry operating margins.
- Clean’s integration, contribution to earnings and cash generation, and final purchase-price allocation and expected tax benefits.
- Progress and testing outcomes for remediation of the CRM-related material weakness.
- Cash needs after the acquisition and capital spending, and continued compliance with credit-facility covenants.
- Developments in the Mexican tax appeal and environmental matters, including possible changes to the recorded liabilities.