UniFirst Corporation (UNF) — Q1 FY2023 Form 10-Q
Business and period: UniFirst provides uniform rental, laundering, workplace supplies, specialty garment services and first aid products. This unaudited quarter covers the 13 weeks ended November 26, 2022; comparable period ended November 27, 2021. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $541.8 million | $486.2 million | +11.4% |
| Operating income | $43.4 million | $44.8 million | -3.1% |
| Operating margin | 8.0% | 9.2% | -1.2 percentage points |
| Income before taxes | $45.4 million | $44.7 million | +1.6% |
| Net income | $34.0 million | $33.7 million | +0.7% |
| Diluted EPS | $1.81 | $1.77 | +2.3% |
| Operating cash flow | $27.7 million | $7.8 million | +$19.9 million |
Net margin was 6.3%, compared with 6.9%. Cost of revenues rose 14.1% and increased from 63.8% to 65.3% of revenue; selling and administrative expense rose 12.4% and was 21.7% of revenue versus 21.5%. Interest income, net, was $2.8 million, compared with $0.6 million, supporting pretax income despite lower operating income.
Revenue by category: Core Laundry Operations $477.4 million (+11.3%; organic growth 10.7%), Specialty Garments $44.1 million (+11.6%), and First Aid $20.3 million (+13.9%).
Cash, liquidity and debt
- Cash and cash equivalents were $244.2 million at November 26, 2022, versus $376.4 million at fiscal year-end. The company also held $107.0 million of short-term investments, bringing cash and investments to $351.2 million, down from $376.4 million.
- Operating cash flow was $27.7 million. Investing used $152.4 million, including $107.0 million of certificate-of-deposit purchases, $39.0 million of capital expenditures and $6.6 million for acquisitions. Financing used $7.6 million, including $5.6 million of dividends.
- No borrowings were outstanding under the $175 million revolving credit facility; $114.2 million remained available after $60.8 million of letters of credit. The company reported covenant compliance. Lease liabilities totaled approximately $49.0 million, including current and long-term amounts.
- Current assets were $1.068 billion and current liabilities were $242.8 million. Management said available liquidity, expected operating cash flow and credit capacity should meet anticipated working-capital and capital-expenditure needs for at least 12 months, while noting there can be no assurance.
Material changes and management commentary
- Revenue growth reflected solid sales, improved customer retention and customer price increases intended to share inflation-related cost increases. Specialty Garments benefited from cleanroom growth and North American nuclear project work; First Aid growth was attributed mainly to its van business.
- Core Laundry operating income declined 7.3% to $33.8 million. Management cited higher merchandise amortization, product costs and energy costs; lower healthcare claims expense partly offset these pressures. Inflation and wage increases continued to pressure margins, and management expects inflationary margin pressure to persist.
- Costs directly attributable to the company’s CRM rollout, brand investment and planned ERP initiative were $10.0 million, compared with $5.9 million a year earlier. The CRM rollout was expected to continue through FY2023.
- The quarterly dividend was raised to $0.31 per Common share and $0.248 per Class B share. No shares were repurchased during the quarter; $63.6 million remained available under the repurchase program.
- No quantified earnings or revenue guidance was provided in the supplied filing text. Management described its liquidity outlook but did not provide a numerical operating forecast.
Risks, contingencies and controls
- Environmental remediation liabilities were $30.9 million at quarter-end. The company identified uncertainty around remediation at sites including Woburn and Somerville, Massachusetts, and noted that estimates could change.
- A Mexican tax assessment relating to fiscal 2016 totaled approximately $84.7 million, including taxes, surcharges, fines and penalties. UniFirst disputes the assessment and has appealed; it said the possible loss could not be reasonably estimated and was neither probable nor remote.
- Two former employees filed Fair Labor Standards Act actions in September 2022. The company intends to defend itself; it could not estimate potential losses and described a loss as neither probable nor remote.
- Disclosure controls and procedures were deemed ineffective because of a previously identified material weakness in CRM user-access controls affecting the revenue and accounts-receivable process. Management was pursuing remediation and expected, without assurance, to complete it by fiscal year-end 2023.
- Other noted exposures include inflation, energy and labor costs, adverse economic conditions, supply-chain disruptions, currency movements, customer retention, regulatory requirements and risks associated with acquisitions and technology-system implementation.
Key facts for investors to verify
- Whether revenue growth and customer price increases can offset inflation, wage and merchandise costs without further margin erosion.
- Whether operating cash generation remains sufficient alongside capital expenditures, acquisitions and dividends; note the quarter’s large cash decline partly reflected investment purchases.
- Progress and costs of the CRM and ERP initiatives, and whether the material weakness is remediated and controls operate effectively.
- Developments in the Mexican tax appeal, environmental matters and employee litigation, including any change in estimated exposure.
- Future operating guidance, if issued; the filing provides no quantified forecast.