UniFirst Corporation (UNF) — Q1 Fiscal 2024 10-Q
Reporting period: The thirteen weeks ended November 25, 2023; comparisons are with the thirteen weeks ended November 26, 2022. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 FY2024 | Prior-year period | Change |
|---|---|---|---|
| Revenue | $593.5 | $541.8 | +9.5% |
| Operating income | $53.1 | $43.4 | +22.4% |
| Operating margin | 9.0% | 8.0% | +1.0 percentage point |
| Net income | $42.3 | $34.0 | +24.6% |
| Diluted EPS, Common Stock | $2.26 | $1.81 | +24.9% |
| Cash from operations | $45.7 | $27.7 | +64.9% |
| Capital expenditures | $39.1 | $39.0 | Approximately flat |
Cost of revenues was $383.8 million, or 64.7% of revenue, versus 65.3% a year earlier. Selling and administrative expense was $122.9 million, or 20.7% of revenue, versus 21.7%. Depreciation and amortization rose 24.7% to $33.7 million, driven by technology and infrastructure investment and Clean acquisition-related charges. The effective tax rate declined to 23.4% from 25.2%, primarily due to releases of certain tax reserves and a state legislative change.
Business context and material changes
UniFirst provides uniform rental, cleaning, sales and related workplace, safety and facility services, serving more than 300,000 customer locations. Core Laundry Operations generated $524.0 million of revenue, up 9.8%; Specialty Garments revenue was $44.7 million, up 1.3%; First Aid revenue was $24.9 million, up 22.4%.
Core Laundry growth reflected 5.2% organic growth, 4.8% acquisition-related growth, and a 0.2% negative currency effect. Management attributed organic growth primarily to pricing actions and solid new-account sales. The prior-year comparison includes Clean Uniform only from its March 2023 acquisition onward; Clean contributed to current-period acquisition growth.
Operating income improved in Core Laundry Operations and Specialty Garments; First Aid reported an operating loss of $1.1 million, versus a $0.6 million loss. Management cited lower merchandise costs as a share of revenue and lower fleet and energy costs as supporting cost-of-revenue margin improvement. Selling and administrative costs included $6.4 million of additional Clean-related costs, partly offset by lower Key Initiative spending ($2.9 million versus $10.0 million).
Cash, debt and liquidity
At November 25, 2023, cash and cash equivalents were $77.4 million and short-term investments were $11.4 million, totaling $88.8 million. The company had no revolver borrowings, $62.4 million of letters of credit and $212.6 million available under its $275 million unsecured revolving credit facility, which matures March 26, 2026. The company reported compliance with facility covenants; the borrowing rate would be SOFR plus 1.00% at the period-end terms.
Operating cash flow was $45.7 million; investing activities used $39.6 million, including $39.1 million of capital expenditures; financing activities used $8.1 million, including $5.6 million of dividends. Management said current liquidity, expected operating cash flows and borrowing availability should be sufficient for anticipated working capital and capital needs for at least 12 months, while noting there can be no assurance. Total liabilities were $561.9 million, including operating lease liabilities; no debt was outstanding under the revolver.
The quarterly dividend was raised to $0.33 per Common share and $0.264 per Class B share. The board authorized a share repurchase program of up to $100 million; $99.7 million remained available at quarter-end. The company repurchased 1,500 shares during the quarter.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management noted that sustained inflation, high interest rates, energy and labor costs, and adverse economic conditions could pressure future results.
- Management expects its ERP initiative to continue through 2027. The company incurred $2.9 million of CRM/ERP costs in the quarter and expects these systems to support operating efficiency and customer retention over time.
- Disclosure controls were deemed ineffective due to a previously identified material weakness in IT general controls for system access and change management, affecting systems relevant to revenue, receivables, inventory and rental merchandise. Remediation is underway; management has not yet concluded the weakness is remediated.
- Environmental remediation liabilities were $29.5 million. The company describes uncertainty around remediation work and related demands at sites in Woburn and Somerville, Massachusetts; actual costs may differ from estimates.
- A Mexican tax authority assessment for fiscal 2016 totals more than $84.7 million, plus accruing interest and other charges. UniFirst is appealing; it says a loss is neither probable nor remote and it cannot reasonably estimate a potential loss range.
- Other notable item: a favorable tax-dispute resolution contributed $2.1 million of interest income in the quarter. The filing also identifies a material weakness and various economic, labor, regulatory, cybersecurity, currency, acquisition-integration and supply-chain risks.
Important facts for investors to verify
- Whether organic growth, pricing and new-account sales continue to offset cost inflation, and how much growth depends on acquisitions.
- Whether operating margin improvement persists as acquisition amortization, labor, energy and technology costs evolve.
- Progress and testing results for remediation of the IT-control material weakness, including any effects on financial reporting.
- Developments in environmental matters and the Mexican tax appeal, including changes to reserves, estimates or potential exposure.
- Capital spending, cash generation, revolver availability and the sustainability of dividends and repurchases.