UniFirst Corporation — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2021, the 13 weeks ended May 29, 2021; year-to-date figures cover the 39 weeks ended that date. Comparisons are to the corresponding periods ended May 30, 2020. Amounts below are in millions of dollars except per-share data.
Business context
UniFirst provides workplace uniforms and protective clothing, rental and laundry services, specialty garment services, and first-aid and safety supplies. It served more than 300,000 customer locations across the United States, Canada, and Europe. The company said customer activity was recovering from pandemic-related disruption, although many customers remained below pre-pandemic levels.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | 39 weeks FY2021 | 39 weeks FY2020 |
|---|---|---|---|---|
| Revenue | $464.3 | $445.5 | $1,360.9 | $1,375.5 |
| Operating income | $54.2 | $27.7 | $150.9 | $131.9 |
| Operating margin | 11.7% | 6.2% | 11.1% | 9.6% |
| Net income | $42.0 | $21.3 | $116.5 | $104.2 |
| Diluted EPS, Common Stock | $2.21 | $1.12 | $6.12 | $5.46 |
- Q3 revenue increased 4.2%; year-to-date revenue declined 1.1%. Q3 Core Laundry Operations revenue rose 5.3%, Specialty Garments rose 5.7%, and First Aid fell 18.6%.
- Year-to-date Core Laundry Operations revenue declined 1.4%; Specialty Garments increased 5.7%, while First Aid declined 7.9%.
- Cost of revenues fell to 61.7% of Q3 revenue from 68.1%; year-to-date it was 62.6%, versus 65.0%. Management attributed improvement partly to pandemic-related costs and depressed rental activity in the prior-year comparison, lower bad-debt expense, and lower merchandise costs. Higher healthcare claims and profit-sharing costs partly offset the improvement.
- Selling and administrative expense rose 9.7% in Q3 and 2.6% year to date. As a share of revenue, it increased to 20.9% from 19.8% in Q3 and to 20.5% from 19.8% year to date; management cited healthcare claims, payroll, incentive compensation, and Q3 travel costs.
- Operating income increased 95.5% in Q3 and 14.4% year to date. Net income increased 97.4% in Q3 and 11.8% year to date. The Q3 tax rate was 22.9%, compared with 21.8%; the year-to-date rate was 23.6%, compared with 22.8%.
Cash flow, liquidity, and debt
- Cash, cash equivalents, and short-term investments were $535.0 at May 29, 2021, up from $474.8 at August 29, 2020. Current assets were $1,070.1 and current liabilities were $238.3.
- For the 39 weeks, operating cash flow was $187.5, versus $205.4. Investing activities used $103.2, including $96.6 of capital expenditures and $7.1 for acquisitions. Financing activities used $28.0, including $13.6 of dividends and $9.5 of share repurchases.
- The company had no revolver borrowings. Its new $175 million unsecured revolving credit agreement matures March 2026; $107.5 million was available after $67.5 million of letters of credit. UniFirst reported compliance with covenants.
- Management said cash, expected operating cash flow, and available credit should be sufficient for anticipated working capital and capital expenditure needs for at least 12 months, while noting there can be no assurance.
Material changes, outlook, and risks
- Management attributed the Q3 revenue recovery partly to the prior-year period’s pandemic impact; the prior-year comparison also included a $20.1 million direct sale. First Aid sales of pandemic-related safety and protective products were lower than in the prior-year period.
- COVID-19 continued to affect customer operating levels and wearer counts. Management said it could not reasonably estimate the pandemic’s full duration or financial impact; renewed outbreaks, customer restrictions, supply disruptions, or facility closures could materially affect results.
- No quantitative revenue or earnings guidance was provided. Management expected the current inflationary environment to pressure margins in future periods. Other cited exposures include labor, healthcare, fuel and energy costs, foreign exchange, customer retention, and supply-chain disruption.
- Environmental remediation liabilities were $28.1 at May 29, 2021, including matters involving sites in Woburn and Somerville, Massachusetts. The company warned costs and reserves could change; the EPA’s comments on Woburn remediation work remained partly unresolved, and reimbursement demands related to Somerville were reserved but uncertain.
- The company began deploying a new customer relationship management system during Q3; it had capitalized $32.0 in project costs and recorded $0.7 of amortization during the quarter. New or revised financial and IT controls are being implemented alongside deployment.
- UniFirst completed four acquisitions during the 39 weeks for an aggregate purchase price of approximately $7.5. It also declared quarterly dividends of $0.25 per Common share and $0.20 per Class B share.
Most important facts for investors to verify
- Whether customer activity and Core Laundry Operations revenue continue to recover, and whether revenue returns toward pre-pandemic levels.
- Whether improved operating margins persist as healthcare, wage, incentive-compensation, and inflationary costs evolve.
- Cash-flow conversion and capital needs, including planned capital expenditures, acquisitions, dividends, and any further share repurchases.
- Available revolver capacity, covenant compliance, and the terms and implications of the new credit agreement.
- Potential changes to environmental remediation costs and reserves, particularly at Woburn and Somerville.
- The pace, costs, and control implications of the CRM rollout, as well as continuing COVID-19 and supply-chain risks.