UniFirst Corporation — Form 10-Q Summary
Reporting period: Quarter ended February 25, 2023 (13 weeks); year-to-date period covers 26 weeks. Comparisons are with the periods ended February 26, 2022. Amounts below are in millions except per-share data.
Business context and key financial metrics
UniFirst provides uniform and workwear rental, cleaning, delivery and sales, alongside specialty garment, facility, and first-aid services. Core Laundry Operations accounted for most revenue. The financial statements are unaudited.
| Metric | Quarter | Prior-year quarter | 26 weeks | Prior-year 26 weeks |
|---|---|---|---|---|
| Revenue | $542.7 | $486.7 | $1,084.5 | $972.9 |
| Operating income | $20.7 | $22.6 | $64.1 | $67.4 |
| Operating margin | 3.8% | 4.6% | 5.9% | 6.9% |
| Net income | $17.8 | $18.5 | $51.8 | $52.2 |
| Diluted EPS, Common Stock | $0.95 | $0.97 | $2.76 | $2.75 |
| Operating cash flow | — | — | $64.2 | $44.9 |
Quarterly diluted EPS for Class B Common Stock was not presented in the filing’s summary table; basic EPS was $0.79 versus $0.81. Six-month basic EPS was $2.31 versus $2.30. The effective tax rate was 24.6% for the quarter and 25.0% year to date, compared with 19.0% and 22.7%, respectively.
At February 25, 2023, cash and cash equivalents were $244.1 and short-term investments were $101.0, totaling $345.1. Total current assets were $1,067.3 and current liabilities $232.1. Total liabilities were $499.2; the balance sheet reported no outstanding borrowings at quarter-end. Capital expenditures were $74.8 for the first half. Investing cash outflow was $182.6, including $107.0 of investment purchases; financing cash outflow was $13.8, including $11.0 of dividends paid.
Material changes versus prior comparable periods
- Revenue rose 11.5% in both the quarter and first half. Core Laundry Operations revenue increased 10.2% quarterly and 10.7% year to date; management attributed much of its organic growth to pricing actions to recover higher costs.
- Specialty Garments revenue grew 18.5% quarterly and 14.9% year to date; First Aid grew 29.9% and 22.0%, respectively.
- Operating income fell 8.4% for the quarter and 4.9% for the first half. Cost of revenues grew faster than revenue, and Core Laundry Operations operating income declined 27.2% quarterly and 14.1% year to date. Management cited inflation in merchandise costs and increased merchandise placed in service.
- Net income declined 3.5% quarterly and 0.7% year to date. Higher interest income on cash and investments partly offset lower operating income; the prior-year periods also benefited from releases of $1.2 of tax reserves, contributing to higher current-period effective tax rates.
- Operating cash flow increased to $64.2 from $44.9, primarily reflecting lower working-capital needs, including a favorable inventory comparison and timing of tax payments. Cash and cash equivalents fell from $376.4 at fiscal year-end, while the company purchased short-term investments.
Outlook, management commentary, risks and unusual items
- Outlook and liquidity: The filing gives no quantified earnings or revenue guidance. Management believes cash, investments, future operating cash flow and credit availability should cover anticipated working capital and capital expenditures for at least 12 months, while cautioning there is no assurance.
- Acquisition and borrowing: After quarter-end, UniFirst completed the approximately $300 million acquisition of Clean on March 13, 2023, adding 11 locations across Missouri, Illinois, Arkansas, Kansas and Oklahoma. It used cash and credit-agreement borrowings, including an $80.0 million post-quarter borrowing. A March 9 amendment increased aggregate credit commitments from $175.0 million to $275.0 million, replaced LIBOR with SOFR, and allows a further conditional increase of up to $100.0 million. At quarter-end, $108.5 million was available under the then-existing facility after $66.5 million of letters of credit; the company reported covenant compliance.
- Cost and operating pressures: Management said inflation has pressured margins through energy, wages and merchandise costs, and may continue to do so. It also cited possible recession and interest-rate risks, supply-chain disruption, labor costs, foreign-exchange exposure, and seasonality and project timing in Specialty Garments.
- Strategic spending: CRM deployment is expected to continue through fiscal 2023; the company is also developing an ERP system and investing in its brand. Costs directly attributable to these initiatives were $9.1 in the quarter and $19.1 year to date, versus $6.7 and $12.7 in the prior-year periods. The company reported $2.0 of Clean acquisition-related costs in the current quarter and first half.
- Contingencies: Accrued environmental liabilities were $30.3 at February 25, 2023, including matters at sites in Massachusetts and elsewhere; estimates depend on remediation assumptions, discount rates, insurance and other parties’ participation. A Mexican tax assessment totals approximately $84.7, including surcharges, fines and penalties. UniFirst disputes it; management said a loss was neither probable nor remote and that a loss range could not be reasonably estimated. Two former-employee wage claims are expected to be resolved for nominal amounts.
- Controls: Disclosure controls were deemed ineffective due to a previously identified material weakness in revenue and accounts-receivable controls, primarily CRM user-access IT controls. Management was implementing remediation and believed, without assurance, that it could be completed by fiscal year-end 2023.
Important facts for investors to verify
- Whether pricing and revenue growth can offset inflation in merchandise, labor and energy without further erosion in operating margins.
- Clean’s post-acquisition contribution, integration costs, and the effect of the $80.0 million borrowing on interest expense, leverage and covenant headroom.
- Progress and effectiveness of CRM access-control remediation, and the status of the material weakness.
- Developments in the disputed Mexican tax assessment and environmental remediation obligations, including changes to estimates or insurance recoveries.
- Capital spending, operating cash conversion and liquidity after the acquisition and subsequent credit-agreement amendment.