UniFirst Corporation (UNF) — Q2 FY2021 Form 10-Q
Reporting period: The 13-week quarter ended February 27, 2021; comparative quarter ended February 29, 2020. Six-month results cover the 26 weeks ended on those dates. Amounts below are in U.S. dollars.
Business context
UniFirst provides uniform and workwear rental, laundering, manufacturing, specialty garment and first-aid services. It serves more than 300,000 customer locations in the U.S., Canada and Europe. Core Laundry Operations accounted for 88.5% of quarterly revenue.
Financial performance
- Quarter revenue: $449.8 million, down 3.2% year over year. Operating income was $40.7 million, down 7.8%; net income was $32.6 million, down 6.0%. Diluted common-stock EPS was $1.71 versus $1.82.
- Six-month revenue: $896.6 million, down 3.6%. Operating income was $96.7 million, down 7.2%; net income was $74.5 million, down 10.2%. Diluted common-stock EPS was $3.91 versus $4.34.
- Margins: Operating margin was 9.0% for the quarter versus 9.5%, and 10.8% for the six months versus 11.2%. Net margin was 7.2% and 8.3%, respectively, versus 7.5% and 8.9%.
- Cash flow: Six-month operating cash flow was $128.0 million versus $136.9 million. Capital expenditures, including capitalized software, were $66.9 million; acquisitions used $7.0 million net of acquired cash. Cash flow after capital expenditures was approximately $61.2 million.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $509.6 million at February 27, 2021, compared with $474.8 million at August 29, 2020. The company had no borrowings under its then-existing revolving facility, with $182.5 million available after letters of credit; it reported covenant compliance. Current assets were $1.02 billion and current liabilities $226.1 million.
- Other balance-sheet items: Total assets were $2.28 billion and total liabilities $474.6 million. Operating lease liabilities totaled about $41.2 million.
Changes and management commentary
- Quarterly Core Laundry Operations revenue fell 3.4%; six-month revenue fell 4.5%. Management attributed the declines primarily to COVID-19 impacts on customer activity and wearer levels. February 2021 winter storms in Texas and nearby states also affected the quarter.
- Specialty Garments revenue declined 2.1% for the quarter but rose 5.7% for the six months, supported by cleanroom growth; nuclear operations were weaker. First Aid revenue declined 0.7% for the quarter and 0.9% for the six months.
- Cost of revenues declined faster than revenue, improving its share of revenue to 64.4% from 64.9% in the quarter and 63.0% from 63.5% for the six months. Management cited lower merchandise costs and bad-debt expense, partly offset by storm impacts and higher healthcare claims.
- Selling and administrative expense was nearly flat in dollars for the quarter and down 0.9% for the six months, but rose as a share of revenue as sales declined. Depreciation and amortization increased 1.2% for the quarter and 2.3% for the six months, reflecting capital investment.
- On March 26, 2021, after quarter-end, UniFirst replaced its $250 million revolving facility with a $175 million unsecured facility maturing March 26, 2026. Borrowing rates are variable and subject to financial covenants.
- Four acquisitions were completed during the six months for aggregate purchase consideration of approximately $7.5 million. The company repurchased 53,200 common shares for approximately $9.5 million and paid $9.1 million in dividends.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said cash, future operating cash generation and credit availability were expected to cover anticipated working-capital and capital-expenditure needs for at least 12 months, while noting this was not assured.
- Management cannot reasonably estimate the full extent or duration of COVID-19 effects. Risks include renewed customer restrictions, lower customer operating levels, supply interruptions, workforce illness or absenteeism, and potential cost increases.
- Environmental remediation liabilities were $28.8 million at February 27, 2021. The company identified matters involving sites including Woburn and Somerville, Massachusetts, and cautioned that estimates and reserves may change. Estimated net anticipated remediation costs in current dollars were $27.5 million before inflation and discounting; the recorded balance reflects those adjustments.
- Other risks include energy and labor costs, foreign-exchange movements, customer retention, acquisition integration, nuclear-facility regulation, and legal or environmental contingencies. The company reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
- The CRM system deployment began in Q3 FY2021; $27.7 million had been capitalized as of February 27, 2021, with depreciation beginning upon deployment. No material impact from newly adopted accounting standards was reported.
Key facts for investors to verify
- Whether customer activity and wearer levels recover from pandemic-related declines, particularly in Core Laundry Operations.
- Whether margin performance holds as revenue changes and healthcare, labor, energy and storm-related costs evolve.
- Utilization and covenant headroom under the amended $175 million credit facility, including the reduction in facility size.
- Updates to environmental remediation estimates, legal matters and associated insurance recoveries.
- CRM deployment costs, timing and operational benefits, as well as the return on continuing capital expenditures and acquisitions.