UniFirst Corporation (UNF) — Q3 FY2024 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended May 25, 2024; comparisons are with the periods ended May 27, 2023. UniFirst provides uniform and workwear rental, cleaning, sales, specialty garment services, and first-aid and safety services.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | 39 weeks FY2024 | 39 weeks FY2023 |
|---|---|---|---|---|
| Revenue | $603.3M | $576.7M | $1,787.6M | $1,661.2M |
| Operating income | $48.5M | $33.4M | $129.5M | $97.5M |
| Operating margin | 8.0% | 5.8% | 7.2% | 5.9% |
| Net income | $38.1M | $24.3M | $100.8M | $76.0M |
| Diluted EPS, Common Stock | $2.03 | $1.29 | $5.38 | $4.06 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $193.0M | $142.8M |
- Q3 revenue increased 4.6%; management attributed Core Laundry Operations growth to organic growth of 4.7%, including new accounts and improved pricing, and acquisition-related growth of 0.6%. For the 39-week period, revenue increased 7.6%, with Core Laundry organic growth of 4.9% and acquisition-related growth of 3.3%, primarily from Clean Uniform.
- Q3 cost of revenues was 64.8% of revenue versus 65.8% a year earlier; management cited lower merchandise and production costs. Selling and administrative expense declined 2.7% in Q3, while depreciation and amortization rose 10.9%. For the 39 weeks, those expenses were 21.4% and 5.8% of revenue, respectively.
- Q3 net income rose 56.8%; the effective tax rate declined to 22.9% from 27.2%, primarily due to favorable tax-reserve adjustments. The 39-week rate was 23.8%, versus 25.7%.
- 39-week capital expenditures were $121.9M. Operating cash flow less reported capital expenditures was approximately $71.1M, a simple calculated measure not reported as free cash flow by the company. Cash and cash equivalents increased to $112.2M from $79.4M at fiscal year-end; short-term investments were $13.2M.
Liquidity, debt and capital allocation
At May 25, 2024, UniFirst reported total assets of $2.65B, total liabilities of $575.8M and shareholders’ equity of $2.08B. It had no borrowings under its revolving credit agreement, $62.7M of outstanding letters of credit and $212.3M of remaining borrowing availability. The $275M facility matures March 26, 2026; the company reported covenant compliance. Borrowings would bear interest at SOFR plus 1.00% based on the terms described.
The company paid $17.4M of cash dividends and repurchased $16.0M of common stock in the 39-week period. It had $84.0M remaining under its $100M repurchase authorization. The quarterly dividend had been raised to $0.33 per common share and $0.264 per Class B share.
Management commentary, outlook and risks
- Management believes cash, operating cash generation and available credit should be sufficient for anticipated working capital and capital expenditure needs for at least the next 12 months, while noting there can be no assurance.
- No specific earnings or revenue guidance is provided in the filing. The ERP program is expected to continue through 2027; the company anticipates potential benefits in operating costs, inventory utilization, vendor management and customer retention. It expensed $10.0M of non-recurring costs for its CRM and ERP initiatives in the 39 weeks.
- Management says inflation has moderated but sustained inflation, energy and labor costs, interest rates and adverse economic conditions could pressure margins and demand. Other cited risks include customer retention and competition, labor relations, supply-chain disruption, foreign exchange, IT and cybersecurity issues, and integrating acquisitions.
- Environmental remediation liabilities were $29.3M at May 25, 2024. Costs and reserves may change as estimates, regulatory requirements, insurance recoveries and other parties’ participation evolve.
- A Mexican tax authority assessment for fiscal 2016 totals over $84.7M before additional accrued interest and charges. UniFirst disputes the assessment and is appealing; it says the outcome is uncertain and it cannot reasonably estimate a potential loss range.
- Disclosure controls were deemed ineffective because of a previously identified material weakness in IT general controls over change management and user access, affecting systems supporting revenue, receivables, inventory and rental merchandise. Remediation is ongoing and the weakness is not considered remediated until controls operate effectively for a sufficient period and are tested.
Important facts for investors to verify
- Whether organic growth, pricing and lower merchandise and production costs continue to support revenue and operating-margin improvement.
- Progress, costs and expected benefits of the ERP program, and remediation and testing of the material weakness in internal controls.
- Developments in the Mexican tax appeal and environmental matters, including whether recorded reserves and insurance recoveries remain adequate.
- Capital spending, cash conversion, dividend and repurchase pace, and remaining credit availability and covenant compliance.
- Specialty Garments’ exposure to nuclear business, reactor-outage timing and project activity; Q3 segment revenue declined 3.7% year over year.