UniFirst Corporation (NYSE: UNF) — Q1 FY2022 Form 10-Q
Reporting period: Thirteen weeks ended November 27, 2021; compared with the thirteen weeks ended November 28, 2020. UniFirst provides uniform rental, laundry, protective-wear, specialty garment, and first-aid services. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $486.2 million | $446.9 million | +8.8% |
| Operating income | $44.8 million | $56.0 million | -20.1% |
| Operating margin | 9.2% | 12.5% | -3.3 percentage points |
| Net income | $33.7 million | $41.9 million | -19.6% |
| Diluted EPS | $1.77 | $2.20 | -19.5% |
| Operating cash flow | $7.8 million | $52.7 million | -85.2% |
| Capital expenditures, including software | $31.1 million | $41.8 million | Lower by $10.8 million |
- Revenue growth was broad but uneven: Core Laundry Operations rose 9.1% to $428.8 million, Specialty Garments increased 3.5% to $39.5 million, and First Aid grew 14.8% to $17.8 million. Core Laundry organic growth was 8.6%.
- Cost of revenues increased 12.4%, faster than revenue, and rose to 63.8% of revenue from 61.7%. Selling and administrative expense increased 17.7% and reached 21.5% of revenue versus 19.9%.
- Management attributed the margin pressure to higher merchandise, production payroll, energy and labor costs, elevated safety-supply expense, and higher corporate payroll and technology initiative costs. Inflation was already pressuring margins.
- Cash, cash equivalents and short-term investments were $478.1 million at quarter end, down $34.8 million from the fiscal year-end balance of $512.9 million. The company reported no revolving-credit borrowings; $107.5 million remained available after $67.5 million of letters of credit under its $175 million facility.
- Total liabilities were $502.6 million, including operating lease liabilities of $45.6 million. The filing reports no outstanding borrowings under the credit agreement and compliance with its covenants.
Material changes and capital allocation
- Operating cash flow declined mainly because of higher receivables, inventories and rental merchandise in service, as business recovered and the company built inventory amid supply-chain disruption. The prior-year quarter also benefited from deferred employer Social Security tax payments under the CARES Act.
- Quarter-end inventory was $158.1 million, up from $143.6 million at August 28, 2021; rental merchandise in service was $189.8 million, up from $181.5 million.
- The company completed four small acquisitions for approximately $0.5 million. Its CRM system rollout began in the second half of FY2021 and is expected to continue through FY2022 and FY2023; $35.9 million had been capitalized at quarter end.
- UniFirst raised its quarterly dividend to $0.30 per Common share and $0.24 per Class B share. It repurchased 22,750 Common shares for approximately $4.8 million and reported about $97.3 million remaining under its repurchase authorization.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings, or margin guidance. Management said cash, future operating cash flow, and credit availability 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.
- Management described customer reopenings, solid sales performance, improved retention, and customer pricing actions as supporting Core Laundry growth. It also expects inflation to continue pressuring margins.
- COVID-19 variants, potential customer closures or reduced activity, supply-chain disruption, labor availability and costs, energy prices, and the ability to pass cost increases through to customers are key uncertainties. Management said the pandemic’s full duration and financial impact cannot be reasonably estimated.
- Environmental remediation liabilities were $32.8 million. The company cited ongoing matters at sites including Woburn and Somerville, Massachusetts, and warned estimates and reserves could change; additional remediation costs could be material. Other potential claims include personal injury, customer contract and employment matters.
- Foreign currency movements affect results; 8.4% of quarterly revenue was denominated in currencies other than the U.S. dollar. The company uses Canadian-dollar forward contracts for a portion of forecasted sales.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether price increases and productivity gains can offset persistent merchandise, labor, energy and other inflation-driven cost increases and restore operating margins.
- Whether the sharp decline in quarterly operating cash flow reverses as supply-chain conditions and working-capital needs normalize.
- How COVID-19 developments, customer activity, labor availability and supply disruptions affect organic growth and service costs.
- Whether environmental remediation estimates and related insurance recoveries change, particularly for the Woburn and Somerville sites.
- Capital allocation plans, including the increased dividend, remaining repurchase authorization, technology spending and available credit capacity.