UniFirst Corporation (NYSE: UNF) — Form 10-K Summary
Business context and reporting period. UniFirst provides uniform rental, cleaning and sales, workplace and protective clothing, facility services, specialty nuclear and cleanroom garment services, and first-aid and safety products. This annual filing covers fiscal 2022, the 52 weeks ended August 27, 2022; comparisons are with fiscal 2021, ended August 28, 2021. The filing is not a quarterly report.
Key financial results
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Revenue | $2,000.8 million | $1,826.2 million | +9.6% |
| Cost of revenue | $1,306.5 million; 65.3% of revenue | $1,141.3 million; 62.5% | +14.5% |
| Operating income / margin | $134.4 million / 6.7% | $195.8 million / 10.7% | -31.4% |
| Net income / margin | $103.4 million / 5.2% | $151.1 million / 8.3% | -31.6% |
| Diluted EPS, common stock | $5.46 | $7.94 | Lower |
| Cash from operating activities | $122.6 million | $212.3 million | -42.2% |
| Capital expenditures | $144.3 million | $133.6 million | Higher |
Operating cash flow less capital expenditures was approximately negative $21.7 million, before acquisitions and financing. Cash and cash equivalents were $376.4 million at year-end, down from $512.9 million. Total assets were $2.43 billion and shareholders’ equity was $1.92 billion.
Debt and liquidity: No borrowings were outstanding under the $175 million unsecured revolving credit agreement, which matures in March 2026. Letters of credit of $60.8 million left $114.2 million available to borrow. UniFirst reported covenant compliance and said available cash, future operating cash and credit availability should cover anticipated working capital and capital needs for at least 12 months.
Material changes and management commentary
- Revenue increased across all reported business areas. Core Laundry Operations revenue rose 9.6% to $1.77 billion, including 8.9% organic growth; Specialty Garments revenue increased 5.1% and First Aid revenue increased 18.8%.
- Revenue growth did not translate into higher profit. Management attributed margin pressure to inflation in merchandise, energy and labor; supply-chain disruption; merchandise amortization normalizing from pandemic-depressed levels; and investment in large national accounts. Selling and administrative expenses also rose, including costs for CRM, ERP and branding initiatives.
- The company spent $33.1 million on its key initiatives in FY 2022: $19.7 million for CRM, $11.7 million for branding and $1.7 million for ERP. CRM deployment was ongoing, with completion anticipated through fiscal 2023; management also described a corporate-wide ERP effort.
- Thirteen acquisitions were completed for aggregate purchase consideration of approximately $44.8 million. Cash used for acquisitions was $44.2 million.
- Fiscal 2022 cash used in financing was $69.4 million, including $44.4 million of common-stock repurchases and $20.8 million of cash dividends. A separate privately negotiated repurchase of Class B shares cost $6.0 million.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management expects inflation to continue pressuring margins and highlights uncertainty from labor, energy and supply costs, economic conditions and customer employment levels.
- Material weakness in financial reporting controls: Management and the external auditor concluded internal control over financial reporting was ineffective at year-end, principally due to CRM user-access security defects affecting revenue and accounts receivable controls. The auditor issued an adverse opinion on internal control, but an unqualified opinion on the financial statements. Management said it completed substantive procedures and believes the statements comply with U.S. GAAP; remediation was targeted by the end of fiscal 2023.
- Mexican tax assessment: In the fourth quarter, Mexico’s federal tax authority assessed more than $84.7 million, including over $17.0 million in taxes and fees and over $67.7 million in surcharges, fines and penalties, relating to fiscal 2016. UniFirst appealed. The company said loss was neither probable nor remote but could not reasonably estimate a potential loss range.
- Employment litigation: Two former employees filed Fair Labor Standards Act actions in September 2022. UniFirst intends to defend them; the company could not estimate potential losses.
- Environmental obligations: Recorded environmental liabilities were $32.2 million. Remediation estimates may change; the filing discusses ongoing matters in Woburn and Somerville, Massachusetts. Nuclear laundry decommissioning obligations were approximately $15.3 million.
- Other risks include competition, customer retention, seasonal and nuclear-outage variability, cyber and system implementation risks, foreign exchange, and potential labor and healthcare cost increases. The Croatti family held approximately 70.4% of combined voting power as of October 2022.
Important facts for investors to verify
- Progress and effectiveness of CRM access-control remediation, including whether the material weakness is resolved and whether revenue or receivable adjustments arise.
- Developments, appeal status and potential financial exposure from the Mexican tax assessment and the FLSA actions.
- Whether pricing and productivity can offset inflation, labor, energy and merchandise costs, and whether operating margins stabilize.
- Cash generation relative to capital expenditures, acquisitions, dividends and repurchases, alongside remaining revolver availability.
- Environmental reserve adequacy and any changes to remediation or nuclear decommissioning estimates.