UNIFIRST CORP - Quarter Report: 2019 November (Form 10-Q)

United States

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2019


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-08504

UNIFIRST CORPORATION

(Exact name of Registrant as Specified in Its Charter)

Massachusetts	04-2103460
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

68 Jonspin Road, Wilmington, MA	01887
(Address of Principal Executive Offices)	(Zip Code)

(978) 658-8888

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.10 par value per share	UNF	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller Reporting Company	☐

Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of outstanding shares of UniFirst Corporation Common Stock and Class B Common Stock at January 3, 2020 were 15,288,774 and 3,643,009, respectively.

UniFirst Corporation

Quarterly Report on Form 10-Q

For the Quarter ended November 30, 2019

Table of Contents

Part I – FINANCIAL INFORMATION	3

Item 1 – Unaudited Financial Statements	3

Consolidated Statements of Income for the Thirteen Weeks ended November 30, 2019 and November 24, 2018	3

Consolidated Statements of Comprehensive Income for the Thirteen Weeks ended November 30, 2019 and November 24, 2018	4

Consolidated Balance Sheets as of November 30, 2019 and August 31, 2019	5

Consolidated Statements of Shareholders’ Equity for the Thirteen Weeks ended November 30, 2019 and November 24, 2018	6

Consolidated Statements of Cash Flows for the Thirteen Weeks ended November 30, 2019 and November 24, 2018	7

Notes to Consolidated Financial Statements	8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	28

Item 4 – Controls and Procedures	28

Part II – OTHER INFORMATION	30

Item 1 – Legal Proceedings	30

Item 1A – Risk Factors	30

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3 – Defaults Upon Senior Securities	30

Item 4 – Mine Safety Disclosures	30

Item 5 – Other Information	30

Item 6 – Exhibits	31

Signatures	32

Certifications
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Statements of Income

UniFirst Corporation and Subsidiaries

(Unaudited)

	Thirteen weeks ended
(In thousands, except per share data)	November 30, 2019			November 24, 2018
Revenues	$	465,398		$	438,550
Operating expenses:
Cost of revenues (1)		289,316			277,049
Selling and administrative expenses (1)		90,528			85,959
Depreciation and amortization		25,459			25,116
Total operating expenses		405,303			388,124

Operating income		60,095			50,426
Other (income) expense:
Interest income, net		(2,361	)		(1,705	)
Other expense, net		528			172
Total other income, net		(1,833	)		(1,533	)

Income before income taxes		61,928			51,959
Provision for income taxes		13,686			13,639
Net income	$	48,242		$	38,320
Income per share – Basic:
Common Stock	$	2.65		$	2.08
Class B Common Stock	$	2.12		$	1.67
Income per share – Diluted:
Common Stock	$	2.52		$	1.99
Income allocated to – Basic:
Common Stock	$	40,526		$	32,137
Class B Common Stock	$	7,716		$	6,183
Income allocated to – Diluted:
Common Stock	$	48,242		$	38,320
Weighted average shares outstanding – Basic:
Common Stock		15,308			15,432
Class B Common Stock		3,643			3,710
Weighted average shares outstanding – Diluted:
Common Stock		19,123			19,302

(1)	Exclusive of depreciation on the Company’s property, plant and equipment and amortization on its intangible assets.

The accompanying notes are an integral part of these

Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

UniFirst Corporation and Subsidiaries

(Unaudited)

	Thirteen weeks ended
(In thousands)	November 30, 2019			November 24, 2018
Net income	$	48,242		$	38,320
Other comprehensive income (loss):
Foreign currency translation adjustments		989			(2,282	)
Change in fair value of derivatives, net of income taxes		25			132
Derivative financial instruments reclassified to earnings		(30	)		(44	)
Other comprehensive income (loss)		984			(2,194	)
Comprehensive income	$	49,226		$	36,126

The accompanying notes are an integral part of these

Consolidated Financial Statements.

Consolidated Balance Sheets

UniFirst Corporation and Subsidiaries

(Unaudited)

(In thousands, except share and par value data)	November 30, 2019			August 31, 2019
Assets
Current assets:
Cash, cash equivalents and short-term investments	$	356,588		$	385,341
Receivables, less reserves of $10,775 and $9,935		217,884			203,457
Inventories		99,794			100,916
Rental merchandise in service		184,889			184,318
Prepaid taxes		7,465			4,060
Prepaid expenses and other current assets		35,837			35,699
Total current assets		902,457			913,791

Property, plant and equipment, net		574,394			574,509
Goodwill		424,545			401,178
Customer contracts, net		64,590			56,588
Other intangible assets, net		22,922			16,132
Deferred income taxes		474			448
Operating lease, right-of-use assets, net		47,739			—
Other assets		86,464			84,674

Total assets	$	2,123,585		$	2,047,320

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	71,416		$	77,918
Accrued liabilities		114,203			111,721
Accrued taxes		—			205
Operating lease liabilities, current		12,013			—
Total current liabilities		197,632			189,844

Accrued liabilities		117,363			117,074
Accrued and deferred income taxes		98,963			99,172
Operating lease liabilities		33,619			—

Total liabilities		447,577			406,090
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred Stock, $1.00 par value; 2,000,000 shares authorized; no shares issued and outstanding		—			—
Common Stock, $0.10 par value; 30,000,000 shares authorized; 15,298,108 and 15,332,759 shares issued and outstanding as of November 30, 2019 and August 31, 2019, respectively		1,530			1,533
Class B Common Stock, $0.10 par value; 20,000,000 shares authorized; 3,643,009 shares issued and outstanding as of November 30, 2019 and August 31, 2019		364			364
Capital surplus		84,749			84,946
Retained earnings		1,622,069			1,588,075
Accumulated other comprehensive loss		(32,704	)		(33,688	)

Total shareholders’ equity		1,676,008			1,641,230

Total liabilities and shareholders’ equity	$	2,123,585		$	2,047,320

The accompanying notes are an integral part of these

Consolidated Financial Statements

Consolidated Statements of Shareholders’ Equity

UniFirst Corporation and Subsidiaries

(In thousands)	Common Shares		Class B Common Shares		Common Stock		Class B Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Loss			Total Equity
Balance, August 25, 2018		15,431		3,710	$	1,543	$	371	$	82,973	$	1,405,239		$	(25,159	)	$	1,464,967
Net income		—		—		—		—		—		38,320			—			38,320
Change in fair value of derivatives		—		—		—		—		—		—			88			88
Foreign currency translation		—		—		—		—		—		—			(2,282	)		(2,282	)
Dividends declared Common Stock ($0.1125 per share)		—		—		—		—		—		(1,736	)		—			(1,736	)
Dividends declared Class B Common Stock ($0.0900 per share)		—		—		—		—		—		(334	)		—			(334	)
Share-based compensation, net (2)		—		—		—		—		1,042		—			—			1,042
Share-based awards exercised, net (1)		2		—		—		—		—		—			—			—
Cumulative effect of change in accounting principle, net		—		—		—		—		—		39,433			—			39,433
Balance, November 24, 2018		15,433		3,710	$	1,543	$	371	$	84,015	$	1,480,922		$	(27,353	)	$	1,539,498

Balance, August 31, 2019	15,333		3,643	$	1,533		$	364	$	84,946		$	1,588,075		$	(33,688	)	$	1,641,230
Net income	—		—		—			—		—			48,242			—			48,242
Change in fair value of derivatives	—		—		—			—		—			—			(5	)		(5	)
Foreign currency translation	—		—		—			—		—			—			989			989
Dividends declared Common Stock ($0.25 per share)	—		—		—			—		—			(3,825	)		—			(3,825	)
Dividends declared Class B Common Stock ($0.20 per share)	—		—		—			—		—			(729	)		—			(729	)
Shares repurchased	(51	)			(5	)				(274	)		(9,694	)					(9,973	)
Share-based compensation, net (2)	—		—		—			—		1,575			—			—			1,575
Share-based awards exercised, net (1)	16		—		2			—		(1,498	)		—			—			(1,496	)
Balance, November 30, 2019	15,298		3,643	$	1,530		$	364	$	84,749		$	1,622,069		$	(32,704	)	$	1,676,008

(1)	These amounts are shown net of the effect of income taxes.

(2)	These amounts are shown net of any shares withheld by the Company to satisfy certain tax withholdings obligations in connection with the vesting of certain shares of restricted stock or restricted stock units.

The accompanying notes are an integral part of these

Consolidated Financial Statements.

Consolidated Statements of Cash Flows

UniFirst Corporation and Subsidiaries

(Unaudited)

Thirteen weeks ended (In thousands)	November 30, 2019			November 24, 2018
Cash flows from operating activities:
Net income	$	48,242		$	38,320
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		25,459			25,116
Amortization of deferred financing costs		28			28
Share-based compensation		1,575			1,182
Accretion on environmental contingencies		134			189
Accretion on asset retirement obligations		232			220
Deferred income taxes		245			(497	)
Other		5			(19	)
Changes in assets and liabilities, net of acquisitions:
Receivables, less reserves		(12,771	)		(12,165	)
Inventories		1,195			(1,061	)
Rental merchandise in service		1,370			(4,513	)
Prepaid expenses and other current assets and Other assets		(2,074	)		(6,884	)
Accounts payable		(5,031	)		(1,264	)
Accrued liabilities		(2,678	)		(19,651	)
Prepaid and accrued income taxes		(3,497	)		13,256
Net cash provided by operating activities		52,434			32,257

Cash flows from investing activities:
Acquisition of businesses, net of cash acquired		(39,286	)		—
Capital expenditures, including capitalization of software costs		(28,975	)		(23,285	)
Proceeds from sale of assets		61			90
Other		—			33
Net cash used in investing activities		(68,200	)		(23,162	)

Cash flows from financing activities:
Proceeds from exercise of share-based awards		74			—
Taxes withheld and paid related to net share settlement of equity awards		(1,570	)		(140	)
Repurchase of Common Stock		(9,973	)		—
Payment of cash dividends		(2,056	)		(2,070	)
Net cash used in financing activities		(13,525	)		(2,210	)

Effect of exchange rate changes		538			(861	)

Net (decrease) increase in cash, cash equivalents and short-term investments		(28,753	)		6,024
Cash, cash equivalents and short-term investments at beginning of period		385,341			270,512
Cash, cash equivalents and short-term investments at end of period	$	356,588		$	276,536

Supplemental disclosure of cash flow information:
Non-cash capital expenditures	$	8,436		$	14,894

The accompanying notes are an integral part of these

Consolidated Financial Statements.

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements

1. Basis of Presentation

These Consolidated Financial Statements of UniFirst Corporation (the “Company”) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the information furnished reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period.

It is suggested that these Consolidated Financial Statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019. There have been no material changes in the accounting policies followed by the Company during the current fiscal year other than the adoption of recent accounting pronouncements discussed in Note 2. Results for an interim period are not indicative of any future interim periods or for an entire fiscal year.

2. Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued updated guidance which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The Company adopted this standard on September 1, 2019 using the modified retrospective adoption method. The standard provides a number of optional practical expedients in transition and the Company has elected certain of these practical expedients upon adoption of this standard. Specifically, the Company elected the package of practical expedients permitted under the standard, which allows a lessee to carry forward its population of existing leases, the classification of each lease, as well as the treatment of initial direct lease costs as of the period of adoption. The Company also elected the practical expedient related to lease and non-lease components, as an accounting policy election which allows a lessee to not separate non-lease from lease components and instead account for consideration paid in a contract as a single lease component. In addition, the Company elected the short-term lease recognition exemption for all leases with a term of 12 months or less, which means it will not recognize right-of-use assets or lease liabilities for these leases. The adoption of this standard resulted in the Company recognizing right-of-use assets, net of $48.7 million and corresponding lease liabilities of $46.2 million and reductions of prepaid expenses and other current assets of $1.2 million and $1.3 million, respectively. The adoption of this standard did not have a material impact on the Company's consolidated statement of income or consolidated statement of cash flows.

In June 2016, the FASB issued updated guidance that introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments including trade receivables. The estimate of expected credit losses will require entities to incorporate historical information, current information and reasonable and supportable forecasts. This guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2019 with early adoption permitted. Accordingly, the guidance will be effective for the Company on August 30, 2020. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.

In August 2018, the FASB issued updated guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance will be effective for annual reporting periods, and any interim periods within those annual periods, ending after December 15, 2020 and will be required to be applied on a retrospective basis with early adoption permitted. Accordingly, the standard will be effective for the Company on August 29, 2021. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.

In August 2018, the FASB issued guidance that addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2019 with early adoption permitted. The amendments in this update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Accordingly, the guidance will be effective for the Company on August 30, 2020. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.

In December 2019, the FASB issued updated guidance to simplify accounting for income taxes by removing certain exceptions and improving the consistent application of and simplifying U.S. GAAP in other areas of this topic. This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2020 with early adoption permitted. Accordingly, the guidance will be effective for the Company on August 29, 2021. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.

3. Revenue Recognition

The following table presents the Company’s revenues for the thirteen weeks ended November 30, 2019 and November 24, 2018, respectively, disaggregated by service type:

	Thirteen Weeks Ended
	November 30, 2019					November 24, 2018
(In thousands, except percentages)	Revenues		% of Revenues			Revenues		% of Revenues
Core Laundry Operations		416,298		89.4	%	$	390,477		89.0	%
Specialty Garments		33,402		7.2	%		34,448		7.9	%
First Aid		15,698		3.4	%		13,625		3.1	%
Total Revenues	$	465,398		100.0	%	$	438,550		100.0	%

See Note 16 “Segment Reporting” for additional details of segment definitions.

Revenue Recognition Policy

During the thirteen weeks ended November 30, 2019 and November 24, 2018, approximately 91.6% and 91.0%, respectively, of the Company’s revenues were derived from fees for route servicing of Core Laundry Operations, Specialty Garments, and First Aid performed by the Company’s employees at the customer’s location of business. Revenues from the Company’s route servicing customer contracts represent a single performance obligation. The Company recognizes these revenues over time as services are performed based on the nature of services provided and contractual rates (input method). Certain of the Company’s customer contracts, primarily within the Company’s Core Laundry Operations, include pricing terms and conditions that include components of variable consideration. The variable consideration is typically in the form of consideration due to customer based performance metrics specified within the contract. Specifically, some contracts contain discounts or rebates that the customer can earn through the achievement of specified volume levels. Each component of variable consideration is earned based on the Company’s actual performance during the measurement period specified within the contract. To determine the transaction price, the Company estimates the variable consideration using the most likely amount method, based on the specific contract provisions and known performance results during the relevant measurement period. When determining if variable consideration should be constrained, the Company considers whether factors outside its control could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal. The Company’s performance period generally corresponds with the monthly invoice period. No significant constraints on the Company’s revenue recognition were applied during the thirteen weeks ended November 30, 2019 or November 24, 2018. The Company reassesses these estimates during each reporting period. The Company maintains a liability for these discounts and rebates within accrued liabilities on the consolidated balance sheets. Variable consideration also includes consideration paid to a customer at the beginning of a contract. The Company capitalizes this consideration and amortizes it over the life of the contract as a reduction to revenue in accordance with the updated accounting guidance for revenue recognition. These assets are included in other assets on the consolidated balance sheets.

Costs to Obtain a Contract

The Company defers commission expenses paid to its employee-partners when the commissions are deemed to be incremental for obtaining the route servicing customer contract. The deferred commissions are amortized on a straight-line basis over the expected period of benefit. The Company reviews the deferred commission balances for impairment on an ongoing basis. Deferred commissions are classified as current or noncurrent based on the timing of when the Company expects to recognize the expense. The current portion is included in prepaid expenses and other current assets and the non-current portion is included in other assets on the Company’s consolidated balance sheets. As of November 30, 2019, the current and non-current assets related to deferred commissions totaled $12.4 million and $53.8 million, respectively. As of August 31, 2019, the current and non-current assets related to deferred commissions totaled $12.4 million and $50.3 million, respectively. During the thirteen weeks ended November 30, 2019 and November 24, 2018, the Company recorded $3.5 million and $2.8 million, respectively, of amortization expense related to deferred commissions. This expense is classified in selling and administrative expenses on the consolidated statements of income.

4. Acquisitions

During the thirteen weeks ended November 30, 2019, the Company completed 3 business acquisitions with an aggregate purchase price of approximately $39.4 million. This $39.4 million includes $38.5 million related to the acquisition of a Missouri-based industrial laundry business (the “Missouri Acquisition”). The Company has allocated $4.4 million, $23.3 million and $10.8 million to tangible assets, goodwill and intangibles, respectively, in the preliminary purchase accounting for the Missouri Acquisition. The initial allocations of the purchase prices are incomplete with respect to certain assets acquired. The results of operations of these acquisitions have been included in the Company’s consolidated financial results since their respective acquisition dates. These acquisitions were not significant in relation to the Company’s consolidated financial results and, therefore, pro-forma financial information has not been presented.

5. Fair Value Measurements

The assets or liabilities measured at fair value on a recurring basis are summarized in the tables below (in thousands):

	As of November 30, 2019
	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents	$	196,615	$	—	$	—	$	196,615
Pension plan assets		—		4,309		—		4,309
Foreign currency forward contracts		—		250		—		250
Total assets at fair value	$	196,615	$	4,559	$	—	$	201,174

	As of August 31, 2019
	Level 1		Level 2		Level 3		Fair Value
Assets:
Cash equivalents	$	214,038	$	—	$	—	$	214,038
Pension plan assets		—		4,603		—		4,603
Foreign currency forward contracts		—		254		—		254
Total assets at fair value	$	214,038	$	4,857	$	—	$	218,895

The Company’s cash equivalents listed above represent money market securities and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Company does not adjust the quoted market price for such financial instruments.

The Company’s pension plan assets listed above represent guaranteed deposit accounts that are maintained and operated by Prudential Retirement Insurance and Annuity Company (“PRIAC”). All assets are merged with the general assets of PRIAC and are invested predominantly in privately placed securities and mortgages. At the beginning of each calendar year, PRIAC notifies the Company of the annual rates of interest which will be applied to the amounts held in the guaranteed deposit account during the next calendar year. In determining the interest rate to be applied, PRIAC considers the investment performance of the underlying assets of the prior year; however, regardless of the investment performance the Company is contractually guaranteed a minimum rate of return. As such, the Company’s pension plan assets are included within Level 2 of the fair value hierarchy.

The Company’s foreign currency forward contracts represent contracts the Company has entered into to exchange Canadian dollars for U.S. dollars at fixed exchange rates in order to manage its exposure related to certain forecasted Canadian dollar denominated sales of one of its subsidiaries. These contracts are included in prepaid expenses and other current assets and other long-term assets as of November 30, 2019 and August 31, 2019. The fair value of the forward contracts is based on similar exchange traded derivatives and are, therefore, included within Level 2 of the fair value hierarchy.

6. Derivative Instruments and Hedging Activities

As of November 30, 2019, the Company had forward contracts with a notional value of approximately $8.3 million CAD outstanding and recorded the fair value of the contracts of $0.1 million in other long-term assets and $0.1 million in prepaid expenses and other current assets with a corresponding decrease in accumulated other comprehensive loss of $0.2 million, which was recorded net of tax. During the thirteen weeks ended November 30, 2019, the Company reclassified a nominal value from accumulated other comprehensive income to revenue, related to the derivative financial instruments. The gain on these forward contracts that resulted in a decrease to accumulated other comprehensive loss as of November 30, 2019 is expected to be reclassified to revenues prior to its maturity on February 25, 2022.

7. Employee Benefit Plans

Defined Contribution Retirement Savings Plan

The Company has a defined contribution retirement savings plan with a 401(k) feature for all eligible U.S. and Canadian employees not under collective bargaining agreements. The Company matches a portion of the employee’s contribution and may make an additional contribution at its discretion. Contributions charged to expense under the plan for the thirteen weeks ended November 30, 2019 and November 24, 2018 were $5.5 million and $4.5 million, respectively.

Pension Plans and Supplemental Executive Retirement Plans

The Company maintains an unfunded Supplemental Executive Retirement Plan for certain eligible employees of the Company and two frozen non-contributory defined benefit pension plans. The amounts charged to expense related to these plans for the thirteen weeks ended November 30, 2019 and November 24, 2018 were $0.7 million and $0.5 million, respectively.

8. Income Per Share

The Company calculates income per share by allocating income to its unvested participating securities as part of its income per share calculations. The following table sets forth the computation of basic income per share using the two-class method for amounts attributable to the Company’s shares of Common Stock and Class B Common Stock (in thousands, except per share data):

	Thirteen Weeks Ended
	November 30, 2019		November 24, 2018
Net income available to shareholders	$	48,242	$	38,320
Allocation of net income for Basic:
Common Stock	$	40,526	$	32,137
Class B Common Stock		7,716		6,183
	$	48,242	$	38,320
Weighted average number of shares for Basic:
Common Stock		15,308		15,432
Class B Common Stock		3,643		3,710
		18,951		19,142
Income per share for Basic:
Common Stock	$	2.65	$	2.08
Class B Common Stock	$	2.12	$	1.67

The Company is required to calculate diluted income per share for Common Stock using the more dilutive of the following two methods:

•

The treasury stock method; or

•

The two-class method assuming a participating security is not exercised or converted.

For the thirteen weeks ended November 30, 2019 and November 24, 2018, the Company’s diluted income per share assumes the conversion of all vested Class B Common Stock into Common Stock and uses the two-class method for its unvested participating shares. The following table sets forth the computation of diluted income per share of Common Stock for the thirteen weeks ended November 30, 2019 and November 24, 2018 (in thousands, except per share data):

	Thirteen Weeks Ended November 30, 2019						Thirteen Weeks Ended November 24, 2018
	Earnings to Common Shareholders		Common Shares		Income Per Share		Earnings to Common Shareholders		Common Shares		Income Per Share
As reported - Basic	$	40,526		15,308	$	2.65	$	32,137		15,432	$	2.08
Add: effect of dilutive potential common shares
Share-Based Awards		—		172				—		160
Class B Common Stock		7,716		3,643				6,183		3,710
As reported – Diluted	$	48,242		19,123	$	2.52	$	38,320		19,302	$	1.99

Share-based awards that would result in the issuance of 178 shares of Common Stock were excluded from the calculation of diluted income per share for the thirteen weeks ended November 30, 2019 because they were anti-dilutive. Share-based awards that would result in the issuance of 10,156 shares of Common Stock were excluded from the calculation of diluted income per share for the November 24, 2018 because they were anti-dilutive.

9. Inventories

Inventories are stated at the lower of cost or net realizable value, net of any reserve for excess and obsolete inventory. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to customers or used in rental operations. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company uses the first-in, first-out (“FIFO”) method to value its inventories.

The components of inventory as of November 30, 2019 and August 31, 2019 were as follows (in thousands):

	November 30, 2019		August 31, 2019
Raw materials	$	20,904	$	23,000
Work in process		3,101		2,864
Finished goods		75,789		75,052
Total inventories	$	99,794	$	100,916

10. Goodwill and Other Intangible Assets

When the Company acquires a business, the amount assigned to the tangible assets and liabilities and intangible assets acquired is based on their respective fair values determined as of the acquisition date. The excess of the purchase price over the tangible assets and liabilities and intangible assets is recorded as goodwill.

The changes in the carrying amount of goodwill are as follows (in thousands):

Balance as of August 31, 2019	$	401,178
Goodwill recorded during the period		23,348
Other		19
Balance as of November 30, 2019	$	424,545

Intangible assets, net in the Company’s accompanying Consolidated Balance Sheets are as follows (in thousands):

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
November 30, 2019
Customer contracts	$	232,302	$	167,712	$	64,590
Software		56,397		35,878		20,519
Other intangible assets		35,675		33,272		2,403
	$	324,374	$	236,862	$	87,512
August 31, 2019
Customer contracts	$	221,306	$	164,718	$	56,588
Software		48,838		34,813		14,025
Other intangible assets		35,063		32,956		2,107
	$	305,207	$	232,487	$	72,720

11. Asset Retirement Obligations

The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company continues to depreciate, on a straight-line basis, the amount added to property, plant and equipment and recognizes accretion expense in connection with the discounted liability over the various remaining lives which range from approximately 1 to 24.

A reconciliation of the Company’s asset retirement liability for the thirteen weeks ended November 30, 2019 was as follows (in thousands):

	November 30, 2019
Beginning balance as of August 31, 2019	$	12,727
Accretion expense		232
Effect of exchange rate changes		29
Ending balance as of November 30, 2019	$	12,988

Asset retirement obligations are included in current and long-term accrued liabilities in the accompanying Consolidated Balance Sheets.

12. Commitments and Contingencies

The Company and its operations are subject to various federal, state and local laws and regulations governing, among other things, air emissions, wastewater discharges, and the generation, handling, storage, transportation, treatment and disposal of hazardous wastes and other substances. In particular, industrial laundries currently use and must dispose of detergent waste water and other residues, and, in the past, used perchloroethylene and other dry cleaning solvents. The Company is attentive to the environmental concerns surrounding the disposal of these materials and has, through the years, taken measures to avoid their improper disposal. Over the years, the Company has settled, or contributed to the settlement of, actions or claims brought against the Company relating to the disposal of hazardous materials and there can be no assurance that the Company will not have to expend material amounts to remediate the consequences of any such disposal in the future.

U.S. GAAP requires that a liability for contingencies be recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. The Company regularly consults with attorneys and outside consultants in its consideration of the relevant facts and circumstances before recording a contingent liability. Changes in enacted laws, regulatory orders or decrees, management’s estimates of costs, risk-free interest rates, insurance proceeds, participation by other parties, the timing of payments, the input of the Company’s attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for environmental and other contingent liabilities.

Under environmental laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on, or in, or emanating from, such property, as well as related costs of investigation and property damage. Such laws often impose liability without regard to whether the owner or lessee knew of, or was responsible for the presence of such hazardous or toxic substances. There can be no assurances that acquired or leased locations have been operated in compliance with environmental laws and regulations or that future uses or conditions will not result in the imposition of liability upon the Company under such laws or expose the Company to third-party actions such as tort suits. The Company continues to address environmental conditions under terms of consent orders negotiated with the applicable environmental authorities or otherwise with respect to sites located in or related to Woburn, Massachusetts, Somerville, Massachusetts, Springfield, Massachusetts, Uvalde, Texas, Stockton, California, two sites related to former operations in Williamstown, Vermont, as well as sites located in Goldsboro, North Carolina and Wilmington, North Carolina.

The Company has accrued certain costs related to the sites described above as it has been determined that the costs are probable and can be reasonably estimated. The Company has potential exposure related to a parcel of land (the “Central Area”) related to the Woburn, Massachusetts site mentioned above. Currently, the consent decree for the Woburn site does not define or require any remediation work in the Central Area. The United States Environmental Protection Agency (the “EPA”) has provided the Company and other signatories to the consent decree with comments on the design and implementation of groundwater and soil remedies at the Woburn site and investigation of environmental conditions in the Central Area. The Company, and other signatories, have implemented and proposed to do additional work at the Woburn site but many of the EPA’s comments remain to be resolved. The Company has accrued costs to perform certain work responsive to the EPA’s comments. Additionally, the Company has implemented mitigation measures and continues to monitor environmental conditions at the Somerville, Massachusetts site. The Company has received a notice of audit findings from the Massachusetts Department of Environmental Protection concerning a regulatory submittal that the Company made in 2009 for a portion of the site. The Company is in the process of responding to that notice. The Company has received demands from the local transit authority for reimbursement of certain costs associated with its construction of a new municipal transit station in the area of the Somerville site. This station is part of an ongoing extension of the transit system. The Company has reserved for costs in connection with this matter; however, in light of the uncertainties associated with this matter, these costs and the related reserve may change.

The Company routinely reviews and evaluates sites that may require remediation and monitoring and determines its estimated costs based on various estimates and assumptions. These estimates are developed using its internal sources or by third party environmental engineers or other service providers. Internally developed estimates are based on:

•

Management’s judgment and experience in remediating and monitoring the Company’s sites;

•

Information available from regulatory agencies as to costs of remediation and monitoring;

•

The number, financial resources and relative degree of responsibility of other potentially responsible parties (“PRPs”) who may be liable for remediation and monitoring of a specific site; and

•

The typical allocation of costs among PRPs.

There is usually a range of reasonable estimates of the costs associated with each site. In accordance with U.S. GAAP, the Company’s accruals reflect the amount within the range that it believes is the best estimate or the low end of a range of estimates if no point within the range is a better estimate. Where it believes that both the amount of a particular liability and the timing of the payments are reliably determinable, the Company adjusts the cost in current dollars using a rate of 3% for inflation until the time of expected payment and discounts the cost to present value using current risk-free interest rates. As of November 30, 2019, the risk-free interest rates utilized by the Company ranged from 1.8% to 2.2%.

For environmental liabilities that have been discounted, the Company includes interest accretion, based on the effective interest method, in selling and administrative expenses on the accompanying Consolidated Statements of Income. The changes to the Company’s environmental liabilities for the thirteen weeks ended November 30, 2019 were as follows (in thousands):

	November 30, 2019
Beginning balance as of August 31, 2019	$	27,718
Revisions in estimates		1,200
Costs incurred for which reserves have been provided		(229	)
Insurance proceeds		31
Interest accretion		134
Changes in discount rates		(602	)
Ending balance as of November 30, 2019	$	28,252

Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of November 30, 2019, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below.

(In thousands)	2020			2021			2022			2023			2024			Thereafter			Total
Estimated costs – current dollars	$	10,915		$	2,186		$	1,353		$	1,091		$	1,058		$	12,032		$	28,635
Estimated insurance proceeds		(128	)		(173	)		(159	)		(173	)		(159	)		(693	)		(1,485	)
Net anticipated costs	$	10,787		$	2,013		$	1,194		$	918		$	899		$	11,339		$	27,150
Effect of inflation																				7,388
Effect of discounting																				(6,286	)
Ending balance as of November 30, 2019																			$	28,252

Estimated insurance proceeds are primarily received from an annuity received as part of a legal settlement with an insurance company. Annual proceeds of approximately $0.3 million are deposited into an escrow account which funds remediation and monitoring costs for two sites related to former operations in Williamstown, Vermont. Annual proceeds received but not expended in the current year accumulate in this account and may be used in future years for costs related to this site through the year 2027. As of November 30, 2019, the balance in this escrow account, which is held in a trust and is not recorded in the Company’s accompanying Consolidated Balance Sheet, was approximately $4.2 million. Also included in estimated insurance proceeds are amounts the Company is entitled to receive pursuant to legal settlements as reimbursements from three insurance companies for estimated costs at the site in Uvalde, Texas.

The Company’s nuclear garment decontamination facilities are licensed by the Nuclear Regulatory Commission or, in certain cases, by the applicable state agency, and are subject to regulation by federal, state and local authorities. There can be no assurance that such regulation will not lead to material disruptions in the Company’s garment decontamination business.

From time to time, the Company is also subject to legal proceedings and claims arising from the conduct of its business operations, including personal injury claims, customer contract matters, employment claims and environmental matters as described above.

While it is impossible for the Company to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits and environmental contingencies, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance have been properly accrued in accordance with U.S. GAAP. It is possible, however, that the future financial position and/or results of operations for any particular future period could be materially affected by changes in the Company’s assumptions or strategies related to these contingencies or changes out of the Company’s control.

13. Income Taxes

In accordance with ASC 740, Income Taxes (“ASC 740”), each interim period is considered integral to the annual period and tax expense is measured using an estimated annual effective tax rate. An entity is required to record income tax expense each quarter based on its annual effective tax rate estimated for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, adjusted for discrete taxable events that occur during the interim period.

Effective tax rate

The Company’s effective tax rate for the thirteen weeks ended November 30, 2019 was 22.1% as compared to 26.2% for the corresponding period in the prior year. The effective tax rate in the thirteen weeks ended November 30, 2019 includes a $1.3 million benefit due to the relief of certain tax reserves as well as a $0.7 million discrete tax benefit related to stock option exercises during the period.

Uncertain tax positions

The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense, which is consistent with the recognition of these items in prior reporting periods. During the thirteen weeks ended November 30, 2019, there was a decrease in unrecognized tax benefits of $1.3 million due to a release of tax reserves.

All U.S. and Canadian federal income tax statutes have lapsed for filings up to and including fiscal years 2015 and 2012, respectively. With a few exceptions, the Company is no longer subject to state and local income tax examinations for periods prior to fiscal 2015. The Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change significantly in the next 12 months.

14. Long-Term Debt

The Company has a $250 million unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks, which matures on April 11, 2021. Under the Credit Agreement, the Company is able to borrow funds at variable interest rates based on, at its election, the Eurodollar rate or a base rate, plus in each case a spread based on the Company’s consolidated funded debt ratio. Availability of credit requires compliance with certain financial and other covenants, including a maximum consolidated funded debt ratio and minimum consolidated interest coverage ratio as defined in the Credit Agreement. The Company tests its compliance with these financial covenants on a fiscal quarterly basis. As of November 30, 2019, the interest rates applicable to the Company’s borrowings under the Credit Agreement would be calculated as LIBOR plus 75 basis points at the time of the respective borrowing. As of November 30, 2019, the Company had no outstanding borrowings and had outstanding letters of credit amounting to $70.8 million, leaving $179.2 million available for borrowing under the Credit Agreement.

As of November 30, 2019, the Company was in compliance with all covenants under the Credit Agreement.

15. Accumulated Other Comprehensive Loss

The changes in each component of accumulated other comprehensive loss, net of tax, for the thirteen weeks ended November 30, 2019 and November 24, 2018 were as follows (in thousands):

	Thirteen Weeks Ended November 30, 2019
	Foreign Currency Translation			Pension- related (1)			Derivative Financial Instruments (1)			Total Accumulated Other Comprehensive Loss
Beginning balance as of August 31, 2019	$	(24,640	)	$	(9,239	)	$	191		$	(33,688	)
Other comprehensive income (loss) before reclassification		989			—			25			1,014
Amounts reclassified from accumulated other comprehensive loss		—			—			(30	)		(30	)
Net current period other comprehensive (loss) income		989			—			(5	)		984
Ending balance as of November 30, 2019	$	(23,651	)	$	(9,239	)	$	186		$	(32,704	)

	Thirteen Weeks Ended November 24, 2018
	Foreign Currency Translation			Pension- related (1)			Derivative Financial Instruments (1)			Total Accumulated Other Comprehensive Loss
Balance as of August 25, 2018	$	(21,116	)	$	(4,135	)	$	92		$	(25,159	)
Other comprehensive (loss) income before reclassification		(2,282	)		—			132			(2,150	)
Amounts reclassified from accumulated other comprehensive loss		—			—			(44	)		(44	)
Net current period other comprehensive (loss) income		(2,282	)		—			88			(2,194	)
Ending balance as of November 24, 2018	$	(23,398	)	$	(4,135	)	$	180		$	(27,353	)

(1)	Amounts are shown net of tax.

Amounts reclassified from accumulated other comprehensive loss, net of tax, for the thirteen weeks ended November 30, 2019 and November 24, 2018 were as follows (in thousands):

	Thirteen weeks ended
	November 30, 2019			November 24, 2018
Derivative financial instruments, net:
Forward contracts (a)		(30	)		(44	)
Total, net of tax		(30	)		(44	)

Total amounts reclassified, net of tax	$	(30	)	$	(44	)

(a)	Amounts included in revenues in the accompanying Consolidated Statements of Income.

16. Segment Reporting

Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the Company’s chief executive officer. The Company has six operating segments based on the information reviewed by its chief executive officer: U.S. Rental and Cleaning, Canadian Rental and Cleaning, Manufacturing (“MFG”), Corporate, Specialty Garments and First Aid. The U.S. Rental and Cleaning and Canadian Rental and Cleaning operating segments have been combined to form the U.S. and Canadian Rental and Cleaning reporting segment, and as a result, the Company has five reporting segments.

The U.S. and Canadian Rental and Cleaning reporting segment purchases, rents, cleans, delivers and sells uniforms and protective clothing and non-garment items in the United States and Canada. The laundry locations of the U.S. and Canadian Rental and Cleaning reporting segment are referred to by the Company as “industrial laundries” or “industrial laundry locations.”

The MFG operating segment designs and manufactures uniforms and non-garment items primarily for the purpose of providing these goods to the U.S. and Canadian Rental and Cleaning reporting segment. MFG revenues are primarily generated when goods are shipped from the Company’s manufacturing facilities, or its subcontract manufacturers, to other Company locations. These intercompany revenues are recorded at a transfer price which is typically in excess of the actual manufacturing cost. Manufactured products are carried in inventory until placed in service at which time they are amortized at this transfer price. On a consolidated basis, intercompany revenues and income are eliminated and the carrying value of inventories and rental merchandise in service is reduced to the manufacturing cost. Income before income taxes from MFG net of the intercompany MFG elimination offsets the merchandise amortization costs incurred by the U.S. and Canadian Rental and Cleaning reporting segment as the merchandise costs of this reporting segment are amortized and recognized based on inventories purchased from MFG at the transfer price which is above the Company’s manufacturing cost.

The Corporate operating segment consists of costs associated with the Company’s distribution center, sales and marketing, information systems, engineering, materials management, manufacturing planning, finance, budgeting, human resources, other general and administrative costs and interest expense. The revenues generated from the Corporate operating segment represent certain direct sales made by the Company directly from its distribution center. The products sold by this operating segment are the same products rented and sold by the U.S. and Canadian Rental and Cleaning reporting segment. In the table below, no assets or capital expenditures are presented for the Corporate operating segment because no assets are allocated to this operating segment in the information reviewed by the chief executive officer. However, depreciation and amortization expense related to certain assets are reflected in operating income and income before income taxes for the Corporate operating segment. The assets that give rise to this depreciation and amortization are included in the total assets of the U.S. and Canadian Rental and Cleaning reporting segment as this is how they are tracked and reviewed by the Company. The majority of expenses accounted for within the Corporate segment relate to costs of the U.S. and Canadian Rental and Cleaning segment, with the remainder of the costs relating to the Specialty Garment and First Aid segments.

The Specialty Garments operating segment purchases, rents, cleans, delivers and sells, specialty garments and non-garment items primarily for nuclear and cleanroom applications and provides cleanroom cleaning services at limited customer locations. The First Aid operating segment sells first aid cabinet services and other safety supplies as well as maintains wholesale distribution and pill packaging operations.

The Company refers to the U.S. and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as its “Core Laundry Operations,” which is included as a subtotal in the following table (in thousands):

Thirteen weeks ended	U.S. and Canadian Rental and Cleaning			MFG		Net Interco MFG Elim			Corporate			Subtotal Core Laundry Operations			Specialty Garments		First Aid		Total
November 30, 2019
Revenues	$	407,803		$	65,010	$	(65,010	)	$	8,495		$	416,298		$	33,402	$	15,698	$	465,398
Operating income (loss)	$	76,287		$	22,546	$	(2,526	)	$	(42,499	)	$	53,808		$	4,879	$	1,408	$	60,095
Interest income, net	$	(976	)	$	—	$	—		$	(1,385	)	$	(2,361	)	$	—	$	—	$	(2,361	)
Income (loss) before taxes	$	77,257		$	22,403	$	(2,526	)	$	(41,498	)	$	55,636		$	4,884	$	1,408	$	61,928
November 24, 2018
Revenues	$	380,788		$	67,546	$	(67,546	)	$	9,689		$	390,477		$	34,448	$	13,625	$	438,550
Operating income (loss)	$	54,714		$	24,732	$	(3,747	)	$	(30,917	)	$	44,782		$	4,470	$	1,174	$	50,426
Interest income, net	$	(1,047	)	$	—	$	—		$	(658	)	$	(1,705	)	$	—	$	—	$	(1,705	)
Income (loss) before taxes	$	55,752		$	24,840	$	(3,747	)	$	(30,233	)	$	46,612		$	4,173	$	1,174	$	51,959

17. Shares Repurchased and Dividends

On October 23, 2019, the Company announced that it will be raising its quarterly dividend to $0.25 per share for Common Stock and to $0.20 per share for Class B Common Stock, up from $0.1125 and $0.09 per share, respectively. The amount and timing of any dividend payment is subject to the approval of the Board of Directors each quarter.

On January 2, 2019, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase from time to time up to $100.0 million of its outstanding shares of Common Stock. Repurchases made under the program, if any, will be made in either the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will depend on a variety of factors, including economic and market conditions, the Company stock price, corporate liquidity requirements and priorities, applicable legal requirements and other factors. The share repurchase program will be funded using the Company’s available cash or capacity under its Credit Agreement and may be suspended or discontinued at any time. During the thirteen weeks ended November 30, 2019, the Company repurchased 50,600 shares for an average price per share of $197.11.

18. Leases

The Company has operating leases for certain operating facilities, vehicles and equipment, which provide the right to use the underlying asset and require lease payments over the term of the lease. Each new contract is evaluated to determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. All identified leases are recorded on the consolidated balance sheet with a corresponding operating lease right-of-use asset, net, representing the right to use the underlying asset for the lease term and the operating lease liabilities representing the obligation to make lease payments arising from the lease. Short-term operating leases, which have an initial term of twelve months or less, are not recorded on the consolidated balance sheet.

Operating lease right-of-use assets, net and operating lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Lease expense for operating leases is recorded on a straight-line basis over the lease term and variable lease costs are recorded as incurred. Both lease expense and variable lease costs are primarily recorded in cost of revenues on the Company's consolidated statements of income. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The following table presents the operating lease cost and information related to the operating lease right-of-use assets, net and operating lease liabilities for the thirteen weeks ended November 30, 2019:

(In thousands, except lease term and discount rate)
Lease cost
Operating lease costs including short-term lease expense and variable lease costs, which were immaterial in the quarter	$	4,567

Operating cash flow impacts
Cash paid for amounts included in the measurement of operating lease liabilities	$	3,235
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities	$	1,909
Weighted-average remaining lease term - operating leases	4.8 years
Weighted-average discount rate - operating leases		2.86	%

The contractual future minimum lease payments of the Company's operating lease liabilities by fiscal year are as follows as of November 30, 2019:

(In thousands, except per share data)
2020 (remaining nine months)	$	9,928
2021		12,211
2022		9,025
2023		6,630
2024		4,397
Thereafter		6,544
Total payments		48,735
Less interest		(3,085	)
Total present value of lease payments	$	45,650

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and any documents incorporated by reference may contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements contained in this Quarterly Report on Form 10-Q and any documents incorporated by reference are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “could,” “should,” “may,” “will,” “strategy,” “objective,” “assume,” “strive,” or the negative versions thereof, and similar expressions and by the context in which they are used. Such forward-looking statements are based upon our current expectations and speak only as of the date made. Such statements are highly dependent upon a variety of risks, uncertainties and other important factors that could cause actual results to differ materially from those reflected in such forward-looking statements. Such factors include, but are not limited to, uncertainties caused by adverse economic conditions and their impact on our customers’ businesses and workforce levels, uncertainties regarding our ability to consummate and successfully integrate acquired businesses, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, any adverse outcome of pending or future contingencies or claims, our ability to compete successfully without any significant degradation in our margin rates, seasonal and quarterly fluctuations in business levels, our ability to preserve positive labor relationships and avoid becoming the target of corporate labor unionization campaigns that could disrupt our business, the effect of currency fluctuations on our results of operations and financial condition, our dependence on third parties to supply us with raw materials, any loss of key management or other personnel, increased costs as a result of any changes in federal or state laws, rules and regulations or governmental interpretation of such laws, rules and regulations, uncertainties regarding the price levels of natural gas, electricity, fuel and labor, the negative effect on our business from sharply depressed oil and natural gas prices, the continuing increase in domestic healthcare costs, our ability to retain and grow our customer base, demand and prices for our products and services, fluctuations in our Specialty Garments business, instability in Mexico and Nicaragua where our principal garment manufacturing plants are located, our ability to properly and efficiently design, construct, implement and operate a new customer relationship management (“CRM”) computer system, interruptions or failures of our information technology systems, including as a result of cyber-attacks, additional professional and internal costs necessary for compliance with any changes in Securities and Exchange Commission, New York Stock Exchange and accounting rules, strikes and unemployment levels, our efforts to evaluate and potentially reduce internal costs, economic and other developments associated with the war on terrorism and its impact on the economy, the impact of foreign trade policies and tariffs or other impositions on imported goods on our business, results of operations and financial condition, general economic conditions, our ability to successfully implement our business strategies and processes, including our capital allocation strategies and other factors described under “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended August 31, 2019 and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

Business Overview

UniFirst Corporation, together with its subsidiaries, hereunder referred to as “we”, “our”, the “Company”, or “UniFirst”, is one of the largest providers of workplace uniforms and protective work wear clothing in the United States. We design, manufacture, personalize, rent, clean, deliver, and sell a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks, aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent and sell industrial wiping products, floor mats, facility service products and other non-garment items, and provide restroom and cleaning supplies and first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies.

We serve businesses of all sizes in numerous industry categories. Typical customers include automobile service centers and dealers, delivery services, food and general merchandise retailers, food processors and service operations, light manufacturers, maintenance facilities, restaurants, service companies, soft and durable goods wholesalers, transportation companies, and others who require employee clothing for image, identification, protection or utility purposes. We also provide our customers with restroom and cleaning supplies, including air fresheners, paper products and hand soaps.

At certain specialized facilities, we also decontaminate and clean work clothes and other items that may have been exposed to radioactive materials and service special cleanroom protective wear and facilities. Typical customers for these specialized services include government agencies, research and development laboratories, high technology companies and utilities operating nuclear reactors.

We continue to expand into additional geographic markets through acquisitions and organic growth. We currently service over 300,000 customer locations in the United States, Canada and Europe from over 260 customer service, distribution and manufacturing facilities.

As mentioned and described in Note 16 to our Consolidated Financial Statements, we have five reporting segments: U.S. and Canadian Rental and Cleaning, MFG, Corporate, Specialty Garments and First Aid. We refer to the laundry locations of the U.S. and Canadian Rental and Cleaning reporting segment as “industrial laundries” or “industrial laundry locations”, and to the U.S. and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our “Core Laundry Operations.”

Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”). As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, the most important and pervasive accounting policies used and areas most sensitive to material changes from external factors. The critical accounting estimates that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019.

Results of Operations

The following table presents certain selected financial data, including the percentage of revenues represented by each item, for the thirteen weeks ended November 30, 2019 and November 24, 2018.

	Thirteen weeks ended
(In thousands, except percentages)	November 30, 2019			% of Revenues			November 24, 2018			% of Revenues			% Change
Revenues	$	465,398			100.0	%	$	438,550			100.0	%		6.1	%
Operating expenses:
Cost of revenues (1)		289,316			62.2			277,049			63.2			4.4
Selling and administrative expenses (1)		90,528			19.5			85,959			19.6			5.3
Depreciation and amortization		25,459			5.5			25,116			5.7			1.4
Total operating expenses		405,303			87.1			388,124			88.5			4.4
Operating income		60,095			12.9			50,426			11.5			19.2
Other income, net		(1,833	)		(0.4	)		(1,533	)		(0.3	)		19.6
Income before income taxes		61,928			13.3			51,959			11.8			19.2
Provision for income taxes		13,686			2.9			13,639			3.1			0.3
Net income	$	48,242			10.4	%	$	38,320			8.7	%		25.9	%

(1)	Exclusive of depreciation on our property, plant and equipment and amortization on our intangible assets.

General

We derive our revenues through the design, manufacture, personalization, rental, cleaning, delivering, and selling of a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks and aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent industrial wiping products, floor mats, facility service products, other non-garment items, and provide restroom and cleaning supplies and first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies. We have five reporting segments, U.S. and Canadian Rental and Cleaning, MFG, Specialty Garments, First Aid and Corporate. We refer to the U.S. and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our “Core Laundry Operations.”

Cost of revenues include the amortization of rental merchandise in service and merchandise costs related to direct sales as well as labor and other production, service and delivery costs and distribution costs associated with operating our Core Laundry Operations, Specialty Garments facilities and First Aid locations. Selling and administrative costs include costs related to our sales and marketing functions as well as general and administrative costs associated with our corporate offices, non-operating environmental sites and operating locations including information systems, engineering, materials management, manufacturing planning, finance, budgeting and human resources.

We have a substantial number of plants and conduct a significant portion of our business in energy producing regions in the U.S. and Canada. In general, we are relatively more dependent on business in these regions than are many of our competitors. Our operating results are also directly impacted by the costs of the gasoline used to fuel our vehicles and the natural gas used to operate our plants. While it is difficult to quantify the positive and negative impacts on our future financial results from changes in energy prices, in general, we believe that significant decreases in oil and natural gas prices would have an overall negative impact on our results due to cutbacks by our customers both in, and dependent upon, the oil and natural gas industries, which would outweigh the benefits in our operating costs from lower energy costs.

Our business is subject to various state and federal regulations, including employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements, healthcare insurance mandates and other laws and regulations that impact our labor costs. We expect that our labor costs will rise in fiscal 2020 as a result of increases in state and local minimum wage levels as well as the overall impact of wage pressure as the result of a low unemployment environment.

On October 23, 2019, we announced that we would be raising our quarterly dividend to $0.25 per share for Common Stock and to $0.20 per share for Class B Common Stock, up from $0.1125 and $0.09 per share, respectively. The amount and timing of any future dividend payment is subject to the approval of the Board of Directors each quarter.

On January 2, 2019, our Board of Directors approved a share repurchase program authorizing the Company to repurchase from time to time up to $100.0 million of its outstanding shares of Common Stock. Repurchases made under the program, if any, will be made in either the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will depend on a variety of factors, including economic and market conditions, the Company stock price, corporate liquidity requirements and priorities, applicable legal requirements and other factors. The share repurchase program will be funded using the Company’s available cash or capacity under its credit agreement and may be suspended or discontinued at any time.

During the thirteen weeks ended November 30, 2019, we repurchased 50,600 shares, for an average price per share of $197.11.

During fiscal 2017, we recorded a pre-tax non-cash impairment charge of $55.8 million once it was determined that it was not probable that the version of the CRM system that was being developed would be completed and placed into service. On December 28, 2018, we entered into a settlement agreement with our lead contractor for the version of the CRM system with respect to which we recorded the impairment charge. As part of the settlement agreement, we recorded in the second quarter ended February 23, 2019 a total gain of $21.1 million as a reduction of selling and administrative expenses, which includes our receipt of a one-time cash payment in the amount of $13.0 million as well as the forgiveness of amounts previously due the contractor. We also received hardware and related maintenance service with a fair value of $0.8 million as part of the settlement.

In our fourth fiscal quarter of 2018, we initiated a multiyear CRM project to further develop, implement and deploy a third-party application we licensed. This new solution is intended to improve functionality, capability and information flow as well as increase automation in servicing our customers. As of November 30, 2019, we have capitalized $14.1 million related to our new CRM project.

Thirteen weeks ended November 30, 2019 compared with thirteen weeks ended November 24, 2018

Revenues

(In thousands, except percentages)	November 30, 2019		November 24, 2018		Dollar Change			Percent Change
Core Laundry Operations	$	416,298	$	390,477	$	25,821			6.6	%
Specialty Garments		33,402		34,448		(1,046	)		(3.0	)%
First Aid		15,698		13,625		2,073			15.2	%
Consolidated total	$	465,398	$	438,550	$	26,848			6.1	%

The increase in our consolidated revenues was due primarily to growth in our Core Laundry Operations. Excluding the effect of a weaker Canadian dollar, which unfavorably impacted our growth by 0.1%, organic growth for our Core Laundry Operations was 6.0% and growth due to acquisitions was 0.7%. Organic growth consists primarily of new sales, price increases, and net changes in the wearer levels at our existing customers, offset by lost accounts. During the first quarter of fiscal 2020, our organic growth rate benefited from net strong new accounts sales as well as reduced lost accounts during fiscal 2019. Also contributing to the organic growth was a 0.7% impact of certain revenue adjustments related to reserves as well as the timing of revenues around the Thanksgiving holiday.

Specialty Garments’ results are often affected by seasonality and the timing and length of its customers’ power reactor outages as well as its project-based activities. The decrease in Specialty Garments revenue was due primarily to decreased outage activity in the US and Canada nuclear operations partially offset by strong performance in our cleanroom operations.

The increase in First Aid revenues was comprised of 9.6% of organic growth and 5.6% growth from acquisitions. Our organic growth was due primarily to the strong performance in our wholesale distribution business.

Cost of Revenues

(In thousands, except percentages)

November 30, 2019

November 24, 2018

Dollar

Change

Percent

Change

Cost of revenues

289,316

277,049

12,267

4.4

% of Revenues

62.2

63.2

Cost of revenues as a percentage of revenues was 62.2% in the thirteen weeks ended November 30, 2019 as compared to 63.2% in the prior year comparable period.

Our Core Laundry Operations cost of revenues as a percentage of revenues decreased in the thirteen weeks ended November 30, 2019 as compared to the prior year comparable period due primarily to lower energy costs and other non-payroll production costs as percentages of revenues.

Our Specialty Garments costs of revenues as a percentage of revenues decreased in the thirteen weeks ended November 30, 2019 as compared to the prior year comparable period. The decrease in cost of revenues was due primarily to lower merchandise and production payroll costs as percentage of revenues, partially offset by higher expenses related to workers’ compensation and auto claims as a percentage of revenues.

Selling and Administrative Expenses

(In thousands, except percentages)

November 30, 2019

November 24, 2018

Dollar

Change

Percent

Change

Selling and administrative expenses

90,528

85,959

4,569

5.3

% of Revenues

19.5

19.6

Our selling and administrative costs increased in the thirteen weeks ended November 30, 2019 as compared to the prior year comparable period. The increase was due primarily to a gain of $3.0 million from the settlement of environmental litigation in the first quarter of fiscal 2019. The increase was partially offset by lower selling payroll costs.

Depreciation and Amortization

(In thousands, except percentages)

November 30, 2019

November 24, 2018

Dollar

Change

Percent

Change

Depreciation and amortization

25,459

25,116

343

1.4

% of Revenues

5.5

5.7

Depreciation and amortization expense increased in the thirteen weeks ended November 30, 2019 as compared to the prior year comparable period due primarily to higher capital expenditures placed in service over the past several quarters. The increase in depreciation and amortization reflects the Company’s continued capital investments in the business.

Operating Income

For the thirteen weeks ended November 30, 2019 and November 24, 2018, changes in our revenues and costs as discussed above resulted in the following changes in our operating income and operating income margin:

(In thousands, except percentages)	Thirteen Weeks			For the Thirteen Weeks Ended November 24,			Dollar Change		Percent Change
Core Laundry Operations	$	53,808		$	44,782		$	9,026		20.2	%
Specialty Garments		4,879			4,470			409		9.1	%
First Aid		1,408			1,174			234		19.9	%
Cost of revenues	$	60,095		$	50,426		$	9,669		19.2	%
% of Revenues		12.9	%		11.5	%

Other Income, net

(In thousands, except percentages)	November 30, 2019			November 24, 2018			Dollar Change			Percent Change
Interest income, net	$	(2,361	)	$	(1,705	)	$	(656	)		38.5	%
Other expense, net		528			172			356			207.0	%
Total other income, net	$	(1,833	)	$	(1,533	)	$	(300	)		19.6	%

The increase in other income, net during the thirteen weeks ended November 30, 2019 as compared to the prior year comparable period was due primarily to higher interest income from greater amounts of cash invested.

Provision for Income Taxes

(In thousands, except percentages)

November 30, 2019

November 24, 2018

Dollar

Change

Percent

Change

Provision for income taxes

13,686

13,639

0.3

Effective income tax rate

22.1

26.2

The decrease in our effective tax rate for the thirteen weeks ended November 30, 2019 as compared to the prior year comparable period was due primarily to a $1.3 million benefit as a result of the relief of certain tax reserves and a $0.7 million discrete tax benefit related to stock option exercises.

Liquidity and Capital Resources

General

Cash, cash equivalents and short-term investments totaled $356.6 million as of November 30, 2019, an increase of $80.1 million from November 24, 2018 when the amount totaled $276.5 million. We generated $52.4 million and $32.3 million in cash from operating activities in the thirteen weeks ended November 30, 2019 and November 24, 2018, respectively.

Pursuant to a share repurchase program approved by our Board of Directors on January 2, 2019, we repurchased 50,600 shares of our Common Stock for an aggregate of approximately $10.0 million during the thirteen weeks ended November 30, 2019. We believe that our current cash, cash equivalents and short-term investments balances, our cash generated from future operations and amounts available under our Credit Agreement (defined below) will be sufficient to meet our current anticipated working capital and capital expenditure requirements for at least the next 12 months.

Cash flows provided by operating activities have historically been the primary source of our liquidity. We generally use these cash flows to fund most, if not all, of our operations, capital expenditure and acquisition activities as well as dividends on our common stock and stock repurchases. We may also use cash flows provided by operating activities, as well as proceeds from loans payable and long-term debt, to fund growth and acquisition opportunities, as well as other cash requirements.

Sources and uses of cash flows for the thirteen weeks ended November 30, 2019 and November 24, 2018, respectively, are summarized as follows:

(In thousands, except percentages)	November 30, 2019			November 24, 2018			Percent Change
Net cash provided by operating activities	$	52,434		$	32,257			62.6	%
Net cash used in investing activities		(68,200	)		(23,162	)		194.4	%
Net cash used in financing activities		(13,525	)		(2,210	)		512.0	%
Effect of exchange rate changes		538			(861	)		(162.5	)%
Net increase (decrease) in cash, cash equivalents and short-term investments	$	(28,753	)	$	6,024			(577.3	)%

Cash Provided by Operating Activities

The increase in cash provided by operating activities was due primarily to an increase in net income of $9.9 million in the first quarter of fiscal 2020 compared to the prior year comparable period as well as the one-time bonus paid to our employees during the first quarter of fiscal 2019. These increases were partially offset by cash received of $3.0 million from the settlement of environmental litigation in the first quarter of fiscal 2019.

Cash Used in Investing Activities

The net increase in cash used in investing activities was due primarily to the Missouri Acquisition, which was completed in September 2019 for $38.5 million, using available cash on hand.

Cash Used in Financing Activities

The increase in cash used in financing activities was due primarily to our repurchase of approximately $10.0 million of Common Stock during the thirteen weeks ended November 30, 2019 as compared to the same period in the prior year.

Long-Term Debt and Borrowing Capacity

We have a $250 million unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks, which matures on April 11, 2021. Under the Credit Agreement, we are able to borrow funds at variable interest rates based on, at our election, the Eurodollar rate or a base rate, plus in each case a spread based on our consolidated funded debt ratio. Availability of credit requires compliance with certain financial and other covenants, including a maximum consolidated funded debt ratio and minimum consolidated interest coverage ratio as defined in the Credit Agreement. We test our compliance with these financial covenants on a fiscal quarterly basis. As of November 30, 2019, the interest rates applicable to our borrowings under the Credit Agreement would be calculated as LIBOR plus 75 basis points at the time of the respective borrowing. As of November 30, 2019, we had no outstanding borrowings and had outstanding letters of credit amounting to $70.8 million, leaving $179.2 million available for borrowing under the Credit Agreement.

As of November 30, 2019, we were in compliance with all covenants under the Credit Agreement.

Derivative Instruments and Hedging Activities

In June 2018, we entered into twelve forward contracts to exchange CAD for U.S. dollars at fixed exchange rates in order to manage our exposure related to certain forecasted CAD denominated sales of one of our subsidiaries. The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries each fiscal quarter, beginning in the third fiscal quarter of 2019 and continuing through the second fiscal quarter of 2022. In total, we will sell approximately 10.7 million CAD at an average Canadian-dollar exchange rate of 0.7814 over these quarterly periods. We concluded that the forward contracts met the criteria to qualify as a cash flow hedge under U.S. GAAP.

As of November 30, 2019, we had forward contracts with a notional value of approximately $8.3 million CAD outstanding and recorded the fair value of the contracts of $0.1 million in other long-term assets and $0.1 million in prepaid expenses and other current assets with a corresponding decrease in accumulated other comprehensive loss of $0.2 million, which was recorded net of tax. During the thirteen weeks ended November 30, 2019, we reclassified a nominal value from accumulated other comprehensive income to revenue, related to the derivative financial instruments. The gain on these forward contracts that results in decrease to accumulated other comprehensive loss as of November 30, 2019 is expected to be reclassified to revenues prior to its maturity on February 25, 2022.

Commitments and Contingencies

We are subject to various federal, state and local laws and regulations governing, among other things, air emissions, wastewater discharges, and the generation, handling, storage, transportation, treatment and disposal of hazardous wastes and other substances. In particular, industrial laundries currently use and must dispose of detergent waste water and other residues, and, in the past, used perchloroethylene and other dry cleaning solvents. We are attentive to the environmental concerns surrounding the disposal of these materials and have, through the years, taken measures to avoid their improper disposal. Over the years, we have settled, or contributed to the settlement of, actions or claims brought against us relating to the disposal of hazardous materials and there can be no assurance that we will not have to expend material amounts to remediate the consequences of any such disposal in the future.

U.S. GAAP requires that a liability for contingencies be recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. We regularly consult with attorneys and outside consultants in our consideration of the relevant facts and circumstances before recording a contingent liability. Changes in enacted laws, regulatory orders or decrees, our estimates of costs, risk-free interest rates, insurance proceeds, participation by other parties, the timing of payments, the input of our attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for our environmental and other contingent liabilities.

Under environmental laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on, or in, or emanating from such property, as well as related costs of investigation and property damage. Such laws often impose liability without regard to whether the owner or lessee knew of, or was responsible for, the presence of such hazardous or toxic substances. There can be no assurances that acquired or leased locations have been operated in compliance with environmental laws and regulations or that future uses or conditions will not result in the imposition of liability upon our Company under such laws or expose our Company to third party actions such as tort suits. We continue to address environmental conditions under terms of consent orders negotiated with the applicable environmental authorities or otherwise with respect to sites located in or related to Woburn, Massachusetts, Somerville, Massachusetts, Springfield, Massachusetts, Uvalde, Texas, Stockton, California, two sites related to former operations in Williamstown, Vermont, as well as sites located in Goldsboro, North Carolina and Wilmington, North Carolina.

We have accrued certain costs related to the sites described above as it has been determined that the costs are probable and can be reasonably estimated. We have potential exposure related to a parcel of land (the “Central Area”) related to the Woburn, Massachusetts site mentioned above. Currently, the consent decree for the Woburn site does not define or require any remediation work in the Central Area. The United States Environmental Protection Agency (the “EPA”) has provided us and other signatories to the consent decree with comments on the design and implementation of groundwater and soil remedies at the Woburn site and investigation of environmental conditions in the Central Area. We, and other signatories, have implemented and proposed to do additional work at the Woburn site but many of the EPA’s comments remain to be resolved. We have accrued costs to perform certain work responsive to the EPA’s comments. Additionally, we have implemented mitigation measures and continue to monitor environmental conditions at the Somerville, Massachusetts site. We have received a notice of audit findings from the Massachusetts Department of Environmental Protection concerning a regulatory submittal that we made in 2009 for a portion of the site. We are in the process of responding to that notice. We have received demands from the local transit authority for reimbursement of certain costs associated with its construction of a new municipal transit station in the area of the Somerville site. This station is part of an ongoing extension of the transit system. We have reserved for costs in connection with this matter; however, in light of the uncertainties associated with this matter, these costs and the related reserve may change.

We routinely review and evaluate sites that may require remediation and monitoring and determine our estimated costs based on various estimates and assumptions. These estimates are developed using our internal sources or by third party environmental engineers or other service providers. Internally developed estimates are based on:

•

Management’s judgment and experience in remediating and monitoring our sites;

•

Information available from regulatory agencies as to costs of remediation and monitoring;

•

The number, financial resources and relative degree of responsibility of other potentially responsible parties (“PRPs”) who may be liable for remediation and monitoring of a specific site; and

•

The typical allocation of costs among PRPs.

There is usually a range of reasonable estimates of the costs associated with each site. In accordance with U.S. GAAP, our accruals represent the amount within the range that we believe is the best estimate or the low end of a range of estimates if no point within the range is a better estimate. When we believe that both the amount of a particular liability and the timing of the payments are reliably determinable, we adjust the cost in current dollars using a rate of 3% for inflation until the time of expected payment and discount the cost to present value using current risk-free interest rates. As of November 30, 2019, the risk-free interest rates we utilized ranged from 1.8% to 2.2% .

For environmental liabilities that have been discounted, we include interest accretion, based on the effective interest method, in selling and administrative expenses on the Consolidated Statements of Income. The changes to the amounts of our environmental liabilities for the thirteen weeks ended November 30, 2019 were as follows (in thousands):

	November 30, 2019
Beginning balance as of August 31, 2019	$	27,718
Revisions in estimates		1,200
Costs incurred for which reserves have been provided		(229	)
Insurance proceeds		31
Interest accretion		134
Changes in discount rates		(602	)
Ending balance as of November 30, 2019	$	28,252

Anticipated payments and insurance proceeds relating to currently identified environmental remediation liabilities as of November 30, 2019, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below.

(In thousands)	2020			2021			2022			2023			2024			Thereafter			Total
Estimated costs – current dollars	$	10,915		$	2,186		$	1,353		$	1,091		$	1,058		$	12,032		$	28,635
Estimated insurance proceeds		(128	)		(173	)		(159	)		(173	)		(159	)		(693	)		(1,485	)
Net anticipated costs	$	10,787		$	2,013		$	1,194		$	918		$	899		$	11,339		$	27,150
Effect of inflation																				7,388
Effect of discounting																				(6,286	)
Ending balance as of November 30, 2019																			$	28,252

Estimated insurance proceeds are primarily received from an annuity received as part of our legal settlement with an insurance company. Annual proceeds of approximately $0.3 million are deposited into an escrow account which funds remediation and monitoring costs for two sites related to our former operations in Williamstown, Vermont. Annual proceeds received but not expended in the current year accumulate in this account and may be used in future years for costs related to this site through the year 2027. As of November 30, 2019, the balance in this escrow account, which is held in a trust and is not recorded in our Consolidated Balance Sheet, was approximately $4.2 million. Also included in estimated insurance proceeds are amounts we are entitled to receive pursuant to legal settlements as reimbursements from three insurance companies for estimated costs at the site in Uvalde, Texas.

Our nuclear garment decontamination facilities are licensed by the Nuclear Regulatory Commission or, in certain cases, by the applicable state agency, and are subject to regulation by federal, state and local authorities. We also have nuclear garment decontamination facilities in the United Kingdom and the Netherlands. These facilities are licensed and regulated by the respective country’s applicable federal agency. There can be no assurance that such regulation will not lead to material disruptions in our garment decontamination business.

From time to time, we are also subject to legal proceedings and claims arising from the conduct of our business operations, including personal injury claims, customer contract matters, employment claims and environmental matters as described above.

While it is impossible for us to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits and environmental contingencies, we believe that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance have been properly accrued in accordance with accounting principles generally accepted in the United States. It is possible, however, that the future financial position and/or results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.

Off-Balance Sheet Arrangements

As of November 30, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission Regulation S-K.

Effects of Inflation

In general, we believe that our results of operations are not dependent on moderate changes in the inflation rate. Historically, we have been able to manage the impacts of more significant changes in inflation rates through our customer relationships, customer agreements that generally provide for price increases consistent with the rate of inflation and continued focus on improvements of operational productivity.

Contractual Obligations and Other Commercial Commitments

As of November 30, 2019, there were no material changes in our contractual obligations that were disclosed in our Annual Report on Form 10-K for the year ended August 31, 2019.

Recent Accounting Pronouncements

See Note 2, “Recent Accounting Pronouncements” to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information on recently implemented and issued accounting standards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

We have determined that all of our foreign subsidiaries operate primarily in local currencies that represent the functional currencies of such subsidiaries. All assets and liabilities of our foreign subsidiaries are translated into U.S. dollars using the exchange rate prevailing at the balance sheet date. The effects of exchange rate fluctuations on the translation of assets and liabilities are recorded as a component of shareholders’ equity. Revenues and expenses are translated at the average exchange rates in effect during each month of the fiscal year. As such, our financial condition and operating results are affected by fluctuations in the value of the U.S. dollar as compared to currencies in foreign countries. Revenues denominated in currencies other than the U.S. dollar represented approximately 7.7% and 7.9% of total consolidated revenues for the thirteen weeks ended November 30, 2019 and November 24, 2018, respectively. Total assets denominated in currencies other than the U.S. dollar represented approximately 7.0% and 6.9% of total consolidated assets as of November 30, 2019 and August 31, 2019, respectively. If exchange rates had increased or decreased by 10% from the actual rates in effect during the thirteen weeks ended November 30, 2019, our revenues would have increased or decreased by approximately $3.7 million and total assets as of November 30, 2019 would have increased or decreased by approximately $14.8 million.

In June 2018, we entered into twelve forward contracts to exchange CAD for U.S. dollars at fixed exchange rates in order to manage our exposure related to certain forecasted CAD denominated sales of one of our subsidiaries. The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries each fiscal quarter, beginning in the third fiscal quarter of 2019 and continuing through the second fiscal quarter of 2022. In total, we will sell approximately 12.1 million CAD at an average Canadian-dollar exchange rate of 0.7814 over these quarterly periods. We concluded that the forward contracts met the criteria to qualify as a cash flow hedge under U.S. GAAP.

As of November 30, 2019, we had forward contracts with a notional value of approximately $8.3 million CAD outstanding and recorded the fair value of the contracts of $0.1 million in other long-term assets and $0.1 million in prepaid expenses and other current assets with a corresponding decrease in accumulated other comprehensive loss of $0.2 million, which was recorded net of tax. During the thirteen weeks ended November 30, 2019, we reclassified a nominal value from accumulated other comprehensive income to revenue, related to the derivative financial instruments. The gain on these forward contracts that results in a decrease to accumulated other comprehensive loss as of November 30, 2019 is expected to be reclassified to revenues prior to its maturity on February 25, 2022.

Other than the forward contracts, discussed above, we do not operate a hedging program to mitigate the effect of a significant change in the value of the functional currencies of our foreign subsidiaries, which include the Canadian dollar, euro, British pound, Mexican peso and Nicaraguan cordoba, as compared to the U.S. dollar. Any losses or gains resulting from unhedged foreign currency transactions, including exchange rate fluctuations on intercompany accounts are reported as transaction losses (gains) in our other income, net. The intercompany payables and receivables are denominated in Canadian dollars, euros, British pounds, Mexican pesos and Nicaraguan cordobas. During the thirteen weeks ended November 30, 2019, we had a nominal amount of transaction losses, which were included in other income. If exchange rates had increased or decreased by 10% during the thirteen weeks ended November 30, 2019, we would have recognized exchange gains or losses of approximately $0.5 million.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our

disclosure controls and procedures are effective to ensure that material information relating to the Company required to be disclosed by the Company in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. We continue to review our disclosure controls and procedures, and our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the first quarter of fiscal year 2020 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to legal proceedings and claims arising from the current conduct of our business operations, including personal injury, customer contract, employment claims and environmental matters as described in our Consolidated Financial Statements. We maintain insurance coverage providing indemnification against many of such claims, and we do not expect that we will sustain any material loss as a result thereof. Refer to Note 12, “Commitments and Contingencies,” to the Consolidated Financial Statements, as well as Item 1A. Risk Factors below, for further discussion.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2019, which could materially affect our business, financial condition, and future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. Except to the extent previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended August 31, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about repurchases of our equity securities during the thirteen weeks ended November 30, 2019:

	(a) Total Number of Shares of Stock Purchased(1)		(b) Average Price Paid per Share(1)		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs(1)
September 1, 2019 - September 28, 2019		19,000	$	194.94		19,000	$	65,780,080
September 29, 2019 - October 26, 2019		19,600	$	193.65		19,600	$	61,986,162
October 27, 2019 - November 30, 2019		12,000	$	206.24		12,000	$	59,510,433
		50,600	$	197.11		50,600

(1)

On January 2, 2019, our Board of Directors approved a share repurchase program authorizing the Company to repurchase from time to time up to $100.0 million of our outstanding shares of common stock. Repurchases made under the program, if any, will be made in either the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will depend on a variety of factors, including economic and market conditions, the Company stock price, corporate liquidity requirements and priorities, applicable legal requirements and other factors. The share repurchase program will be funded using our available cash or capacity under our Credit Agreement and may be suspended or discontinued at any time.

In the thirteen weeks ended November 30, 2019, we repurchased 50,600 shares for an average price per share of $197.11.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

10.1		Form of Stock Appreciation Right Award for Company Employees under the UniFirst Corporation Amended and Restated 2010 Stock Option and Incentive Plan (filed herewith).

10.2		Form of Restricted Stock Unit Award for Company Employees under the UniFirst Corporation Amended and Restated 2010 Stock Option and Incentive Plan (filed herewith).

31.1		Rule 13a-14(a)/15d-14(a) Certification of Steven S. Sintros (filed herewith).

31.2		Rule 13a-14(a)/15d-14(a) Certification of Shane O’Connor (filed herewith).

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101.SCH		Inline XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
104		Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101*) (filed herewith).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		UniFirst Corporation

January 9, 2020	By:	/s/ Steven S. Sintros
		Steven S. Sintros
		President and Chief Executive Officer

January 9, 2020	By:	/s/ Shane O’Connor
		Shane O’Connor
		Senior Vice President and Chief Financial Officer