UNIFIRST CORP - Quarter Report: 2019 February (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 February 23, 2019

OR

 

☐	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)

 

 

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 March 29, 2019 were 15,352,793 and 3,710,009, respectively.

 

 

 

UniFirst Corporation

Quarterly Report on Form 10-Q

For the Quarter ended February 23, 2019

Table of Contents

 

Part I – FINANCIAL INFORMATION			3
Item 1 – Unaudited Financial Statements			3
Consolidated Statements of Income for the Thirteen and Twenty-six Weeks ended February 23, 2019 and February 24, 2018			3
Consolidated Statements of Comprehensive Income for the Thirteen and Twenty-six Weeks ended February 23, 2019 and February 24, 2018			4
Consolidated Balance Sheets as of February 23, 2019 and August  25, 2018			5
Consolidated Statements of Shareholders’ Equity for the Thirteen and Twenty-six Weeks ended February 23, 2019 and February 24, 2018			6
Consolidated Statements of Cash Flows for the Twenty-six Weeks ended February 23, 2019 and February 24, 2018			8
Notes to Consolidated Financial Statements			9
Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item  3 – Quantitative and Qualitative Disclosures About Market Risk			43
Item 4 – Controls and Procedures			44
Part II – OTHER INFORMATION			44
Item 1 – Legal Proceedings			44
Item 1A – Risk Factors			44
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3 – Defaults Upon Senior Securities			45
Item 4 – Mine Safety Disclosures			46
Item 5 – Other Information			46
Item 6 – Exhibits			47
Signatures			48
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

 

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Statements of Income

UniFirst Corporation and Subsidiaries

(Unaudited)

 

		Thirteen weeks ended								Twenty-six weeks ended
(In thousands, except per share data)		February 23, 2019				February 24, 2018				February 23, 2019				February 24, 2018
Revenues		$	437,485			$	419,264			$	876,035			$	835,042
Operating expenses:
Cost of revenues (1)			281,672				265,400				558,721				519,050
Selling and administrative expenses (1)			68,321				88,648				154,280				176,158
Depreciation and amortization			25,046				23,264				50,162				45,971
Total operating expenses			375,039				377,312				763,163				741,179
Operating income			62,446				41,952				112,872				93,863
Other (income) expense:
Interest income, net			(2,009	)			(1,430	)			(3,714	)			(2,706	)
Other expense (income), net			1,060				(186	)			1,232				(32	)
Total other income, net			(949	)			(1,616	)			(2,482	)			(2,738	)
Income before income taxes			63,395				43,568				115,354				96,601
Provision (benefit) for income taxes			15,789				(14,810	)			29,428				4,017
Net income		$	47,606			$	58,378			$	85,926			$	92,584
Income per share – Basic:
Common Stock		$	2.59			$	3.02			$	4.67			$	4.79
Class B Common Stock		$	2.07			$	2.42			$	3.74			$	3.83
Income per share – Diluted:
Common Stock		$	2.48			$	2.85			$	4.46			$	4.53
Income allocated to – Basic:
Common Stock		$	39,923			$	46,744			$	72,061			$	74,126
Class B Common Stock		$	7,683			$	11,634			$	13,865			$	18,458
Income allocated to – Diluted:
Common Stock		$	47,606			$	58,378			$	85,926			$	92,584
Weighted average number of shares outstanding – Basic:
Common Stock			15,428				15,481				15,430				15,471
Class B Common Stock			3,710				4,816				3,710				4,816
Weighted average number of shares outstanding – Diluted:
Common Stock			19,232				20,463				19,258				20,434

 

(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.

 

3

Consolidated Statements of Comprehensive Income

UniFirst Corporation and Subsidiaries

(Unaudited)

 

		Thirteen weeks ended								Twenty-six weeks ended
(In thousands)		February 23, 2019				February 24, 2018				February 23, 2019				February 24, 2018
Net income		$	47,606			$	58,378			$	85,926			$	92,584
Other comprehensive income (loss):
Foreign currency translation adjustments			1,418				1,250				(864	)			(763	)
Pension benefit liabilities			—				(1,192	)			—				(1,192	)
Change in fair value of derivatives, net of income taxes			(39	)			(23	)			93				59
Derivative financial instruments reclassified to earnings			(32	)			10				(76	)			14
Other comprehensive income (loss)			1,347				45				(847	)			(1,882	)
Comprehensive income		$	48,953			$	58,423			$	85,079			$	90,702

The accompanying notes are an integral part of these

Consolidated Financial Statements.

 

4

Consolidated Balance Sheets

UniFirst Corporation and Subsidiaries

(Unaudited)

 

(In thousands, except share and par value data)		February 23, 2019				August 25, 2018
Assets
Current assets:
Cash, cash equivalents and short-term investments		$	335,322			$	270,512
Receivables, less reserves of $12,328 and $9,237			203,163				200,797
Inventories			95,706				90,176
Rental merchandise in service			179,134				174,392
Prepaid taxes			576				27,024
Prepaid expenses and other current assets			35,195				21,899
Total current assets			849,096				784,800
Property, plant and equipment, net of accumulated depreciation of $751,928 and $721,527			554,187				547,996
Goodwill			397,336				397,422
Customer contracts, net			61,510				67,318
Other intangible assets, net			16,097				15,166
Deferred income taxes			433				425
Other assets			75,447				30,259
Total assets		$	1,954,106			$	1,843,386
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	69,596			$	73,500
Accrued liabilities			108,574				124,225
Accrued taxes			2,012				736
Total current liabilities			180,182				198,461
Accrued liabilities			105,446				105,888
Accrued and deferred income taxes			87,688				74,070
Total liabilities			373,316				378,419
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; 15,399,871 and 15,431,209 shares issued and outstanding as of February 23, 2019 and August 25, 2018, respectively			1,540				1,543
Class B Common Stock, $0.10 par value; 20,000,000 shares authorized; 3,710,009 shares issued and outstanding as of February 23, 2019 and August 25, 2018			371				371
Capital surplus			84,454				82,973
Retained earnings			1,520,431				1,405,239
Accumulated other comprehensive loss			(26,006	)			(25,159	)
Total shareholders’ equity			1,580,790				1,464,967
Total liabilities and shareholders’ equity		$	1,954,106			$	1,843,386

The accompanying notes are an integral part of these

Consolidated Financial Statements

 

5

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 (3)			—				—				—				—				—				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
Net income			—				—			$	—			$	—			$	—			$	47,606			$	—			$	47,606
Change in fair value of derivatives			—				—				—				—				—				—				(71	)			(71	)
Foreign currency translation			—				—				—				—				—				—				1,418				1,418
Dividends declared Common Stock ($0.1125 per share)			—				—				—				—				—				(1,732	)			—				(1,732	)
Dividends declared Class B Common Stock ($0.0900 per share)			—				—				—				—				—				(334	)			—				(334	)
Share-based compensation, net (2)			—				—				—				—				659				—				—				659
Share-based awards exercised, net (1)			12				—				1				—				25				—				—				26
Repurchase of Common Stock			(45	)			—				(4	)			—				(245	)			(6,031	)			—				(6,280	)
Balance, February 23, 2019			15,400				3,710			$	1,540			$	371			$	84,454			$	1,520,431			$	(26,006	)		$	1,580,790

 

6

Consolidated Statements of Shareholders’ Equity (Continued)

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 26, 2017			15,453				4,815			$	1,545			$	482			$	86,245			$	1,386,438			$	(21,518	)		$	1,453,192
Net income			—				—				—				—				—				34,206				—				34,206
Change in fair value of derivatives			—				—				—				—				—				—				86				86
Foreign currency translation			—				—				—				—				—				—				(2,013	)			(2,013	)
Dividends declared Common Stock ($0.0375 per share)			—				—				—				—				—				(582	)			—				(582	)
Dividends declared Class B Common Stock ($0.0300 per share)			—				—				—				—				—				(144	)			—				(144	)
Share-based compensation, net (2)			—				—				—				—				1,334				(738	)			—				596
Share-based awards exercised, net (1)			16				—				2				—				265				—				—				267
Balance, November 25, 2017			15,469				4,815			$	1,547			$	482			$	87,844			$	1,419,180			$	(23,445	)		$	1,485,608
Net income			—				—			$	—			$	—			$	—			$	58,378			$	—			$	58,378
Pension benefit liabilities, net (4)			—				—				—				—				—				1,192				(1,192	)			—
Change in fair value of derivatives			—				—				—				—				—				—				(13	)			(13	)
Foreign currency translation			—				—				—				—				—				—				1,250				1,250
Dividends declared Common Stock ($0.0375 per share)			—				—				—				—				—				(580	)			—				(580	)
Dividends declared Class B Common Stock ($0.0300 per share)			—				—				—				—				—				(140	)			—				(140	)
Share-based compensation, net (2)			—				—				—				—				(265	)			—				—				(265	)
Share-based awards exercised, net (1)			23				—				2								161				—				—				163
Balance, February 24, 2018			15,492				4,815			$	1,549			$	482			$	87,740			$	1,478,030			$	(23,400	)		$	1,544,401

 

(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.

(3)	These amounts consist of the cumulative impact of the adoption of the new revenue recognition accounting guidance. See Note 2, “Recent Accounting Pronouncements” in the Company’s Consolidated Financial Statements.

(4)	These amounts include the impact of the adoption of ASU 2018-02 in the second quarter of fiscal 2018. See Note 15, “Accumulated Other Comprehensive Loss” in our Consolidated Financial Statements for further details.

The accompanying notes are an integral part of these

Consolidated Financial Statements.

 

7

Consolidated Statements of Cash Flows

UniFirst Corporation and Subsidiaries

(Unaudited)

 

Twenty-six weeks ended (In thousands)		February 23, 2019				February 24, 2018
Cash flows from operating activities:
Net income		$	85,926			$	92,584
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			50,162				45,971
Amortization of deferred financing costs			56				56
Forgiveness of a liability			(7,346	)			—
Share-based compensation			2,796				2,417
Accretion on environmental contingencies			377				346
Accretion on asset retirement obligations			441				470
Deferred income taxes			364				(20,613	)
Other			(810	)			(135	)
Changes in assets and liabilities, net of acquisitions:
Receivables, less reserves			(2,502	)			(6,931	)
Inventories			(5,589	)			(5,296	)
Rental merchandise in service			(4,862	)			(69	)
Prepaid expenses and other current assets and Other assets			(3,616	)			(7,067	)
Accounts payable			(5,268	)			(5,395	)
Accrued liabilities			(7,711	)			39
Prepaid and accrued income taxes			26,243				22,535
Net cash provided by operating activities			128,661				118,912
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired			(67	)			(21,729	)
Capital expenditures, including capitalization of software costs			(52,152	)			(56,653	)
Proceeds from sale of assets			178				1,164
Other			15				(200	)
Net cash used in investing activities			(52,026	)			(77,418	)
Cash flows from financing activities:
Proceeds from exercise of share-based awards			27				430
Taxes withheld and paid related to net share settlement of equity awards			(1,095	)			(2,094	)
Repurchase of Common Stock			(6,281	)			—
Payment of cash dividends			(4,140	)			(1,447	)
Net cash used in financing activities			(11,489	)			(3,111	)
Effect of exchange rate changes			(336	)			(444	)
Net increase in cash, cash equivalents and short-term investments			64,810				37,939
Cash, cash equivalents and short-term investments at beginning of period			270,512				349,752
Cash, cash equivalents and short-term investments at end of period		$	335,322			$	387,691
Supplemental disclosure of cash flow information:
Non-cash capital expenditures		$	10,141			$	10,087

The accompanying notes are an integral part of these

Consolidated Financial Statements.

 

8

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements

1. Basis of Presentation

These Consolidated Financial Statements of UniFirst Corporation (“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 25, 2018. 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.

Certain prior year amounts have been reclassified to conform to current year presentation. The Company has reclassified $11.6 million of software from property, plant, and equipment, net to intangible assets as of August 25, 2018. This reclassification did not impact current or historical net income or shareholder’s equity.

2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance for revenue recognition, which it has subsequently modified. This modified update provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The standard includes cost guidance, whereby all direct and incremental costs to obtain or fulfill a contract will be capitalized and amortized over the corresponding period of benefit, determined on a contract by contract basis. This guidance is also intended to improve disclosure requirements and enhance the comparability of revenue recognition practices. Improved disclosures under the amended guidance relate to the nature, amount, timing and uncertainty of revenue that is recognized from contracts with customers. The Company adopted the standard on August 26, 2018 using the modified retrospective adoption method. Upon adoption of this guidance, the Company recorded an adjustment to the opening balance of retained earnings as of August 26, 2018. The adoption of the standard did not have any material impact to the timing or measurement of revenues. The adjustment to retained earnings relates to the capitalization of certain direct and incremental contract costs required by the new guidance, net of the related income tax effect. Capitalized costs are amortized ratably over the anticipated period of benefit. The Company applied the new guidance to all contracts as of August 26, 2018. Results for reporting periods beginning after August 25, 2018 are presented under the new guidance, while comparative prior period amounts have not been restated and continue to be presented under accounting standards in effect in those periods.

Capitalization of Contract Costs. The Company has elected to apply the guidance, as a practical expedient, to a portfolio of contracts (or performance obligations) with similar characteristics because the Company reasonably expects that the effects on the Consolidated Financial Statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within the portfolio. The Company also continues to expense certain costs to obtain a contract if those costs do not meet the criteria of the new standard or the amortization period of the asset would have been one year or less.

 

9

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

The cumulative effect of applying the new guidance was recorded as an adjustment to retained earnings as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the adjustments set forth in the table below were made to accounts on the consolidated balance sheet as of August 26, 2018:

 

Consolidated Balance Sheet (In thousands)		August 25, 2018				Capitalization of Contract Costs				August 26, 2018
Assets
Prepaid expenses and other current assets		$	21,899			$	10,789			$	32,688
Total current assets			784,800				10,789				795,589
Other assets			30,259				42,405				72,664
Total assets		$	1,843,386			$	53,194			$	1,896,580
Liabilities and shareholders’ equity
Accrued and deferred income taxes		$	74,070			$	13,761			$	87,831
Total liabilities			378,419				13,761				392,180
Retained earnings			1,405,239				39,433				1,444,672
Total shareholders’ equity			1,464,967				39,433				1,504,400
Total liabilities and shareholders’ equity		$	1,843,386			$	53,194			$	1,896,580

The impacts of adopting this standard on the thirteen and twenty-six weeks ended February 23, 2019 Consolidated Financial Statements are presented in the following tables:

 

		Thirteen weeks ended February 23, 2019
Consolidated Statement of Income (In thousands, except per share data)		As Reported				Under Historical Guidance				Impact of Adopting New Revenue Standard
Operating expenses:
Selling and administrative expenses		$	68,321			$	69,630			$	(1,309	)
Total operating expenses			375,039				376,348				(1,309	)
Operating income			62,446				61,137				1,309
Income before income taxes			63,395				62,086				1,309
Provision for income taxes			15,789				15,463				326
Net income		$	47,606			$	46,623			$	983
Income per share – Diluted:		$	2.48			$	2.43			$	0.05

 

10

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

		Twenty-six weeks ended February 23, 2019
Consolidated Statement of Income (In thousands, except per share data)		As Reported				Under Historical Guidance				Impact of Adopting New Revenue Standard
Operating expenses:
Selling and administrative expenses		$	154,280			$	156,505			$	(2,225	)
Total operating expenses			763,163				765,388				(2,225	)
Operating income			112,872				110,647				2,225
Income before income taxes			115,354				113,129				2,225
Provision for income taxes			29,428				28,861				567
Net income		$	85,926			$	84,268			$	1,658
Income per share – Diluted:		$	4.46			$	4.37			$	0.09

 

		Balance at February 23, 2019
Consolidated Balance Sheet (In thousands)		As Reported				Under Historical Guidance				Impact of Adopting New Revenue Standard
Assets
Prepaid expenses and other current assets		$	35,195			$	24,406			$	10,789
Total current assets			849,096				838,307				10,789
Other assets			75,447				30,817				44,630
Total assets		$	1,954,106			$	1,898,687			$	55,419
Liabilities and shareholders’ equity
Accrued and deferred income taxes		$	87,688			$	73,360			$	14,328
Total liabilities			373,316				358,988				14,328
Retained earnings			1,520,431				1,479,340				41,091
Total shareholders’ equity			1,580,790				1,539,699				41,091
Total liabilities and shareholders’ equity		$	1,954,106			$	1,898,687			$	55,419

The adoption of this standard had no impact on the Company’s twenty-six weeks ended February 23, 2019 operating cash flow, and the only impact of the adoption on its fiscal 2019 consolidated statement of comprehensive income was the impact to net income as presented in the tables above.

In January 2016, the FASB issued updated guidance for the recognition, measurement, presentation, and disclosure of certain financial assets and liabilities. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. Accordingly, the Company adopted this standard on August 26, 2018. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

11

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

In February 2016, 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, respectively. 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. This new guidance is effective for reporting periods beginning after December 15, 2018, however, early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in their financial statements. The Company will adopt the new guidance on September 1, 2019. At August 25, 2018, the Company was contractually obligated to make future payments of $47.1 million under its operating lease obligations in existence as of that date, primarily related to long-term leases. The Company is evaluating the impact that this guidance will have on its financial statements. While the Company is in the early stages of its implementation process of this guidance, and has not yet determined its impact on its consolidated balance sheet or consolidated statement of income, these leases would be required to be presented on the consolidated balance sheet in accordance with the requirements of this guidance.

In August 2016, the FASB issued updated guidance that reduces diversity in how certain cash receipts and cash payments are presented and classified in the Consolidated Statements of Cash Flows. This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and is required to be applied retrospectively, with early adoption permitted. Accordingly, the Company adopted this standard on August 26, 2018. The adoption of this guidance did not have a material impact on its financial statements.

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 October 2016, the FASB issued updated guidance to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and is required to be applied on a modified retrospective basis, with early adoption permitted. Accordingly, the Company adopted this standard on August 26, 2018. The adoption of this guidance did not have a material impact on its financial statements.

In March 2017, the FASB issued updated guidance that requires a change in the presentation of net periodic benefit cost on the consolidated statements of operations. Specifically, entities must present the service cost component of net periodic benefit cost in the same financial statement line items as other compensation costs arising from services rendered by the related employees during the period, whereas the non-service components of net periodic benefit cost must be presented separately from the financial statement line items that include service cost and outside of operating income. The Company’s adoption of this guidance on August 26, 2018 did not have a material impact on its financial statements.

In August 2017, the FASB issued guidance that expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. The accounting update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted, and is to be applied on a modified retrospective basis. The Company elected to early adopt this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on its financial statements.

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,

 

12

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

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.

3. Revenue Recognition

The following table presents the Company’s revenues for the thirteen and twenty-six weeks ended February 23, 2019 and February 24, 2018, respectively, disaggregated by service type:

 

		Thirteen weeks ended																Twenty-six weeks ended
		February 23, 2019								February 24, 2018								February 23, 2019								February 24, 2018
(In thousands, except percentages)		Revenues				% of Revenues				Revenues				% of Revenues				Revenues				% of Revenues				Revenues				% of Revenues
Core Laundry Operations		$	394,408				90.2	%		$	378,955				90.4	%		$	784,885				89.6	%		$	752,751				90.2	%
Specialty Garments			29,745				6.8	%			27,009				6.4	%			64,193				7.3	%			55,436				6.6	%
First Aid			13,332				3.0	%			13,300				3.2	%			26,957				3.1	%			26,855				3.2	%
Total Revenues		$	437,485				100.0	%		$	419,264				100.0	%		$	876,035				100.0	%		$	835,042				100.0	%

For the thirteen weeks ended February 23, 2019, the percentage of revenues recognized over time as the services are performed was 95.3% of Core Laundry Operations revenues and 82.2% of Specialty Garments revenues. For the twenty-six weeks ended February 23, 2019, the percentage of revenues recognized over time as the services are performed was 95.3% of Core Laundry Operations revenues and 83.1% of Specialty Garments revenues. See Note 16 “Segment Reporting” for additional details of segment definitions. During the thirteen weeks ended February 23, 2019, 4.7% of Core Laundry Operations revenues, 17.8% of Specialty Garments revenues and 100% of First Aid revenues were recognized at a point in time, which generally occurs when the goods are transferred to the customer. During the twenty-six weeks ended February 23, 2019, 4.7% of Core Laundry Operations revenues, 16.9% of Specialty Garments revenues and 100% of First Aid revenues were recognized at a point in time, which generally occurs when the goods are transferred to the customer.

Revenue Recognition Policy

Approximately 91.0% of the Company’s revenues are 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 a customer based on 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 and twenty-six weeks ended February 23, 2019. 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.

 

13

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

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 February 23, 2019, the current and non-current assets related to deferred commissions totaled $10.8 million and $44.6 million, respectively. During the thirteen and twenty-six weeks ended February 23, 2019, the Company recorded $2.9 million and $5.7 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. Business Acquisitions

During the twenty-six weeks ended February 23, 2019, the Company completed one business acquisition with an aggregate purchase price of approximately $0.1 million. The initial allocation of the purchase price is incomplete with respect to certain assets acquired. The results of operations of this acquisition have been included in the Company’s consolidated financial results since its acquisition date. This acquisition was 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 February 23, 2019
		Level 1				Level 2				Level 3				Fair Value
Assets:
Cash equivalents		$	123,900			$	—			$	—			$	123,900
Pension plan assets			—				5,907				—				5,907
Foreign currency forward contracts			—				148				—				148
Total assets at fair value		$	123,900			$	6,055			$	—			$	129,955
		As of August 25, 2018
		Level 1				Level 2				Level 3				Fair Value
Assets:
Cash equivalents		$	103,190			$	—			$	—			$	103,190
Pension plan assets			—				6,325				—				6,325
Foreign currency forward contracts			—				127				—				127
Total assets at fair value		$	103,190			$	6,452			$	—			$	109,642

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.

 

14

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

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 February 23, 2019 and August 25, 2018. 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 February 23, 2019, the Company had forward contracts with a notional value of approximately 12.1 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 $0.1 million, which was recorded net of tax. During the twenty-six weeks ended February 23, 2019, the Company reclassified $0.1 million from accumulated other comprehensive loss 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 February 23, 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 February 23, 2019 and February 24, 2018 were $4.3 million and $3.9 million, respectively. Contributions charged to expense under the plan for the twenty-six weeks ended February 23, 2019 and February 24, 2018 were $8.8 million and $8.0 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 February 23, 2019 and February 24, 2018 were $0.5 million and $0.6 million, respectively. The amounts charged to expense related to these plans for the twenty-six weeks ended February 23, 2019 and February 24, 2018 were $1.1 million and $1.3 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):

 

15

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

		Thirteen weeks ended								Twenty-six weeks ended
		February 23, 2019				February 24, 2018				February 23, 2019				February 24, 2018
Net income available to shareholders		$	47,606			$	58,378			$	85,926			$	92,584
Allocation of net income for Basic:
Common Stock		$	39,923			$	46,744			$	72,061			$	74,126
Class B Common Stock			7,683				11,634				13,865				18,458
		$	47,606			$	58,378			$	85,926			$	92,584
Weighted average number of shares for Basic:
Common Stock			15,428				15,481				15,430				15,471
Class B Common Stock			3,710				4,816				3,710				4,816
			19,138				20,297				19,140				20,287
Income per share for Basic:
Common Stock		$	2.59			$	3.02			$	4.67			$	4.79
Class B Common Stock		$	2.07			$	2.42			$	3.74			$	3.83

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 and twenty-six weeks ended February 23, 2019, 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 and twenty-six weeks ended February 23, 2019 (in thousands, except per share data):

 

		Thirteen weeks ended February 23, 2019												Twenty-six weeks ended February 23, 2019
		Earnings to Common Shareholders				Common Shares				Income Per Share				Earnings to Common Shareholders				Common Shares				Income Per Share
As reported - Basic		$	39,923				15,428			$	2.59			$	72,061				15,430			$	4.67
Add: effect of dilutive potential common shares
Share-Based Awards			—				94								—				118
Class B Common Stock			7,683				3,710								13,865				3,710
As reported – Diluted		$	47,606				19,232			$	2.48			$	85,926				19,258			$	4.46

Share-based awards that would result in the issuance of 195 shares of Common Stock were excluded from the calculation of diluted income per share for the thirteen weeks ended February 23, 2019 because they were anti-dilutive. Share-based awards that would result in the issuance of 754 shares of Common Stock were excluded from the calculation of diluted income per share for the twenty-six weeks ended February 23, 2019 because they were anti-dilutive.

 

16

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

For the thirteen and twenty-six weeks ended February 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 and twenty-six weeks ended February 24, 2018 (in thousands, except per share data):

 

		Thirteen weeks ended February 24, 2018												Twenty-six weeks ended February 24, 2018
		Earnings to Common Shareholders				Common Shares				Income Per Share				Earnings to Common Shareholders				Common Shares				Income Per Share
As reported - Basic		$	46,744				15,481			$	3.02			$	74,126				15,471			$	4.79
Add: effect of dilutive potential common shares
Share-Based Awards			—				166								—				147
Class B Common Stock			11,634				4,816								18,458				4,816
As reported – Diluted		$	58,378				20,463			$	2.85			$	92,584				20,434			$	4.53

Share-based awards that would result in the issuance of 4,368 shares of Common Stock were excluded from the calculation of diluted income per share for the thirteen weeks ended February 24, 2018 because they were anti-dilutive. Share-based awards that would result in the issuance of 1,001 shares of Common Stock were excluded from the calculation of diluted income per share for the twenty-six weeks ended February 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 February 23, 2019 and August 25, 2018 were as follows (in thousands):

 

		February 23, 2019				August 25, 2018
Raw materials		$	17,006			$	18,508
Work in process			3,669				3,271
Finished goods			75,031				68,397
Total inventories		$	95,706			$	90,176

10. Goodwill and Other Intangible Assets

As discussed in Note 4, “Business Acquisitions”, 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.

 

17

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

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

 

Balance as of August 25, 2018		$	397,422
Other			(86	)
Balance as of February 23, 2019		$	397,336

During fiscal 2019, the Company reclassified $11.6 million of software from property, plant and equipment, net to intangible assets. Intangible assets information as of August 25, 2018 has been recast in the table that follows, to reflect this change.

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

 

		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
February 23, 2019
Customer contracts		$	220,351			$	158,841			$	61,510
Software			45,921				32,628				13,293
Other intangible assets			35,027				32,223				2,804
		$	301,299			$	223,692			$	77,607
August 25, 2018
Customer contracts		$	220,303			$	152,985			$	67,318
Software		$	41,885			$	30,305			$	11,580
Other intangible assets			35,030				31,444				3,586
		$	297,218			$	214,734			$	82,484

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 one to twenty-six years.

A reconciliation of the Company’s asset retirement liability for the twenty-six weeks ended February 23, 2019 was as follows (in thousands):

 

		February 23, 2019
Beginning balance as of August 25, 2018		$	13,668
Accretion expense			441
Effect of exchange rate changes			(61	)
Change in estimate			(1,705	)
Ending balance as of February 23, 2019		$	12,343

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

 

18

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

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 EPA’s comments. The Company has implemented mitigation measures and continues to monitor environmental conditions at the Somerville, Massachusetts site. In addition, 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 the 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 has also received notice that the Massachusetts Department of Environmental Protection is conducting an audit of the Company’s investigation and remediation work with respect to the Somerville site.

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;

 

19

UniFirst Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

•

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 February 23, 2019, the risk-free interest rates utilized by the Company ranged from 2.7% to 3.0%.

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 Consolidated Statements of Income. The changes to the Company’s environmental liabilities for the twenty-six weeks ended February 23, 2019 were as follows (in thousands):

 

		February 23, 2019
Beginning balance as of August 25, 2018		$	25,486
Costs incurred for which reserves had been provided			(456	)
Insurance proceeds			87
Interest accretion			377
Change in discount rates			(80	)
Balance as of February 23, 2019		$	25,414

Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of February 23, 2019, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below.

 

(In thousands)		2019				2020				2021				2022				2023				Thereafter				Total
Estimated costs – current dollars		$	9,038			$	2,122			$	1,635			$	1,272			$	1,175			$	12,137			$	27,379
Estimated insurance proceeds			(86	)			(159	)			(173	)			(159	)			(173	)			(830	)			(1,580	)
Net anticipated costs		$	8,952			$	1,963			$	1,462			$	1,113			$	1,002			$	11,307			$	25,799
Effect of inflation																											7,666
Effect of discounting																											(8,051	)
Balance as of February 23, 2019																										$	25,414

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 February 23, 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 $3.8 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.

 

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