Table of Contents

 
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 25, 2017	
 	 	 	
 	 	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	 	(I.R.S. Employer	
Incorporation or Organization)	 	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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).      
 
Yes ☑     No       
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☑       Accelerated filer              Smaller Reporting Company            Non-accelerated filer        
 
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 31, 2017 were 15,462,689 and 4,845,519, respectively.  

 

Table of Contents

 
UniFirst Corporation
Quarterly Report on Form 10-Q
For the Quarter ended February 25, 2017
 
Table of Contents
 
Part I – FINANCIAL INFORMATION	 	
 	 	
Item 1 – Unaudited Financial Statements	 	
 	 	
Consolidated Statements of Income for the Thirteenand Twenty-sixWeeks endedFebruary 25, 2017 and February 27, 2016	 	
 	 	
Consolidated Statements of Comprehensive Income for the Thirteenand Twenty-sixWeeks endedFebruary 25, 2017 and February 27, 2016	 	
 	 	
Consolidated Balance Sheets as ofFebruary 25, 2017 and August 27, 2016	 	
 	 	
Consolidated Statements of Cash Flows for the Twenty-six Weeks endedFebruary 25, 2017 andFebruary 27, 2016	 	
 	 	
Notes to Consolidated Financial Statements	 	
 	 	
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	
 	 	
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	 	
 	 	
Item 4 – Controls and Procedures	 	
 	 	
Part II – OTHER INFORMATION	 	
 	 	
Item 1 – Legal Proceedings	 	
 	 	
Item 1A – Risk Factors	 	
 	 	
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	 	
 	 	
Item 3 – Defaults Upon Senior Securities	 	
 	 	
Item 4 – Mine Safety Disclosures	 	
 	 	
Item 5 – Other Information	 	
 	 	
Item 6 – Exhibits	 	
 	 	
Signatures	 	
 	 	
Exhibit Index	 	
 	 	
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	 	

 

Table of Contents

 
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
Consolidated Statements of Income
UniFirst Corporation and Subsidiaries
(Unaudited)
 	 	Thirteen weeks ended	 	 	Twenty-six weeks ended	 	
 	 	February 25,	 	 	February 27,	 	 	February 25,	 	 	February 27,	 	
(In thousands, except per share data)	 	2017	 	 	2016	 	 	2017	 	 	2016	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	391,427	 	 	$	363,097	 	 	$	777,535	 	 	$	736,481	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenues (1)	 	 	249,280	 	 	 	229,672	 	 	 	488,045	 	 	 	452,275	 	
Selling and administrative expenses (1)	 	 	84,861	 	 	 	75,423	 	 	 	164,307	 	 	 	148,172	 	
Depreciation and amortization	 	 	21,140	 	 	 	19,809	 	 	 	43,280	 	 	 	39,547	 	
Total operating expenses	 	 	355,281	 	 	 	324,904	 	 	 	695,632	 	 	 	639,994	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	 	 	36,146	 	 	 	38,193	 	 	 	81,903	 	 	 	96,487	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other (income) expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	 	172	 	 	 	218	 	 	 	354	 	 	 	439	 	
Interest income	 	 	(1,292	)	 	 	(892	)	 	 	(2,275	)	 	 	(1,656	)	
Foreign exchange (gain) loss	 	 	(108	)	 	 	(132	)	 	 	386	 	 	 	347	 	
Total other (income) expense	 	 	(1,228	)	 	 	(806	)	 	 	(1,535	)	 	 	(870	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	 	37,374	 	 	 	38,999	 	 	 	83,438	 	 	 	97,357	 	
Provision for income taxes	 	 	14,858	 	 	 	15,501	 	 	 	32,708	 	 	 	37,969	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	22,516	 	 	$	23,498	 	 	$	50,730	 	 	$	59,388	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income per share – Basic:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	$	1.17	 	 	$	1.23	 	 	$	2.63	 	 	$	3.10	 	
Class B Common Stock	 	$	0.93	 	 	$	0.98	 	 	$	2.10	 	 	$	2.48	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income per share – Diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	$	1.10	 	 	$	1.16	 	 	$	2.49	 	 	$	2.94	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income allocated to – Basic:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	$	17,836	 	 	$	18,691	 	 	$	40,178	 	 	$	47,232	 	
Class B Common Stock	 	$	4,518	 	 	$	4,704	 	 	$	10,184	 	 	$	11,896	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income allocated to – Diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	$	22,362	 	 	$	23,401	 	 	$	50,381	 	 	$	59,141	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of shares outstanding – Basic:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	 	15,305	 	 	 	15,241	 	 	 	15,295	 	 	 	15,230	 	
Class B Common Stock	 	 	4,846	 	 	 	4,795	 	 	 	4,846	 	 	 	4,795	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of shares outstanding – Diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	 	20,263	 	 	 	20,138	 	 	 	20,250	 	 	 	20,127	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	$	0.0375	 	 	$	0.0375	 	 	$	0.0750	 	 	$	0.0750	 	
Class B Common Stock	 	$	0.0300	 	 	$	0.0300	 	 	$	0.0600	 	 	$	0.0600	 	

(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.

 

Table of Contents

 
Consolidated Statements of Comprehensive Income
UniFirst Corporation and Subsidiaries
(Unaudited)
 
 	 	Thirteen weeks ended	 	 	Twenty-six weeks ended	 	
 	 	February 25,	 	 	February 27,	 	 	February 25,	 	 	February 27,	 	
(In thousands)	 	2017	 	 	2016	 	 	2017	 	 	2016	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	$	22,516	 	 	$	23,498	 	 	$	50,730	 	 	$	59,388	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign currency translation adjustments	 	 	3,332	 	 	 	(2,011	)	 	 	(1,797	)	 	 	(3,583	)	
Pension benefit liabilities, net of income taxes	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(218	)	
Change in fair value of derivatives, net of income taxes	 	 	(202	)	 	 	175	 	 	 	122	 	 	 	(48	)	
Derivative financial instruments reclassified to earnings	 	 	(27	)	 	 	(93	)	 	 	(103	)	 	 	(165	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss)	 	 	3,103	 	 	 	(1,929	)	 	 	(1,778	)	 	 	(4,014	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	$	25,619	 	 	$	21,569	 	 	$	48,952	 	 	$	55,374	 	

The accompanying notes are an integral part of these
Consolidated Financial Statements.

 

Table of Contents

 
Consolidated Balance Sheets
UniFirst Corporation and Subsidiaries
(Unaudited)
 
(In thousands, except share and par value data)	 	February 25,
2017	 	 	August 27,
2016	 	
 	 	 	 	 	 	 	 	 	
Assets	 	 	 	 	 	 	 	 	
Current assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	313,535	 	 	$	363,795	 	
Receivables, less reserves of $10,152 and $7,675	 	 	176,564	 	 	 	156,578	 	
Inventories	 	 	71,493	 	 	 	78,887	 	
Rental merchandise in service	 	 	144,603	 	 	 	138,105	 	
Prepaid taxes	 	 	1,178	 	 	 	10,418	 	
Prepaid expenses and other current assets	 	 	25,873	 	 	 	29,831	 	
Total current assets	 	 	733,246	 	 	 	777,614	 	
 	 	 	 	 	 	 	 	 	
Property, plant and equipment, net of accumulated depreciation of $691,091 and $661,295	 	 	551,053	 	 	 	539,818	 	
Goodwill	 	 	371,773	 	 	 	320,641	 	
Customer contracts, net	 	 	71,121	 	 	 	35,854	 	
Other intangible assets, net	 	 	4,766	 	 	 	2,810	 	
Deferred income taxes	 	 	338	 	 	 	97	 	
Other assets	 	 	29,250	 	 	 	25,173	 	
 	 	 	 	 	 	 	 	 	
Total assets	 	$	1,761,547	 	 	$	1,702,007	 	
 	 	 	 	 	 	 	 	 	
Liabilities and shareholders’ equity	 	 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	 	 	
Accounts payable	 	$	55,250	 	 	$	50,884	 	
Accrued liabilities	 	 	104,785	 	 	 	100,782	 	
Accrued taxes	 	 	—	 	 	 	969	 	
Total current liabilities	 	 	160,035	 	 	 	152,635	 	
 	 	 	 	 	 	 	 	 	
Accrued liabilities	 	 	105,078	 	 	 	104,921	 	
Accrued and deferred income taxes	 	 	79,038	 	 	 	79,670	 	
 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	344,151	 	 	 	337,226	 	
 	 	 	 	 	 	 	 	 	
Commitments and contingencies (Note 11)	 	 	 	 	 	 	 	 	
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; 15,456,483 and 15,415,125 shares issued and outstanding as of February 25, 2017 and August 27, 2016, respectively	 	 	1,546	 	 	 	1,542	 	
Class B Common Stock, $0.10 par value; 20,000,000 shares authorized; 4,845,519 and 4,849,519 shares issued and outstanding as of February 25, 2017 and August 27, 2016, respectively	 	 	485	 	 	 	485	 	
Capital surplus	 	 	77,668	 	 	 	72,561	 	
Retained earnings	 	 	1,368,424	 	 	 	1,319,142	 	
Accumulated other comprehensive (loss) income	 	 	(30,727	)	 	 	(28,949	)	
 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	 	 	1,417,396	 	 	 	1,364,781	 	
 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	 	$	1,761,547	 	 	$	1,702,007	 	

The accompanying notes are an integral part of these
Consolidated Financial Statements

 

Table of Contents

 
Consolidated Statements of Cash Flows
UniFirst Corporation and Subsidiaries
(Unaudited)
 
Twenty-six weeks ended
(In thousands)	 	February 25,
2017	 	 	February 27,
2016	 	
Cash flows from operating activities:	 	 	 	 	 	 	 	 	
Net income	 	$	50,730	 	 	$	59,388	 	
Adjustments to reconcile net income to cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation	 	 	37,051	 	 	 	35,297	 	
Amortization of intangible assets	 	 	6,229	 	 	 	4,250	 	
Amortization of deferred financing costs	 	 	56	 	 	 	104	 	
Gain on sale of assets	 	 	(517	)	 	 	—	 	
Share-based compensation	 	 	4,370	 	 	 	2,537	 	
Accretion on environmental contingencies	 	 	300	 	 	 	334	 	
Accretion on asset retirement obligations	 	 	423	 	 	 	398	 	
Deferred income taxes	 	 	(1,346	)	 	 	5,978	 	
Changes in assets and liabilities, net of acquisitions:	 	 	 	 	 	 	 	 	
Receivables, less reserves	 	 	(12,887	)	 	 	(6,528	)	
Inventories	 	 	9,233	 	 	 	4,733	 	
Rental merchandise in service	 	 	444	 	 	 	3,477	 	
Prepaid expenses and other current assets and Other assets	 	 	7,471	 	 	 	(851	)	
Accounts payable	 	 	3,695	 	 	 	(79	)	
Accrued liabilities	 	 	704	 	 	 	1,574	 	
Prepaid and accrued income taxes	 	 	8,793	 	 	 	(5,131	)	
Net cash provided by operating activities	 	 	114,749	 	 	 	105,481	 	
 	 	 	 	 	 	 	 	 	
Cash flows from investing activities:	 	 	 	 	 	 	 	 	
Acquisition of businesses, net of cash acquired	 	 	(121,414	)	 	 	(73	)	
Capital expenditures	 	 	(43,011	)	 	 	(44,028	)	
Proceeds from sale of assets	 	 	826	 	 	 	—	 	
Other	 	 	123	 	 	 	111	 	
Net cash used in investing activities	 	 	(163,476	)	 	 	(43,990	)	
 	 	 	 	 	 	 	 	 	
Cash flows from financing activities:	 	 	 	 	 	 	 	 	
Payments on loans payable and long-term debt	 	 	—	 	 	 	(1,046	)	
Proceeds from exercise of share-based awards, including excess tax benefits	 	 	2,283	 	 	 	1,026	 	
Taxes withheld and paid related to net share settlement of equity awards	 	 	(1,546	)	 	 	—	 	
Payment of cash dividends	 	 	(1,448	)	 	 	(1,436	)	
 	 	 	 	 	 	 	 	 	
Net cash used in financing activities	 	 	(711	)	 	 	(1,456	)	
 	 	 	 	 	 	 	 	 	
Effect of exchange rate changes	 	 	(822	)	 	 	(1,596	)	
 	 	 	 	 	 	 	 	 	
Net (decrease) increase in cash and cash equivalents	 	 	(50,260	)	 	 	58,439	 	
Cash and cash equivalents at beginning of period	 	 	363,795	 	 	 	276,553	 	
 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	 	$	313,535	 	 	$	334,992	 	

The accompanying notes are an integral part of these
Consolidated Financial Statements.

 

Table of Contents

  
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 (“US 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 27, 2016. There have been no material changes in the accounting policies followed by the Company during the current fiscal year. Results for an interim period are not indicative of any future interim periods or for an entire fiscal year.
 
2. Recent Accounting Pronouncements
 
In May 2014, the FASB issued updated accounting guidance for revenue recognition, which they have 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. This guidance will be effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and will be required to be applied retrospectively, with early adoption permitted. Accordingly, the standard will be effective for the Company on August 26, 2018. The Company is currently evaluating the adoption method it will apply and the impact that this guidance will have on its financial statements and related disclosures.
 
In February 2015, the FASB issued updated accounting guidance on consolidation requirements. This update changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Accordingly, the standard became effective for the Company on August 28, 2016. The Company adopted this guidance and the adoption did not have a material impact on its financial statements.
 
In April 2015, the FASB issued updated guidance on the presentation of debt issuance costs. This update changes the guidance with respect to presenting such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Accordingly, the standard became effective for the Company on August 28, 2016. The Company adopted this guidance and the adoption did not have a material impact on its financial statements.
 
In July 2015, the FASB issued updated guidance which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value. Subsequent measurement is unchanged for inventory measured using last-in, first-out or the retail inventory method. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, and is to be applied prospectively, with early adoption permitted. Accordingly, the standard will be effective for the Company on August 27, 2017. The Company expects that adoption of this guidance will not have a material impact on its financial statements.
 
In September 2015, the FASB issued updated guidance that requires an entity to recognize adjustments made to provisional amounts that are identified in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, and is to be applied prospectively, with early adoption permitted. Accordingly, the standard became effective for the Company on August 28, 2016. The Company adopted this guidance and the adoption did not have a material impact on its financial statements.
 
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 standard will be effective for the Company on August 26, 2018. The Company expects that adoption of this guidance will not have a material impact on its financial statements.
 
In February 2016, the FASB issued updated guidance that improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Accordingly, the standard will be effective for the Company on September 1, 2019. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.
 
In March 2016, the FASB issued updated guidance that simplifies several aspects of accounting for share-based payment transactions. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and, depending on the amendment, must be applied using a prospective transition method, retrospective transition method, modified retrospective transition method, prospectively and/or retroactively, with early adoption permitted. Accordingly, the standard will be effective for the Company on August 27, 2017. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.

 

Table of Contents

 
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 will be effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and will be required to be applied retrospectively, with early adoption permitted. Accordingly, the standard will be effective for the Company on August 26, 2018. 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 will be effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and will be required to be applied on a modified retrospective basis, with early adoption permitted. Accordingly, the standard will be effective for the Company on August 26, 2018. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.
 
3. Business Acquisitions
 
During the twenty-six weeks ended February 25, 2017, the Company completed three business acquisitions (including Arrow discussed below) with an aggregate purchase price of approximately $119.1 million. 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.
 
On September 19, 2016, the Company completed an acquisition of Arrow Uniform (“Arrow”) for approximately $118.3 million and contingent consideration subject to certain holdback provisions of $1.5 million. The all-cash transaction was structured as an asset acquisition, with the Company acquiring substantially all of Arrow’s assets and a limited amount of liabilities. Arrow, headquartered in Taylor, Michigan, provided uniform and facility service rental programs as well as direct sales uniform programs to a wide range of large and small customers. Arrow operated from 12 locations with nearly 700 employees in five Midwestern states.
 
The Arrow acquisition was accounted for using the purchase method of accounting. The initial allocation of the purchase price is incomplete with respect to certain assets acquired from Arrow. The Company is still in the process of identifying and measuring the fair value of tangible and intangible assets acquired and liabilities assumed. The Company has engaged specialists to assist in the valuation of intangible assets for which certain assumptions have not yet been finalized. The table below summarizes the current purchase price allocation to the estimated fair value of assets acquired and liabilities assumed at the acquisition date. Goodwill is calculated as the excess of the purchase price over the net assets recognized and represents the estimated future economic benefits arising from expected synergies and growth opportunities for the Company. All of the goodwill and intangible assets were allocated to the US and Canadian Rental and Cleaning segment and are deductible for tax purposes. The cash paid upon closing for the acquisition was approximately $119.9 million. The difference between the cash paid and the total purchase price represents amounts owed from the seller as a result of final closing adjustments. As such, a receivable due from the seller of $1.6 million is included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheet as of February 25, 2017.

Receivables	 	$	7,365	 	
Inventories	 	 	1,824	 	
Rental merchandise in service	 	 	7,175	 	
Prepaid expense and other current assets	 	 	1,722	 	
Property, plant and equipment	 	 	4,140	 	
Goodwill	 	 	51,189	 	
Customer contracts	 	 	40,256	 	
Other intangible assets	 	 	2,580	 	
Other assets	 	 	4,790	 	
Accrued liabilities	 	 	(2,705	)	

Total Purchase Price	 	$	118,336	 	
 
Goodwill, customer contracts and other intangible assets are estimated utilizing Level 3 valuation inputs to the fair value hierarchy, which are unobservable and consist of discounted future cash flow estimates, while the remaining assets acquired and liabilities assumed were measured using Level 2 inputs which principally include estimated market values of comparable assets. 

 

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4. Fair Value Measurements
 
US GAAP establishes a framework for measuring fair value and establishes disclosure requirements about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We considered non-performance risk when determining fair value of our derivative financial instruments.
 
The fair value hierarchy prescribed under US GAAP contains three levels as follows:
 
  Level 1 –  	Quoted prices in active markets for identical assets or liabilities.	
 
  Level 2 –  	Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.	
 
  Level 3 –  	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.	
 
All financial assets or liabilities that are measured at fair value on a recurring basis (at least annually) have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.  The assets or liabilities measured at fair value on a recurring basis are summarized in the tables below (in thousands):
 
 	 	As of February 25, 2017	 	
 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Fair Value	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash equivalents	 	$	224,756	 	 	$	—	 	 	$	—	 	 	$	224,756	 	
Pension plan assets	 	 	—	 	 	 	4,817	 	 	 	—	 	 	 	4,817	 	
Foreign currency forward contracts	 	 	—	 	 	 	220	 	 	 	—	 	 	 	220	 	
Total assets at fair value	 	$	224,756	 	 	$	5,037	 	 	$	—	 	 	$	229,793	 	
 
 	 	As of August 27, 2016	 	
 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Fair Value	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash equivalents	 	$	172,760	 	 	$	—	 	 	$	—	 	 	$	172,760	 	
Pension plan assets	 	 	—	 	 	 	4,753	 	 	 	—	 	 	 	4,753	 	
Foreign currency forward contracts	 	 	—	 	 	 	188	 	 	 	—	 	 	 	188	 	
Total assets at fair value	 	$	172,760	 	 	$	4,941	 	 	$	—	 	 	$	177,701	 	

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 were included in other assets as of February 25, 2017. 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.

 

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5. Derivative Instruments and Hedging Activities
 
The Company uses derivative financial instruments to mitigate its exposure to fluctuations in foreign currencies on certain forecasted transactions denominated in foreign currencies. US GAAP requires that all of the Company’s derivative instruments be recorded on the balance sheet at fair value. All subsequent changes in a derivative’s fair value are recognized in income, unless specific hedge accounting criteria are met.
 
Derivative instruments that qualify for hedge accounting are classified as a hedge of the variability of cash flows to be received or paid related to a recognized asset, liability or forecasted transaction. Changes in the fair value of a derivative that is highly effective and designated as a cash flow hedge are recognized in accumulated other comprehensive (loss) income until the hedged item or forecasted transaction is recognized in earnings. The Company performs an assessment at the inception of the hedge and on a quarterly basis thereafter, to determine whether its derivatives are highly effective in offsetting changes in the value of the hedged items. Any changes in the fair value resulting from hedge ineffectiveness are immediately recognized as income or expense.
 
In January 2015, the Company entered into sixteen forward contracts to exchange Canadian dollars (“CAD”) for U.S. dollars at fixed exchange rates in order to manage its exposure related to certain forecasted CAD denominated sales of one of its subsidiaries. The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of the Company’s domestic subsidiaries each fiscal quarter, beginning in the third fiscal quarter of 2015 and continuing through the second fiscal quarter of 2019. In total, the Company will sell approximately 31.0 million CAD at an average Canadian-dollar exchange rate of 0.7825 over these quarterly periods. The Company concluded that the forward contracts met the criteria to qualify as a cash flow hedge under US GAAP. Accordingly, the Company has reflected all changes in the fair value of the forward contracts in accumulated other comprehensive (loss) income, a component of shareholders’ equity. Upon the maturity of each foreign exchange forward contract, the gain or loss on the contract will be recorded as an adjustment to revenues.
 
As of February 25, 2017, the Company had forward contracts with a notional value of approximately 13.8 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 gain in accumulated other comprehensive (loss) income of $0.1 million, which was recorded net of tax. During the twenty-six weeks ended February 25, 2017, the Company reclassified $0.1 million from accumulated other comprehensive (loss) income to revenue, related to the derivative financial instruments. The gain in accumulated other comprehensive (loss) income as of February 25, 2017 is expected to be reclassified to revenues prior to its maturity on February 22, 2019.
 
6. 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 25, 2017 and February 27, 2016 were $3.7 million and $3.6 million, respectively. Contributions charged to expense under the plan for both the twenty-six weeks ended February 25, 2017 and February 27, 2016 were $7.3 million.
 
Pension Plans and Supplemental Executive Retirement Plans
 
The Company maintains an unfunded Supplemental Executive Retirement Plan for certain eligible employees of the Company, a non-contributory defined benefit pension plan covering union employees at one of its locations, and a frozen pension plan the Company assumed in connection with its acquisition of Textilease Corporation in fiscal 2004. The amounts charged to expense related to these plans for both the thirteen weeks ended February 25, 2017 and February 27, 2016 were $0.9 million. The amounts charged to expense related to these plans for both the twenty-six weeks ended February 25, 2017 and February 27, 2016 were $1.7 million.

 

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7. Net Income Per Share
 
The Company calculates net income per share in accordance with US GAAP, which requires the Company to allocate income to its unvested participating securities as part of its earnings per share (“EPS”) calculations. The following table sets forth the computation of basic earnings 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	 	 	Twenty-six weeks ended	 	
 	 	February 25,	 	 	February 27,	 	 	February 25,	 	 	February 27,	 	
 	 	2017	 	 	2016	 	 	2017	 	 	2016	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income available to shareholders	 	$	22,516	 	 	$	23,498	 	 	$	50,730	 	 	$	59,388	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allocation of net income for Basic:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	$	17,836	 	 	$	18,691	 	 	$	40,178	 	 	$	47,232	 	
Class B Common Stock	 	 	4,518	 	 	 	4,704	 	 	 	10,184	 	 	 	11,896	 	
Unvested participating shares	 	 	162	 	 	 	103	 	 	 	368	 	 	 	260	 	
 	 	$	22,516	 	 	$	23,498	 	 	$	50,730	 	 	$	59,388	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of shares for Basic:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	 	15,305	 	 	 	15,241	 	 	 	15,295	 	 	 	15,230	 	
Class B Common Stock	 	 	4,846	 	 	 	4,795	 	 	 	4,846	 	 	 	4,795	 	
Unvested participating shares	 	 	139	 	 	 	96	 	 	 	140	 	 	 	95	 	
 	 	 	20,290	 	 	 	20,132	 	 	 	20,281	 	 	 	20,120	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per share for Basic:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common Stock	 	$	1.17	 	 	$	1.23	 	 	$	2.63	 	 	$	3.10	 	
Class B Common Stock	 	$	0.93	 	 	$	0.98	 	 	$	2.10	 	 	$	2.48	 	
 
The Company is required to calculate diluted EPS 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 25, 2017, the Company’s diluted EPS 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 earnings per share of Common Stock for the thirteen and twenty-six weeks ended February 25, 2017 (in thousands, except per share data):
 
 	 	Thirteen weeks ended
February 25, 2017	 	 	Twenty-six weeks ended
February 25, 2017	 	
 	 	Earnings	 	 	 	 	 	 	 	 	 	 	Earnings	 	 	 	 	 	 	 	 	 	
 	 	to Common	 	 	Common	 	 	 	 	 	 	to Common	 	 	Common	 	 	 	 	 	
 	 	shareholders	 	 	Shares	 	 	EPS	 	 	shareholders	 	 	Shares	 	 	EPS	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported - Basic	 	$	17,836	 	 	 	15,305	 	 	$	1.17	 	 	$	40,178	 	 	 	15,295	 	 	$	2.63	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Add: effect of dilutive potential common shares	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Share-Based Awards	 	 	—	 	 	 	112	 	 	 	 	 	 	 	—	 	 	 	109	 	 	 	 	 	
Class B Common Stock	 	 	4,518	 	 	 	4,846	 	 	 	 	 	 	 	10,184	 	 	 	4,846	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Add: Undistributed earnings allocated to unvested participating shares	 	 	158	 	 	 	—	 	 	 	 	 	 	 	357	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	—	 	 	 	 	 	
Less: Undistributed earnings reallocated to unvested participating shares	 	 	(150	)	 	 	—	 	 	 	 	 	 	 	(338	)	 	 	—	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted EPS – Common Stock	 	$	22,362	 	 	 	20,263	 	 	$	1.10	 	 	$	50,381	 	 	 	20,250	 	 	$	2.49	 	
 
Share-based awards that would result in the issuance of 11,821 shares of Common Stock were excluded from the calculation of diluted earnings per share for the thirteen weeks ended February 25, 2017 because they were anti-dilutive. There were no share-based awards that were excluded from the calculation of diluted earnings per share for the twenty-six weeks ended February 25, 2017 because they were anti-dilutive.  

 

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For the thirteen and twenty-six weeks ended February 27, 2016, the Company’s diluted EPS assumes the conversion of all vested Class B Common Stock into Common Stock and uses the two-class method for its unvested participating shares as it was the more dilutive of the two methods. The following table sets forth the computation of diluted earnings per share of Common Stock for the thirteen and twenty-six weeks ended February 27, 2016 (in thousands, except per share data):
 
 	 	Thirteen weeks	 	 	Twenty-six weeks	 	
 	 	ended February 27, 2016	 	 	ended February 27, 2016	 	
 	 	Earnings	 	 	 	 	 	 	 	 	 	 	Earnings	 	 	 	 	 	 	 	 	 	
 	 	to Common	 	 	Common	 	 	 	 	 	 	to Common	 	 	Common	 	 	 	 	 	
 	 	Shareholders	 	 	Shares	 	 	EPS	 	 	Shareholders	 	 	Shares	 	 	EPS	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported - Basic	 	$	18,691	 	 	 	15,241	 	 	$	1.23	 	 	$	47,232	 	 	 	15,230	 	 	$	3.10	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Add: effect of dilutive potential common shares	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Share-based awards	 	 	—	 	 	 	102	 	 	 	 	 	 	 	—	 	 	 	102	 	 	 	 	 	
Class B Common Stock	 	 	4,704	 	 	 	4,795	 	 	 	 	 	 	 	11,896	 	 	 	4,795	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Add: Undistributed earnings allocated to unvested participating shares	 	 	100	 	 	 	—	 	 	 	 	 	 	 	253	 	 	 	—	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less: Undistributed earnings reallocated to unvested participating shares	 	 	(94	)	 	 	—	 	 	 	 	 	 	 	(240	)	 	 	—	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted EPS – Common Stock	 	$	23,401	 	 	 	20,138	 	 	$	1.16	 	 	$	59,141	 	 	 	20,127	 	 	$	2.94	 	
 
Share-based awards that would result in the issuance of 700 shares of Common Stock were excluded from the calculation of diluted earnings per share for the thirteen weeks ended February 27, 2016 because they were anti-dilutive. Share-based awards that would result in the issuance of 3,909 shares of Common Stock were excluded from the calculation of diluted earnings per share for the twenty-six weeks ended February 27, 2016 because they were anti-dilutive.
 
8. Inventories
 
Inventories are stated at the lower of cost or market value, net of any reserve for excess and obsolete inventory. 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 25, 2017 and August 27, 2016 were as follows (in thousands):
 
 	 	February 25,
2017	 	 	August 27,
2016	 	
Raw materials	 	$	14,603	 	 	$	16,826	 	
Work in process	 	 	3,257	 	 	 	2,275	 	
Finished goods	 	 	53,633	 	 	 	59,786	 	
Total inventories	 	$	71,493	 	 	$	78,887	 	
 
9. Goodwill and Other Intangible Assets
 
As discussed in Note 3, “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.
 
The changes in the carrying amount of goodwill are as follows (in thousands):

Balance as of August 27, 2016	 	$	320,641	 	
Goodwill recorded during the period	 	 	51,189	 	
Other	 	 	(57	)	
 	 	 	 	 	
Balance as of February 25, 2017	 	$	371,773	 	

 

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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 25, 2017	 	 	 	 	 	 	 	 	 	 	 	 	
Customer contracts	 	$	206,258	 	 	$	135,137	 	 	$	71,121	 	
Other intangible assets	 	 	33,933	 	 	 	29,167	 	 	 	4,766	 	
 	 	$	240,191	 	 	$	164,304	 	 	$	75,887	 	
August 27, 2016	 	 	 	 	 	 	 	 	 	 	 	 	
Customer contracts	 	$	165,405	 	 	$	129,551	 	 	$	35,854	 	
Other intangible assets	 	 	31,382	 	 	 	28,572	 	 	 	2,810	 	
 	 	$	196,787	 	 	$	158,123	 	 	$	38,664	 	

10. 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-seven years.
 
A reconciliation of the Company’s asset retirement liability for the twenty-six weeks ended February 25, 2017 was as follows (in thousands):
 
 	 	February 25,
2017	 	
Beginning balance as of August 27, 2016	 	$	13,032	 	
Accretion expense	 	 	423	 	
Effect of exchange rate changes	 	 	(217	)	
Change in estimate	 	 	(357	)	
Ending balance as of February 25, 2017	 	$	12,881	 	
 
Asset retirement obligations are included in current and long-term accrued liabilities in the accompanying Consolidated Balance Sheets.
 
11. 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 waste and other substances. In particular, industrial laundries 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. In the past, 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.
 
US 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, three sites related to former operations in Williamstown, Vermont, as well as sites located in Goldsboro, North Carolina, Wilmington, North Carolina, Landover, Maryland and Syracuse, New York.

 

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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 Company’s Somerville site. This station is part of a planned extension of the transit system. Due to cost projections of the extension which now substantially exceed original estimates, the local transit authority has placed the extension on hold pending its redesign and receipt of related state and federal approvals and funding increases. 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.
 
During the fourth quarter of fiscal 2016, the Company entered into a settlement related to environmental litigation which resulted in a $15.9 million gain that was recorded as a reduction of selling and administrative expenses. This gain consisted of amounts previously received but not recognized into income as well as amounts that the Company received in September 2016.
 
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 US 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 25, 2017, the risk-free interest rates utilized by the Company ranged from 2.3% 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 25, 2017 were as follows (in thousands):
 
 	 	February 25,
2017	 	
Beginning balance as of August 27, 2016	 	$	26,748	 	
Costs incurred for which reserves had been provided	 	 	(1,020	)	
Insurance proceeds	 	 	69	 	
Interest accretion	 	 	300	 	
Change in discount rates	 	 	(1,434	)	
 	 	 	 	 	
Balance as of February 25, 2017	 	$	24,663	 	
 
Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of February 25, 2017, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below.
 
(In thousands)	 	2017	 	 	2018	 	 	2019	 	 	2020	 	 	2021	 	 	Thereafter	 	 	Total	 	
Estimated costs – current dollars	 	$	8,653	 	 	$	1,859	 	 	$	1,492	 	 	$	1,284	 	 	$	1,172	 	 	$	12,392	 	 	$	26,852	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Estimated insurance proceeds	 	 	(104	)	 	 	(159	)	 	 	(173	)	 	 	(159	)	 	 	(173	)	 	 	(1,130	)	 	 	(1,898	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net anticipated costs	 	$	8,549	 	 	$	1,700	 	 	$	1,319	 	 	$	1,125	 	 	$	999	 	 	$	11,262	 	 	$	24,954	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Effect of inflation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	7,556	 	
Effect of discounting	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(7,847	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of February 25, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	24,663	 	

 

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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 three 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 25, 2017, 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 $3.4 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 (“NRC”), or, in certain cases, by the applicable state agency, and are subject to regulation by federal, state and local authorities. The Company also has 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 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 US 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.
 
12. Income Taxes
 
The Company’s effective income tax rate was 39.8% and 39.2% for the thirteen and twenty-six weeks ended February 25, 2017 respectively, as compared to 39.7% and 39.0% for the thirteen and twenty-six weeks ended February 27, 2016 respectively. 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 twenty-six weeks ended February 25, 2017, there were no material changes in the amount of unrecognized tax benefits or the amount accrued for interest and penalties.
 
U.S. and Canadian federal income tax statutes have lapsed for filings up to and including fiscal years 2012 and 2008, respectively, and the Company has concluded an audit of U.S. federal income taxes for 2010 and 2011. With a few exceptions, the Company is no longer subject to state and local income tax examinations for periods prior to fiscal 2011. 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.
 
13. Long-Term Debt
 
On April 11, 2016, the Company entered into an amended and restated $250.0 million unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks, which matures on April 11, 2021. The Credit Agreement amended and restated the Company’s prior $250.0 million revolving credit agreement, which was scheduled to mature on May 4, 2016. Under the Credit Agreement, the Company is able to borrow funds at variable interest rates based on, at the Company’s 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. At February 25, 2017, 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 February 25, 2017, the Company had no outstanding borrowings and had outstanding letters of credit amounting to $66.2 million, leaving $183.8 million available for borrowing under the Credit Agreement.
 
As of February 25, 2017, the Company was in compliance with all covenants under the Credit Agreement.

 

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14. Accumulated Other Comprehensive (Loss) Income
 
The changes in each component of accumulated other comprehensive (loss) income, net of tax, for the thirteen and twenty-six weeks ended February 25, 2017 and February 27, 2016 were as follows (in thousands):
 
 	 	Thirteen Weeks Ended February 25, 2017	 	
 	 	Foreign
Currency
Translation	 	 	Pension-
related (1)	 	 	Derivative
Financial
Instruments (1)	 	 	Total
Accumulated Other Comprehensive (Loss)
Income	 	
Balance as of November 26, 2016	 	$	(25,943	)	 	$	(8,251	)	 	$	364	 	 	$	(33,830	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss) before reclassification	 	 	3,332	 	 	 	—	 	 	 	(202	)	 	 	3,130	 	
Amounts reclassified from accumulated other comprehensive (loss) income	 	 	—	 	 	 	—	 	 	 	(27	)	 	 	(27	)	
Net current period other comprehensive income (loss)	 	 	3,332	 	 	 	—	 	 	 	(229	)	 	 	3,103	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of February 25, 2017	 	$	(22,611	)	 	$	(8,251	)	 	$	135	 	 	$	(30,727	)	

 	 	Twenty-six Weeks Ended February 25, 2017	 	
 	 	Foreign
Currency
Translation	 	 	Pension-
related (1)	 	 	Derivative
Financial
Instruments (1)	 	 	Total
Accumulated Other
Comprehensive (Loss)
Income	 	
Balance as of August 27, 2016	 	$	(20,814	)	 	$	(8,251	)	 	$	116	 	 	$	(28,949	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive (loss) income before reclassification	 	 	(1,797	)	 	 	—	 	 	 	122	 	 	 	(1,675	)	
Amounts reclassified from accumulated other comprehensive (loss) income	 	 	—	 	 	 	—	 	 	 	(103	)	 	 	(103	)	
Net current period other comprehensive (loss) income	 	 	(1,797	)	 	 	—	 	 	 	19	 	 	 	(1,778	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of February 25, 2017	 	$	(22,611	)	 	$	(8,251	)	 	$	135	 	 	$	(30,727	)	
 
 	 	Thirteen Weeks Ended February 27, 2016	 	
 	 	Foreign
Currency
Translation	 	 	Pension-
related (1)	 	 	Derivative
Financial
Instruments (1)	 	 	Total
Accumulated Other
Comprehensive (Loss)
Income	 	
Balance as of November 28, 2015	 	$	(21,995	)	 	$	(4,937	)	 	$	434	 	 	$	(26,498	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive (loss) income before reclassification	 	 	(2,011	)	 	 	—	 	 	 	175	 	 	 	(1,836	)	
Amounts reclassified from accumulated other comprehensive loss	 	 	—	 	 	 	—	 	 	 	(93	)	 	 	(93	)	
Net current period other comprehensive (loss) income	 	 	(2,011	)	 	 	—	 	 	 	82	 	 	 	(1,929	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of February 27, 2016	 	$	(24,006	)	 	$	(4,937	)	 	$	516	 	 	$	(28,427	)	
 
 	 	Twenty-six Weeks Ended February 27, 2016	 	
 	 	Foreign
Currency
Translation	 	 	Pension-
related (1)	 	 	Derivative
Financial
Instruments (1)	 	 	Total
Accumulated Other
Comprehensive (Loss)
Income	 	
Balance as of August 29, 2015	 	$	(20,423	)	 	$	(4,719	)	 	$	729	 	 	$	(24,413	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive (loss) income before reclassification	 	 	(3,583	)	 	 	(261	)	 	 	(48	)	 	 	(3,892	)	
Amounts reclassified from accumulated other comprehensive loss	 	 	—	 	 	 	43	 	 	 	(165	)	 	 	(122	)	
Net current period other comprehensive (loss) income	 	 	(3,583	)	 	 	(218	)	 	 	(213	)	 	 	(4,014	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of February 27, 2016	 	$	(24,006	)	 	$	(4,937	)	 	$	516	 	 	$	(28,427	)	
 
 	(1)	Amounts are shown net of tax	

 

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Amounts reclassified from accumulated other comprehensive (loss) income, net of tax, for the thirteen and twenty-six weeks ended February 25, 2017 and February 27, 2016 were as follows (in thousands):
 
 	 	Thirteen weeks ended	 	 	Twenty-six weeks ended	 	
 	 	February 25,	 	 	February 27,	 	 	February 25,	 	 	February 27,	 	
 	 	2017	 	 	2016	 	 	2017	 	 	2016	 	
Pension benefit liabilities, net:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Actuarial losses	 	$	—	 	 	$	—	 	 	$	—	 	 	$	43	(a) 	
Total, net of tax	 	 	 	 	 	 	—	 	 	 	 	 	 	 	43	 	
Derivative financial instruments, net:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Forward contracts (b)	 	 	(27	)	 	 	(93	)	 	 	(103	)	 	 	(165	)	
Total, net of tax	 	 	(27	)	 	 	(93	)	 	 	(103	)	 	 	(165	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total amounts reclassified, net of tax	 	$ 	(27	)	 	$ 	(93	)	 	$ 	(103	)	 	$ 	(122	)	
  
 	(a)	Amounts included in selling and administrative expenses in the accompanying Consolidated Statements of Income.	
 
 	(b)	Amounts included in revenues in the accompanying Consolidated Statements of Income.	
   
15. 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: US Rental and Cleaning, Canadian Rental and Cleaning, Manufacturing (“MFG”), Corporate, Specialty Garments Rental and Cleaning (“Specialty Garments”) and First Aid. The US Rental and Cleaning and Canadian Rental and Cleaning operating segments have been combined to form the US and Canadian Rental and Cleaning reporting segment, and as a result, the Company has five reporting segments.
 
The US 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 US 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 US and Canadian Rental and Cleaning reporting segment. MFG revenues are generated when goods are shipped from the Company’s manufacturing facilities, or its subcontract manufacturers, to other Company locations. These 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 US 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 US and Canadian Rental and Cleaning reporting segment. The majority of expenses accounted for within the Corporate segment relate to costs of the US 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.

 

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The Company refers to the US 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 tables (in thousands):
   
 	 	US and	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Subtotal	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Canadian	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Core	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Rental and	 	 	 	 	 	 	Net Interco	 	 	 	 	 	 	Laundry	 	 	Specialty	 	 	 	 	 	 	 	 	 	
Thirteen weeks ended	 	Cleaning	 	 	MFG	 	 	MFG Elim	 	 	Corporate	 	 	Operations	 	 	Garments	 	 	First Aid	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
February 25, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	350,059	 	 	$	46,224	 	 	$	(46,118	)	 	$	8,221	 	 	$	358,386	 	 	$	21,787	 	 	$	11,254	 	 	$	391,427	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from operations	 	$	42,731	 	 	$	16,652	 	 	$	1,007	 	 	$	(27,331	)	 	$	33,059	 	 	$	2,095	 	 	$	992	 	 	$	36,146	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest (income) expense, net	 	$	(925	)	 	$	—	 	 	$	—	 	 	$	(195	)	 	$	(1,120	)	 	$	—	 	 	$	—	 	 	$	(1,120	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before taxes	 	$	43,691	 	 	$	16,630	 	 	$	1,007	 	 	$	(27,093	)	 	$	34,235	 	 	$	2,147	 	 	$	992	 	 	$	37,374	 	

February 27, 2016	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	326,101	 	 	$	42,436	 	 	$	(42,436	)	 	$	5,264	 	 	$	331,365	 	 	$	20,451	 	 	$	11,281	 	 	$	363,097	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from operations	 	$	43,117	 	 	$	14,051	 	 	$	1,752	 	 	$	(22,791	)	 	$	36,129	 	 	$	1,146	 	 	$	918	 	 	$	38,193	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest (income) expense, net	 	$	(818	)	 	$	—	 	 	$	—	 	 	$	144	 	 	$	(674	)	 	$	—	 	 	$	—	 	 	$	(674	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before taxes	 	$	43,948	 	 	$	14,098	 	 	$	1,752	 	 	$	(23,040	)	 	$	36,758	 	 	$	1,323	 	 	$	918	 	 	$	38,999	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Twenty-six weeks ended	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
February 25, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	694,540	 	 	$	95,086	 	 	$	(94,922	)	 	$	15,525	 	 	$	710,229	 	 	$	44,143	 	 	$	23,163	 	 	$	777,535	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from operations	 	$	95,558	 	 	$	34,859	 	 	$	68	 	 	$	(53,753	)	 	$	76,732	 	 	$	3,246	 	 	$	1,925	 	 	$	81,903	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest (income) expense, net	 	$	(1,759	)	 	$	—	 	 	$	—	 	 	$	(162	)	 	$	(1,921	)	 	$	—	 	 	$	—	 	 	$	(1,921	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before taxes	 	$	97,399	 	 	$	34,852	 	 	$	68	 	 	$	(53,673	)	 	$	78,646	 	 	$	2,867	 	 	$	1,925	 	 	$	83,438	 	

February 27, 2016	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	655,881	 	 	$	88,251	 	 	$	(88,251	)	 	$	10,521	 	 	$	666,402	 	 	$	47,221	 	 	$	22,858	 	 	$	736,481	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from operations	 	$	99,843	 	 	$	30,595	 	 	$	1,701	 	 	$	(43,038	)	 	$	89,101	 	 	$	5,432	 	 	$	1,954	 	 	$	96,487	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest (income) expense, net	 	$	(1,562	)	 	$	—	 	 	$	—	 	 	$	345	 	 	$	(1,217	)	 	$	—	 	 	$	—	 	 	$	(1,217	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before taxes	 	$	101,441	 	 	$	30,634	 	 	$	1,701	 	 	$	(43,618	)	 	$	90,158	 	 	$	5,245	 	 	$	1,954	 	 	$	97,357	 	

 

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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 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,” 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, our ability to maintain and grow Arrow’s customer base and enhance its operating margins, 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 future 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 prices, the continuing increase in domestic healthcare costs, including the ultimate impact of the Affordable Care Act, our ability to retain and grow our customer base, demand and prices for our products and services, fluctuations in our Specialty Garments business, rampant criminal activity and instability in Mexico where our principal garment manufacturing plants are located, our ability to properly and efficiently design, construct, implement and operate our 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 recent and proposed future 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 and general economic conditions and other factors described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 27, 2016 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 such statements 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 more than 300,000 customer locations in the United States, Canada and Europe from more than 240 customer service, distribution and manufacturing facilities.
 
As mentioned and described in Note 15 to the Consolidated Financial Statements, we have five reporting segments: US and Canadian Rental and Cleaning, MFG, Corporate, Specialty Garments and First Aid. We refer to the laundry locations of the US and Canadian Rental and Cleaning reporting segment as “industrial laundries” or “industrial laundry locations”, and to the US 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 (“US 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.

 

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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. See Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 27, 2016 for additional discussion regarding our application of these and other accounting policies.
 
Results of Operations
 
The following table presents certain selected financial data, including the percentage of revenues represented by each item, for the thirteen and twenty-six weeks ended February 25, 2017 and February 27, 2016.
 
 	 	Thirteen weeks ended	 	 	Twenty-six weeks ended	 	
(In thousands, except percentages)	 	February 25,
2017	 	 	% of
Rev.	 	 	February 27,
2016	 	 	% of
Rev.	 	 	%
Change	 	 	February 25,
2017	 	 	% of
Rev.	 	 	February 27,
2016	 	 	% of
Rev.	 	 	%
Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	391,427	 	 	 	100.0	%	 	$	363,097	 	 	 	100.0	%	 	 	7.8	%	 	$	777,535	 	 	 	100.0	%	 	$	736,481	 	 	 	100.0	%	 	 	5.6	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenues (1)	 	 	249,280	 	 	 	63.7	 	 	 	229,672	 	 	 	63.3	 	 	 	8.5	 	 	 	488,045	 	 	 	62.8	 	 	 	452,275	 	 	 	61.4	 	 	 	7.9	 	
Selling and administrative expenses (1)	 	 	84,861	 	 	 	21.7	 	 	 	75,423	 	 	 	20.8	 	 	 	12.5	 	 	 	164,307	 	 	 	21.1	 	 	 	148,172	 	 	 	20.1	 	 	 	10.9	 	
Depreciation and amortization	 	 	21,140	 	 	 	5.4	 	 	 	19,809	 	 	 	5.5	 	 	 	6.7	 	 	 	43,280	 	 	 	5.6	 	 	 	39,547	 	 	 	5.4	 	 	 	9.4	 	
Total operating expenses	 	 	355,281	 	 	 	90.8	 	 	 	324,904	 	 	 	89.5	 	 	 	9.3	 	 	 	695,632	 	 	 	89.5	 	 	 	639,994	 	 	 	86.9	 	 	 	8.7	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	 	 	36,146	 	 	 	9.2	 	 	 	38,193	 	 	 	10.5	 	 	 	-5.4	 	 	 	81,903	 	 	 	10.5	 	 	 	96,487	 	 	 	13.1	 	 	 	-15.1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income	 	 	(1,228	)	 	 	0.3	 	 	 	(806	)	 	 	0.2	 	 	 	52.4	 	 	 	(1,535	)	 	 	0.2	 	 	 	(870	)	 	 	0.1	 	 	 	76.4	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	 	37,374	 	 	 	9.5	 	 	 	38,999	 	 	 	10.7	 	 	 	-4.2	 	 	 	83,438	 	 	 	10.7	 	 	 	97,357	 	 	 	13.2	 	 	 	-14.3	 	
Provision for income taxes	 	 	14,858	 	 	 	3.8	 	 	 	15,501	 	 	 	4.3	 	 	 	-4.1	 	 	 	32,708	 	 	 	4.2	 	 	 	37,969	 	 	 	5.2	 	 	 	-13.9	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	22,516	 	 	 	5.8	%	 	$	23,498	 	 	 	6.5	%	 	 	-4.2	%	 	$	50,730	 	 	 	6.5	%	 	$	59,388	 	 	 	8.1	%	 	 	-14.6	%	
 
(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, US and Canadian Rental and Cleaning, MFG, Corporate, Specialty Garments, and First Aid. We refer to the US 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. The dramatic decrease in oil prices beginning in 2014 and continuing to the present has directly affected our customers in the oil industry as they have curtailed their level of operations. In addition, this decline has also had a corresponding effect on our customers in businesses which service or supply the oil industry as well as our customers in unrelated businesses located in areas which had benefited from the economic expansion generated by the robust growth driven by the higher oil prices in prior years. As a result, our organic growth has been impacted by elevated headcount reductions in our wearer base as well as increased lost accounts. Recent trends indicate that wearer levels at existing customers in our North American energy-dependent markets have begun to stabilize. On the other hand, we have benefited from lower 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 lower oil prices, the negative impact on our results from the cutbacks by our customers in the oil industry and other affected businesses have and will continue to outweigh the benefits from lower energy costs.

 

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The cost of healthcare that we provide to our employees has grown over the last few years at a rate in excess of our revenue growth and as a result, has negatively impacted our operating results. In fiscal 2015, the Affordable Care Act (“ACA”) required us to modify one of the healthcare plans we provided to our employees. Moreover, it is generally expected that healthcare costs in the United States will increase over the coming years at rates in excess of inflation. As a result of these factors, and depending on the effect of the modifications we have made, and may make in the future, to our employee healthcare plans and enrollment levels in those plans, we expect that our future operating results will continue to be further adversely impacted by increasing healthcare costs.
 
We are currently undertaking a company-wide initiative to update our customer relationship management (“CRM”) systems. As of February 25, 2017, we have capitalized $53.5 million related to our CRM project (“Unity 20/20”). Although we have not deployed the system, we have continued to make investments in IT infrastructure, including headcount, to help support this and other technology initiatives that have impacted our results of operations. In addition, our future operating results will be impacted by the eventual depreciation of our Unity 20/20 investment.
 
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. We expect that our labor costs will rise in fiscal 2017 as a result of increases in state and local minimum wage levels as well as the recent update to the regulations under the Fair Labor Standards Act which has expanded the number of employees entitled to overtime pay. Although the current changes to the Fair Labor Standards Act have been put on hold due to litigation, they may still become effective in their current or a revised form.
 
A portion of our sales is derived from international markets, including Canada. Revenues denominated in currencies other than the U.S. dollar represented approximately 7.4% and 7.3% of total consolidated revenues for the thirteen and twenty-six weeks ended February 25, 2017, respectively. Revenues denominated in currencies other than the U.S. dollar represented approximately 8.0% of total consolidated revenues for both the thirteen and twenty-six weeks ended February 27, 2016. The operating results of our international subsidiaries are translated into U.S. dollars and such results are affected by movements in foreign currencies relative to the U.S. dollar. In addition, fluctuations in the Canadian dollar may have an effect on the margins of our Canadian business because a weaker Canadian dollar will increase the cost of merchandise and other operational inputs that are sourced from outside of Canada. Our operating results in future years could be negatively impacted by any devaluation, as compared to the U.S. dollar, of the Canadian dollar or any of the currencies of the other countries in which we operate.
 
Thirteen weeks ended February 25, 2017 compared with thirteen weeks ended February 27, 2016
 
Revenues 
 
 	 	February 25,	 	 	February 27,	 	 	Dollar	 	 	Percent	 	
(In thousands, except percentages)	 	2017	 	 	2016	 	 	Change	 	 	Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Core Laundry Operations	 	$	358,386	 	 	$	331,365	 	 	$	27,021	 	 	 	8.2	%	
Specialty Garments	 	 	21,787	 	 	 	20,451	 	 	 	1,336	 	 	 	6.5	%	
First Aid	 	 	11,254	 	 	 	11,281	 	 	 	(27	)	 	 	-0.2	%	
Consolidated total	 	$	391,427	 	 	$	363,097	 	 	$	28,330	 	 	 	7.8	%	
 
For the thirteen weeks ended February 25, 2017, our consolidated revenues increased by $28.3 million from the comparable period in fiscal 2016, or 7.8%. This increase was primarily due to a $27.0 million increase in revenues from our Core Laundry Operations. Revenues from our Core Laundry Operations increased to $358.4 million for the thirteen weeks ended February 25, 2017 from $331.4 million for the comparable period of fiscal 2016, or 8.2%. Excluding the positive effect of acquisitions which increased our revenues by 5.6%, as well as a stronger Canadian dollar which impacted our growth 0.4%, organic growth for our Core Laundry Operations was 2.2%. The impact on our revenues from acquisitions was primarily the result of our acquisition of Arrow Uniform (“Arrow”) which was completed on September 19, 2016. Organic growth consists primarily of new sales, price increases, and net changes in the wearer levels at our existing customers, offset by lost accounts. Our organic growth during the thirteen weeks ended February 25, 2017 continued to be negatively impacted by the cumulative reductions experienced over the last year at our customers that directly or indirectly support oil or other energy production in the United States and Canada, however, recent trends indicate wearer levels in these geographies have begun to stabilize.
 
Specialty Garments’ revenues increased to $21.8 million in the second fiscal quarter of 2017 from $20.5 million in the comparable period of fiscal 2016, an increase of $1.3 million or 6.5%. This segment’s results are often affected by the timing and length of its customers’ power reactor outages as well as its project-based activities. First Aid revenues decreased by 0.2% compared to the comparable period in fiscal 2016.
 
Cost of Revenues
 
For the thirteen weeks ended February 25, 2017, cost of revenues increased to 63.7% of revenues, or $249.3 million, from 63.3% of revenues, or $229.7 million, for the thirteen weeks ended February 27, 2016. This increase is partially the result of the Arrow acquisition. The operations related to the Arrow acquisition had costs of revenues during the quarter that were significantly higher as a percentage of revenues than the remaining Core Laundry Operations. In addition, our Core Laundry Operations, excluding the new Arrow business, had higher production payroll and other production related expenses as a percentage of revenues compared to the thirteen weeks ended February 27, 2016, partially due to the wage increases for many of our plant employees, in addition to energy costs which increased as a percent of Core Laundry revenues. These higher costs were partially offset by lower merchandise amortization as a percentage of revenues as well as lower healthcare costs in comparison to the second fiscal quarter of 2016.

 

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Selling and Administrative Expense
 
Selling and administrative expenses were 21.7% and 20.8% of revenues for the thirteen weeks ended February 25, 2017 and February 27, 2016, respectively. During the thirteen weeks ended February 25, 2017, this increase was primarily driven by higher payroll costs and other administrative costs, partially the result of investments in our CRM systems project and other technology initiatives. In addition, stock compensation expense was higher during the quarter due to the April 2016 restricted stock grant to our Chief Executive Officer.
 
Depreciation and Amortization
 
Our depreciation and amortization expense was $21.1million, or 5.4% of revenues, for the thirteen weeks ended February 25, 2017 compared to $19.8 million, or 5.5% of revenues, for the thirteen weeks ended February 27, 2016. The increase in depreciation and amortization expense was primarily due to an increase in amortization resulting from the intangible assets acquired from Arrow as well as normal capital expenditure activity in earlier periods.
 
Income from Operations
 
For the thirteen weeks ended February 25, 2017 and February 27, 2016, changes in our revenues and costs as discussed above resulted in the following changes in our income from operations:
 
 	 	February 25,	 	 	February 27,	 	 	Dollar	 	 	Percent	 	
(In thousands, except percentages)	 	2017	 	 	2016	 	 	Change	 	 	Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Core Laundry Operations	 	$	33,059	 	 	$	36,129	 	 	$	(3,070	)	 	 	-8.5	%	
Specialty Garments	 	 	2,095	 	 	 	1,146	 	 	 	949	 	 	 	82.8	%	
First Aid	 	 	992	 	 	 	918	 	 	 	74	 	 	 	8.0	%	
Consolidated total	 	$	36,146	 	 	$	38,193	 	 	$	(2,047	)	 	 	-5.4	%	
 
Other Income
 
Other income, which includes interest expense, interest income and exchange rate loss (gain), was $1.2 million of income in the thirteen weeks ended February 25, 2017 compared to income of $0.8 million in the thirteen weeks ended February 27, 2016. This increase of $0.4 million was primarily due to interest income of $1.3 million during the thirteen weeks ended February 25, 2017 compared to interest income of $0.9 million during the thirteen weeks ended February 27, 2016.
 
Provision for Income Taxes
 
Our effective income tax rate was essentially unchanged at 39.8% for the thirteen weeks ended February 25, 2017 compared to 39.7% for the thirteen weeks ended February 27, 2016.
 
Twenty-six weeks ended February 25, 2017 compared with twenty-six weeks ended February 27, 2016
 
Revenues 
 
 	 	February 25,	 	 	February 27,	 	 	Dollar	 	 	Percent	 	
(In thousands, except percentages)	 	2017	 	 	2016	 	 	Change	 	 	Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Core Laundry Operations	 	$	710,229	 	 	$	666,402	 	 	$	43,827	 	 	 	6.6	%	
Specialty Garments	 	 	44,143	 	 	 	47,221	 	 	 	(3,078	)	 	 	-6.5	%	
First Aid	 	 	23,163	 	 	 	22,858	 	 	 	305	 	 	 	1.3	%	
Consolidated total	 	$	777,535	 	 	$	736,481	 	 	$	41,054	 	 	 	5.6	%	
 
For the twenty-six weeks ended February 25, 2017, our consolidated revenues increased by $41.1 million from the comparable period in fiscal 2016, or 5.6%. Core Laundry Operations’ revenues increased to $710.2 million for the twenty-six weeks ended February 25, 2017 from $666.4 million for the comparable period of fiscal 2016, an increase of 6.6%. Excluding the positive effect of acquisitions which increased our revenues by 5.0%, as well as a stronger Canadian dollar which impacted our growth 0.2%, organic growth for our Core Laundry Operations was 1.4%. The impact on our revenues from acquisitions was primarily the result of our acquisition of Arrow Uniform (“Arrow”) which was completed on September 19, 2016. Organic growth consists primarily of new sales, price increases, and net changes in the wearer levels at our existing customers, offset by lost accounts.
 
Specialty Garments’ revenues decreased to $44.1 million in the twenty-six weeks ended February 25, 2017 from $47.2 million in the comparable period of 2016, a decrease of 6.5%. This segment’s results are affected by the timing and length of its customers’ power reactor outages as well as its project-based activities. First Aid’s revenues increased to $23.2 million for the twenty-six weeks ended February 25, 2017 from $22.9 million for the comparable period of fiscal 2016, an increase of 1.3%.

 

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Cost of Revenues
 
For the twenty-six weeks ended February 25, 2017, cost of revenues increased to 62.8% of revenues, or $488.0 million, from 61.4% of revenues, or $452.3 million, for the twenty-six weeks ended February 27, 2016. This increase is partially the result of the Arrow acquisition. The operations related to the Arrow acquisition had costs of revenues during the first half of the fiscal year that were significantly higher as a percentage of revenues than the remaining Core Laundry Operations. In addition, our Core Laundry Operations, excluding the new Arrow business, had higher production payroll and other production related expenses as a percentage of revenues compared to the twenty-six weeks ended February 27, 2016, partially due to wage increases for many of our plant employees, in addition to energy costs which increased as a percent of Core Laundry revenues.
 
Selling and Administrative Expense
 
Our selling and administrative expenses increased to 21.1% of revenues, or $164.3 million, for the twenty-six weeks ended February 25, 2017 from 20.1% of revenues, or $148.2 million, for the twenty-six weeks ended February 27, 2016. During the twenty-six weeks ended February 25, 2017, this increase was primarily driven by higher payroll costs, legal fees and other administrative costs, partially the result of investments in our CRM systems project and other technology initiatives. In addition, stock compensation expense was higher during the first half of the 2017 fiscal year due to the April 2016 restricted stock grant to our Chief Executive Officer. These higher costs were partially offset by lower costs associated with legal and environment contingencies compared to the twenty-six weeks ended February 27, 2016.
 
Depreciation and Amortization
 
Our depreciation and amortization expense was $43.3 million, or 5.6% of revenues, for the twenty-six weeks ended February 25, 2017 compared to $39.5 million, or 5.4% of revenues, for the twenty-six weeks ended February 27, 2016. The increase in depreciation and amortization expense was primarily due to an increase in amortization resulting from the intangible assets acquired from Arrow as well as normal capital expenditure activity in earlier periods.
 
Income from Operations
 
For the twenty-six weeks ended February 25, 2017 and February 27, 2016, the revenue growth in our operations, as well as the change in our costs as mentioned above, resulted in the following changes in our income from operations:
 
 	 	February 25,	 	 	February 27,	 	 	Dollar	 	 	Percent	 	
(In thousands, except percentages)	 	2017	 	 	2016	 	 	Change	 	 	Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Core Laundry Operations	 	$	76,732	 	 	$	89,101	 	 	$	(12,369	)	 	 	-13.9	%	
Specialty Garments	 	 	3,246	 	 	 	5,432	 	 	 	(2,186	)	 	 	-40.2	%	
First Aid	 	 	1,925	 	 	 	1,954	 	 	 	(29	)	 	 	-1.5	%	
Consolidated total	 	$	81,903	 	 	$	96,487	 	 	$	(14,584	)	 	 	-15.1	%	
 
Other Income 
 
Other income, which includes interest expense, interest income and foreign currency exchange loss, was $1.5 million of income for the twenty-six weeks ended February 25, 2017 as compared to $0.9 million of income for the twenty-six weeks ended February 27, 2016. This change was primarily due to interest income of $2.3 million during the twenty-six weeks ended February 25, 2017 compared to interest income of $1.7 million during the twenty-six weeks ended February 27, 2016.
 
Provision for Income Taxes
 
Our effective income tax rate increased slightly to 39.2% for the twenty-six weeks ended February 25, 2017 compared to 39.0% for the twenty-six weeks ended February 27, 2016 due to a change in the mix of our jurisdictional earnings.
 
Liquidity and Capital Resources
 
General 
 
Cash and cash equivalents totaled $313.5 million as of February 25, 2017, a decrease of $50.3 million from August 27, 2016 when the amount totaled $363.8 million. Our working capital was $573.2 million as of February 25, 2017 compared to $625.0 million as of August 27, 2016. On September 19, 2016, we expended $119.9 million in cash upon the closing of our acquisition of Arrow. We generated $114.7 million and $207.6 million in cash from operating activities in the twenty-six weeks ended February 25, 2017 and the full fiscal year ended August 27, 2016, respectively. We believe that our current cash and cash equivalent 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.

 

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We have accumulated $57.5 million in cash outside the United States that is expected to be invested indefinitely in our foreign subsidiaries. If these funds were distributed to the U.S. in the form of dividends, we would likely be subject to additional U.S. income taxes. However, we do not believe that any resulting taxes payable would have a material impact on our liquidity.
 
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. 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. 
 
Cash Provided by Operating Activities
 
Cash provided by operating activities for the twenty-six weeks ended February 25, 2017 was $114.7 million, an increase of $9.2 million from the comparable period in the prior year when cash provided by operating activities was $105.5 million. The increased cash provided by operating activities was primarily related to a settlement of environmental litigation we entered into in the fourth quarter of fiscal 2016 which resulted in a gain of $15.9 million booked as a reduction of selling and administrative expenses. The cash received in September 2016 on account of this gain was $12.5 million. The increase in cash provided by operating activities was also related to a decrease in prepaid and accrued income taxes due to the timing of payments. This positive impact on net cash provided by operating activities was partially offset by lower net income during the twenty-six weeks ended February 25, 2017.
 
Cash Used in Investing Activities
 
Cash used in investing activities for the twenty-six weeks ended February 25, 2017 was $163.5 million, an increase of $119.5 million from the comparable period in the prior year when cash used in investing activities was $44.0 million. The net increase in cash used in investing activities was primarily the result of our acquisition of Arrow which was completed on September 19, 2016 for an aggregate purchase price of approximately $119.9 million.
 
Cash Used in Financing Activities
 
Cash used in financing activities for the twenty-six weeks ended February 25, 2017 was $0.7 million compared to cash used in financing activities of $1.5 million for the twenty-six weeks ended February 27, 2016. This change was primarily due to a decrease in payments on loans. As of February 25, 2017 we had no long-term debt outstanding.
 
Long-Term Debt and Borrowing Capacity
 
On April 11, 2016, we entered into an amended and restated $250.0 million unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks, which matures on April 11, 2021. The Credit Agreement amended and restated our prior $250.0 million revolving credit agreement, which was scheduled to mature on May 4, 2016. 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. At February 25, 2017, 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 February 25, 2017, we had no outstanding borrowings and had outstanding letters of credit amounting to $66.2 million, leaving $183.8 million available for borrowing under the Credit Agreement.
 
As of February 25, 2017, we were in compliance with all covenants under the Credit Agreement.
 
Derivative Instruments and Hedging Activities
 
In January 2015, we entered into sixteen forward contracts to exchange Canadian dollars (“CAD”) for U.S. dollars at fixed exchange rates in order to manage its exposure related to certain forecasted CAD denominated sales of one of its 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 2015 and continuing through the second fiscal quarter of 2019. In total, we will sell approximately 31.0 million CAD at an average Canadian-dollar exchange rate of 0.7825 over these quarterly periods. We concluded that the forward contracts met the criteria to qualify as a cash flow hedge under US GAAP. Accordingly, we have reflected all changes in the fair value of the forward contracts in accumulated other comprehensive (loss) income, a component of shareholders’ equity. Upon the maturity of each foreign exchange forward contract, the gain or loss on the contract will be recorded as an adjustment to revenues.
 
As of February 25, 2017, we had forward contracts with a notional value of approximately 13.8 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 gain in accumulated other comprehensive (loss) income of $0.1 million, which was recorded net of tax. During the twenty-six weeks ended February 25, 2017, we reclassified $0.1 million from accumulated other comprehensive (loss) income to revenue, related to the derivative financial instruments. The gain in accumulated other comprehensive (loss) income as of February 25, 2017 is expected to be reclassified to revenues prior to its maturity on February 22, 2019.

 

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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 waste and other substances. In particular, industrial laundries 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. In the past, 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.
 
US 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, management’s 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 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, three sites related to former operations in Williamstown, Vermont, as well as sites located in Goldsboro, North Carolina, Wilmington, North Carolina, Landover, Maryland and Syracuse, New York.
 
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 EPA's comments. We have implemented mitigation measures and continue to monitor environmental conditions at the Somerville, Massachusetts site. In addition, 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 our Somerville site. This station is part of a planned extension of the transit system. Due to cost projections of the extension which now substantially exceed original estimates, the local transit authority has placed the extension on hold pending its redesign and receipt of related state and federal approvals and funding increases. 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 have 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.
 
During the fourth quarter of fiscal 2016, we entered into a settlement related to environmental litigation which resulted in a $15.9 million gain that was recorded as a reduction of selling and administrative expenses. This gain consisted of amounts previously received but not recognized into income as well as amounts that the Company received in September 2016.
 
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 US GAAP, our accruals reflect 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. Where 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 February 25, 2017, the risk-free interest rates we utilized ranged from 2.3% to 3.0%.

 

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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 twenty-six weeks ended February 25, 2017 were as follows (in thousands):
 
 	 	February 25, 2017	 	
Beginning balance as of August 27, 2016	 	$	26,748	 	
Costs incurred for which reserves have been provided	 	 	(1,020	)	
Insurance proceeds	 	 	69	 	
Interest accretion	 	 	300	 	
Change in discount rates	 	 	(1,434	)	
 	 	 	 	 	
Balance as of February 25, 2017	 	$	24,663	 	
 
Anticipated payments and insurance proceeds relating to currently identified environmental remediation liabilities as of February 25, 2017, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below.
 
(In thousands)	 	2017	 	 	2018	 	 	2019	 	 	2020	 	 	2021	 	 	Thereafter	 	 	Total	 	
Estimated costs – current dollars	 	$	8,653	 	 	$	1,859	 	 	$	1,492	 	 	$	1,284	 	 	$	1,172	 	 	$	12,392	 	 	$	26,852	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Estimated insurance proceeds	 	 	(104	)	 	 	(159	)	 	 	(173	)	 	 	(159	)	 	 	(173	)	 	 	(1,130	)	 	 	(1,898	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net anticipated costs	 	$	8,549	 	 	$	1,700	 	 	$	1,319	 	 	$	1,125	 	 	$	999	 	 	$	11,262	 	 	$	24,954	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Effect of inflation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	7,556	 	
Effect of discounting	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(7,847	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of February 25, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	24,663	 	
 
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 three 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 February 25, 2017, the balance in this escrow account, which is held in a trust and is not recorded in our Consolidated Balance Sheet, was approximately $3.4 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 (“NRC”), 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 February 25, 2017, 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.

 

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Seasonality
 
Historically, our revenues and operating results have varied from quarter to quarter and are expected to continue to fluctuate in the future. These fluctuations have been due to a number of factors, including: general economic conditions in our markets; the timing of acquisitions and of commencing start-up operations and related costs; our effectiveness in integrating acquired businesses and start-up operations; the timing of nuclear plant outages; capital expenditures; seasonal rental and purchasing patterns of our customers; and price changes in response to competitive factors. In addition, our operating results historically have been lower during the second and fourth fiscal quarters than during the other quarters of the fiscal year. The operating results for any historical quarter are not necessarily indicative of the results to be expected for an entire fiscal year or any other interim periods.
 
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 February 25, 2017, 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 27, 2016.
 
Recent Accounting Pronouncements
 
In May 2014, the FASB issued updated accounting guidance for revenue recognition, which they have 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. This guidance will be effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and will be required to be applied retrospectively, with early adoption permitted. Accordingly, the standard will be effective for us on August 26, 2018. We are currently evaluating the adoption method we will apply and the impact that this guidance will have on our financial statements and related disclosures.
 
In February 2015, the FASB issued updated accounting guidance on consolidation requirements. This update changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Accordingly, the standard became effective for us on August 28, 2016. We adopted this guidance and the adoption did not have a material impact on our financial statements.
 
In April 2015, the FASB issued updated guidance on the presentation of debt issuance costs. This update changes the guidance with respect to presenting such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Accordingly, the standard became effective for the Company on August 28, 2016. We adopted this guidance and the adoption did not have a material impact on our financial statements.
 
In July 2015, the FASB issued updated guidance which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value. Subsequent measurement is unchanged for inventory measured using last-in, first-out or the retail inventory method. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, and is to be applied prospectively, with early adoption permitted. Accordingly, the standard will be effective for us on August 27, 2017. We expect that adoption of this guidance will not have a material impact on our financial statements.
 
In September 2015, the FASB issued updated guidance that requires an entity to recognize adjustments made to provisional amounts that are identified in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, and is to be applied prospectively, with early adoption permitted. Accordingly, the standard became effective for us on August 28, 2016. We adopted this guidance and the adoption did not have a material impact on our financial statements.
 
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 standard will be effective for us on August 26, 2018. We expect that adoption of this guidance will not have a material impact on our financial statements.
 
In February 2016, the FASB issued updated guidance that improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Accordingly, the standard will be effective for us on September 1, 2019. We are currently evaluating the impact that this guidance will have on our financial statements and related disclosures.

 

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In March 2016, the FASB issued updated guidance that simplifies several aspects of accounting for share-based payment transactions. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and, depending on the amendment, must be applied using a prospective transition method, retrospective transition method, modified retrospective transition method, prospectively and/or retroactively, with early adoption permitted. Accordingly, the standard will be effective for us on August 27, 2017. We are currently evaluating the impact that this guidance will have on our financial statements and related disclosures.
 
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 will be effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and will be required to be applied retrospectively, with early adoption permitted. Accordingly, the standard will be effective for us on August 26, 2018. We are currently evaluating the impact that this guidance will have on our 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 will be effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and will be required to be applied on a modified retrospective basis, with early adoption permitted. Accordingly, the standard will be effective for us on August 26, 2018. We are currently evaluating the impact that this guidance will have on our financial statements and related disclosures.
 
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 effect 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 7.4 % and 7.3% of total consolidated revenues for the thirteen and twenty-six weeks ended February 25, 2017, respectively, and total assets denominated in currencies other than the U.S. dollar represented approximately 7.9% and 8.2% of total consolidated assets as of February 25, 2017 and August 27, 2016, respectively. If exchange rates had increased or decreased by 10% from the actual rates in effect during the thirteen and twenty-six weeks ended and as of February 25, 2017, our revenues would have increased or decreased by approximately $2.9 million and $5.7 million, respectively, and assets as of February 25, 2017 would have increased or decreased by approximately $13.9 million.
 
In January 2015, we entered into sixteen forward contracts to exchange Canadian dollars (“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 2015 and continuing through the second fiscal quarter of 2019. In total, we will sell approximately 31.0 million CAD at an average Canadian-dollar exchange rate of 0.7825 over these quarterly periods. We concluded that the forward contracts met the criteria to qualify as a cash flow hedge under US GAAP. Accordingly, we have reflected all changes in the fair value of the forward contracts in accumulated other comprehensive (loss) income, a component of shareholders’ equity. Upon the maturity of each foreign exchange forward contract, the gain or loss on the contract will be recorded as an adjustment to revenues.
 
As of February 25, 2017, we had forward contracts with a notional value of approximately 13.8 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 gain in accumulated other comprehensive (loss) income of $0.1 million, which was recorded net of tax. During the twenty-six weeks ended February 25, 2017, we reclassified $0.1 million from accumulated other comprehensive (loss) income to revenue, related to the derivative financial instruments. The gain in accumulated other comprehensive (loss) income as of February 25, 2017 is expected to be reclassified to revenues prior to its maturity on February 22, 2019.
 
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 our foreign subsidiaries functional currencies, 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) expense. The intercompany payables and receivables are denominated in Canadian dollars, euros, British pounds, Mexican pesos and Nicaraguan cordobas. During the thirteen weeks ended February 25, 2017, transaction gains included in other (income) expense were approximately $0.1 million. During the twenty-six weeks ended February 25, 2017, transaction losses included in other (income) expense were approximately $0.4 million. If exchange rates had increased or decreased by 10% during the thirteen and twenty-six weeks ended February 25, 2017, we would have recognized exchange gains or losses of approximately $0.9 million and $1.0 million, respectively.

 

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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 second quarter of fiscal year 2017 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 11, “Commitments and Contingencies,” to the Consolidated Financial Statements, as well as Item 1A. Risk Factors below, for further discussion.
 
ITEM 1A. RISK FACTORS
 
To our knowledge, there have been no material changes in the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 27, 2016. In addition to the other information set forth in this Quarterly Report on Form 10-Q, 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 27, 2016, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not Applicable.
 
ITEM 5. OTHER INFORMATION
 
None.

 

Table of Contents

 
ITEM 6. EXHIBITS
 
*	 	10.1 UniFirst Corporation Unfunded Supplemental Executive Retirement Plan, as restated January 11, 2017, to incorporate and consolidate all previous amendments thereto	
 	 	 	
*	 	31.1 Rule 13a-14(a)/15d-14(a) Certification of Ronald D. Croatti	
 	
*	 	31.2 Rule 13a-14(a)/15d-14(a) Certification of Steven S. Sintros	
 	
**	 	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	
 	
**	 	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	
 
*	 	101 The following materials from UniFirst Corporation’s Quarterly Report on Form 10-Q for the quarter ended February 25, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.	

*	 	Filed herewith	
 	 	
**	 	Furnished herewith	

 

Table of Contents

 
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	
 	 	 	 	
 	April 6, 2017	By:	/s/ Ronald D. Croatti
Ronald D. Croatti
President and Chief Executive Officer	
 	 	 	 	
 	April 6, 2017	By:	/s/ Steven S. Sintros
Steven S. Sintros
Senior Vice President and Chief Financial Officer	

 

Table of Contents

 
EXHIBIT INDEX
 
*	10.1 UniFirst Corporation Unfunded Supplemental Executive Retirement Plan, as restated January 11, 2017, to incorporate and consolidate all previous amendments thereto	
 	 	
*	31.1 Rule 13a-14(a)/15d-14(a) Certification of Ronald D. Croatti	
 	
*	31.2 Rule 13a-14(a)/15d-14(a) Certification of Steven S. Sintros	
 	
**	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	
 	
**	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	
 
*	101 The following materials from UniFirst Corporation’s Quarterly Report on Form 10-Q for the quarter ended February 25, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.	

*	Filed herewith	
 	 	
**	Furnished herewith	

Exhibit 10.1

UNIFIRST CORPORATION
UNFUNDED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
 
TABLE OF CONTENTS

Section 1	Definitions	1	
 	 	 	
Section 2	Eligibility To Participate	4	
 	 	 	
2.1	Criteria for Eligibility	4	
2.2	Duration of Participation	4	
 	 	 	
Section 3	Eligibility For Benefits And Amount To Be Paid	4	
 	 	 	
3.1	Eligibility	4	
3.2	Normal and Late Retirement Benefit	4	
3.3	Retirements prior to September 1, 2005	4	
3.4	Normal and Alternate Form of Benefit	4	
3.5	Forfeiture for Separation from Service before Normal Retirement Date	5	
3.6	Change in Control	5	
3.7	Disability	5	
3.8	Death of Participant	6	
3.9	Acceleration of Benefits	6	
3.1	Delay of Payment for Key Employees	6	
3.11	Termination of Employment	6	
3.12	Non-Competition After Termination of Employment and General Release	6	
 	 	 	
Section 4	Funding	7	
 	 	 	
Section 5	Nonexistence Of Trust; Subjection To General Creditors	7	
 	 	 	
5.1	Nonexistence of Trust	7	
5.2	Subject to General Creditors	7	
 	 	 	
Section 6	Administration Of The Plan	7	
 	 	 	
6.1	Administration by the Retirement Committee	7	
6.2	General Powers of Administration	7	
 	 	 	
Section 7	Amendment And Termination	7	
 	 	 	
7.1	Rights Reserved	7	
7.2	Participant Protection	8	
 	 	 	
Section 8	General Provisions	8	
 	 	 	
8.1	No Guaranty of Benefits	8	
8.2	No enlargement of Employee Rights	8	
8.3	Spendthrift Provision	8	
8.4	Incapacity of Recipient	8	
8.5	Corporate Successors	8	
8.6	Unclaimed Benefit	9	
8.7	Limitations on Liability	9	
8.8	Gender	9	
8.9	Applicable Law	9	

 

 
 
UNIFIRST CORPORATION
UNFUNDED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
 
UniFirst Corporation (the “Company”) maintains the UniFirst Corporation Unfunded Supplemental Executive Retirement Plan (the “Plan) for the purpose of attracting, retaining, and motivating qualified management employees. The Plan is restated in its entirety for administrative convenience. It includes the Plan as amended and restated as of March 8, 2006, and further incorporates the Amendments dated January 8, 2008; December 23, 2008; and December 4, 2012.
 
The right to amend the Plan further is expressly reserved, including for purposes of Internal Revenue Code (“Code”) Section 409A (“Section 409A”) compliance
 
Section 1	Definitions	
 
When used in this Plan, the following words have the meanings below unless the context clearly indicates otherwise:
 
“Actuarial Equivalent” means a benefit or payment of equivalent value, based on the following interest and mortality factors:
 
(1) for determination of equivalencies for alternate forms of pension payments in Section 3.4: 1994 Uninsured Pensioner Mortality Table and 6% interest; and
 
(2) for purposes of determining lump sums for Change in Control payments under Section 3.6: the interest and mortality tables under Code Section 417(e) for purposes of determining a lump sum distribution under a qualified pension plan, such factors and rates to be those in effect on the first day of the third month preceding payment or, if a greater lump sum would be produced, those factors and rates in effect on the first day of the third month preceding the Change in Control.
 
"Affiliate" means any subsidiary of the Company.
 
"Beneficiary" means the person or persons designated in writing by the Participant, including contingent beneficiaries. The designation must be received by the Retirement Committee, which may reject any designation it determines to be inconsistent with the Plan or applicable law. If no such designation has been received prior to death, payment shall be made to the Participant's then living spouse and, if the Participant is not survived by a spouse, payment shall be made to the then living children (with  per stirpes  payment to the issue of any predeceased child), and, if none, to the estate of the Participant.
 
“Board” means the Board of Directors of the Company, which has delegated responsibilities for this Plan to a Compensation Committee.
 
"Chairman" means the Chairman of the Board of Directors.
 
"Change in Control" shall be an event or series of events which is considered to be a change in ownership or effective control under Section 409A. Special rules in Guidance, such as those related to multiple Change in Control events, persons acting “as a group”, additions to controlling interests, and stock ownership attribution are all incorporated by reference.
 
(a)     It is intended, except as otherwise provided in this definition (including clause (c)), that any event deemed a “Change in Control” under Section 409A will be deemed a “Change in Control” under this Plan. No event which is not considered a Change in Control under Section 409A will be treated as a Change in Control under this Plan.

 

 
 
(b)      Subject to the foregoing, a Change in Control will be deemed to be any of the following:
 
(1)     A change in ownership of Company stock which constitutes more than 50% of the total fair market value or total voting power of the Company, as described in Guidance.
 
(2)     A change in effective control of the Company as described in Guidance, meaning that any one or more persons “acting as a group”, acquires during a 12 month period stock constituting 35 percent or more of the total voting power of the Company, or that a majority of the Board of Directors is replaced during any 12 month period and their appointment or election is not endorsed by the majority of the members serving immediately prior to the appointment or election.
 
(3)     A change in ownership of a substantial portion of Company Assets as described in Guidance, meaning a transfer to unrelated buyers of assets that have a total gross fair market value of at least 40% of the gross value of all Company assets, disregarding liabilities.
 
(c)     Notwithstanding any provision to the contrary, no change of direct or indirect ownership of Company stock (whether voting or other stock) among any of the persons who control the senior voting stock of the Company as of the Effective Date, including their descendants and spouses or any trust or other entity holding shares on their behalf, will be considered a Change in Control under this Plan.
 
(d)     A Change in Control with respect to an Affiliated Company will not be a Change in Control for persons who do not render services to that Affiliated Company at the time of the Change In Control Event. The determination of whether a Change in Control has occurred will be made by the public accounting firm serving as auditors to the Company as of the date immediately preceding any alleged Change in Control. If that firm declines to express a written opinion, the Chairman of the Board, as of the date immediately preceding any alleged Change in Control, shall designate an independent law firm in Boston, Massachusetts, which is not counsel to the Company or to an Affiliated Company, to make the determination.
 
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
 
 “Company" means UniFirst Corporation, a Massachusetts corporation and any successor thereto.
 
“Disability” means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration, based solely on the findings of the Social Security Administration. The date as of which the Social Security Administration finds the Disability condition to exist will be determinative for this Plan.
 
"Effective Date" means, for this restated document, January 1, 2005, except where any other effective date is specified herein (such as in Section 3.3) or if a different date is required by Guidance. Unless specifically stated otherwise, the rights of or with respect to any Participant will be governed by the terms of the Plan as in effect at the date of the Participant’s Separation from Service.
 
“Employee” means a common law Employee of the Company or an Affiliate. Service with an Affiliate prior to its acquisition by the Company will not be credited unless specifically approved in writing by the Committee.
 
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
 
"Final Average Earnings" means the Participant's annual average base earnings, exclusive of bonuses, commissions, fringe benefits, and reimbursed expenses, for the last three (3) years of fulltime employment (or, if shorter than three (3) years, over the actual period of fulltime employment) prior to the Participant's Retirement Date. Base earnings shall be increased by the amount of any elective salary deferrals to a Section 401(k) plan or pursuant to a Section 125 arrangement.
 
“Guidance” refers to regulations, notices, and rulings issued by the Treasury or the Internal Revenue Service, as in effect from time to time, interpreting Section 409A and, when relevant, other statutory provisions. Guidance also refers to other governmental regulations, rulings, and notices, when relevant and applicable.

2

 
 
“Key Employee” means a “key employee” as defined in Code Section 416(i) without regard to paragraph 5 thereof, and as further described in Code Section 409A(a)(2)(B)(i) and Guidance.
 
“Normal Retirement Date” is the first day of the month in which a Participant may retire under the Social Security Act with no reduction in his social security benefits, as set forth in Schedule A. In the case of any Participant who receives Social Security benefits under the system of Canada or any other country in which he is employed by UniFirst, the Normal Retirement Date shall be computed as if he or she was a Participant in the US Social Security System.
 
"Participant" means any Employee of the Company who meets the eligibility requirements and is designated as a Participant, as set forth in Section 2 .
 
"Plan" means the UniFirst Corporation Supplemental Executive Retirement Plan.
 
"Plan Benefit" means the benefit earned at any point in time and calculated in accordance with Section 3.
 
"Plan Year" means the same fiscal period as the fiscal year of the Company.
 
“Primary Social Security Benefit” means the annual primary old age insurance amount provided under the Social Security Act which the Participant would be entitled to receive if he retired at his Normal Retirement Date. This amount will not be affected by amendments to the Social Security Act after his Separation from Service. In the case of any Participant who receives Social Security benefits under the system of Canada or any other country in which he is employed by UniFirst, the Primary Social Security Benefit offset in this Plan shall be computed as if he or she was employed in the United States throughout his or her career and was a full Participant in the US Social Security System.
 
“Retirement Committee” means a committee appointed by the Compensation Committee to administer the Plan. Unless other persons are designated, the Retirement Committee shall consist of those persons serving as the Chief Executive Officer and the Chief Financial Officer.
 
"Retirement Date" means the date on which occurs a Participant’s Separation From Service after Normal Retirement Date, or within three years following a Change in Control, as described in Section 3.6.
 
“Section 409A” means Section 409A of the Code, as interpreted in Guidance.
 
“Select Group” means a group of management or highly compensated Employees, as determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
 
“Separation from Service” shall be determined in accordance with Section 409A, and shall generally mean a “substantial” discontinuance of service for the Company, its Affiliates, and any other entity with which it must be aggregated under Section 409A for this purpose. A discontinuance of service will be “substantial”, and a separation from service will have occurred, as of the earlier of: .
 
(1)     the date that employment terminates, or
 
(2)     the date as of which the Company and the Employee reasonably anticipate the level of future services to be provided by the Employee (as an employee or contractor) to be less than 50% of the average level of bona fide services during the immediately preceding 36 months.
 
Separation from Service, as is the case with any other definition or rule in this Plan, shall be interpreted and administered so that a “failure” under Section 409A does not occur
 
“Year of Service” shall mean a 12 consecutive month period during which an Employee is employed by the Company or an Affiliate or on approved absence. Credit will be granted for fractional Years of Service, based on credited days in any 12 month period divided by 365. Service with a prior employer will be granted, but only if the prior employer (or a division thereof) was acquired by the Company, and only if the Retirement Committee grants its specific, written approval.

3

 
 
Section 2	Eligibility To Participate	
 
2.1     Criteria for Eligibility
 
An Employee of the Company, or its Affiliates, is eligible to become a Participant in the Plan, provided that the Employee is a member of a Select Group, and that the Retirement Committee votes that the employee may participate.
 
2.2     Duration of Participation
 
At any time, the Retirement Committee may determine to discontinue credit for future service of a Participant, but shall not reduce the Plan Benefit earned as of that date. A Participant shall be considered a Participant until all benefits to which he or his Beneficiary is entitled under the Plan have been paid.
 
Section 3	Eligibility For Benefits And Amount To Be Paid	
 
3.1     Eligibility
 
No Participant will receive a benefit unless he qualifies for a benefit under this Section 3.
 
3.2     Normal and Late Retirement Benefit
 
(a)     The Plan Benefit of a Participant who has a Separation from Service on or after the later of January 1, 2008 or his Normal Retirement Date shall equal (1) less (2) where:
 
(1)     equals one and one third (1& 1/3 %) percent of his Final Average Earnings multiplied by his Years of Service, limited to 30 such Years, and
 
(2)     equals three and one third (3 & 1/3 %) percent of his Primary Social Security Benefit multiplied by his Years of Service, limited to 30 such Years .
 
(b)     A Participant who retires after his Normal Retirement Date will have his Plan Benefit computed based on Final Average Earnings as of his actual Retirement Date and on his Years of Service as of such date, without credit for more than 30 such Years.
 
3.3     Retirements prior to September 1, 2005
 
Participants who have retired prior to the Effective Date will continue to receive benefits, if any, as provided in the Plan in the restatement dated July 12, 2001 and not as provided under the benefit formula and payment modes specified in this restated Plan. 
 
3.4     Normal and Alternate Form of Benefit
 
(a)     The normal form of the Plan Benefit formula provided in Section 3.2(a) shall be a pension payable for a Participant’s lifetime with a guarantee, in the event of the Participant’s death prior to receiving 12 years of payments, that payments for the balance of the 12 year period will be made to a designated Beneficiary. The Beneficiary for the 12 year certain payments under this Section 3.4(a) may be changed at any time prior to the completion of the 12 year period, provided that the change is in writing and submitted to the Retirement Committee before the Participant’s death. If the Beneficiary predeceases the Participant, and if a new Beneficiary is not selected prior to the death of the Participant, payments for the balance of the 12 year period will be to the estate of the Participant.

4

 
 
(b)     In lieu of receiving payments in the normal form, a Participant may elect a lifetime pension with a 100% survivor pension for the lifetime of a surviving spouse, with payments stopping in the month of the final death. This alternate form of pension shall be the Actuarial Equivalent of the normal form in Section 3.4(a).
 
(c)      The election of form of payment must be made prior to Retirement and in a manner consistent with Section 409A.
 
(d)     Payment shall commence as soon as practicable after the earliest permitted payment event specified in the Plan, subject to a 6 month delay of payment for Key Employees as specified in Section 3.10. In the event that a Participant is requested to execute a release of claims under Section 3.12(b) prior to payment, the following special rules shall apply, retroactive to payment events occurring on or after April 1, 2011:
 
(i)     If the 60 day period following the payment event overlaps two calendar years, the 60th day following the payment event shall be the designated payment date.
 
(ii)     Payments owed to the Participant in the first calendar year of the overlapping 60 day period shall be paid to the Participant, without interest, in the second calendar year of the 60 day overlapping period as soon as practicable, but not earlier than the 31 st  day of the 60 day overlapping period.
 
Payments shall be made in the same payroll mode as in current use as of the date of this amendment for payment of base salaries, which is biweekly.
 
3.5     Forfeiture for Separation from Service before Normal Retirement Date
 
Except in the case of Change in Control payments described in Section 3.6, or Death payments described in Section 3.8, the Plan does not provide for payments in the event a Participant has a Separation from Service prior to Normal Retirement Date. However, the Retirement Committee, in it sole discretion, may waive this forfeiture requirement, in whole or in part, with respect to any Participant who has a Separation from Service prior to Normal Retirement Date. In no event will the grant of one or more waivers by the Committee be considered to be binding precedent and justification for a Participant’s claim that a waiver must be granted in the event of Separation from Service prior to Normal Retirement Date.
 
3.6     Change in Control
 
(a)     Within ninety (90) days following a Change in Control, Retired Participants, and any Beneficiary in pay status of a deceased Retired Participant, shall receive a lump sum payment equal to the Actuarial Equivalent of the Plan Benefit based on the form of payment elected under Section 3.4.
 
(b)     Within ninety (90) days following a Change in Control, all active Participants as of the day prior to the Change in Control shall receive a lump sum payment equal to the Actuarial Equivalent of the Plan Benefit calculated under Section 3.2, based on Years of Service and Final Average Earnings at the date of the Change in Control, and the following assumptions: (A) the Participant had retired at the Social Security Retirement Age specified in Schedule A, and (B) the Primary Social Security Benefit is the maximum Primary Social Security Benefit for a person who has attained Social Security Retirement Age at that date.
 
3.7     Disability
 
Any Participant who has a Separation from Service due to Disability will have a non-forfeitable interest in his Plan Benefit. The Plan Benefit shall be payable when the Participant reaches Normal Retirement Date, not at his Disability Date, and shall be payable according to the pension formula in Section 3.2(a), based on Years of Service and Final Average Earnings at the date of Separation from Service and the following assumptions: (A) the Participant had retired at the Social Security Retirement Age specified in Schedule A, and (B) the Primary Social Security Benefit is the maximum Primary Social Security Benefit for a person who has attained Social Security Retirement Age at that date. The Participant may select the mode of payments under Section 3.4.

5

 
 
3.8     Death of Participant
 
If a Participant dies while actively employed by the Company or after becoming eligible for a Normal Retirement Benefit, his Beneficiary, if any, shall be entitled to a salary continuation benefit determined under subsection (a) or (b), whichever is applicable.
 
(a)     If such Participant has not yet commenced to receive payments under the Plan, the pre-retirement death benefit for his Beneficiary will be equal to the 12 year pension which would have been payable under Section 3.2, based on the Years of Service and Final Average Earnings at the date of death and the following assumptions: (A) the Participant had retired at the Social Security Retirement Age specified in Schedule A, and (B) the Primary Social Security Benefit is the maximum Primary Social Security Benefit for a person who has attained Social Security Retirement Age at that date.
 
(b)     If the Participant has commenced receiving payments, the death benefit, if any, shall consist of any remaining amounts due to the surviving spouse or Beneficiary pursuant to the form of payment elected in Section 3.4.
 
3.9     Acceleration of Benefits
 
The Retirement Committee shall have the discretion to accelerate any annual payments due the Participant or Beneficiary, but only if such acceleration would be permissible under Section 409A(a)(3). The value of accelerated payments shall be based on the factors specified in the definition of Actuarial Equivalent.
 
3.10     Delay of Payment for Key Employees
 
For any Participant who is a Key Employee, payment shall be deferred after separation from service for 6 months, but only to the extent required by Code Section 409A(a)(2)(B). At the expiration of the applicable extension period, deferred payments shall be paid in a single payment. The determination of Key Employee status for this purpose shall be determined under the default rules for identifying specified employees and as set forth in Guidance, subject to prospective change in method, if adopted by the Retirement Committee and consistent with Guidance.
 
3.11     Termination of Employment
 
If a Participant's employment with the Company is terminated and neither the Participant nor his Beneficiary qualifies for benefits under any of the preceding paragraphs of this Section 3, neither the Participant nor his Beneficiary nor any other person shall have a right to any benefit from the Plan with respect to such Participant.
 
3.12     Non-Competition After Termination of Employment and General Release
 
(a)     Each Participant expressly agrees that, as consideration for the benefit provided herein and as a condition to the performance by the Company of its obligations hereunder, for a two (2) year period from and after the termination of his employment with the Company for any reason other than his death while employed by the Company, and throughout the period following his retirement from the active service of the Company during which the Company is obligated to make payments to him, as provided herein, he will not, without the prior written consent of the Company or any Affiliate, engage in, become interested, directly or indirectly, as a sole proprietor, as a partner in a partnership, or as a substantial shareholder in a corporation, nor become associated with, in the capacity of an Employee, director, officer, principal, agent, trustee or in any other capacity whatsoever, any enterprise conducted in the trading area of business of the Company or any Affiliate which enterprise is, or may deemed to be, competitive with any business carried on by the Company or any Affiliate as of the date of the termination of the Participant's employment or his retirement.
 
(b)     Prior to receipt of Payments under this Plan, the recipient of payments may be required to execute a release of any and all claims against the Company, its officers, directors, employees, and affiliates. A release may not be required unless it is provided to the Participant (or Beneficiary in the event of death) no later than a date which permits adequate time for its consideration and (if applicable) rescission within the 60 days following the applicable payment event under this Plan. All benefits under this Plan will be forfeited if a release which has been timely provided for consideration is not signed and effective on or before the earlier of (i) the time specified in the release, or (ii) the 60 th  day following the payment event. If a release has been required, and if the 60 day period following a payment event overlaps a calendar year, the special payment rule in section 3.4(d) shall apply.

6

 
 
(c)     In the event of any breach by any Participant of the agreements and covenants contained herein, all rights of the Participant and his Beneficiary under the Plan, including rights to further payments hereunder, shall thereupon terminate.
 
Section 4	Funding	
 
This Plan shall be unfunded, as such term is used in Revenue Ruling 60-3 1, and shall constitute a "top hat plan", as such term is commonly used to describe a plan referred to in Sections 201(2), 301(a) (3) and 401(a) (1) of the Employee Retirement Income Security Act of 1974, as amended. Any question of Plan interpretation shall be resolved in a manner which is consistent with the foregoing definition.
 
Section 5	Nonexistence Of Trust; Subjection To General Creditors	
 
5.1     Nonexistence of Trust
 
Nothing contained in the Plan and no action taken pursuant to the provisions of the Plan shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and such Participant, their successors, or any other person.
 
5.2     Subject to General Creditors
 
Any benefit under the provisions of the Plan shall continue for all purposes to be a part of the Company's general funds and to be subject to the claims of the Company's general creditors. To the extent that a Participant acquires a right to receive payments from the Company under this Plan, such right shall not be greater than the right of any unsecured general creditor of the Company.
 
Section 6	Administration Of The Plan	
 
6.1     Administration by the Retirement Committee
 
Unless otherwise directed by the Board or its Compensation Committee, the Retirement Committee shall consist of the Chairman and the Chief Financial Officer of the Company. The Retirement Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Retirement Committee shall establish a claim procedure (which may be attached as a schedule to this Plan) which meets the requirements of Section 503 of the Employee Retirement Income Security Act of 1974, as amended, and the regulations issued pursuant thereto.
 
6.2     General Powers of Administration
 
The Retirement Committee and/or the Company shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Retirement Committee or the Company with respect to the Plan.
 
Section 7	Amendment And Termination	
 
7.1     Rights Reserved
 
The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole opinion of the Compensation Committee, such amendment or termination is advisable. The Retirement Committee may amend the Plan without prior approval of the Compensation Committee if the purpose of the amendment is to comply with Section 409A or for administrative convenience or to reconcile any ambiguities. However, any amendment which would change the amount of benefits payable under the Plan requires Compensation Committee approval.

7

 
 
7.2     Participant Protection
 
(a)     No amendment or termination of the Plan shall:
 
(1)     directly or indirectly deprive any Participant who has retired or Beneficiary of all or any portion of any Plan Benefit payment of which has commenced prior to the effective date of the action amending or terminating the Plan, or
 
(2)     reduce the benefit earned by any Participant with respect to his Final Average Earnings and Years of Service as of the last day of the Plan Year preceding the amendment or termination, or change the actuarial factors in the definition of Actuarial Equivalent with respect to any Plan Benefit at the date of the change.
 
Section 8	General Provisions	
 
8.1     No Guaranty of Benefits
 
Nothing contained in the Plan shall constitute a guaranty by the Company or any other person or entity that the assets of the Company will be sufficient to pay any benefit hereunder.
 
8.2     No enlargement of Employee Rights
 
No Participant shall have any right to receive a distribution or contributions made under the Plan except in accordance with the terms of the Plan. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company.
 
8.3     Spendthrift Provision
 
No interest of any person or entity in, or right to receive a distribution under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a distribution be taken, either voluntarily or involuntarily for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings.
 
8.4     Incapacity of Recipient
 
If any person entitled to a distribution under the Plan is deemed by the Company to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such payment or any part thereof to be made to the Participant's Beneficiary.
 
8.5     Corporate Successors
 
The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions hereof.

8

 
 
8.6     Unclaimed Benefit
 
Each Participant shall keep the Company informed of his current address and the current address of his Beneficiary. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within two (2) years after the date on which payment to such Participant may first be made, payment may be made as though such Participant had died at the end of such two-year period. If, within one additional year after such two-year period has elapsed, or, within two years after the actual death of a Participant, the Company is unable to locate any Beneficiary of such Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Beneficiary, and such benefit shall be irrevocably forfeited.
 
8.7     Limitations on Liability
 
Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as Employee or agent of the Company shall be liable to any Participant, former Participant or other person for any claim, loss, liability or expense incurred in connection with the Plan.
 
8.8     Gender
 
The masculine shall include the feminine, and the singular shall include the plural, as the context dictates.
 
8.9     Applicable Law
 
The Plan shall be governed by and construed in accordance with ERISA. To the extent that state law is referred to, the law shall be that of the Commonwealth of Massachusetts. The Plan shall be interpreted at all times in a manner consistent with Section 409A and Guidance.
 
January 11, 2017
 
 	By: /s/ Ronald D. Croatti
Ronald D. Croatti, Committee member and CEO	

 	 	
 	By: /s/Steven S. Sintros
Steven S. Sintros, Committee member, EVP and CFO	

9

 
 
SCHEDULE A

If The Participant Was Born In:	The Participant's Retirement Age Is:	
1937 or earlier	65 yrs	 	
1938	65 yrs,	2 mos	
1939	65 yrs,	4 mos	
1940	65 yrs,	6 mos	
1941	65 yrs,	8 mos	
1942	65 yrs,	10 mos	
1943 – 1954	66 yrs	 	
1955	66 yrs,	2 mos	
1956	66 yrs,	4 mos	
1957	66 yrs,	6 mos	
1958	66 yrs,	8 mos	
1959	66 yrs,	10 mos	
1960 or later	67 yrs	 	

10

 
 
SCHEDULE B / CLAIMS PROCEDURE
 
(a)     Claim. A person who believes that he is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Company, setting forth his claim. The request must be addressed to the President of the Company at its then principal place of business.
 
(b)     Claim Decision. Upon receipt of a claim, the Company shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Company may, however, extend the reply period for an additional ninety (90) days for reasonable cause.
 
If the claim is denied in whole or in part, Company shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth:
 
(1)     The specific reason or reasons for such denial;
 
(2)     The specific reference to pertinent provisions of the Plan on which such denial is based;
 
(3)     A description of any additional material or information necessary for the Claimant to perfect his claim and an explanation why such material or such information is necessary;
 
(4)     Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and
 
(5)     The time limits for requesting a review under subsection c. and for review under subsection d. hereof.
 
(c)     Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the "Appeal Board" (as defined herein) review the determination of the Company. Such request must be addressed to the Appeal Board, c/o the Chairman of the Company at its then principal place of business. The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Appeal Board. If the Claimant does not request a review of the Company's determination by the Appeal Board within such sixty (60) day period, he shall be barred and estopped from challenging the Company's determination.
 
(d)     Review of Decision. Within sixty (60) days after the Appeal Board's receipt of a request for review, it will review the Company's determination. After considering all materials presented by the Claimant, the Appeal Board will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Appeal Board will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review.
 
(e)     Appeal Board. The Appeal Board shall be an ad hoc committee consisting of the Chairman, the Vice Chairman and the Chief Financial Officer of the Company, unless otherwise determined by the Board of Directors of the Company. In the event of a Change in Control, the Appeal Board shall be composed of those persons who served in those offices immediately prior to the Change in Control.

 

Exhibit 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES
EXCHANGE ACT RULE 13a-14(a)/15d-14(a) AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Ronald D. Croatti, certify that:
 
1.	 	I have reviewed this Quarterly Report on Form 10-Q of UniFirst Corporation;	
 	
2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;	
 	
4.	 	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant, and have:	
 
 	(a)	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	 	
 	(b)	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	
 	(c)	 	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	
 	(d)	 	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and	
 
5.	 	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):	
 
 	(a)	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and	
 	
 	(b)	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.	

Date: April 6, 2017 	By:  	/s/ Ronald D. Croatti  	 	
 	 	Ronald D. Croatti, 	 	
 	 	Chief Executive Officer
(Principal Executive Officer) 

Exhibit 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES
EXCHANGE ACT RULE 13a-14(a)/15d-14(a) AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Steven S. Sintros, certify that:
 
1.	 	I have reviewed this Quarterly Report on Form 10-Q of UniFirst Corporation;	
 	
2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;	
 	
4.	 	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant, and have:	
 
 	(a)	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	 	
 	(b)	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	
 	(c)	 	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	
 	(d)	 	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and	
 
5.	 	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):	
 
 	(a)	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and	
 	
 	(b)	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.	

Date: April 6, 2017	By:  	/s/Steven S. Sintros	 	
 	 	Steven S. Sintros	 	
 	 	Chief Financial Officer
(Principal Financial Officer)	 	

Exhibit 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
 
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Ronald D. Croatti, President and Chief Executive Officer of UniFirst Corporation (the “Company”), do hereby certify, to the best of my knowledge, that:
 
 	(1)	The Company’s Quarterly Report on Form 10-Q for the quarter ended February 25, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

Date: April 6, 2017	By:  	/s/ Ronald D. Croatti  	
 	 	Ronald D. Croatti, President and 	
 	 	Chief Executive Officer
(Principal Executive Officer) 	

Exhibit 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
 
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Steven S. Sintros, Chief Financial Officer of UniFirst Corporation (the “Company”), do hereby certify, to the best of my knowledge, that:
 
 	(1)	The Company’s Quarterly Report on Form 10-Q for the quarter ended February 25, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

Date: April 6, 2017	By:  	/s/ Steven S. Sintros	
 	 	Steven S. Sintros	
 	 	Chief Financial Officer
(Principal Financial Officer)