What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-10-28 compared with 2019-10-30 · 189 added, 213 removed, 355 unchanged (53% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FI NANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

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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 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 as well as provide certain safety training, 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.

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, healthcare providers, 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, gloves, masks, hand soaps and sanitizers.

At certain specialized facilities, we also decontaminate and clean work clothes and other items that may have been exposed to radioactive materials and service special cleanroom protective wear and facilities.

Typical customers for these specialized services include government agencies, research and development laboratories, high technology companies and utilities operating nuclear reactors.

We continue to expand into additional geographic markets through acquisitions and organic growth.

We currently service over 300,000 customer locations in the United States, Canada and Europe from over 260 customer service, distribution and manufacturing facilities.

Headquartered in Wilmington, Massachusetts, UniFirst Corporation (NYSE:

UNF) is a North American leader in the supply and servicing of uniform and workwear programs, as well as the delivery of facility service programs.

Together with its subsidiaries, the Company also provides first aid and safety products, and manages specialized garment programs for the cleanroom and nuclear industries.

UniFirst manufactures its own branded workwear, protective clothing, and floorcare products;

and with 260 service locations, over 300,000 customer locations, and 14,000 employee Team Partners, the Company outfits more than 2 million workers each business day.

For more information, contact UniFirst at 800.455.7654 or visit UniFirst.com.

GAAP establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial reports issued to shareholders.

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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 our manufacturing cost.

The Corporate operating segment consists of costs associated with our distribution center, sales and marketing, information systems, engineering, materials management, manufacturing planning, finance, budgeting, human resources, other general and administrative costs and interest expense.

and administrative costs and interest expense.

The revenues generated from the Corporate operating segment represent certain direct sales made directly from our distribution center.

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and Canadian Rental and Cleaning reporting segment.

In the segment disclosures in

Note 15, “Segment Reporting”, of our Consolidated Financial Statements, no assets or capital expenditures are presented for the Corporate operating segment as no assets are a llocated to this operating segment in the information reviewed by our chief executive officer.

In the segment disclosures in Note 15, “Segment Reporting”, of our Consolidated Financial Statements, no assets or capital expenditures are presented for the Corporate operating segment as no assets are allocated to this operating segment in the information reviewed by our chief executive officer.

However, depreciation and amortization expense related to certain assets are reflected in income from operations and income before income taxes for the Corporate operating segment.

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GAAP, which requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes.

We utilize key estimates in preparing the financial statements, including casualty and environmental estimates, recoverability of goodwill, intangibles, income taxes and long-lived assets.

These estimates are based on historical information, current trends, and information available from other sources.

The actual results could differ from our estimates.

Our results are affected by economic, political, legislative, regulatory and legal actions.

Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, government policies surrounding the containment of COVID-19 and changes in the prices of raw materials, can have a significant effect on operations.

These factors and other events could cause actual results to differ from management's estimates.

Revenue Recognition and Allowance for Doubtful Accounts

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The deferred commissions are amortized on a straight-line basis over the expected period of benefit, which is generally the estimated life of the customer relationship.

We review the deferred commission balances for impairment on an ongoing basis.

We review the deferred commission

balances for impairment on an ongoing basis.

Deferred commissions are classified as current or noncurrent based on the timing of when we expect to recognize the expense.

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As of August 29, 2020, the current and non-current assets related to deferred commissions totaled $ 13.3 million and $ 55.6 million, respectively.

During fiscal 2019, we recorded $11.8 million of amortization expense related to deferred commissions.

As of August 31, 2019, the current and non-current assets related to deferred commissions totaled $12.4 million and $50.3 million, respectively.

During fiscal 2020 and 2019, we recorded $13.7 million and $11.8 million, respectively, of amortization expense related to deferred commissions.

This expense is classified in selling and administrative expenses on the consolidated statements of income.

Inventories and Rental Merchandise in Servic e

Our inventories are stated at the lower of cost or market value, net of any reserve for excess and obsolete inventory.

Inventories and Rental Merchandise in Service

Our inventories are stated at the lower of cost or net realizable 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 our customers or used in our rental operations.

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Our evaluation considers changes in the operating environment, competitive information, market trends, operating performance and cash flow modeling.

We complete our annual goodwill impairment test as of the last day of the fourth quarter of each fiscal year and there have been no impairments of goodwill or other intangible assets in fiscal 2019, 2018 or 2017.

We cannot predict future economic conditions and their impact on the Company or the future market value of our stock.

We completed our annual goodwill impairment test as of the first day of the fourth quarter in fiscal 2020 and the last day of the fourth quarter of each fiscal year in fiscal 2019 and 2018.

There have been no impairments of goodwill or other intangible assets in fiscal 2020, 2019 and 2018.

We cannot predict future economic conditions and their impact on the Company or the future net realizable value of our stock.

A decline in our market capitalization and/or deterioration in general economic conditions could negatively and materially impact our assumptions and assessment of the fair value of our business.

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There were no material impairments of long-lived assets in fiscal 2020, 2019, and 2018.

During the fourth quarter of fiscal 2017, the Company recognized a non-cash impairment charge in its U.S.

and Canadian Rental and Cleaning segment of $55.8 million on its ongoing CRM systems project, as the Company had determined that it was no longer probable that the then current version of the CRM system that was being developed would be completed and placed into service.

We self-insure for certain obligations related to health, workers’ compensation, vehicles and general liability programs.

We self-insure for certain obligations related to healthcare, workers’ compensation, vehicles and general liability programs.

We also purchase stop-loss insurance policies for workers’ compensation, vehicles and general liability programs to protect ourselves from catastrophic losses.

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Environmental and Other Contingencies

We are subject to legal proceedings and claims arising from the conduct o f our business operations, including environmental matters, personal injury, customer contract matters and employment claims.

GAAP requires that a liability for contingencies be recorded when it is probable that a liability has occurred, and the amount of the liability can be reasonably estimated.

We are subject to legal proceedings and claims arising from the conduct of our business operations, including environmental matters, personal injury, customer contract matters and employment claims.

GAAP requires that a liability for

contingencies be recorded when it is probable that a liability has occurred, 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.

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The estimated current costs, net of legal settlements with insurance carriers, have been adjusted for the estimated impact of inflation at 3.0% per year.

Changes in enacted laws, regulatory orders or decrees, our estimate s of costs, risk-free interest rates, insurance proceeds, participation by other parties, the timing of payments, the input of our attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for our environmental and other contingent liabilities.

Changes in enacted laws, regulatory orders or decrees, our estimates of costs, risk-free interest rates, insurance proceeds, participation by other parties, the timing of payments, the input of our attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for our environmental and other contingent liabilities.

Refer to Note 11, “Commitments and Contingencies”, of our Consolidated Financial Statements for additional discussion and analysis.

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domestic and foreign tax authorities regarding the amount of taxes due.

These reviews typically include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdiction s.

These reviews typically include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions.

Tax authorities may disagree with certain positions we have taken.

In evaluating our exposure associated with various filing positions, we have recorded estimated reserves .

Refer to Note 4, “Income Taxes”, of our Consolidated Financial Statements for fu rther discussion regarding our accounting for income taxes and uncertain tax positions for financial accounting purposes.

Refer to Note 4, “Income Taxes”, of our Consolidated Financial Statements for further discussion regarding our accounting for income taxes and uncertain tax positions for financial accounting purposes.

COVID-19 Assessment

The outbreak of a novel strain of coronavirus (COVID-19) continues to impact a number of countries, including the United States, Canada, Mexico, Nicaragua and the European countries in which we operate.

Developments continue to occur rapidly with respect to the spread of COVID-19 and its impact on human health and businesses.

New and changing government actions to address the COVID-19 pandemic continue to occur on a daily basis.

Our revenues in the second half of fiscal 2020 were significantly adversely impacted as a result of many customers closing their businesses or operating at limited capacities.

Although many of our customers have reopened or increased their operating levels as government restrictions have begun to be lifted, our sales to many such customers are below their pre-pandemic levels and may not return to such pre-pandemic levels.

In addition, although many of our customers reopened or increased their operating levels, such customers may again be forced to close or limit operations as any new COVID-19 outbreaks occur.

Any such closures or reductions in operating levels could have a significant adverse impact on our business.

At times during the pandemic, we have also experienced supply chain disruptions with respect to certain products, including hand sanitizer and masks.

Such disruptions continue to occur, but have moderated to some extent more recently.

We remain focused on the safety and well-being of our team partners and on the service of our customers.

We will continue to review and assess the rapidly-changing COVID-19 pandemic and its impacts on our team partners, our customers, our suppliers and our business so that we can seek to address the impacts on our business and service our customers.

Because developments with respect to the spread of COVID-19 and its impacts continue to occur so rapidly, and because of the unprecedented nature of the pandemic, we are unable to predict the extent and duration of the adverse impact of COVID-19 on our business, financial condition and results of operations.

We have assessed the current impact of COVID-19 on our consolidated financial condition, results of operations, and cash flows, as well as our estimates and accounting policies.

We have made additional disclosures of these assessments, as necessary.

Given the unprecedented nature of this situation, we cannot reasonably estimate the full extent of the impact COVID-19 will have on our consolidated financial condition, results of operations, and cash flows in the foreseeable future.

The ultimate impact of COVID-19 on the Company is highly uncertain and will depend on future developments, and such impacts could exist for an extended period of time, even after the COVID-19 pandemic subsides.

As of August 29, 2020, our cash, cash equivalents, and short-term investments were $474.8 million, and we had access to $179.2 million of borrowing capacity under our $250 million unsecured revolving credit facility, which we believe will continue to help us manage the impacts of the COVID-19 pandemic on our business and address related liquidity needs.

National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including, without limitation, by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limit operations or people to stay at home.

Although we have been permitted to continue to operate in all of the jurisdictions in which we operate, including in jurisdictions that have mandated the closure of certain businesses and we expect to be permitted to continue to operate under any orders or other restrictions imposed by any government authorities in the future, there is no assurance that we will be permitted to operate under every future government order or other restriction and in every location.

If we were to be subject to government orders or other restrictions on the operation of our business, we may be required to limit , or close, our operations at certain locations in the future.

Any such limitations or closures could have a material adverse impact on our ability to service our customers and on our business, financial condition and results of operations.

In particular, any limitations on, or closures of, our manufacturing facilities in Mexico or Nicaragua, or our distribution center in Owensboro, Kentucky, could have a material adverse impact on our ability to manufacture products and service customers and could have a material adverse impact on our business, financial condition and results of operations.

The COVID-19 pandemic has caused significant disruptions to our business and operations and could cause material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions.

For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, our suppliers and their manufacturers.

Depending on the extent and duration of all of the above-described effects on our business and operations and the business and operations of our suppliers, our costs could increase, including our costs to address the health and safety of personnel, our ability to obtain products or services from suppliers may be adversely impacted, our ability to service certain customers could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected.

In addition, depending on the extent and duration of the COVID-19 pandemic, we may be subject to significant increases in healthcare costs in the event that a significant number of our personnel become infected with COVID-19 and require medical treatment.

As a result, any significant increases in healthcare costs as a result of COVID-19 or otherwise could have a material adverse impact on our business, financial condition and results of operations.

The COVID-19 pandemic has also resulted in material adverse economic conditions that are impacting, and may continue to impact, our business and the businesses of our suppliers and customers.

Unemployment levels have increased significantly, and the U.S.

economy has entered an economic recession.

Some analysts have predicted that the current economic recession may persist for a significant period of time and become severe.

Although the extent and duration of the impact of the COVID-19 pandemic on our business and operations and the business and operations of our customers and suppliers remain uncertain, the continued spread of COVID-19, the imposition of related public health measures and travel, health-related, business and other restrictions and the resulting materially adverse economic conditions may materially adversely impact our business, financial condition, results of operations and cash flows.

Please see “Item 1A.

Risk Factors” in this Annual Report on Form 10- K for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations.

Results of Operations

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Selling and administrative

Impairment charge

Depreciation and amortization

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Revenues and income (loss) from operations by reporting segment for fiscal 2020, 2019, and 2018 are presented in the following table.

Refer to Note 15, “Segment Reporting”, of our Consolidated Financial Statements for discussion of our reporting segments.

Refer to Note 15, “Segment Reporting”, of our Consolidated Financial Statements for a discussion of our reporting segments.

(In thousands)

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We also rent industrial wiping products, floor mats, facility service products, other non-garment items, and provide restroom and cleaning supplies and first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies.

We have five reporting segments, U.S.

and Canadian Rental and Cleaning, MFG, Specialty Garments, First Aid and Corporate.

We refer to the U.S.

and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our “Core Laundry Operations.”

Cost of revenues include the amortization of rental merchandise in service and merchandise costs related to direct sales as well as labor and other production, service and delivery costs, and distribution costs associated with operating our Core Laundry Operations, Specialty Garments facilities, and First Aid locations.

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In general, we are relatively more dependent on business in these regions than are many of our competitors.

Recent volatility in energy prices have had and may continue to have a significant impact on wearer levels at existing customers in our North American energy-dependent markets.

Our operating results are also directly impacted by the costs of the gasoline used to fuel our vehicles and the natural gas used to operate our plants.

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Our business is subject to various state and federal regulations, including employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements, healthcare insurance mandates and other laws and regulations that impact our labor costs.

We expect that our labor costs will rise in fiscal 2020 as a result of increases in state and local minimum wage levels as well as the overall impact of wage pressure as the result of a low unemployment environment.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted into law, which, among other provisions, reduced the U.S.

federal corporate income tax rate effective January 1, 2018 from a 35% rate to a new 21% corporate rate and

impose d a one-time transition tax on the deemed repatriation of certain deferred foreign income .

We have made reasonable estimates of the effects of the Act and these estimates could change in future periods as we continue to analyze the effects of the Act (see Note 4, “Income Taxes” to our Consolidated Financial Statements included in this Annual Report on Form 10-K).

As a result of the Act , U.S.

Labor costs increased in fiscal 2020 as a result of increases in state and local minimum wage levels as well as the overall impact of wage pressure as the result of a low unemployment environment.

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted into law, which, among other provisions, reduced the U.S.

federal corporate income tax rate effective January 1, 2018 from a top marginal rate of 35% to a new 21% corporate rate and imposed a one-time transition tax on the deemed repatriation of certain deferred foreign income.

We have made reasonable estimates of the effects of the TCJA and these estimates could change in future periods as we continue to analyze the effects of the TCJA (see Note 4, “Income Taxes” to our Consolidated Financial Statements included in this Annual Report on Form 10-K).

As a result of the TCJA, U.S.

corporations are subject to lower income tax rates, and we were required to remeasure our U.S.

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A portion of our sales is derived from international markets, including Canada.

Rev enues denominated in currencies other than the U.S.

dollar represented approximately 7.0 %, 8.1 % and 7.

4 % of total consolidated revenues for fiscal years 201 9 , 201 8 and 201 7 , respectively.

The operating results of our international subsidiaries are translat ed into U.S.

Revenues denominated in currencies other than the U.S.

dollar represented approximately 6.9%, 7.0% and 8.1% of total consolidated revenues for fiscal years 2020, 2019 and 2018, respectively.

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.

In addition, a weaker Canadian dollar increases the costs to our Canadian operations of merchandise and other operational inputs that are sou rced from outside Canada, which has the effect of reducing the operating margins of our Canadian business if we are unable to recover these additional costs through price adjustments with our Canadian customers.

In fiscal 201 9 a nd 201 8 , foreign currency fl uctuations impacted our consolidated revenues negatively by 0.3% and positively by 0.3%, respectively.

In addition, a weaker Canadian dollar increases the costs to our Canadian operations of merchandise and other operational inputs that are sourced from outside Canada, which has the effect of reducing the operating margins of our Canadian business if we are unable to recover these additional costs through price adjustments with our Canadian customers.

In fiscal 2020 and 2019, foreign currency fluctuations impacted our consolidated revenues negatively by 0.1% and 0.3%, respectively.

In fiscal 2018, foreign currency fluctuations negligibly impacted our consolidated revenues.

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The sale of shares by the Croatti family was executed to provide liquidity as well as for estate and family financial planning following the passing of our former Chief Executive Officer, Ronald D.

The Special Committee determined that a repurchase of Croatti family Class B Common Stock at a discount to market was in our best interests as it is accretive to income per share and addresses uncertainties that may have been created if the Croatti family had pursued other liquidity options.

The Special Committee determined that a repurchase of Croatti family Class B Common Stock at a discount to market was in our

best interests as it is accretive to income per share and addresses uncertainties that may have been created if the Croatti family had pursued other liquidity options.

The Special Committee undertook its evaluation with the assistance of Stifel Financial Corp.

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During fiscal 2020, the Company repurchased 0.1 million shares for an average price per share of $184.67.

During fiscal 2019, the Company repurchased 0.2 million shares for an average price per share of $154.78.

During fiscal 2017, we recorded a pre-tax non-cash impairment charge of $55.8 million once it was determined that it was not probable that the version of the CRM system that was being developed would be completed and placed into service.

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We also received hardware and related maintenance service with a fair value of $0.8 million as part of the settlement.

In our fourth fiscal quarter of 2018, we initiated a multiyear CRM project to further develop, implement and deploy a third-party application we licensed.

This new solution is intended to improve functionality, capability and information flow as well as in crease automation in servicing our customers.

In fiscal 2018, we initiated a multiyear CRM project to further develop, implement and deploy a third-party application we licensed.

This new solution is intended to improve functionality, capability and information flow as well as increase automation in servicing our customers.

As of August 29, 2020, we have capitalized $22.6 million related to our new CRM project.

Our fiscal year ends on the last Saturday in August.

For financial reporting purposes fiscal 2020 and fiscal 2018 both consisted of 52 weeks and fiscal 2019 consisted of 53 weeks.

Fiscal Year Ended August 29, 2020 Compared with Fiscal Year Ended August 31, 2019

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Total consolidated revenues

The decrease in our consolidated revenues in fiscal 2020 compared to the prior fiscal year was due primarily to a decline in our Core Laundry Operations.

Of this decline, 1.9% was due to the extra week in fiscal 2019.

Also contributing to the decline was the negative impact on rental revenues from COVID-19 related customer closures as well as related wearer

reductions at customers that remained open.

These declines were partially offset in fiscal 2020 by a large direct sale of $20.1 million .

The Specialty Garments segment’s results are often affected by seasonality and the timing and length of its customers’ power reactor outages as well as its project-based activities.

The improvement in revenues in fiscal 2020 compared to fiscal 2019 was due primarily to increased direct sales activity in our nuclear operations in the U.S.

and Canada as well as strong performance in our cleanroom operations.

These increases were partially offset by a decline in revenue from the extra week in fiscal 2019.

The increase in our First Aid revenues in fiscal 2020 compared to fiscal 2019 was due primarily to the strong performance in our wholesale distribution business and increased demand for the segment’s safety and personal protective equipment offerings as a result of COVID-19.

These increases were partially offset by a decline in revenue from the extra week in fiscal 2019.

Cost of revenues

(In thousands, except percentages)

Cost of revenues

% of Revenues

Core Laundry Operations cost of revenues as a percentage of revenues in fiscal 2020 increased from the prior fiscal year.

This increase was due to a number of items, including the impact of the decline in our rental revenues on our cost structure, higher merchandise amortization as a percentage of revenues due to the amortization of prior period expenditures, higher cost of revenues related to the large $20.1 million direct sale, additional employee compensation expense, higher bad debt expense, higher casualty claims expense, as well as increased costs for internal-use safety supplies.

These items were partially offset by lower incentive compensation, energy, travel-related and healthcare claim costs in fiscal 2020.

Our Specialty Garments cost of revenues as a percentage of revenues decreased in fiscal 2020 as compared to the prior fiscal year.

The decrease was due primarily to lower production and service, delivery payroll and other delivery costs in fiscal 2020.

Selling and administrative expenses

(In thousands, except percentages)

Selling and administrative expenses

% of Revenues

The increase in our selling and administrative expenses as a percentage of revenues in fiscal 2020 compared to fiscal 2019 was due primarily to a gain of $21.1 million in fiscal 2019 related to the settlement agreement with the lead contractor for the version of the CRM system with respect to which we recorded a $55.8 million impairment charge in fiscal 2017.

Also contributing to the increase was a gain of $3.0 million from the settlement of environmental litigation in fiscal 2019 and higher indirect tax costs in fiscal 2020.

The items driving the increase in fiscal 2020 were partially offset by lower healthcare claim, travel-related, incentive and other compensation-related costs.

Depreciation and amortization

(In thousands, except percentages)

Depreciation and amortization

% of Revenues

Depreciation and amortization expense increased in fiscal 2020 as compared to the prior fiscal year due primarily to capital expenditures placed in service over the past several quarters.

The increase in depreciation and amortization reflects our continued capital investments in the business.

Income from operations

For fiscal 2020, the changes in revenues in our Core Laundry Operations, Specialty Garments and First Aid segments, as well as the changes in our costs discussed above, resulted in the following changes in our income from operations:

(In thousands, except percentages)

Core Laundry Operations

Specialty Garments

Total consolidated income from operations

Percentage of total revenues

Other income, net

(In thousands, except percentages)

Interest income, net

Other expense, net

Total other income, net

The decrease in other income, net, during fiscal 2020 as compared to the prior fiscal year was due primarily to lower interest income from declining interest rates partially offset by higher foreign currency exchange gains.

Provision for income taxes

(In thousands, except percentages)

Provision for income taxes

Effective income tax rate

The decrease in our effective income tax rate for fiscal 2020 as compared to fiscal 2019 was due primarily to a $1.8 million benefit as a result of the relief of certain tax reserves and a $1.6 million discrete tax benefit related to the exercise of stock appreciation rights.

Fiscal Year Ended August 31, 2019 Compared with Fiscal Year Ended August 26, 2018

(In thousands, except percentages)

Core Laundry Operations

Specialty Garments

Total consolidated revenues

The increase of our consolidated revenues in fiscal 2019 compared to the prior fiscal year was due primarily to growth in our Core Laundry Operations.

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Organic growth consists primarily of new sales, price increases, and net changes in the wearer levels at our existing customers, offset by lost accounts.

Core Laundry Operations’ organic growth in 2019 benefitted from strong new accounts sales as well as reduced lost accounts.

The Specialty Garments segment’s results are often affected by seasonality and the timing and length of its customers’ power reactor outages as well as its project-based act ivities.

The improvement in revenues in fiscal 2019 compared to fiscal 2018 was primarily comprised of 7.4% growth from acquisitions, 2.7% of organic growth from increased outages and project-based activity at the segment’s Canadian and European nuclear cu stomers, and 2.0% growth from the extra week in fiscal 2019.

Core Laundry Operations’ organic growth in fiscal 2019 benefitted from strong new accounts sales as well as reduced lost accounts.

The Specialty Garments segment’s results are often affected by seasonality and the timing and length of its customers’ power reactor outages as well as its project-based activities.

The improvement in revenues in fiscal 2019 compared to fiscal 2018 was primarily comprised of 7.4% growth from acquisitions, 2.7% of organic growth from increased outages and project-

based activity at the segment’s Canadian and European nuclear cu stomers, and 2.0% growth from the extra week in fiscal 2019.

The increase of our First Aid revenues in fiscal 2019 compared to fiscal 2018 was comprised of 7.8% of organic growth, 1.9% growth from the extra week in fiscal 2019 and 1.5% growth from acquisitions.

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Cost of revenues

Core Laundry Operations

Specialty Garments

Consolidated total

% of Revenues

Cost of revenues as a percentage of revenues was 63.0% for fiscal 2019 as compared to 62.3% in fiscal 2018.

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The decrease was due primarily to lower merchandise and production costs in our wholesale distribution business in fiscal 2019.

Selling and administrative e xpense s

Selling and administrative expense

(In thousands, except percentages)

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Effective income tax rate

The increase in our effective income tax rate for fiscal 2019 as compared to fiscal 2018 was due primarily to the impact of the Act, which lowered the U.S.

The increase in our effective income tax rate for fiscal 2019 as compared to fiscal 2018 was due primarily to the impact of the TCJA, which lowered the U.S.

federal corporate income tax rates as of January 1, 2018 to 21.0% from 35.0%.

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net deferred tax liabilities and the one-time transition tax resulted in a $20.1 million net benefit to our provision for income taxes in the second quarter of fiscal 2018.

For additional information pertaining to income taxes and the Act, please refer to Note 4, “Income Taxes” to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Fiscal Year Ended August 25, 2018 Compared with Fiscal Year Ended August 26, 2017

(In thousands, except percentages)

Core Laundry Operations

Specialty Garments

Total consolidated revenues

In fiscal 2018, our consolidated revenues increased by $105.5 million from the comparable period in fiscal 2017, or 6.6%.

The increase in our consolidated revenues was primarily driven by the growth in our Core Laundry Operations, with revenues increasing to $1.524 billion in fiscal 2018 from $1.442 billion in fiscal 2017, or 5.7%.

Excluding the positive effect of acquisitions, which we estimate increased our revenues by approximately 1.0% during fiscal 2018, as well as a slightly stronger Canadian dollar, which favorably impacted our growth by approximately 0.2%, organic growth for our Core Laundry Operations was approximately 4.5%.

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’ revenue increased from $98.0 million in fiscal 2017 to $118.5 million in fiscal 2018, or 20.9%.

This segment’s results are often affected by seasonality and the timing and length of its customers’ power reactor outages as well as its project-based activities.

The improvement in results in fiscal 2018 compared to fiscal 2017 was primarily due to increased outages and project-based activity at the segment’s Canadian and European nuclear customers, as well as solid growth from the cleanroom business.

First Aid revenues increased 7.0%, from $50.8 million in fiscal 2017 to $54.4 million in fiscal 2018.

The improvement in results was due to a strong performance from this segment’s wholesale distribution business as well as a small acquisition that closed in the third quarter of fiscal 2017.

Cost of revenues

Cost of revenues was 62.3% and 62.5% of revenues in fiscal 2018 and fiscal 2017, respectively.

The decrease was due primarily to lower worker’s compensation expense as a percentage of revenues, as well as lower merchandise costs in our Core Laundry Operations and Specialty Garments segments.

These cost improvements were partially offset by higher production and service and delivery payroll costs as well as higher energy costs as percentages of revenues in our Core Laundry Operations.

Selling and administrative expense

Our selling and administrative expenses were 21.3% and 21.5% of revenues in fiscal 2018 and fiscal 2017, respectively.

Our results in fiscal 2018 include a $7.2 million one-time cash bonus to our employees so that they may share in the benefits received from the recent U.S.

Our results in fiscal 2017 include $5.4 million of stock compensation expense related to the accelerated vesting of restricted stock for our former Chief Executive Officer, Ronald Croatti, upon his death.

Excluding the effect of the one-time bonus in fiscal 2018 and the accelerated vesting in fiscal 2017, our selling and administrative expenses, as a percentage of revenues for fiscal 2018 as compared to fiscal 2017, decreased due primarily to lower expenses from claims related to healthcare for our employees and worker’s compensation.

Impairment charge

Our fiscal 2017 fourth quarter results included a $55.8 million impairment charge related to our CRM systems project.

We determined that, as of August 26, 2017, it was not probable that the then current version of the CRM system that was being developed would be completed and placed into service and as a result, an impairment of most capitalized costs was required.

During fiscal 2018, the previous version of the CRM system being developed was abandoned, and the Company is now working on a new CRM system.

Depreciation and amortization

Our depreciation and amortization expense was $96.7 million, or 5.7% of revenues, in fiscal 2018 compared to $88.9 million, or 5.6% of revenues, in fiscal 2017.

Depreciation and amortization expense increased due primarily to an increase in depreciation resulting from higher capital expenditures placed in service in recent fiscal years.

Income from operations

For fiscal 2018, the changes in revenues in our Core Laundry Operations, Specialty Garments and First Aid segments, as well as the changes in our costs discussed above, resulted in the following changes in our income from operations:

(In thousands, except percentages)

Core Laundry Operations

Specialty Garments

Total consolidated income from operations

Percentage of total revenues

Other income, net

Other income, net, which includes interest expense, interest income and other income and expense, increased by 0.6% in fiscal 2018 as compared to fiscal 2017.

This change was primarily due to net interest income of $5.5 million during fiscal 2018 compared to interest income of $4.3 million during fiscal 2017.

The increase was offset by a decrease in other expense (income), net, of $1.2 million in fiscal 2018 compared to fiscal 2017 due to a $0.5 million insurance policy gain in the fourth quarter of fiscal 2017 and foreign currency exchange gains.

Provision for income taxes

Our effective income tax rate for fiscal 2018 was 12.5% compared to 39.0% for fiscal 2017.

The decrease in our effective tax rate was due primarily to the impact of the Act, which lowered the U.S.

federal corporate income tax rates as of January 1, 2018.

These new rates required us to remeasure our U.S.

net deferred income tax liabilities for fiscal 2018.

Also, we will be subject to a one-time transition tax for the deemed repatriation of our foreign earnings.

The remeasurement of our U.S.

net deferred tax liabilities and the one-time transition tax resulted in a $20.1 million net benefit to our provision for income taxes in fiscal 2018.

Our effective tax rate for fiscal 2018 also benefited from the effect of the lower U.S.

federal corporate income tax rates on our earnings.

In addition to the impact of the Act, our effective tax rate for fiscal 2018 was lower due to a discrete tax benefit of $3.1 million from the adoption of new accounting guidance during the first quarter of fiscal 2018 that requires tax effects of exercised or vested awards to be treated as discrete items as a reduction of income tax expense in the reporting period in which they occur.

For additional information pertaining to income taxes and the TCJA, please refer to Note 4, “Income Taxes” to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Liquidity and Capital Resources

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We generated $286.7 million and $282.1 million in cash from operating activities in the fiscal years ended August 29, 2020 and August 31, 2019, respectively.

Pursuant to a share repurchase program approved by the Board of Directors on January 2, 2019, we repurchased 0.2 million shares of our Common Stock for a combined $30.5 million during fiscal 2019.

On March 27, 2018, we repurchased

1.105 million shares of Class B Common Stock and 0.073 million shares of Common Stock for a combined $146.0 million in a private transacti on with the Croatti family at a per share price of $124.00.

We believe that our current cash, cash equivalents and short-term investments balances, our cash generated from future operations and amounts available under our Credit Agreement (defined below) w ill be sufficient to meet our current anticipated working capital and capital expenditure requirements for at least the next 12 months.

Pursuant to a share repurchase program approved by the Board of Directors on January 2, 2019, we repurchased 0.1 million shares of our Common Stock for an aggregate of approximately $21.7 million during fiscal 2020 and 0.2 million shares of our Common Stock for an aggregate $30.5 million during fiscal 2019.

On March 27, 2018, we repurchased 1.105 million shares of Class B Common Stock and 0.073 million shares of Common Stock for a combined $146.0 million in a private transaction with the Croatti family at a per share price of $124.00.

We believe , although there can be no assurance, t hat our current cash, cash equivalents and short-term investments balances, our cash generated from future operations and amounts available under our Credit Agreement (defined below) will be sufficient to meet our current anticipated working capital and capital expenditure requirements for at least the next 12 months and will help us manage the impacts of the COVID-19 pandemic on our business and address related liquidity needs .

Cash flows provided by operating activities have historically been the primary source of our liquidity.

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Effect of exchange rate changes

Net increase (decrease) in cash, cash equivalents and

Net increase in cash, cash equivalents and

short-term investments

Cash Provided by Operating Activities

This net increase in cash provided by operating activities in fiscal 2019 compared to fiscal 2018 was due primarily to cash received of $13.0 million in the second quarter of fiscal 2019 from the settlement agreement with the lead contractor for the version of the CRM system with respect to which we recorded a $55.8 million impairment charge in fiscal 2017.

Also contributing to the increase was $3.0 million from the settlement of environmental litigation in the first quarter of fiscal 2019, lower inventory purchases and rental merchandise placed in service and improved collections of trade receivables.

This increase was partially offset by the one-time bonus of $7.2 million paid to our employees during the first quarter of fiscal 2019 and the timing of income tax payments.

Cash Used in Investing Activities

The net decrease in cash used in investing activities in fiscal 2019 compared to fiscal 2018 was due primarily to a lower level of acquisition activity in fiscal 2019 as compared to fiscal 2018, partially offset by increased capital expenditures and capitalized software costs.

Cash Used in Financing Activities

This decrease in cash used in financing activities in fiscal 2019 compared to fiscal 2018 was primarily the result of the repurchase of 1.105 million shares of Class B Common Stock and 0.073 million shares of Common Stock from the Croatti family for $146.0 million in fiscal 2018.

This decrease was partially offset by repurchases of 0.2 million shares of Common Stock for $30.5 million in fiscal 2019.

Net Cash Provided by Operating Activities

The increase in net cash provided by operating activities was due primarily to lower expenditures on rental merchandise and declining accounts receivable in fiscal 2020 as compared to the prior fiscal year due to lower revenues.

Also contributing to the increase was the one-time bonus paid to our employees during the first quarter of fiscal 2019.

These increases were partially offset by cash received of $13.0 million in the second quarter of fiscal 2019 from the settlement agreement with the lead contractor for the version of the CRM system with respect to which we recorded a $55.8 million impairment charge in fiscal 2017.

Also partially offsetting the increases was $3.0 million from the settlement of environmental litigation in the first quarter of fiscal 2019.

Net Cash Used in Investing Activities

The net increase in cash used in investing activities was due primarily to the acquisition of a Missouri-based industrial laundry business, which was completed in September 2019 for $38.8 million, using available cash on hand.

This increase was partially offset by lower capital expenditures of $3.1 million in fiscal 2020 as compared to the prior year comparable period.

Net Cash Used in Financing Activities

The decrease in cash used in financing activities was due primarily to lower repurchases of Common Stock partially offset by an increase in dividends paid of $7.4 million in fiscal 2020 as compared to the prior fiscal year.

Long-term debt and borrowing capacity

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As of August 29, 2020, we had no outstanding borrowings and had outstanding letters of credit amounting to $70.8 million, leaving $179.2 million available for borrowing under the Credit Agreement.

We expect to replace the Credit Agreement prior to its maturity with a new revolving credit facility.

As of August 29, 2020, 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 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 fiscal 2015 and continuing through the second fiscal quarter of the fiscal 2019.

In total, we sold 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 U.S.

Accordingly, we have reflected all changes in the fair value of the forward contracts in accumulated other comprehensive loss, a component of shareholders’ equity.

Upon the maturity of each foreign exchange forward contract, the gain or loss on the contract was recorded as an adjustment to revenues.

In June 2018, we entered into twelve forward contracts to exchange CAD for U.S.

dollars at fixed exchange rates in order to manage our exposure related to certain forecasted CAD denominated sales of one of our subsidiaries.

The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries each fiscal quarter, beginning in the third fiscal quarter of 2019 and continuing through the second fiscal quarter of 2022.

The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries

each fiscal quarter, beginning in the third fiscal quarter of 2019 and continuing through the second fiscal quarter of 2022.

In total, we will sell approximately 12.1 million CAD at an average Canadian-dollar exchange rate of 0.7814 over these quarterly periods.

We concluded that the forward contracts met the criteria to qualify as a cash flow hedge under U.S.

As of August 31, 2019, we had forward contracts with a notional value of approximately $9.5 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 $0.2 million gain in accumulated other comprehensive loss, which was recorded net of tax.

As of August 29, 2020, we had forward contracts with a notional value of approximately 5.0 million CAD outstanding and recorded the fair value of the contracts of 0.1 million CAD in prepaid expenses and other current assets with a corresponding $0.1 million gain in accumulated other comprehensive loss, which was recorded net of tax.

During fiscal 2020, we reclassified $0.2 million from accumulated other comprehensive loss to revenue, related to the derivative financial instruments.

The gain on these forward contracts that results in decrease to accumulated other comprehensive loss as of August 31, 2019 is expected to be reclassified to revenues prior to its maturity on February 25, 2022.

The gain on these forward contracts that results in a decrease to accumulated other comprehensive loss as of August 29, 2020 is expected to be reclassified to revenues prior to its maturity on February 25, 2022.

Environmental and Legal Contingencies

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We are attentive to the environmental concerns surrounding the disposal of these materials and have, through the years, taken measures to avoid their improper disposal.

Over the years, we have settled, or contributed to the settlement of, actions or claims brought against us relating to the disposal of hazardous materials and there can be no assurance that we will not have to expend material amounts to remediate the consequences of any such disposal in the future.

We have settled, or contributed to the settlement of, past actions or claims brought against us relating to the disposal of hazardous materials at several sites 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.

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.

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There can be no assurances that acquired or leased locations have been operated in compliance with environmental laws and regulations or that future uses or conditions will not result in the imposition of liability upon our Company under such laws or expose our Company to third party actions such as tort suits.

We continue to address environmental conditions under terms of consent orders negotiated with the applicable environmental authorities or otherwise with respect to sites located in or related to Woburn, Massachusetts, Somerville, Massachusetts, Springfield, Massachusetts, Uvalde, Texas, Stockton, California, two sites related to former operations in Williamstown, Vermont, as well as sites located in Goldsboro, North Carolina and Wilmington, North Carolina.

We have accrued certain costs related to the sites described above as it has been determined that the costs are probable and can be reasonably estimated.

We have potential exposure related to a parcel of land (the “Central Area”) related to the Woburn, Massachusetts site mentioned above.

We continue to address environmental conditions under terms of consent orders negotiated with the applicable environmental authorities or otherwise with respect to certain sites.

We have accrued certain costs related to certain sites, including but not limited to sites in Woburn and Somerville, Massachusetts, 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 a site in Woburn, Massachusetts site.

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 signato ries, have implemented and proposed to do additional work at the Woburn site but many of the EPA’s comments remain to be resolved.

The United States Environmental Protection Agency (the “EPA”) has provided us and other signatories to the consent decree with comments on the design and implementation of groundwater and soil remedies at the Woburn site and investigation of environmental conditions in the Central Area.

We, and other signatories, have implemented and proposed to do additional work at the Woburn site but many of the EPA’s comments remain to be resolved.

We have accrued costs to perform certain work responsive to the EPA’s comments.

Additionally, we have implemented mitigation measures and continue to monitor environmental conditions at the Somerville, Massachusetts site.

We have received a n otice of a udit f indings from the Massachusetts Department of Environmental Protection concerning a regulatory submittal that we made in 200 9 for a portion of the site.

We are in the process of responding to that n otice.

Additionally, we have implemented mitigation measures and continue to monitor environmental conditions at a site in Somerville, Massachusetts.

We have received, responded, and agreed to undertake additional response actions pertaining to a notice of audit findings from the Massachusetts Department of Environmental Protection concerning a regulatory submittal that we made in 2009 for a portion of the site.

We have received demands from the local transit authority for reimbursement of certain costs associated with its construction of a new municipal transit station in the area of the Somerville site.

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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 monitorin g costs for two sites related to our former operations in Williamstown, Vermont.

Annual proceeds of approximately $0.3 million are deposited into an escrow account which funds remediation and monitoring costs for two sites related to our former operations.

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 August 29, 2020, the balance in this escrow account, which is held in a trust and is not recorded in our Consolidated Balance Sheet, was approximately $4.5 million.

Also included in estimated insurance proceeds are amounts we are entitled to receive pursuant to legal settlements as reimbursements from three insurance companies for estimated costs at the site in Uvalde, Texas.

Our nuclear garment decontamination facilities are licensed by the Nuclear Regulatory Commission, or, in certain cases, by the applicable state agency, and are subject to regulation by federal, state and local authorities.

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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.

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.

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Forward contracts

Purchase Commitments*

Total contractual cash obligations

*Includes non-cancellable purchase commitments for inventories, software, and services.

We have uncertain tax positions that are reserved totaling $6.3 million as of August 29, 2020 that are excluded from the above table as we cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority.

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We expect to replace the Credit Agreement prior to its maturity with a new revolving line of credit on appropriate terms.

As discussed above under “Der ivative Instruments and Hedging Activities”, as of August 31, 2019 , we had forward contracts with a notional value of approximately $9.5 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 $0.2 million gain in accumulated other comprehensive loss, which was recorded net of tax.

As discussed above under “Derivative Instruments and Hedging Activities”, as of August 29, 2020, we had forward contracts with a notional value of approximately 5.0 million CAD outstanding and recorded the fair value of the contracts of $0.1 million in prepaid expenses and other current assets with a corresponding $0.1 million gain in accumulated other comprehensive loss, which was recorded net of tax.

During fiscal 2020, we reclassified $0.2 million from accumulated other comprehensive loss to revenue, related to the derivative financial instruments.

The gain on these forward contracts that results in decrease to accumulated other comprehensive loss as of August 31 , 201 9 is expected to be reclassified to revenues prior to its maturity on Febr uary 25, 2022.

The gain on these forward contracts that results in decrease to accumulated other comprehensive loss as of August 29, 2020 is expected to be reclassified to revenues prior to its maturity on February 25, 2022.

Off Balance Sheet Arrangements

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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.

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.

Significant increases in energy costs, specifically with respect to natural gas and gasoline, can materially affect our operating costs.

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Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance for revenue recognition, which it has subsequently modified.

This modified update provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.

The standard includes cost guidance, whereby all direct and incremental costs to obtain or fulfill a contract will be capitalized and amortized over the corresponding period of benefit, determined on a contract by contract basis.

This guidance is also intended to improve disclosure requirements and enhance the comparability of revenue recognition practices.

Improved disclosures under the amended guidance relate to the nature, amount, timing and uncertainty of revenue that is recognized from contracts with customers.

We adopted the standard on August 26, 2018 using the modified retrospective adoption method.

Upon adoption of this guidance, we recorded an adjustment to the opening balance of retained earnings as of August 26, 2018.

The adoption of the standard did not have any material impact to the timing or measurement of revenues.

The adjustment to retained earnings relates to the capitalization of certain direct and incremental contract costs required by the new guidance, net of the related income tax effect.

Capitalized costs are amortized ratably over the anticipated period of benefit.

We applied the new guidance to all contracts as of August 26, 2018.

Results for reporting periods beginning after August 25, 2018 are presented under the new guidance, while comparative prior period amounts have not been restated and continue to be presented under accounting standards in effect in those periods.

Capitalization of Contract Costs.

We elected to apply the guidance, as a practical expedient, to a portfolio of contracts (or performance obligations) with similar characteristics because we reasonably expect that the effects on the Consolidated Financial Statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within the portfolio.

We also continue to expense certain costs to obtain a contract if those costs do not meet the criteria of the new standard or the amortization period of the asset would have been one year or less.

The cumulative effect of applying the new guidance was recorded as an adjustment to retained earnings as of the adoption date.

The adoption of this standard had no impact on our fiscal 2019 operating cash flow with the exception of the impact to net income as mentioned in Note 1, “Recent Accounting Pronouncements” to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

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, be ginning after December 15, 2017, with early adoption permitted.

Accordingly, we adopted this guidance on August 26, 2018.

The adoption of this standard did not have a material impact on our financial statements.

In February 2016, the FASB issued updated guidance which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors).

The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.

This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively.

A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.

Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases.

This new guidance is effective for reporting periods beginning after December 15, 2018.

Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in their financial statements.

We adopted the new guidance on September 1, 2019.

In accordance with Topic 842, a registrant can elect not to present comparative financial information under Topic 842 if it recognizes a cumulative-effect adjustment to retained earnings upon adoption.

We intend to make this transition election.

The majority of our lease spend relates to certain real estate with the remaining lease spend primarily related to vehicles and equipment.

In addition to the new qualitative and quantitative disclosures that will be required upon adoption of this standard, we anticipate recognizing lease assets and liabilities on the balance sheet in the range of approximately $40.0 million to $50.0 million, based on our portfolio of leases at August 31, 2019.

We do not expect a material impact on its consolidated statements of income or consolidated statements of cash flows.

We are substantially complete with our implementation efforts.

In August 2016, the FASB issued updated guidance that reduces diversity in how certain cash receipts and cash payments are presented and classified in the Consolidated Statements of Cash Flows.

This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and is required to be applied retrospectively, with early adoption permitted.

Accordingly, we adopted this guidance on August 26, 2018.

The adoption of this guidance did not have a material impact on our financial statements.

In June 2016, the FASB issued updated guidance that introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments including trade receivables.

The estimate of expected credit losses will require entities to incorporate historical information, current information and reasonable and supportable forecasts.

This guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses.

This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2019 with early adoption permitted.

Accordingly, the guidance will be effective for the Company on August 30, 2020.

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 is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2017 and is required to be applied on a modified retrospective basis, with early adoption permitted.

Accordingly, we adopted this standard us on August 26, 2018.

The adoption of this guidance did not have a material impact on our financial statements.

In March 2017, the FASB issued updated guidance that requires a change in the presentation of net periodic benefit cost on the consolidated statements of operations.

Specifically, entities must present the service cost component of net periodic benefit cost in the same financial statement line items as other compensation costs arising from services rendered by the related employees during the period, whereas the non-service components of net periodic benefit cost must be presented separately from the financial statement line items that include service cost and outside of operating income.

Our adoption of this guidance on August 26, 2018 did not have a material impact on our financial statements.

In August 2017, the FASB issued guidance that expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness.

The accounting update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted, and is to be applied on a modified retrospective basis.

We elected to early adopt this guidance in the first quarter of fiscal 2019.

The adoption of this guidance did not have a material impact on our financial statements.

In August 2018, the FASB issued updated guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

This guidance will be effective for annual reporting periods, and any interim periods within those annual periods, ending after December 15, 2020 and will be required to be applied on a retrospective basis, with early adoption permitted.

Accordingly, the standard will be effective for us on August 29, 2021.

We are currently evaluating the impact that this guidance will have on our financial statements and related disclosures.

In August 2018, the FASB issued guidance that addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements.

This guidance aligns the requirements for capitalizi ng implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use soft ware license).

This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2019 with early adoption permitted.

The amendments in this update can be applied either retrospective ly or prospectively to all implementation costs incurred after the date of adoption.

Accordingly, the guidance will be effective for us on August 30, 2020.

We are currently evaluating the impact that this guidance will have on its financial statements and related disclosures.

See Note 1, “Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on recently implemented and issued accounting standards

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis