UNIFIRST CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statements of Income UniFirst Corporation and Subsidiaries Year ended (In thousands, except per share data) August 29, 2020 August 31, 2019 August 25, 2018 Revenues $ 1,804,159 $ 1,809,376 $ 1,696,489 Operating expenses: Cost of revenues (1) 1,164,932 1,139,195 1,056,724 Selling and administrative expenses (1) 361,801 334,840 360,727 Depreciation and amortization 104,697 103,333 96,662 Total operating expenses 1,631,430 1,577,368 1,514,113 Operating income 172,729 232,008 182,376 Other (income) expense: Interest income, net ( 6,382 ) ( 9,082 ) ( 5,543 ) Other expense, net 1,223 3,166 673 Total other income, net ( 5,159 ) ( 5,916 ) ( 4,870 ) Income before income taxes 177,888 237,924 187,246 Provision for income taxes 42,118 58,790 23,351 Net income $ 135,770 $ 179,134 $ 163,895 Income per share—Basic: Common Stock $ 7.46 $ 9.77 $ 8.66 Class B Common Stock $ 5.97 $ 7.81 $ 6.91 Income per share—Diluted: Common Stock $ 7.13 $ 9.33 $ 8.21 Income allocated to—Basic: Common Stock $ 114,017 $ 150,247 $ 133,802 Class B Common Stock $ 21,753 $ 28,887 $ 30,093 Income allocated to—Diluted: Common Stock $ 135,770 $ 179,134 $ 163,895 Weighted average number of shares outstanding—Basic: Common Stock 15,276 15,385 15,454 Class B Common Stock 3,643 3,697 4,357 Weighted average number of shares outstanding—Diluted: Common Stock 19,042 19,196 19,963 (1) Exclusive of depreciation on the Company’s property, plant and equipment and amortization of its intangible assets. The accompanying notes are an integral part of these Consolidated Financial Statements. 38 Consolidated Statements of Comprehensive Income UniFirst Corporation and Subsidiaries Year ended (In thousands) August 29, 2020 August 31, 2019 August 25, 2018 Net income $ 135,770 $ 179,134 $ 163,895 Other comprehensive (loss) income: Foreign currency translation adjustments 2,631 ( 3,524 ) ( 5,184 ) Pension benefit liabilities, net of income taxes ( 787 ) ( 5,104 ) 1,342 Change in fair value of derivatives, net of income taxes 25 252 247 Derivative financial instruments reclassified to earnings ( 151 ) ( 153 ) ( 46 ) Other comprehensive (loss) income 1,718 ( 8,529 ) ( 3,641 ) Comprehensive income $ 137,488 $ 170,605 $ 160,254 The accompanying notes are an integral part of these Consolidated Financial Statements. 39 Consolidated Balance Sheets UniFirst Corporation and Subsidiaries (In thousands, except share and par value data) August 29, 2020 August 31, 2019 Assets Current assets: Cash, cash equivalents and short-term investments $ 474,838 $ 385,341 Receivables, less reserves of $ 12,125 and $ 9,935 , respectively 190,916 203,457 Inventories 106,269 100,916 Rental merchandise in service 154,278 184,318 Prepaid taxes 7,115 4,060 Prepaid expenses and other current assets 35,918 35,699 Total current assets 969,334 913,791 Property, plant and equipment, net 582,470 574,509 Goodwill 424,844 401,178 Customer contracts, net 56,946 56,588 Other intangible assets, net 28,590 16,132 Deferred income taxes 522 448 Operating lease right-of-use assets, net 42,710 — Other assets 93,611 84,674 Total assets $ 2,199,027 $ 2,047,320 Liabilities and shareholders’ equity Current liabilities: Accounts payable $ 64,035 $ 77,918 Accrued liabilities 132,965 111,721 Accrued taxes 527 205 Operating lease liabilities, current 12,569 — Total current liabilities 210,096 189,844 Accrued liabilities 132,820 117,074 Accrued and deferred income taxes 85,721 99,172 Operating lease liabilities 29,261 — Total liabilities 457,898 406,090 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; 15,251,176 and 15,332,759 shares issued and outstanding in 2020 and 2019, respectively 1,525 1,533 Class B Common Stock, $ 0.10 par value; 20,000,000 shares authorized; 3,643,009 shares issued and outstanding in both 2020 and 2019 364 364 Capital surplus 86,645 84,946 Retained earnings 1,684,565 1,588,075 Accumulated other comprehensive loss ( 31,970 ) ( 33,688 ) Total shareholders’ equity 1,741,129 1,641,230 Total liabilities and shareholders’ equity $ 2,199,027 $ 2,047,320 The accompanying notes are an integral part of these Consolidated Financial Statements. 40 Consolidated Statements of Shareholders’ Equity UniFirst Corporation and Subsidiaries (In thousands) Common Shares Class B Common Shares Common Stock Class B Common Stock Capital Surplus Retained Earnings Accumulated Other Comprehensive Loss Total Equity Balance, August 26, 2017 15,453 4,815 $ 1,545 $ 482 $ 86,245 $ 1,386,438 $ ( 21,518 ) $ 1,453,192 Net income — — — — — 163,895 — 163,895 Pension benefit liabilities, net (1) — — — — — 1,192 1,342 2,534 Change in fair value of derivatives — — — — — — 201 201 Foreign currency translation — — — — — — ( 5,184 ) ( 5,184 ) Dividends declared — — — — — ( 5,586 ) — ( 5,586 ) Share-based compensation, net (2) — — — — 2,204 ( 738 ) — 1,466 Share-based awards exercised, net (1) 51 — 5 — 456 — — 461 Repurchase of Common Stock ( 73 ) ( 1,105 ) ( 7 ) ( 111 ) ( 5,932 ) ( 139,962 ) — ( 146,012 ) Balance, August 25, 2018 15,431 3,710 $ 1,543 $ 371 $ 82,973 $ 1,405,239 $ ( 25,159 ) $ 1,464,967 Net income — — — — — 179,134 — 179,134 Pension benefit liabilities, net (1) — — — — — — ( 5,104 ) ( 5,104 ) Change in fair value of derivatives — — — — — — 99 99 Foreign currency translation — — — — — — ( 3,524 ) ( 3,524 ) Dividends declared — — — — — ( 8,243 ) — ( 8,243 ) Shares converted 67 ( 67 ) 7 ( 7 ) — — — — Share-based compensation, net (2) — — — — 2,997 — — 2,997 Share-based awards exercised, net (1) 32 — 3 — 48 — — 51 Repurchase of Common Stock ( 197 ) — ( 20 ) — ( 1,072 ) ( 29,423 ) — ( 30,515 ) Cumulative effect of change in accounting principle — — — — — 41,368 — 41,368 Balance, August 31, 2019 15,333 3,643 $ 1,533 $ 364 $ 84,946 $ 1,588,075 $ ( 33,688 ) $ 1,641,230 Net income — — — — — 135,770 — 135,770 Pension benefit liabilities, net (1) — — — — — — ( 787 ) ( 787 ) Change in fair value of derivatives — — — — — — ( 126 ) ( 126 ) Foreign currency translation — — — — — — 2,631 2,631 Dividends declared — — — — — ( 18,185 ) — ( 18,185 ) Share-based compensation, net (2) — — — — 2,268 — — 2,268 Share-based awards exercised, net (1) 36 — 3 — 70 — — 73 Repurchase of Common Stock ( 118 ) — ( 11 ) — ( 639 ) ( 21,095 ) — ( 21,745 ) Balance, August 29, 2020 15,251 3,643 $ 1,525 $ 364 $ 86,645 $ 1,684,565 $ ( 31,970 ) $ 1,741,129 (1) These amounts are shown net of the effect of income taxes. (2) These amounts are shown net of any shares withheld by the Company to satisfy certain tax withholdings obligations in connection with the vesting of certain shares of restricted stock. The accompanying notes are an integral part of these Consolidated Financial Statements. 41 Consolidated Statements of Cash Flows UniFirst Corporation and Subsidiaries Year ended (In thousands) August 29, 2020 August 31, 2019 August 25, 2018 Cash flows from operating activities: Net income $ 135,770 $ 179,134 $ 163,895 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 104,697 103,333 96,662 Amortization of deferred financing costs 112 112 112 Forgiveness of a liability — ( 7,346 ) — Share-based compensation 5,999 5,761 4,638 Accretion on environmental contingencies 537 755 692 Accretion on asset retirement obligations 929 865 935 Other 2,524 ( 283 ) ( 232 ) Deferred income taxes ( 12,152 ) 8,896 ( 7,861 ) Changes in assets and liabilities, net of acquisitions: Receivables, less reserves 14,589 ( 3,189 ) ( 12,420 ) Inventories ( 5,066 ) ( 10,736 ) ( 11,051 ) Rental merchandise in service 32,262 ( 10,324 ) ( 21,572 ) Prepaid expenses and other current assets and Other assets 840 ( 8,011 ) ( 5,643 ) Accounts payable ( 10,702 ) 3,365 4,573 Accrued liabilities 19,866 ( 1,027 ) 12,233 Prepaid and accrued income taxes ( 3,521 ) 20,837 5,112 Net cash provided by operating activities 286,684 282,142 230,073 Cash flows from investing activities: Acquisition of businesses, net of cash acquired ( 41,221 ) ( 4,919 ) ( 42,665 ) Capital expenditures, including capitalization of software costs ( 116,717 ) ( 119,815 ) ( 112,747 ) Proceeds from sale of assets 322 405 1,777 Other — — ( 263 ) Net cash used in investing activities ( 157,616 ) ( 124,329 ) ( 153,898 ) Cash flows from financing activities: Proceeds from exercise of share-based awards 73 51 461 Taxes withheld and paid related to net share settlement of equity awards ( 3,731 ) ( 2,767 ) ( 3,180 ) Repurchase of Common Stock ( 21,745 ) ( 30,515 ) ( 146,011 ) Payment of cash dividends ( 15,700 ) ( 8,260 ) ( 4,218 ) Net cash used in financing activities ( 41,103 ) ( 41,491 ) ( 152,948 ) Effect of exchange rate changes 1,532 ( 1,493 ) ( 2,467 ) Net (decrease) increase in cash, cash equivalents and short-term investments 89,497 114,829 ( 79,240 ) Cash, cash equivalents and short-term investments at beginning of period 385,341 270,512 349,752 Cash, cash equivalents and short-term investments at end of period $ 474,838 $ 385,341 $ 270,512 Supplemental disclosure of cash flow information: Capital expenditures in accounts payable $ 6,637 $ 9,928 $ 15,050 Interest paid $ 637 $ 750 $ 538 Income taxes paid, net of refunds received $ 58,402 $ 28,354 $ 28,355 The accompanying notes are an integral part of these Consolidated Financial Statements. 42 Notes to Consolidated Financial Statements UniFirst Corporation and Subsidiaries 1. Summary of Significant Accounting Policies Business Description UniFirst Corporation (the “Company”) is one of the largest providers of workplace uniforms and protective clothing in the United States. The Company designs, manufactures, personalizes, rents, cleans, delivers, and sells 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. The Company also rents and sells industrial wiping products, floor mats, facility service products and other non-garment items, and provides 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. The Company serves 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, healthcare providers, and others who require employee clothing for image, identification, protection or utility purposes. The Company also provides its customers with restroom and cleaning supplies, including air fresheners, paper products, gloves, masks, hand soaps and sanitizers. At certain specialized facilities, the Company decontaminates and cleans work clothes and other items that may have been exposed to radioactive materials and services special cleanroom protective wear. Typical customers for these specialized services include government agencies, research and development laboratories, high technology companies and utility providers operating nuclear reactors. As discussed and described in Note 15, “Segment Reporting”, to these Consolidated Financial Statements, the Company has five reporting segments: U.S. and Canadian Rental and Cleaning, Manufacturing (“MFG”), Specialty Garments Rental and Cleaning (“Specialty Garments”), First Aid and Corporate. The operations of the U.S. and Canadian Rental and Cleaning reporting segment are referred to by the Company as its “industrial laundry operations” and the locations related to this reporting segment are referred to as “industrial laundries”. The Company refers to its U.S. and Canadian Rental and Cleaning, MFG, and Corporate segments combined as its “Core Laundry Operations”. In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, and has since spread globally. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Through the first two quarters of fiscal 2020, the COVID-19 pandemic did not have a significant impact on the Company’s business. However, efforts to contain the spread of COVID-19 intensified during the second half of the Company’s fiscal 2020. Most states and municipalities within the U.S. enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. Within the U.S., the Company’s business has been designated an essential business, which allows the Company to continue to serve customers that remain open. In these consolidated financial statements and related disclosures, the Company has assessed the current impact of COVID-19 on its consolidated financial condition, results of operations, and cash flows, as well as our estimates and accounting policies. The Company has made additional disclosures of these assessments, as necessary. Given the unprecedented nature of this situation, the Company cannot reasonably estimate the full extent of the impact COVID-19 will have on its consolidated financial condition, results of operations, or 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. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany balances and transactions are eliminated in consolidation. 43 Basis of Presentation The Consolidated Financial Statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. There have been no material changes in the accounting policies followed by the Company during the current fiscal year other than the adoption of recent accounting pronouncements as discussed in greater detail in the Recent Accounting Pronouncements sub-section of this Note. Use of Estimates The preparation of these Consolidated Financial Statements is in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) which requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. The Company utilizes 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 Company’s 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. Fiscal Year The Company’s fiscal year ends on the last Saturday in August. For financial reporting purposes, fiscal year ended August 31, 2019 (“fiscal 2019”) consisted of 53 weeks, and fiscal years ended August 29, 2020 (“fiscal 2020”) and August 25, 2018 (“fiscal 2018”) both consisted of 52 weeks . Cash, Cash Equivalents and Short-Term Investments Cash, cash equivalents and short-term investments include cash in banks, money market securities, and bank short-term investments having original maturities of twelve months or less. As of August 29, 2020, the Company had no short-term investments. As of August 31, 2019, short-term investments consist of certificates of deposits totaling $ 4.9 million having original maturities of six and twelve months. Accounts receivable Accounts receivable represents amounts due from customers and is presented net of an allowance for doubtful accounts. The Company utilizes its judgment and estimates are used in determining the collectability of accounts receivable and evaluating the adequacy of the allowance for doubtful accounts. The Company considers specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances as part of its evaluation. When an account is considered uncollectible, it is written off against the allowance for doubtful accounts. In response to the economic disruption created by the COVID-19 pandemic and the resulting impact on our customer base, the Company performed an additional evaluation of amounts due from customers in fiscal 2020 that were deemed to be higher collection risk. This evaluation resulted in an allowance for doubtful accounts in excess of historical rates. The judgment applied to increase the allowance for doubtful accounts beyond our historical policy was deemed to be reasonable and supportable based on the data available as of the consolidated balance sheet date. Financial Instruments The Company’s financial instruments, which may expose the Company to concentrations of credit risk, include cash, cash equivalents and short-term investments, receivables, accounts payable and foreign exchange forward contracts. Each of these financial instruments is recorded at cost, which approximates its fair value given the short maturity of each financial instrument. Revenue Recognition Approximately 89.9 % of the Company’s revenues are derived from fees for route servicing of Core Laundry Operations, Specialty Garments and First Aid services performed by the Company’s employees at the customer’s location of business. Revenues from the Company’s route servicing customer contracts represent a single-performance obligation. The Company 44 recognizes these revenues over time as services are performed based on the nature of services provided and contractual rates (input method). Certain of the Company’s customer contracts, primarily within the Company’s Core Laundry Operations, include pricing terms and conditions that include components of variable consideration. The variable consideration is typically in the form of consideration due to a customer based on performance metrics specified within the contract. Specifically, some contracts contain discounts or rebates that the customer can earn through the achievement of specified volume levels. Each component of variable consideration is earned based on the Company’s actual performance during the measurement period specified within the contract. To determine the transaction price, the Company estimates the variable consideration using the most likely amount method, based on the specific contract provisions and known performance results during the relevant measurement period. When determining if variable consideration should be constrained, the Company considers whether factors outside its control could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal. The Company’s performance period generally corresponds with the monthly invoice period. No significant constraints on the Company’s revenue recognition were applied during fiscal 2020 . The Company reassesses these estimates during each reporting period. The Company maintains a liability for these discounts and rebates within accrued liabilities on the consolidated balance sheets. Variable consideration also includes consideration paid to a customer at the beginning of a contract. The Company capitalizes this consideration and amortizes it over the life of the contract as a reduction to revenue in accordance with the accounting guidance for revenue recognition. These assets are included in other assets on the consolidated balance sheets. The following table presents the Company’s revenues for fiscal 2020, 2019, and 2018 disaggregated by service type: Years ended August 29, 2020 August 31, 2019 August 25, 2018 (In thousands, except percentages) Revenues % of Revenues Revenues % of Revenues Revenues % of Revenues Core Laundry Operations $ 1,601,485 88.8 % $ 1,616,205 89.3 % $ 1,523,648 89.8 % Specialty Garments 133,185 7.4 % 132,767 7.3 % 118,477 7.0 % First Aid 69,489 3.9 % 60,404 3.4 % 54,364 3.2 % Total Revenues $ 1,804,159 100.0 % $ 1,809,376 100.0 % $ 1,696,489 100.0 % During fiscal 2020, the percentage of revenues recognized over time as the services are performed was 94.7 % of Core Laundry Operations revenues and 79.2 % of Specialty Garments revenues. During fiscal 2020, 5.3 % of Core Laundry Operations revenues, 20.8 % of Specialty Garments revenues and 100 % of First Aid revenues were recognized at a point in time, which generally occurs when the goods are transferred to the customer. Costs to Obtain a Contract The Company defers commission expenses paid to its employee-partners when the commissions are deemed to be incremental for obtaining the route servicing customer contract. The deferred commissions are amortized on a straight-line basis over the expected period of benefit. The Company reviews the deferred commission balances for impairment on an ongoing basis. Deferred commissions are classified as current or noncurrent based on the timing of when the Company expects to recognize the expense. The current portion is included in prepaid expenses and other current assets and the non-current portion is included in other assets on the Company’s consolidated balance sheets. As of August 29, 2020, the current and non-current assets related to deferred commissions totaled $ 13.3 million and $ 55.6 million, respectively. As of August 31, 2019, the current and non-current assets related to deferred commissions totaled $ 12.4 million and $ 50.3 million, respectively. During fiscal 2020 and 2019, we recorded $ 13.7 million and $ 11.8 million, respectively, of amortization expense related to deferred commissions. This amortization expense is classified in selling and administrative expenses on the consolidated statements of income. Inventories and Rental Merchandise in Service Inventories are stated at the lower of cost or net realizable value, net of any reserve for excess and obsolete inventory. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to customers or used in rental operations. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company uses the first-in, first-out (“FIFO”) method to value its inventories. 45 The components of inventory as of August 29, 2020 and August 31, 2019 were as follows (in thousands): August 29, 2020 August 31, 2019 Raw materials $ 20,266 $ 23,000 Work in process 2,730 2,864 Finished goods 83,273 75,052 Total inventory $ 106,269 $ 100,916 Rental merchandise in service is amortized, primarily on a straight-line basis, over the estimated service lives of the merchandise, which range from six to thirty-six months . The amortization expense is included in the cost of revenues on the Company’s Consolidated Statements of Income. In establishing estimated lives for merchandise in service, management considers historical experience and the intended use of the merchandise. Material differences may result in the amount and timing of operating profit for any period if management makes significant changes to these estimates. Property, plant and equipment Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are expensed as incurred, while expenditures for renewals and betterments are capitalized. The components of property, plant and equipment as of August 29, 2020 and August 31, 2019 were as follows (in thousands): August 29, 2020 August 31, 2019 Land, buildings and leasehold equipment $ 558,277 $ 527,419 Machinery and equipment 585,211 565,319 Motor vehicles 278,098 253,841 1,421,586 1,346,579 Less: accumulated depreciation 839,116 772,070 Total property, plant and equipment $ 582,470 $ 574,509 The Company provides for depreciation on the straight-line method based on the date the asset is placed in service using the following estimated useful lives: Buildings (in years) 30 — 40 Building components (in years) 10 — 20 Leasehold improvements Shorter of useful life or term of lease Machinery and equipment (in years) 3 — 10 Motor vehicles (in years) 3 — 5 Long-lived assets, including property, plant and equipment, are evaluated for impairment whenever events or circumstances indicate an asset may be impaired. There were no material impairments of long-lived assets in fiscal 2020, 2019 and 2018. Goodwill and Other Intangible Assets In accordance with U.S. GAAP, the Company does not amortize goodwill. Instead, the Company tests goodwill for impairment on an annual basis. Management completed its annual goodwill impairment test on the last day of the fourth quarter of each fiscal year prior to fiscal 2020. In fiscal 2020, the Company changed its annual goodwill impairment test date to the first day of the fourth quarter to better align with its internal business processes. In addition, U.S. GAAP requires that companies test goodwill if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit to which goodwill is assigned below its carrying amount. Despite the significant excess fair value identified in the Company’s fiscal 2019 impairment assessment, the Company determined that its reduced cash flow projections and the significant decline in its market capitalization as a result of the COVID-19 pandemic indicated that an impairment loss may have been incurred as of the last day of the third quarter of fiscal 2020. Therefore, the Company qualitatively assessed whether it was more likely than not that the goodwill in each of its 46 reporting units was impaired as of the last day of the third quarter of fiscal 2020 . The Company reviewed its previous forecasts and assumptions based on its current projections, which are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of the impact of the COVID-19 pandemic on the Company’s business (2) current discount rates, (3) the reduction in the Company’s market capitalization, (4) observable market transactions, (5) changes to the regulatory environment and (6) the nature and amount of government support that will be provided. Based on the Company’s interim impairment assessment as of the last day of the third quarter of fiscal 2020, the Company determined that its goodwill was not impaired. The Company also concluded that its goodwill was not impaired on the first day of the fourth quarter of fiscal 2020, its new annual impairment test date. However, the Company is unable to predict how long these conditions will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on its business. The majority of the Company’s goodwill resides within the US Core Laundry Operations reporting unit, for which there continues to exist significant excess fair value over book value. The Company cannot predict future economic conditions and their impact on the Company or the future net realizable value of the Company’s stock. A decline in the Company’s market capitalization and/or deterioration in general economic conditions could negatively and materially impact the Company’s assumptions and assessment of the fair value of the Company’s business. If general economic conditions or the Company’s financial performance deteriorate, the Company may be required to record a goodwill impairment charge in the future which could have a material impact on the Company’s financial condition and results of operations. Definite-lived intangible assets are amortized over their estimated useful lives, which are based on management’s estimates of the period that the assets will generate economic benefits. Definite-lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable in accordance with U.S. GAAP. There were no impairments of goodwill or indicators of impairment for definite-lived intangible assets in fiscal 2020, 2019 and 2018. As of August 29, 2020, definite-lived intangible assets have a weighted average useful life of approximately 12.1 years. Customer contracts have a weighted average useful life of approximately 13.7 years and other intangible assets, net, which consist of primarily, restrictive covenants, software and trademarks, have a weighted average useful life of approximately 8.8 years. Environmental and Other Contingencies The Company is subject to legal proceedings and claims arising from the conduct of its business operations, including environmental matters, personal injury, customer contract matters and employment claims. Accounting principles generally accepted in the United States require 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. The Company regularly consults with attorneys and outside consultants in its consideration of the relevant facts and circumstances before recording a contingent liability. The Company records accruals for environmental and other contingencies based on enacted laws, regulatory orders or decrees, the Company’s estimates of costs, insurance proceeds, participation by other parties, the timing of payments, and the input of outside consultants and attorneys. The estimated liability for environmental contingencies has been discounted as of August 29, 2020 using risk-free interest rates ranging from 0.7 % to 1.5 % over periods ranging from ten to thirty years . The estimated current costs, net of legal settlements with insurance carriers, have been adjusted for the estimated impact of inflation at 3 % per year. 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. Refer to Note 11, “Commitments and Contingencies”, of these Consolidated Financial Statements for additional discussion and analysis. 47 Asset Retirement Obligations Under U.S. GAAP, asset retirement obligations generally apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. 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 has recognized as a liability the present value of the estimated future costs to decommission its nuclear laundry facilities. The Company depreciates, 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-five years . The estimated liability has been based on historical experience in decommissioning nuclear laundry facilities, estimated useful lives of the underlying assets, external vendor estimates as to the cost to decommission these assets in the future, and federal and state regulatory requirements. The estimated current costs have been adjusted for the estimated impact of inflation at 3 % per year. The liability has been discounted using credit-adjusted risk-free rates that range from approximately 7.0 % to 7.5 %. Revisions to the liability could occur due to changes in the Company’s estimated useful lives of the underlying assets, estimated dates of decommissioning, changes in decommissioning costs, changes in federal or state regulatory guidance on the decommissioning of such facilities, or other changes in estimates. Changes due to revised estimates will be recognized by adjusting the carrying amount of the liability and the related long-lived asset if the assets are still in service, or charged to expense in the period if the assets are no longer in service. Insurance The Company is self-insured for certain obligations related to health, workers’ compensation, vehicles and general liability programs. The Company also purchases stop-loss insurance policies for health, workers’ compensation, vehicles and general liability programs to protect itself from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for events that have occurred, but have not been reported. The Company’s estimates consider historical claims experience and other factors. In certain cases where partial insurance coverage exists, the Company estimates the portion of the liability that will be covered by existing insurance policies to arrive at its net expected liability. Receivables for insurance recoveries are recorded as assets, on an undiscounted basis. The Company’s liabilities are based on estimates, and, while the Company believes that its accruals are adequate, the ultimate liability may be significantly different from the amounts recorded. Changes in claims experience, the Company’s ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period. Supplemental Executive Retirement Plan and other Pension Plans Pension expense is recognized on an accrual basis over employees’ estimated service periods. Pension expense is generally independent of funding decisions or requirements. The Company (1) recognizes in its statement of financial position the over-funded or under-funded status of its defined benefit postretirement plans measured as the difference between the fair value of plan assets and the benefit obligation, (2) recognizes as a component of other comprehensive (loss) income, net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measures defined benefit plan assets and defined benefit plan obligations as of the date of its statement of financial position, and (4) discloses additional information in the notes to financial statements about certain effects on net periodic benefit cost in the upcoming fiscal year that arise from delayed recognition of the actuarial gains and losses and the prior service costs and credits. Refer to Note 7, “Employee Benefit Plans”, of these Consolidated Financial Statements for further discussion regarding the Company’s pension plans. The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rates of return on plan assets, the assumed discount rates, assumed rate of compensation increases and life expectancy of participants. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions. Pension expense increases as the expected rate of return on pension plan assets decreases. Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in the Company’s pension plans will impact the Company’s future pension expense and liabilities. The Company cannot predict with certainty what these factors will be in the future. 48 Income Taxes The Company computes income tax expense by jurisdiction based on its operations in each jurisdiction. Deferred income taxes are provided for temporary differences between the amounts recognized for income tax and financial reporting purposes at currently enacted tax rates. The Tax Cuts and Jobs Act of 2017 (the “TCJA”) included a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries and, as a result, previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Deferred tax assets and liabilities are determined by the differences between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities. See Note 4, “Income Taxes” in these Consolidated Financial Statements for the types of items that give rise to significant deferred income tax assets and liabilities. Deferred income taxes are classified as assets or liabilities based on the classification of the related asset or liability for financial reporting purposes. The Company regularly reviews deferred tax assets for recoverability based upon projected future taxable income and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets will be realized. The Company is periodically reviewed by U.S. 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 jurisdictions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves . Refer to Note 4, “Income Taxes”, of these Consolidated Financial Statements for further discussion regarding the Company’s accounting for income taxes and its uncertain tax positions for financial accounting purposes. Advertising Costs Advertising costs are expensed as incurred and are classified as selling and administrative expenses. The Company incurred advertising costs of $ 3.8 million, $ 3.6 million and $ 2.8 million, for fiscal 2020, 2019 and 2018, respectively. Share-Based Compensation Compensation expense for all stock options, stock appreciation rights, unrestricted stock and restricted stock units (collectively, “Share-Based Awards”) is recognized ratably over the related vesting period, net of actual forfeitures. Certain Share-Based Awards in the form of stock appreciation rights and shares of unrestricted stock were granted during fiscal 2020, 2019 and 2018 to non-employee Directors of the Company, which were fully vested upon grant and, with respect to stock appreciation rights, expire eight years after the grant date. Accordingly, compensation expense related to these Share-Based Awards in fiscal 2020, 2019 and 2018 was recognized on the date of grant. For performance-based restricted stock unit awards with revenue and adjusted operating margin targets, we evaluate the probability of meeting the performance criteria at each balance sheet date and if probable, related compensation cost is amortized over the performance period on a straight-line basis because such awards vest only at the end of the measurement period. Changes to the probability assessment and the estimate of shares expected to vest will result in adjustments to the related share-based compensation expense that will be recorded in the period of the change. If the performance targets are not achieved, no compensation cost is recognized and any previously recognized compensation cost is reversed. U.S. GAAP requires that share-based compensation cost be measured at the grant date based on the fair value of the award and be recognized as expense over the requisite service period, which is generally the vesting period. Determining the fair value of Share-Based Awards in the form of stock appreciation rights at the grant date requires judgment, including estimating expected dividends and share price volatility. The fair value of each Share-Based Award in the form of stock appreciation rights is estimated on the date of grant using the Black-Scholes option pricing model. The Company recognizes compensation expense for restricted stock and restricted stock unit grants over the related vesting period. The fair value for each restricted stock, unrestricted stock and restricted stock unit grant is determined by using the closing price of the Company’s stock on the date of the grant. Refer to Note 12, “Share-Based Compensation”, of these Consolidated Financial Statements for further discussion regarding the Company’s share-based compensation plans. Income Per Share The Company calculates income per share by allocating income to its unvested participating securities as part of its income per share calculations. 49 The Class B Common Stock may be converted at any time on a one -for-one basis into Common Stock at the option of the holder of the Class B Common Stock. Diluted income per share for the Company’s Common Stock assumes the conversion of all of the Company’s Class B Common Stock into Common Stock, full vesting of outstanding restricted stock, and the exercise of Share-Based Awards under the Company’s stock incentive plans. The following table sets forth the computation of basic income per share using the two-class method for amounts attributable to the Company’s shares of Common Stock and Class B Common Stock (in thousands, except per share data): Year ended August 29, 2020 August 31, 2019 August 25, 2018 Net income available to shareholders $ 135,770 $ 179,134 $ 163,895 Allocation of net income for Basic: Common Stock $ 114,017 $ 150,247 $ 133,802 Class B Common Stock 21,753 28,887 30,093 $ 135,770 $ 179,134 $ 163,895 Weighted average number of shares for Basic: Common Stock 15,276 15,385 15,454 Class B Common Stock 3,643 3,697 4,357 18,919 19,082 19,811 Income per share for Basic: Common Stock $ 7.46 $ 9.77 $ 8.66 Class B Common Stock $ 5.97 $ 7.81 $ 6.91 The Company is required to calculate the diluted income per share for Common Stock using the more dilutive of the following two methods: • The treasury stock method; or • The two-class method assuming a participating security is not exercised or converted. For fiscal 2020, 2019 and 2018, the Company’s diluted income per share assumes the conversion of all Class B Common Stock into Common Stock and uses the two-class method for its unvested participating shares. The following table sets forth the computation of diluted income per share of Common Stock for the years ended August 29, 2020, August 31, 2019 and August 25, 2018 (in thousands, except per share data): Year Ended August 29, 2020 Year Ended August 31, 2019 Year Ended August 25, 2018 Earnings to Common shareholders Common Shares Income Per Share Earnings to Common shareholders Common Shares Income Per Share Earnings to Common shareholders Common Shares Income Per Share As reported—Basic $ 114,017 15,276 $ 7.46 $ 150,247 15,385 $ 9.77 $ 133,802 15,454 $ 8.66 Add: effect of dilutive potential common shares Share-Based Awards — 123 — 114 — 152 Class B Common Stock 21,753 3,643 28,887 3,697 30,093 4,357 Diluted Income Per Share— Common Stock $ 135,770 19,042 $ 7.13 $ 179,134 19,196 $ 9.33 $ 163,895 19,963 $ 8.21 Share-Based Awards that would result in the issuance of 8,094 , 8,325 and 4,972 shares, respectively, of Common Stock were excluded from the calculation of diluted earnings per share for fiscal 2020, 2019 and 2018 because they were anti-dilutive. Foreign Currency Translation The functional currency of our foreign operations is the local country’s currency. Transaction gains and losses, including gains and losses on our intercompany transactions, are included in other (income) expense in the accompanying Consolidated Statements of Income. Assets and liabilities of operations outside the United States are translated into U.S. dollars using period-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during each month of the fiscal year. The effects of foreign currency translation adjustments are included in shareholders’ equity as a component of accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets. 50 Recent Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (the “FASB”) issued updated guidance which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The Company adopted this standard on September 1, 2019 using the modified retrospective adoption method. The standard provides a number of optional practical expedients in transition and the Company has elected certain of these practical expedients upon adoption of this standard. Specifically, the Company elected the package of practical expedients permitted under the standard, which allows a lessee to carry forward its population of existing leases, the classification of each lease, as well as the treatment of initial direct lease costs as of the period of adoption. The Company also elected the practical expedient related to lease and non-lease components, as an accounting policy election which allows a lessee to not separate non-lease from lease components and instead account for consideration paid in a contract as a single lease component. In addition, the Company elected the short-term lease recognition exemption for all leases with a term of 12 months or less, which means it will not recognize right-of-use assets or lease liabilities for these leases. The adoption of this standard resulted in the Company recognizing right-of-use assets, net of $ 48.7 million and corresponding lease liabilities of $ 46.2 million and reductions of prepaid expenses and other current assets of $ 1.2 million and $ 1.3 million, respectively. The adoption of this standard did not have a material impact on the Company's consolidated statement of income or consolidated statement of cash flows. In June 2016, the FASB issued updated guidance that introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments including trade receivables. The estimate of expected credit losses will require entities to incorporate historical information, current information and reasonable and supportable forecasts. This guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2019 with early adoption permitted. Accordingly, the guidance will be effective for the Company on August 30, 2020. The Company expects that adoption of this guidance will not have a material impact on its financial statements and related disclosures. In August 2018, the FASB issued updated guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance will be effective for annual reporting periods, and any interim periods within those annual periods, ending after December 15, 2020 and will be required to be applied on a retrospective basis with early adoption permitted. Accordingly, the standard will be effective for the Company on August 29, 2021. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures. In August 2018, the FASB issued guidance that addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2019 with early adoption permitted. The amendments in this update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Accordingly, the guidance will be effective for the Company on August 30, 2020. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures. In December 2019, the FASB issued updated guidance to simplify accounting for income taxes by removing certain exceptions and improving the consistent application of and simplifying U.S. GAAP in other areas of this topic. This guidance is effective for annual reporting periods, and any interim periods within those annual periods, that begin after December 15, 2020 with early adoption permitted. Accordingly, the guidance will be effective for the Company on August 29, 2021. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures. In March 2020, the FASB issued optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures. 51 2. Acquisitions During fiscal 2020, the Company completed eight business acquisitions with an aggregate purchase price of approximately $ 41.3 million. The allocations of the purchase prices with respect to certain assets acquired during fiscal 2020 are complete. 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. Aggregate information relating to the acquisition of businesses which were accounted for as purchases is as follows (in thousands, except number of businesses acquired): Year ended August 29, 2020 August 31, 2019 August 25, 2018 Number of businesses acquired $ 8 $ 6 $ 9 Tangible assets acquired 6,370 322 7,743 Goodwill 23,544 3,929 21,459 Customer contracts 12,697 1,344 11,751 Other intangible assets 594 118 900 Liabilities assumed ( 1,872 ) — ( 95 ) Acquisition of businesses $ 41,333 $ 5,713 $ 41,758 Tangible assets acquired primarily relate to accounts receivable, inventory, prepaid expenses and property, plant and equipment. Liabilities assumed primarily relate to leases, accounts payable and accrued liabilities. The amount assigned to intangible assets acquired was based on their respective fair values determined as of the acquisition date. The excess of the purchase price over the tangible and intangible assets was recorded as goodwill. In fiscal 2020, 2019 and 2018, the goodwill was primarily allocated to the U.S. and Canadian Rental and Cleaning segment and is deductible for tax purposes. In September 2019, the Company completed an acquisition for approximately $ 38.8 million. The all-cash transaction was structured as an asset acquisition, with the Company acquiring substantially all of the acquired company’s industrial laundry, industrial uniform rental and industrial direct sales assets. 3. Fair Value Measurements U.S. 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 U.S. 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. 52 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 August 29, 2020 Level 1 Level 2 Level 3 Fair Value Assets: Cash equivalents $ 196,478 $ — $ — $ 196,478 Pension plan assets — 4,146 — 4,146 Foreign currency forward contracts — 87 — 87 Total assets at fair value $ 196,478 $ 4,233 $ — $ 200,711 As of August 31, 2019 Level 1 Level 2 Level 3 Fair Value Assets: Cash equivalents $ 214,038 $ — $ — $ 214,038 Pension plan assets — 4,603 — 4,603 Foreign currency forward contracts — 254 — 254 Total assets at fair value $ 214,038 $ 4,857 $ — $ 218,895 The Company’s cash equivalents listed above represent money market securities and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Company does not adjust the quoted market price for such financial instruments. The Company’s pension plan assets listed above represent guaranteed deposit accounts that are maintained and operated by Prudential Retirement Insurance and Annuity Company (“PRIAC”). All assets are merged with the general assets of PRIAC and are invested predominantly in privately placed securities and mortgages. At the beginning of each calendar year, PRIAC notifies the Company of the annual rates of interest which will be applied to the amounts held in the guaranteed deposit account during the next calendar year. In determining the interest rate to be applied, PRIAC considers the investment performance of the underlying assets of the prior year; however, regardless of the investment performance the Company is contractually guaranteed a minimum rate of return. As such, the Company’s pension plan assets are included within Level 2 of the fair value hierarchy. 53 The Company’s foreign currency forward contracts represent contracts the Company has entered into to exchange Canadian dollars for U.S. dollars at fixed exchange rates in order to manage its exposure related to certain forecasted Canadian dollar denominated sales of one of its subsidiaries. These contracts are included in prepaid expenses and other current assets and other long-term assets as of August 29, 2020 and August 31, 2019 . The fair value of the forward contracts is based on similar exchange traded derivatives and are, therefore, included within Level 2 of the fair value hierarchy. 4. Income Taxes The provision / (benefit) for income taxes consists of the following (in thousands): Fiscal year 2020 2019 2018 Current: Federal $ 40,084 $ 38,545 $ 23,815 Foreign 1,589 ( 200 ) 527 State 12,865 11,733 8,012 Total current $ 54,538 $ 50,078 $ 32,354 Deferred: Federal $ ( 8,522 ) $ 7,289 $ ( 11,517 ) Foreign ( 599 ) 645 363 State ( 3,299 ) 778 2,151 Total deferred $ ( 12,420 ) $ 8,712 $ ( 9,003 ) Total $ 42,118 $ 58,790 $ 23,351 The following table reconciles the provision for income taxes using the statutory federal income tax rate to the actual provision for income taxes: Fiscal year 2020 2019 2018 Income taxes at the statutory federal income tax rate 21.0 % 21.0 % 25.9 % State income taxes 4.4 4.3 4.1 Other ( 1.7 ) ( 0.6 ) ( 2.8 ) Deemed Repatriation of Non—U.S. Earnings, net foreign tax credits and other (collectively, Transition Tax) — — 1.4 Impact of U.S. tax reform federal tax rate reduction — — ( 16.1 ) Total 23.7 % 24.7 % 12.5 % The components of deferred income taxes included on the consolidated balance sheets are as follows (in thousands): August 29, 2020 August 31, 2019 Deferred Tax Assets Payroll and benefit related $ 17,451 $ 15,929 Insurance related 13,790 11,948 Environmental 7,856 7,093 Accrued expenses 6,270 2,164 Operating lease liabilities 8,720 — Other 7,536 7,301 Total deferred tax assets $ 61,623 $ 44,435 Deferred Tax Liabilities Payroll and benefit related $ 17,722 $ 16,056 Tax in excess of book depreciation 41,713 42,691 Purchased intangible assets 32,892 29,633 Rental merchandise in service 38,846 46,649 Operating lease right-of-use assets 8,952 — Other 191 290 Total deferred tax liabilities 140,316 135,319 Net deferred tax liability $ 78,693 $ 90,884 54 The Company regularly reviews deferred tax assets for recoverability based upon projected future taxable income and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets will be realized. U.S. Tax Reform The TCJA enacted on December 22, 2017, among other matters, reduced the U.S. federal corporate income tax rate from 35.0 % to 21.0 %, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. On December 22, 2017, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing SEC registrants to consider the impact of the U.S. legislation as “provisional” when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, during fiscal 2018 the Company recorded its best estimates based on its interpretation of the U.S. legislation while it continued to accumulate data to finalize the underlying calculations. This resulted in the Company recording a provisional net income tax benefit of $ 20.1 million for the fiscal year ended August 25, 2018 related to remeasuring its U.S. net deferred tax liabilities at the lower tax rate and the one-time transition tax. As a result of the TCJA, U.S. corporations are subject to lower income tax rates. For fiscal 2020 and 2019, the statutory tax rate was 21.0 % compared to the applicable blended statutory tax rate of 25.9 % for fiscal 2018. During the second quarter of fiscal 2019, the Company completed its accounting for the tax effects of enactment of the TCJA as required by SAB 118. There were no changes from the provisional calculation as recorded through August 25, 2018 to the final calculation. Effective tax rate The Company’s effective tax rate for the fiscal year ended August 29, 2020 was 23.7 % as compared to 24.7 % for the corresponding period in the prior year. The decrease in the effective tax rate was primarily due to higher benefits of $ 2.1 million resulting from the release of certain tax reserves and the tax benefit related to the exercise of stock appreciation rights in fiscal 2020 compared to fiscal 2019. Foreign tax effect As of August 29, 2020, unremitted foreign earnings, have been retained by the Company’s foreign subsidiaries for indefinite reinvestment. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to immaterial withholding taxes payable to the various foreign countries. Uncertain tax positions As of August 29, 2020 and August 31, 2019, there was $ 6.3 million and $ 7.7 million, respectively, of unrecognized tax benefits, of which $ 5.6 million and $ 7.0 million, respectively, would favorably impact the Company’s effective tax rate, if recognized. The Company recognized 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. As of August 29, 2020 and August 31, 2019, the Company had accrued a total of $ 0.2 million and $ 0.2 million, respectively, in interest and penalties, in its long-term accrued liabilities. For the years ended August 29, 2020, August 31, 2019 and August 25, 2018 the Company recognized a nominal expense in its Consolidated Statement of Income related to interest and penalties. 55 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance at August 25, 2018 $ 2,198 Additions based on tax positions related to the current year 329 Additions for tax positions of prior years 5,535 Statute expirations ( 394 ) Balance at August 31, 2019 7,668 Additions based on tax positions related to the current year 475 Reduction for tax positions of prior years ( 1,389 ) Statute expirations ( 424 ) Balance at August 29, 2020 $ 6,330 The Company has a significant portion of its operations in the United States and Canada. It is required to file federal income tax returns as well as state income tax returns in a majority of the U.S. states and also in a number of Canadian provinces. At times, the Company is subject to audits in these jurisdictions, which typically are complex and can require several years to resolve. The final resolution of any such tax audits could result in either a reduction in the Company’s accruals or an increase in its income tax provision, both of which could have a material impact on the consolidated results of operations in any given period. All U.S. and Canadian federal income tax statutes have lapsed for filings up to and including fiscal years 2015 and 2012, respectively. With a few exceptions, the Company is no longer subject to state and local income tax examinations for periods prior to fiscal 2016. 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. 5. Loans Payable and Long-term Debt As of August 29, 2020 and August 31, 2019, the Company had no outstanding loans payable. The Company has a $ 250.0 million unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks, which matures on April 11, 2021 . Under the Credit Agreement, the Company is able to borrow funds at variable interest rates based on, at its election, the Eurodollar rate or a base rate, plus in each case a spread based on the Company’s consolidated funded debt ratio. Availability of credit requires compliance with certain financial and other covenants, including a maximum consolidated funded debt ratio and minimum consolidated interest coverage ratio as defined in the Credit Agreement. The Company tests its compliance with these financial covenants on a fiscal quarterly basis. As of August 29, 2020, 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 August 29, 2020, the Company had no outstanding borrowings and had outstanding letters of credit amounting to $ 70.8 million, leaving $ 179.2 million available for borrowing under the Credit Agreement. As of August 29, 2020, the Company was in compliance with all covenants under the Credit Agreement. 6. 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. U.S. 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. 56 In June 2018, the Company entered into twelve forward contracts to exchange 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 2019 and continuing through the second fiscal quarter of 2022. In total, the Company will sell approximately 12.1 million CAD at an average Canadian-dollar exchange rate of 0.7814 over these quarterly periods. The Company concluded that the forward contracts met the criteria to qualify as a cash flow hedge under U.S. GAAP. As of August 29, 2020, the Company 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. For the fiscal year ended August 29, 2020, the Company 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 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. 7. Employee Benefit Plans Defined Contribution Retirement Savings Plan The Company has a defined contribution retirement savings plan with a 401(k) feature for all eligible U.S. and Canadian employees not under collective bargaining agreements. The Company matches a portion of the employee’s contribution and may make an additional contribution at its discretion. Contributions charged to expense under the plan for fiscal 2020, 2019 and 2018 were $ 16.6 million, $ 19.7 million and $ 18.1 million, respectively. Pension Plans and Supplemental Executive Retirement Plans The Company accounts for its pension plans and Supplemental Executive Retirement Plan on an accrual basis over employees’ estimated service periods. The Company maintains an unfunded Supplemental Executive Retirement Plan (“SERP”) for certain eligible employees of the Company. The benefits are based on the employee’s compensation upon retirement. The amount charged to expense related to this plan amounted to approximately $ 2.6 million, $ 2.1 million and $ 2.1 million for fiscal 2020, 2019 and 2018, respectively. The Company maintains a non-contributory defined benefit pension plan (“UniFirst Plan”) covering employees at one of its locations. The benefits are based on years of service. The UniFirst Plan assets are invested in a Guaranteed Deposit Account (“GDA”) that is 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 GDA 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 annual interest rate applied per the contract must be a minimum of 3.25 %. The amount charged to expense related to this plan amounted to approximately $ 0.2 million, $ 0.3 million and $ 0.3 million for fiscal 2020, 2019 and 2018. In connection with one of the Company’s acquisitions, the Company assumed liabilities related to a frozen pension plan covering many of the acquired Company’s former employees (“Textilease Plan”). The pension benefits are based on years of service and the employee’s compensation. The Textilease Plan assets are held in a separate GDA with PRIAC; however the minimum interest rate per the Textilease Plan contract is 1.5 %. The amount charged to expense related to this plan amounted to approximately $ 0 , $ 0.5 million and $ 0.2 million, respectively, for fiscal 2020, 2019 and 2018. The Company refers to its UniFirst Plan and Textilease Plan collectively as its “Pension Plans”. 57 The components of net periodic benefit cost related to the Company’s Pension Plans and SERP for fiscal 2020, 2019 and 2018 were as follows (in thousands): Pension Plans SERP 2020 2019 2018 2020 2019 2018 Service cost $ 113 $ 114 $ 115 $ 918 $ 725 $ 694 Interest cost 131 260 257 1,027 1,148 1,027 Expected return on assets ( 138 ) ( 199 ) ( 174 ) — — — Amortization of prior service cost 66 66 66 — — — Amortization of unrecognized loss — 51 102 703 247 362 Other events 12 503 96 — — — Net periodic benefit cost $ 184 $ 795 $ 462 $ 2,648 $ 2,120 $ 2,083 The Company’s obligations and funded status related to its Pension Plans and SERP as of August 29, 2020 and August 31, 2019 were as follows (in thousands): Pension Plans SERP 2020 2019 2020 2019 Change in benefit obligation: Projected benefit obligation, beginning of year $ 5,566 $ 7,449 $ 35,967 $ 27,547 Service cost 113 114 918 725 Interest cost 131 260 1,027 1,148 Actuarial loss 169 163 1,658 7,456 Benefits paid ( 224 ) ( 50 ) ( 954 ) ( 909 ) Settlements ( 287 ) ( 2,370 ) — — Projected benefit obligation, end of year $ 5,468 $ 5,566 $ 38,616 $ 35,967 Change in plan assets: Fair value of plan assets, beginning of year $ 4,603 $ 6,325 $ — $ — Actual return on plan assets 54 170 — — Employer contributions — 528 — — Benefits paid ( 224 ) ( 50 ) — — Settlements ( 287 ) ( 2,370 ) — — Fair value of plan assets, end of year $ 4,146 $ 4,603 $ — $ — Funded status (net amount recognized): $ ( 1,322 ) $ ( 963 ) $ ( 38,616 ) $ ( 35,967 ) As of August 29, 2020 and August 31, 2019, the accumulated benefit obligations for the Company’s Pension Plans were $ 5.5 million and $ 5.6 million, respectively. As of August 29, 2020 and August 31, 2019, the accumulated benefit obligations for the Company’s SERP were $ 30.7 million and $ 27.4 million, respectively. The amounts recorded on the Consolidated Balance Sheet for the Company’s Pension Plans and SERP as of August 29, 2020 and August 19, 2019 were as follows (in thousands): Pension Plans SERP 2020 2019 2020 2019 Deferred tax assets $ 279 $ 254 $ 3,144 $ 2,912 Accrued liabilities $ 1,322 $ 963 $ 38,616 $ 35,967 Accumulated other comprehensive loss $ ( 819 ) $ ( 741 ) $ ( 9,234 ) $ ( 8,509 ) As of August 29, 2020 and August 31, 2019, the amounts recognized in accumulated other comprehensive loss for the Company’s Pension Plans and SERP were as follows (in thousands): Pension Plans SERP 2020 2019 2020 2019 Net actuarial gain (loss) $ ( 1,011 ) $ ( 549 ) $ ( 9,234 ) $ ( 8,509 ) Unrecognized prior service cost 192 ( 192 ) — — Accumulated other comprehensive loss $ ( 819 ) $ ( 741 ) $ ( 9,234 ) $ ( 8,509 ) 58 The weighted average assumptions used in calculating the Company’s projected benefit obligation as of August 29, 2020 and August 31, 2019, were as follows: Pension Plans SERP 2020 2019 2020 2019 Discount rate 2.0 % 2.7 % 2.5 % 2.9 % Rate of compensation increase N/A N/A 5.0 % 5.0 % The weighted average assumptions used in calculating the Company’s net periodic service cost for the years ended August 29, 2020, August 31, 2019 and August 25, 2018, were as follows: Pension Plans SERP 2020 2019 2018 2020 2019 2018 Discount rate 2.7 % 3.8 % 3.2 % 2.9 % 4.0 % 3.6 % Expected return on plan assets 3.5 % 3.5 % 3.5 % N/A N/A N/A Rate of compensation increase N/A N/A N/A 5.0 % 5.0 % 5.0 % The following benefit payments, which reflect expected future service, that are expected to be paid for the five fiscal years subsequent to August 29, 2020 and thereafter are as follows (in thousands): Pension Plans SERP 2021 $ 723 $ 1,194 2022 214 1,363 2023 313 1,364 2024 307 1,560 2025 379 1,625 Thereafter 3,532 31,510 Total benefit payments $ 5,468 $ 38,616 8. Goodwill and Other Intangible Assets As discussed in Note 2, “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 following details the changes in the Company’s intangible assets and goodwill related to the Company’s acquisitions for the years ended August 29, 2020 and August 31, 2019 as well as the respective periods over which the assets will be amortized (in thousands, except weighted average life in years). These amounts include additional payments associated with prior year acquisitions: Year ended August 29, 2020 Weighted Average Life in Years August 31, 2019 Weighted Average Life in Years Goodwill $ 23,544 N/A $ 3,885 N/A Customer contracts 12,697 14.1 1,070 10.0 Other intangible assets 594 5.3 118 3.0 Total intangible assets and goodwill acquired $ 36,835 $ 5,073 59 The Company does not amortize goodwill, but it is reviewed annually or more frequently if certain indicators arise, for impairment. There were no impairment losses related to goodwill or intangible assets during the years ended August 29, 2020, August 31, 2019 and August 25, 2018. The changes in the carrying amount of goodwill are as follows (in thousands): Balance as of August 25, 2018 $ 397,422 Goodwill recorded during the period 3,885 Other ( 129 ) Balance as of August 31, 2019 $ 401,178 Goodwill recorded during the period 23,544 Other 122 Balance as of August 29, 2020 $ 424,844 As of August 29, 2020, the Company has allocated $ 413.2 million, $ 11.0 million and $ 0.6 million of goodwill to its U.S. and Canadian Rental and Cleaning, Specialty Garments and First Aid segments, respectively. Intangible assets, net in the Company’s accompanying Consolidated Balance Sheets are as follows (in thousands): Gross Carrying Amount Accumulated Amortization Net Carrying Amount August 29, 2020 Customer contracts $ 234,065 $ 177,119 $ 56,946 Software 66,014 39,020 26,994 Other intangible assets 35,741 34,145 1,596 $ 335,820 $ 250,284 $ 85,536 August 31, 2019 Customer contracts $ 221,306 $ 164,718 $ 56,588 Software 48,838 34,813 14,025 Other intangible assets 35,063 32,956 2,107 $ 305,207 $ 232,487 $ 72,720 Estimated amortization expense for the five fiscal years subsequent to August 29, 2020 and thereafter, based on intangible assets, net as of August 29, 2020 is as follows (in thousands): 2021 $ 14,127 2022 12,573 2023 10,633 2024 9,367 2025 8,276 Thereafter 30,560 Total estimated amortization expense $ 85,536 60 9. Accrued Liabilities Accrued liabilities in the accompanying Consolidated Balance Sheet consists of the following (in thousands): August 29, 2020 August 31, 2019 Current liabilities: Payroll and benefit related $ 46,789 $ 36,634 Bonuses 13,803 14,288 Insurance related 34,403 31,778 Environmental related 11,172 9,785 Other 26,798 19,236 Total current liabilities $ 132,965 $ 111,721 Long-term liabilities: Benefit related $ 38,744 $ 35,883 Environmental related 19,530 17,933 Asset retirement obligations 13,920 12,727 Insurance related 60,626 50,531 Total long-term liabilities $ 132,820 $ 117,074 Total accrued liabilities $ 265,785 $ 228,795 10. Asset Retirement Obligations Asset retirement obligations generally result from legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Accordingly, 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-five years . The Company recognized as a liability the present value of the estimated future costs to decommission its nuclear laundry facilities. The estimated liability is based on historical experience in decommissioning nuclear laundry facilities, estimated useful lives of the underlying assets, external vendor estimates as to the cost to decommission these assets in the future, and federal and state regulatory requirements. The estimated current costs have been adjusted for the estimated impact of inflation at 3 % per year. The liability has been discounted using credit-adjusted risk-free rates that range from approximately 7.0 % to 7.5 % over approximately one to twenty-five years . Revisions to the liability could occur due to changes in the Company’s estimated useful lives of the underlying assets, estimated dates of decommissioning, changes in decommissioning costs, changes in federal or state regulatory guidance on the decommissioning of such facilities, or other changes in estimates. Changes due to revised estimates will be recognized by adjusting the carrying amount of the liability and the related long-lived asset if the assets are still in service, or charged to expense in the period if the assets are no longer in service. A rollforward of the Company’s asset retirement liability is as follows for fiscal 2020 and 2019 (in thousands): August 29, 2020 August 31, 2019 Beginning balance $ 12,727 $ 13,668 Accretion expense 929 865 Effect of exchange rate changes 264 ( 165 ) Change in estimate — ( 1,641 ) Ending balance $ 13,920 $ 12,727 The Company’s asset retirement obligations are included in current accrued liabilities in the accompanying Consolidated Balance Sheet. 61 11. Commitments and Contingencies Lease Commitments The Company has operating leases for certain operating facilities, vehicles and equipment, which provide the right to use the underlying asset and require lease payments over the term of the lease. Each new contract is evaluated to determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. All identified leases are recorded on the consolidated balance sheet with a corresponding operating lease right-of-use asset, net, representing the right to use the underlying asset for the lease term and the operating lease liabilities representing the obligation to make lease payments arising from the lease. Short-term operating leases, which have an initial term of twelve months or less, are not recorded on the consolidated balance sheet. Operating lease right-of-use assets, net and operating lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available as of the lease commencement date. Lease expense for operating leases is recorded on a straight-line basis over the lease term and variable lease costs are recorded as incurred. Both lease expense and variable lease costs are primarily recorded in cost of revenues on the Company's consolidated statements of income. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. The following table presents the operating lease cost and information related to the operating lease right-of-use assets, net and operating lease liabilities for the fifty-two weeks ended August 29, 2020: (In thousands, except lease term and discount rate) Lease cost Operating lease costs including short-term lease expense and variable lease costs, which were immaterial in the period $ 18,125 Operating cash flow impacts Cash paid for amounts included in the measurement of operating lease liabilities $ 13,048 Operating lease right-of-use assets obtained in exchange for new operating lease liabilities $ 7,407 Weighted-average remaining lease term - operating leases 4.3 Weighted-average discount rate - operating leases 2.76 % Total rent expense on all leases was $ 15.2 million, $ 16.5 million and $ 14.8 million for the fiscal 2020, 2019 and 2018, respectively. The contractual future minimum lease payments of the Company's operating lease liabilities by fiscal year are as follows as of August 29, 2020: (In thousands) 2021 $ 13,458 2022 10,581 2023 7,692 2024 5,314 2025 3,288 Thereafter 3,895 Total payments 44,228 Less interest 2,380 Total present value of lease payments $ 41,848 Environmental and Legal Contingencies The Company and its operations are subject to various federal, state and local laws and regulations governing, among other things, air emissions, wastewater discharges, and the generation, handling, storage, transportation, treatment and disposal of hazardous wastes and other substances. In particular, industrial laundries currently use and must dispose of detergent waste water and other residues, and, in the past, used perchloroethylene and other dry-cleaning solvents. The Company is attentive to the environmental concerns surrounding the disposal of these materials and has, through the years, taken measures to avoid their improper disposal. The Company has settled, or contributed to the settlement of, past actions or claims brought against 62 the Company relating to the disposal of hazardous materials at several sites and there can be no assurance that the Company will not have to expend material amounts to remediate the consequences of any such disposal in the future. U.S. GAAP requires that a liability for contingencies be recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. The Company regularly consults with attorneys and outside consultants in its consideration of the relevant facts and circumstances before recording a contingent liability. Changes in enacted laws, regulatory orders or decrees, management’s estimates of costs, risk-free interest rates, insurance proceeds, participation by other parties, the timing of payments, the input of the Company’s attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for environmental and other contingent liabilities. Under environmental laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on, or in, or emanating from, such property, as well as related costs of investigation and property damage. Such laws often impose liability without regard to whether the owner or lessee knew of, or was responsible for the presence of such hazardous or toxic substances. There can be no assurances that acquired or leased locations have been operated in compliance with environmental laws and regulations or that future uses or conditions will not result in the imposition of liability upon the Company under such laws or expose the Company to third-party actions such as tort suits. The Company continues to address environmental conditions under terms of consent orders negotiated with the applicable environmental authorities or otherwise with respect to certain sites. The Company has 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. The Company has potential exposure related to a parcel of land (the “Central Area”) related to a site in Woburn, Massachusetts. Currently, the consent decree for the Woburn site does not define or require any remediation work in the Central Area. The United States Environmental Protection Agency (the “EPA”) has provided the Company and other signatories to the consent decree with comments on the design and implementation of groundwater and soil remedies at the Woburn site and investigation of environmental conditions in the Central Area. The Company, and other signatories, have implemented and proposed to do additional work at the Woburn site but many of the EPA’s comments remain to be resolved. The Company has accrued costs to perform certain work responsive to the EPA’s comments. Additionally, the Company has implemented mitigation measures and continues to monitor environmental conditions at the Somerville, Massachusetts site. The Company has received, 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 the Company made in 2009 for a portion of the site. The Company has received demands from the local transit authority for reimbursement of certain costs associated with its construction of a new municipal transit station in the area of the Somerville site. This station is part of an ongoing extension of the transit system. The Company has reserved for costs in connection with this matter; however, in light of the uncertainties associated with this matter, these costs and the related reserve may change. The Company routinely reviews and evaluates sites that may require remediation and monitoring and determines its estimated costs based on various estimates and assumptions. These estimates are developed using its internal sources or by third party environmental engineers or other service providers. Internally developed estimates are based on: • Management’s judgment and experience in remediating and monitoring the Company’s sites; • Information available from regulatory agencies as to costs of remediation and monitoring; • The number, financial resources and relative degree of responsibility of other potentially responsible parties (“PRPs”) who may be liable for remediation and monitoring of a specific site; and • The typical allocation of costs among PRPs. There is usually a range of reasonable estimates of the costs associated with each site. In accordance with U.S. GAAP, the Company’s accruals reflect the amount within the range that it believes is the best estimate or the low end of a range of estimates if no point within the range is a better estimate. Where it believes that both the amount of a particular liability and the timing of the payments are reliably determinable, the Company adjusts the cost in current dollars using a rate of 3 % for inflation until the time of expected payment and discounts the cost to present value using current risk-free interest rates. As of August 29, 2020, the risk-free interest rates utilized by the Company ranged from 0.7 to 1.5 %. 63 For environmental liabilities that have been discounted, the Company includes interest accretion, based on the effective interest method, in selling and administrative expenses on the accompanying Consolidated Statements of Income. The changes to the Company’s environmental liabilities for fiscal 2020 and 201 9 were as follows (in thousands): Year ended August 29, 2020 August 31, 2019 Beginning balance $ 27,718 $ 25,486 Costs incurred for which reserves have been provided ( 1,160 ) ( 1,079 ) Insurance proceeds 111 143 Interest accretion 537 755 Changes in discount rates 1,133 2,239 Revisions in estimates 2,363 174 Ending balance $ 30,702 $ 27,718 Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of August 29, 2020, for the next five fiscal years and thereafter, as measured in current dollars, are reflected below. (In thousands) 2021 2022 2023 2024 2025 Thereafter Total Estimated costs—current dollars $ 11,368 $ 2,668 $ 1,371 $ 1,073 $ 1,076 $ 11,852 $ 29,408 Estimated insurance proceeds ( 197 ) ( 159 ) ( 173 ) ( 159 ) ( 173 ) ( 521 ) ( 1,382 ) Net anticipated costs $ 11,171 $ 2,509 $ 1,198 $ 914 $ 903 $ 11,331 $ 28,026 Effect of inflation 7,251 Effect of discounting ( 4,575 ) Balance as of August 29, 2020 $ 30,702 Estimated insurance proceeds are primarily received from an annuity received as part of a legal settlement with an insurance company. Annual proceeds of approximately $ 0.3 million are deposited into an escrow account which funds remediation and monitoring costs for two sites related to former operations. 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 the Company’s accompanying Consolidated Balance Sheet, was approximately $ 4.5 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 one of its sites. 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. There can be no assurance that such regulation will not lead to material disruptions in the Company’s garment decontamination business. During fiscal 2017, the Company recorded a pre-tax non-cash impairment charge of $ 55.8 million once it was determined that it was not probable that a Customer Relationship Management (“CRM”) system that was being developed would be completed and placed into service. On December 28, 2018, the Company entered into a settlement agreement with its lead contractor for the version of the CRM system with respect to which the Company recorded the impairment charge. As part of the settlement agreement, the Company recorded in the second quarter of fiscal 2019 a total gain of $ 21.1 million as a reduction of selling and administrative expenses, which includes the Company’s receipt of a one-time cash payment in the amount of $ 13.0 million as well as the forgiveness of amounts previously due the contractor. The Company also received hardware and related maintenance service with a fair value of $ 0.8 million as part of the settlement. From time to time, the Company is also subject to legal proceedings and claims arising from the conduct of its business operations, including personal injury claims, customer contract matters, employment claims and environmental matters as described above. While it is impossible for the Company to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits and environmental contingencies, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance have been properly accrued in accordance with U.S. GAAP. It is possible, however, that the future financial position and/or results of operations for any particular future period could be 64 materially affected by changes in the Company’s assumptions or strategies related to these contingencies or changes out of the Company’s control. Other Contingent Liabilities As security for certain agreements with the NRC and various state agencies related to the nuclear operations (see above) and certain insurance programs, the Company had standby irrevocable bank commercial letters of credit of $ 70.8 million and $ 71.8 million outstanding as of August 29, 2020 and August 31, 2019, respectively. Non-cancellable purchase commitments for inventories, software, and services amounted to $ 22.4 million as of August 29, 2020, of which $ 19.0 million will be paid in less than 1 year, $ 3.2 million will be paid in 1 to 3 years, and the remaining will be paid in 3 to years. 12. Share-based Compensation The Company adopted a stock incentive plan (the “1996 Plan”) in November 1996 and reserved 1,500,000 shares of Common Stock for issuance under the 1996 Plan. The 1996 Plan provided for the issuance of stock options and stock appreciation rights. The Company ceased granting new awards under the 1996 Plan as of January 21, 2011, and the 1996 Plan expired in accordance with its terms on January 8, 2012. The Company adopted a stock incentive plan (the “2010 Plan”) in October 2010 and reserved 600,000 shares of Common Stock for issuance under the 2010 Plan. The 2010 Plan replaced the Company’s 1996 Plan. The 2010 Plan permits the award of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock and performance shares (collectively referred to as “Share-Based Awards”) as well as dividend equivalent rights and cash-based awards. On October 27, 2014, the Board of Directors, subject to the approval of the Company’s shareholders, which was received at the 2015 annual meeting of shareholders, adopted an amendment to the 2010 Plan to, among other matters, reserve for issuance an additional 750,000 shares and extend to 2025 the time period awards may be granted under the 2010 Plan. As of August 29, 2020, the number of remaining shares available for future grants under the 2010 Plan was 311,055 . Share-based compensation, which includes expense related to Share-Based Awards, has been recorded in the accompanying Consolidated Statements of Income in selling and administrative expenses. All Share-Based Awards issued to management were recommended to the Board of Directors by the Compensation Committee and approved by the Board of Directors. All Share-Based Awards issued to the Company’s non-employee members of the Board of Directors (the “Directors”) under the 2010 Plan were recommended to the Board of Directors by the Compensation Committee and approved by the Board of Directors. Share-Based Awards granted to non-employee Directors are granted on the third business day following the annual shareholders’ meeting. In fiscal 2019 and 2018, a total of 291 and 234 shares of fully vested unrestricted stock, respectively, were granted to certain non-employee Directors of the Company. No such shares were granted during fiscal 2020. Accordingly, compensation expense related to the 2019 and 2018 unrestricted stock was recognized on the date of grant. In each of fiscal 2020, 2019 and 2018, the Company granted a total of 5,000 stock appreciation rights under the 2010 Plan to the Company’s non-employee Directors. Such stock appreciation rights were fully vested upon grant, expire on the earlier of the eighth anniversary of the grant date or the second anniversary of the date that the Director ceases to be a member of the Board of Directors and must be settled in stock at the time of exercise. Accordingly, compensation expense related to the stock appreciation rights was recognized on the date of grant. As of August 29, 2020, the total compensation cost not yet recognized related to non-vested Share-Based Awards was approximately $ 13.7 million. The weighted average period over which compensation cost for Share-Based Awards will be recognized is 2.2 years. All stock appreciation rights issued to employees were granted with an exercise price equal to the fair net realizable value of the Company’s Common Stock on the date of grant. Other than certain stock appreciation rights which vest 20 % on each anniversary of the grant date over a five-year period and beginning in fiscal 2020, certain stock appreciation rights which vest 60 % on the third anniversary of the grant date and 20 % on each of the fourth and fifth anniversaries of the grant date, stock appreciation rights are subject to a five-year cliff-vesting schedule under which the awards become fully vested or exercisable after five years from the date of grant and expire ten years after the grant date. Share-Based Awards granted to the Company’s non-employee Directors were fully vested as of the date of grant. Beginning in fiscal 2009, non-employee Director Share-Based Award grants in the form of stock options and stock appreciation rights expire on the earlier of the eighth anniversary of the grant date or the second anniversary of the date that the Director ceases to be a member of the Board of Directors. 65 Time-based restricted stock units granted to employees vest either 20 % on each anniversary of the grant date over a five-year period, 33 % on each anniversary of the grant date over a three-year period or on a five-year cliff vesting schedule under which the awards become fully vested after five years from the date of grant. Beginning in fiscal 2020, certain time-based restricted stock units granted to employees vest 60 % on the third anniversary of the grant date and 20 % on each of the fourth and fifth anniversaries of the grant date. Generally, performance-based restricted stock units granted to employees are earned based on whether and the extent to which the Company achieves certain consolidated revenues and adjusted operating margins. The fair value of each stock appreciation right is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used: Fiscal year ended August 2020 2019 2018 Risk-free interest rate 1.69 % 3.07 % 2.23 % Expected dividend yield 0.50 % 0.48 % 0.18 % Expected life in years 5.60 7.24 7.41 Expected volatility 22.4 % 22.9 % 23.1 % The weighted average fair values of Share-Based Awards granted in the form of stock appreciation rights during fiscal years 2020, 2019 and 2018 were $ 46.58 , $ 46.20 and $ 47.51 , respectively. The following table summarizes the Share-Based Awards activity in the form of stock options and stock appreciation rights for fiscal 2020: Number of Shares Weighted Average Exercise Price Outstanding, August 31, 2019 570,250 $ 122.03 Granted 35,396 203.04 Exercised ( 92,501 ) 98.96 Forfeited ( 18,212 ) 121.83 Outstanding, August 29, 2020 494,933 $ 132.14 Exercisable, August 29, 2020 150,099 $ 113.69 The following table summarizes the Share-Based Awards activity in the form of restricted stock units for fiscal 2020: Number of Shares Weighted Average Grant Price Unvested balance at August 31, 2019 28,533 $ 153.96 Granted 36,421 201.29 Vested ( 6,434 ) 156.99 Forfeited ( 600 ) 201.24 Unvested balance at August 29, 2020 57,920 $ 183.90 13. Shareholders’ Equity The Company has two classes of common stock: Common Stock and Class B Common Stock. Each share of Common Stock is entitled to one vote, is freely transferable, and is entitled to a cash dividend equal to 125 % of any cash dividend paid on each share of Class B Common Stock. Each share of Class B Common Stock is entitled to ten votes and can be converted to Common Stock on a share-for-share basis. However, until converted to Common Stock, shares of Class B Common Stock are not freely transferable. For the year ended August 31, 2019, 67,000 shares of Class B Common Stock were converted to Common Stock. On March 27, 2018, the Company 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 . 66 This opportunity to repurchase shares from the Croatti family was evaluated by an independent special committee of the Board of Directors (the “Special Committee”). 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 former UniFirst Chief Executive Officer, Ronald D. Croatti. The Special Committee determined that a repurchase of Croatti family Class B Common Stock at a discount to market was in the best interests of the Company 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. (“Stifel”) and received an opinion from Stifel to the effect that, as of March 27, 2018, the $ 124.00 per share in cash to be paid was fair to the Company, from a financial point of view. The entire Board of Directors other than Cynthia Croatti, who is affiliated with the selling shareholders and therefore abstained, approved the transaction upon the recommendation of the Special Committee. On March 28, 2018, the Company announced that it would be raising its quarterly dividend to $ 0.1125 per share for Common Stock and to $ 0.09 per share for Class B Common Stock, up from $ 0.0375 and $ 0.03 per share, respectively. On October 23, 2019, the Company announced that it would be raising its quarterly dividend to $ 0.25 per share for Common Stock and to $ 0.20 per share for Class B Common Stock, up from $ 0.1125 and $ 0.09 per share, respectively. The amount and timing of any future dividend payment is subject to the approval of the Board of Directors each quarter. On January 2, 2019, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase from time to time up to $ 100.0 million of its outstanding shares of Common Stock. Repurchases made under the program, if any, will be made in either the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will depend on a variety of factors, including economic and market conditions, the Company stock price, corporate liquidity requirements and priorities, applicable legal requirements and other factors. The share repurchase program will be funded using the Company’s available cash or capacity under its Credit Agreement and may be suspended or discontinued at any time. During fiscal 2020, the Company repurchased approximately 118,000 shares for an average price per share of $ 184.67 . During fiscal 2019, the Company repurchased 197,150 shares for an average price per share of $ 154.78 . Currently, there is $47.7 million remaining to repurchase outstanding shares of Common Stock under this program. 14. Accumulated Other Comprehensive Loss The changes in each component of accumulated other comprehensive loss for fiscal 2020 and 2019 are as follows (in thousands): Foreign Currency Translation Pension- related (1) Derivative Financial Instruments (1) Total Accumulated Other Comprehensive Loss Balance as of August 25, 2018 $ ( 21,116 ) $ ( 4,135 ) $ 92 $ ( 25,159 ) Change during the year ( 3,524 ) ( 5,104 ) 99 ( 8,529 ) Balance as of August 31, 2019 ( 24,640 ) ( 9,239 ) 191 ( 33,688 ) Change during the year 2,631 ( 787 ) ( 126 ) 1,718 Balance as of August 29, 2020 $ ( 22,009 ) $ ( 10,026 ) $ 65 $ ( 31,970 ) (1) Amounts are shown net of tax. 67 Amounts reclassified from accumulated other comprehensive loss, net of tax, for fiscal 2020 and 2019 were as follows (in thousands): Year Ended August 29, 2020 Year Ended August 31, 2019 Pension benefit liabilities, net: Actuarial losses (a) $ 233 $ 645 Tax effect reclass — — Total, net of tax 233 645 Derivative financial instruments, net: Forward contracts loss (gain) (b) 151 ( 153 ) Total, net of tax 151 ( 153 ) Total amounts reclassified, net of tax $ 384 $ 492 (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: U.S. Rental and Cleaning, Canadian Rental and Cleaning, MFG, Specialty Garments, First Aid and Corporate. The U.S. Rental and Cleaning and Canadian Rental and Cleaning operating segments have been combined to form the U.S. and Canadian Rental and Cleaning reporting segment, and as a result, the Company has five reporting segments. The U.S. and Canadian Rental and Cleaning reporting segment purchases, rents, cleans, delivers and sells, uniforms and protective clothing and non-garment items in the United States and Canada. The laundry locations of the U.S. and Canadian Rental and Cleaning reporting segment are referred to by the Company as “industrial laundries” or “industrial laundry locations.” The MFG operating segment designs and manufactures uniforms and non-garment items primarily for the purpose of providing these goods to the U.S. and Canadian Rental and Cleaning reporting segment. MFG revenues are primarily generated when goods are shipped from the Company’s manufacturing facilities, or its subcontract manufacturers, to other Company locations. These intercompany revenues are recorded at a transfer price which is typically in excess of the actual manufacturing cost. Manufactured products are carried in inventory until placed in service at which time they are amortized at this transfer price. On a consolidated basis, intercompany revenues and income are eliminated and the carrying value of inventories and rental merchandise in service is reduced to the manufacturing cost. Income before income taxes from MFG net of the intercompany MFG elimination offsets the merchandise amortization costs incurred by the U.S. and Canadian Rental and Cleaning reporting segment as the merchandise costs of this reporting segment are amortized and recognized based on inventories purchased from MFG at the transfer price which is above the Company’s manufacturing cost. The Corporate operating segment consists of costs associated with the Company’s distribution center, sales and marketing, information systems, engineering, procurement, supply chain, accounting and finance, human resources, other general and administrative costs and interest expense. The revenues generated from the Corporate operating segment represent certain direct sales made by the Company directly from its distribution center. The products sold by this operating segment are the same products rented and sold by the U.S. and Canadian Rental and Cleaning reporting segment. In the table below, no assets or capital expenditures are presented for the Corporate operating segment because no assets are allocated to this operating segment in the information reviewed by the chief executive officer. However, depreciation and amortization expense related to certain assets are reflected in income from operations and income before income taxes for the Corporate operating segment. The assets that give rise to this depreciation and amortization are included in the total assets of the U.S. and Canadian Rental and Cleaning reporting segment as this is how they are tracked and reviewed by the Company. The majority of expenses accounted for within the Corporate segment relate to costs of the U.S. and Canadian Rental and Cleaning segment, with the remainder of the costs relating to the Specialty Garment and First Aid segments. 68 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 , provides certain safety training and maintains wholesale distribution and pill packaging operations. The Company refers to the U.S. and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as its “Core Laundry Operations,” which is included as a subtotal in the following tables (in thousands): As of and for the year ended August 29, 2020 US and Canadian Rental and Cleaning MFG Net Interco MFG Elim Corporate Subtotal Core Laundry Operations Specialty Garments First Aid Total Revenues $ 1,552,179 $ 214,683 $ ( 214,683 ) $ 49,306 $ 1,601,485 $ 133,185 $ 69,489 $ 1,804,159 Income (loss) from operations $ 247,392 $ 64,097 $ 10,012 $ ( 171,514 ) $ 149,987 $ 17,845 $ 4,897 $ 172,729 Interest (income) expense, net $ ( 3,741 ) $ — $ — $ ( 2,641 ) $ ( 6,382 ) $ — $ — $ ( 6,382 ) Income (loss) before taxes $ 251,088 $ 63,912 $ 10,012 $ ( 170,629 ) $ 154,383 $ 18,604 $ 4,901 $ 177,888 Depreciation and amortization $ 71,020 $ 2,404 $ — $ 24,983 $ 98,407 $ 4,335 $ 1,955 $ 104,697 Capital expenditures $ 110,024 $ 397 $ — $ — $ 110,421 $ 4,864 $ 1,432 $ 116,717 Total assets $ 1,992,546 $ 33,233 $ — $ — $ 2,025,779 $ 131,328 $ 41,920 $ 2,199,027 As of and for the year ended August 31, 2019 US and Canadian Rental and Cleaning MFG Net Interco MFG Elim Corporate Subtotal Core Laundry Operations Specialty Garments First Aid Total Revenues $ 1,582,416 $ 254,218 $ ( 254,111 ) $ 33,682 $ 1,616,205 $ 132,767 $ 60,404 $ 1,809,376 Income (loss) from operations $ 235,046 $ 84,248 $ 1,128 $ ( 107,468 ) $ 212,954 $ 14,145 $ 4,909 $ 232,008 Interest income, net $ ( 4,105 ) $ — $ — $ ( 4,977 ) $ ( 9,082 ) $ — $ — $ ( 9,082 ) Income (loss) before taxes $ 239,122 $ 84,008 $ 1,128 $ ( 104,742 ) $ 219,516 $ 13,499 $ 4,909 $ 237,924 Depreciation and amortization $ 69,376 $ 2,384 $ — $ 25,098 $ 96,858 $ 4,759 $ 1,716 $ 103,333 Capital expenditures $ 115,071 $ 401 $ — $ — $ 115,472 $ 3,423 $ 920 $ 119,815 Total assets $ 1,865,713 $ 36,376 $ — $ — $ 1,902,089 $ 110,335 $ 34,896 $ 2,047,320 As of and for the year ended August 25, 2018 US and Canadian Rental and Cleaning MFG Net Interco MFG Elim Corporate Subtotal Core Laundry Operations Specialty Garments First Aid Total Revenues $ 1,485,548 $ 247,530 $ ( 247,424 ) $ 37,994 $ 1,523,648 $ 118,477 $ 54,364 $ 1,696,489 Income (loss) from operations $ 213,322 $ 89,035 $ ( 9,658 ) $ ( 129,111 ) $ 163,588 $ 14,070 $ 4,718 $ 182,376 Interest (income) expense, net $ ( 3,927 ) $ — $ — $ ( 1,616 ) $ ( 5,543 ) $ — $ — $ ( 5,543 ) Income (loss) before taxes $ 217,252 $ 88,856 $ ( 9,658 ) $ ( 127,510 ) $ 168,940 $ 13,589 $ 4,717 $ 187,246 Depreciation and amortization $ 64,481 $ 2,238 $ — $ 24,108 $ 90,827 $ 4,244 $ 1,591 $ 96,662 Capital expenditures $ 105,481 $ 2,882 $ — $ — $ 108,363 $ 3,781 $ 603 $ 112,747 Total assets $ 1,670,713 $ 33,622 $ — $ — $ 1,704,335 $ 110,811 $ 28,240 $ 1,843,386 The Company’s long-lived assets as of August 29, 2020 and August 31, 2019 and revenues and income before income taxes for the years ended August 29, 2020, August 31, 2019 and August 25, 2018 were attributed to the following countries (in thousands): Long-lived assets as of: August 29, 2020 August 31, 2019 United States $ 1,177,107 $ 1,087,901 Europe, Canada, Mexico and Nicaragua (1) 52,586 45,628 Total $ 1,229,693 $ 1,133,529 Revenues for fiscal years: 2020 2019 2018 United States $ 1,659,913 $ 1,683,321 $ 1,559,780 Europe and Canada (1) 144,246 126,055 136,709 Total $ 1,804,159 $ 1,809,376 $ 1,696,489 69 Income before income taxes for fiscal years: 2020 2019 2018 United States $ 175,301 $ 236,843 $ 184,605 Europe, Canada, Mexico and Nicaragua (1) 2,587 1,081 2,641 Total $ 177,888 $ 237,924 $ 187,246 (1) No country accounts for greater than 10% of total long-lived assets, revenues or income before income taxes 70 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of UniFirst Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of UniFirst Corporation and subsidiaries (the “Company”) as of August 29, 2020 and August 31, 2019, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended August 29, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 29, 2020 and August 31, 2019, and the results of its operations and its cash flows for each of the three years in the period ended August 29, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 29, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated October 28, 2020 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Self-Insurance Accruals Description of the Matter As of August 29, 2020, the Company had recognized current and long-term insurance related liabilities of $33.4 million and $60.6 million, respectively. As discussed in Note 1 to the Company’s consolidated financial statements, the Company is self-insured for certain obligations related to health, workers’ compensation, vehicles and general liability programs and judgments and estimates are used by the Company in determining the potential value associated with reported claims and for events that have occurred but have not been reported. 71 Auditing management’s estimate of the portion of the insurance related liabilities related to workers’ compensation, vehicles and general liability is highly judgmental and complex due to the significant uncertainty in the potential value of reported claims and the number and potential value of incurred but not reported claims, the application of significant management judgment in making those estimates and the use of various actuarial methods. The reserve estimate is sensitive to actuarial assumptions used to estimate the ultimate liability for reported claims and to estimate the value of claims that have been incurred but have not been reported. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s self-insurance accrual process. This includes controls over the assumptions and methods used to establish the estimate. Specifically, we tested controls related to management’s review of data provided to the actuary, significant actuarial assumptions and the related reconciliations. To test the self-insurance accrual, we performed audit procedures over the significant inputs used in management’s analysis, including performing transactional testing over the completeness and accuracy of claims data and vouching payments made to third parties. Furthermore, we involved our actuarial specialists to assist in evaluating the key assumptions and methodologies used by management to determine the reserve. We then compared the Company’s reserve amount to a range which our actuarial specialist developed based on independently selected assumptions. Environmental Contingencies Description of the Matter As discussed in Note 11 to the Company’s consolidated financial statements, the Company is subject to various federal, state, and local laws and regulations governing the treatment and disposal of hazardous waste and other substances. As of August 29, 2020, the Company had recorded a current and long-term liability of $11.2 million and $19.5 million, respectively, representing its best estimate of losses related to these environmental matters. Auditing management’s accounting for environmental loss contingencies was especially challenging, as significant judgment is required by the Company to evaluate whether it is probable that an environmental loss contingency has been incurred and to estimate the future costs to remediate the environmental matters. These judgments include management’s identification of sites with potential liabilities, management’s estimate of the amount and timing of remediation and other costs, allocation of costs among other potentially responsible parties, changes to enacted laws and regulations, discount rates, and evaluation of information available from regulatory agencies. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s identification and measurement of the environmental loss contingency. For example, we tested controls over management’s review of the environmental loss contingency calculation and management’s meetings where they evaluate key judgments and estimates affecting the environmental loss contingency, including those outlined in the paragraph above. To test the assessment of the probability of incurrence of a loss and whether the loss was reasonably estimable, we inspected correspondence to and from regulatory agencies, obtained legal counsel confirmation letters, met with the Company’s legal counsel and other members of management to discuss environmental matters, inspected environmental studies, read the minutes of the meetings of the Company’s Board of Directors and committees of the Company’s Board of Directors, and obtained a representation letter from the Company. Additionally, we utilized our environmental specialists to perform a search for unrecorded environmental liabilities related to the Company’s sites to look for new or contrary evidence. To test the measurement of the environmental liabilities, we performed detailed testing over costs incurred, and based on historical trends and input from management, we evaluated the reasonableness of estimated costs to be incurred. We tested the allocation of costs among potentially responsible parties by analyzing allocation settlement agreements, and tested other assumptions impacting the estimate such as inflation and discount rates by agreeing to third party sources. We also evaluated the accuracy of any changes in measurement of the liability through comparison with historical data. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2002. Boston, Massachusetts October 28, 2020 72 Quarterly Financial Data (Unaudited) The following is a summary of the results of operations for each of the quarters within the years ended August 29, 2020 and August 31, 2019. This quarterly financial information was prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission; however, the Company believes that the information furnished reflects all adjustments (consisting only of normal recurring adjustments) which were, in the opinion of management, necessary for a fair statement of results in the interim periods. This summary should be read in conjunction with these Consolidated Financial Statements and notes to Consolidated Financial Statements. (In thousands, except per share data) For the year ended August 29, 2020 First Quarter (1) Second Quarter (2) Third Quarter (3) Fourth Quarter Revenues $ 465,398 $ 464,600 $ 445,518 $ 428,643 Income before income taxes 61,928 45,763 27,206 42,991 Provision for income taxes 13,686 11,083 5,921 11,428 Net income $ 48,242 $ 34,680 $ 21,285 $ 31,563 Income per share—basic Common Stock $ 2.65 $ 1.90 $ 1.17 $ 1.74 Class B Common Stock $ 2.12 $ 1.52 $ 0.94 $ 1.39 Income per share—diluted Common Stock $ 2.52 $ 1.82 $ 1.12 $ 1.66 Income allocated to—basic Common Stock $ 40,526 $ 29,129 $ 17,871 $ 26,499 Class B Common Stock $ 7,716 $ 5,551 $ 3,414 $ 5,064 Income allocated to—diluted Common Stock $ 48,242 $ 34,680 $ 21,285 $ 31,563 Weighted average number of shares outstanding—basic Common Stock 15,308 15,293 15,255 15,250 Class B Common Stock 3,643 3,643 3,643 3,643 Weighted average number of shares outstanding—diluted Common Stock 19,123 19,105 18,995 19,019 (1) During the first quarter of fiscal 2020, the Company repurchased 50,600 shares for an average price per share of $ 197.11 . (2) During the second quarter of fiscal 2020, the Company repurchased 20,500 shares for an average price per share of $ 206.34 . (3) During the third quarter of fiscal 2020, the Company repurchased 46,667 shares for an average price per share of $ 161.65 . 73 (In thousands, except per share data) For the year ended August 31, 2019 First Quarter Second Quarter (1) Third Quarter (2) Fourth Quarter (3) Revenues $ 438,550 $ 437,485 $ 453,720 $ 479,621 Income before income taxes 51,959 63,395 61,700 60,870 Provision (benefit) for income taxes 13,639 15,789 14,480 14,882 Net income $ 38,320 $ 47,606 $ 47,220 $ 45,988 Income per share—basic Common Stock $ 2.08 $ 2.59 $ 2.58 $ 2.52 Class B Common Stock $ 1.67 $ 2.07 $ 2.06 $ 2.01 Income per share—diluted Common Stock $ 1.99 $ 2.48 $ 2.46 $ 2.40 Income allocated to—basic Common Stock $ 32,137 $ 39,923 $ 39,563 $ 38,619 Class B Common Stock $ 6,183 $ 7,683 $ 7,657 $ 7,369 Income allocated to—diluted Common Stock $ 38,320 $ 47,606 $ 47,220 $ 45,988 Weighted average number of shares outstanding—basic Common Stock 15,432 15,428 15,341 15,340 Class B Common Stock 3,710 3,710 3,710 3,659 Weighted average number of shares outstanding—diluted Common Stock 19,302 19,232 19,168 19,159 (1) During the second quarter of fiscal 2019, the Company repurchased 45,000 shares for an average price per share of $ 139.57 . 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 a CRM system that was being developed would be completed and placed into service. During fiscal 2020, we entered into a settlement agreement with our lead contractor for the version of the CRM system with respect to which we recorded the impairment charge. As part of the settlement agreement, we recorded a total gain of $ 21.1 million as a reduction of selling and administrative expenses, which includes our receipt of a one-time cash payment in the amount of $ 13.0 million as well as the forgiveness of amounts previously due the contractor. We also received hardware and related maintenance service with a fair value of $ 0.8 million as part of the settlement. This gain, net of tax, benefitted the Company’s diluted income per share by $ 0.81 in fiscal 2020. (2) During the third quarter of fiscal 2019, the Company repurchased 99,500 shares for an average price per share of $ 147.47 . (3) During the fourth quarter of fiscal 2019, the Company repurchased 52,650 shares for an average price per share of $ 181.61 . The Company’s fiscal year ends on the last Saturday in August. For financial reporting purposes, fiscal 2020 consisted of 52 weeks, and fiscal 2019 consisted of 53 weeks. Each of the quarterly periods contained 13 weeks except for the fourth quarter of fiscal 2019 which contained 14 weeks. 74 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.