UNIFIRST CORPORATION SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and any documents incorporated by reference may contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements contained in this Quarterly Report on Form 10-Q and any documents incorporated by reference are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "estimates," "anticipates," "projects," "plans," "expects," "intends," "believes," "seeks," "could," "should," "may," "will," "strategy," "objective," "assume," "strive," or the negative versions thereof, and similar expressions and by the context in which they are used. Such forward-looking statements are based upon our current expectations and speak only as of the date made. Such statements are highly dependent upon a variety of risks, uncertainties and other important factors that could cause actual results to differ materially from those reflected in such forward-looking statements. Such factors include, but are not limited to, uncertainties caused by an economic recession or other adverse economic conditions, including, without limitation, as a result of continued high inflation rates or further increases in inflation or interest rates or extraordinary events or circumstances such as geopolitical conflicts like the conflict betweenRussia andUkraine or the COVID-19 pandemic, and their impact on our customers' businesses and workforce levels, disruptions of our business and operations, including limitations on, or closures of, our facilities, or the business and operations of our customers or suppliers in connection with extraordinary events or circumstances such as the COVID-19 pandemic, uncertainties regarding our ability to consummate and successfully integrate acquired businesses, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, any adverse outcome of pending or future contingencies or claims, our ability to compete successfully without any significant degradation in our margin rates, seasonal and quarterly fluctuations in business levels, our ability to preserve positive labor relationships and avoid becoming the target of corporate labor unionization campaigns that could disrupt our business, the effect of currency fluctuations on our results of operations and financial condition, our dependence on third parties to supply us with raw materials, which such supply could be severely disrupted as a result of extraordinary events or circumstances such as the COVID-19 pandemic or the conflict betweenRussia andUkraine , any loss of key management or other personnel, increased costs as a result of any changes in federal, state, international or other laws, rules and regulations or governmental interpretation of such laws, rules and regulations, uncertainties regarding, or adverse impacts from continued high price levels of natural gas, electricity, fuel and labor or increases in such costs, the negative effect on our business from sharply depressed oil and natural gas prices, including, without limitation, as a result of extraordinary events or circumstances such as the COVID-19 pandemic, the continuing increase in domestic healthcare costs, increased workers' compensation claim costs, increased healthcare claim costs, including as a result of extraordinary events or circumstances such as the COVID-19 pandemic, our ability to retain and grow our customer base, demand and prices for our products and services, fluctuations in our Specialty Garments business, political or other instability, supply chain disruption or infection among our employees inMexico andNicaragua where our principal garment manufacturing plants are located, including, without limitation, as a result of extraordinary events or circumstances such as the COVID-19 pandemic, our ability to properly and efficiently design, construct, implement and operate a new customer relationship management ("CRM") computer system and an enterprise resource planning ("ERP") computer system, interruptions or failures of our information technology systems, including as a result of cyber-attacks, additional professional and internal costs necessary for compliance with any changes in or additionalSecurities and Exchange Commission ("SEC"),New York Stock Exchange and accounting or other rules, including, without limitation, recent rules proposed by theSEC regarding climate-related and cybersecurity-related disclosures, strikes and unemployment levels, our efforts to evaluate and potentially reduce internal costs, economic and other developments associated with the war on terrorism and its impact on the economy, the impact of foreign trade policies and tariffs or other impositions on imported goods on our business, results of operations and financial condition, general economic conditions, our ability to successfully implement our business strategies and processes, including our capital allocation strategies, our ability to successfully remediate the material weakness in internal control over financial reporting disclosed in our Annual Report on Form 10-K for the year endedAugust 27, 2022 and the other factors described under "Part I, Item 1A. Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year endedAugust 27, 2022 and in our other filings with theSEC , including, without limitation, under Part II, Item 1A. "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.
Business Overview
UniFirst Corporation , together with its subsidiaries, hereunder referred to as "we", "our", the "Company", or "UniFirst", is one of the largest providers of workplace uniforms and protective work wear clothing inthe United States . We design, manufacture, personalize, rent, clean, deliver, and sell a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks, aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent and sell industrial wiping products, floor mats, facility service products and other non-garment items, and provide restroom and cleaning supplies and first aid cabinet services and other safety supplies as well as provide certain safety training to a variety of manufacturers, retailers and service companies. We serve businesses of all sizes in numerous industry categories. Typical customers include automobile service centers and dealers, delivery services, food and general merchandise retailers, food processors and service operations, light manufacturers, maintenance 21 -------------------------------------------------------------------------------- facilities, restaurants, service companies, soft and durable goods wholesalers, transportation companies, healthcare providers and others who require employee clothing for image, identification, protection or utility purposes. We also provide our customers with restroom and cleaning supplies, including air fresheners, paper products and hand soaps. At certain specialized facilities, we also decontaminate and clean work clothes and other items that may have been exposed to radioactive materials and service special cleanroom protective wear and facilities. Typical customers for these specialized services include government agencies, research and development laboratories, high technology companies and utilities operating nuclear reactors. We continue to expand into additional geographic markets through acquisitions and organic growth. We currently service over 300,000 customer locations inthe United States ,Canada andEurope from over 260 customer service, distribution and manufacturing facilities. As mentioned and described in Note 16 to our Consolidated Financial Statements, we have five reporting segments:U.S. and Canadian Rental and Cleaning, MFG, Corporate, Specialty Garments and First Aid. We refer to the laundry locations of theU.S. and Canadian Rental and Cleaning reporting segment as "industrial laundries" or "industrial laundry locations", and to theU.S. and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our "Core Laundry Operations."
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in conformity with GAAP. As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, the most important and pervasive accounting estimates used and areas most sensitive to material changes from external factors. The critical accounting estimates that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedAugust 27, 2022 . There have been no significant changes in our critical accounting estimates since the year endedAugust 27, 2022 .
Effects of Inflation and Current Economic Conditions
In general, we believe that our results of operations are not dependent on moderate changes in the inflation rate. Historically, we have been able to manage the impacts of more significant changes in inflation rates through our customer relationships, customer agreements that generally provide for price increases and continued focus on improvements of operational productivity. However, the current inflationary environment has had a negative impact on our margins, including as a result of increased energy costs for our vehicles and our plants, as well as increasing wages in the labor markets in which we compete. We expect that inflation will continue to pressure our margins in future periods. In addition, in response to the concerns over inflation risk in the broaderU.S. economy, theU.S. Federal Reserve has been steadily increasing its benchmark interest rate sinceMarch 2022 and has signaled that additional rate increases will continue in 2023. It is possible that increases in interest rates may ultimately result in an economic recession, which could have a material adverse impact on our business. Adverse economic conditions resulting from inflationary pressures,U.S. Federal Reserve actions, geopolitical issues or otherwise are difficult to predict and may have a material adverse impact on our business, results of operations and financial condition. Please see Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedAugust 27, 2022 for an additional discussion of risks and potential risks of inflation and adverse economic conditions on our business, financial condition and results of operations.
COVID-19 Assessment
At times during the global COVID-19 pandemic, our revenues have been significantly adversely impacted as a result of many customers closing their businesses or operating at limited capacities. In addition, at times during the pandemic, we have experienced supply chain disruptions with respect to certain products, including hand sanitizer and masks. Although our operating results continue to be impacted by supply chain disruption and increased costs for supplies, including as a result of general inflationary pressures andRussia's invasion ofUkraine , these adverse impacts and disruptions have declined since the height of the pandemic. 22 --------------------------------------------------------------------------------
As the COVID-19 pandemic has continued, instances of new COVID-19 cases have risen periodically with the outbreak of various COVID-19 variants, and new COVID-19 variants could emerge and spread in the future and have an adverse impact on our business.
We remain focused on the safety and well-being of our team partners and on the service of our customers. We will continue to review and assess the ongoing COVID-19 pandemic and its impacts on our team partners, our customers, our suppliers and our business so that we can seek to address the impacts on our business and service our customers. Please see Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedAugust 27, 2022 for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations. Results of Operations
The following table presents certain selected financial data, including the
percentage of revenues represented by each item, for the thirteen weeks ended
Thirteen weeks ended
(In thousands, except % of % of %
percentages) November 26, 2022 Revenues November 27, 2021 Revenues Change
Revenues $ 541,798 100.0 % $ 486,164 100.0 % 11.4 %
Operating expenses:
Cost of revenues (1) 353,972 65.3 310,130 63.8 14.1
Selling and
administrative expenses
(1) 117,363 21.7 104,388 21.5 12.4
Depreciation and
amortization 27,045 5.0 26,856 5.5 0.7
Total operating
expenses 498,380 92.0 441,374 90.8 12.9
Operating income 43,418 8.0 44,790 9.2 (3.1 )
Other (income) expense,
net (1,978 ) (0.4 ) 88 0.0 (2,347.7 )
Income before income
taxes 45,396 8.4 44,702 9.2 1.6
Provision for income
taxes 11,439 2.1 10,997 2.3 4.0
Net income $ 33,957 6.3 % $ 33,705 6.9 % 0.7 %
(1) Exclusive of depreciation on our property, plant and equipment and amortization on our intangible assets.
General
We derive our revenues through the design, manufacture, personalization, rental, cleaning, delivering, and selling of a wide range of uniforms and protective clothing, including shirts, pants, jackets, coveralls, lab coats, smocks and aprons and specialized protective wear, such as flame resistant and high visibility garments. We also rent industrial wiping products, floor mats, facility service products, other non-garment items, and provide restroom and cleaning supplies and first aid cabinet services and other safety supplies, to a variety of manufacturers, retailers and service companies. We have five reporting segments,U.S. and Canadian Rental and Cleaning, MFG, Specialty Garments, First Aid and Corporate. We refer to theU.S. and Canadian Rental and Cleaning, MFG, and Corporate reporting segments combined as our "Core Laundry Operations." Cost of revenues include the amortization of rental merchandise in service and merchandise costs related to direct sales as well as labor and other production, service and delivery costs and distribution costs associated with operating our Core Laundry Operations, Specialty Garments facilities and First Aid locations. Selling and administrative costs include costs related to our sales and marketing functions as well as general and administrative costs associated with our corporate offices, non-operating environmental sites and operating locations including information systems, engineering, materials management, manufacturing planning, finance, budgeting and human resources. Our operating results are also directly impacted by the costs of the gasoline used to fuel our vehicles and the natural gas used to operate our plants. Our operating margins have been, and may continue to be, adversely impacted by the recent volatility in energy prices. In addition, as described above, the current inflationary environment has had a negative impact on our margins, and we expect that it will continue to pressure our margins in future periods. Our business is subject to various state and federal regulations, including employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements, healthcare insurance mandates and other laws and regulations that impact our labor costs. Labor costs have increased recently as a result of increases in state and local minimum wage levels as well as the overall impact of wage pressure as the result of a low unemployment environment. In fiscal 2018, we initiated a multiyear CRM project to further develop, implement and deploy a third-party application we licensed. This new solution improves functionality, capability and information flow as well as increased automation in servicing our customers. As ofNovember 26, 2022 , we had capitalized$41.4 million related to this CRM project. We began deployment of our new CRM 23 -------------------------------------------------------------------------------- system during the second half of fiscal 2021 and anticipate this will continue through fiscal 2023. We are depreciating this system over a 10-year life and recognized$0.8 million of amortization expense during the thirteen weeks endedNovember 26, 2022 . Over the next few years, we intend to be focused on three discrete strategic initiatives that are critical in our efforts to transform the company in terms of our overall capabilities and competitive positioning. These initiatives are the continued rollout of our new CRM system (discussed above), investments in the UniFirst brand, and an ERP system with a strong focus on supply chain and procurement automation and technology. We refer to these initiatives together as our "Key Initiatives". For the thirteen weeks endedNovember 26, 2022 andNovember 27, 2021 , we incurred$10.0 million and$5.9 million , respectively, of costs directly attributable to our Key Initiatives. OnOctober 25, 2022 , we announced that we will be raising our quarterly dividend to$0.31 per share of Common Stock and to$0.248 per share of ClassB Common Stock, up from$0.30 and$0.24 per share, respectively. The amount and timing of any dividend payment is subject to the approval of our Board of Directors each quarter. OnJanuary 2, 2019 , our Board of Directors approved a share repurchase program authorizing the Company to repurchase from time to time up to$100.0 million of its outstanding shares of Common Stock. OnOctober 18, 2021 , our Board of Directors authorized a new share repurchase program to repurchase from time to time up to$100.0 million of our outstanding shares of Common Stock, inclusive of the amount which remained available under the existing share repurchase program approved onJanuary 2, 2019 . Repurchases made under the new 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 has been funded to date with our available cash and will be funded in the future using our available cash or capacity under our 2021 Credit Agreement (defined below) and may be suspended or discontinued at any time. During the thirteen weeks endedNovember 26, 2022 , we did not repurchase any shares. During the thirteen weeks endedNovember 27, 2021 , we repurchased 22,750 shares for an average price per share of$209.73 under the share repurchase programs. As ofNovember 26, 2022 , we had$63.6 million remaining to repurchase under our share repurchase program. Thirteen weeks endedNovember 26, 2022 compared with thirteen weeks endedNovember 27, 2021 Revenues November November Dollar Percent (In thousands, except percentages) 26, 2022 27, 2021 Change Change Core Laundry Operations$ 477,398 $ 428,846 $ 48,552 11.3 % Specialty Garments 44,079 39,484 4,595 11.6 % First Aid 20,321 17,834 2,487 13.9 % Consolidated total$ 541,798 $ 486,164 $ 55,634 11.4 % Core Laundry Operations' revenues during the first quarter of fiscal 2023 increased compared to the prior year comparable period. Core Laundry Operations' organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 10.7%. This strong organic growth rate was primarily the result of solid sales performance and improved customer retention as well as efforts over the last year to share with our customers the cost increases that we have incurred in our business due to the ongoing inflationary environment. Specialty Garments revenues in the first quarter of fiscal 2023 increased compared to the prior year comparable period due primarily to growth in our cleanroom operations and increased project work in our North American nuclear operations. Specialty Garments' results are often affected by seasonality and the timing and length of its customers' power reactor outages as well as its project-based activities.
First Aid revenues in the first quarter of fiscal 2023 increased compared to the prior year comparable period due primarily to growth in our van business.
24
--------------------------------------------------------------------------------
Cost of Revenues
November November Dollar Percent
(In thousands, except percentages) 26, 2022 27, 2021 Change Change
Cost of revenues $ 353,972 $ 310,130 $ 43,842 14.1 %
% of Revenues 65.3 % 63.8 %
Core Laundry Operations' cost of revenues as a percentage of revenues increased
in the first quarter of fiscal 2023 as compared to the prior year comparable
period. This increase was due primarily to higher merchandise amortization,
which increased as a percentage of revenues due to the inflationary effect on
the cost of our products as well as higher levels of merchandise put in service
with our customers in fiscal 2022 to support solid new account sales, increased
activity in our energy-related markets, elevated wearer additions at our
customers and certain national account investments. In addition, we incurred
higher energy costs as a percentage of revenues. Partially offsetting these
headwinds was lower healthcare claims expense in the first quarter of fiscal
2023 as compared to the prior year comparable period.
Specialty Garments cost of revenues as a percentage of revenues in the first quarter of fiscal 2023 remained relatively consistent with the prior year comparable period.
Selling and Administrative Expenses
November November Dollar Percent
(In thousands, except percentages) 26, 2022 27, 2021 Change Change
Selling and administrative expenses $ 117,363 $ 104,388 $ 12,975 12.4 %
% of Revenues 21.7 % 21.5 %
Our selling and administrative costs increased as a percentage of revenues in
the first quarter of fiscal 2023 as compared to the prior year comparable period
primarily due to Key Initiatives.
Depreciation and Amortization
Dollar Percent
(In thousands, except percentages)
Change
Depreciation and amortization $ 27,045 $ 26,856 $ 189 0.7 %
% of Revenues 5.0 % 5.5 %
Depreciation and amortization expense remained relatively consistent with the prior year comparable period.
Operating Income
For the thirteen weeks endedNovember 26, 2022 andNovember 27, 2021 , changes in our revenues and costs as discussed above resulted in the following changes in our operating income and margin: Dollar Percent (In thousands, except percentages) November 26, 2022 November 27, 2021 Change Change Core Laundry Operations $ 33,831 $ 36,507$ (2,676 ) (7.3 )% Specialty Garments 10,183 8,629 1,554 18.0 % First Aid (596 ) (346 ) (250 ) 72.3 % Operating income $ 43,418 $ 44,790$ (1,372 ) (3.1 )% Operating income margin 8.0 % 9.2 % 25
--------------------------------------------------------------------------------
Other (Income) Expense, net
Dollar Percent
(In thousands, except percentages)
$ (2,769 ) $ (648 ) $ (2,121 ) 327.3 %
Other (income) expense, net 791 736 55 7.5 %
Total other (income) expense, net $ (1,978 ) $
88
The increase in other (income) expense, net during the first quarter of fiscal 2023 as compared to the prior year comparable period was due primarily to increases in interest income earned on our cash reserves and short-term investments.
Provision for Income Taxes
Dollar Percent
(In thousands, except percentages) November 26, 2022 November 27, 2021 Change Change
Provision for income taxes $ 11,439 $ 10,997 $ 442 4.0 %
Effective income tax rate 25.2 % 24.6 %
The increase in the effective tax rate for the thirteen weeks ended November 26,
2022 as compared to the corresponding period in the prior year was due primarily
to higher excess tax benefits on stock appreciation rights during the thirteen
weeks ended November 27, 2021 .
Liquidity and Capital Resources
General
Cash and cash equivalents and short-term investments totaled$351.2 million as ofNovember 26, 2022 , a decrease from$376.4 million as of prior fiscal year end. We generated$27.7 million and$7.8 million in cash from operating activities in the thirteen weeks endedNovember 26, 2022 andNovember 27, 2021 , respectively, which was primarily due to lower working capital needs of the business. During the first quarter of fiscal 2023, we continued to invest in our business with capital expenditures totaling$39.0 million .
Pursuant to our share repurchase program, we did not repurchase any shares of
our Common Stock during the thirteen weeks ended
We believe, although there can be no assurance, that our current cash, cash equivalents and short-term investments balances, our cash generated from future operations and amounts available under our 2021 Credit Agreement (defined below) will be sufficient to meet our current anticipated working capital and capital expenditure requirements for at least the next 12 months and address related liquidity needs. Cash flows provided by operating activities have historically been the primary source of our liquidity. We generally use these cash flows to fund most, if not all, of our operations, capital expenditure and acquisition activities as well as dividends on our Common Stock and stock repurchases. We may also use cash flows provided by operating activities, as well as proceeds from loans payable and long-term debt, to fund growth and acquisition opportunities, as well as other cash requirements.
Sources and uses of cash flows for the thirteen weeks ended
November November 27, Percent
(In thousands, except percentages) 26, 2022 2021 Change
Net cash provided by operating activities
254.1 %
Net cash used in investing activities (152,360 ) (31,517 ) 383.4 %
Net cash used in financing activities (7,596 ) (9,858 ) (22.9 )%
Effect of exchange rate changes 33 (1,254 ) (102.6 )%
Net increase (decrease) in cash and cash
equivalents $ (132,225 ) $ (34,807 ) 279.9 %
26--------------------------------------------------------------------------------
Net Cash Provided by Operating Activities
The net cash provided by operating activities during the thirteen weeks endedNovember 26, 2022 increased as compared to the prior year comparable period due primarily to a decrease in inventories. The decrease in inventories was due primarily to elevated inventories in the prior year attributable to pandemic supply chain disruption that has improved over the past twelve months.
The net increase in cash used in investing activities during the thirteen weeks endedNovember 26, 2022 was due primarily to the initial purchases of certificates of deposit during the first quarter of fiscal 2023 at a cost of$107.0 million . There were also increases in capital expenditures and acquisition related activity of$8.0 million and$6.1 million , respectively, as compared to the prior year comparable period.
The decrease in net cash used in financing activities during the thirteen weeks endedNovember 26, 2022 was due primarily to no cash used to repurchase shares of Common Stock during the first quarter of fiscal 2023 as compared to$4.1 million during the prior year comparable period. This was partially offset by increases in taxes withheld and paid related to net-share settlement of equity awards and dividends paid of$3.4 million and$1.0 million , respectively.
Long-Term Debt and Borrowing Capacity
OnMarch 26, 2021 , we entered into an amended and restated$175.0 million unsecured revolving credit agreement (the "2021 Credit Agreement") with a syndicate of banks, which matures onMarch 26, 2026 . The 2021 Credit Agreement amended and restated our prior credit agreement, which was scheduled to mature onApril 11, 2021 . Under the 2021 Credit Agreement, we are able to borrow funds at variable interest rates based on, at our election, the Eurodollar rate or a base rate, plus in each case a spread based on our consolidated funded debt ratio. Availability of credit requires compliance with certain financial and other covenants, including a maximum consolidated funded debt ratio and minimum consolidated interest coverage ratio as defined in the 2021 Credit Agreement. We test our compliance with these financial covenants on a fiscal quarterly basis. As ofNovember 26, 2022 , the interest rates applicable to our borrowings under the 2021 Credit Agreement would be calculated as LIBOR plus 1.00% at the time of the respective borrowing. The 2021 Credit Agreement includes provisions for the phasing out of LIBOR to the SOFR. As ofNovember 26, 2022 , we had no outstanding borrowings and had outstanding letters of credit amounting to$60.8 million , leaving$114.2 million available for borrowing under the 2021 Credit Agreement.
As of
Derivative Instruments and Hedging Activities
InAugust 2021 , we entered into twenty forward contracts to exchange CAD forU.S. dollars at fixed exchange rates in order to manage our exposure related to certain forecasted CAD denominated sales of one of our subsidiaries. The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries each fiscal quarter, beginning in the first fiscal quarter of 2022 and continuing through the fourth fiscal quarter of 2026. In total, we will sell approximately14.1 million CAD at an average Canadian-dollar exchange rate of 0.7861 over these quarterly periods. We concluded that the forward contracts met the criteria to qualify as a cash flow hedge underU.S. GAAP. As ofNovember 26, 2022 , we had forward contracts with a notional value of approximately6.8 million CAD outstanding and recorded the fair value of the contracts, in the amount of$0.2 million , in prepaid expenses and other current assets and other long-term assets with a corresponding$0.1 million gain in accumulated other comprehensive loss, which was recorded net of tax. During the thirteen weeks endedNovember 26, 2022 , we reclassified a nominal amount from accumulated other comprehensive loss to revenue, related to the derivative financial instruments. The gain on these forward contracts that resulted in a decrease to accumulated other comprehensive loss as ofNovember 26, 2022 is expected to be reclassified to revenues prior to their maturity onAugust 29, 2026 .
Commitments and Contingencies
We are subject to various federal, state and local laws and regulations
governing, among other things, air emissions, wastewater discharges, and the
generation, handling, storage, transportation, treatment and disposal of
hazardous wastes and other substances. In particular, industrial laundries
currently use and must dispose of detergent wastewater and other residues, and,
in the past, used perchloroethylene and other dry-cleaning solvents. We are
attentive to the environmental concerns surrounding the disposal of these
materials and have, through the years, taken measures to avoid their improper
disposal. We have settled, or contributed to the
27
--------------------------------------------------------------------------------
settlement of, past actions or claims brought against us relating to the
disposal of hazardous materials at several sites and there can be no assurance
that we will not have to expend material amounts to remediate the consequences
of any such disposal in the future.
U.S. GAAP requires that a liability for contingencies be recorded when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. Significant judgment is required to determine the
existence of a liability, as well as the amount to be recorded. We regularly
consult with attorneys and outside consultants in our consideration of the
relevant facts and circumstances before recording a contingent liability.
Changes in enacted laws, regulatory orders or decrees, our estimates of costs,
risk-free interest rates, insurance proceeds, participation by other parties,
the timing of payments, the input of our attorneys and outside consultants or
other factual circumstances could have a material impact on the amounts recorded
for environmental and other contingent liabilities.
Under environmental laws, an owner or lessee of real estate may be liable for
the costs of removal or remediation of certain hazardous or toxic substances
located on, or in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose liability without
regard to whether the owner or lessee knew of, or was responsible for the
presence of such hazardous or toxic substances. There can be no assurances that
acquired or leased locations have been operated in compliance with environmental
laws and regulations or that future uses or conditions will not result in the
imposition of liability upon our Company under such laws or expose our Company
to third-party actions such as tort suits. We continue to address environmental
conditions under terms of consent orders negotiated with the applicable
environmental authorities or otherwise with respect to certain sites.
We have accrued certain costs related to certain sites, including but not
limited to sites in Woburn and Somerville, Massachusetts , as it has been
determined that the costs are probable and can be reasonably estimated. We,
together with multiple other companies, are party to a consent decree related to
our property and other parcels of land (the "Central Area") at a site in Woburn,
Massachusetts . The United States Environmental Protection Agency (the "EPA ") has
provided us and other signatories to the consent decree with comments on the
design and implementation of groundwater and soil remedies at the Woburn site
and investigation of environmental conditions in the Central Area. The consent
decree does not address any remediation work that may be required in the Central
Area. We, and other signatories, have implemented and proposed to do additional
work at the Woburn site but many of the EPA 's comments remain to be resolved. We
have accrued costs to perform certain work responsive to the EPA 's comments.
Additionally, we have implemented mitigation measures and continue to monitor
environmental conditions at the Somerville, Massachusetts site. We have agreed
to undertake additional actions responsive to a notice of audit findings from
the Massachusetts Department of Environmental Protection concerning a regulatory
submittal that we made in 2009 for a portion of the site. We have received
demands from the local transit authority for reimbursement of certain costs
associated with its construction of a new municipal transit station in the area
of the Somerville site. We have reserved for costs in connection with this
matter; however, in light of the uncertainties associated with this matter,
these costs and the related reserve may change.
We routinely review and evaluate sites that may require remediation and monitoring and determine our estimated costs based on various estimates and assumptions. These estimates are developed using our internal sources or by third party environmental engineers or other service providers. Internally developed estimates are based on:
•
Management's judgment and experience in remediating and monitoring our sites;
•
Information available from regulatory agencies as to costs of remediation and monitoring;
28
--------------------------------------------------------------------------------•
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 withU.S. GAAP, our accruals represent the amount within the range that we believe is the best estimate or the low end of a range of estimates if no point within the range is a better estimate. When we believe that both the amount of a particular liability and the timing of the payments are reliably determinable, we adjust the cost in current dollars using a rate of 3% for inflation until the time of expected payment and discount the cost to present value using current risk-free interest rates. As ofNovember 26, 2022 , the risk-free interest rates we utilized ranged from 3.68% to 4.20%. For environmental liabilities that have been discounted, we include interest accretion, based on the effective interest method, in selling and administrative expenses on the Consolidated Statements of Income. The changes to the amounts of our environmental liabilities for the thirteen weeks endedNovember 26, 2022 were as follows (in thousands): November 26, 2022 Balance as of August 27, 2022 $ 32,191 Revisions in estimates (4 ) Costs incurred for which reserves have been provided (379 ) Insurance proceeds 35 Interest accretion 259 Changes in discount rates (1,251 ) Balance as of November 26, 2022 $ 30,851 Anticipated payments and insurance proceeds relating to currently identified environmental remediation liabilities as ofNovember 26, 2022 , for the next five fiscal years and thereafter, as measured in current dollars, are reflected below. (In thousands) 2023 2024 2025 2026 2027 Thereafter Total Estimated costs - current dollars$ 11,750 $ 3,051 $ 1,741 $ 1,437 $ 1,250 $ 14,947 $ 34,176 Estimated insurance proceeds (137 ) (159 ) (173 ) (159 ) (173 ) (230 ) (1,031 )
Net anticipated costs
$ 1,077 $ 14,717 $ 33,145 Effect of inflation 9,647 Effect of discounting (11,941 ) Balance as of November 26, 2022$ 30,851 Estimated insurance proceeds are primarily received from an annuity received as part of our legal settlement with an insurance company. Annual proceeds of approximately$0.3 million are deposited into an escrow account which funds remediation and monitoring costs for two sites related to our former operations inWilliamstown, Vermont . Annual proceeds received but not expended in the current year accumulate in this account and may be used in future years for costs related to this site through the year 2027. As ofNovember 26, 2022 , the balance in this escrow account, which is held in a trust and is not recorded in our Consolidated Balance Sheet, was approximately$4.8 million . Also included in estimated insurance proceeds are amounts we are entitled to receive pursuant to legal settlements as reimbursements from three insurance companies for estimated costs at the site inUvalde, Texas . Our nuclear garment decontamination facilities are licensed by respective state agencies, as delegated authority by theNuclear Regulatory Commission (the "NRC") pursuant to the NRC's Agreement State program and are subject to applicable federal and state radioactive material regulations. In addition, our international locations (Canada , theUnited Kingdom and theEuropean Union ) are regulated by equivalent respective jurisdictional authorities. There can be no assurance that such regulation will not lead to material disruptions in the Company's garment decontamination business. From time to time, we are also subject to legal proceedings and claims arising from the conduct of our business operations, including personal injury claims, customer contract matters, employment claims and environmental matters as described above. 29 -------------------------------------------------------------------------------- We are subject to two actions filed by former employees inSeptember 2022 alleging damages under the Fair Labor Standards Act. We believe that we have meritorious defenses to such allegations and intend to defend ourselves vigorously in such matters. While we are unable to ascertain the ultimate outcome of such actions, based on the information currently available, we believe that a loss with respect to such matters is neither probable nor remote. Given the uncertainty associated with the ultimate resolution of such matters, we are unable to reasonably assess an estimate or range of estimates of any potential losses. In addition, in the fourth quarter of fiscal 2022, the Mexican federal tax authority issued a tax assessment on our subsidiary inMexico for fiscal 2016 import taxes, value added taxes and custom processing fees of over$17.0 million , plus surcharges, fines and penalties of over$67.7 million for a total assessment of over$84.7 million . We disagree with such tax assessment and have filed an administrative appeal before the legal division of the Mexican federal tax authority challenging the validity of the tax assessment. While we are unable to ascertain the ultimate outcome of this matter, based on the information currently available, we believe that a loss with respect to this matter is neither probable nor remote. Given the uncertainty associated with the ultimate resolution of this matter, we are unable to reasonably assess an estimate or range of estimates of any potential losses. While it is impossible for us to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits and environmental contingencies, we believe that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance have been properly accrued in accordance with accounting principles generally accepted inthe United States . It is possible, however, that the future financial position and/or results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.
Contractual Obligations and Other Commercial Commitments
As ofNovember 26, 2022 , there were no material changes to our contractual obligations that were disclosed in our Annual Report on Form 10-K for the year endedAugust 27, 2022 . As ofNovember 26, 2022 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recent Accounting Pronouncements
See Note 2, "Recent Accounting Pronouncements" to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information on recently implemented and issued accounting standards.
© Edgar Online, source
