# UNIFIRST CORP (UNF) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from UNIFIRST CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/717954/000095017023055282/unf-20230826.htm
Accession: 0000950170-23-055282
Filing date: 2023-10-26
Report date: 2023-08-26
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/UNF/
All MD&A years: /company/UNF/mda/
Previous year: /company/UNF/mda/fy2022/ (FY 2022)
Next year: /company/UNF/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

UniFirst Corporation, together with its subsidiaries, hereunder referred to as “we”, “our”, the “Company”, or “UniFirst”, is one of the leading providers of workplace uniforms and protective work wear clothing in the U.S. 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 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.

Headquartered in Wilmington, Massachusetts, we are a North American leader in the supply and servicing of uniform and workwear programs, as well as the delivery of facility service programs. Together with our subsidiaries, we also provide first aid and safety products, and manage specialized garment programs for the cleanroom and nuclear industries. We manufacture our own branded workwear, protective clothing, and floorcare products, as well as offer products from industry leading suppliers; and with 270 service locations, over 300,000 customer locations, and approximately 16,000 employee Team Partners, we outfit more than 2 million workers each business day.

U.S. GAAP establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial reports issued to shareholders. 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. Our chief operating decision-maker is our Chief Executive Officer. We have six operating segments based on the information reviewed by our Chief Executive Officer: U.S. Rental and Cleaning, Canadian Rental and Cleaning, Manufacturing (“MFG”), Specialty Garments Rental and Cleaning (“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. Refer to Note 15, “Segment Reporting”, of our Consolidated Financial Statements for our disclosure of segment information.

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 U.S. and Canada. The operations of the U.S. and Canadian Rental and Cleaning reporting segment are referred to by us as our ‘industrial laundry operations’ and we refer to the locations related to this reporting segment as our ‘industrial laundries’.

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. The amounts reflected as revenues of MFG are primarily generated when goods are shipped from our manufacturing facilities, or subcontract manufacturers, to our other locations. These intercompany revenues are recorded at a transfer price which is typically in excess of the actual manufacturing cost. Products are carried in inventory and subsequently placed in service and amortized at this transfer price. On a consolidated basis, intercompany MFG revenues and MFG 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 our manufacturing cost.

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

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certain direct sales made directly from our 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 segment disclosures in Note 15, “Segment Reporting”, of our Consolidated Financial Statements, no assets or capital expenditures are presented for the Corporate operating segment as no assets are allocated to this operating segment in the information reviewed by our chief executive officer. However, depreciation and amortization expense related to certain assets are reflected in income from operations and income before income taxes for the Corporate operating segment. 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 us.

We refer to our U.S. and Canadian Rental and Cleaning, MFG, and Corporate segments combined as our “Core Laundry Operations”.

The Specialty Garments operating segment purchases, rents, cleans, delivers and sells, specialty garments and non-garment items primarily for nuclear and cleanroom applications and provides cleanroom cleaning services at limited customer locations. The First Aid operating segment sells first aid cabinet services and other safety supplies as well as maintains wholesale distribution and pill packaging operations.

Approximately 87.8% of our revenues in fiscal 2023 were derived from our U.S. and Canadian Rental and Cleaning and Corporate segments. A key driver of this business is the number of workers employed by our customers. Our revenues are directly impacted by fluctuations in these employment levels. Revenues from Specialty Garments, which accounted for approximately 8.0% of our fiscal 2023 revenues, increase during outages and refueling by nuclear power plants, as garment usage increases at these times. First Aid represented approximately 4.2% of our total revenues in fiscal 2023.

Critical Accounting Policies and Estimates

We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Use of Estimates

We prepare our financial statements in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. We utilize key estimates in preparing the financial statements, including casualty and environmental estimates, valuation of intangible assets acquired in connection with a business combination, 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. Our results are affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, and changes in the prices of raw materials, can have a significant effect on operations. These factors and other events could cause actual results to differ from management's estimates.

Revenue Recognition and Allowance for Doubtful Accounts

We recognize revenue from rental operations and related services in the period in which the services are provided. Direct sale revenue is recognized in the period in which the services are performed or when the product is shipped. Our judgment and estimates are used in determining the collectability of accounts receivable and evaluating the adequacy of the allowance for doubtful accounts as well as our sales credits reserve. We consider specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances as part of our evaluation in assessing the allowance for doubtful accounts. We consider our historical credit experience in assessing the sales credits reserve. Changes in our estimates are reflected in the period they become known. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Material changes in our estimates may result in significant differences in the amount and timing of bad debt expense recognition for any given period. Our revenues do not include taxes we collect from our customers and remit to governmental authorities.

Costs to Obtain a Contract

We defer commission expenses paid to 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, which is generally the estimated life of the customer relationship. We review the deferred commission balances for impairment on an ongoing basis. Deferred commissions are classified as current or noncurrent based on the timing of when we expect to recognize the expense. The current portion is included in prepaid expenses and other current

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assets and the non-current portion is included in other assets on our Consolidated Balance Sheets. As of August 26, 2023, the current and non-current assets related to deferred commissions totaled $16.5 million and $70.4 million, respectively. As of August 27, 2022, the current and non-current assets related to deferred commissions totaled $15.2 million and $65.1 million, respectively. During fiscal 2023 and 2022, we recorded $16.5 million and $15.4 million, respectively, of amortization expense related to deferred commissions. This expense is classified in selling and administrative expenses on our Consolidated Statements of Income.

Inventories and Rental Merchandise in Service

Our inventories are stated at the lower of cost or net realizable value, net of any reserve for excess and obsolete inventory. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to our customers or used in our rental operations. 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 the amount we projected, additional inventory write-downs may be required. We use the first-in, first-out method to value our inventories, which primarily consist of finished goods. Rental merchandise in service is being amortized on a straight-line basis over the estimated service lives of the merchandise, which range from six to thirty-six months. In establishing estimated lives for merchandise in service, our 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 we make significant changes to our estimates.

Goodwill, Intangibles and Other Long-Lived Assets

In accordance with U.S. GAAP, we do not amortize goodwill. Instead, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Our evaluation considers changes in the operating environment, competitive information, market trends, operating performance and cash flow modeling.

We completed our annual goodwill impairment test as of the first day of the fourth quarter in fiscal 2023, fiscal 2022 and fiscal 2021. There have been no impairments of goodwill or other intangible assets in fiscal 2023, 2022 or 2021.

We cannot predict future economic conditions and their impact on us or the future net realizable value of our stock. A decline in our market capitalization and/or deterioration in general economic conditions could negatively and materially impact our assumptions and assessment of the fair value of our business. If general economic conditions or our financial performance deteriorate, we may be required to record a goodwill impairment charge in the future which could have a material impact on our financial condition and results of operations.

Property, plant and equipment, and definite-lived intangible assets are depreciated or amortized over their useful lives. Useful lives are based on our estimates of the period that the assets will generate economic benefits. Long-lived assets 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 2023, 2022 or 2021.

Business Combinations

The Company accounts for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.

The Company’s management exercises significant judgments in determining the fair value of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to the fair value of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results.

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Insurance

We self-insure for certain obligations related to health and dental, workers’ compensation, vehicles and general liability programs. We also purchase stop-loss insurance policies for workers’ compensation, vehicles and general liability programs to protect ourselves from catastrophic losses. 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. Our estimates consider historical claim experience and other factors. Our liabilities are based on our estimates, and, while we believe that our accruals are adequate, the ultimate liability may be significantly different from the amounts recorded. In certain cases where partial insurance coverage exists, we must estimate the portion of the liability that will be covered by existing insurance policies to arrive at our net expected liability. Receivables for insurance recoveries are recorded as assets, on an undiscounted basis. Changes in our claim experience, our ability to settle claims or other estimates and judgments we use could have a material impact on the amount and timing of expense for any given period.

Environmental and Other Contingencies

We are subject to legal proceedings and claims arising from the conduct of our business operations, including environmental matters, personal injury, customer contract matters and employment claims. U.S. GAAP requires that a liability for contingencies be recorded when it is probable that a liability has occurred, and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. We regularly consult with our attorneys and outside consultants, in our consideration of the relevant facts and circumstances, before recording a contingent liability. We record accruals for environmental and other contingencies based on enacted laws, regulatory orders or decrees, our estimates of costs, insurance proceeds, participation by other parties, the timing of payments, and the input of our attorneys and outside consultants.

The estimated liability for environmental contingencies has been discounted as of August 26, 2023 using risk-free interest rates ranging from 4.3% to 4.7% over periods ranging from three to thirty years. The estimated current costs, net of legal settlements with insurance carriers, have been adjusted for the estimated impact of inflation at 3.0% per year. Changes in enacted laws, regulatory orders or decrees, our estimates of costs, risk-free interest rates, insurance proceeds, participation by other parties, the timing of payments, the input of our attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for our environmental and other contingent liabilities. Refer to Note 11, “Commitments and Contingencies”, of our Consolidated Financial Statements for additional discussion and analysis.

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. Current accounting guidance requires that we recognize 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.

We have recognized as a liability the present value of the estimated future costs to decommission our nuclear laundry facilities in accordance with U.S. GAAP. We depreciate, on a straight-line basis, the amount added to property, plant and equipment and recognize accretion expense in connection with the discounted liability over the various remaining lives which range from approximately one to twenty-one years.

Our 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 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 revisions in our estimates are 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.

Supplemental Executive Retirement Plan and Pension Plan

We recognize pension expense on an accrual basis over our employees’ estimated service periods. Pension expense is generally independent of funding decisions or requirements.

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The calculation of pension expense and the corresponding liability requires us to use a number of critical assumptions, including the expected long-term rates of return on plan assets, the assumed discount rate, the assumed rate of compensation increases and life expectancy of participants. Changes in our assumptions can result in different expense and liability amounts, and future actual expense 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 our pension plans will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.

Income Taxes

We compute income tax expense by jurisdiction based on our 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. 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” of our 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. We regularly review 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.

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

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. Inflation could continue to pressure our margins in future periods. In addition, in response to the concerns over inflation risk in the broader U.S. economy, the U.S. Federal Reserve has increased its benchmark interest rate significantly and has signaled that it may approve one additional rate increase in 2023. Interest rates may remain high and/or continue to increase in 2024. Adverse economic conditions resulting from inflationary pressures, U.S. Federal Reserve actions, including continued high interest rates and/or increases in interest rates, 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 this Annual Report on Form 10-K for an additional discussion of risks and potential risks of inflation and adverse economic conditions on our business, financial condition and results of operations.

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Results of Operations

The following table presents certain selected financial data, including the percentage of revenues represented by each item, for fiscal years 2023 and 2022. For discussion of fiscal 2022 results compared to fiscal 2021 results, see the Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report on Form 10-K for the fiscal year ended August 27, 2022, filed with the SEC on October 26, 2022.

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[[/GREPCENT_TABLE]]

(1)
Exclusive of depreciation on our property, plant and equipment and amortization of our intangible assets.

Revenues and income (loss) from operations by reporting segment for fiscal 2023 and 2022 are presented in the following table:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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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.

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 volatility in energy prices. In addition, as described above, the current inflationary environment has had a negative impact on our margins, and could 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.

A portion of our sales is derived from international markets, including Canada. Revenues denominated in currencies other than the U.S. dollar represented approximately 7.0% and 7.9% of total consolidated revenues for fiscal 2023 and 2022, respectively. The operating results of our international subsidiaries are translated into U.S. dollars and such results are affected by movements in foreign currencies relative to the U.S. dollar. In addition, a weaker Canadian dollar increases the costs to our Canadian operations of merchandise and other operational inputs that are sourced from outside Canada, which has the effect of reducing the operating margins of our Canadian business if we are unable to recover these additional costs through price adjustments with our Canadian customers. In fiscal 2023 and 2022, foreign currency fluctuations impacted our consolidated revenues negatively by 0.6% and 0.1%, respectively. These impacts were primarily driven by fluctuations in the Canadian dollar. Our operating results in future years could be negatively impacted by any further devaluation, as compared to the U.S. dollar, of the Canadian dollar or any of the currencies of the other countries in which we operate.

In fiscal 2018, we initiated a multiyear CRM project to further develop, implement and deploy a third-party application we licensed. This new solution is intended to improve functionality, capability and information flow as well as increase automation in servicing our customers. We began deployment of our new CRM project during the second half of fiscal 2021 and while deployment of the CRM system is substantially complete in the U.S., we continue to work on the implementation and operation of the system. We are depreciating this system over a 10-year life and recognized $3.3 million and $3.2 million of amortization expense in fiscal 2023 and fiscal 2022, respectively.

In fiscal 2022, we initiated a multiyear ERP project that will continue through 2027, with early phases focused on master data management and finance capabilities followed by subsequent phases with a strong focus on supply chain and procurement automation and technology. We believe that this initiative will become the core of the UniFirst technology footprint and will integrate and complement the capabilities of the CRM system that we are currently deploying. We expect this system and the supply chain and procurement capabilities that it will provide to enable lower operating costs and customer churn through enhanced inventory utilization and vendor management, improved response times to customer orders and more efficient back-end processes. These capabilities will allow us to more effectively respond to and mitigate the types of supply chain challenges that we experienced during the COVID-19 pandemic and that we continue to experience primarily as a result of the current inflationary environment.

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We have been focused on the 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, implementation of the ERP system (each discussed above) as well as increased investments in the UniFirst brand. Such increased investments in the UniFirst brand concluded in fiscal 2023. We refer to these initiatives together as our “Key Initiatives”. In fiscal 2023, we incurred $17.8 million, $4.8 million and $11.0 million of costs related to our CRM system, UniFirst branding project and ERP system, respectively, for a total of $33.6 million directly attributable to our Key Initiatives. As of August 26, 2023, we had capitalized $45.2 million related to our CRM project and $2.2 million related to our ERP project.

On October 25, 2022, we raised our quarterly dividend to $0.31 per share of Common Stock and to $0.248 per share of Class B Common Stock, up from $0.30 and $0.24 per share, respectively.

On October 24, 2023, we announced that we would be raising our quarterly dividend to $0.33 per share of Common Stock and to $0.264 per share of Class B Common Stock, up from $0.31 and $0.248 per share, respectively. The amount and timing of any dividend payment is subject to the approval of our Board of Directors each quarter.

On October 24, 2023, 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 on October 18, 2021. 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, our stock price, corporate liquidity requirements and priorities, applicable legal requirements and other factors. The share repurchase program may be funded using available cash or capacity under our Credit Agreement (as defined below) and may be suspended or discontinued at any time. During fiscal 2023, we did not repurchase any shares. During fiscal 2022, we repurchased 0.2 million shares for an average price per share of $179.98. As of August 26, 2023, we had $63.6 million remaining under our existing share repurchase program.

On March 9, 2023, we exercised the accordion feature of the Credit Agreement pursuant to an amendment to the Credit Agreement. The exercise of the accordion feature increases the aggregate commitments under the Credit Agreement by $100.0 million, for a total aggregate commitment of up to $275.0 million. In addition, the amendment provides for the replacement of LIBOR with SOFR such that borrowings are based on, at our election, the SOFR rate or a base rate, plus in each case a spread based on our consolidated funded debt ratio. The amendment also refreshed the accordion feature, so that, provided there is no default or event of default under the Credit Agreement and we are in compliance with our financial covenants on a pro forma basis, we may request an increase in the aggregate commitments under the Credit Agreement (in the form of revolving or term tranches) of up to an additional $100.0 million, for a total aggregate commitment of up to $375.0 million.

On March 13, 2023, we completed our acquisition of the business and certain real estate assets of Clean from Clean Holdco, Inc. and certain of its affiliates for an aggregate purchase price of approximately $299.1 million, net of cash acquired. Clean is a uniform, workwear and facility service program provider with 11 locations covering Missouri, Illinois, Arkansas, Kansas and Oklahoma. The results of operations from Clean were included in our results under the Core Laundry Operations segment subsequent to the acquisition date of March 13, 2023. We paid for the acquisition of Clean with cash on hand and borrowings under the Credit Agreement, which we repaid in full during the third quarter of fiscal 2023. Transaction and related costs, consisting primarily of professional fees, directly related to the acquisition, totaled approximately $3.0 million for fiscal 2023. All transaction and related costs were expensed as incurred and are included in selling and administrative expenses.

Our fiscal year ends on the last Saturday in August. For financial reporting purposes, fiscal 2023 and 2022 both consisted of 52 weeks.

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The following section of this Annual Report on Form 10-K generally discusses fiscal 2023 and fiscal 2022 items and year-to-year comparisons between fiscal 2023 and fiscal 2022. Discussions of fiscal 2021 items and year-to-year comparisons between fiscal 2022 and fiscal 2021 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended August 27, 2022, which was filed with the SEC on October 26, 2022.

Fiscal Year Ended August 26, 2023 Compared with Fiscal Year Ended August 27, 2022

Revenues

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal 2023","","","Fiscal 2022","","","Dollar Change","","","Percent Change"],["Core Laundry Operations","","$","1,961,189","","","$","1,770,502","","","$","190,687","","","","10.8","%"],["Specialty Garments","","","177,034","","","","152,885","","","","24,149","","","","15.8","%"],["First Aid","","","94,824","","","","77,435","","","","17,389","","","","22.5","%"],["Total consolidated revenues","","$","2,233,047","","","$","2,000,822","","","$","232,225","","","","11.6","%"]]
[[/GREPCENT_TABLE]]

The increase in consolidated revenues of 11.6% during fiscal 2023 compared to the prior year was due primarily to growth in our Core Laundry Operations of 10.8%. The increase in our Core Laundry Operations was due to organic growth of 8.5%, the effect of Canadian dollar exchange rate changes on our revenues of (0.5)%, and acquisition related growth of 2.8%. The Core Laundry Operations strong organic growth rate was primarily the result of pricing efforts over the last year to share with our customers the cost increases that we have incurred due to the ongoing inflationary environment and solid new account sales. The impact on our revenues from acquisitions was primarily the result of our acquisition of Clean, which was completed on March 13, 2023. During fiscal 2023, Clean accounted for $43.0 million of revenue, which was included in Core Laundry Operations.

Specialty Garments revenues for fiscal 2023 increased compared to the prior fiscal year due primarily to growth in our North American nuclear operations and our cleanroom operations. North American nuclear operations accounted for growth of 8.5%, due primarily to increased project work in fiscal 2023 and the cleanroom revenue growth accounted for growth of 7.1%. European nuclear operations effect on Specialty Garments revenue growth was minimal as it accounted for growth of 0.2%. Specialty Garments’ results are often affected by seasonality and the timing and length of our customers’ power reactor outages as well as our project-based activities.

First Aid revenues for fiscal 2023 increased compared to the prior fiscal year. This increase was driven primarily by increased activity in the wholesale distribution business, which accounted for growth of 12.0% and our continued investment in expanding the first aid van business, which accounted for growth of 10.5%.

Cost of revenues

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal 2023","","","Fiscal 2022","","","Dollar Change","","","Percent Change"],["Cost of revenues","","$","1,481,296","","","$","1,306,451","","","$","174,845","","","","13.4","%"],["% of Revenues","","","66.3","%","","","65.3","%"]]
[[/GREPCENT_TABLE]]

The increase in consolidated costs of revenues of 13.4% during fiscal 2023 compared to the prior fiscal year was due primarily to the impact of the revenue growth, as mentioned above. In addition, the cost of revenues increased due to an increase in Core Laundry Operations’ merchandise expense as a percentage of revenues of 0.9%, which is being impacted by the current inflationary environment.

Selling and administrative expenses

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal 2023","","","Fiscal 2022","","","Dollar Change","","","Percent Change"],["Selling and administrative expenses","","$","496,915","","","$","451,243","","","$","45,672","","","","10.1","%"],["% of Revenues","","","22.3","%","","","22.6","%"]]
[[/GREPCENT_TABLE]]

The increase in selling and administrative costs of 10.1% during fiscal 2023 compared to the prior fiscal year was due primarily to additional investments we are making in our support functions due to our growth and in support of our ongoing technology initiatives. Also contributing to the increase were $3.0 million of Clean acquisition-related costs in fiscal 2023 and an additional $0.5 million of costs to support our Key Initiatives compared to the prior year comparable period.

29

Depreciation and amortization

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal 2023","","","Fiscal 2022","","","Dollar Change","","","Percent Change"],["Depreciation and amortization","","$","121,233","","","$","108,777","","","$","12,456","","","","11.5","%"],["% of Revenues","","","5.4","%","","","5.4","%"]]
[[/GREPCENT_TABLE]]

Depreciation and amortization expense increased by 11.5% in fiscal 2023 as compared to the prior fiscal year but remained relatively consistent with the prior fiscal year as a percentage of revenues. The increase was due primarily to continued investment in our technology capabilities and infrastructure, and future growth as well as $6.7 million of depreciation and amortization related to the Clean acquisition, of which $4.7 million was intangibles amortization.

Operating Income

For fiscal 2023, changes in our revenues and costs as discussed above resulted in the following changes in our operating income and margin:

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal 2023","","","Fiscal 2022","","","Dollar Change","","","Percent Change"],["Core Laundry Operations","","$","98,666","","","$","110,710","","","$","(12,044",")","","","(10.9",")%"],["Specialty Garments","","","37,488","","","","23,658","","","","13,830","","","","58.5","%"],["First Aid","","","(2,551",")","","","(17",")","","","(2,534",")","","","14905.9","%"],["Operating income","","$","133,603","","","$","134,351","","","$","(748",")","","","(0.6",")%"],["Operating income margin","","","6.0","%","","","6.7","%"]]
[[/GREPCENT_TABLE]]

Other (income) expense, net

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal 2023","","","Fiscal 2022","","","Dollar Change","","","Percent Change"],["Interest income, net","","$","(6,738",")","","$","(2,851",")","","$","(3,887",")","","","136.3","%"],["Other expense, net","","","1,504","","","","2,877","","","","(1,373",")","","","(47.7",")%"],["Total other (income) expense, net","","$","(5,234",")","","$","26","","","$","(5,260",")","","","(20230.8",")%"]]
[[/GREPCENT_TABLE]]

The increase in other (income) expense, net, in fiscal 2023 compared to the prior fiscal year was due primarily to increases in interest income earned on our cash reserves and short-term investments as a result of rising interest rates.

Provision for income taxes

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal 2023","","","Fiscal 2022","","","Dollar Change","","","Percent Change"],["Provision for income taxes","","$","35,163","","","$","30,921","","","$","4,242","","","","13.7","%"],["Effective income tax rate","","","25.3","%","","","23.0","%"]]
[[/GREPCENT_TABLE]]

The increase in the effective tax rate for fiscal 2023 as compared to the prior fiscal year was due primarily from the release of certain tax reserves during fiscal 2022 which did not recur in fiscal 2023.

Liquidity and Capital Resources

General

Cash and cash equivalents and short-term investments totaled $89.6 million as of August 26, 2023, a decrease of $286.8 million from $376.4 million as of August 27, 2022. The decrease in cash and cash equivalents and short-term investments was largely driven by our purchase of Clean for $299.1 million, net of cash, and continued investment in our business with capital expenditures. We generated $215.8 million and $122.6 million in cash from operating activities in fiscal 2023 and 2022, respectively.

As described above, on March 13, 2023, we completed our acquisition of the business and certain real estate assets of Clean and certain of its affiliates for an aggregate purchase price of approximately $299.1 million, net cash acquired of $3.3 million. Clean is a uniform, workwear and facility service program provider with 11 locations covering Missouri, Illinois, Arkansas, Kansas and Oklahoma. We borrowed and repaid $80.0 million from our Credit Agreement (as defined below) during the third quarter of fiscal 2023 to finance the acquisition of Clean and fund our day-to-day operations.

On March 9, 2023, we exercised the accordion feature of the Credit Agreement pursuant to an amendment to the Credit Agreement. The exercise of the accordion feature increases the aggregate commitments under the Credit Agreement by

30

$100.0 million, for a total aggregate commitment of up to $275.0 million. In addition, the amendment provides for the replacement of LIBOR with SOFR such that borrowings are based on, at our election, the SOFR rate or a base rate, plus in each case a spread based on our consolidated funded debt ratio. The amendment also refreshed the accordion feature, so that, provided there is no default or event of default under the Credit Agreement and we are in compliance with our financial covenants on a pro forma basis, we may request an increase in the aggregate commitments under the Credit Agreement (in the form of revolving or term tranches) of up to an additional $100.0 million, for a total aggregate commitment of up to $375.0 million.

We did not repurchase any shares of our Common Stock during fiscal 2023 pursuant to our share repurchase program.

We believe, although there can be no assurance, that our current cash and cash equivalents balances, our cash generated from future operations and amounts available under our Credit Agreement (as defined below) will be sufficient to meet our current anticipated working capital and capital expenditure requirements for at least the next 12 months and will help us manage the impacts of inflation 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. We may also use cash flows provided by operating activities, as well as proceeds from long-term debt, to fund growth and acquisition opportunities, as well as other cash requirements.

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal 2023","","","Fiscal 2022","","","Dollar Change","","","Percent Change"],["Net cash provided by operating activities","","$","215,762","","","$","122,649","","","$","93,113","","","","75.9","%"],["Net cash used in investing activities","","","(487,647",")","","","(186,507",")","","","(301,140",")","","","161.5","%"],["Net cash used in financing activities","","","(25,839",")","","","(69,438",")","","","43,599","","","","(62.8",")%"],["Effect of exchange rate changes","","","768","","","","(3,173",")","","","3,941","","","","(124.2",")%"],["Net decrease in cash and cash equivalents","","$","(296,956",")","","$","(136,469",")","","$","(160,487",")","","","117.6","%"]]
[[/GREPCENT_TABLE]]

Net Cash Provided by Operating Activities

The net cash provided by operating activities in fiscal 2023 increased as compared to fiscal 2022 due to positive impacts from receivables of $18.9 million, accrued liabilities of $18.8 million, rental merchandise in service of $15.7 million, prepaid and accrued income taxes of $15.6 million, inventories of $12.1 million and accounts payable of $11.0 million.

The positive impact from receivables was due primarily to a focused effort on collections and timing. The positive impact from inventories and merchandise in service was due primarily to a focused effort on managing our inventory balances in the current year and our balance sheet position continuing to normalize coming out of the COVID-19 pandemic. Accounts payable had a positive impact on cash flows due to the timing of invoices. The positive impact of accrued liabilities was due to higher casualty and compensation accruals. Lastly, the positive impact from prepaid and accrued taxes was due to fewer overpayments for U.S. federal income taxes for fiscal 2023 as compared to fiscal 2022.

Net Cash Used in Investing Activities

The net increase in cash used in investing activities in fiscal 2023 was primarily the result of our acquisition of Clean, which was completed on March 13, 2023 for a purchase price, net of cash acquired, of approximately $299.1 million. Also contributing to the increases during fiscal 2023 as compared to the prior fiscal year were additional capital expenditures of $27.7 million and the purchases of certificates of deposit (net of maturing certificates of deposit) during fiscal 2023 of $10.0 million.

Net Cash Used in Financing Activities

The decrease in net cash used in financing activities in fiscal 2023 was due primarily to no Common Stock repurchases during fiscal 2023 as compared to $44.4 million of repurchases in the prior fiscal period. Furthermore, there was also a decrease in taxes withheld and paid related to net-share settlement of equity awards of $1.2 million. During fiscal 2023, we borrowed and repaid $80.0 million under our Credit Agreement. The funds were used primarily to finance the acquisition of Clean. This was partially offset by an increase in dividends paid of $1.3 million.

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Long-term Debt and Borrowing Capacity

On March 26, 2021, we entered into an amended and restated $175.0 million unsecured revolving credit agreement (as subsequently amended, the “Credit Agreement”) with a syndicate of banks, which matures on March 26, 2026. The Credit Agreement amended and restated our prior credit agreement, which was scheduled to mature on April 11, 2021. Under the Credit Agreement, we are able to borrow funds at variable interest rates. Prior to the amendment discussed below, interest on borrowings was 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.

On March 9, 2023, we exercised the accordion feature of the Credit Agreement pursuant to an amendment to the Credit Agreement. The exercise of the accordion feature increases the aggregate commitments under the Credit Agreement by $100.0 million, for a total aggregate commitment of up to $275.0 million. In addition, the amendment provides for the replacement of LIBOR with SOFR such that borrowings are based on, at our election, the SOFR rate or a base rate, plus in each case a spread based on our consolidated funded debt ratio. The amendment also refreshed the accordion feature, so that, provided there is no default or event of default under the Credit Agreement and we are in compliance with our financial covenants on a pro forma basis, we may request an increase in the aggregate commitments under the Credit Agreement (in the form of revolving or term tranches) of up to an additional $100.0 million, for a total aggregate commitment of up to $375.0 million. Availability of credit requires compliance with certain financial and other covenants, including a maximum consolidated funded debt ratio and minimum consolidated interest coverage ratio as defined in the Credit Agreement. We test our compliance with these financial covenants on a fiscal quarterly basis. As of August 26, 2023, the interest rates applicable to our borrowings under the Credit Agreement would be calculated as SOFR plus 1.00% at the time of the respective borrowing.

During fiscal 2023, we borrowed $80.0 million under our Credit Agreement to finance the acquisition of Clean and fund our day-to-day operations. All borrowings were repaid as of August 26, 2023 and we had no outstanding amounts under our Credit Agreement as of August 26, 2023. As of August 26, 2023, we had outstanding letters of credit amounting to $66.5 million, leaving $208.5 million available for borrowing under the Credit Agreement.

As of August 26, 2023, we were in compliance with all covenants under the Credit Agreement.

Derivative Instruments and Hedging Activities

In August 2021, we entered into twenty forward contracts to exchange CAD for U.S. dollars at fixed exchange rates in order to manage our exposure related to certain forecasted CAD denominated sales of one of our subsidiaries. The hedged transactions are specified as the first amount of CAD denominated revenues invoiced by one of our domestic subsidiaries each fiscal quarter, beginning in the first fiscal quarter of 2022 and continuing through the fourth fiscal quarter of 2026. In total, we will sell approximately 14.1 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 under U.S. GAAP.

As of August 26, 2023, we had forward contracts with a notional value of approximately 5.4 million CAD outstanding and recorded the fair value of the contracts of $0.2 million in prepaid expenses and other current assets with a corresponding gain of $0.2 million in accumulated other comprehensive loss, which was recorded net of tax. During fiscal 2023, we reclassified $0.1 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 26, 2023 is expected to be reclassified to revenues prior to their maturity on August 29, 2026.

Environmental and Legal 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 waste water and other residues, and, in the past, used perchloroethylene and other dry cleaning solvents. We are attentive to the environmental concerns surrounding the disposal of these materials and have, through the years, taken measures to avoid their improper disposal. We have settled, or contributed to the settlement of, past actions or claims brought against us relating to the disposal of hazardous materials at several sites and there can be no assurance that we will not have to expend material amounts to remediate the consequences of any such disposal in the future.

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

32

payments, the input of our attorneys and outside consultants or other factual circumstances could have a material impact on the amounts recorded for our environmental and other contingent liabilities.

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 the Central Area in Woburn, Massachusetts. 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 a site in Somerville, Massachusetts. 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. This station is part of an ongoing extension of the transit system. 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;

•
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, 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 of August 26, 2023, the risk-free interest rates we utilized ranged from 4.3% to 4.7%.

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 fiscal 2023 and 2022 are as follows (in thousands):

[[GREPCENT_TABLE]]
[["Year ended","","August 26, 2023","","","August 27, 2022"],["Beginning balance","","$","32,191","","","$","32,859"],["Costs incurred for which reserves have been provided","","","(1,936",")","","","(2,188",")"],["Insurance proceeds","","","147","","","","135"],["Interest accretion","","","1,036","","","","596"],["Changes in discount rates","","","(2,446",")","","","(3,235",")"],["Revisions in estimates","","","1,037","","","","4,024"],["Ending balance","","$","30,029","","","$","32,191"]]
[[/GREPCENT_TABLE]]

33

Anticipated payments and insurance proceeds of currently identified environmental remediation liabilities as of August 26, 2023 for the next five fiscal years and thereafter, as measured in current dollars, are reflected below (in thousands):

[[GREPCENT_TABLE]]
[["Fiscal year ended August","","2024","","","2025","","","2026","","","2027","","","2028","","","Thereafter","","","Total"],["Estimated costs\u2014current dollars","","$","14,049","","","$","2,651","","","$","1,442","","","$","1,270","","","$","972","","","$","14,617","","","$","35,001"],["Estimated insurance proceeds","","","(180",")","","","(195",")","","","(159",")","","","(173",")","","","(9",")","","","(230",")","","","(946",")"],["Net anticipated costs","","$","13,869","","","$","2,456","","","$","1,283","","","$","1,097","","","$","963","","","$","14,387","","","$","34,055"],["Effect of inflation","","","","","","","","","","","","","","","","","","","","","9,227"],["Effect of discounting","","","","","","","","","","","","","","","","","","","","","(13,253",")"],["Balance as of August 26, 2023","","","","","","","","","","","","","","","","","","","","$","30,029"]]
[[/GREPCENT_TABLE]]

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. 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 26, 2023, the balance in this escrow account, which is held in a trust and is not recorded in our Consolidated Balance Sheet, was approximately $5.2 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 one of our sites.

Our nuclear garment decontamination facilities are licensed by respective state agencies, as delegated authority by the Nuclear 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, the United Kingdom and the European Union) are regulated by equivalent respective jurisdictional authorities. There can be no assurance that such regulation will not lead to material disruptions in our garment decontamination business.

From time to time, we are also subject to legal and regulatory 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.

In addition, in the fourth quarter of fiscal 2022, the Mexican federal tax authority issued a tax assessment on our subsidiary in Mexico 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, which accrues interest and other charges. We disagree with such tax assessment and are challenging the validity of the tax assessment through an appeal process. 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 under U.S. GAAP. It is possible, however, that the future financial position and/or results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.

Acquisitions

As part of our business, we regularly evaluate opportunities to acquire other garment service companies. In recent years, we have typically paid for acquisitions with cash and may continue to do so in the future. To pay for an acquisition, we may use cash on hand, cash generated from operations or borrowings under our Credit Agreement, or we may pursue other forms of debt financing. Our ability to secure short-term and long-term debt financing in the future will depend on several factors, including our future profitability, our levels of debt and equity, and the overall credit and equity market environments.

34

Contractual Obligations and Other Commercial Commitments

The following information is presented as of August 26, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["","","Payments Due by Fiscal Period"],["Contractual Obligations","","Total","","","Less than 1 year","","","1 \u2013 3 years","","","3 \u2013 5 years","","","More than 5 years"],["Retirement plan benefit payments","","$","28,668","","","$","2,276","","","$","3,891","","","$","3,799","","","$","18,702"],["Asset retirement obligations","","","16,471","","","","\u2014","","","","\u2014","","","","\u2014","","","","16,471"],["Operating leases","","","71,444","","","","19,629","","","","29,034","","","","16,163","","","","6,618"],["Forward contracts","","","3,969","","","","992","","","","2,977","","","","\u2014","","","","\u2014"],["Purchase Commitments*","","","74,787","","","","45,870","","","","15,985","","","","10,782","","","","2,150"],["Total contractual cash obligations","","$","195,339","","","$","68,767","","","$","51,887","","","$","30,744","","","$","43,941"]]
[[/GREPCENT_TABLE]]

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

We have uncertain tax positions that are fully reserved totaling $7.8 million as of August 26, 2023 that are excluded from the above table as we cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority.

We have accrued $30.0 million in costs related to certain environmental obligations we have to address under terms of consent orders negotiated with the applicable environmental authorities or otherwise. Refer to “Environmental and Legal Contingencies”, above for additional discussion on our environmental obligations.

As discussed above under “Long-Term Debt and Borrowing Capacity”, as of August 26, 2023, we had borrowing capacity of $375.0 million under our Credit Agreement, of which approximately $208.5 million was available for borrowing. Also, as of such date, we had no outstanding borrowings and letters of credit outstanding of $66.5 million. All letters of credit expire in less than one year.

As discussed above under “Derivative Instruments and Hedging Activities”, as of August 26, 2023, we had forward contracts with a notional value of approximately 5.4 million CAD outstanding and recorded the fair value of the contracts of $0.2 million in prepaid expenses and other current assets with a corresponding gain of $0.2 million in accumulated other comprehensive loss, which was recorded net of tax. During fiscal 2023, we reclassified $0.1 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 26, 2023 is expected to be reclassified to revenues prior to their maturity on August 29, 2026.

Energy Costs

Significant variability in energy costs, specifically with respect to natural gas and gasoline, can materially affect our operating costs. During fiscal 2023, our energy costs, which include fuel, natural gas, and electricity, represented approximately 4.3% of our total revenue.

Recent Accounting Pronouncements

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

35