UNIFIRST CORP

The Company’s effective tax rate for the thirteen weeks ended May 25, 2019 of 23.5% was generally consistent with 23.9% for the corresponding period in the prior year. The lower statutory tax rate in the thirteen weeks ended May 25, 2019 compared to the corresponding period in the prior year was primarily offset by a discrete benefit of $1.5 million related to tax credits.

The Company’s effective tax rate for the thirty-nine weeks ended May 25, 2019 was 24.8% compared to 10.7% for the corresponding period in the prior year. The increase in the effective tax rate was primarily due to the impact of the Act, which required us to remeasure our U.S net deferred income tax liabilities in the second quarter of fiscal 2018.  The benefit of $22.7 million associated with the reduction in the U.S net deferred income tax liabilities was partially offset by a one-time transition tax of $2.5 million for the deemed repatriation of our foreign earnings.

The Act subjects a U.S. shareholder to tax on GILTI, defined below, earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (“GILTI”), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company will account for GILTI in the year the tax is incurred as a period cost.

We have a substantial number of plants and conduct a significant portion of our business in energy producing regions in the U.S. and Canada. In general, we are relatively more dependent on business in these regions than are many of our competitors. For example, the dramatic decrease in oil prices beginning in 2014 directly affected our customers in the oil industry as they curtailed their level of operations, which also had a corresponding effect on our customers in businesses which service or supply the oil industry as well as our customers in unrelated businesses located in areas which had benefited from the economic expansion generated by the robust growth driven by the higher oil prices in prior years. As a result, our organic growth in periods following this dramatic decrease in oil prices was negatively impacted by elevated headcount reductions in our wearer base as well as increased lost accounts. Recent trends indicate that increased energy prices have resulted in stabilized or improved wearer levels at existing customers in our North American energy-dependent markets. Our operating results are also directly impacted by the costs of the gasoline used to fuel our vehicles and the natural gas used to operate our plants. While it is difficult to quantify the positive and negative impacts on our future financial results from changes in energy prices, in general, we believe that significant decreases in oil and natural gas prices would have an overall negative impact on our results due to cutbacks by our customers both in, and dependent upon, the oil and natural gas industries, which would outweigh the benefits in our operating costs from lower energy costs.

A portion of our sales is derived from international markets, including Canada. Revenues denominated in currencies other than the U.S. dollar represented approximately 7.9% and 7.8% of total consolidated revenues for the thirteen and thirty-nine weeks ended May 25, 2019, respectively. Revenues denominated in currencies other than the U.S. dollar represented approximately 8.3% and 8.1% of total consolidated revenues for the thirteen and thirty-nine weeks ended May 26, 2018, respectively. The operating results of our international subsidiaries are translated into U.S. dollars and such results are affected by movements in foreign currencies relative to the U.S. dollar. In addition, fluctuations in the Canadian dollar may have an effect on the margins of our Canadian business because a weaker Canadian dollar will increase the cost of merchandise and other operational inputs that are sourced from outside of Canada. Our operating results in future years could be negatively impacted by any devaluation, as compared to the U.S. dollar, of the Canadian dollar or any of the currencies of the other countries in which we operate.

The decrease in our effective tax rate for the thirteen weeks ended May 25, 2019 as compared to the prior year comparable period was due primarily to the impact of the Act, which lowered the U.S. federal corporate income tax rates as of January 1, 2018 to 21.0% from 35.0%. Our U.S federal corporate income tax rate in thirteen weeks ended May 25, 2019 was 21.0% compared to a blended rate of 25.9% in the prior year comparable period.  The lower U.S. federal corporate income tax rate in the thirteen weeks ended May 25, 2019 was partially offset by a discrete benefit of $1.5 million related to tax credits in the prior year comparable period. For additional information pertaining to income taxes and the Act, please refer to Note 13, “Income Taxes” to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.