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Liabilities
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Accounting Policies (Policies)
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Accounting Policies - Schedule of Accumulated
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(Exact
name of registrant as specified in its charter)
iDelaware
i20-8236097
(State or other jurisdiction of
incorporation
or organization)
(I.R.S. Employer
Identification Number)
i2400 Market Street
i19103
iPhiladelphia,
iPennsylvania
(Address
of principal executive offices)
(Zip Code)
(i215) i238-3000
(Registrant's telephone number, including area code)
___________________________________________
Securities registered
pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on which Registered
iCommon
Stock,
par value $0.01 per share
iARMK
iNew York Stock Exchange
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYesx No ¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYesx No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
This report contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations as to future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. These statements include, but are not limited to, statements related to our expectations regarding the impact of the ongoing COVID-19 pandemic, the performance of our business, our financial results, our operations, our liquidity and capital resources, the conditions in our industry and our growth strategy. In some cases forward-looking statements can be identified by words such as "outlook,""aim,""anticipate,""are or remain or continue to be confident,""have confidence,""estimate,""expect,""will be,""will continue,""will likely result,""project,""intend,""plan,""believe,""see,""look to" and other words and terms of similar meaning or the negative versions of such words. These forward-looking statements are subject to risks and uncertainties that may change at any time, actual results or outcomes may differ materially from those that we expected.
Some of the factors that we believe could affect or continue to affect our results include without limitation: the severity and duration of the ongoing COVID-19 pandemic; the pandemic's impact on the United States and global economies, including particularly the client sectors we serve and governmental responses to the pandemic; unfavorable economic conditions; natural disasters, global calamities, climate change, new pandemics, sports strikes and other adverse incidents; geopolitical events including, but not limited to, the ongoing conflict between Russia and Ukraine and its effects on global supply chains, volatility and disruption of global financial
markets; the failure to retain current clients, renew existing client contracts and obtain new client contracts; a determination by clients to reduce their outsourcing or use of preferred vendors; competition in our industries; increased operating costs and obstacles to cost recovery due to the pricing and cancellation terms of our food and support services contracts; currency risks and other risks associated with international operations, including compliance with a broad range of laws and regulations, including the United States Foreign Corrupt Practices Act; risks associated with suppliers from whom our products are sourced; disruptions to our relationship with our distribution partners; the contract
intensive nature of our business, which may lead to client disputes; our expansion strategy and our ability to successfully integrate the businesses we acquire and costs and timing related thereto; continued or further unionization of our workforce; liability resulting from our participation in multiemployer defined benefit pension plans; the inability to hire and retain key or sufficient qualified personnel or increases in labor costs; laws and governmental regulations including those relating to food and beverages, the environment, wage and hour and government contracting; liability associated with noncompliance with applicable law or other governmental regulations; new interpretations of or changes in the enforcement of the government regulatory framework; increases or changes in income tax rates or tax-related laws; the failure to maintain food safety throughout our supply chain, food-borne illness concerns and claims of illness or injury; a cybersecurity incident
or other disruptions in the availability of our computer systems or privacy breaches; our leverage; the inability to generate sufficient cash to service all of our indebtedness; debt agreements that limit our flexibility in operating our business; risks associated with the impact, timing or terms of the proposed spin-off of Aramark Uniform Services (our Uniform segment) as an independent publicly traded company to our stockholders (the "proposed spin-off'"); risks associated with the expected benefits and costs of the proposed spin-off, including the risk that the expected benefits of the proposed spin-off will not be realized within the expected time frame, in full or at all, and the risk that conditions to the proposed spin-off will not be satisfied and/or that the proposed spin-off will not be completed within the expected time frame, on the expected terms or at all; the expected qualification of the proposed spin-off as a tax-free transaction for United States
federal income tax purposes, including whether or not an Internal Revenue Service ruling will be sought or obtained; the risk that any consents or approvals required in connection with the proposed spin-off will not be received or obtained within the expected time frame, on the expected terms or at all; risks associated with expected financing transactions undertaken in connection with the proposed spin-off and risks associated with indebtedness incurred in connection with the proposed spin-off; the risk of increased costs from lost synergies, costs of restructuring transactions and other costs incurred in connection with the proposed spin-off; retention of existing management team members as a result of the proposed spin-off; reaction of customers, our employees and other parties to the proposed spin-off; and the impact of the proposed spin-off on our business and the risk that the proposed spin-off may be more difficult, time-consuming or costly than expected, including
the impact on our resources, systems, procedures and controls, diversion of management’s attention and the impact on relationships with customers, suppliers, employees and other business counterparties; and other factors set forth under the headings “Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 1A—Risk Factors—Risks associated with the proposed spin-off" herein and headings "Part I, Item 1A Risk Factors,""Part I, Item 3 Legal Proceedings" and "Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on November 23, 2021 as such factors may be updated from time to time in our other periodic filings with the SEC, which are accessible on the SEC's website
at www.sec.gov and which may be obtained by contacting Aramark's investor relations department via its website at www.aramark.com. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein and in our other filings with the SEC. As a result of these risks and uncertainties, readers are cautioned not to place
undue reliance on any forward-looking
statements included herein or that may be made elsewhere from time to time by, or on behalf of, us. Forward-looking statements speak only as of the date made. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, changes in our expectations, or otherwise, except as required by law.
Receivables
(less allowances: $i69,122 and $i79,644)
i2,052,245
i1,748,601
Inventories
i514,887
i412,676
Prepayments
and other current assets
i192,037
i204,987
Total
current assets
i3,198,037
i2,898,855
Property
and Equipment, net
i2,017,094
i2,038,394
Goodwill
i5,551,004
i5,487,297
Other
Intangible Assets
i2,150,906
i2,028,622
Operating
Lease Right-of-use Assets
i599,988
i587,854
Other
Assets
i1,471,741
i1,335,142
$
i14,988,770
$
i14,376,164
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term borrowings
$
i77,506
$
i58,850
Current
operating lease liabilities
i70,853
i67,280
Accounts
payable
i908,135
i919,090
Accrued
expenses and other current liabilities
i1,503,411
i1,812,213
Total
current liabilities
i2,559,905
i2,857,433
Long-Term
Borrowings
i8,084,841
i7,393,417
Noncurrent
Operating Lease Liabilities
i318,303
i314,378
Deferred
Income Taxes and Other Noncurrent Liabilities
i1,101,297
i1,079,014
Commitments
and Contingencies (see Note 12)
i
i
Redeemable Noncontrolling Interests
i9,163
i9,050
Stockholders'
Equity:
Common stock, par value $ii0.01/
(authorized: ii600,000,000/ shares; issued:
i296,267,332 shares and i294,329,180 shares;and outstanding: i257,704,289
shares and i255,998,119 shares)
i2,963
i2,943
Capital
surplus
i3,642,792
i3,533,054
Retained
earnings
i359,339
i327,557
Accumulated
other comprehensive loss
(i148,608)
(i208,011)
Treasury
stock (shares held in treasury: i38,563,043 shares and i38,331,061 shares)
(i941,225)
(i932,671)
Total
stockholders' equity
i2,915,261
i2,722,872
$
i14,988,770
$
i14,376,164
The
accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. iBASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Aramark (the "Company") is a leading global provider of food, facilities and uniform services to education, healthcare, business & industry and sports, leisure & corrections clients. The Company's core market is the United States, which is supplemented by an additional i18-country footprint. The
Company operates its business in ithree reportable segments that share many of the same operating characteristics: Food and Support Services United States ("FSS United States"), Food and Support Services International ("FSS International") and Uniform and Career Apparel ("Uniform").
iThe
condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated financial statements, and the notes to those statements, included in the Company's Form 10-K filed with the SEC on November 23, 2021. The Condensed Consolidated Balance Sheet as of October 1, 2021 was derived from audited financial statements which have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). Certain information and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of the Company, the statements include all adjustments, which are of a normal, recurring nature, required for a fair presentation for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for a full year, due to the seasonality of some of the Company's business activities, the impact of the COVID-19 pandemic ("COVID-19") and the possibility of changes in general economic conditions.
The
condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling financial interest is maintained. All intercompany transactions and accounts have been eliminated.
i
New Accounting Standards Updates
Adopted Standards (from
most to least recent date of issuance)
In March 2022, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") which eliminates the accounting guidance for troubled debt restructuring for creditors in Accounting Standards Codification 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the ASU requires an entity to disclose current-period gross write offs by year of origination for financing receivables and net investments in leases. The Company early adopted the ASU during the third quarter of fiscal 2022, which did not have a material impact on the condensed consolidated
financial statements.
In March 2022, the FASB issued an ASU which expands the scope of existing guidance to allow entities to apply the portfolio layer method to portfolios of all financial assets, including both pre-payable and non-pre-payable financial assets. The Company early adopted the ASU during the third quarter of fiscal 2022, which did not have a material impact on the condensed consolidated financial statements.
In January 2020, the FASB issued an ASU which provided clarification and improvements to existing guidance related to accounting for certain equity securities upon the application or discontinuation of equity method accounting and the measurement of forward contracts and purchased options
on certain securities. The guidance was effective for the Company in the first quarter of fiscal 2022. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements.
Standards Not Yet Adopted (from most to least recent date of issuance)
In November 2021, the FASB issued an ASU which requires that an entity provide certain annual disclosures when they have received government assistance. The guidance is effective for the Company in the first quarter of fiscal 2023 and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the condensed consolidated financial statements.
In
October 2021, the FASB issued an ASU which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606") as if it had originated the contracts. The guidance is effective for the Company in the first quarter of fiscal 2024 and early adoption is permitted. The
Company is currently evaluating the impact of this standard.
In January 2021, the FASB issued an ASU which clarifies certain optional expedients and exceptions for contract modifications and hedge accounting that may apply to derivatives that are affected by the discontinuance of LIBOR and the reference rate
In March 2020, the FASB issued an ASU which provides optional expedients that may be adopted and applied through December 31, 2022 to assist with the discontinuance of LIBOR. The expedients allow companies to
ease the potential accounting burden when modifying contracts and hedging relationships that use LIBOR as a reference rate, if certain criteria are met. During fiscal 2020, the Company adopted the optional expedient to assert probability of forecasted hedged transactions occurring on its interest rate swap derivative contracts regardless of any expected contract modifications related to reference rate reform. The Company may adopt the remaining amendments of this standard through December
31, 2022, which generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact of this standard.
Other new accounting pronouncements recently issued or newly effective were not applicable to the Company, did not have a material impact on the condensed consolidated financial statements or are not expected to have a material impact on the condensed consolidated financial statements.
iComprehensive
Income (Loss)
Comprehensive income (loss) includes all changes to stockholders' equity during a period, except those resulting from investments by and distributions to stockholders. Components of comprehensive income (loss) include net income (loss), changes in foreign currency translation adjustments (net of tax), pension plan adjustments (net of tax), changes in the fair value of cash flow hedges (net of tax) and changes to the share of any equity investees' comprehensive income (net of tax).
iThe summary of the
components of comprehensive income (loss) is as follows (in thousands):
Share
of equity investee's accumulated other comprehensive loss
(i6,100)
(i7,427)
$
(i148,608)
$
(i208,011)
/
iCurrency
Translation
Beginning in fiscal 2018, Argentina was determined to have a highly inflationary economy. As a result, the Company remeasures the financial statements of Argentina's operations in accordance with the accounting guidance for highly inflationary economies. The impact of foreign currency transaction gains and losses during the three and nine month periods of both fiscal 2022 and 2021 were immaterial to the condensed consolidated financial statements.
iCurrent
Assets
The Company insures portions of its risk in general liability, automobile liability, workers’ compensation liability and property liability through a wholly owned captive insurance subsidiary (the "Captive"), to enhance its risk financing strategies. The Captive is subject to regulations within its domicile of Bermuda, including regulations established by the Bermuda Monetary Authority (the "BMA") relating to levels of liquidity and solvency as such concepts are defined by the BMA. The Captive was in compliance with these regulations as of July 1, 2022. These regulations may have the effect of limiting the Company's ability to access certain cash and cash equivalents held by the
Captive for uses other than for the payment of its general liability, automobile liability, workers' compensation liability, property liability and related Captive costs. As of July 1, 2022 and October 1, 2021, cash and cash equivalents at the Captive were $i149.4 million and $i194.3
million, respectively.
i
Other Assets
Other assets consist primarily of costs to obtain or fulfill contracts, including employee sales commissions and rental merchandise in-service, long-term receivables, investments in 50% or less owned entities and computer software costs.
For investments in 50% or less owned entities accounted for under the equity method of accounting, the carrying
amount as of July 1, 2022 and October 1, 2021 was $i253.8 million and $i224.6 million,
respectively.
/
For investments in 50% or less owned entities, other than those accounted for under the equity method of accounting, the Company measures these investments at cost, less any impairment and adjusted for changes in fair value resulting from observable price changes for an identical or a similar investment of the same issuer due to the lack of readily available fair values related to those investments. The carrying amount of equity investments without readily determinable fair values as of both July 1, 2022 and October 1, 2021 was $ii180.5/
million. During the three and nine months ended July 2, 2021, the Company identified an observable price change related to an equity investment without a readily determinable fair value and recognized a non-cash gain of $ii137.9/
million on the Condensed Consolidated Statements of Income (Loss).
i
Other Current and Noncurrent Liabilities
The Company is self-insured for obligations related to certain risks that are retained under the Company's casualty program, which includes general liability, automobile liability and workers' compensation liability, as well as for property
liability and employee healthcare benefit programs. Reserves for retained costs associated with the casualty program are estimated through actuarialmethods, with the assistance of third-party actuaries, using loss development assumptions based on the Company's claims history.
i
Defined Benefit Pension Plan
During the third quarter of fiscal 2021, the
Company terminated certain Canadian single-employer defined benefit pension plans and recognized a non-cash loss of $ii60.9/
million on the Condensed Consolidated Statements of Income (Loss) for the three and nine months ended July 2, 2021.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
i
Aramark's
Intention to Spin-off Uniform Segment
On May 10, 2022, the Company announced its intention to spin-off its Uniform segment into an independent publicly traded company to Aramark’s stockholders. The proposed spin-off is intended to be a tax-free transaction to Aramark and its stockholders for United States federal income tax purposes. The proposed spin-off is expected to be completed by the end of fiscal 2023, subject to certain customary conditions, including final approval of the Aramark Board of Directors, receipt of a favorable opinion and Internal Revenue Service ruling with respect to the tax-free nature of the transaction, the effectiveness of a registration statement on Form 10 to be filed with the SEC and the receipt of other regulatory approvals.
Impact
of COVID-19
COVID-19 has adversely affected global economies, disrupted global supply chains and labor force participation and created significant volatility and disruption of financial markets. COVID-19 related disruptions negatively impacted the Company's financial and operating results beginning in the second quarter of fiscal 2020 through the first half of fiscal 2021. The Company's financial results started to improve during the second half of fiscal 2021 and continue to improve during the nine month period of fiscal 2022 as COVID-19 restrictions were lifted and operations re-opened.
The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") provided for deferred payment of the employer portion
of social security taxes through the end of calendar 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% of the amount due December 31, 2022. Approximately $i64.2 million of the deferred social security taxes were paid during the nine months ended July 1, 2022. Approximately $i64.2
million of social security taxes remain deferred, which are recorded as liabilities within "Accrued expenses and other current liabilities" on the Company’s Condensed Consolidated Balance Sheet as of July 1, 2022.
Within the FSS International and Uniform segments, many foreign jurisdictions in which the Company operates provided companies various forms of relief from COVID-19, including labor related tax credits. These labor related tax credits generally allowed companies to receive credits if they retained employees on their payroll, rather than furloughing or terminating employees as a result of the business disruption caused by COVID-19. The
Company qualified for these tax credits. The Company recorded approximately $i2.3 million and $i35.5
million of labor related tax credits in the FSS International segment within "Cost of services provided (exclusive of depreciation and amortization)" on the Condensed Consolidated Statements of Income (Loss) during the three and nine months ended July 1, 2022, respectively. The Company recorded approximately $i29.0 million and $i105.2
million of labor related tax credits within "Cost of services provided (exclusive of depreciation and amortization)" on the Condensed Consolidated Statements of Income (Loss) during the three and nine months ended July 2, 2021, respectively, of which approximately $i5.0 million and $i14.0
million, respectively, were recorded in the Uniform segment and the remainder was recorded in the FSS International segment. The Company does not expect to receive significant additional tax credits during the remainder of fiscal 2022.
The Company accounted for these labor related tax credits as a reduction to the expense that they were intended to compensate in the period in which the corresponding expense was incurred and there was reasonable assurance the Company would both receive the tax credits and comply with all conditions attached to the tax credits.
The CARES Act provided an employee retention credit, which is a refundable
tax credit against certain employment taxes. The Company recorded $i5.0 million and $i11.0
million during the three and nine months ended July 2, 2021, respectively, related to the employee retention credit in "Cost of services provided (exclusive of depreciation and amortization)" on the Company's Condensed Consolidated Statements of Income (Loss).
NOTE 2. iACQUISITIONS:
Union
Supply Group, Inc.
On June 2, 2022, the Company completed the acquisition of Union Supply Group Inc. ("Union Supply"), a commissary goods and services supplier, pursuant to the Stock Purchase Agreement ("Union Supply Purchase Agreement") dated as of April 8, 2022, by and among Aramark Correctional Services, LLC, a wholly owned subsidiary of the Company, and Tom Thomas, in his capacity as the sellers' representative. Upon completion of the acquisition, Union Supply became a wholly owned subsidiary of the Company and its results are included in the
Company's FSS United States segment. The cash consideration paid for Union Supply was $i202.6 million, subject to a working capital adjustment. The Union Supply Purchase Agreement provides for contingent consideration, which the Company may be required to pay if Union Supply achieves certain adjusted EBITDA levels during calendar year 2023. A contingent consideration liability of $i40.2
million was recorded as part of the acquisition with a separate amount that will be accounted for as compensation expense to be recognized in earnings over the earnout period. The acquisition was financed utilizing funds from the Receivables Facility.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consideration
The
Company has accounted for the Union Supply acquisition as a business combination under the acquisition method of accounting. The Company has preliminarily allocated the purchase price for the transaction based upon the estimated fair value of net assets acquired and liabilities assumed at the date of acquisition. Accordingly, the preliminary purchase price allocation is subject to change. The Company expects to finalize the allocation of the purchase price upon finalization of the valuation for the intangible assets and final resolution of post-closing adjustments related to working capital based on the best estimates of management. Any adjustments to the preliminary fair values will be made as soon as practicable but no later than one year from the acquisition date.
Recognition
and Measurement of Assets Acquired and Liabilities Assumed at Fair Value
i
The following tables summarize the assets and liabilities assigned as of the acquisition date (in thousands):
Current assets
$
i99,177
Noncurrent
assets
i215,134
Total assets
$
i314,311
Current
liabilities
$
i24,934
Noncurrent liabilities
i86,757
Total
liabilities
$
i111,691
/
Intangible Assets
i
The
following table identifies the Company’s allocation of purchase price to the intangible assets acquired by category:
Estimated Fair Value (in millions)
Weighted-Average Estimated Useful Life (in years)
Customer relationship assets
$
i82.3
i15
Trade
name
i43.0
i15
Total
intangible assets
$
i125.3
/
The fair value of the customer relationship assets was determined using the “multi-period excess earnings method” which considers
the present value of net cash flows expected to be generated by the customer relationships, excluding any cash flows related to contributory assets. The fair value of the trade name acquired was determined using the “relief-from-royalty method” which considers the discounted estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.
Goodwill
The Company recorded $i65.0 million of goodwill in connection
with its purchase price allocation relating to the Union Supply acquisition, all of which was recognized in the FSS United States segment. Goodwill is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized, such as assembled workforce. Factors that contributed to the Company's preliminary recognition of goodwill include the Company's intent to complement its existing corrections business and expand its customer base. Goodwill related to the Union Supply acquisition may be revised upon final determination of the purchase price allocation. None of the goodwill recognized is expected to be deductible for income tax purposes.
Revenue
and Earnings for Union Supply
Included in the Company’s Condensed Consolidated Statements of Income for the three and nine months ended July 1, 2022 was revenues from Union Supply of approximately $ii21.1/
million. Net income in the Company's Consolidated Statements of Income from Union Supply was not material for the three and nine months ended July 1, 2022. The effect of the acquisition on proforma revenue and net income was not material.
Next Level Hospitality ("Next Level") Acquisition
On June 4, 2021, the Company completed the acquisition of Next Level Hospitality ("Next Level"), a premier provider of culinary and environmental services in the senior living industry, specializing in skilled nursing and rehabilitation facilities,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
pursuant to the Unit Purchase Agreement ("Next Level Purchase Agreement") dated as of April 28, 2021, by and among Aramark Healthcare Support Services, LLC, a wholly owned subsidiary of the Company, Aramark Services, Inc. ("ASI"), a wholly owned subsidiary of the Company, Next Level Hospitality Services, LLC, Next Level Stockholders and Seth Gribetz, in his capacity as Stockholder Representative. Next Level
is a wholly owned subsidiary of the Company and its results are included in the Company's FSS United States segment. The cash consideration paid for Next Level was $i226.1 million. In addition, contingent consideration of $i78.4
million was recorded as part of the acquisition. The acquisition was financed utilizing cash and cash equivalents on hand.
Consideration
The Company accounted for the Next Level acquisition as a business combination under the acquisition method of accounting. The Company finalized its allocation of the purchase price for the transaction based upon the fair value of net assets acquired and liabilities assumed at the date of acquisition.
Recognition and Measurement of Assets Acquired and Liabilities Assumed at Fair Value
The following tables summarize the assets and liabilities assigned as of the acquisition date (in thousands):
Current
assets
$
i18,088
Noncurrent assets
i307,291
Total
assets
$
i325,379
Current liabilities
$
i50,956
Noncurrent
liabilities
i48,323
Total liabilities
$
i99,279
Intangible
Assets
The following table identifies the Company’s allocation of purchase price to the intangible assets acquired by category:
Estimated Fair Value (in millions)
Weighted-Average Estimated Useful Life (in years)
Customer relationship assets
$
i133.0
i15
Trade
name
i49.5
i15
Total
intangible assets
$
i182.5
The fair value of the customer relationship assets was determined using the “multi-period excess earnings method” which considers the present value of net cash flows expected to be generated by the customer relationships, excluding any cash flows related to contributory assets. The fair value of the trade name acquired was determined
using the “relief-from-royalty method” which considers the discounted estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.
Goodwill
The Company recorded $i123.6 million of goodwill in connection with its purchase price allocation relating to the Next Level acquisition, all of which was recognized in the FSS United States segment. Goodwill is calculated as the excess of consideration transferred
over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized, such as assembled workforce. Factors that contributed to the Company's recognition of goodwill include the Company's intent to complement its existing healthcare business and expand its customer base. Goodwill related to the Next Level acquisition is deductible for income tax purposes.
NOTE 3. iSEVERANCE:
During
fiscal 2020, the Company made changes to its organization as a result of COVID-19. These actions included headcount reductions, resulting in severance charges during fiscal 2020. As of July 1, 2022 and October 1, 2021, the Company had an accrual of approximately $i9.9 million and $i24.6
million, respectively, related to unpaid severance obligations. The majority of the charges are expected to be paid out through the remainder of fiscal 2022. During the nine months ended July 2, 2021, the Company reversed approximately $i5.4 million of unpaid obligations related to severance, which were recorded in both "Cost of
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
services provided (exclusive of depreciation and amortization)" and "Selling and general corporate expenses" in the Condensed Consolidated Statements of Income (Loss).
During fiscal 2021, the Uniform segment approved action plans to streamline and improve the efficiency and effectiveness of the segment's general and administrative functions. Part of this action plan also included a series of facility consolidations and closures. As of July 1, 2022 and October 1, 2021, the
Company had an accrual of approximately $i4.4 million and $i9.0 million, respectively, related to unpaid severance obligations within the Uniform segment. The majority of the charges are expected to be paid out
through the remainder of fiscal 2022.
NOTE 4. iGOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill represents the excess of the fair value of consideration paid for an acquired entity over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized and is subject to an impairment test that the
Company conducts annually or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists, using discounted cash flows.
iChanges in total goodwill during the nine months ended July 1, 2022 are as follows (in thousands):
Amortization
of intangible assets for the nine months ended July 1, 2022 and July 2, 2021 was approximately $i81.1 million and $i85.9
million, respectively.
Senior secured revolving credit facility, due April 2026
$
i347,097
$
i71,896
Senior
secured term loan facility, due March 2025
i1,661,300
i1,660,382
Senior
secured term loan facility, due April 2026
i366,732
i406,543
Senior
secured term loan facility, due January 2027
i834,372
i833,643
Senior
secured term loan facility, due April 2028
i722,871
i721,986
i5.000%
senior notes, due April 2025
i595,770
i594,719
i3.125%
senior notes, due April 2025(1)
i336,871
i374,668
i6.375%
senior notes, due May 2025
i1,486,500
i1,483,328
i5.000%
senior notes, due February 2028
i1,141,148
i1,140,144
Receivables
Facility, due June 2024
i500,000
i—
Finance
leases
i138,309
i146,368
Other
i31,377
i18,590
i8,162,347
i7,452,267
Less—current
portion
(i77,506)
(i58,850)
$
i8,084,841
$
i7,393,417
(1)
This
is a Euro denominated borrowing.
/
As of July 1, 2022, there were approximately $i873.7 million of outstanding foreign currency borrowings and approximately $i848.2
million of availability under the senior secured revolving credit facility.
Receivables Facility
On June 17, 2022, the Company increased the purchase limit available under the Receivables Facility from $i400.0 million to $i500.0
million, and removed the seasonal tranche which increased the capacity of the Receivables Facility by $i100.0 million from October through March. All other terms and conditions of the agreement remained largely unchanged.
NOTE 6. iDERIVATIVE
INSTRUMENTS:
The Company enters into contractual derivative arrangements to manage changes in market conditions related to interest on debt obligations and exposure to fluctuating gasoline and diesel fuel prices. Derivative instruments utilized during the period include interest rate swap agreements and gasoline and diesel fuel agreements. All derivative instruments are recognized as either assets or liabilities on the balance sheet at fair value at the end of each quarter. The counterparties to the Company's contractual derivative agreements are all major international financial institutions. The Company is exposed to credit loss in the event of nonperformance
by these counterparties. The Company continually monitors its positions and the credit ratings of its counterparties and does not anticipate nonperformance by the counterparties. For designated hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged and how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively for designated hedges. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting cash flows of hedged items.
Cash Flow Hedges
The Company has approximately $i3.6 billion notional amount of outstanding interest rate swap agreements as of July 1, 2022, which fix the rate on a like amount of variable rate borrowings through December of fiscal 2028. During the nine months ended July 1,
2022, the Company entered into $i700.0 million notional amount of forward starting interest rate swap agreements to hedge the cash flow risk of variability in interest payments on variable rate borrowings. During the nine months ended July 1, 2022, interest rate swaps with notional amounts of $i250.0
million matured.
Changes in the fair value of a derivative that is designated as and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of July 1, 2022 and October 1, 2021,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
approximately $i58.1 million and ($i49.2)
million, respectively, of unrealized net of tax gains (losses) related to the interest rate swaps were included in "Accumulated other comprehensive loss."
iThe following table summarizes the effect of the Company's derivatives designated as cash flow hedging instruments on Other comprehensive income (loss) (in thousands):
Derivatives
not Designated in Hedging Relationships
The Company entered into a series of pay fixed/receive floating gasoline and diesel fuel agreements based on the Department of Energy weekly retail on-highway index in order to limit its exposure to price fluctuations for gasoline and diesel fuel. As of July 1, 2022, the Company has contracts for approximately i7.7 million
gallons outstanding through June of fiscal 2023. The Company does not record its gasoline and diesel fuel agreements as hedges for accounting purposes. The impact on earnings related to the change in fair value of these unsettled contracts were gains of approximately $i1.8 million and $i1.4
million for the three and nine months ended July 1, 2022, respectively. The impact on earnings related to the change in fair value of these unsettled contracts was a loss of approximately $i0.7 million and a gain of approximately $i5.1
million for the three and nine months ended July 2, 2021, respectively. The change in fair value for unsettled contracts is included in "Selling and general corporate expenses" on the Condensed Consolidated Statements of Income (Loss). When the contracts settle, the gain or loss is recorded to "Cost of services provided (exclusive of depreciation and amortization)" on the Condensed Consolidated Statements of Income (Loss).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
i
The following table summarizes the location and fair value, using Level 2 inputs (see Note 14 for a description of the fair value levels), of the Company's derivatives designated and
not designated as hedging instruments in the Condensed Consolidated Balance Sheets (in thousands):
Interest
rate swap positions moved from liability positions as of October 1, 2021 to asset positions as of July 1, 2022 due to changes in forward interest rates.
/
iThe
following table summarizes the location of the loss (gain) reclassified from "Accumulated other comprehensive loss" into earnings for derivatives designated as hedging instruments and the location of the loss (gain) for the Company's derivatives not designated as hedging instruments in the Condensed Consolidated Statements of Income (Loss) (in thousands):
Cost of services provided (exclusive of depreciation and amortization) / Selling and general corporate expenses
(i8,578)
(i7,235)
$
i21,157
$
i30,926
/
At
July 1, 2022, the net of tax gain expected to be reclassified from "Accumulated other comprehensive loss" into earnings over the next twelve months based on current market rates is approximately $i18.6 million.
NOTE 7. iREVENUE
RECOGNITION:
The Company generates revenue through sales of food, facility and uniform services to customers based on written contracts at the locations it serves. Within the FSS United States and FSS International segments, the Company provides food and beverage services, including catering and retail services, and facilities services, including plant operations and maintenance, custodial,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
housekeeping, landscaping and other services. Within the Uniform segment, the Company provides a full service uniform solution, including delivery, cleaning and maintenance. In accordance with ASC 606, the Company accounts for a customer contract when both parties have approved the arrangement and are committed to perform their respective obligations, each party's rights can be identified, payment terms can be identified, the contract
has commercial substance and it is probable the Company will collect substantially all of the consideration to which it is entitled. Revenue is recognized upon the transfer of control of the promised product or service to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods and services.
Performance Obligations
The Company recognizes revenue when its performance obligation is satisfied. Each contract generally has ione
performance obligation, which is satisfied over time. The Company primarily accounts for its performance obligations under the series guidance, using the as-invoiced practical expedient when applicable. The Company applies the right to invoice practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contracts. Under this practical expedient, the Company recognizes revenue in an amount that corresponds directly with the value to the customer of the
Company’s performance completed to date and for which the Company has the right to invoice the customer. Certain arrangements include performance obligations which include variable consideration (primarily per transaction fees). For these arrangements, the Company does not need to estimate the variable consideration for the contract and allocate to the entire performance obligation; therefore, the variable fees are recognized in the period they are earned.
Disaggregation of Revenue
i
The
following table presents revenue disaggregated by revenue source (in millions):
Revenue
was favorable during the three and nine months ended July 1, 2022 compared to the three and nine months ended July 2, 2021 as COVID-19 restrictions were lifted and operations re-opened.
Deferred income is recognized in "Accrued expenses and other current liabilities" on the Condensed Consolidated Balance Sheets when the Company has received consideration, or has the right to receive consideration, in advance of the transfer
of the performance obligation of the contract to the customer, primarily prepaid meal plans. The consideration received remains a liability until the goods or services have been provided to the customer. The Company classifies deferred income as current as the arrangement is short term in nature.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
During the nine months ended July 1, 2022, deferred income increased related to customer prepayments and decreased related to income recognized during the period as a result of satisfying the performance obligation. For the nine months ended July 1, 2022, the Company recognized $i267.7
million of revenue that was included in deferred income at the beginning of the period. iDeferred income balances are summarized in the following table (in millions):
As of each reporting date, the Company considers existing evidence, both positive and negative, that could impact the need for valuation allowances against deferred tax assets ("DTAs"). During the nine months ended July 1, 2022, the Company recorded a benefit to the "Provision (Benefit) for Income
Taxes" within the Condensed Consolidated Statements of Income (Loss) of approximately $i8.5 million for the reversal of a valuation allowance at a subsidiary in the FSS International segment driven by the Company's ability to utilize the DTAs based on future taxable income expected due to the acquisition of a business. During the nine months ended July 2, 2021,
the Company recorded a valuation allowance against DTAs based on cumulative losses in certain subsidiaries in the FSS International segment of approximately $i14.6 million to the "Provision (Benefit) for Income Taxes" within the Condensed Consolidated Statements of Income (Loss).
On
March 27, 2020, the CARES Act was enacted in response to COVID-19. The CARES Act, among other things, permitted net operating losses ("NOLs") incurred in fiscal 2019, 2020 and 2021 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. NOLs arising in fiscal 2019, 2020 or 2021 are created in years that have a 21.0% federal income tax rate. If these NOLs are carried back to years prior to fiscal 2018, the resulting refund would be in years with a 35.0% federal income tax rate.
As a result of the CARES Act, the Company recorded a net benefit to the "Provision (Benefit) for Income Taxes" of approximately $i3.8
million and $i38.1 million during the three and nine months ended July 2, 2021, respectively, which reflect the NOLs carried back or expected to be carried back to Pre-Tax Cuts and Jobs Act tax years at 35.0%. In addition, the Company recorded a valuation allowance to the "Provision (Benefit) for Income Taxes" of $i3.8
million and $i30.0 million during the three and nine months ended July 2, 2021, respectively, against certain foreign tax credits that were re-established by the NOL carryback, as it is more likely than not a tax benefit will not be realized. During the second quarter of fiscal 2021, the Company received approximately $i93.6
million of proceeds related to the fiscal 2020 income tax return from the NOLs generated in fiscal 2020 as a result of the CARES Act.
The Company recorded a net benefit to the "Provision (Benefit) for Income Taxes" in both the three and nine month periods ended July 2, 2021 of $ii4.0/
million related to the release of certain stranded tax effects when the Company terminated certain Canadian defined benefit pension plans (see Note 1).
NOTE 9. iSTOCKHOLDERS' EQUITY:
During the nine months ended July 1, 2022
and July 2, 2021, the Company paid cash dividends of approximately $i84.8 million and $i83.9
million to its stockholders, respectively. On August 2, 2022, the Company's Board declared an $i0.11 dividend per share of common stock, payable on August 30, 2022, to shareholders of record on the close of business on August 17, 2022.
The
Company has ii100.0/ million
shares of preferred stock authorized, with a par value of $ii0.01/
per share. At July 1, 2022 and October 1, 2021, iiiizero///
shares of preferred stock were issued or outstanding.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10. iSHARE-BASED
COMPENSATION:
iThe following table summarizes the share-based compensation expense and related information for Time-Based Options ("TBOs"), Retention Time-Based Options ("TBO-Rs"), Time-Based Restricted Stock Units ("RSUs"), Performance Stock Units ("PSUs"), Deferred Stock Units and Employee Stock Purchase Plan ("ESPP") recorded within "Selling and general corporate
expenses" on the Condensed Consolidated Statements of Income (Loss) (in millions).
Cash
Received from Option Exercises/ESPP Purchases
i11.6
i6.6
i35.3
i33.9
Tax
Benefit on Share Deliveries
i0.2
i0.2
i0.1
i3.0
/
iThe below table summarizes the number of shares granted and the weighted-average grant-date fair value per unit during the nine months ended July 1, 2022:
Shares
Granted (in millions)
Weighted Average Grant-Date Fair Value (dollars per share)
TBOs
i1.2
$
i13.27
RSUs
i2.1
$
i36.61
PSUs
i0.5
$
i39.70
i3.8
NOTE
11. iEARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the periods presented. Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding adjusted to include the potentially dilutive effect of stock awards.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
i
The following table sets forth the computation of basic and diluted earnings (loss) per share attributable to the Company's stockholders (in thousands, except per share data):
Incremental
shares of i2.1 million have been excluded from the computation of diluted weighted-average shares outstanding for the nine months ended July 2, 2021, because the effect would have been antidilutive due to the net loss attributable to Aramark stockholders during the period.
/
Share-based
awards to purchase i10.0 million and i8.5
million shares were outstanding for the three months ended July 1, 2022 and July 2, 2021, respectively, but were not included in the computation of diluted earnings per common share, as their effect would have been antidilutive. In addition, PSUs related to i1.0 million and i1.1
million shares were outstanding for the three months ended July 1, 2022 and July 2, 2021, respectively, but were not included in the computation of diluted earnings per common share, as the performance targets were not yet met.
Share-based awards to purchase i9.3 million and i9.4
million shares were outstanding for the nine months ended July 1, 2022 and July 2, 2021, respectively, but were not included in the computation of diluted earnings (loss) per common share, as their effect would have been antidilutive. In addition, PSUs related to i1.0 million and i1.1
million shares were outstanding for the nine months ended July 1, 2022 and July 2, 2021, respectively, but were not included in the computation of diluted earnings (loss) per common share, as the performance targets were not yet met.
NOTE 12. iCOMMITMENTS AND CONTINGENCIES:
Certain
of the Company's lease arrangements, primarily vehicle leases, with terms of one to i12 years, contain provisions related to residual value guarantees. The maximum potential liability to the Company under such arrangements was approximately $i26.7
million at July 1, 2022 if the terminal fair value of vehicles coming off lease was izero. Consistent with past experience, management does not expect any significant payments will be required pursuant to these arrangements. iNo
amounts have been accrued for guarantee arrangements at July 1, 2022.
From time to time, the Company and its subsidiaries are a party to various legal actions, proceedings and investigations involving claims incidental to the conduct of their business, including actions by clients, consumers, employees, government entities and third parties, including under federal, state, international, national, provincial and local employment laws, wage and hour laws, discrimination laws, immigration laws, human health and safety laws, import and export controls and customs laws, environmental laws, false claims or whistleblower statutes, minority, women and disadvantaged business enterprise statutes, tax codes,
antitrust and competition laws, consumer protection statutes, procurement regulations, intellectual property laws, food safety and sanitation laws, cost and accounting principles, the Foreign Corrupt Practices Act, the U.K. Bribery Act, other anti-corruption laws, lobbying laws, motor carrier safety laws, data privacy and security laws and alcohol licensing and service laws, or alleging negligence and/or breaches of contractual and other obligations. Based on information currently available, advice of counsel, available insurance coverage, established reserves and other resources, the Company does not believe that any such actions are likely to be, individually or in the aggregate, material to its business, financial condition, results of operations or cash flows. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters,
or other similar matters, if unfavorable, may be materially adverse to the Company's business, financial condition, results of operations or cash flows.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company was involved in a dispute with a client regarding
Aramark’s provision of services pursuant to a contract. During the second quarter of fiscal 2022, the Company resolved the matter by entering into a settlement agreement with the client whereby the Company's obligations totaled approximately $ii13.6/ million,
resulting in a reversal of previously reserved amounts of approximately $i5.7 million, which is included in "Cost of services provided (exclusive of depreciation and amortization)" on the Condensed Consolidated Statements of Income (Loss).
NOTE 13. iBUSINESS
SEGMENTS:
The Company reports its operating results in ithree reportable segments: FSS United States, FSS International and Uniform. Corporate includes general expenses not specifically allocated to an individual segment and share-based compensation expense (see Note 10). In the Company's food and support services segments, approximately i71%
of the global revenue is related to food services and i29% is related to facilities services. During the nine months ended July 1, 2022 and July 2, 2021, the Company received proceeds of approximately $i9.0
million and $i10.0 million, respectively, relating to the recovery of the Company's investment (possessory interest) at ione
of the National Park Service sites within the FSS United States segment. The Company recorded a gain related to the recovery of its investment, which is included in "Cost of services provided (exclusive of depreciation and amortization)" on the Condensed Consolidated Statements of Income (Loss). Revenue, operating income and net income (loss) were favorable during the three and nine months ended July 1, 2022 compared to the three and nine months ended July 2, 2021 as COVID-19 restrictions were lifted and operations re-opened.
iFinancial
information by segment follows (in millions):
NOTE
14. iFAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
i
Fair value is defined as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are classified based upon the level of judgment associated with the inputs used to measure their fair value. The hierarchical levels related to the subjectivity of the valuation inputs are defined as follows:
• Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets
• Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument
• Level 3—inputs to the valuation methodology are unobservable and significant
to the fair value measurement
Recurring Fair Value Measurements
The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, borrowings and derivatives. Management believes that the carrying value of cash and cash equivalents, accounts receivable and accounts payable are representative of their respective fair values. In conjunction with the fair value measurement of the derivative instruments, the Company made an accounting policy election to measure the credit risk of its derivative instruments that are subject to master netting agreements on a net basis by counterparty portfolio, as the gross values would not be materially different. The
fair value of the Company's debt at July 1, 2022 and October 1, 2021 was $i7,884.7 million and $i7,580.7
million, respectively. The carrying value of the Company's debt at July 1, 2022 and October 1, 2021 was $i8,162.3 million and $i7,452.3
million, respectively. The fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the respective periods. The inputs utilized in estimating the fair value of the Company's debt have been classified as Level 2 in the fair value hierarchy levels.
As part of the Union Supply acquisition (see Note 2), the Company recorded a contingent consideration obligation based on the fair value of the expected payments. The Company performed a fair value assessment of the contingent consideration obligation based on the terms and conditions of the purchase agreement. The inputs utilized in estimating
the fair value of the contingent consideration have been classified as Level 3 in the fair value hierarchy levels and are subject to risk and uncertainty. The calculation of fair value is dependent on several subjective factors including future earnings and profitability. If assumptions or estimates vary from what was expected, the fair value of the contingent consideration liability may materially change. The fair value of the contingent consideration liability at July 1, 2022 was $i40.2 million.
As
part of the Next Level Hospitality acquisition completed in fiscal 2021, the Company recorded a contingent consideration obligation based on the fair value of the expected payments. During the second quarter of fiscal 2022, the unit purchase agreement with the former owners of Next Level was amended to modify the terms and conditions associated with the contingent consideration. The amended agreement includes calendar year 2023, in addition to calendar years 2022 and 2021, as a performance period to earn consideration should Next Level achieve certain adjusted EBITDA levels. The Company
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
accounted for the agreement prospectively and did not modify its allocation of the purchase price for the transaction, which was finalized in fiscal 2021. The Company performed a fair value assessment of the contingent consideration obligation based on the terms and conditions of the amended agreement, using internal models. The inputs utilized in estimating the fair value of the contingent consideration have been classified as Level 3 in the fair value hierarchy levels and are subject to risk and uncertainty. The calculation of fair value is dependent
on several subjective factors including future earnings and profitability. If assumptions or estimates vary from what was expected, the fair value of the contingent consideration liability may materially change. The fair value of the contingent consideration liability at July 1, 2022 and October 1, 2021 was $i69.1 million and $i78.4 million,
respectively. During the third quarter of fiscal 2022, the Company paid $i9.3 million related to the contingent consideration liability, which was for the calendar 2021 performance period.
The following discussion and analysis of Aramark's (the "Company,""we,""our" and "us") financial condition and results of operations for the three and nine months ended July 1, 2022 and July 2, 2021 should be read in conjunction with our audited consolidated financial statements and the notes to those statements for the fiscal year ended October 1, 2021 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on November 23,
2021.
Our discussion contains forward-looking statements, such as our plans, objectives, opinions, expectations, anticipations, intentions and beliefs, that are based upon our current expectations but that involve risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in those forward-looking statements as a result of a number of factors, including those described under the heading "Special Note About Forward-Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q. In the following discussion and analysis of financial condition and results of operations, certain financial measures may be considered "non-GAAP financial measures" under SEC rules. These rules require supplemental explanation and reconciliation, which is provided elsewhere in this Quarterly Report on Form 10-Q.
Overview
We
are a leading global provider of food, facilities and uniform services to education, healthcare, business & industry and sports, leisure & corrections clients. Our core market is the United States, which is supplemented by an additional 18-country footprint. Through our established brand, broad geographic presence and employees, we anchor our business in our partnerships with thousands of clients. Through these partnerships, we serve millions of consumers including students, patients, employees, sports fans and guests worldwide. We operate our business in three reportable segments: Food and Support Services United States ("FSS United States"), Food and Support Services International ("FSS International") and Uniform and Career Apparel ("Uniform").
Our FSS United States reportable segment operations focus on serving clients in five principal sectors: Business & Industry, Education, Healthcare,
Sports, Leisure & Corrections and Facilities & Other. Our FSS International reportable segment provides a similar range of services as those provided to our FSS United States clients. Administrative expenses not allocated to our three reportable segments are presented separately as corporate expenses.
Business Update
The COVID-19 pandemic ("COVID-19") has adversely affected global economies, disrupted global supply chains and labor force participation and created significant volatility and disruption of financial markets. COVID-19 related disruptions negatively impacted our financial and operating results beginning in the second quarter of fiscal 2020 through the first half of fiscal 2021. Our financial results started to improve during the second half of fiscal 2021 and continue to improve during the nine month period of fiscal 2022 as COVID-19 restrictions were lifted
and operations re-opened. In addition, the ongoing conflict between Russia and Ukraine has further disrupted global supply chains and heightened volatility and disruption of global financial markets. While we do not have direct operations within Russia, Belarus or Ukraine, the conflict involving these nations has heightened the disruption to our supply chain, triggered inflation in our food and labor costs and may increase our risk of cyberattacks. The impact of these global events on our longer-term operational and financial performance will depend on future developments, including the lingering effects of the COVID-19 pandemic, our ability to effectively hire and retain personnel, governmental response to inflation and the duration and severity of the conflict in Ukraine. These future developments are largely outside of our control and are highly uncertain.
We continue to remain principally focused on the safety and well-being
of our employees, clients and everyone we serve, while simultaneously taking timely, proactive measures to adapt to the current environment. We continue to modify our business model in response to the current environment, including proactively managing inflation and global supply chain disruption, through supply chain initiatives. We have also implemented pricing pass-throughs, as appropriate, to cover incremental costs. In certain sectors, like Education, there can be a lag in pricing pass-throughs due to the timing of when prices are determined in the academic year.
In the FSS United States segment, the current environment of our sectors are as follows:
•Education – Education saw solid performance through the end of the academic year. In Higher Education and K-12, teams are preparing for the upcoming new school season as well as implementing enhanced pricing
strategies for meal plans and on-campus retail outlets.
•Sports, Leisure & Corrections – Sports saw increased spending trends and a strong attendance in professional sports, led by Major League Baseball, and a more consistent concert schedule. Leisure experienced increased guest activity,
particularly in National Parks. Corrections again performed above pre-COVID-19 revenue levels and have implemented enhanced pricing strategies.
•Business & Industry – Companies continued to experience a steady increase
of in-person activity, albeit still below pre-pandemic levels. Our clients implemented customized offerings and meal subsidies, helping increase participation rates.
•Facilities & Other – Revenues performed above pre-COVID-19 levels driven by higher levels of activity at existing clients and strong levels of new wins. We continue to offer our core business offerings, with an added focus on new engineering solutions and client project services.
•Healthcare – Revenue growth led by increased client activity related to elective surgeries and clinical care. We have also added new offerings, including Ambulatory Surgical Centers.
Within the FSS International segment, we continue to recover, returning to pre-pandemic revenue levels. South America continues to experience strong performance in extractive
services. Europe and Canada continue to recover given improved activity levels, especially in sports and entertainment venues. China has continued to show revenue growth despite recent lockdown restrictions in certain cities that occurred due to the increase in COVID-19 cases. Across the FSS International segment, clients continue to focus on re-openings as government support programs eased, while also managing labor shortages.
In the Uniform segment, our business serves a range of clients, focusing on solution-oriented service driving safety and hygiene. Client operations have mostly resumed, which, combined with increasing levels of net new client wins and improved pricing, enabled the segment to continue to surpass pre-pandemic revenue levels.
During fiscal 2022, we saw continued improved profitability from clients re-opening as COVID-19 restrictions continued to ease as well as
from effective management of operating costs, including supply chain initiatives, and pricing pass-throughs to mitigate the effects of elevated inflation. We continue to evaluate and react to the effects of a prolonged global disruption and the continued impact on our results of operations. These items may include, but are not limited to: the financial condition of our clients; supply chain disruptions that caused delivery delays, product inflation, lower fill rates and higher substitution rates for a range of products; and greater labor challenges. We expect these items to continue, and we regularly evaluate and react in order to take appropriate actions to mitigate the risk in these areas. We have seen a slight easing in off-program procurement purchases in the third quarter of fiscal 2022.
Aramark’s Intention to Spin-off Uniform Segment
On May
10, 2022, we announced our intention to spin-off our Uniform segment into an independent publicly traded company to our stockholders. The proposed spin-off is intended to be a tax-free transaction to us and our stockholders for United States federal income tax purposes. The proposed spin-off is expected to be completed by the end of fiscal 2023, subject to certain customary conditions, including final approval of our Board of Directors, receipt of a favorable opinion and Internal Revenue Service ruling with respect to the tax-free nature of the transaction, the effectiveness of a registration statement on Form 10 to be filed with the SEC and the receipt of other regulatory approvals.
Seasonality
Our revenue and operating results have varied from quarter to quarter as a result of different factors. Historically, within our FSS United States segment, there has been a lower level
of activity during our first and second fiscal quarters in operations that provide services to sports and leisure clients. This lower level of activity, historically, has been partially offset during our first and second fiscal quarters by the increased activity levels in our educational operations. Conversely, historically there has been a significant increase in the provision of services to sports and leisure clients during our third and fourth fiscal quarters, which is partially offset by the effect of summer recess at colleges, universities and schools in our education sector. Our business and results of operations have started to resemble our historically typical patterns of seasonality; however, the lingering effects of the COVID-19 pandemic may still cause atypical patterns in our seasonality.
Foreign Currency Fluctuations
The impact from foreign currency translation assumes
constant foreign currency exchange rates based on the rates in effect for the prior year period being used in translation for the comparable current year period. We believe that providing the impact of fluctuations in foreign currency rates on certain financial results can facilitate analysis of period-to-period comparisons of business performance.
Fiscal Year
Our fiscal year is the fifty-two or fifty-three week period which ends on the Friday nearest September 30th. The fiscal years ending September 30, 2022 and October 1, 2021 are both fifty-two week periods.
The following tables present an overview of our results on a consolidated and segment basis with the amount of and percentage change between periods for the three and nine months ended July 1, 2022 and July 2, 2021 (dollars in millions).
(1)
As a percentage of total revenue, FSS United States represented 60.1% and 55.3%, FSS International represented 23.7% and 24.5% and Uniform represented 16.2% and 20.2% for the three months ended July 1, 2022 and July 2, 2021, respectively.
(2) Revenue and operating income were favorable during the three months ended July 1, 2022 compared to the three months ended July 2, 2021 as COVID-19 restrictions were lifted and operations re-opened.
(3) As a percentage of total revenue, FSS United States represented 60.7% and 54.4%, FSS International represented 22.8% and 24.6% and Uniform represented 16.5% and 21.0% for the nine months ended July 1, 2022 and July 2, 2021, respectively.
(4) Revenue and operating income were favorable during the nine months ended July 1, 2022 compared to the nine months ended July 2, 2021 as COVID-19 restrictions were lifted and operations re-opened.
Consolidated Overview
Revenue increased by approximately 38.4% and 39.7% during the three and nine month periods of fiscal 2022 compared to the prior
year periods, respectively. The increase during the three and nine month periods of fiscal 2022 was primarily attributable to improved business as COVID-19 restrictions were lifted and operations re-opened across all of our business segments, net increases in new business and pricing pass-throughs. In addition, the Next Level Hospitality acquisition, that occurred in third quarter of fiscal 2021, contributed $72.9 million and $259.6 million more during the three and nine month periods of fiscal 2022 compared to the three and nine month periods of fiscal 2021, respectively. Foreign currency translation unfavorably impacted revenue for the three and nine month periods of fiscal 2022 (approximately 3.8% and 2.0%).
The following table presents the cost of services provided (exclusive of depreciation and amortization) by segment and as a percent of revenue for the three and nine months ended July 1, 2022 and July 2, 2021.
Cost of services provided (exclusive of depreciation and amortization)
$
%
of Revenue
$
% of Revenue
$
% of Revenue
$
% of Revenue
FSS United States
$
2,282.6
91.9
%
$
1,496.0
90.7
%
$
6,646.8
91.7
%
$
4,287.8
92.3
%
FSS
International
921.3
94.2
%
684.3
93.9
%
2,561.2
94.1
%
2,004.7
95.4
%
Uniform
543.9
81.4
%
505.8
83.9
%
1,602.1
81.4
%
1,521.5
84.6
%
$
3,747.8
90.8
%
$
2,686.1
90.1
%
$
10,810.1
90.6
%
$
7,814.0
91.4
%
The
following table presents the percentages attributable to the components in cost of services provided (exclusive of depreciation and amortization) for the three and nine months ended July 1, 2022 and July 2, 2021.
Three Months
Ended
Nine Months Ended
Cost of services provided (exclusive of depreciation and amortization) components
(1)
Food and support service costs represented a higher proportion of total cost of services provided (exclusive of depreciation and amortization) during the three and nine months ended July 1, 2022 mainly from COVID-19 restrictions being lifted and operations continuing to re-open and inflationary food costs.
(2) Personnel costs decreased as a percentage of total cost of services provided (exclusive of depreciation and amortization) during the three and nine months ended July 1, 2022 due to food and support service costs and other direct costs increasing at a higher proportion as compared to personnel costs.
(3) Other direct costs represented a slightly higher proportion of total cost of services provided (exclusive of depreciation and amortization) during the nine months ended July 1,
2022 mainly from increases in client payments related to our revenue contracts from COVID-19 restrictions being lifted and operations continuing to re-open.
Operating income increased by approximately $73.7 million and $371.0 million during the three and nine month periods of fiscal 2022 compared to the prior year periods, respectively, driven by improved profitability from clients re-opening after COVID-19 restrictions lifted and effective cost management. The increase in operating income during the three and nine month periods of fiscal 2022 also benefited from lower insurance expenses, mainly related to our medical and risk programs (approximately $10.3 million and $33.8 million), and prior year non-cash charges related to excess inventory (approximately $8.0 million and $19.6 million).
These
increases in operating income during the three and nine month periods of fiscal 2022 more than offset lower United States and non-United States governmental labor related tax credits received in relation to COVID-19 (see Note 1 to the condensed consolidated financial statements), increased inflationary costs, including supply chain challenges from off-program purchases, higher expenses incurred related to new business when compared to the prior year periods and the negative impact of foreign currency translation (approximately $5.0 million and $6.2 million). The increase in operating income during the nine month period of fiscal 2022 was partially offset by lower income related to favorable loss experience in older insurance years under our general liability, automotive liability and workers' compensation liability programs when compared to the nine month period of fiscal 2021 (approximately $16.2 million).
During the three
and nine month periods ended July 2, 2021, a non-cash gain related to an equity investment of approximately $137.9 million was recorded, which was partially offset by a non-cash loss from the termination of certain defined benefit pension plans of approximately $60.9 million.
Interest and Other Financing Costs, net, decreased 18.1% and 11.1% during the three and nine month periods of fiscal 2022 compared to the prior year period, respectively. The decrease during the three and nine month periods of fiscal 2022 was primarily due to lower interest from the repayment of the 4.750% Senior Notes due 2026 ("2026 Notes") during the third quarter of fiscal 2021. The decrease was also due to approximately $18.7 million of charges related to the repayment of the 2026 Notes during the third quarter of fiscal 2021, including approximately $11.9 million of a call premium payment and
$6.8 million related to the write-off of unamortized debt issuance costs.
The provision for income taxes for the three and nine month periods of fiscal 2022 was recorded at an effective tax rate of 28.3% and 23.9%, respectively. The provision for income taxes for the three month period of fiscal 2021 was recorded at an
effective tax rate of 17.8% and the benefit for income taxes for the nine month period of fiscal 2021 was recorded at an effective rate of 26.6%. During the nine months ended July 1, 2022, we recorded an income tax benefit of approximately
$8.5 million for the reversal of a valuation allowance against deferred tax assets ("DTAs") within a subsidiary in the FSS International segment due to an acquisition of a business (see Note 8 to the condensed consolidated financial statements). During the nine month period of fiscal 2021, we recorded a valuation allowance against DTAs in certain subsidiaries in the FSS International segment from cumulative losses of approximately $14.6 million. As a result of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), we recorded an income tax benefit, net, of approximately $3.8 million and $38.1 million for the three and nine months ended July 2, 2021, respectively. This benefit reflects the net operating losses ("NOLs") carried back or expected to be carried back to Pre-Tax Cut and Jobs Act years,
which are benefited at an income tax rate of 35.0%. In addition, we recorded a valuation allowance of $3.8 million and $30.0 million during the three and nine month periods of fiscal 2021, respectively, against certain foreign tax credits that were re-established by the NOL carryback. We recorded a net benefit to the provision (benefit) for income taxes in both the three and nine months ended July 2, 2021 of $4.0 million related to the release of certain stranded tax effects when we terminated certain Canadian defined benefit pension plans (see Note 1 to the condensed consolidated financial statements).
Segment Results
FSS United States Segment
The FSS United States reportable segment consists of five sectors which have similar economic characteristics and comprise a single operating segment.
The five sectors of the FSS United States reportable segment are Business & Industry, Education, Healthcare, Sports, Leisure & Corrections and Facilities & Other.
Revenue for each of these sectors are summarized as follows (in millions):
Historically,
the Healthcare, Education and Facilities & Other sectors generally have high-single digit operating income margins and the Business & Industry and Sports, Leisure & Corrections sectors generally have mid-single digit operating income margins. During the COVID-19 pandemic, operating income margins in the FSS United States sectors differ from our otherwise historical patterns.
FSS United States segment revenue increased by approximately 50.4% and 55.9% during the three and nine month periods of fiscal 2022 compared to the prior year periods, respectively. The increase during the three and nine month periods of fiscal 2022 was primarily attributable to operations re-opening across all sectors, particularly in our Sports, Leisure & Corrections sector as professional sports stadiums and arenas began to allow fans in attendance, net new business growth and pricing pass-throughs. In addition, the Next Level Hospitality
acquisition, that occurred in third quarter of fiscal 2021, contributed $72.9 million and $259.6 million more of revenue during the three and nine month periods of fiscal 2022 compared to the three and nine month periods of fiscal 2021, respectively, to our Healthcare sector.
Operating income increased by approximately $45.1 million and $240.1 million during the three and nine month periods of fiscal 2022 compared to the prior year periods, respectively. The increase was primarily attributable to improved profitability from clients re-opening after COVID-19 restrictions lifted and effective cost management. The increase also benefited from lower insurance expenses, mainly related to our medical and risk programs (approximately $10.3 million and $31.6 million), and lower employee incentive expenses. The increase in operating income during the three and nine month period of fiscal 2022 was partially offset by higher expenses
incurred related to new business when compared to the prior year periods as well as increased inflationary costs, including supply chain challenges from off-program purchases. The increase in operating income during the nine month period of fiscal 2022 was partially offset by lower income related to favorable loss experience in older insurance years under our general liability, automotive liability and workers' compensation liability programs when compared to the nine month period of fiscal 2021 (approximately $16.2 million).
FSS International segment revenue increased by approximately
34.2% and 29.6% during the three and nine month periods of fiscal 2022 compared to the prior year periods, respectively. The increase during the three and nine month periods of fiscal 2022 was primarily attributable to operations re-opening, net new business growth and pricing pass-throughs, partially offset by the negative impact of foreign currency translation (approximately 14.9% and 8.1%).
Operating income increased by approximately $13.8 million and $64.3 million during the three and nine month periods of fiscal 2022 compared to the prior year periods, respectively. The increase was attributable to improved profitability from clients re-opening after COVID-19 restrictions continued to lift, which more than offset lower labor related tax credits provided from governmental assistance programs (see Note 1 to the condensed consolidated financial statements), increased inflationary costs and the negative impact of foreign
currency translation (approximately $4.5 million and $6.1 million). The increase during the nine month period of fiscal 2022 compared to the prior year period is also due to the reversal of previously reserved amounts related to the resolution of a client contract dispute (approximately $5.7 million).
Uniform Segment
Uniform segment revenue increased by approximately 10.8% and 9.5% during the three and nine month periods of fiscal 2022 compared to the prior year periods, respectively. The increase during the three and nine month periods of fiscal 2022 was primarily attributable to growth within our uniform rental business as more clients re-opened, net increases in new business and improved pricing.
Operating income increased by approximately $25.5
million and $86.6 million during the three and nine month periods of fiscal 2022 compared to the prior year periods, respectively. The increase in operating income during the three and nine month periods of fiscal 2022 was primarily attributable to increased profitability within the uniform rental business driven by client re-openings and net new business, improved pricing, lower rental merchandise in-service expense and lower costs as a result of the fiscal 2021 reduction in headcount. The increase was also attributable to:
•a prior year non-cash charge related to excess inventory (approximately $7.1 million and $17.1 million); and
•prior year charges related to integration of the Ameripride acquisition (approximately $3.8 million and $9.9 million).
These increases more than offset the lower
labor related tax credits provided by government assistance programs in response to COVID-19 (see Note 1 to the condensed consolidated financial statements) and increased inflationary costs.
Corporate
Corporate expenses, those administrative expenses not allocated to the business segments, increased by approximately $10.7 million and $20.0 million during the three and nine month periods of fiscal 2022 compared to the prior year periods, respectively. The increase was mainly attributable to higher share-based compensation expense (approximately $6.2 million and $19.2 million) (see Note 10 to the condensed consolidated financial statements) and accounting and legal fees related to our intention to spin-off the Uniform segment (approximately $1.5 million). The nine month period of fiscal 2022 included an unfavorable change in fair value of certain gasoline and diesel agreements (approximately
$5.2 million) offset by lower employee incentive expenses.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash generated from operating activities, funds from borrowings and existing cash on hand. As of July 1, 2022, we had $438.9 million of cash and cash equivalents and approximately $848.2 million of availability under our senior secured revolving credit facility. A significant portion of our cash and cash equivalents are held in mature, liquid geographies where we have operations. As of July 1, 2022, there were approximately $873.7 million of outstanding foreign currency borrowings.
We
believe that our cash and cash equivalents and availability under our revolving credit facility will be adequate to meet anticipated cash requirements for the foreseeable future to fund working capital, capital spending, debt service obligations, refinancings, dividends and other cash needs. We have no significant debt maturities due until 2025. We also have flexibility to optimize working capital and defer certain capital expenditures as appropriate without a material impact to the business. We believe that our assumptions used to estimate our liquidity and working capital requirements are reasonable; however, due to the unprecedented current environment, we cannot assure that our assumptions will be correct and, as a consequence, our ability to be predictive is uncertain. For additional information regarding the risks associated with our liquidity and capital resources, see Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K filed with the SEC
on November 23, 2021 and Part II, Item 1A, "Risk Factors—Risks associated with the proposed spin-off" herein.
Net cash (used in) provided by operating activities
$
(142.0)
$
233.8
Net cash used in investing activities
(641.4)
(503.2)
Net cash provided by (used in) financing activities
703.5
(1,767.0)
Reference
to the Condensed Consolidated Statements of Cash Flows will facilitate understanding of the discussion that follows.
Cash Flows (Used in) Provided by Operating Activities
Cash used in operating activities was $142.0 million during the nine month period of fiscal 2022, compared to $233.8 million of cash provided by operating activities for the nine month period of fiscal 2021. The change was driven by the recovery of our businesses resulting in a use of cash from operating assets and liabilities. The use of cash from the change in operating assets and liabilities more than offset the impact of having net income in the nine month period of fiscal 2022 of $118.7 million compared to the net loss in the nine month period of fiscal 2021 of $126.5 million as discussed in "Results of Operations" above. The $721.2 million change in operating assets and liabilities compared to the prior
year period was primarily due to:
•Receivables by $291.7 million generating a greater use of cash during the nine month period of fiscal 2022 compared to the nine month period of fiscal 2021 as operations increasingly returned following the lifting of COVID-19 restrictions, new business and timing of collections;
•Accrued expenses by $262.5 million, generating a greater use of cash during the nine month period of fiscal 2022 compared to the nine month period of fiscal 2021 primarily due to the following: payment of social security taxes in the current year whereas payment was previously deferred in the prior year period as permitted under the CARES Act (see Note 1 to the condensed consolidated financial statements); higher payments related to the annual bonus; and higher recognition of deferred income in our Higher Education business
and higher client payments related to our revenue contracts in our Sports business from operations returning following the lifting of COVID-19 restrictions;
•Prepayments and Other Current Assets by $106.6 million, generating a use of cash during the nine month period of fiscal 2022 compared to a source of cash during the nine month period of fiscal 2021 mainly from proceeds received in the second quarter of fiscal 2021 related to the fiscal 2020 federal income tax return (see Note 8 to the condensed consolidated financial statements); and
•Inventory by $62.9 million, generating a use of cash during the nine month period of fiscal 2022 compared to a source of cash during the nine month period of fiscal 2021 as operations increasingly returned
following the lifting of COVID-19 restrictions and new business.
The nine month periods of fiscal 2022 and fiscal 2021 include approximately $53.7 million and $129.8 million, respectively, of proceeds associated with labor related tax credits from the foreign jurisdictions in which we operate as a form of relief from COVID-19 (see Note 1 to the condensed consolidated financial statements). During the nine month periods of fiscal 2022 and 2021, we received proceeds of approximately $1.9 million and $17.0 million, respectively, related to favorable loss experience in older insurance years under our general liability, automobile liability and workers' compensation liability programs. During the nine month period of fiscal 2021, we received proceeds of approximately $38.3 million from United States governmental entities related to refunds from an accounting method change from a prior tax return year and estimated tax payments being
higher than actual due to the impact of COVID-19. The "Other operating activities" caption reflects adjustments to net income (loss) in the current year and prior year periods related to non-cash gains and losses and adjustments to non-operating cash gains and losses.
Cash Flows Used in Investing Activities
The net cash flows used in investing activities were higher during the nine month period of fiscal 2022 compared to the nine month period of fiscal 2021 due to a higher level of acquisitions of certain businesses and certain equity method investments in fiscal 2022. During the third quarter of fiscal 2022, we acquired Union Supply for $202.6 million, and during the third quarter of fiscal 2021, we acquired Next Level for $226.1 million (see Note 2 to the condensed consolidated financial statements).
Cash Flows Provided by (Used
in) Financing Activities
During the nine month period of fiscal 2022, cash provided by financing activities was primarily impacted by borrowings under the Receivables Facility ($500.0 million) and borrowing under the United States revolving credit facility ($289.5 million).
During the nine month period of fiscal 2021, cash used in financing activities was impacted by the following:
•the repayment of borrowings under the United States revolving credit facility ($780.0 million);
•repayment
of the aggregate principal amount of the 2026 Notes ($500.0 million);
•repayments under the Receivables Facility ($315.6 million);
•net repayments of term loan borrowings ($64.8 million); and
•payment of fees and expenses related to refinancing activities, which is included in "Other financing activities," including debt issuance costs ($17.5 million) and the call premium ($11.9 million) from the repayment of the 2026 Notes.
The "Other financing activities" caption also reflects a use of cash during the nine month periods of fiscal 2022 and fiscal 2021 primarily related to taxes paid by us when we withhold shares upon an employee's exercise or vesting of equity awards to cover income taxes and payments of contingent
consideration recognized for certain acquisitions.
Covenant Compliance
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries to: incur additional indebtedness; issue preferred stock or provide guarantees; create liens on assets; engage in mergers or consolidations; sell assets; pay dividends; make distributions or repurchase our capital stock; make investments, loans or advances; repay or repurchase any subordinated debt, except as scheduled or at maturity; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; make certain acquisitions;
engage in certain transactions with affiliates; amend material agreements governing our subordinated debt (or any indebtedness that refinances our subordinated debt); and fundamentally change our business. The indentures governing our senior notes contain similar provisions. As of July 1, 2022, we were in compliance with these covenants.
As stated above, the Credit Agreement and the indentures governing our senior notes contain provisions that restrict our ability to pay dividends and repurchase stock (collectively, “Restricted Payments”). In addition to customary exceptions, the Credit Agreement and indentures
permit Restricted Payments in the aggregate up to an amount that increases quarterly by 50% of our Consolidated Net Income, as such term is defined in these debt agreements, subject to being in compliance with the interest coverage ratio described below.
Under the Credit Agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants. The indentures governing our senior notes also require us to comply with certain financial ratios in order to take certain actions. Our continued ability to meet those financial ratios, tests and covenants can be affected by events beyond our control, and there can be no assurance that we will meet those ratios, tests and covenants.
These financial ratios, tests and covenants involve the calculation
of certain measures that we refer to in this discussion as "Covenant Adjusted EBITDA." Covenant Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP. Covenant Adjusted EBITDA is defined as net income (loss) of Aramark Services, Inc. ("ASI") and its restricted subsidiaries plus interest and other financing costs, net, provision (benefit) for income taxes and depreciation and amortization, further adjusted to give effect to adjustments required in calculating covenant ratios and compliance under our Credit Agreement and the indentures governing our senior notes.
Our presentation of these measures has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of
our results as reported under U.S. GAAP. You should not consider these measures as alternatives to net income or operating income determined in accordance with U.S. GAAP. Covenant Adjusted EBITDA, as presented by us, may not be comparable to other similarly titled measures of other companies because not all companies use identical calculations.
The following is a reconciliation of net income (loss) attributable to ASI stockholder, which is a U.S. GAAP measure of ASI's operating results, to Covenant Adjusted EBITDA as defined in our debt agreements. The terms and related calculations are defined in the Credit Agreement and the indentures governing our senior notes. Covenant Adjusted EBITDA is a measure of
Net
income (loss) attributable to ASI stockholders
$
154.1
$
(274.9)
Interest and other financing costs, net
367.1
417.6
Provision (benefit) for income taxes
42.3
(99.8)
Depreciation
and amortization
539.4
563.3
Share-based compensation expense(1)
90.2
67.6
Unusual or non-recurring (gains) and losses(2)
—
(77.1)
Pro
forma EBITDA for equity method investees(3)
9.4
10.4
Pro forma EBITDA for certain transactions(4)
16.5
15.1
Other(5)(6)
(17.1)
252.9
Covenant
Adjusted EBITDA
$
1,201.9
$
875.1
(1) Represents share-based compensation expense resulting from the application of accounting for stock options, restricted stock units, performance stock units, deferred stock unit awards and employee stock purchases (see Note 10 to the condensed consolidated financial statements).
(2) Represents the fiscal 2021 non-cash gain from an observable price change related to an equity investment ($137.9 million) and the fiscal 2021 non-cash loss from the termination of certain defined benefit pension plans ($60.9 million).
(3) Represents
our estimated share of EBITDA, primarily from our AIM Services Co., Ltd. equity method investment, not already reflected in our Net Income (Loss) Attributable to ASI stockholders. EBITDA for this equity method investee is calculated in a manner consistent with consolidated Covenant Adjusted EBITDA but does not represent cash distributions received from this investee.
(4) Represents the annualizing of net EBITDA from certain acquisitions made during the period.
(5) "Other" for the twelve months ended July 1, 2022 includes United States and non-United States governmental labor related tax credits resulting from the COVID-19 pandemic, net of labor charges, incremental expenses and other expenses associated with closed or partially closed client locations ($63.0 million), adjustments to remove the impact attributable to the
adoption of certain accounting standards that are made to the calculation in accordance with the Credit Agreement and indentures ($32.7 million), non-cash charges for inventory write-downs to net realizable value and for excess inventory related to personal protective equipment ($16.4 million), expenses related to merger and integration related charges ($12.2 million), gain from a funding agreement related to a legal matter ($10.0 million), reversal of severance charges ($7.9 million), reversal of charges related to a client contract dispute ($5.7 million), the gain from the insurance proceeds received related to property damage from a tornado in Nashville ($4.0 million), charges related to our intention to spin-off the Uniform segment ($3.4 million), the impact of hyperinflation in Argentina
($3.0 million), due diligence charges related to acquisitions ($2.7 million), non-cash charges related to information technology assets ($2.2 million) and other miscellaneous expenses.
(6) "Other" for the twelve months ended July 2, 2021 includes labor charges, incremental expenses and other expenses associated with closed or partially closed client locations resulting from the COVID-19 pandemic, net of United States and non-United States governmental labor related credits ($123.8 million), non-cash impairment charges related to various assets ($34.3 million), adjustments to remove the impact attributable to the adoption of certain accounting standards that are made to the calculation in accordance with the Credit Agreement and indentures ($25.5 million), severance charges ($20.0
million), non-cash charges for inventory write-downs to net realizable value and for excess inventory related to personal protective equipment ($19.6 million), charges related to a client contract dispute ($17.9 million), expenses related to merger and integration related charges ($16.4 million), the gain from the change in fair value related to certain gasoline and diesel agreements ($8.7 million), a favorable non-cash settlement of a multiemployer pension plan obligation ($6.7 million), a favorable settlement of a legal matter ($4.7 million), non-cash charges related to information technology assets ($4.2 million), expenses related to the impact of the ice storm in Texas ($2.5 million), a non-cash charge related to an environmental matter ($2.5 million), the impact of hyperinflation in Argentina ($2.3 million) and other miscellaneous expenses.
Our covenant requirement and actual ratio for the twelve months ended July 1, 2022 are as follows:
Covenant Requirement
Actual Ratio
Consolidated Secured Debt Ratio(1)
5.125x
3.58x
Interest
Coverage Ratio (Fixed Charge Coverage Ratio)(2)
2.000x
3.34x
(1) The Credit Agreement requires ASI to maintain a maximum Consolidated Secured Debt Ratio, defined as consolidated total indebtedness secured by a lien to Covenant Adjusted EBITDA, of 5.125x. Consolidated total indebtedness secured by a lien is defined in the Credit Agreement as total indebtedness consisting of debt for borrowed money, finance leases, debt in respect of sales-leaseback transactions, disqualified and preferred stock and advances under the Receivables Facility secured by a lien reduced by the amount of cash and cash equivalents on the consolidated balance sheet that is free and clear of any lien. Non-compliance with the maximum Consolidated Secured Debt Ratio could
result in the requirement to immediately repay all amounts outstanding under the Credit Agreement, which, if ASI's lenders under our Credit Agreement (other than the lenders in respect of ASI's U.S. Term B Loans, which lenders do not benefit from the maximum Consolidated Debt Ratio covenant) failed to waive any such default, would also constitute a default under the indentures governing our senior notes.
(2) Our Credit Agreement establishes an incurrence-based minimum Interest Coverage Ratio, defined as Covenant Adjusted EBITDA to consolidated interest expense, the achievement of which is a condition for us to incur additional indebtedness and to make certain restricted payments and does not result in a default under the Credit Agreement or the indentures
governing the senior notes. If we do not maintain this minimum Interest Coverage Ratio calculated on a pro forma basis for any such additional indebtedness or restricted payments, we could be prohibited from being able to (1) incur additional indebtedness, other than the incremental capacity provided for under our Credit Agreement and pursuant to specified exceptions, and (2) make certain restricted payments, other than pursuant to certain exceptions. However, any failure to maintain the minimum Interest Coverage Ratio would not result in a default or an event of default under either the Credit Agreement or the indentures governing the senior notes. The minimum Interest Coverage Ratio is 2.000x for the term of the Credit Agreement. Consolidated interest expense is defined in our Credit Agreement as consolidated interest expense excluding interest income, adjusted for acquisitions
and dispositions, further adjusted for certain non-cash or nonrecurring interest expense and our estimated share of interest expense from one equity method investee. The indentures governing our senior notes include a similar requirement which is referred to as a Fixed Charge Coverage Ratio.
We and our subsidiaries and affiliates may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt securities (including any publicly issued debt securities), in privately negotiated or open market transactions, by tender offer or otherwise, or extend or refinance any of our outstanding indebtedness.
Supplemental Consolidating Information
Pursuant
to Regulation S-X Rule 13-01, which simplifies certain disclosure requirements for guarantors and issuers of guaranteed securities, we are no longer required to provide condensed consolidating financial statements for Aramark and its subsidiaries, including the guarantors and non-guarantors under our Credit Agreement and the indentures governing our senior notes. ASI, the borrower under our Credit Agreement and the indentures governing our senior notes, and its restricted subsidiaries together comprise substantially all of our assets, liabilities and operations, and there are no material differences between the
consolidating information related to Aramark and Aramark Intermediate Holdco Corporation, the direct parent of ASI and a guarantor under our Credit Agreement, on the one hand, and ASI and its restricted subsidiaries on a standalone basis, on the other hand.
Other
Our business activities do not include the use of unconsolidated special purpose entities and there are no significant business transactions that have not been reflected in the accompanying condensed consolidated financial statements. We insure portions of our risk in general liability, automobile liability, workers’ compensation liability and property liability through a wholly owned captive insurance subsidiary (the "Captive") to enhance our risk financing strategies. The Captive is subject to the regulations within its
domicile of Bermuda, including regulations established by the Bermuda Monetary Authority (the "BMA") relating to levels of liquidity and solvency as such concepts are defined by the BMA. The Captive was in compliance with these regulations as of July 1, 2022. These regulations may have the effect of limiting our ability to access certain cash and cash equivalents held by the Captive for uses other than for the payment of our general liability, automobile liability, workers’ compensation liability, property liability and related Captive costs. As of July 1, 2022 and October 1, 2021, cash and cash equivalents at the Captive were $149.4 million and $194.3 million, respectively.
Our significant accounting policies are described in the notes to the consolidated financial statements included in our Annual Report on Form 10-K, filed with the SEC on November 23, 2021. For a more complete discussion of the critical accounting policies and estimates that we have identified in the preparation of our condensed consolidated financial statements, please refer to our Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, filed with the SEC on November 23, 2021.
In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect
the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
Critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require.
New Accounting Standard Updates
See Note 1 to the condensed
consolidated financial statements for a full description of recent accounting standard updates, including the expected dates of adoption.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps. We do not enter into contracts for trading purposes and do not use leveraged instruments. The market risk associated with debt obligations as of July 1, 2022 has not materially changed from October 1, 2021
(see Part II, Item 7A "Quantitative and Qualitative Disclosure About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended October 1, 2021 filed with the SEC on November 23, 2021). See Note 5 to the condensed consolidated financial statements related to the changes in our debt levels. See Note 6 to the condensed consolidated financial statements for a discussion of our derivative instruments and Note 14 for the disclosure of the fair value and related carrying value of our debt obligations as of July 1, 2022.
Item 4. Controls and Procedures
Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. A
controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. No change in our internal control over financial reporting occurred during our third quarter of fiscal 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we and our subsidiaries are party to various legal actions, proceedings and investigations involving claims incidental to the conduct of our business, including those brought by clients, consumers, employees, government entities and third parties under, among others, federal, state, international, national, provincial and local employment laws, wage and hour laws, discrimination laws, immigration laws, human health and safety laws, import and export controls and customs laws, environmental laws, false claims or whistleblower statutes, minority, women and disadvantaged business enterprise statutes, tax codes, antitrust and
competition laws, consumer protection statutes, procurement regulations, intellectual property laws, food safety and sanitation laws, cost and accounting principles, the Foreign Corrupt Practices Act, the U.K. Bribery Act, other anti-corruption laws, lobbying laws, motor carrier safety laws, data privacy and security laws and alcohol licensing and service laws, or alleging negligence and/or breaches of contractual and other obligations. Based on information currently available, advice of counsel, available insurance coverage, established reserves and other resources, we do not believe that any such actions, proceedings or investigations are likely to be, individually or in the aggregate, material to our business, financial condition, results of operations or cash flows. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to our business,
financial condition, results of operations or cash flows.
Our business is subject to various federal, state and local laws and regulations governing, among other things, the generation, handling, storage, transportation, treatment and disposal of water wastes and other substances. We engage in informal settlement discussions with federal, state, local and foreign authorities regarding allegations of violations of environmental laws in connection with our operations or businesses conducted by our predecessors or companies that we have acquired, the aggregate amount of which and related remediation costs we do not believe should have a material adverse effect on our financial condition or results of operations as of July 1, 2022.
Item
1A. Risk Factors
There have been no material changes to the risk factors disclosed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended October 1, 2021 filed with the SEC on November 23, 2021, except as follows:
Risks associated with the proposed spin-off.
On May 10, 2022, we announced our intention to spin-off our Uniform segment into an independent publicly traded company to our stockholders. The proposed spin-off is intended to be a tax-free transaction to us and our stockholders for United States federal income tax purposes. The proposed spin-off is expected to be completed by the end of fiscal 2023, subject to certain customary conditions,
including final approval of our Board of Directors, receipt of a favorable opinion and Internal Revenue Service ruling with respect to the tax-free nature of the transaction, the effectiveness of a registration statement on Form 10 to be filed with the SEC and the receipt of other regulatory approvals.
Executing the proposed spin-off will require significant time and attention from our senior management and employees, which could disrupt our ongoing business and adversely affect financial results and results of operations. The proposed spin-off is also complex and subject to potentially unforeseen costs and expenses, including additional general and administrative costs for us and the new independent public company, costs from lost synergies, restructuring costs or other costs and expenses. The proposed spin-off may hinder our ability to retain existing business and operational relationships, including with clients, customers,
suppliers and employees, as well as to cultivate new business relationships. The completion of the proposed spin-off and the timing of its completion will be subject to a number of factors and conditions (some of which are outside our control), including receipt of any required consents or approvals within the expected timeframe or at all and the readiness of the new company to operate as an independent public company and finalization of the capital structure of the new company. Unanticipated developments could delay, prevent or otherwise adversely affect the proposed spin-off, including, but not limited to, disruptions in general or financial market conditions, material adverse changes in business or industry conditions, unanticipated costs and potential problems or delays in obtaining various regulatory and tax approvals, rulings or clearances, and the expected qualification of the proposed spin-off as a tax-free transaction for United States federal income tax purposes,
including whether or not an Internal Revenue Service ruling will be sought or obtained. There are also risks associated with the expected financing transactions undertaken and indebtedness incurred in connection with the proposed spin-off, including the risk that we may not be able to secure financing on favorable terms or at all. There can be no assurances that we will be able to complete the proposed spin-off on the terms or on the timeline that was announced, if at all. In addition, if the proposed spin-off is completed, the independent publicly traded company may not be able to achieve the full strategic and financial benefits that are expected to result from the proposed spin-off. Further, there can be no assurance that the combined value of the common
36
stock
of the two companies will be equal to or greater than what the value of our common stock would have been had the proposed spin-off not occurred.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 9, 2022.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents
themselves, and should not be relied upon for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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Dates Referenced Herein and Documents Incorporated by Reference
