S-1 1 d574424ds1.htm ARAMARK HOLDINGS CORP--FORM S-1 Aramark Holdings Corp--Form S-1
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As filed with the Securities and Exchange Commission on September 9, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ARAMARK Holdings Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5812  

20-8236097

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

ARAMARK Tower

1101 Market Street

Philadelphia, Pennsylvania 19107

(215) 238-3000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Stephen R. Reynolds, Esq.

Executive Vice President, General Counsel and Secretary

ARAMARK Tower

1101 Market Street

Philadelphia, Pennsylvania 19107

(215) 238-3000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Joseph H. Kaufman, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017-3954

(212) 455-2000

 

Daniel J. Zubkoff, Esq.

Douglas S. Horowitz, Esq.

Timothy B. Howell, Esq.

Cahill Gordon & Reindel LLP

80 Pine Street

New York, New York 10005

(212) 701-3000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

   ¨            Accelerated filer    ¨     

Non-accelerated filer

   x         (Do not check if a smaller reporting company)    Smaller reporting company    ¨     

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock, par value $0.01 per share

  $100,000,000.00   $13,640.00

 

 

(1) Includes shares to be sold upon exercise of the underwriters’ option. See “Underwriting.”
(2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated September 9, 2013

             Shares

 

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Common Stock

 

 

This is the initial public offering of shares of common stock of ARAMARK Holdings Corporation. We are selling              of the shares to be sold in this offering. The selling stockholders named in this prospectus are selling an additional              shares. We will not receive any proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of shares of our common stock is expected to be between $             and $         per share. We intend to apply for listing of shares of our common stock on the New York Stock Exchange under the symbol “            .”

After completion of this offering, certain stockholders will continue to beneficially own a majority of the voting power of all outstanding shares of our common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. See “Principal and Selling Stockholders.”

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $            $        

Proceeds, before expenses, to ARAMARK Holdings Corporation

   $            $        

Proceeds, before expenses, to selling stockholders

   $            $        

We and the selling stockholders have granted the underwriters an option to purchase up to              additional shares of common stock at the initial public offering price, less the underwriting discount.

 

 

Investing in shares of our common stock involves risks. See “Risk Factors” beginning on page 16.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about             , 2013.

 

 

 

Goldman, Sachs & Co.   J.P. Morgan   Credit Suisse   Morgan Stanley

 

Barclays   BofA Merrill Lynch   RBC Capital Markets   Wells Fargo Securities
Baird   PNC Capital Markets LLC   Rabo Securities   Ramirez & Co., Inc.

 

Santander   SMBC Nikko   The Williams Capital Group, L.P.

The date of this prospectus is             , 2013


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     16   

Use of Proceeds

     31   

Dividend Policy

     32   

Capitalization

     33   

Dilution

     34   

Selected Consolidated Financial Data

     36   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     39   

Business

     69   

Management

     86   

Principal and Selling Stockholders

     134   

Certain Relationships and Related Party Transactions

     138   

Description of Certain Indebtedness

     140   

Description of Capital Stock

     147   

Shares Eligible for Future Sale

     155   

Certain United States Federal Income and Estate Tax Considerations for Non-U.S. Holders

     158   

Underwriting (Conflicts of Interest)

     161   

Legal Matters

     166   

Experts

     166   

Where You Can Find More Information

     166   

Index to Consolidated Financial Statements

     F-1   

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

You should rely only on the information contained in this prospectus or in any free writing prospectuses we have prepared. We have not authorized anyone to provide you with different information and we and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are not, the selling stockholders are not, and the underwriters are not, making an offer to sell or seeking offers to buy these securities in any state or jurisdiction where an offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.


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STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy under “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” You can identify forward-looking statements because they contain words such as “aim,” “anticipate,” “are confident,” “estimate,” “expect,” “will be,” “will continue,” “will likely result,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. All statements we make relating to our estimated and projected earnings, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations (“cautionary statements”) are disclosed under “Risk Factors” and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results include:

 

   

unfavorable economic conditions;

 

   

natural disasters, global calamities, sports strikes and other adverse incidents;

 

   

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;

 

   

the inability to achieve cost savings through our cost reduction efforts;

 

   

our expansion strategy;

 

   

the failure to maintain food safety throughout our supply chain, food-borne illness concerns and claims of illness or injury;

 

   

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;

 

   

changes in, new interpretations of or changes in the enforcement of the government regulatory framework;

 

   

currency risks and other risks associated with international operations, including Foreign Corrupt Practices Act, U.K. Bribery Act and other anti-corruption law compliance;

 

   

continued or further unionization of our workforce;

 

   

liability resulting from our participation in multiemployer defined benefit pension plans;

 

   

risks associated with suppliers from whom our products are sourced;

 

   

disruptions to our relationship with, or to the business of, our primary distributor;

 

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the inability to hire and retain sufficient qualified personnel or increases in labor costs;

 

   

healthcare reform legislation;

 

   

the contract intensive nature of our business, which may lead to client disputes;

 

   

seasonality;

 

   

our leverage;

 

   

the inability to generate sufficient cash to service all of our indebtedness;

 

   

debt agreements that limit our flexibility in operating our business;

 

   

potential conflicts of interest between our Controlling Owners (as defined herein) and us; and

 

   

other factors set forth under the heading “Risk Factors” in this prospectus.

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Unless otherwise indicated or the context otherwise requires, references in this prospectus to “we,” “our,” “us,” “ARAMARK” and “the Company” and similar terms refer to ARAMARK Holdings Corporation and its subsidiaries and references to “Holdings” refer to ARAMARK Holdings Corporation and not any of its subsidiaries.

Our fiscal year ends on the Friday nearest September 30 in each year. In this prospectus, when we refer to our fiscal years, we say “fiscal” and the year number, as in “fiscal 2012,” which refers to our fiscal year ended September 28, 2012. In addition, “client” refers to those businesses and other organizations which engage us to provide services. “Consumers” refers to those consumers of our services, such as employees, students and patrons, to whom our clients provide us access.

We present Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA, as defined under “Prospectus Summary—Summary Consolidated Financial Data,” as non-U.S. Generally Accepted Accounting Principles, or non-GAAP, financial measures in various places throughout this prospectus. Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA are supplemental measures used by management to measure operating performance. Our presentation of Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA 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 generally accepted accounting principles in the United States (“U.S. GAAP”). We use Adjusted Net Income as a supplemental measure of our overall profitability because it excludes the impact of the non-cash amortization of certain intangible assets and depreciation of property and equipment that were created at the time of our 2007 going-private transaction (the “2007 Transaction”), non-cash share-based compensation expense and other costs that are not indicative of our ongoing operational performance. Similarly, we use Adjusted Operating Income and Adjusted EBITDA as supplemental measures of our operating profitability and to evaluate and control our cash operating costs because they exclude the impact of the items noted above relating to the calculation of Adjusted Net Income that are not indicative of our ongoing operational performance. We believe the presentation of Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA is appropriate to provide additional information to investors about our operating performance.

We also present Covenant EBITDA and Covenant Adjusted EBITDA as non-GAAP financial measures of ARAMARK Corporation and its restricted subsidiaries under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our presentation of Covenant

 

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EBITDA and Covenant Adjusted EBITDA 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. In addition, Covenant EBITDA and Covenant Adjusted EBITDA are measures of ARAMARK Corporation and its restricted subsidiaries only and do not include the results of Holdings. We believe that the inclusion of Covenant EBITDA and Covenant Adjusted EBITDA in this prospectus is appropriate to provide additional information to investors about the calculation of certain financial measures in our senior secured credit facilities and the indenture governing our 5.75% Senior Notes due 2020, which we refer to as our senior notes. For instance, our senior secured credit facilities and the indenture governing our senior notes contain financial ratios that are calculated by reference to Covenant Adjusted EBITDA. Non-compliance with the financial ratio maintenance covenants contained in our senior secured credit facilities could result in the requirement to immediately repay all amounts outstanding under such facilities, while non-compliance with the debt incurrence ratio contained in our senior secured credit facilities and the indenture governing our senior notes would prohibit us from being able to incur additional indebtedness other than pursuant to specified exceptions.

Because Adjusted Net Income, Adjusted Operating Income, Adjusted EBITDA, Covenant EBITDA and Covenant Adjusted EBITDA are not measures determined in accordance with U.S. GAAP and are susceptible to varying calculations, we caution investors that these measures as presented may not be comparable to similarly titled measures of other companies. Under “Prospectus Summary—Summary Consolidated Financial Data” herein, we include a quantitative reconciliation of Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA to the most directly comparable U.S. GAAP financial performance measure, which is net income. Under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” we include a quantitative reconciliation of Covenant EBITDA and Covenant Adjusted EBITDA to the most directly comparable U.S. GAAP financial performance measure, which is net income attributable to ARAMARK Corporation stockholder.

MARKET AND INDUSTRY DATA

The data included in this prospectus regarding our industry and market opportunity, including the size of certain sectors and geographies, our position and the position of our competitors within these sectors and geographies and the portion of the market opportunity that is currently outsourced, are based on our management’s knowledge and experience in the sectors and geographies in which we operate. We believe these estimates to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for the estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market, ranking and other similar industry data included in this prospectus, and estimates and beliefs based on that data, may not be reliable. While we believe internal company research is reliable, such research has not been verified by any independent source.

 

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PROSPECTUS SUMMARY

This summary does not contain all of the information that you should consider before making your investment decision. You should read the entire prospectus carefully, including the matters discussed under the caption “Risk Factors” and the detailed information and financial statements included in this prospectus.

Our Company

We are a leading global provider of food, facilities and uniform services to education, healthcare, business and industry and sports, leisure and corrections clients. Our core market is North America, which is supplemented by an additional 19-country footprint serving many of the fastest growing global geographies. We hold the #2 position in North America, a top 3 position in countries representing 98% of 2012 total sales, and are one of only 3 food and facilities competitors with the combination of scale, scope, and global reach. Through our established brand, broad geographic presence and approximately 267,000 employees, we anchor our business in our partnerships with thousands of education, healthcare, business, sports, leisure and corrections clients. Through these partnerships we serve millions of consumers including students, patients, employees, sports fans and guests worldwide. The scope and range of ARAMARK’s services are evidenced by the following:

 

   

We provide services to 84% of the Fortune 500

 

   

We serve over 500 million meals annually to approximately 5 million students at colleges, universities, and K-12 schools

 

   

We service over 2,000 healthcare facilities, collectively representing over 75 million patient days annually

 

   

We cater to approximately 100 million sports fans annually through our partnerships with over 150 professional and collegiate teams

 

   

We put over 2 million people in uniforms each day

 

   

We operate in 22 countries in North America, Europe, Asia and South America

ARAMARK’s mission is to Deliver experiences that enrich and nourish lives.” This mission is anchored in a set of core values that guide our execution in the marketplace:

 

   

Sell and Serve with Passion. Placing clients and consumers at the center of all that we do by listening and responding to their needs with best-in-class quality, innovation and exceptional service

 

   

Set Goals. Act. Win. Maintaining a culture of accountability where performance matters and exhibiting leadership that achieves and exceeds expectations through industry-leading execution

 

   

Front-Line First. Providing our front-line employees with tools and training that empower them to deliver excellence at the “moment of truth”—at the time they are providing service to thousands of consumers and clients every day

 

   

Integrity and Respect Always. Doing the right things without exception is the cornerstone of the ARAMARK brand and helps us earn the trust of our key constituents

ARAMARK is a well-recognized global brand, known for exceptional customer service and a compelling value proposition. We partner with clients on-site and integrate our employees within their operations, which enables us to obtain valuable consumer insights and innovate to satisfy each client’s unique needs and requirements. Our repeatable business model is founded on five core principles of excellence—selling, service, execution, marketing and operations—that allow us to deliver high quality service consistent with the values that the ARAMARK brand embodies. Our commitment to excellence has earned us numerous awards and recognitions; we have been named one of the “World’s Most Admired Companies” by Fortune Magazine every year since 1999 and we are recognized as one of the “World’s Most Ethical Companies” by the Ethisphere Institute.

 

 

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We operate our business in three reportable segments that share many of the same operating characteristics: Food and Support Services North America, or FSS North America, Food and Support Services International, or FSS International, and Uniform and Career Apparel, or Uniform. The following chart provides a brief overview of our reportable segments (dollars in millions):

 

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(1)  Fiscal 2012 operating income excludes $51.8 million of unallocated corporate expenses.

Within our reportable segments, our business is generally focused around key client types—Education, Healthcare, Business & Industry, Sports & Leisure and Corrections.

 

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(1) Based on 2012 total sales.

Our broad range of services, diversified client base, global reach and repeatable business model position us well for continued growth and margin expansion opportunities. In fiscal 2012, we generated $13.5 billion of sales, and $1.1 billion of Adjusted EBITDA.

Our History and Recent Accomplishments

Since ARAMARK’s founding in 1959, we have broadened our service offerings and expanded our client base through a combination of organic growth and successful acquisitions, with the goal of further developing our food, facilities and uniform capabilities, as well as growing our international presence.

 

 

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On January 26, 2007, ARAMARK delisted from the NYSE in conjunction with a going-private transaction executed with investment funds affiliated with GS Capital Partners, CCMP Capital Advisors and J.P. Morgan Partners, Thomas H. Lee Partners and Warburg Pincus LLC as well as approximately 250 senior management personnel.

In May 2012, Eric Foss became the new CEO and President of our company. Previously, Mr. Foss was the CEO of Pepsi Beverages Company and was Chairman and CEO of the publicly-traded Pepsi Bottling Group. During his tenure with Pepsi Bottling Group, Mr. Foss implemented numerous growth and productivity initiatives designed to strengthen customer service and improve selling effectiveness, streamline operations, and rationalize supply chain infrastructure. Under Mr. Foss’ leadership at ARAMARK, we have sharpened our focus on achieving sustainable value creation through accelerating revenue and profit growth with expanding margins.

We continue to grow our existing business and win exciting new clients, including Airbus, the Ohio and Michigan departments of corrections, American University, the Minnesota Vikings, the Chicago Bears, and the Tampa Bay Buccaneers.

Our Market Opportunity

ARAMARK operates in large and highly fragmented markets with attractive industry dynamics. We believe that the global food and support services market and the North American uniform and career apparel market is approximately $900 billion. As only approximately 50% of this opportunity is outsourced, there is a substantial potential for growth by winning business with educational and healthcare institutions, businesses, sports and leisure facilities and correctional facilities that currently provide these services in-house. We expect that demand for increased outsourced services will continue to be driven by shifting client imperatives, including: the need to focus on core businesses, the desire to deliver a high level of consumer satisfaction, the pursuit of reduced costs and the attractiveness of consolidating services with a single provider. Our value-added provision of these services is increasingly important to our clients’ achievement of their own missions.

The food and support services market is highly fragmented, with the five largest competitors capturing only 9% of the global market. We expect larger service providers to continue to win a disproportionate amount of the business that is converted from self-operated services as clients are increasingly seeking services from partners with the scale and sophistication necessary to drive consumer satisfaction and increase operational efficiency.

Our core geographic market is North America, which we believe will remain a compelling opportunity due to the favorable underlying economic conditions, stability and opportunities for profitable growth, and growing trend towards outsourcing. We continue to focus on the Education and Healthcare sectors, which are only approximately 30% outsourced, and have increased as a percentage of GDP, representing significant growth opportunities. While cost reduction continues to be a key consideration, clients’ decisions are increasingly driven by the broader value proposition associated with outsourcing. Clients across sectors, from business to education to sports, recognize that providing higher quality, more efficient food and facilities services is critical to driving satisfaction of their key constituents: students and faculty, patients, employees and sports fans.

We also operate in select, high growth, emerging markets in Asia and South America. The GDP of the countries making up these markets grew at approximately 8.6% in 2012. The economic growth in these countries is driven by factors such as rising discretionary income and increased investment in growth sectors such as mining, education and healthcare. Additionally, we estimate emerging markets are approximately 70% self-operated, making them highly attractive opportunities for outsourcing expansion. Our operations in Europe are selectively centered around top 3 positions in Germany, the UK and Ireland and our exposure to southern Europe is limited to Spain, representing approximately 1% of our total sales.

 

 

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Our Strengths

We believe the following competitive strengths are key to our continued success:

Leader in a Large, Fragmented and Growing Market

We are a global market leader in the large, fragmented and growing food, facilities and uniform services industries. We hold the #2 position in North America and a top 3 position in countries representing 98% of 2012 total sales. We have developed these leadership positions primarily due to our commitment to helping build our clients’ success through leveraging our vast experience and sector knowledge while gaining deep consumer insight and providing a premier service offering to our clients. These leadership positions provide us with significant economies of scale, allow us to attract and retain top industry talent and position us to compete effectively for new business opportunities as clients are increasingly interested in service providers with a national or global reach, and a breadth of service offerings.

We estimate the combined addressable global food and support services market and the North American uniform and career apparel opportunity to be $900 billion collectively. We believe our market has the potential to grow in excess of GDP driven by the growing trend towards outsourcing. While the global food, facilities and uniform market is very large, it remains underpenetrated, with approximately 50% of the total opportunity currently outsourced. We expect to benefit disproportionately from the trend towards outsourcing as large service providers, such as ARAMARK, have had greater success in winning new client business relative to smaller outsourcing service providers. The global food and support services market’s highly fragmented nature, with the top three competitors accounting for only 7% of the market, enables additional opportunity for share gains and consolidation.

Favorable Geographic, Sector and Service Mix

We have the global reach and capability to deliver high quality services consistently and safely across 22 countries around the world, which represent approximately 65% of the world’s GDP. We believe that our strong and expanding presence in our core North American market will remain a principal growth driver. Also, utilizing the skills and experience we have developed over decades of service in the North American market, we have increasingly established our position in key, high growth, emerging markets in Asia and South America. Our sales in emerging markets have increased at an annual rate of approximately 14% over the last five years, and represent 7% of our sales in 2012 versus 4% in 2007. We believe that our expanding presence in these geographies will become increasingly important for our overall growth. We have a selective and stable position in Europe concentrated in Germany, the UK and Ireland with sales in southern Europe limited to Spain, which represents approximately 1% of our total sales. We believe our global footprint serves our clients in the most desirable geographies and provides a promising platform for further growth.

We serve a large and diversified client base across a wide range of sectors and businesses, including Education, Healthcare, Business & Industry and Sports, Leisure and Corrections, with no single client accounting for more than 1% of 2012 sales (other than collectively a number of U.S. government entities). The Education and Healthcare sectors, which together contributed 43% of our 2012 sales globally, are large, underpenetrated, and only approximately 30% outsourced, representing attractive growth opportunities for ARAMARK.

We believe that the breadth of our service capabilities and ability to innovate position ARAMARK well to meet evolving consumer needs and address our clients’ increasing desire to conduct business with an experienced single provider of multiple services. ARAMARK is a trusted partner across a variety of services, sectors and geographies, from offering safe living and working environments for miners in Latin America to patient transportation services for healthcare clients in China.

 

 

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Deep Client and Consumer Insight Leads to Attractive Growth Opportunities

ARAMARK’s leading positions, scale and breadth of product offering enable us to continue to grow our business through higher penetration into existing clients and cross-selling of additional services. We have long-lasting relationships with our clients due to our service excellence and our overall value proposition, which is evidenced by our approximately 95% annual retention rate and an average client relationship of approximately 10 years. We believe we are able to maintain these strong relationships year after year by providing value-added services which help our clients achieve their own mission and also improve satisfaction of their key constituencies: employees, students and faculty, patients and sports fans. This is increasingly important as, for example, businesses compete for employees, colleges compete for students and hospitals compete for patients. Given that only 9% of our current clients utilize both food and facilities services, we believe substantial opportunities remain for us to provide additional services to our existing client base. Further, we aim to increase the per capita spending of our target consumers and expand the participation rates of these populations in our existing service offering, through innovative marketing and merchandising programs.

We continuously innovate our existing services to better meet our clients’ evolving needs. We use ARAMARK’s consumer insights and other research to increase our awareness of market trends, client needs and consumer preferences. Annualized revenue from new clients contracted during 2012 was over $1.0 billion. Our recent wins span sectors and geographies, including Airbus, the Ohio and Michigan departments of corrections, American University, the Minnesota Vikings, the Chicago Bears and the Tampa Bay Buccaneers.

Improving Profitability with Resilient Cash Flow

We have and continue to implement a number of programs and tools to increase our profitability, including enhanced management of our key costs—food, labor and overhead—through SKU rationalization, portioning, waste control, enhanced labor scheduling, turn-over reduction and SG&A discipline, among others. Because of the leverage inherent in our business model, we believe the implementation of these measures will increase our profitability. Since instituting these new productivity initiatives in 2012, we have seen positive momentum in our performance. During the first nine months of fiscal 2013, we achieved year-over-year growth in our Adjusted Operating Income of 10% and sales growth of 3%.

We have a favorable business mix that allows us to deliver consistent profitability in most macroeconomic environments. We can react quickly to changing conditions in our day to day operations due to our highly variable cost structure. We generate strong and stable cash flow as a result of our consistent profitability and limited working capital and capital expenditure requirements. Our capital expenditures in the last 5 years have averaged only 2.4% of sales. In the economic downturn in 2009 for example, our cash flow actually increased as lower capital expenditures and a reduction in working capital more than offset a modest earnings decline. We believe that the low capital intensity of our business model positions us to continue to generate significant cash flow, which should give us the flexibility to reduce debt, pursue strategic acquisitions and return capital to our stockholders.

Strong Management Team with Diverse Experience

Our management team is a carefully constructed group of successful long-tenured leaders with significant industry and company experience blended with talented outside leaders with significant Fortune 500 management, consumer/retail and food industry experience. Our CEO and President, Eric Foss, is an experienced Fortune 500 public company CEO with a demonstrated multi-year track record of success and stockholder value creation. Since joining ARAMARK in 2012, he has further enhanced ARAMARK’s strong foundation with an integrated strategy focusing on growth, productivity, people and delivering on financial commitments. The average tenure of our principal operating leaders is 20 years, with individual tenure ranging from 33 years to less

 

 

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than one year. Our remaining senior management team and business unit presidents’ tenure averages 12 years. ARAMARK has a long history of broad management ownership dating back to the 1980s, and our management team collectively has a significant equity position in ARAMARK.

Our Strategies

Our core strategy is to provide the highest quality food, facilities and uniform services to our clients and consumers through a consistent, repeatable business model anchored around five core principles of excellence—selling, service, execution, marketing and operations. We will continue to build our core business in North America, and expand our emerging markets platform through the following growth and operational strategies:

Grow Our Base Business

    Drive Incremental Revenue from Existing Clients

We intend to increase penetration within our existing client base. We have implemented a framework that establishes high levels of excellence in service and execution across our food, facilities and uniform businesses. We leverage our extensive industry knowledge and decades of experience, which has allowed us to gain deep client and consumer insight in our efforts to provide the highest quality of service in the industry. We believe our ideas and innovations are a key differentiating factor for ARAMARK in winning new business at existing clients. Opportunities exist to increase penetration in each of our major service lines—food service, facilities service and uniform service. In each of our sectors we have identified the top items that drive demand and have established rigorous executional frameworks at the location level to maximize results. At our Major League Baseball venues where these programs have been introduced, per-capita expenditures by fans are 5.7% higher than last season.

Currently, 9% of our clients use both our food and facilities services. Having an on-site team successfully providing one service positions us well to expand the services we provide. An example of a recent success is American University, where we have been providing facilities services since 2001 and recently won the dining business from a competitor based on our strategic vision for the campus and the local management teams that have consistently delivered high quality services.

•    Increase Client Retention Rates

ARAMARK has historically experienced high and consistent client retention rates. In 2012, our client retention rate was 95%. Our front-line focus and increased emphasis on providing world class service enables us to uphold excellence in all facets of our client-facing operations. Our service orientation is centered on creating a culture of excellence. We focus our consumer facing employees on adhering to stringent quality standards, which create an enhanced consumer experience. By delivering high quality, innovative and consistent service to our clients, we believe our attractive value proposition will drive client and consumer loyalty, enabling us to increase our retention rates and enhance profitability for our stockholders.

Grow New Business

•    Expand New Business Through Selling Excellence

ARAMARK’s platform for achieving consistent selling excellence is centered on listening to and understanding our clients’ needs, creating innovative service offerings that meet those needs and selling our services with passion. Our market leadership and extensive industry experience position us to capitalize on the

 

 

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large, under-penetrated and growing food, facilities and uniform services markets. We believe that the current rate of penetration will accelerate as more businesses and organizations continue to see the benefits of outsourcing non-core activities.

We are particularly focused on the Education and Healthcare sectors due to their lower level of economic sensitivity and strong growth. Despite recent economic weakness, total spending on Education and Healthcare has increased as a percentage of total GDP. Additionally, we believe the addressable Education and Healthcare sectors represent opportunities of $87 billion and $31 billion, respectively, and are only approximately 30% outsourced to third party providers, which provides a significant opportunity for further growth.

•    Increase Our Presence in Emerging Markets

The favorable growth characteristics and relatively low outsourcing rates in emerging market regions present a substantial opportunity for accelerated growth. Our emerging markets presence currently consists of 7 countries across Asia and South America. Our growth strategy in select emerging market geographies is focused on three initiatives: supporting existing clients as they expand into emerging markets, growing in geographies in which we already operate profitably, and entering new geographies where we have identified attractive prospects for profitable expansion. Over the last several years, our China business has experienced high double-digit organic growth and we are well positioned to utilize our deep industry and country knowledge to continue to expand in this key geography. Additionally, we have established a strong presence in South America and are focused on growing our presence in this region.

Given the scale and coordination required to successfully execute a multinational contract, we believe we are one of a very small group of global companies currently capable of competing for these highly attractive contracts within emerging markets.

•    Pursue Strategic Acquisitions

We anticipate that continued consolidation in the global food, facilities and uniform services markets will create opportunities for us to acquire businesses with complementary geographic and service offering profiles. We intend to continue strengthening our existing business through selective, accretive acquisitions that will solidify our position, enhance and expand our service capabilities, further develop our differentiated positions, or allow us to enter into high growth geographies. We have a history of successful acquisitions, which we have successfully integrated into our existing operations while achieving targeted synergies with minimal client losses. For example, in fiscal 2012 we acquired Filterfresh, a leader in providing quality office refreshment services to employees in the workplace, and in fiscal 2011 we acquired Masterplan, a clinical technology management and medical equipment maintenance company, which expanded our capability to service all levels of hospital clinical technology and strengthened our position in a key sector within the North American market. Both acquisitions were integrated into larger, similar ARAMARK operations.

Accelerate Margin Expansion through Operational Excellence

Since the 2007 Transaction, we have delivered solid, consistent performance in Adjusted Operating Income as a percentage of sales, despite periods of instability in the global economy. During that time we have also implemented a disciplined process to achieve operational excellence and capture productivity for growth through a standard, repeatable business model. To achieve this, we are investing in the systems, tools and training utilized by our front-line employees, and establishing quality standards and processes to more efficiently manage our food, merchandise, labor, and above-unit costs. For example, we have implemented several productivity initiatives, including SKU rationalization, waste reduction, improved labor scheduling and menu standardization. Additionally, our scale and operating leverage allow us to effectively manage these costs, which together

 

 

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accounted for 77% of our operating costs in fiscal 2012. We are also incorporating automated, standardized and centralized processes that have resulted in the reduction of above-unit overhead costs through the elimination of redundancies in our finance and HR functions.

The successful implementation of these initiatives has led to increased profitability, a portion of which we are reinvesting in our business to achieve additional growth and margin expansion. This reinvestment is focused on two primary goals: improving the efficiency of standard tools and selling resources, and continuing to recruit, train and develop employees to maintain our culture of high performance. Through continued reinvestment in our business, we expect to both increase our ability to execute upon our core strategies and maintain our operational excellence.

Risks Relating to Our Business and This Offering

Participating in this offering involves substantial risk. Our ability to execute our strategies also is subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategies. Some of the more significant challenges and risks include the following:

 

   

unfavorable economic conditions, as well as natural disasters, global calamities, sports strikes and other adverse incidents, have, and in the future could, adversely affect our results of operations and financial condition;

 

   

our failure to retain our current clients, renew our existing client contracts and obtain new clients could adversely affect our business;

 

   

we may be adversely affected if clients reduce their outsourcing or use of preferred vendors;

 

   

competition in our industries could adversely affect our results of operations;

 

   

increased operating costs and obstacles to cost recovery due to the pricing and cancellation terms of our FSS contracts may constrain our ability to make a profit;

 

   

our inability to achieve cost savings through our cost reduction efforts could impact our results of operations;

 

   

a failure to maintain food safety throughout our supply chain and food-borne illness concerns may result in reputational harm and claims of illness or injury that could adversely affect us;

 

   

governmental regulations, including those relating to food and beverages, the environment, wage and hour, anti-corruption and our government contracts, may subject us to significant liability;

 

   

our business may suffer if we are unable to hire and retain sufficient qualified personnel or if labor costs increase;

 

   

our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industries, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations; and

 

   

the other factors set forth under the “Risk Factors” in this prospectus.

Before you participate in this offering, you should carefully consider all of the information in this prospectus, including those matters set forth under the heading “Risk Factors.”

 

 

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Company Information

ARAMARK Holdings Corporation is organized under the laws of the State of Delaware. Our business traces its history back to the 1930s.

Our executive offices are located at ARAMARK Tower, 1101 Market Street, Philadelphia, Pennsylvania 19107. Our website is www.aramark.com. Please note that our Internet website address is provided as an inactive textual reference only. Information on our website does not constitute part of this prospectus.

 

 

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The Offering

 

Common stock offered by us

             shares

 

Common stock offered by the selling stockholders

             shares

 

Common stock to be outstanding after this offering

             shares (             shares if the underwriters exercise their option to purchase additional shares in full).

 

Option to purchase additional shares

We and the selling stockholders have granted the underwriters an option to purchase up to              additional shares. The underwriters could exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We estimate that the net proceeds we will receive from the sale of              shares of our common stock we are offering, after deducting underwriters’ discounts and commissions and estimated expenses payable by us, will be approximately $             million (or $             million if the underwriters exercise their option to purchase additional shares in full). This estimate assumes an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. For a sensitivity analysis as to the initial public offering price and other information, see “Use of Proceeds.”

 

  We intend to use the net proceeds received by us from this offering to repay certain of our existing indebtedness, including a portion of the outstanding term loans due July 26, 2016 under our senior secured credit facilities. See “Description of Certain Indebtedness.”

 

Dividend policy

Following completion of this offering, we intend to commence the payment of cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, business prospects and other factors that our board of directors may deem relevant. Our ability to pay dividends on our common stock is limited by the covenants of our senior secured credit facilities and the indenture governing our senior notes and may be further restricted by the terms of any future debt or preferred securities. See “Dividend Policy” and “Description of Certain Indebtedness.”

 

Controlled company

After the completion of this offering, certain stockholders will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the NYSE corporate governance standards.

 

 

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Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

 

New York Stock Exchange symbol

We intend to apply for listing of shares of our common stock on the New York Stock Exchange under the symbol “            .”

 

Conflicts of interest

Goldman, Sachs & Co. and J.P. Morgan Securities LLC and/or their respective affiliates each own in excess of 10% of our issued and outstanding common stock and it is expected that, by selling shares of common stock in this offering, they will collectively receive more than 5% of the net proceeds of the offering, not including underwriting compensation and as a result are deemed to have a “conflict of interest” with us within the meaning of Rule 5121 of the Financial Industry Regulatory Authority (“Rule 5121”). Therefore, this offering will be conducted in accordance with Rule 5121, which requires that Goldman, Sachs & Co. and J.P. Morgan Securities LLC will not make sales to discretionary accounts without the prior written consent of the account holder and that a qualified independent underwriter (“QIU”) as defined in Rule 5121 participate in the preparation of the registration statement of which this prospectus forms a part and perform its usual standard of due diligence with respect thereto and              has agreed to act as QIU for this offering.

 

  Certain of the underwriters or their affiliates are lenders or have committed to lend under our senior secured credit facility due July 26, 2016. As described under “Use of Proceeds”, the Company intends to repay outstanding amounts under such senior secured credit facility using a portion of the net proceeds of this offering received by the Company and will pay such amounts to the underwriters or their respective affiliates in proportion to their respective current commitments thereunder.

The number of shares of our common stock to be outstanding following this offering is based on              shares of common stock outstanding as of                      and excludes:

 

   

             shares issuable upon the exercise of options to purchase shares outstanding as of                     ; with an exercise price of $          per share; and              restricted stock units,              shares of restricted stock and              director deferred stock units and

 

   

             shares reserved for future issuance under our share-based compensation plans as of                     .

Unless otherwise noted, the information in this prospectus reflects and assumes no exercise by the underwriters of their option to purchase additional shares.

 

 

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Summary Consolidated Financial Data

The following table sets forth summary consolidated financial data as of the dates and for the periods indicated. The summary consolidated financial data for the fiscal years 2012, 2011 and 2010 have been derived from our consolidated financial statements appearing elsewhere in this prospectus, which have been audited by KPMG LLP. The summary consolidated financial data as of October 1, 2010 has been derived from our consolidated financial statements that are not included in this prospectus, which have been audited by KPMG LLP.

The summary consolidated financial data as of June 28, 2013, and for the nine months ended June 28, 2013 and June 29, 2012, have been derived from our unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated financial data as of June 29, 2012 has been derived from our unaudited condensed consolidated financial statements that are not included in this prospectus. The unaudited financial data presented have been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, such unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.

The financial data set forth in this table should be read in conjunction with the section titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus, as well as with our consolidated financial statements and related notes and our unaudited condensed consolidated financial statements and related notes that are also included elsewhere in this prospectus.

 

     Fiscal year(1)     Nine months ended  
     2012      2011     2010     June 28,
2013
     June 29,
2012
 
(dollars in millions, except per share data)                       (unaudited)      (unaudited)  

Statement of operations data:

         

Sales

   $ 13,505       $ 13,082      $ 12,419      $ 10,430       $ 10,104   

Costs and expenses:

         

Cost of services provided

     12,191         11,836        11,247        9,482         9,141   

Depreciation and amortization

     529         511        503        405         396   

Selling and general corporate expenses

     203         188        191        164         151   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     582         547        478        379         416   

Interest and other financing costs, net

     457         451        445        341         357   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations before income taxes

     125         96        33        38         59   

Provision (benefit) for income taxes

     18         (1     1        7         12   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations

     107         97        32        31         47   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Loss from discontinued operations, net of tax(2)

     —           (12     (1     —           —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     107         85        31        31         47   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Less: Net income attributable to noncontrolling interests

     3        1        —          1         2   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to ARAMARK stockholders

   $ 104       $ 84      $ 31      $ 30       $ 45   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

 

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     Fiscal year(1)     Nine months ended  
     2012     2011     2010     June 28,
2013
    June 29,
2012
 
(dollars in millions, except per share data)                      (unaudited)     (unaudited)  

Per Share Data:

          

Basic:

          

Income from continuing operations

   $ 0.51      $ 0.47      $ 0.16      $ 0.15      $ 0.22   

Loss from discontinued operations

     0.00        (0.06     (0.01     —          0.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ARAMARK stockholders

   $ 0.51      $ 0.41      $ 0.15      $ 0.15      $ 0.22   

Diluted:

          

Income from continuing operations

   $ 0.49      $ 0.46      $ 0.16      $ 0.15      $ 0.21   

Loss from discontinued operations

     0.00        (0.06     (0.01     —          0.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ARAMARK stockholders

   $ 0.49      $ 0.40      $ 0.15      $ 0.15      $ 0.21   

Cash dividend per share(3)

   $ —        $ 3.50      $ —        $ —        $ —     

Statement of cash flows data:

        

Net cash provided by/(used in):

        

Operating activities(4)

   $ 692      $ 304      $ 634      $ 136      $ 137   

Investing activities

     (482     (363     (354     (252     (363

Financing activities(4)

     (287     112        (344     77        114   

Other financial data:

        

Adjusted Net Income(5)

   $ 209      $ 200      $ 130      $ 162      $ 124   

Adjusted Operating Income(5)

     750        717        640        596        544   

Adjusted EBITDA(5)

     1,126        1,075        1,002        885        826   

Capital expenditures, net of disposals

     343        272        264        255        219   

Balance sheet data (at period end):

        

Cash and cash equivalents

   $ 137      $ 213      $ 161      $ 98      $ 101   

Noncash working capital(4)(6)

     (105     (101     (321     242        239   

Total assets(4)

     10,487        10,523        10,222        10,127        10,431   

Total debt (including current portion of long term debt)(4)(7)

     6,009        6,232        5,402        6,217        6,377   

Total equity(3)

     967        882        1,397        829        927   

 

(1) Fiscal years 2012, 2011 and 2010 refer to the fiscal years ended September 28, 2012, September 30, 2011 and October 1, 2010, respectively. All periods presented are 52-week periods.
(2) During fiscal 2011, the Company completed the sale of its wholly-owned subsidiary, Galls, for approximately $75.0 million in cash. The transaction resulted in a pretax loss of approximately $1.5 million (after-tax loss of approximately $12.0 million). Galls is accounted for as a discontinued operation. Galls’ results of operations have been removed from the Company’s results of continuing operations for all periods presented.
(3) During fiscal 2011, the Company paid a dividend of approximately $711 million to its stockholders. On October 29, 2012, we completed the spin-off of our majority interest in Seamless North America, LLC, an online and mobile food ordering service, to our stockholders in the form of a dividend. Each stockholder received one share of the common stock of Seamless Holdings, a newly formed company created to hold our former interest in Seamless North America, LLC, for each share of our common stock held as of the record date.
(4) In the first quarter of fiscal 2011, the Company adopted the new authoritative accounting guidance regarding transfers of financial assets. The impact upon adoption resulted in the recognition of both the receivables securitized under the program and the borrowings they collateralize on the Consolidated Balance Sheet, which led to a $220.9 million increase in “Receivables” and “Long-Term Borrowings.” As a result of implementing the new guidance, funding under the agreement of $220.9 million on October 2, 2010 was reflected in the Company’s Consolidated Statement of Cash Flows as a use of cash from the securitization of accounts receivables under net cash provided by/(used in) operating activities and as a source of cash under net cash provided by/(used in) financing activities.

 

 

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(5) We use Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA as supplemental measures to evaluate our performance. Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA are not measurements of financial performance under generally accepted accounting principles in the United States, or U.S. GAAP. Adjusted Net Income represents net income adjusted to eliminate the impact from discontinued operations, net of tax; the increased amortization of acquisition-related customer relationship intangible assets and depreciation of property and equipment resulting from the 2007 Transaction; the impact of changes in the fair value of our gasoline and diesel fuel derivative instruments; severance and other charges; and share-based compensation, less the tax impact of these adjustments. Adjusted Operating Income represents Adjusted Net Income further adjusted to exclude the impact from income taxes and interest and other financing costs. Adjusted EBITDA represents Adjusted Operating Income further adjusted to exclude the impact of all other depreciation and amortization expense.

We use Adjusted Net Income as a supplemental measure of our overall profitability because it excludes the impact of the non-cash amortization of certain intangible assets and depreciation of property and equipment that were created at the time of the 2007 Transaction, non-cash share-based compensation expense and other items which are not indicative of our ongoing operational performance. Similarly, we use Adjusted Operating Income and Adjusted EBITDA as supplemental measures of our operating profitability and to evaluate and control our cash operating costs because they exclude the impact of the items noted above relating to the calculation of Adjusted Net Income that are not indicative of our ongoing operational performance. We believe the presentation of Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA is appropriate to provide additional information to investors about our operating performance.

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. Adjusted Net Income, Adjusted Operating Income and 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. Moreover, our definition of Adjusted EBITDA as presented here, although similar, is not the same as Covenant EBITDA and Covenant Adjusted EBITDA, which are calculated for ARAMARK Corporation in connection with our financial covenants in the indenture governing our senior notes and in our senior secured credit facilities.

 

 

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A directly comparable U.S. GAAP measure to Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA is net income. Adjusted Net Income, Adjusted Operating Income and Adjusted EBITDA are reconciled from net income as follows:

 

      Fiscal year     Nine months ended  
(unaudited, dollars in millions)    2012     2011     2010     June 28,
2013
    June 29,
2012
 

Net Income (as reported)

   $ 107      $ 85      $ 31      $ 31      $ 47   

Adjustment:

          

Loss from Discontinued Operations, net of tax

     —          12        1        —          —     

Increased Amortization of Acquisition-Related Customer Relationship Intangible Assets and Depreciation of Property and Equipment Resulting from the 2007 Transaction

     153        153        141        116        114   

Change in Fair Value of Gasoline and Diesel Fuel Derivative Instruments

     (1     —          —          1        1   

Severance and Other Charges (a)

     —          —          —          88        —     

Share-Based Compensation

     16        17        21        12        13   

Tax Impact of Adjustments to Adjusted Net Income (b)

     (66     (67     (64     (86     (51
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

   $ 209      $ 200      $ 130      $ 162      $ 124   

Adjustment:

          

Tax Impact of Adjustments to Adjusted Net Income (b)

     66        67        64        86        51   

Provision (Benefit) for Income Taxes

     18        (1     1        7        12   

Interest and Other Financing Charges

     457        451        445        341        357   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Income

   $ 750      $ 717      $ 640      $ 596      $ 544   

Adjustment:

          

Increased Amortization of Acquisition-Related Customer Relationship Intangible Assets and Depreciation of Property and Equipment Resulting from the 2007 Transaction

     (153     (153     (141     (116     (114

Depreciation and Amortization

     529        511        503        405        396   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 1,126      $ 1,075      $ 1,002      $ 885      $ 826   

 

  (a) Severance and Other Charges includes severance and related costs of $47.4 million, goodwill impairments of $11.7 million, asset write-offs of $11.4 million and costs related to transformation initiatives of $17.1 million for the nine months ended June 28, 2013.
  (b) Represents the tax benefit, using an effective tax rate of 39.5%, associated with the adjusted expenses.

 

(6) Noncash working capital represents accounts receivable, net, plus inventories, prepayments and other current assets, minus accounts payable, accrued payroll and related expenses, and other accrued expenses and current liabilities, exclusive of assets held for sale.
(7) During fiscal 2011, the Company completed a private placement of $600 million, net of a 1% discount, in aggregate principal amount of 8.625% / 9.375% Senior Notes due 2016. In the second quarter of fiscal 2013, the Company completed a refinancing, repurchasing ARAMARK Corporation’s outstanding 8.50% Senior Notes due 2015 and Senior Floating Rate Notes due 2015 and our 8.625% / 9.375% Senior Notes due 2016. The Company refinanced that debt with new term loan borrowings and the issuance of our senior notes.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider each of the following risks as well as the other information included in this prospectus, including “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes, before investing in our common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, the trading price of the common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business

Unfavorable economic conditions have, and in the future could, adversely affect our results of operations and financial condition.

A national or international economic downturn has, and in the future could, reduce demand for our services in each of our operating segments, which may result in the loss of business or increased pressure to contract for business on less favorable terms than our generally preferred terms. Economic hardship among our client base can also impact our business. For example, during the recent period of economic distress, certain of our businesses have been negatively affected by reduced employment levels at our clients’ locations and declining levels of business and consumer spending. In addition, insolvency experienced by clients, especially larger clients, has, and in the future could, make it difficult for us to collect amounts we are owed and could result in the voiding of existing contracts. Similarly, financial distress or insolvency, if experienced by our key vendors and service providers such as insurance carriers, could significantly increase our costs.

The portion of our food and support services business that provides services in public facilities such as convention centers and tourist and recreational attractions is particularly sensitive to an economic downturn, as expenditures to take vacations or hold or attend conventions are funded to a partial or total extent by discretionary income. A decrease in such discretionary income on the part of potential attendees at our clients’ facilities has, and in the future could, result in a reduction in our sales. Further, because our exposure to the ultimate consumer of what we provide is limited by our dependence on our clients to attract those consumers to their facilities and events, our ability to respond to such a reduction in attendance, and therefore our sales, is limited. There are many factors that could reduce the numbers of events in a facility or attendance at an event, including labor disruptions involving sports leagues, poor performance by the teams playing in a facility, number of playoff games, inclement weather and adverse economic conditions which would adversely affect sales and profits.

Natural disasters, global calamities, sport strikes and other adverse incidents could adversely affect our sales and operating results.

Natural disasters, including hurricanes and earthquakes, or global calamities have, and in the future could, affect our sales and operating results. In the past, ARAMARK experienced lost and closed client locations, business disruptions and delays, the loss of inventory and other assets, and the effect of the temporary conversion of a number of ARAMARK client locations to provide food and shelter to those left homeless by storms. In addition, any terrorist attacks, particularly against venues that we serve, and the national and global military, diplomatic and financial response to such attacks or other threats, also may adversely affect our sales and operating results. Sports strikes, particularly those that are for an extended time period, can reduce our sales and have an adverse impact on our results of operations. For example, in 2012, the collective bargaining agreement for the players in the National Hockey League expired. As a result, the 2012/2013 season was significantly shortened and our sales and profits were negatively impacted. Any decrease in the number of games played would mean a loss of sales and reduced profits at the venues we service.

 

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Our failure to retain our current clients, renew our existing client contracts and obtain new client contracts could adversely affect our business.

Our success depends on our ability to retain our current clients, renew our existing client contracts and obtain new business. Our ability to do so generally depends on a variety of factors, including the quality, price and responsiveness of our services, as well as our ability to market these services effectively and differentiate ourselves from our competitors. We cannot assure you that we will be able to obtain new business, renew existing client contracts at the same or higher levels of pricing or that our current clients will not turn to competitors, cease operations, elect to self-operate or terminate contracts with us. The failure to renew a significant number of our existing contracts would have a material adverse effect on our business and results of operations and the failure to obtain new business could have an adverse impact on our growth.

We may be adversely affected if clients reduce their outsourcing or use of preferred vendors.

Our business and growth strategies depend in large part on the continuation of a current trend toward outsourcing services. Clients will outsource if they perceive that outsourcing may provide quality services at a lower overall cost and permit them to focus on their core business activities. We cannot be certain that this trend will continue or not be reversed or that clients that have outsourced functions will not decide to perform these functions themselves.

In addition, labor unions representing employees of some of our current and prospective clients have occasionally opposed the outsourcing trend to the extent that they believed that current union jobs for their memberships might be lost. In these cases, unions typically seek to prevent public sector entities from outsourcing and if that fails, ensure that jobs that are outsourced continue to be unionized, which can reduce our pricing and operational flexibility with respect to such businesses.

We have also identified a trend among some of our clients toward the retention of a limited number of preferred vendors to provide all or a large part of their required services. We cannot be certain that this trend will continue or not be reversed or, if it does continue, that we will be selected and retained as a preferred vendor to provide these services. Unfavorable developments with respect to either outsourcing or the use of preferred vendors could have a material adverse effect on our business and results of operations.

Competition in our industries could adversely affect our results of operations.

There is significant competition in the food and support services business from local, regional, national and international companies, of varying sizes, many of which have substantial financial resources. Our ability to successfully compete depends on our ability to provide quality services at a reasonable price and to provide value to our clients and consumers. Certain of our competitors have been and may in the future be willing to underbid us or accept a lower profit margin or expend more capital in order to obtain or retain business. Also, certain regional and local service providers may be better established than we are within a specific geographic region. In addition, existing or potential clients may elect to self-operate their food and support services, eliminating the opportunity for us to serve them or compete for the account. While we have a significant international presence, certain of our competitors have more extensive portfolios of services and a broader geographic footprint than we do. Therefore, we may be placed at a competitive disadvantage for clients who require multiservice or multinational bids.

We have a number of major national competitors in the uniform rental industry with significant financial resources. In addition, there are regional and local uniform suppliers whom we believe may have strong client loyalty. While most clients focus primarily on quality of service, uniform rental also is a price-sensitive service and if existing or future competitors seek to gain clients or accounts by reducing prices, we may be required to lower prices, which would reduce our sales and profits. The uniform rental business requires investment capital for growth. Failure to maintain capital investment in this business would put us at a competitive disadvantage. In addition, due to competition in our uniform rental business, it has become increasingly important for us to source

 

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garments and other products overseas, particularly from Asia. To the extent we are not able to effectively source such products from Asia and gain the related cost savings, we may be at a further disadvantage in relation to some of our competitors.

Increased operating costs and obstacles to cost recovery due to the pricing and cancellation terms of our food and support services contracts may constrain our ability to make a profit.

Our profitability can be adversely affected to the extent we are faced with cost increases for food, wages, other labor related expenses (including workers’ compensation, state unemployment insurance and federal or state mandated health benefits and other healthcare costs), insurance, fuel, utilities, piece goods, clothing and equipment, especially to the extent we are unable to recover such increased costs through increases in the prices for our products and services, due to one or more of general economic conditions, competitive conditions or contractual provisions in our client contracts. Oil and natural gas prices have fluctuated significantly in the last several years. Substantial increases in the cost of fuel and utilities have historically resulted in substantial cost increases in our uniform rental business, and to a lesser extent in our food and support services segments. From time to time we have experienced increases in our food costs. While we believe a portion of these increases were attributable to fuel prices, we believe the increases also resulted from rising global food demand and the increased production of biofuels such as ethanol. In addition, food prices can fluctuate as a result of temporary changes in supply, including as a result of incidences of severe weather such as droughts, heavy rains and late freezes. We have two main types of contract in our food and facilities business: profit and loss contracts in which we bear all of the expenses of the contract but gain the benefit of the sales, and client interest contracts in which our clients share some or all of the expenses and gain some or all of the sales. Approximately 73% of our food and support services sales in fiscal 2012 are from profit and loss contracts under which we have limited ability to pass on cost increases to our clients. Therefore, in many cases, we will have to absorb any cost increases, which may adversely impact our operating results.

The amount of risk that we bear and our profit potential vary depending on the type of contract under which we provide food and support services. We may be unable to fully recover costs on contracts that limit our ability to increase prices. In addition, we provide many of our services under contracts of indefinite term, which are subject to termination on short notice by either party without cause. Some of our profit and loss contracts contain minimum guaranteed remittances to our client regardless of our sales or profit at the facility involved. If sales do not exceed costs under a contract that contains minimum guaranteed commissions, we will bear any losses which are incurred, as well as the guaranteed commission. Generally, our contracts also limit our ability to raise prices on the food, beverages and merchandise we sell within a particular facility without the client’s consent. In addition, some of our contracts exclude certain events or products from the scope of the contract, or give the client the right to modify the terms under which we may operate at certain events. The payment of guaranteed commissions to a client under a profit and loss contract that is not profitable, the refusal by individual clients to permit the sale of some products at their venues, the imposition by clients of limits on prices which are not economically feasible for us, or decisions by clients to curtail their use of the services we provide could adversely affect our sales and results of operations. For example, during the recent economic downturn, certain of our business and industry clients curtailed their employees’ use of catering, which had a negative effect on our sales and profits.

Our inability to achieve cost savings through our cost reduction efforts could impact our results of operations.

The achievement of the goals we set in our plans and our future financial performance is dependent, in part, on our efforts to reduce our cost structure through various cost reduction initiatives. One of our recent initiatives is the establishment of a North American business services center that will bring together certain back office operations that are currently dispersed in many areas. Successful execution of our cost reduction initiatives is not assured and there are several obstacles to success, including our ability to enable the information technology and business process required for these efforts, as well as the timing of the transition to our business services center. In addition, there can be no assurance that our efforts, if properly executed, will result in our desired outcome of improved financial performance.

 

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Our expansion strategy involves risks.

We may seek to acquire companies or interests in companies or enter into joint ventures that complement our business, and our inability to complete acquisitions, integrate acquired companies successfully or enter into joint ventures may render us less competitive. We may be evaluating acquisitions or engaging in acquisition negotiations at any given time. We cannot be sure that we will be able to continue to identify acquisition candidates or joint venture partners on commercially reasonable terms or at all. If we make acquisitions, we also cannot be sure that any benefits anticipated from the acquisitions will actually be realized. Likewise, we cannot be sure that we will be able to obtain necessary financing for acquisitions. Such financing could be restricted by the terms of our debt agreements or it could be more expensive than our current debt. The amount of such debt financing for acquisitions could be significant and the terms of such debt instruments could be more restrictive than our current covenants. In addition, our ability to control the planning and operations of our joint ventures and other less than majority-owned affiliates may be subject to numerous restrictions imposed by the joint venture agreements and majority stockholders. Our joint venture partners may also have interests which differ from ours.

The process of integrating acquired operations into our existing operations may result in operating, contract and supply chain difficulties, such as the failure to retain clients or management personnel and problems coordinating technology and supply chain arrangements. Also, in connection with any acquisition, we could fail to discover liabilities of the acquired company for which we may be responsible as a successor owner or operator in spite of any investigation we make prior to the acquisition. In addition, labor laws in certain countries may require us to retain more employees than would otherwise be optimal from entities we acquire. Such difficulties may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives. The diversion of management attention, particularly in a difficult operating environment, may affect our sales. Similarly, our business depends on effective information technology systems and implementation delays or poor execution of the integration of different information technology systems could disrupt our operations and increase costs. Possible future acquisitions could result in the incurrence of additional debt and related interest expense or contingent liabilities and amortization expenses related to intangible assets, which could have a material adverse effect on our financial condition, operating results and/or cash flow. In addition, goodwill resulting from business combinations represents a significant portion of our assets. If the goodwill were deemed to be impaired, we would need to take a charge to earnings to write down the goodwill to its fair value.

A failure to maintain food safety throughout our supply chain and food-borne illness concerns may result in reputational harm and claims of illness or injury that could adversely affect us.

Food safety is a top priority for us and we dedicate substantial resources to ensuring that our consumers enjoy safe, quality food products. Claims of illness or injury relating to food quality or food handling are common in the food service industry, and a number of these claims may exist at any given time. Because food safety issues could be experienced at the source or by food suppliers or distributors, food safety could, in part, be out of our control. Regardless of the source or cause, any report of food-borne illness or other food safety issues such as food tampering or contamination at one of our locations could adversely impact our reputation, hindering our ability to renew contracts on favorable terms or to obtain new business, and have a negative impact on our sales. Even instances of food-borne illness, food tampering or contamination at a location served by one of our competitors could result in negative publicity regarding the food service industry generally and could negatively impact our sales. Future food product recalls and health concerns associated with food contamination may also increase our raw materials costs and, from time to time, disrupt our business.

Governmental regulations relating to food and beverages may subject us to significant liability.

The regulations relating to each of our food and support services segments are numerous and complex. A variety of regulations at various governmental levels relating to the handling, preparation and serving of food (including, in some cases, requirements relating to the temperature of food), and the cleanliness of food

 

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production facilities and the hygiene of food-handling personnel are enforced primarily at the local public health department level. We cannot assure you that we are in full compliance with all applicable laws and regulations at all times or that we will be able to comply with any future laws and regulations. Furthermore, legislation and regulatory attention to food safety is very high. Additional or amended regulations in this area may significantly increase the cost of compliance or expose us to liabilities.

We serve alcoholic beverages at many facilities, and must comply with applicable licensing laws, as well as state and local service laws, commonly called dram shop statutes. Dram shop statutes generally prohibit serving alcoholic beverages to certain persons such as an individual who is intoxicated or a minor. If we violate dram shop laws, we may be liable to the patron and/or third parties for the acts of the patron. Although we sponsor regular training programs designed to minimize the likelihood of such a situation, we cannot guarantee that intoxicated or minor patrons will not be served or that liability for their acts will not be imposed on us. There can be no assurance that additional regulation in this area would not limit our activities in the future or significantly increase the cost of regulatory compliance. We must also obtain and comply with the terms of licenses in order to sell alcoholic beverages in the states in which we serve alcoholic beverages. Some of our contracts require us to pay liquidated damages during any period in which our liquor license for the facility is suspended, and most contracts are subject to termination if we lose our liquor license for the facility.

If we fail to comply with requirements imposed by applicable law or other governmental regulations, we could become subject to lawsuits, investigations and other liabilities and restrictions on our operations that could significantly and adversely affect our business.

We are subject to governmental regulation at the federal, state, international, national, provincial and local levels in many areas of our business, such as 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, public 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 laws and alcohol licensing and service laws.

From time to time, both federal and state governmental agencies have conducted reviews of our billing practices as part of investigations or audits of providers of services under governmental contracts, or otherwise. We also receive requests for information from governmental agencies in connection with these reviews. While we attempt to comply with all applicable laws and regulations, we cannot assure you that we are in full compliance with all applicable laws and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws, regulations or interpretations of these laws and regulations.

If we fail to comply with applicable laws and regulations, including those referred to above, we may be subject to investigations, criminal sanctions or civil remedies, including fines, penalties, damages, reimbursement, injunctions, seizures or debarments from government contracts or the loss of liquor licenses. The cost of compliance or the consequences of non-compliance, including debarments, could have a material adverse effect on our business and results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require either the corporation as a whole or individual businesses to incur substantial increases in costs in order to comply with such laws and regulations.

Changes in, new interpretations of or changes in the enforcement of the governmental regulatory framework may affect our contracts and contract terms and may reduce our sales or profits.

A portion of our sales, estimated to be approximately 11.7% in fiscal 2012, is derived from business with U.S. federal, state and local governments and agencies. Changes or new interpretations in, or changes in the

 

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enforcement of, the statutory or regulatory framework applicable to services provided under governmental contracts or bidding procedures, particularly by our food and support services businesses, could result in fewer new contracts or contract renewals, modifications to the methods we apply to price government contracts, or in contract terms of shorter duration than we have historically experienced. Any of these changes could result in lower sales or profits than we have historically achieved, which could have an adverse effect on our results of operations.

Environmental regulations may subject us to significant liability and limit our ability to grow.

We are subject to various environmental protection laws and regulations, including the U.S. federal Clean Water Act, Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes and regulations governing the use, management, and disposal of chemicals and hazardous materials. In particular, industrial laundries in our uniform rental business use certain detergents and cleaning chemicals to launder garments and other merchandise. The residues from such detergents and chemicals and residues from soiled garments and other merchandise laundered at our facilities may result in potential discharges to air and to water (through sanitary sewer systems and publicly owned treatment works) and may be contained in waste generated by our wastewater treatment systems.

Our industrial laundries are subject to certain volume and chemical air and water pollution discharge limits, monitoring, permitting and recordkeeping requirements.

We own or operate aboveground and underground storage tank systems at some locations to store petroleum products for use in our or our clients’ operations. Certain of these storage tank systems also are subject to performance standards, periodic monitoring, and recordkeeping requirements. We also may use and manage chemicals and hazardous materials in our operations from time to time. In the course of our business, we may be subject to penalties and fines for non-compliance with environmental protection laws and regulations and we may settle, or contribute to the settlement of, actions or claims relating to the management of underground storage tanks and the handling and disposal of chemicals or hazardous materials. We may, in the future, be required to expend material amounts to rectify the consequences of any such events.

In addition, changes to environmental laws may subject us to additional costs or cause us to change aspects of our business. Under U.S. federal and state environmental protection laws, as an owner or operator of real estate we may be liable for the costs of removal or remediation of certain hazardous materials located on or in or emanating from our owned or leased property or our client’s properties, as well as related costs of investigation and property damage, without regard to our fault, knowledge, or responsibility for the presence of such hazardous materials. There can be no assurance that locations that we own, lease or otherwise operate, either for ourselves or for our clients, or that we may acquire in the future, have been operated in compliance with environmental laws and regulations or that future uses or conditions will not result in the imposition of liability upon us under such laws or expose us to third-party actions such as tort suits. In addition, such regulations may limit our ability to identify suitable sites for new or expanded facilities. In connection with our present or past operations and the present or past operations of our predecessors or companies that we have acquired, hazardous substances may migrate from properties on which we operate or which were operated by our predecessors or companies we acquired to other properties. We may be subject to significant liabilities to the extent that human health is adversely affected or the value of such properties is diminished by such migration.

Our international business faces risks different from those we face in the United States that could have an effect on our results of operations and financial condition.

A significant portion of our sales is derived from international business. During fiscal 2012, approximately 20% of our sales were generated outside of North America. We currently have a presence in 19 countries outside of North America with approximately 82,000 personnel. Our international operations are subject to risks that are different from those we face in the United States, including the requirement to comply with changing and

 

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conflicting national and local regulatory requirements; Foreign Corrupt Practices Act, U.K. Bribery Act and other anti-corruption law compliance matters; potential difficulties in staffing and labor disputes; differing local labor laws; managing and obtaining support and distribution for local operations; credit risk or financial condition of local clients; potential imposition of restrictions on investments; potentially adverse tax consequences, including imposition or increase of withholding, VAT and other taxes on remittances and other payments by subsidiaries; foreign exchange controls; and local political and social conditions. In addition, the operating results of our non-U.S. subsidiaries are translated into U.S. dollars and those results are affected by movements in foreign currencies relative to the U.S. dollar.

We intend to continue to develop our business in emerging countries over the long term. Emerging international operations present several additional risks, including greater fluctuation in currencies relative to the U.S. dollar; economic and governmental instability; civil disturbances; volatility in gross domestic production; and nationalization and expropriation of private assets.

There can be no assurance that the foregoing factors will not have a material adverse effect on our international operations or on our consolidated financial condition and results of operations.

Continued or further unionization of our workforce may increase our costs and work stoppages could damage our business.

Approximately 40,000 employees in our U.S. operations are represented by unions and covered by collective bargaining agreements. The continued or further unionization of a significantly greater portion of our workforce could increase our overall costs at the affected locations and adversely affect our flexibility to run our business in the most efficient manner to remain competitive or acquire new business. In addition, any significant increase in the number of work stoppages at our various operations could adversely affect our business, financial condition or results of operations.

We may incur significant liability as a result of our participation in multiemployer defined benefit pension plans.

We operate at a number of locations under collective bargaining agreements. Under some of these agreements, we are obligated to participate in and contribute to multiemployer defined benefit pension plans. As a contributing employer to such plans, should ARAMARK withdraw, either totally or trigger a “partial withdrawal,” we would be subject to withdrawal liability (or partial withdrawal liability) for our proportionate share of any unfunded vested benefits. In addition, if a multiemployer defined benefit pension plan fails to satisfy the minimum funding standards, we could be liable to increase our contributions to meet minimum funding standards. Also, if a participating employer withdraws from the plan or experiences financial difficulty, including bankruptcy, our obligation could increase. The financial status of certain of the plans in which ARAMARK participates has deteriorated in the recent past and continues to deteriorate. In addition, any increased funding obligations for underfunded multiemployer defined benefit pension plans could have a financial impact on us.

Risks associated with the suppliers from whom our products are sourced could adversely affect our results of operations.

The raw materials we use in our business and the finished products we sell are sourced from a wide variety of domestic and international suppliers. We seek to require our suppliers to comply with applicable laws and otherwise be certified as meeting our supplier standards of conduct. Our ability to find qualified suppliers who meet our standards, and to access raw materials and finished products in a timely and efficient manner is a challenge, especially with respect to suppliers located and goods sourced outside the United States. In addition, insolvency experienced by suppliers could make it difficult for us to source the items we need to run our business. Political and economic stability in the countries in which foreign suppliers are located, the financial stability of suppliers, suppliers’ failure to meet our supplier standards, labor problems experienced by our

 

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suppliers, the availability of raw materials to suppliers, currency exchange rates, transport availability and cost, inflation and other factors relating to the suppliers and the countries in which they are located are beyond our control. In addition, United States foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade are beyond our control. In addition, if one of our suppliers were to violate the law, our reputation may be harmed simply due to our association with that supplier. These and other factors affecting our suppliers and our access to raw materials and finished products could adversely affect our results of operations.

In fiscal 2012, one distributor distributed approximately 60% of our food and non-food products in the United States and Canada, and if our relationship or their business were to be disrupted, we could experience disruptions to our operations and cost structure.

Although we negotiate the pricing and other terms for the majority of our purchases of food and related products in the U.S. and Canada directly with national manufacturers, we purchase these products and other items through SYSCO Corporation and other distributors. SYSCO, the main U.S. and Canadian distributor of our food and non-food products, and other distributors are responsible for tracking our orders and delivering products to our specific locations. If our relationship with, or the business of, SYSCO were to be disrupted, we would have to arrange alternative distributors and our operations and cost structure could be adversely affected in the short term. Similarly, a sudden termination of the relationship with a significant provider in other geographic areas could in the short term adversely affect our ability to provide services and disrupt our client relationships in such areas.

Our business may suffer if we are unable to hire and retain sufficient qualified personnel or if labor costs increase.

From time to time, we have had difficulty in hiring and retaining qualified management personnel, particularly at the entry management level. We will continue to have significant requirements to hire such personnel. In the past, at times when the United States or other geographic regions have periodically experienced reduced levels of unemployment, there has been a shortage of qualified workers at all levels. Given that our workforce requires large numbers of entry level and skilled workers and managers, low levels of unemployment when such conditions exist or mismatches between the labor markets and our skill requirements can compromise our ability in certain areas of our businesses to continue to provide quality service or compete for new business. We also regularly hire a large number of part-time and seasonal workers, particularly in our food and support services segments. Any difficulty we may encounter in hiring such workers could result in significant increases in labor costs, which could have a material adverse effect on our business, financial condition and results of operations. Competition for labor has at times resulted in wage increases in the past and future competition could substantially increase our labor costs. Due to the labor intensive nature of our businesses and the fact that 73% of our food and support services segments’ sales are from profit and loss contracts under which we have limited ability to pass along cost increases, a shortage of labor or increases in wage levels in excess of normal levels could have a material adverse effect on our results of operations.

Healthcare reform legislation could have an impact on our business.

During 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the United States. Certain of the provisions that have increased our healthcare costs include the removal of annual plan limits and the mandate that health plans provide 100% coverage on expanded preventative care. In addition, our healthcare costs could increase as the new legislation and accompanying regulations require us to apply new eligibility rules, which could potentially cover more variable hour employees than we do currently or pay penalty amounts in the event that employees do not elect our offered coverage. While much of the cost of the recent healthcare legislation enacted will occur after 2014 due to provisions of the legislation being delayed and phased in over time, changes to our healthcare cost structure could have an impact on our business and operating costs.

 

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Our business is contract intensive and may lead to client disputes.

Our business is contract intensive and we are parties to many contracts with clients all over the world. Our client interest contracts provide that client billings, and for some contracts the sharing of profits and losses, are based on our determinations of costs of service. Contract terms under which we base these determinations and, for certain government contracts, regulations governing our cost determinations, may be subject to differing interpretations which could result in disputes with our clients from time to time. Clients generally have the right to audit our contracts, and we periodically review our compliance with contract terms and provisions. If clients were to dispute our contract determinations, the resolution of such disputes in a manner adverse to our interests could negatively affect sales and operating results. While we do not believe any reviews, audits or other such matters should result in material adjustments, if a large number of our client arrangements were modified in response to any such matter, the effect could be materially adverse to our business or results of operations.

Our operations are seasonal and quarter to quarter comparisons may not be a good indicator of our performance.

In our first and second fiscal quarters, within the FSS North America segment, there historically has been a lower level of sales at the sports, entertainment and recreational clients, which is partly offset by increased activity in educational operations. In our third and fourth fiscal quarters, there historically has been a significant increase in sales at the sports, entertainment and recreational clients, which is partially offset by the effect of summer recess in educational operations. For these reasons, a quarter to quarter comparison is not a good indication of our performance or how we will perform in the future.

Risks Related to Our Indebtedness

Our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industries, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations.

We are highly leveraged. As of June 28, 2013, our outstanding indebtedness was $6,217.1 million, including amounts outstanding under our credit facilities, senior notes and receivables facility. We also had additional availability of approximately $447.0 million under our revolving credit facility at that date.

This degree of leverage could have important consequences, including:

 

   

exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our senior secured credit facilities and our receivables facility, are at variable rates of interest;

 

   

making it more difficult for us to make payments on our indebtedness;

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and

 

   

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities and the indenture governing our senior notes. If new indebtedness is added to our current debt levels, the related risks that we now face could increase.

 

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If our financial performance were to deteriorate, we may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. While we believe that we currently have adequate cash flows to service our indebtedness, if our financial performance were to deteriorate significantly, we might be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If, due to such a deterioration in our financial performance, our cash flows and capital resources were to be insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, if we were required to raise additional capital in the current financial markets, the terms of such financing, if available, could result in higher costs and greater restrictions on our business. In addition, although a significant amount of our long-term borrowings do not mature until 2016 and later, if we were to need to refinance our existing indebtedness, the conditions in the financial markets at that time could make it difficult to refinance our existing indebtedness on acceptable terms or at all. If such alternative measures proved unsuccessful, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit agreement and the indenture governing our senior notes restrict our ability to dispose of assets and use the proceeds from any disposition of assets and to refinance our indebtedness. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our senior secured credit agreement and the indenture governing our senior notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:

 

   

incur additional indebtedness, refinance or restructure indebtedness or issue certain preferred shares;

 

   

pay dividends on, repurchase or make distributions in respect of our capital stock, make unscheduled payments on our notes, repurchase or redeem our notes or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

   

enter into certain transactions with our affiliates.

In addition, our senior secured revolving credit facility requires us to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and in the event of a significant deterioration of our financial performance, we cannot assure you that we will satisfy those ratios and tests. A breach of any of these covenants could result in a default under the senior secured credit agreement. Upon our failure to maintain compliance with these covenants that is not waived by the lenders under the revolving credit facility, the lenders under the senior secured credit facilities could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit under such facilities. If we were unable to repay

 

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those amounts, the lenders under the senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the senior secured credit agreement. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings, as well as our unsecured indebtedness. If our senior secured indebtedness was accelerated by the lenders as a result of a default, our senior notes may become due and payable as well. Any such acceleration may also constitute an amortization event under our receivables facility, which could result in the amount outstanding under that facility becoming due and payable.

Risks Related to this Offering and Ownership of Our Common Stock

There is no existing market for our common stock and an active, liquid trading market may not develop.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the New York Stock Exchange, or NYSE, or otherwise or how active and liquid that market may become. If an active and liquid trading market does not develop, you may have difficulty selling any of our common stock that you purchase. The initial public offering price for the shares of our common stock will be determined by negotiations between us, the selling stockholders and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all.

You will incur immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

Prior investors have paid substantially less per share of our common stock than the price in this offering. The initial public offering price of our common stock is substantially higher than the net tangible book value per share outstanding prior to completion of the offering. Based on our net tangible book deficit as of June 28, 2013 and upon the issuance and sale of shares of common stock by us at an assumed initial public offering price of $         per share (the midpoint of the initial public offering price range indicated on the cover of this prospectus), if you purchase our common stock in this offering, you will pay more for your shares than the amounts paid by our existing stockholders for their shares and you will suffer immediate dilution of approximately $         per share in net tangible book value. We also have a large number of outstanding stock options to purchase shares of common stock with exercise prices that are below the estimated initial offering price of shares of our common stock. To the extent that these options are exercised, you will experience further dilution.

Our share price may change significantly following the offering, and you could lose all or part of your investment as a result.

The trading price of our common stock is likely to be highly volatile and could fluctuate due to a number of factors such as those listed in “—Risks Related to Our Business” and the following, some of which are beyond our control:

 

   

quarterly variations in our results of operations;

 

   

results of operations that vary from the expectations of securities analysts and investors;

 

   

results of operations that vary from those of our competitors;

 

   

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

 

   

announcements by us, our competitors or our vendors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

 

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announcements by third parties of significant claims or proceedings against us;

 

   

future sales of our common stock;

 

   

general domestic and international economic conditions; and

 

   

unexpected and sudden changes in senior management.

Furthermore, the stock market has experienced extreme volatility that, in some cases, has been unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance.

In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.

Certain stockholders’ shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly.

After the completion of this offering, we will have              million shares of common stock outstanding (             million shares of common stock if the underwriters exercise their option to purchase additional shares in full). This number includes              million shares of common stock that are being sold in this offering, which may be resold immediately in the public market.

We and the selling stockholders, our directors and executive officers and certain of our principal stockholders have agreed not to offer or sell, dispose of or hedge, directly or indirectly, any of our common stock without the permission of              for a period of 180 days from the date of this prospectus, subject to certain exceptions and automatic extensions in certain circumstances. See “Shares Eligible for Future Sale.” In addition, pursuant to our Registration Rights Agreement, stockholders who hold more than 20% of our then-outstanding shares, or Joseph Neubauer, have the right to require us to file a registration statement with the SEC for the resale of our common stock at any time after the consummation of an initial public offering. These shares may also be sold pursuant to Rule 144 under the Securities Act of 1933, as amended, which we refer to as the Securities Act, depending on their holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates. As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our common stock could decline if the holders of restricted shares sell them or are perceived by the market as intending to sell them. See “Certain Relationships and Related Party Transactions.”

We also have outstanding options to purchase our common stock with exercise prices that are below the estimated initial offering price of our common stock. To the extent that these options are exercised, you will experience further dilution. We also intend to file a registration statement on Form S-8 under the Securities Act covering all of the common stock subject to outstanding equity awards, as well as options and shares reserved for future issuance, under our stock incentive plans. Once we register these shares, they can be freely sold in the public market upon issuance and vesting, subject to the lock-up agreements described in the “Underwriting” section of this prospectus and contained in the terms of such plans, or unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act. Sales of a substantial number of shares of these shares could cause the market price of our common stock to decline.

The availability of shares for sale in the future could reduce the market price of our common stock.

In the future, we may issue securities to raise cash for acquisitions or otherwise. We may also acquire interests in other companies by using a combination of cash and common stock or just common stock. We may also issue securities convertible into our common stock. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common stock.

 

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In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.

We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.

Following completion of this offering, we intend to commence the payment of cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, business prospects and other factors that our board of directors may deem relevant. Our senior secured credit facilities and the indenture governing our senior notes contain, and the terms of any future indebtedness we or our subsidiaries incur may contain, limitations on our ability to pay dividends. For more information, see “Dividend Policy.” There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends.

Our Controlling Owners can significantly influence our business and affairs and may have conflicts of interest with us in the future.

Following the completion of this offering, investment funds associated with or designated by GS Capital Partners, CCMP Capital Advisors, J.P. Morgan Partners, Thomas H. Lee Partners and Warburg Pincus, which we refer to as the Sponsors, and Joseph Neubauer, who, together with the Sponsors, we refer to as the Controlling Owners, will collectively own approximately     % of our common stock (or     % if the underwriters exercise their option to purchase additional shares in full). As a result, the Controlling Owners have the ability to prevent any transaction that requires the approval of stockholders, including the election of directors, mergers and takeover offers, regardless of whether others believe that approval of those matters is in our best interests. In addition, the Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as the Controlling Owners, or funds controlled by or associated with the Sponsors, continue to own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Controlling Owners will continue to be able to strongly influence us.

Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.

These provisions provide for, among other things:

 

   

the ability of our board of directors to issue one or more series of preferred stock;

 

   

advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

   

certain limitations on convening special stockholder meetings;

 

   

the removal of directors only upon the affirmative vote of the holders of at least 75% in voting power of all the then-outstanding common stock of the company entitled to vote thereon, voting together as a single class, if the Controlling Owners and their affiliates beneficially own, in the aggregate, less than a majority in voting power of the common stock of the Company entitled to vote generally in the election of directors; and

 

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that certain provisions may be amended only by the affirmative vote of the holders of at least 75% in voting power of all the then-outstanding common stock of the company entitled to vote thereon, voting together as a single class, if the Controlling Owners and their affiliates beneficially own, in the aggregate, less than 50% in voting power of the common stock of the Company entitled to vote generally in the election of directors.

These anti-takeover provisions could make it more difficult for a third-party to acquire us, even if the third-party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. See “Description of Capital Stock.”

We are a “controlled company” within the meaning of the New York Stock Exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, certain stockholders will continue to beneficially own a majority of the voting power of all outstanding shares of our common stock. Under New York Stock Exchange corporate governance standards, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of the board of directors consist of “independent directors” as defined under the rules of the NYSE;

 

   

the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors, our nominating and corporate governance committee and compensation committee may not consist entirely of independent directors and such committees may not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

We will incur increased costs and our management will face increased demands as a result of operating as a listed company.

As a listed company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a listed company, we will need to adopt additional internal controls and disclosure controls and procedures and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under applicable securities laws.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, the Dodd-Frank Act and related regulations implemented by the Securities and Exchange Commission, or the SEC, and the stock exchanges are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. We are currently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result,

 

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their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a listed company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and attract and retain qualified executive officers.

The increased costs associated with operating as a listed company may decrease our net income, and may cause us to reduce costs in other areas of our business or increase the prices of our products or services to offset the effect of such increased costs. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

If securities or industry research analysts do not publish or cease publishing research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, our share price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that securities and industry research analysts publish about us, our industry, our competitors and our business. We do not have any control over these analysts. Our share price and trading volumes could decline if one or more securities or industry analysts downgrade our common stock, issue unfavorable commentary about us, our industry or our business, cease to cover our company or fail to regularly publish reports about us, our industry or our business.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of              shares of our common stock we are offering, after deducting underwriters’ discounts and commissions and estimated expenses payable by us, will be approximately $             million (or $             million if the underwriters exercise the option to purchase additional shares in full). This estimate assumes an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. A one million share increase (decrease) in the number of shares offered by us in this offering would increase (decrease) the net proceeds to us by approximately $             million, assuming an initial public offering price of $         per share, after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

We intend to use the net proceeds received by us from this offering to repay certain of our existing indebtedness, including a portion of the outstanding term loans due July 26, 2016 under our senior secured credit facilities. As of June 28, 2013, our senior secured credit facilities included term loan facilities consisting of $3,286.8 million of term loans maturing on July 26, 2016 and $1,400.0 million of term loans maturing on September 7, 2019, exclusive of the original issue discount. The term loans maturing in July 2016 have applicable margins of 3.50% for eurocurrency (LIBOR) term loan borrowings and 2.50% for base rate term loan borrowings. The term loans maturing in September 2019 have applicable margins of 3.00% for eurocurrency (LIBOR) term loan borrowings, subject to a LIBOR floor of 1.00%, and 2.00% for base-rate borrowings, subject to minimum base rate of 2.00%. See “Description of Certain Indebtedness.”

To the extent we raise more proceeds in this offering than currently estimated, we intend to use such proceeds to repay certain other of our existing indebtedness, as will be determined following completion of this offering, and for general corporate purposes.

Affiliates of certain of the underwriters are lenders under our senior secured credit agreement and, accordingly, may receive a portion of the net proceeds from this offering through repayment of such indebtedness. See “Underwriting—Conflicts of Interest.”

 

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DIVIDEND POLICY

Following completion of this offering, we intend to commence the payment of cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, business prospects and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our senior secured credit facilities and the indenture governing our senior notes. Future agreements may also limit our ability to pay dividends. See “Description of Certain Indebtedness.”

On April 18, 2011, we declared a dividend to our stockholders of approximately $711 million. The dividend was funded with the net proceeds from the private offering of our 8.625% / 9.375% Senior Notes due 2016 and dividends from our subsidiaries. The 8.625% / 9.375% Senior Notes due 2016 were repurchased through a cash tender offer in March 2013. In addition, on October 29, 2012, we completed the spin-off of our majority interest in Seamless North America, LLC, an online and mobile food ordering service, to our stockholders in the form of a dividend. Each stockholder received one share of the common stock of Seamless Holdings, a newly formed company created to hold our former interest in Seamless North America, LLC, for each share of our common stock held as of the record date. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements and related notes and our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 28, 2013 (1) on a historical basis and (2) on an as adjusted basis to give effect to the issuance of approximately              shares of our common stock offered by us hereby and the use of proceeds therefrom. The information in this table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” “Prospectus Summary—Summary Consolidated Financial Data,” the audited consolidated financial statements and related notes and the unaudited condensed consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of June 28, 2013  

(in millions)

   Actual     As Adjusted  

Cash and cash equivalents

   $ 97.8      $                
  

 

 

   

 

 

 

Senior secured credit facilities:

    

Revolving credit facility(1)

   $ 142.0      $     

Term loan facility(2)

     4,678.7     

5.75% senior notes due 2020

     1,000.0     

Receivables facility

     300.0     

Capital leases

     54.3     

Other existing debt(3)

     42.1     
  

 

 

   

 

 

 

Total debt

     6,217.1     

Common stock subject to repurchase and other

     163.8     

Stockholders’ equity:

    

Common stock, 600,000,000 shares authorized, actual; 218,751,738 shares issued and 201,364,511 shares outstanding, actual;              shares authorized, as adjusted; and              shares issued and outstanding, as adjusted

     2.2     

Capital surplus

     1,686.3     

Accumulated deficit

     (518.1  

Accumulated other comprehensive loss

     (93.9  

Treasury stock

     (247.2  
  

 

 

   

 

 

 

Total stockholders’ equity

     829.3     
  

 

 

   

 

 

 

Total capitalization

   $ 7,210.2      $     
  

 

 

   

 

 

 

 

(1) Consists of a $555.0 million revolving credit facility available to the Company in U.S. dollars and a $50.0 million revolving credit facility available to the Company and a Canadian subsidiary in U.S. dollars and Canadian dollars. U.S. dollar borrowings under the revolving credit facilities have an applicable margin of 3.25% for eurocurrency (LIBOR) borrowings and 2.25% for base-rate borrowings and an unused commitment fee of 0.50% per annum. Canadian dollar borrowings have an applicable margin of 3.25% for BA (bankers’ acceptance) rate borrowings and 2.25% for base-rate borrowings and an unused commitment fee of 0.50% per annum. The final maturity date of the Canadian revolving loan commitments and $505.0 million of the $555.0 million U.S. revolving loan commitments is January 26, 2017, provided, however, that the maturity date accelerates to April 26, 2016 if any term loans, other than the term loans due on September 7, 2019 and any other term loans with a maturity at least 91 days after January 26, 2017, remain outstanding on April 26, 2016. The final maturity date of the remaining $50.0 million in revolving loan commitments is January 26, 2015. See “Description of Certain Indebtedness.”
(2) As of June 28, 2013, term loans with an aggregate principal amount of $4,686.8 million (recorded at $4,678.7 million to reflect original issue discount) were outstanding. The maturity date for $3,285.4 million of term loans is July 26, 2016. The maturity date for the remaining $1,393.3 million of term loans is September 7, 2019. The senior secured credit agreement also includes a $200.0 million synthetic letter of credit facility. The maturity date of $159.3 million of deposits securing the synthetic letter of credit facility is July 26, 2016. The maturity date for $40.7 million of deposits securing the letter of credit facility is January 26, 2014. As of June 28, 2013, there were approximately $142.0 million of issued letters of credit under the synthetic letter of credit facility. See “Description of Certain Indebtedness.”
(3) Consists of borrowings by our foreign subsidiaries.

 

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DILUTION

If you invest in our common stock, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share after this offering. Dilution results from the fact that the initial public offering price per share is substantially in excess of the net tangible book value per share attributable to the existing stockholders for our presently outstanding shares of common stock. We calculate net tangible book value per share by dividing the net tangible book value (total consolidated tangible assets less total consolidated liabilities) by the number of outstanding shares of common stock.

Our net tangible book value (deficit) as of June 28, 2013 was $(5,060,023), or $(0.03) per share, based on 201,364,511 shares of common stock outstanding.

Without taking into account any other changes in such net tangible book value after June 28, 2013, after giving effect to the sale by us of              shares of common stock in this offering assuming an initial public offering price of $         per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus, less the underwriting discounts and commissions and the estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at June 28, 2013 would have been $        , or $         per share. This represents an immediate increase in net tangible book value of $         per share to the existing stockholders and an immediate dilution in net tangible book value of $         per share, to investors purchasing shares of our common stock in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

   $                

Net tangible book value (deficit) per share as of June 28, 2013

  

Pro forma net tangible book value per share after giving effect to this offering

  

Amount of dilution in net tangible book value per share to new investors in this offering

  

If the underwriters were to fully exercise the underwriters’ option to purchase additional shares of common stock from us, the pro forma net tangible book value per share after giving effect to the offering would be $         per share. This represents an increase in adjusted net tangible book value of $         per share to existing stockholders and dilution in pro forma net tangible book value of $         per share to new investors.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our pro forma net tangible book value after giving to the offering by $             million, or by $         per share, assuming no change to the number of shares of common stock offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and estimated expenses payable by us. A 10% increase (decrease) in the number of shares of common stock offered by us would increase (decrease) our pro forma net tangible book value after giving to the offering by $             million, or by $         per share, after deducting the estimated underwriting discounts and estimated expenses payable by us.

The following table summarizes, on a pro forma basis as of June 28, 2013, the total number of shares of our common stock purchased from us, the total cash consideration paid to us by existing stockholders and by new investors purchasing shares of our common stock in this offering.

 

     Shares of Common  Stock
Purchased
    Total Consideration     Average
Price Per
Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

               $                             $                

New investors

               $                             $                
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

               $                             $                
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

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If the underwriters were to fully exercise the underwriters’ option to purchase              additional shares of common stock from us, the percentage of shares of our common stock held by existing stockholders would be     %, and the percentage of shares of our common stock held by new investors would be     %.

To the extent that we grant equity awards to our employees in the future under our stock incentive plans, and those equity awards vest and/or are exercised, as the case may be, or other issuances of shares of our common stock are made, there will be further dilution to new investors.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

Set forth below is selected consolidated financial data of the Company, as of the dates and for the periods indicated. The selected consolidated financial data as of September 28, 2012 and September 30, 2011, and for the fiscal years 2012, 2011 and 2010 have been derived from our consolidated financial statements appearing elsewhere in this prospectus, which have been audited by KPMG LLP. The selected consolidated financial data as of October 1, 2010 have been derived from our consolidated financial statements that are not included in this prospectus, which have been audited by KPMG LLP. The selected consolidated financial data as of October 2, 2009 and October 3, 2008 and for the fiscal years 2009 and 2008 have been derived from our unaudited consolidated financial statements that are not included in this prospectus. Consolidated financial statements for our indirect wholly-owned subsidiary, ARAMARK Corporation, have been audited for such periods.

The selected consolidated financial data as of June 28, 2013, and for the nine months ended June 28, 2013 and June 29, 2012 have been derived from our unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. The unaudited financial data presented have been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, such unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.

The selected consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as with our consolidated financial statements and related notes and our unaudited condensed consolidated financial statements and related notes that are also included in this prospectus.

 

    Fiscal year(1)     Nine months ended  
    2012     2011     2010     2009     2008     June 28,
2013
    June 29,
2012
 
(dollars in millions, except per share data)                     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Statement of operations data:

           

Sales

  $ 13,505      $ 13,082      $ 12,419      $ 12,138      $ 13,252      $ 10,430      $ 10,104   

Costs and expenses:

           

Cost of services provided

    12,191        11,836        11,247        11,009        12,011        9,482        9,141   

Depreciation and amortization

    529        511        503        497        506        405        396   

Selling and general corporate expenses

    203        188        191        183        177        164        151   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    582        547        478        449        558        379        416   

Interest and other financing costs, net

    457        451        445        473        515        341        357   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    125        96        33        (24     43        38        59   

Provision (benefit) for income taxes

    18        (1     1        (24     9        7        12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    107        97        32        —          34        31        47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations, net of tax(2)

    —          (12     (1     (7     5        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    107        85        31        (7     39        31        47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

    3        1        —          —          —          1        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ARAMARK stockholders

  $ 104      $ 84      $ 31      $ (7   $ 39      $ 30      $ 45   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Fiscal year(1)     Nine months ended  
    2012     2011     2010     2009     2008     June 28,
2013
    June 29,
2012
 
(dollars in millions, except per share data)                     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Per Share Data:

           

Basic:

             

Income (loss) from continuing operations

  $ 0.51      $ 0.47      $ 0.16      $ (0.00   $ 0.17      $ 0.15      $ 0.22   

Income (loss) from discontinued operations

    0.00        (0.06     (0.01     (0.03     0.03        —          0.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ARAMARK stockholders

  $ 0.51      $ 0.41      $ 0.15      $ (0.03   $ 0.20      $ 0.15      $ 0.22   

Diluted:

           

Income (loss) from continuing operations

  $ 0.49      $ 0.46      $ 0.16      $ (0.00   $ 0.16      $ 0.15      $ 0.21   

Income (loss) from discontinued operations

    0.00        (0.06     (0.01     (0.03     0.03        —          0.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ARAMARK stockholders

  $ 0.49      $ 0.40      $ 0.15      $ (0.03   $ 0.19      $ 0.15      $ 0.21   

Cash dividend per share(3)

  $ —        $ 3.50      $ —        $ —        $ —        $ —        $ —     

Statement of cash flows data:

           

Net cash provided by/(used in):

             

Operating activities(4)

  $ 692      $ 304      $ 634      $ 707      $ 494      $ 136      $ 137   

Investing activities

    (482     (363     (354     (465     (405     (252     (363

Financing activities(4)

    (287     112        (344     (167     (24     77        114   

Other financial data:

           

Capital expenditures, net of disposals

    343        272        264        330        350        255        219   

Balance sheet data (at period end):

           

Cash and cash equivalents

  $ 137      $ 213      $ 161      $ 225      $ 149      $ 98      $ 101   

Noncash working capital(4)(5)

    (105     (101     (321     (236     (139     242        239   

Total assets(4)

    10,487        10,523        10,222        10,327        10,523        10,127        10,431   

Total debt (including current portion of long term debt)(4)(6)

    6,009        6,232        5,402        5,722        5,860        6,217        6,377   

Total equity(3)

    967        882        1,397        1,360        1,340        829        927   

 

(1) Fiscal years 2012, 2011, 2010, 2009 and 2008 refer to the fiscal years ended September 28, 2012, September 30, 2011, October 1, 2010, October 2, 2009 and October 3, 2008, respectively. Fiscal years 2012, 2011, 2010 and 2009 were each 52-week periods. Fiscal 2008 was a 53-week period.
(2) During fiscal 2011, the Company completed the sale of its wholly-owned subsidiary, Galls, for approximately $75.0 million in cash. The transaction resulted in a pretax loss of approximately $1.5 million (after-tax loss of approximately $12.0 million). Galls is accounted for as a discontinued operation. Galls’ results of operations have been removed from the Company’s results of continuing operations for all periods presented.
(3) During fiscal 2011, the Company paid a dividend of approximately $711 million to its stockholders. On October 29, 2012, we completed the spin-off of our majority interest in Seamless North America, LLC, on online and mobile food ordering service, to our stockholders in the form of a dividend. Each stockholder received one share of the common stock or Seamless Holdings, a newly formed company created to hold our former interest in Seamless North America, LLC, for each share of our common stock held as of the record date.
(4) In the first quarter of fiscal 2011, the Company adopted the new authoritative accounting guidance regarding transfers of financial assets. The impact upon adoption resulted in the recognition of both the receivables securitized under the program and the borrowings they collateralize on the Consolidated Balance Sheet, which led to a $220.9 million increase in “Receivables” and “Long-Term Borrowings.” As a result of implementing the new guidance, funding under the agreement of $220.9 million on October 2, 2010 was reflected in the Company’s Consolidated Statement of Cash Flows as a use of cash from the securitization of accounts receivables under net cash provided by/(used in) operating activities and as a source of cash under net cash provided by/(used in) provided by financing activities.
(5) Noncash working capital represents accounts receivable, net, plus inventories, prepayments and other current assets, minus accounts payable, accrued payroll and related expenses, and other accrued expenses and current liabilities, exclusive of assets held for sale.

 

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(6) During fiscal 2011, the Company completed a private placement of $600 million, net of a 1% discount, in aggregate principal amount of 8.625% / 9.375% Senior Notes due 2016. In the second quarter of fiscal 2013, the Company completed a refinancing, repurchasing ARAMARK Corporation’s outstanding 8.50% Senior Notes due 2015 and Senior Floating Rate Notes due 2015 and our 8.625% / 9.375% Senior Notes due 2016. The Company refinanced that debt with new term loan borrowings and the issuance of our senior notes.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the fiscal years ended September 28, 2012, September 30, 2011 and October 1, 2010, and for the three and nine months ended June 28, 2013 and June 29, 2012, should be read in conjunction with Selected Consolidated Financial Data, our consolidated financial statements and the notes to those statements and our unaudited condensed consolidated financial statements and the notes to those statements.

Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, opinions, expectations, anticipations, intentions and beliefs. 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 set forth under “Risk Factors,” “Statements Regarding Forward-looking Information” and “Business” sections and elsewhere in this prospectus. In the following discussion and analysis of financial condition and results of operations, certain financial measures may be considered “non-GAAP financial measures” under Securities and Exchange Commission (“SEC”) rules. These rules require supplemental explanation and reconciliation, which is provided elsewhere in this prospectus.

Overview

We are a leading global provider of food, facilities and uniform services to education, healthcare, business and industry, and sports, leisure and corrections clients. Our core market is North America, which is supplemented by an additional 19-country footprint serving many of the fastest growing global geographies. We hold the #2 position in North America, a top 3 position in countries representing 98% of total 2012 sales, and are one of only 3 food and facilities competitors with the combination of scale, scope, and global reach. Through our established brand, broad geographic presence and approximately 267,000 employees, we anchor our business in our partnerships with thousands of education, healthcare, business, sports, leisure and corrections clients. Through these partnerships we serve millions of consumers including students, patients, employees, sports fans and guests worldwide.

The Company operates its business in three reportable segments:

 

   

Food and Support Services North America (“FSS North America”)—Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, entertainment, recreational and other facilities serving the general public in the United States, Canada and Mexico.

 

   

Food and Support Services International (“FSS International”)—Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, entertainment, recreational and other facilities serving the general public. We have operations in 19 countries outside North America. Our largest international operations are in the United Kingdom, Germany, Chile and Ireland, and in each of these countries we are one of the leading food service providers. We also have operations in emerging market geographies, such as South America and China, and we own 50% of AIM Services Co., Ltd., a leader in providing outsourced food services in Japan.

 

   

Uniform and Career Apparel (“Uniform”)—Rental, sale, cleaning, maintenance and delivery of personalized uniform and career apparel and other textile items on a contract basis and direct marketing of personalized uniforms and career apparel and accessories to businesses, public institutions and individuals. We also provide walk-off mats, cleaning cloths, disposable towels and other environmental control items.

Our Food and Support Services operations focus on serving clients in four principal sectors: Education, Healthcare, Business & Industry and Sports, Leisure and Corrections. Our FSS North America segment serves these client sectors, which are distinguished by the types of consumers served and types of services offered. Our

 

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FSS International segment provides a similar range of services as those provided to our FSS North America segment clients and operates in the same sectors although this segment is more heavily weighted towards Business & Industry. In fiscal 2012, our FSS North America segment generated $9.4 billion in sales, or 70% of our total sales, and our FSS International segment generated $2.7 billion in sales, or 20% of our total sales. Our Uniform segment provides uniforms, career and image apparel, work clothes and accessories to meet the needs of clients in a wide range of industries in the United States, Puerto Rico and Canada, including manufacturing, transportation, construction, restaurants and hotels, healthcare and pharmaceutical industries and many others. We supply garments, other textile and paper products and other accessories through rental and direct purchase programs to businesses, government agencies and individuals. In fiscal 2012, our Uniform segment generated $1.4 billion in sales, or 10% of our total sales. Administrative expenses not allocated to our three reportable segments are presented separately as corporate expenses and are not included in our segment results.

Our operating results continue to be affected by the economic uncertainty being experienced in the countries in which we operate. We anticipate that economic conditions, specifically in Europe, and unemployment levels will continue to remain challenging.

We are planning and executing both growth and cost control initiatives and are working to streamline and improve the efficiency and effectiveness of our general and administrative functions through increased standards, process improvements, and consolidation. As a result, we recorded certain costs during the second and third quarters of fiscal 2013 and estimate that we will incur an additional $40 to $65 million of costs over the next 18 months.

Seasonality

Our sales and operating results have varied, and we expect them to continue to vary, from quarter to quarter, as a result of different factors. Within our FSS North America segment, historically there has been a lower level of activity during our first and second fiscal quarters in operations that provide services to sports, entertainment and recreational clients. This lower level of activity historically has been partially offset during our first and second fiscal quarters by the increased activity in our educational operations. Conversely, historically there has been a significant increase in the provision of services to sports, entertainment and recreational clients during our third and fourth fiscal quarters, which is partially offset by the effect of summer recess at colleges, universities and schools on our educational operations.

Sources of Sales

Our clients engage us, generally through written contracts, to provide our services at their locations. Depending on the type of client and service, we are paid either by our client or directly by the consumer to whom we have been provided access by our client. We use two general contract types in our FSS North America and FSS International segments: profit and loss contracts and client interest contracts. These contracts differ in their provision for the amount of financial risk that we bear and, accordingly, the potential compensation, profits or fees we may receive. Under profit and loss contracts, we receive all of the revenue from, and bear all of the expenses of, the provision of our services at a client location. For fiscal 2012, approximately 73% of our FSS North America and FSS International sales were derived from profit and loss contracts. Client interest contracts include management fee contracts, under which our clients reimburse our operating costs and pay us a management fee, which may be calculated as a fixed dollar amount or a percentage of sales or operating costs. Some management fee contracts entitle us to receive incentive fees based upon our performance under the contract, as measured by factors such as sales, operating costs and customer satisfaction surveys. For fiscal 2012, approximately 27% of our FSS North America and FSS International sales were derived from client interest contracts.

For our Uniform segment, we typically serve our rental clients under written service contracts for an initial term of three to five years. Because the majority of our clients purchase on a recurring basis, our backlog of orders at

 

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any given time consists principally of orders in the process of being filled. With the exception of certain governmental bid business, most of our direct marketing business is conducted under invoice arrangement with repeat clients. Our direct marketing business is, to a large degree, relationship-centered. While we have long term relationships with some of our larger clients, we generally do not have contracts with these clients.

Costs and Expenses

Our costs and expenses are comprised of cost of services provided, depreciation and amortization and selling and general corporate expenses. Cost of services provided consists of direct expenses associated with our operations, including food costs, wages, other labor related expenses (including workers’ compensation, state unemployment insurance and federal or state mandated health benefits and other healthcare costs), insurance, fuel, utilities, piece goods and clothing and equipment. Depreciation and amortization mainly relate to assets used in generating sales. Selling and general corporate expenses include expenses related to commissions, marketing, share-based compensation and other costs related to administrative functions including compensation and benefits, professional services and information technology.

Interest and Other Financing Costs, net

Interest and other financing costs, net relates primarily to interest expense on long-term borrowings. Interest and other financing costs, net also includes third-party costs associated with long-term borrowings that were capitalized as deferred financing costs and are being amortized over the term of the borrowing.

Provision for Income Taxes

The provision for income taxes represents federal, foreign, state and local income taxes. Our effective tax rate differs from the statutory U.S. income tax rate due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and nonrecurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, including certain business tax credits, state and local income taxes, tax audit settlements and the interaction of various global tax strategies. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

Foreign Currency Fluctuations

The impact from foreign currency translation assumes constant foreign currency exchange rates based on the rates in effect for the current year period were used in translation for the comparable prior 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.

 

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RESULTS OF OPERATIONS

The following tables present our sales and operating income from continuing operations, and related percentages, attributable to each operating segment for the three and nine months ended June 28, 2013 and June 29, 2012 (dollars in millions).

 

    Three Months Ended     Nine Months Ended  
    June 28, 2013     June 29, 2012     June 28, 2013     June 29, 2012  

Sales by Segment

  $     %     $     %     $     %     $     %  

FSS North America

  $ 2,405.9        69   $ 2,319.6        70   $ 7,217.8        69   $ 7,053.4        70

FSS International

    727.5        21     673.9        20     2,154.6        21     2,030.5        20

Uniform

    356.6        10     342.6        10     1,057.3        10     1,020.4        10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 3,490.0        100   $ 3,336.1        100   $ 10,429.7        100   $ 10,104.3        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended     Nine Months Ended  
    June 28, 2013     June 29, 2012     June 28, 2013     June 29, 2012  

Operating Income by Segment

  $     %     $     %     $     %     $     %  

FSS North America

  $ 73.1        59   $ 74.1        64   $ 298.9        79   $ 301.4        72

FSS International

    28.7        23     23.0        20     37.9        10     65.8        16

Uniform

    35.4        29     30.4        27     89.8        24     87.0        21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    137.2        111     127.5        111     426.6        113     454.2        109

Corporate

    (13.6     -11     (12.3     -11     (47.5     -13     (38.4     -9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 123.6        100   $ 115.2        100   $ 379.1        100   $ 415.8        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three and Nine Months Ended June 28, 2013 Compared to Three and Nine Months Ended June 29, 2012

Consolidated Overview

Sales of $3.5 billion for the third quarter of fiscal 2013 and $10.4 billion for the nine month period represented an increase of 5% and 3% over the prior year periods, respectively. This increase is primarily attributable to growth in the Healthcare and Education sectors and the facilities business in the Business & Industry sector of the FSS North America segment, growth in Ireland, China, Chile and Argentina in our FSS International segment and growth in the uniform rental business in our Uniform segment. This increase was partially offset by a sales decline in the U.K. in our FSS International segment. Sales for the nine month period of fiscal 2013 were negatively impacted as a result of the National Hockey League (“NHL”) lockout and the impact of Hurricane Sandy in our FSS North America segment.

Operating income for the third quarter of fiscal 2013 was $123.6 million compared to $115.2 million in the prior year period as profit growth in our Business & Industry and Education sectors more than offset severance and related costs of approximately $6.6 million (see Note 4 to our unaudited condensed consolidated financial statements) and approximately $4.5 million of costs related to transformation initiatives. Operating income for the nine month period of fiscal 2013 was $379.1 million compared to $415.8 million in the prior year period. The decline in operating income for the nine month period of fiscal 2013 was primarily due to $47.4 million of severance and related costs as a result of the series of actions the Company initiated in the second quarter of fiscal 2013 to drive efficiency through the consolidation and centralization of its operations (see Note 4 to our unaudited condensed consolidated financial statements). During the nine month period of fiscal 2013, the Company also recorded approximately $11.7 million of goodwill impairment charges (see Note 5 to our unaudited condensed consolidated financial statements), other asset write-downs of approximately $11.4 million primarily related to the write-offs of certain client contractual investments and approximately $17.1 million of costs related to transformation initiatives. In addition, the nine month period of fiscal 2013 was also negatively affected by the NHL lockout and Hurricane Sandy. This profit decline was partially offset by profit growth in our Business & Industry and Education sectors and other income recognized of approximately $14.0 million relating to the recovery of the

 

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Company’s investment (possessory interest) at one of the National Park Service (“NPS”) sites in the Sports, Leisure and Corrections sector, which was terminated in the current year. The nine month period of fiscal 2012 includes a favorable risk insurance adjustment of $7.4 million related to favorable claims experience, of which $5.7 million relates to our uniform rental business, transition and integration costs of $4.3 million related to the Filterfresh acquisition and severance related charges of $6.1 million in the Uniform segment and FSS International segment.

Interest and Other Financing Costs, net, for the three and nine month periods of fiscal 2013 decreased approximately by $20.7 million and $15.0 million when compared to the prior year periods, respectively. The decrease in the three month period of fiscal 2013 was primarily due to the repurchase of the 8.625% / 9.375% Senior Notes due 2016 (“Holdings Notes”), 8.50% senior notes due 2015 (“Fixed Rate Notes”) and senior floating rate notes due 2015 (“Floating Rate Notes”) (see Note 6 to our unaudited condensed consolidated financial statements). The decrease in the nine month period of fiscal 2013 was primarily due to the maturity of interest rate swaps during fiscal 2012. Interest and Other Financing Costs, net, for the nine months ended June 28, 2013 includes charges of $39.8 million in connection with the tender offer and repayment of the Holdings Notes, Fixed Rate Notes and Floating Rate Notes (see Note 6 to our unaudited condensed consolidated financial statements), consisting of $12.9 million of third-party costs for the tender offer premium and $26.9 million of non-cash charges for the write-off of deferred financing costs. Interest and Other Financing Costs, net, for the nine month period of fiscal 2013 also includes approximately $11.6 million of third-party costs incurred related to Amendment Agreement No. 3 to the senior secured credit agreement and approximately $3.2 million of hedge ineffectiveness related to the repayment of the Canadian subsidiary’s term loan with a maturity date of January 26, 2014. Interest and Other Financing Costs, net, for the nine month period of fiscal 2012 includes $10.5 million of third-party costs related to Amendment Agreement No. 2 and the amendment of the Company’s Canadian subsidiary cross currency swap.

The Company recorded a provision for income taxes of $14.7 million on pretax income of $42.7 million for the three months ended June 28, 2013 as compared to a benefit for income taxes of $(1.0) million on pretax income of $13.6 million in the prior year period. The change in the three months ended June 28, 2013 is primarily due to the tax benefit of discrete items included in the income tax provision in the third quarter of fiscal 2012. The effective income tax rate for the nine months of fiscal 2013 was 17.2% compared to 20.0% in the prior year period.

Net income for the three and nine month periods of fiscal 2013 was $28.0 million and $31.3 million, respectively, compared to $14.5 million and $47.8 million in the prior year periods, respectively. Net income attributable to noncontrolling interests for the three and nine month periods of fiscal 2013 was $0.2 million and $0.8 million, respectively, compared to $0.6 million and $2.4 million in the prior year periods, respectively.

 

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Segment Results

The following tables present a comparison of segment sales and operating income from continuing operations for the three and nine months ended June 28, 2013 and June 29, 2012 together with the amount of and percentage change between periods (dollars in millions).

 

Sales by Segment

  Three Months Ended     Nine Months Ended  
  June 28,
2013
    June 29,
2012
    Change     June 28,
2013
    June 29,
2012
    Change  
      $     %         $     %  

FSS North America

  $ 2,405.9      $ 2,319.6      $ 86.3        4   $ 7,217.8      $ 7,053.4      $ 164.4        2

FSS International

    727.5        673.9        53.6        8     2,154.6        2,030.5        124.1        6

Uniform

    356.6        342.6        14.0        4     1,057.3        1,020.4        36.9        4
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   
  $ 3,490.0      $ 3,336.1      $ 153.9        5   $ 10,429.7      $ 10,104.3      $ 325.4        3
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Operating Income by Segment

  Three Months Ended     Nine Months Ended  
  June 28,
2013
    June 29,
2012
    Change     June 28,
2013
    June 29,
2012
    Change  
      $     %         $     %  

FSS North America

  $ 73.1      $ 74.1      $ (1.0     -1   $ 298.9      $ 301.4      $ (2.5     -1

FSS International

    28.7        23.0        5.7        25     37.9        65.8        (27.9     *

Uniform

    35.4        30.4        5.0        16     89.8        87.0        2.8        3

Corporate

    (13.6     (12.3     (1.3     11     (47.5     (38.4     (9.1     24
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   
  $ 123.6      $ 115.2      $ 8.4        7   $ 379.1      $ 415.8      $ (36.7     -9
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

** —Not meaningful

FSS North America Segment

FSS North America segment sales for the three and nine month periods of fiscal 2013 increased 4% and 2% over the prior year periods, respectively, primarily due to growth in the Healthcare and Education sectors and in the facilities business in the Business & Industry sector. Sales for the three month period of fiscal 2013 were positively impacted by the timing of the Easter holiday. Sales for the nine month period of fiscal 2013 were negatively impacted by the NHL lockout and Hurricane Sandy. The negative impact of acquisitions and divestitures was approximately -1% in the three and nine month periods. The Business & Industry sector had flat sales for the third quarter and low-single digit sales decline for the nine month period of fiscal 2013 primarily due to the spin-off of Seamless North America, LLC (“Seamless”) in October 2012 and the impact of Hurricane Sandy on our business dining operations offset by growth in our facilities business. The Education sector had high-single digit sales growth for the third quarter and mid-single digit sales growth for the nine month period of fiscal 2013, due to base and net new business growth in our Higher Education and K-12 food and facilities businesses. The Healthcare sector had mid-single digit sales growth for the third quarter and low-single digit sales growth for the nine month period of fiscal 2013 primarily due to base business growth. The Sports, Leisure and Corrections sector had low-single digit sales growth for the third quarter due to growth in our Major League Baseball venues. For the nine month period of fiscal 2013, sales in the Sports, Leisure and Corrections sector were flat as growth in our Major League Baseball venues were offset by the effect of the NHL lockout.

Operating income for the three and nine month periods of fiscal 2013 was $73.1 million and $298.9 million compared to $74.1 million and $301.4 million in the prior year periods, respectively. The decrease in the third quarter of fiscal 2013 is due to approximately $6.6 million for severance and related costs and approximately $3.3 million of costs related to transformation initiatives, which more than offset the profit growth in our Business & Industry and Education sectors. The nine month period of fiscal 2013 was negatively affected by approximately $33.7 million of severance and related costs, $6.8 million of asset write-offs and approximately $14.4 million of costs related to transformation initiatives, which more than offset the profit growth in our Business & Industry and Education sectors and the other income recognized of approximately $14.0 million

 

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relating to the recovery of the Company’s investment (possessory interest) at one of the NPS sites in the Sports, Leisure and Corrections sector, which was terminated in the current year. The nine month period of fiscal 2013 was also negatively affected by the NHL lockout and Hurricane Sandy. Operating income for the nine month period of fiscal 2012 includes $4.3 million of transition and integration costs related to the Filterfresh acquisition.

FSS International Segment

Sales in the FSS International segment for the three and nine month periods of fiscal 2013 increased 8% and 6% compared to the prior year periods, respectively, as growth in Germany, Ireland, Chile, Argentina and China more than offset the sales decline in the U.K.

Operating income for the third quarter of fiscal 2013 was $28.7 million compared to $23.0 million in the prior year period. This increase was due to the profit growth in Germany, Chile and Spain offset by the negative impact of foreign currency translation (approximately -3%) and $1.2 million of costs related to transformation initiatives. Operating income for the nine month period of fiscal 2013 was $37.9 million compared to $65.8 million in the prior year period. The nine month period of fiscal 2013 was negatively affected by $12.8 million of severance and related costs, $16.3 million of goodwill impairment charges and other asset write-offs and $2.6 million of costs related to transformation initiatives as well as the negative impact of foreign currency translation (approximately -1%). Operating income for the nine month period of fiscal 2012 includes a favorable adjustment of $1.5 million related to a non-income tax settlement in the U.K. and $2.1 million of severance related expenses.

Uniform Segment

Uniform segment sales increased 4% for the three and nine month periods of fiscal 2013 compared to both prior year periods primarily due to growth in our uniform rental base business.

Operating income for the third quarter of fiscal 2013 was $35.4 million compared to $30.4 million in the prior year period. Operating income for the nine month period of fiscal 2013 was $89.8 million compared to $87.0 million in the prior year period. Operating income for the three and nine month periods of fiscal 2013 benefited from growth in the uniform rental business and operational efficiencies across the segment. Operating income for the nine month period of fiscal 2013 includes severance related expenses of $3.7 million and a net charge of approximately $3.5 million related to a multiemployer pension withdrawal and a preliminary settlement of wage and hour claims, net of a favorable risk insurance adjustment. Operating income for the nine month period of fiscal 2012 includes severance related charges of $4.0 million and a favorable risk insurance adjustment of $5.7 million.

Corporate

Corporate expenses, those administrative expenses not allocated to the business segments, were $13.6 million for the third quarter of fiscal 2013 compared to $12.3 million for the prior year period. The increase is primarily due to the reversal in the prior year period of share-based compensation expense previously recognized for the performance-based options. For the nine month period of fiscal 2013, corporate expenses were $47.5 million compared to $38.4 million for the prior year period. The nine month period of fiscal 2013 includes an accounting charge related to the retirement obligation to our current Chairman and former Chief Executive Officer and $0.9 million of severance and related costs.

 

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The following tables present our sales and operating income from continuing operations, and the related percentages, attributable to each operating segment, for the fiscal years 2012, 2011 and 2010 (dollars in millions). On September 30, 2011, the Company sold its wholly-owned subsidiary, Galls (see Note 2 to our consolidated financial statements). Accordingly, operating results for this business are reported as discontinued operations.

 

     Fiscal Year Ended
September 28,

2012
    Fiscal Year Ended
September 30,

2011
    Fiscal Year Ended
October 1,
2010
 

Sales by Segment

   $     %     $     %     $     %  

FSS North America

   $ 9,413.2        70   $ 9,019.0        69   $ 8,654.7        70

FSS International

     2,729.5        20     2,723.3        21     2,437.7        20

Uniform

     1,362.7        10     1,340.1        10     1,326.7        10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 13,505.4        100   $ 13,082.4        100   $ 12,419.1        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Fiscal Year Ended
September 28,

2012
    Fiscal Year Ended
September 30,
2011
    Fiscal Year Ended
October 1,
2010
 

Operating Income by Segment

   $     %     $     %     $     %  

FSS North America

   $ 425.6        73   $ 400.5        73   $ 350.6        73

FSS International

     89.9        15     79.9        15     75.3        16

Uniform

     118.1        21     117.3        21     102.7        22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     633.6        109     597.7        109     528.6        111

Corporate

     (51.8     -9     (50.6     -9     (51.1     -11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 581.8        100   $ 547.1        100   $ 477.5        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2012 Compared to Fiscal 2011

Consolidated Overview

Sales of $13.5 billion for fiscal 2012 represented an increase of 3% over the prior year. This increase is primarily attributable to growth in the Higher Education business and Business & Industry sector of the FSS North America segment, growth in Ireland, Germany, China, Chile and Argentina in our FSS International segment, growth in the uniform rental business in our Uniform segment and the impact of acquisitions (approximately 1%). Sales were also positively impacted from our role as the exclusive food service provider in the Athletes’ Villages for the London Olympics in the U.K. in our FSS International segment. This increase more than offset the sales decline in Spain in our FSS International segment and the negative impact of foreign currency translation (approximately -1%).

Operating income was $581.8 million for fiscal 2012 compared to $547.1 million for the prior year. This increase is primarily attributable to profit growth in our Higher Education business, our Healthcare sector and in the U.K., Ireland and Chile, offset by the negative impact of foreign currency translation (approximately -1%). Fiscal 2012 also includes other income recognized of $6.7 million relating to the recovery of the Company’s investment (possessory interest) at one of the National Park Service (“NPS”) sites in the Sports, Leisure and Corrections sector, which was terminated during fiscal 2012, a favorable risk insurance adjustment of $7.4 million related to favorable claims experience, of which $5.7 million relates to our uniform rental business, transition and integration costs of $4.9 million related to the Filterfresh acquisition and severance related charges of $6.9 million. Fiscal 2011 included a gain of approximately $7.7 million on the sale of the Company’s 67% ownership interest in the security business of its Chilean subsidiary, favorable non-income tax settlements of approximately $5.3 million in the U.K., a goodwill and other intangible assets impairment charge of $5.3 million, severance related charges of approximately $22.8 million, other income of approximately $7.8 million related to

 

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a compensation agreement signed with the NPS under which the NPS agreed to pay down a portion of our investment (possessory interest) in certain assets at one of our NPS sites in our Sports, Leisure and Corrections sector and a favorable risk insurance adjustment of $5.7 million.

Interest and Other Financing Costs, net, for fiscal 2012 increased approximately $5.7 million from the prior year primarily due to the impact of a full year of interest expense on the Holdings Notes compared to the prior year period, which more than offset the positive impact of interest rate swaps that matured during fiscal 2012. Interest and Other Financing Costs, net, for fiscal 2012 includes $7.5 million of third-party costs incurred related to the March 2012 amendment that extended the U.S. dollar equivalent of approximately $1,231.6 million of the Company’s term loans and approximately $3.6 million of hedge ineffectiveness incurred related to the Company’s amendment of its cross currency swaps. Interest and Other Financing Costs, net, for fiscal 2011 includes interest income related to $14.1 million of favorable non-income tax settlements in the U.K. recorded in the second quarter of fiscal 2011 and a write-off of deferred financing fees of $2.1 million related to the amendment that extended the U.S. dollar denominated portion of the revolving credit facility.

The effective income tax rate for fiscal 2012 was 14.5% compared to (0.8%) in the prior year. The higher effective income tax rate in fiscal 2012 is due to a reduction of approximately $17.0 million in reserves in fiscal 2011 related to the remeasurement of an uncertain tax position.

Income from continuing operations for fiscal 2012 was $106.9 million compared to $96.7 million in the prior year. Income (loss) from discontinued operations during fiscal 2012 was $0.3 million compared to $(11.7) million in fiscal 2011. Fiscal 2011 included the pretax loss of approximately $1.5 million (after-tax loss of approximately $12.0 million) related to the sale of the Company’s wholly-owned subsidiary, Galls, for approximately $75.0 million in cash (see Note 2 to our consolidated financial statements). Net income attributable to noncontrolling interests for fiscal 2012 was $3.6 million compared to $1.1 million in the prior year.

Segment Results

The following tables present a fiscal 2012/2011 comparison of segment sales and operating income from continuing operations together with the amount of and percentage change between periods (dollars in millions).

 

Sales by Segment

   Fiscal Year Ended
September 28,
2012
    Fiscal Year Ended
September 30,
2011
    $     %  

FSS North America

   $ 9,413.2      $ 9,019.0      $ 394.2        4

FSS International

     2,729.5        2,723.3        6.2       

Uniform

     1,362.7        1,340.1        22.6        2
  

 

 

   

 

 

   

 

 

   
   $ 13,505.4      $ 13,082.4      $ 423.0        3
  

 

 

   

 

 

   

 

 

   

Operating Income by Segment

   Fiscal Year Ended
September 28,
2012
    Fiscal Year Ended
September 30,
2011
    $     %  

FSS North America

   $ 425.6      $ 400.5      $ 25.1        6

FSS International

     89.9        79.9        10.0        13

Uniform

     118.1        117.3        0.8        1

Corporate

     (51.8     (50.6     (1.2     2
  

 

 

   

 

 

   

 

 

   
   $ 581.8      $ 547.1      $ 34.7        6
  

 

 

   

 

 

   

 

 

   

FSS North America Segment

FSS North America segment sales for fiscal 2012 increased 4% over the prior year primarily due to growth in the Higher Education business, the Sports, Leisure and Corrections and Business & Industry sectors and the positive impact of acquisitions (approximately 2%), which more than offset the negative impact of foreign

 

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currency translation (approximately -1%). The Business & Industry sector had high-single digit sales growth for fiscal 2012 primarily due to base business growth in our refreshment services and facilities businesses and the Filterfresh acquisition. This growth more than offset the sales decline in our business dining operations due to the impact of lost business. The Education sector had mid-single digit sales growth for fiscal 2012, due to base and net new business growth in our Higher Education food and facilities services businesses which more than offset the sales decline in K-12 due to the impact of lost business. The Healthcare sector had low-single digit sales growth for fiscal 2012 primarily due to base business growth and the full year effect of the 2011 acquisition of Masterplan within the Healthcare Technologies business. The Sports, Leisure and Corrections sector had low-single digit sales growth for fiscal 2012 primarily related to growth at our National Hockey League and Major League Baseball venues.

Operating income for fiscal 2012 was $425.6 million compared to $400.5 million in the prior year. The increase is due to profit growth in our Higher Education business and Healthcare sector and other income recognized of $6.7 million relating to the recovery of the Company’s investment (possessory interest) at one of the NPS sites in the Sports, Leisure and Corrections sector, which was terminated in the current year. This profit growth more than offset the negative impact of foreign currency translation (approximately -1%), the profit decline in our Business & Industry sector and the transition and integration costs of $4.9 million related to the Filterfresh acquisition. Fiscal 2011 included other income recognized in the first quarter of fiscal 2011 of $7.8 million related to a compensation agreement signed with the NPS under which the NPS agreed to pay down a portion of our investment (possessory interest) in certain assets at one of our NPS sites in our Sports, Leisure and Corrections sector and severance related charges of $6.2 million.

FSS International Segment

Sales in the FSS International segment for fiscal 2012 were flat compared to the prior year as growth in Ireland, Germany, China, Chile and Argentina and sales related to the London Olympics were offset by the negative impact of foreign currency translation (approximately -5%), divestitures (approximately -1%) and the sales decline in Spain.

Operating income for fiscal 2012 was $89.9 million compared to $79.9 million in the prior year. This increase is primarily attributable to profit growth in the U.K., Ireland and Chile and a reduction in severance related expenses, which more than offset the profit decline in Belgium and in our equity method investee in Japan and the negative impact of foreign currency translation (approximately -4%). Operating income for fiscal 2011 included a gain of $7.7 million related to the divestiture of the Company’s 67% ownership interest in the security business of its Chilean subsidiary, favorable non-income tax settlements in the U.K. of $5.3 million, a goodwill and other intangible assets impairment charge of $5.3 million and severance related expenses of $11.4 million.

Uniform Segment

Uniform segment sales increased 2% for fiscal 2012 compared to the prior year, resulting primarily from growth in our uniform rental business.

Operating income for fiscal 2012 was $118.1 million compared to $117.3 million in the prior year as the increase in favorable risk insurance adjustments compared to the prior year and a reduction in severance related expenses more than offset the fiscal 2012 increased investment in our growing sales force and higher energy costs. Operating income for fiscal 2012 includes a favorable risk insurance adjustment of $5.7 million compared to $4.8 million in the prior year. Operating income for fiscal 2012 also includes severance related charges of $2.6 million compared to $3.9 million in the prior year.

Corporate

Corporate expenses, those administrative expenses not allocated to the business segments, were $51.8 million in fiscal 2012, compared to $50.6 million for the prior year. The increase is mainly due to costs related to the hiring of our new Chief Executive Officer and President in May 2012, which more than offset the decrease in share-based compensation expense related to performance-based options (see Note 10 to our consolidated financial statements), gains due to the change in fair value on gasoline and diesel fuel agreements and prior year charges for headcount reductions.

 

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Fiscal 2011 Compared to Fiscal 2010

Consolidated Overview

Sales of $13.1 billion for fiscal 2011 represented an increase of 5% over the prior year. This increase is attributable to growth in the Education and Healthcare sectors of our FSS North America segment, growth in Ireland, Germany, Spain, Chile, Argentina and China in our FSS International segment, growth in the uniform rental business in our Uniform segment and the positive impact of foreign currency translation (approximately 1%). This increase more than offset the sales decline in our Sports, Leisure and Corrections sector of our FSS North America segment and in the U.K. and Korea in our FSS International segment.

Operating income was $547.1 million for fiscal 2011 compared to $477.5 million for the prior year. The increase in operating income in fiscal 2011 was attributable to profit growth in the Education and Healthcare sectors, operational efficiencies in our uniform rental business and the positive impact of foreign currency translation (approximately 2%), which more than offset the profit decline in our Business & Industry sector. Fiscal 2011 also includes a gain of approximately $7.7 million on the sale of the Company’s 67% ownership interest in the security business of its Chilean subsidiary, favorable non-income tax settlements of approximately $5.3 million in the U.K., a goodwill and other intangible assets impairment charge of $5.3 million, severance related charges of approximately $22.8 million, other income of approximately $7.8 million related to a compensation agreement signed with the NPS under which the NPS agreed to pay down a portion of our investment (possessory interest) in certain assets at one of our NPS sites in our Sports, Leisure and Corrections sector and a favorable risk insurance adjustment of $5.7 million.

Interest and other financing costs, net, for fiscal 2011 increased approximately $6.6 million from the prior year primarily due to interest expense on the Holdings Notes that were issued in April 2011 and the increase in interest rates mainly due to the amendment that extended $1,407.4 million of outstanding U.S. denominated term loan in the second quarter of fiscal 2010 (see Note 5 to our consolidated financial statements). These increases were partially offset by the increase in interest income related to the $14.1 million of favorable non-income tax settlements in the U.K. recorded in the second quarter of fiscal 2011 and $8.5 million of third-party costs incurred during fiscal 2010 related to the amendment that extended $1,407.4 million of outstanding U.S. denominated term loan.

The Company recorded a benefit for income taxes of $(0.7) million on pretax income of $96.0 million for fiscal 2011 as compared to a provision for income taxes of $0.7 million on pretax income of $33.0 million for fiscal 2010. The changes in both periods principally reflects the relative mix and amount of U.S. and non-U.S. income or loss and the impact of tax credits relative to pretax amounts. The benefit for income taxes in fiscal 2011 included a reduction of approximately $17.0 million in reserves in fiscal 2011 related to the remeasurement of an uncertain tax position.

Income from continuing operations for fiscal 2011 was $96.7 million, compared to $32.3 million in fiscal 2010. Loss from discontinued operations during fiscal 2011 was $(11.7) million compared to $(1.6) million in fiscal 2010. Fiscal 2011 includes the pretax loss of approximately $1.5 million (after-tax loss of approximately $12.0 million) related to the sale of the Company’s wholly-owned subsidiary, Galls, for approximately $75.0 million in cash (see Note 2 to the consolidated financial statements).

Net income attributable to noncontrolling interest for fiscal 2011 was $1.1 million.

 

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Segment Results

The following tables present a 2011/2010 comparison of segment sales and operating income from continuing operations together with the amount of and percentage change between periods (dollars in millions).

 

Sales by Segment

   Fiscal Year Ended
September 30,
2011
    Fiscal Year Ended
October 1,
2010
    $      %  

FSS North America

   $ 9,019.0      $ 8,654.7      $ 364.3         4

FSS International

     2,723.3        2,437.7        285.6         12

Uniform

     1,340.1        1,326.7        13.4         1
  

 

 

   

 

 

   

 

 

    
   $ 13,082.4      $ 12,419.1      $ 663.3         5
  

 

 

   

 

 

   

 

 

    

Operating Income by Segment

   Fiscal Year Ended
September 30,
2011
    Fiscal Year Ended
October 1,
2010
    $      %  

FSS North America

   $ 400.5      $ 350.6      $ 49.9         14

FSS International

     79.9        75.3        4.6         6

Uniform

     117.3        102.7        14.6         14

Corporate

     (50.6     (51.1     0.5         -1
  

 

 

   

 

 

   

 

 

    
   $ 547.1      $ 477.5      $ 69.6         15
  

 

 

   

 

 

   

 

 

    

FSS North America Segment

FSS North America segment sales for fiscal 2011 were $9.0 billion, an increase of 4% compared to the prior year as growth in the Education and Healthcare sectors more than offset the decline in the Sports, Leisure and Corrections sector. The Business & Industry sector had a low-single digit sales increase for fiscal 2011 as base business growth in our food and facilities services businesses more than offset the one-time sales in the prior year related to the contract to provide support services, including temporary accommodations and food, for the Canadian security detail that served the G-8 and G-20 meetings in Toronto. The Education sector had high-single digit sales growth for fiscal 2011 due to base and net new business growth in our Higher Education food and facilities services businesses. The Education sector also benefited from net new business growth in our K-12 food and facilities services businesses. In our Healthcare sector, we had high-single digit sales growth for fiscal 2011, primarily due to base business growth across the sector and the acquisition of Masterplan. Our Sports, Leisure and Corrections sector had a low-single digit sales decline for fiscal 2011 as growth in our National Hockey League venues and in our stadiums was more than offset by a reduction in the number of events in our amphitheaters, the impact of prior year lost business and sales in the prior year related to the Winter Olympics.

Operating income in the FSS North America segment was $400.5 million for fiscal 2011 compared to $350.6 million in the prior year as profit growth in our Education and the Healthcare sectors, the positive impact of foreign currency translation (approximately 1%) and other income recognized of $7.8 million related to a compensation agreement signed with the NPS under which the NPS agreed to pay down a portion of our investment (possessory interest) in certain assets at one of our NPS sites in our Sports, Leisure and Corrections sector more than offset the profit decline in our Business & Industry sector and severance related charges of $6.2 million.

FSS International Segment

Sales in the FSS International segment for fiscal 2011 were $2.7 billion, an increase of 12% compared to the prior year, as growth in base and net new business in Ireland, Germany, Spain, Chile, and China and the positive impact of foreign currency translation (approximately 5%) more than offset the sales declines in the U.K. and Korea.

 

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Operating income for fiscal 2011 was $79.9 million, an increase of 6% over the prior year period as profit growth in Germany and Ireland and the positive impact of foreign currency translation (approximately 6%) more than offset the profit declines in China and Chile. In addition, severance related charges of approximately $11.4 million and the goodwill and other intangible assets impairment charge of $5.3 million more than offset the approximately $7.7 million gain on the sale of our 67% ownership interest in a security business in our Chilean subsidiary, favorable non-income tax settlements of $5.3 million in the U.K. and the $1.7 million gain on the sale of land in Chile.

Uniform Segment

In the Uniform segment, sales for fiscal 2011 were $1.3 billion, up 1% from the prior year, resulting primarily due to growth in our uniform rental base business.

Operating income for fiscal 2011 was $117.3 million compared to $102.7 million in the prior year, primarily due to profit growth in our uniform rental business and operational efficiencies across the segment. Operating income in fiscal 2011 also benefited from a gain of $2.6 million related to a property settlement of an eminent domain claim and a favorable risk insurance adjustment of $4.8 million based on favorable claims experience, which more than offset severance related charges of approximately $3.9 million.

Corporate

Corporate expenses, those administrative expenses not allocated to the business segments, were $50.6 million in fiscal 2011, compared to $51.1 million for the prior year. The decrease is mainly due to the decrease in share-based compensation expense related to performance-based options (see Note 10 to our consolidated financial statements) which was partially offset by charges for headcount reductions.

Quarterly Financial Data

The following table presents select historical quarterly consolidated statements of operations data for fiscal 2011, fiscal 2012 and the nine months ended June 28, 2013.

This quarterly information has been prepared using our unaudited condensed consolidated financial statements and only includes all normal recurring adjustments necessary for a fair presentation of the results of the interim periods.

 

(in millions)   Quarter Ended  
    December 31,
2010
    April 1,
2011
    July 1,
2011
    September 30,
2011
    December 30,
2011
    March 30,
2012
    June 29,
2012
    September 28,
2012
    December 28,
2012
    March 29,
2013
    June 28,
2013
 

Sales

  $ 3,284      $ 3,220      $ 3,286      $ 3,292      $ 3,423      $ 3,345      $ 3,336      $ 3,401      $ 3,536      $ 3,404      $ 3,490   

Operating Income

    164        122        109        152        167        134        115        166        175        80        124   

Net income (loss) attributable to ARAMARK stockholders

  $ 39      $ 20      $ (8   $ 33      $ 30      $ 1      $ 14      $ 59      $ 43      $ (40   $ 27   

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 June 28, 2013, we had $97.8 million of cash and cash equivalents and approximately $447.0 million of availability under our senior secured revolving credit facility.

We believe that our cash and cash equivalents and the unused portion of our committed credit availability under our senior secured revolving credit facility will be adequate to meet anticipated cash requirements to fund working capital, capital spending, debt service obligations, refinancings and other cash needs. We believe we enjoy a strong liquidity position overall and we will continue to seek to invest strategically but prudently in certain sectors and geographies. Over time, the Company has repositioned its service portfolio so that today a significant portion of the operating income in our

 

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FSS North America segment comes from sectors and businesses such as Education, Healthcare and corrections, which we believe to be economically less sensitive. In addition, we have worked to further diversify our international business by geography and sector. The Company routinely monitors its cash flow and the condition of the capital markets in order to be prepared to respond to changing conditions.

The table below summarizes our cash activity (in millions):

 

     Nine Months Ended     Fiscal Year  
      June 28, 2013     June 29, 2012     2012     2011     2010  

Net cash provided by operating activities

   $ 136.3      $ 136.7      $ 691.8     $ 303.6     $ 634.0  

Net cash used in investing activities

     (252.1     (363.4     (481.6 )     (363.1 )     (353.5 )

Net cash (used in) provided by financing activities

     76.8        114.3        (286.8 )     112.0       (344.2 )

Reference to the Condensed Consolidated Statements of Cash Flows and Consolidated Statements of Cash Flows will facilitate understanding of the discussion that follows.

Cash Flows Provided by Operating Activities

For the nine months ended June 28, 2013, the decrease in the total of net income and noncash charges results mainly from the results of operations of the Company as discussed above. As expected and consistent with historical patterns, working capital was a use of cash for us during the nine month period of fiscal 2013. The change in working capital requirements relates principally to changes in Accounts Receivable (approximately $14.2 million) primarily due to business growth and the timing of collections, Prepayments (approximately $22.9 million) due to the timing of estimated tax payments and Accounts Payable (approximately $10.8 million) primarily due to business growth and the timing of disbursements, offset by changes in Inventory (approximately $23.0 million) due to less inventory purchases in our Uniform segment and seasonality within some of our businesses. The “Other, net” caption reflects adjustments to net income in the current year and prior year periods related to nonoperating gains and losses, which are primarily non-cash and include goodwill impairments and other financing related charges and write-offs.

During fiscal 2012, the increase in the total of net income and noncash charges results mainly from the overall growth of the business and higher results of operations of the Company, as discussed above. A portion of the net change in cash provided by operating activities was driven by the new accounting treatment for the Company’s accounts receivable securitization agreement. On October 2, 2010, the Company adopted new accounting guidance that affected the presentation of its accounts receivables securitization program, through which the Company sells eligible accounts receivables on a revolving basis. As a result of implementing the new guidance, funding under the agreement of $220.9 million on October 2, 2010 was reflected in the Company’s Consolidated Statement of Cash Flows as a use of cash from the securitization of accounts receivables under net cash provided in operating activities and as a source of cash under net cash (used in) provided by financing activities in fiscal 2011. As expected and consistent with historical patterns, working capital was a source of cash for us during fiscal 2012. The change in working capital requirements relates principally to changes in Accounts Receivable (approximately $66.7 million), primarily due to the improvement and timing of collections offset by the overall growth in the business, Accounts Payable (approximately $57.0 million), due to the timing of disbursements and Prepayments (approximately $41.4 million), primarily due to the timing of income tax payments, partially offset by changes in Inventory (approximately $24.3 million), primarily due to the growth of the business. The increase in the “Other, net” caption is primarily due to $34.9 million of cash distributions received in fiscal 2012 versus $10.5 million in fiscal 2011 from our 50% ownership interest in AIM Services Co., Ltd. The “Other, net” caption also reflects adjustments to net income in the current year and prior year periods related to nonoperating gains and losses.

During fiscal 2011, the increase in the total of net income and noncash charges results mainly from the overall growth of the business and higher results of operations of the Company, as discussed above. Cash flows provided by operating activities include an increase in accounts receivable of $220.9 million associated with the

 

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Company’s adoption of the new authoritative accounting guidance related to the transfer of financial assets in the first quarter of fiscal 2011. Effective October 2, 2010, the periodic transfers of undivided interests in accounts receivable no longer qualify for sale accounting treatment in accordance with the new accounting guidance and are now accounted for as secured borrowings. Cash flows after October 2, 2010 associated with the receivables facility are presented as financing activities. During fiscal 2011, the Company’s accounts receivable increased by $220.9 million resulting in a cash outflow being reported in the operating section of the Consolidated Statement of Cash Flows and the secured borrowings associated with the Receivables Facility increased by $225.9 million resulting in a cash inflow being reported in the financing section of the Consolidated Statement of Cash Flows. As expected, working capital was a use of cash during fiscal 2011. The change in working capital requirements relates principally to changes in Accounts Receivable (approximately $42.6 million), primarily due to the overall growth of the business and timing of collections, Inventory (approximately $44.9 million) due to growth of the business, Accounts Payable (approximately $47.7 million) due to timing of disbursements and Accrued Expenses (approximately $35.7 million) due to the timing of commissions and income tax payments as compared to the prior year period. The “Other, net” caption reflects adjustments to net income related to nonoperating gains and losses.

During fiscal 2010, the increase in the total of net income and noncash charges results mainly from the improved results of operations of the Company. The change in working capital requirements relates principally to changes in Accounts Receivable (approximately $238.8 million), primarily due to the improvement in collection efforts in fiscal 2009 that created a large source of cash, whereas fiscal 2010 has been a normal use of cash, and Inventory (approximately $54.4 million), primarily due to inventory reductions in the Uniform segment and other Company-wide inventory control measures in fiscal 2009, partially offset by changes in Accounts Payable (approximately $149.5 million), due to timing of disbursements, and Accrued Expenses (approximately $43.2 million) due to an increase in accrued commissions and timing of advanced payments. The “Other, net” caption decreased primarily due to $24.2 million of cash distributions received in fiscal 2009 versus $8.2 million in fiscal 2010 from our 50% ownership interest in AIM Services Co., Ltd. and fluctuations in certain noncurrent liabilities (retirement plans and insurance).

Cash Flows Used in Investing Activities

For the nine months ended June 28, 2013, the Company received proceeds of approximately $15.3 million related to the recovery of our investment (possessory interest) in certain assets at one of our NPS sites in our Sports, Leisure and Corrections sector, which was terminated in the current year.

During fiscal 2012, ARAMARK Refreshment Services, LLC, a subsidiary of the Company, acquired all of the outstanding shares of common stock of Van Houtte USA Holdings, Inc. (doing business as “Filterfresh”), a refreshment services company, for approximately $145.2 million. The acquisition was financed with cash on hand and borrowings under the Company’s revolving credit facility. Under the terms of the purchase agreement, if a certain significant customer relationship was not maintained within a specific timeframe, the Company was entitled to a refund of a portion of the purchase price. During fiscal 2012, the Company received a refund of approximately $7.4 million related to the termination of this customer relationship. During fiscal 2012, the Company received $5.5 million in cash related to the settlement of indemnity claims filed against the former owners of Masterplan. During fiscal 2012, the Company received proceeds of approximately $7.3 million related to the recovery of our investment (possessory interest) at one of our NPS sites in our Sports, Leisure and Corrections sector which was terminated in the current year.

During fiscal 2011, ARAMARK Clinical Technology Services, LLC, a subsidiary of the Company, purchased the common stock of the ultimate parent company of Masterplan, a clinical technology management and medical equipment maintenance company, for cash consideration of approximately $154.2 million. During fiscal 2011, the Company completed the sale of its wholly-owned subsidiary, Galls, for approximately $75.0 million in cash. The Company, also during fiscal 2011, completed the sale of the Company’s 67% ownership interest in a security business in its Chilean subsidiary for approximately $11.6 million in cash. During fiscal

 

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2011, the Company received proceeds of $7.8 million related to a compensation agreement signed with the NPS under which the NPS agreed to pay down a portion of our investment (possessory interest) in certain assets at one of our NPS sites in our Sports, Leisure and Corrections sector.

During fiscal 2010, the Company completed the acquisition of the facilities management and property management businesses of Veris plc, an Irish company, for consideration of approximately $74.3 million in cash.

Cash Flows Provided by (Used in) Financing Activities

During the nine months ended June 28, 2013, the Company completed the spin-off of its majority interest in Seamless to its stockholders. In the spin-off, ARAMARK Corporation distributed all of the issued and outstanding shares of the common stock of Seamless Holdings Corporation (“Seamless Holdings”), an entity formed for the purpose of completing the spin-off and whose assets primarily consist of the Company’s former interest in Seamless, to its parent company and sole stockholder, ARAMARK Intermediate Holdco Corporation (“ARAMARK Intermediate”). Thereafter, ARAMARK Intermediate distributed such shares to the Company, its parent company and sole stockholder, who then distributed all of the shares of Seamless Holdings on a pro rata basis to the holders of ARAMARK Holdings common stock as of October 26, 2012, the record date, through a tax-free stock dividend. Each ARAMARK Holdings stockholder received one share of Seamless Holdings common stock for each share of ARAMARK Holdings common stock held as of the record date. The Company distributed cash of approximately $47.4 million to Seamless prior to the spin-off.

On February 22, 2013, ARAMARK Corporation amended the senior secured credit agreement (“Amendment Agreement No. 4”) to provide for, among other things, additional term loans and the extension of a portion of the revolving credit facility. On March 7, 2013, ARAMARK Corporation borrowed $1,400 million of term loans pursuant to Amendment Agreement No. 4. The new term loans were borrowed by ARAMARK Corporation with an original issue discount of 0.50% and mature on September 7, 2019. During the second quarter of fiscal 2013, approximately $14.0 million of third-party costs directly attributable to the term loans borrowed pursuant to Amendment Agreement No. 4 were capitalized and are included in “Other Assets” in the Condensed Consolidated Balance Sheets, of which approximately $6.2 million were paid to entities affiliated with GS Capital Partners and J.P. Morgan Partners. Amendment Agreement No. 4 also provided for the extension, from January 26, 2015 to January 26, 2017, of the maturity of $500 million in revolving lender commitments of the existing $550 million revolving credit facility. Third-party costs directly attributable to the revolving credit facility of approximately $2.8 million were capitalized and are included in “Other Assets” in the Condensed Consolidated Balance Sheets, of which approximately $0.6 million were paid to entities affiliated with GS Capital Partners and J.P. Morgan Partners.

On December 20, 2012, ARAMARK Corporation amended the senior secured credit agreement (“Amendment Agreement No. 3”) to, among other things, borrow $670 million of new term loans with a maturity date of July 26, 2016. The proceeds of the new term loans were used primarily to repay approximately $650 million of existing term loans with a maturity date of January 26, 2014 and to fund certain discounts, fees and costs associated with the amendment. During the first quarter of fiscal 2013, approximately $11.6 million of third-party costs directly attributable to the amendment were expensed and are included in “Interest and Other Financing Costs, net” in the Condensed Consolidated Statements of Income. Approximately $4.6 million of the third-party costs were paid to entities affiliated with GS Capital Partners and J.P. Morgan Partners.

On March 7, 2013, ARAMARK Corporation issued $1,000 million of 5.75% Senior Notes due 2020 (the “Senior Notes”) pursuant to a new indenture, dated as of March 7, 2013 (the “Indenture”), entered into by ARAMARK Corporation. During the second quarter of fiscal 2013, approximately $13.8 million of third-party costs directly attributable to the Senior Notes were capitalized and are included in “Other Assets” in the Condensed Consolidated Balance Sheets. Approximately $7.3 million of the third-party costs were paid to entities affiliated with GS Capital Partners and J.P. Morgan Partners.

 

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In February 2013, ARAMARK Corporation and the Company commenced a tender offer to purchase for cash any and all of the Holdings Notes, the Fixed Rate Notes and the Floating Rate Notes (collectively, the “Notes”). On March 7, 2013, ARAMARK Corporation used a portion of the aggregate proceeds of the Senior Notes offering and the borrowings under the new term loans pursuant to Amendment Agreement No. 4 to purchase all Notes tendered by March 6, 2013, the early tender date. On March 7, 2013, ARAMARK Corporation issued redemption notices for the portions of ARAMARK Corporation’s Fixed Rate Notes and Floating Rate Notes that remained outstanding, including accrued and unpaid interest, as of March 7, 2013, which provided for the redemption of such notes on April 6, 2013 at prices of 100% of the principal amount thereof. On March 7, 2013, the Company issued a redemption notice for the portion of the Holdings Notes that remained outstanding as of March 7, 2013, including accrued and unpaid interest, which notices provided for the redemption of the Holdings Notes on May 1, 2013 at a price of 101% of the principal amount thereof. On March 7, 2013, ARAMARK Corporation and the Company deposited sufficient funds in trust with the trustee under the indenture governing the Notes in full and complete satisfaction and discharge of the remaining aggregate principal amount of such notes, including accrued and unpaid interest (the “Satisfaction and Discharge”). As a result of the Satisfaction and Discharge, the trustee became the primary obligor for payment of the remaining Notes on or about the redemption notice date of March 7, 2013. ARAMARK Corporation and the Company had a contingent obligation for payment of the Notes were the trustee to default on its payment obligations. The Company believed the risk of such default was remote and therefore did not record a related liability. The remaining Fixed Rate Notes and Floating Rate Notes were redeemed by the trustee on April 6, 2013. The remaining Holdings Notes were redeemed by the trustee on May 1, 2013. In connection with the tender offer and Satisfaction and Discharge of the Notes, the Company recorded $39.8 million of charges to “Interest and Other Financing Costs, net” in the Condensed Consolidated Statements of Income for the nine months ended June 28, 2013, consisting of $12.9 million cash charges for the tender offer premium and $26.9 million of non-cash charges for the write-off of deferred financing costs.

During fiscal 2012, the Company’s 5.00% Senior Notes, contractually due in June 2012, were paid in full. The Company, also during fiscal 2012, paid an amendment fee of approximately $3.2 million and third-party costs of approximately $7.5 million related to Amendment Agreement No. 2 to the senior secured credit agreement, which extended the maturity date of an aggregate U.S. dollar equivalent of approximately $1,231.6 million of the Company’s term loans and $66.7 million of letter of credit deposits securing the Company’s synthetic letter of credit facility to July 26, 2016. Approximately $4.5 million of the third-party costs were paid to entities affiliated with GS Capital Partners and J.P. Morgan Partners.

During fiscal 2011, the Company paid commitment fees and third-party costs of approximately $7.2 million, of which approximately $3.9 million were paid to entities affiliated with GS Capital Partners and J.P. Morgan Partners, related to an Amendment Agreement to the senior secured credit agreement that extended, from January 2013 to January 2015, the maturity of, and increased, from $435 million to $500 million, the U.S. dollar denominated portion of its existing revolving credit facility. In addition, during fiscal 2011, the Company paid third-party costs of approximately $14.6 million, of which approximately $8.3 million were paid to entities affiliated with GS Capital Partners and J.P. Morgan Partners, related to the private placement of $600 million, net of a 1% discount, in aggregate principal amount of the Holdings Notes. The Company used the net proceeds from the offering of the Holdings Notes, along with $132.7 million in borrowings under the extended U.S. dollar revolving credit facility, to pay an approximately $711 million dividend to the Company’s stockholders and to pay fees and expenses related to the issuance of the Holdings Notes. During fiscal 2011, the Company sold a noncontrolling ownership interest in Seamless North America, LLC, an online and mobile food ordering service, for consideration of $50.0 million in cash.

In June 2010 and September 2010, the Company made optional prepayments of outstanding un-extended U.S. dollar term loan of $150.0 million and $150.0 million, respectively. In addition, during fiscal 2010, the Company paid consenting lenders a one-time amendment fee of approximately $1.9 million in the aggregate on their total loan commitments and approximately $8.5 million of third-party costs related to the amended and restated senior secured credit agreement, which among other things, (i) extended the maturity date of $1,407.4

 

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million of the Company’s U.S. denominated term loan and $92.6 million of the letter of credit deposits securing the Company’s synthetic letter of credit facility to July 26, 2016, (ii) permits future extensions and refinancings of the maturity date of the Company’s term loans, letter of credit deposits and revolving credit commitments under the Restated Credit Agreement, (iii) establishes a sub-limit of $250 million for letters of credit under the Restated Credit Agreement’s revolving credit facility, and (iv) permits the Company to refinance term loans in the future with the proceeds of unsecured or secured notes issued by the Company; provided that any such secured notes are subject to a customary first- or second-lien intercreditor agreement, as applicable.

Our Indebtedness

Senior Secured Credit Facilities

Our senior secured credit facilities currently provide:

 

   

a total of $4,686.8 million in term loan facilities comprised of various tranches denominated in U.S. Dollars, Canadian dollars, euros, yen and pounds sterling;

 

   

a revolving credit facility of up to $605.0 million available for loans denominated in U.S. Dollars, $50.0 million of which is also available in Canadian dollars; and

 

   

a synthetic letter of credit facility of up to $200.0 million.

The primary borrower under the senior secured credit facilities is ARAMARK Corporation. In addition, certain subsidiaries of ARAMARK Corporation are borrowers under certain tranches of the term loan facility and/or the revolving credit facility. Holdings is not a guarantor under the senior secured credit facilities and is not subject to the covenants or obligations under the senior secured credit agreement.

The revolving credit facility currently consists of the following subfacilities:

 

   

a revolving credit facility available for loans in U.S. dollars to ARAMARK Corporation with aggregate commitments of $555.0 million; and

 

   

a revolving credit facility available for loans in Canadian dollars or U.S. dollars to ARAMARK Canada, Ltd. or ARAMARK Corporation with aggregate commitments of $50.0 million.

The final maturity date of $505.0 million of the $555.0 million U.S. revolving loan commitments and of all of the Canadian revolving loan commitments is January 26, 2017, provided, however, that the maturity date accelerates to April 26, 2016 if any term loans, other than the term loans due September 7, 2019 and any other term loans with a maturity at least 91 days after January 26, 2017, remain outstanding on April 26, 2016. The final maturity date of the $50.0 million of remaining U.S. dollar revolving loan commitments is January 26, 2015.

Our revolving credit facility includes a $250.0 million sublimit for letters of credit and includes borrowing capacity available for short-term borrowings referred to as swingline loans subject to a sublimit.

The senior secured credit facilities provide that we have the right at any time to request up to $675.0 million of incremental commitments in the aggregate under one or more incremental term loan facilities and/or synthetic letter of credit facilities and/or revolving credit facilities and/or by increasing commitments under the revolving credit facility. The lenders under these facilities are not under any obligation to provide any such incremental facilities or commitments, and any such addition of or increase in facilities or commitments will be subject to pro forma compliance with an incurrence-based financial covenant and customary conditions precedent. Our ability to obtain extensions of credit under these incremental facilities or commitments is subject to the same conditions as extensions of credit under the existing credit facilities.

As of June 28, 2013, outstanding term loan borrowings were $4,678.7 million and outstanding revolving credit borrowings were $142.0 million.

 

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Senior Notes

On March 7, 2013, ARAMARK Corporation issued $1,000 million of 5.75% Senior Notes due 2020 (the “senior notes”) pursuant to the indenture, dated as of March 7, 2013 (the “Indenture”), among the ARAMARK Corporation, the guarantors named therein and The Bank of New York Mellon, as trustee.

The senior notes are unsecured obligations of ARAMARK Corporation. The senior notes rank equal in right of payment to all of ARAMARK Corporation’s existing and future senior debt and senior in right of payment to all of ARAMARK Corporation’s existing and future debt that is expressly subordinated in right of payment to the senior notes. Each of the guarantors named in the Indenture (each a “ Senior Notes Guarantor”) is providing an unconditional guarantee of the senior notes which ranks equal in right of payment to all of the senior obligations of such Senior Notes Guarantor. The senior notes and the guarantees are effectively subordinated to ARAMARK Corporation’s existing and future secured debt and that of the Senior Notes Guarantors, including all indebtedness under our senior secured credit facilities, to the extent of the value of the assets securing that indebtedness. The senior notes and guarantees are structurally subordinated to all of the liabilities of any of ARAMARK Corporation’s subsidiaries that do not guarantee the senior notes.

Interest on the senior notes is payable on March 15 and September 15 of each year, commencing on September 15, 2013. Interest on the senior notes will accrue from March 7, 2013. Interest will be calculated on the basis of a 360-day year of twelve 30-day months. The senior notes mature on March 15, 2020.

Holdings does not currently guarantee the senior notes and is not subject to the covenants that apply to ARAMARK Corporation or its restricted subsidiaries under the senior notes. Following completion of this offering, it is intended that Holdings will guarantee the senior notes for purposes of financial reporting, but will not become subject to any covenants under the senior notes.

Receivables Facility

We have in place an agreement whereby ARAMARK Receivables, LLC (“ARAMARK Receivables”), a wholly-owned, bankruptcy-remote subsidiary of ARAMARK Corporation, purchases accounts receivable generated by certain of our operating subsidiaries using funding provided through the sale of an interest in such accounts receivable and other related assets to Wells Fargo Bank, N.A. (“Wells Fargo”) and a commercial paper conduit (the “Commercial Paper Conduit”) sponsored by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., New York Branch (“Rabobank”). This receivables facility provides an amount of funding up to a maximum of $300.0 million. The availability of funding under the facility depends on the amount of receivables eligible for funding under the receivables facility and satisfaction of other customary conditions. As of June 28, 2013, we had outstanding borrowings under the receivables facility of $300.0 million.

Availability of funding under the receivables facility depends primarily upon the outstanding accounts receivable balance of our subsidiaries that participate in the facility. Aggregate availability is determined by using a formula that reduces the gross receivables balance by factors that take into account, among other things, historical default and dilution rates, excessive obligor concentrations and average days outstanding and the costs of the facility.

The Commercial Paper Conduit may discontinue funding the receivables facility at any time for any reason. If it does, Rabobank will be obligated to fund the Commercial Paper Conduit’s proportion of the receivables facility.

Twenty-three of our subsidiaries participate in the receivables facility program all of which are domestic subsidiaries in our FSS North America segment.

Covenant Compliance

The senior secured credit agreement contains a number of covenants that, among other things, restrict our ability to: incur additional indebtedness; issue preferred stock or provide guarantees; create liens on assets;

 

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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 notes, 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 the notes (or any indebtedness that refinances the notes); and fundamentally change the Company’s business. The indenture governing our senior notes contains similar provisions. As of June 28, 2013, we were in compliance with these covenants.

Under the senior secured credit agreement and the indenture governing our senior notes we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants. Our continued ability to meet those financial ratios, tests and covenants can be affected by events beyond our control, and we cannot assure you 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 EBITDA” and “Covenant Adjusted EBITDA.” Covenant EBITDA and Covenant Adjusted EBITDA are not measurements of financial performance under U.S. GAAP. Covenant EBITDA is defined as net income (loss) of ARAMARK Corporation and its restricted subsidiaries plus interest and other financing costs, net, provision (benefit) for income taxes, and depreciation and amortization. Covenant Adjusted EBITDA is defined as Covenant EBITDA, further adjusted to give effect to adjustments required in calculating covenant ratios and compliance under our senior secured credit agreement and the indenture.

Covenant EBITDA and Covenant Adjusted EBITDA are included in this section to provide additional information to investors about the calculation of certain financial measures in the senior secured credit agreement and the indenture governing our senior notes that are calculated by reference to Covenant Adjusted EBITDA. 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 EBITDA and 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.

 

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The following is a reconciliation of net income attributable to ARAMARK Corporation stockholder, which is a U.S. GAAP measure of ARAMARK Corporation’s operating results, to Covenant Adjusted EBITDA as defined in our debt agreements. The terms and related calculations are defined in the senior secured credit agreement and the indenture governing our senior notes. Covenant EBITDA and Covenant Adjusted EBTIDA are measures of ARAMARK Corporation and its restricted subsidiaries only and do not include the results of Holdings.

 

(dollars in millions)    Twelve
Months
Ended
June 28,
2013
    Twelve
Months
Ended
June 29,
2012
    Twelve
Months
Ended
September 28,
2012
    Twelve
Months
Ended
September 30,
2011
    Twelve
Months
Ended
October 1,
2010
 

Net income attributable to ARAMARK Corporation stockholder

   $ 130.0      $ 113.0      $ 138.3      $ 100.1      $ 30.7   

Interest and other financing costs, net

     377.0        426.2        401.7        426.3        444.5   

Provision for income taxes

     37.3        14.3        38.8        9.0        0.7   

Depreciation and amortization

     537.7        524.0        529.2        510.5        502.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Covenant EBITDA

     1,082.0        1,077.5        1,108.0        1,045.9        978.8   

Share-based compensation expense

     15.4        18.1        15.7        17.3        21.3   

Unusual or non-recurring (gains)/losses(1)

     2.0        10.7        (6.7     1.8        6.4   

Pro forma EBITDA for equity method investees(2)

     22.7        25.8        26.0        23.6        22.2   

Pro forma EBITDA for certain transactions(3)

     —          3.1        (0.1     2.0        1.8   

Seamless North America, LLC EBITDA(4)

     (7.3     (15.7     (17.5     (17.2     —     

Other(5)

     58.3        16.8        10.3        26.8        5.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Covenant Adjusted EBITDA

   $ 1,173.1      $ 1,136.3      $ 1,135.7      $ 1,100.2      $ 1,035.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The twelve months ended June 28, 2013 includes: goodwill impairment charges in Spain and Korea, asset write-downs mainly related to client contract investments and other income related to the Company’s investments (possessory interest) at two of our terminated National Park Service (“NPS”) client sites. Fiscal 2012 includes other income recognized related to our investment (possessory interest) at one of our NPS sites which was terminated in the prior year. Fiscal 2011 includes the after-tax loss on the sale of our Galls business, the gain on the sale of our 67% ownership interest in a security business in Chile, goodwill and other intangible assets impairment charge and other income related to a compensation agreement signed with the NPS under which the NPS agreed to pay down a portion of our investment (possessory interest) in certain assets at one of our NPS sites.
(2) Represents our estimated share of EBITDA from our AIM Services Co., Ltd. equity method investment not already reflected in Covenant EBITDA. EBITDA for this equity method investee is calculated in a manner consistent with Covenant EBITDA but does not represent cash distributions received from this investee.
(3) Represents the annualizing of estimated EBITDA from acquisitions and divestitures made during the period.
(4) During fiscal 2011, the Company sold a noncontrolling ownership interest in Seamless North America, LLC. In connection with the sale, we designated Seamless North America, LLC as an Unrestricted Subsidiary under the senior secured credit agreement, and as a result, its EBITDA for all periods presented are excluded from Covenant Adjusted EBITDA.
(5) Other includes certain other miscellaneous items (primarily severance related expenses).

 

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Our covenant requirements and actual ratios for the twelve months ended June 28, 2013 are as follows:

 

     Covenant
Requirements
     Actual
Ratios
 

Maximum Consolidated Secured Debt Ratio(1)

     5.75x         4.35x   

Interest Coverage Ratio (Fixed Charge Coverage Ratio)(2)

     2.00x         3.46x   

 

(1) Our senior secured credit agreement requires us to maintain a maximum Consolidated Secured Debt Ratio, defined as consolidated total indebtedness secured by a lien to Covenant Adjusted EBITDA, of 5.875x, being reduced over time to 5.125x by the end of 2016. Consolidated total indebtedness secured by a lien is defined in the senior secured credit agreement as total indebtedness outstanding under the senior secured credit agreement, capital leases, advances under the receivables facility and any other indebtedness secured by a lien reduced by the lesser of the amount of cash and cash equivalents on our balance sheet that is free and clear of any lien and $75 million. Non-compliance with the maximum Consolidated Secured Debt Ratio could result in the requirement to immediately repay all amounts outstanding under such agreement, which, if the Company’s revolving credit facility lenders failed to waive any such default, would also constitute a default under our indenture.
(2) Our senior secured 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. 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 incur additional indebtedness, other than the additional funding provided for under the senior secured credit agreement and pursuant to specified exceptions, and make certain restricted payments, other than pursuant to certain exceptions. The minimum Interest Coverage Ratio is 2.00x for the term of the senior secured credit agreement. Consolidated interest expense is defined in the senior secured 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 indenture governing our senior notes includes a similar requirement which is referred to as a Fixed Charge Coverage Ratio.

The Company and its subsidiaries, affiliates or significant stockholders may from time to time, in their sole discretion, purchase, repay, redeem or retire any of the Company’s 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 the Company’s outstanding indebtedness.

 

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Contractual Obligations

The following table summarizes the Company’s future obligations for debt repayments, capital leases, estimated interest payments, future minimum rental and similar commitments under noncancelable operating leases as well as contingent obligations related to outstanding letters of credit and guarantees as of September 28, 2012 (dollars in thousands):

 

     Payments Due by Period  
Contractual Obligations as of September 28, 2012    Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Long-term borrowings(1)(5)

   $ 5,963,697       $ 26,187       $ 2,743,119       $ 3,194,391       $ —     

Capital lease obligations(5)

     49,584         11,275         21,441         10,571         6,297   

Estimated interest payments(2)(5)

     927,000         317,900         490,200         118,900         —     

Operating leases

     583,068         205,009         163,898         112,137         102,024   

Purchase obligations(3)

     254,593         135,277         74,900         10,607         33,809   

Other long-term liabilities reflected on the balance sheet(4)

     261,500         7,200         9,700         5,300         239,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,039,442       $ 702,848       $ 3,503,258       $ 3,451,906       $ 381,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Total
Amounts
Committed
     Amount of Commitment Expiration Per Period  
Other Commercial Commitments as of September 28, 2012       Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Letters of credit

   $ 181,729       $ 181,729       $ —         $ —         $ —     

Guarantees

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 181,729       $ 181,729       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes the $4.5 million discount on the Holdings Notes and presumes repayment of the $1.28 billion of the Fixed Rate Notes and $500 million of the Floating Rate Notes by October 31, 2014 and the extended $2.6 billion U.S. and non-U.S. denominated term loan on July 26, 2016.
(2) These amounts represent future interest payments related to our existing debt obligations based on fixed and variable interest rates specified in the associated debt agreements. Payments related to variable debt are based on applicable rates at September 28, 2012 plus the specified margin in the associated debt agreements for each period presented. The amounts provided relate only to existing debt obligations and do not assume the refinancing or replacement of such debt. The average debt balance for each fiscal year from 2013 through 2016 is $5,678,300, $5,235,500, $3,802,700, and $2,555,200, respectively. The average interest rate (after giving effect to interest rate swaps) for each fiscal year from 2013 through 2016 is 5.60%, 5.59%, 5.12% and 4.49%, respectively. Refer to Note 5 to the consolidated financial statements for the terms and maturities of existing debt obligations.
(3) Represents commitments for capital projects and client contract investments to help finance improvements or renovations at the facilities from which the Company operates.
(4) Includes certain unfunded employee retirement obligations.

 

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(5) During the second quarter of fiscal 2013, the Company had a material change to its debt structure in which the Company replaced the Holding Notes, the Fixed Rate Notes and the Floating Notes with $1,400 million of new term loan borrowings and the issuance of $1,000 million of 5.75% Senior Notes due 2020. The below table provides the effect of this debt refinancing on the Company’s future debt payments (excluding the original debt discounts on the senior secured term loan facilities) and estimated interest payments as of June 28, 2013 (in thousands):

 

      Payments Due by Period  
As of June 28, 2013    Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Long-term borrowings

   $ 6,170,935       $ 59,006       $ 400,580       $ 3,374,349       $ 2,337,000   

Capital lease obligations

     54,248         12,133         16,269         13,131         12,715   

Estimated interest payments

     1,215,200         260,100         500,100         295,000         160,000   

The Company has excluded from the table above uncertain tax liabilities due to the uncertainty of the amount and period of payment. As of September 28, 2012, the Company has gross uncertain tax liabilities of $32.0 million (see Note 8 to our consolidated financial statements). During fiscal 2012, the Company made contributions totaling $20.6 million into our defined benefit pension plans and benefit payments of $11.7 million out of these plans. Estimated contributions to our defined benefit pension plans in fiscal 2013 are $20.8 million and estimated benefit payments out of these plans in fiscal 2013 are $11.7 million (see Note 7 to our consolidated financial statements).

Pursuant to the Stockholders Agreement dated January 26, 2007, as amended (the “Stockholders Agreement”), upon termination of employment from the Company or one of its subsidiaries, members of the Company’s management (other than Mr. Neubauer) who hold shares of common stock can cause the Company to repurchase all of their initial investment shares (as defined) or shares acquired as a result of the exercise of installment stock purchase opportunities at appraised fair market value. Generally, payment for shares repurchased could be, at the Company’s option, in cash or installment notes. The amount of common stock subject to repurchase as of June 28, 2013 and September 28, 2012 was $153.6 million and $167.5 million, which is based on approximately 9.5 million and 11.0 million shares of common stock valued at $16.21 and $15.17 per share, respectively. The Stockholders Agreement, the senior secured credit agreement and the indenture governing our senior notes contain limitations on the amount that can be expended for such share repurchases.

The Company’s 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 financial statements. The Company is self-insured for a limited portion of the risk retained under its general liability and workers’ compensation arrangements. Self-insurance reserves are recorded based on actuarial analyses.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in the notes to the consolidated financial statements included in this prospectus. As described in such notes, the Company recognizes sales in the period in which services are provided pursuant to the terms of our contractual relationships with our clients. Sales from direct marketing activities are recognized upon shipment.

In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, sales 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. We discuss below the more significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.

 

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Asset Impairment Determinations

Goodwill and the ARAMARK trade name are indefinite-lived intangible assets that are not amortizable and are subject to an impairment test that we conduct annually or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists, using discounted cash flows. The Company performs its assessment of goodwill at the reporting unit level. Within the FSS International segment, each country is evaluated separately since such operating units are relatively autonomous and separate goodwill balances have been recorded for each entity. The Company completed its annual goodwill and trade names impairment tests for fiscal 2012, which did not result in an impairment charge. While at the date of our annual goodwill impairment test the estimated fair value of each reporting unit exceeded its corresponding carrying amount, including goodwill, a prolonged economic decline in certain of the European countries in which we operate could put the Company at risk of not achieving future growth assumptions, which could result in an impairment of goodwill or other long-lived assets within the FSS International segment. During the second quarter of fiscal 2013, the Company recorded an impairment charge of approximately $11.7 million in the FSS International segment to write-off all of the goodwill associated with its reporting units in Spain and Korea. The impairment charge results from continued economic weakness in Spain and recent reductions in government support for the Healthcare and Education sectors, two of the primary sectors of the Spanish reporting unit. In Korea, the Company undertook a recent strategic analysis of the Korean reporting unit, which prompted the impairment analysis in the second quarter.

With respect to our other long-lived assets, we are required to test for asset impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the Company compares the sum of the future expected cash flows from the asset, undiscounted and without interest charges, to the asset’s carrying value. If the sum of the future expected cash flows from the asset is less than the carrying value, an impairment would be recognized for the difference between the estimated fair value and the carrying value of the asset.

In making future cash flow analyses of various assets, the Company makes assumptions relating to the following:

 

   

the intended use of assets and the expected future cash flows resulting directly from such use;

 

   

comparable market valuations of businesses similar to ARAMARK’s business segments;

 

   

industry specific economic conditions;

 

   

competitor activities and regulatory initiatives; and

 

   

client and consumer preferences and behavior patterns.

We believe that an accounting estimate relating to asset impairment is a critical accounting estimate because the assumptions underlying future cash flow estimates are subject to change from time to time and the recognition of an impairment could have a significant impact on our consolidated statement of income.

Environmental Loss Contingencies

Accruals for environmental loss contingencies (i.e., environmental reserves) are recorded when it is probable that a liability has been incurred and the amount can reasonably be estimated. Management views the measurement of environmental reserves as a critical accounting estimate because of the considerable uncertainty surrounding estimation, including the need to forecast well into the future. We are involved in legal proceedings under federal, state, local and foreign environmental laws in connection with our operations or businesses conducted by our predecessors or companies that we have acquired. The calculation of environmental reserves is based on the evaluation of currently available information, prior experience in the remediation of contaminated sites and assumptions with respect to government regulations and enforcement activity, changes in remediation technology and practices, and financial obligations and creditworthiness of other responsible parties and insurers.

 

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Litigation and Claims

From time to time, the Company and its subsidiaries are party to various legal actions, proceedings and investigations involving claims incidental to the conduct of their 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 laws and alcohol licensing and service laws, or alleging negligence and/or breaches of contractual and other obligations. Management considers the measurement of litigation reserves as a critical accounting estimate because of the significant uncertainty in some cases relating to the outcome of potential claims or litigation and the difficulty of predicting the likelihood and range of potential liability involved, coupled with the material impact on our results of operations that could result from litigation or other claims. In determining legal reserves, management considers, among other issues:

 

   

interpretation of contractual rights and obligations;

 

   

the status of government regulatory initiatives, interpretations and investigations;

 

   

the status of settlement negotiations;

 

   

prior experience with similar types of claims;

 

   

impact to the Company’s brand or reputation;

 

   

whether there is available insurance; and

 

   

advice of counsel.

Allowance for Doubtful Accounts

We encounter risks associated with sales and the collection of the associated accounts receivable. We record a provision for accounts receivable that are considered to be uncollectible. In order to calculate the appropriate provision, management analyzes the creditworthiness of specific clients and the aging of client balances. Management also considers general and specific industry economic conditions, industry concentrations, such as exposure to small and medium-sized businesses, the non-profit healthcare sector and the automotive, airline and financial services industries, and contractual rights and obligations. Management believes that the accounting estimate related to the allowance for doubtful accounts is a critical accounting estimate because the underlying assumptions used for the allowance can change from time to time and uncollectible accounts could potentially have a material impact on our results of operations.

Inventory Obsolescence

We record an inventory obsolescence reserve for obsolete, excess and slow-moving inventory, principally in the Uniform segment. In calculating our inventory obsolescence reserve, management analyzes historical and projected data regarding client demand within specific product categories and makes assumptions regarding economic conditions within client specific industries, as well as style and product changes. Management believes that its accounting estimate related to inventory obsolescence is a critical accounting estimate because client demand in certain of our businesses can be variable and changes in our reserve for inventory obsolescence could materially affect our results of operations.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. We must make assumptions, judgments and estimates to determine our

 

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current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. Our assumptions, judgments and estimates relative to the amount of deferred income taxes take into account estimates of the amount of future taxable income, and actual operating results in future years could render our current assumptions, judgments and estimates inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates.

Share-Based Compensation

Under the ARAMARK Holdings Corporation 2007 Management Stock Incentive Plan, as amended (the “Plan”), incentive awards may be granted to employees or directors of, or consultants to, the Company or one of its affiliates in the form of non-qualified stock options (time- and performance-based), installment stock purchase opportunities (“ISPOs”) and deferred stock units (only to non-employee directors). In June 2013, the Plan was amended and now additionally provides for the grant of restricted stock units and restricted stock. The compensation committee also approved a new form of non-qualified stock option award agreement which provides for 100% time-based vesting rather than earlier forms of non-qualified discretionary stock option agreements which had provided for 50% time-based vesting and 50% performance-based vesting. Finally, in June 2013, the Company offered to holders of outstanding ISPOs the ability to exchange such awards for restricted stock and non-qualified stock options (the “Award Exchange”).

We value our non-qualified stock option and ISPO awards using the Black-Scholes option valuation model. The Black-Scholes option valuation model uses assumptions of expected volatility, the expected dividend yield of our stock, the expected term of the awards and the risk-free interest rate, as well as our estimated fair value of our common stock. Since our stock has not been publicly traded, the expected volatility is based on an average of the historical volatility of our competitors’ stocks over the expected term of the share-based awards. The dividend yield assumption is based on our history and expected future dividend payouts, excluding dividends that resulted from activities we deemed to be one-time in nature. The expected term of share-based awards represents the weighted-average period the share-based award is expected to remain outstanding. The expected term was calculated using the simplified method, as permitted under SEC rules and regulations due to the lack of history, which uses the midpoint between an option’s vesting date and contractual term. The risk-free interest rate assumption is based upon the rate applicable to the U.S. Treasury security with a maturity equal to the expected term of the option on the grant date. All other employee share-based awards and non-employee director awards are valued based on the fair value of our common stock on the date of grant.

Share-based compensation expense is recognized in our results of operations for the awards that are expected to vest. For time-based options, restricted stock and restricted stock units, share-based compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. For performance-based options, management must assess the probability of the achievement of the earnings before interest and taxes (“EBIT”) targets, as defined in the Plan. If the EBIT targets are not probable of achievement, changes in the recognition of share-based compensation expense may occur. Management makes its probability assessments based on the Company’s actual and projected results of operations. As share-based compensation expense recognized in the Company’s results of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of each grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on our historical experience.

 

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For the nine months ended June 28, 2013 and June 29, 2012, share-based compensation expense was approximately $12.3 million and $12.5 million, respectively. During fiscal 2012, fiscal 2011 and fiscal 2010, share-based compensation expense was approximately $15.7 million, $17.3 million and $21.3 million, respectively. We expect to continue to grant share-based awards in the future, and to the extent that we do, our actual share-based compensation expense recognized will likely increase.

Valuation of our Common Stock

The following table presents the grant dates, timing of valuations performed relative to the date of grant and the number of underlying shares and related exercise prices of awards granted to employees and non-employee directors of the Company, from June 1, 2012 through the date of this filing, as well as the estimated fair value of the underlying common stock per share on the grant date.

 

Grant Date    Date of Valuation   

Number of

Options Granted

    

Original

Exercise Price

    

Fair Value per share

of Common Stock

 

June 2, 2012(a)

  

June 1, 2012

     3,340          $ 14.96   

June 6, 2012

  

June 1, 2012

     2,040,000       $ 14.96       $ 14.96   

September 5, 2012

  

September 1, 2012

     150,000       $ 15.17       $ 15.17   

October 29, 2012(a)

  

September 1, 2012

     17,066          $ 14.23   

December 5, 2012

  

December 1, 2012

     1,150,000       $ 14.99       $ 14.99   

March 2, 2013(a)

  

March 1, 2013

     25,396          $ 15.75   

March 7, 2013

  

March 1, 2013

     125,000       $ 15.75       $ 15.75   

June 20, 2013

  

June 1, 2013

     1,247,638       $ 16.21       $ 16.21   

June 20, 2013(b)

  

June 1, 2013

     271,438          $ 16.21   

July 9, 2013

  

June 1, 2013

     3,059,626       $ 16.21       $ 16.21   

July 9, 2013(b)

  

June 1, 2013

     975,618          $ 16.21   

July 31, 2013(c)

  

June 1, 2013

     1,108,738       $ 16.21       $ 16.21   

July 31, 2013(c)

  

June 1, 2013

     225,262          $ 16.21   

September 4, 2013

  

September 1, 2013

     80,341       $ 16.88       $ 16.88   

September 4, 2013(b)

  

September 1, 2013

     26,219          $ 16.88   

 

(a) Represents Deferred Stock Units issued to non-employee members of the board of directors. Value of deferred stock units is based on the fair value of the Company's common stock on date of grant.
(b) Represents grants of restricted stock units.
(c) As a result of the Award Exchange, a total of 1,334,000 outstanding ISPOs were exchanged for 225,262 restricted stock awards and 1,108,738 replacement stock option awards. The offer to holders of outstanding ISPOs relating to the Award Exchange commenced on June 28, 2013 and, following an offer period of 20 business days, the Award Exchange was completed on July 31, 2013.

For each award grant, a contemporaneous valuation (within the meaning of such term under the American Institute of Certified Public Accountants (the “AICPA”) Practice Aid) was performed. At each grant date, the applicable committee of the board of directors considered whether any events or circumstances occurred between the date of the valuation and the date of the grant that would indicate a significant change in the fair value of our common stock per share during that period. The decline in market value from September 5, 2012 to October 29, 2012 was a result of the spin-off of our majority interest in Seamless North America, LLC, an online and mobile food ordering service, to our stockholders in the form of a dividend. Each stockholder received one share of Seamless Holdings, a newly formed company created to hold our former interest in Seamless North America, LLC, for each share of our common stock held as of the record date.

We have been a private company with no active public market for our common stock. Management, with authority delegated by the board of directors, estimates the fair value of our common stock per share, which includes consideration of a contemporaneous valuation by an independent third-party valuation firm in accordance with the guidelines outlined in the AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation. A valuation of the Company’s common stock per share is performed on a regular quarterly

 

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basis as of the beginning of the month when share-based awards are expected to be granted. Our valuations consider a number of objective and subjective factors that we believe market participants would consider, including understanding the financial condition, future prospects and projected operations of the Company, a review of the history and nature of the Company, a review of the financial data bearing upon recent and prospective operations, a review of certain other publicly available financial data for certain companies deemed comparable to the Company and capital market information deemed relevant to the assessment of the investment risk return attributes of the Company’s common stock. In making a determination of the fair value of common stock per share, the Company considers the independent third-party valuation firm’s utilization of the market-comparable approach and the income approach. The market-comparable approach estimates the value of a company by applying market multiples of publicly traded companies in the same or similar lines of business to the results and projected results of the company being valued. The income approach involves applying an appropriate risk-adjusted discount rate to projected cash flows based on forecasted sales and costs. When estimating an enterprise value at each valuation date and the corresponding value of the common stock per share, the Company equally weights the market-comparable approach and income approach.

Management believes that the accounting estimate related to the expense of share-based awards is a critical accounting estimate because the underlying assumptions can change from time to time and, as a result, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period with respect to similar instruments.

Fair Value of Financial Assets and Financial Liabilities

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

Management believes that the carrying value of cash and cash equivalents, accounts receivable and accounts payable are representative of their respective fair values. The fair value of the Company’s debt was computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the period. The fair values for interest rate swap agreements, foreign currency forward exchange contracts and natural gas, gasoline and diesel fuel agreements are based on quoted market prices from various banks for similar instruments, adjusted for the Company and the counterparties’ credit risk. The Company performs an independent review of these values to determine if they are reasonable. The fair value of our derivative instruments are impacted by changes in interest rates, foreign exchange rates, and the prices of natural gas, gasoline and diesel fuel. The fair value of our common stock subject to repurchase is derived principally from unobservable inputs. Management believes that the accounting estimate related to the fair value of our financial assets and financial liabilities is a critical accounting estimate due to its complexity and the significant judgments and estimates involved in determining fair value in the absence of quoted market prices.

*****

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.

 

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New Accounting Standard Updates

See Note 13 to our unaudited condensed consolidated financial statements for a full description of recent accounting standard updates, including the expected dates of adoption.

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 information below summarizes our market risks associated with debt obligations and other significant financial instruments as of June 28, 2013 (See Notes 6 and 7 to our unaudited condensed consolidated financial statements). 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. For debt obligations, the table presents principal cash flows and related interest rates by contractual fiscal year of maturity. Variable interest rates disclosed represent the weighted-average rates of the portfolio at June 28, 2013. For interest rate swaps, the table presents the notional amounts and related weighted-average interest rates by the fiscal year of maturity. The variable rates presented are the average forward rates for the term of each contract.

 

      Expected Fiscal Year of Maturity              

As of June 28, 2013

   2013     2014     2015      2016     2017     Thereafter     Total     Fair Value  
     (US$ equivalent in millions)  

Debt:

                 

Fixed rate

   $ 3      $ 15      $ 10       $ 7      $ 6      $ 1,013 (a)    $ 1,054      $ 1,074   

Average interest rate

     5.0     5.0     5.0      5.0     5.0     5.7     5.7  

Variable rate

   $ 28 (b)    $ 43 (b)    $ 350 (b)(c)     $ 3,246 (b)    $ 156 (b)(d)    $ 1,348 (b)    $ 5,171      $ 5,161   

Average interest rate

     8.9     4.4     2.0      3.8     4.5     4.0     3.8  

Interest Rate Swaps:

                 

Receive variable/pay fixed

     $ 582         $ 574      $ 150      $ 150      $ 1,456      $ (54

Average pay rate

       3.5        2.8     1.0     1.6    

Average receive rate

       0.3        0.3     0.3     0.3    

 

(a) Balance includes $1,000 million of senior notes callable by us at any time with any applicable prepayment penalty.
(b) Balance includes $35 million for fiscal 2014, $47 million for fiscal 2015, $3,243 million for fiscal 2016, $14 million for fiscal 2017 and $1,348 million thereafter of senior secured term loan facilities callable by us at any time.
(c) Balance includes $300 million of borrowings under the receivables facility.
(d) Balance includes $142 million of senior secured revolving credit facility.

As of June 28, 2013, the Company had foreign currency forward exchange contracts outstanding with notional amounts of €88.4 million, and £44.2 million to mitigate the risk of changes in foreign currency exchange rates on short-term intercompany loans to certain international subsidiaries. As of June 28, 2013, the fair value of these foreign exchange contracts is $1.2 million, which is included in “Prepayments and Other Current Assets” in our unaudited Condensed Consolidated Balance Sheets.

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 June 28, 2013, the Company has contracts for approximately 1.3 million gallons outstanding for fiscal 2013 and fiscal 2014. As of June 28, 2013, the fair value of the Company’s gasoline and diesel fuel hedge agreements is $0.1 million, which is included in “Prepayments and Other Current Assets” in our unaudited Condensed Consolidated Balance Sheets.

 

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BUSINESS

Our Company

We are a leading global provider of food, facilities and uniform services to education, healthcare, business and industry, and sports, leisure and corrections clients. Our core market is North America, which is supplemented by an additional 19-country footprint serving many of the fastest growing global geographies. We hold the #2 position in North America, a top 3 position in countries representing 98% of 2012 total sales, and are one of only 3 food and facilities competitors with the combination of scale, scope, and global reach. Through our established brand, broad geographic presence and approximately 267,000 employees, we anchor our business in our partnerships with thousands of education, healthcare, business, sports, leisure and corrections clients. Through these partnerships we serve millions of consumers including students, patients, employees, sports fans and guests worldwide. The scope and range of ARAMARK’s services are evidenced by the following:

 

   

We provide services to 84% of the Fortune 500

 

   

We serve over 500 million meals annually to approximately 5 million students at colleges, universities, and K-12 schools

 

   

We service over 2,000 healthcare facilities, collectively representing over 75 million patient days annually

 

   

We cater to approximately 100 million sports fans annually through our partnerships with over 150 professional and collegiate teams

 

   

We serve approximately 50 million visitors annually to convention centers, national and state parks

 

   

We maintain and enhance the environment in over 800 million square feet of client facility space

 

   

We put over 2 million people in uniforms each day

 

   

We operate in 22 countries in North America, Europe, Asia and South America

 

   

We provide refreshment services to over 100,000 offices in North America

 

   

We provide food and commissary services to correctional facilities housing over 250,000 inmates

 

   

We provide food and facilities services to over 160 mining and off-shore and in-shore oil & gas drilling operations around the world

We operate our business in three reportable segments that share many of the same operating characteristics: FSS North America, FSS International and Uniform. Both FSS North America and Uniform have significant scale and hold the #2 position in North America while all of our reportable segments hold a top 3 position in countries representing 98% of 2012 total sales. The following chart shows a breakdown of our sales and operating income by our reportable segments:

 

LOGO

 

(1) 

Fiscal 2012 operating income excludes $51.8 million of unallocated corporate expenses.

 

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Our broad range of services, diversified client base, global reach and repeatable business model position us well for continued growth and margin expansion opportunities. In fiscal 2012, we generated $13.5 billion of sales, $581.8 million of operating income, $750.0 million of Adjusted Operating Income and $1.1 billion of Adjusted EBITDA.

Our Mission

ARAMARK’s mission is to “Deliver experiences that enrich and nourish lives.” This mission is anchored in a set of core values that guide our execution in the marketplace:

 

   

Sell and Serve with Passion. Placing clients and consumers at the center of all that we do by listening and responding to their needs with best-in-class quality, innovation and exceptional service

 

   

Set Goals. Act. Win. Maintaining a culture of accountability where performance matters and exhibiting leadership that achieves and exceeds expectations through industry-leading execution

 

   

Front-Line First. Providing our front-line employees with tools and training that empower them to deliver excellence at the “moment of truth” —at the time they are providing service to thousands of consumers and clients every day

 

   

Integrity and Respect Always. Doing the right things without exception is the cornerstone of the ARAMARK brand and helps us earn the trust of our key constituents

ARAMARK is a well-recognized global brand, known for exceptional customer service and a compelling value proposition. We partner with clients on-site and integrate our employees within their operations, which enables us to obtain valuable consumer insights and innovate to satisfy each client’s unique needs and requirements. Our repeatable business model is founded on five core principles of excellence—selling, service, execution, marketing and operations—that allow us to deliver high quality service consistent with the values that the ARAMARK brand embodies. Our commitment to excellence has earned us numerous awards and recognitions; we have been named one of the “World’s Most Admired Companies” by Fortune Magazine every year since 1999 and we are recognized as one of the “World’s Most Ethical Companies” by the Ethisphere Institute.

Our History and Recent Accomplishments

Since ARAMARK’s founding in 1959, we have broadened our service offerings and expanded our client base through a combination of organic growth and successful acquisitions, with the goal of further developing our food, facilities and uniform capabilities, as well as growing our international presence.

In 1984, we completed a management buyout, after which our management and employees increased their Company ownership to approximately 90% of our equity capital leading up to our December 2001 public offering.

On January 26, 2007, ARAMARK delisted from the NYSE in conjunction with a going-private transaction executed with investment funds affiliated with GS Capital Partners, CCMP Capital Advisors, J.P. Morgan Partners, Thomas H. Lee Partners and Warburg Pincus LLC as well as approximately 250 senior management personnel.

In May 2012, Eric Foss became the new CEO and President of our company. Previously, Mr. Foss was the CEO of Pepsi Beverages Company and was Chairman and CEO of the publicly-traded Pepsi Bottling Group. During his tenure with Pepsi Bottling Group, Mr. Foss implemented numerous growth and productivity initiatives designed to strengthen customer service and improve selling effectiveness, streamline operations, and rationalize supply chain infrastructure. Under Mr. Foss’ leadership at ARAMARK, we have sharpened our focus on achieving sustainable value creation through accelerating revenue and profit growth with expanding margins.

 

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We continue to grow our existing business and win exciting new clients, including Airbus, the Ohio and Michigan departments of corrections, American University, the Minnesota Vikings, the Chicago Bears, and the Tampa Bay Buccaneers.

Our Market Opportunity

ARAMARK operates in large and highly fragmented markets with attractive industry dynamics. We believe that the global food and support services market and the North American uniform and career apparel market is approximately $900 billion. As only approximately 50% of this opportunity is outsourced, there is a substantial potential for growth by winning business with educational and healthcare institutions, businesses, sports and leisure facilities and correctional facilities that currently provide these services in-house. We expect that demand for increased outsourced services will continue to be driven by shifting client imperatives, including: the need to focus on core businesses, the desire to deliver a high level of consumer satisfaction, the pursuit of reduced costs and the attractiveness of consolidating services with a single provider. Our value-added provision of these services is increasingly important to our clients’ achievement of their own missions.

The food and support services market is highly fragmented, with the five largest competitors capturing only 9% of the global market. We expect larger service providers to continue to win a disproportionate amount of the business that is converted from self-operated services as clients are increasingly seeking services from partners with the scale and sophistication necessary to drive consumer satisfaction and increase operational efficiency.

Our core geographic market is North America, which we believe will remain a compelling opportunity due to the favorable underlying economic conditions, stability and opportunities for profitable growth, and growing trend towards outsourcing. We continue to focus on the Education and Healthcare sectors, which are only approximately 30% outsourced, and have increased as a percentage of GDP, representing significant growth opportunities. While cost reduction continues to be a key consideration, clients’ decisions