10-Q 1 q22012aramark.htm ARAMARK CORP -- FORM 10-Q Q2 2012 ARAMARK

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
___________________________________________
FORM 10-Q
 
___________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-04762
___________________________________________
ARAMARK CORPORATION
(Exact name of registrant as specified in its charter)
 ___________________________________________
Delaware
95-2051630
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
ARAMARK Tower
1101 Market Street
Philadelphia, Pennsylvania
19107
(Address of principal executive offices)
(Zip Code)
(215) 238-3000
(Registrant’s telephone number, including area code)
___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files).    Yes  x    No  ¨
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
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common stock outstanding at April 27, 2012: 1,000 shares
 









PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands, Except Share Amounts)
 
 
March 30, 2012
 
September 30, 2011
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
100,973

 
$
213,323

Receivables
1,351,856

 
1,252,266

Inventories, at lower of cost or market
487,191

 
450,848

Prepayments and other current assets
215,613

 
211,587

Assets held for sale
2,798

 
2,798

Total current assets
2,158,431

 
2,130,822

Property and Equipment, net
1,027,823

 
1,004,690

Goodwill
4,712,243

 
4,640,606

Other Intangible Assets
1,704,117

 
1,748,417

Other Assets
969,541

 
985,017

 
$
10,572,155

 
$
10,509,552

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term borrowings
$
59,061

 
$
49,064

Accounts payable
756,088

 
775,455

Accrued expenses and other current liabilities
1,067,032

 
1,226,510

Total current liabilities
1,882,181

 
2,051,029

Long-Term Borrowings
5,757,560

 
5,588,614

Deferred Income Taxes and Other Noncurrent Liabilities
1,230,895

 
1,234,885

Common Stock Subject to Repurchase
169,328

 
158,061

Equity:
 
 
 
ARAMARK Shareholder’s Equity:
 
 
 
Common stock, par value $.01 (authorized: 1,000 shares; issued and outstanding: 1,000 shares)

 

Capital surplus
1,464,606

 
1,476,061

Earnings retained for use in the business
82,197

 
46,468

Accumulated other comprehensive loss
(47,586
)
 
(77,345
)
Total ARAMARK shareholder’s equity
1,499,217

 
1,445,184

Noncontrolling interest
32,974

 
31,779

Total equity
1,532,191

 
1,476,963

 
$
10,572,155

 
$
10,509,552


The accompanying notes are an integral part of these condensed consolidated financial statements.

1



ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands)
 
 
Three Months
Ended
 
Three Months
Ended
 
March 30, 2012
 
April 1, 2011
Sales
$
3,345,560

 
$
3,220,260

Costs and Expenses:
 
 
 
Cost of services provided
3,028,661

 
2,925,134

Depreciation and amortization
131,714

 
127,321

Selling and general corporate expenses
51,471

 
45,537

 
3,211,846

 
3,097,992

Operating income
133,714

 
122,268

Interest and Other Financing Costs, net
118,533

 
92,765

Income from Continuing Operations Before Income Taxes
15,181

 
29,503

Provision for Income Taxes
4,229

 
9,505

Income from Continuing Operations
10,952

 
19,998

Income from Discontinued Operations, net of tax

 
392

Net income
10,952

 
20,390

Less: Net income attributable to noncontrolling interest
1,064

 

Net income attributable to ARAMARK shareholder
$
9,888

 
$
20,390

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2


ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands)
 
 
Six Months
Ended
 
Six Months
Ended
 
March 30, 2012
 
April 1, 2011
Sales
$
6,768,172

 
$
6,504,766

Costs and Expenses:
 
 
 
Cost of services provided
6,104,367

 
5,874,384

Depreciation and amortization
263,580

 
253,812

Selling and general corporate expenses
99,635

 
90,460

 
6,467,582

 
6,218,656

Operating income
300,590

 
286,110

Interest and Other Financing Costs, net
227,347

 
201,911

Income from Continuing Operations Before Income Taxes
73,243

 
84,199

Provision for Income Taxes
23,172

 
25,755

Income from Continuing Operations
50,071

 
58,444

Income from Discontinued Operations, net of tax
297

 
347

Net income
50,368

 
58,791

Less: Net income attributable to noncontrolling interest
1,804

 

Net income attributable to ARAMARK shareholder
$
48,564

 
$
58,791


The accompanying notes are an integral part of these condensed consolidated financial statements.


3



ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
 
 
Six Months
Ended
 
Six Months
Ended
 
March 30, 2012
 
April 1, 2011
Cash flows from operating activities:
 
 
 
Net income
$
50,368

 
$
58,791

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
263,580

 
256,706

Income taxes deferred
(30,621
)
 
(11,828
)
Share-based compensation expense
11,565

 
6,392

Changes in noncash working capital
(263,817
)
 
(211,611
)
Net change in proceeds from sale of receivables

 
(220,855
)
Other operating activities
26,267

 
(3,078
)
Net cash provided by (used in) operating activities
57,342

 
(125,483
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment, client contract investments and other
(149,731
)
 
(129,244
)
Disposals of property and equipment
4,611

 
8,925

Proceeds from divestitures
4,427

 
10,042

Acquisition of certain businesses, net of cash acquired
(150,352
)
 
(155,493
)
Other investing activities
593

 
6,517

Net cash used in investing activities
(290,452
)
 
(259,253
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term borrowings
187,302

 
95,159

Payments of long-term borrowings
(17,771
)
 
(18,409
)
Net change in funding under the Receivables Facility
(1,975
)
 
245,650

Advance to Parent Company
(27,744
)
 

Proceeds from issuance of Parent Company common stock
5,152

 
2,329

Repurchase of Parent Company common stock
(12,462
)
 
(9,397
)
Other financing activities
(11,742
)
 
(2,317
)
Net cash provided by financing activities
120,760

 
313,015

Decrease in cash and cash equivalents
(112,350
)
 
(71,721
)
Cash and cash equivalents, beginning of period
213,323

 
160,929

Cash and cash equivalents, end of period
100,973

 
89,208

Less: Cash and cash equivalents included in assets held for sale

 
435

Cash and cash equivalents, end of period
$
100,973

 
$
88,773


The accompanying notes are an integral part of these condensed consolidated financial statements.


4


ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(In Thousands)

 
Total
 
Total
ARAMARK
Shareholder’s
Equity
 
Common
Stock
 
Capital
Surplus
 
Earnings
Retained
for Use
in the
Business
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interest
Balance, September 30, 2011
$
1,476,963

 
$
1,445,184

 
$

 
$
1,476,061

 
$
46,468

 
$
(77,345
)
 
$
31,779

Net income
49,805

 
48,564

 
 
 
 
 
48,564

 
 
 
1,241

Pension plan adjustments (net of tax)
772

 
772

 
 
 
 
 
 
 
772

 
 
Foreign currency translation adjustments (net of tax)
(5,232
)
 
(5,232
)
 
 
 
 
 
 
 
(5,232
)
 
 
Change in fair value of cash flow hedges (net of tax)
34,219

 
34,219

 
 
 
 
 
 
 
34,219

 
 
Capital contributions from issuance of Parent Company common stock
13,737

 
13,737

 
 
 
13,737

 
 
 
 
 
 
Compensation expense related to stock incentive plans
11,565

 
11,565

 
 
 
11,565

 
 
 
 
 
 
Tax benefits related to stock incentive plans
2,206

 
2,206

 
 
 
2,206

 
 
 
 
 
 
Increase in Parent Company common stock subject to repurchase obligation, net
(11,267
)
 
(11,267
)
 
 
 
(11,267
)
 
 
 
 
 
 
Purchases of Parent Company common stock
(27,696
)
 
(27,696
)
 
 
 
(27,696
)
 
 
 
 
 
 
Advance to Parent Company, net
(12,835
)
 
(12,835
)
 
 
 
 
 
(12,835
)
 
 
 
 
Distributions to noncontrolling interest
(46
)
 
 
 
 
 
 
 
 
 
 
 
(46
)
Balance, March 30, 2012
$
1,532,191

 
$
1,499,217

 
$

 
$
1,464,606

 
$
82,197

 
$
(47,586
)
 
$
32,974


The accompanying notes are an integral part of these condensed consolidated financial statements.


5


ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1)
BASIS OF PRESENTATION:
ARAMARK Corporation (the “Company” or “ARAMARK”) was acquired on January 26, 2007 through a merger transaction with RMK Acquisition Corporation, a Delaware corporation controlled by investment funds associated with GS Capital Partners, CCMP Capital Advisors, J.P. Morgan Partners, Thomas H. Lee Partners and Warburg Pincus LLC (collectively, the “Sponsors”), Joseph Neubauer, Chairman and former Chief Executive Officer of ARAMARK, and certain other members of the Company’s management. The acquisition was accomplished through the merger of RMK Acquisition Corporation with and into ARAMARK Corporation with ARAMARK Corporation being the surviving company (the “Transaction”).
The Company is a wholly-owned subsidiary of ARAMARK Intermediate Holdco Corporation, which is wholly-owned by ARAMARK Holdings Corporation (the “Parent Company”). ARAMARK Holdings Corporation, ARAMARK Intermediate Holdco Corporation and RMK Acquisition Corporation were formed for the purpose of facilitating the Transaction. The Company’s operating results are included in the consolidated federal tax returns filed by the Parent Company. Any realized tax effects or credits attributable to the Company’s operations accrue to the Company based upon the Parent Company’s procedures for allocating the costs and benefits to its subsidiaries. The income tax provisions in the accompanying Condensed Consolidated Statements of Income approximate the provisions that would be required if the Company were a separate taxpayer. All income tax payments are made by the Company on behalf of the Parent Company (see Note 17).
On March 30, 2007, ARAMARK Corporation was merged with and into ARAMARK Services, Inc. with ARAMARK Services, Inc. being the surviving corporation. In connection with the consummation of the merger, ARAMARK Services, Inc. changed its name to ARAMARK Corporation.
The condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling financial interest is maintained. For those material consolidated subsidiaries in which the Company’s ownership is less than 100%, the outside stockholders’ interests are shown as noncontrolling interest in the accompanying condensed consolidated balance sheets. All significant intercompany transactions and accounts have been eliminated. The condensed consolidated financial statements exclude the accounts of ARAMARK Holdings Corporation and ARAMARK Intermediate Holdco Corporation, but do reflect the Sponsors’ investment cost basis allocated to the assets and liabilities acquired on January 26, 2007 and the Parent Company’s common stock subject to repurchase. See Note 17 for further discussion of ARAMARK Holdings Corporation.
The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements, and the notes to those statements, included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011. The condensed consolidated balance sheet as of September 30, 2011 was derived from audited financial statements which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of the Company, the statements include all adjustments, which are of a normal, recurring nature, required for a fair presentation for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for a full year, due to the seasonality of some of the Company’s business activities and the possibility of changes in general economic conditions.
(2)
DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE:
On September 30, 2011, the Company completed the sale of its wholly-owned subsidiary, Galls, LLC (“Galls”), for approximately $75.0 million in cash. The transaction resulted in a pretax loss of approximately $1.5 million (net of tax loss of approximately $12.0 million) during fiscal 2011. Galls is accounted for as a discontinued operation in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Income. Galls’ results of operations have been removed from the Company’s results of continuing operations for all periods presented. Galls was previously included in the Uniform and Career Apparel segment. All related disclosures have also been adjusted to reflect the discontinued operation.

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Summarized selected financial information of discontinued operations is as follows (in thousands):
 
 
Three Months
Ended
 
Three Months
Ended
 
March 30, 2012
 
April 1, 2011 
Sales
$

 
$
41,544

Income before income taxes

 
648

Income tax provision

 
256

Income from discontinued operations
$

 
$
392

 
 
 
 
 
Six Months
Ended
 
Six Months
Ended
 
March 30, 2012
 
April 1, 2011 
Sales
$

 
$
81,363

Income before income taxes
491

 
579

Income tax provision
194

 
232

Income from discontinued operations
$
297

 
$
347

The assets of the discontinued operation are stated separately in the Condensed Consolidated Balance Sheets as held for sale, which consists of property.
(3)
ACQUISITIONS AND DIVESTITURES:
Fiscal 2012
On October 3, 2011, ARAMARK Refreshment Services, LLC, a subsidiary of the Company, purchased all of the outstanding shares of capital stock of Van Houtte USA Holdings, Inc. (doing business as “Filterfresh”), a provider of office coffee services in the United States, for cash consideration of 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 the second quarter of fiscal 2012, the Company received a refund of approximately $7.4 million related to the termination of such customer relationship.
As part of the acquisition of Filterfresh, the Company acquired a subsidiary with a redeemable noncontrolling interest. The Company classifies redeemable noncontrolling interests outside of shareholder’s equity in the Condensed Consolidated Balance Sheet in “Deferred Income Taxes and Other Noncurrent Liabilities.” As of March 30, 2012, the redeemable noncontrolling interest related to the subsidiary was approximately $10.2 million. For the three and six months ended March 30, 2012, net income attributable to redeemable noncontrolling interest was $0.3 million and $0.6 million, respectively. Distributions to redeemable noncontrolling interest was $0.4 million for the six months ended March 30, 2012.
For the three months and six months ended March 30, 2012, $28.9 million and $60.1 million of sales, respectively, and $0.3 million of net income and ($1.7) million of net loss, which includes planned transition and integration costs, respectively, were recorded in the Condensed Consolidated Statements of Income related to the acquisition. During fiscal 2011, approximately $0.7 million of pretax transaction-related costs related to the acquisition were recorded in earnings. The Company’s proforma results of operations for fiscal 2012 and fiscal 2011 would not have been materially different than reported, assuming the acquisition had occurred at the beginning of the prior year period.
Fiscal 2011
On March 18, 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. Also acquired in the transaction was ReMedPar, an independent provider of sourced and refurbished medical equipment parts. During the first quarter of fiscal 2012, the Company sold MESA, a wholly-owned subsidiary acquired as part of the Masterplan acquisition, for cash consideration of approximately $4.2 million. The sale resulted in a reduction to goodwill of approximately $1.7 million. The Company’s proforma results of operations for fiscal 2011 would not have been materially different than reported.
 

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company followed the acquisition method of accounting in accordance with the accounting standard related to business combinations. The Company has finalized its assessment of the fair value of the assets acquired and liabilities assumed. The following table summarizes the fair values of the assets acquired and liabilities assumed in the acquisition (in thousands):
 
Purchase consideration
$
154,154

Current assets
$
29,906

Current liabilities
(31,396
)
Property and equipment
3,736

Other intangible assets
42,800

Goodwill
126,757

Other assets
314

Long-term borrowings
(767
)
Deferred income taxes and other noncurrent liabilities
(17,196
)
 
$
154,154

For the three and six months ended March 30, 2012, $27.2 million and $57.3 million of sales, respectively, and ($0.8) million and ($1.6) million of net loss, respectively, were recorded in the Condensed Consolidated Statements of Income related to the acquisition. For the three and six months ended April 1, 2011, $3.9 million of sales and ($0.2) million of net loss were recorded in the Condensed Consolidated Statements of Income in both periods related to the acquisition.

During the second quarter of fiscal 2011, the Company completed the sale of its 67% ownership interest in the security business of its Chilean subsidiary for approximately $10 million in cash and future consideration of approximately $4 million. The transaction resulted in a pretax gain of approximately $6.4 million (net of tax gain of approximately $4.8 million), which is included in “Cost of services provided” in the Condensed Consolidated Statements of Income. The results of operations and cash flows associated with the security business were not material to the Company's consolidated operations and cash flows.
(4)
SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made interest payments of approximately $207.7 million and $180.9 million and income tax payments of approximately $55.0 million and $25.6 million during the six months ended March 30, 2012 and April 1, 2011, respectively.
(5)
COMPREHENSIVE INCOME:
Comprehensive income includes all changes to shareholder’s equity during a period, except those resulting from investment by and distributions to shareholders. Components of comprehensive income include net income (loss), changes in foreign currency translation adjustments (net of tax), pension plan adjustments (net of tax) and changes in the fair value of cash flow hedges (net of tax). For the three and six months ended March 30, 2012, total comprehensive income was approximately $30.4 million and $80.1 million, respectively. For the three and six months ended March 30, 2012, total comprehensive income attributable to ARAMARK shareholder was approximately $29.3 million and $78.3 million, respectively. For the three and six months ended April 1, 2011, total comprehensive income was approximately $52.7 million and $109.1 million, respectively. As of March 30, 2012 and September 30, 2011, “Accumulated other comprehensive loss” consists of pension plan adjustments (net of tax) of approximately ($33.3) million and ($34.1) million, respectively, foreign currency translation adjustment (net of tax) of approximately $19.6 million and $24.8 million, respectively, and fair value of cash flow hedges (net of tax) of approximately ($33.9) million and ($68.1) million, respectively.
(6)
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill represents the excess of the fair value of consideration paid for an acquired entity over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized and is subject to an impairment test that the Company conducts annually or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists, using discounted cash flows. Changes in total goodwill during the six months ended March 30, 2012 follow (in thousands):
 

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Segment
September 30, 2011 
 
Acquisitions and
Divestitures
 
 
Translation 
 
March 30, 2012 
Food and Support Services—North America
$
3,613,370

 
$
65,882

 
$
26

 
$
3,679,278

Food and Support Services—International
453,996

 

 
5,518

 
459,514

Uniform and Career Apparel
573,240

 
211

 

 
573,451

 
$
4,640,606

 
$
66,093

 
$
5,544

 
$
4,712,243

The Food and Support Services—North America acquisitions and divestitures activity consists primarily of goodwill resulting from the fiscal 2012 Filterfresh acquisition and the final determination of the purchase price allocations related to Masterplan (see Note 3). The amounts for acquisitions during fiscal 2012 may be revised upon final determination of the purchase price allocations.
Other intangible assets consist of (in thousands):
 
March 30, 2012 
 
September 30, 2011 
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
Customer relationship assets
$
1,911,866

 
$
(969,864
)
 
$
942,002

 
$
1,852,531

 
$
(865,524
)
 
$
987,007

Trade names
762,863

 
(748
)
 
762,115

 
761,919

 
(509
)
 
761,410

 
$
2,674,729

 
$
(970,612
)
 
$
1,704,117

 
$
2,614,450

 
$
(866,033
)
 
$
1,748,417

Acquisition-related intangible assets consist of customer relationship assets, the ARAMARK trade name and other trade names. Customer relationship assets are being amortized principally on a straight-line basis over the expected period of benefit, 3 to 24 years, with a weighted average life of approximately 11 years. The ARAMARK and Seamless trade names are indefinite lived intangible assets and are not amortizable but are evaluated for impairment at least annually.
Amortization of intangible assets for the six months ended March 30, 2012 and April 1, 2011 was approximately $100.0 million and $94.9 million, respectively.
(7)
BORROWINGS:
On February 29, 2012, the Company entered into Amendment Agreement No. 2 (the “Amendment Agreement”) to the Amended and Restated Credit Agreement dated as of March 26, 2010 (as amended, the “Credit Agreement”). The Amendment Agreement extends 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. The maturity dates of the extended term loans and letter of credit deposits will accelerate to October 31, 2014 if any of the Company’s senior fixed rate notes due 2015 or senior floating rate notes due 2015 remain outstanding on October 31, 2014. The Company’s senior fixed rate notes due 2015 and senior floating rate notes due 2015 mature on February 1, 2015.
The term loans extended include (i) $858.1 million of U.S. dollar denominated term loans borrowed by the Company; (ii) ¥5,150.9 million of yen denominated term loans borrowed by the Company; (iii) $75.4 million of U.S. dollar denominated term loans borrowed by a Canadian subsidiary of the Company; (iv) €30.4 million of Euro denominated term loans borrowed by an Irish subsidiary of the Company; (v) £82.3 million of sterling denominated term loans borrowed by a U.K. subsidiary of the Company; and (vi) €46.1 million of Euro denominated term loans borrowed by German subsidiaries of the Company. From and after the effective date of the Amendment Agreement, (A) the Eurocurrency rate margin and letter of credit fees with respect to the extended U.S. dollar denominated and Euro denominated term loans and letter of credit deposits increased 1.375% to 3.25%, (B) the margin on extended U.S. dollar denominated base rate term loans increased 1.375% to 2.25% and (C) the margins on extended yen denominated term loans and sterling denominated term loans increased 1.375% to 3.375%. The maturity date, interest margins and letter of credit fees for lenders not extending their loans or letters of credit deposits remain unchanged. Consenting lenders received a one-time amendment fee of approximately $3.2 million in the aggregate on their total loan commitments. For the three and six months ended March 30, 2012, approximately $7.5 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 $4.5 million of the third-party costs were paid to entities affiliated with Goldman Sachs Capital Partners and J.P. Morgan Partners.
The Company’s 5.00% senior notes, contractually due in June 2012, have been classified as noncurrent in the accompanying condensed consolidated balance sheet as the Company has the ability and intent to finance the repayments through additional

9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

borrowings under the senior secured credit agreement.
(8)
DERIVATIVE INSTRUMENTS:
The Company enters into derivative contractual arrangements to manage changes in market conditions related to interest on debt obligations, foreign currency exposures and exposure to fluctuating natural gas, gasoline and diesel fuel prices. Derivative instruments utilized during the period include interest rate swap agreements, foreign currency forward exchange contracts, and natural gas, gasoline and diesel fuel agreements. All derivative instruments are recognized as either assets or liabilities on the balance sheet at fair value at the end of each quarter. The counterparties to the Company’s contractual derivative agreements are all major international financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. For designated hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items.
Cash Flow Hedges
The Company has entered into $1.0 billion and ¥5.0 billion of interest rate swap agreements, fixing the rate on a like amount of variable rate term loan borrowings and floating rate notes. During the six months ended March 30, 2012, $2.3 billion of interest rate swap agreements matured. Changes in the fair value of a derivative that is designated as and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. As of March 30, 2012 and September 30, 2011, approximately ($27.0) million and ($56.3) million of unrealized net of tax losses related to the interest rate swaps were included in “Accumulated other comprehensive loss,” respectively. The hedge ineffectiveness for these cash flow hedging instruments during the six months ended March 30, 2012 and April 1, 2011 was immaterial.
The Company previously entered into a $169.6 million amortizing cross currency swap to mitigate the risk of variability in principal and interest payments on the Canadian subsidiary’s variable rate debt denominated in U.S. dollars. The agreement fixes the rate on the variable rate borrowings and mitigates changes in the Canadian dollar/U.S. dollar exchange rate. In March 2012, the cross currency swap was amended to match the terms of the Canadian subsidiary's debt that was impacted by the Amendment Agreement. A portion of the swap was amended and extended to match the terms related to its variable rate debt denominated in U.S. dollars that was extended under the Amendment Agreement. The Company has designated the swaps as cash flow hedges. During the six months ended March 30, 2012 and April 1, 2011, approximately ($2.8) million and ($5.2) million of unrealized net of tax losses related to the swap were added to “Accumulated other comprehensive loss,” respectively. Approximately $7.3 million and $7.1 million were reclassified to offset net translation gains (losses) on the foreign currency denominated debt during the six months ended March 30, 2012 and April 1, 2011, respectively. As of March 30, 2012 and September 30, 2011, unrealized net of tax losses of approximately ($6.1) million and ($10.6) million related to the cross currency swap were included in “Accumulated other comprehensive loss,” respectively. As a result of amending the cross currency swap, the hedge ineffectiveness was approximately $3.0 million, which is recorded in "Interest and Other Financing Costs, net". The Company expects the hedge to be highly effective in future periods. The hedge ineffectiveness for this cash flow hedging instrument during the six months ended April 1, 2011 was immaterial.
The Company entered into a series of pay fixed/receive floating natural gas hedge agreements based on a NYMEX price in order to limit its exposure to price increases for natural gas, primarily in the Uniform and Career Apparel segment. As of March 30, 2012, the Company has contracts for approximately 112,000 MMBtu’s outstanding for fiscal 2012 that are designated as cash flow hedging instruments. As of March 30, 2012 and September 30, 2011, approximately ($0.2) million and ($0.1) million of unrealized net of tax losses, respectively, were recorded in “Accumulated other comprehensive loss” for these contracts. There was no hedge ineffectiveness for the six months ended March 30, 2012 and April 1, 2011.
 

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the net of tax effect of our derivatives designated as cash flow hedging instruments on Comprehensive Income (in thousands):
 
 
Three Months
Ended
March 30, 2012
 
Three Months
Ended
April 1, 2011
Interest rate swap agreements
$
13,225

 
$
17,960

Cross currency swap agreements
1,752

 
1,460

Natural gas hedge agreements
9

 

Gasoline and diesel fuel agreements

 
997

 
$
14,986

 
$
20,417

 
Six Months
Ended
March 30, 2012  
 
Six Months
Ended
April 1, 2011  
Interest rate swap agreements
$
29,301

 
$
38,867

Cross currency swap agreements
4,478

 
1,861

Natural gas hedge agreements
(61
)
 
92

Gasoline and diesel fuel agreements

 
1,489

 
$
33,718

 
$
42,309

Derivatives not Designated in Hedging Relationships
The Company entered into a series of pay fixed/receive floating gasoline and diesel fuel agreements based on the Department of Energy weekly retail on-highway index in order to limit its exposure to price fluctuations for gasoline and diesel fuel. As of March 30, 2012, the Company has contracts for approximately 3.7 million gallons outstanding for fiscal 2012 and fiscal 2013. During the six months ended March 30, 2012, the Company entered into contracts totaling approximately 1.6 million gallons. Prior to October 1, 2011, these contracts met the required criteria to be designated as cash flow hedging instruments; therefore, changes in the fair value of these contracts were recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. Beginning in first quarter of fiscal 2012, the Company elected to de-designate its gasoline and diesel fuel agreements for accounting purposes. As a result, on a prospective basis, changes in the fair value of these contracts will be recorded in earnings. Amounts previously recorded in accumulated other comprehensive income (loss) will continue to be reclassified into earnings as the underlying item affects earnings. During the six months ended March 30, 2012, the Company recorded a pretax gain of $1.3 million in the Condensed Consolidated Statement of Income for the change in the fair value of these agreements. As of March 30, 2012 and September 30, 2011, unrealized net of tax losses of approximately ($0.6) million and ($1.1) million were recorded in “Accumulated other comprehensive loss” for these contracts, respectively. The hedge ineffectiveness for the gasoline and diesel fuel hedging instruments for the six months ended April 1, 2011 was immaterial.
As of March 30, 2012, the Company had foreign currency forward exchange contracts outstanding with notional amounts of €56.6 million, £7.0 million and CAD25.0 million to mitigate the risk of changes in foreign currency exchange rates on short-term intercompany loans to certain international subsidiaries. Gains and losses on these foreign currency exchange contracts are recognized in income currently as the contracts were not designated as hedging instruments, substantially offsetting currency transaction gains and losses on the short term intercompany loans.
 

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the location and fair value of the Company’s derivatives designated and not designated as hedging instruments in our Condensed Consolidated Balance Sheets (in thousands):
 
 
 
Balance Sheet Location
 
March 30, 2012
 
September 30, 2011 
ASSETS
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Prepayments
 
$

 
$
2,856

Gasoline and diesel fuel agreements
 
Prepayments
 
225

 

Total derivatives
 
 
 
$
225

 
$
2,856

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
 
Natural gas hedge agreements
 
Accounts Payable
 
$
288

 
$
187

Gasoline and diesel fuel agreements
 
Accounts Payable
 

 
1,894

Interest rate swap agreements
 
Accrued Expenses
 
227

 
49,349

Interest rate swap agreements
 
Other Noncurrent Liabilities
 
44,350

 
44,054

Cross currency swap agreements
 
Other Noncurrent Liabilities
 
42,077

 
35,551

 
 
 
 
86,942

 
131,035

 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Accounts Payable
 
85

 

 
 
 
 
$
87,027

 
$
131,035

The following table summarizes the location of (gain) loss reclassified from “Accumulated other comprehensive loss” into earnings for derivatives designated as hedging instruments in the Condensed Consolidated Statements of Income (in thousands):
 
 
 
Account
 
Three Months
Ended
March 30, 2012
 
Three Months
Ended
April 1, 2011
Interest rate swap agreements
 
Interest Expense
 
$
26,620

 
$
30,829

Cross currency swap agreements
 
Interest Expense
 
1,817

 
2,234

Natural gas hedge agreements
 
Cost of services provided
 
59

 

Gasoline and diesel fuel agreements
 
Cost of services provided
 

 
(448
)
 
 

 
$
28,496

 
$
32,615

 
 
Account
 
Six Months
Ended
March 30, 2012 
 
Six Months
Ended
April 1, 2011
Interest rate swap agreements
 
Interest Expense
 
$
55,458

 
$
58,430

Cross currency swap agreements
 
Interest Expense
 
3,930

 
4,418

Natural gas hedge agreements
 
Cost of services provided
 
129

 
158

Gasoline and diesel fuel agreements
 
Cost of services provided
 

 
(369
)
 
 
 
 
$
59,517

 
$
62,637

At March 30, 2012, the net of tax loss expected to be reclassified from “Accumulated other comprehensive loss” into earnings over the next twelve months based on current market rates is approximately $19.1 million.
 

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the location of (gain) loss for our derivatives not designated as hedging instruments in the Condensed Consolidated Statements of Income (in thousands):
 

 
Account
 
Three Months
Ended
March 30, 2012
 
Three Months
Ended
April 1, 2011
Gasoline and diesel fuel agreements
 
Cost of services provided
 
$
(466
)
 
$

Foreign currency forward exchange contracts
 
Interest Expense
 
2,522

 
(6,016
)

 
 
 
$
2,056

 
$
(6,016
)

 
Account
 
Six Months
Ended
March 30, 2012
 
Six Months
Ended
April 1, 2011
Gasoline and diesel fuel agreements
 
Cost of services provided
 
$
(1,003
)
 
$

Foreign currency forward exchange contracts
 
Interest Expense
 
1,740

 
(6,482
)

 
 
 
$
737

 
$
(6,482
)
(9)
CAPITAL STOCK:
Pursuant to the Stockholders Agreement of the Parent Company, 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 of the Parent Company can cause the Parent Company to repurchase all of their initial investment shares (as defined) or shares acquired as a result of the exercise of Installment Share Purchase Opportunities at appraised fair market value. Generally, payment for shares repurchased could be, at the Parent Company’s option, in cash or installment notes, which would be effectively subordinated to all indebtedness of the Company. The amount of this potential repurchase obligation has been classified outside of shareholder’s equity, which reflects the Parent Company’s investment basis and capital structure in the Company’s condensed consolidated financial statements. The amount of common stock subject to repurchase as of March 30, 2012 and September 30, 2011 was $169.3 million and $158.1 million, which is based on approximately 11.7 million and 12.4 million shares of common stock of the Parent Company valued at $14.45 and $12.73 per share, respectively. The fair value of the common stock subject to repurchase is calculated using discounted cash flow techniques and comparable public company trading multiples. Inputs used in the discounted cash flow analysis include the weighted average cost of capital, long-term revenue growth rates, long-term EBIT margins and residual growth rates. Inputs used in the comparable public company trading multiples include the last-twelve-months' EBITDA multiple, forward EBITDA multiples and control premium. During the six months ended March 30, 2012 and April 1, 2011, approximately $27.7 million and $19.7 million of common stock of the Parent Company was repurchased, respectively, and has been reflected in the Company’s condensed consolidated financial statements. The Stockholders Agreement, the senior secured credit agreement, the indenture governing the 8.50% senior notes due 2015, the indenture governing the senior floating rate notes due 2015 and the indenture governing the notes issued by the Parent Company contain limitations on the amount the Company can expend for such share repurchases.
(10)
SHARE-BASED COMPENSATION:
During the three months and six months ended March 30, 2012, share-based compensation expense was approximately $5.7 million, before taxes of $2.2 million, and approximately $11.6 million, before taxes of $4.5 million, respectively. During the three and six months ended April 1, 2011, share-based compensation expense was approximately $3.0 million, before taxes of $1.2 million, and approximately $6.4 million, before taxes of $2.5 million, respectively.
Stock Options
Time-Based Options
The compensation cost charged to expense during the three and six months ended March 30, 2012 for Time-Based Options was approximately $2.0 million and $4.1 million, respectively. The compensation cost charged to expense during the three and six months ended April 1, 2011 for Time-Based Options was approximately $2.6 million and $6.0 million, respectively. As of March 30, 2012, there was approximately $19.0 million of unrecognized compensation expense related to nonvested Time-Based Options, which is expected to be recognized over a weighted-average period of approximately 2.86 years.

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A summary of Time-Based Options activity is presented below:
 
Options
Shares
(000s)
 
Weighted-
Average
Exercise
Price
Outstanding at September 30, 2011
15,982

 
$
8.73

Granted
1,914

 
$
13.84

Exercised
(1,126
)
 
$
7.66

Forfeited and expired
(570
)
 
$
11.26

Outstanding at March 30, 2012
16,200

 
$
10.24

Performance-Based Options
Approximately $2.5 million and $5.6 million was charged to expense during the three and six months ended March 30, 2012 for Performance-Based Options, respectively. During the three and six months ended April 1, 2011, $0 was charged to expense for Performance-Based Options. As of March 30, 2012, there was approximately $4.6 million of unrecognized compensation expense related to nonvested Performance-Based Options, which is expected to be recognized over a weighted-average period of approximately 1 year.
A summary of Performance-Based Options activity is presented below:
 
Options
Shares
(000s)
 
Weighted-
Average
Exercise
Price
Outstanding at September 30, 2011
16,051

 
$
8.73

Granted
1,914

 
$
13.84

Exercised
(498
)
 
$
7.15

Forfeited and expired
(1,354
)
 
$
9.25

Outstanding at March 30, 2012
16,113

 
$
9.35

Installment Stock Purchase Opportunities (“ISPOs”)
The Company recorded approximately $0.1 million and $0.3 million of compensation expense related to these awards during the three and six months ended March 30, 2012, respectively. As of March 30, 2012, there was approximately $1.6 million of unrecognized compensation expense related to nonvested ISPOs, which is expected to be recognized over a weighted-average period of approximately 3.80 years. During the six months ended March 30, 2012, the Company granted 300,000 ISPOs at a weighted-average exercise price of $14.01.
Seamless Unit Options
The Company recognized compensation expense of approximately $0.6 million and $1.1 million for Seamless unit options during the three and six months ended March 30, 2012, respectively. During the six months ended March 30, 2012, Seamless granted approximately 2.2 million unit options.
Deferred Stock Units
The Company granted 31,140 deferred stock units during the six months ended March 30, 2012. The compensation cost charged to expense during the three and six months ended March 30, 2012 for deferred stock units was approximately $0.5 million in each period. The Company granted 28,480 deferred stock units during the six months ended April 1, 2011. The compensation cost charged to expense during the three and six months ended April 1, 2011 for deferred stock units was approximately $0.4 million in each period.
(11) ACCOUNTS RECEIVABLE SECURITIZATION:
The Company has an agreement (the Receivables Facility) with several financial institutions whereby it sells on a continuous basis an undivided interest in all eligible trade accounts receivable, as defined in the Receivables Facility. The maximum amount of the facility is $250 million, which expires in January 2013. Pursuant to the Receivables Facility, the Company formed ARAMARK Receivables, LLC, a wholly-owned, consolidated, bankruptcy-remote subsidiary. ARAMARK

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Receivables, LLC was formed for the sole purpose of buying and selling receivables generated by certain subsidiaries of the Company. Under the Receivables Facility, the Company and certain of its subsidiaries transfer without recourse all of their accounts receivable to ARAMARK Receivables, LLC. As collections reduce previously transferred interests, interests in new, eligible receivables are transferred to ARAMARK Receivables, LLC, subject to meeting certain conditions. At March 30, 2012 and September 30, 2011, the amount of outstanding borrowings under the Receivables Facility was $223.9 million and $225.9 million and is included in “Long-Term Borrowings”, respectively. The Receivables Facility has been classified as noncurrent in the accompanying condensed consolidated balance sheet as the Company has the ability and intent to finance the repayments through additional borrowings under the senior secured credit agreement or through refinancing of the Receivables Facility.
(12)
EQUITY INVESTMENTS:
The Company’s principal equity method investment is its 50% ownership interest in AIM Services Co., Ltd., a Japanese food and support services company (approximately $254.3 million and $269.7 million at March 30, 2012 and September 30, 2011, respectively, which is included in “Other Assets” in the Condensed Consolidated Balance Sheets). Summarized financial information for AIM Services Co., Ltd. follows (in thousands):

 
Three Months
Ended
 
Three Months
Ended
 
March 30, 2012
 
April 1, 2011 
Sales
$
475,894

 
$
429,942

Gross profit
51,695

 
52,127

Net income
6,763

 
9,066

 
Six Months
Ended
 
Six Months
Ended
 
March 30, 2012
 
April 1, 2011 
Sales
$
960,096

 
$
867,389

Gross profit
110,339

 
109,750

Net income
17,595

 
20,728

ARAMARK’s equity in undistributed earnings of AIM Services Co., Ltd., net of amortization related to purchase accounting for the Transaction, was $2.3 million and $6.7 million for the three and six months ended March 30, 2012, respectively. ARAMARK’s equity in undistributed earnings of AIM Services Co., Ltd., net of amortization related to purchase accounting for the Transaction, was $3.5 million and $9.1 million for the three and six months ended April 1, 2011, respectively.
(13)
BUSINESS SEGMENTS:
Sales and operating income by reportable segment follow (in thousands):
 
 
Three Months
Ended
 
Three Months
Ended
Sales 
March 30, 2012
 
April 1, 2011 
Food and Support Services—North America
$
2,336,609

 
$
2,212,307

Food and Support Services—International
671,679

 
677,280

Uniform and Career Apparel
337,272

 
330,673

 
$
3,345,560

 
$
3,220,260

 

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Three Months
Ended
 
Three Months
Ended
Operating Income 
March 30, 2012
 
April 1, 2011 
Food and Support Services—North America
$
101,074

 
$
88,465

Food and Support Services—International
22,289

 
19,875

Uniform and Career Apparel
23,543

 
25,157

 
146,906

 
133,497

Corporate
(13,192
)
 
(11,229
)
Operating Income
133,714

 
122,268

Interest and other financing costs, net
(118,533
)
 
(92,765
)
Income from Continuing Operations Before Income Taxes
$
15,181

 
$
29,503

 
 
 
 
Six Months
Ended
 
Six Months
Ended
Sales 
March 30, 2012
 
April 1, 2011 
Food and Support Services—North America
$
4,733,857

 
$
4,480,343

Food and Support Services—International
1,356,518

 
1,349,716

Uniform and Career Apparel
677,797

 
674,707

 
$
6,768,172

 
$
6,504,766

 
 
Six Months
Ended
 
Six Months
Ended
Operating Income
March 30, 2012
 
April 1, 2011 
Food and Support Services—North America
$
227,319

 
$
216,836

Food and Support Services—International
42,843

 
32,455

Uniform and Career Apparel
56,585

 
59,686

 
326,747

 
308,977

Corporate
(26,157
)
 
(22,867
)
Operating Income
300,590

 
286,110

Interest and other financing costs, net
(227,347
)
 
(201,911
)
Income from Continuing Operations Before Income Taxes
$
73,243

 
$
84,199

In the first and second fiscal quarters, within the Food and Support Services—North America segment, historically there has been a lower level of activity at the sports, entertainment and recreational food service operations that is partly offset by increased activity in the educational operations. However, in the third and fourth fiscal quarters, historically there has been a significant increase at sports, entertainment and recreational accounts that is partially offset by the effect of summer recess on the educational accounts.
Food and Support Services—North America operating income for the six months ended March 30, 2012 includes planned transition and integration costs of $4.3 million related to the Filterfresh acquisition and a favorable risk insurance adjustment of $1.7 million related to favorable claims experience. Food and Support Services—North America operating income for the six months ended April 1, 2011 includes other income recognized of $7.8 million related to a compensation agreement signed with the National Park Service (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 the Sports & Entertainment sector, severance related expenses of $2.6 million and a favorable risk insurance adjustment of $0.9 million related to favorable claims experience.
Food and Support Services—International operating income for the three and six months ended March 30, 2012 includes a favorable adjustment of $1.5 million related to a non-income tax settlement in the U.K. in both periods and $0.4 million and $1.7 million of severance related expenses, respectively. Food and Support Services—International operating income for the three and six months ended April 1, 2011 includes a gain of $6.4 million related to the divestiture of the Company’s 67% ownership interest in the security business of its Chilean subsidiary (see Note 3) in both periods, favorable non-income tax settlements in the U.K. of $5.3 million in both periods, a goodwill and other intangible assets impairment charge of $5.3 million related to our India operations in both periods and severance related expenses of $2.9 million and $9.7 million,

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

respectively.
Uniform and Career Apparel operating income for the six months ended March 30, 2012 includes a favorable risk insurance adjustment of $5.7 million related to favorable claims experience and severance related expenses of $4.0 million. Uniform and Career Apparel operating income for the three and six months ended April 1, 2011 includes a gain of $2.6 million related to a property settlement of an eminent domain claim. Uniform and Career Apparel operating income for the six months ended April 1, 2011 also includes a risk insurance adjustment of $4.8 million related to favorable claims experience and severance related expenses of $1.3 million.
Corporate expenses include share-based compensation expense (see Note 10). Corporate expenses for the six months ended April 1, 2011 include severance related expenses of $1.0 million.
Interest and Other Financing Costs, net, for the three and six months of fiscal 2012 includes $10.5 million in both periods of third-party costs related to the amendment of the senior secured credit agreement that extended the maturity date of $1,231.6 million of the Company's outstanding term loans (see Note 7) and the amendment of the Company's Canadian subsidiary cross currency swap. Interest and Other Financing Costs, net, for the three and six month periods of fiscal 2011 includes interest income of approximately $14.1 million in both periods related to favorable non-income tax settlements in the U.K.
(14)
NEW ACCOUNTING STANDARD UPDATES:
In January 2010, the FASB issued an accounting standard update that requires new disclosures about recurring and non-recurring fair value measurements. The new disclosures include significant transfers into and out of level 1 and 2 measurements and changes the current disclosure requirement of level 3 measurement activity from a net basis to a gross basis. The standard also clarifies existing disclosure guidance about the level of disaggregation, inputs and valuation techniques. The new and revised disclosures were effective for ARAMARK in fiscal 2010, except for the revised disclosures about level 3 measurement activity, which became effective for ARAMARK in the first quarter of fiscal 2012 (see Note 16).
 
 
In May 2011, the FASB issued an accounting standard update that is intended to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. The new standard does not extend the use of fair value but rather provides clarification of existing guidance and additional disclosures. The Company adopted this guidance prospectively beginning in the second quarter of fiscal 2012. The standard update has resulted in expanded disclosures, specifically regarding level 3 fair value measurements (see Note 9 and Note 16).
In September 2011, the FASB issued an accounting standard update that simplifies how entities test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The update does not address impairment testing of the indefinite-lived intangibles. The guidance is effective for the Company beginning in fiscal 2013; however, early adoption is permitted. The Company is currently evaluating the impact of this pronouncement.
In June 2011, the FASB issued an accounting standard update that modifies the presentation of comprehensive income in the financial statements. The standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. In December 2011, the FASB issued an accounting standard update which deferred the portion of this update related to the presentation of reclassification adjustments between other comprehensive income and net income. The guidance is effective retrospectively for the Company beginning in the first quarter of fiscal 2013. The Company is currently evaluating the impact of this pronouncement.
In September 2011, the FASB issued an accounting standard update that requires companies participating in multiemployer pension plans to disclose more information about their involvement in the plans, specifically related to the amount of employer contributions made to each significant plan and to all plans in the aggregate, whether an employer’s contributions represent more than 5% of total contributions to the plan, whether any plans are subject to a funding improvement plan, the expiration date(s) of the collective bargaining agreement(s) and any minimum funding arrangements, the most recent certified funded status of the plan, as determined by the plan’s “zone status,” (required by the Pension Protection Act of 2006) and a description of the nature and effect of any changes affecting comparability for each period an income statement is presented. The guidance is effective for the Company’s 2012 fiscal year-end. The Company is currently evaluating the impact of this pronouncement.
In December 2011, the FASB issued an accounting standard update that requires companies with financial instruments and derivative instruments that are offset on the balance sheet or subject to a master netting arrangement to provide additional

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

disclosures regarding the instruments impact on a company’s financial position. The guidance is effective for the Company beginning in the first quarter of fiscal 2014. The Company is currently evaluating the impact of this pronouncement.
(15)
COMMITMENTS AND CONTINGENCIES:
Certain of the Company’s lease arrangements, primarily vehicle leases, with terms of one to eight years, contain provisions related to residual value guarantees. The maximum potential liability to the Company under such arrangements was approximately $97.0 million at March 30, 2012 if the terminal fair value of vehicles coming off lease was zero. Consistent with past experience, management does not expect any significant payments will be required pursuant to these arrangements. No amounts have been accrued for guarantee arrangements at March 30, 2012.
From time to time, the Company is a party to various legal actions and investigations involving claims incidental to the conduct of its business, including actions by clients, customers, employees, government entities and third parties, including under federal and state employment laws, wage and hour laws, immigration laws, human health and safety laws, import and export controls and customs laws, environmental laws, false claims statutes, minority business enterprise and women owned business enterprise statutes, contractual disputes, antitrust and competition laws and dram shop laws. Based on information currently available, advice of counsel, available insurance coverage, established reserves and other resources, the Company does not believe that any such actions are likely to be, individually or in the aggregate, material to its business, financial condition, results of operations or cash flows. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company’s business, financial condition, results of operations or cash flows.
The Company has been informed that an Illinois state civil action has been filed against a subsidiary of the Company by an unnamed Relator under the Illinois Whistleblower Reward and Protection Act in the Circuit Court of Cook County, Illinois County Department, Law Division. The action alleges, among other things, that the subsidiary has not complied with the requirement to contract with minority owned and women owned businesses in connection with its contracts with Cook County and seeks monetary damages. The Company has accrued its best estimate of this potential liability as of March 30, 2012.
 (16) FAIR VALUE OF ASSETS AND 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
Recurring Fair Value Measurements
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, borrowings and derivatives. Management believes that the carrying value of cash and cash equivalents, accounts receivable and accounts payable are representative of their respective fair values. In conjunction with the fair value measurement of the derivative instruments, the Company made an accounting policy election to measure the credit risk of its derivative instruments, that are subject to master netting agreements, on a net basis by counterparty portfolio. The fair value of the Company’s debt at March 30, 2012 and September 30, 2011 was $5,833.5 million and $5,505.7 million, respectively. The carrying value of the Company’s debt at March 30, 2012 and September 30, 2011 was $5,816.6 million and $5,637.7 million, respectively. The fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the respective periods. The inputs utilized in estimating the fair value of the Company's debt has been classified as level 2 in the fair value hierarchy levels.
At March 30, 2012 and September 30, 2011, the following financial assets and financial liabilities were measured at fair value on a recurring basis using the type of inputs shown (in thousands):
 

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
March 30, 2012
 
September 30, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$

 
$

 
$

 
$

 
$
2,856

Gasoline and diesel fuel agreements

 
225

 

 
225

 

Total assets measured at fair value on a recurring basis
$

 
$
225

 
$

 
$
225

 
$
2,856

 

 

 

 

 

Liabilities:

 

 

 

 

Interest rate swap agreements
$

 
$
44,577

 
$

 
$
44,577

 
$
93,403

Cross currency swap agreements

 
42,077

 

 
42,077

 
35,551

Natural gas hedge agreements

 
288

 

 
288

 
187

Gasoline and diesel fuel agreements

 

 

 

 
1,894

Foreign currency forward exchange contracts

 
85

 

 
85

 

Total liabilities measured at fair value on a recurring basis
$

 
$
87,027

 
$

 
$
87,027

 
$
131,035

Common Stock Subject to Repurchase
$

 
$

 
$
169,328

 
$
169,328

 
$
158,061

The following table presents the changes in financial instruments for which level 3 inputs were significant to their valuation for the six months ended March 30, 2012 (in thousands):
 
 
Common Stock
Subject to
Repurchase
Balance at September 30, 2011
$
158,061

Issuances of Parent Company common stock
806

Repurchases of Parent Company common stock
(9,746
)
Change in fair market value of Parent Company common stock
20,207

Balance at March 30, 2012
$
169,328

(17)
ARAMARK HOLDINGS CORPORATION (PARENT COMPANY):
ARAMARK Holdings Corporation has 600.0 million common shares authorized, approximately 214.0 million common shares issued and approximately 203.2 million common shares outstanding as of March 30, 2012.
On April 18, 2011, the Parent 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 (the Parent Company Notes). Interest on the Parent Company Notes accrues at the rate of 8.625% per annum with respect to interest payments made in cash and 9.375% per annum with respect to any payment in-kind interest. The Parent Company Notes are obligations of the Parent Company, are not guaranteed by the Company and its subsidiaries and are structurally subordinated to all existing and future indebtedness and other liabilities of the Company and its subsidiaries, including trade payables, the senior secured revolving credit facility, the senior secured term loan facility, 8.50% senior notes due 2015, senior floating rate notes due 2015 and 5.00% senior notes due 2012. The Parent Company is obligated to pay interest on the Parent Company Notes in cash to the extent the Company has sufficient capacity to distribute such amounts to the Parent Company under the covenants relating to the Company’s outstanding indebtedness, including the senior secured revolving credit facility, the senior secured term loan facility, the 8.50% senior notes due 2015 and the senior floating rate notes due 2015. If the Company does not have sufficient covenant capacity to distribute such amounts to the Parent Company, the Parent Company will have the ability to pay the interest on the Parent Company Notes through the issuance of additional notes.
At March 30, 2012, ARAMARK Holdings Corporation had long-term borrowings of $595.0 million, net of discount, interest payable of $21.2 million and unamortized deferred financing costs on the Parent Company Notes of $12.2 million. For the

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

three and six months ended March 30, 2012, ARAMARK Holdings Corporation recorded Interest and Other Financing Costs, net, of $13.7 million and $27.4 million, respectively. In November 2011, the Company distributed approximately $27.7 million to the Parent Company as an advance which was used to pay the interest on the Parent Company Notes. During the first quarter of fiscal 2012, the advance was reduced by approximately $14.9 million, reflecting a non-cash reduction in the Company’s income taxes payable due to the tax benefit attributable to the interest on the Parent Company Notes.
(18)
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF ARAMARK CORPORATION AND SUBSIDIARIES:
The following condensed consolidating financial statements of ARAMARK Corporation and subsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X.
These condensed consolidating financial statements have been prepared from the Company’s financial information on the same basis of accounting as the condensed consolidated financial statements. Interest expense and certain administrative costs are partially allocated to all of the subsidiaries of the Company. Goodwill and other intangible assets have been allocated to all of the subsidiaries of the Company based on management’s estimates. On January 26, 2007, in connection with the Transaction, the Company issued 8.50% senior notes due 2015 and senior floating rate notes due 2015. The senior notes are jointly and severally guaranteed on a senior unsecured basis by substantially all of the Company’s existing and future domestic subsidiaries (excluding the receivables facility subsidiary) (“Guarantors”). Each of the Guarantors is wholly-owned, directly or indirectly, by the Company. All other subsidiaries of the Company, either direct or indirect, do not guarantee the senior notes (“Non-Guarantors”). The Guarantors also guarantee certain other unregistered debt.
 
 

20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
March 30, 2012
(in millions)
 
 
ARAMARK
Corporation
 
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
22.5

 
$
38.7

 
$
39.7

 
$

 
$
100.9

Receivables
2.8

 
271.7

 
1,077.3

 

 
1,351.8

Inventories, at lower of cost or market
15.9

 
388.3

 
83.1

 

 
487.3

Prepayments and other current assets
5.2

 
121.6

 
88.8

 

 
215.6

Assets held for sale

 
2.8

 

 

 
2.8

Total current assets
46.4

 
823.1

 
1,288.9

 

 
2,158.4

 
 
 
 
 
 
 
 
 
 
Property and Equipment, net
37.1

 
763.2

 
227.6

 

 
1,027.9

Goodwill
173.0

 
3,766.3

 
772.9

 

 
4,712.2

Investment in and Advances to Subsidiaries
6,857.7

 
460.6

 
189.7

 
(7,508.0
)
 

Other Intangible Assets
46.7

 
1,371.1

 
286.4

 

 
1,704.2

Other Assets
69.3

 
558.6

 
343.7

 
(2.0
)
 
969.6

 
$
7,230.2

 
$
7,742.9

 
$
3,109.2

 
$
(7,510.0
)
 
$
10,572.3

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term borrowings
$
0.7

 
$
11.4

 
$
47.0

 
$

 
$
59.1

Accounts payable
138.9

 
306.2

 
311.0

 

 
756.1

Accrued expenses and other liabilities
139.8

 
676.3

 
250.9

 
0.1

 
1,067.1

Total current liabilities
279.4

 
993.9

 
608.9

 
0.1

 
1,882.3

Long-term Borrowings
4,948.5

 
33.9

 
775.2

 

 
5,757.6

Deferred Income Taxes and Other Noncurrent Liabilities
333.8

 
678.6

 
218.5

 

 
1,230.9

Intercompany Payable

 
5,628.0

 
1,080.2

 
(6,708.2
)
 

Common Stock Subject to Repurchase
169.3

 

 

 

 
169.3

Total Equity
1,499.2

 
408.5

 
426.4

 
(801.9
)
 
1,532.2

 
$
7,230.2

 
$
7,742.9

 
$
3,109.2

 
$
(7,510.0
)
 
$
10,572.3




21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 2011
(in millions)
 
 
ARAMARK
Corporation
 
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
137.4

 
$
32.2

 
$
43.7

 
$

 
$
213.3

Receivables
3.1

 
241.9

 
1,007.3

 

 
1,252.3

Inventories, at lower of cost or market
16.1

 
356.6

 
78.1

 

 
450.8

Prepayments and other current assets
31.9

 
118.5

 
61.2

 

 
211.6

Assets held for sale

 
2.8

 

 

 
2.8

Total current assets
188.5

 
752.0

 
1,190.3

 

 
2,130.8

 
 
 
 
 
 
 
 
 
 
Property and Equipment, net
38.3

 
751.6

 
214.8

 

 
1,004.7

Goodwill
173.1

 
3,766.1

 
701.4

 

 
4,640.6

Investment in and Advances to Subsidiaries
6,609.0

 
250.7

 
180.9

 
(7,040.6
)
 

Other Intangible Assets
51.4

 
1,442.7

 
254.3

 

 
1,748.4

Other Assets
75.5

 
554.5

 
357.0

 
(2.0
)
 
985.0

 
$
7,135.8

 
$
7,517.6

 
$
2,898.7

 
$
(7,042.6
)
 
$
10,509.5

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of long-term borrowings
$
0.7

 
$
10.0

 
$
38.3

 
$

 
$
49.0

Accounts payable
132.9

 
335.1

 
307.4

 

 
775.4

Accrued expenses and other liabilities
218.2

 
770.0

 
238.3

 
0.1

 
1,226.6

Total current liabilities
351.8

 
1,115.1

 
584.0

 
0.1

 
2,051.0

Long-term Borrowings
4,833.7

 
34.7

 
720.2

 

 
5,588.6

Deferred Income Taxes and Other Noncurrent Liabilities
347.0

 
695.7

 
192.1

 

 
1,234.8

Intercompany Payable

 
5,352.7

 
1,158.7

 
(6,511.4
)
 

Common Stock Subject to Repurchase
158.1

 

 

 

 
158.1

Total Equity
1,445.2

 
319.4

 
243.7

 
(531.3
)
 
1,477.0

 
$
7,135.8

 
$
7,517.6

 
$
2,898.7

 
$
(7,042.6
)
 
$
10,509.5


 
 

22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the three months ended March 30, 2012
(in millions)
 
 
ARAMARK
Corporation
 
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$
253.6

 
$
2,013.2

 
$
1,078.8

 
$

 
$
3,345.6

Costs and Expenses:
 
 
 
 
 
 
 
 
 
Cost of services provided
236.6

 
1,803.4

 
988.7

 

 
3,028.7

Depreciation and amortization
4.7

 
94.9

 
32.1

 

 
131.7

Selling and general corporate expenses
14.9

 
30.1

 
6.5

 

 
51.5

Interest and other financing costs
108.2

 
(0.2
)
 
10.5

 

 
118.5

Expense allocations
(102.4
)
 
96.5

 
5.9

 

 

 
262.0

 
2,024.7

 
1,043.7

 

 
3,330.4

Income (Loss) from Continuing Operations before Income Taxes
(8.4
)
 
(11.5
)
 
35.1

 

 
15.2

Provision (Benefit) for Income Taxes
(2.5
)
 
(7.9
)
 
14.6

 

 
4.2

Equity in Net Income of Subsidiaries
16.9

 

 

 
(16.9
)
 

Income (loss) from Continuing Operations
11.0

 
(3.6
)
 
20.5

 
(16.9
)
 
11.0

Income from Discontinued Operations, net of tax

 

 

 

 

Net income (loss)
11.0

 
(3.6
)
 
20.5

 
(16.9
)
 
11.0

Less: Net income attributable to noncontrolling interest

 

 
1.1

 

 
1.1

Net income (loss) attributable to ARAMARK shareholder
$
11.0

 
$
(3.6
)
 
$
19.4

 
$
(16.9
)
 
$
9.9

 
 

23


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the six months ended March 30, 2012
(in millions)
 
ARAMARK
Corporation
 
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$
510.3

 
$
4,093.0

 
$
2,164.9

 
$

 
$
6,768.2

Costs and Expenses:
 
 
 
 
 
 
 
 
 
Cost of services provided
480.7

 
3,634.3

 
1,989.4

 

 
6,104.4

Depreciation and amortization
9.6

 
189.2

 
64.8

 

 
263.6

Selling and general corporate expenses
28.9

 
57.8

 
12.9

 

 
99.6

Interest and other financing costs
208.3

 
(0.2
)
 
19.2

 

 
227.3

Expense allocations
(198.1
)
 
186.3

 
11.8

 

 

 
529.4

 
4,067.4

 
2,098.1

 

 
6,694.9

Income (Loss) from Continuing Operations before Income Taxes
(19.1
)
 
25.6

 
66.8

 

 
73.3

Provision (Benefit) for Income Taxes
(6.0
)
 
8.1

 
21.1

 

 
23.2

Equity in Net Income of Subsidiaries
63.5

 

 

 
(63.5
)
 

Income from Continuing Operations
50.4

 
17.5

 
45.7

 
(63.5
)
 
50.1

Income from Discontinued Operations, net of tax

 
0.3

 

 

 
0.3

Net income
50.4

 
17.8

 
45.7

 
(63.5
)
 
50.4

Less: Net income attributable to noncontrolling interest

 

 
1.8

 

 
1.8

Net income attributable to ARAMARK shareholder
$
50.4

 
$
17.8

 
$
43.9

 
$
(63.5
)
 
$
48.6


 

 
 

24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the three months ended April 1, 2011
(in millions)
 
 
ARAMARK
Corporation
 
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$
246.3

 
$
1,971.3

 
$
1,002.7

 
$

 
$
3,220.3

Costs and Expenses:
 
 
 
 
 
 
 
 
 
Cost of services provided
234.2

 
1,763.4

 
927.5

 

 
2,925.1

Depreciation and amortization
5.0

 
95.8

 
26.5

 

 
127.3

Selling and general corporate expenses
12.3

 
27.3

 
6.0

 

 
45.6

Interest and other financing costs
100.2

 

 
(7.4
)
 

 
92.8

Expense allocations
(98.8
)
 
92.3

 
6.5

 

 

 
252.9

 
1,978.8

 
959.1

 

 
3,190.8

Income (loss) from Continuing Operations before Income Taxes
(6.6
)
 
(7.5
)
 
43.6

 

 
29.5

Provision (benefit) for Income Taxes
(2.0
)
 
(4.7
)
 
16.2

 

 
9.5

Equity in Net Income of Subsidiaries
25.0

 

 

 
(25.0
)
 

Income (loss) from Continuing Operations
20.4

 
(2.8
)
 
27.4

 
(25.0
)
 
20.0

Income from Discontinued Operations, net of tax

 
0.4

 

 

 
0.4

Net income (loss)
$
20.4

 
$
(2.4
)
 
$
27.4

 
$
(25.0
)
 
$
20.4


 
 

25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the six months ended April 1, 2011
(in millions)
 
 
ARAMARK
Corporation
 
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$
501.2

 
$
4,031.5

 
$
1,972.1

 
$

 
$
6,504.8

Costs and Expenses:
 
 
 
 
 
 
 
 
 
Cost of services provided
466.6

 
3,577.3

 
1,830.5

 

 
5,874.4

Depreciation and amortization
10.1

 
191.6

 
52.1

 

 
253.8

Selling and general corporate expenses
25.7

 
53.3

 
11.5

 

 
90.5

Interest and other financing costs
201.7

 
0.2

 

 

 
201.9

Expense allocations
(199.2
)
 
188.3

 
10.9