10-Q 1 q12014aramark10-q.htm 10-Q Q1 2014 ARAMARK 10-Q


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 December 27, 2013
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 001-36223
___________________________________________
ARAMARK HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
 ___________________________________________
Delaware
20-8236097

(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  ¨    No  x
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
Common stock outstanding as of January 24, 2014: 230,229,672 shares
 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
 
 
 
 
 
 
ITEM 1.
 
ITEM 1A.
 
ITEM 2.
 
ITEM 5.
 
ITEM 6.





PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands, Except Share Amounts)
 
 
December 27, 2013
 
September 27, 2013
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
115,598

 
$
110,998

Receivables
1,504,479

 
1,405,843

Inventories, at lower of cost or market
532,943

 
541,972

Prepayments and other current assets
183,549

 
228,352

Total current assets
2,336,569

 
2,287,165

Property and Equipment, net
967,350

 
977,323

Goodwill
4,615,082

 
4,619,987

Other Intangible Assets
1,363,219

 
1,408,764

Other Assets
967,116

 
973,867

 
$
10,249,336

 
$
10,267,106

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term borrowings
$
88,786

 
$
65,841

Accounts payable
760,284

 
888,969

Accrued expenses and other current liabilities
1,139,678

 
1,434,443

Total current liabilities
1,988,748

 
2,389,253

Long-Term Borrowings
5,555,929

 
5,758,229

Deferred Income Taxes and Other Noncurrent Liabilities
1,011,182

 
1,047,002

Common Stock Subject to Repurchase and Other
10,146

 
168,915

Stockholders' Equity:
 
 
 
Common stock, par value $.01 (authorized: 600,000,000 shares; issued: 2014–247,835,638 shares and 2013–219,585,247 shares; outstanding: 2014–229,958,467 shares and 2013–201,798,518 shares)
2,478

 
2,194

Capital surplus
2,424,437

 
1,693,663

Accumulated deficit
(434,471
)
 
(479,233
)
Accumulated other comprehensive loss
(53,674
)
 
(59,225
)
Treasury stock (shares held in treasury: 2014–17,877,171 shares and 2013–17,786,729 shares)
(255,439
)
 
(253,692
)
Total stockholders' equity
1,683,331

 
903,707

 
$
10,249,336

 
$
10,267,106


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

1



ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
 
 
Three Months
Ended
 
Three Months
Ended
 
December 27, 2013
 
December 28, 2012
Sales
$
3,763,081

 
$
3,535,915

Costs and Expenses:
 
 
 
Cost of services provided
3,354,819

 
3,171,540

Depreciation and amortization
136,824

 
133,400

Selling and general corporate expenses
114,216

 
55,656

 
3,605,859

 
3,360,596

Operating income
157,222

 
175,319

Interest and Other Financing Costs, net
83,353

 
113,351

Income Before Income Taxes
73,869

 
61,968

Provision for Income Taxes
28,953

 
18,776

Net income
44,916

 
43,192

Less: Net income attributable to noncontrolling interests
154

 
378

Net income attributable to ARAMARK Holdings stockholders
$
44,762

 
$
42,814

 
 
 
 
Earnings per share attributable to ARAMARK Holdings stockholders:
 
 
 
Basic
$
0.22

 
$
0.21

Diluted
$
0.21

 
$
0.20

Weighted Average Shares Outstanding:
 
 
 
Basic
206,462

 
201,991

Diluted
215,294

 
209,107

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



2



ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)

 
Three Months
Ended
 
Three Months
Ended
 
December 27, 2013
 
December 28, 2012
Net income
$
44,916

 
$
43,192

Other comprehensive income (loss), net of tax:
 
 
 
Pension plan adjustments
(155
)
 
(587
)
Foreign currency translation adjustments
1,370

 
(1,230
)
Fair value of cash flow hedges
4,336

 
6,477

Other comprehensive income, net of tax
5,551

 
4,660

Comprehensive income
50,467

 
47,852

Less: Net income attributable to noncontrolling interests
154

 
378

Comprehensive income attributable to ARAMARK Holdings stockholders
$
50,313

 
$
47,474


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


3




ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
 
 
Three Months
Ended
 
Three Months
Ended
 
December 27, 2013
 
December 28, 2012
Cash flows from operating activities:
 
 
 
Net income
$
44,916

 
$
43,192

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
136,824

 
133,400

Income taxes deferred
(21,162
)
 
(18,460
)
Share-based compensation expense
45,398

 
4,027

Changes in noncash working capital
(493,545
)
 
(386,109
)
Other operating activities
6,311

 
25,011

Net cash used in operating activities
(281,258
)
 
(198,939
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment, client contract investments and other
(85,722
)
 
(75,421
)
Disposals of property and equipment
8,791

 
4,222

Proceeds from divestitures
24,000

 
136

Acquisition of certain businesses, net of cash acquired
(8,176
)
 
(11,671
)
Other investing activities
2,278

 
4,013

Net cash used in investing activities
(58,829
)
 
(78,721
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term borrowings
197,969

 
963,654

Payments of long-term borrowings
(377,534
)
 
(658,917
)
Net change in funding under the Receivables Facility

 
36,200

Proceeds from initial public offering, net
524,081

 

Proceeds from issuance of common stock
1,837

 
3,246

Distribution in connection with spin-off of Seamless Holdings

 
(47,352
)
Repurchase of common stock
(629
)
 
(15,573
)
Other financing activities
(1,037
)
 
(11,393
)
Net cash provided by financing activities
344,687

 
269,865

Increase (Decrease) in cash and cash equivalents
4,600

 
(7,795
)
Cash and cash equivalents, beginning of period
110,998

 
136,748

Cash and cash equivalents, end of period
$
115,598

 
$
128,953


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


4


ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 27, 2013
(Unaudited)
(In Thousands)

 
Total
 
Common
Stock
 
Capital
Surplus
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
Balance, September 27, 2013
$
903,707

 
$
2,194

 
$
1,693,663

 
$
(479,233
)
 
$
(59,225
)
 
$
(253,692
)
Net income attributable to ARAMARK Holdings stockholders
44,762

 
 
 
 
 
44,762

 
 
 
 
Other comprehensive income
5,551

 
 
 
 
 
 
 
5,551

 
 
Capital contributions from issuance of common stock
2,398

 
4

 
2,394

 
 
 
 
 
 
Capital contributions from initial public offering
524,081

 
280

 
523,801

 
 
 
 
 
 
Compensation expense related to stock incentive plans
45,398

 
 
 
45,398

 
 
 
 
 
 
Tax benefits related to stock incentive plans
473

 
 
 
473

 
 
 
 
 
 
Change due to termination of provision in Stockholders' Agreement (see Note 8)
158,708

 
 
 
158,708

 
 
 
 
 
 
Purchases of common stock
(1,747
)
 
 
 
 
 
 
 
 
 
(1,747
)
Balance, December 27, 2013
$
1,683,331

 
$
2,478

 
$
2,424,437

 
$
(434,471
)
 
$
(53,674
)
 
$
(255,439
)

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

5


ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 28, 2012
(Unaudited)
(In Thousands)

 
Total
 
Total
ARAMARK Holdings
Stockholders'
Equity
 
Common
Stock
 
Capital
Surplus
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Noncontrolling
Interest
Balance, September 28, 2012
$
966,864

 
$
933,017

 
$
2,159

 
$
1,636,128

 
$
(444,479
)
 
$
(73,745
)
 
$
(187,046
)
 
$
33,847

Net income attributable to ARAMARK Holdings stockholders
43,030

 
42,814

 
 
 
 
 
42,814

 
 
 
 
 
216

Other comprehensive income
4,660

 
4,660

 
 
 
 
 
 
 
4,660

 
 
 
 
Capital contributions from issuance of common stock
8,508

 
8,508

 
12

 
8,496

 
 
 
 
 
 
 
 
Compensation expense related to stock incentive plans
4,027

 
4,027

 
 
 
4,027

 
 
 
 
 
 
 
 
Tax benefits related to stock incentive plans
788

 
788

 
 
 
788

 
 
 
 
 
 
 
 
Decrease in common stock subject to repurchase obligation, net
10,777

 
10,777

 
 
 
10,777

 
 
 
 
 
 
 
 
Purchases of common stock
(24,650
)
 
(24,650
)
 
 
 
 
 
 
 
 
 
(24,650
)
 
 
Distribution of Seamless Holdings
(138,173
)
 
(104,110
)
 
 
 
 
 
(104,110
)
 
 
 
 
 
(34,063
)
Balance, December 28, 2012
$
875,831

 
$
875,831

 
$
2,171

 
$
1,660,216

 
$
(505,775
)
 
$
(69,085
)
 
$
(211,696
)
 
$


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



6


ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1)
BASIS OF PRESENTATION:
On January 26, 2007, ARAMARK Holdings Corporation (the “Company” or “Holdings”), 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 the Company, and certain other members of the Company’s management, acquired all of the outstanding shares of ARAMARK Corporation (“ARAMARK Corporation”) in a going-private transaction.
On December 12, 2013, the Company began trading its common stock on the New York Stock Exchange under the symbol "ARMK" after its initial public offering ("IPO") of 28,000,000 shares of its common stock at a price of $20.00 per share (see Note 8).
The condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling financial interest is maintained. All significant intercompany transactions and accounts have been eliminated. The Company has an ownership interest in a subsidiary with a redeemable noncontrolling interest. The Company classifies redeemable noncontrolling interests outside of stockholders' equity in the Condensed Consolidated Balance Sheets in “Common Stock Subject to Repurchase and Other.” As of December 27, 2013 and September 27, 2013, the redeemable noncontrolling interest was approximately $10.1 million and $10.2 million, respectively. For the three months ended December 27, 2013, net income attributable to redeemable noncontrolling interest was $0.2 million. Distributions to redeemable noncontrolling interest was $0.3 million for the three months ended December 27, 2013. For the three months ended December 28, 2012, net income attributable to redeemable noncontrolling interest was $0.2 million. Distributions to redeemable noncontrolling interest was $0.2 million for the three months ended December 28, 2012.
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 prospectus, dated December 11, 2013, filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, on December 12, 2013. The Condensed Consolidated Balance Sheet as of September 27, 2013 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)
DIVESTITURES:
Fiscal 2014
McKinley Chalet Hotel
On October 7, 2013, the Company completed the sale of its McKinley Chalet Hotel (the "Chalet") located in Denali National Park for approximately $24.0 million in cash. The transaction resulted in a pretax loss of approximately $6.7 million (net of tax loss of approximately $9.1 million), which is included in "Cost of services provided" in the Condensed Consolidated Statements of Income. The pretax loss includes a write-off of an allocation of goodwill of approximately $12.8 million (see Note 5). The results of operations and cash flows associated with the Chalet divestiture were not material to the Company's condensed consolidated statements of income and cash flows.
Fiscal 2013
Spin-off of Seamless Holdings Corporation
On October 29, 2012, the Company completed the spin-off of its majority interest in Seamless North America, LLC ("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. 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 Holdings common

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

stock as of October 26, 2012, the record date, through a tax-free stock dividend. Each Holdings stockholder received one share of Seamless Holdings common stock for each share of Holdings common stock held as of the record date.
Until October 29, 2012, Seamless Holdings and its subsidiaries were part of the Company and its assets, liabilities, results of operations, and cash flows are included in the amounts reported in these condensed consolidated financial statements until that date. Following the spin-off, Seamless Holdings is an independent company and the Company retains no ownership interest in Seamless Holdings or Seamless. The Company's proforma results of operations for fiscal 2013 would not have been materially different than reported assuming the spin-off and related transactions had occurred at the beginning of the prior year period.
(3)
SUPPLEMENTAL FINANCIAL INFORMATION:
The Company made interest payments of approximately $66.6 million and $68.9 million and income tax payments of approximately $16.5 million and $25.0 million during the three months ended December 27, 2013 and December 28, 2012, respectively.
As of December 27, 2013 and September 27, 2013, “Accumulated other comprehensive loss” consists of pension plan adjustments (net of tax) of approximately ($30.7) million and ($30.5) million, respectively, foreign currency translation adjustment (net of tax) of approximately $4.7 million and $3.3 million, respectively, fair value of cash flow hedges (net of tax) of approximately ($19.7) million and ($24.0) million, respectively, and share of equity investees' accumulated other comprehensive loss (net of tax) of approximately ($8.0) million and ($8.0) million, respectively.
For the three months ended December 27, 2013 and December 28, 2012, the tax effects on comprehensive income for pension plan adjustments was approximately $0.1 million and $0.3 million, respectively, foreign currency translation adjustment was approximately $2.6 million and $4.3 million, respectively, and fair value of cash flow hedges was approximately ($3.0) million and ($3.8) million, respectively.
(4)
SEVERANCE:
During the second quarter and continuing through the remainder of fiscal 2013, the Company initiated a series of actions and further developed its plans to drive efficiency through the consolidation and centralization of its operations. As a result, the Company recorded charges during fiscal 2013 for severance and related costs. As of December 27, 2013 and September 27, 2013, the Company had an accrual of approximately $37.5 million and $46.7 million, respectively, related to the unpaid obligations for these costs.
(5)
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 three months ended December 27, 2013 follow (in thousands):  
Segment
September 27, 2013
 
Acquisitions and Divestitures
 
Translation
 
December 27, 2013
FSS North America
$
3,595,048

 
$
(11,103
)
 
$
(93
)
 
$
3,583,852

FSS International
451,154

 

 
6,291

 
457,445

Uniform
573,785

 

 

 
573,785

 
$
4,619,987

 
$
(11,103
)
 
$
6,198

 
$
4,615,082

The reduction in goodwill for Food and Support Services North America ("FSS North America") is primarily related to the Chalet divestiture (see Note 2). The amounts for acquisitions during fiscal 2014 may be revised upon final determination of the purchase price allocations.
Other intangible assets consist of (in thousands):

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
December 27, 2013
 
September 27, 2013
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
Customer relationship assets
$
1,892,212

 
$
(1,288,700
)
 
$
603,512

 
$
1,892,484

 
$
(1,242,578
)
 
$
649,906

Trade names
761,340

 
(1,633
)
 
759,707

 
760,491

 
(1,633
)
 
758,858

 
$
2,653,552

 
$
(1,290,333
)
 
$
1,363,219

 
$
2,652,975

 
$
(1,244,211
)
 
$
1,408,764

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, 5 to 24 years, with a weighted average life of approximately 11 years. The ARAMARK trade name is an indefinite lived intangible asset and is not amortizable but is evaluated for impairment at least annually.
Amortization of intangible assets for the three months ended December 27, 2013 and December 28, 2012 was approximately $47.6 million and $48.1 million.
(6)
BORROWINGS:
As of December 27, 2013 and September 27, 2013, all of the Company’s indebtedness was held by the Company’s wholly-owned subsidiary, ARAMARK Corporation. Long-term borrowings are summarized in the following table (in thousands):
 
 
December 27,
2013
 
September 27,
2013
Senior secured revolving credit facility
 
$
189,320

 
$
10,000

Senior secured term loan facility, due July 2016
 
2,663,613

 
3,032,349

Senior secured term loan facility, due September 2019
 
1,393,805

 
1,393,559

5.75% senior notes, due March 2020
 
1,000,000

 
1,000,000

Receivables Facility, due January 2015
 
300,000

 
300,000

Capital leases
 
49,170

 
52,385

Other
 
48,807

 
35,777

 
 
5,644,715

 
5,824,070

Less—current portion
 
(88,786
)
 
(65,841
)
 
 
$
5,555,929

 
$
5,758,229

The Company used the net proceeds from its initial public offering to repay borrowings of approximately $154.1 million on the senior secured revolving credit facility that were borrowed during the first quarter of fiscal 2014 and $370.0 million on the senior secured term loan facility, due July 2016 (see Note 8).
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.  The new term loans were borrowed by ARAMARK Corporation with an original issue discount of 0.25%. 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 Goldman Sachs Capital Partners and J.P. Morgan Partners.
(7)
DERIVATIVE INSTRUMENTS:
The Company enters into contractual derivative arrangements to manage changes in market conditions related to interest on debt obligations, foreign currency exposures and exposure to fluctuating gasoline and diesel fuel prices. Derivative instruments utilized during the period include interest rate swap agreements, foreign currency forward exchange contracts, and gasoline and diesel fuel agreements. All derivative instruments are recognized as either assets or liabilities on the balance sheet at fair value at the end of each quarter. The counterparties to the Company’s contractual derivative agreements are all major international financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. For designated hedging relationships, the Company formally documents the

9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 previously entered into $2.3 billion notional amount of interest rate swap agreements, fixing the rate on a like amount of variable rate borrowings. During the first quarter of fiscal 2014, the Company entered into $600 million notional amount of forward starting interest rate swap agreements to hedge the cash flow risk of variability in interest rate payments on a like amount of variable rate borrowings. 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 December 27, 2013 and September 27, 2013, approximately ($14.7) million and ($20.5) 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 three months ended December 27, 2013 and December 28, 2012 was not material.
The Company also previously entered into a $158.1 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. During the three months ended December 27, 2013 and December 28, 2012, approximately $2.8 million and $0.6 million of unrealized net of tax gains (losses) related to the swap were added to “Accumulated other comprehensive loss,” respectively. Approximately ($2.9) million and ($2.0) million were reclassified to offset net translation gains (losses) on the foreign currency denominated debt during the three months ended December 27, 2013 and December 28, 2012, respectively. As of December 27, 2013 and September 27, 2013, unrealized net of tax losses of approximately ($4.9) million and ($3.5) million related to the cross currency swap were included in “Accumulated other comprehensive loss,” respectively. There was no hedge ineffectiveness for the three months ended December 27, 2013. The hedge ineffectiveness for this cash flow hedging instrument during the three months ended December 28, 2012 was not material. As a result of Amendment Agreement No. 3, the Company de-designated the cross currency swaps that hedged the Canadian subsidiary's term loan with a maturity date of January 26, 2014. Prior to Amendment Agreement No. 3, these contracts met the required criteria to be designated as cash flow hedging instruments. As a result, approximately $3.2 million was reclassified from “Accumulated other comprehensive loss” in the Condensed Consolidated Balance Sheets to “Interest and Other Financing Costs, net” in the Condensed Consolidated Statements of Income during the three months ended December 28, 2012.
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
 
Three Months
Ended
 
December 27, 2013
 
December 28, 2012
Interest rate swap agreements
$
5,783

 
$
3,132

Cross currency swap agreements
(1,447
)
 
3,345

 
$
4,336

 
$
6,477

 
 
 
 
Derivatives not Designated in Hedging Relationships
In fiscal 2013, the Company elected to de-designate the cross currency swaps that were hedged against the Canadian subsidiary's term loan with a maturity date of January 26, 2014 due to the repayment of the term loan as a result of Amendment Agreement No. 3. As a result, on a prospective basis, changes in the fair value of these swaps will be recorded in earnings. For the three months ended December 27, 2013 and December 28, 2012, the Company recorded a pretax gain (loss) of approximately $2.2 million and $0.7 million, respectively, for the change in the fair value of these swaps in “Interest and Other Financing Costs, net” in the Condensed Consolidated Statements of Income. The changes in the fair value of these swaps are expected to offset future currency transaction gains and losses on the U.S. dollar denominated intercompany loan between the Company and its Canadian subsidiary.
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 December 27, 2013, the Company has contracts for approximately 2.1 million gallons outstanding for fiscal 2014. The

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Company does not record its gasoline and diesel fuel agreements as hedges for accounting purposes. As such, changes in the fair value of these contracts are recorded in earnings. The impact on earnings related to the change in fair value of these contracts for the three months ended December 27, 2013 and December 28, 2012 was not material.
As of December 27, 2013, the Company had foreign currency forward exchange contracts outstanding with notional amounts of €85.2 million and £36.5 million to mitigate the risk of changes in foreign currency exchange rates on 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 intercompany loans.
 
The Company's interest rate swap agreements are subject to master netting arrangements, which serve as credit mitigants to both the Company and its counterparties under certain situations. The Company presents the net asset or liability position of its derivative fair values on the Condensed Consolidated Balance Sheets.The following table summarizes the location and fair value, using Level 2 inputs, of the Company’s derivatives designated and not designated as hedging instruments in our Condensed Consolidated Balance Sheets (in thousands):
 
 
Balance Sheet Location
 
December 27, 2013
 
September 27, 2013
ASSETS
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Prepayments
 
$
41

 
$

Gasoline and diesel fuel agreements
 
Prepayments
 
367

 
37

 
 
 
 
$
408

 
$
37

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Accrued Expenses
 
$
112

 
$
3,494

Interest rate swap agreements
 
Other Noncurrent Liabilities
 
24,255

 
30,431

Cross currency swap agreements
 
Other Noncurrent Liabilities
 
13,201

 
16,129

 
 
 
 
37,568

 
50,054

 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Cross currency swap agreements
 
Accrued Expenses
 
9,043

 
12,818

Foreign currency forward exchange contracts
 
Accounts Payable
 

 
366

 
 
 
 
$
46,611

 
$
63,238


The following table summarizes the location of (gain) loss reclassified from “Accumulated other comprehensive loss” into earnings for derivatives designated as hedging instruments and the location of (gain) loss from the derivatives not designated as hedging instruments in the Condensed Consolidated Statements of Income (in thousands):  
 
 
 
 
Three Months
Ended
 
Three Months
Ended
 
 
Account
 
December 27, 2013
 
December 28, 2012
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Interest Expense
 
$
9,194

 
$
5,542

Cross currency swap agreements
 
Interest Expense
 
(2,615
)
 
1,997

 
 

 
$
6,579

 
$
7,539

 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Cross currency swap agreements
 
Interest Expense
 
$
(1,646
)
 
$
2,534

Gasoline and diesel fuel agreements
 
Cost of services provided
 
(356
)
 
122

Foreign currency forward exchange contracts
 
Interest Expense
 
3,137

 
840

 
 
 
 
$
1,135

 
$
3,496

 
 
 
 
 
 
 

At December 27, 2013, 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 $17.4 million.
 

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(8)
CAPITAL STOCK:
On December 17, 2013, the Company completed the IPO of 28,000,000 shares of its common stock at a price of $20.00 per share, raising approximately $524.1 million, net of costs directly related to the IPO. GS Capital Partners and J.P. Morgan Partners received approximately $6.5 million and $6.5 million, respectively, of underwriters' discounts relating to the shares sold by the Company which were included in the costs directly related to the IPO. The Company used the net proceeds to repay borrowings on the senior secured revolving credit facility and a portion of the principal on the senior secured term loan facility, due July 2016 (see Note 6). In addition, the Company paid cash bonuses and certain other expenses of approximately $5.0 million related to the IPO, which were included in the Condensed Consolidated Statements of Income.
Prior to the IPO, pursuant to the Amended and Restated Stockholders Agreement of the Company, upon termination of employment from the Company or one of its subsidiaries, members of the Company’s management (other than Mr. Neubauer) who held shares of common stock could have caused 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 have been, at the 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 had been classified outside of stockholders' equity. With the completion of the IPO, this provision was terminated. The amount of common stock subject to repurchase as of December 27, 2013 and September 27, 2013 was $0 and $158.7 million, respectively.
(9)
SHARE-BASED COMPENSATION:
On November 12, 2013, the Board of Directors (the "Board") approved, and the stockholders of Holdings adopted by written consent, the ARAMARK Holdings Corporation 2013 Stock Incentive Plan (the “2013 Stock Plan”), which became effective on December 1, 2013. The 2013 Stock Plan provides that the total number of shares of common stock that may be issued under the 2013 Stock Plan is 25,500,000. In connection with the adoption of the 2013 Stock Plan, the Board approved, and the stockholders of Holdings adopted by written consent, the Fifth Amended and Restated ARAMARK Holdings Corporation 2007 Management Stock Incentive Plan (the “Fifth Amended Stock Plan”) which amended certain terms of the 2007 Management Stock Incentive Plan ("2007 MSIP") in contemplation of the initial public offering of Holdings, including providing that no awards will be granted under the Fifth Amended Stock Plan shortly following the consummation of an initial public offering, as it is intended that grants following the initial public offering will be made under the 2013 Stock Plan.
During the three months ended December 27, 2013, share-based compensation expense was approximately $45.4 million, before taxes of $17.7 million. During the three months ended December 28, 2012, share-based compensation expense was approximately $4.0 million, before taxes of $1.6 million.
Stock Options
Time-Based Options
The Company granted 1.9 million time-based options with a weighted-average grant-date fair value of $6.65 during the three months ended December 27, 2013. The compensation cost charged to expense during the three months ended December 27, 2013 for time-based options was approximately $3.2 million. The compensation cost charged to expense during the three months ended December 28, 2012 for time-based options was approximately $1.9 million.
Performance-Based Options
On November 11, 2013, the Compensation Committee approved an amendment to all outstanding 2007 MSIP Option Agreements (the “Performance Option Amendment”) modifying the vesting provisions relating to outstanding performance-based options granted under the 2007 MSIP. The Performance Option Amendment provides that in the event of an initial public offering of Holdings, subject to continued employment on such date, 50% of any then-unvested performance-based options that did not meet applicable performance thresholds in prior years (the “Missed Year Options”) will become vested if the initial public offering price for the common stock of Holdings equals or exceeds $20.00 per share. In addition, during the 18 month period following the initial public offering, if the closing trading price for common stock of Holdings equals or exceeds $25.00 per share over any consecutive twenty day trading period, 100% of the Missed Year Options will become vested. There are a total of approximately 5.1 million Missed Year Options. The fair values of the Missed Year Options were valued at the award modification date using a Monte-Carlo option model, which simulates a range of possible future stock prices and estimates the probabilities of meeting the modified vesting provision of the trading price for the common stock of Holdings equaling or exceeding $25.00 per share over any consecutive twenty day trading period during the 18 month period following the initial public offering. The following weighted-average assumptions were used in estimating the fair value of the

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Missed Year Options: estimated volatility (30%), expected dividend yield (1.5%), expected life (3-8 years) and risk-free rate (0.66%-2.63%). The weighted-average fair value of the Missed Year Options modified on November 11, 2013 was $10.19 per option.
During the three months ended December 27, 2013, approximately $39.1 million was charged to expense for performance-based options, including $36.9 million related to the Missed Year Options that were modified. As of December 27, 2013, there was approximately $15.4 million of unrecognized compensation expense related to the Missed Year Options, which will be recgonized over the remainder of fiscal 2014. During the three months ended December 28, 2012, approximately $1.3 million was charged to expense for performance-based options.
Installment Stock Purchase Opportunities (“ISPOs”)
The Company recorded approximately $0.7 million of compensation expense related to ISPOs and the exchanged restricted stock and non-qualified stock options during the three months ended December 27, 2013. The Company recorded approximately $0.4 million of compensation expense related to ISPOs during the three months ended December 28, 2012.
Time-Based Restricted Stock Units
The Restricted Stock Unit Agreement provides for grants of restricted stock units (“RSUs”), 25% of which will vest and be settled in shares on each of the first four anniversaries of the date of grant, subject to the participant’s continued employment with the Company through each such anniversary. The grant-date fair value of RSUs is based on the fair value of the Company’s common stock. Participants holding RSUs will receive the benefit of any dividends paid on shares in the form of additional restricted stock units. The unvested units are subject to forfeiture if employment is terminated other than due to death, disability or retirement, and the units are nontransferable while subject to forfeiture.
The Company granted 2,048,785 RSUs during the three months ended December 27, 2013 at a weighted-average grant-date fair value of $20.45. Compensation expense for RSUs is recognized on a straight-line basis over the vesting period during which employees perform related services. The compensation cost charged to expense during the three months ended December 27, 2013 for RSUs was approximately $2.3 million.
Performance Stock Units
Under the 2013 Stock Plan, the Company is authorized to grant Performance Stock Units ("PSUs") to its employees. A participant is eligible to become vested in a number of PSUs equal to a percentage, higher or lower, of the target number of PSUs granted based on the level of the Company’s achievement of performance conditions. The first 33% of the award will vest if and when the Company achieves these performance conditions while the remaining 67% will generally vest ratably over the next two anniversaries of the date of grant, subject to the achievement of the performance condition in the first year of grant and the participant's continued employment with the Company through each such anniversary. The grant-date fair value of the PSUs is based on the fair value of the Company's common stock. On December 20, 2013, the Company granted 466,763 PSUs with a weighted-average grant-date fair value of $23.92 with performance conditions based upon the achievement of a level of earnings per share.
Deferred Stock Units
The Company granted 6,318 deferred stock units during the three months ended December 27, 2013. The compensation cost charged to expense during the three months ended December 27, 2013 was approximately $0.1 million. The Company granted 17,066 deferred stock units during the three months ended December 28, 2012. The compensation cost charged to expense during the three months ended December 28, 2012 for deferred stock units was approximately $0.2 million.
(10) 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 available under the facility is $300 million, which expires in January 2015. Pursuant to the Receivables Facility, the Company formed ARAMARK Receivables, LLC, a wholly-owned, consolidated, bankruptcy-remote subsidiary. ARAMARK 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 December 27, 2013 and September 27, 2013, the amount of outstanding borrowings under the Receivables Facility was $300.0 million and $300.0 million and is included in “Long-Term Borrowings”, respectively.

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(11)
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 $181.9 million and $190.7 million at December 27, 2013 and September 27, 2013, 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
 
December 27, 2013
 
December 28, 2012
Sales
$
399,101

 
$
480,901

Gross profit
46,021

 
56,740

Net income
7,743

 
9,402

The period to period comparisons of the summarized financial information for AIM Services Co., Ltd., presented in U.S. dollars above, is significantly impacted by currency translation. ARAMARK’s equity in undistributed earnings of AIM Services Co., Ltd., net of amortization related to purchase accounting for the 2007 going-private transaction, was $3.2 million for the three months ended December 27, 2013. ARAMARK’s equity in undistributed earnings of AIM Services Co., Ltd., net of amortization related to purchase accounting for the 2007 going-private transaction, was $3.9 million for the three months ended December 28, 2012.
(12)
BUSINESS SEGMENTS:
Sales, operating income and depreciation and amortization by reportable segment follow (in thousands):
 
Three Months
Ended
 
Three Months
Ended
Sales 
December 27, 2013
 
December 28, 2012
FSS North America
$
2,620,351

 
$
2,457,584

FSS International
775,575

 
724,897

Uniform
367,155

 
353,434

 
$
3,763,081

 
$
3,535,915

 
Three Months
Ended
 
Three Months
Ended
Operating Income 
December 27, 2013
 
December 28, 2012
FSS North America
$
163,134

 
$
141,551

FSS International
27,072

 
19,210

Uniform
40,295

 
31,096

 
230,501

 
191,857

Corporate
(73,279
)
 
(16,538
)
Operating Income
157,222

 
175,319

Interest and other financing costs, net
(83,353
)
 
(113,351
)
Income Before Income Taxes
$
73,869

 
$
61,968

 

 
Three Months
Ended
 
Three Months
Ended
Depreciation and Amortization
December 27, 2013
 
December 28, 2012
FSS North America
$
96,048

 
$
91,848

FSS International
15,459

 
15,779

Uniform
25,232

 
25,544

Corporate
85

 
229

 
$
136,824

 
$
133,400


14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In the first and second fiscal quarters, within the FSS 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.
FSS North America operating income for the three months ended December 27, 2013 includes a favorable risk insurance adjustment of $3.0 million related to favorable claims experience offset by the pretax loss of approximately $6.7 million on the Chalet divestiture (see Note 2). FSS North America sales and operating income for the three months ended December 28, 2012 were negatively affected by Hurricane Sandy and the National Hockey League lockout.
Food and Support Services International ("FSS International") operating income for the three months ended December 28, 2012 includes severance related expenses of $2.4 million.
Uniform and Career Apparel ("Uniform") operating income for the three months ended December 28, 2012 includes a favorable risk insurance adjustment of $1.7 million related to favorable claims experience and severance related expenses of $3.6 million.
Corporate expenses includes share-based compensation expense (see Note 9), approximately $5.0 million of cash bonuses and certain other expenses related to the completion of the IPO (see Note 8) and approximately $5.2 million of costs related to the Company's rebranding initiative.
Interest and Other Financing Costs, net, for the three month period of fiscal 2014 was favorably impacted by the refinancing of the Company's debt during fiscal 2013 and lower average debt levels offset by the impact of forward starting interest rate swaps entered into during fiscal 2013. Interest and Other Financing Costs, net, for the three month period of fiscal 2013 includes approximately $11.6 million of third-party costs incurred related to Amendment Agreement No. 3 to the senior secured credit agreement (see Note 6) 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 (see Note 7).
(13)
NEW ACCOUNTING STANDARD UPDATES:
 
In December 2011, the FASB issued an accounting standard update (“ASU”) 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 disclosures regarding the instruments impact on a company’s financial position. In January 2013, the FASB issued an accounting standard update to clarify the scope of this ASU. The Company adopted the guidance in the first quarter of fiscal 2014 which did not have a material impact on the condensed consolidated financial statements.
In February 2013, the FASB issued an accounting standard update which requires companies to disclose information about reclassifications out of accumulated other comprehensive income (“AOCI”). Companies also are required to present reclassifications by component when reporting changes in AOCI balances. For significant items reclassified out of AOCI to net income in their entirety in the period, companies must report the effect of the reclassifications on the respective line items in the statement where net income is presented. The Company adopted the guidance in the first quarter of fiscal 2014 which did not have a material impact on the condensed consolidated financial statements.
In January 2014, the FASB issued an accounting standard update which states that companies should not account for certain service concession arrangements with public-sector entities as leases and should not recognize the related infrastructure as property, plant and equipment. The guidance is effective for the Company beginning in the second quarter of fiscal 2015. The Company is currently evaluating the impact of the pronouncement.
(14)
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 $117.4 million at December 27, 2013 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 December 27, 2013.
From time to time, the Company and its subsidiaries are 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, 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,

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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. 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.
 (15) 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 December 27, 2013 and September 27, 2013 was $5,715.9 million and $5,854.9 million, respectively. The carrying value of the Company’s debt at December 27, 2013 and September 27, 2013 was $5,644.7 million and $5,824.1 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.
During the first quarter of fiscal 2014, the Company's obligation to repurchase shares was eliminated (see Note 8). The following table presents the changes in the Company's common stock subject to repurchase, a level 3 measurement, for the three months ended December 27, 2013 (in thousands):
 
Common Stock
Subject to
Repurchase
Balance, September 27, 2013
$
158,708

Repurchases of common stock
(763
)
Reclassification of common stock subject to repurchase
(157,945
)
Balance, December 27, 2013
$

 (16) EARNINGS PER SHARE:
Basic earnings per share is computed using the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is computed using the weighted average number of common shares outstanding adjusted to include the potentially dilutive effect of stock awards.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following table sets forth the computation of basic and diluted earnings per share attributable to ARAMARK Holdings stockholders (in thousands, except per share data):
 
 
Three Months
Ended
 
Three Months
Ended
 
 
December 27, 2013
 
December 28, 2012
Earnings:
 
 
 
 
Net income attributable to ARAMARK Holdings stockholders
 
$
44,762

 
$
42,814

Shares:
 
 
 
 
Basic weighted-averages shares outstanding
 
206,462

 
201,991

Effect of dilutive securities
 
8,832

 
7,116

Diluted weighted-averages shares outstanding
 
215,294

 
209,107

 
 
 
 
 
Basic Earnings Per Share:
 
 
 
 
Net income attributable to ARAMARK Holdings stockholders
 
$
0.22

 
$
0.21

 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
Net income attributable to ARAMARK Holdings stockholders
 
$
0.21

 
$
0.20

Share-based awards to purchase 7.3 million and 3.9 million shares were outstanding at December 27, 2013 and December 28, 2012, respectively, but were not included in the computation of diluted earnings per share, as their effect would have been antidilutive. In addition, performance-based options and performance stock units to purchase 5.6 million and 10.7 million shares were outstanding at December 27, 2013 and December 28, 2012, respectively, but were not included in the computation of diluted earnings per share, as the performance targets were not met.
 (17) SUBSEQUENT EVENT:

On February 4, 2014, the Company's Board declared a $0.075 dividend per share of common stock, payable on March 11, 2014, to shareholders of record on the close of business on February 18, 2014.
(18)
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES:

The following condensed consolidating financial statements of the Company 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 consolidated financial statements. Interest expense and certain other costs are partially allocated to all of the subsidiaries of the Company. Goodwill and other intangible assets have been allocated to the subsidiaries based on management’s estimates. The 5.75% Senior Notes are an obligation of the Company's wholly-owned subsidiary, ARAMARK Corporation, and are jointly and severally guaranteed on a senior unsecured basis by the Company and 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 debt.


17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
December 27, 2013
(in millions)
 
 
ARAMARK Holdings
Corporation
  (Parent)
 
ARAMARK
Corporation
  (Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
23.3

 
$
43.5

 
$
48.8

 
$

 
$
115.6

Receivables

 
2.2

 
277.3

 
1,225.0

 

 
1,504.5

Inventories, at lower of cost or market

 
15.3

 
434.1

 
83.6

 

 
533.0

Prepayments and other current assets

 
19.5

 
77.9

 
86.1

 

 
183.5

Total current assets

 
60.3

 
832.8

 
1,443.5

 

 
2,336.6

 
 
 
 
 
 
 
 
 
 
 
 
Property and Equipment, net

 
24.9

 
746.4

 
196.0

 

 
967.3

Goodwill

 
173.1

 
3,981.7

 
460.3

 

 
4,615.1

Investment in and Advances to Subsidiaries
1,687.0

 
6,138.8

 
474.3

 
122.4

 
(8,422.5
)
 

Other Intangible Assets

 
30.2

 
1,190.8

 
142.2

 

 
1,363.2

Other Assets

 
71.4

 
630.5

 
267.2

 
(2.0
)
 
967.1

 
$
1,687.0

 
$
6,498.7

 
$
7,856.5

 
$
2,631.6

 
$
(8,424.5
)
 
$
10,249.3

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

 
$
29.9

 
$
12.0

 
$
46.9

 
$

 
$
88.8

Accounts payable
2.0

 
159.1

 
354.9

 
244.3

 

 
760.3

Accrued expenses and other current liabilities
1.7

 
222.5

 
608.3

 
307.1

 
0.1

 
1,139.7

Total current liabilities
3.7

 
411.5

 
975.2

 
598.3

 
0.1

 
1,988.8

Long-term Borrowings

 
4,872.6

 
37.2

 
646.1

 

 
5,555.9

Deferred Income Taxes and Other Noncurrent Liabilities

 
330.0

 
593.3

 
87.9

 

 
1,011.2

Intercompany Payable

 

 
5,333.3

 
1,383.1

 
(6,716.4
)
 

Common Stock Subject to Repurchase and other

 

 
10.1

 

 

 
10.1

Total Stockholders' Equity
1,683.3

 
884.6

 
907.4

 
(83.8
)
 
(1,708.2
)
 
1,683.3

 
$
1,687.0

 
$
6,498.7

 
$
7,856.5

 
$
2,631.6

 
$
(8,424.5
)
 
$
10,249.3




18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
September 27, 2013
(in millions)
 
 
ARAMARK
Holdings Corporation (Parent)
 
 
ARAMARK
Corporation
  (Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
23.0

 
$
40.5

 
$
47.5

 
$

 
$
111.0

Receivables

 
1.4

 
242.9

 
1,161.6

 

 
1,405.9

Inventories, at lower of cost or market

 
15.9

 
441.0

 
85.1

 

 
542.0

Prepayments and other current assets

 
46.2

 
103.1

 
79.0

 

 
228.3

Total current assets

 
86.5

 
827.5

 
1,373.2

 

 
2,287.2

 
 
 
 
 
 
 
 
 
 
 
 
Property and Equipment, net

 
24.4

 
751.2

 
201.7

 

 
977.3

Goodwill

 
173.1

 
3,994.6

 
452.3

 

 
4,620.0

Investment in and Advances to Subsidiaries
1,062.7

 
6,267.4

 
444.8

 
124.5

 
(7,899.4
)
 

Other Intangible Assets

 
32.6

 
1,230.0

 
146.1

 

 
1,408.7

Other Assets

 
68.4

 
629.5

 
278.0

 
(2.0
)
 
973.9

 
$
1,062.7

 
$
6,652.4

 
$
7,877.6

 
$
2,575.8

 
$
(7,901.4
)
 
$
10,267.1

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

 
$
22.5

 
$
12.0

 
$
31.3

 
$

 
$
65.8

Accounts payable

 
147.0

 
448.3

 
293.7

 

 
889.0

Accrued expenses and other current liabilities
0.3

 
230.2

 
875.6

 
328.3

 
0.1

 
1,434.5

Total current liabilities
0.3

 
399.7

 
1,335.9

 
653.3

 
0.1

 
2,389.3

Long-term Borrowings

 
5,101.7

 
40.4

 
616.1

 

 
5,758.2

Deferred Income Taxes and Other Noncurrent Liabilities

 
326.2

 
618.3

 
102.5

 

 
1,047.0

Intercompany Payable

 

 
5,016.0

 
1,305.7

 
(6,321.7
)
 

Common Stock Subject to Repurchase and other
158.7

 

 
10.2

 

 

 
168.9

Total Stockholders' Equity
903.7

 
824.8

 
856.8

 
(101.8
)
 
(1,579.8
)
 
903.7

 
$
1,062.7

 
$
6,652.4

 
$
7,877.6

 
$
2,575.8

 
$
(7,901.4
)
 
$
10,267.1


 
 

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended December 27, 2013
(in millions)
 
 
ARAMARK Holdings
Corporation
  (Parent)
 
ARAMARK
Corporation (Issuer)
 
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$

 
$
264.0

 
$
2,390.0

 
$
1,109.1

 
$

 
$
3,763.1

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of services provided

 
233.7

 
2,102.1

 
1,018.9

 

 
3,354.7

Depreciation and amortization

 
5.0

 
106.4

 
25.4

 

 
136.8

Selling and general corporate expenses
5.2

 
70.8

 
33.5

 
4.7

 

 
114.2

Interest and other financing costs, net

 
75.3

 
(0.1
)
 
8.2

 

 
83.4

Expense allocations

 
(123.1
)
 
114.8

 
8.3

 

 

 
5.2

 
261.7

 
2,356.7

 
1,065.5

 

 
3,689.1

Income (Loss) before Income Taxes
(5.2
)
 
2.3

 
33.3

 
43.6

 

 
74.0

Provision (Benefit) for Income Taxes
(1.8
)
 
0.7

 
15.0

 
15.1

 

 
29.0

Equity in Net Income of Subsidiaries
48.2

 

 

 

 
(48.2
)
 

Net income
44.8

 
1.6

 
18.3

 
28.5

 
(48.2
)
 
45.0

Less: Net income attributable to noncontrolling interests

 

 
0.2

 

 

 
0.2

Net income attributable to ARAMARK Holdings stockholders
$
44.8

 
$
1.6

 
$
18.1

 
$
28.5

 
$
(48.2
)
 
$
44.8

Other comprehensive income (loss), net of tax
5.5

 
11.7

 
1.0

 
(9.2
)
 
(3.5
)
 
5.5

Comprehensive income attributable to ARAMARK Holdings stockholders
$
50.3

 
$
13.3

 
$
19.1

 
$
19.3

 
$
(51.7
)
 
$
50.3

 
 


 

 
 

20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK HOLDNGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended December 28, 2012
(in millions)
 
 
ARAMARK
Holdings
Corporation
  (Parent)
 
ARAMARK
Corporation (Issuer)
 
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$

 
$
257.1

 
$
2,219.2

 
$
1,059.6

 
$

 
$
3,535.9

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of services provided

 
239.2

 
1,949.0

 
983.2

 

 
3,171.4

Depreciation and amortization

 
5.0

 
102.3

 
26.1

 

 
133.4

Selling and general corporate expenses
1.1

 
18.1

 
31.4

 
5.1

 

 
55.7

Interest and other financing costs, net
13.9

 
87.8

 
(0.1
)
 
11.8

 

 
113.4

Expense allocations

 
(86.1
)
 
81.8

 
4.3

 

 

 
15.0

 
264.0

 
2,164.4

 
1,030.5

 

 
3,473.9

Income (Loss) before Income Taxes
(15.0
)
 
(6.9
)
 
54.8

 
29.1

 

 
62.0

Provision (benefit) for Income Taxes
(5.6
)
 
(4.1
)
 
18.7

 
9.8

 

 
18.8

Equity in Net Income of Subsidiaries
52.2

 

 

 

 
(52.2
)
 

Net income (loss)
42.8

 
(2.8
)
 
36.1

 
19.3

 
(52.2
)
 
43.2

Less: Net income attributable to noncontrolling interests

 

 
0.2

 
0.2

 

 
0.4

Net income attributable to ARAMARK Holdings stockholders
$
42.8

 
$
(2.8
)
 
$
35.9

 
$
19.1

 
$
(52.2
)
 
$
42.8

Other comprehensive income (loss), net of tax
4.7

 
13.6

 

 
(6.2
)
 
(7.4
)
 
4.7

Comprehensive income attributable to ARAMARK Holdings stockholders
$
47.5

 
$
10.8

 
$
35.9

 
$
12.9

 
$
(59.6
)
 
$
47.5


 
 


21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ARAMARK HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three months ended December 27, 2013
(in millions)
 
 
ARAMARK
Holdings Corporation
 (Parent)
 
ARAMARK
Corporation
 (Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$

 
$
85.6

 
$
(273.1
)
 
$
(92.3
)
 
$
(1.5
)
 
$
(281.3
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, client contract investments and other

 
(6.0
)
 
(65.7
)
 
(14.0
)
 

 
(85.7
)
Disposals of property and equipment

 
6.4

 
1.8

 
0.6

 

 
8.8

Proceeds from divestiture

 

 
24.0

 

 

 
24.0

Acquisitions of businesses, net of cash acquired

 

 
(4.6
)
 
(3.6
)
 

 
(8.2
)
Other investing activities

 

 
3.7

 
(1.4
)
 

 
2.3

Net cash used in investing activities

 
0.4

 
(40.8
)
 
(18.4
)
 

 
(58.8
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term borrowings

 
151.3

 

 
46.6

 

 
197.9

Payments of long-term borrowings

 
(370.0
)
 
(3.4
)
 
(4.1
)
 

 
(377.5
)
Net change in funding under the Receivables Facility

 

 

 

 

 

Proceeds from initial public offering, net
524.1

 

 

 

 

 
524.1

Proceeds from issuance of common stock

 
1.8

 

 

 

 
1.8

Repurchase of common stock

 
(0.6
)
 

 

 

 
(0.6
)
Other financing activities

 
0.3

 
(1.1
)
 
(0.2
)
 

 
(1.0
)
Change in intercompany, net
(524.1
)
 
131.5

 
321.4

 
69.7

 
1.5

 

Net cash provided by (used in) financing activities

 
(85.7
)
 
316.9

 
112.0

 
1.5

 
344.7

Increase in cash and cash equivalents

 
0.3