10-Q 1 q32016aramark10-q.htm 10-Q Q3 FY 2016 Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

___________________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
___________________________________________

For the quarterly period ended July 1, 2016 Commission File Number: 001-36223




Aramark
(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  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 the 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
x  
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 29, 2016, the number of shares of the registrant's common stock outstanding is 243,910,027.






Special Note About Forward-Looking Statements
This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views as to future events and financial performance with respect to, without limitation, conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “outlook,” “aim,” “anticipate,” “are confident,” “estimate,” “expect,” “will be,” “will continue,” “will likely result,” “project,” “intend,” “plan,” “believe,” “see,” “look to” and other words and terms of similar meaning or the negative versions of such words.
Forward-looking statements speak only as of the date made. All statements we make relating to our estimated and projected earnings, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results include without limitation: unfavorable economic conditions; natural disasters, global calamities, sports strikes and other adverse incidents; the failure to retain current clients, renew existing client contracts and obtain new client contracts; a determination by clients to reduce their outsourcing or use of preferred vendors; competition in our industries; increased operating costs and obstacles to cost recovery due to the pricing and cancellation terms of our food and support services contracts; the inability to achieve cost savings through our cost reduction efforts; our expansion strategy; the failure to maintain food safety throughout our supply chain, food-borne illness concerns and claims of illness or injury; governmental regulations including those relating to food and beverages, the environment, wage and hour and government contracting; liability associated with noncompliance with applicable law or other governmental regulations; new interpretations of or changes in the enforcement of the government regulatory framework; currency risks and other risks associated with international operations, including Foreign Corrupt Practices Act, U.K. Bribery Act and other anti-corruption law compliance; continued or further unionization of our workforce; liability resulting from our participation in multiemployer defined benefit pension plans; risks associated with suppliers from whom our products are sourced; disruptions to our relationship with, or to the business of, our primary distributor; the inability to hire and retain sufficient qualified personnel or increases in labor costs; healthcare reform legislation; the contract intensive nature of our business, which may lead to client disputes; seasonality; disruptions in the availability of our computer systems or privacy breaches; failure to achieve and maintain effective internal controls; our leverage; the inability to generate sufficient cash to service all of our indebtedness; debt agreements that limit our flexibility in operating our business; and other factors set forth under the headings Item 1A “Risk Factors,” Item 3 “Legal Proceedings” and Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of our Annual Report on Form 10-K, filed with the SEC on December 1, 2015, as such factors may be updated from time to time in our other periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov and which may be obtained by contacting Aramark’s investor relations department via its website www.aramark.com. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other filings with the SEC. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, us. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, changes in our expectations, or otherwise, except as required by law.



PART I
Item 1.    Financial Statements
ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
 
July 1, 2016
 
October 2, 2015
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
196,507

 
$
122,416

Receivables (less allowances: 2016 - $47,019; 2015 - $39,023)
1,434,744

 
1,444,574

Inventories
561,242

 
575,263

Prepayments and other current assets
236,091

 
236,870

Total current assets
2,428,584

 
2,379,123

Property and Equipment, net
995,058

 
959,345

Goodwill
4,577,910

 
4,558,968

Other Intangible Assets
1,048,076

 
1,111,980

Other Assets
1,281,869

 
1,186,941

 
$
10,331,497

 
$
10,196,357

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term borrowings
$
50,066

 
$
81,427

Accounts payable
683,313

 
850,040

Accrued expenses and other current liabilities
1,063,502

 
1,249,521

Total current liabilities
1,796,881

 
2,180,988

Long-Term Borrowings
5,383,118

 
5,184,597

Deferred Income Taxes and Other Noncurrent Liabilities
1,052,198

 
937,311

Redeemable Noncontrolling Interest
9,980

 
10,102

Stockholders' Equity:
 
 
 
Common stock, par value $.01 (authorized: 600,000,000 shares; issued: 2016—271,094,424 shares and 2015—266,564,567 shares; and outstanding: 2016—243,431,926 shares and 2015—239,917,320 shares)
2,711

 
2,666

Capital surplus
2,883,686

 
2,784,730

Accumulated deficit
(93,920
)
 
(228,641
)
Accumulated other comprehensive loss
(161,027
)
 
(166,568
)
Treasury stock (shares held in treasury: 2016—27,662,498 shares and 2015—26,647,247 shares)
(542,130
)
 
(508,828
)
Total stockholders' equity
2,089,320

 
1,883,359

 
$
10,331,497

 
$
10,196,357


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

1


ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)
 
Three Months Ended
 
July 1, 2016
 
July 3, 2015
Sales
$
3,586,908

 
$
3,486,203

Costs and Expenses:
 
 
 
Cost of services provided
3,233,884

 
3,164,700

Depreciation and amortization
122,363

 
125,332

Selling and general corporate expenses
61,317

 
79,293

 
3,417,564

 
3,369,325

Operating income
169,344

 
116,878

Interest and Other Financing Costs, net
103,764

 
71,225

Income Before Income Taxes
65,580

 
45,653

Provision for Income Taxes
20,722

 
11,615

Net income
44,858

 
34,038

Less: Net income attributable to noncontrolling interest
93

 
277

Net income attributable to Aramark stockholders
$
44,765

 
$
33,761

 
 
 
 
Earnings per share attributable to Aramark stockholders:
 
 
 
Basic

$0.18

 

$0.14

Diluted

$0.18

 

$0.14

Weighted Average Shares Outstanding:
 
 
 
Basic
242,831

 
238,718

Diluted
249,057

 
247,224

 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
Sales
$
10,872,005

 
$
10,783,183

Costs and Expenses:
 
 
 
Cost of services provided
9,738,117

 
9,691,195

Depreciation and amortization
370,172

 
375,757

Selling and general corporate expenses
208,165

 
242,597

 
10,316,454

 
10,309,549

Operating income
555,551

 
473,634

Interest and Other Financing Costs, net
246,835

 
214,354

Income Before Income Taxes
308,716

 
259,280

Provision for Income Taxes
103,925

 
79,517

Net income
204,791

 
179,763

Less: Net income attributable to noncontrolling interest
329

 
682

Net income attributable to Aramark stockholders
$
204,462

 
$
179,081

 
 
 
 
Earnings per share attributable to Aramark stockholders:
 
 
 
Basic

$0.85

 

$0.76

Diluted

$0.82

 

$0.73

Weighted Average Shares Outstanding:
 
 
 
Basic
241,740

 
236,933

Diluted
248,322

 
246,035


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

2


ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
 
Three Months Ended
 
July 1, 2016
 
July 3, 2015
Net income
$
44,858

 
$
34,038

Other comprehensive income (loss), net of tax:
 
 
 
Pension plan adjustments
(5,383
)
 
2,696

Foreign currency translation adjustments
(2,105
)
 
1,731

Fair value of cash flow hedges
(441
)
 
4,260

Other comprehensive income (loss), net of tax
(7,929
)
 
8,687

Comprehensive income
36,929

 
42,725

Less: Net income attributable to noncontrolling interest
93

 
277

Comprehensive income attributable to Aramark stockholders
$
36,836

 
$
42,448


 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
Net income
$
204,791

 
$
179,763

Other comprehensive income (loss), net of tax:
 
 
 
Pension plan adjustments
(5,383
)
 
2,696

Foreign currency translation adjustments
3,655

 
(36,101
)
Fair value of cash flow hedges
7,269

 
(14,296
)
Other comprehensive income (loss), net of tax
5,541

 
(47,701
)
Comprehensive income
210,332

 
132,062

Less: Net income attributable to noncontrolling interest
329

 
682

Comprehensive income attributable to Aramark stockholders
$
210,003

 
$
131,380


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


3


ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
Cash flows from operating activities:
 
 
 
Net income
$
204,791

 
$
179,763

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
370,172

 
375,757

Deferred income taxes
54,291

 
11,032

Share-based compensation expense
43,556

 
51,984

Changes in operating assets and liabilities
(331,728
)
 
(479,492
)
Other operating activities
23,833

 
18,540

Net cash provided by operating activities
364,915

 
157,584

Cash flows from investing activities:
 
 
 
Purchases of property and equipment, client contract investments and other
(350,170
)
 
(354,129
)
Disposals of property and equipment
18,029

 
7,658

Acquisition of certain businesses, net of cash acquired
(59,377
)
 
(3,349
)
Other investing activities
7,194

 
2,973

Net cash used in investing activities
(384,324
)
 
(346,847
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term borrowings
1,398,395

 
234,856

Payments of long-term borrowings
(1,245,449
)
 
(39,853
)
Net change in funding under the Receivables Facility
(9,730
)
 
(7,870
)
Payments of dividends
(68,873
)
 
(61,236
)
Proceeds from issuance of common stock
23,296

 
24,109

Other financing activities
(4,139
)
 
45,403

Net cash provided by financing activities
93,500

 
195,409

Increase in cash and cash equivalents
74,091

 
6,146

Cash and cash equivalents, beginning of period
122,416

 
111,690

Cash and cash equivalents, end of period
$
196,507

 
$
117,836


 
 
Nine Months Ended
(dollars in millions)
 
July 1, 2016
 
July 3, 2015
Interest paid
 
$
174.0

 
$
186.8

Income taxes paid
 
26.2

 
41.8


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

4


ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)

 
Total
Stockholders'
Equity
 
Common
Stock
 
Capital
Surplus
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
Balance, October 2, 2015
$
1,883,359

 
$
2,666

 
$
2,784,730

 
$
(228,641
)
 
$
(166,568
)
 
$
(508,828
)
Net income attributable to Aramark stockholders
204,462

 
 
 
 
 
204,462

 
 
 
 
Other comprehensive income (loss)
5,541

 
 
 
 
 
 
 
5,541

 
 
Capital contributions from issuance of common stock
33,761

 
45

 
33,716

 
 
 
 
 
 
Compensation expense related to stock incentive plans
43,556

 
 
 
43,556

 
 
 
 
 
 
Tax benefits related to stock incentive plans
21,684

 
 
 
21,684

 
 
 
 
 
 
Repurchases of common stock
(33,302
)
 
 
 
 
 
 
 
 
 
(33,302
)
Payments of dividends
(69,741
)
 
 
 
 
 
(69,741
)
 
 
 
 
Balance, July 1, 2016
$
2,089,320

 
$
2,711

 
$
2,883,686

 
$
(93,920
)
 
$
(161,027
)
 
$
(542,130
)

 
Total
Stockholders'
Equity
 
Common
Stock
 
Capital
Surplus
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
Balance, October 3, 2014
$
1,718,036

 
$
2,561

 
$
2,575,011

 
$
(382,463
)
 
$
(106,298
)
 
$
(370,775
)
Net income attributable to Aramark stockholders
179,081

 
 
 
 
 
179,081

 
 
 
 
Other comprehensive income (loss)
(47,701
)
 
 
 
 
 
 
 
(47,701
)
 
 
Capital contributions from issuance of common stock
57,297

 
79

 
57,218

 
 
 
 
 
 
Compensation expense related to stock incentive plans
51,984

 
 
 
51,984

 
 
 
 
 
 
Tax benefits related to stock incentive plans
50,029

 
 
 
50,029

 
 
 
 
 
 
Repurchases of common stock
(80,923
)
 
 
 
 
 
 
 
 
 
(80,923
)
Payment of dividends
(61,462
)
 
 
 
 
 
(61,462
)
 
 
 
 
Balance, July 3, 2015
$
1,866,341

 
$
2,640

 
$
2,734,242

 
$
(264,844
)
 
$
(153,999
)
 
$
(451,698
)

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


5

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Aramark (the “Company”) is a leading global provider of food, facilities and uniform services to education, healthcare, business & industry, and sports, leisure & corrections clients. The Company's core market is North America (composed of the United States and Canada), which is supplemented by an additional 19-country footprint serving many of the fastest growing global geographies. The Company operates its business in three reportable segments that share many of the same operating characteristics: Food and Support Services North America ("FSS North America"), Food and Support Services International ("FSS International") and Uniform and Career Apparel ("Uniform").
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 Form 10-K filed with the SEC on December 1, 2015. The Condensed Consolidated Balance Sheet as of October 2, 2015 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.
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.
New Accounting Standard Updates
In March 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standard update ("ASU") to update several aspects of the accounting for share-based payment transactions, including the income tax consequences and classification of awards. The guidance is effective for the Company in the first quarter of fiscal 2018 and early adoption is permitted. The Company is currently evaluating the impact of the pronouncement.
In February 2016, the FASB issued an ASU requiring lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets and to disclose key information about lease arrangements. The guidance is effective for the Company in the first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact of the pronouncement.
In January 2016, the FASB issued an ASU to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance is effective for the Company in the first quarter of fiscal 2019 and early adoption is permitted. The Company is currently evaluating the impact of the pronouncement.
In November 2015, the FASB issued an ASU to simplify the presentation of deferred income taxes to require all deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The company adopted the guidance in the second quarter of fiscal 2016 on a prospective basis, resulting in a reclassification of approximately $18.1 million from "Accrued expenses and other current liabilities" to "Deferred Income Taxes and Other Noncurrent Liabilities" in the Condensed Consolidated Balance Sheet.
In July 2015, the FASB issued an ASU which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. The guidance is effective for the Company in the first quarter of fiscal 2018 and early adoption is permitted. The Company is currently evaluating the impact of the pronouncement.
In April 2015, the FASB issued an ASU on debt issuance costs which requires presentation on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts, and will no longer be recorded as a separate asset. The Company adopted the retrospective guidance in the first quarter of fiscal 2016 (see note 5).
In June 2014, the FASB issued an ASU on stock compensation which requires that a performance target affecting vesting and that could be achieved after the requisite service period be treated as a performance condition. The guidance is effective for the Company beginning in the first quarter of fiscal 2017. The Company is currently evaluating the impact of the pronouncement relative to its stock incentive awards.
In May 2014, the FASB issued an ASU on revenue from contracts with customers which outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In July 2015, the FASB voted to defer the effective date of the new revenue standard by one year, but to permit

6

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

entities to adopt one year earlier if they choose (i.e., the original effective date). The guidance is effective for the Company beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact of the pronouncement.
In January 2014, the FASB issued an ASU 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 Company adopted the guidance in the first quarter of fiscal 2016 which did not have a material impact on the condensed consolidated financial statements.
Comprehensive Income
Comprehensive income includes all changes to stockholders' equity during a period, except those resulting from investments by and distributions to stockholders. Components of comprehensive income include net income (loss), changes in foreign currency translation adjustments (net of tax), pension plan adjustments (net of tax), changes in the fair value of cash flow hedges (net of tax) and changes to the share of any equity investees' comprehensive income (net of tax).
The summary of the components of comprehensive income (loss) is as follows (in thousands):
 
Three Months Ended
 
July 1, 2016
 
July 3, 2015
 
Pre-Tax Amount
Tax Effect
After-Tax Amount
 
Pre-Tax Amount
Tax Effect
After-Tax Amount
Net income
 
 
$
44,858

 
 
 
$
34,038

Pension plan adjustments
(8,282
)
2,899

(5,383
)
 
4,148

(1,452
)
2,696

Foreign currency translation adjustments
4,142

(6,247
)
(2,105
)
 
(1,882
)
3,613

1,731

Fair value of cash flow hedges
(730
)
289

(441
)
 
7,211

(2,951
)
4,260

Other comprehensive income (loss)
(4,870
)
(3,059
)
(7,929
)
 
9,477

(790
)
8,687

Comprehensive income
 
 
36,929

 
 
 
42,725

Less: Net income attributable to noncontrolling interest
 
 
93

 
 
 
277

Comprehensive income attributable to Aramark stockholders
 
 
$
36,836

 
 
 
$
42,448

 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
 
Pre-Tax Amount
Tax Effect
After-Tax Amount
 
Pre-Tax Amount
Tax Effect
After-Tax Amount
Net income
 
 
$
204,791

 
 
 
$
179,763

Pension plan adjustments
(8,282
)
2,899

(5,383
)
 
4,148

(1,452
)
2,696

Foreign currency translation adjustments
17,190

(13,535
)
3,655

 
(41,359
)
5,258

(36,101
)
Fair value of cash flow hedges
2,351

4,918

7,269

 
(23,572
)
9,276

(14,296
)
Other comprehensive income (loss)
11,259

(5,718
)
5,541

 
(60,783
)
13,082

(47,701
)
Comprehensive income
 
 
210,332

 
 
 
132,062

Less: Net income attributable to noncontrolling interest
 
 
329

 
 
 
682

Comprehensive income attributable to Aramark stockholders
 
 
$
210,003

 
 
 
$
131,380

Accumulated other comprehensive loss consists of the following (in thousands):
 
July 1, 2016
 
October 2, 2015
Pension plan adjustments
$
(51,279
)
 
$
(45,896
)
Foreign currency translation adjustments
(67,886
)
 
(71,541
)
Cash flow hedges
(41,862
)
 
(49,131
)
 
$
(161,027
)
 
$
(166,568
)

7

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Property, Plant and Equipment
During the third quarter of fiscal 2016, the Company sold one of its buildings for cash proceeds of approximately $9.5 million within the FSS North America segment. The Company recorded a loss of approximately $5.1 million related to the sale and other asset write-offs, which is included in "Cost of services provided" in the Condensed Consolidated Statement of Income. During the third quarter of fiscal 2015, the Company recorded an impairment charge of approximately $8.7 million, which is included in "Cost of services provided" in the Condensed Consolidated Statement of Income, to write down the book value of the building to its fair value.
Other Assets
Other assets consist primarily of investments in 50% or less owned entities, client contract investments, computer software costs and long-term receivables. Client contract investments generally represent a cash payment provided by the Company to help finance improvement or renovation at the facility from which the Company operates. These amounts are amortized over the contract period. If a contract is terminated prior to its maturity date, the Company is generally reimbursed for the unamortized client contract investment amount. Client contract investments, net of accumulated amortization, were $811.1 million and $782.7 million as of July 1, 2016 and October 2, 2015, respectively.
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 $177.7 million and $152.5 million at July 1, 2016 and October 2, 2015, 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
 
July 1, 2016
 
July 3, 2015
Sales
$
396,492

 
$
340,527

Gross profit
47,742

 
38,683

Net income
10,396

 
5,785

 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
Sales
$
1,088,311

 
$
1,029,733

Gross profit
124,343

 
113,304

Net income
22,312

 
17,058

The period to period comparisons of the summarized financial information for AIM Services Co., Ltd., presented in U.S. dollars above, are significantly impacted by currency translation. The Company’s equity in undistributed earnings of AIM Services Co., Ltd. was $4.3 million and $9.2 million for the three and nine months ended July 1, 2016, respectively, and $2.2 million and $6.9 million for the three and nine months ended July 3, 2015, respectively, and is recorded as a reduction of "Cost of services provided" in the Condensed Consolidated Statements of Income.
NOTE 2. ACQUISITIONS AND DIVESTITURES:
Fiscal 2016
Avoca Handweavers Limited Acquisition
During the second quarter of fiscal 2016, the Company completed the purchase of Avoca Handweavers Limited ("Avoca"), an Irish retail and cafe business, for cash consideration of approximately $65.8 million (approximately $59.2 million, net of cash acquired). The sales, net income, assets and liabilities of Avoca did not have a material impact on the Company's condensed consolidated financial statements.
HPSI Asset Acquisition
During the fourth quarter of fiscal 2016, the Company acquired the assets of HPSI, a group purchasing organization, in its FSS North America segment for cash consideration of $140.0 million.
Fiscal 2015
Aramark India Private Limited Divestiture
During the second quarter of fiscal 2015, the Company completed the sale of Aramark India Private Limited ("India") resulting in a pretax loss of approximately $4.3 million (after tax gain of approximately $1.8 million due to the tax basis exceeding the book basis of the subsidiary and the realization during that period of net operating loss carryforwards for which a full valuation

8

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

allowance was taken in prior years), which is included in "Cost of services provided" in the Condensed Consolidated Statements of Income for the nine months ended July 3, 2015. The Company did not receive any proceeds from the sale of its India subsidiary. The results of operations and cash flows associated with the India subsidiary divestiture were not material to the Company's Condensed Consolidated Statements of Income and Cash Flows.
NOTE 3. SEVERANCE:
During the third quarter of fiscal 2016, the Company continued and refined its focus on streamlining and improving the efficiency and effectiveness of its selling, general and administrative functions. As a result, the Company recorded net severance charges of approximately $1.9 million and $9.0 million during the three and nine month periods of fiscal 2016, respectively. For the three and nine months ended July 3, 2015, the Company recorded net severance charges of $3.8 million and $0.9 million, respectively, as a result of additional cost saving and productivity initiatives offset by refinements to the Company's original plans for consolidation and centralization initiatives and actual attrition of the workforce. As of July 1, 2016 and October 2, 2015, the Company had an accrual of approximately $16.1 million and $26.0 million, respectively, related to the unpaid obligations for these costs.
In addition, the Company incurred approximately $4.4 million of severance charges during the fourth quarter of fiscal 2015 from its decision to exit certain operations within the FSS International segment, $1.3 million of which was unpaid as of July 1, 2016.
NOTE 4. 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 nine months ended July 1, 2016 follow (in thousands):
Segment
October 2, 2015
 
Acquisition
 
Translation
 
July 1, 2016
FSS North America
$
3,583,365

 
$

 
$
33

 
$
3,583,398

FSS International
400,824

 
40,432

 
(21,523
)
 
419,733

Uniform
574,779

 

 

 
574,779

 
$
4,558,968

 
$
40,432

 
$
(21,490
)
 
$
4,577,910

The amount in acquisition in the FSS International segment relates to the Avoca acquisition, which may be revised upon final determination of the purchase price allocation.
Other intangible assets consist of the following (in thousands):
 
July 1, 2016
 
October 2, 2015
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
Customer relationship assets
$
1,852,058

 
$
(1,563,118
)
 
$
288,940

 
$
1,859,689

 
$
(1,494,885
)
 
$
364,804

Trade names
760,769

 
(1,633
)
 
759,136

 
748,809

 
(1,633
)
 
747,176

 
$
2,612,827

 
$
(1,564,751
)
 
$
1,048,076

 
$
2,608,498

 
$
(1,496,518
)
 
$
1,111,980

During the second quarter of fiscal 2016, as part of the Avoca acquisition, the Company acquired a trade name with a preliminary value of approximately $14.5 million. 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 13 years. The Aramark and Avoca 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 nine months ended July 1, 2016 and July 3, 2015 was approximately $75.9 million and $100.7 million, respectively.

9

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5. BORROWINGS:
Long-term borrowings are summarized in the following table (in thousands):
 
 
July 1,
2016
 
October 2,
2015
Senior secured revolving credit facility, due February 2019
 
$

 
$
70,000

Senior secured term loan facility, due July 2016
 

 
74,130

Senior secured term loan facility, due September 2019
 
938,950

 
1,189,371

Senior secured term loan facility, due February 2021
 
2,457,907

 
2,489,235

5.75% senior notes, due March 2020
 
226,941

 
990,540

5.125% senior notes, due January 2024
 
905,495

 

4.75% senior notes, due June 2026
 
492,890

 

Receivables Facility, due May 2019
 
340,270

 
350,000

Capital leases
 
57,137

 
57,660

Other
 
13,594

 
45,088

 
 
5,433,184

 
5,266,024

Less—current portion
 
(50,066
)
 
(81,427
)
 
 
$
5,383,118

 
$
5,184,597

During the first quarter of fiscal 2016, the Company early adopted the April 2015 ASU on debt issuance costs, which requires these costs to be presented on the balance sheet as a direct reduction of long-term borrowings, similar to the presentation of debt discounts. As a result of the retrospective adoption, approximately $27.7 million of debt issuance costs were reclassified from "Other Assets" to "Long-Term Borrowings" in the Condensed Consolidated Balance Sheet, as of October 2, 2015.
During the first quarter of fiscal 2016, the Company repaid a U.S. dollar denominated term loan of a Canadian subsidiary that had been borrowed under the Company's senior secured credit agreement and was due in July 2016 in the amount of $74.1 million.
During the second quarter of fiscal 2016, the Company made an optional prepayment of $60.0 million of outstanding term loans under its senior secured term loan facility, due September 2019 (the "2019 Term Loans").
During the third quarter of fiscal 2016, the Company extended the terms of the $350 million Receivables Facility from May 2017 to May 2019. The terms and conditions remain largely consistent and the additional seasonal capacity of the Receivables Facility increases from $25.0 million to $50.0 million from September to March and May to June.
On December 17, 2015, Aramark Services, Inc. ("the Issuer"), a subsidiary of the Company, issued $400 million of 5.125% Senior Notes (the "Original 2024 Notes"), due January 15, 2024, pursuant to an indenture, dated as of December 17, 2015 (the “Base Indenture”), entered into by the Issuer, certain other Aramark entities, as guarantors of the Original 2024 Notes and the Bank of New York Mellon, as trustee. The Original 2024 Notes were issued at par and the net proceeds were used for general corporate purposes and to reduce the outstanding balance under the Company's revolving credit facility. The Company paid approximately $6.0 million in financing fees related to the Original 2024 Notes.
On May 31, 2016, the Issuer issued $1,000 million principal amount of senior unsecured notes, consisting of $500 million of 5.125% Senior Notes due 2024 (the "New 2024 Notes") and $500 million of 4.75% Senior Notes due 2026 (the "2026 Notes" and, together with the New 2024 Notes, the "Issued Notes"). The New 2024 Notes constitute a further issuance of the Original 2024 Notes (together with the New 2024 Notes, the "2024 Notes" and, together with the Issued Notes, the "Notes"). The New 2024 Notes were issued pursuant to the Base Indenture, as supplemented by the supplemental indenture, dated as of May 31, 2016 (the "Supplemental Indenture"), entered into by the Issuer, certain other Aramark entities, as guarantors of the New 2024 Notes and the Bank of New York Mellon, as trustee. The 2026 Notes were issued pursuant to the indenture, dated as of May 31, 2016 (the "2026 Notes Indenture"), entered into by the Issuer, certain other Aramark entities, as guarantors of the 2026 Notes and The Bank of New York Mellon, as trustee. The New 2024 Notes were issued at a premium of $18.8 million, which creates an effective yield of 4.6%. The premium was recorded to "Long-Term Borrowings" in the Condensed Consolidated Balance Sheets and will be amortized to "Interest and Other Financing Costs, net" in the Condensed Consolidated Statements of Income until maturity in 2024. The 2026 Notes were issued at par. The net proceeds from the Issued Notes and premium from the New 2024 Notes were used to redeem $194.1 million of 2019 Term Loans, repay $771.2 million principal of 5.75% senior notes, due March 2020 (the "2020 Notes"), pay a $22.2 million call premium on the 2020 Notes, pay $11.1 million of accrued interest on the 2020 Notes and fees and costs associated with the Issued Notes. As a result of the issuance of the Issued Notes, the Company recorded charges of approximately $30.2 million, to "Interest and Other Financing Costs, net" in the Condensed

10

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Statements of Income, consisting of $22.2 million for the call premium on the 2020 Notes and $8.0 million of non-cash charges for the write-off of debt issuance costs and debt discount on the 2020 Notes and 2019 Term Loans. The Company also paid approximately $14.2 million in debt issuance costs spread evenly between the Issued Notes, which were recorded as a reduction to "Long-Term Borrowings" in the Condensed Consolidated Balance Sheets.
The Notes are senior unsecured obligations of the Issuer. The Notes rank equal in right of payment to all of the Issuer’s existing and future senior debt. The Notes are guaranteed on a senior, unsecured basis by the Company and substantially all of the domestic subsidiaries of the Issuer. The Notes and guarantees are effectively subordinated to all existing and future secured debt of the Issuer and the guarantors, to the extent of the value of the assets securing such debt, and structurally subordinated to all of the liabilities of any of the Issuer's subsidiaries that do not guarantee the Notes. Interest on the 2024 Notes is payable on January 15 and July 15 of each year. Interest on the 2026 Notes will be payable on June 1 and December 1 of each year.
The Base Indenture, Supplemental Indenture and 2026 Notes Indenture contain covenants limiting the Company's ability and the ability of its restricted subsidiaries to: incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; limit the ability of restricted subsidiaries to make payments to the Company; enter into sale and leaseback transactions; merge, consolidate, sell or otherwise dispose of all or substantially all of the Company's assets; and designate the Company's subsidiaries as unrestricted subsidiaries. They also provide for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Notes to become or to be declared due and payable.
Registration Rights Agreement
On May 31, 2016, the Company entered into a registration rights agreement (the “New 2024 Notes Registration Rights Agreement”) with Wells Fargo Securities, LLC, as representative of the several initial purchasers, with respect to the New 2024 Notes and a registration rights agreement (the "2026 Notes Registration Rights Agreement" and together with the New 2024 Notes Registration Agreement, the "Registration Rights Agreements") with Wells Fargo Securities, LLC, as representative of several initial purchasers, with respect to the 2026 Notes. In each of the Registration Rights Agreements, the Issuer agreed to (1) file an exchange offer registration statement pursuant to which the Issuer will offer exchange notes with terms identical in all material respects to, and evidencing the same indebtedness as, the applicable series of Issued Notes, in exchange for such series of Issued Notes (but which exchange notes will not contain terms with respect to transfer restrictions or provide for the additional interest described below); and (2) use commercially reasonable efforts to cause the exchange offer registration statement to be declared effective under the Securities Act of 1933, as amended. The Issuer has agreed to use commercially reasonable efforts to cause the exchange offer to be consummated or, if required, to have one or more shelf registration statements declared effective, within 270 days after the issue date of the Issued Notes.
If the Company fails to satisfy this obligation (a “registration default”), the annual interest rate on the New 2024 Notes or the 2026 Notes, as applicable, will increase by 0.25%. The annual interest rate on the New 2024 Notes or the 2026 Notes, as applicable will increase by an additional 0.25% for each subsequent 90-day period during which the registration default continues, up to a maximum additional interest rate of 1.00% per year over the applicable interest rate in the Supplemental Indenture or 2026 Notes Indenture, as applicable. If the registration default is corrected, the applicable interest rate on the New 2024 Notes or the 2026 Notes, as applicable, will revert to the original level.
NOTE 6. 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 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 $2.4 billion notional amount of outstanding interest rate swap agreements, fixing the rate on a like amount of variable rate borrowings. During the nine month period of fiscal 2016, $0.5 billion of interest rate swap agreements matured.

11

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 July 1, 2016 and October 2, 2015, approximately ($41.9) million and ($43.3) 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 nine months ended July 1, 2016 and July 3, 2015 was not material.
During the first quarter of fiscal 2016, the Company repaid a U.S. dollar denominated term loan of a Canadian subsidiary in the amount of $74.1 million. As a result of this repayment, the Company terminated its $74.1 million of outstanding amortizing cross currency swap agreements, which resulted in a pre-tax charge of approximately $1.1 million recorded to "Interest and Other Financing Costs, net" in the Condensed Consolidated Statements of Income for the nine months ended July 1, 2016. The termination of these agreements resulted in the Company receiving $5.7 million of proceeds.
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
 
July 1, 2016
 
July 3, 2015
Interest rate swap agreements
$
(228
)
 
$
7,029

Cross currency swap agreements

 
(536
)
 
$
(228
)
 
$
6,493

 
 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
Interest rate swap agreements
$
4,225

 
$
(10,036
)
Cross currency swap agreements
(2,074
)
 
8,992

 
$
2,151

 
$
(1,044
)

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. During the nine month period of fiscal 2016, the Company entered into contracts for approximately 34.7 million gallons. As of July 1, 2016, the Company has contracts for approximately 36.5 million gallons outstanding for fiscal 2016, fiscal 2017 and fiscal 2018. The Company does not record its gasoline and diesel fuel agreements as hedges for accounting purposes. The impact on earnings related to the change in fair value of these unsettled contracts was a gain of approximately $10.7 million and $7.9 million for the three and nine months ended July 1, 2016, respectively. The impact on earnings related to the change in fair value of these unsettled contracts for the three and nine months ended July 3, 2015 was a gain of approximately $2.9 million and $0.2 million, respectively. The change in fair value for unsettled contracts is included in “Selling and general corporate expenses” in the Condensed Consolidated Statements of Income. When the contracts settle, the gain or loss is recorded to “Costs of services provided” in the Condensed Consolidated Statements of Income.
As of July 1, 2016, the Company had foreign currency forward exchange contracts outstanding with notional amounts of €31.1 million, £59.9 million and CAD145.5 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 as the contracts were not designated as hedging instruments, substantially offsetting currency transaction gains and losses on the short-term intercompany loans and the net impact was not material.

12

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 the Condensed Consolidated Balance Sheets (in thousands):
 
 
Balance Sheet Location
 
July 1, 2016
 
October 2, 2015
ASSETS
 
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
 
Cross currency swap agreements
 
Prepayments
 
$

 
$
7,523

 
 
 
 

 

Not designated as hedging instruments:
 
 
 
 
 
 
Gasoline and diesel fuel agreements
 
Prepayments
 
3,450

 

 
 
 
 
$
3,450

 
$
7,523

LIABILITIES
 
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Accrued expenses
 
$
2,610

 
$
6,086

Interest rate swap agreements
 
Other Noncurrent Liabilities
 
48,254

 
51,762

 
 
 
 
50,864

 
57,848

 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Accounts Payable
 
248

 
922

Gasoline and diesel fuel agreements
 
Accounts Payable
 

 
4,419

 
 
 
 
248

 
5,341

 
 
 
 
$
51,112

 
$
63,189

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 for the Company's derivatives not designated as hedging instruments in the Condensed Consolidated Statements of Income (in thousands):
 
 
 
 
Three Months Ended
 
 
Account
 
July 1, 2016
 
July 3, 2015
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Interest Expense
 
$
8,217

 
$
7,838

Cross currency swap agreements
 
Interest Expense
 

 
(441
)
 
 
 
 
8,217

 
7,397

Not designated as hedging instruments:
 
 
 
 
 
 
Gasoline and diesel fuel agreements
 
Costs of services provided / Selling and general corporate expenses
 
$
(8,997
)
 
$
(1,175
)
Foreign currency forward exchange contracts
 
Interest Expense
 
(4,441
)
 
184

 
 
 
 
(13,438
)
 
(991
)
 
 
 
 
$
(5,221
)
 
$
6,406


13

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
 
 
 
Nine Months Ended
 
 
Account
 
July 1, 2016
 
July 3, 2015
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Interest Expense
 
$
26,322

 
$
23,458

Cross currency swap agreements
 
Interest Expense
 
2,061

 
(7,998
)
 
 
 
 
28,383

 
15,460

Not designated as hedging instruments:
 
 
 
 
 
 
Gasoline and diesel fuel agreements
 
Costs of services provided / Selling and general corporate expenses
 
$
(1,921
)
 
$
4,224

Foreign currency forward exchange contracts
 
Interest Expense
 
(5,216
)
 
(4,373
)
 
 
 
 
(7,137
)
 
(149
)
 
 
 
 
$
21,246

 
$
15,311

At July 1, 2016, 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 $15.4 million.
NOTE 7. STOCKHOLDERS' EQUITY:
During the nine months ended July 1, 2016 and July 3, 2015, the Company paid dividends of approximately $68.9 million and $61.2 million to its stockholders, respectively. On August 3, 2016, the Company's Board declared a $0.095 dividend per share of common stock, payable on September 6, 2016, to shareholders of record on the close of business on August 16, 2016.
NOTE 8. SHARE-BASED COMPENSATION:
Share-based compensation expense for the three and nine months ended July 1, 2016 was approximately $14.2 million, before taxes of approximately $5.5 million and approximately $43.6 million, before taxes of approximately $17.0 million, respectively. Share-based compensation expense for the three and nine months ended July 3, 2015 was approximately $20.5 million, before taxes of approximately $8.0 million and approximately $52.0 million, before taxes of approximately $20.3 million, respectively. The compensation expense recognized is classified as "Selling and general corporate expenses" in the Condensed Consolidated Statements of Income. No compensation expense was capitalized.
Stock Options
Time-Based Options
The Company granted 2.3 million time-based options with a weighted-average grant-date fair value of $9.21 per option during the nine months ended July 1, 2016. The Company recorded compensation expense during the three and nine months ended July 1, 2016 for time-based options of approximately $4.8 million and $14.4 million, respectively. The Company recorded compensation expense during the three and nine months ended July 3, 2015 for time-based options of approximately $4.2 million and $12.3 million, respectively.
Performance-Based Options
During the three and nine months ended July 3, 2015, approximately $6.2 million and $10.8 million, respectively, was charged to expense for performance-based options. During the third quarter of fiscal 2015, all unvested performance-based options granted under the 2007 Management Stock Incentive Plan (the "2007 MSIP") vested due to the sponsors of the Company's 2007 going-private transaction achieving the required rate of return on their sales of the Company's stock to constitute a return-based event under the original terms of such options related to approximately 0.7 million shares.
Time-Based Restricted Stock Units ("RSUs")
The Company granted 0.6 million RSUs during the nine months ended July 1, 2016 at a weighted-average grant-date fair value of $31.91 per RSU. The compensation cost charged to expense during the three and nine months ended July 1, 2016 for RSUs was approximately $5.3 million and $16.4 million, respectively. The compensation cost charged to expense during the three and nine months ended July 3, 2015 for RSUs was approximately $5.0 million and $14.3 million, respectively.
Performance Stock Units ("PSUs")
The Company granted 0.7 million PSUs during the nine months ended July 1, 2016 at a weighted-average grant-date fair value of $31.41 per PSU with performance conditions based upon the achievement of a level of adjusted earnings per share. The Company recorded compensation expense during the three and nine months ended July 1, 2016 for PSUs of approximately $3.4 million and $10.7 million, respectively. The Company recorded compensation expense during the three and nine months ended July 3, 2015 for PSUs of approximately $4.4 million and $13.0 million, respectively.
Deferred Stock Units ("DSUs")
The Company granted 0.1 million DSUs during the nine months ended July 1, 2016 at a weighted-average grant-date fair value of $32.48 per DSU. The compensation cost charged to expense during the three and nine months ended July 1, 2016 for DSUs was approximately $0.4 million and $1.1 million, respectively. The compensation cost charged to expense during the three and nine months ended July 3, 2015 for DSUs was approximately $0.3 million and $0.3 million.

14

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9. 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 share-based awards.
The following table sets forth the computation of basic and diluted earnings per share attributable to the Company's stockholders (in thousands, except per share data):
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
 
July 1, 2016
 
July 3, 2015
Earnings:
 
 
 
 
 
 
 
Net income attributable to Aramark stockholders

$44,765

 

$33,761

 

$204,462

 

$179,081

Shares:
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
242,831

 
238,718

 
241,740

 
236,933

Effect of dilutive securities
6,226

 
8,506

 
6,582

 
9,102

Diluted weighted-average shares outstanding
249,057

 
247,224

 
248,322

 
246,035

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
 
 
 
 
 
 
 
Net income attributable to Aramark stockholders

$0.18

 

$0.14

 

$0.85

 

$0.76

Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income attributable to Aramark stockholders

$0.18

 

$0.14

 

$0.82

 

$0.73

Share-based awards to purchase 2.4 million and 2.9 million shares were outstanding for the three months ended July 1, 2016 and July 3, 2015, respectively, but were not included in the computation of diluted earnings per common share, as their effect would have been antidilutive. In addition, PSUs related to 0.7 million shares and 0.8 million shares were outstanding for the three month period of July 1, 2016 and July 3, 2015, respectively, but were not included in the computation of diluted earnings per common share, as the performance targets were not yet met.
Share-based awards to purchase 3.4 million and 2.4 million shares were outstanding for nine months ended July 1, 2016 and July 3, 2015, respectively, but were not included in the computation of diluted earnings per common share, as their effect would have been antidilutive. In addition, PSUs related to 0.7 million shares and 0.8 million shares were outstanding for the nine month period of July 1, 2016 and July 3, 2015, respectively, but were not included in the computation of diluted earnings per common share, as the performance targets were not yet met.
NOTE 10. 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 $121.9 million at July 1, 2016 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 July 1, 2016.
From time to time, the Company and its subsidiaries are a party to various legal actions, proceedings and investigations involving claims incidental to the conduct of their business, including actions by clients, consumers, employees, government entities and third parties, including under federal, state, international, national, provincial and local employment laws, wage and hour laws, discrimination laws, immigration laws, human health and safety laws, import and export controls and customs laws, environmental laws, false claims or whistleblower statutes, minority, women and disadvantaged business enterprise statutes, tax codes, antitrust and competition laws, consumer protection statutes, procurement regulations, intellectual property laws, food safety and sanitation laws, cost and accounting principles, the Foreign Corrupt Practices Act, the U.K. Bribery Act, other anti-corruption laws, lobbying laws, motor carrier safety laws, data privacy and security laws and alcohol licensing and service laws, or alleging negligence and/or breaches of contractual and other obligations. Based on information currently available, advice of counsel, available insurance coverage, established reserves and other resources, the Company does not believe that any such actions are likely to be, individually or in the aggregate, material to its business, financial condition, results of operations or cash flows. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company’s business, financial condition, results of operations or cash flows.

15

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. BUSINESS SEGMENTS:
The Company reports its operating results in three reportable segments: FSS North America, FSS International and Uniform. Corporate includes general expenses not specifically allocated to an individual segment and share-based compensation expense (see note 8). Financial information by segment follows (in millions):
 
Sales
 
Three Months Ended
 
July 1, 2016
 
July 3, 2015
FSS North America
$
2,487.9

 
$
2,382.6

FSS International
709.7

 
722.0

Uniform
389.3

 
381.6

 
$
3,586.9

 
$
3,486.2

 
Operating Income
 
Three Months Ended
 
July 1, 2016
 
July 3, 2015
FSS North America
$
100.7

 
$
73.6

FSS International
38.5

 
32.3

Uniform
52.2

 
49.6

 
191.4

 
155.5

Corporate
(22.1
)
 
(38.6
)
Operating Income
169.3

 
116.9

Interest and Other Financing Costs, net
(103.7
)
 
(71.2
)
Income Before Income Taxes
$
65.6

 
$
45.7

 
Sales
 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
FSS North America
$
7,630.7

 
$
7,466.1

FSS International
2,068.7

 
2,180.4

Uniform
1,172.6

 
1,136.7

 
$
10,872.0

 
$
10,783.2

 
Operating Income
 
Nine Months Ended
 
July 1, 2016
 
July 3, 2015
FSS North America
$
406.3

 
$
363.5

FSS International
93.0

 
83.4

Uniform
146.3

 
145.7

 
645.6

 
592.6

Corporate
(90.1
)
 
(119.0
)
Operating Income
555.5

 
473.6

Interest and Other Financing Costs, net
(246.8
)
 
(214.3
)
Income Before Income Taxes
$
308.7

 
$
259.3



16

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are classified based upon the level of judgment associated with the inputs used to measure their fair value. The hierarchical levels related to the subjectivity of the valuation inputs are defined as follows:
Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument
Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement
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 July 1, 2016 and October 2, 2015 was $5,523.0 million and $5,341.3 million, respectively. The carrying value of the Company’s debt at July 1, 2016 and October 2, 2015 was $5,433.2 million and $5,266.0 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.
NOTE 13. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF ARAMARK 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 condensed 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 2020 Notes, 2024 Notes and 2026 Notes are obligations of the Company's wholly-owned subsidiary, Aramark Services, Inc., and are each 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 2020 Notes, 2024 Notes or 2026 Notes (“Non-Guarantors”). The Guarantors also guarantee certain other debt.

17

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
July 1, 2016
(in thousands)
 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors
 
Non
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
63,686

 
$
36,040

 
$
96,776

 
$

 
$
196,507

Receivables

 
343

 
344,375

 
1,090,026

 

 
1,434,744

Inventories, at lower of cost or market

 
15,143

 
476,655

 
69,444

 

 
561,242

Prepayments and other current assets

 
72,897

 
76,990

 
86,204

 

 
236,091

Total current assets
5

 
152,069

 
934,060

 
1,342,450

 

 
2,428,584

Property and Equipment, net

 
31,258

 
773,651

 
190,149

 

 
995,058

Goodwill

 
173,104

 
3,982,737

 
422,069

 

 
4,577,910

Investment in and Advances to Subsidiaries
2,089,415

 
5,458,441

 
588,247

 
226,304

 
(8,362,407
)
 

Other Intangible Assets

 
29,729

 
914,400

 
103,947

 

 
1,048,076

Other Assets

 
60,396

 
993,707

 
229,767

 
(2,001
)
 
1,281,869

 
$
2,089,420

 
$
5,904,997

 
$
8,186,802

 
$
2,514,686

 
$
(8,364,408
)
 
$
10,331,497

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

 
$
21,992

 
$
12,922

 
$
15,152

 
$

 
$
50,066

Accounts payable

 
129,012

 
306,786

 
247,515

 

 
683,313

Accrued expenses and other liabilities
100

 
144,462

 
657,599

 
265,080

 
(3,739
)
 
1,063,502

Total current liabilities
100

 
295,466

 
977,307

 
527,747

 
(3,739
)
 
1,796,881

Long-term Borrowings

 
4,673,903

 
44,058

 
665,157

 

 
5,383,118

Deferred Income Taxes and Other Noncurrent Liabilities

 
440,478

 
540,701

 
71,019

 

 
1,052,198

Intercompany Payable

 

 
4,943,383

 
1,095,136

 
(6,038,519
)
 

Redeemable Noncontrolling Interest

 

 
9,980

 

 

 
9,980

Total Stockholders' Equity
2,089,320

 
495,150

 
1,671,373

 
155,627

 
(2,322,150
)
 
2,089,320

 
$
2,089,420

 
$
5,904,997

 
$
8,186,802

 
$
2,514,686

 
$
(8,364,408
)
 
$
10,331,497



18

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
October 2, 2015
(in thousands)
 
 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
31,792

 
$
42,811

 
$
47,808

 
$

 
$
122,416

Receivables

 
3,721

 
295,618

 
1,145,235

 

 
1,444,574

Inventories, at lower of cost or market

 
15,981

 
487,551

 
71,731

 

 
575,263

Prepayments and other current assets

 
59,706

 
74,395

 
102,769

 

 
236,870

Total current assets
5

 
111,200

 
900,375

 
1,367,543

 

 
2,379,123

Property and Equipment, net

 
20,713

 
785,274

 
153,358

 

 
959,345

Goodwill

 
173,104

 
3,982,737

 
403,127

 

 
4,558,968

Investment in and Advances to Subsidiaries
1,883,454

 
5,586,010

 
479,517

 
16,121

 
(7,965,102
)
 

Other Intangible Assets

 
29,729

 
985,449

 
96,802

 

 
1,111,980

Other Assets

 
40,128

 
919,811

 
229,004

 
(2,002
)
 
1,186,941

 
$
1,883,459

 
$
5,960,884

 
$
8,053,163

 
$
2,265,955

 
$
(7,967,104
)
 
$
10,196,357

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

 
$
21,921

 
$
13,013

 
$
46,493

 
$

 
$
81,427

Accounts payable

 
152,844

 
419,188

 
278,008

 

 
850,040

Accrued expenses and other liabilities
100

 
135,540

 
818,610

 
295,183

 
88

 
1,249,521

Total current liabilities
100

 
310,305

 
1,250,811

 
619,684

 
88

 
2,180,988

Long-term Borrowings

 
4,366,341

 
44,464

 
773,792

 

 
5,184,597

Deferred Income Taxes and Other Noncurrent Liabilities

 
415,284

 
500,632

 
21,395

 

 
937,311

Intercompany Payable

 

 
5,096,806

 
1,075,836

 
(6,172,642
)
 

Redeemable Noncontrolling Interest

 

 
10,102

 

 

 
10,102

Total Stockholders' Equity
1,883,359

 
868,954

 
1,150,348

 
(224,752
)
 
(1,794,550
)
 
1,883,359

 
$
1,883,459

 
$
5,960,884

 
$
8,053,163

 
$
2,265,955

 
$
(7,967,104
)
 
$
10,196,357



19

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended July 1, 2016
(in thousands)
 
 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$

 
$
263,378

 
$
2,406,759

 
$
916,771

 
$

 
$
3,586,908

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 

Cost of services provided

 
242,148

 
2,169,767

 
821,969

 

 
3,233,884

Depreciation and amortization

 
3,890

 
101,569

 
16,904

 

 
122,363

Selling and general corporate expenses

 
24,167

 
32,599

 
4,551

 

 
61,317

Interest and other financing costs, net

 
98,762

 
(653
)
 
5,655

 

 
103,764

Expense allocations
 
 
(95,447
)
 
80,109

 
15,338

 

 

 

 
273,520

 
2,383,391

 
864,417

 

 
3,521,328

Income (Loss) before Income Taxes

 
(10,142
)
 
23,368

 
52,354

 

 
65,580

Provision (Benefit) for Income Taxes

 
(3,718
)
 
6,218

 
18,222

 

 
20,722

Equity in Net Income of Subsidiaries
44,765

 

 

 

 
(44,765
)
 

Net income (loss)
44,765

 
(6,424
)
 
17,150

 
34,132

 
(44,765
)
 
44,858

Less: Net income attributable to noncontrolling interest

 

 
93

 

 

 
93

Net income (loss) attributable to Aramark stockholders
44,765

 
(6,424
)
 
17,057

 
34,132

 
(44,765
)
 
44,765

Other comprehensive income (loss), net of tax
(7,929
)
 
(10,635
)
 
(3,010
)
 
(2,356
)
 
16,001

 
(7,929
)
Comprehensive income (loss) attributable to Aramark stockholders
$
36,836

 
$
(17,059
)
 
$
14,047

 
$
31,776

 
$
(28,764
)
 
$
36,836
























20

ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months ended July 1, 2016
(in thousands)
 
 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$

 
$
773,795

 
$
7,357,628

 
$
2,740,582

 
$

 
$
10,872,005

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of services provided

 
712,877

 
6,503,117

 
2,522,123

 

 
9,738,117

Depreciation and amortization

 
11,758

 
307,149

 
51,265

 

 
370,172

Selling and general corporate expenses

 
96,596

 
97,575

 
13,994

 

 
208,165

Interest and other financing costs, net

 
229,226