10-Q 1 q12017aramark10-q.htm 10-Q 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 December 30, 2016 Commission File Number: 001-36223

image0a06.jpg


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 January 27, 2017, the number of shares of the registrant's common stock outstanding is 246,304,708.






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," "have confidence," "estimate," "expect," "will be," "will continue," "will likely result," "project," "intend," "plan," "believe," "see," "look to" and other words and terms of similar meaning or the negative versions of such words.
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 November 23, 2016, 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)
 
December 30, 2016
 
September 30, 2016
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
146,951

 
$
152,580

Receivables (less allowances: 2017 - $45,780; 2016 - $48,058)
1,492,291

 
1,476,349

Inventories
563,935

 
587,155

Prepayments and other current assets
170,418

 
276,487

Total current assets
2,373,595

 
2,492,571

Property and Equipment, net
997,562

 
1,023,083

Goodwill
4,608,287

 
4,628,881

Other Intangible Assets
1,084,279

 
1,111,883

Other Assets
1,320,201

 
1,325,654

 
$
10,383,924

 
$
10,582,072

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term borrowings
$
47,603

 
$
46,522

Accounts payable
703,878

 
847,588

Accrued expenses and other current liabilities
1,027,768

 
1,290,635

Total current liabilities
1,779,249

 
2,184,745

Long-Term Borrowings
5,364,855

 
5,223,514

Deferred Income Taxes and Other Noncurrent Liabilities
991,453

 
1,003,013

Redeemable Noncontrolling Interest
9,825

 
9,794

Stockholders' Equity:
 
 
 
Common stock, par value $.01 (authorized: 600,000,000 shares; issued: 2017—274,528,737 shares and 2016—272,565,923 shares; and outstanding: 2017—246,064,656 shares and 2016—244,713,580 shares)
2,745

 
2,726

Capital surplus
2,937,191

 
2,921,725

Retained earnings/(Accumulated deficit)
74,707

 
(33,778
)
Accumulated other comprehensive loss
(205,465
)
 
(180,783
)
Treasury stock (shares held in treasury: 2017—28,464,081 shares and 2016—27,852,343 shares)
(570,636
)
 
(548,884
)
Total stockholders' equity
2,238,542

 
2,161,006

 
$
10,383,924

 
$
10,582,072


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
 
December 30, 2016
 
January 1, 2016
Sales
$
3,735,383

 
$
3,710,275

Costs and Expenses:
 
 
 
Cost of services provided
3,299,329

 
3,294,523

Depreciation and amortization
126,527

 
127,518

Selling and general corporate expenses
65,472

 
74,141

 
3,491,328

 
3,496,182

Operating income
244,055

 
214,093

Interest and Other Financing Costs, net
65,677

 
71,320

Income Before Income Taxes
178,378

 
142,773

Provision for Income Taxes
52,943

 
49,337

Net income
125,435

 
93,436

Less: Net income attributable to noncontrolling interest
96

 
93

Net income attributable to Aramark stockholders
$
125,339

 
$
93,343

 
 
 
 
Earnings per share attributable to Aramark stockholders:
 
 
 
Basic
$
0.51

 
$
0.39

Diluted
$
0.50

 
$
0.38

Weighted Average Shares Outstanding:
 
 
 
Basic
244,758

 
240,521

Diluted
252,593

 
247,613

 
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
 
December 30, 2016
 
January 1, 2016
Net income
$
125,435

 
$
93,436

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(34,880
)
 
(10,572
)
Fair value of cash flow hedges
10,198

 
15,574

Other comprehensive income (loss), net of tax
(24,682
)
 
5,002

Comprehensive income
100,753

 
98,438

Less: Net income attributable to noncontrolling interest
96

 
93

Comprehensive income attributable to Aramark stockholders
$
100,657

 
$
98,345

 
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)
 
Three Months Ended
 
December 30, 2016
 
January 1, 2016
Cash flows from operating activities:
 
 
 
Net income
$
125,435

 
$
93,436

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
126,527

 
127,518

Deferred income taxes
819

 
21,399

Share-based compensation expense
16,224

 
15,270

Changes in operating assets and liabilities
(296,738
)
 
(429,795
)
Other operating activities
1,707

 
3,179

Net cash used in operating activities
(26,026
)
 
(168,993
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment, client contract investments and other
(106,600
)
 
(91,499
)
Disposals of property and equipment
1,349

 
2,017

Acquisition of certain businesses, net of cash acquired
(1,045
)
 
(231
)
Other investing activities
166

 
3,579

Net cash used in investing activities
(106,130
)
 
(86,134
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term borrowings
45,987

 
431,736

Payments of long-term borrowings
(13,609
)
 
(172,522
)
Net change in funding under the Receivables Facility
132,000

 
25,000

Payments of dividends
(25,246
)
 
(22,853
)
Proceeds from issuance of common stock
3,121

 
7,512

Other financing activities
(15,726
)
 
(20,804
)
Net cash provided by financing activities
126,527

 
248,069

Decrease in cash and cash equivalents
(5,629
)
 
(7,058
)
Cash and cash equivalents, beginning of period
152,580

 
122,416

Cash and cash equivalents, end of period
$
146,951

 
$
115,358


 
 
Three Months Ended
(dollars in millions)
 
December 30, 2016
 
January 1, 2016
Interest paid
 
$
27.5

 
$
51.7

Income taxes paid
 
17.8

 
10.8


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

4

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. The Company's core market is North America (composed of the United States and Canada), which is supplemented by an additional 17-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 November 23, 2016. The Condensed Consolidated Balance Sheet as of September 30, 2016 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 January 2017, the Financial Accounting Standards Board ("FASB") issued an accounting standard update ("ASU") to simplify the subsequent measurement of goodwill as part of the impairment test. The guidance is effective for the Company in the first quarter of fiscal 2021 and early adoption is permitted. The Company is currently evaluating the impact of the pronouncement.
In January 2017, the FASB issued an ASU to clarify the definition of a business. 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 October 2016, the FASB issued an ASU to require entities to recognize the income tax consequences of certain intercompany assets transfers at the transaction date. 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 August 2016, the FASB issued an ASU to address the classification of certain cash receipts and cash payments in the Statement of Cash Flows. 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 March 2016, the FASB issued an ASU to update several aspects of the accounting for share-based payment transactions. Upon adoption, the ASU requires that excess tax benefits for share-based payments be recorded as a reduction to the provision for income taxes and reflected within cash flows from operating activities rather than being recorded within stockholders’ equity and reflected within cash flow from financing activities. The standard also clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on a cash flow statement, and provides an accounting policy election to account for forfeitures as they occur. The guidance is effective for the Company in the first quarter of fiscal 2018 and early adoption is permitted.
The Company elected to early adopt the guidance as of the beginning of its first quarter of fiscal 2017. The impact to the Condensed Consolidated Statements of Income for the three months ended December 30, 2016 was $6.3 million of excess tax benefit recorded as a reduction to the provision for income taxes. The adoption impact to the Condensed Consolidated Balance Sheets was a cumulative-effect adjustment of approximately $9.8 million to increase retained earnings for previously unrecognized excess tax benefits. The Company applied the guidance related to the presentation in the Condensed Consolidated Statements of Cash Flows on a retrospective basis. The excess tax benefit of $6.3 million and $6.4 million for share-based awards is included in operating activities, previously classified in financing activities, and approximately $15.3 million and $19.9 million of cash paid for employee taxes for withheld shares is included in financing activities, previously classified in operating activities, for the three months ended December 30, 2016 and January 1, 2016, respectively. As a result of the adoption, the excess tax benefit is no longer included in the calculation of diluted shares under the treasury stock method, which

5

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

increased the diluted shares outstanding by approximately 2.0 million shares. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
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 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 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 Company adopted the guidance in the first quarter of fiscal 2017 which did not have an impact on the condensed consolidated financial statements.
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 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. As the new standard will supersede most existing revenue guidance affecting the Company, it could impact revenue and cost recognition on contracts across all reportable segments. The Company has been closely monitoring the FASB activity related to the new standard and continues to work to conclude on specific interpretative issues. The Company also continues to make progress on a comprehensive contract review project in order to develop a full understanding of the adoption impact on the 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, 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
 
December 30, 2016
 
January 1, 2016
 
Pre-Tax Amount
Tax Effect
After-Tax Amount
 
Pre-Tax Amount
Tax Effect
After-Tax Amount
Net income
 
 
$
125,435

 
 
 
$
93,436

Foreign currency translation adjustments
(43,648
)
8,768

(34,880
)
 
(10,563
)
(9
)
(10,572
)
Fair value of cash flow hedges
16,718

(6,520
)
10,198

 
16,079

(505
)
15,574

Other comprehensive income (loss)
(26,930
)
2,248

(24,682
)
 
5,516

(514
)
5,002

Comprehensive income
 
 
100,753

 
 
 
98,438

Less: Net income attributable to noncontrolling interest
 
 
96

 
 
 
93

Comprehensive income attributable to Aramark stockholders
 
 
$
100,657

 
 
 
$
98,345

 

6

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

Accumulated other comprehensive loss consists of the following (in thousands):
 
December 30, 2016
 
September 30, 2016
Pension plan adjustments
$
(65,267
)
 
$
(65,267
)
Foreign currency translation adjustments
(103,341
)
 
(68,461
)
Cash flow hedges
(26,175
)
 
(36,373
)
Share of equity investee's accumulated other comprehensive loss
(10,682
)
 
(10,682
)
 
$
(205,465
)
 
$
(180,783
)
Other Assets
Other assets consist primarily of client contract investments, investments in 50% or less owned entities, 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 $877.6 million and $865.0 million as of December 30, 2016 and September 30, 2016, respectively.
Income Taxes
Effective for the first quarter of fiscal 2017, the earnings since the beginning of the fiscal year of certain of the Company's foreign subsidiaries are intended to be indefinitely reinvested in operations outside the U.S. and, therefore, U.S. taxes have not been recorded on those earnings.
NOTE 2. SEVERANCE:
The Company previously initiated a series of actions and developed plans for streamlining and improving the efficiencies and effectiveness of its selling, general and administrative functions.
As of December 30, 2016 and September 30, 2016, the Company had an accrual of approximately $20.3 million and $26.1 million, respectively, related to the unpaid obligations for these actions.
NOTE 3. 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 30, 2016 follow (in thousands):
Segment
September 30, 2016
 
Acquisition
 
Translation
 
December 30, 2016
FSS North America
$
3,635,614

 
$
220

 
$
(42
)
 
$
3,635,792

FSS International
418,488

 

 
(20,772
)
 
397,716

Uniform
574,779

 

 

 
574,779

 
$
4,628,881

 
$
220

 
$
(20,814
)
 
$
4,608,287

Other intangible assets consist of the following (in thousands):
 
December 30, 2016
 
September 30, 2016
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
Customer relationship assets
$
1,298,148

 
$
(989,651
)
 
$
308,497

 
$
1,793,739

 
$
(1,462,058
)
 
$
331,681

Trade names
777,415

 
(1,633
)
 
775,782

 
781,835

 
(1,633
)
 
780,202

 
$
2,075,563

 
$
(991,284
)
 
$
1,084,279

 
$
2,575,574

 
$
(1,463,691
)
 
$
1,111,883

Acquisition-related intangible assets consist of customer relationship assets and the Aramark, Avoca, HPSI 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, Avoca and HPSI trade names are indefinite lived intangible assets and are not amortizable but are evaluated for impairment at least annually.

7

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

Amortization of intangible assets for the three months ended December 30, 2016 and January 1, 2016 was approximately $22.5 million and $32.0 million, respectively.
NOTE 4. BORROWINGS:
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.
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, the Company and 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 during the first quarter of fiscal 2016.
NOTE 5. 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.
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. Approximately ($26.2) million and ($36.4) million of unrealized net of tax losses related to the interest rate swaps were included in "Accumulated other comprehensive loss" as of December 30, 2016 and September 30, 2016, respectively. The hedge ineffectiveness for these cash flow hedging instruments during the three months ended December 30, 2016 and January 1, 2016 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 three months ended January 1, 2016. The termination of these agreements resulted in the Company receiving $5.7 million of proceeds.
The following table summarizes the effect of our derivatives designated as cash flow hedging instruments (effective portion) on Other comprehensive income (loss) (in thousands):
 
Three Months Ended
 
December 30, 2016
 
January 1, 2016
Interest rate swap agreements
$
10,745

 
$
7,117

Cross currency swap agreements

 
(2,116
)
 
$
10,745

 
$
5,001

 

8

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

Derivatives not Designated in Hedging Relationships
The Company entered into a series of pay fixed/receive floating gasoline and diesel fuel agreements based on the Department of Energy weekly retail on-highway index in order to limit its exposure to price fluctuations for gasoline and diesel fuel. As of December 30, 2016, the Company has contracts for approximately 29.0 million gallons outstanding for 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 $4.4 million and a loss of approximately $0.9 million for the three months ended December 30, 2016 and January 1, 2016, respectively.
As of December 30, 2016, the Company had foreign currency forward exchange contracts outstanding with notional amounts of €48.7 million, £67.4 million and CAD113.5 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.
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
 
December 30, 2016
 
September 30, 2016
ASSETS
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Gasoline and diesel fuel agreements
 
Prepayments and other current assets
 
$
8,152

 
$
3,878

 
 
 
 
8,152

 
3,878

LIABILITIES
 
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Accrued expenses and other current liabilities
 
$
4,489

 
$
5,929

Interest rate swap agreements
 
Other Noncurrent Liabilities
 
18,585

 
34,919

 
 
 
 
23,074

 
40,848

 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Accounts payable
 
1,066

 
447

 
 
 
 
$
24,140

 
$
41,295

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
 
 
Income Statement Location
 
December 30, 2016
 
January 1, 2016
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Interest expense
 
$
5,973

 
$
9,017

Cross currency swap agreements
 
Interest expense
 

 
2,061

 
 
 
 
5,973

 
11,078

Not designated as hedging instruments:
 
 
 
 
 
 
Gasoline and diesel fuel agreements
 
Costs of services provided
 
$
(4,684
)
 
$
2,505

Foreign currency forward exchange contracts
 
Interest expense
 
(7,404
)
 
5,090

 
 
 
 
(12,088
)
 
7,595

 
 
 
 
$
(6,115
)
 
$
18,673

 
At December 30, 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 $8.8 million.

9

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

NOTE 6. STOCKHOLDERS' EQUITY:
During the three months ended December 30, 2016 and January 1, 2016, the Company paid dividends of approximately $25.2 million and $22.9 million to its stockholders, respectively. On February 1, 2017, the Company's Board declared a $0.103 dividend per share of common stock, payable on March 1, 2017, to shareholders of record on the close of business on February 15, 2017.
NOTE 7. SHARE-BASED COMPENSATION:
The following table summarizes the share-based compensation expense and related information for Time-Based Options ("TBOs"), Time-Based Restricted Stock Units ("RSUs"), Performance Stock Units and Performance Restricted Stock ("PSUs"), and Deferred Stock and Other Units classified as "Selling and general corporate expenses" in the Condensed Consolidated Statements of Income (in millions).
 
 
Three Months Ended
 
 
December 30, 2016
 
January 1, 2016
TBOs
 
$
5.3

 
$
4.9

RSUs
 
6.4

 
5.7

PSUs
 
3.6

 
4.0

Deferred Stock and Other Units
 
0.9

 
0.7

 
 
$
16.2

 
$
15.3

 
 
 
 
 
Taxes related to share-based compensation
 
$
6.0

 
$
6.0

The below table summarizes the number of shares granted and the weighted-average grant-date fair value per unit during the three months ended December 30, 2016:
 
 
Shares Granted (in millions)
 
Weighted-Average Grant-Date Fair Value (dollars per share)
TBOs
 
2.6

 
$
8.46

RSUs
 
1.4

 
$
34.08

PSUs
 
0.4

 
$
34.08

 
 
4.4

 
 

10

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

NOTE 8. 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
 
December 30, 2016
 
January 1, 2016
Earnings:
 
 
 
Net income attributable to Aramark stockholders
$
125,339

 
$
93,343

Shares:
 
 
 
Basic weighted-average shares outstanding
244,758

 
240,521

Effect of dilutive securities
7,835

 
7,092

Diluted weighted-average shares outstanding
252,593

 
247,613

 
 
 
 
Basic Earnings Per Share:
 
 
 
Net income attributable to Aramark stockholders
$
0.51

 
$
0.39

Diluted Earnings Per Share:
 
 
 
Net income attributable to Aramark stockholders
$
0.50

 
$
0.38

Share-based awards to purchase 3.3 million and 3.8 million shares were outstanding for the three months ended December 30, 2016 and January 1, 2016, 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 1.1 million shares and 0.7 million shares were outstanding for the three month periods of December 30, 2016 and January 1, 2016, respectively, but were not included in the computation of diluted earnings per common share, as the performance targets were not yet met.
NOTE 9. 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 $110.6 million at December 30, 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 December 30, 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.

11

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

NOTE 10. 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 7). In the Company's two food and support services segments, approximately 80% of the global sales is related to food services and 20% is related to facilities services. Financial information by segment follows (in millions):
 
Sales
 
Three Months Ended
 
December 30, 2016
 
January 1, 2016
FSS North America
$
2,662.8

 
$
2,622.7

FSS International
677.1

 
694.9

Uniform
395.5

 
392.7

 
$
3,735.4

 
$
3,710.3

 
Operating Income
 
Three Months Ended
 
December 30, 2016
 
January 1, 2016
FSS North America
$
185.2

 
$
168.3

FSS International
31.7

 
30.1

Uniform
53.8

 
50.3

 
270.7

 
248.7

Corporate
(26.6
)
 
(34.6
)
Operating Income
244.1

 
214.1

Interest and Other Financing Costs, net
(65.7
)
 
(71.3
)
Income Before Income Taxes
$
178.4

 
$
142.8

 
 
NOTE 11. 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 December 30, 2016 and September 30, 2016 was $5,486.9 million and $5,365.6 million, respectively. The carrying value of the Company's debt at December 30, 2016 and September 30, 2016 was $5,412.5 million and $5,270.0 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.

12

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

NOTE 12. 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 5.75% Senior Notes due March 15, 2020 ("2020 Notes"), 5.125% Senior Notes due January 15, 2024 ("2024 Notes") and 4.75% Senior Notes due June 1, 2026 ("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.

13

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

CONDENSED CONSOLIDATING BALANCE SHEETS
December 30, 2016
(in thousands)

 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors
 
Non
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
27,484

 
$
28,984

 
$
90,478

 
$

 
$
146,951

Receivables

 
150

 
321,995

 
1,170,146

 

 
1,492,291

Inventories

 
14,673

 
475,353

 
73,909

 

 
563,935

Prepayments and other current assets

 
3,848

 
66,505

 
100,065

 

 
170,418

Total current assets
5

 
46,155

 
892,837

 
1,434,598

 

 
2,373,595

Property and Equipment, net

 
29,688

 
762,707

 
205,167

 

 
997,562

Goodwill

 
173,104

 
3,982,737

 
452,446

 

 
4,608,287

Investment in and Advances to Subsidiaries
2,238,637

 
5,565,845

 
740,647

 
230,145

 
(8,775,274
)
 

Other Intangible Assets

 
29,729

 
875,692

 
178,858

 

 
1,084,279

Other Assets

 
61,309

 
1,048,300

 
212,594

 
(2,002
)
 
1,320,201

 
$
2,238,642

 
$
5,905,830

 
$
8,302,920

 
$
2,713,808

 
$
(8,777,276
)
 
$
10,383,924

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

 
$
21,931

 
$
15,951

 
$
9,721

 
$

 
$
47,603

Accounts payable

 
156,316

 
304,823

 
242,739

 

 
703,878

Accrued expenses and other current liabilities
100

 
148,265

 
599,976

 
297,805

 
(18,378
)
 
1,027,768

Total current liabilities
100

 
326,512

 
920,750

 
550,265

 
(18,378
)
 
1,779,249

Long-term Borrowings

 
4,601,287

 
58,223

 
705,345

 

 
5,364,855

Deferred Income Taxes and Other Noncurrent Liabilities

 
434,320

 
492,365

 
64,768

 

 
991,453

Intercompany Payable

 

 
5,251,307

 
869,183

 
(6,120,490
)
 

Redeemable Noncontrolling Interest

 

 
9,825

 

 

 
9,825

Total Stockholders' Equity
2,238,542

 
543,711

 
1,570,450

 
524,247

 
(2,638,408
)
 
2,238,542

 
$
2,238,642

 
$
5,905,830

 
$
8,302,920

 
$
2,713,808

 
$
(8,777,276
)
 
$
10,383,924



14

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

CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 2016
(in thousands)

 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
47,850

 
$
31,344

 
$
73,381

 
$

 
$
152,580

Receivables

 
167

 
265,124

 
1,211,058

 

 
1,476,349

Inventories

 
15,284

 
492,855

 
79,016

 

 
587,155

Prepayments and other current assets

 
69,033

 
98,779

 
108,675

 

 
276,487

Total current assets
5

 
132,334

 
888,102

 
1,472,130

 

 
2,492,571

Property and Equipment, net

 
30,201

 
782,347

 
210,535

 

 
1,023,083

Goodwill

 
173,104

 
3,982,737

 
473,040

 

 
4,628,881

Investment in and Advances to Subsidiaries
2,161,101

 
5,450,692

 
598,759

 
230,488

 
(8,441,040
)
 

Other Intangible Assets

 
29,729

 
894,274

 
187,880

 

 
1,111,883

Other Assets

 
56,850

 
1,028,887

 
241,919

 
(2,002
)
 
1,325,654

 
$
2,161,106

 
$
5,872,910

 
$
8,175,106

 
$
2,815,992

 
$
(8,443,042
)
 
$
10,582,072

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

 
$
21,998

 
$
15,598

 
$
8,926

 
$

 
$
46,522

Accounts payable

 
156,471

 
415,481

 
275,636

 

 
847,588

Accrued expenses and other current liabilities
100

 
145,314

 
827,213

 
319,447

 
(1,439
)
 
1,290,635

Total current liabilities
100

 
323,783

 
1,258,292

 
604,009

 
(1,439
)
 
2,184,745

Long-term Borrowings

 
4,570,931

 
62,892

 
589,691

 

 
5,223,514

Deferred Income Taxes and Other Noncurrent Liabilities

 
440,839

 
510,254

 
51,920

 

 
1,003,013

Intercompany Payable

 

 
4,619,489

 
1,400,741

 
(6,020,230
)
 

Redeemable Noncontrolling Interest

 

 
9,794

 

 

 
9,794

Total Stockholders' Equity
2,161,006

 
537,357

 
1,714,385

 
169,631

 
(2,421,373
)
 
2,161,006

 
$
2,161,106

 
$
5,872,910

 
$
8,175,106

 
$
2,815,992

 
$
(8,443,042
)
 
$
10,582,072



15

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

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended December 30, 2016
(in thousands)
 
 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$

 
$
252,379

 
$
2,528,456

 
$
954,548

 
$

 
$
3,735,383

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of services provided

 
228,812

 
2,197,649

 
872,868

 

 
3,299,329

Depreciation and amortization

 
4,381

 
102,183

 
19,963

 

 
126,527

Selling and general corporate expenses

 
28,367

 
32,481

 
4,624

 

 
65,472

Interest and other financing costs, net

 
61,353

 
(632
)
 
4,956

 

 
65,677

Expense allocations
 
 
(76,019
)
 
73,872

 
2,147

 

 

 

 
246,894

 
2,405,553

 
904,558

 

 
3,557,005

Income before Income Taxes

 
5,485

 
122,903

 
49,990

 

 
178,378

Provision for Income Taxes

 
1,477

 
36,316

 
15,150

 

 
52,943

Equity in Net Income of Subsidiaries
125,339

 

 

 

 
(125,339
)
 

Net income
125,339

 
4,008

 
86,587

 
34,840

 
(125,339
)
 
125,435

Less: Net income attributable to noncontrolling interest

 

 
96

 

 

 
96

Net income attributable to Aramark stockholders
125,339

 
4,008

 
86,491

 
34,840

 
(125,339
)
 
125,339

Other comprehensive income (loss), net of tax
(24,682
)
 
25,467

 
(1,927
)
 
(68,348
)
 
44,808

 
(24,682
)
Comprehensive income (loss) attributable to Aramark stockholders
$
100,657

 
$
29,475

 
$
84,564

 
$
(33,508
)
 
$
(80,531
)
 
$
100,657


 

16

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

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended January 1, 2016
(in thousands)

 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Sales
$

 
$
256,743

 
$
2,517,067

 
$
936,465

 
$

 
$
3,710,275

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of services provided

 
234,974

 
2,199,744

 
859,805

 

 
3,294,523

Depreciation and amortization

 
3,463

 
106,277

 
17,778

 

 
127,518

Selling and general corporate expenses

 
36,846

 
32,493

 
4,802

 

 
74,141

Interest and other financing costs

 
63,583

 
(449
)
 
8,186

 

 
71,320

Expense allocations


 
(94,050
)
 
97,551

 
(3,501
)
 

 

 

 
244,816

 
2,435,616

 
887,070

 

 
3,567,502

Income before Income Taxes

 
11,927

 
81,451

 
49,395

 

 
142,773

Provision for Income Taxes

 
4,829

 
26,774

 
17,734

 

 
49,337

Equity in Net Income of Subsidiaries
93,343

 

 

 

 
(93,343
)
 

Net income
93,343

 
7,098

 
54,677

 
31,661

 
(93,343
)
 
93,436

Less: Net income attributable to noncontrolling interest

 

 
93

 

 

 
93

Net income attributable to Aramark stockholders
93,343

 
7,098

 
54,584

 
31,661

 
(93,343
)
 
93,343

Other comprehensive income (loss), net of tax
5,002

 
9,885

 
(1,562
)
 
(13,965
)
 
5,642

 
5,002

Comprehensive income attributable to Aramark stockholders
$
98,345

 
$
16,983

 
$
53,022

 
$
17,696

 
$
(87,701
)
 
$
98,345


 


17

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

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three months ended December 30, 2016
(in thousands)

 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$

 
$
102,805

 
$
(168,396
)
 
$
40,175

 
$
(610
)
 
$
(26,026
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, client contract investments and other

 
(4,921
)
 
(88,327
)
 
(13,352
)
 

 
(106,600
)
Disposals of property and equipment

 
49

 
546

 
754

 

 
1,349

Acquisitions of businesses, net of cash acquired

 

 

 
(1,045
)
 

 
(1,045
)
Other investing activities

 
(1,836
)
 
(3,083
)
 
5,085

 

 
166

Net cash used in investing activities

 
(6,708
)
 
(90,864
)
 
(8,558
)
 

 
(106,130
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term borrowings

 
40,900

 

 
5,087

 

 
45,987

Payments of long-term borrowings

 
(5,484
)
 
(4,591
)
 
(3,534
)
 

 
(13,609
)
Net change in funding under the Receivables Facility

 

 

 
132,000

 

 
132,000

Payments of dividends

 
(25,246
)
 

 

 

 
(25,246
)
Proceeds from issuance of common stock

 
3,121

 

 

 

 
3,121

Other financing activities

 
(15,300
)
 
(361
)
 
(65
)
 

 
(15,726
)
Change in intercompany, net

 
(114,454
)
 
261,852

 
(148,008
)
 
610

 

Net cash provided by (used in) financing activities

 
(116,463
)
 
256,900

 
(14,520
)
 
610

 
126,527

Increase (decrease) in cash and cash equivalents

 
(20,366
)
 
(2,360
)
 
17,097

 

 
(5,629
)
Cash and cash equivalents, beginning of period
5

 
47,850

 
31,344

 
73,381

 

 
152,580

Cash and cash equivalents, end of period
$
5

 
$
27,484

 
$
28,984

 
$
90,478

 
$

 
$
146,951



18

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

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three months ended January 1, 2016
(in thousands)

 
Aramark (Parent)
 
Aramark Services, Inc.
(Issuer)
 
Guarantors 
 
Non
Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
64

 
$
3,763

 
$
(162,469
)
 
$
(67,731
)
 
$
57,380

 
$
(168,993
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, client contract investments and other

 
(4,038
)
 
(72,101
)
 
(15,360
)
 

 
(91,499
)
Disposals of property and equipment

 

 
2,017

 

 

 
2,017

Acquisitions of businesses, net of cash acquired

 

 
(231
)
 

 

 
(231
)
Other investing activities

 
493

 
4,824

 
(1,738
)
 

 
3,579

Net cash used in investing activities

 
(3,545
)
 
(65,491
)
 
(17,098
)
 

 
(86,134
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term borrowings

 
393,969

 

 
37,767

 

 
431,736

Payments of long-term borrowings

 
(67,480
)
 
(2,818
)
 
(102,224
)
 

 
(172,522
)
Net change in funding under the Receivables Facility

 

 

 
25,000

 

 
25,000

Payments of dividends

 
(22,853
)
 

 

 

 
(22,853
)
Proceeds from issuance of common stock

 
7,512

 

 

 

 
7,512

Other financing activities

 
(20,000
)
 
(589
)
 
(215
)
 

 
(20,804
)
Change in intercompany, net
(64
)
 
(298,081
)
 
221,711

 
133,814

 
(57,380
)
 

Net cash provided by (used in) financing activities
(64
)
 
(6,933
)
 
218,304

 
94,142

 
(57,380
)
 
248,069

Increase (decrease) in cash and cash equivalents

 
(6,715
)
 
(9,656
)
 
9,313

 

 
(7,058
)
Cash and cash equivalents, beginning of period
5

 
31,792

 
42,811

 
47,808

 

 
122,416

Cash and cash equivalents, end of period
$
5

 
$
25,077

 
$
33,155

 
$
57,121

 
$

 
$
115,358


19


Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations for the three months ended December 30, 2016 and January 1, 2016 should be read in conjunction with Aramark's (the "Company", "we", "our" and "us") audited consolidated financial statements, and the notes to those statements for the fiscal year ended September 30, 2016 included in the Company's Form 10-K, filed with the Securities and Exchange Commission ("SEC") on November 23, 2016.
Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, opinions, expectations, anticipations, intentions and beliefs. Actual results and the timing of events could differ materially from those anticipated in those forward-looking statements as a result of a number of factors, including those set forth under the heading "Special Note About Forward-Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q. In the following discussion and analysis of financial condition and results of operations, certain financial measures may be considered "non-GAAP financial measures" under SEC rules. These rules require supplemental explanation and reconciliation, which is provided elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a leading global provider of food, facilities and uniform services. Our core market is North America, which is supplemented by an additional 17-country footprint. Through our established brand, broad geographic presence and employees, we anchor our business in our partnerships with thousands of education, healthcare, business and sports, leisure & corrections clients. Through these partnerships we serve millions of consumers including students, patients, employees, sports fans and guests worldwide. We operate our business in three reportable segments, Food and Support Services North America ("FSS North America"), Food and Support Services International ("FSS International") and Uniform and Career Apparel ("Uniform").
Our Food and Support Services operations focus on serving clients in five principal sectors: Business & Industry, Education, Healthcare, Sports, Leisure & Corrections and Facilities & Other. Our FSS International reportable segment provides a similar range of services as those provided to our FSS North America clients and operates in the same sectors although it is more heavily weighted towards Business & Industry.
Seasonality
Our sales and operating results have varied from quarter to quarter as a result of different factors. Historically, within our FSS North America segment, there has been a lower level of activity during our first and second fiscal quarters in operations that provide services to sports and leisure clients. This lower level of activity, historically, has been partially offset during our first and second fiscal quarters by the increased activity levels in our educational operations. Conversely, historically there has been a significant increase in the provision of services to sports and leisure clients during our third and fourth fiscal quarters, which is partially offset by the effect of summer recess at colleges, universities and schools in our educational operations.
Foreign Currency Fluctuations
The impact from foreign currency translation assumes constant foreign currency exchange rates based on the rates in effect for the prior year period being used in translation for the comparable current year period. We believe that providing the impact of fluctuations in foreign currency rates on certain financial results can facilitate analysis of period-to-period comparisons of our business performance.
Fiscal Year
Our fiscal year is the fifty-two or fifty-three week period which ends on the Friday nearest September 30th. The fiscal years ending September 29, 2017 and September 30, 2016 are each fifty-two week periods.

20


Results of Operations
The following tables present an overview of our results on a consolidated and segment basis with the amount of and percentage change between periods for the three months ended December 30, 2016 and January 1, 2016 (dollars in millions).
 
Three Months Ended
 
Change
 
December 30, 2016
 
January 1, 2016
 
$
 
%
Sales
$
3,735.4

 
$
3,710.3

 
$
25.1

 
1
 %
Costs and Expenses:
 
 
 
 
 
 
 
Cost of services provided
3,299.3

 
3,294.5

 
4.8

 
 %
Other operating expenses
192.0

 
201.7

 
(9.7
)
 
(5
)%
 
3,491.3

 
3,496.2

 
(4.9
)
 
 %
Operating income
244.1

 
214.1

 
30.0

 
14
 %
Interest and Other Financing Costs, net
65.7

 
71.3

 
(5.6
)
 
(8
)%
Income Before Income Taxes
178.4

 
142.8

 
35.6

 
25
 %
Provision for Income Taxes
53.0

 
49.3

 
3.7

 
7
 %
Net income
$
125.4

 
$
93.5

 
$
31.9

 
34
 %
 
 
Three Months Ended
 
Change
Sales by Segment(1)
 
December 30, 2016
 
January 1, 2016
 
$
 
%
FSS North America
 
$
2,662.8

 
$
2,622.7

 
$
40.1

 
2
 %
FSS International
 
677.1

 
694.9

 
(17.8
)
 
(3
)%
Uniform
 
395.5

 
392.7

 
2.8

 
1
 %
 
 
$