Information about our directors and persons nominated to become directors required by Item 10 will be included under the caption "Proposal No. 1 - Election of Directors" in the Company'sour Proxy Statement for the 20202022 Annual Meeting of Stockholders and is incorporated herein by reference. Information about our executive officers is included under the caption “Information About Our Executive Officers” in Part I of this report and incorporated herein.
Information on beneficial ownership reporting required by Item 10, if any, will be included under the caption "Delinquent Section 16(a) Reports" in the Company'sour Proxy Statement for the 20202022 Annual Meeting of Stockholders and is incorporated herein by reference.
We have a Business Conduct Policy that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer, which is available on the Investor Relations section of our website at www.aramark.com. A copy of our Business Conduct Policy may be obtained free of charge by writing to Investor Relations, Aramark, 2400 Market Street, Philadelphia, PA 19103. Our Business Conduct Policy contains a "code of ethics," as defined in Item 406(b) of Regulation S-K. Please note that our website address is provided as an inactive textual reference only. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website.
The remaining information required by Item 10 will be included under the caption "Board Committees and Meetings" in the Company'sour Proxy Statement for the 20202022 Annual Meeting of Stockholders and is incorporated herein by reference.
Information required by Item 11 will be included under the caption "Compensation Matters" in the Company'sour Proxy Statement for the 20202022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by Item 12 will be included under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the Company'sour Proxy Statement for the 20202022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by Item 13 will be included under the captions "Certain Relationships and Related Transactions" and "Director Independence and Independence Determinations" in the Company'sour Proxy Statement for the 20202022 Annual Meeting of Stockholders and is incorporated herein by reference.
Information required by Item 14 will be included under the caption "Fees to Independent Registered Public Accounting Firm" in the Company'sour Proxy Statement for the 20202022 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements
See Index to Financial Statements and Schedule at page S-1 and the Exhibit Index.
(b) Exhibits Required by Item 601 of Regulation S-K
See the Exhibit Index which is incorporated herein by reference.
(c) Financial Statement Schedules
See Index to Financial Statements and Schedule at page S-1.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized on November 26, 2019.
|
| | | | | | | | | | | | | | | | | | | |
| | | | Aramark |
| | | |
| | | | By: | | /s/ STEPHEN P. BRAMLAGE, JR.CHRISTOPHER T. SCHILLING |
| | | | Name: | | Stephen P. Bramlage, Jr.Christopher T. Schilling |
| | | | Title: | | ExecutiveSenior Vice President, Controller and Chief FinancialAccounting Officer (Authorized Signatory) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 26, 2019.
| | | | | | | | |
Name | | Capacity |
| |
/s/ JOHN J. ZILLMER | | Chief Executive Officer and Director |
John J. Zillmer | | (Principal Executive Officer) |
| |
/s/ THOMAS G. ONDROF | | Executive Vice President and Chief Financial Officer |
Thomas G. Ondrof | | (Principal Financial Officer) |
| | |
/s/ CHRISTOPHER T. SCHILLING | | Senior Vice President, Controller and Chief Accounting Officer |
Christopher T. Schilling | | (Principal Accounting Officer) |
| | |
/s/ SUSAN CAMERON | | Director |
Susan Cameron | | |
| | |
Name/s/ GREG CREED | | CapacityDirector |
Greg Creed | | |
/s/ JOHN J. ZILLMER | | Chief Executive Officer and Director |
John J. Zillmer | | (Principal Executive Officer) |
| |
/s/ STEPHEN P. BRAMLAGE JR. | | Executive Vice President and Chief Financial Officer |
Stephen P. Bramlage, Jr. | | (Principal Financial Officer and Principal Accounting Officer) |
| | |
/s/ SUSAN CAMERON | | Director |
Susan Cameron | | |
| | |
/s/ CALVIN DARDEN | | Director |
Calvin Darden | | |
| | |
/s/ RICHARD W. DREILING | | Director |
Richard W. Dreiling | | |
| | |
/s/ IRENE M. ESTEVES | | Director |
Irene M. Esteves | | |
| | |
/s/ DANIEL J. HEINRICH | | Director |
Daniel J. Heinrich | | |
| | |
/s/ BRIDGETTE P. HELLER | | Director |
Bridgette P. Heller | | |
| | |
/s/ PAUL HILAL | | Vice Chairman, Director |
Paul Hilal | | |
| | |
/s/ KAREN KING | | Director |
Karen King | | |
| | |
/s/ STEPHEN I. SADOVE | | Chairman, Director |
Stephen I. Sadove | | |
| | |
/s/ ART WINKLEBLACK | | Director |
Art Winkleblack | | |
ARAMARK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
All other schedules are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or in the notes thereto.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Aramark
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Aramark and subsidiaries (the "Company") as of October 1, 2021, the related consolidated statements of loss, comprehensive income, cash flows, and stockholders’ equity for the year then ended, and the related notes and financial statement schedule II (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 1, 2021, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 1, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 23, 2021, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill - FSS US Reporting Unit - Refer to Note 4 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the estimated fair value of each reporting unit to its carrying amount annually in the fourth quarter of each year as of the end of the fiscal month of August or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. During the fourth quarter, the Company performed a quantitative test to determine the fair value of each reporting unit using discounted cash flow calculations, which required management to make assumptions and estimates that are subject to risk and uncertainty related to future growth rates, margin projections, and the discount rate. Changes in these assumptions or estimates may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in an impairment charge. The fair value of the FSS United States (FSS US) reporting unit exceeded its carrying amount, and therefore, the Company determined that its goodwill was not impaired.
We identified the valuation of goodwill for the FSS US reporting unit as a critical audit matter because of the significant judgments made by management to estimate its fair value. Auditing the discounted cash flow calculations for this reporting unit involved a high degree of auditor judgment and an increased effort, which included the involvement of our fair value
specialists, as it related to evaluating management’s assumptions and estimates related to future growth rates, margin projections, and the discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions and estimates of future growth rates, margin projections, and the discount rate used by management to estimate the fair value of the FSS US reporting unit included the following, among others:
•We tested the effectiveness of internal controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the FSS US reporting unit, including controls related to management’s assumptions and estimates of future growth rates, margin projections, and the discount rate.
•We evaluated management’s ability to accurately forecast future FSS US reporting unit growth rates and margin projections by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s FSS US reporting unit growth rates and margin projections by comparing the forecasts to:
◦Historical results.
◦Internal communications to management and the Board of Directors.
◦Forecasted information included in analyst and industry reports for the Company and certain of its peer companies.
•With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of future growth rates and the discount rate by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rate selected by management.
/s/ Deloitte & Touche LLP
Philadelphia, PA
November 23, 2021
We have served as the Company's auditor since 2021.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Aramark:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Aramark and subsidiaries (the Company) as of September 27, 2019 and September 28, 2018,October 2, 2020, the related consolidated statements of (loss) income, comprehensive income (loss), cash flows, and stockholders’ equity for each of the fiscal years ended October 2, 2020 and September 27, 2019 September 28, 2018 and September 29, 2017 and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 27, 2019 and September 28, 2018,October 2, 2020, and the results of its operations and its cash flows for each of the fiscal years ended October 2, 2020 and September 27, 2019, September 28, 2018 and September 29, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 27, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 26, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 78 to the consolidated financial statements, the Company has changed its method of accounting for revenueleases as of September 29, 201828, 2019 due to the adoption of Accounting Standards Codification Topic 606,842, Revenue from Contracts with CustomersLeases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the carrying value of goodwill in one reporting unit in the FSS International segment
As discussed in Note 4 to the consolidated financial statements, the Company performs goodwill impairment testing on an annual basis and whenever events and changes in circumstances indicate that the carrying value of a reporting unit might exceed its fair value. The goodwill balance as of September 27, 2019 was $5,518.8 million. The Company performed a goodwill impairment test for each reporting unit using a qualitative approach, except for one reporting unit in the FSS International segment which was tested using the quantitative approach. The goodwill balance for that reporting unit was $282.3 million as of September 27, 2019.
We identified the assessment of the carrying value of goodwill for that reporting unit as a critical audit matter. Significant auditor judgment was required to evaluate the Company’s impairment test, which was performed using a discounted cash flow model and included assumptions related to forecasted revenue growth rates, earnings, discount rate, and the effect of the Company’s actions to exit or plans to improve the operating performance of certain underperforming client contracts. Minor changes to these key assumptions had a significant effect on the assessment of the carrying value of the goodwill.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s goodwill impairment assessment process, including controls related to the development of the key assumptions. We evaluated the Company’s forecasted revenue growth rates and earnings assumptions by comparing to external market and industry data. We compared the assumptions to the Company’s historical results to assess the Company’s ability to accurately forecast. We assessed the impact of the Company's actions to exit and likelihood of the plans to improve the operating performance of certain underperforming client contracts by comparing the assumptions to the Company’s past performance carrying out similar actions. We involved a valuation professional with specialized skills and knowledge, who assisted in:
evaluating the Company’s discount rate, by comparing it against a discount rate range that was independently developed using publicly available third-party market data for comparable entities, and
developing an estimate of the reporting unit’s fair value using the reporting unit’s cash flow forecast and an independently developed discount rate, and compared the results of our estimate of fair value to the Company’s fair value estimate.
/s/ KPMG LLP
We have served as the Company's auditor since 2002.from 2002 to 2020.
Philadelphia, Pennsylvania
November 26, 2019
24, 2020
ARAMARK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 2019OCTOBER 1, 2021 AND SEPTEMBER 28, 2018OCTOBER 2, 2020
(in thousands, except share amounts)
|
| | | | | | | |
| September 27, 2019 | | September 28, 2018 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 246,643 |
| | $ | 215,025 |
|
Receivables (less allowances: 2019 - $49,566; 2018 - $52,682) | 1,806,964 |
| | 1,790,433 |
|
Inventories | 411,319 |
| | 724,802 |
|
Prepayments and other current assets | 193,461 |
| | 171,165 |
|
Total current assets | 2,658,387 |
| | 2,901,425 |
|
Property and Equipment, at cost: | | | |
Land, buildings and improvements | 947,522 |
| | 901,874 |
|
Service equipment and fixtures | 3,993,014 |
| | 2,296,331 |
|
| 4,940,536 |
| | 3,198,205 |
|
Less - Accumulated depreciation | (2,758,774 | ) | | (1,820,111 | ) |
| 2,181,762 |
| | 1,378,094 |
|
Goodwill | 5,518,800 |
| | 5,610,568 |
|
Other Intangible Assets | 2,033,566 |
| | 2,136,844 |
|
Other Assets | 1,343,806 |
| | 1,693,171 |
|
| $ | 13,736,321 |
| | $ | 13,720,102 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current Liabilities: | | | |
Current maturities of long-term borrowings | $ | 69,928 |
| | $ | 30,907 |
|
Accounts payable | 999,517 |
| | 1,018,920 |
|
Accrued payroll and related expenses | 509,617 |
| | 422,299 |
|
Accrued expenses and other current liabilities | 1,126,236 |
| | 1,018,033 |
|
Total current liabilities | 2,705,298 |
| | 2,490,159 |
|
Long-Term Borrowings | 6,612,239 |
| | 7,213,077 |
|
Deferred Income Taxes and Other Noncurrent Liabilities | 1,088,822 |
| | 977,215 |
|
Redeemable Noncontrolling Interest | 9,915 |
| | 10,093 |
|
Stockholders' Equity: | | | |
Common stock, par value $.01 (authorized: 600,000,000 shares; issued: 2019—282,919,536 shares and 2018—279,314,297; and outstanding: 2019—247,756,091 shares and 2018—246,744,438 shares) | 2,829 |
| | 2,793 |
|
Capital surplus | 3,236,450 |
| | 3,132,421 |
|
Retained earnings | 1,107,029 |
| | 710,519 |
|
Accumulated other comprehensive loss | (216,965 | ) | | (91,223 | ) |
Treasury stock (shares held in treasury: 2019—35,163,445 shares and 2018—32,569,859 shares) | (809,296 | ) | | (724,952 | ) |
Total stockholders' equity | 3,320,047 |
| | 3,029,558 |
|
| $ | 13,736,321 |
| | $ | 13,720,102 |
|
| | | | | | | | | | | |
| October 1, 2021 | | October 2, 2020 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 532,591 | | | $ | 2,509,188 | |
Receivables (less allowances: 2021 - $79,644; 2020 - $74,925) | 1,748,601 | | | 1,431,206 | |
Inventories | 412,676 | | | 436,473 | |
Prepayments and other current assets | 204,987 | | | 298,944 | |
Total current assets | 2,898,855 | | | 4,675,811 | |
Property and Equipment, at cost: | | | |
Land, buildings and improvements | 983,540 | | | 929,354 | |
Service equipment and fixtures | 4,355,699 | | | 4,184,603 | |
| 5,339,239 | | | 5,113,957 | |
Less - Accumulated depreciation | (3,300,845) | | | (3,063,049) | |
| 2,038,394 | | | 2,050,908 | |
Goodwill | 5,487,297 | | | 5,343,828 | |
Other Intangible Assets | 2,028,622 | | | 1,932,637 | |
Operating Lease Right-of-use Assets | 587,854 | | | 551,394 | |
Other Assets | 1,335,142 | | | 1,158,106 | |
| $ | 14,376,164 | | | $ | 15,712,684 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current Liabilities: | | | |
Current maturities of long-term borrowings | $ | 58,850 | | | $ | 99,915 | |
Current operating lease liabilities | 67,280 | | | 71,810 | |
Accounts payable | 919,090 | | | 663,455 | |
Accrued payroll and related expenses | 677,185 | | | 572,076 | |
Accrued expenses and other current liabilities | 1,135,028 | | | 940,202 | |
Total current liabilities | 2,857,433 | | | 2,347,458 | |
Long-Term Borrowings | 7,393,417 | | | 9,178,508 | |
Noncurrent Operating Lease Liabilities | 314,378 | | | 341,667 | |
Deferred Income Taxes and Other Noncurrent Liabilities | 1,079,014 | | | 1,099,075 | |
Commitments and Contingencies (see Note 14) | 0 | | 0 |
Redeemable Noncontrolling Interest | 9,050 | | | 9,988 | |
Stockholders' Equity: | | | |
Common stock, par value $0.01 (authorized: 600,000,000 shares; issued: 2021—294,329,180 shares and 2020—290,663,529; and outstanding: 2021—255,998,119 shares and 2020—253,042,169 shares) | 2,943 | | | 2,907 | |
Capital surplus | 3,533,054 | | | 3,416,132 | |
Retained earnings | 327,557 | | | 532,379 | |
Accumulated other comprehensive loss | (208,011) | | | (307,258) | |
Treasury stock (shares held in treasury: 2021—38,331,061 shares and 2020—37,621,360 shares) | (932,671) | | | (908,172) | |
Total stockholders' equity | 2,722,872 | | | 2,735,988 | |
| $ | 14,376,164 | | | $ | 15,712,684 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019 SEPTEMBER 28, 2018 AND SEPTEMBER 29, 2017
(in thousands, except per share data)
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| September 27, 2019 | | September 28, 2018 | | September 29, 2017 |
Revenue | $ | 16,227,341 |
| | $ | 15,789,633 |
| | $ | 14,604,412 |
|
Costs and Expenses: | | | | | |
Cost of services provided | 14,532,662 |
| | 13,997,911 |
| | 12,995,403 |
|
Depreciation and amortization | 592,573 |
| | 596,182 |
| | 508,212 |
|
Selling and general corporate expenses | 367,256 |
| | 377,129 |
| | 299,170 |
|
Gain on sale of Healthcare Technologies | (156,309 | ) | | — |
| | — |
|
| 15,336,182 |
| | 14,971,222 |
| | 13,802,785 |
|
Operating income | 891,159 |
| | 818,411 |
| | 801,627 |
|
Interest and Other Financing Costs, net | 334,987 |
| | 346,535 |
| | 280,985 |
|
Income Before Income Taxes | 556,172 |
| | 471,876 |
| | 520,642 |
|
Provision (Benefit) for Income Taxes | 107,706 |
| | (96,564 | ) | | 146,455 |
|
Net income | 448,466 |
| | 568,440 |
| | 374,187 |
|
Less: Net income (loss) attributable to noncontrolling interest | (83 | ) | | 555 |
| | 264 |
|
Net income attributable to Aramark stockholders | $ | 448,549 |
| | $ | 567,885 |
| | $ | 373,923 |
|
| | | | | |
Earnings per share attributable to Aramark stockholders: | | | | | |
Basic | $ | 1.82 |
| | $ | 2.31 |
| | $ | 1.53 |
|
Diluted | $ | 1.78 |
| | $ | 2.24 |
| | $ | 1.49 |
|
Weighted Average Shares Outstanding: | | | | | |
Basic | 246,854 |
| | 245,771 |
| | 244,453 |
|
Diluted | 252,010 |
| | 253,352 |
| | 251,557 |
|
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Revenue | $ | 12,095,965 | | | $ | 12,829,559 | | | $ | 16,227,341 | |
Costs and Expenses: | | | | | |
Cost of services provided (exclusive of depreciation and amortization) | 11,007,080 | | | 11,993,667 | | | 14,532,662 | |
Depreciation and amortization | 550,692 | | | 595,195 | | | 592,573 | |
Selling and general corporate expenses | 346,749 | | | 307,016 | | | 367,256 | |
Goodwill impairment | — | | | 198,600 | | | — | |
Gain on sale of Healthcare Technologies | — | | | — | | | (156,309) | |
| 11,904,521 | | | 13,094,478 | | | 15,336,182 | |
Operating income (loss) | 191,444 | | | (264,919) | | | 891,159 | |
Gain on Equity Investment | (137,934) | | | — | | | — | |
Loss on Defined Benefit Pension Plan Termination | 60,864 | | | — | | | — | |
Interest and Other Financing Costs, net | 401,366 | | | 382,800 | | | 334,987 | |
(Loss) Income Before Income Taxes | (132,852) | | | (647,719) | | | 556,172 | |
(Benefit) Provision for Income Taxes | (40,633) | | | (186,284) | | | 107,706 | |
Net (loss) income | (92,219) | | | (461,435) | | | 448,466 | |
Less: Net (loss) income attributable to noncontrolling interest | (1,386) | | | 94 | | | (83) | |
Net (loss) income attributable to Aramark stockholders | $ | (90,833) | | | $ | (461,529) | | | $ | 448,549 | |
| | | | | |
(Loss) Earnings per share attributable to Aramark stockholders: | | | | | |
Basic | $ | (0.36) | | | $ | (1.83) | | | $ | 1.82 | |
Diluted | $ | (0.36) | | | $ | (1.83) | | | $ | 1.78 | |
Weighted Average Shares Outstanding: | | | | | |
Basic | 254,748 | | | 251,828 | | | 246,854 | |
Diluted | 254,748 | | | 251,828 | | | 252,010 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019 SEPTEMBER 28, 2018 AND SEPTEMBER 29, 2017
(in thousands)
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| September 27, 2019 | | September 28, 2018 | | September 29, 2017 |
Net income | $ | 448,466 |
| | $ | 568,440 |
| | $ | 374,187 |
|
Other comprehensive income (loss), net of tax: | | | | | |
Pension plan adjustments | (22,594 | ) | | 20,647 |
| | 19,992 |
|
Foreign currency translation adjustments | (34,308 | ) | | (31,253 | ) | | 5,903 |
|
Cash flow hedges: | | | | | |
Unrealized gains (losses) arising during the period | (62,450 | ) | | 39,311 |
| | 19,449 |
|
Reclassification adjustments | (4,798 | ) | | 3,675 |
| | 10,130 |
|
Share of equity investee's comprehensive income (loss) | (1,592 | ) | | 157 |
| | 1,549 |
|
Other comprehensive income (loss), net of tax | (125,742 | ) | | 32,537 |
| | 57,023 |
|
Comprehensive income | 322,724 |
| | 600,977 |
| | 431,210 |
|
Less: Net income (loss) attributable to noncontrolling interest | (83 | ) | | 555 |
| | 264 |
|
Comprehensive income attributable to Aramark stockholders | $ | 322,807 |
| | $ | 600,422 |
| | $ | 430,946 |
|
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Net (loss) income | $ | (92,219) | | | $ | (461,435) | | | $ | 448,466 | |
Other comprehensive income (loss), net of tax: | | | | | |
Pension plan adjustments | 48,568 | | | (25,669) | | | (22,594) | |
Foreign currency translation adjustments | 8,925 | | | (7,818) | | | (34,308) | |
Cash flow hedges: | | | | | |
Unrealized gains (losses) arising during the period | 909 | | | (82,005) | | | (62,450) | |
Reclassification adjustments | 37,440 | | | 25,463 | | | (4,798) | |
Share of equity investee's comprehensive income (loss) | 3,405 | | | (264) | | | (1,592) | |
Other comprehensive income (loss), net of tax | 99,247 | | | (90,293) | | | (125,742) | |
Comprehensive income (loss) | 7,028 | | | (551,728) | | | 322,724 | |
Less: Net (loss) income attributable to noncontrolling interest | (1,386) | | | 94 | | | (83) | |
Comprehensive income (loss) attributable to Aramark stockholders | $ | 8,414 | | | $ | (551,822) | | | $ | 322,807 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019 SEPTEMBER 28, 2018 AND SEPTEMBER 29, 2017
| | | Fiscal Year Ended | | Fiscal Year Ended |
| September 27, 2019 | | September 28, 2018 | | September 29, 2017 | | October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Cash flows from operating activities: | | | | | | Cash flows from operating activities: | | | | | |
Net income | $ | 448,466 |
| | $ | 568,440 |
| | $ | 374,187 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Net (loss) income | | Net (loss) income | $ | (92,219) | | | $ | (461,435) | | | $ | 448,466 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |
Depreciation and amortization | 592,573 |
| | 596,182 |
| | 508,212 |
| Depreciation and amortization | 550,692 | | | 595,195 | | | 592,573 | |
Goodwill impairment and asset write-downs | | Goodwill impairment and asset write-downs | — | | | 283,743 | | | — | |
Gain on equity investment | | Gain on equity investment | (137,934) | | | — | | | — | |
Loss on defined benefit pension plan termination | | Loss on defined benefit pension plan termination | 60,864 | | | — | | | — | |
Deferred income taxes | 40,503 |
| | (104,289 | ) | | (37,856 | ) | Deferred income taxes | (43,234) | | | (134,048) | | | 40,503 | |
Share-based compensation expense | 55,280 |
| | 88,276 |
| | 65,155 |
| Share-based compensation expense | 71,053 | | | 30,339 | | | 55,280 | |
Net gain on sale of Healthcare Technologies | (139,165 | ) | | — |
| | — |
| Net gain on sale of Healthcare Technologies | — | | | — | | | (139,165) | |
Changes in operating assets and liabilities: | | | | | | Changes in operating assets and liabilities: | |
Accounts Receivable | (78,771 | ) | | (45,891 | ) | | (111,423 | ) | Accounts Receivable | (290,214) | | | 362,708 | | | (78,771) | |
Inventories | (49,732 | ) | | (40,187 | ) | | (21,147 | ) | Inventories | (7,536) | | | (25,675) | | | (49,732) | |
Prepayments and Other Current Assets | (37,854 | ) | | 42,450 |
| | 95,536 |
| Prepayments and Other Current Assets | 101,939 | | | (86,444) | | | (37,854) | |
Accounts Payable | 17,680 |
| | 26,658 |
| | 93,965 |
| Accounts Payable | 252,158 | | | (342,069) | | | 17,680 | |
Accrued Expenses | 193,532 |
| | (111,386 | ) | | 26,804 |
| Accrued Expenses | 261,154 | | | (143,640) | | | 193,532 | |
Payments made to clients on contracts (see Note 7) | (40,073 | ) | | — |
| | — |
| |
Payments made to clients on contracts | | Payments made to clients on contracts | (100,918) | | | (69,575) | | | (40,073) | |
Changes in other noncurrent liabilities | 18,904 |
| | 1,576 |
| | 31,959 |
| Changes in other noncurrent liabilities | (17,427) | | | 92,782 | | | 18,904 | |
Changes in other assets | (41,436 | ) | | (2,225 | ) | | (9,342 | ) | Changes in other assets | 4,177 | | | 66,650 | | | (41,436) | |
Other operating activities | 4,320 |
| | 32,271 |
| | 36,776 |
| Other operating activities | 44,524 | | | 8,151 | | | 4,320 | |
Net cash provided by operating activities | 984,227 |
| | 1,051,875 |
| | 1,052,826 |
| Net cash provided by operating activities | 657,079 | | | 176,682 | | | 984,227 | |
Cash flows from investing activities: | | | | | | Cash flows from investing activities: | | | | | |
Purchases of property and equipment and other | (503,090 | ) | | (628,604 | ) | | (552,729 | ) | Purchases of property and equipment and other | (407,818) | | | (418,508) | | | (503,090) | |
Disposals of property and equipment | 17,871 |
| | 10,491 |
| | 18,906 |
| Disposals of property and equipment | 32,474 | | | 54,074 | | | 17,871 | |
Proceeds from divestitures | 293,711 |
| | — |
| | — |
| Proceeds from divestitures | — | | | — | | | 293,711 | |
Acquisition of certain businesses, net of cash acquired | | | | | | Acquisition of certain businesses, net of cash acquired | (265,766) | | | (22,201) | | | (44,863) | |
Working capital other than cash acquired | 10,634 |
| | 37,985 |
| | 8,114 |
| |
Property and equipment | (3,320 | ) | | (283,447 | ) | | (2,273 | ) | |
Additions to goodwill, other intangible assets and other assets, net | (52,177 | ) | | (1,994,822 | ) | | (147,963 | ) | |
Proceeds from governmental agencies related to property and equipment | 23,025 |
| | — |
| | — |
| Proceeds from governmental agencies related to property and equipment | 10,000 | | | 23,550 | | | 23,025 | |
Other investing activities | 3,825 |
| | (6,879 | ) | | (2,539 | ) | Other investing activities | (3,276) | | | 1,965 | | | 3,825 | |
Net cash used in investing activities | (209,521 | ) | | (2,865,276 | ) | | (678,484 | ) | Net cash used in investing activities | (634,386) | | | (361,120) | | | (209,521) | |
Cash flows from financing activities: | | | | | | Cash flows from financing activities: | | | | | |
Proceeds from long-term borrowings | 77,630 |
| | 3,177,313 |
| | 3,851,417 |
| Proceeds from long-term borrowings | 893,993 | | | 3,239,772 | | | 77,630 | |
Payments of long-term borrowings | (654,560 | ) | | (973,689 | ) | | (3,911,992 | ) | Payments of long-term borrowings | (2,453,571) | | | (1,000,463) | | | (654,560) | |
Net change in funding under the Receivables Facility | — |
| | (254,200 | ) | | (13,800 | ) | Net change in funding under the Receivables Facility | (315,600) | | | 315,600 | | | — | |
Payments of dividends | (108,439 | ) | | (103,115 | ) | | (100,813 | ) | Payments of dividends | (112,010) | | | (110,893) | | | (108,439) | |
Proceeds from issuance of common stock | 39,087 |
| | 21,507 |
| | 28,779 |
| Proceeds from issuance of common stock | 41,587 | | | 90,022 | | | 39,087 | |
Repurchase of common stock | (50,000 | ) | | (24,410 | ) | | (100,000 | ) | Repurchase of common stock | — | | | (6,540) | | | (50,000) | |
Other financing activities | (38,610 | ) | | (49,253 | ) | | (42,277 | ) | Other financing activities | (59,738) | | | (89,976) | | | (38,610) | |
Net cash provided by (used in) financing activities | (734,892 | ) | | 1,794,153 |
| | (288,686 | ) | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (2,005,339) | | | 2,437,522 | | | (734,892) | |
Effect of foreign exchange rates on cash and cash equivalents | (8,196 | ) | | (4,524 | ) | | 561 |
| Effect of foreign exchange rates on cash and cash equivalents | 6,049 | | | 9,461 | | | (8,196) | |
Increase (decrease) in cash and cash equivalents | 31,618 |
| | (23,772 | ) | | 86,217 |
| |
(Decrease) increase in cash and cash equivalents | | (Decrease) increase in cash and cash equivalents | (1,976,597) | | | 2,262,545 | | | 31,618 | |
Cash and cash equivalents, beginning of period | 215,025 |
| | 238,797 |
| | 152,580 |
| Cash and cash equivalents, beginning of period | 2,509,188 | | | 246,643 | | | 215,025 | |
Cash and cash equivalents, end of period | $ | 246,643 |
| | $ | 215,025 |
| | $ | 238,797 |
| Cash and cash equivalents, end of period | $ | 532,591 | | | $ | 2,509,188 | | | $ | 246,643 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
Fiscal Year
Our fiscal year is the fifty-two or fifty-three week period which ends on the Friday nearest to September 30th. The fiscal year ended October 1, 2021 was a fifty-two week period and the fiscal year ended October 2, 2020 was a fifty-three week period.
Results of Operations
Fiscal 2021 Compared to Fiscal 2020
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 fiscal years 2021 and 2020 (dollars in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Change | | Change |
| | October 1, 2021 | | October 2, 2020 | | $ | | % |
Revenue | | $ | 12,096.0 | | | $ | 12,829.6 | | | $ | (733.6) | | | (5.7) | % |
Costs and Expenses: | | | | | | | | |
Cost of services provided (exclusive of depreciation and amortization) | | 11,007.2 | | | 11,993.7 | | | (986.5) | | | (8.2) | % |
Other operating expenses | | 897.4 | | | 902.2 | | | (4.8) | | | (0.5) | % |
Goodwill impairment | | — | | | 198.6 | | | (198.6) | | | (100.0) | % |
| | 11,904.6 | | | 13,094.5 | | | (1,189.9) | | | (9.1) | % |
Operating income (loss) | | 191.4 | | | (264.9) | | | 456.3 | | | 172.3 | % |
Gain on Equity Investment | | (137.9) | | | — | | | (137.9) | | | (100.0) | % |
Loss on Defined Benefit Pension Plan Termination | | 60.9 | | | — | | | 60.9 | | | 100.0 | % |
Interest and Other Financing Costs, net | | 401.3 | | | 382.8 | | | 18.5 | | | 4.9 | % |
Loss Before Income Taxes | | (132.9) | | | (647.7) | | | 514.8 | | | 79.5 | % |
Benefit for Income Taxes | | (40.7) | | | (186.3) | | | (145.6) | | | (78.2) | % |
Net loss | | $ | (92.2) | | | $ | (461.4) | | | $ | 369.2 | | | 80.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Change | | Change |
Revenue by Segment(1) | | October 1, 2021 | | October 2, 2020 | | $ | | % |
FSS United States | | $ | 6,809.3 | | | $ | 7,366.7 | | | $ | (557.4) | | | (7.6 | %) |
FSS International | | 2,866.2 | | | 2,945.8 | | | (79.6) | | | (2.7 | %) |
Uniform | | 2,420.5 | | | 2,517.1 | | | (96.6) | | | (3.8 | %) |
| | $ | 12,096.0 | | | $ | 12,829.6 | | | $ | (733.6) | | | (5.7 | %) |
| | | | | | | | |
| | Fiscal Year Ended | | Change | | Change |
Operating Income (Loss) by Segment(1) | | October 1, 2021 | | October 2, 2020 | | $ | | % |
FSS United States | | $ | 131.8 | | | $ | 5.3 | | | $ | 126.5 | | | *** |
FSS International | | 58.2 | | | (344.2) | | | 402.4 | | | 116.9 | % |
Uniform | | 120.8 | | | 171.5 | | | (50.7) | | | (29.6 | %) |
Corporate | | (119.4) | | | (97.5) | | | (21.9) | | | (22.4 | %) |
| | $ | 191.4 | | | $ | (264.9) | | | $ | 456.3 | | | 172.3 | % |
*** Not meaningful
(1) As a percentage of total revenue, FSS United States represented 56.3% and 57.4%, FSS International represented 23.7% and 23.0% and Uniform represented 20.0% and 19.6% for fiscal 2021 and fiscal 2020, respectively.
Consolidated Overview
Revenue decreased by approximately 5.7% during fiscal 2021 compared to the prior year period, which was mainly due to COVID-19. The impact from our clients either reducing or ceasing operations was more significant during fiscal 2021 as the pandemic did not materially affect operations until late in the second quarter of fiscal 2020. Revenue began to improve during the second half of fiscal 2021 as lockdowns were lifted and operations began to re-open. The decrease in revenue was also attributable to the estimated impact of the 53rd week in fiscal 2020 (approximately 1.3%). Foreign currency translation favorably impacted fiscal 2021 (approximately 1.3%).
The following table presents the cost of services provided (exclusive of depreciation and amortization) by segment and as a percent of revenue for the fiscal years ended October 1, 2021 and October 2, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | October 1, 2021 | | October 2, 2020 |
Cost of services provided (exclusive of depreciation and amortization)(1) | | $ | | % of Revenue | | $ | | % of Revenue |
FSS United States | | $ | 6,237.6 | | | 91.6 | % | | $ | 6,889.4 | | | 93.5 | % |
FSS International | | 2,719.2 | | | 94.9 | % | | 2,998.4 | | | 101.8 | % |
Uniform | | 2,050.4 | | | 84.7 | % | | 2,105.9 | | | 83.7 | % |
| | $ | 11,007.2 | | | 91.0 | % | | $ | 11,993.7 | | | 93.5 | % |
(1) During fiscal 2020, Cost of services provided (exclusive of depreciation and amortization) included severance charges related to COVID-19. The severance charges by segment are the following: FSS United States ($51.8 million), FSS International ($87.3 million) and Uniform ($4.9 million) (see Note 2 to the audited consolidated financial statements).
The following table presents the percentages attributable to the components in cost of services provided (exclusive of depreciation and amortization) for fiscal 2021 and fiscal 2020.
| | | | | | | | | | | | | | |
| | Fiscal Year Ended |
Cost of services provided (exclusive of depreciation and amortization) components | | October 1, 2021 | | October 2, 2020 |
Food and support service costs | | 24.3 | % | | 25.7 | % |
Personnel costs | | 50.3 | % | | 49.3 | % |
Other direct costs | | 25.4 | % | | 25.0 | % |
| | 100.0 | % | | 100.0 | % |
Operating income (loss) increased by approximately $456.3 million during fiscal 2021 compared to the prior year period. Operating income (loss) was negatively impacted during both fiscal 2021 and 2020 by COVID-19 as clients either reduced or ceased operations at certain locations across all of our segments. Operating income (loss) began to improve during the second half of fiscal 2021 as lockdowns were lifted and operations began to re-open. In addition, operating income (loss) benefited from both United States and non-United States governmental labor related tax credits, which were higher in fiscal 2021 than fiscal 2020 (see Note 1 to the audited consolidated financial statements). The increase in operating income (loss) during fiscal 2021 was attributable to:
•improved profitability from client re-openings as well as from actions to reduce variable and fixed costs, including headcount reductions primarily taken during the second half of fiscal 2020;
•prior year non-cash goodwill impairment charge in the FSS International segment (approximately $198.6 million) (see Note 4 to the audited consolidated financial statements);
•prior year severance charges, mainly related to COVID-19, and current year severance accrual reversals (approximately $166.0 million);
•prior year non-cash charges related to operating lease right-of-use ("ROU") assets, property and equipment and other assets in the FSS United States and FSS International segments, primarily related to client contracts that were reassessed due to the impact of COVID-19 (approximately $30.6 million);
•prior year non-cash charges related to operating lease ROU assets, property and equipment and other assets from disposal by abandonment of certain rental properties in the FSS United States segment (approximately $28.5 million); and
•prior year non-cash charges related to information technology assets in the FSS United States segment due to discontinued use and non-renewal or expiration of contracts with specific vendors (approximately $26.1 million).
These increases in operating income (loss) during fiscal 2021 more than offset:
•higher personnel costs from incentive expenses related to the annual bonus and employer retirement matching contributions;
•higher share-based compensation expense (approximately $40.7 million) (see Note 12 to the audited consolidated financial statements);
•non-cash inventory charges, mainly to write down personal protective equipment ("PPE") to its net realizable value in the Uniform segment (approximately $25.0 million);
•higher personnel costs related to sales growth initiatives (approximately $23.8 million); and
•prior year gain from the insurance proceeds received related to property damage from a tornado in Nashville (approximately $16.3 million).
During fiscal 2021, a non-cash gain related to an equity investment of approximately $137.9 million was recorded, which was partially offset by a non-cash loss from the termination of certain defined benefit pension plans of approximately $60.9 million.
Interest and Other Financing Costs, net, increased 4.9% during fiscal 2021 compared to the prior year period. The increase for fiscal 2021 was primarily due to the issuance of $1,500.0 million of 6.375% Senior Notes, due 2025 (the "6.375% 2025 Notes") in April 2020, partially offset by lower interest from the repayments of $900.0 million of the 5.125% Senior Notes due 2024 (the "5.125% 2024 Notes") in January of fiscal 2020 and $500.0 million of the 4.75% Senior Notes due 2026 (the "4.75% 2026 Notes") during the third quarter of fiscal 2021 and from lower borrowings on the receivables facility and revolving credit facility.
The Benefit for Income Taxes for fiscal 2021 was recorded at an effective rate of 30.6% compared to an effective rate of 28.8% in the prior year. As a result of the CARES Act, we recorded a net benefit to the (Benefit) Provision for Income Taxes of approximately $12.0 million and $58.4 million during fiscal 2021 and fiscal 2020, respectively. The (Benefit) Provision for Income Taxes during fiscal 2021 and fiscal 2020 includes the Net Operating Losses ("NOL") expected to be carried back to Pre-Tax Cut and Jobs Act years, which are benefited at an income tax rate of 35.0% as opposed to the current year rate of 21.0%. During fiscal 2021, we recorded a valuation allowance of $36.5 million against certain foreign tax credits that were re-established by the NOL carryback. Within the FSS International segment, we also recorded during fiscal 2021 and fiscal 2020 a valuation allowance against deferred tax assets in certain subsidiaries from cumulative losses of approximately $22.0 million and $21.4 million, respectively. The effective tax rate for fiscal 2020 also includes income tax benefits of approximately $46.2 million as a result of an excess tax benefit recognized in relation to equity awards exercised during fiscal 2020, including by the former Chairman, President and Chief Executive Officer. The Loss Before Taxes for fiscal 2020 includes a non-cash impairment charge of goodwill of $198.6 million, which is nondeductible for income tax purposes.
Segment Results
FSS United States Segment
The FSS United States reportable segment consists of five sectors which have similar economic characteristics and comprise a single operating segment. The five sectors of the FSS United States reportable segment are Business & Industry, Education, Healthcare, Sports, Leisure & Corrections and Facilities & Other.
Revenue for each of these sectors is summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Change |
| | October 1, 2021 | | October 2, 2020 | | % |
Business & Industry | | $ | 695.7 | | | $ | 1,097.3 | | | (36.6) | % |
Education | | 2,124.4 | | | 2,416.4 | | | (12.1) | % |
Healthcare | | 891.2 | | | 824.6 | | | 8.1 | % |
Sports, Leisure & Corrections | | 1,511.3 | | | 1,535.8 | | | (1.6) | % |
Facilities & Other | | 1,586.7 | | | 1,492.6 | | | 6.3 | % |
| | $ | 6,809.3 | | | $ | 7,366.7 | | | (7.6) | % |
The Healthcare sector had high-single digit operating income margins, consistent with prior year. The Education and Facilities & Other sectors had mid-single digit operating income margins, consistent with prior year. The Business & Industry sector had negative mid-single digit operating income margins, consistent with prior year. The Sports, Leisure & Corrections sector had mid-single digit operating income margins, compared to negative low-single digits in the prior year. As described above, during the COVID-19 pandemic, and in following periods, operating income margins in the FSS United States sectors may differ from our otherwise historical patterns.
FSS United States segment revenue decreased by approximately 7.6% during fiscal 2021 compared to the prior year period. The decrease was primarily attributable to COVID-19, which significantly impacted our Business and Industry sector due to many clients working from home instead of the office for a majority of fiscal 2021 compared to half of fiscal 2020 and our Education sector where clients during the 2020-2021 school year either reduced or ceased operations at certain locations, and instead opted for virtual or remote learning. The decrease in revenue was also impacted by the estimated impact of the 53rd week in fiscal 2020 (approximately 1.5%). The Healthcare sector increased due to the acquisition of Next Level Hospitality, which contributed $108.9 million of revenue during fiscal 2021.
Operating income increased by approximately $126.5 million during fiscal 2021 compared to the prior year period. The increase during fiscal 2021 was attributable to:
•higher profitability from clients re-opening as well as from actions to reduce variable and fixed costs, including headcount reductions primarily taken during the second half of fiscal 2020;
•prior year severance charges, mainly related to COVID-19, and current year severance accrual reversals (approximately $55.6 million);
•prior year non-cash charges related to operating lease ROU assets, property and equipment and other assets from disposal by abandonment of certain rental properties (approximately $28.5 million);
•prior year non-cash charges related to information technology assets due to discontinued use and non-renewal or expiration of contracts with specific vendors (approximately $26.1 million); and
•prior year non-cash charges related to operating lease ROU assets, property and equipment and other assets, primarily related to client contracts that were reassessed due to the impact of COVID-19 (approximately $19.4 million).
These increases in operating income during fiscal 2021 more than offset higher insurance expenses, mainly from our medical program due to operations returning (approximately $9.2 million), and higher personnel costs from sales growth initiatives (approximately $7.1 million) and from incentive expenses related to the annual bonus and employer retirement matching contributions.
FSS International Segment
FSS International segment revenue decreased by approximately 2.7% during fiscal 2021 compared to the prior year period. The decrease was attributable to the negative impact of COVID-19 from restrictions and higher levels of lockdowns from government mandates in certain countries for a majority of fiscal 2021 compared to half of fiscal 2020, partially offset by the positive impact of foreign currency translation (approximately 5.2%).
Operating income (loss) increased by approximately $402.4 million during fiscal 2021 compared to the prior year period. The increase was mainly attributable to:
•improved profitability from clients re-opening after COVID-19 restrictions began to lift as well as from actions to reduce variable and fixed costs, including headcount reductions taken during the second half of fiscal 2020;
•higher labor related tax credits provided from government assistance programs (see Note 1 to the audited consolidated financial statements);
•prior year non-cash goodwill impairment charge (approximately $198.6 million);
•prior year severance charges, mainly related to COVID-19, and current year severance accrual reversals (approximately $107.5 million);
•higher charges in the prior year related to a client contract dispute (approximately $12.4 million); and
•prior year non-cash charges related to property and equipment from client contracts that were reassessed due to the impact of COVID-19 (approximately $11.2 million).
These increases in operating income during fiscal 2021 more than offset higher personnel costs from incentive expenses related to the annual bonus.
Uniform Segment
Uniform segment revenue decreased by approximately 3.8% during fiscal 2021 compared to the prior year period. The decrease was primarily attributable to the greater negative impact of COVID-19 in the current year period compared to fiscal 2020 and the estimated impact of the 53rd week in fiscal 2020 (approximately 1.7%), partially offset by improved pricing.
Operating income decreased by approximately $50.7 million during fiscal 2021 compared to the prior year period. The decrease was attributable to the negative impact of COVID-19, from clients either reducing or ceasing operations at certain locations for a majority of fiscal 2021 compared to half of fiscal 2020. While the negative impact of COVID-19 was partially offset by both United States and non-United States governmental labor related tax credits, the benefit from the credits was lower in fiscal 2021 than fiscal 2020 (see Note 1 to the audited consolidated financial statements). The decrease in operating income was attributable to:
•non-cash inventory charges, mainly to write down PPE to its net realizable value (approximately $25.0 million);
•higher personnel costs related to sales growth initiatives (approximately $16.7 million);
•prior year gain from the insurance proceeds received related to property damage from a tornado in Nashville (approximately $16.3 million);
•higher personnel costs from incentive expenses related to the annual bonus and employer retirement matching contributions;
•prior year favorable non-cash settlement of a multiemployer pension plan obligation (approximately $6.7 million); and
•higher severance charges compared to the prior year period (approximately $3.0 million).
These decreases in operating income during fiscal 2021 more than offset:
•favorable impact of headcount reductions taken during the second half of fiscal 2020;
•favorable in-service rental merchandise amortization compared to fiscal 2020; and
•lower merger and integration charges from the AmeriPride acquisition (approximately $2.4 million).
Corporate
Corporate expenses, those administrative expenses not allocated to the business segments, increased by approximately $21.9 million during fiscal 2021 compared to the prior year period. The increase was attributable to:
•higher share-based compensation expense (approximately $40.7 million) (see Note 12 to the audited consolidated financial statements); and
•higher personnel costs from incentive expenses related to the annual bonus.
These increases in corporate expenses during fiscal 2021 more than offset:
•the favorable change in fair value of certain gasoline and diesel agreements (approximately $6.4 million);
•effective cost discipline and prior year mitigating actions, including headcount reductions primarily taken during the second half of fiscal 2020; and
•prior year severance charges, mainly related to COVID-19, and current year severance accrual reversals (approximately $6.0 million).
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash generated from operating activities, funds from borrowings and existing cash on hand. As of October 1, 2021, we had $532.6 million of cash and cash equivalents, approximately $1,091.6 million of availability under our senior secured revolving credit facility and $400.0 million of availability under the receivables facility. A significant portion of our cash and cash equivalents are held in mature, liquid geographies where we have operations. As of October 1, 2021, there were approximately $869.5 million of outstanding foreign currency borrowings.
In response to the COVID-19 pandemic, we undertook a number of actions during fiscal 2020 to enhance our cash position, including increasing borrowings under our revolving credit facility and under our receivables facility, renegotiations of client contracts, salary and other compensation adjustments and reductions to general corporate expenses. In addition, on April 27, 2020, Aramark Services Inc. (“ASI”), our indirect wholly owned subsidiary, issued $1,500.0 million aggregate principal amount of 6.375% 2025 Notes. We continue to apply effective cost discipline to mitigate the negative impacts of COVID-19 as well as take advantage of relief provisions, including the CARES Act, CAA, and other United States and foreign governmental programs (see Note 1 to the audited consolidated financial statements). During fiscal 2021, we repaid $780.0 million of outstanding borrowings under our United States revolving credit facility, $500.0 million aggregate principal amount of 4.750% 2026 Notes and $315.6 million of outstanding borrowings under the receivables facility utilizing cash and cash equivalents on hand. Additionally, during fiscal 2021, we made $244.2 million of net repayments on term loan borrowings.
On April 6, 2021, we entered into Amendment No. 11 ("Amendment No. 11") to the Credit Agreement, dated as of March 28, 2017 (as supplemented or otherwise modified from time to time, the "Credit Agreement"), which, among other things, increased the availability on the revolving credit facility by $200.0 million and extended the maturity dates on a portion of the revolving credit facility, a portion of the Canadian dollar denominated term loan due October 2023, a portion of the euro denominated term loan due October 2023 and all of the yen denominated term loan due October 2023, in each case, to April 2026. We also extended the maturity date of the United States dollar denominated term loan due 2024 to April 2028. In addition, on June 25, 2021, we extended the maturity date of our receivables facility from June 2022 to June 2024 (see Note 5 to the audited consolidated financial statements).
While the full impact of COVID-19 on our long-term liquidity remains uncertain, we currently believe that our cash and cash equivalents and availability under our revolving credit facility and receivables facility will be adequate to meet anticipated cash requirements for the foreseeable future to fund working capital, capital spending, debt service obligations, refinancings, dividends and other cash needs. As a result of the refinancings executed in fiscal 2021, we have no significant debt maturities due until 2025 and we believe we have sufficient flexibility to manage the impact of COVID-19, based on our current assumptions. We also have flexibility to optimize working capital and defer certain capital expenditures as appropriate without a material impact to the business. We believe that our assumptions used to estimate our liquidity and working capital requirements are reasonable; however, due to the unprecedented current environment, we cannot assure that our assumptions will be correct and, as a consequence, our ability to be predictive is uncertain. For additional information regarding the impact of COVID-19, including on our liquidity and capital resources, see Part I, Item 1A, "Risk Factors."
The table below summarizes our cash activity (in millions):
| | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 |
Net cash provided by operating activities | $ | 657.1 | | | $ | 176.7 | |
Net cash used in investing activities | (634.4) | | | (361.1) | |
Net cash (used in) provided by financing activities | (2,005.3) | | | 2,437.5 | |
Reference to the audited Consolidated Statements of Cash Flows will facilitate understanding of the discussion that follows.
Cash Flows Provided by Operating Activities
Cash provided by operating activities increased by approximately $480.4 million during fiscal 2021 compared to fiscal 2020, primarily driven by a $552.6 million favorable increase in operating assets and liabilities and by a lower net loss, as discussed in "Results of Operations" above. These increases were partially offset by non-cash gains and losses, including the prior year non-cash impairment charges related to goodwill and other assets of approximately $283.7 million, the current year non-cash gain from our equity investment of approximately $137.9 million and the loss on termination of certain defined benefit pension plans of approximately $60.9 million. The $552.6 million favorable change in operating assets and liabilities compared to the prior year period was primarily due to:
•Accounts payable by $594.2 million, generating a source of cash during fiscal 2021 compared to a use of cash in fiscal 2020 due to the reduction in the prior year balance from COVID-19 and the timing of disbursements whereas the current year balance has increased from client re-openings;
•Accrued expenses by $404.8 million, generating a source of cash during fiscal 2021 compared to a use of cash in fiscal 2020 primarily due to the following: operations returning, including higher client advances within our Higher Education business; the deferral of payments permitted under the CARES Act; lower commission payments in our Sports business; and lower payments related to the annual bonus, partially offset by current year severance payments from headcount reductions made in the second half of fiscal 2021; and
•Prepayment and Other Current Assets by $188.4 million, generating a source of cash during fiscal 2021 compared to a use of cash in fiscal 2020 mainly from proceeds received in the second quarter of fiscal 2021 related to the fiscal 2020 federal income tax return (approximately $93.6 million), whereas the prior year period income tax receivable balance increased due to our net loss position.
These changes in operating assets and liabilities more than offset:
•Receivables by $652.9 million, generating a use of cash during fiscal 2021 compared to a source of cash during fiscal 2020 due to the reduction in the prior year balance from COVID-19, whereas the current year balance has increased due to client re-openings.
Fiscal 2021 and fiscal 2020 include approximately $159.1 million and $101.3 million, respectively, of proceeds associated with labor related tax credits from many foreign jurisdictions in which we operate as a form of relief from COVID-19 (see Note 1 to the audited consolidated financial statements). During fiscal 2021 and fiscal 2020, we received income of approximately $17.0 million and $15.5 million, respectively, related to favorable loss experience in older insurance years under our general liability, automobile liability and workers' compensation programs. The "Change in other noncurrent liabilities" caption was a use of cash during fiscal 2021 compared to a source of cash in fiscal 2020 due to the deferral of the employer portion of social security taxes as permitted under the CARES Act (see Note 1 to the audited consolidated financial statements) and changes in insurance reserves. The "Changes in other assets" caption was less of a source of cash during fiscal 2021 compared to fiscal 2020 mainly from the increase to in-service rental merchandise as customer installations were reduced in fiscal 2020 from the impact of COVID-19. The "Other operating activities" caption reflects mainly adjustments to net loss in the current year and prior year
periods related to non-cash gains and losses, including current year inventory write-downs within the Uniform segment and adjustments to non-operating cash gains and losses, including call premium expenses for debt repayments and the gain from the insurance proceeds of $16.3 million related to property damage from a tornado at one of our Uniform locations in Nashville during fiscal 2020.
Cash Flows Used in Investing Activities
The net cash flows used in investing activities were higher during fiscal 2021 compared to fiscal 2020 due to the acquisition of Next Level Hospitality for $226.1 million (see Note 2 to the audited consolidated financial statements). This increase was partially offset by lower capital expenditures. The "Disposals of property and equipment" caption for fiscal 2020 includes approximately $21.5 million of insurance proceeds related to a tornado at one of our Uniform locations in Nashville. The "Proceeds from governmental agencies related to property and equipment" caption includes approximately $10.0 million and $15.3 million of proceeds during fiscal 2021 and 2020, respectively, relating to the recovery of our investment (possessory interest) at one of the National Park Service sites within our Sports, Leisure & Corrections sector. Fiscal 2020 also includes approximately $8.3 million during fiscal 2020 of proceeds from government grants related to the relocation to our headquarters.
Cash Flows (Used In) Provided by Financing Activities
During fiscal 2021, cash used in financing activities was impacted by the following:
•the repayment of borrowings under the United States revolving credit facility ($780.0 million);
•repayment of the aggregate principal amount of the 4.750% 2026 Notes ($500.0 million);
•repayments under the receivables facility ($315.6 million);
•net repayments of term loan borrowings ($244.2 million);
•payment of fees and expenses related to refinancing activities, which is included in "Other financing activities," including debt issuance costs ($17.5 million) and the call premium ($11.9 million) from the repayment of the 4.750% 2026 Notes; and
•payment of an earnout related to a prior year acquisition ($7.4 million).
During fiscal 2020, cash provided by financing activities was impacted by the following:
•issuance of the 6.375% 2025 Notes ($1,500.0 million);
•issuance of a new United States dollar denominated term loan due January 2027, net of original issue discount ($898.9 million);
•an increase in borrowings under the revolving credit facility ($849.9 million);
•an increase in funding under the receivables facility ($315.6 million);
•an increase in proceeds from issuance of common stock as a result of higher stock option exercises ($90.0 million); and
•cash proceeds received from a stockholder in connection with short-swing profits earned through transactions in our common stock, which are included in "Other financing activities" ($14.8 million); which more than offset
•repayment of the aggregate principal amount of the 5.125% 2024 Notes ($900.0 million); and
•payment of fees and expenses related to refinancing activities, which is included in "Other financing activities," including a call premium ($23.1 million) and debt issuance costs ($29.4 million).
The "Other financing activities" caption also reflects a use of cash during fiscal 2021 and fiscal 2020, primarily related to taxes paid by us when we withhold shares upon an employee's exercise or vesting of equity awards to cover income taxes.
During the second quarter of fiscal 2020, we repurchased 0.3 million shares of our common stock for $6.5 million under the fiscal 2019 share repurchase program, which will expire in July 2022.
On February 2, 2021, our stockholders approved the Third Amended and Restated 2013 Stock Incentive Plan, which amended and restated our 2013 Incentive Plan last amended on January 29, 2020. The Third Amended and Restated 2013 Stock Incentive Plan provides for up to 3.5 million of new shares authorized for issuance to participants, in addition to the shares that remained available for issuance under the 2013 Incentive Plan as of February 2, 2021.
On February 2, 2021, our stockholders approved the Aramark 2021 Employee Stock Purchase Plan (“ESPP”). The ESPP allows eligible employees to contribute up to 10% of their eligible pay toward the quarterly purchase of our common stock, subject to an annual maximum dollar amount. The purchase price is 85% of the lesser of the i) fair market value per share of our common
stock as determined on the purchase date or ii) fair market value per share of our common stock as determined on the first trading day of the quarterly offering period. Purchases under the ESPP are made in March, June, September and December. The aggregate number of shares of common stock that may be issued under the ESPP may not exceed 12.5 million shares. Our first purchase window began on April 1, 2021. There were 0.5 million shares purchased under the ESPP during the fiscal year ended October 1, 2021.
We intend to continue to pay cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements, business prospects and other factors that our Board of Directors may deem relevant. However, the payment of any future dividends will be at the discretion of our Board of Directors and our Board of Directors may, at any time, determine not to continue to declare quarterly dividends.
Covenant Compliance
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries to: incur additional indebtedness; issue preferred stock or provide guarantees; create liens on assets; engage in mergers or consolidations; sell assets; pay dividends, make distributions or repurchase our capital stock; make investments, loans or advances; repay or repurchase any subordinated debt, except as scheduled or at maturity; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing our subordinated debt (or any indebtedness that refinances our subordinated debt); and fundamentally change our business. The indentures governing our senior notes contain similar provisions. As of October 1, 2021, we were in compliance with these covenants.
As stated above, the Credit Agreement and the indentures governing our senior notes contain provisions that restrict our ability to pay dividends and repurchase stock (collectively, "Restricted Payments"). In addition to customary exceptions, the Credit Agreement and indentures permit Restricted Payments in the aggregate up to an amount that increases quarterly by 50% of our Consolidated Net Income, as such term is defined in these debt agreements, subject to being in compliance with the interest coverage ratio described below.
Under the Credit Agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants. The indentures governing our senior notes also require us to comply with certain financial ratios in order to take certain actions. Our continued ability to meet those financial ratios, tests and covenants can be affected by events beyond our control, and there can be no assurance that we will meet those ratios, tests and covenants.
On April 22, 2020, as a result of the impact of COVID-19 on our business, ASI entered into Amendment No. 9 to the Credit Agreement. Amendment No. 9 provided for a covenant waiver period which suspended the Consolidated Secured Debt Ratio covenant required under the credit agreement for four fiscal quarters, commencing with the fourth quarter of fiscal 2020 through the third quarter of fiscal 2021, subject to, among other things, ongoing compliance with a minimum liquidity condition of $400.0 million and restrictions on making certain restricted payments (including share repurchases) and investments in unrestricted subsidiaries, in each case, as set forth in Amendment No. 9. This exclusion was intended to prevent the effects of COVID-19 from impacting the covenant calculation. The covenant waiver period expired at the beginning of the fourth quarter of fiscal 2021. The Consolidated Secured Debt Ratio debt covenant is once again effective and the amendment adjusted period ended October 1, 2021 consists of results from the third quarter of fiscal 2019 through the first quarter of fiscal 2020 plus the fourth quarter of fiscal 2021, excluding the results of the second quarter of fiscal 2020 through the third quarter of fiscal 2021.
These financial ratios, tests and covenants involve the calculation of certain measures that we refer to in this discussion as "Covenant Adjusted EBITDA." Covenant Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP. Covenant Adjusted EBITDA is defined as net income (loss) of ASI and its restricted subsidiaries plus interest and other financing costs, net, provision (benefit) for income taxes, and depreciation and amortization, further adjusted to give effect to adjustments required in calculating covenant ratios and compliance under our Credit Agreement and the indentures governing our senior notes.
Our presentation of these measures has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. You should not consider these measures as alternatives to net income (loss) or operating income (loss) determined in accordance with U.S. GAAP. Covenant Adjusted EBITDA, as presented by us, may not be comparable to other similarly titled measures of other companies because not all companies use identical calculations.
The following is a reconciliation of net income attributable to ASI stockholder, which is a U.S. GAAP measure of ASI''s operating results, to Covenant Adjusted EBITDA as defined in our debt agreements. The terms and related calculations are defined in the Credit Agreement and the indentures governing our senior notes. Covenant Adjusted EBITDA is a measure of ASI and its restricted subsidiaries only and does not include the results of Aramark.
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| | Twelve Month Period Ended | | Amendment Adjusted Period Ended(1) |
(in millions) | | October 1, 2021 | | October 1, 2021 |
Net (loss) income attributable to ASI stockholder | | $ | (90.8) | | | $ | 349.7 | |
Interest and other financing costs, net | | 401.4 | | | 340.4 | |
(Benefit) Provision for income taxes | | (40.6) | | | 92.6 | |
Depreciation and amortization | | 550.7 | | | 580.5 | |
Share-based compensation expense(2) | | 71.1 | | | 54.6 | |
Unusual or non-recurring (gains) and losses(3) | | (77.1) | | | — | |
Pro forma EBITDA for equity method investees(4) | | 10.2 | | | 4.5 | |
Pro forma EBITDA for certain transactions(5) | | 11.2 | | | (1.0) | |
Other(6)(7) | | 102.5 | | | 97.7 |
Covenant Adjusted EBITDA | | $ | 938.6 | | | $ | 1,519.0 | |
| | | | |
(1) The covenant waiver period outlined in Amendment No. 9 to our Credit Agreement expired at the beginning of the fourth quarter of fiscal 2021. The Consolidated Secured Debt Ratio debt covenant is once again effective and the amendment adjusted period ended October 1, 2021 consists of results from the third quarter of fiscal 2019 through the first quarter of fiscal 2020 plus the fourth quarter of fiscal 2021, excluding the results of the second quarter of fiscal 2020 through the third quarter of fiscal 2021.
(2) Represents share-based compensation expense resulting from the application of accounting for stock options, restricted stock units, performance stock units and deferred stock units awards and employee stock purchases (see Note 12 to the audited consolidated financial statements).
(3) Represents the fiscal 2021 non-cash gain from an observable price change on our equity investment ($137.9 million) and the fiscal 2021 non-cash loss from the termination of certain defined benefit pension plans ($60.9 million).
(4) Represents our estimated share of EBITDA, primarily from our AIM Services Co., Ltd. equity method investment, not already reflected in our Net (loss) income attributable to ASI stockholder. EBITDA for this equity method investee is calculated in a manner consistent with consolidated Covenant Adjusted EBITDA but does not represent cash distributions received from this investee.
(5) Represents the annualizing of net EBITDA from acquisitions made during the period.
(6) "Other" for the twelve months ended October 1, 2021 includes non-cash charges for inventory write-downs to net realizable value and for excess inventory related to personal protective equipment ($36.0 million), labor charges, incremental expenses and other expenses associated with closed or partially closed client locations resulting from the COVID-19 pandemic, net of United States and non-United States governmental labor related tax credits ($28.4 million), adjustments to remove the impact attributable to the adoption of certain accounting standards that are made to the calculation in accordance with the Credit Agreement and indentures ($25.3 million), expenses related to merger and integration related charges ($22.2 million), gain from a funding agreement related to a legal matter ($10.0 million), reversal of severance charges ($8.2 million), the gain from the change in fair value related to certain gasoline and diesel agreements ($5.9 million), a favorable settlement of a legal matter ($4.7 million), non-cash impairment charges related to various assets ($3.8 million), charges related to a client contract dispute ($2.6 million), expenses related to the impact of the ice storm in Texas ($2.5 million), a non-cash charge related to an environmental matter ($2.5 million), non-cash charges related to information technology assets ($2.2 million), the impact of hyperinflation in Argentina ($1.8 million) and other miscellaneous expenses.
(7) "Other" for the amendment adjusted period ended October 1, 2021 includes labor charges, incremental expenses and other expenses associated with closed or partially closed client locations resulting from the COVID-19 pandemic, net of United States and non-United States governmental labor related tax credits ($45.7 million benefit), expenses related to merger and integration related charges ($40.1 million), charges related to certain legal settlements ($27.9 million), adjustments to remove the impact attributable to the adoption of certain accounting standards that are made to the calculation in accordance with the Credit Agreement and indentures ($25.0 million), non-cash charges for inventory write-downs ($16.4 million), non-cash impairment charges related to various assets ($11.9 million), reversal of severance
charges ($11.2 million), compensation expense for retirement contributions and employee training programs funded by the benefits from United States tax reform ($10.9 million), cash compensation charges associated with the retirement of our former chief executive officer ($10.4 million), gain from a funding agreement related to a legal matter ($10.0 million), advisory fees related to shareholder matters ($7.7 million), closing costs mainly related to customer contracts ($7.3 million), the impact of hyperinflation in Argentina ($5.7 million), non-cash charges related to information technology assets ($5.1 million), the gain from the change in fair value related to certain gasoline and diesel agreements ($3.2 million) and other miscellaneous expenses.
Our covenant requirements and actual ratios for the twelve months ended October 1, 2021 are as follows:
| | | | | | | | | | | |
| Covenant Requirements | | Actual Ratios |
Consolidated Secured Debt Ratio(1) | 5.125x | | 2.32x |
Interest Coverage Ratio (Fixed Charge Coverage Ratio)(2) | 2.000x | | 2.60x |
(1) The Credit Agreement requires ASI to maintain a maximum Consolidated Secured Debt Ratio, defined as consolidated total indebtedness secured by a lien to Covenant Adjusted EBITDA, of 5.125x. Consolidated total indebtedness secured by a lien is defined in the Credit Agreement as total indebtedness consisting of debt for borrowed money, finance leases, debt in respect of sales-leaseback transactions, disqualified and preferred stock and advances under the receivables facility secured by a lien reduced by the amount of cash and cash equivalents on the consolidated balance sheet that is free and clear of any lien. Non-compliance with the maximum Consolidated Secured Debt Ratio could result in the requirement to immediately repay all amounts outstanding under the Credit Agreement, which, if ASI's lenders under our Credit Agreement (other than the lenders in respect of ASI's U.S. Term B Loans, which lenders do not benefit from the maximum Consolidated Debt Ratio covenant) failed to waive any such default, would also constitute a default under the indentures governing our senior notes. The Consolidated Secured Debt Ratio debt covenant was calculated per the terms in Amendment No. 9 to our Credit Agreement, which consists of results from the third quarter of fiscal 2019 through the first quarter of fiscal 2020 plus the fourth quarter of fiscal 2021, excluding the results of the second quarter of fiscal 2020 through the third quarter of fiscal 2021.
(2) Our Credit Agreement establishes an incurrence-based minimum Interest Coverage Ratio, defined as Covenant Adjusted EBITDA to consolidated interest expense, the achievement of which is a condition for us to incur additional indebtedness and to make certain restricted payments and does not result in a default or an event of default under the Credit Agreement or the indentures governing the senior notes. If we do not maintain this minimum Interest Coverage Ratio calculated on a pro forma basis for any such additional indebtedness or restricted payments, we could be prohibited from being able to (1) incur additional indebtedness, other than the incremental capacity provided for under the Credit Agreement and pursuant to specified exceptions, and (2) make certain restricted payments, other than pursuant to certain exceptions. However, any failure to maintain the Interest Coverage Ratio would not result in a default or an event of default under either the Credit Agreement or the indentures governing the senior notes. The minimum Interest Coverage Ratio is 2.000x for the term of the Credit Agreement. Consolidated interest expense is defined in the Credit Agreement as consolidated interest expense excluding interest income, adjusted for acquisitions and dispositions, further adjusted for certain non-cash or nonrecurring interest expense and our estimated share of interest expense from one equity method investee. The indentures governing our senior notes include a similar requirement which is referred to as a Fixed Charge Coverage Ratio. The Interest Coverage Ratio was calculated based on the twelve months ended October 1, 2021 and was not required to be adjusted similar to the Consolidated Secured Debt Ratio as prescribed under the terms of Amendment No. 9 to our Credit Agreement.
We and our subsidiaries and affiliates may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt securities (including any publicly issued debt securities), in privately negotiated or open market transactions, by tender offer or otherwise, or extend or refinance any of our outstanding indebtedness.
The following table summarizes our future obligations for debt repayments, finance leases, estimated interest payments, future minimum rental and similar commitments under noncancelable operating leases as well as contingent obligations related to outstanding letters of credit and guarantees as of October 1, 2021 (dollars in thousands):
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| | Payments Due by Period |
Contractual Obligations as of October 1, 2021 | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Long-term borrowings(1) | | $ | 7,360,210 | | | $ | 31,137 | | | $ | 80,219 | | | $ | 4,529,146 | | | $ | 2,719,708 | |
Finance lease obligations | | 159,949 | | | 29,157 | | | 46,710 | | | 34,266 | | | 49,816 | |
Estimated interest payments(2) | | 1,303,800 | | | 311,400 | | | 572,400 | | | 304,500 | | | 115,500 | |
Operating leases and other noncancelable commitments | | 449,707 | | | 80,265 | | | 123,614 | | | 80,931 | | | 164,897 | |
Purchase obligations(3) | | 612,336 | | | 225,598 | | | 158,892 | | | 70,328 | | | 157,518 | |
Other liabilities(4) | | 725,760 | | | 242,202 | | | 217,145 | | | 44,304 | | | 222,109 | |
| | $ | 10,611,762 | | | $ | 919,759 | | | $ | 1,198,980 | | | $ | 5,063,475 | | | $ | 3,429,548 | |
| | | | | | | | | | |
| | Amount of Commitment Expiration by Period |
Other Commercial Commitments as of October 1, 2021 | | Total Amounts Committed | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Letters of credit | | $ | 120,500 | | | $ | 120,500 | | | $ | — | | | $ | — | | | $ | — | |
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(1)Excludes the $53.5 million reduction to long-term borrowings from debt issuance costs and $0.8 million reduction from the discount on the U.S. Term B-4 Loans due 2027.
(2)These amounts represent future interest payments related to our existing debt obligations based on fixed and variable interest rates specified in the associated debt agreements and reflect any current hedging arrangements. Payments related to variable debt are based on applicable rates at October 1, 2021 plus the specified margin in the associated debt agreements for each period presented. The amounts provided relate only to existing debt obligations and do not assume the refinancing or replacement of such debt. The average debt balance for each fiscal year from 2022 through 2027 is $7,477.1 million, $7,407.9 million, $7,346.3 million, $5,379.9 million, $2,933.9 million and $2,334.7 million, respectively. The weighted average interest rate of our existing debt obligations for each fiscal year from 2022 through 2027 is 4.17%, 3.87%, 3.89%, 3.81%, 3.39% and 3.80%, respectively (see Note 5 to the audited consolidated financial statements for the terms and maturities of existing debt obligations).
(3)Represents commitments for capital projects to help finance improvements or renovations at the facilities in which we operate.
(4)Includes certain unfunded employee retirement obligations, contingent consideration, deferred social security taxes, self-insurance obligations, severance obligations and other obligations.
We have excluded from the table above uncertain tax liabilities due to the uncertainty of the amount and period of payment. As of October 1, 2021, we have gross uncertain tax liabilities of $65.4 million (see Note 10 to the audited consolidated financial statements). During fiscal 2021, we made contributions totaling $3.6 million into our defined benefit pension plans. Estimated contributions to our defined benefit pension plans in fiscal 2022 are $6.3 million (see Note 9 to the audited consolidated financial statements).
We have an agreement (the "Receivables Facility") with three financial institutions where we sell on a continuous basis an undivided interest in all eligible accounts receivable, as defined in the Receivables Facility. The maximum amount available under the Receivables Facility is $400.0 million. In addition, the Receivables Facility includes a seasonal tranche which increases the capacity of the Receivables Facility and the maximum amount available by $100.0 million from October through March. During the third quarter of fiscal 2021, we extended the scheduled maturity date of the Receivables Facility from June 2022 to June 2024. All other terms and conditions of the agreement remained largely unchanged. As of October 1, 2021, there are no outstanding borrowings under the Receivables Facility. Amounts borrowed under the Receivables Facility fluctuate monthly based on our funding requirements and the level of qualified receivables available to collateralize the Receivables Facility.
Pursuant to the Receivables Facility, we formed ARAMARK Receivables, LLC, a wholly-owned, consolidated, bankruptcy-remote subsidiary. ARAMARK Receivables, LLC was formed for the sole purpose of buying and selling receivables generated by certain of our subsidiaries. Under the Receivables Facility, we and certain of our subsidiaries transfer without recourse all of
our accounts receivable to ARAMARK Receivables, LLC. As collections reduce previously transferred interests, interests in new, eligible receivables are transferred to ARAMARK Receivables, LLC, subject to meeting certain conditions.
Supplemental Consolidating Information
Pursuant to Regulation S-X Rule 13-01, which simplified certain disclosure requirements for guarantors and issuers of guaranteed securities, we are no longer required to provide condensed consolidating financial statements for Aramark and its subsidiaries, including the guarantors and non-guarantors under our Credit Agreement and the indentures governing our senior notes. ASI, the borrower under our Credit Agreement and the indentures governing our senior notes, and its restricted subsidiaries together comprise substantially all of our assets, liabilities and operations, and there are no material differences between the consolidating information related to Aramark and Aramark Intermediate Holdco Corporation, the direct parent of ASI and a guarantor under our Credit Agreement, on the one hand, and ASI and its restricted subsidiaries on a standalone basis, on the other hand.
Other
Our business activities do not include the use of unconsolidated special purpose entities and there are no significant business transactions that have not been reflected in the accompanying audited consolidated financial statements. We insure portions of our general liability, automobile liability and workers’ compensation risks through a wholly owned captive insurance subsidiary (the "Captive") to enhance our risk financing strategies. The Captive is subject to regulations within its domicile of Bermuda, including regulations established by the Bermuda Monetary Authority (the "BMA") relating to levels of liquidity and solvency as such concepts are defined by the BMA. The Captive was in compliance with these regulations as of October 1, 2021. These regulations may have the effect of limiting our ability to access certain cash and cash equivalents held by the Captive for uses other than for the payment of our general liability, automobile liability and workers’ compensation claims and related Captive costs. As of October 1, 2021 and October 2, 2020, cash and cash equivalents at the Captive were $194.3 million and $92.1 million, respectively.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in the notes to the audited consolidated financial statements included in this Annual Report. As described in such notes, we recognize revenue in the period in which the performance obligation is satisfied. See Note 7 to our audited consolidated financial statements for further information related to our revenue recognition policy.
In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
Asset Impairment Determinations
Goodwill, the Aramark trade name and other trade names are primarily indefinite lived intangible assets that are not amortized and are subject to an impairment test that we conduct annually or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. The impairment test may first consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Examples of qualitative factors include, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events, events affecting reporting units and sustained changes in our stock price. If results of the qualitative assessment indicate a more likely than not determination or if a qualitative assessment is not performed, a quantitative test is performed by comparing the estimated fair value using discounted cash flow calculations of each reporting unit with its estimated net book value.
We perform the assessment of goodwill at the reporting unit level. Within our FSS International segment, each country or region is evaluated separately since they are relatively autonomous and separate goodwill balances have been recorded for each entity. During the fourth quarter of fiscal 2021, we performed the annual impairment test for goodwill for each of our reporting units using a quantitative testing approach. Based on our evaluation performed, we determined that the fair value of each of the reporting units significantly exceeded its respective carrying amount, and therefore, we determined that goodwill was not impaired.
During fiscal 2020, we identified a triggering event from the decline in our stock price resulting from COVID-19. As a result, we performed a quantitative impairment test as of March 27, 2020 and recognized a non-cash impairment charge of $198.6 million related to one reporting unit within our FSS International segment in the Consolidated Statements of (Loss) Income for the fiscal year ended October 2, 2020. For tax purposes, the impairment charge was not tax deductible. The impaired reporting unit has a remaining goodwill balance of $91.0 million as of October 1, 2021.
The determination of fair value for each reporting unit includes assumptions, which are considered Level 3 inputs, that are subject to risk and uncertainty. The discounted cash flow calculations are dependent on several subjective factors including the timing of future cash flows, the underlying margin projection assumptions, future growth rates and the discount rate. If our assumptions or estimates in our fair value calculations change or if future cash flows, margin projections or future growth rates vary from what was expected, including those assumptions relating to the duration and severity of COVID-19, this may impact our impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.
With respect to our other long-lived assets, we are required to test for asset impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, we compare the sum of the future expected cash flows from the asset, undiscounted and without interest charges, to the asset’s carrying value. If the sum of the future expected cash flows from the asset is less than the carrying value, an impairment would be recognized for the difference between the estimated fair value and the carrying value of the asset.
In making future cash flow analyses of various assets, we make assumptions relating to the following:
• The intended use of assets and the expected future cash flows resulting directly from such use;
• Comparable market valuations of businesses similar to Aramark's business segments;
• Industry specific economic conditions;
• Competitor activities and regulatory initiatives; and
• Client and customer preferences and behavior patterns.
We believe that an accounting estimate relating to asset impairment is a critical accounting estimate because the assumptions underlying future cash flow estimates are subject to change from time to time and the recognition of an impairment could have a significant impact on our consolidated statements of (loss) income.
During fiscal 2020, we recorded non-cash impairment charges related to the following: abandonment of rental properties ($28.5 million), information technology assets from either discontinue of use or contracts terminated ($26.1 million) and from client contracts that were reassessed due to the impact of COVID-19 ($30.6 million).
Litigation and Claims
From time to time, we and our subsidiaries are party to various legal actions, proceedings and investigations involving claims incidental to the conduct of our businesses, including those brought by clients, consumers, employees, government entities and third parties under, among others, federal, state, international, national, provincial and local employment laws, wage and hour laws, discrimination laws, immigration laws, human health and safety laws, import and export controls and customs laws, environmental laws, false claims or whistleblower statutes, 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 breach of contractual and other obligations. We consider the measurement of litigation reserves as a critical accounting estimate because of the significant uncertainty in some cases relating to the outcome of potential claims or litigation and the difficulty of predicting the likelihood and range of potential liability involved, coupled with the material impact on our results of operations that could result from litigation or other claims. In determining legal reserves, we consider, among other issues:
• interpretation of contractual rights and obligations;
• the status of government regulatory initiatives, interpretations and investigations;
• the status of settlement negotiations;
• prior experience with similar types of claims;
• whether there is available insurance; and
• advice of counsel.
We are involved in a dispute with a client regarding Aramark’s provision of services pursuant to a contract. We continue to simultaneously litigate the matter and attempt to reach a negotiated resolution. We recorded a reserve for this matter as it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of October 1, 2021 and October 2, 2020, we have accrued our best estimate of the probable loss associated with this contract, which is approximately $19.1 million and $16.3 million, respectively. We continue to believe it is reasonably possible that this potential exposure may change in the near term based on the outcome of either the settlement negotiations or through continued litigation.
Allowance for Credit Losses
We encounter credit loss risks associated with the collection of receivables. We analyze historical experience, current general and specific industry economic conditions, industry concentrations, such as exposure to small and medium-sized businesses, the non-profit healthcare sector, federal and local governments, and reasonable and supportable forecasts that affect the collectability of the reported amount in estimating credit losses. The accounting estimate related to the allowance for credit losses is a critical accounting estimate because the underlying assumptions used for the allowance can change from time to time and credit losses could potentially have a material impact on our results of operations. We adopted a new accounting standard related to the measurement of expected credit losses as of October 3, 2020 (the first day of fiscal 2021) (see Note 1 to the audited consolidated financial statements).
As of October 1, 2021 and October 2, 2020, our allowance for credit losses was approximately $79.6 million and $74.9 million, respectively.
Inventory Obsolescence
We record an inventory obsolescence reserve for obsolete, excess and slow-moving inventory, principally in the Uniform segment. In calculating our inventory obsolescence reserve, we analyze historical and projected data regarding customer demand within specific product categories and make assumptions regarding economic conditions within customer specific industries, as well as style and product changes. Our accounting estimate related to inventory obsolescence is a critical accounting estimate because customer demand in certain of our businesses can be variable and changes in our reserve for inventory obsolescence could materially affect our results of operations.
As of October 1, 2021 and October 2, 2020, our reserve for inventory obsolescence was approximately $45.7 million and $36.7 million, respectively.
Self-Insurance Reserves
We self-insure for obligations related to certain risks that we retain under our casualty program, which includes general liability, automobile liability and workers’ compensation claims, as well as for our employee health care benefit programs. The accounting estimates related to our self-insurance reserves are critical accounting estimates because changes in our claim experience, our ability to settle claims or other estimates and judgments we use could potentially have a material impact on our results of operations. Our reserves for retained costs associated with our casualty program are estimated through actuarialmethods, with the assistance of third-party actuaries, using loss development assumptions based on our claims history. Our casualty program reserves take into account reported claims as well as incurred-but-not-reported losses using loss development factors based upon past experience. In order to determine the loss development factors, we make judgments relating to the nature, frequency, severity, and age of claims, and industry, regulatory, and company-specific trends impacting the development of claims. The actual cost to settle our self-insured casualty claim liabilities can differ from our reserve estimates because of a number of uncertainties, including the inherent difficulty in estimating the severity of a claim and the potential amount to defend and settle a claim.
As of October 1, 2021 and October 2, 2020, our self-insurance reserves were approximately $235.7 million and $250.1 million, respectively.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. We make assumptions, judgments and estimates to determine the current income tax provision (benefit), deferred tax asset and liabilities and valuation allowance recorded against a deferred tax asset. The assumptions, judgments and estimates relative to the current income tax provision (benefit) take into account current tax laws, their interpretation and possible results of foreign and domestic tax audits. Changes in tax law, their interpretation and resolution of tax audits could significantly impact the income taxes provided in our consolidated financial statements. Assumptions, judgments and estimates relative to the amount of deferred income taxes take into account future taxable income. Any of the assumptions, judgments and estimates mentioned above could cause the actual income tax obligations to differ from our estimates.
As of October 1, 2021 and October 2, 2020, our valuation allowance reserves recorded against deferred tax assets were approximately $97.5 million and $39.0 million, respectively (see Note 10 to the audited consolidated financial statements).
Critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require.
New Accounting Standards Updates
See Note 1 to the audited consolidated financial statements for a full description of recent accounting standards updates, including the expected dates of adoption.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps. We do not enter into contracts for trading purposes and do not use leveraged instruments. The information below summarizes our market risks associated with debt obligations and other significant financial instruments as of October 1, 2021 (see Notes 5 and 6 to the audited consolidated financial statements). Fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the respective periods. For debt obligations, the table presents principal cash flows and related interest rates by contractual fiscal year of maturity. Variable interest rates disclosed represent the weighted-average rates of the portfolio at October 1, 2021. For interest rate swaps, the table presents the notional amounts and related weighted-average interest rates by fiscal year of maturity. The variable rates presented are the average forward rates for the term of each contract.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (US$ equivalent in millions) |
| | Expected Fiscal Year of Maturity |
As of October 1, 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | | Fair Value |
Debt: | | | | | | | | | | | | | | | | |
Fixed rate | | $ | 29 | | | $ | 25 | | | $ | 22 | | | $ | 2,496 | | | $ | 15 | | | $ | 1,200 | | | $ | 3,787 | | | $ | 3,908 | |
Average interest rate | | 4.1 | % | | 4.1 | % | | 4.1 | % | | 5.5 | % | | 4.1 | % | | 5.0 | % | | 5.3 | % | | |
Variable rate | | $ | 31 | | | $ | 55 | | | $ | 25 | | | $ | 1,724 | | | $ | 329 | | | $ | 1,569 | | | $ | 3,733 | | | $ | 3,674 | |
Average interest rate | | 5.1 | % | | 1.7 | % | | 1.8 | % | | 1.8 | % | | 1.8 | % | | 2.2 | % | | 2.0 | % | | |
Interest Rate Swaps: | | | | | | | | | | | | | | | | |
Receive variable/pay fixed | | $ | 250 | | $ | 1,550 | | $ | — | | $ | 800 | | $ | — | | $ | 500 | | $ | 3,100 | | $ | (67) |
Average pay rate | | 2.6 | % | | 2.1 | % | | — | % | | 1.6 | % | | — | % | | 1.5 | % | | | | |
Average receive rate | | 0.1 | % | | 0.1 | % | | — | % | | 0.1 | % | | — | % | | 0.1 | % | | | | |
As of October 1, 2021, we had foreign currency forward exchange contracts outstanding with nominal notional amounts to mitigate the risk of changes in foreign currency exchange rates on short-term intercompany loans to certain international subsidiaries. As of October 1, 2021, the fair value of these foreign exchange contracts is immaterial and included in "Accounts Payable" on our Consolidated Balance Sheets.
We 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 our exposure to price fluctuations for gasoline and diesel fuel. As of October 1, 2021, we had contracts for approximately 6.0 million gallons outstanding through June of fiscal 2022. As of October 1, 2021, the fair value of our gasoline and diesel fuel hedge agreements is $2.6 million, which is included in "Prepayments and other current assets" on our Consolidated Balance Sheets.
Item 8. Financial Statements and Supplementary Data
See Financial Statements and Schedule beginning on page S-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon criteria established in Internal Control – Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of October 1, 2021. The effectiveness of our internal control over financial reporting as of October 1, 2021 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their report that is included herein on the following page.
(c) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our fourth quarter of fiscal 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Aramark
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Aramark and subsidiaries (the "Company") as of October 1, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 1, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended October 1, 2021, of the Company and our report dated November 23, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Philadelphia, PA
November 23, 2021
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information about our directors and persons nominated to become directors required by Item 10 will be included under the caption "Proposal No. 1 - Election of Directors" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Information about our executive officers is included under the caption “Information About Our Executive Officers” in Part I of this report and incorporated herein.
Information on beneficial ownership reporting required by Item 10, if any, will be included under the caption "Delinquent Section 16(a) Reports" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
We have a Business Conduct Policy that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer, which is available on the Investor Relations section of our website at www.aramark.com. A copy of our Business Conduct Policy may be obtained free of charge by writing to Investor Relations, Aramark, 2400 Market Street, Philadelphia, PA 19103. Our Business Conduct Policy contains a "code of ethics," as defined in Item 406(b) of Regulation S-K. Please note that our website address is provided as an inactive textual reference only. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website.
The remaining information required by Item 10 will be included under the caption "Board Committees and Meetings" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 11. Executive Compensation
Information required by Item 11 will be included under the caption "Compensation Matters" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by Item 12 will be included under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by Item 13 will be included under the captions "Certain Relationships and Related Transactions" and "Director Independence and Independence Determinations" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by Item 14 will be included under the caption "Fees to Independent Registered Public Accounting Firm" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements
See Index to Financial Statements and Schedule at page S-1 and the Exhibit Index.
(b) Exhibits Required by Item 601 of Regulation S-K
See the Exhibit Index which is incorporated herein by reference.
(c) Financial Statement Schedules
See Index to Financial Statements and Schedule at page S-1.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized on November 23, 2021.
| | | | | | | | | | | | | | | | | | | | |
| | | | Aramark |
| | | |
| | | | By: | | /s/ CHRISTOPHER T. SCHILLING |
| | | | Name: | | Christopher T. Schilling |
| | | | Title: | | Senior Vice President, Controller and Chief Accounting Officer (Authorized Signatory) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 23, 2021.
| | | | | | | | |
Name | | Capacity |
| |
/s/ JOHN J. ZILLMER | | Chief Executive Officer and Director |
John J. Zillmer | | (Principal Executive Officer) |
| |
/s/ THOMAS G. ONDROF | | Executive Vice President and Chief Financial Officer |
Thomas G. Ondrof | | (Principal Financial Officer) |
| | |
/s/ CHRISTOPHER T. SCHILLING | | Senior Vice President, Controller and Chief Accounting Officer |
Christopher T. Schilling | | (Principal Accounting Officer) |
| | |
/s/ SUSAN CAMERON | | Director |
Susan Cameron | | |
| | |
/s/ GREG CREED | | Director |
Greg Creed | | |
| | |
/s/ RICHARD W. DREILING | | Director |
Richard W. Dreiling | | |
| | |
/s/ IRENE M. ESTEVES | | Director |
Irene M. Esteves | | |
| | |
/s/ DANIEL J. HEINRICH | | Director |
Daniel J. Heinrich | | |
| | |
/s/ BRIDGETTE P. HELLER | | Director |
Bridgette P. Heller | | |
| | |
/s/ PAUL HILAL | | Vice Chairman, Director |
Paul Hilal | | |
| | |
/s/ KAREN KING | | Director |
Karen King | | |
| | |
/s/ STEPHEN I. SADOVE | | Chairman, Director |
Stephen I. Sadove | | |
| | |
/s/ ART WINKLEBLACK | | Director |
Art Winkleblack | | |
ARAMARK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
All other schedules are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or in the notes thereto.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Aramark
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Aramark and subsidiaries (the "Company") as of October 1, 2021, the related consolidated statements of loss, comprehensive income, cash flows, and stockholders’ equity for the year then ended, and the related notes and financial statement schedule II (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 1, 2021, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 1, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 23, 2021, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill - FSS US Reporting Unit - Refer to Note 4 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the estimated fair value of each reporting unit to its carrying amount annually in the fourth quarter of each year as of the end of the fiscal month of August or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. During the fourth quarter, the Company performed a quantitative test to determine the fair value of each reporting unit using discounted cash flow calculations, which required management to make assumptions and estimates that are subject to risk and uncertainty related to future growth rates, margin projections, and the discount rate. Changes in these assumptions or estimates may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in an impairment charge. The fair value of the FSS United States (FSS US) reporting unit exceeded its carrying amount, and therefore, the Company determined that its goodwill was not impaired.
We identified the valuation of goodwill for the FSS US reporting unit as a critical audit matter because of the significant judgments made by management to estimate its fair value. Auditing the discounted cash flow calculations for this reporting unit involved a high degree of auditor judgment and an increased effort, which included the involvement of our fair value
specialists, as it related to evaluating management’s assumptions and estimates related to future growth rates, margin projections, and the discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions and estimates of future growth rates, margin projections, and the discount rate used by management to estimate the fair value of the FSS US reporting unit included the following, among others:
•We tested the effectiveness of internal controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the FSS US reporting unit, including controls related to management’s assumptions and estimates of future growth rates, margin projections, and the discount rate.
•We evaluated management’s ability to accurately forecast future FSS US reporting unit growth rates and margin projections by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s FSS US reporting unit growth rates and margin projections by comparing the forecasts to:
◦Historical results.
◦Internal communications to management and the Board of Directors.
◦Forecasted information included in analyst and industry reports for the Company and certain of its peer companies.
•With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of future growth rates and the discount rate by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rate selected by management.
/s/ Deloitte & Touche LLP
Philadelphia, PA
November 23, 2021
We have served as the Company's auditor since 2021.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Aramark:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Aramark and subsidiaries (the Company) as of October 2, 2020, the related consolidated statements of (loss) income, comprehensive income (loss), cash flows, and stockholders’ equity for each of the fiscal years ended October 2, 2020 and September 27, 2019 and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 2, 2020, and the results of its operations and its cash flows for each of the fiscal years ended October 2, 2020 and September 27, 2019, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 8 to the consolidated financial statements, the Company has changed its method of accounting for leases as of September 28, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company's auditor from 2002 to 2020.
Philadelphia, Pennsylvania
November 24, 2020
ARAMARK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 1, 2021 AND OCTOBER 2, 2020
(in thousands, except share amounts)
| | | | | | | | | | | |
| October 1, 2021 | | October 2, 2020 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 532,591 | | | $ | 2,509,188 | |
Receivables (less allowances: 2021 - $79,644; 2020 - $74,925) | 1,748,601 | | | 1,431,206 | |
Inventories | 412,676 | | | 436,473 | |
Prepayments and other current assets | 204,987 | | | 298,944 | |
Total current assets | 2,898,855 | | | 4,675,811 | |
Property and Equipment, at cost: | | | |
Land, buildings and improvements | 983,540 | | | 929,354 | |
Service equipment and fixtures | 4,355,699 | | | 4,184,603 | |
| 5,339,239 | | | 5,113,957 | |
Less - Accumulated depreciation | (3,300,845) | | | (3,063,049) | |
| 2,038,394 | | | 2,050,908 | |
Goodwill | 5,487,297 | | | 5,343,828 | |
Other Intangible Assets | 2,028,622 | | | 1,932,637 | |
Operating Lease Right-of-use Assets | 587,854 | | | 551,394 | |
Other Assets | 1,335,142 | | | 1,158,106 | |
| $ | 14,376,164 | | | $ | 15,712,684 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current Liabilities: | | | |
Current maturities of long-term borrowings | $ | 58,850 | | | $ | 99,915 | |
Current operating lease liabilities | 67,280 | | | 71,810 | |
Accounts payable | 919,090 | | | 663,455 | |
Accrued payroll and related expenses | 677,185 | | | 572,076 | |
Accrued expenses and other current liabilities | 1,135,028 | | | 940,202 | |
Total current liabilities | 2,857,433 | | | 2,347,458 | |
Long-Term Borrowings | 7,393,417 | | | 9,178,508 | |
Noncurrent Operating Lease Liabilities | 314,378 | | | 341,667 | |
Deferred Income Taxes and Other Noncurrent Liabilities | 1,079,014 | | | 1,099,075 | |
Commitments and Contingencies (see Note 14) | 0 | | 0 |
Redeemable Noncontrolling Interest | 9,050 | | | 9,988 | |
Stockholders' Equity: | | | |
Common stock, par value $0.01 (authorized: 600,000,000 shares; issued: 2021—294,329,180 shares and 2020—290,663,529; and outstanding: 2021—255,998,119 shares and 2020—253,042,169 shares) | 2,943 | | | 2,907 | |
Capital surplus | 3,533,054 | | | 3,416,132 | |
Retained earnings | 327,557 | | | 532,379 | |
Accumulated other comprehensive loss | (208,011) | | | (307,258) | |
Treasury stock (shares held in treasury: 2021—38,331,061 shares and 2020—37,621,360 shares) | (932,671) | | | (908,172) | |
Total stockholders' equity | 2,722,872 | | | 2,735,988 | |
| $ | 14,376,164 | | | $ | 15,712,684 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(LOSS) INCOME
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019 SEPTEMBER 28, 2018 AND SEPTEMBER 29, 2017
(in thousands)thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Stockholders' Equity | | Common Stock | | Capital Surplus | | Retained Earnings / (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Treasury Stock |
Balance, September 30, 2016 | $ | 2,161,006 |
| | $ | 2,726 |
| | $ | 2,921,725 |
| | $ | (33,778 | ) | | $ | (180,783 | ) | | $ | (548,884 | ) |
Adoption of new accounting standard | 1,129 |
| | | | (8,013 | ) | | 9,142 |
| | | | |
Net income attributable to Aramark stockholders | 373,923 |
| | | | | | 373,923 |
| | | | |
Other comprehensive income | 57,023 |
| | | | | | | | 57,023 |
| | |
Capital contributions from issuance of common stock | 35,724 |
| | 45 |
| | 35,679 |
| | | | | | |
Share-based compensation expense | 65,155 |
| | | | 65,155 |
| | | | | | |
Repurchases of common stock | (132,662 | ) | | | | | | | | | | (132,662 | ) |
Payments of dividends | (102,237 | ) | | | | | | (102,237 | ) | | | | |
Balance, September 29, 2017 | $ | 2,459,061 |
| | $ | 2,771 |
| | $ | 3,014,546 |
| | $ | 247,050 |
| | $ | (123,760 | ) | | $ | (681,546 | ) |
Net income attributable to Aramark stockholders | 567,885 |
| | | | | | 567,885 |
| | | | |
Other comprehensive income | 32,537 |
| | | | | | | | 32,537 |
| | |
Capital contributions from issuance of common stock | 29,621 |
| | 22 |
| | 29,599 |
| | | | | | |
Share-based compensation expense | 88,276 |
| | | | 88,276 |
| | | | | | |
Repurchases of common stock | (43,406 | ) | | | | | | | | | | (43,406 | ) |
Payments of dividends | (104,416 | ) | | | | | | (104,416 | ) | | | | |
Balance, September 28, 2018 | $ | 3,029,558 |
| | $ | 2,793 |
| | $ | 3,132,421 |
| | $ | 710,519 |
| | $ | (91,223 | ) | | $ | (724,952 | ) |
Adoption of new accounting standard | 58,395 |
| | | | | | 58,395 |
| | | | |
Net income attributable to Aramark stockholders | 448,549 |
| | | | | | 448,549 |
| | | | |
Other comprehensive loss | (125,742 | ) | | | | | | | | (125,742 | ) | | |
Capital contributions from issuance of common stock | 48,785 |
| | 36 |
| | 48,749 |
| | | | | | |
Share-based compensation expense | 55,280 |
| | | | 55,280 |
| | | | | | |
Repurchases of common stock | (84,344 | ) | | | | | | | | | | (84,344 | ) |
Payments of dividends | (110,434 | ) | | | | | | (110,434 | ) | | | | |
Balance, September 27, 2019 | $ | 3,320,047 |
| | $ | 2,829 |
| | $ | 3,236,450 |
| | $ | 1,107,029 |
| | $ | (216,965 | ) | | $ | (809,296 | ) |
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Revenue | $ | 12,095,965 | | | $ | 12,829,559 | | | $ | 16,227,341 | |
Costs and Expenses: | | | | | |
Cost of services provided (exclusive of depreciation and amortization) | 11,007,080 | | | 11,993,667 | | | 14,532,662 | |
Depreciation and amortization | 550,692 | | | 595,195 | | | 592,573 | |
Selling and general corporate expenses | 346,749 | | | 307,016 | | | 367,256 | |
Goodwill impairment | — | | | 198,600 | | | — | |
Gain on sale of Healthcare Technologies | — | | | — | | | (156,309) | |
| 11,904,521 | | | 13,094,478 | | | 15,336,182 | |
Operating income (loss) | 191,444 | | | (264,919) | | | 891,159 | |
Gain on Equity Investment | (137,934) | | | — | | | — | |
Loss on Defined Benefit Pension Plan Termination | 60,864 | | | — | | | — | |
Interest and Other Financing Costs, net | 401,366 | | | 382,800 | | | 334,987 | |
(Loss) Income Before Income Taxes | (132,852) | | | (647,719) | | | 556,172 | |
(Benefit) Provision for Income Taxes | (40,633) | | | (186,284) | | | 107,706 | |
Net (loss) income | (92,219) | | | (461,435) | | | 448,466 | |
Less: Net (loss) income attributable to noncontrolling interest | (1,386) | | | 94 | | | (83) | |
Net (loss) income attributable to Aramark stockholders | $ | (90,833) | | | $ | (461,529) | | | $ | 448,549 | |
| | | | | |
(Loss) Earnings per share attributable to Aramark stockholders: | | | | | |
Basic | $ | (0.36) | | | $ | (1.83) | | | $ | 1.82 | |
Diluted | $ | (0.36) | | | $ | (1.83) | | | $ | 1.78 | |
Weighted Average Shares Outstanding: | | | | | |
Basic | 254,748 | | | 251,828 | | | 246,854 | |
Diluted | 254,748 | | | 251,828 | | | 252,010 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019
(in thousands)
NOTE 1. NATURE OF BUSINESS, 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 the United States, which is supplemented by an additional 18-country footprint. The Company operates its business in 3 reportable segments that share many of the same operating characteristics:
Food and Support Services United States ("FSS United States") - Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, leisure and other facilities.
Food and Support Services International ("FSS International") - Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, leisure and other facilities.
Uniform and Career Apparel ("Uniform") - Provides a full service employee uniform solution, including design, sourcing and manufacturing, delivery, cleaning and maintenance on a contract basis. Directly markets personalized uniforms and accessories, provides managed restroom services and rents uniforms, work clothing, outerwear, particulate-free garments and non-garment items and related services, including mats, shop towels and first aid supplies, to clients in a wide range of industries in the United States, Puerto Rico, Canada and through a joint venture in Japan, including the manufacturing, transportation, construction, restaurant and hotel, healthcare and pharmaceutical industries. | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Net (loss) income | $ | (92,219) | | | $ | (461,435) | | | $ | 448,466 | |
Other comprehensive income (loss), net of tax: | | | | | |
Pension plan adjustments | 48,568 | | | (25,669) | | | (22,594) | |
Foreign currency translation adjustments | 8,925 | | | (7,818) | | | (34,308) | |
Cash flow hedges: | | | | | |
Unrealized gains (losses) arising during the period | 909 | | | (82,005) | | | (62,450) | |
Reclassification adjustments | 37,440 | | | 25,463 | | | (4,798) | |
Share of equity investee's comprehensive income (loss) | 3,405 | | | (264) | | | (1,592) | |
Other comprehensive income (loss), net of tax | 99,247 | | | (90,293) | | | (125,742) | |
Comprehensive income (loss) | 7,028 | | | (551,728) | | | 322,724 | |
Less: Net (loss) income attributable to noncontrolling interest | (1,386) | | | 94 | | | (83) | |
Comprehensive income (loss) attributable to Aramark stockholders | $ | 8,414 | | | $ | (551,822) | | | $ | 322,807 | |
The accompanying notes are an integral part of these consolidated financial statements include the accountsstatements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019
(in thousands)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Cash flows from operating activities: | | | | | |
Net (loss) income | $ | (92,219) | | | $ | (461,435) | | | $ | 448,466 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 550,692 | | | 595,195 | | | 592,573 | |
Goodwill impairment and asset write-downs | — | | | 283,743 | | | — | |
Gain on equity investment | (137,934) | | | — | | | — | |
Loss on defined benefit pension plan termination | 60,864 | | | — | | | — | |
Deferred income taxes | (43,234) | | | (134,048) | | | 40,503 | |
Share-based compensation expense | 71,053 | | | 30,339 | | | 55,280 | |
Net gain on sale of Healthcare Technologies | — | | | — | | | (139,165) | |
Changes in operating assets and liabilities: | | | | | |
Accounts Receivable | (290,214) | | | 362,708 | | | (78,771) | |
Inventories | (7,536) | | | (25,675) | | | (49,732) | |
Prepayments and Other Current Assets | 101,939 | | | (86,444) | | | (37,854) | |
Accounts Payable | 252,158 | | | (342,069) | | | 17,680 | |
Accrued Expenses | 261,154 | | | (143,640) | | | 193,532 | |
Payments made to clients on contracts | (100,918) | | | (69,575) | | | (40,073) | |
Changes in other noncurrent liabilities | (17,427) | | | 92,782 | | | 18,904 | |
Changes in other assets | 4,177 | | | 66,650 | | | (41,436) | |
Other operating activities | 44,524 | | | 8,151 | | | 4,320 | |
Net cash provided by operating activities | 657,079 | | | 176,682 | | | 984,227 | |
Cash flows from investing activities: | | | | | |
Purchases of property and equipment and other | (407,818) | | | (418,508) | | | (503,090) | |
Disposals of property and equipment | 32,474 | | | 54,074 | | | 17,871 | |
Proceeds from divestitures | — | | | — | | | 293,711 | |
Acquisition of certain businesses, net of cash acquired | (265,766) | | | (22,201) | | | (44,863) | |
Proceeds from governmental agencies related to property and equipment | 10,000 | | | 23,550 | | | 23,025 | |
Other investing activities | (3,276) | | | 1,965 | | | 3,825 | |
Net cash used in investing activities | (634,386) | | | (361,120) | | | (209,521) | |
Cash flows from financing activities: | | | | | |
Proceeds from long-term borrowings | 893,993 | | | 3,239,772 | | | 77,630 | |
Payments of long-term borrowings | (2,453,571) | | | (1,000,463) | | | (654,560) | |
Net change in funding under the Receivables Facility | (315,600) | | | 315,600 | | | — | |
Payments of dividends | (112,010) | | | (110,893) | | | (108,439) | |
Proceeds from issuance of common stock | 41,587 | | | 90,022 | | | 39,087 | |
Repurchase of common stock | — | | | (6,540) | | | (50,000) | |
Other financing activities | (59,738) | | | (89,976) | | | (38,610) | |
Net cash (used in) provided by financing activities | (2,005,339) | | | 2,437,522 | | | (734,892) | |
Effect of foreign exchange rates on cash and cash equivalents | 6,049 | | | 9,461 | | | (8,196) | |
(Decrease) increase in cash and cash equivalents | (1,976,597) | | | 2,262,545 | | | 31,618 | |
Cash and cash equivalents, beginning of period | 2,509,188 | | | 246,643 | | | 215,025 | |
Cash and cash equivalents, end of period | $ | 532,591 | | | $ | 2,509,188 | | | $ | 246,643 | |
The accompanying notes are an integral part of its subsidiaries in which a controllingthese consolidated financial interest is maintained in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). All significant intercompany transactions and accounts have been eliminated.statements.
ARAMARK AND SUBSIDIARIES
Fiscal Year
Our fiscal year is the fifty-two or fifty-three week period which ends on the Friday nearest to September 30th. The fiscal year ended October 1, 2021 was a fifty-two week period and the fiscal year ended October 2, 2020 was a fifty-three week period.
Results of Operations
Fiscal 2021 Compared to Fiscal 2020
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 fiscal years 2021 and 2020 (dollars in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Change | | Change |
| | October 1, 2021 | | October 2, 2020 | | $ | | % |
Revenue | | $ | 12,096.0 | | | $ | 12,829.6 | | | $ | (733.6) | | | (5.7) | % |
Costs and Expenses: | | | | | | | | |
Cost of services provided (exclusive of depreciation and amortization) | | 11,007.2 | | | 11,993.7 | | | (986.5) | | | (8.2) | % |
Other operating expenses | | 897.4 | | | 902.2 | | | (4.8) | | | (0.5) | % |
Goodwill impairment | | — | | | 198.6 | | | (198.6) | | | (100.0) | % |
| | 11,904.6 | | | 13,094.5 | | | (1,189.9) | | | (9.1) | % |
Operating income (loss) | | 191.4 | | | (264.9) | | | 456.3 | | | 172.3 | % |
Gain on Equity Investment | | (137.9) | | | — | | | (137.9) | | | (100.0) | % |
Loss on Defined Benefit Pension Plan Termination | | 60.9 | | | — | | | 60.9 | | | 100.0 | % |
Interest and Other Financing Costs, net | | 401.3 | | | 382.8 | | | 18.5 | | | 4.9 | % |
Loss Before Income Taxes | | (132.9) | | | (647.7) | | | 514.8 | | | 79.5 | % |
Benefit for Income Taxes | | (40.7) | | | (186.3) | | | (145.6) | | | (78.2) | % |
Net loss | | $ | (92.2) | | | $ | (461.4) | | | $ | 369.2 | | | 80.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Change | | Change |
Revenue by Segment(1) | | October 1, 2021 | | October 2, 2020 | | $ | | % |
FSS United States | | $ | 6,809.3 | | | $ | 7,366.7 | | | $ | (557.4) | | | (7.6 | %) |
FSS International | | 2,866.2 | | | 2,945.8 | | | (79.6) | | | (2.7 | %) |
Uniform | | 2,420.5 | | | 2,517.1 | | | (96.6) | | | (3.8 | %) |
| | $ | 12,096.0 | | | $ | 12,829.6 | | | $ | (733.6) | | | (5.7 | %) |
| | | | | | | | |
| | Fiscal Year Ended | | Change | | Change |
Operating Income (Loss) by Segment(1) | | October 1, 2021 | | October 2, 2020 | | $ | | % |
FSS United States | | $ | 131.8 | | | $ | 5.3 | | | $ | 126.5 | | | *** |
FSS International | | 58.2 | | | (344.2) | | | 402.4 | | | 116.9 | % |
Uniform | | 120.8 | | | 171.5 | | | (50.7) | | | (29.6 | %) |
Corporate | | (119.4) | | | (97.5) | | | (21.9) | | | (22.4 | %) |
| | $ | 191.4 | | | $ | (264.9) | | | $ | 456.3 | | | 172.3 | % |
*** Not meaningful
(1) As a percentage of total revenue, FSS United States represented 56.3% and 57.4%, FSS International represented 23.7% and 23.0% and Uniform represented 20.0% and 19.6% for fiscal 2021 and fiscal 2020, respectively.
Consolidated Overview
Revenue decreased by approximately 5.7% during fiscal 2021 compared to the prior year period, which was mainly due to COVID-19. The impact from our clients either reducing or ceasing operations was more significant during fiscal 2021 as the pandemic did not materially affect operations until late in the second quarter of fiscal 2020. Revenue began to improve during the second half of fiscal 2021 as lockdowns were lifted and operations began to re-open. The decrease in revenue was also attributable to the estimated impact of the 53rd week in fiscal 2020 (approximately 1.3%). Foreign currency translation favorably impacted fiscal 2021 (approximately 1.3%).
The following table presents the cost of services provided (exclusive of depreciation and amortization) by segment and as a percent of revenue for the fiscal years ended October 1, 2021 and October 2, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | October 1, 2021 | | October 2, 2020 |
Cost of services provided (exclusive of depreciation and amortization)(1) | | $ | | % of Revenue | | $ | | % of Revenue |
FSS United States | | $ | 6,237.6 | | | 91.6 | % | | $ | 6,889.4 | | | 93.5 | % |
FSS International | | 2,719.2 | | | 94.9 | % | | 2,998.4 | | | 101.8 | % |
Uniform | | 2,050.4 | | | 84.7 | % | | 2,105.9 | | | 83.7 | % |
| | $ | 11,007.2 | | | 91.0 | % | | $ | 11,993.7 | | | 93.5 | % |
(1) During fiscal 2020, Cost of services provided (exclusive of depreciation and amortization) included severance charges related to COVID-19. The severance charges by segment are the following: FSS United States ($51.8 million), FSS International ($87.3 million) and Uniform ($4.9 million) (see Note 2 to the audited consolidated financial statements).
The following table presents the percentages attributable to the components in cost of services provided (exclusive of depreciation and amortization) for fiscal 2021 and fiscal 2020.
| | | | | | | | | | | | | | |
| | Fiscal Year Ended |
Cost of services provided (exclusive of depreciation and amortization) components | | October 1, 2021 | | October 2, 2020 |
Food and support service costs | | 24.3 | % | | 25.7 | % |
Personnel costs | | 50.3 | % | | 49.3 | % |
Other direct costs | | 25.4 | % | | 25.0 | % |
| | 100.0 | % | | 100.0 | % |
Operating income (loss) increased by approximately $456.3 million during fiscal 2021 compared to the prior year period. Operating income (loss) was negatively impacted during both fiscal 2021 and 2020 by COVID-19 as clients either reduced or ceased operations at certain locations across all of our segments. Operating income (loss) began to improve during the second half of fiscal 2021 as lockdowns were lifted and operations began to re-open. In addition, operating income (loss) benefited from both United States and non-United States governmental labor related tax credits, which were higher in fiscal 2021 than fiscal 2020 (see Note 1 to the audited consolidated financial statements). The increase in operating income (loss) during fiscal 2021 was attributable to:
•improved profitability from client re-openings as well as from actions to reduce variable and fixed costs, including headcount reductions primarily taken during the second half of fiscal 2020;
•prior year non-cash goodwill impairment charge in the FSS International segment (approximately $198.6 million) (see Note 4 to the audited consolidated financial statements);
•prior year severance charges, mainly related to COVID-19, and current year severance accrual reversals (approximately $166.0 million);
•prior year non-cash charges related to operating lease right-of-use ("ROU") assets, property and equipment and other assets in the FSS United States and FSS International segments, primarily related to client contracts that were reassessed due to the impact of COVID-19 (approximately $30.6 million);
•prior year non-cash charges related to operating lease ROU assets, property and equipment and other assets from disposal by abandonment of certain rental properties in the FSS United States segment (approximately $28.5 million); and
•prior year non-cash charges related to information technology assets in the FSS United States segment due to discontinued use and non-renewal or expiration of contracts with specific vendors (approximately $26.1 million).
These increases in operating income (loss) during fiscal 2021 more than offset:
•higher personnel costs from incentive expenses related to the annual bonus and employer retirement matching contributions;
•higher share-based compensation expense (approximately $40.7 million) (see Note 12 to the audited consolidated financial statements);
•non-cash inventory charges, mainly to write down personal protective equipment ("PPE") to its net realizable value in the Uniform segment (approximately $25.0 million);
•higher personnel costs related to sales growth initiatives (approximately $23.8 million); and
•prior year gain from the insurance proceeds received related to property damage from a tornado in Nashville (approximately $16.3 million).
During fiscal 2021, a non-cash gain related to an equity investment of approximately $137.9 million was recorded, which was partially offset by a non-cash loss from the termination of certain defined benefit pension plans of approximately $60.9 million.
Interest and Other Financing Costs, net, increased 4.9% during fiscal 2021 compared to the prior year period. The increase for fiscal 2021 was primarily due to the issuance of $1,500.0 million of 6.375% Senior Notes, due 2025 (the "6.375% 2025 Notes") in April 2020, partially offset by lower interest from the repayments of $900.0 million of the 5.125% Senior Notes due 2024 (the "5.125% 2024 Notes") in January of fiscal 2020 and $500.0 million of the 4.75% Senior Notes due 2026 (the "4.75% 2026 Notes") during the third quarter of fiscal 2021 and from lower borrowings on the receivables facility and revolving credit facility.
The Benefit for Income Taxes for fiscal 2021 was recorded at an effective rate of 30.6% compared to an effective rate of 28.8% in the prior year. As a result of the CARES Act, we recorded a net benefit to the (Benefit) Provision for Income Taxes of approximately $12.0 million and $58.4 million during fiscal 2021 and fiscal 2020, respectively. The (Benefit) Provision for Income Taxes during fiscal 2021 and fiscal 2020 includes the Net Operating Losses ("NOL") expected to be carried back to Pre-Tax Cut and Jobs Act years, which are benefited at an income tax rate of 35.0% as opposed to the current year rate of 21.0%. During fiscal 2021, we recorded a valuation allowance of $36.5 million against certain foreign tax credits that were re-established by the NOL carryback. Within the FSS International segment, we also recorded during fiscal 2021 and fiscal 2020 a valuation allowance against deferred tax assets in certain subsidiaries from cumulative losses of approximately $22.0 million and $21.4 million, respectively. The effective tax rate for fiscal 2020 also includes income tax benefits of approximately $46.2 million as a result of an excess tax benefit recognized in relation to equity awards exercised during fiscal 2020, including by the former Chairman, President and Chief Executive Officer. The Loss Before Taxes for fiscal 2020 includes a non-cash impairment charge of goodwill of $198.6 million, which is nondeductible for income tax purposes.
Segment Results
FSS United States Segment
The FSS United States reportable segment consists of five sectors which have similar economic characteristics and comprise a single operating segment. The five sectors of the FSS United States reportable segment are Business & Industry, Education, Healthcare, Sports, Leisure & Corrections and Facilities & Other.
Revenue for each of these sectors is summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Change |
| | October 1, 2021 | | October 2, 2020 | | % |
Business & Industry | | $ | 695.7 | | | $ | 1,097.3 | | | (36.6) | % |
Education | | 2,124.4 | | | 2,416.4 | | | (12.1) | % |
Healthcare | | 891.2 | | | 824.6 | | | 8.1 | % |
Sports, Leisure & Corrections | | 1,511.3 | | | 1,535.8 | | | (1.6) | % |
Facilities & Other | | 1,586.7 | | | 1,492.6 | | | 6.3 | % |
| | $ | 6,809.3 | | | $ | 7,366.7 | | | (7.6) | % |
The Healthcare sector had high-single digit operating income margins, consistent with prior year. The Education and Facilities & Other sectors had mid-single digit operating income margins, consistent with prior year. The Business & Industry sector had negative mid-single digit operating income margins, consistent with prior year. The Sports, Leisure & Corrections sector had mid-single digit operating income margins, compared to negative low-single digits in the prior year. As described above, during the COVID-19 pandemic, and in following periods, operating income margins in the FSS United States sectors may differ from our otherwise historical patterns.
FSS United States segment revenue decreased by approximately 7.6% during fiscal 2021 compared to the prior year period. The decrease was primarily attributable to COVID-19, which significantly impacted our Business and Industry sector due to many clients working from home instead of the office for a majority of fiscal 2021 compared to half of fiscal 2020 and our Education sector where clients during the 2020-2021 school year either reduced or ceased operations at certain locations, and instead opted for virtual or remote learning. The decrease in revenue was also impacted by the estimated impact of the 53rd week in fiscal 2020 (approximately 1.5%). The Healthcare sector increased due to the acquisition of Next Level Hospitality, which contributed $108.9 million of revenue during fiscal 2021.
Operating income increased by approximately $126.5 million during fiscal 2021 compared to the prior year period. The increase during fiscal 2021 was attributable to:
•higher profitability from clients re-opening as well as from actions to reduce variable and fixed costs, including headcount reductions primarily taken during the second half of fiscal 2020;
•prior year severance charges, mainly related to COVID-19, and current year severance accrual reversals (approximately $55.6 million);
•prior year non-cash charges related to operating lease ROU assets, property and equipment and other assets from disposal by abandonment of certain rental properties (approximately $28.5 million);
•prior year non-cash charges related to information technology assets due to discontinued use and non-renewal or expiration of contracts with specific vendors (approximately $26.1 million); and
•prior year non-cash charges related to operating lease ROU assets, property and equipment and other assets, primarily related to client contracts that were reassessed due to the impact of COVID-19 (approximately $19.4 million).
These increases in operating income during fiscal 2021 more than offset higher insurance expenses, mainly from our medical program due to operations returning (approximately $9.2 million), and higher personnel costs from sales growth initiatives (approximately $7.1 million) and from incentive expenses related to the annual bonus and employer retirement matching contributions.
FSS International Segment
FSS International segment revenue decreased by approximately 2.7% during fiscal 2021 compared to the prior year period. The decrease was attributable to the negative impact of COVID-19 from restrictions and higher levels of lockdowns from government mandates in certain countries for a majority of fiscal 2021 compared to half of fiscal 2020, partially offset by the positive impact of foreign currency translation (approximately 5.2%).
Operating income (loss) increased by approximately $402.4 million during fiscal 2021 compared to the prior year period. The increase was mainly attributable to:
•improved profitability from clients re-opening after COVID-19 restrictions began to lift as well as from actions to reduce variable and fixed costs, including headcount reductions taken during the second half of fiscal 2020;
•higher labor related tax credits provided from government assistance programs (see Note 1 to the audited consolidated financial statements);
•prior year non-cash goodwill impairment charge (approximately $198.6 million);
•prior year severance charges, mainly related to COVID-19, and current year severance accrual reversals (approximately $107.5 million);
•higher charges in the prior year related to a client contract dispute (approximately $12.4 million); and
•prior year non-cash charges related to property and equipment from client contracts that were reassessed due to the impact of COVID-19 (approximately $11.2 million).
These increases in operating income during fiscal 2021 more than offset higher personnel costs from incentive expenses related to the annual bonus.
Uniform Segment
Uniform segment revenue decreased by approximately 3.8% during fiscal 2021 compared to the prior year period. The decrease was primarily attributable to the greater negative impact of COVID-19 in the current year period compared to fiscal 2020 and the estimated impact of the 53rd week in fiscal 2020 (approximately 1.7%), partially offset by improved pricing.
Operating income decreased by approximately $50.7 million during fiscal 2021 compared to the prior year period. The decrease was attributable to the negative impact of COVID-19, from clients either reducing or ceasing operations at certain locations for a majority of fiscal 2021 compared to half of fiscal 2020. While the negative impact of COVID-19 was partially offset by both United States and non-United States governmental labor related tax credits, the benefit from the credits was lower in fiscal 2021 than fiscal 2020 (see Note 1 to the audited consolidated financial statements). The decrease in operating income was attributable to:
•non-cash inventory charges, mainly to write down PPE to its net realizable value (approximately $25.0 million);
•higher personnel costs related to sales growth initiatives (approximately $16.7 million);
•prior year gain from the insurance proceeds received related to property damage from a tornado in Nashville (approximately $16.3 million);
•higher personnel costs from incentive expenses related to the annual bonus and employer retirement matching contributions;
•prior year favorable non-cash settlement of a multiemployer pension plan obligation (approximately $6.7 million); and
•higher severance charges compared to the prior year period (approximately $3.0 million).
These decreases in operating income during fiscal 2021 more than offset:
•favorable impact of headcount reductions taken during the second half of fiscal 2020;
•favorable in-service rental merchandise amortization compared to fiscal 2020; and
•lower merger and integration charges from the AmeriPride acquisition (approximately $2.4 million).
Corporate
Corporate expenses, those administrative expenses not allocated to the business segments, increased by approximately $21.9 million during fiscal 2021 compared to the prior year period. The increase was attributable to:
•higher share-based compensation expense (approximately $40.7 million) (see Note 12 to the audited consolidated financial statements); and
•higher personnel costs from incentive expenses related to the annual bonus.
These increases in corporate expenses during fiscal 2021 more than offset:
•the favorable change in fair value of certain gasoline and diesel agreements (approximately $6.4 million);
•effective cost discipline and prior year mitigating actions, including headcount reductions primarily taken during the second half of fiscal 2020; and
•prior year severance charges, mainly related to COVID-19, and current year severance accrual reversals (approximately $6.0 million).
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash generated from operating activities, funds from borrowings and existing cash on hand. As of October 1, 2021, we had $532.6 million of cash and cash equivalents, approximately $1,091.6 million of availability under our senior secured revolving credit facility and $400.0 million of availability under the receivables facility. A significant portion of our cash and cash equivalents are held in mature, liquid geographies where we have operations. As of October 1, 2021, there were approximately $869.5 million of outstanding foreign currency borrowings.
In response to the COVID-19 pandemic, we undertook a number of actions during fiscal 2020 to enhance our cash position, including increasing borrowings under our revolving credit facility and under our receivables facility, renegotiations of client contracts, salary and other compensation adjustments and reductions to general corporate expenses. In addition, on April 27, 2020, Aramark Services Inc. (“ASI”), our indirect wholly owned subsidiary, issued $1,500.0 million aggregate principal amount of 6.375% 2025 Notes. We continue to apply effective cost discipline to mitigate the negative impacts of COVID-19 as well as take advantage of relief provisions, including the CARES Act, CAA, and other United States and foreign governmental programs (see Note 1 to the audited consolidated financial statements). During fiscal 2021, we repaid $780.0 million of outstanding borrowings under our United States revolving credit facility, $500.0 million aggregate principal amount of 4.750% 2026 Notes and $315.6 million of outstanding borrowings under the receivables facility utilizing cash and cash equivalents on hand. Additionally, during fiscal 2021, we made $244.2 million of net repayments on term loan borrowings.
On April 6, 2021, we entered into Amendment No. 11 ("Amendment No. 11") to the Credit Agreement, dated as of March 28, 2017 (as supplemented or otherwise modified from time to time, the "Credit Agreement"), which, among other things, increased the availability on the revolving credit facility by $200.0 million and extended the maturity dates on a portion of the revolving credit facility, a portion of the Canadian dollar denominated term loan due October 2023, a portion of the euro denominated term loan due October 2023 and all of the yen denominated term loan due October 2023, in each case, to April 2026. We also extended the maturity date of the United States dollar denominated term loan due 2024 to April 2028. In addition, on June 25, 2021, we extended the maturity date of our receivables facility from June 2022 to June 2024 (see Note 5 to the audited consolidated financial statements).
While the full impact of COVID-19 on our long-term liquidity remains uncertain, we currently believe that our cash and cash equivalents and availability under our revolving credit facility and receivables facility will be adequate to meet anticipated cash requirements for the foreseeable future to fund working capital, capital spending, debt service obligations, refinancings, dividends and other cash needs. As a result of the refinancings executed in fiscal 2021, we have no significant debt maturities due until 2025 and we believe we have sufficient flexibility to manage the impact of COVID-19, based on our current assumptions. We also have flexibility to optimize working capital and defer certain capital expenditures as appropriate without a material impact to the business. We believe that our assumptions used to estimate our liquidity and working capital requirements are reasonable; however, due to the unprecedented current environment, we cannot assure that our assumptions will be correct and, as a consequence, our ability to be predictive is uncertain. For additional information regarding the impact of COVID-19, including on our liquidity and capital resources, see Part I, Item 1A, "Risk Factors."
The table below summarizes our cash activity (in millions):
| | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 |
Net cash provided by operating activities | $ | 657.1 | | | $ | 176.7 | |
Net cash used in investing activities | (634.4) | | | (361.1) | |
Net cash (used in) provided by financing activities | (2,005.3) | | | 2,437.5 | |
Reference to the audited Consolidated Statements of Cash Flows will facilitate understanding of the discussion that follows.
Cash Flows Provided by Operating Activities
Cash provided by operating activities increased by approximately $480.4 million during fiscal 2021 compared to fiscal 2020, primarily driven by a $552.6 million favorable increase in operating assets and liabilities and by a lower net loss, as discussed in "Results of Operations" above. These increases were partially offset by non-cash gains and losses, including the prior year non-cash impairment charges related to goodwill and other assets of approximately $283.7 million, the current year non-cash gain from our equity investment of approximately $137.9 million and the loss on termination of certain defined benefit pension plans of approximately $60.9 million. The $552.6 million favorable change in operating assets and liabilities compared to the prior year period was primarily due to:
•Accounts payable by $594.2 million, generating a source of cash during fiscal 2021 compared to a use of cash in fiscal 2020 due to the reduction in the prior year balance from COVID-19 and the timing of disbursements whereas the current year balance has increased from client re-openings;
•Accrued expenses by $404.8 million, generating a source of cash during fiscal 2021 compared to a use of cash in fiscal 2020 primarily due to the following: operations returning, including higher client advances within our Higher Education business; the deferral of payments permitted under the CARES Act; lower commission payments in our Sports business; and lower payments related to the annual bonus, partially offset by current year severance payments from headcount reductions made in the second half of fiscal 2021; and
•Prepayment and Other Current Assets by $188.4 million, generating a source of cash during fiscal 2021 compared to a use of cash in fiscal 2020 mainly from proceeds received in the second quarter of fiscal 2021 related to the fiscal 2020 federal income tax return (approximately $93.6 million), whereas the prior year period income tax receivable balance increased due to our net loss position.
These changes in operating assets and liabilities more than offset:
•Receivables by $652.9 million, generating a use of cash during fiscal 2021 compared to a source of cash during fiscal 2020 due to the reduction in the prior year balance from COVID-19, whereas the current year balance has increased due to client re-openings.
Fiscal 2021 and fiscal 2020 include approximately $159.1 million and $101.3 million, respectively, of proceeds associated with labor related tax credits from many foreign jurisdictions in which we operate as a form of relief from COVID-19 (see Note 1 to the audited consolidated financial statements). During fiscal 2021 and fiscal 2020, we received income of approximately $17.0 million and $15.5 million, respectively, related to favorable loss experience in older insurance years under our general liability, automobile liability and workers' compensation programs. The "Change in other noncurrent liabilities" caption was a use of cash during fiscal 2021 compared to a source of cash in fiscal 2020 due to the deferral of the employer portion of social security taxes as permitted under the CARES Act (see Note 1 to the audited consolidated financial statements) and changes in insurance reserves. The "Changes in other assets" caption was less of a source of cash during fiscal 2021 compared to fiscal 2020 mainly from the increase to in-service rental merchandise as customer installations were reduced in fiscal 2020 from the impact of COVID-19. The "Other operating activities" caption reflects mainly adjustments to net loss in the current year and prior year
periods related to non-cash gains and losses, including current year inventory write-downs within the Uniform segment and adjustments to non-operating cash gains and losses, including call premium expenses for debt repayments and the gain from the insurance proceeds of $16.3 million related to property damage from a tornado at one of our Uniform locations in Nashville during fiscal 2020.
Cash Flows Used in Investing Activities
The net cash flows used in investing activities were higher during fiscal 2021 compared to fiscal 2020 due to the acquisition of Next Level Hospitality for $226.1 million (see Note 2 to the audited consolidated financial statements). This increase was partially offset by lower capital expenditures. The "Disposals of property and equipment" caption for fiscal 2020 includes approximately $21.5 million of insurance proceeds related to a tornado at one of our Uniform locations in Nashville. The "Proceeds from governmental agencies related to property and equipment" caption includes approximately $10.0 million and $15.3 million of proceeds during fiscal 2021 and 2020, respectively, relating to the recovery of our investment (possessory interest) at one of the National Park Service sites within our Sports, Leisure & Corrections sector. Fiscal 2020 also includes approximately $8.3 million during fiscal 2020 of proceeds from government grants related to the relocation to our headquarters.
Cash Flows (Used In) Provided by Financing Activities
During fiscal 2021, cash used in financing activities was impacted by the following:
•the repayment of borrowings under the United States revolving credit facility ($780.0 million);
•repayment of the aggregate principal amount of the 4.750% 2026 Notes ($500.0 million);
•repayments under the receivables facility ($315.6 million);
•net repayments of term loan borrowings ($244.2 million);
•payment of fees and expenses related to refinancing activities, which is included in "Other financing activities," including debt issuance costs ($17.5 million) and the call premium ($11.9 million) from the repayment of the 4.750% 2026 Notes; and
•payment of an earnout related to a prior year acquisition ($7.4 million).
During fiscal 2020, cash provided by financing activities was impacted by the following:
•issuance of the 6.375% 2025 Notes ($1,500.0 million);
•issuance of a new United States dollar denominated term loan due January 2027, net of original issue discount ($898.9 million);
•an increase in borrowings under the revolving credit facility ($849.9 million);
•an increase in funding under the receivables facility ($315.6 million);
•an increase in proceeds from issuance of common stock as a result of higher stock option exercises ($90.0 million); and
•cash proceeds received from a stockholder in connection with short-swing profits earned through transactions in our common stock, which are included in "Other financing activities" ($14.8 million); which more than offset
•repayment of the aggregate principal amount of the 5.125% 2024 Notes ($900.0 million); and
•payment of fees and expenses related to refinancing activities, which is included in "Other financing activities," including a call premium ($23.1 million) and debt issuance costs ($29.4 million).
The "Other financing activities" caption also reflects a use of cash during fiscal 2021 and fiscal 2020, primarily related to taxes paid by us when we withhold shares upon an employee's exercise or vesting of equity awards to cover income taxes.
During the second quarter of fiscal 2020, we repurchased 0.3 million shares of our common stock for $6.5 million under the fiscal 2019 share repurchase program, which will expire in July 2022.
On February 2, 2021, our stockholders approved the Third Amended and Restated 2013 Stock Incentive Plan, which amended and restated our 2013 Incentive Plan last amended on January 29, 2020. The Third Amended and Restated 2013 Stock Incentive Plan provides for up to 3.5 million of new shares authorized for issuance to participants, in addition to the shares that remained available for issuance under the 2013 Incentive Plan as of February 2, 2021.
On February 2, 2021, our stockholders approved the Aramark 2021 Employee Stock Purchase Plan (“ESPP”). The ESPP allows eligible employees to contribute up to 10% of their eligible pay toward the quarterly purchase of our common stock, subject to an annual maximum dollar amount. The purchase price is 85% of the lesser of the i) fair market value per share of our common
stock as determined on the purchase date or ii) fair market value per share of our common stock as determined on the first trading day of the quarterly offering period. Purchases under the ESPP are made in March, June, September and December. The aggregate number of shares of common stock that may be issued under the ESPP may not exceed 12.5 million shares. Our first purchase window began on April 1, 2021. There were 0.5 million shares purchased under the ESPP during the fiscal year ended October 1, 2021.
We intend to continue to pay cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements, business prospects and other factors that our Board of Directors may deem relevant. However, the payment of any future dividends will be at the discretion of our Board of Directors and our Board of Directors may, at any time, determine not to continue to declare quarterly dividends.
Covenant Compliance
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries to: incur additional indebtedness; issue preferred stock or provide guarantees; create liens on assets; engage in mergers or consolidations; sell assets; pay dividends, make distributions or repurchase our capital stock; make investments, loans or advances; repay or repurchase any subordinated debt, except as scheduled or at maturity; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing our subordinated debt (or any indebtedness that refinances our subordinated debt); and fundamentally change our business. The indentures governing our senior notes contain similar provisions. As of October 1, 2021, we were in compliance with these covenants.
As stated above, the Credit Agreement and the indentures governing our senior notes contain provisions that restrict our ability to pay dividends and repurchase stock (collectively, "Restricted Payments"). In addition to customary exceptions, the Credit Agreement and indentures permit Restricted Payments in the aggregate up to an amount that increases quarterly by 50% of our Consolidated Net Income, as such term is defined in these debt agreements, subject to being in compliance with the interest coverage ratio described below.
Under the Credit Agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants. The indentures governing our senior notes also require us to comply with certain financial ratios in order to take certain actions. Our continued ability to meet those financial ratios, tests and covenants can be affected by events beyond our control, and there can be no assurance that we will meet those ratios, tests and covenants.
On April 22, 2020, as a result of the impact of COVID-19 on our business, ASI entered into Amendment No. 9 to the Credit Agreement. Amendment No. 9 provided for a covenant waiver period which suspended the Consolidated Secured Debt Ratio covenant required under the credit agreement for four fiscal quarters, commencing with the fourth quarter of fiscal 2020 through the third quarter of fiscal 2021, subject to, among other things, ongoing compliance with a minimum liquidity condition of $400.0 million and restrictions on making certain restricted payments (including share repurchases) and investments in unrestricted subsidiaries, in each case, as set forth in Amendment No. 9. This exclusion was intended to prevent the effects of COVID-19 from impacting the covenant calculation. The covenant waiver period expired at the beginning of the fourth quarter of fiscal 2021. The Consolidated Secured Debt Ratio debt covenant is once again effective and the amendment adjusted period ended October 1, 2021 consists of results from the third quarter of fiscal 2019 through the first quarter of fiscal 2020 plus the fourth quarter of fiscal 2021, excluding the results of the second quarter of fiscal 2020 through the third quarter of fiscal 2021.
These financial ratios, tests and covenants involve the calculation of certain measures that we refer to in this discussion as "Covenant Adjusted EBITDA." Covenant Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP. Covenant Adjusted EBITDA is defined as net income (loss) of ASI and its restricted subsidiaries plus interest and other financing costs, net, provision (benefit) for income taxes, and depreciation and amortization, further adjusted to give effect to adjustments required in calculating covenant ratios and compliance under our Credit Agreement and the indentures governing our senior notes.
Our presentation of these measures has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. You should not consider these measures as alternatives to net income (loss) or operating income (loss) determined in accordance with U.S. GAAP. Covenant Adjusted EBITDA, as presented by us, may not be comparable to other similarly titled measures of other companies because not all companies use identical calculations.
The following is a reconciliation of net income attributable to ASI stockholder, which is a U.S. GAAP measure of ASI''s operating results, to Covenant Adjusted EBITDA as defined in our debt agreements. The terms and related calculations are defined in the Credit Agreement and the indentures governing our senior notes. Covenant Adjusted EBITDA is a measure of ASI and its restricted subsidiaries only and does not include the results of Aramark.
| | | | | | | | | | | | | | |
| | Twelve Month Period Ended | | Amendment Adjusted Period Ended(1) |
(in millions) | | October 1, 2021 | | October 1, 2021 |
Net (loss) income attributable to ASI stockholder | | $ | (90.8) | | | $ | 349.7 | |
Interest and other financing costs, net | | 401.4 | | | 340.4 | |
(Benefit) Provision for income taxes | | (40.6) | | | 92.6 | |
Depreciation and amortization | | 550.7 | | | 580.5 | |
Share-based compensation expense(2) | | 71.1 | | | 54.6 | |
Unusual or non-recurring (gains) and losses(3) | | (77.1) | | | — | |
Pro forma EBITDA for equity method investees(4) | | 10.2 | | | 4.5 | |
Pro forma EBITDA for certain transactions(5) | | 11.2 | | | (1.0) | |
Other(6)(7) | | 102.5 | | | 97.7 |
Covenant Adjusted EBITDA | | $ | 938.6 | | | $ | 1,519.0 | |
| | | | |
(1) The covenant waiver period outlined in Amendment No. 9 to our Credit Agreement expired at the beginning of the fourth quarter of fiscal 2021. The Consolidated Secured Debt Ratio debt covenant is once again effective and the amendment adjusted period ended October 1, 2021 consists of results from the third quarter of fiscal 2019 through the first quarter of fiscal 2020 plus the fourth quarter of fiscal 2021, excluding the results of the second quarter of fiscal 2020 through the third quarter of fiscal 2021.
(2) Represents share-based compensation expense resulting from the application of accounting for stock options, restricted stock units, performance stock units and deferred stock units awards and employee stock purchases (see Note 12 to the audited consolidated financial statements).
(3) Represents the fiscal 2021 non-cash gain from an observable price change on our equity investment ($137.9 million) and the fiscal 2021 non-cash loss from the termination of certain defined benefit pension plans ($60.9 million).
(4) Represents our estimated share of EBITDA, primarily from our AIM Services Co., Ltd. equity method investment, not already reflected in our Net (loss) income attributable to ASI stockholder. EBITDA for this equity method investee is calculated in a manner consistent with consolidated Covenant Adjusted EBITDA but does not represent cash distributions received from this investee.
(5) Represents the annualizing of net EBITDA from acquisitions made during the period.
(6) "Other" for the twelve months ended October 1, 2021 includes non-cash charges for inventory write-downs to net realizable value and for excess inventory related to personal protective equipment ($36.0 million), labor charges, incremental expenses and other expenses associated with closed or partially closed client locations resulting from the COVID-19 pandemic, net of United States and non-United States governmental labor related tax credits ($28.4 million), adjustments to remove the impact attributable to the adoption of certain accounting standards that are made to the calculation in accordance with the Credit Agreement and indentures ($25.3 million), expenses related to merger and integration related charges ($22.2 million), gain from a funding agreement related to a legal matter ($10.0 million), reversal of severance charges ($8.2 million), the gain from the change in fair value related to certain gasoline and diesel agreements ($5.9 million), a favorable settlement of a legal matter ($4.7 million), non-cash impairment charges related to various assets ($3.8 million), charges related to a client contract dispute ($2.6 million), expenses related to the impact of the ice storm in Texas ($2.5 million), a non-cash charge related to an environmental matter ($2.5 million), non-cash charges related to information technology assets ($2.2 million), the impact of hyperinflation in Argentina ($1.8 million) and other miscellaneous expenses.
(7) "Other" for the amendment adjusted period ended October 1, 2021 includes labor charges, incremental expenses and other expenses associated with closed or partially closed client locations resulting from the COVID-19 pandemic, net of United States and non-United States governmental labor related tax credits ($45.7 million benefit), expenses related to merger and integration related charges ($40.1 million), charges related to certain legal settlements ($27.9 million), adjustments to remove the impact attributable to the adoption of certain accounting standards that are made to the calculation in accordance with the Credit Agreement and indentures ($25.0 million), non-cash charges for inventory write-downs ($16.4 million), non-cash impairment charges related to various assets ($11.9 million), reversal of severance
charges ($11.2 million), compensation expense for retirement contributions and employee training programs funded by the benefits from United States tax reform ($10.9 million), cash compensation charges associated with the retirement of our former chief executive officer ($10.4 million), gain from a funding agreement related to a legal matter ($10.0 million), advisory fees related to shareholder matters ($7.7 million), closing costs mainly related to customer contracts ($7.3 million), the impact of hyperinflation in Argentina ($5.7 million), non-cash charges related to information technology assets ($5.1 million), the gain from the change in fair value related to certain gasoline and diesel agreements ($3.2 million) and other miscellaneous expenses.
Our covenant requirements and actual ratios for the twelve months ended October 1, 2021 are as follows:
| | | | | | | | | | | |
| Covenant Requirements | | Actual Ratios |
Consolidated Secured Debt Ratio(1) | 5.125x | | 2.32x |
Interest Coverage Ratio (Fixed Charge Coverage Ratio)(2) | 2.000x | | 2.60x |
(1) The Credit Agreement requires ASI to maintain a maximum Consolidated Secured Debt Ratio, defined as consolidated total indebtedness secured by a lien to Covenant Adjusted EBITDA, of 5.125x. Consolidated total indebtedness secured by a lien is defined in the Credit Agreement as total indebtedness consisting of debt for borrowed money, finance leases, debt in respect of sales-leaseback transactions, disqualified and preferred stock and advances under the receivables facility secured by a lien reduced by the amount of cash and cash equivalents on the consolidated balance sheet that is free and clear of any lien. Non-compliance with the maximum Consolidated Secured Debt Ratio could result in the requirement to immediately repay all amounts outstanding under the Credit Agreement, which, if ASI's lenders under our Credit Agreement (other than the lenders in respect of ASI's U.S. Term B Loans, which lenders do not benefit from the maximum Consolidated Debt Ratio covenant) failed to waive any such default, would also constitute a default under the indentures governing our senior notes. The Consolidated Secured Debt Ratio debt covenant was calculated per the terms in Amendment No. 9 to our Credit Agreement, which consists of results from the third quarter of fiscal 2019 through the first quarter of fiscal 2020 plus the fourth quarter of fiscal 2021, excluding the results of the second quarter of fiscal 2020 through the third quarter of fiscal 2021.
(2) Our Credit Agreement establishes an incurrence-based minimum Interest Coverage Ratio, defined as Covenant Adjusted EBITDA to consolidated interest expense, the achievement of which is a condition for us to incur additional indebtedness and to make certain restricted payments and does not result in a default or an event of default under the Credit Agreement or the indentures governing the senior notes. If we do not maintain this minimum Interest Coverage Ratio calculated on a pro forma basis for any such additional indebtedness or restricted payments, we could be prohibited from being able to (1) incur additional indebtedness, other than the incremental capacity provided for under the Credit Agreement and pursuant to specified exceptions, and (2) make certain restricted payments, other than pursuant to certain exceptions. However, any failure to maintain the Interest Coverage Ratio would not result in a default or an event of default under either the Credit Agreement or the indentures governing the senior notes. The minimum Interest Coverage Ratio is 2.000x for the term of the Credit Agreement. Consolidated interest expense is defined in the Credit Agreement as consolidated interest expense excluding interest income, adjusted for acquisitions and dispositions, further adjusted for certain non-cash or nonrecurring interest expense and our estimated share of interest expense from one equity method investee. The indentures governing our senior notes include a similar requirement which is referred to as a Fixed Charge Coverage Ratio. The Interest Coverage Ratio was calculated based on the twelve months ended October 1, 2021 and was not required to be adjusted similar to the Consolidated Secured Debt Ratio as prescribed under the terms of Amendment No. 9 to our Credit Agreement.
We and our subsidiaries and affiliates may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt securities (including any publicly issued debt securities), in privately negotiated or open market transactions, by tender offer or otherwise, or extend or refinance any of our outstanding indebtedness.
The following table summarizes our future obligations for debt repayments, finance leases, estimated interest payments, future minimum rental and similar commitments under noncancelable operating leases as well as contingent obligations related to outstanding letters of credit and guarantees as of October 1, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
Contractual Obligations as of October 1, 2021 | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Long-term borrowings(1) | | $ | 7,360,210 | | | $ | 31,137 | | | $ | 80,219 | | | $ | 4,529,146 | | | $ | 2,719,708 | |
Finance lease obligations | | 159,949 | | | 29,157 | | | 46,710 | | | 34,266 | | | 49,816 | |
Estimated interest payments(2) | | 1,303,800 | | | 311,400 | | | 572,400 | | | 304,500 | | | 115,500 | |
Operating leases and other noncancelable commitments | | 449,707 | | | 80,265 | | | 123,614 | | | 80,931 | | | 164,897 | |
Purchase obligations(3) | | 612,336 | | | 225,598 | | | 158,892 | | | 70,328 | | | 157,518 | |
Other liabilities(4) | | 725,760 | | | 242,202 | | | 217,145 | | | 44,304 | | | 222,109 | |
| | $ | 10,611,762 | | | $ | 919,759 | | | $ | 1,198,980 | | | $ | 5,063,475 | | | $ | 3,429,548 | |
| | | | | | | | | | |
| | Amount of Commitment Expiration by Period |
Other Commercial Commitments as of October 1, 2021 | | Total Amounts Committed | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Letters of credit | | $ | 120,500 | | | $ | 120,500 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
| | | | | | | | | | |
(1)Excludes the $53.5 million reduction to long-term borrowings from debt issuance costs and $0.8 million reduction from the discount on the U.S. Term B-4 Loans due 2027.
(2)These amounts represent future interest payments related to our existing debt obligations based on fixed and variable interest rates specified in the associated debt agreements and reflect any current hedging arrangements. Payments related to variable debt are based on applicable rates at October 1, 2021 plus the specified margin in the associated debt agreements for each period presented. The amounts provided relate only to existing debt obligations and do not assume the refinancing or replacement of such debt. The average debt balance for each fiscal year from 2022 through 2027 is $7,477.1 million, $7,407.9 million, $7,346.3 million, $5,379.9 million, $2,933.9 million and $2,334.7 million, respectively. The weighted average interest rate of our existing debt obligations for each fiscal year from 2022 through 2027 is 4.17%, 3.87%, 3.89%, 3.81%, 3.39% and 3.80%, respectively (see Note 5 to the audited consolidated financial statements for the terms and maturities of existing debt obligations).
(3)Represents commitments for capital projects to help finance improvements or renovations at the facilities in which we operate.
(4)Includes certain unfunded employee retirement obligations, contingent consideration, deferred social security taxes, self-insurance obligations, severance obligations and other obligations.
We have excluded from the table above uncertain tax liabilities due to the uncertainty of the amount and period of payment. As of October 1, 2021, we have gross uncertain tax liabilities of $65.4 million (see Note 10 to the audited consolidated financial statements). During fiscal 2021, we made contributions totaling $3.6 million into our defined benefit pension plans. Estimated contributions to our defined benefit pension plans in fiscal 2022 are $6.3 million (see Note 9 to the audited consolidated financial statements).
We have an agreement (the "Receivables Facility") with three financial institutions where we sell on a continuous basis an undivided interest in all eligible accounts receivable, as defined in the Receivables Facility. The maximum amount available under the Receivables Facility is $400.0 million. In addition, the Receivables Facility includes a seasonal tranche which increases the capacity of the Receivables Facility and the maximum amount available by $100.0 million from October through March. During the third quarter of fiscal 2021, we extended the scheduled maturity date of the Receivables Facility from June 2022 to June 2024. All other terms and conditions of the agreement remained largely unchanged. As of October 1, 2021, there are no outstanding borrowings under the Receivables Facility. Amounts borrowed under the Receivables Facility fluctuate monthly based on our funding requirements and the level of qualified receivables available to collateralize the Receivables Facility.
Pursuant to the Receivables Facility, we formed ARAMARK Receivables, LLC, a wholly-owned, consolidated, bankruptcy-remote subsidiary. ARAMARK Receivables, LLC was formed for the sole purpose of buying and selling receivables generated by certain of our subsidiaries. Under the Receivables Facility, we and certain of our subsidiaries transfer without recourse all of
our accounts receivable to ARAMARK Receivables, LLC. As collections reduce previously transferred interests, interests in new, eligible receivables are transferred to ARAMARK Receivables, LLC, subject to meeting certain conditions.
Supplemental Consolidating Information
Pursuant to Regulation S-X Rule 13-01, which simplified certain disclosure requirements for guarantors and issuers of guaranteed securities, we are no longer required to provide condensed consolidating financial statements for Aramark and its subsidiaries, including the guarantors and non-guarantors under our Credit Agreement and the indentures governing our senior notes. ASI, the borrower under our Credit Agreement and the indentures governing our senior notes, and its restricted subsidiaries together comprise substantially all of our assets, liabilities and operations, and there are no material differences between the consolidating information related to Aramark and Aramark Intermediate Holdco Corporation, the direct parent of ASI and a guarantor under our Credit Agreement, on the one hand, and ASI and its restricted subsidiaries on a standalone basis, on the other hand.
Other
Our business activities do not include the use of unconsolidated special purpose entities and there are no significant business transactions that have not been reflected in the accompanying audited consolidated financial statements. We insure portions of our general liability, automobile liability and workers’ compensation risks through a wholly owned captive insurance subsidiary (the "Captive") to enhance our risk financing strategies. The Captive is subject to regulations within its domicile of Bermuda, including regulations established by the Bermuda Monetary Authority (the "BMA") relating to levels of liquidity and solvency as such concepts are defined by the BMA. The Captive was in compliance with these regulations as of October 1, 2021. These regulations may have the effect of limiting our ability to access certain cash and cash equivalents held by the Captive for uses other than for the payment of our general liability, automobile liability and workers’ compensation claims and related Captive costs. As of October 1, 2021 and October 2, 2020, cash and cash equivalents at the Captive were $194.3 million and $92.1 million, respectively.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in the notes to the audited consolidated financial statements included in this Annual Report. As described in such notes, we recognize revenue in the period in which the performance obligation is satisfied. See Note 7 to our audited consolidated financial statements for further information related to our revenue recognition policy.
In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
Asset Impairment Determinations
Goodwill, the Aramark trade name and other trade names are primarily indefinite lived intangible assets that are not amortized and are subject to an impairment test that we conduct annually or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. The impairment test may first consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Examples of qualitative factors include, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events, events affecting reporting units and sustained changes in our stock price. If results of the qualitative assessment indicate a more likely than not determination or if a qualitative assessment is not performed, a quantitative test is performed by comparing the estimated fair value using discounted cash flow calculations of each reporting unit with its estimated net book value.
We perform the assessment of goodwill at the reporting unit level. Within our FSS International segment, each country or region is evaluated separately since they are relatively autonomous and separate goodwill balances have been recorded for each entity. During the fourth quarter of fiscal 2021, we performed the annual impairment test for goodwill for each of our reporting units using a quantitative testing approach. Based on our evaluation performed, we determined that the fair value of each of the reporting units significantly exceeded its respective carrying amount, and therefore, we determined that goodwill was not impaired.
During fiscal 2020, we identified a triggering event from the decline in our stock price resulting from COVID-19. As a result, we performed a quantitative impairment test as of March 27, 2020 and recognized a non-cash impairment charge of $198.6 million related to one reporting unit within our FSS International segment in the Consolidated Statements of (Loss) Income for the fiscal year ended October 2, 2020. For tax purposes, the impairment charge was not tax deductible. The impaired reporting unit has a remaining goodwill balance of $91.0 million as of October 1, 2021.
The determination of fair value for each reporting unit includes assumptions, which are considered Level 3 inputs, that are subject to risk and uncertainty. The discounted cash flow calculations are dependent on several subjective factors including the timing of future cash flows, the underlying margin projection assumptions, future growth rates and the discount rate. If our assumptions or estimates in our fair value calculations change or if future cash flows, margin projections or future growth rates vary from what was expected, including those assumptions relating to the duration and severity of COVID-19, this may impact our impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.
With respect to our other long-lived assets, we are required to test for asset impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, we compare the sum of the future expected cash flows from the asset, undiscounted and without interest charges, to the asset’s carrying value. If the sum of the future expected cash flows from the asset is less than the carrying value, an impairment would be recognized for the difference between the estimated fair value and the carrying value of the asset.
In making future cash flow analyses of various assets, we make assumptions relating to the following:
• The intended use of assets and the expected future cash flows resulting directly from such use;
• Comparable market valuations of businesses similar to Aramark's business segments;
• Industry specific economic conditions;
• Competitor activities and regulatory initiatives; and
• Client and customer preferences and behavior patterns.
We believe that an accounting estimate relating to asset impairment is a critical accounting estimate because the assumptions underlying future cash flow estimates are subject to change from time to time and the recognition of an impairment could have a significant impact on our consolidated statements of (loss) income.
During fiscal 2020, we recorded non-cash impairment charges related to the following: abandonment of rental properties ($28.5 million), information technology assets from either discontinue of use or contracts terminated ($26.1 million) and from client contracts that were reassessed due to the impact of COVID-19 ($30.6 million).
Litigation and Claims
From time to time, we and our subsidiaries are party to various legal actions, proceedings and investigations involving claims incidental to the conduct of our businesses, including those brought by clients, consumers, employees, government entities and third parties under, among others, federal, state, international, national, provincial and local employment laws, wage and hour laws, discrimination laws, immigration laws, human health and safety laws, import and export controls and customs laws, environmental laws, false claims or whistleblower statutes, 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 breach of contractual and other obligations. We consider the measurement of litigation reserves as a critical accounting estimate because of the significant uncertainty in some cases relating to the outcome of potential claims or litigation and the difficulty of predicting the likelihood and range of potential liability involved, coupled with the material impact on our results of operations that could result from litigation or other claims. In determining legal reserves, we consider, among other issues:
• interpretation of contractual rights and obligations;
• the status of government regulatory initiatives, interpretations and investigations;
• the status of settlement negotiations;
• prior experience with similar types of claims;
• whether there is available insurance; and
• advice of counsel.
We are involved in a dispute with a client regarding Aramark’s provision of services pursuant to a contract. We continue to simultaneously litigate the matter and attempt to reach a negotiated resolution. We recorded a reserve for this matter as it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of October 1, 2021 and October 2, 2020, we have accrued our best estimate of the probable loss associated with this contract, which is approximately $19.1 million and $16.3 million, respectively. We continue to believe it is reasonably possible that this potential exposure may change in the near term based on the outcome of either the settlement negotiations or through continued litigation.
Allowance for Credit Losses
We encounter credit loss risks associated with the collection of receivables. We analyze historical experience, current general and specific industry economic conditions, industry concentrations, such as exposure to small and medium-sized businesses, the non-profit healthcare sector, federal and local governments, and reasonable and supportable forecasts that affect the collectability of the reported amount in estimating credit losses. The accounting estimate related to the allowance for credit losses is a critical accounting estimate because the underlying assumptions used for the allowance can change from time to time and credit losses could potentially have a material impact on our results of operations. We adopted a new accounting standard related to the measurement of expected credit losses as of October 3, 2020 (the first day of fiscal 2021) (see Note 1 to the audited consolidated financial statements).
As of October 1, 2021 and October 2, 2020, our allowance for credit losses was approximately $79.6 million and $74.9 million, respectively.
Inventory Obsolescence
We record an inventory obsolescence reserve for obsolete, excess and slow-moving inventory, principally in the Uniform segment. In calculating our inventory obsolescence reserve, we analyze historical and projected data regarding customer demand within specific product categories and make assumptions regarding economic conditions within customer specific industries, as well as style and product changes. Our accounting estimate related to inventory obsolescence is a critical accounting estimate because customer demand in certain of our businesses can be variable and changes in our reserve for inventory obsolescence could materially affect our results of operations.
As of October 1, 2021 and October 2, 2020, our reserve for inventory obsolescence was approximately $45.7 million and $36.7 million, respectively.
Self-Insurance Reserves
We self-insure for obligations related to certain risks that we retain under our casualty program, which includes general liability, automobile liability and workers’ compensation claims, as well as for our employee health care benefit programs. The accounting estimates related to our self-insurance reserves are critical accounting estimates because changes in our claim experience, our ability to settle claims or other estimates and judgments we use could potentially have a material impact on our results of operations. Our reserves for retained costs associated with our casualty program are estimated through actuarialmethods, with the assistance of third-party actuaries, using loss development assumptions based on our claims history. Our casualty program reserves take into account reported claims as well as incurred-but-not-reported losses using loss development factors based upon past experience. In order to determine the loss development factors, we make judgments relating to the nature, frequency, severity, and age of claims, and industry, regulatory, and company-specific trends impacting the development of claims. The actual cost to settle our self-insured casualty claim liabilities can differ from our reserve estimates because of a number of uncertainties, including the inherent difficulty in estimating the severity of a claim and the potential amount to defend and settle a claim.
As of October 1, 2021 and October 2, 2020, our self-insurance reserves were approximately $235.7 million and $250.1 million, respectively.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. We make assumptions, judgments and estimates to determine the current income tax provision (benefit), deferred tax asset and liabilities and valuation allowance recorded against a deferred tax asset. The assumptions, judgments and estimates relative to the current income tax provision (benefit) take into account current tax laws, their interpretation and possible results of foreign and domestic tax audits. Changes in tax law, their interpretation and resolution of tax audits could significantly impact the income taxes provided in our consolidated financial statements. Assumptions, judgments and estimates relative to the amount of deferred income taxes take into account future taxable income. Any of the assumptions, judgments and estimates mentioned above could cause the actual income tax obligations to differ from our estimates.
As of October 1, 2021 and October 2, 2020, our valuation allowance reserves recorded against deferred tax assets were approximately $97.5 million and $39.0 million, respectively (see Note 10 to the audited consolidated financial statements).
Critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require.
New Accounting Standards Updates
See Note 1 to the audited consolidated financial statements for a full description of recent accounting standards updates, including the expected dates of adoption.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps. We do not enter into contracts for trading purposes and do not use leveraged instruments. The information below summarizes our market risks associated with debt obligations and other significant financial instruments as of October 1, 2021 (see Notes 5 and 6 to the audited consolidated financial statements). Fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the respective periods. For debt obligations, the table presents principal cash flows and related interest rates by contractual fiscal year of maturity. Variable interest rates disclosed represent the weighted-average rates of the portfolio at October 1, 2021. For interest rate swaps, the table presents the notional amounts and related weighted-average interest rates by fiscal year of maturity. The variable rates presented are the average forward rates for the term of each contract.
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| | (US$ equivalent in millions) |
| | Expected Fiscal Year of Maturity |
As of October 1, 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | | Fair Value |
Debt: | | | | | | | | | | | | | | | | |
Fixed rate | | $ | 29 | | | $ | 25 | | | $ | 22 | | | $ | 2,496 | | | $ | 15 | | | $ | 1,200 | | | $ | 3,787 | | | $ | 3,908 | |
Average interest rate | | 4.1 | % | | 4.1 | % | | 4.1 | % | | 5.5 | % | | 4.1 | % | | 5.0 | % | | 5.3 | % | | |
Variable rate | | $ | 31 | | | $ | 55 | | | $ | 25 | | | $ | 1,724 | | | $ | 329 | | | $ | 1,569 | | | $ | 3,733 | | | $ | 3,674 | |
Average interest rate | | 5.1 | % | | 1.7 | % | | 1.8 | % | | 1.8 | % | | 1.8 | % | | 2.2 | % | | 2.0 | % | | |
Interest Rate Swaps: | | | | | | | | | | | | | | | | |
Receive variable/pay fixed | | $ | 250 | | $ | 1,550 | | $ | — | | $ | 800 | | $ | — | | $ | 500 | | $ | 3,100 | | $ | (67) |
Average pay rate | | 2.6 | % | | 2.1 | % | | — | % | | 1.6 | % | | — | % | | 1.5 | % | | | | |
Average receive rate | | 0.1 | % | | 0.1 | % | | — | % | | 0.1 | % | | — | % | | 0.1 | % | | | | |
As of October 1, 2021, we had foreign currency forward exchange contracts outstanding with nominal notional amounts to mitigate the risk of changes in foreign currency exchange rates on short-term intercompany loans to certain international subsidiaries. As of October 1, 2021, the fair value of these foreign exchange contracts is immaterial and included in "Accounts Payable" on our Consolidated Balance Sheets.
We 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 our exposure to price fluctuations for gasoline and diesel fuel. As of October 1, 2021, we had contracts for approximately 6.0 million gallons outstanding through June of fiscal 2022. As of October 1, 2021, the fair value of our gasoline and diesel fuel hedge agreements is $2.6 million, which is included in "Prepayments and other current assets" on our Consolidated Balance Sheets.
Item 8. Financial Statements and Supplementary Data
See Financial Statements and Schedule beginning on page S-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon criteria established in Internal Control – Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of October 1, 2021. The effectiveness of our internal control over financial reporting as of October 1, 2021 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their report that is included herein on the following page.
(c) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our fourth quarter of fiscal 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Aramark
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Aramark and subsidiaries (the "Company") as of October 1, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 1, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended October 1, 2021, of the Company and our report dated November 23, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Philadelphia, PA
November 23, 2021
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information about our directors and persons nominated to become directors required by Item 10 will be included under the caption "Proposal No. 1 - Election of Directors" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Information about our executive officers is included under the caption “Information About Our Executive Officers” in Part I of this report and incorporated herein.
Information on beneficial ownership reporting required by Item 10, if any, will be included under the caption "Delinquent Section 16(a) Reports" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
We have a Business Conduct Policy that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer, which is available on the Investor Relations section of our website at www.aramark.com. A copy of our Business Conduct Policy may be obtained free of charge by writing to Investor Relations, Aramark, 2400 Market Street, Philadelphia, PA 19103. Our Business Conduct Policy contains a "code of ethics," as defined in Item 406(b) of Regulation S-K. Please note that our website address is provided as an inactive textual reference only. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website.
The remaining information required by Item 10 will be included under the caption "Board Committees and Meetings" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 11. Executive Compensation
Information required by Item 11 will be included under the caption "Compensation Matters" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by Item 12 will be included under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by Item 13 will be included under the captions "Certain Relationships and Related Transactions" and "Director Independence and Independence Determinations" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by Item 14 will be included under the caption "Fees to Independent Registered Public Accounting Firm" in our Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements
See Index to Financial Statements and Schedule at page S-1 and the Exhibit Index.
(b) Exhibits Required by Item 601 of Regulation S-K
See the Exhibit Index which is incorporated herein by reference.
(c) Financial Statement Schedules
See Index to Financial Statements and Schedule at page S-1.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized on November 23, 2021.
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| | | | Aramark |
| | | |
| | | | By: | | /s/ CHRISTOPHER T. SCHILLING |
| | | | Name: | | Christopher T. Schilling |
| | | | Title: | | Senior Vice President, Controller and Chief Accounting Officer (Authorized Signatory) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 23, 2021.
| | | | | | | | |
Name | | Capacity |
| |
/s/ JOHN J. ZILLMER | | Chief Executive Officer and Director |
John J. Zillmer | | (Principal Executive Officer) |
| |
/s/ THOMAS G. ONDROF | | Executive Vice President and Chief Financial Officer |
Thomas G. Ondrof | | (Principal Financial Officer) |
| | |
/s/ CHRISTOPHER T. SCHILLING | | Senior Vice President, Controller and Chief Accounting Officer |
Christopher T. Schilling | | (Principal Accounting Officer) |
| | |
/s/ SUSAN CAMERON | | Director |
Susan Cameron | | |
| | |
/s/ GREG CREED | | Director |
Greg Creed | | |
| | |
/s/ RICHARD W. DREILING | | Director |
Richard W. Dreiling | | |
| | |
/s/ IRENE M. ESTEVES | | Director |
Irene M. Esteves | | |
| | |
/s/ DANIEL J. HEINRICH | | Director |
Daniel J. Heinrich | | |
| | |
/s/ BRIDGETTE P. HELLER | | Director |
Bridgette P. Heller | | |
| | |
/s/ PAUL HILAL | | Vice Chairman, Director |
Paul Hilal | | |
| | |
/s/ KAREN KING | | Director |
Karen King | | |
| | |
/s/ STEPHEN I. SADOVE | | Chairman, Director |
Stephen I. Sadove | | |
| | |
/s/ ART WINKLEBLACK | | Director |
Art Winkleblack | | |
ARAMARK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
All other schedules are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or in the notes thereto.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Aramark
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Aramark and subsidiaries (the "Company") as of October 1, 2021, the related consolidated statements of loss, comprehensive income, cash flows, and stockholders’ equity for the year then ended, and the related notes and financial statement schedule II (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 1, 2021, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 1, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 23, 2021, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill - FSS US Reporting Unit - Refer to Note 4 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the estimated fair value of each reporting unit to its carrying amount annually in the fourth quarter of each year as of the end of the fiscal month of August or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. During the fourth quarter, the Company performed a quantitative test to determine the fair value of each reporting unit using discounted cash flow calculations, which required management to make assumptions and estimates that are subject to risk and uncertainty related to future growth rates, margin projections, and the discount rate. Changes in these assumptions or estimates may impact the impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in an impairment charge. The fair value of the FSS United States (FSS US) reporting unit exceeded its carrying amount, and therefore, the Company determined that its goodwill was not impaired.
We identified the valuation of goodwill for the FSS US reporting unit as a critical audit matter because of the significant judgments made by management to estimate its fair value. Auditing the discounted cash flow calculations for this reporting unit involved a high degree of auditor judgment and an increased effort, which included the involvement of our fair value
specialists, as it related to evaluating management’s assumptions and estimates related to future growth rates, margin projections, and the discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions and estimates of future growth rates, margin projections, and the discount rate used by management to estimate the fair value of the FSS US reporting unit included the following, among others:
•We tested the effectiveness of internal controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the FSS US reporting unit, including controls related to management’s assumptions and estimates of future growth rates, margin projections, and the discount rate.
•We evaluated management’s ability to accurately forecast future FSS US reporting unit growth rates and margin projections by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s FSS US reporting unit growth rates and margin projections by comparing the forecasts to:
◦Historical results.
◦Internal communications to management and the Board of Directors.
◦Forecasted information included in analyst and industry reports for the Company and certain of its peer companies.
•With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of future growth rates and the discount rate by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rate selected by management.
/s/ Deloitte & Touche LLP
Philadelphia, PA
November 23, 2021
We have served as the Company's auditor since 2021.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Aramark:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Aramark and subsidiaries (the Company) as of October 2, 2020, the related consolidated statements of (loss) income, comprehensive income (loss), cash flows, and stockholders’ equity for each of the fiscal years ended October 2, 2020 and September 27, 2019 and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 2, 2020, and the results of its operations and its cash flows for each of the fiscal years ended October 2, 2020 and September 27, 2019, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 8 to the consolidated financial statements, the Company has changed its method of accounting for leases as of September 28, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company's auditor from 2002 to 2020.
Philadelphia, Pennsylvania
November 24, 2020
ARAMARK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 1, 2021 AND OCTOBER 2, 2020
(in thousands, except share amounts)
| | | | | | | | | | | |
| October 1, 2021 | | October 2, 2020 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 532,591 | | | $ | 2,509,188 | |
Receivables (less allowances: 2021 - $79,644; 2020 - $74,925) | 1,748,601 | | | 1,431,206 | |
Inventories | 412,676 | | | 436,473 | |
Prepayments and other current assets | 204,987 | | | 298,944 | |
Total current assets | 2,898,855 | | | 4,675,811 | |
Property and Equipment, at cost: | | | |
Land, buildings and improvements | 983,540 | | | 929,354 | |
Service equipment and fixtures | 4,355,699 | | | 4,184,603 | |
| 5,339,239 | | | 5,113,957 | |
Less - Accumulated depreciation | (3,300,845) | | | (3,063,049) | |
| 2,038,394 | | | 2,050,908 | |
Goodwill | 5,487,297 | | | 5,343,828 | |
Other Intangible Assets | 2,028,622 | | | 1,932,637 | |
Operating Lease Right-of-use Assets | 587,854 | | | 551,394 | |
Other Assets | 1,335,142 | | | 1,158,106 | |
| $ | 14,376,164 | | | $ | 15,712,684 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current Liabilities: | | | |
Current maturities of long-term borrowings | $ | 58,850 | | | $ | 99,915 | |
Current operating lease liabilities | 67,280 | | | 71,810 | |
Accounts payable | 919,090 | | | 663,455 | |
Accrued payroll and related expenses | 677,185 | | | 572,076 | |
Accrued expenses and other current liabilities | 1,135,028 | | | 940,202 | |
Total current liabilities | 2,857,433 | | | 2,347,458 | |
Long-Term Borrowings | 7,393,417 | | | 9,178,508 | |
Noncurrent Operating Lease Liabilities | 314,378 | | | 341,667 | |
Deferred Income Taxes and Other Noncurrent Liabilities | 1,079,014 | | | 1,099,075 | |
Commitments and Contingencies (see Note 14) | 0 | | 0 |
Redeemable Noncontrolling Interest | 9,050 | | | 9,988 | |
Stockholders' Equity: | | | |
Common stock, par value $0.01 (authorized: 600,000,000 shares; issued: 2021—294,329,180 shares and 2020—290,663,529; and outstanding: 2021—255,998,119 shares and 2020—253,042,169 shares) | 2,943 | | | 2,907 | |
Capital surplus | 3,533,054 | | | 3,416,132 | |
Retained earnings | 327,557 | | | 532,379 | |
Accumulated other comprehensive loss | (208,011) | | | (307,258) | |
Treasury stock (shares held in treasury: 2021—38,331,061 shares and 2020—37,621,360 shares) | (932,671) | | | (908,172) | |
Total stockholders' equity | 2,722,872 | | | 2,735,988 | |
| $ | 14,376,164 | | | $ | 15,712,684 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Revenue | $ | 12,095,965 | | | $ | 12,829,559 | | | $ | 16,227,341 | |
Costs and Expenses: | | | | | |
Cost of services provided (exclusive of depreciation and amortization) | 11,007,080 | | | 11,993,667 | | | 14,532,662 | |
Depreciation and amortization | 550,692 | | | 595,195 | | | 592,573 | |
Selling and general corporate expenses | 346,749 | | | 307,016 | | | 367,256 | |
Goodwill impairment | — | | | 198,600 | | | — | |
Gain on sale of Healthcare Technologies | — | | | — | | | (156,309) | |
| 11,904,521 | | | 13,094,478 | | | 15,336,182 | |
Operating income (loss) | 191,444 | | | (264,919) | | | 891,159 | |
Gain on Equity Investment | (137,934) | | | — | | | — | |
Loss on Defined Benefit Pension Plan Termination | 60,864 | | | — | | | — | |
Interest and Other Financing Costs, net | 401,366 | | | 382,800 | | | 334,987 | |
(Loss) Income Before Income Taxes | (132,852) | | | (647,719) | | | 556,172 | |
(Benefit) Provision for Income Taxes | (40,633) | | | (186,284) | | | 107,706 | |
Net (loss) income | (92,219) | | | (461,435) | | | 448,466 | |
Less: Net (loss) income attributable to noncontrolling interest | (1,386) | | | 94 | | | (83) | |
Net (loss) income attributable to Aramark stockholders | $ | (90,833) | | | $ | (461,529) | | | $ | 448,549 | |
| | | | | |
(Loss) Earnings per share attributable to Aramark stockholders: | | | | | |
Basic | $ | (0.36) | | | $ | (1.83) | | | $ | 1.82 | |
Diluted | $ | (0.36) | | | $ | (1.83) | | | $ | 1.78 | |
Weighted Average Shares Outstanding: | | | | | |
Basic | 254,748 | | | 251,828 | | | 246,854 | |
Diluted | 254,748 | | | 251,828 | | | 252,010 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019
(in thousands)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Net (loss) income | $ | (92,219) | | | $ | (461,435) | | | $ | 448,466 | |
Other comprehensive income (loss), net of tax: | | | | | |
Pension plan adjustments | 48,568 | | | (25,669) | | | (22,594) | |
Foreign currency translation adjustments | 8,925 | | | (7,818) | | | (34,308) | |
Cash flow hedges: | | | | | |
Unrealized gains (losses) arising during the period | 909 | | | (82,005) | | | (62,450) | |
Reclassification adjustments | 37,440 | | | 25,463 | | | (4,798) | |
Share of equity investee's comprehensive income (loss) | 3,405 | | | (264) | | | (1,592) | |
Other comprehensive income (loss), net of tax | 99,247 | | | (90,293) | | | (125,742) | |
Comprehensive income (loss) | 7,028 | | | (551,728) | | | 322,724 | |
Less: Net (loss) income attributable to noncontrolling interest | (1,386) | | | 94 | | | (83) | |
Comprehensive income (loss) attributable to Aramark stockholders | $ | 8,414 | | | $ | (551,822) | | | $ | 322,807 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019
(in thousands)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Cash flows from operating activities: | | | | | |
Net (loss) income | $ | (92,219) | | | $ | (461,435) | | | $ | 448,466 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 550,692 | | | 595,195 | | | 592,573 | |
Goodwill impairment and asset write-downs | — | | | 283,743 | | | — | |
Gain on equity investment | (137,934) | | | — | | | — | |
Loss on defined benefit pension plan termination | 60,864 | | | — | | | — | |
Deferred income taxes | (43,234) | | | (134,048) | | | 40,503 | |
Share-based compensation expense | 71,053 | | | 30,339 | | | 55,280 | |
Net gain on sale of Healthcare Technologies | — | | | — | | | (139,165) | |
Changes in operating assets and liabilities: | | | | | |
Accounts Receivable | (290,214) | | | 362,708 | | | (78,771) | |
Inventories | (7,536) | | | (25,675) | | | (49,732) | |
Prepayments and Other Current Assets | 101,939 | | | (86,444) | | | (37,854) | |
Accounts Payable | 252,158 | | | (342,069) | | | 17,680 | |
Accrued Expenses | 261,154 | | | (143,640) | | | 193,532 | |
Payments made to clients on contracts | (100,918) | | | (69,575) | | | (40,073) | |
Changes in other noncurrent liabilities | (17,427) | | | 92,782 | | | 18,904 | |
Changes in other assets | 4,177 | | | 66,650 | | | (41,436) | |
Other operating activities | 44,524 | | | 8,151 | | | 4,320 | |
Net cash provided by operating activities | 657,079 | | | 176,682 | | | 984,227 | |
Cash flows from investing activities: | | | | | |
Purchases of property and equipment and other | (407,818) | | | (418,508) | | | (503,090) | |
Disposals of property and equipment | 32,474 | | | 54,074 | | | 17,871 | |
Proceeds from divestitures | — | | | — | | | 293,711 | |
Acquisition of certain businesses, net of cash acquired | (265,766) | | | (22,201) | | | (44,863) | |
Proceeds from governmental agencies related to property and equipment | 10,000 | | | 23,550 | | | 23,025 | |
Other investing activities | (3,276) | | | 1,965 | | | 3,825 | |
Net cash used in investing activities | (634,386) | | | (361,120) | | | (209,521) | |
Cash flows from financing activities: | | | | | |
Proceeds from long-term borrowings | 893,993 | | | 3,239,772 | | | 77,630 | |
Payments of long-term borrowings | (2,453,571) | | | (1,000,463) | | | (654,560) | |
Net change in funding under the Receivables Facility | (315,600) | | | 315,600 | | | — | |
Payments of dividends | (112,010) | | | (110,893) | | | (108,439) | |
Proceeds from issuance of common stock | 41,587 | | | 90,022 | | | 39,087 | |
Repurchase of common stock | — | | | (6,540) | | | (50,000) | |
Other financing activities | (59,738) | | | (89,976) | | | (38,610) | |
Net cash (used in) provided by financing activities | (2,005,339) | | | 2,437,522 | | | (734,892) | |
Effect of foreign exchange rates on cash and cash equivalents | 6,049 | | | 9,461 | | | (8,196) | |
(Decrease) increase in cash and cash equivalents | (1,976,597) | | | 2,262,545 | | | 31,618 | |
Cash and cash equivalents, beginning of period | 2,509,188 | | | 246,643 | | | 215,025 | |
Cash and cash equivalents, end of period | $ | 532,591 | | | $ | 2,509,188 | | | $ | 246,643 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED OCTOBER 1, 2021, OCTOBER 2, 2020 AND SEPTEMBER 27, 2019
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Stockholders' Equity | | Common Stock | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock |
Balance, September 28, 2018 | $ | 3,029,558 | | | $ | 2,793 | | | $ | 3,132,421 | | | $ | 710,519 | | | $ | (91,223) | | | $ | (724,952) | |
Adoption of new accounting standard | 58,395 | | | | | | | 58,395 | | | | | |
Net income attributable to Aramark stockholders | 448,549 | | | | | | | 448,549 | | | | | |
Other comprehensive loss | (125,742) | | | | | | | | | (125,742) | | | |
Capital contributions from issuance of common stock | 48,785 | | | 36 | | | 48,749 | | | | | | | |
Share-based compensation expense | 55,280 | | | | | 55,280 | | | | | | | |
Repurchases of common stock | (84,344) | | | | | | | | | | | (84,344) | |
Payments of dividends ($0.44 per share) | (110,434) | | | | | | | (110,434) | | | | | |
Balance, September 27, 2019 | $ | 3,320,047 | | | $ | 2,829 | | | $ | 3,236,450 | | | $ | 1,107,029 | | | $ | (216,965) | | | $ | (809,296) | |
Net loss attributable to Aramark stockholders | (461,529) | | | | | | | (461,529) | | | | | |
Other comprehensive loss | (90,293) | | | | | | | | | (90,293) | | | |
Capital contributions from issuance of common stock | 134,607 | | | 78 | | | 134,529 | | | | | | | |
Capital contributions from stockholder | 14,814 | | | | | 14,814 | | | | | | | |
Share-based compensation expense | 30,339 | | | | | 30,339 | | | | | | | |
Repurchases of common stock | (98,876) | | | | | | | | | | | (98,876) | |
Payments of dividends ($0.44 per share) | (113,121) | | | | | | | (113,121) | | | | | |
Balance, October 2, 2020 | $ | 2,735,988 | | | $ | 2,907 | | | $ | 3,416,132 | | | $ | 532,379 | | | $ | (307,258) | | | $ | (908,172) | |
Net loss attributable to Aramark stockholders | (90,833) | | | | | | | (90,833) | | | | | |
Other comprehensive income | 99,247 | | | | | | | | | 99,247 | | | |
Capital contributions from issuance of common stock | 45,905 | | | 36 | | | 45,869 | | | | | | | |
Share-based compensation expense | 71,053 | | | | | 71,053 | | | | | | | |
Repurchases of common stock | (24,499) | | | | | | | | | | | (24,499) | |
Payments of dividends ($0.44 per share) | (113,989) | | | | | | | (113,989) | | | | | |
Balance, October 1, 2021 | $ | 2,722,872 | | | $ | 2,943 | | | $ | 3,533,054 | | | $ | 327,557 | | | $ | (208,011) | | | $ | (932,671) | |
The accompanying notes are an integral part of these consolidated financial statements.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS, 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 the United States, which is supplemented by an additional 18-country footprint. The Company operates its business in 3 reportable segments that share many of the same operating characteristics:
•Food and Support Services United States ("FSS United States") - Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, leisure and other facilities.
•Food and Support Services International ("FSS International") - Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, leisure and other facilities.
•Uniform and Career Apparel ("Uniform") - Provides a full service employee uniform solution, including design, sourcing and manufacturing, delivery, cleaning and maintenance on a contract basis. Directly markets personalized uniforms and accessories, provides managed restroom services and rents uniforms, work clothing, outerwear, particulate-free garments and non-garment items and related services, including mats, shop towels and first aid supplies, to clients in a wide range of industries in the United States, Puerto Rico, Canada and through a joint venture in Japan, including the manufacturing, transportation, construction, restaurant and hotel, healthcare and pharmaceutical industries.
The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling financial interest is maintained in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). All significant intercompany transactions and accounts have been eliminated.
Fiscal Year
The Company's fiscal year is the fifty-two or fifty-three week period which ends on the Friday nearest September 30th. The fiscal years ended October 1, 2021 and September 27, 2019 September 28, 2018 and September 29, 2017 were each fifty-two week periods.periods and the fiscal year ended October 2, 2020 was a fifty-three week period.
New Accounting Standards Updates
Adopted Standards
In October 2018,December 2019, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") which permitssimplifies the use of the Overnight Index Swap Rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rateaccounting for hedge accounting purposes. The guidance is effective for the Companyincome taxes and clarifies and amends existing income tax guidance. Impacted areas include intraperiod tax allocations, interim period taxes, deferred tax liabilities with outside basis differences, franchise taxes and transactions which result in the first quarter"step-up" of fiscal 2020.goodwill. The Company early adopted thethis guidance in the first quarter of fiscal 2019, which2021. The adoption of this guidance did not have ana material impact on the consolidated financial statements, as the Company's existing interest rate hedges use LIBOR as the benchmark interest rate. The use of the Secured Overnight Financing Rate Overnight Index Swap Rate as the benchmark interest rate may be contemplated in future hedging arrangements.statements.
In February 2018,November 2019, the FASB issued an ASU which provides clarification regardingand improvements to existing guidance related to the credit losses on financial instrumentinstruments standard. The guidance was effective for the Company in the first quarter of fiscal 2019.2021. The Company adopted theadoption of this guidance in the first quarter of fiscal 2019, which did not have an impact on the consolidated financial statements.
In May 2017, the FASB issued an ASU to clarify the determination of the customer of the operation services in a service concession arrangement. The guidance was effective for the Company in the first quarter of fiscal 2019. The Company adopted this standard in the first quarter of fiscal 2019, which did not have a material impact on the consolidated financial statements.
In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance was effective for the Company in the first quarter of fiscal 2019. The Company adopted the guidance during the first quarter of fiscal 2019, which did not result in an impact to net income. However, certain balances, including $7.7 million and $6.4 million for the fiscal years ended September 28, 2018 and September 29, 2017, respectively, were reclassified from "Cost of services provided" to "Interest and Other Financing Costs, net" on the Consolidated Statements of Income. The Company applied the practical expedient allowing for the use of amounts disclosed in the pension footnote for prior comparative periods as an estimation basis for applying the retrospective presentation requirements.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2017, the FASB issued an ASU to clarify the accounting guidance for partial sales of nonfinancial assets. The guidance was effective for the Company in the first quarter of fiscal 2019. The Company adopted the guidance in the first quarter of fiscal 2019, which did not have an impact on the consolidated financial statements.
In January 2017, the FASB issued an ASU to clarify the definition of a business. The guidance was effective for the Company in the first quarter of fiscal 2019. The Company adopted the guidance in the first quarter of fiscal 2019, using the prospective method, which did not have a material impact on the consolidated financial statements.
In January 2016, the FASB issued an ASU to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Under this guidance, equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation of the investee, are to be measured at fair value with the changes in fair value recognized in net income. The guidance was effective for the Company in the first quarter of fiscal 2019. The Company adopted the guidance in the first quarter of fiscal 2019. Due to the lack of readily available fair values for the Company's equity investments, other than those accounted for under the equity method of accounting, the Company elected to apply the practical expedient to measure these investments at cost minus impairment plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The guidance did not have an impact on the Company's consolidated financial statements.
In May 2014, the FASB issued an ASU on revenue from contracts with customers which superseded most current revenue recognition guidance. The standard outlines a single comprehensive model which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Additionally, the standard requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this guidance on September 29, 2018 (the first day of fiscal 2019).
In connection with the new revenue recognition guidance, the Company completed a comprehensive contract review project and an evaluation of the standard's impact on the timing and presentation of various financial aspects of its contractual arrangements. The Company identified and implemented appropriate changes to business processes, controls and systems to support recognition and disclosure under the new standard. The adoption of the guidance did not have a material impact on the timing of revenue recognition or net income, but it did have an impact on the financial statement line item classification of certain items (see Note 7).
The Company adopted the new revenue recognition guidance using the modified retrospective transition method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As such, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative transition adjustment, net of tax, was an increase to retained earnings upon adoption (approximately $58.4 million) mainly to capitalize costs to obtain contracts related to employee commissions previously expensed. See Note 7 for further information on the impact of adopting the new revenue recognition standard.
Standards Not Yet Adopted (from most to least recent date of issuance)
In May 2019, the FASB issued an ASU which provides the option to irrevocably elect to apply the fair value measurement option on an instrument-by-instrument basis for certain financial instruments within the scope of the credit losses on financial instruments standard. The guidance iswas effective for the Company in the first quarter of fiscal 2021 when2021. The adoption of this guidance did not have a material impact on the credit losses onconsolidated financial instruments standard will be adopted and early adoption is permitted. The Company is currently evaluating the impact of the pronouncement.statements.
In April 2019, the FASB issued an ASU which provides clarification, error corrections and improvements to existing guidance related to the credit losses on financial instruments ASU issued in June 2016, the derivatives and hedging ASU issued in August 2017 and the financial instruments ASU issued in January 2016. The Company adopted the guidance related to the financial instruments ASU and the derivatives and hedging ASU in prior fiscal years, which did not have a material impact on the consolidated financial statements. The guidance related to the credit losses on financial instruments ASU is effective for the Company in the first quarter of 2021 when the related ASU is adopted, while the guidance related to the derivatives and hedging and the financial instruments ASUs arewas effective for the Company in the first quarter of fiscal 2020 and the first quarter of 2021, respectively. Early adoption is permitted. The Company will adopt the guidance related to derivatives and hedging in the first quarter of fiscal 2020 and doeswhich did not expecthave a material impact on the consolidated financial statements. The Company is currently evaluating the impact of the remaining amendments of the pronouncement.
In March 2019, the FASB issued an ASU which provides clarification regarding three issues related to the lease recognition standard. The guidance is effective for the Company in the first quarter of fiscal 2020 when the lease recognition standard will be adopted. See below for further discussion regarding the impact of this standard.
In August 2018, the FASB issued an ASU which adds, modifies and removes several disclosure requirements related to defined benefit pension plans. The guidance is effective forCompany early adopted the Companyguidance in the firstfourth quarter of fiscal 2022 and early adoption is permitted. The Company is currently evaluating2021, which did not have a material impact on the impact of the pronouncement.
consolidated financial statements.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2018, the FASB issued an ASU which adds, modifies and removes several disclosure requirements related to fair value measurements. The guidance iswas 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 July 2018, the FASB issued two ASUs regarding the lease recognition standard. The guidance provides clarification on issues identified regarding the adoption of the standard, provides an additional transition method to adopt the standard and provides an additional practical expedient to lessors. The guidance is effective for the Company in the first quarter of fiscal 2020. See below for further discussion regarding the impact of this standard.
In July 2018, the FASB issued an ASU which clarifies, corrects errors in or makes minor improvements to the Accounting Standards Codification. The guidance is effective for the Company either upon issuance or in the first quarter of fiscal 2020, depending on the amendment. There was no impact on the consolidated financial statements related to the amendments that were effective upon issuance of the guidance. The Company will adopt the remaining amendments of the pronouncement in the first quarter of fiscal 2020 and doesdid not expecthave a material impact on the consolidated financial statements.
In February 2018, the FASB issued an ASU which allows for the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The guidance is effective for the Company in the first quarter of fiscal 2020. The Company does not expect this pronouncement to have a material impact on the Company's consolidated financial statements.
In September 2017, the FASB issued an ASU to provide additional implementation guidance with respect to the revenue recognition standard (see above) and the leases recognition standard (see below). The guidance is effective for the Company in the first quarter of fiscal 2019 with respect to the revenue recognition standard and in the first quarter of fiscal 2020 with respect to the lease recognition standard. The Company adopted the revenue related portions of this standard in conjunction with the revenue recognition standard during the first quarter of fiscal 2019, as described above. The lease related portions of this standard will be adopted in the first quarter of fiscal 2020 in conjunction with the lease recognition standard.
In June 2016, the FASB issued an ASU to require entities to account for expected credit losses on financial instruments including trade receivables. The expected credit loss model replaced the incurred credit loss model, that generally required a loss to be incurred before it was recognized. The forward-looking credit loss model required the Company to consider historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount in estimating credit losses. The amended guidance required financial assets that are measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of financial assets. The Company adopted this guidance on October 3, 2020 (the first date of fiscal 2021) using a modified retrospective approach. This approach allows the new standard to be applied retrospectively through a cumulative-effect adjustment to retained earnings recognized upon adoption. The adoption of this guidance did not have a material impact on the consolidated financial statements.
Standards Not Yet Adopted (from most to least recent date of issuance)
In October 2021, the FASB issued an ASU which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606") as if it had originated the contracts. The guidance is effective for the Company in the first quarter of fiscal 20212024 and early adoption is permitted. The Company is currently evaluating the impact of the pronouncement.this standard.
In February 2016,January 2021, the FASB issued an ASU requiring lesseeswhich clarifies certain optional expedients and exceptions for contract modifications and hedge accounting that may apply to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assetsderivatives that are affected by the discontinuance of LIBOR and to disclose key information about lease arrangements. Recognition of expense on the Consolidated Statements of Income will continue in a manner similar to current guidance.reference rate reform standard. The Company willmay adopt this guidance usingthrough December 2022 if the modified retrospective approachremaining amendment to the reference rate reform standard is adopted. The Company is currently evaluating the impact of this standard.
In March 2020, the FASB issued an ASU which provides optional expedients that may be adopted and applied through December 2022 to assist with an adjustmentthe discontinuance of LIBOR. The expedients allow companies to recognizeease the potential accounting burden when modifying contracts and hedging relationships that use LIBOR as a reference rate, if certain criteria are met. During fiscal 2020, the Company adopted the optional expedient to assert probability of forecasted hedged transactions occurring on its interest rate swap derivative contracts regardless of any expected contract modifications related to reference rate reform. Other optional expedients related to hedging relationships may be contemplated in the future resulting from reference rate reform. The Company reviewed its portfolio of debt agreements, lease liabilities offset by a right-of-use asset. This adjustmentagreements and other contracts and determined that only its debt agreements will be recorded atimpacted by this standard, as the beginninglease agreements and other contracts do not use LIBOR as a reference rate. The Company is currently evaluating the impact of the periodremaining amendment of adoptionthis standard.
In January 2020, the FASB issued an ASU which provides clarification and improvements to existing guidance related to accounting for certain equity securities upon the application or discontinuation of equity method accounting and the measurement of forward contracts and purchased options on certain securities. The guidance is effective for the Company in the first quarter of fiscal 2020; therefore, the Company will recognize2022 and measure leases without revising comparative period information or disclosure.
For existing leases as of the effective date, the Company will elect the package of practical expedients available at transition to not reassess historical lease determinations, lease classifications and initial direct costs. Additionally, the Company will not elect the use of hindsight for determining the reasonably certain lease term.early adoption is permitted. The Company will elect the short-term lease recognition exemption whereby lease-related assets and liabilities will not be recognized for arrangements with terms less than one year.
The Company has substantially completed its review of lease arrangements in order to determine the impact the adoption of this ASUguidance will not have a material impact on itsthe consolidated financial statements and related disclosures. The Company has also implemented a new lease system in connection with the adoption of this standard. The majority of the Company's lease spend relates to certain real estate, with the remaining lease spend primarily related to vehicles and equipment. Based on its assessment, adoption of the standard is expected to result in the recognition of lease liabilities and associated right of use assets of approximately $410.0 million to $440.0 million and approximately $540.0 million and $570.0 million, respectively. The expected right of use assets include $167.0 million of long-term prepaid rent associated with certain leases at client locations. The Company does not expect adoption of the standard to significantly impact its Consolidated Statements of Income or Cash Flows.statements.
Revenue Recognition
The Company recognizes revenue when its performance obligation is satisfied upon the transfer of control of the promised product or service to customers in an amount that reflects the consideration the Company expects to receivebe entitled to in exchange for those goods and services. In each of the Company's operating segments, revenue is recognized over time in the period in which services are provided pursuant to the terms of the Company's contractual relationships with its clients. The Company generally records revenue on food and support services contracts (both profit and loss contracts and client interest contracts) on a gross basis as the Company is the primary obligor and service provider. See Note 7 for additional information on revenue recognition.
Certain profit and loss contracts include payments to the client, typically calculated as a fixed or variable percentage of various categories of revenue and income. In some cases these contracts require minimum guaranteed payments that are contingent on certain future events. These expenses are currently recorded in “Cost"Cost of services provided.”
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
depreciation and amortization)."
Revenue from client interest contracts is generally comprised of amounts billed to clients for food, labor and other costs that the Company incurs, controls and pays for. Revenue from these contracts also includes any associated management fees, client subsidies or incentive fees based upon the Company's performance under the contract. Revenue from direct marketing activities is recognized at a point in time upon shipment. All revenue related taxes are presented on a net basis.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an accounts receivable balance when revenue is recognized prior to or at the time of invoicing the customer. A majority of the Company’s receivables balances are based on contracts with customers.
The Company estimates and reserves for its bad debtcredit loss exposure based on itshistorical experience, with past due accountscurrent conditions and reasonable and supportable forecasts that affect the collectability of the aging of accounts receivable and its analysis of customer data. Bad debtreported amount in estimating credit losses. Credit loss expense is classified within “Cost"Cost of services provided.”provided (exclusive of depreciation and amortization)."
Vendor Consideration
Consideration received from vendors includes rebates, allowances and volume discounts and are accounted for as an adjustment to the cost of the vendors' products or services and are reported as a reduction of "Cost of services provided (exclusive of depreciation and amortization)," "Inventory," or "Property and equipment, net." Income from rebates, allowances and volume discounts is recognized based on actual purchases in the fiscal period relative to total actual purchases to be made for the contractual rebate period agreed to with the vendor. Rebates, allowances and volume discounts related to “Inventory” held at the balance sheet date are deducted from the carrying value of these inventories. Rebates, allowances and volume discounts related to "Property and equipment, net" are deducted from the costs capitalized.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes to stockholders' equity during a period, except those resulting from investments by and distributions to stockholders. Components of comprehensive income (loss) 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 (loss) (net of tax).
The summary of the components of comprehensive income (loss) is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
| Pre-Tax Amount | Tax Effect | After-Tax Amount | | Pre-Tax Amount | Tax Effect | After-Tax Amount | | Pre-Tax Amount | Tax Effect | After-Tax Amount |
Net (loss) income | | | $ | (92,219) | | | | | $ | (461,435) | | | | | $ | 448,466 | |
Pension plan adjustments | 63,959 | | (15,391) | | 48,568 | | | (33,831) | | 8,162 | | (25,669) | | | (29,137) | | 6,543 | | (22,594) | |
Foreign currency translation adjustments | 7,383 | | 1,542 | | 8,925 | | | (6,348) | | (1,470) | | (7,818) | | | (34,099) | | (209) | | (34,308) | |
Cash flow hedges: | | | | | | | | | | | |
Unrealized gains (losses) arising during the period | 1,228 | | (319) | | 909 | | | (110,817) | | 28,812 | | (82,005) | | | (84,392) | | 21,942 | | (62,450) | |
Reclassification adjustments | 50,595 | | (13,155) | | 37,440 | | | 34,409 | | (8,946) | | 25,463 | | | (6,484) | | 1,686 | | (4,798) | |
Share of equity investee's comprehensive income (loss) | 3,405 | | — | | 3,405 | | | (264) | | — | | (264) | | | (1,592) | | — | | (1,592) | |
Other comprehensive income (loss) | 126,570 | | (27,323) | | 99,247 | | | (116,851) | | 26,558 | | (90,293) | | | (155,704) | | 29,962 | | (125,742) | |
Comprehensive income (loss) | | | 7,028 | | | | | (551,728) | | | | | 322,724 | |
Less: Net (loss) income attributable to noncontrolling interest | | | (1,386) | | | | | 94 | | | | | (83) | |
Comprehensive income (loss) attributable to Aramark stockholders | | | $ | 8,414 | | | | | $ | (551,822) | | | | | $ | 322,807 | |
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The summary of the components of comprehensive income is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| September 27, 2019 | | September 28, 2018 | | September 29, 2017 |
| Pre-Tax Amount | Tax Effect | After-Tax Amount | | Pre-Tax Amount | Tax Effect | After-Tax Amount | | Pre-Tax Amount | Tax Effect | After-Tax Amount |
Net income | | | $ | 448,466 |
| | | | $ | 568,440 |
| | | | $ | 374,187 |
|
Pension plan adjustments | (29,137 | ) | 6,543 |
| (22,594 | ) | | 29,650 |
| (9,003 | ) | 20,647 |
| | 22,548 |
| (2,556 | ) | 19,992 |
|
Foreign currency translation adjustments | (34,099 | ) | (209 | ) | (34,308 | ) | | (31,003 | ) | (250 | ) | (31,253 | ) | | 5,903 |
| — |
| 5,903 |
|
Cash flow hedges: | | | | | | | | | | | |
Unrealized gains (losses) arising during the period | (84,392 | ) | 21,942 |
| (62,450 | ) | | 55,445 |
| (16,134 | ) | 39,311 |
| | 31,884 |
| (12,435 | ) | 19,449 |
|
Reclassification adjustments | (6,484 | ) | 1,686 |
| (4,798 | ) | | 5,185 |
| (1,510 | ) | 3,675 |
| | 16,606 |
| (6,476 | ) | 10,130 |
|
Share of equity investee's comprehensive income (loss) | (1,592 | ) | — |
| (1,592 | ) | | 157 |
| — |
| 157 |
| | 2,383 |
| (834 | ) | 1,549 |
|
Other comprehensive income (loss) | (155,704 | ) | 29,962 |
| (125,742 | ) | | 59,434 |
| (26,897 | ) | 32,537 |
| | 79,324 |
| (22,301 | ) | 57,023 |
|
Comprehensive income | | | 322,724 |
| | | | 600,977 |
| | | | 431,210 |
|
Less: Net income (loss) attributable to noncontrolling interest | | | (83 | ) | | | | 555 |
| | | | 264 |
|
Comprehensive income attributable to Aramark stockholders | | | $ | 322,807 |
| | | | $ | 600,422 |
| | | | $ | 430,946 |
|
Accumulated other comprehensive loss consists of the following (in thousands):
|
| | | | | | | |
| September 27, 2019 | | September 28, 2018 |
Pension plan adjustments | $ | (47,222 | ) | | $ | (24,628 | ) |
Foreign currency translation adjustments | (128,119 | ) | | (93,811 | ) |
Cash flow hedges | (31,056 | ) | | 36,192 |
|
Share of equity investee's accumulated other comprehensive loss | (10,568 | ) | | (8,976 | ) |
| $ | (216,965 | ) | | $ | (91,223 | ) |
| | | | | | | | | | | |
| October 1, 2021 | | October 2, 2020 |
Pension plan adjustments | $ | (24,323) | | | $ | (72,891) | |
Foreign currency translation adjustments | (127,012) | | | (135,937) | |
Cash flow hedges | (49,249) | | | (87,598) | |
Share of equity investee's accumulated other comprehensive loss | (7,427) | | | (10,832) | |
| $ | (208,011) | | | $ | (307,258) | |
Currency Translation
Gains and losses resulting from the translation of financial statements of non-U.S.non-United States subsidiaries are reflected as a component of accumulated other comprehensive income (loss) in stockholders' equity. During both fiscal 2019 andBeginning in fiscal 2018, Argentina was determined to have a highly inflationary economy. As a result, the Company remeasuredremeasures the financial statements of Argentina's operations in accordance with the accounting guidance for highly inflationary economies. The impact of the remeasurements was a foreign currency transaction loss of approximately $4.9$1.8 million, $2.5 million and $3.8$4.9 million during fiscal 20192021, fiscal 2020 and 2018,fiscal 2019, respectively, to the Consolidated Statements of (Loss) Income. The impact of foreign currency transaction gains and losses exclusive of Argentina's operations included in the Company's operating results for fiscal 2019,2021, fiscal 20182020 and fiscal 20172019 were immaterial to the consolidated financial statements.
Current Assets
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
In fiscal 2019, theThe Company began insuringinsures portions of its general liability, automobile liability and workers’ compensation risks through a wholly owned captive insurance subsidiary (the "Captive"), to enhance its risk financing strategies. The Captive is subject to regulation inregulations within its jurisdictiondomicile of domicile,Bermuda, including regulations established by the Bermuda Monetary Authority (the "BMA") relating to levels of liquidity and solvency as such concepts are defined by the regulator.BMA. The Captive was in compliance with these regulations as of year-end.October 1, 2021. These regulations may have the effect of limiting the Company's ability to access certain cash and cash equivalents held by the Captive for uses
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other than for the payment of its general liability, automobile liability and workers’ compensation claims and related Captive costs. As of September 27, 2019,October 1, 2021 and October 2, 2020, cash and cash equivalents at the Captive was $50.4 million.
The Company is self-insured for a limited portion of the risk retained under its general liability, automobile liabilitywere $194.3 million and workers’ compensation insurance arrangements. Self-insurance reserves are recorded based on actuarial analyses.$92.1 million, respectively.
Inventories are valued at the lower of cost (principally the first-in, first-out method) andor net realizable value. As of September 27, 2019October 1, 2021 and September 28, 2018,October 2, 2020, the Company's reserve for inventory obsolescence was approximately $23.6$45.7 million and $21.5$36.7 million, respectively. The increase is mainly related to excess inventory related to personal protective equipment ("PPE"). The inventory obsolescence reserve is determined based on history and projected customer consumption and specific identification. In addition, the Company recorded approximately $25.4 million in inventory write-downs during fiscal 2021 to reflect the current net realizable value of PPE inventory.
The components of inventories are as follows:
|
| | | | | | |
| | September 27, 2019 | | September 28, 2018 |
Food | | 54.3 | % | | 31.6 | % |
Career apparel and linens(1) | | 40.5 | % | | 65.7 | % |
Parts, supplies and novelties | | 5.2 | % | | 2.7 | % |
| | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | |
| | October 1, 2021 | | October 2, 2020 |
Food(1) | | 48.7 | % | | 42.7 | % |
Career apparel and linens(2) | | 46.0 | % | | 52.2 | % |
Parts, supplies and novelties | | 5.3 | % | | 5.1 | % |
| | 100.0 | % | | 100.0 | % |
|
| | | | |
(1) | DecreaseFood inventory increased during fiscal 20192021 as the COVID-19 pandemic ("COVID-19") lockdowns were lifted and operations began to re-open.
|
(2) | Career apparel and linens inventory decreased during fiscal 2021 due to the Company's adoptiondecreased production and distribution of Accounting Standards Codification ("ASC") 606, PPE, which was elevated during fiscal 2020 in response to COVID-19.Revenue from Contracts with Customers (see Note 7). |
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepayments and other current assets
The following table presents details of "Prepayments and other current assets" as presented in the Consolidated Balance Sheets (in thousands):
| | | | | | | | | | | | | | |
| | October 1, 2021 | | October 2, 2020 |
Prepaid Insurance | | $ | 12,566 | | | $ | 13,396 | |
Prepaid Taxes and Licenses | | 11,159 | | | 11,130 | |
Current Income Tax Asset(1) | | 23,523 | | | 123,608 | |
Other Prepaid Expenses | | 157,739 | | | 150,810 | |
| | $ | 204,987 | | | $ | 298,944 | |
| | | | | |
(1) | Fiscal 2020 income tax receivable driven by the net loss position during fiscal 2020 from the impact of COVID-19. Income tax proceeds were received in fiscal 2021. |
Property and Equipment
Property and equipment are stated at cost and are depreciated over their estimated useful lives on a straight-line basis. Gains and losses on dispositions are included in operating results. Maintenance and repairs are charged to current operations and replacements and significant improvements that extend the useful life of the asset are capitalized. The estimated useful lives for the major categories of property and equipment are 10 to 40 years for buildings and improvements and 3three to 1020 years for service equipment and fixtures. Depreciation expense during fiscal 2019,2021, fiscal 20182020 and fiscal 20172019 was $378.3 million, $418.3 million and $421.4 million, $270.0 million, and $237.9 million, respectively. The increase from fiscal 2018 to fiscal 2019 is due to the Company's adoption of ASC 606, Revenue from Contracts with Customers (see Note 7). The increase from fiscal 2017 to fiscal 2018 is primarily driven by the acquisition of AmeriPride (see Note 2).
During the fourth quarter of fiscal 2017,2020, the Company received proceedsrecognized impairment charges of approximately $30.1$30.6 million related to the sale of a building within theits FSS United States and FSS International segment. Subsequently, the Company entered into a capital lease for the building. The proceedssegments, consisting of right-of-use assets ($11.6 million), property and equipment ($17.8 million) and other assets ($1.2 million), which are included in "Other financing activities" in the Consolidated Statements"Cost of Cash Flows. The impactservices provided (exclusive of depreciation and amortization)" on the Consolidated Statements of (Loss) Income was not material.for the fiscal year ended October 2, 2020. These impairment charges primarily relate to client contracts that were reassessed due to the impact of COVID-19. In order to determine the impairment charges, the Company compared the estimated fair value of each asset group, calculated using discount cash flows, to its book value.
During the third quarter of fiscal 2020, the Company permanently vacated certain rental properties and assets at various locations throughout the United States related to non-core operations and no longer intends to operate or sublease at these locations. Accordingly, the Company recorded a loss on disposal by abandonment of $28.5 million within its FSS United States segment, consisting of right-of-use assets ($10.3 million), leasehold improvements ($17.4 million) and other assets ($0.8 million), which is included in "Cost of services provided (exclusive of depreciation and amortization)" on the Consolidated Statements of (Loss) Income for the fiscal year ended October 2, 2020. The Company has 0 remaining lease liability related to the abandoned leases as of October 1, 2021.
During the third quarter of fiscal 2020, the Company received $25.0 million of insurance proceeds from one of its insurance carriers related to property damage and business interruption from a tornado at one of its Uniform market centers in Nashville, Tennessee. These proceeds serve to cover the cost of rebuilding the property and for any incremental expenses the Company incurs to continue servicing its customers at nearby market centers. The Company’s insurance policy provides coverage for the property damage and reimbursement for other expenses and incremental costs that have been incurred related to the damages and losses. The Company recorded a gain during fiscal 2020 of approximately $16.3 million from these proceeds, which represents the excess of previously incurred losses, including the write-down of the damaged property and equipment and business interruption expenses. The gain is included in “Cost of services provided (exclusive of depreciation and amortization” on the Consolidated Statements of (Loss) Income. The Company allocated $21.5 million of the insurance proceeds to the recovery of the damaged building and equipment and is included within “Net cash used in investing activities” on the Consolidated Statement of Cash Flows for the fiscal year ended October 2, 2020. The remaining $3.5 million of insurance proceeds is included within “Net cash provided by operating activities” to offset the business interruption expenses incurred during the fiscal year ended October 2, 2020.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Assets
The following table presents details of "Other Assets" as presented in the Consolidated Balance Sheets (in thousands):
| | | | | | | | October 1, 2021 | | October 2, 2020 |
| | September 27, 2019 | | September 28, 2018 | |
Client contract investments(1) | | $ | — |
| | $ | 1,034,476 |
| |
Long-term prepaid rent(1) | | 166,931 |
| | — |
| |
Cost to fulfill - Client(1) | | 109,401 |
| | — |
| Cost to fulfill - Client(1) | | $ | 109,541 | | | $ | 113,940 | |
Cost to fulfill - Rental merchandise in-service(2) | | 356,853 |
| | — |
| Cost to fulfill - Rental merchandise in-service(2) | | 324,433 | | | 311,238 | |
Long-term receivables | | 27,574 |
| | 90,068 |
| Long-term receivables | | 31,832 | | | 28,460 | |
Miscellaneous investments(3) | | 264,452 |
| | 239,547 |
| Miscellaneous investments(3) | | 405,498 | | | 262,609 | |
Computer software costs, net(4) | | 170,510 |
| | 152,188 |
| Computer software costs, net(4) | | 182,650 | | | 177,136 | |
Interest rate swap agreements | | — |
| | 54,708 |
| |
| Employee sales commissions(5) | | 111,001 |
| | — |
| Employee sales commissions(5) | | 124,610 | | | 122,011 | |
Other(6) | | 137,084 |
| | 122,184 |
| Other(6) | | 156,578 | | | 142,712 | |
| | $ | 1,343,806 |
| | $ | 1,693,171 |
| | $ | 1,335,142 | | | $ | 1,158,106 | |
|
| | | | |
(1) | PriorCost to the Company's adoption of ASC 606, Revenue from Contracts with Customers, client contract investments generally represented a cash payment providedfulfill - Client represent payments made by the Company to help finance improvement or renovation atenhance the facility from whichservice resources used by the Company operated. These amounts were amortized over the contract period. If the contract was terminated prior to satisfy its maturity date, the Company was reimbursed for the unamortized client contract investment amounts. Amortization expense was $183.6 million and $159.6 million during fiscal 2018 and fiscal 2017, respectively.performance obligation (see Note 7).
Subsequent to adoption of ASC 606, these balances were reclassified to either leasehold improvements in "Property and Equipment, net" or to long-term prepaid rent or costs
|
(2) | Costs to fulfill - client in "Other Assets" and continue to be expensed over the contract life (see Note 7). |
(2) | Due to the Company's adoption of ASC 606, costs to fulfill contracts related toRental merchandise in-service represent personalized work apparel, linens and other rental items in service previously capitalized within "Inventories" are now capitalized within "Other Assets." These in-service rental items are recorded at cost and are amortized over their estimated useful lives, which primarily range from one to four years. The amortization rates used are based on the Company's specific experience.customer locations (see Note 7). |
(3) | Miscellaneous investments represent investments in 50% or less owned entities, including the Company's 50% ownership in AIM Services Co., Ltd., a Japanese food and support services company (approximately $180.5 million and $155.1 million at September 27, 2019 and September 28, 2018, respectively). During fiscal 2019, the Company recognized an impairment of $7.0 million in "Cost of services provided" related to an equity investment.entities. |
(4) | Computer software costs represent capitalized costs incurred to purchase or develop software for internal use, and are amortized over the estimated useful life of the software, generally a period of three to ten10 years. |
(5) | Due to the Company's adoption The Company recorded non-cash asset write-downs within its FSS United States segment of ASC 606, costs to obtain contractsapproximately $26.1 million related to employee sales commissions are now capitalized within "Other Assets," whichcertain information technology assets during the fiscal year ended October 2, 2020, as a result of management decisions to discontinue use of these solutions and from non-renewal or expirations of contracts with specific vendors. These non-cash charges were previously expensed torecorded in "Cost of services provided" at contract inceptionprovided (exclusive of depreciation and amortization)" on the Consolidated Statements of (Loss) Income for the fiscal year ended October 2, 2020. |
(5) | Employee sales commissions represent commission payments made to employees related to new or retained business contracts (see Note 7). |
(6) | Other consistconsists primarily of noncurrent deferred tax assets, pension assets, and deferred financing costs on certain revolving credit facilities.facilities and other noncurrent assets. |
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 $187.5 million and $182.9 million at October 1, 2021 and October 2, 2020, respectively). The Company's equity in undistributed earnings of AIM Services Co., Ltd. for fiscal 2021, fiscal 2020, and fiscal 2019 was approximately $16.7 million, $10.8 million and $24.9 million, respectively, and is recorded as a reduction of "Cost of services provided (exclusive of depreciation and amortization)" on the Consolidated Statements of (Loss) Income.
For investments in 50% or less owned entities, other than those accounted for under the equity method of accounting, the Company measures these investments at cost, less any impairment and adjusted for changes in fair value resulting from observable price changes for an identical or a similar investment of the same issuer due to the lack of readily available fair values related to those investments. During fiscal 2021, the Company identified an observable price change related to an equity investment without a readily determinable fair value and recognized a non-cash gain of $137.9 million on the Consolidated Statements of (Loss) Income. The carrying amount of equity investments without readily determinable fair values as of October 1, 2021 and October 2, 2020 was $180.5 million and $42.5 million, respectively. During fiscal 2019, the Company recognized an impairment of $7.0 million in "Cost of services provided (exclusive of depreciation and amortization)" related to an equity investment.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Accrued Expenses and Liabilities
The following table presents details of "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets (in thousands):
| | | | | | | | | | | | | | |
| | October 1, 2021 | | October 2, 2020 |
Deferred income(1)(2) | | $ | 340,587 | | | $ | 291,680 | |
Accrued client expenses(2) | | 127,086 | | | 44,419 | |
Accrued taxes | | 58,410 | | | 53,146 | |
Accrued insurance(3) and interest | | 167,323 | | | 174,048 | |
Other | | 441,622 | | | 376,909 | |
| | $ | 1,135,028 | | | $ | 940,202 | |
|
| | | | | | | | |
| | September 27, 2019 | | September 28, 2018 |
Deferred income(1) | | $ | 345,840 |
| | $ | 299,089 |
|
Accrued client expenses | | 105,636 |
| | 98,282 |
|
Accrued taxes | | 61,816 |
| | 96,855 |
|
Accrued insurance and interest | | 192,695 |
| | 164,890 |
|
Other | | 420,249 |
| | 358,917 |
|
| | $ | 1,126,236 |
| | $ | 1,018,033 |
|
|
| | | | |
(1) | Includes consideration received in advance from customers prior to the service being performed ($319.0312.6 million and $263.8 million) or from vendors prior to the goods being consumed ($26.821.3 million and $27.9 million). in fiscal 2021 and fiscal 2020, respectively. |
(2) | Increases in fiscal 2021 as COVID-19 lockdowns were lifted and operations began to re-open. See Note 7. |
(3) | The Company is self-insured for certain obligations related to its employee health care benefit programs as well as for certain risks retained under its general liability, automobile liability and workers’ compensation liability programs. Reserves are estimated through actuarialmethods, with the assistance of third-party actuaries using loss development assumptions based on the Company's history. |
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Income Taxes and Other Noncurrent Liabilities
The following table presents details of "Deferred Income Taxes and Other Noncurrent Liabilities" as presented in the Consolidated Balance Sheets (in thousands):
| | | | | | | | | | | | | | |
| | October 1, 2021 | | October 2, 2020 |
Deferred income taxes (see Note 10) | | $ | 383,224 | | | $ | 398,777 | |
Deferred compensation | | 212,222 | | | 210,884 | |
Pension-related liabilities | | 16,113 | | | 18,044 | |
Interest rate swap agreements | | 65,012 | | | 116,882 | |
Insurance reserves(1) | | 126,314 | | | 143,923 | |
Other noncurrent liabilities(2) | | 276,129 | | | 210,565 | |
| | $ | 1,079,014 | | | $ | 1,099,075 | |
|
| | | | | | | | |
| | September 27, 2019 | | September 28, 2018 |
Deferred income tax payable | | $ | 519,904 |
| | $ | 503,429 |
|
Deferred compensation | | 212,090 |
| | 226,558 |
|
Pension-related liabilities | | 21,367 |
| | 28,478 |
|
Interest rate swap agreements | | 43,112 |
| | — |
|
Other noncurrent liabilities | | 292,349 |
| | 218,750 |
|
| | $ | 1,088,822 |
| | $ | 977,215 |
|
| | | | | |
(1) | The Company is self-insured for certain obligations related to its employee health care benefit programs as well as for certain risks retained under its general liability, automobile liability and workers’ compensation liability programs. Reserves are estimated through actuarialmethods, with the assistance of third-party actuaries using loss development assumptions based on the Company's claims history. |
(2) | Fiscal 2021 and 2020 include the payment deferral related to the employer portion of social security taxes as permitted under the Coronavirus Aid, Relief and Economic Security Act of $64.3 million and $80.8 million, respectively. Fiscal 2021 also includes the non-current portion of the Next Level contingent consideration of $65.4 million. |
Impact of COVID-19
COVID-19 has adversely affected global economies, financial markets and the overall environment for the Company and the extent to which it may impact future results of operations and overall financial performance remains uncertain. The decline in operations from COVID-19 caused a deterioration in the Company's revenue, operating income (loss) and net (loss) income for the fiscal years ended October 1, 2021 and October 2, 2020. The Company's financial results began to improve during the second half of fiscal 2021 from operations re-opening as vaccines were distributed and lockdowns were lifted as well as from actions to reduce variable and fixed costs, including headcount reductions primarily taken during the second half of fiscal 2020. However, certain businesses continue to be impacted by COVID-19. The allowance for credit losses increased to $79.6 million as of October 1, 2021 compared to $74.9 million as of October 2, 2020, which includes the Company's current estimates that reflect the continued economic uncertainty resulting from COVID-19. In response, the Company continues to apply effective cost discipline to mitigate the negative impact of COVID-19 as well as take advantage of relief provisions, including the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), the Consolidated Appropriations Act of 2021 ("CAA") and other United States and foreign governmental programs (see below and Note 10).
The ongoing impact of COVID-19, including the emergence of COVID-19 variants, on the Company's longer-term operational and financial performance will depend on future developments, which are highly uncertain and cannot be predicted.
The CARES Act provides an employee retention credit (“CARES Employee Retention credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee through December 31,
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2020. Additional relief provisions were passed by the United States government, which extend and slightly expand the qualified wage caps on these credits through December 31, 2021. Based on these additional provisions, the tax credit is now equal to 70% of qualified wages paid to employees during a quarter, and the limit on qualified wages per employee has been increased to $10,000 of qualified wages per quarter. The Company qualifies for the tax credit under the CARES Act and expects to continue to receive additional tax credits under the additional relief provisions for qualified wages through December 31, 2021. During the fiscal year ended October 1, 2021 and October 2, 2020, the Company recorded $15.1 million and $18.7 million related to the CARES Employee Retention credit in “Cost of services provided (exclusive of depreciation and amortization)” on the Company’s Consolidated Statements of (Loss) Income. As of October 1, 2021, the Company has a $23.8 million receivable balance from the United States government related to the CARES Act, which is recorded in "Receivables" on the Company's Consolidated Balance Sheet.
The CARES Act also provided for deferred payment of the employer portion of social security taxes through the end of calendar 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. Approximately $128.5 million of social security taxes remain deferred, of which 50% are recorded as liabilities within "Accrued payroll and related expenses" and 50% are recorded as liabilities within "Deferred Income Taxes and Other Noncurrent Liabilities" on the Company's Consolidated Balance Sheet as of October 1, 2021. Deferred amounts of approximately $80.8 million were recorded as a liability within "Deferred Income Taxes and Other Noncurrent Liabilities" on the Company's Consolidated Balance Sheet as of October 2, 2020.
Within the FSS International and Uniform segments, many foreign jurisdictions in which the Company operates are also providing companies various forms of relief from the COVID-19 pandemic, including labor related tax credits. These labor related tax credits generally allow companies to receive credits if they retain employees on their payroll, rather than furloughing or terminating employees as a result of the business disruption caused by COVID-19. The Company qualifies for these tax credits and expects to continue to receive additional tax credits for qualified wages in foreign jurisdictions while these programs remain through December 31, 2021. The Company recorded approximately $155.3 million and $128.1 million of labor related tax credits within "Cost of services provided (exclusive of depreciation and amortization)" on the Consolidated Statements of (Loss) Income during the fiscal years ended October 1, 2021 and October 2, 2020, respectively, of which approximately $17.9 million and $23.0 million, respectively, were recorded in the Uniform segment with the remaining balances recorded in the FSS International segment.
The Company accounts for these labor related tax credits as a reduction to the expense that they are intended to compensate in the period in which the corresponding expense is incurred and there is reasonable assurance the Company will both receive the tax credits and comply with all conditions attached to the tax credits. The Company believes these tax credits are not expected to be returned to the foreign jurisdictions.
Supplemental Cash Flow Information
|
| | | | | | | | | | | | |
| | Fiscal Year Ended |
(dollars in millions) | | September 27, 2019 | | September 28, 2018 | | September 29, 2017 |
Interest paid | | $ | 306.2 |
| | $ | 307.1 |
| | $ | 201.7 |
|
Income taxes paid (refunded)(1) | | 139.3 |
| | (1.1 | ) | | 126.3 |
|
|
| |
(1) | During fiscal 2018, the Company was in a net refund position, primarily due to the impact of the Tax Cuts and Jobs Act (see Note 9). |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
(dollars in millions) | | October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Interest paid | | $ | 369.7 | | | $ | 353.6 | | | $ | 306.2 | |
Income taxes (refunded) paid | | (104.9) | | | 40.2 | | | 139.3 | |
Significant noncashnon-cash activities follow:
•During fiscal 2019,2021, fiscal 20182020 and fiscal 2017,2019, the Company executed capitalfinance lease transactions. The present value of the future rental obligations was approximately $41.6$36.0 million, $34.0$29.3 million and $55.4$41.6 million for the respective periods, which is included in property and equipment and long-term borrowings.
•During fiscal 2019,2021, fiscal 20182020 and fiscal 2017,2019, cashless settlements of the exercise price and related employee minimum tax withholding liabilities of share-based payment awards were approximately $24.5 million, $92.3 million and $34.3 million, $19.0 million and $32.7 million, respectively.
NOTE 2. ACQUISITIONS AND DIVESTITURES:
Next Level Hospitality ("Next Level") Acquisition
Divestiture
On November 9, 2018, the Company completed the sale of its wholly-owned Healthcare Technologies ("HCT") business for $293.7 million in cash. The transaction resulted in a pretax gain of $156.3 million (tax effected gain of $139.2 million) in the Consolidated Statements of Income for the fiscal year ended September 27, 2019. The Company evaluated the business under the rules for discontinued operations and concluded it did not meet all of the criteria required.
AmeriPride Services, Inc. ("AmeriPride") Acquisition
On January 19, 2018,June 4, 2021, the Company completed the acquisition of AmeriPride,Next Level Hospitality ("Next Level"), a uniformpremier provider of culinary and linen rental and supply companyenvironmental services in the U.S.senior living industry, specializing in skilled nursing and Canada,rehabilitation facilities, pursuant to the Unit Purchase Agreement and Plan of Merger ("AmeriPride MergerNext Level Purchase Agreement") dated as of October 13, 2017,April 28, 2021, by and among Aramark Healthcare Support Services, LLC, a wholly owned subsidiary of the Company, AmeriPride, Timberwolf Acquisition Corporation,Aramark Services, Inc. ("ASI"), a wholly owned subsidiary of the Company, Next Level Hospitality Services, LLC, Next Level Stockholders and Bruce M. Steiner,Seth Gribetz, in his capacity as Stockholder Representative. Upon completion of the acquisition, AmeriPrideNext Level became a wholly owned subsidiary
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the Company and its results are included in the Company's UniformFSS United States segment. The totalcash consideration paid for AmeriPrideNext Level was $995.4$226.1 million. In addition, contingent consideration of $78.4 million partially offset by $84.9 millionwas recorded as part of cash acquired. In order to finance the AmeriPride acquisition, which the Company entered into a long-term financing agreement (see Note 5). During the fiscalmay be required to pay if Next Level achieves certain adjusted EBITDA levels during calendar year ended September 28, 2018, the Company incurred acquisition-related costs of $12.7 million, included in "Selling2021 and general corporate expenses,"2022. The acquisition was financed utilizing cash and $5.2 million of commitment fees, included in "Interest and Other Financing Costs, net" in the Company’s Consolidated Statements of Income.cash equivalents on hand.
Consideration
The Company has accounted for the AmeriPrideNext Level acquisition as a business combination under the acquisition method of accounting. The Company has finalized its allocation of the purchase price for the transaction based upon the fair value of net assets acquired and liabilities assumed at the date of acquisition. For tax purposes, this acquisition is a taxable transaction.
Recognition and Measurement of Assets Acquired and Liabilities Assumed at Fair Value
The following tables summarize the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed atassigned as of the acquisition date (in thousands):
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
Current assets | $ | 237,807 |
|
Noncurrent assets | 963,078 |
|
Total assets | $ | 1,200,885 |
|
| |
Current liabilities | $ | 137,867 |
|
Noncurrent liabilities | 67,590 |
|
Total liabilities | $ | 205,457 |
|
| | | | | |
Current assets | $ | 18,088 | |
Noncurrent assets | 307,291 | |
Total assets | $ | 325,379 | |
| |
Current liabilities | $ | 50,956 | |
Noncurrent liabilities | 48,323 | |
Total liabilities | $ | 99,279 | |
Intangible Assets
The following table identifies the Company’s allocationsallocation of purchase price to the intangible assets acquired by category:
|
| | | | | | | |
| | Estimated Fair Value (in millions) | | Weighted-Average Estimated Useful Life (in years) |
Customer relationship assets | | $ | 297.0 |
| | 15 |
Trade names | | | 24.0 |
| | 3 | to indefinite |
Total intangible assets | | $ | 321.0 |
| | |
The fair value of the customer relationship assets was determined using the “multi-period excess earnings method” which considers the present value of net cash flows expected to be generated by the customer relationships, excluding any cash flows related to contributory assets. The fair value of the 2 trade names acquired were determined using the “relief-from-royalty method” which considers the discounted estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.
Goodwill
The Company recorded $365.2 million of goodwill in connection with its purchase price allocation relating to the AmeriPride acquisition, all of which was recognized in the Uniform reporting segment. Factors that contributed to the Company’s recognition of goodwill include the Company’s intent to expand and complement its existing uniform business and to enhance its customer service experience, in addition to the anticipated synergies the Company expects to generate from the acquisition.
Avendra, LLC ("Avendra") Acquisition
On December 11, 2017, the Company completed the acquisition of Avendra, a hospitality procurement services provider in North America, which included the merger of Capital Merger Sub, LLC, a wholly owned subsidiary of the Company, with Avendra, pursuant to the Agreement and Plan of Merger ("Avendra Merger Agreement") dated as of October 13, 2017, by and among Aramark Services, Inc. (“ASI”), a wholly owned subsidiary of the Company, Avendra, Capital Merger Sub, LLC, and Marriott International, Inc., in its capacity as Holder Representative. Avendra continued as the surviving entity of the merger and is a wholly owned subsidiary of the Company whose financial results are included within the FSS United States reporting segment from December 11, 2017. The total consideration paid for Avendra was $1,386.4 million, partially offset by $87.3 million of cash and restricted investments acquired. In order to finance the Avendra acquisition, the Company entered into a long-term financing agreement (see Note 5). During the fiscal year ended September 28, 2018, the Company incurred acquisition-related costs of $11.5 million, included in "Selling and general corporate expenses," and $6.7 million of commitment fees, included in "Interest and Other Financing Costs, net" in the Company’s Consolidated Statements of Income.
Consideration
The Company has accounted for the Avendra acquisition as a business combination under the acquisition method of accounting. The Company finalized its allocation of the purchase price for the transaction based upon the fair value of net assets acquired and liabilities assumed at the date of acquisition. For tax purposes, this acquisition is a taxable transaction.
Recognition and Measurement of Assets Acquired and Liabilities Assumed at Fair Value
The following tables summarize the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
Current assets | $ | 157,614 |
|
Noncurrent assets | 1,345,532 |
|
Total assets | $ | 1,503,146 |
|
| |
Current liabilities | $ | 111,087 |
|
Noncurrent liabilities | 5,681 |
|
Total liabilities | $ | 116,768 |
|
Intangible Assets
The following table identifies the Company’s allocations of purchase price to the intangible assets acquired by category: |
| | | | | | |
| | Estimated Fair Value (in millions) | | Weighted-Average Estimated Useful Life (in years) |
Customer relationship assets | | $ | 567.0 |
| | 15 |
Trade name | | | 222.0 |
| | indefinite |
Total intangible assets | | $ | 789.0 |
| | |
| | | | | | | | | | | |
| | Estimated Fair Value (in millions) | Weighted-Average Estimated Useful Life (in years) |
Customer relationship assets | | $ | 133.0 | | 15 |
Trade name | | 49.5 | | 15 |
Total intangible assets | | $ | 182.5 | | |
The fair value of the customer relationship assets was determined using the “multi-period excess earnings method” which considers the present value of net cash flows expected to be generated by the customer relationships, excluding any cash flows related to contributory assets. The fair value of the trade name acquired was determined using the “relief-from-royalty method” which considers the discounted estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.
Goodwill
The Company recorded $530.5$123.6 million of goodwill in connection with its purchase price allocation relating to the AvendraNext Level acquisition, all of which was recognized in the FSS United States reporting segment. Goodwill is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized, such as assembled workforce. Factors that contributed to the Company’sCompany's preliminary recognition of goodwill include the Company’sCompany's intent to expandcomplement its buying scale through Avendra’s procurement capabilitiesexisting healthcare business and to expand its customer base outside of its traditional industries, in additionbase. Goodwill related to the anticipated synergies the Company expectsNext Level acquisition is expected to generate from the acquisition.be deductible for income tax purposes.
Combined Revenue and Earnings for AmeriPride and AvendraNext Level
Included in the Company’sCompany's Consolidated Statements of (Loss) Income for the fiscal year ended October 1, 2021 was revenue of approximately $108.9 million. Net loss in the Company's Consolidated Statements of (Loss) Income from Next Level was not material for fiscal 2021. The effects of the acquisition on proforma revenue and net income of the combined entity were not material.
Divestiture
On November 9, 2018, the Company completed the sale of its wholly-owned Healthcare Technologies ("HCT") business for $293.7 million in cash. The transaction resulted in a pretax gain of $156.3 million (tax effected gain of $139.2 million) in the Consolidated Statements of (Loss) Income for the fiscal year ended September 28, 2018 were combined revenue from AmeriPride and Avendra of approximately $522.2 million related to these entities. Combined net income for the results of AmeriPride and Avendra was approximately $8 million for the fiscal year ended September 28, 2018, which excludes the impact of the increased interest expense incurred from the financing of the acquisitions and acquisition related costs included in the Corporate segment.
Unaudited Pro Forma Results of Operations Reflecting AmeriPride and Avendra
The following table reflects the unaudited pro forma combined results of operations for the fiscal years ended September 28, 2018 and September 29, 2017 for the Company, assuming the closing of both acquisitions occurred on October 1, 2016:27, 2019.
|
| | | | | | | | |
| Fiscal Year Ended |
Unaudited (in thousands) | | September 28, 2018 | | September 29, 2017 |
Total revenue | | $ | 16,014,463 |
| | $ | 15,378,832 |
|
Net income | | | 624,334 |
| | | 328,932 |
|
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the closing of the acquisitions taken place on October 1, 2016. Furthermore, the pro forma results do not purport to project the future results of operations of the Company.
The unaudited pro forma information primarily reflects the following adjustments:
adjustments to amortization expense related to identifiable intangible assets acquired;
adjustments to depreciation expense related to the fair value of property and equipment acquired;
adjustments to interest expense to reflect the long-term financing agreements used to finance the acquisitions (see Note 5); and
S-18
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adjustments for the tax effect of the aforementioned adjustments.
Merger and Integration Costs
As a result of the Avendra and AmeriPride acquisitions occurring in fiscal year 2018, the Company incurred merger and integration costs of approximately $36.1$22.2 million, $28.9 million and $78.1$36.1 million during fiscal 20192021, fiscal 2020 and fiscal 2018,2019, respectively. The expenses mainly related to severance costs facilityfor transitional employees and integration related consulting costs and charges related to plant consolidations, professional services, rebranding expensesmainly asset write-downs, the implementation of a new route accounting system and other expenses.
Other Acquisitions
During fiscal 2021, the Company paid net cash consideration of approximately $39.7 million for various acquisitions, excluding the purchase of Next Level. During fiscal 2020 and fiscal 2019, the Company paid net cash consideration of approximately $22.2 million and $44.9 million for various acquisitions. During fiscal 2018, the Company paid cash consideration of approximately $30.6 million for various acquisitions, excluding the purchases of AmeriPride and Avendra. During fiscal 2017, the Company paid cash consideration of approximately $142.1 million for various acquisitions.respectively. The revenue, net income, assets and liabilities of the acquisitions did not have a material impact on the Company's consolidated financial statements.
NOTE 3. SEVERANCE:
Beginning in the third quarter of fiscal 2020, the Company made changes to its organization as a result of COVID-19 to align its cost base to better support its clients' needs as the Company navigates the current environment and focuses on its long-term strategy. These actions included headcount reductions, which resulted in severance charges of approximately $145.8 million during the fiscal year ended October 2, 2020, which were recorded in both “Cost of services provided (exclusive of depreciation and amortization” and “Selling and general corporate expenses” on the Consolidated Statements of (Loss) Income. The Company reversed approximately $16.3 million of unpaid obligations related to severance during fiscal 2021, which were recorded in both "Cost of services provided (exclusive of depreciation and amortization)" and "Selling and general corporate expenses" on the Consolidated Statements of (Loss) Income. The majority of these charges were paid in fiscal 2021, with the remaining balance expected to be paid out within the next fiscal year.
The following table summarizes the severance charges by segment recognized in the Consolidated Statements of (Loss) Income for the fiscal year ended October 2, 2020 (in millions):
| | | | | |
FSS United States | $ | 51.8 | |
FSS International | 87.3 | |
Uniform | 4.9 | |
Corporate | 1.8 | |
| $ | 145.8 | |
During fiscal 2018, the Company commenced a new phase of strategic reinvestment and reorganization actions to streamline and improve efficiencies and effectiveness of its selling, general and administrative functions, which resulted in net severance charges of approximately $18.7 million and $36.6 million during fiscal 2019 and fiscal 2018, respectively.2019. The Company completed this cost savings phase as of September 27, 2019.
During fiscal 2017, the Company updated its previously initiated actions on streamlining and improving the efficiencies and effectiveness There are no remaining unpaid obligations as of its selling, general and administrative functions. The Company recorded net severance charges of approximately $18.4 million during fiscal 2017.October 1, 2021.
The following table summarizes the unpaid obligations for severance and related costs as of September 27, 2019,October 1, 2021, which are included in "Accrued payroll and related expenses" inon the Consolidated Balance Sheets. These unpaid obligations
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | October 2, 2020 | | Net Expense Reduction(1) | | Payments and Other | | October 1, 2021 |
Fiscal 2018 Reorganization | $ | 2.5 | | | $ | — | | | $ | (2.5) | | | $ | — | |
Fiscal 2020 Reorganization | 118.5 | | | (16.3) | | | (77.6) | | | 24.6 | |
Total Reorganization | $ | 121.0 | | | $ | (16.3) | | | $ | (80.1) | | | $ | 24.6 | |
| | | | | |
(1) | During fiscal 2021, several previously expected actions were reversed due to changes in facts, including the timing of client re-openings after COVID-19 restrictions began to lift. |
During fiscal 2021, the Uniform segment approved action plans to streamline and improve the efficiency and effectiveness of the segment's general and administrative functions. Part of this action plan also included a series of facility consolidations and closures. As a result of these actions, severance charges of approximately $9.0 million were recorded within “Cost of services provided (exclusive of depreciation and amortization)” on the Consolidated Statements of (Loss) Income for the fiscal year ended October 1, 2021. The severance charges are expected to be paid out through fiscal 2020.2022.
|
| | | | | | | | | | | | | |
(in millions) | September 28, 2018 | | Net Charges | | Payments and Other | | September 27, 2019 |
Severance and Related Costs Accrual | $ | 16.6 |
| | 18.7 |
| | (23.4 | ) | | $ | 11.9 |
|
S-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company performs its assessment of goodwill at the reporting unit level. Within the FSS International segment, each country or region is evaluated separately since such operating units are relatively autonomous and separate goodwill balances have been recorded for each entity. The Company performs its annual impairment test as of the end of the fiscal month of August. For reporting units in whichIf results of the Company’s qualitative assessment indicates that it isindicate a more likely than not that the fair value ofdetermination or if a reporting unit exceeds its carrying amount, no further impairment testingqualitative assessment is performed. For those reporting units where events or changes in circumstances indicate that potential impairment indicators exist, the Company performsnot performed, a quantitative assessment to test goodwillis performed by comparing the estimated fair value using discounted cash flow calculations of each reporting unit with its estimated net book value.
During the fourth quarter of fiscal 2021, the Company performed the annual impairment test for goodwill for each of the reporting units using a quantitative testing approach. The Company compared the estimated fair value using discounted cash flow calculations of each reporting unit with its book value. Based on the evaluation performed, the Company determined that the fair value of each of the reporting units significantly exceeded its respective carrying amount, and therefore, the Company determined that goodwill was not impaired.
During fiscal 2020, the Company identified a triggering event from the decline in its stock price resulting from COVID-19. As a result, the Company performed a quantitative impairment test and recognized a non-cash impairment charge of $198.6 million related to one reporting unit within the FSS International segment on the Consolidated Statements of (Loss) Income for the fiscal year ended October 2, 2020. For tax purposes, the impairment charge was not tax deductible. The impaired reporting unit has a remaining goodwill balance of $91.0 million as of October 1, 2021.
The determination of fair value for each reporting unit includes assumptions, which are considered Level 3 inputs, that are subject to risk and uncertainty. The discounted cash flow calculations are dependent on several subjective factors including the timing of future cash flows and the underlying margin projection assumptions, future growth rates and the discount rate. If assumptions or estimates in the fair value calculations change or if future cash flows or future growth rates vary from what was planned,expected, including those assumptions relating to the duration and severity of COVID-19, this may impact the impairment analysis.
The Company performed an impairment test for goodwill for each ofanalysis and could reduce the reporting units usingunderlying cash flows used to estimate fair values and result in a qualitative testing approach, except for one reporting unit which was tested using the quantitative approach. Based on the evaluations performed, the Company determined that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying amount, and therefore, the Company determined that goodwill was not impaired. The fair value of the reporting unitdecline in the FSS International segment for which goodwill was tested using the quantitative approach has a goodwill balance of $282.3 million and a fair value that exceeded its carrying value by approximately 22% in fiscal 2019.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
may trigger future impairment charges.
Changes in total goodwill during fiscal 2019 is2021 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
Segment | September 28, 2018 | | Acquisitions and Divestitures | | Translation and Other | | September 27, 2019 |
FSS United States(1) | $ | 4,028,454 |
| | $ | (81,823 | ) | | $ | 2,587 |
| | $ | 3,949,218 |
|
FSS International | 626,379 |
| | 16,135 |
| | (34,046 | ) | | 608,468 |
|
Uniform | 955,735 |
| | 3,981 |
| | 1,398 |
| | 961,114 |
|
| $ | 5,610,568 |
| | $ | (61,707 | ) | | $ | (30,061 | ) | | $ | 5,518,800 |
|
|
| |
(1) | Includes the removal of approximately $87.0 million of goodwill related to the divestiture of HCT during the first quarter of fiscal 2019 (see Note 2). |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Segment | October 2, 2020 | | Acquisitions | | | | Translation | | October 1, 2021 |
FSS United States | $ | 3,953,332 | | | $ | 134,546 | | | | | $ | 58 | | | $ | 4,087,936 | |
FSS International | 426,118 | | | — | | | | | 8,347 | | | 434,465 | |
Uniform | 964,378 | | | 27 | | | | | 491 | | | 964,896 | |
| $ | 5,343,828 | | | $ | 134,573 | | | | | $ | 8,896 | | | $ | 5,487,297 | |
Other intangible assets consist of (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 27, 2019 | | September 28, 2018 |
| Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Customer relationship assets | $ | 2,183,492 |
| | $ | (1,193,525 | ) | | $ | 989,967 |
| | $ | 2,244,215 |
| | $ | (1,156,811 | ) | | $ | 1,087,404 |
|
Trade names | 1,047,959 |
| | (4,360 | ) | | 1,043,599 |
| | 1,050,825 |
| | (1,385 | ) | | 1,049,440 |
|
| $ | 3,231,451 |
| | $ | (1,197,885 | ) | | $ | 2,033,566 |
| | $ | 3,295,040 |
| | $ | (1,158,196 | ) | | $ | 2,136,844 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 1, 2021 | | October 2, 2020 |
| Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Customer relationship assets | $ | 2,106,423 | | | $ | (1,173,092) | | | $ | 933,331 | | | $ | 2,195,700 | | | $ | (1,308,002) | | | $ | 887,698 | |
Trade names | 1,100,579 | | | (5,288) | | | 1,095,291 | | | 1,052,744 | | | (7,805) | | | 1,044,939 | |
| $ | 3,207,002 | | | $ | (1,178,380) | | | $ | 2,028,622 | | | $ | 3,248,444 | | | $ | (1,315,807) | | | $ | 1,932,637 | |
During fiscal 2019,2021, the Company acquired customer relationship assets and trade names with values of approximately $28.5$157.8 million and $4.4$52.5 million, respectively. During fiscal 2018,2020, the Company acquired customer relationship assets and trade names with values of approximately $887.5 million and $246.0 million, respectively.$9.7 million. Customer relationship assets are being amortized principally on a straight-line basis over the expected period of benefit between 9 and 24 years, with a weighted average life of approximately 14 years. The Aramark, Avendra and a majority of the other trade names are indefinite lived intangible assets and are not amortizableamortized, but are evaluated for impairment at least annually.annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. The Company utilized the "relief-from-royalty" method, which considers the discounted estimated royalty payments that are expected to be avoided as a result of the trade names being owned. The Company completed its annual trade name impairment test for fiscal 2019,2021, which did not result in an impairment charge. Amortization of other intangible assets for fiscal 2019,2021, fiscal 20182020 and fiscal 20172019 was approximately $117.0$116.5 million, $112.1$117.6 million and $87.9$117.0 million, respectively.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the recorded balances at
September 27, 2019,October 1, 2021, total estimated amortization of all acquisition-related intangible assets for fiscal years
20202022 through
20242026 are as follows (in thousands):
|
| | | |
2020 | $ | 113,136 |
|
2021 | 105,929 |
|
2022 | 85,709 |
|
2023 | 78,843 |
|
2024 | 78,464 |
|
| | | | | |
2022 | $ | 95,729 | |
2023 | 91,583 | |
2024 | 91,166 | |
2025 | 91,308 | |
2026 | 87,606 | |
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. BORROWINGS:
Long-term borrowings, net, are summarized in the following table (in thousands):
| | | | | | | | | October 1, 2021 | | October 2, 2020 |
| | September 27, 2019 | | September 28, 2018 | |
Senior secured revolving credit facility, due October 2023 | | $ | 51,410 |
| | $ | 77,000 |
| |
Senior secured term loan facility, due October 2023 | | 507,887 |
| | 538,674 |
| |
Senior secured term loan facility, due March 2024 | | 829,344 |
| | 1,325,923 |
| |
Senior secured revolving credit facility, due April 2026 | | Senior secured revolving credit facility, due April 2026 | | $ | 71,896 | | | $ | 849,895 | |
Senior secured term loan facility, due March 2025 | | 1,658,026 |
| | 1,656,919 |
| Senior secured term loan facility, due March 2025 | | 1,660,382 | | | 1,659,194 | |
5.125% senior notes, due January 2024 | | 902,351 |
| | 902,908 |
| |
Senior secured term loan facility, due April 2026 | | Senior secured term loan facility, due April 2026 | | 406,543 | | | 485,346 | |
Senior secured term loan facility, due January 2027 | | Senior secured term loan facility, due January 2027 | | 833,643 | | | 888,540 | |
Senior secured term loan facility, due April 2028 | | Senior secured term loan facility, due April 2028 | | 721,986 | | | 830,133 | |
5.000% senior notes, due April 2025 | | 592,087 |
| | 590,884 |
| 5.000% senior notes, due April 2025 | | 594,719 | | | 593,381 | |
3.125% senior notes, due April 2025(1) | | 352,363 |
| | 373,240 |
| 3.125% senior notes, due April 2025(1) | | 374,668 | | | 377,960 | |
6.375% senior notes, due May 2025 | | 6.375% senior notes, due May 2025 | | 1,483,328 | | | 1,479,341 | |
4.750% senior notes, due June 2026 | | 494,731 |
| | 494,082 |
| 4.750% senior notes, due June 2026 | | — | | | 495,426 | |
5.000% senior notes, due February 2028 | | 1,137,625 |
| | 1,136,472 |
| 5.000% senior notes, due February 2028 | | 1,140,144 | | | 1,138,864 | |
Capital leases | | 148,754 |
| | 143,388 |
| |
Receivables Facility, due June 2024 | | Receivables Facility, due June 2024 | | — | | | 315,600 | |
Finance leases | | Finance leases | | 146,368 | | | 142,588 | |
Other | | 7,589 |
| | 4,494 |
| Other | | 18,590 | | | 22,155 | |
| | 6,682,167 |
| | 7,243,984 |
| | 7,452,267 | | | 9,278,423 | |
Less—current portion | | (69,928 | ) | | (30,907 | ) | Less—current portion | | (58,850) | | | (99,915) | |
| | $ | 6,612,239 |
| | $ | 7,213,077 |
| | $ | 7,393,417 | | | $ | 9,178,508 | |
|
| | | | |
(1) | This is a Euro denominated borrowing. See the disclosure below in the Senior Notes section for further information. |
As of September 27, 2019,October 1, 2021, there waswere approximately $881.9$869.5 million of outstanding foreign currency borrowings.
As of October 1, 2021, the Company had $71.9 million of borrowings under the revolving credit facility, 0 borrowings under the receivables facility, $532.6 million of cash and cash equivalents, approximately $1,091.6 million of availability under the senior secured revolving credit facility and $400.0 million of availability under the receivables facility. During fiscal 2021, the Company repaid $780.0 million of outstanding borrowings under the United States revolving credit facility, $500.0 million aggregate principal amount of 4.750% Senior Notes due 2026 (the "4.750% 2026 Notes") and $315.6 million of outstanding borrowings under the receivables facility utilizing cash and cash equivalents on hand. Additionally, during fiscal 2021, the Company made $244.2 million of net repayments on term loan borrowings.
Senior Secured Credit Agreement
Aramark Services, Inc. ("ASI"), an indirect wholly owned subsidiary of the Company, and certain of its subsidiaries entered into a credit agreement on March 28, 2017 (as supplemented or otherwise modified from time to time, the "Credit Agreement"), which replaced the existing Amended and Restated Credit Agreement, originally dated January 26, 2007, and last amended on March 28, 2014 (the "Previous Credit Agreement").
The Credit Agreement includes senior secured term loan facilities consisting of the following as of September 27, 2019:October 1, 2021:
•A U.S.United States dollar denominated term loan to ASI in the amount of $829.3 million, due 2024, ("U.S. Term Loan B due 2024") and $1,658.0$1,660.4 million, due 2025 ("U.S. Term Loan BB-3 Loans due 2025"), $833.6 million, due 2027 ("U.S. Term B-4 Loans due 2027") and $722.0 million due 2028 ("U.S. Term B-5 Loans due 2028");
•A yen denominated term loan to ASI in the amount of ¥10,378.1¥9,087.8 million (approximately $96.2$81.8 million), due 20232026 (the "Yen Term LoanC-2 Loans due 2023"2026");
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•A Canadian dollar denominated term loan to Aramark Canada Ltd. in the amount of CAD365.3C$251.7 million (approximately $275.7$199.0 million), due 20232026 (the "Canadian Term Loan A-2A-3 Loans due 2023"2026"); and
•A euro denominated term loan to Aramark Investments Limited, a U.K. borrower, in an amount of €124.4€108.5 million (approximately $136.0$125.7 million), of which €32.3 million (approximately $37.4 million) is due in 2023 (the "Euro Term LoanA-1 Loans due 2023") and the remainder of which is due 2026 (the "Euro Term A-2 Loans due 2026").
The Credit Agreement also includes a revolving credit facility available for loans in U.S.United States dollars, Canadian dollars, euros and pounds sterling to ASI and certain foreign borrowers with aggregate commitments underof $1.2 billion. A portion of the Credit Agreementrevolving credit facility with commitments of $1.0 billion. The$53.7 million has a final maturity date of October 1, 2023 and the remainder of the revolving credit facility has a final maturity date of April 6, 2026. As of October 1, 2023. As of September 27, 2019,2021, there was approximately $897.8$1,091.6 million available for borrowing under the revolving credit facility. The Company's revolving credit facility includes a $250.0 million sublimit for letters of credit. The revolving credit facility may be drawn by ASI as well as by certain foreign subsidiaries of ASI. Each foreign borrower is subject to a sublimit of $150.0 million with respect to borrowings under the revolving credit facility. In addition to paying interest on outstanding principal under the senior secured credit facilities, the Company is required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. On October 1, 2018, ASI entered into Amendment No. 7 ("Amendment No. 7")The revolving credit facility is subject to the Credit Agreement which changed thea commitment fee ranging from a rate range from 0.25% to 0.40% per annum toof 0.15% to 0.30% per annum. The actual rate within the range is based on a Consolidated Leverage Ratio, as defined in the Credit Agreement.
The primary borrower under the senior secured credit facilities is ASI. In addition, certain subsidiaries of ASI are borrowers of the term loan facilities and/or the revolving credit facility. The Company is not a guarantor under the senior secured credit facilities and is not subject to the covenants or obligations under the Credit Agreement.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The applicable margin on the U.S. Term LoanB-3 Loans due 20242025 and the U.S. Term Loan BB-4 Loans due 20252027 is 1.75% with respect to eurocurrency (LIBOR) borrowings, subject to a LIBOR floor of 0.00%, and 0.75% with respect to base-rate borrowings, subject to a minimum base rate of 0.00%. The applicable margin on the U.S. Term B-5 Loans due 2028 is 2.50% with respect to eurocurrency (LIBOR) borrowings, subject to a LIBOR floor of 0.00% and 1.50% with respect to base-rate borrowings, subject to a minimum base rate of 0.00%. The applicable margin spread for the Yen Term LoanC-2 Loans due 2023,2026, the Canadian Term Loan A-2A-3 Loans due 2026, the Euro Term A-1 Loans due 2023, the Euro Term LoanA-2 Loans due 20232026 and the senior secured revolving credit facility is 1.125% to 1.625% (as of September 27, 2019October 1, 2021 - 1.375%1.625%) with respect to eurocurrency (LIBOR) borrowings, bankers’ acceptance ("BA") rate borrowings, Tokyo Interbank offer ("TIBOR") rate borrowings and letters of credit fees, subject to a floor of 0.00%, and 0.125% to 0.625% (as of September 27, 2019October 1, 2021 - 0.375%0.625%) with respect to U.S.United States and Canadian base rate borrowings, subject to a floor of 0.00%, and 1.1576% to 1.6576% (as of October 1, 2021 - 1.6576%) with respect to Sterling Overnight Index Average ("SONIA") rate borrowings, subject to a floor of 0.00%. The actual spreads within all ranges referred to above are based on a Consolidated Leverage Ratio, as defined in the Credit Agreement.
Fiscal 2021 Refinancing Transactions
On April 6, 2021, the Company entered into Amendment No. 11 to the Credit Agreement. Amendment No. 11 provided for, among other things, the extension of the maturity date, in each case, applicable to a portion of the revolving credit facility (the "2018 Tranche Revolving Facility"), a portion of the Canadian dollar denominated term loan due October 2023 (the "Canadian Term A-2 Loans due 2023"), all of the Euro Term A-1 Loans due 2023, all of the Yen Term C-1 Loans due 2023 and all of the United States dollar denominated term loan due 2024 (the "U.S. Term B-2 Loans due 2024") and an increase of approximately $200.0 million in commitments available under the 2018 Tranche Revolving Facility, in each case, under the Credit Agreement through the establishment of Replacement Revolving Commitments (as defined in the Credit Agreement), New Revolving Commitments (as defined in the Credit Agreement), borrowings of Extended Term Loans (as defined in the Credit Agreement) and borrowings of Refinancing Term Loans (as defined in the Credit Agreement), as applicable, under the Credit Agreement comprised of (i) in the case of the portion of the 2018 Tranche Revolving Facility which was extended, new 2021 Tranche Revolving Commitments (the "New 2021 Tranche Revolving Commitments") in an amount equal to $1,153.1 million, terminating in April 2026, (ii) in the case of the portion of the Canadian Term A-2 Loans due 2023 which was extended, the new Canadian Term A-3 Loans due 2026 in an amount equal to C$276.9 million, due in April 2026, (iii) in the case of the portion of the Euro Term A-1 Loans due 2023 which was extended, the new Euro Term A-2 Loans due 2026 in an amount equal to €78.8 million, due in April 2026, (iv) in the case of the Yen Term C-1 Loans due 2023, the new Yen Term C-2 Loans due 2026 in an amount equal to ¥9,343.3 million, due in April 2026 and (v) in the case of the U.S. Term B-2 Loans due 2024, the new U.S. Term B-5 Loans due 2028 in an amount equal to $833.0 million, due in April 2028. The new Canadian Term A-3 Loans due 2026, Euro Term A-2 Loans due 2026, Yen Term C-2 Loans due 2026 and U.S. Term B-5 Loans due 2028 were funded in full on April 6, 2021 and were applied by the Company to refinance in part the Canadian Term A-2 Loans due 2023 and Euro Term A-1 Loans due 2023 and to refinance in full the Yen Term C-1 Loans due 2023 and U.S. Term B-2 Loans due 2024, in each case, previously outstanding under the Credit Agreement. As of April 6, 2021 and after giving effect to Amendment No. 11, $53.7 million of 2018 Tranche Revolving Commitments, €33.6 million of Euro Term A-1 Loans due 2023
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and C$27.1 million of Canadian Term A-2 Loans due 2023 were outstanding under the Credit Agreement, as amended by Amendment No. 11, in each case due in October 2023 (which date is unchanged from the maturity date previously applicable to such loans and commitments, as applicable). The Canadian Term A-2 Loans due 2023 were repaid in full as of October 1, 2021.
The New 2021 Tranche Revolving Commitments are subject to substantially similar terms currently relating to guarantees, collateral, mandatory prepayments and covenants that are applicable to the Company’s existing 2018 Tranche Revolving Facility outstanding under the Credit Agreement. For the avoidance of doubt, the remaining 2018 Revolving Tranche Commitments shall be available only in United States dollars and shall bear interest and accrue unused fees at rates consistent with the 2021 Tranche Revolving Facility.
The Canadian Term A-3 Loans due 2026 are subject to substantially similar terms currently relating to guarantees, collateral, mandatory prepayments and covenants that are applicable to the Company’s Canadian Term A-2 Loans due 2023 under the Credit Agreement. Amortization payments in respect of the remaining Canadian Term A-2 Loans due 2023 have been reduced on a pro rate basis to reflect the partial refinancing thereof.
The Euro Term A-2 Loans due 2026 are subject to substantially similar terms currently relating to guarantees, collateral, mandatory prepayments and covenants that are applicable to the Company’s existing Euro Term A-1 Loans due 2023 outstanding under the Credit Agreement. Amortization payments in respect of the remaining Euro Term A-1 Loans have been reduced on a pro rata basis to reflect the partial refinancing thereof.
The Yen Term C-2 Loans due 2026 are subject to substantially similar terms currently relating to guarantees, collateral, mandatory prepayments and covenants that are applicable to the Company’s existing Yen Term C-1 Loans due 2023 outstanding under the Credit Agreement, except for the option to use TIBOR rate borrowings on or after January 31, 2022.
The U.S. Term B-5 Loans due 2028 are subject to substantially similar terms currently relating to guarantees, collateral, mandatory prepayments and covenants that are applicable to the Company’s existing U.S. Term B Loans outstanding under the Credit Agreement.
The Company capitalized third-party costs of approximately $16.8 million related to banker fees, rating agency fees and legal fees directly attributable to the refinancings in Amendment No. 11, of which $11.6 million are included in "Long-Term Borrowings" and $5.2 million are included in "Other Assets" on the Consolidated Balance Sheet as of October 1, 2021. Amounts paid for the capitalized third-party costs are included within "Other Financing activities" on the Consolidated Statements of Cash Flows for the fiscal year ended October 1, 2021. Additionally the Company recorded a $2.7 million non-cash loss for the write-off of unamortized deferred financing costs on the revolving credit facility and U.S. Term B-2 Loans due 2024 to "Interest and Other Financing Costs, net" in the Consolidated Statements of (Loss) Income for the fiscal year ended October 1, 2021.
Fiscal 2020 Refinancing Transactions
On January 15, 2020, ASI entered into Amendment No. 8 to the Credit Agreement. Amendment No. 8 provided for an incremental, senior secured credit facility under the Credit Agreement, the U.S. Term B-4 Loans due 2027, comprised of a United States dollar denominated term loan made to ASI in an amount equal to $900.0 million, due January 15, 2027. The U.S. Term B-4 Loans due 2027 were borrowed with an original issue discount of 0.125%.
The net proceeds from the U.S. Term B-4 Loans due 2027 were used to redeem the aggregate $900.0 million principal amount outstanding on ASI’s 5.125% Senior Notes due 2024 (the “2024 Notes”) at a redemption price of 102.563% of the aggregate principal amount and to pay accrued interest, certain fees and related expenses. The Company recorded $20.9 million of charges to "Interest and Other Financing Costs, net" in the Consolidated Statements of (Loss) Income for the fiscal year ended October 2, 2020, consisting of the payment of a $23.1 million call premium and a $2.2 million non-cash gain for the write-off of unamortized debt premium and unamortized deferred financing costs on the 2024 Notes. The Company capitalized third-party costs of approximately $6.6 million related to banker fees, rating agency fees and legal fees directly attributable to the U.S. Term B-4 Loans due 2027, which are included in "Long-Term Borrowings" on the Consolidated Balance Sheets. Amounts paid for the call premium and capitalized third-party costs are included within "Other financing activities" on the Consolidated Statements of Cash Flows for the fiscal year ended October 2, 2020.
The U.S. Term B-4 Loans due 2027 are subject to substantially similar terms relating to guarantees, collateral, mandatory prepayments and covenants that are applicable to the Company’s then existing U.S. Term B-2 Loans due 2024 and U.S. Term B-3 Loans due 2025, in each case, outstanding under the Credit Agreement as of October 2, 2020.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal 2019 Refinancing Transactions
On October 1, 2018, the Company extended the maturity dates of the then existing Revolving Credit Facility, Yen Term Loan due 2022, Canadian Term Loan due 2022, Canadian Term Loan due 2023 and Euro Term Loan due 2022 to October 1, 2023 and lowered the interest rates applicable to each such tranche of commitments or outstanding indebtedness, as applicable, as described in the preceding paragraph.
Fiscal 2018 Refinancing Transactions
On December 11, 2017, ASI entered into Incremental Amendment No. 2 to the Credit Agreement. Incremental Amendment No. 2 provided for an incremental senior secured credit facility under the Credit Agreement, the U.S. Term Loan B due 2025, comprised of a U.S. dollar denominated term loan made to ASI in an amount equal to $1,785.0 million, due on March 11, 2025.
The net proceeds from the U.S. Term Loan B due 2025 were used to finance the Avendra acquisition and, together with approximately $200.0 million of proceeds from a borrowing made under the Credit Agreement’s revolving credit facility, to repay the $633.8 million of principal outstanding on the U.S. Term Loan A due 2022 under the Credit Agreement, along with accrued interest and certain fees and related expenses. The Company recorded $5.7 million of charges to "Interest and Other Financing Costs, net" in the Consolidated Statements of Income for fiscal 2018 for the write-off of debt issuance costs.
During the first quarter of fiscal 2018, the Company capitalized third-party costs of approximately $8.9 million directly attributable to the U.S. Term Loan B due 2025, which are included in "Long-Term Borrowings" in the Consolidated Balance Sheets.
The U.S. Term Loan B due 2025 is subject to substantially similar terms relating to guarantees, collateral, mandatory prepayments and covenants that are applicable to the Company’s existing U.S. Term Loan B due 2024 outstanding under the Credit Agreement.above.
Incremental Facilities
The Credit Agreement provides that the Company has the right at any time to request one or more incremental term loan facilities or increases under existing term loan facilities and/or additional revolving credit facilities or increases under the existing revolving credit facility in an amount up to $1,400.0 million of incremental commitments in the aggregate plus an unlimited amount so long as the pro forma Consolidated Secured Debt to Covenant Adjusted EBITDA ratio (each as calculated in accordance with the Credit Agreement (the "Consolidated Secured Debt Ratio")) would not exceed 3.00 to 1.00, plus any amount of loans and commitments optionally prepaid and terminated under the senior secured credit facilities. The lenders under these facilities are not under any obligation to provide any such incremental facilities or commitments and any such addition of or increase in facilities or commitments will be subject to customary conditions precedent.
Prepayments and Amortization
The Credit Agreement requires usthe Company to prepay outstanding term loans, subject to certain exceptions, with:
•50% of ASI's annual excess cash flow (as defined in the Credit Agreement) with stepdownsstep-downs to 25% and 0% upon ASI's reaching certain Consolidated Secured Debt Ratio thresholds; provided, further, that such prepayment shall only be required to the extent excess cash flow for the applicable year exceeds $10.0 million;
•100% of the net cash proceeds of all nonordinarynon-ordinary course asset sales or other dispositions of property subject to certain exceptions and customary reinvestment rights; provided, further, that such prepayment shall only be required to the extent net cash proceeds exceeds $100.0 million; and
•100% of the net cash proceeds of any incurrence of debt, but excluding proceeds from certain debt permitted under the Credit Agreement.
The foregoing mandatory prepayments will be applied to the term loan facilities on a pro rata basis and will reduce the obligations to make scheduled amortization payments on a dollar for dollar basis as directed by the Company. The Company may voluntarily repay outstanding loans under the Credit Agreement any time without premium or penalty, other than (i) customary "breakage" costs with respect to LIBOR loans, and (ii) with respect to any voluntary prepayments of the U.S. Term Loan
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BB-5 Loans due 20242028 in connection with any repricing transaction (as defined in the Credit Agreement) effected prior to November 24, 2018, a 1% prepayment premium and (iii) with respect to any voluntary prepayments of the U.S. Term Loan B due 2025 in connection with any repricing transaction (as defined in the Credit Agreement) effected prior to December 12, 2018,October 6, 2021, a 1% prepayment premium. Prepaid term loans may not be reborrowed.
The Company made optional prepayments of approximately $500.0 million, $260.4 million and $330.6$194.1 million of outstanding U.S.United States dollar and Canadian dollar term loans during fiscal 2019,2021, 0 optional prepayments during fiscal 20182020 and optional prepayments of approximately $500.0 million of outstanding United States dollar term loans during fiscal 2017, respectively.2019.
If a change of control as defined in the Credit Agreement occurs, this will cause an event of default under the Credit Agreement. Upon an event of default, the new senior secured credit facilities may be accelerated, in which case the Company would be required to repay all outstanding loans plus accrued and unpaid interest and all other amounts outstanding under the new senior secured credit facilities under the Credit Agreement.
The Company is required to makenew Canadian Term A-3 Loans due 2026 require the payment of installments in quarterly principal payments onamounts of C$3.5 million from June 30, 2021 through March 31, 2023, C$5.2 million from June 30, 2023 through March 31, 2024, C$6.9 million from June 30, 2024 through March 31, 2025, C$10.4 million from June 30, 2025 through March 31, 2026 and C$159.2 million at maturity.
The new Euro Term A-2 Loans due 2026 require the Canadianpayment of installments in quarterly principal amounts of €1.0 million from June 30, 2021 through March 31, 2023, €1.5 million from June 30, 2023 through March 31, 2024, €2.0 million from June 30, 2024 through March 31, 2025, €3.0 million from June 30, 2025 through March 31, 2026 and €45.3 million at maturity.
The remaining Euro Term Loan A-2A-1 Loans due 2023 require the payment of installments in quarterly principal amounts of 1.25%, 1.25%, 1.88%, 2.50%€0.7 million from June 30, 2021 through September 30, 2021, €1.0 million from December 31, 2021 through September 30, 2022, €1.5 million from December 31, 2022 through June 30, 2023 and 3.75% per annum€24.0 million at maturity.
The new Yen Term C-2 Loans due 2026 require the payment of their funded totalinstallments in quarterly principal amounts of ¥116.8 million from June 30, 2021 through March 31, 2023, ¥175.2 million from June 30, 2023 through March 31, 2024, ¥233.6 million from June 30, 2024 through March 31, 2025, ¥350.4 million from June 30, 2025 through March 31, 2026 and ¥5,372.4 million at
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
maturity.
The U.S. Term B-5 Loans due 2028 require the payment of installments in a quarterly principal amount during the first, second, third, fourthof $2.1 million from June 30, 2021 through March 31, 2028, and fifth years subsequent to entering into Amendment No. 7$774.7 million at maturity. All quarterly amortization installments with respect to the Credit Agreement, with the remaining balanceU.S. Term B-5 Loans due at maturity. The Company is required to make quarterly principal repayments on the Yen Term Loan due 2023 and the Euro Term Loan due 20232028 were repaid in quarterly amountsfull as of 1.25%, 1.25%, 1.75%, 2.50% and 3.75% per annum of their funded total principal amount during the first, second, third, fourth and fifth years subsequent to entering into Amendment No. 7 to the Credit Agreement, with the remaining balance due at maturity.October 1, 2021.
Guarantees
All obligations under the Credit Agreement are unconditionally guaranteed by Aramark Intermediate HoldCo Corporation and, subject to certain exceptions, substantially all of ASI's existing and future wholly-owned domestic subsidiaries excluding certain immaterial subsidiaries, receivables facility subsidiaries, certain other customarily excluded subsidiaries and certain subsidiaries designated under the Credit Agreement as "unrestricted subsidiaries," referred to, collectively, as the U.S.United States Guarantors. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by (i) a pledge of 100% of the capital stock of ASI, (ii) pledges of 100% of the capital stock (or 65% of voting stock and 100% of non-voting stock, in the case of the stock of foreign subsidiaries) held by ASI, Aramark Intermediate HoldCo Corporation or any of the U.S.United States Guarantors and (iii) a security interest in, and mortgages on, substantially all tangible assets of Aramark Intermediate HoldCo Corporation, ASI or any of the U.S.United States Guarantors.
Certain Covenants
The Credit Agreement contains certaina number of covenants that, among other things, restrict, subject to certain exceptions, ASI's ability and the ability of its restricted subsidiaries to: incur additional indebtedness; issue preferred stock or provide guarantees; create liens on assets; engage in mergers or consolidations; sell assets; pay dividends, make distributions or repurchase its capital stock; make investments, loans or advances; repay or repurchase any subordinated debt, except as scheduled or at maturity; create restrictions on the payment of dividends or other transfersamounts to ASI from its restricted subsidiaries; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing ASI's subordinated debt;debt (or any indebtedness that refinances its subordinated debt); and fundamentally change ASI's business. In addition, the Credit Agreement requires ASI to comply with a maximum Consolidated Secured Debt Ratio maintenance covenant. The Credit Agreement also contains certain customary affirmative covenants, such as financial and other reporting, and certain events of default. At September 27, 2019,October 1, 2021, ASI was in compliance with all of these covenants.
The Credit Agreement requires ASI to maintain a maximum Consolidated Secured Debt Ratio, defined as consolidated total indebtedness secured by a lien to Covenant Adjusted EBITDA, of 5.125x. Consolidated total indebtedness secured by a lien is defined in the Credit Agreement as total indebtedness consisting of debt for borrowed money, capitalfinance leases, debt in respect of sale-leaseback transactions, disqualified and preferred stock and advances under the Receivables Facilityreceivables facility secured by a lien reduced by the amount of cash and cash equivalents onin the consolidated balance sheet that is free and clear of any lien. Non-compliance with the maximum Consolidated Secured Debt Ratio could result in the requirement to immediately repay all amounts outstanding under the Credit Agreement, which, if ASI's lenders under the Credit Agreement (other than the lenders in respect of ASI’s U.S. Term Loan BB-3 Loans due 20242025, U.S. Term B-4 Loans due 2027 and U.S. Term Loan BB-5 Loans due 20252028 which lenders shall not benefit from the maximum Consolidated Secured Debt Ratio) failed to waive any such default, would also constitute a default under the indentures governing the senior notes.
On April 22, 2020, as a result of the impact of COVID-19 on the Company's business, ASI entered into Amendment No. 9 to the Credit Agreement. Amendment No. 9 provided for a covenant waiver period which suspended the Consolidated Secured Debt Ratio covenant required under the credit agreement for four fiscal quarters, commencing with the fourth quarter of fiscal 2020 through the third quarter of fiscal 2021, subject to, among other things, ongoing compliance with a minimum liquidity condition of $400.0 million and restrictions on making certain restricted payments (including share repurchases) and investments in unrestricted subsidiaries, in each case, as set forth in Amendment No. 9. This exclusion was intended to prevent the effects of COVID-19 from impacting the covenant calculation. The covenant waiver period expired at the beginning of the fourth quarter of fiscal 2021. The Consolidated Secured Debt Ratio debt covenant is once again effective and the amendment adjusted period ended October 1, 2021 consists of results from the third quarter of fiscal 2019 through the first quarter of fiscal 2020 plus the fourth quarter of fiscal 2021, excluding the results of the second quarter of fiscal 2020 through the third quarter of fiscal 2021. The actual ratio at September 27, 2019October 1, 2021 was 1.78x.2.32x.
The Credit Agreement establishes an incurrence-based minimum Interest Coverage Ratio, defined as Covenant Adjusted EBITDA to consolidated interest expense, as a condition for ASI and its restricted subsidiaries to incur additional indebtedness and to make certain restricted payments. The minimum Interest Coverage Ratio is 2.00x for the term of the Credit Agreement. If ASI does not maintain this minimum Interest Coverage Ratio calculated on a pro forma basis for any such additional indebtedness or restricted payments, it could be prohibited from being able to incur additional indebtedness, other than the
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
additional funding provided for under the Credit Agreement and pursuant to specified exceptions, and make certain restricted payments, other than pursuant to certain exceptions. The actual ratio was 5.02x2.60x for the fiscal year ended September 27, 2019.October 1, 2021.
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A failure to pay any obligations under the Credit Agreement as they become due or any event causing amounts to become due prior to their stated maturity could result in a cross-default and potential acceleration of the Company’s other outstanding debt obligations, including the senior notes.
Senior Notes
4.750% Senior Notes due 2026
On June 2, 2021, the Company redeemed the aggregate $500.0 million principal amount outstanding on the 4.750% 2026 Notes at a redemption price of 102.375% of the aggregate principal amount together with accrued and unpaid interest. The Company recorded $16.0 million of charges to "Interest and Other Financing Costs, net" on the Consolidated Statements of (Loss) Income for the fiscal year ended October 1, 2021, consisting of the payment of a $11.9 million call premium and a $4.1 million non-cash loss for the write-off of unamortized deferred financing costs on the 4.750% 2026 Notes. The amount paid for the call premium is included within "Other financing activities" on the Consolidated Statements of Cash Flows for the fiscal year ended October 1, 2021.
6.375% Senior Notes due 2025
On April 27, 2020, ASI issued $1,500.0 million aggregate principal amount of 6.375% Senior Notes due May 1, 2025 (the "6.375% 2025 Notes"). ASI used the net proceeds from the 6.375% 2025 Notes for general corporate purposes. The Company capitalized third-party costs of approximately $22.3 million directly attributable to the 6.375% 2025 Notes, which are included in "Long-Term Borrowings" on the Consolidated Balance Sheets and within "Other financing activities" on the Consolidated Statements of Cash Flows for the fiscal year ended October 2, 2020.
The 6.375% 2025 Notes were issued pursuant to an indenture, dated as of April 27, 2020 (the "6.375% 2025 Notes Indenture"), entered into by and among ASI, the Company and certain other Aramark entities, as guarantors, and the U.S. Bank National Association, as trustee. The 6.375% 2025 Notes were issued at par.
The 6.375% 2025 Notes are senior unsecured obligations of ASI. The 6.375% 2025 Notes rank equal in right of payment to all of the Issuer's existing and future senior indebtedness and will rank senior in right of payment to the Issuer's future subordinated indebtedness. The 6.375% 2025 Notes are guaranteed on a senior, unsecured basis by the Company and substantially all of the domestic subsidiaries of ASI. The guarantees of the 6.375% 2025 Notes rank equal in right of payment to all of the senior obligations of such guarantor. The 6.375% 2025 Notes are effectively subordinated to all of ASI's existing and future secured indebtedness, to the extent of the value of the assets securing that indebtedness, and structurally subordinated to all of the liabilities of any of ASI's subsidiaries that do not guarantee the 6.375% 2025 Notes. Interest on the 6.375% 2025 Notes is payable on May 1 and November 1 of each year.
In the event of certain types of changes of control, the holders of the 6.375% 2025 Notes may require ASI to purchase for cash all or a portion of their 6.375% 2025 Notes at a purchase price equal to 101% of the principal amount of such 6.375% 2025 Notes, plus accrued and unpaid interest, if any, to, but not including, the purchase date. At any time prior to May 1, 2022, ASI has the option to redeem all or a part of the 6.375% 2025 Notes at a purchase price equal to 100% of the principal amount of such 6.375% 2025 Notes plus an applicable premium and accrued and unpaid interest, if any, to, but not including the date of redemption. In addition, prior to May 1, 2022, ASI has the option to redeem up to 40% of the aggregate principal amount of all 6.375% 2025 Notes at a purchase price equal to 106.375% of the principal amount of such 6.375% 2025 Notes plus accrued and unpaid interest, if any, to, but not including, the date of redemption, with the net cash proceeds of one or more equity offerings, provided that at least 50% of the sum of the aggregate principal amount of the 6.375% 2025 Notes originally issued remain outstanding immediately after the purchase and the redemption occurs within 90 days of the closing date of the equity offering.
The 6.375% 2025 Notes Indenture contains covenants limiting ASI'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 ASI; enter into sale and leaseback transactions; merge, consolidate, sell or otherwise dispose of all or substantially all of ASI's and its restricted subsidiaries assets; and designate ASI's subsidiaries as unrestricted subsidiaries. The 6.375% 2025 Notes Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the applicable series of 6.375% 2025 Notes to become or to be declared due and payable. Further, a failure to pay any obligations under the 6.375% 2025 Notes Indenture as they become due or any event causing amounts to become due prior to their stated maturity could result in a cross-default and potential acceleration of the Company’s other outstanding debt obligations, including the other senior notes and obligations under the Credit Agreement.
5.000% Senior Notes due 2028
On January 18, 2018, ASI issued $1,150.0 million aggregate principal amount of 5.000% Senior Notes due February 1, 2028 (the "2028 Notes"). The net proceeds from the 2028 Notes were used to finance the AmeriPride acquisition, to pay down certain
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
borrowings under the revolving credit facility and to pay fees related to the transaction. During the second quarter of fiscal 2018, theThe Company capitalized third-party costs of approximately $14.2 million directly attributable to the 2028 Notes, which are included in "Long-Term Borrowings" inon the Consolidated Balance Sheets.Sheets and are being amortized over the debt period.
The 2028 Notes were issued pursuant to an indenture, dated as of January 18, 2018 (the "2028 Notes Indenture"), entered into by and among ASI, the Company and certain other Aramark entities, as guarantors, and the U.S. Bank National Association, as trustee. The 2028 Notes were issued at par.
The 2028 Notes are senior unsecured obligations of ASI. The 2028 Notes rank equal in right of payment to all of the Issuer's existing and future senior indebtedness and will rank senior in right of payment to the Issuer's future subordinated indebtedness. The 2028 Notes are guaranteed on a senior, unsecured basis by the Company and substantially all of the domestic subsidiaries of ASI. The guarantees of the 2028 Notes rank equal in right of payment to all of the senior obligations of such guarantor. The 2028 Notes are effectively subordinated to all of ASI's existing and future secured indebtedness, to the extent of the value of the assets securing that indebtedness, and structurally subordinated to all of the liabilities of any of ASI's subsidiaries that do not guarantee the 2028 Notes. Interest on the 2028 Notes is payable on February 1 and August 1 of each year, commencing on August 1, 2018.year.
At any time prior to February 1, 2023, ASI has the option to redeem all or a part of the 2028 Notes at a purchase price equal to 100% of the principal amount of such 2028 Notes plus an applicable premium and accrued and unpaid interest, if any, to, but not including the date of redemption. Prior to February 1, 2021, ASI has the option to redeem up to 40% of the aggregate principal amount of all 2028 Notes at a purchase price equal to 105% of the principal amount of such 2028 Notes plus accrued and unpaid interest, if any, to, but not including, the date of redemption, with the net cash proceeds of one or more equity offerings, provided that at least 50% of the sum of the aggregate principal amount of the 2028 Notes originally issued remain outstanding immediately after the purchase.
The 2028 Notes Indenture contains covenants limiting ASI'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 ASI; enter into sale and leaseback transactions; merge, consolidate, sell or otherwise dispose of all or substantially all of ASI's and its restricted subsidiaries assets; and designate ASI's subsidiaries as unrestricted subsidiaries. The 2028 Notes Indenture also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the applicable series of 2028 Notes to become or to be declared due and payable. Further, a failure to pay any obligations under the 2028 Notes Indenture as they become due or any event causing amounts to become due prior to their stated maturity could result in a cross-default and potential acceleration of the Company’s other outstanding debt obligations.obligations, including the other senior notes and obligations under the Credit Agreement.
5.000% Senior Notes due 2025 and 3.125% Senior Notes due 2025
On March 22, 2017, ASI issued $600.0 million of 5.000% Senior Notes due April 1, 2025 (the "5.000% 2025 Notes"). The 5.000% 2025 Notes were issued pursuant to an indenture (the "5.000% 2025 Notes Indenture"), entered into by and among ASI, the Company and certain other Aramark entities, as guarantors, and The Bank of New York Mellon, as trustee. The 5.000% 2025 Notes were issued at par. On March 27, 2017, Aramark International Finance S.à r.l..r.l. ("AIFS"), an indirect wholly owned subsidiary of the Company, issued €325.0 million of 3.125% Senior Notes due April 1, 2025 (the "3.125% 2025 Notes" and, together with the 5.000% 2025 Notes, the "2025 Notes"). The 3.125% 2025 Notes were issued pursuant to an indenture (the "3.125% 2025 Notes Indenture"), entered into by and among AIFS, the Company and certain other Aramark entities, as guarantors, The Bank of New York Mellon, as trustee and registrar, and The Bank of New York Mellon, London Branch, as paying agent and transfer agent. The 3.125% 2025 Notes were issued at par.
The 2025 Notes are senior unsecured obligations of the respective Issuers. Each series of the 2025 Notes ranks equal in right of payment to all of the respective Issuer's existing and future senior indebtedness, including the senior secured credit facilities
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the Credit Agreement, and, in the case of the 5.000% 2025 Notes with respect to ASI ASI's 5.125% Senior Notes due 2024 (the "2024 Notes") and 4.750% Senior Notes due 2026 (the "2026 Notes") and will rank senior in right of payment to the respective Issuer's future subordinated indebtedness. The 2025 Notes are guaranteed on a senior, unsecured basis by the Company and substantially all of the domestic subsidiaries of ASI and the 3.125% 2025 Notes are guaranteed on a senior, unsecured basis by ASI. The guarantees of the 2025 Notes rank equal in right of payment to all of the senior obligations of such guarantor, including guarantees of the senior secured credit facilities the 2024 Notes, the 2026 Notes and the 2028 Notes, as applicable, and in the case of the 3.125% 2025 Notes with respect to ASI, ASI’s obligations under the senior secured credit facilities, the 2024 Notes, the 2026 Notes, the 5.000% 2025 Notes and the 2028 Notes. Each series of the 2025 Notes and the related guarantees thereof are effectively subordinated to all of the respective Issuers' existing and future secured indebtedness, including obligations and/or guarantees of the senior secured credit facilities under the Credit Agreement, to the extent of the value of the assets securing that indebtedness, and structurally subordinated to all of the liabilities of any of ASI's subsidiaries that do not guarantee the 2025 Notes. Interest on the 2025 Notes is payable on April 1 and October 1 of each year, commencing on October 1, 2017.year.
In the event of certain types of changes of control, the holders of the 2025 Notes may require the applicable Issuer to purchase for cash all or a portion of their 2025 Notes at a purchase price equal to 101% of the principal amount of such 2025 Notes, plus accrued and unpaid interest, if any, to, but not including, the purchase date. Beginning April 1, 2020, ASI has the option to redeem all or a portion of the 5.000% 2025 Notes at any time at the redemption prices set forth in the 5.000% 2025 Notes Indenture, plus accrued and unpaid
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest. Beginning April 1, 2020, AIFS has the option to redeem all or a portion of the 3.125% 2025 Notes at any time at the redemption prices set forth in the 3.125% 2025 Notes Indenture, plus accrued and unpaid interest.
The 5.000% 2025 Notes Indenture and the 3.125% 2025 Notes Indenture contain covenants limiting ASI'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 ASI; enter into sale and leaseback transactions; merge, consolidate, sell or otherwise dispose of all or substantially all of ASI's and its restricted subsidiaries assets; and designate ASI's subsidiaries as unrestricted subsidiaries. The 5.000% 2025 Notes Indenture and the 3.125% 2025 Notes Indenture also provide for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the applicable series of 2025 Notes to become or to be declared due and payable. Further, a failure to pay any obligations under the 5.000% 2025 Notes Indenture or the 3.125% 2025 Notes Indenture as they become due or any event causing amounts to become due prior to their stated maturity could result in a cross-default and potential acceleration of the Company’s other outstanding debt obligations, including the other senior notes and obligations under the Credit Agreement.
5.125% Senior Notes due 2024 and 4.75% Senior Notes due 2026
On December 17, 2015, ASI issued $400.0 million of 5.125% Senior Notes due January 15, 2024 (the "Original 2024 Notes"), pursuant to an indenture, dated as of December 17, 2015 (the "2024 Base Indenture"), entered into by ASI, 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 offering of the Original 2024 Notes.
On May 31, 2016, ASI issued $1,000.0 million aggregate principal amount of senior unsecured notes, consisting of $500 million of additional 5.125% Senior Notes due January 15, 2024 (the "New 2024 Notes") and $500 million of 4.75% Senior Notes due June 1, 2026 (the "2026 Notes"). The New 2024 Notes constitute a further issuance of the Original 2024 Notes (together with the New 2024 Notes, the "2024 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 "2024 Supplemental Indenture" and together with the 2024 Base Indenture, the "2024 Notes Indenture"), entered into by ASI, the Company and 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 ASI, the Company and 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 created an effective yield of 4.6%. The premium was recorded to "Long-Term Borrowings" in the Consolidated Balance Sheets and is amortized to "Interest and Other Financing Costs, net" in the Consolidated Statements of Income until maturity in 2024.
The 2024 Notes and 2026 Notes are senior unsecured obligations of ASI. The 2024 Notes and 2026 Notes rank equal in right of payment to all of the ASI's existing and future senior debt and senior in the right of payment to the ASI's future debt and other obligations that are expressly subordinated in right of payment to the 2024 Notes and 2026 Notes. The 2024 Notes and 2026 Notes are guaranteed on a senior, unsecured basis by the Company and substantially all of the domestic subsidiaries of ASI. The
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2024 Notes and 2026 Notes and the guarantees thereof are effectively subordinated to all existing and future secured debt of ASI 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 ASI's subsidiaries that do not guarantee the 2024 Notes and 2026 Notes. Interest on the 2024 Notes is payable on January 15 and July 15 of each year. Interest on the 2026 Notes is payable on June 1 and December 1 of each year.
In the event of certain types of changes of control, the holders of the 2024 Notes or 2026 Notes may require ASI to purchase for cash all or a portion of their 2024 Notes or 2026 Notes, as applicable, at a purchase price equal to 101% of the principal amount of such notes, plus accrued and unpaid interest, if any, but not including, the purchase date. Beginning January 15, 2019, ASI has the option to redeem all or a portion of the 2024 Notes at any time at the redemption prices set forth in the 2024 Notes Indenture, plus accrued and unpaid interest. Beginning June 1, 2021, ASI has the option to redeem all or a portion of the 2026 Notes at any time at the redemption prices set forth in the 2026 Notes Indenture, plus accrued and unpaid interest.
The 2024 Notes Indenture and 2026 Notes Indenture contain covenants limiting ASI'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 ASI; enter into sale and leaseback transactions; merge, consolidate, sell or otherwise dispose of all or substantially all of ASI's assets; and designate ASI'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 2024 Notes and 2026 Notes to become or to be declared due and payable.
Fiscal 2017 Refinancing Transactions
During fiscal 2017, the net proceeds from the 2025 Notes and borrowings under the senior secured term loan facilities under the Credit Agreement were used to repay all existing outstanding borrowings under the term loans under the Previous Credit Agreement, to redeem ASI's 5.750% senior notes, due March 2020 (the "2020 Notes"), and to pay certain fees and related expenses. The Company recorded $28.5 million of charges to "Interest and Other Financing Costs, net" in the Consolidated Statements of Income for the fiscal year ended September 29, 2017, consisting of $25.2 million of non-cash charges for the write-off of deferred financing costs and original issue discount and $3.3 million for the call premium on the 2020 Notes. The Company used the borrowings to pay down a portion of the existing U.S. Term Loan B due 2024 loans outstanding under the Credit Agreement and to pay certain related fees and expenses.
Receivables Facility
The Company has an agreement (the "Receivables Facility") with 3 financial institutions where it sells on a continuous basis an undivided interest in all eligible trade accounts receivable, as defined in the Receivables Facility. The maximum amount available under the Receivables Facility is $400.0 million, which expires in May 2021.million. In addition, the Receivables Facility includes a seasonal tranche which increases the capacity of the Receivables Facility and maximum amount available by $100.0 million from October through March. During the third quarter of fiscal 2021, the Company extended the scheduled maturity date of the Receivables Facility from June 2022 to June 2024. All other terms and conditions of the agreement remained largely unchanged. Amounts borrowed under the Receivables Facility fluctuate monthly based on the Company's funding requirements and the level of qualified receivables available to collateralize the Receivables Facility.
Pursuant to the Receivables Facility, the Company formed ARAMARK Receivables, LLC, a wholly-owned, consolidated, bankruptcy-remote subsidiary. ARAMARK Receivables, LLC was formed for the sole purpose of buying and selling receivables generated by certain subsidiaries of the Company. Under the Receivables Facility, the Company and certain of its subsidiaries transfer without recourse all of their accounts receivable to ARAMARK Receivables, LLC. As collections reduce previously transferred interests, interests in new, eligible receivables are transferred to ARAMARK Receivables, LLC, subject to meeting certain conditions.
As of September 27, 2019October 1, 2021, there are 0 outstanding borrowings under the Receivables Facility. As of and September 28, 2018,October 2, 2020, there were 0$315.6 million borrowings outstanding on the Receivables Facility.
Future Maturities and Interest and Other Financing Costs, net
At September 27, 2019,October 1, 2021, annual maturities on long-term borrowings maturing in the next five fiscal years and thereafter (excluding the $48.3$53.5 million reduction to long-term borrowings from debt issuance costs and the increase of $10.0$0.8 million reduction from the premiumdiscount on the 2024 Notes)U.S. Term B-4 Loans due 2027) are as follows (in thousands):
|
| | | |
2020 | $ | 69,928 |
|
2021 | 69,936 |
|
2022 | 72,695 |
|
2023 | 93,736 |
|
2024 | 2,106,525 |
|
Thereafter | 4,307,650 |
|
| | | | | |
2022 | $ | 60,294 | |
2023 | 79,755 | |
2024 | 47,174 | |
2025 | 4,219,793 | |
2026 | 343,619 | |
Thereafter | 2,769,524 | |
ARAMARK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of interest and other financing costs, net, are summarized as follows (in thousands):
| | | | Fiscal Year Ended | | Fiscal Year Ended |
| | September 27, 2019 | | September 28, 2018(1) | | September 29, 2017(1) | | October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Interest expense | | $ | 352,812 |
| | $ | 353,048 |
| | $ | 285,995 |
| Interest expense | | $ | 413,713 | | | $ | 389,434 | | | $ | 352,812 | |
Interest income | | (28,985 | ) | | (16,964 | ) | | (12,372 | ) | Interest income | | (15,250) | | | (14,990) | | | (28,985) | |
Other financing costs | | 11,160 |
| | 10,451 |
| | 7,362 |
| Other financing costs | | 2,903 | | | 8,356 | | | 11,160 | |
Total | | $ | 334,987 |
| | $ | 346,535 |
| | $ | 280,985 |
| Total | | $ | 401,366 | | | $ | 382,800 | | | $ | 334,987 | |
|
| |
(1) | Fiscal 2018 and 2017 balances have been restated to reflect the impact of the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (see Note 1).
|
ARAMARK AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively for designated hedges. 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 approximately $2.5$3.1 billion notional amount of outstanding interest rate swap agreements as of September 27, 2019,October 1, 2021, which fixesfix the rate on a like amount of variable rate borrowings through the first quarterDecember of fiscal 2023.2028. During fiscal 2019,2021, the Company entered into approximately $500.0 million notional amount of forward starting interest rate swap agreements to hedge the cash flow risk of variability in interest payments on variable rate borrowings. In addition, interest rate swaps with notional amounts of $575.0$250.0 million matured during fiscal 20192021. As a result of the Credit Agreement entered into in fiscal 2017, the Company de-designated the previous interest rate swap agreements as the terms of the interest rate swaps did not match the terms of the new term loans. Prior to the Credit Agreement, these agreements met the required criteria to be designated as cash flow hedging instruments. The Company then amended the interest rate swap agreements to match the terms of the new term loans under the Credit Agreement to meet the criteria to be designated as cash flow hedging instruments. As a result of the de-designation, the Company recorded charges to "Interest and Other Financing Costs, net" in the Consolidated Statements of Income during fiscal 2017 of approximately $2.9 million for the changes in market value of the interest rate swaps.
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. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of September 27, 2019October 1, 2021 and September 28, 2018October 2, 2020, approximately ($31.1)49.2) million and $36.2($87.6) million, respectively, of unrealized net of tax gains (losses)losses related to the interest rate swaps were included in "Accumulated other comprehensive loss,loss." respectively.
The following table summarizes the effect of ourthe Company's derivatives designated as cash flow hedging instruments on Other comprehensive income (loss) (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| October 1, 2021 | | October 2, 2020 | | September 27, 2019 |
Interest rate swap agreements(1) | $ | 1,228 | | | $ | (110,817) | | | $ | (84,392) | |
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| September 27, 2019 | | September 28, 2018 | | September 29, 2017 |
Interest rate swap agreements | $ | (84,392 | ) | | $ | 55,445 |
| | $ | 31,884 |
|
| | | | | |
(1) | Fiscal 2020 was impacted by changes in interest rates due to actions taken by the federal government in response to COVID-19. |
The following table summarizes the location and fair value, using Level 2 inputs (see Note 16 for a description of the fair value levels), of the Company's derivatives designated and not designated as hedging instruments in the Consolidated Balance Sheets (in thousands):
The Company has an outstanding Japanese yen denominated term loan in the amount of ¥10,378.1¥9,087.8 million. The term loan was designated as a hedge of the Company's net Japanese currency exposure represented by the equity investment in ourthe Company's Japanese affiliate, AIM Services Co., Ltd. Additionally, the Company has a Euro denominated term loan in the amount of €124.4€108.5 million. The term loan was designated as a hedge of the Company's net Euro currency exposure represented by certain holdings in ourthe Company's European affiliates.
NOTE 7. REVENUE RECOGNITION:
The Company generates revenue through sales of food, facility and uniform services to customers based on written contracts at the locations it serves. Within ourthe FSS United States and FSS International segments, the Company provides food and beverage services, including catering and retail services, or facilities services, including plant operations and maintenance, custodial, housekeeping, landscaping and other services. Within the Uniform segment, the Company provides a full service uniform
solution, including delivery, cleaning and maintenance. In accordance with ASC 606, the Company accounts for a customer contract when both parties have approved the arrangement and are committed to perform their respective obligations, each party's rights can be identified, payment terms can be identified, the contract has commercial substance and it is probable the Company will collect substantially all of the consideration to which it is entitled. Revenue is recognized upon the transfer of control of the promised product or service to customers in an amount that reflects the consideration the Company expects to receivebe entitled to in exchange for those goods and services.
The Company recognizes revenue when its performance obligation is satisfied. Each contract generally has 1 performance obligation, which is satisfied over time. The Company primarily accounts for its performance obligations under the series guidance, using the as-invoiced practical expedient when applicable. The Company applies the right to invoice practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contracts. Under this practical expedient, the Company recognizes revenue in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date and for which the Company has the right to invoice the customer. Certain arrangements include performance obligations which include variable consideration (primarily per transaction fees). For these arrangements, the Company does not need to estimate the variable consideration for the contract and allocate to the entire performance obligation; therefore, the variable fees are recognized in the period they are earned.
The following table presents revenue disaggregated by revenue source (in millions):
The Company defers sales commissions earned by its sales force that are considered to be incremental and recoverable costs of obtaining a contract tied to its food, facilities and uniform services. The deferred costs are amortized using the portfolio approach on a straight line basis over the average period of benefit, approximately 8.58.1 years, and are assessed for impairment on a periodic basis. Determination of the amortization period and the subsequent assessment for impairment of the contract cost asset requires judgment. During the fiscal year ended September 27, 2019, the Company expensed approximately $20.0 million of these costs to “Cost of services provided” inEmployee sales commissions are recorded within "Other Assets" on the Consolidated Statements of Income.Balance Sheets (see Note 1).
Long-term prepaid rent is amortized over the contract period. If a contract is terminated prior to its maturity date, the Company is typically reimbursed for the unamortized amount. During the fiscal year ended September 27, 2019, the Company expensed approximately $16.0 million of these costs to "Cost of services provided" inLong-term prepaid rent is recorded within "Operating Lease Right-of use Assets" on the Consolidated Statements of Income.Balance Sheets (see Notes 1 and 8).
Deferred income is recognized in "Accrued expenses and other current liabilities" inon the Consolidated Balance Sheets when the Company has received consideration, or has the right to receive consideration, in advance of the transfer of the performance obligation of the contract to the customer, primarily prepaid meal plans. The consideration received remains a liability until the goods or services have been provided to the customer. The Company classifies deferred income as current as the arrangement is short term in nature. If the Company cannot render its performance obligation according to contract terms after receiving the consideration in advance, amounts may be required contractually to be refunded to the customer.
Amounts recognized in the Consolidated Balance Sheets consist of the following (in thousands):
The following weighted average assumptions were used to determine pension expense of the respective fiscal years: