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Aramark - Quarter Report: 2019 December (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
___________________________________________

For the quarterly period ended December 27, 2019 Commission File Number: 001-36223

image0a11.jpg
Aramark
(Exact name of registrant as specified in its charter)
Delaware
20-8236097
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2400 Market Street
19103
Philadelphia,
Pennsylvania
(Address of principal executive offices)
(Zip Code)
(215) 238-3000
(Registrant's telephone number, including area code)
___________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on which Registered
Common Stock,
par value $0.01 per share
ARMK
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x  
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐  No  x
As of January 24, 2020, the number of shares of the registrant's common stock outstanding is 252,267,858.


    
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Special Note About Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views as to future events and financial performance with respect to, without limitation, conditions in our industry, our operations, our economic performance and financial condition, including, in particular, with respect to, without limitation, anticipated effects of our adoption of new accounting standards, the expected impact of strategic portfolio actions, the benefits and costs of our acquisitions of each of Avendra, LLC ("Avendra") and AmeriPride Services, Inc. ("AmeriPride"), as well as statements regarding these companies' services and products and statements relating to our business and growth strategy. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "outlook," "aim," "anticipate," "are or remain or continue to be confident," "have confidence," "estimate," "expect," "will be," "will continue," "will likely result," "project," "intend," "plan," "believe," "see," "look to" and other words and terms of similar meaning or the negative versions of such words.
Forward-looking statements speak only as of the date made. All statements we make relating to our estimated and projected earnings, costs, expenditures, cash flows, growth rates, financial results and our estimated benefits and costs of our acquisitions are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results or the costs and benefits of the acquisitions include without limitation: unfavorable economic conditions; natural disasters, global calamities, pandemics, sports strikes and other adverse incidents; the failure to retain current clients, renew existing client contracts and obtain new client contracts; a determination by clients to reduce their outsourcing or use of preferred vendors; competition in our industries; increased operating costs and obstacles to cost recovery due to the pricing and cancellation terms of our food and support services contracts; the inability to achieve cost savings through our cost reduction efforts; our expansion strategy; our ability to successfully integrate the businesses of Avendra and AmeriPride and costs and timing related thereto; the risk of unanticipated restructuring costs or assumption of undisclosed liabilities; the risk that we are unable to achieve the anticipated benefits (including tax benefits) and synergies of the acquisition of AmeriPride and Avendra including whether the transactions will be accretive and within the expected timeframes; the availability of sufficient cash to repay certain indebtedness and our decision to utilize the cash for that purpose; the disruption of the transactions to each of Avendra and AmeriPride and their respective managements; the effect of the transactions on each of Avendra's and AmeriPride's ability to retain and hire key personnel and maintain relationships with customers, suppliers and other third parties; the failure to maintain food safety throughout our supply chain, food-borne illness concerns and claims of illness or injury; governmental regulations including those relating to food and beverages, the environment, wage and hour and government contracting; liability associated with noncompliance with applicable law or other governmental regulations; new interpretations of or changes in the enforcement of the government regulatory framework; currency risks and other risks associated with international operations, including Foreign Corrupt Practices Act, U.K. Bribery Act and other anti-corruption law compliance; continued or further unionization of our workforce; liability resulting from our participation in multiemployer defined benefit pension plans; risks associated with suppliers from whom our products are sourced; disruptions to our relationship with, or to the business of, our primary distributor; the inability to hire and retain sufficient qualified personnel or increases in labor costs; healthcare reform legislation; the contract intensive nature of our business, which may lead to client disputes; seasonality; disruptions in the availability of our computer systems or privacy breaches; failure to maintain effective internal controls; our leverage; the inability to generate sufficient cash to service all of our indebtedness; debt agreements that limit our flexibility in operating our business; our ability to attract new or maintain existing customer and supplier relationships at reasonable cost, our ability to retain key personnel and other factors set forth under the headings Item 1A "Risk Factors," Item 3 "Legal Proceedings" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of our Annual Report on Form 10-K, filed with the SEC on November 26, 2019 as such factors may be updated from time to time in our other periodic filings with the SEC, which are accessible on the SEC's website at www.sec.gov and which may be obtained by contacting Aramark's investor relations department via its website www.aramark.com. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other filings with the SEC. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, us. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, changes in our expectations, or otherwise, except as required by law.


PART I
Item 1.    Financial Statements
ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
 
December 27, 2019
 
September 27, 2019
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
264,618

 
$
246,643

Receivables (less allowances: 2020 - $42,951; 2019 - $49,566)
1,971,939

 
1,806,964

Inventories
397,933

 
411,319

Prepayments and other current assets
194,417

 
193,461

Total current assets
2,828,907

 
2,658,387

Property and Equipment, net
2,158,162

 
2,181,762

Goodwill
5,537,025

 
5,518,800

Other Intangible Assets
2,013,773

 
2,033,566

Operating Lease Right-of-use Assets (see Note 8)
561,872

 
—

Other Assets
1,173,326

 
1,343,806

 
$
14,273,065

 
$
13,736,321

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term borrowings
$
82,981

 
$
69,928

Current operating lease liabilities (see Note 8)
75,751

 
—

Accounts payable
855,214

 
999,517

Accrued expenses and other current liabilities
1,283,547

 
1,635,853

Total current liabilities
2,297,493

 
2,705,298

Long-Term Borrowings
7,087,720

 
6,612,239

Noncurrent Operating Lease Liabilities (see Note 8)
345,500

 
—

Deferred Income Taxes and Other Noncurrent Liabilities
1,080,768

 
1,088,822

Redeemable Noncontrolling Interest
10,008

 
9,915

Stockholders' Equity:
 
 
 
Common stock, par value $.01 (authorized: 600,000,000 shares; issued: 2020—287,103,477 shares and 2019—282,919,536 shares; and outstanding: 2020—250,064,705 shares and 2019—247,756,091 shares)
2,871

 
2,829

Capital surplus
3,311,147

 
3,236,450

Retained earnings
1,223,078

 
1,107,029

Accumulated other comprehensive loss
(195,765
)
 
(216,965
)
Treasury stock (shares held in treasury: 2020—37,038,772 shares and 2019—35,163,445 shares)
(889,755
)
 
(809,296
)
Total stockholders' equity
3,451,576

 
3,320,047

 
$
14,273,065

 
$
13,736,321


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

1

ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
Revenue
$
4,253,597

 
$
4,265,349

Costs and Expenses:
 
 
 
Cost of services provided
3,768,113

 
3,794,445

Depreciation and amortization
147,936

 
150,721

Selling and general corporate expenses
83,255

 
104,130

Gain on sale of Healthcare Technologies
—

 
(157,309
)
 
3,999,304

 
3,891,987

Operating income
254,293

 
373,362

Interest and Other Financing Costs, net
79,585

 
82,978

Income Before Income Taxes
174,708

 
290,384

Provision for Income Taxes
28,825

 
39,708

Net income
145,883

 
250,676

Less: Net income (loss) attributable to noncontrolling interest
122

 
(6
)
Net income attributable to Aramark stockholders
$
145,761

 
$
250,682

 
 
 
 
Earnings per share attributable to Aramark stockholders:
 
 
 
Basic
$
0.59

 
$
1.02

Diluted
$
0.57

 
$
0.99

Weighted Average Shares Outstanding:
 
 
 
Basic
248,731

 
246,887

Diluted
254,121

 
253,656


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

2

ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
Net income
$
145,883

 
$
250,676

Other comprehensive income (loss), net of tax
 
 
 
Pension plan adjustments
(285
)
 
753

Foreign currency translation adjustments
14,585

 
(18,007
)
Fair value of cash flow hedges
6,753

 
(24,239
)
         Share of equity investee's comprehensive income (loss)
147

 
(280
)
Other comprehensive income (loss), net of tax
21,200

 
(41,773
)
Comprehensive income
167,083

 
208,903

Less: Net income (loss) attributable to noncontrolling interest
122

 
(6
)
Comprehensive income attributable to Aramark stockholders
$
166,961

 
$
208,909


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

3

ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
Cash flows from operating activities:
 
 
 
Net income
$
145,883

 
$
250,676

Adjustments to reconcile net income to net cash used in operating activities
 
 
 
Depreciation and amortization
147,936

 
150,721

Deferred income taxes
29,432

 
(5,764
)
Share-based compensation expense
14,116

 
18,562

            Net gain on sale of Healthcare Technologies
—

 
(140,165
)
Changes in operating assets and liabilities:
 
 
 
Accounts Receivable
(155,284
)
 
(145,634
)
Inventories
14,199

 
(7,858
)
Prepayments and Other Current Assets
(2,224
)
 
(47
)
Accounts Payable
(141,235
)
 
(132,285
)
Accrued Expenses
(359,801
)
 
(150,229
)
Payments made to clients on contracts
(10,006
)
 
(22,422
)
Other operating activities
7,500

 
(19,217
)
Net cash used in operating activities
(309,484
)
 
(203,662
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment and other
(99,196
)
 
(114,400
)
Disposals of property and equipment
3,646

 
954

Proceeds from divestiture
—

 
293,711

Acquisition of certain businesses, net of cash acquired
(7,102
)
 
(5,257
)
Proceeds from governmental agencies related to property and equipment
15,250

 
16,200

Other investing activities
51

 
2,943

Net cash (used in) provided by investing activities
(87,351
)
 
194,151

Cash flows from financing activities:
 
 
 
Proceeds from long-term borrowings
58,671

 
72,723

Payments of long-term borrowings
(38,385
)
 
(314,031
)
Net change in funding under the Receivables Facility
450,000

 
390,000

Payments of dividends
(27,483
)
 
(27,161
)
Proceeds from issuance of common stock
26,089

 
1,077

Repurchase of common stock
—

 
(50,000
)
Other financing activities
(57,329
)
 
(24,489
)
Net cash provided by financing activities
411,563

 
48,119

Effect of foreign exchange rates on cash and cash equivalents
3,247

 
(3,752
)
Increase in cash and cash equivalents
17,975

 
34,856

Cash and cash equivalents, beginning of period
246,643

 
215,025

Cash and cash equivalents, end of period
$
264,618

 
$
249,881

 
Three Months Ended
(dollars in millions)
December 27, 2019
 
December 28, 2018
Interest paid
$
87.3

 
$
80.2

Income taxes paid
$
15.7

 
$
57.7

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

4

ARAMARK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
 
Total Stockholders' Equity
 
Common Stock
 
Capital Surplus
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
Balance, September 27, 2019
$
3,320,047

 
$
2,829

 
$
3,236,450

 
$
1,107,029

 
$
(216,965
)
 
$
(809,296
)
Net income attributable to Aramark stockholders
145,761

 
 
 
 
 
145,761

 
 
 
 
Other comprehensive income
21,200

 
 
 
 
 
 
 
21,200

 
 
Capital contributions from issuance of common stock
60,623

 
42

 
60,581

 
 
 
 
 
 
Share-based compensation expense
14,116

 
 
 
14,116

 
 
 
 
 
 
Repurchases of Common Stock
(80,459
)
 
 
 
 
 
 
 
 
 
(80,459
)
Payments of dividends
(29,712
)
 
 
 
 
 
(29,712
)
 
 
 
 
Balance, December 27, 2019
$
3,451,576

 
$
2,871

 
$
3,311,147

 
$
1,223,078

 
$
(195,765
)
 
$
(889,755
)

 
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
250,682

 
 
 
 
 
250,682

 
 
 
 
Other comprehensive loss
(41,773
)
 
 
 
 
 
 
 
(41,773
)
 
 
Capital contributions from issuance of common stock
3,510

 
14

 
3,496

 
 
 
 
 
 
Share-based compensation expense
18,562

 
 
 
18,562

 
 
 
 
 
 
Repurchases of Common Stock
(71,884
)
 
 
 
 
 
 
 
 
 
(71,884
)
Payments of dividends
(29,157
)
 
 
 
 
 
(29,157
)
 
 
 
 
Balance, December 28, 2018
$
3,217,893

 
$
2,807

 
$
3,154,479

 
$
990,439

 
$
(132,996
)
 
$
(796,836
)

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

5
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Aramark (the "Company") is a leading global provider of food, facilities and uniform services to education, healthcare, business & industry and sports, leisure & corrections clients. The Company's core market is the United States, which is supplemented by an additional 18-country footprint. The Company operates its business in three reportable segments that share many of the same operating characteristics: Food and Support Services United States ("FSS United States"), Food and Support Services International ("FSS International") and Uniform and Career Apparel ("Uniform").
The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited consolidated financial statements, and the notes to those statements, included in the Company's Form 10-K filed with the SEC on November 26, 2019. The Condensed Consolidated Balance Sheet as of September 27, 2019 was derived from audited financial statements which have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of the Company, the statements include all adjustments, which are of a normal, recurring nature, required for a fair presentation for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for a full year, due to the seasonality of some of the Company's business activities and the possibility of changes in general economic conditions.
The condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling financial interest is maintained. All significant intercompany transactions and accounts have been eliminated.
New Accounting Standards Updates
Adopted Standards
In March 2019, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") which provided clarification regarding three issues related to the lease recognition standard. The guidance was effective for the Company in the first quarter of fiscal 2020 when the lease accounting standard was adopted. See below for further discussion regarding the impact of this standard.
In July 2018, the FASB issued two ASUs regarding the lease recognition standard. The guidance provided clarification on issues identified regarding the adoption of the standard, provided an additional transition method to adopt the standard and provided an additional practical expedient to lessors. The guidance was effective for the Company in the first quarter of fiscal 2020 when the lease accounting standard was adopted. 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 was 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 condensed consolidated financial statements related to the amendments that were effective upon issuance of the guidance. The Company adopted the remaining amendments of the pronouncement in the first quarter of fiscal 2020, which did not have a material impact on the condensed 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 was effective for the Company in the first quarter of fiscal 2020. The Company adopted the guidance in the first quarter of fiscal 2020, which did not have an impact on the condensed consolidated financial statements. The Company did not elect to reclassify the stranded income tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.
In September 2017, the FASB issued an ASU to provide additional implementation guidance with respect to the revenue recognition standard and the lease accounting standard (see below). The guidance was 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 accounting 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. The lease related portions of this standard were adopted in the first quarter of fiscal 2020 in conjunction with the lease recognition standard. See below for further discussion regarding the impact of the lease accounting provisions related to this standard.
In February 2016, the FASB issued an ASU requiring lessees to recognize most leases on their balance sheets as operating lease liabilities with corresponding operating lease right-of-use assets and to disclose key information about lease arrangements. Recognition of expense on the Condensed Consolidated Statements of Income continues in a manner similar to previous guidance. The Company adopted this guidance on September 28, 2019 (first day of fiscal 2020).

6
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In connection with the new lease guidance, the Company completed a comprehensive review of its lease arrangements in order to determine the impact of this ASU on its consolidated financial statements and related disclosures. The Company identified and implemented appropriate changes to business processes, controls and systems to support recognition and disclosure under the new standard.
The Company adopted Accounting Standards Codification 842 (“ASC 842” or the "new lease standard") using the modified retrospective transition approach with an adjustment that recognized "Operating Lease Right-of-use Assets," "Current operating lease liabilities" and "Noncurrent Operating Lease Liabilities" on the Condensed Consolidated Balance Sheets on September 28, 2019. Comparative period information and disclosures were not revised as a result of the recognition and measurement of leases. Adoption of the new lease standard resulted in the recognition of operating lease liabilities and associated operating lease right-of-use assets of approximately $416.1 million and $558.5 million, respectively, as of September 28, 2019 on the Condensed Consolidated Balance Sheets. The operating lease right-of-use assets includes adjustments for deferred rent, tenant improvement allowances and prepaid rent, including $166.9 million of long-term prepaid rent associated with certain leases at client locations. There was no material impact to the Condensed Consolidated Statements of Income or Condensed Consolidated Statements of Cash Flows as a result of adoption. See Note 8 for further information on the impact of adopting the new lease standard.
Standards Not Yet Adopted (from most to least recent date of issuance)
In December 2019, the FASB issued an ASU which simplifies the accounting for income 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 "step-up" of goodwill. The guidance is effective for the Company in the first quarter of fiscal 2022 and early adoption is permitted. The Company is currently evaluating the impact of this standard.
In November 2019, the FASB issued an ASU which provides clarification and improvements to existing guidance related to the credit losses on financial instruments standard. The Company will adopt this guidance in the first quarter of fiscal 2021 when the credit losses on financial instruments standard is adopted. The Company is currently evaluating the impact of this standard.
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 Company will adopt this guidance in the first quarter of fiscal 2021 when the credit losses on financial instruments standard is adopted. The Company is currently evaluating the impact of this standard.
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 guidance related to the credit losses on financial instruments ASU and the financial instruments ASU will be adopted in the first quarter of fiscal 2021. The Company adopted the guidance related to derivatives and hedging in the first quarter of fiscal 2020, which did not have a material impact on the condensed consolidated financial statements. The Company is currently evaluating the impact of the remaining amendments 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 for the Company in the first quarter of fiscal 2022 and early adoption is permitted. The Company is currently evaluating the impact of this standard.
In August 2018, the FASB issued an ASU which adds, modifies and removes several disclosure requirements related to fair value measurements. The Company will adopt this guidance in the first quarter of fiscal 2021 and early adoption is permitted. The Company is currently evaluating the impact of this 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 Company will adopt this guidance in the first quarter of fiscal 2021. The Company is currently evaluating the impact of this standard.
Comprehensive Income
Comprehensive income includes all changes to stockholders' equity during a period, except those resulting from investments by and distributions to stockholders. Components of comprehensive income include net income (loss), changes in foreign currency translation adjustments (net of tax), pension plan adjustments (net of tax), changes in the fair value of cash flow hedges (net of tax) and changes to the share of any equity investees' comprehensive income (loss) (net of tax).

7
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The summary of the components of comprehensive income is as follows (in thousands):
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
 
Pre-Tax Amount
Tax Effect
After-Tax Amount
 
Pre-Tax Amount
Tax Effect
After-Tax Amount
Net income
 
 
$
145,883

 
 
 
$
250,676

Pension plan adjustments
(285
)
—

(285
)
 
753

—

753

Foreign currency translation adjustments
14,354

231

14,585

 
(17,876
)
(131
)
(18,007
)
Fair value of cash flow hedges
9,126

(2,373
)
6,753

 
(32,702
)
8,463

(24,239
)
Share of equity investee's comprehensive income (loss)
147

—

147

 
(280
)
—

(280
)
Other comprehensive income (loss)
23,342

(2,142
)
21,200

 
(50,105
)
8,332

(41,773
)
Comprehensive income
 
 
167,083

 
 
 
208,903

Less: Net income (loss) attributable to noncontrolling interest
 
 
122

 
 
 
(6
)
Comprehensive income attributable to Aramark stockholders
 
 
$
166,961

 
 
 
$
208,909


Accumulated other comprehensive loss consists of the following (in thousands):
 
December 27, 2019
 
September 27, 2019
Pension plan adjustments
$
(47,507
)
 
$
(47,222
)
Foreign currency translation adjustments
(113,534
)
 
(128,119
)
Cash flow hedges
(24,303
)
 
(31,056
)
Share of equity investee's accumulated other comprehensive loss
(10,421
)
 
(10,568
)
 
$
(195,765
)
 
$
(216,965
)

Currency Translation
During fiscal 2018, Argentina was determined to have a highly inflationary economy. As a result, the Company remeasures the financial statements of Argentina's operations in accordance with the accounting guidance for highly inflationary economies. During the first quarter of both fiscal 2020 and 2019, the impact of foreign currency transactions were immaterial to the condensed consolidated financial statements. 
Current Assets
Beginning in fiscal 2019, the Company began insuring 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 the regulations within its domicile, including regulations relating to levels of liquidity and solvency as such concepts are defined by the regulator. The Captive was in compliance with these regulations as of December 27, 2019. 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 other than for the payments of its general liability, automobile liability and workers' compensation claims and related Captive costs. As of December 27, 2019, cash and cash equivalents at the Captive was $59.9 million.
The Company is self-insured for a portion of the risk retained under its general liability, automobile liability and workers' compensation insurance arrangements. Self-insurance reserves are recorded based on actuarial analyses.
Other Assets
Other assets consist primarily of costs to obtain or fulfill contracts, including rental merchandise in-service, long-term receivables, investments in 50% or less owned entities, computer software costs and employee sales commissions. 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 due to the lack of readily available fair values related to these investments.
NOTE 2. DIVESTITURES:
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 $157.3 million (tax effected gain of $140.2 million) in the Condensed Consolidated Statements of Income for the three months ended December 28, 2018.

8
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. SEVERANCE:
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 a net severance charge of approximately $22.0 million for the three months ended December 28, 2018. The Company completed this cost savings phase as of September 27, 2019. As of December 27, 2019 and September 27, 2019, the Company had an accrual of approximately $9.6 million and $11.9 million, respectively, related to unpaid severance obligations. These obligations are expected to be paid through fiscal 2020.
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill represents the excess of the fair value of consideration paid for an acquired entity over the fair value of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized and is subject to an impairment test that the Company conducts annually or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists, using discounted cash flows.
Changes in total goodwill during the three months ended December 27, 2019 is as follows (in thousands):
Segment
September 27, 2019
 
Acquisitions
 
Translation
 
December 27, 2019
FSS United States
$
3,949,218

 
$
728

 
$
15

 
$
3,949,961

FSS International
608,468

 
220

 
17,101

 
625,789

Uniform
961,114

 
40

 
121

 
961,275

 
$
5,518,800

 
$
988

 
$
17,237

 
$
5,537,025


Other intangible assets consist of the following (in thousands):
 
December 27, 2019
 
September 27, 2019
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Customer relationship assets
$
2,189,753

 
$
(1,221,563
)
 
$
968,190

 
$
2,183,492

 
$
(1,193,525
)
 
$
989,967

Trade names
1,050,801

 
(5,218
)
 
1,045,583

 
1,047,959

 
(4,360
)
 
1,043,599

 
$
3,240,554

 
$
(1,226,781
)
 
$
2,013,773

 
$
3,231,451

 
$
(1,197,885
)
 
$
2,033,566


Amortization of intangible assets for the three months ended December 27, 2019 and December 28, 2018 was approximately $29.1 million and $30.4 million, respectively.

9
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5. BORROWINGS:
Long-term borrowings, net, are summarized in the following table (in thousands):
 
 
December 27, 2019
 
September 27, 2019
Senior secured revolving credit facility, due October 2023
 
$
78,711

 
$
51,410

Senior secured term loan facility, due October 2023
 
506,463

 
507,887

Senior secured term loan facility, due March 2024
 
829,535

 
829,344

Senior secured term loan facility, due March 2025
 
1,658,308

 
1,658,026

5.125% senior notes, due January 2024
 
902,213

 
902,351

5.000% senior notes, due April 2025
 
592,398

 
592,087

3.125% senior notes, due April 2025(1)
 
360,128

 
352,363

4.750% senior notes, due June 2026
 
494,898

 
494,731

5.000% senior notes, due February 2028
 
1,137,923

 
1,137,625

Receivables Facility, due May 2021
 
450,000

 
—

Finance leases
 
142,552

 
148,754

Other
 
17,572

 
7,589

 
 
7,170,701

 
6,682,167

Less—current portion
 
(82,981
)
 
(69,928
)
 
 
$
7,087,720

 
$
6,612,239


(1)
This is a Euro denominated borrowing.

As of December 27, 2019, there was approximately $923.6 million of outstanding foreign currency borrowings.
Fiscal 2020 Refinancing Transactions
On January 15, 2020, Aramark Services, Inc. ("ASI"), an indirect wholly owned subsidiary of the Company, entered into Amendment No. 8 ("Amendment No. 8") to the credit agreement dated as of March 28, 2017 (as supplemented or otherwise modified from time to time, the "Credit Agreement") and last amended by Amendment No. 7 on October 1, 2018. Amendment No. 8 provides for an incremental, senior secured credit facility under the Credit Agreement comprised of a U.S. dollar denominated term loan made to ASI in an amount equal to $900.0 million, due January 15, 2027 (the "U.S. Term Loan B due 2027"). The U.S. Term Loan B due 2027 was borrowed with an original issue discount of 0.125%.
The net proceeds from the U.S. Term Loan B 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, including a $23.1 million call premium on the 2024 Notes and approximately $6.5 million of charges related to banker fees, rating agency fees and legal fees.
The U.S. Term Loan B due 2027 bears interest at a rate equal to, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to such borrowing adjusted for certain additional costs or (b) a base rate determined by reference to the highest of (1) the prime rate of the administrative agent, (2) the federal funds rate plus 0.50% and (3) the LIBOR rate plus 1.00% plus an applicable margin set initially at 1.75% for borrowings based on the LIBOR rate, subject to a LIBOR floor of 0.00% and 0.75% for borrowings based on the base rate, subject to a minimum base rate of 0.00%.
The Company is required to make quarterly principal repayments on the U.S. Term Loan B due 2027 in quarterly amounts of 1.00% per annum of the funded total principal amount on the initial funding date thereof and 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 and U.S. Term Loan B due 2025, in each case, outstanding under the Credit Agreement.
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

10
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 $3.3 billion notional amount of outstanding interest rate swap agreements as of December 27, 2019, which fixes the rate on a like amount of variable rate borrowings through January of fiscal 2025. During the three months ended December 27, 2019, the Company entered into approximately $800.0 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.
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 December 27, 2019 and September 27, 2019, approximately ($24.3) million and ($31.1) million, respectively, of unrealized net of tax losses related to the interest rate swaps were included in "Accumulated other comprehensive loss."
The following table summarizes the effect of our derivatives designated as cash flow hedging instruments on Other comprehensive income (loss) (in thousands):
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
Interest rate swap agreements
$
6,926

 
$
(31,000
)

Derivatives not Designated in Hedging Relationships
The Company entered into a series of pay fixed/receive floating gasoline and diesel fuel agreements based on the Department of Energy weekly retail on-highway index in order to limit its exposure to price fluctuations for gasoline and diesel fuel. As of December 27, 2019, the Company has contracts for approximately 17.8 million gallons outstanding through the first quarter of fiscal 2021. The Company does not record its gasoline and diesel fuel agreements as hedges for accounting purposes. The impact on earnings related to the change in fair value of these unsettled contracts was a gain of approximately $3.1 million for the three months ended December 27, 2019. The impact on earnings related to the change in fair value of these unsettled contracts was a loss of approximately $9.2 million for the three months ended December 28, 2018. The change in fair value for unsettled contracts is included in "Selling and general corporate expenses" in the Condensed Consolidated Statements of Income. When the contracts settle, the gain or loss is recorded to"Costs of services provided" in the Condensed Consolidated Statements of Income.
As of December 27, 2019, the Company had foreign currency forward exchange contracts outstanding with notional amounts of €37.5 million, £6.5 million and CAD$5.0 million to mitigate the risk of changes in foreign currency exchange rates on short-term intercompany loans to certain international subsidiaries. Gains and losses on these foreign currency exchange contracts are recognized in earnings as the contracts were not designated as hedging instruments, substantially offsetting currency transaction gains and losses on the short-term intercompany loans.

11
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the location and fair value, using Level 2 inputs (see Note 14 for a description of the fair value levels), of the Company's derivatives designated and not designated as hedging instruments in the Condensed Consolidated Balance Sheets (in thousands):
 
 
Balance Sheet Location
 
December 27, 2019
 
September 27, 2019
ASSETS
 
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Noncurrent Assets
 
$
200

 
$
—

 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
Prepayments and other current assets
 
166

 
64

Gasoline and diesel fuel agreements
 
Prepayments and other current assets
 
2,652

 
—

 
 
 
 
$
3,018

 
$
64

LIABILITIES
 
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Other Noncurrent Liabilities
 
$
31,996

 
$
43,112

 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Gasoline and diesel fuel agreements
 
Accounts payable
 
—

 
462

 
 
 
 
$
31,996

 
$
43,574


The following table summarizes the location of (gain) loss reclassified from "Accumulated other comprehensive loss" into earnings for derivatives designated as hedging instruments and the location of (gain) loss for the Company's derivatives not designated as hedging instruments in the Condensed Consolidated Statements of Income (in thousands):
 
 
 
 
Three Months Ended
 
 
Income Statement Location
 
December 27, 2019
 
December 28, 2018
Designated as hedging instruments:
 
 
 
 
 
 
Interest rate swap agreements
 
Interest and Other Financing Costs, net
 
$
2,200

 
$
(1,702
)
Not designated as hedging instruments:
 
 
 
 
 
 
Gasoline and diesel fuel agreements
 
Costs of services provided / Selling and general corporate expenses
 
(3,798
)
 
9,144

Foreign currency forward exchange contracts
 
Interest and Other Financing Costs, net
 
(102
)
 
178

 
 
 
 
(3,900
)
 
9,322

 
 
 
 
$
(1,700
)
 
$
7,620


At December 27, 2019, the net of tax loss expected to be reclassified from "Accumulated other comprehensive loss" into earnings over the next twelve months based on current market rates is approximately $10.2 million.
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 the 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 Accounting Standards Codification 606 ("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 receive in exchange for those goods and services.

12
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Performance Obligations
The Company recognizes revenue when its performance obligation is satisfied. Each contract generally has one 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.
Disaggregation of Revenue
The following table presents revenue disaggregated by revenue source (in millions):
 
 
Three Months Ended
 
 
December 27, 2019
 
December 28, 2018
FSS United States:
 
 
 
 
    Business & Industry
 
$
405.5

 
$
399.9

    Education
 
1,001.1

 
1,016.3

    Healthcare
 
227.2

 
263.3

    Sports, Leisure & Corrections
 
608.9

 
594.3

    Facilities & Other
 
396.3

 
386.5

         Total FSS United States
 
2,639.0

 
2,660.3

 
 
 
 
 
FSS International:
 
 
 
 
    Europe
 
502.7

 
520.1

    Rest of World
 
443.5

 
433.0

          Total FSS International
 
946.2

 
953.1

 
 
 
 
 
Uniform
 
668.4

 
651.9

 
 
 
 
 
Total Revenue
 
$
4,253.6

 
$
4,265.3


Contract Balances
Deferred income is recognized in "Accrued expenses and other current liabilities" in the Condensed 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.
During the three months ended December 27, 2019, deferred income increased related to customer prepayments and decreased related to income recognized during the period as a result of satisfying the performance obligation. Below is a summary of the changes (in millions):
 
 
Balance, September 27, 2019
 
Add: Net increase in current period deferred income
 
Less: Recognition of deferred income
 
Balance, December 27, 2019
Deferred income
 
$
319.0

 
240.3

 
(405.6
)
 
$
153.7


NOTE 8. LEASES:
The Company has lease arrangements primarily related to real estate, vehicles and equipment, which generally have terms of one to 30 years. Finance leases primarily relate to vehicles and certain real estate. In addition, there can be leases identified in the Company's revenue contracts with customers, which generally include variable lease payments. The Company assesses

13
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

whether an arrangement is a lease, or contains a lease, upon inception of the related contract. Certain of the Company's lease arrangements, primarily vehicle leases, with terms of one to eight years, contain provisions related to residual value guarantees. The maximum potential liability to the Company under such arrangements was approximately $25.9 million at December 27, 2019 if the terminal fair value of vehicles coming off lease was zero. Consistent with past experience, management does not expect any significant payments will be required pursuant to these arrangements. No amounts have been accrued for guarantee arrangements at December 27, 2019.
As a result of adopting ASC 842 on September 28, 2019 (first day of fiscal 2020), the Company recognized $416.1 million of operating lease liabilities and $558.5 million of operating lease right-of-use assets on its Condensed Consolidated Balance Sheets. Operating lease right-of-use assets represent the Company’s right to use the underlying assets for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease liabilities and operating lease right-of-use assets are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. Operating lease right-of-use lease assets include adjustments for deferred rent, tenant improvement allowances and prepaid rent. Lease expense is recognized on a straight-line basis over the expected lease term.
Variable lease payments, which primarily consist of leases associated with our revenue contracts with customers, real estate taxes, common area maintenance charges, insurance costs and other operating expenses, are not included in the operating lease right-of-use asset or operating lease liability balances and are recognized in the period in which the expenses are incurred. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain they will be exercised or not, respectively. Options to extend lease terms that are reasonably certain of exercise are recognized as part of the operating lease right-of-use asset and operating lease liability balances.
As permitted under the transition guidance upon adoption of ASC 842, the Company elected the following practical expedients:
•
the simplified approach to not recast comparative periods and to apply the new lease standard on a prospective basis beginning in the year of initial adoption;
•
the package of practical expedients to not reassess the lease determination, lease classification or initial direct costs for leases commenced prior to adoption;
•
the component election to not separate lease and nonlease components in all arrangements that contain a lease; and
•
the short-term lease recognition exemption whereby lease-related assets and liabilities are not recognized for arrangements with initial lease terms of one year or less.
The Company did not elect the use of the hindsight expedient for determining the lease term.
The Company is required to discount its future minimum lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. The Company uses its incremental borrowing rate as the discount rate. The Company uses a portfolio approach to determine the incremental borrowing rate based on the geographic location of the lease and the remaining lease term. The incremental borrowing rate is calculated using a base line rate plus an applicable margin.

14
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes the location of the operating and finance leases in the Company’s Condensed Consolidated Balance Sheets as of December 27, 2019 (in thousands), as well as the weighted average remaining lease term and weighted average discount rate:
Leases
 
Balance Sheet Location
 
December 27, 2019
Assets:
 
 
 
 
Operating
 
Operating Lease Right-of-use Assets
 
$
561,872

Finance
 
Property and Equipment, net
 
134,539

Total lease assets
 
 
 
$
696,411

Liabilities:
 
 
 
 
Current
 
 
 
 
Operating
 
Current operating lease liabilities
 
$
75,751

    Finance
 
Current maturities of long-term borrowings
 
30,928

Noncurrent
 
 
 
 
    Operating
 
Noncurrent Operating Lease Liabilities
 
345,500

    Finance
 
Long-term borrowings
 
111,624

Total lease liabilities
 
 
 
$
563,803

 
 
 
 
 
Weighted average remaining lease term (in years)
 
 
 
 
    Operating leases
 
 
 
9.1

    Finance leases
 
 
 
8.5

Weighted average discount rate
 
 
 
 
    Operating leases
 
 
 
3.6
%
    Finance leases
 
 
 
4.1
%

The following table summarizes the location of lease related costs in the Condensed Consolidated Statements of Income for the three months ended December 27, 2019 (in thousands):
 
 
 
 
Three Months Ended
Lease Cost
 
Income Statement Location
 
December 27, 2019
Operating lease cost1:
 
 
 
 
Fixed lease costs
 
Cost of services provided
 
$
29,529

Variable lease costs2
 
Cost of services provided
 
196,625

Short-term lease costs
 
Cost of services provided
 
21,330

Finance lease cost3:
 
 
 
 
Amortization of right-of-use-assets
 
Depreciation and amortization
 
7,087

Interest on lease liabilities
 
Interest and Other Financing Costs, net
 
1,291

Net lease cost
 
 
 
$
255,862

(1)
Excludes sublease income, which is immaterial.
(2)
Includes $193.6 million of costs related to leases associated with revenue contracts with customers. These costs represent the rent the Company pays its clients to operate at their locations, typically based on a percentage of sales.
(3)
Excludes variable lease costs, which are immaterial.


15
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Supplemental cash flow information related to leases for the period reported is as follows (in thousands):
 
 
Three Months Ended
 
 
December 27, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
245,284

Operating cash flows from finance leases
 
1,270

Financing cash flows from finance leases
 
8,613

Right-of-use lease assets obtained in exchange for lease obligations:
 
 
Operating leases
 
$
23,768

Finance leases
 
1,722


Future minimum lease payments under non-cancelable leases as of December 27, 2019 are as follows (in thousands):
 
Operating leases
 
Finance leases
 
Total
Remainder of 2020
$
68,984

 
$
18,818

 
$
87,802

2021
76,092

 
35,769

 
111,861

2022
58,588

 
19,827

 
78,415

2023
46,282

 
16,558

 
62,840

2024
38,567

 
14,042

 
52,609

Thereafter
213,448

 
52,396

 
265,844

Total future minimum lease payments
501,961

 
157,410

 
659,371

Less: Interest
(80,710
)
 
(14,858
)
 
(95,568
)
Present value of lease liabilities
$
421,251

 
$
142,552

 
$
563,803


Following is a schedule of the future minimum rental and similar commitments under all non-cancelable operating leases as of September 27, 2019 (in thousands):
2020
$
101,061

2021
74,908

2022
56,765

2023
43,795

2024
36,215

2025-Thereafter
214,818

Total minimum rental obligations
$
527,562


NOTE 9. STOCKHOLDERS' EQUITY:
During the three months ended December 27, 2019 and December 28, 2018, the Company paid cash dividends of approximately $27.5 million and $27.2 million to its stockholders, respectively. On January 28, 2020, the Company's Board declared a $0.110 dividend per share of common stock, payable on February 27, 2020, to shareholders of record on the close of business on February 13, 2020. During the first quarter of fiscal 2019, the Company completed a repurchase of 1.6 million shares of its common stock for $50.0 million under the fiscal 2017 share repurchase program, which expired on February 1, 2019.
On January 29, 2020, the Company's stockholders approved the Second Amended and Restated 2013 Stock Incentive Plan, which replaces the Company's 2013 Incentive Plan. The Second Amended and Restated 2013 Stock Incentive Plan provides for up to 7.5 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 January 29, 2020 that are not subject to outstanding awards under the 2013 Incentive Plan.

16
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10. SHARE-BASED COMPENSATION:
The following table summarizes the share-based compensation expense and related information for Time-Based Options ("TBOs"), Time-Based Restricted Stock Units ("RSUs"), Performance Stock Units ("PSUs"), and Deferred Stock Units classified as "Selling and general corporate expenses" in the Condensed Consolidated Statements of Income (in millions).
 
 
Three Months Ended
 
 
December 27, 2019
 
December 28, 2018
TBOs
 
$
2.9

 
$
5.3

RSUs
 
8.1

 
8.9

PSUs
 
2.6

 
3.8

Deferred Stock Units
 
0.5

 
0.6

 
 
$
14.1

 
$
18.6

 
 
 
 
 
Taxes related to share-based compensation
 
$
3.5

 
$
4.6

Cash Received from Option Exercises
 
26.1

 
1.1

Tax Benefit on Share Deliveries
 
18.6

 
1.3


The below table summarizes the number of shares granted and the weighted-average grant-date fair value per unit during the three months ended December 27, 2019:
 
 
Shares Granted (in millions)
 
Weighted-Average Grant-Date Fair Value (dollars per share)
TBOs
 
1.5

 
$
9.49

RSUs
 
1.1

 
$
42.40

PSUs(1)(2)
 
0.9

 
$
45.03

 
 
3.5

 
 
(1)
Includes approximately 0.3 million shares resulting from the payout of the 2017 PSU grants due to exceeding the adjusted earnings per share target.
(2)
During the first quarter of fiscal 2020, the Company granted PSUs subject to the level of achievement of adjusted revenue growth, adjusted operating income growth, return on invested capital and a total shareholder return multiplier for the cumulative three year performance period and the participant's continued employment with the Company. The Company is accounting for this award as a market-based award which was valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome.


17
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 11. EARNINGS PER SHARE:
Basic earnings per share is computed using the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is computed using the weighted average number of common shares outstanding adjusted to include the potentially dilutive effect of stock awards.
The following table sets forth the computation of basic and diluted earnings per share attributable to the Company's stockholders (in thousands, except per share data):
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
Earnings:
 
 
 
Net income attributable to Aramark stockholders
$
145,761

 
$
250,682

Shares:
 
 
 
Basic weighted-average shares outstanding
248,731

 
246,887

Effect of dilutive securities
5,390

 
6,769

Diluted weighted-average shares outstanding
254,121

 
253,656

 
 
 
 
Basic Earnings Per Share:
 
 
 
Net income attributable to Aramark stockholders
$
0.59

 
$
1.02

Diluted Earnings Per Share:
 
 
 
Net income attributable to Aramark stockholders
$
0.57

 
$
0.99

Share-based awards to purchase 1.6 million and 4.6 million shares were outstanding for the three months ended December 27, 2019 and December 28, 2018, respectively, but were not included in the computation of diluted earnings per common share, as their effect would have been antidilutive. In addition, PSUs related to 1.7 million shares and 1.7 million shares were outstanding for the three months ended December 27, 2019 and December 28, 2018, respectively, but were not included in the computation of diluted earnings per common share, as the performance targets were not yet met.
NOTE 12. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company and its subsidiaries are a party to various legal actions, proceedings and investigations involving claims incidental to the conduct of their business, including actions by clients, consumers, employees, government entities and third parties, including under federal, state, international, national, provincial and local employment laws, wage and hour laws, discrimination laws, immigration laws, human health and safety laws, import and export controls and customs laws, environmental laws, false claims or whistleblower statutes, minority, women and disadvantaged business enterprise statutes, tax codes, antitrust and competition laws, consumer protection statutes, procurement regulations, intellectual property laws, food safety and sanitation laws, cost and accounting principles, the Foreign Corrupt Practices Act, the U.K. Bribery Act, other anti-corruption laws, lobbying laws, motor carrier safety laws, data privacy and security laws and alcohol licensing and service laws, or alleging negligence and/or breaches of contractual and other obligations. Based on information currently available, advice of counsel, available insurance coverage, established reserves and other resources, the Company does not believe that any such actions are likely to be, individually or in the aggregate, material to its business, financial condition, results of operations or cash flows. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company's business, financial condition, results of operations or cash flows.
During fiscal 2019, Eric J. Foss, the Company's former Chairman, President and Chief Executive Officer, stepped down and $10.4 million of cash compensation related charges were recognized related to his separation from the Company. As of December 27, 2019, the Company had $8.8 million of remaining unpaid obligations related to his separation, which are recorded in "Accrued expenses and other current liabilities" in the Condensed Consolidated Balance Sheets. These remaining unpaid obligations are expected to be paid through fiscal 2021.
During fiscal 2019, the Company was a defendant in two class action lawsuits alleging breach of contract, promissory estoppel, unjust enrichment and various state law claims for failure to pay employee annual incentive bonuses related to the 2018 fiscal year. In November 2019, the Company settled the lawsuits with the plaintiffs for approximately $21.0 million, which includes payments to the class members, attorneys' fees and other expenses. The Company recognized the settlement charge in "Accrued expenses and other current liabilities" in the Condensed Consolidated Balance Sheets as of December 27, 2019.

18
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 13. BUSINESS SEGMENTS:
The Company reported its operating results in three reportable segments: FSS United States, FSS International and Uniform. Corporate includes general expenses not specifically allocated to an individual segment and share-based compensation expense (see Note 10). In the Company's food and support services segments, approximately 78% of the global revenue is related to food services and 22% is related to facilities services. During the three months ended December 27, 2019 and December 28, 2018, the Company received proceeds of approximately $15.3 million and $16.2 million, respectively, relating to the recovery of the Company's investment (possessory interest) at one of the National Park Service sites within the FSS United States segment. The Company recorded a gain related to the recovery of its investment, which is included in "Cost of services provided" in the Condensed Consolidated Statements of Income. Financial information by segment follows (in millions):
 
Revenue
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
FSS United States
$
2,639.0

 
$
2,660.3

FSS International
946.2

 
953.1

Uniform
668.4

 
651.9

 
$
4,253.6

 
$
4,265.3

 
Operating Income
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
FSS United States
$
185.9

 
$
363.7

FSS International
43.7

 
11.5

Uniform
53.3

 
52.7

 
282.9

 
427.9

Corporate
(28.6
)
 
(54.5
)
Operating Income
254.3

 
373.4

Interest and Other Financing Costs, net
79.6

 
83.0

Income Before Income Taxes
$
174.7

 
$
290.4


NOTE 14. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are classified based upon the level of judgment associated with the inputs used to measure their fair value. The hierarchical levels related to the subjectivity of the valuation inputs are defined as follows:
•
Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets
•
Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument
•
Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement
Recurring Fair Value Measurements
The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, borrowings and derivatives. Management believes that the carrying value of cash and cash equivalents, accounts receivable and accounts payable are representative of their respective fair values. In conjunction with the fair value measurement of the derivative instruments, the Company made an accounting policy election to measure the credit risk of its derivative instruments that are subject to master netting agreements on a net basis by counterparty portfolio, the gross values would not be materially different. The fair value of the Company's debt at December 27, 2019 and September 27, 2019 was $7,374.1 million and $6,851.2 million, respectively. The carrying value of the Company's debt at December 27, 2019 and September 27, 2019 was $7,170.7 million and $6,682.2 million, respectively. The fair values were computed using market quotes, if available, or based

19
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

on discounted cash flows using market interest rates as of the end of the respective periods. The inputs utilized in estimating the fair value of the Company's debt has been classified as level 2 in the fair value hierarchy levels.

20
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF ARAMARK AND SUBSIDIARIES:
The following condensed consolidating financial statements of the Company have been prepared pursuant to Rule 3-10 of Regulation S-X.
The condensed consolidating financial statements are presented for: (i) Aramark (the "Parent"); (ii) ASI and Aramark International Finance S.à r.l. (the "Issuers"); (iii) the guarantors; (iv) the non guarantors; (v) elimination entries necessary to consolidate the Parent with the Issuers, the guarantors and non guarantors; and (vi) the Company on a consolidated basis. Each of the guarantors is wholly-owned, directly or indirectly, by the Company. The 5.125% Senior Notes due 2024 (the "2024 Notes"), 5.000% Senior Notes due April 1, 2025 (the "5.000% 2025 Notes"), 3.125% Senior Notes due April 1, 2025 (the "3.125% 2025 Notes" and, together with the 5.000% 2025 Notes, the "2025 Notes"), 4.75% Senior Notes due June 1, 2026 ("2026 Notes") and 5.000% Senior Notes due February 1, 2028 (the "2028 Notes") are obligations of the Company's wholly-owned subsidiary, ASI, (other than the 3.125% 2025 Notes, which are obligations of the Company's wholly owned subsidiary, Aramark International Finance S.a.r.l) and are each jointly and severally guaranteed on a senior unsecured basis by the Company and substantially all of the Company's existing and future domestic subsidiaries (excluding the Receivables Facility subsidiary) ("Guarantors"). All other subsidiaries of the Company, either direct or indirect, are non-guarantors and do not guarantee the 2024 Notes, 2025 Notes, 2026 Notes or 2028 Notes ("Non Guarantors"). The Guarantors also guarantee certain other debt. These condensed consolidating financial statements have been prepared from the Company's financial information on the same basis of accounting as the condensed consolidated financial statements. Interest expense and certain other costs are partially allocated to all of the subsidiaries of the Company. Goodwill and other intangible assets have been allocated to the subsidiaries based on management's estimates.

21
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
December 27, 2019
(in thousands)

 
Aramark (Parent)
 
Issuers
 
Guarantors
 
Non Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
35,168

 
$
33,544

 
$
195,901

 
$
—

 
$
264,618

Receivables
—

 
1,388

 
551,947

 
1,418,604

 
—

 
1,971,939

Inventories
—

 
15,567

 
284,698

 
97,668

 
—

 
397,933

Prepayments and other current assets
—

 
46,536

 
68,272

 
79,609

 
—

 
194,417

Total current assets
5

 
98,659

 
938,461

 
1,791,782

 
—

 
2,828,907

Property and Equipment, net
—

 
43,896

 
1,763,268

 
350,998

 
—

 
2,158,162

Goodwill
—

 
173,104

 
4,695,304

 
668,617

 
—

 
5,537,025

Investment in and Advances to Subsidiaries
3,451,571

 
6,532,122

 
—

 
745,792

 
(10,729,485
)
 
—

Other Intangible Assets
—

 
21,526

 
1,804,342

 
187,905

 
—

 
2,013,773

Operating Lease Right-of-use Assets
—

 
20,700

 
457,597

 
83,575

 
—

 
561,872

Other Assets
—

 
18,440

 
798,897

 
357,991

 
(2,002
)
 
1,173,326

 
$
3,451,576

 
$
6,908,447

 
$
10,457,869

 
$
4,186,660

 
$
(10,731,487
)
 
$
14,273,065

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

 
$
6,662

 
$
27,491

 
$
48,828

 
$
—

 
$
82,981

Current operating lease liabilities
—

 
2,194

 
54,742

 
18,815

 
—

 
75,751

Accounts payable
—

 
128,402

 
421,271

 
305,541

 
—

 
855,214

Accrued expenses and other current liabilities
—

 
208,474

 
710,173

 
364,812

 
88

 
1,283,547

Total current liabilities
—

 
345,732

 
1,213,677

 
737,996

 
88

 
2,297,493

Long-term Borrowings
—

 
6,076,564

 
76,619

 
934,537

 
—

 
7,087,720

Noncurrent Operating Lease Liabilities
—

 
17,348

 
263,244

 
64,908

 
—

 
345,500

Deferred Income Taxes and Other Noncurrent Liabilities
—

 
366,329

 
549,167

 
165,272

 
—

 
1,080,768

Intercompany Payable
—

 
—

 
4,411,209

 
385,850

 
(4,797,059
)
 
—

Redeemable Noncontrolling Interest
—

 
—

 
10,008

 
—

 
—

 
10,008

Total Stockholders' Equity
3,451,576

 
102,474

 
3,933,945

 
1,898,097

 
(5,934,516
)
 
3,451,576

 
$
3,451,576

 
$
6,908,447

 
$
10,457,869

 
$
4,186,660

 
$
(10,731,487
)
 
$
14,273,065


22
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
September 27, 2019
(in thousands)

 
Aramark (Parent)
 
Issuers
 
Guarantors 
 
Non Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
33,510

 
$
40,544

 
$
172,584

 
$
—

 
$
246,643

Receivables
—

 
1,966

 
522,627

 
1,282,371

 
—

 
1,806,964

Inventories
—

 
15,804

 
301,091

 
94,424

 
—

 
411,319

Prepayments and other current assets
—

 
27,164

 
82,666

 
83,631

 
—

 
193,461

Total current assets
5

 
78,444

 
946,928

 
1,633,010

 
—

 
2,658,387

Property and Equipment, net
—

 
43,329

 
1,784,410

 
354,023

 
—

 
2,181,762

Goodwill
—

 
173,104

 
4,694,549

 
651,147

 
—

 
5,518,800

Investment in and Advances to Subsidiaries
3,320,042

 
6,649,119

 
—

 
717,228

 
(10,686,389
)
 
—

Other Intangible Assets
—

 
29,684

 
1,819,315

 
184,567

 
—

 
2,033,566

Other Assets
—

 
20,382

 
979,350

 
346,076

 
(2,002
)
 
1,343,806

 
$
3,320,047

 
$
6,994,062

 
$
10,224,552

 
$
3,886,051

 
$
(10,688,391
)
 
$
13,736,321

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

 
$
6,256

 
$
27,924

 
$
35,748

 
$
—

 
$
69,928

Accounts payable
—

 
127,640

 
507,903

 
363,974

 
—

 
999,517

Accrued expenses and other current liabilities
—

 
241,523

 
1,030,074

 
364,168

 
88

 
1,635,853

Total current liabilities
—

 
375,419

 
1,565,901

 
763,890

 
88

 
2,705,298

Long-term Borrowings
—

 
6,090,487

 
82,394

 
439,358

 
—

 
6,612,239

Deferred Income Taxes and Other Noncurrent Liabilities
—

 
380,453

 
569,409

 
138,960

 
—

 
1,088,822

Intercompany Payable
—

 
—

 
4,187,591

 
726,464

 
(4,914,055
)
 
—

Redeemable Noncontrolling Interest
—

 
—

 
9,915

 
—

 
—

 
9,915

Total Stockholders' Equity
3,320,047

 
147,703

 
3,809,342

 
1,817,379

 
(5,774,424
)
 
3,320,047

 
$
3,320,047

 
$
6,994,062

 
$
10,224,552

 
$
3,886,051

 
$
(10,688,391
)
 
$
13,736,321



23
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended December 27, 2019
(in thousands)
 
 
Aramark (Parent)
 
Issuers
 
Guarantors 
 
Non Guarantors
 
Eliminations
 
Consolidated
Revenue
$
—

 
$
268,435

 
$
2,840,056

 
$
1,145,106

 
$
—

 
$
4,253,597

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of services provided
—

 
246,308

 
2,473,177

 
1,048,628

 
—

 
3,768,113

Depreciation and amortization
—

 
11,944

 
109,237

 
26,755

 
—

 
147,936

Selling and general corporate expenses
—

 
30,179

 
46,240

 
6,836

 
—

 
83,255

Interest and other financing costs, net
—

 
74,769

 
645

 
4,171

 
—

 
79,585

Expense allocations
—

 
(69,599
)
 
65,378

 
4,221

 
—

 
—

 
—

 
293,601

 
2,694,677

 
1,090,611

 
—

 
4,078,889

Income (Loss) before Income Tax
—

 
(25,166
)
 
145,379

 
54,495

 
—

 
174,708

Provision (Benefit) for Income Taxes
—

 
(7,352
)
 
22,209

 
13,968

 
—

 
28,825

Equity in Net Income of Subsidiaries
145,761

 
—

 
—

 
—

 
(145,761
)
 
—

Net income (loss)
145,761

 
(17,814
)
 
123,170

 
40,527

 
(145,761
)
 
145,883

Less: Net income attributable to noncontrolling interest
—

 
—

 
122

 
—

 
—

 
122

Net income (loss) attributable to Aramark stockholders
145,761

 
(17,814
)
 
123,048

 
40,527

 
(145,761
)
 
145,761

Other comprehensive income, net of tax
21,200

 
8,018

 
1,486

 
36,544

 
(46,048
)
 
21,200

Comprehensive income (loss) attributable to Aramark stockholders
$
166,961

 
$
(9,796
)
 
$
124,534

 
$
77,071

 
$
(191,809
)
 
$
166,961




24
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended December 28, 2018
(in thousands)

 
Aramark (Parent)
 
Issuers
 
Guarantors 
 
Non Guarantors
 
Eliminations
 
Consolidated
Revenue
$
—

 
$
268,522

 
$
2,848,927

 
$
1,147,900

 
$
—

 
$
4,265,349

Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of services provided
—

 
246,609

 
2,464,602

 
1,083,234

 
—

 
3,794,445

Depreciation and amortization
—

 
4,472

 
120,982

 
25,267

 
—

 
150,721

Selling and general corporate expenses
—

 
55,742

 
41,552

 
6,836

 
—

 
104,130

Gain on sale of Healthcare Technologies
—

 
—

 
(157,309
)
 
—

 
—

 
(157,309
)
Interest and other financing costs, net
—

 
78,560

 
971

 
3,447

 
—

 
82,978

Expense allocations
—

 
(230,589
)
 
225,801

 
4,788

 
—

 
—

 
—

 
154,794

 
2,696,599

 
1,123,572

 
—

 
3,974,965

Income before Income Taxes
—

 
113,728

 
152,328

 
24,328

 
—

 
290,384

Provision for Income Taxes
—

 
8,741

 
25,000

 
5,967

 
—

 
39,708

Equity in Net Income of Subsidiaries
250,682

 
—

 
—

 
—

 
(250,682
)
 
—

Net income
250,682

 
104,987

 
127,328

 
18,361

 
(250,682
)
 
250,676

Less: Net loss attributable to noncontrolling interest
—

 
—

 
(6
)
 
—

 
—

 
(6
)
Net income attributable to Aramark stockholders
250,682

 
104,987

 
127,334

 
18,361

 
(250,682
)
 
250,682

Other comprehensive loss, net of tax
(41,773
)
 
(27,351
)
 
—

 
(44,951
)
 
72,302

 
(41,773
)
Comprehensive income (loss) attributable to Aramark stockholders
$
208,909

 
$
77,636

 
$
127,334

 
$
(26,590
)
 
$
(178,380
)
 
$
208,909




25
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three months ended December 27, 2019
(in thousands)

 
Aramark (Parent)
 
Issuers
 
Guarantors 
 
Non Guarantors
 
Eliminations
 
Consolidated
Net cash used in operating activities
$
—

 
$
(38,011
)
 
$
(153,914
)
 
$
(117,559
)
 
$
—

 
$
(309,484
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment and other
—

 
(12,141
)
 
(72,678
)
 
(14,377
)
 
—

 
(99,196
)
Disposals of property and equipment
—

 
324

 
438

 
2,884

 
—

 
3,646

Acquisitions of businesses, net of cash acquired
—

 
—

 
(3,205
)
 
(3,897
)
 
—

 
(7,102
)
Proceeds from governmental agencies related to property and equipment
—

 
—

 
15,250

 
—

 
—

 
15,250

Other investing activities
—

 
(14
)
 
(1,380
)
 
1,445

 
—

 
51

Net cash used in investing activities
—

 
(11,831
)
 
(61,575
)
 
(13,945
)
 
—

 
(87,351
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term borrowings
—

 
—

 
—

 
58,671

 
—

 
58,671

Payments of long-term borrowings
—

 
(21,151
)
 
(7,765
)
 
(9,469
)
 
—

 
(38,385
)
Net change in funding under the Receivables Facility
—

 
—

 
—

 
450,000

 
—

 
450,000

Payments of dividends
—

 
(27,483
)
 
—

 
—

 
—

 
(27,483
)
Proceeds from issuance of common stock
—

 
26,089

 
—

 
—

 
—

 
26,089

Repurchase of common stock
—

 
—

 
—

 
—

 
—

 
—

Other financing activities
—

 
(56,471
)
 
(858
)
 
—

 
—

 
(57,329
)
Change in intercompany, net
—

 
130,516

 
217,112

 
(347,628
)
 
—

 
—

Net cash provided by financing activities
—

 
51,500

 
208,489

 
151,574

 
—

 
411,563

Effect of foreign exchange rates on cash and cash equivalents
—

 
—

 
—

 
3,247

 
—

 
3,247

Increase (decrease) in cash and cash equivalents
—

 
1,658

 
(7,000
)
 
23,317

 
—

 
17,975

Cash and cash equivalents, beginning of period
5

 
33,510

 
40,544

 
172,584

 
—

 
246,643

Cash and cash equivalents, end of period
$
5

 
$
35,168

 
$
33,544

 
$
195,901

 
$
—

 
$
264,618


26
ARAMARK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three months ended December 28, 2018
(in thousands)

 
Aramark (Parent)
 
Issuers
 
Guarantors 
 
Non Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
—

 
$
172,881

 
$
(328,363
)
 
$
(43,680
)
 
$
(4,500
)
 
$
(203,662
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment and other
—

 
(4,454
)
 
(89,443
)
 
(20,503
)
 
—

 
(114,400
)
Disposals of property and equipment
—

 
50

 
564

 
340

 
—

 
954

Proceeds from divestiture
—

 
—

 
293,711

 
—

 
—

 
293,711

Acquisitions of businesses, net of cash acquired
—

 
—

 
(5,033
)
 
(224
)
 
—

 
(5,257
)
Proceeds from governmental agencies related to property and equipment
—

 
—

 
16,200

 
—

 
—

 
16,200

Other investing activities
—

 
862

 
1,744

 
337

 
—

 
2,943

Net cash (used in) provided by investing activities
—

 
(3,542
)
 
217,743

 
(20,050
)
 
—

 
194,151

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term borrowings
—

 
—

 
—

 
72,723

 
—

 
72,723

Payments of long-term borrowings
—

 
(278,339
)
 
(8,781
)
 
(26,911
)
 
—

 
(314,031
)
Net change in funding under the Receivables Facility
—

 
—

 
—

 
390,000

 
—

 
390,000

Payments of dividends
—

 
(27,161
)
 
—

 
—

 
—

 
(27,161
)
Proceeds from issuance of common stock
—

 
1,077

 
—

 
—

 
—

 
1,077

Repurchase of common stock
—

 
(50,000
)
 
—

 
—

 
—

 
(50,000
)
Other financing activities
—

 
(23,447
)
 
(929
)
 
(113
)
 
—

 
(24,489
)
Change in intercompany, net
—

 
203,883

 
121,522

 
(329,905
)
 
4,500

 
—

Net cash (used in) provided by financing activities
—

 
(173,987
)
 
111,812

 
105,794

 
4,500

 
48,119

Effect of foreign exchange rates on cash and cash equivalents
—

 
—

 
—

 
(3,752
)
 
—

 
(3,752
)
(Decrease) increase in cash and cash equivalents
—

 
(4,648
)
 
1,192

 
38,312

 
—

 
34,856

Cash and cash equivalents, beginning of period
5

 
50,716

 
29,844

 
134,460

 
—

 
215,025

Cash and cash equivalents, end of period
$
5

 
$
46,068

 
$
31,036

 
$
172,772

 
$
—

 
$
249,881



27

Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of Aramark's (the "Company," "we," "our" and "us") financial condition and results of operations for the three months ended December 27, 2019 and December 28, 2018 should be read in conjunction with our audited consolidated financial statements, and the notes to those statements for the fiscal year ended September 27, 2019 included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on November 26, 2019.
Our discussion contains forward-looking statements, such as our plans, objectives, opinions, expectations, anticipations, intentions and beliefs, that are based upon our current expectations but that involve risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in those forward-looking statements as a result of a number of factors, including those described under the heading "Special Note About Forward-Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q. In the following discussion and analysis of financial condition and results of operations, certain financial measures may be considered "non-GAAP financial measures" under SEC rules. These rules require supplemental explanation and reconciliation, which is provided elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a leading global provider of food, facilities and uniform services to education, healthcare, business & industry and sports, leisure & corrections clients. Our core market is the United States, which is supplemented by an additional 18-country footprint. Through our established brand, broad geographic presence and employees, we anchor our business in our partnerships with thousands of education, healthcare, business, sports, leisure and corrections clients. Through these partnerships we serve millions of consumers including students, patients, employees, sports fans and guests worldwide. We operate our business in three reportable segments: Food and Support Services United States ("FSS United States"), Food and Support Services International ("FSS International") and Uniform and Career Apparel ("Uniform").
Our Food and Support Services operations focus on serving clients in five principal sectors: Business & Industry, Education, Healthcare, Sports, Leisure & Corrections and Facilities & Other. Our FSS International reportable segment provides a similar range of services as those provided to our FSS United States clients and operates in the same sectors. Administrative expenses not allocated to our three reportable segments are presented separately as corporate expenses.
During fiscal 2018, we acquired Avendra, LLC ("Avendra") and AmeriPride Services, Inc. ("AmeriPride") in separate transactions. Our earnings have been impacted and we expect to continue to be impacted for some period following the closings as a result of these acquisitions, due to, among other factors, merger and integration costs as well as depreciation and amortization resulting from purchase accounting and higher interest expense as a result of the new debt to finance the transactions. As a part of the integration of Avendra and AmeriPride, we have incurred $102 million of charges and expect to incur approximately $20 million to $25 million of additional charges over the next nine months.
During fiscal 2019, Eric J. Foss, our former Chairman, President and Chief Executive Officer, stepped down and $12.1 million of charges related to his separation from us were recognized during the quarter ended September 27, 2019, of which $10.4 million were cash compensation related charges. As of December 27, 2019, we had $8.8 million of remaining unpaid obligations related to his separation, which are recorded in "Accrued expenses and other current liabilities" in the Condensed Consolidated Balance Sheets. These remaining unpaid obligations are expected to be paid through fiscal 2021.
Divestiture
On November 9, 2018, we completed the sale of our wholly-owned Healthcare Technologies ("HCT") business for $293.7 million in cash. The transaction resulted in a pretax gain of $157.3 million (tax effected gain of $140.2 million) in the Condensed Consolidated Statements of Income for the three months ended December 28, 2018.

28

Seasonality
Our revenue and operating results have varied from quarter to quarter as a result of different factors. Historically, within our FSS United States segment, there has been a lower level of activity during our first and second fiscal quarters in operations that provide services to sports and leisure clients. This lower level of activity, historically, has been partially offset during our first and second fiscal quarters by the increased activity levels in our educational operations. Conversely, historically there has been a significant increase in the provision of services to sports and leisure clients during our third and fourth fiscal quarters, which is partially offset by the effect of summer recess at colleges, universities and schools in our educational operations.
Foreign Currency Fluctuations
The impact from foreign currency translation assumes constant foreign currency exchange rates based on the rates in effect for the prior year period being used in translation for the comparable current year period. We believe that providing the impact of fluctuations in foreign currency rates on certain financial results can facilitate analysis of period-to-period comparisons of business performance.
Fiscal Year
Our fiscal year is the fifty-two or fifty-three week period which ends on the Friday nearest September 30th. The fiscal year ended October 2, 2020 is a fifty-three week period and the fiscal year ended September 27, 2019 is a fifty-two week period.
Results of Operations
The following tables present an overview of our results on a consolidated and segment basis with the amount of and percentage change between periods for the three months ended December 27, 2019 and December 28, 2018 (dollars in millions).
 
Three Months Ended
 
Change
 
December 27, 2019
 
December 28, 2018
 
$
 
%
Revenue
$
4,253.6

 
$
4,265.3

 
$
(11.7
)
 
—
 %
Costs and Expenses:
 
 
 
 
 
 
 
Cost of services provided
3,768.1

 
3,794.4

 
(26.3
)
 
(1
)%
Other operating expenses
231.2

 
254.8

 
(23.6
)
 
(9
)%
          Gain on sale of Healthcare Technologies
—

 
(157.3
)
 
157.3

 
(100
)%
 
3,999.3

 
3,891.9

 
107.4

 
3
 %
Operating income
254.3

 
373.4

 
(119.1
)
 
(32
)%
Interest and Other Financing Costs, net
79.6

 
83.0

 
(3.4
)
 
(4
)%
Income Before Income Taxes
174.7

 
290.4

 
(115.7
)
 
(40
)%
Provision for Income Taxes
28.8

 
39.7

 
(10.9
)
 
(27
)%
Net income
$
145.9

 
$
250.7

 
$
(104.8
)
 
(42
)%

29

 
 
Three Months Ended
 
Change
Revenue by Segment(1)
 
December 27, 2019
 
December 28, 2018
 
$
 
%
FSS United States
 
$
2,639.0

 
$
2,660.3

 
$
(21.3
)
 
(1
)%
FSS International
 
946.2

 
953.1

 
(6.9
)
 
(1
)%
Uniform
 
668.4

 
651.9

 
16.5

 
3
 %
 
 
$
4,253.6

 
$
4,265.3

 
$
(11.7
)
 
—
 %
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Change
Operating Income by Segment(1)
 
December 27, 2019
 
December 28, 2018
 
$
 
%
FSS United States
 
$
185.9

 
$
363.7

 
$
(177.8
)
 
(49
)%
FSS International
 
43.7

 
11.5

 
32.2

 
281
 %
Uniform
 
53.3

 
52.7

 
0.6

 
1
 %
Corporate
 
(28.6
)
 
(54.5
)
 
25.9

 
(47
)%
 
 
$
254.3

 
$
373.4

 
$
(119.1
)
 
(32
)%
(1) As a percentage of total revenue, FSS United States represented 62% and 63%, FSS International represented 22% and 22% and Uniform represented 16% and 15% for the three month periods ended December 27, 2019 and December 28, 2018, respectively.
Consolidated Overview
Revenue was slightly lower during the three month period of fiscal 2020 compared to the prior year period. The slight decrease was attributable to:
•
the negative impact of foreign currency translation (approximately -1%); and
•
the effect of the divestiture of HCT in the prior year (approximately -1%) and a decline in the Education sector in our FSS United States segment; which more than offset
•
growth in our Sports, Leisure & Corrections and Facilities & Other sectors in our FSS United States segment (approximately 1%); and
•
growth in South America in our FSS International segment (approximately 1%).
The following table presents the cost of services provided by segment and as a percent of revenue for the three month periods ended December 27, 2019 and December 28, 2018.
 
 
Three Months Ended
 
 
December 27, 2019
 
December 28, 2018
Cost of services provided
 
$
 
% of Revenue
 
$
 
% of Revenue
FSS United States
 
$
2,331.6

 
88
%
 
$
2,332.2

 
88
%
FSS International
 
880.5

 
93
%
 
920.4

 
97
%
Uniform
 
556.0

 
83
%
 
541.8

 
83
%
 
 
$
3,768.1

 
89
%
 
$
3,794.4

 
89
%
The following table presents the percentages attributable to the components in cost of services provided for the three month periods ended December 27, 2019 and December 28, 2018.
 
 
Three Months Ended
Cost of services provided components
 
December 27, 2019
 
December 28, 2018
Food and support service costs
 
29
%
 
28
%
Personnel costs
 
46
%
 
46
%
Other direct costs
 
25
%
 
26
%
 
 
100
%
 
100
%
Operating income decreased by approximately $119.1 million during the three month period of fiscal 2020 compared to the prior year period. The decrease was attributable to:
•
the prior year gain from the divestiture of the HCT business (approximately $157.3 million); and

30

•
profit decline in our FSS United States segment, reflecting our investment in actions to accelerate growth, the impact of negative net new business within the Education sector, an increase in medical insurance claims and lower income from possessory interest compared to the prior year;
•
personnel costs and consulting costs related to sales growth initiatives (approximately $8.7 million); which more than offset
•
profit growth from revenue increases in our Uniform segment;
•
profit growth in our FSS International segment, mainly from strong unit level cost containment and timing of annual employee incentive compensation;
•
lower severance and consulting costs related to streamlining initiatives (approximately $26.2 million); and
•
an increase from the change in fair value of certain gasoline and diesel agreements (approximately $12.2 million).
Interest and Other Financing Costs, net, decreased 4% during the three month period of fiscal 2020 compared to the prior year period. The decrease was primarily due to lower outstanding term loan borrowings resulting from optional prepayments made during fiscal 2019.
The effective income tax rate for the three month period of fiscal 2020 was 16.5% compared to 13.7% in the prior year period. The lower effective tax rate in fiscal 2019 was driven by a tax benefit of approximately $11.3 million as a result of U.S tax reform and a lower effective tax rate on the gain on sale of HCT, which resulted in a $17 million provision for income taxes (see Note 2 to the condensed consolidated financial statements). The effective tax rate for the three months ended December 27, 2019 also includes a tax benefit of approximately $18.6 million as a result of an excess tax benefit recognized in relation to equity awards exercised during the first quarter of fiscal 2020, including by the former Chairman, President and Chief Executive Officer.
Segment Results
FSS United States Segment
The FSS United States reportable segment consists of five operating sectors which have similar economic characteristics and are aggregated into a single operating segment. The five operating 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 are summarized as follows (in millions):
 
Three Months Ended
 
Change
 
December 27, 2019
 
December 28, 2018
 
%
Business & Industry
$
405.5

 
$
399.9

 
1
 %
Education
1,001.1

 
1,016.3

 
(1
)%
Healthcare
227.2

 
263.3

 
(14
)%
Sports, Leisure & Corrections
608.9

 
594.3

 
2
 %
Facilities & Other
396.3

 
386.5

 
2
 %
 
$
2,639.0

 
$
2,660.3

 
(1
)%
The Healthcare, Education and Facilities & Other sectors generally have high-single digit operating income margins and the Business & Industry and Sports, Leisure & Corrections sectors generally have mid-single digit operating income margins.
FSS United States segment revenue decreased by approximately 1% during the three month period of fiscal 2020 compared to the prior year period. The decrease was attributable to:
•
a decrease in Healthcare sector revenue resulting from the divestiture of HCT (approximately -17% of Healthcare sector), partially offset by base business growth; and
•
a decrease in Education sector revenue resulting from negative net new business; which more than offset
•
an increase in Facilities & Other, Sports, Leisure & Corrections and Business & Industry sector revenue resulting from base business growth.
Operating income decreased by approximately $177.8 million during the three month period of fiscal 2020 compared to the prior year period. The decrease was attributable to:
•
the prior year gain from the divestiture of the HCT business (approximately $157.3 million);
•
the effect of the divestiture of HCT in the prior year (approximately $3.8 million) and profit decline in the Education and Facilities & Other sectors; and

31

•
personnel costs and consulting costs related to sales growth initiatives (approximately $5.0 million);
•
an increase in medical insurance claims and lower income from possessory interest compared to the prior year; which more than offset
•
the prior year duplicate rent charges to build out and ready our new headquarters while occupying our previous headquarters, impairment costs while exiting our previous headquarters and moving costs associated with the relocation to the new headquarters (approximately $5.0 million); and
•
lower severance charges related to streamlining initiatives (approximately $3.5 million).
FSS International Segment
FSS International segment revenue decreased by approximately 1% during the three month period of fiscal 2020 compared to the prior year period. The decrease was attributable to:
•
the negative impact of foreign currency translation (approximately -4%); and
•
a decline in revenue in Northern Europe related to strategic exit of non-core custodial accounts; partially offset by
•
revenue growth in South America, China and Spain.
Operating income increased by approximately $32.2 million during the three month period of fiscal 2020 compared to the prior year period. The increase was attributable to:
•
profit growth from strong unit level cost containment and timing of annual employee incentive compensation; and
•
lower severance costs related to streamlining initiatives (approximately $17.9 million); partially offset by
•
the negative impact of foreign currency translation (approximately $1 million).
Uniform Segment
Uniform segment revenue increased by approximately 3% during the three month period of fiscal 2020 compared to the prior year period. The increase was primarily from new business and improved pricing.
Operating income increased by approximately $0.6 million during the three month period of fiscal 2020 compared to the prior year period from revenue increase and synergies from the AmeriPride acquisition, which more than offset personnel costs related to sales growth initiatives (approximately $3.7 million) and higher merger and integration charges from the AmeriPride acquisition (approximately $0.9 million).
Corporate
Corporate expenses, those administrative expenses not allocated to the business segments, decreased by approximately $25.9 million during the three month period of fiscal 2020 compared to the prior year period. The decrease was attributable to:
•
an increase from the change in fair value of certain gasoline and diesel agreements (approximately $12.2 million);
•
prior year banker fees related to the divestiture of HCT (approximately $6.1 million);
•
lower share-based compensation expense primarily related to forfeitures and the fourth quarter fiscal 2019 decrease in the expected attainment percentage related to the fiscal 2018 PSU grants (approximately $4.4 million); and
•
prior year consulting costs relating to streamlining initiatives (approximately $4.2 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 December 27, 2019, we had $264.6 million of cash and cash equivalents and approximately $874.3 million of availability under our senior secured revolving credit facility. A significant portion of our cash and cash equivalents is held in mature, liquid geographies where we have operations. As of December 27, 2019, there was approximately $923.6 million of outstanding foreign currency borrowings.
We believe that our cash and cash equivalents and the unused portion of our committed credit availability under the senior secured revolving credit facility will be adequate to meet anticipated cash requirements to fund working capital, capital spending, debt service obligations, refinancings, dividends and other cash needs. As part of our ongoing liquidity assessments, we routinely monitor our cash flow (including the mix of domestic and international inflows and outflows) and the condition of the capital markets in order to be prepared to respond to changing conditions.
On February 5, 2019, we announced as a result of tax savings from U.S. tax reform that we would invest $90 million in our workforce through targeted wage adjustments, retirement contributions and special recognition awards, as well as employee training programs and scholarships. We funded a majority of these investments during fiscal 2019. Through December 27,

32

2019, we have invested approximately $84 million in special recognition awards, employee training programs, retirement contributions and educational assistance. We expect to spend approximately $6 million during fiscal 2020 related to the tax reform funded investment in our workforce.
The table below summarizes our cash activity (in millions):
 
Three Months Ended
 
December 27, 2019
 
December 28, 2018
Net cash used in operating activities
$
(309.5
)
 
$
(203.7
)
Net cash (used in) provided by investing activities
(87.4
)
 
194.2

Net cash provided by financing activities
411.6

 
48.1

Reference to the Condensed Consolidated Statements of Cash Flows will facilitate understanding of the discussion that follows.
Cash Flows Used in Operating Activities
During the three month period of fiscal 2020, as discussed in "Results of Operations" above, net income decreased and non-cash charges increased compared to the three month period of fiscal 2019, which was impacted by the prior year gain from the divestiture of the HCT business of approximately $140.2 million. The increase in cash flows used in operating activities was primarily due to the unfavorable change in operating assets and liabilities ($208.3 million). The change in operating assets and liabilities compared to the prior year period was primarily due to the following:
•
Accrued expenses were a greater use of cash primarily due to higher employer retirement matching contributions and the timing of payments related to the annual bonus, deferred income, insurance and interest;
•
Receivables were a greater use of cash due to timing of collections;
•
Accounts payable were a greater use of cash due to timing of disbursements; and
•
Inventories were a source of cash in the three month period of fiscal 2020 compared to a use of cash in the three month period of fiscal 2019 due to less purchases in the Uniform segment.
During the three month periods of fiscal 2020 and fiscal 2019, we received income of approximately $12.5 million and $14.6 million, respectively, related to favorable loss experience in older insurance years under our general liability, automobile liability and workers' compensation programs. The "Other operating activities" caption in both periods reflects adjustments to net income related to non-operating gains and losses.
Cash Flows (Used in) Provided by Investing Activities
The decrease in net cash flows (used in) provided by investing activities during the three month period of fiscal 2020 compared to the three month period of fiscal 2019 relates primarily to the proceeds from the sale of Healthcare Technologies in the first quarter of fiscal 2019 of $293.7 million and lower levels of capital expenditures. The "Proceeds from governmental agencies related to property and equipment" caption includes $15.3 million and $16.2 million of proceeds relating to the recovery of our investment (possessory interest) at one of the National Park Service sites within our Sports, Leisure & Corrections sector during each of the three month periods of fiscal 2020 and 2019, respectively.
Cash Flows Provided by Financing Activities
During the three month period of fiscal 2020, cash provided by financing activities was impacted by the following:
•
an increase in funding under the Receivables Facility ($450.0 million); and
•
an increase in proceeds from issuance of common stock as a result of higher stock option exercises ($26.1 million).
During the three month period of fiscal 2019, cash provided by financing activities was impacted by the following:
•
an increase in funding under the Receivables Facility ($390.0 million); and
•
a repayment of borrowings on term loans and the revolving credit facility ($280.0 million, which includes $200.0 million of optional prepayments).
During fiscal 2017, the Board of Directors authorized a share repurchase program providing for purchases of up to $250.0 million of Aramark common stock, which expired February 1, 2019. During the three month period of fiscal 2019, we completed a repurchase of 1.6 million shares of our common stock for $50.0 million under this program.
The "Other financing activities" caption also reflects a use of cash during the three month periods of fiscal 2020 and fiscal 2019, 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.

33

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 December 27, 2019, 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.
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 Aramark Services, Inc. ("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 or operating income 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 Months Ended
(in millions)
 
December 27, 2019
Net income attributable to ASI stockholder
 
$
343.6

Interest and other financing costs, net
 
331.6

Provision for income taxes
 
96.8

Depreciation and amortization
 
589.8

Share-based compensation expense(1)    
 
50.8

Unusual or non-recurring (gains) and losses
 
1.0

Pro forma EBITDA for equity method investees(2)    
 
7.2

Pro forma EBITDA for certain transactions(3)
 
19.1

Other(4)    
 
208.5

Covenant Adjusted EBITDA
 
$
1,648.4

(1)
Represents share-based compensation expense resulting from the application of accounting for stock options, restricted stock units, performance stock units, and deferred stock unit awards (see Note 10 to the condensed consolidated financial statements).
(2)
Represents our estimated share of EBITDA, primarily from our AIM Services Co., Ltd. equity method investment, not already reflected in our Net 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.

34

(3)
Represents the annualizing of net EBITDA from acquisitions made during the period.
(4)
Other for the twelve months ended December 27, 2019 includes compensation expense for special recognition awards, employee training programs and retirement contributions funded by benefits from U.S. tax reform ($76.3 million), expenses related to merger and integration related charges ($37.5 million), charges related to certain legal settlements ($27.9 million), adjustments to remove the impact attributable to the adoption of certain new accounting standards in accordance with the Credit Agreement and indentures ($24.5 million), non cash impairment charges ($14.8 million), cash compensation charges associated with the retirement of the Company's former chief executive officer ($10.4 million), closing costs mainly related to customer contracts ($8.5 million), advisory fees related to shareholder matters ($7.7 million), the impact of hyperinflation in Argentina ($4.9 million), settlement charges related to exiting a joint venture arrangement ($4.5 million), organizational streamlining initiatives ($3.3 million reversal), the impact of the change in fair value related to certain gasoline and diesel agreements ($7.5 million gain) and other miscellaneous expenses.
Our covenant requirements and actual ratios for the twelve months ended December 27, 2019 are as follows:
 
Covenant
Requirements
 
Actual
Ratios
Consolidated Secured Debt Ratio(1)
5.125x
 
2.07
Interest Coverage Ratio (Fixed Charge Coverage Ratio)(2)
2.000x
 
4.94
(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 sale-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 condensed 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 our Credit Agreement, which, if ASI's lenders under our Credit Agreement (other than the lenders in respect of ASI's U.S. Term Loan B, which lenders do not benefit from the maximum Consolidated Secured Debt Ratio covenant) failed to waive any such default, would also constitute a default under the indentures governing our senior notes.
(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. 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 incur additional indebtedness, other than the incremental capacity provided for under our Credit Agreement and pursuant to specified exceptions, and make certain restricted payments, other than pursuant to certain exceptions. The minimum Interest Coverage Ratio is 2.000x for the term of the Credit Agreement. Consolidated interest expense is defined in our 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.
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.
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 financial statements. Beginning in fiscal 2019, we began insuring 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 the regulations within its domicile, including regulations relating to levels of liquidity and solvency as such concepts are defined by the regulator. The Captive was in compliance with these regulations as of December 27, 2019. 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 December 27, 2019, cash and cash equivalents at the Captive was $59.9 million. We are self-insured for a portion of the risk retained under our general liability, automobile liability and workers’ compensation insurance arrangements. Self-insurance reserves are recorded based on actuarial analyses.
During the second quarter of fiscal 2020, we entered into a new U.S. dollar denominated term loan due January 15, 2027 (the "U.S. Term Loan B due 2027"), in an aggregate principal amount of $900.0 million. The U.S. Term Loan B due 2027 was borrowed with an original issue discount of 0.125%. The net proceeds from the U.S. Term Loan B due 2027 were used to

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redeem the aggregate $900.0 million principal amount outstanding on the 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, including a $23.1 million call premium on the 2024 Notes and approximately $6.5 million of charges related to banker fees, rating agency fees and legal fees (see Note 5 to the condensed consolidated financial statements).
On January 29, 2020, our stockholders approved the Second Amended and Restated 2013 Stock Incentive Plan, which replaces our 2013 Incentive Plan. The Second Amended and Restated 2013 Stock Incentive Plan provides for up to 7.5 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 January 29, 2020 that are not subject to outstanding awards under the 2013 Incentive Plan.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in the notes to the consolidated financial statements included in our Form 10-K filed with the SEC on November 26, 2019. As described in such notes, we recognize revenue in the period in which the performance obligation is satisfied. For a more complete discussion of the critical accounting policies and estimates that we have identified in the preparation of our condensed consolidated financial statements, please refer to our Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K filed with the SEC on November 26, 2019.
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.
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 Standard Updates
See Note 1 to the condensed consolidated financial statements for a full description of recent accounting standard updates, including the expected dates of adoption.
Item 3.    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 market risk associated with debt obligations as of December 27, 2019 has not materially changed from September 27, 2019 (see Item 7A "Quantitative and Qualitative Disclosure About Market Risk" in our Form 10-K for the fiscal year ended September 27, 2019 filed with the SEC on November 26, 2019). See Note 6 to the condensed consolidated financial statements for a discussion of our derivative instruments and Note 14 for the disclosure of the fair value and related carrying value of our debt obligations as of December 27, 2019.
Item 4.    Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's 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 the Chief Executive Officer and Chief Financial Officer, concluded that the Company's 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 the Company 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 the Company's management, including its 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. During the first quarter of fiscal 2020, the Company implemented a lease accounting system and related controls to facilitate adoption of the new lease accounting standard effective September 28, 2019. There were no other changes in the Company's internal control over financial reporting during the Company's first quarter of fiscal 2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II
Item 1.    Legal Proceedings
Our business is subject to various federal, state and local laws and regulations governing, among other things, the generation, handling, storage, transportation, treatment and disposal of water wastes and other substances. We engage in informal settlement discussions with federal, state, local and foreign authorities regarding allegations of violations of environmental laws in connection with our operations or businesses conducted by our predecessors or companies that we have acquired, the aggregate amount of which and related remediation costs we do not believe should have a material adverse effect on our financial condition or results of operations as of December 27, 2019.
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 business, 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, minority, women and disadvantaged business enterprise statutes, tax codes, antitrust and competition laws, consumer protection statutes, procurement regulations, intellectual property laws, food safety and sanitation laws, cost and accounting principles, the Foreign Corrupt Practices Act, the U.K. Bribery Act, other anti-corruption laws, lobbying laws, motor carrier safety laws, data privacy and security laws and alcohol licensing and service laws, or alleging negligence and/or breaches of contractual and other obligations. Based on information currently available, advice of counsel, available insurance coverage, established reserves and other resources, we do not believe that any such actions, proceedings or investigations are likely to be, individually or in the aggregate, material to our business, financial condition, results of operations or cash flows. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to our business, financial condition, results of operations or cash flows.
Item 1A.    Risk Factors
There have been no material changes to the risk factors disclosed in Part I, Item 1A of the Form 10-K for the fiscal year ended September 27, 2019 and filed with the SEC on November 26, 2019.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
c) Issuer Purchases of Equity Securities
The following table provides information about the Company's share repurchase activity during the first fiscal quarter:
 
 
(a)
 
(b)
 
(c)
 
(d)
Period
 
Total Number of Shares (or Units) Purchased
 
Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1)
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1)
Month 1
September 28, 2019 - October 25, 2019
 
N/A

 
N/A

 
N/A
 
$
200,000,000

Month 2
October 26, 2019 - November 22, 2019(2)
 
132,304

 
$
43.24

 
N/A
 
N/A

Month 3
November 23, 2019 - December 27, 2019
 
N/A

 
N/A

 
N/A
 
N/A

Total
 
132,304

 
$
43.24

 
N/A
 
$
200,000,000

(1)
On August 6, 2019, we announced a share repurchase program allowing us to repurchase up to $200.0 million of our common stock through July 2022.
(2)
Consists of shares withheld to pay taxes in connection with the vesting of performance restricted stock granted under the Company’s Amended and Restated 2013 Stock Incentive Plan.
Item 6.    Exhibits
See the Exhibit Index which is incorporated herein by reference.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 4, 2020.
 
 
 
 
Aramark
 
 
 
 
 
 
 
 
By:
 
/s/ THOMAS G. ONDROF
 
 
 
 
Name:
 
Thomas G. Ondrof
 
 
 
 
Title:
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Signatory)

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Exhibit Index
Exhibit No.
 
Description 
 
 
Incremental Amendment No. 8 (the “Incremental Amendment”), dated as of January 15, 2020, among Aramark Services, Inc. (the “Company”), Aramark Intermediate HoldCo Corporation (“Holdings”), certain wholly-owned subsidiaries of the Aramark Services, Inc., the U.S. Term B-4 Lenders (as defined therein) and JPMorgan Chase Bank, N.A. as administrative agent for the Lenders (as defined therein) and collateral agent for the secured parties thereunder amending that certain credit agreement, dated March 28, 2017, among the Aramark Services, Inc., Holdings, ARAMARK Canada Ltd., ARAMARK Investments Limited, ARAMARK Limited, ARAMARK Ireland Holdings Limited, ARAMARK Regional Treasury Europe, Designated Activity Company, ARAMARK Holdings Deutschland GMBH (as successor by merger to ARAMARK Holdings GmbH & Co. KG), Aramark International Finance S.à r.l. and certain other wholly-owned domestic subsidiaries of the Company, the financial institutions from time to time party thereto (including the financial institutions party to the Incremental Amendment, the “Lenders”), the issuing banks named therein and JPMorgan Chase Bank, N.A., as administrative agent for the Lenders and collateral agent for the secured parties thereunder (incorporated by reference to Exhibit 10.1 to Aramark’s Current Report on Form 8-K filed with the SEC on January 16, 2020 pursuant to the Exchange Act (file number 001-36223)).
 
 
 
 
 
 
 
 
 
104
 
Inline XBRL for the cover page of this Quarterly Report on Form 10-Q; included in Exhibit 101 Inline XBRL document set.
*    Filed herewith.
†    Identifies exhibits that consist of management contract or compensatory arrangement.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and should not be relied upon for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
The XBRL instance document does not appear in the interactive data file because the XBRL tags are embedded within the inline XBRL document.

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