Vestis Corp (VSTS)

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of Vestis Corporation’s (“Vestis”, the “Company”, “our”, “we” or “us”) financial condition and results of operations for the fiscal years ended September 27, 2024 and September 29, 2023 should be read in conjunction with our audited Consolidated and Combined Financial Statements and the notes to those statements. For additional information on the year ended September 30, 2022 and year-over-year comparisons to September 29, 2023, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended September 29, 2023.

This 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 set forth under “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Business” sections and elsewhere in this Annual Report on Form 10-K (“Annual Report”).

All amounts discussed are in thousands of U.S. dollars, except where otherwise indicated.

Company Overview

We are a leading provider of uniforms and workplace supplies across the United States and Canada, with over 75 years of experience in the workplace apparel and supplies industry. We provide a full range of uniform programs, restroom supply services, first aid supplies and safety products, as well as ancillary items such as floor mats, towels, and linens, to more than 300,000 customer locations across the United States and Canada. We compete with national, regional, and local providers who vary in size, scale, capabilities and product and service offering. Primary methods of competition include product quality, service quality and price. Notable competitors of size include Cintas Corporation and UniFirst Corporation, as well as numerous regional and local competitors. Additionally, many businesses perform certain aspects of our product and service offerings in-house rather than outsourcing them and leveraging the benefits of full-service programs.

With approximately 19,600 employees, we operate a network of over 350 facilities including laundry plants, satellite plants, distribution centers and manufacturing plants along with a fleet of service vehicles that support over 3,300 pick-up and delivery routes. We have two manufacturing facilities in Mexico with approximately 189,000 square feet of manufacturing capacity between both plants that produce approximately 60% of our uniforms and linens products. We source raw materials, finished goods, equipment, and other supplies from a variety of domestic and international suppliers. We leverage our broad footprint, supply chain, delivery fleet and route logistics capabilities to serve customers on a recurring basis, typically weekly, and primarily through multi-year contracts.

Our full-service uniform offering (“Uniforms”) includes the design, sourcing, manufacturing, customization, personalization, delivery, laundering, sanitization, repair, and replacement of uniforms. Our uniform options include shirts, pants, outerwear, gowns, scrubs, high visibility garments, particulate-free garments, and flame-resistant garments, along with shoes and accessories. We service our customers on a recurring rental basis, typically weekly, delivering clean uniforms while, during the same visit, picking up worn uniforms for inspection, cleaning and repair or replacement. In addition to our weekly, recurring customer contracts, we offer customized uniforms through direct sales agreements, typically for large, regional, or national companies.

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In addition to Uniforms, we also provide workplace supplies (“Workplace Supplies”) including restroom supply services, first aid supplies and safety products, floor mats, towels, and linens. Similar to our uniform offering, on a recurring rental basis, generally weekly, we pick up used and soiled floor mats, towels and linens, replacing them with clean products. We also restock restroom supplies, first aid supplies and safety products as needed.

We manage and operate our business in two reportable segments, United States and Canada. Both segments provide Uniforms and Workplace Supplies, as described above, to customers within their specific geographic territories.

Separation from and Relationship with Aramark

On September 30, 2023 (the "Distribution Date"), Aramark completed the previously announced spin-off of Vestis (the "Spin-Off," or the “Separation”). The Separation was completed through a distribution of our outstanding common stock to stockholders of record of Aramark’s common stock as of the close of business on September 20, 2023. Aramark stockholders of record received one share of Vestis common stock for every two shares of common stock, par value $0.01, of Aramark.

Following the separation, certain functions that Aramark provided to us prior to the separation continued to be provided to us by Aramark under a transition services agreement. As of September 27, 2024 these transition services were no longer being provided.

Basis of Presentation

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of Vestis Corporation’s (“Vestis”, the “Company”, “our”, “we” or “us”) financial condition and results of operations for the fiscal years ended September 29, 2023 and September 30, 2022 should be read in conjunction with our audited Combined Financial Statements and the notes to those statements. For additional information on the year ended October 1, 2021 and year-over-year comparisons to September 30, 2022, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-12B/A filed with the Securities and Exchange Commission (“SEC”) on September 6, 2023.

This 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 set forth under “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Business” sections and elsewhere in this Annual Report on Form 10-K (“Annual Report”).

All amounts discussed are in thousands of U.S. dollars, except where otherwise indicated.

Company Overview

We are a leading provider of uniforms and workplace supplies across the United States and Canada, with over 75 years of experience in the workplace apparel and supplies industry. We provide a full range of uniform programs, managed restroom supply services, first aid supplies and safety products, as well as ancillary items such as floor mats, towels, and linens, to more than 300,000 customer locations across the United States and Canada. We compete with national, regional, and local providers who vary in size, scale, capabilities and product and service offering. Primary methods of competition include product quality, service quality and price. Notable competitors of size include Cintas Corporation and UniFirst Corporation, as well as numerous regional and local competitors. Additionally, many businesses

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perform certain aspects of our product and service offerings in-house rather than outsourcing them and leveraging the benefits of full-service programs.

With approximately 20,000 employees, we operate a network of over 350 facilities including laundry plants, satellite plants, distribution centers and manufacturing plants along with a fleet of service vehicles that support over 3,400 pick-up and delivery routes. We have two manufacturing facilities in Mexico with approximately 189,000 square feet of manufacturing capacity between both plants that produce approximately 50% of our uniforms and linens products. We source raw materials, finished goods, equipment, and other supplies from a variety of domestic and international suppliers. We leverage our broad footprint, supply chain, delivery fleet and route logistics capabilities to serve customers on a recurring basis, typically weekly, and primarily through multi-year contracts.

Our full-service uniform offering (“Uniforms”) includes the design, sourcing, manufacturing, customization, personalization, delivery, laundering, sanitization, repair, and replacement of uniforms. Our uniform options include shirts, pants, outerwear, gowns, scrubs, high visibility garments, particulate-free garments, and flame-resistant garments, along with shoes and accessories. We service our customers on a recurring rental basis, typically weekly, delivering clean uniforms while, during the same visit, picking up worn uniforms for inspection, cleaning and repair or replacement. In addition to our weekly, recurring customer contracts, we offer customized uniforms through direct sales agreements, typically for large, regional, or national companies.

In addition to Uniforms, we also provide workplace supplies (“Workplace Supplies”) including managed restroom supply services, first aid supplies and safety products, floor mats, towels, and linens. Similar to our uniform offering, on a recurring rental basis, generally weekly, we pick up used and soiled floor mats, towels and linens, replacing them with clean products. We also restock restroom supplies, first aid supplies and safety products as needed.

We manage and operate our business in two reportable segments, United States and Canada. Both segments provide Uniforms and Workplace Supplies, as described above, to customers within their specific geographic territories.

Separation from and Relationship with Aramark

On September 30, 2023 (the "Distribution Date"), Aramark completed the previously announced spin-off of Vestis (the "Spin-Off," or the “Separation”). The Separation was completed through a distribution of our outstanding common stock to stockholders of record of Aramark’s common stock as of the close of business on September 20, 2023. Aramark stockholders of record received one share of Vestis common stock for every two shares of common stock, par value $0.01, of Aramark.

Following the separation, certain functions that Aramark provided to us prior to the separation will continue to be provided to us by Aramark under a transition services agreement.

Basis of Presentation

The Combined Financial Statements reflect the combined historical results of operations, comprehensive income and cash flows for the years ended September 29, 2023, September 30, 2022 and October 1, 2021 and the financial position as of September 29, 2023 and September 30, 2022 for Vestis. The Combined Financial Statements have been derived from Aramark’s historical accounting records and were prepared on a standalone basis in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC. The assets, liabilities, revenue, and expenses of Vestis have been reflected in these Combined Financial Statements on a historical cost basis, as included in the Combined Financial Statements of Aramark, using the historical accounting policies applied by Aramark. Historically, separate financial statements have not been prepared for Vestis and it has not operated as a standalone business from Aramark. The historical results of operations, financial position and cash flows of Vestis presented in these Combined Financial Statements may not be indicative of what they would have been had we been an independent standalone public company, nor are they necessarily indicative of our future results of operations, financial position, and cash flows.

Our business has historically functioned together with other Aramark businesses. Accordingly, we relied on certain of Aramark’s corporate support functions to operate. The Combined Financial Statements include all revenues and costs directly attributable to us and an allocation of expenses related to certain Aramark corporate functions. These expenses have been allocated to us on the basis of direct usage where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount or other drivers. We consider these allocations to be a reasonable reflection of the

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utilization of services or the benefit received. However, the allocations may not be indicative of the actual expense that would have been incurred had we operated as an independent, standalone public entity, nor are they indicative of our future expenses.

The Combined Financial Statements include assets and liabilities that have been determined to be specifically identifiable or otherwise attributable to us.

Our cash flows within the United States segment are transferred to Aramark regularly as part of Aramark’s centralized cash management program. Our cash flows within the Canada segment are reinvested locally. The cash and cash equivalents held by Aramark at the corporate level are not specifically identifiable to us and therefore were not allocated to any of the periods presented. Only cash amounts specifically attributable to us are reflected in the Combined Balance Sheets. Transfers of cash, both to and from Aramark’s central cash management system, are reflected as a component of “Net parent investment” on the Combined Balance Sheets and in “Net cash used in financing activities” on the accompanying Combined Statements of Cash Flows.

Aramark’s long-term borrowings and related interest expense, exclusive of certain financing lease obligations, have not been attributed to us for any of the periods presented because the borrowings are neither directly attributable to us nor are we the primary legal obligor of such borrowings. However, as of September 29, 2023, we incurred indebtedness in an aggregate principal amount of $1,500 million, which have been included in the Combined Financial Statements (see Note 4. Borrowings to our Combined Financial Statements).

All intercompany transactions and balances within Vestis have been eliminated. Transactions between us and Aramark have been included in these Combined Financial Statements and are considered related party transactions (see Note 5. Related Party Transactions and Parent Company Investments to our Combined Financial Statements).

The “Provision for Income Taxes” in the Combined Statements of Income has been calculated as if we filed a separate tax return and were operating as a standalone company. Therefore, income tax expense, cash tax payments and items of current and deferred income taxes may not be reflective of our actual tax balances prior to or subsequent to the distribution.

Sources of Revenue

We generate and recognize over 93% of our total revenue from route servicing contracts on both Uniforms, which we generally manufacture, and Workplace Supplies, such as mats, towels, and linens that are procured from third-party suppliers. Revenue from these contracts represent a single-performance obligation and are recognized over time as services are performed based on the nature of services provided and contractual rates (output method). We generate the remaining revenue primarily from the direct sale of uniforms to customers, with such revenue being recognized when the related performance obligation is satisfied, typically upon the transfer of control of the promised product to the customer. Revenue is recognized in an amount that reflects the consideration we expect to be entitled to in exchange for the services or products described above and is presented net of sales and other taxes we collect on behalf of governmental authorities.

Costs and Expenses

Our costs and expenses are comprised of cost of services provided (exclusive of depreciation and amortization) (hereafter referred to as “cost of services provided”), depreciation and amortization and selling, general and administrative expenses.

Cost of services provided includes the costs associated with the recurring pickup, processing and delivery of products to rental customers, the amortized cost of merchandise in service for the rental business, and the cost of products sold to customers through our direct sales offerings.

Depreciation and amortization expense reflects the cost of investments in our manufacturing plants, processing facilities, distribution centers and technology capabilities, and the amortization of intangible assets related to acquisitions. More specifically, depreciation expense is related to processing operation assets such as washers, dryers, steam tunnels and related equipment, distribution centers and related product handling and storage equipment, company-owned and financed delivery vehicles, information technologies and other assets for which we expect to receive an economic benefit for greater than one year. The cost of these investments is depreciated on a straight-line basis over three to 40 years based upon the estimated useful life of the asset.

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Selling, general and administrative expenses include costs attributable to our sales team and the administrative functions required to support our customers and our team members.

Interest Expense and Other, net, is primarily comprised of interest expense recognized on financing leases, our share of the financial results for equity method investments and interest expense incurred under our Credit Agreement.

Provision for Income Taxes

The Provision for Income Taxes represents federal, foreign, state, and local income taxes. Our effective tax rate differs from the statutory United States income tax rate due to the effect of state and local income taxes, the tax rate in Canada where we have operations, nontaxable gain on the sale of our equity investment in Sanikleen, a Japanese linen supply company, tax credits and certain nondeductible expenses.

Foreign Currency Fluctuations

The impact from foreign currency translation assumes constant foreign currency exchange rates based on the rates in effect for the prior fiscal 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 52- or 53-week period which ends on the Friday nearest to September 30th. The fiscal years ended September 29, 2023, September 30, 2022 and October 1, 2021 were each 52-week periods.

Key Trends Affecting Our Results of Operations

We serve the uniforms, mats, towels, linens, restroom supplies, first-aid supplies and safety products industry within the United States and Canada. This includes businesses that outsource these services through rental programs or direct purchases, as well as non-programmers, or businesses that maintain these services in-house. We believe that demand in this industry is largely influenced by macro-economic conditions, employment levels, increasing standards for workplace hygiene and safety and an ongoing trend of businesses outsourcing non-core, back-end operations. As a result of the diversity of our customers and the wide variety of industries in which they participate, demand for our products and services is not specifically linked to the cyclical nature of any one sector.

Recent global events, including the COVID-19 pandemic, have adversely affected global economies, disrupted global supply chains and labor force participation, and created significant volatility and disruption of financial markets. COVID-19 related disruptions negatively impacted our financial and operating results beginning in the second quarter of fiscal 2020 through the first half of fiscal 2021. Our financial results started to improve during the second half of fiscal 2021 and continued to improve throughout fiscal 2022 as COVID-19 restrictions were lifted, and operations reopened.

In addition, the ongoing conflict between Russia and Ukraine and the recent Israel-Hamas War, regions in which we do not have direct operations, further disrupted global supply chains and heightened volatility and disruption of global financial markets. The ongoing volatility and disruption of financial markets caused by these global events, as well as other current global economic factors, triggered inflation in labor and energy costs and has driven significant changes in foreign currencies. The impact on our longer-term operational and financial performance will depend on future developments, including our response and governmental response to inflation, the duration and severity of the ongoing volatility and disruption of global financial markets and our ability to effectively hire and retain personnel. Some of these future developments are outside of our control and are highly uncertain.

We continue to remain principally focused on the safety and well-being of our employees, customers, and everyone we serve, while simultaneously taking timely, proactive measures to adapt to the current environment. Throughout fiscal 2022, we saw continued improved profitability from customers reopening as COVID-19 restrictions eased as well as from effective management of operating costs and pricing including temporary fees to mitigate the effects of elevated inflation. We continue to evaluate and react to the effects of a prolonged global disruption, including items such as inflationary pressures on product and energy costs and greater labor challenges. These challenges have continued to impact our business during fiscal 2023. Our actions to mitigate the effects of inflation in fiscal 2022 and fiscal 2023 included operating cost reductions, reductions in discretionary spending and reductions in our non-operational footprint,

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along with the implementation of targeted and strategic price increases under the terms of our customer contracts. We do not know whether we will be able to mitigate any future impacts of inflation with further increases in pricing for our goods and services. We continue to evaluate and react to take appropriate actions to mitigate the risk in these areas. See “Risk Factors—Operational Risks—Unfavorable economic conditions have in the past adversely affected, are currently affecting and in the future could adversely affect our business, financial condition or results of operations.”

Results of Operations

Fiscal 2023 Compared to Fiscal 2022

The following table presents an overview of our results on a combined basis with the amount of and percentage change between periods for the fiscal years 2023 and 2022 (dollars in thousands).

______________________

(1)Exclusive of depreciation and amortization

Consolidated revenue of $2,825.3 million increased 5.1% in fiscal 2023 compared to the prior fiscal year. This increase was driven by sales volume growth and pricing actions, partially offset by the approximately $14.5 million negative impact of foreign currency exchange rates between years. Sales volume growth contributed approximately $77.7 million to the increase. Pricing accounted for the remainder of the increase, including actions taken to offset the impact of inflationary pressures and increased merchandise amortization on sales growth. This includes the impact of a temporary energy fee implemented late in the second quarter of fiscal 2022, continuing through the second quarter of fiscal 2023. The revenue from the temporary energy fee was $26 million in both fiscal 2022 and fiscal 2023.

Cost of services provided increased 3.2% in fiscal 2023 compared to the prior fiscal year primarily due to approximately $31.1 million of incremental amortization of rental merchandise in service assets and due to roughly $30.8 million of higher labor and energy costs from the continuation of inflationary pressures.

Selling, general and administrative expenses increased 11.1% in fiscal 2023 compared to the prior fiscal year. The increase was primarily attributable to non-cash charges for the impairment of operating lease right-of-use assets and other costs ($7.7 million), incremental personnel and other expenses related to Aramark’s intention to spin off its Uniforms segment ($27.1 million), severance charges ($7.6 million), incremental charges for bad debt ($9.3 million), and incremental personnel costs related to merit and inflation ($5.0 million), partially offset by a gain on the sale of land ($6.8 million) recorded in fiscal 2023 and savings from severance actions in fiscal 2023 ($3.3 million).

Operating income of $217.9 million increased 13.4% in fiscal 2023 compared to the prior fiscal year driven by the growth in revenue offset by higher costs of services provided and selling, general and administrative expenses as noted above.

Operating income as a percentage of revenue (“operating income margin”) increased from 7.2% in fiscal 2022 to 7.7% in fiscal 2023, an improvement of approximately 50 basis points.

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Gain on Sale of Equity Investments, net increased $51.8 million in fiscal 2023 from the prior fiscal year. The increase was driven by the sale of our equity investment in Sanikleen, a Japanese linen supply company, for approximately $51.9 million.

Interest Expense and Other, net, decreased $2.3 million in fiscal 2023 from the prior fiscal year.

The provision for income taxes for fiscal 2023 was recorded at an effective rate of 21.0% compared to an effective rate of 25.4% in fiscal 2022. The lower effective tax rate was primarily due to a nontaxable gain on the sale of our equity investment in Sanikleen in fiscal 2023.

Net income of $213.2 million in fiscal 2023 represented an increase of $71.5 million, or 50.5% compared to the prior fiscal year.

Results of Operations—United States Results

Fiscal 2023 Compared to Fiscal 2022

The following table presents an overview of our United States reportable segment results with the amount of and percentage change between periods for the fiscal years 2023 and 2022 (dollars in thousands).

United States revenue increased 5.2% in fiscal 2023 compared to the prior fiscal year. This increase was driven by sales volume growth and pricing actions. Sales volume growth in the U.S. contributed approximately $64.4 million to the increase. Pricing in the U.S. accounted for the remainder of the increase, including actions taken to offset the impact of inflationary pressures and increased merchandise amortization on sales growth. This includes the impact of a temporary energy fee implemented late in the second quarter of fiscal 2022, continuing through the second quarter of fiscal 2023. The revenue from the temporary energy fee was $26 million in both fiscal 2022 and fiscal 2023. Uniforms revenue for fiscal 2023 of approximately $1,068 million was essentially flat relative to fiscal 2022. Workplace Supplies revenue for fiscal 2023 of approximately $1,508 million increased roughly $128 million, or 9.3%, relative to fiscal 2022.

Segment operating income of $303.8 million in fiscal 2023 increased 25.0% compared to the prior fiscal year, primarily driven by:

•an approximate $118.8 million increase in operating income from the higher year-over-year revenue during fiscal 2023 relative to the prior fiscal year;

•an approximate $14.0 million in savings from permanent cost reduction actions taken earlier in fiscal year 2023; and

•a $6.8 million gain on the sale of real estate property during fiscal 2023; partially offset by:

•incremental labor and energy costs of approximately $47.2 million linked to a significant inflationary environment;

•an approximate $27.1 million increase in rental merchandise amortization associated with incremental investments made in rental merchandise to support sales growth as we exited the COVID-19 pandemic;

•severance costs of $7.6 million during fiscal 2023.

Segment operating income margin improved approximately 190 basis points from 9.9% in fiscal 2022 to approximately 11.8% in fiscal 2023.

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Results of Operations—Canada Results

Fiscal 2023 Compared to Fiscal 2022

The following table presents an overview of our Canada reportable segment results with the amount of and percentage change between periods for the fiscal years 2023 and 2022 (dollars in thousands).

Canada revenue increased 4.1% in fiscal 2023 compared to the prior fiscal year was driven by sales volume growth and pricing, offset by an approximate $14.4 million negative impact of foreign currency exchange rates between years. Uniforms revenue for fiscal 2023 of approximately $100 million was essentially flat relative to fiscal 2022. Workplace Supplies revenue for fiscal 2023 of approximately $150 million increased roughly $11 million, or 7.6%, relative to fiscal 2022.

Segment operating income of 13.7 million decreased 23.9% in fiscal 2023 compared to the prior fiscal year primarily driven by:

•incremental labor and energy costs of approximately $7.2 million linked to a significant inflationary environment; and

•an approximate $4.2 million increase in rental merchandise amortization associated with incremental investments made in rental merchandise to support sales growth as we exited the COVID-19 pandemic; partially offset by:

•an approximate $7.2 million increase in operating income from the higher year-over-year revenue during fiscal 2023 relative to the prior fiscal year.

Segment operating income margin decreased approximately 200 basis points from 7.5% in fiscal 2022 to 5.5% in fiscal 2023.

Liquidity and Capital Resources

Overview

Historically, our business generated positive cash flows from operations. Cash flows within our United States operations were transferred to Aramark regularly as part of Aramark’s centralized cash management program. This arrangement was used to manage liquidity of Aramark and fund the operations of our business as needed. This arrangement is not indicative of how we would have funded our operations had we been a standalone company separate from Aramark during the periods presented. Cash transferred to and from Aramark’s cash management accounts are reflected within net parent investment as a component of Aramark’s equity.

The cash and cash equivalents held by Aramark at the corporate level were not specifically identifiable to us and therefore were not allocated to any of the periods presented. The majority of our cash and cash equivalents balance is from our Canadian operations. Third-party debt and the related interest expense of Aramark has not been allocated to us for any of the periods presented because Aramark’s borrowings were not directly attributable to our standalone business.

On September 29, 2023, we entered into a senior secured financing in an aggregate amount of $1,800 million, consisting of the Term Loan Facilities and the Revolving Credit Facility. The Term Loan Facilities consist of a United States dollar denominated term loan A-1 tranche in the amount of $800 million (the "Term Loan A-1”), and a United States dollar denominated term loan A-2 tranche in the amount of $700 million (the "Term Loan A-2" and, together with the Term Loan A-1, the “Term Loan Facilities”). The Term Loan A-2 includes $8.75M of principal payments each quarter until the maturity date, in which the remaining unpaid principal amount is due. Additionally, the Revolving Credit Facility is available for loans in United States dollars and Canadian dollars with aggregate commitments of $300 million (the “Revolving Credit Facility” and, together with the Term Loan Facilities, the “Credit Facilities”).

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The Term Loan A-1 will mature on September 29, 2025 (the “Term A-1 Maturity Date”) and the Term Loan A-2 will mature on the earlier of (i) September 29, 2028 and (ii) the date (the “Springing Maturity Date”) that is 4 months prior to the Term A-1 Maturity Date if any portion of the Term Loan A-1 (or indebtedness which extends, renews, refunds or replaces any portion of the Term Loan A-1) remains outstanding as of such date and has, as of such date, a scheduled maturity date prior to September 29, 2028. The Revolving Credit Facility will mature on the earliest of (i) September 29, 2028, (ii) the Springing Maturity Date, and (iii) the date of termination of all of the commitments under the Revolving Credit Facility or the date on which the loans under the Revolving Credit Facility become due and payable or the commitments under the Revolving Credit Facility are terminated. Borrowings under the Credit Facilities will bear interest at rates calculated by reference to the Secured Overnight Financing Rate (“SOFR”) or the Base Rate (as defined in the definitive credit agreement entered into with respect to the Credit Facilities (the “Credit Agreement”)), at the option of the Company, plus a margin, which initially will be 2.25% for SOFR loans and 1.25% for Base Rate loans and thereafter will fluctuate based on the Company’s total net leverage ratio.

The Company’s obligations under the Credit Facilities are guaranteed by the Company’s existing and future wholly owned domestic material subsidiaries, subject to certain customary exceptions. Borrowings under the Credit Facilities are secured by first priority liens on substantially all the assets of the Company and the guarantors, subject to certain customary exceptions.

On September 29, 2023, concurrent with consummation of the Separation, we made a cash distribution of approximately $1,457 million to Aramark.

As of September 29, 2023, we had approximately $36 million of cash and cash equivalents and $300 million of availability for borrowing under the Revolving Credit Facility.

The table below summarizes our cash activity (in thousands):

Reference to the audited Combined Statements of Cash Flows will facilitate understanding of the discussion that follows.

Cash Flows Provided by Operating Activities

Net cash provided by operating activities was $257.0 million during fiscal 2023 and $232.8 million during fiscal 2022, respectively. The change was driven by net income in fiscal 2023 of $213.2 million compared to net income in fiscal 2022 of $141.7 million, as discussed in "Results of Operations" above, and unfavorable non-cash adjustments to net income between fiscal years of $77.3 million, which were primarily driven by a $26.1 million inventory charge in fiscal 2022 that did not recur in fiscal 2023 and due to a $51.8 million gain on sale of an equity investment in fiscal 2023. The change in net income inclusive of non-cash adjustments was offset by the change in cash from operating assets and liabilities of $30.0 million, which was primarily due to:

•Increase in operating cash flows during fiscal 2023 compared to fiscal 2022 due to the lower use of cash for rental merchandise in-service of $36.9 million as the result of the prior year period operations returning following the lifting of COVID-19 restrictions;

•Increase in operating cash flows during fiscal 2023 compared to fiscal 2022 due to the lower use of cash from accounts receivables of $30.2 million as the prior year period had a higher use of cash from operations returning following the lifting of COVID-19 restrictions. Both periods were impacted by base and new business growth and timing of collections;

•Increase in operating cash flows during fiscal 2023 compared to fiscal 2022 due to a greater source of cash from accrued expenses of $23.5 million primarily due to growth in business operations, higher severance charges recorded in fiscal 2023 and timing of other payments; partially offset by:

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•Decrease in operating cash flows during fiscal 2023 compared to fiscal 2022 due to a lower source of cash from accounts payable of $64.3 million primarily due to the timing of disbursements.

Cash Flows Used in Investing Activities

Net cash used in investing activities of $14.7 million during fiscal 2023 was $71.4 million lower during fiscal 2023 relative to fiscal 2022 primarily due to cash proceeds of $51.9 million related to the sale of our Sanikleen equity investment and due to the prior year use of $17.2 million of cash to fund the acquisition of certain businesses.

Cash Flows Used in Financing Activities

During fiscal 2023, cash provided by financing activities was impacted by the following:

• cash receipts related to newly issued debt of ($1,500.0 million);

• cash transferred to Aramark ($1,688.9 million);

• payments related to finance leases ($27.6 million); and

• payments related to debt issuance costs ($13.7 million).

During fiscal 2022, cash used in financing activities was impacted by the following:

• cash transferred to Aramark ($134.5 million); and

• payments related to finance leases ($28.0 million).

Covenant Compliance

The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: incur additional indebtedness; issue preferred stock or provide guarantees; create liens on assets; engage in mergers or consolidations; sell or dispose of assets; pay dividends, make distributions or repurchase its capital stock; engage in certain transactions with affiliates; make investments, loans or advances; create restrictions on the payment of dividends or other amounts to the Company from its restricted subsidiaries; amend material agreements governing our subordinated debt; repay or repurchase any subordinated debt, except as scheduled or at maturity; make certain acquisitions; change our fiscal year; and fundamentally change our business. The Credit Agreement contains certain customary affirmative covenants. The Credit Agreement also includes customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable at the option of the lenders, if we fail to comply with the terms of the Credit Agreement or if other customary events occur.

The Credit Agreement requires us to maintain a maximum Consolidated Total Net Leverage Ratio, defined as consolidated total indebtedness over unrestricted cash divided by Covenant Adjusted EBITDA, not to exceed 5.25x for any fiscal quarter ending prior to March 31, 2025, and not to exceed 4.50x for any fiscal quarter ending on or after March 31, 2025, subject to certain exceptions. Consolidated total indebtedness is defined in the Credit Agreement as total indebtedness consisting of debt for borrowed money, finance leases, disqualified and preferred stock and advances under any Receivables Facility. Covenant Adjusted EBITDA is defined in the Credit Agreement as consolidated net income increased by interest expense, taxes, depreciation and amortization expense, initial public company costs, restructuring charges, write-offs and noncash charges, non-controlling interest expense, net cost savings in connection with any acquisition, disposition, or other permitted investment under the Credit Agreement, share-based compensation expense, non-recurring or unusual gains and losses, reimbursable insurance costs, cash expenses related to earn outs, and insured losses.

The Credit Agreement establishes a minimum Interest Coverage Ratio, defined as Covenant Adjusted EBITDA divided by consolidated interest expense. The minimum Interest Coverage Ratio is required to be at least 2.00x for the term of the Credit Agreement.

Under the Credit Agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants. 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.

At September 29, 2023, we were in compliance with all covenants under the Credit Agreement.

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Future Liquidity and Contractual Obligations

We have historically relied on available cash, recurring cash flow provided by operations and Aramark’s centralized cash management program to fund operations. Going forward we will primarily rely on cash and recurring cash flow provided by operations to fund our operations. We also have access to our $300 million Revolving Credit Facility and expect to have access to capital markets for additional funding. The cost and availability of debt financing will be influenced by market conditions and our future credit ratings.

We believe that we will meet known and likely future cash requirements through the combination of cash flows from operating activities, available cash balances, available borrowings under our financing arrangements and access to capital markets.

Following the Separation, our recurring cash needs are primarily directed toward working capital requirements to support ongoing business activities, investments in growth initiatives, capital expenditures, acquisitions, interest payments and repayment of borrowings. Our ability to fund these needs will depend, in part, on our ability to generate or raise cash in the future, which is subject to general economic, financial, competitive, regulatory, and other factors that are beyond our control.

The following table summarizes our future obligations for long-term borrowings, estimated interest payments, finance leases, future minimum lease payments under noncancelable operating leases, purchase obligations and other liabilities as of September 29, 2023 (dollars in thousands):

______________________

(1)Excludes the $11.1 million reduction to long-term borrowings from debt issuance costs

(2)Interest payments on long-term debt includes interest due on outstanding debt obligations under our Credit Agreement. Payments related to variable debt are based on applicable rates at September 29, 2023 plus the specified margin in the Credit Agreement for each period presented.

(3)Represents purchase commitments for inventory.

(4)Includes severance.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in the notes to the audited Combined Financial Statements included in this Annual Report. We have chosen accounting policies that management believes are appropriate to accurately and fairly report our operating results and financial position in conformity with U.S. GAAP. We apply these accounting policies in a consistent manner.

In preparing our Combined 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.

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Revenue Recognition

We generate and recognize over 93% of our total revenue from route servicing contracts on both Uniforms, which we generally manufacture, and Workplace Supplies, such as mats, towels, and linens that are procured from third-party suppliers. Revenue from these contracts represent a single-performance obligation and are recognized over time as services are performed based on the nature of services provided and contractual rates (output method). We generate our remaining revenue primarily from the direct sale of uniforms to customers, with such revenue being recognized when our performance obligation is satisfied, typically upon the transfer of control of the promised product to the customer.

Goodwill

Annually, in our fiscal fourth quarter, we perform an impairment assessment of goodwill at the reporting unit level. This assessment may first consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Examples of qualitative factors include, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events, events affecting reporting units and sustained changes in our stock price. If results of the qualitative assessment indicate a more likely than not determination or if a qualitative assessment is not performed, a quantitative test is performed by comparing the estimated fair value using discounted cash flow calculations of each reporting unit with its estimated net book value. Historically, Vestis has represented one reporting unit under Aramark’s structure. During the fourth quarter of fiscal 2023, we performed the annual impairment test for goodwill using a quantitative testing approach. Based on our evaluation performed, we determined that the fair value of the reporting unit significantly exceeded its respective carrying amount, and therefore, we determined that goodwill was not impaired.

The determination of fair value for the Vestis reporting unit includes assumptions, which are considered Level 3 inputs, that are subject to risk and uncertainty. The discounted cash flow calculations are dependent on several subjective factors including the timing of future cash flows, the underlying margin projection assumptions, future growth rates and the discount rate. If our assumptions or estimates in our fair value calculations change or if future cash flows, margin projections or future growth rates vary from what was expected, this may impact our impairment analysis and could reduce the underlying cash flows used to estimate fair values and result in a decline in fair value that may trigger future impairment charges.

We believe that an accounting estimate relating to goodwill impairment is a critical accounting estimate because the assumptions underlying future cash flow estimates are subject to change from time to time and the recognition of an impairment could have a significant impact on our Combined Statements of Income.

Litigation and Claims

From time to time, we and our subsidiaries are party to various legal actions, proceedings and investigations involving claims incidental to the conduct of our businesses, including actions by customers, employees, government entities and third parties, including under federal, state, international, national, provincial and local employment laws, wage and hour laws, discrimination laws, immigration laws, human health and safety laws, import and export controls and customs laws, environmental laws, false claims or whistleblower statutes, tax codes, antitrust and competition laws, customer protection statutes, procurement regulations, intellectual property laws, supply chain laws, the Foreign Corrupt Practices Act and other anti-corruption laws, lobbying laws, motor carrier safety laws, data privacy and security laws, or claims alleging negligence and/or breach of contractual and other obligations. We consider the measurement of litigation reserves as a critical accounting estimate because of the significant uncertainty in some cases relating to the outcome of potential claims or litigation and the difficulty of predicting the likelihood and range of potential liability involved, coupled with the material impact on our results of operations that could result from litigation or other claims. In determining legal reserves, we consider, among other issues:

•interpretation of contractual rights and obligations;

•the status of government regulatory initiatives, interpretations, and investigations;

•the status of settlement negotiations;

•prior experience with similar types of claims;

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•whether there is available insurance; and

•advice of counsel.

Allowance for Credit Losses

We encounter credit loss risks associated with the collection of receivables. We analyze historical experience, current general and specific industry economic conditions, industry concentrations, such as exposure to small and medium-sized businesses, the nonprofit healthcare sector, federal and local governments, and reasonable and supportable forecasts that affect the collectability of the reported amount in estimating credit losses. The accounting estimate related to the allowance for credit losses is a critical accounting estimate because the underlying assumptions used for the allowance can change from time to time and credit losses could potentially have a material impact on our results of operations.

Inventories and Rental Merchandise In Service

We record an inventory obsolescence reserve for obsolete, excess, and slow-moving inventory. In calculating our inventory obsolescence reserve, we analyze historical and projected data regarding customer demand within specific product categories and make assumptions regarding economic conditions within customer specific industries, as well as style and product changes. Our accounting estimate related to inventory obsolescence is a critical accounting estimate because customer demand in certain industries can be variable and changes in our reserve for inventory obsolescence could materially affect our results of operations.

Rental merchandise in service is valued at cost less amortization, calculated using the straight-line method. Rental merchandise in service is amortized over its useful life, which ranges from one to four years. The amortization rates are based on industry experience, intended use of the merchandise, our specific experience, and wear tests performed by us. These factors are critical to determining the amount of rental merchandise in service and related cost of services provided that are presented in the Combined Financial Statements. Material differences may result in the amount and timing of operating income if management makes significant changes to these estimates.

Costs to Obtain a Contract

We defer employee sales commissions earned by our sales force that are considered to be incremental and recoverable costs of obtaining a contract. The deferred costs are amortized using the portfolio approach on a straight-line basis over the average period of benefit, approximately nine years, and are assessed for impairment on a periodic basis.

New Accounting Standards Updates

See Note 1 to the audited Combined Financial Statements for a full description of recent accounting standards updates, including the expected dates of adoption.