Vestis Corp 10-K

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. 32 Table of Contents 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 Consolidated Financial Statements The Consolidated Financial Statements reflect the historical results of operations, comprehensive income and cash flows for the year ended September 27, 2024 and the financial position as of September 27, 2024 for Vestis. Combined Financial Statements The Combined Financial Statements reflect the combined historical results of operations, comprehensive income and cash flows for the years ended September 29, 2023 and September 30, 2022 and the financial position as of September 29, 2023 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 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 were transferred to Aramark regularly as part of Aramark’s centralized cash management program. Our cash flows within the Canada segment were reinvested locally. 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. 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 33 Table of Contents 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 15. Related Party Transactions and Parent Company Investment 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 94% 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 3 to 40 years based upon the estimated useful life of the asset. 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 is comprised of interest expense incurred under our Credit Agreement and interest expense recognized on financing leases. Other income, net is primarily comprised of fees incurred for our accounts receivable securitization facility and our share of the financial results for our equity method investment. 34 Table of Contents 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, change to deferred taxes on foreign investments, 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 27, 2024, September 29, 2023 and September 30, 2022 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. Global events, including ongoing geopolitical events, have adversely affected global economies, disrupted global supply chains and labor force participation, and created significant volatility and disruption of financial markets. While we do not have direct operations in Russia and Ukraine or in Israel, conflicts in those regions 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. 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 2024. Our actions to mitigate the effects of inflation in fiscal 2023 and fiscal 2024 included operating cost reductions, reductions in discretionary spending and reductions in our non-operational footprint, 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.” 35 Table of Contents Results of Operations Fiscal 2024 Compared to Fiscal 2023 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 2024 and 2023 (dollars in thousands). Fiscal Year Ended Change Change September 27, 2024 September 29, 2023 $ % Revenue $ 2,805,820 $ 2,825,286 $ (19,466) (0.7 %) Operating Expenses: Cost of services provided (1) 1,989,872 1,970,215 19,657 1.0 % Depreciation and amortization 140,781 136,504 4,277 3.1 % Selling, general and administrative expenses 517,216 500,658 16,558 3.3 % Total Operating Expenses 2,647,869 2,607,377 40,492 1.6 % Operating Income 157,951 217,909 (59,958) (27.5 %) Gain on Sale of Equity Investment, net — (51,831) 51,831 (100.0 %) Interest Expense, net 126,563 2,109 124,454 5901.1 % Other (Income), net (642) (2,099) 1,457 (69.4 %) Income Before Income Taxes 32,030 269,730 (237,700) (88.1 %) Provision for Income Taxes 11,060 56,572 (45,512) (80.4 %) Net Income $ 20,970 $ 213,158 $ (192,188) (90.2 %) ______________________ (1) Exclusive of depreciation and amortization Consolidated revenue of $2,805.8 million decreased $19.5 million or 0.7% in fiscal 2024 compared to the prior fiscal year. Temporary energy fees of $26.7 million recorded during fiscal 2023 that did not repeat during fiscal 2024 accounted for approximately 100 basis points of the decrease. Sales volume growth and the net effect of pricing actions contributed approximately $220 million and $59 million, respectively, with approximately 680 basis points of the volume growth coming from new customer sales. The sales growth was partially offset by the impact on revenue from customer losses along with lower year-over-year direct sales. There was a negligible impact to revenue growth from the change in foreign currency rates year-over-year. Customer retention 1 improved from 90.4% in fiscal 2023 to 91.9% in fiscal 2024. Cost of services provided increased $19.7 million, or 1.0%, in fiscal 2024 compared to the prior fiscal year primarily due to an increase in labor costs of $20.2 million, rental merchandise in service costs of $6.3 million, and vehicle costs of $6.2 million partially offset by $12.2 million of lower energy costs linked primarily to lower energy rates as well as productivity savings from route optimization efforts. Selling, general and administrative expenses increased $16.6 million, or 3.3%, in fiscal 2024 compared to the prior fiscal year. The increase was primarily due to approximately $18 million of incremental public company and standalone costs, a prior fiscal year $6.8 million gain on sale of land, $13.0 million of incremental bad debt expense, and $5.1 million of increased insurance costs. The increases were partially offset by the prior year $7.7 million impairment of operating lease right-of-use assets and other costs, a $9.0 million decrease in selling payroll costs, and a $8.6 million decrease in separation and rebranding costs. Operating income of $158.0 million decreased 27.5% in fiscal 2024 compared to the prior fiscal year from the impact of changes in revenue and costs noted above. Gain on Sale of Equity Investments, net, decreased $51.8 million in fiscal 2024 from the prior fiscal year. The Company sold its equity investment in Sanikleen, a Japanese linen supply company, in fiscal 2023. Interest Expense, net, increased $124.5 million in fiscal 2024 from the prior fiscal year primarily due to the issuance of our term loan debt on September 29, 2023, and subsequently partially refinanced on February 22, 2024. Prior to September 29, 2023, the Company had no debt obligations. Interest expense in fiscal 2024 also included a $3.9 million 36 Table of Contents non-cash expense for the write-off of unamortized debt issuance costs associated with the extinguishment of our $800 million Term Loan A-1 as a result of the aforementioned refinancing. Other Income, net, decreased $1.5 million, in fiscal 2024 from the prior fiscal year primarily as a result of expenses from the Company’s Accounts Receivable Securitization Facility, which was entered on August 2, 2024. The provision for income taxes for fiscal 2024 was recorded at an effective rate of 34.5% compared to an effective rate of 21.0% in fiscal 2023. The higher effective tax rate was primarily due to the non-taxable gain on the sale of our equity investment in Sanikleen in fiscal 2023, change in deferred tax on foreign investments in fiscal 2024, and the impact of tax adjustments on the lower year-over-year earnings. Net income of $21.0 million in fiscal 2024 represented a decrease of $192.2 million, or 90.2% compared to the prior fiscal year from the impact of changes to revenue, operating costs, interest expense, and income taxes noted above. ______________________ (1) Customer retention is equal to lost annualized recurring revenue for the period reported divided by total company annualized recurring revenue for the trailing 52 weeks. This metric takes the full annualized impact of a lost customer in the period it is reported. Retention is a leading indicator, in that the financial impact from the lost business will be realized over the 12 months after the billings cease for the lost customer. Results of Operations—United States Results Fiscal 2024 Compared to Fiscal 2023 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 2024 and 2023 (dollars in thousands). Fiscal Year Ended Change Change September 27, 2024 September 29, 2023 $ % Revenue $ 2,555,922 $ 2,575,352 $ (19,430) (0.8 %) Segment Operating Income 264,709 303,762 (39,053) (12.9 %) Segment Operating Income % 10.4 % 11.8 % United States revenue decreased 0.8% in fiscal 2024 compared to the prior fiscal year. Temporary energy fees of $26.7 million recorded during fiscal 2023 did not repeat during fiscal 2024. Sales volume growth and pricing contributed approximately a combined $260 million increase in revenue with 690 basis points of growth from new customer sales and 200 basis points of growth from net pricing. A decline in revenue from losing customers is the primary driver of the remaining year over year variance. Uniforms revenue for fiscal 2024 of approximately $1,038 million decreased approximately $30 million, or 2.8%, relative to fiscal 2023. Workplace Supplies revenue for fiscal 2024 of approximately $1,518 million increased roughly $11 million, or 0.7%, relative to fiscal 2023. Segment operating income of $264.7 million in fiscal 2024 decreased 12.9% compared to the prior fiscal year, primarily driven by: • the nonrecurrence of the $26.0 million temporary energy fee recorded in fiscal 2023; • incremental production and delivery labor costs of approximately $18.4 million in fiscal 2024; • higher rental merchandise in service costs of $4.2 million in fiscal year 2024; • higher bad debt expense of $11.5 million in fiscal year 2024; and • the decreases were partially offset by: • lower sales wage costs of $9.0 million largely resulting from lower year-over-year headcount; • year-over-year energy savings of $12.9 million primarily driven by lower rates, as well as our route optimization efforts; Segment operating income margin decreased approximately 140 basis points from 11.8% in fiscal 2023 to approximately 10.4% in fiscal 2024. 37 Table of Contents Results of Operations—Canada Results Fiscal 2024 Compared to Fiscal 2023 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 2024 and 2023 (dollars in thousands). Fiscal Year Ended Change Change September 27, 2024 September 29, 2023 $ % Revenue $ 249,898 $ 249,934 $ (36) — % Segment Operating Income 8,162 13,707 (5,545) (40.5) % Segment Operating Income % 3.3 % 5.5 % Canada revenue was flat in fiscal 2024 relative to the prior fiscal year. Revenue was driven by sales volume growth and pricing of approximately $20 million, with pricing accounting for 180 basis points of the growth. This growth was offset by $18 million lower revenue from lost customers and $2 million lower revenue from foreign currency exchange rates between years. Uniforms revenue for fiscal 2024 of approximately $97 million decreased roughly $4 million, or 3.5%, relative to fiscal 2023. Workplace Supplies revenue for fiscal 2024 of approximately $153 million increased roughly $4 million, or 2.3%, relative to fiscal 2023. Segment operating income of $8.2 million decreased 40.5% in fiscal 2024 compared to the prior fiscal year primarily driven by: • incremental labor costs of approximately $4.0 million; and • higher rental merchandise in service costs of $2.1 million; partially offset by: • year-over-year energy savings of approximately $0.5 million Segment operating income margin decreased approximately 220 basis points from 5.5% in fiscal 2023 to 3.3% in fiscal 2024. Liquidity and Capital Resources Overview Historically, our business generated positive cash flows from operations. For the Combined Statement of Cash Flows during the fiscal years ended September 29, 2023 and September 30, 2022, 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 fiscal 2023 and fiscal 2022 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 the Combined Balance Sheet as of September 29, 2023. The majority of our cash and cash equivalents balance, as of September 29, 2023, is from our Canadian operations. Third-party debt and the related interest expense of Aramark was 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, the Company and certain of its subsidiaries entered into a senior secured credit agreement in the aggregate amount of $1,800 million (the “Credit Agreement”). The Credit Agreement was initially comprised of an $800 million term loan A-1 due September 29, 2025 (“Term Loan A-1”), a $700 million term loan A-2 due September 29, 2028 (“Term Loan A-2” and, together with the Term Loan A-1, the “Term Loan Facilities”), and a revolving credit facility available for loans in United States dollars and Canadian dollars with aggregate commitments of $300 million and a maturity of September 29, 2028 (the “Revolving Credit Facility”). 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. On February 22, 2024, the Company amended the Credit Agreement to refinance its Term Loan A-1 with an $800 million term loan B-1 due 38 Table of Contents February 22, 2031 (“Term Loan B-1”). The Term Loan B-1 requires $2.0 million of principal payments each quarter until the maturity date, at which the remaining unpaid principal amount is due. During fiscal 2024, the Company paid principal amounts of $202.5 million and $135.0 million on its Term Loan A-2 and Term Loan B-1. As a result of these payments, the Company has met its quarterly principal payment obligations through the maturity of both term loans. The Term Loan A-1 interest rate was, and the Term Loan A-2 interest rate is, the Secured Overnight Financing Rate (“SOFR”), plus a Credit Spread Adjustment of 10 basis points and a margin from 1.50% to 2.50% depending on the Company’s Consolidated Total Net Leverage Ratio, as defined in the Credit Agreement. The applicable margin on these term loans was 2.25% during fiscal 2024. The Term Loan B-1 interest rate is SOFR plus a margin from 2.0% to 2.25% depending on the Company’s Consolidated Total Net Leverage Ratio, as defined in the Credit Agreement. The applicable margin on the Term Loan B-1 was 2.25% during fiscal 2024. 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 27, 2024, we had approximately $31 million of cash and cash equivalents and $295 million of availability for borrowing under the Revolving Credit Facility. The table below summarizes our cash activity (in thousands): Fiscal Year Ended September 27, 2024 September 29, 2023 Net cash provided by operating activities $ 471,788 $ 256,977 Net cash used in investing activities (73,636) (14,746) Net cash used in financing activities (402,975) (230,269) Reference to the audited Consolidated and 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 $471.8 million and $257.0 million during fiscal 2024 and fiscal 2023, respectively. The $214.8 million increase in cash flows from operating activities was primarily driven by $390.0 million of incremental cash inflow from improved management of the Company’s operating assets and liabilities, with incremental cash generation from the change in receivables of $239.4 million being the largest as the Company entered its Accounts Receivable Securitization Facility in August 2024, offset by lower year over year net income of $192.2 million. Other significant changes in cash from operating assets and liabilities were primarily due to: • Increase in operating cash flows during fiscal 2024 compared to fiscal 2023 due to a greater source of cash from accrued expenses of $88.5 million primarily due to timing of other payments; and • Increase in operating cash flows during fiscal 2024 compared to fiscal 2023 due to a higher source of cash from accounts payable of $54.6 million primarily due to the timing of disbursements. 39 Table of Contents Cash Flows Used in Investing Activities Net cash used in investing activities of $73.6 million during fiscal 2024 was $58.9 million higher during fiscal 2024 relative to fiscal 2023 primarily due to cash proceeds of $51.9 million related to the sale of our Sanikleen equity investment and due to $5.9 million lower proceeds from the disposal of assets in fiscal 2024 compared to fiscal 2023. Cash Flows Used in Financing Activities During fiscal 2024, cash used in financing activities was primarily impacted by the following: • cash proceeds from long-term debt borrowings ($798.0 million); • principal payments on long-term borrowings ($1,137.5 million) ; • payments related to finance leases ($30.6 million); • payments related to debt issuance costs ($11.1 million); • dividend payments ($13.8 million); and • cash distributions to Aramark ($6.1 million); During fiscal 2023, cash used in financing activities was impacted by the following: • cash proceeds from long-term debt borrowings ($1,500.0 million); • payments related to debt issuance costs ($13.7 million); • payments related to finance leases ($27.6 million); and • cash distributions to Aramark ($1,688.9 million); Accounts Receivable Securitization Facility On August 2, 2024, certain of our subsidiaries entered into a three-year $250 million accounts receivable securitization facility (the “A/R Facility”). Under the A/R Facility, Vestis Services, LLC (“Vestis Services”) and certain other wholly-owned subsidiaries (together with Vestis Services, the “Originators”) transfer accounts receivable and certain related assets (collectively, the “Receivables”) to VS Financing, LLC, a bankruptcy remote special purpose entity (“SPE”) formed as a wholly-owned subsidiary of Vestis Services, who in turn, may sell Receivables to one or more financial institutions party to the facility (“Purchasers”). Transfers of the Receivables from the SPE to the Purchasers are accounted for as a sale of financial assets, and those accounts receivable are derecognized from the consolidated financial statements. Other than collection and administrative responsibilities, the Originators have no continuing involvement in the transferred Receivables. The Receivables, once sold to the SPE, are no longer available to satisfy creditors of any Originator in the event of its bankruptcy. These sales are priced at the face value of the relevant accounts receivable less a fair market value discount. The A/R Facility is structured on a revolving basis under which cash collections from Receivables are used to fund additional purchases of Receivables. The future outstanding balance of Receivables that will be sold is expected to vary based on the level of originations and other factors. The Purchasers benefit from SPE’s guarantee of repayment on Receivables transferred as well as its pledge of additional Receivables as collateral. We have agreed to guarantee the performance of the Originators’ respective obligations under the A/R Facility. Neither we (except for the SPE referenced above) nor the Originators guarantees the collectability of the Receivables under the A/R Facility. The Company controls and therefore consolidates the SPE in its consolidated financial statements. The A/R Facility is scheduled to terminate on August 2, 2027 , unless terminated earlier pursuant to its terms. As of September 27, 2024, the total value of accounts receivable sold under the A/R Facility and derecognized from the Company's Consolidated Balance Sheet was $229.0 million. Refer to Note 16, “Accounts Receivable Securitization Facility”, of our Consolidated and Combined Financial Statements for further discussion regarding our accounting for the A/R Facility. 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 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 40 Table of Contents 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. 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. 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. At September 27, 2024, we were in compliance with all covenants under the Credit Agreement. Future Liquidity and Contractual Obligations We primarily rely on cash and recurring cash flow provided by operations to fund our operations. As of September 27, 2024, we have access to $295 million of borrowing capacity from our 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. 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 27, 2024 (dollars in thousands): Payments Due by Period Contractual Obligations as of September 27, 2024 Total Less than 1 year 1-3 years 3-5 years More than 5 years Long-term borrowings (1) 1,162,500 — — 497,500 665,000 Estimated interest payments (2) 473,844 89,914 176,436 137,780 69,714 Finance lease obligations 167,586 37,246 61,112 42,821 26,407 Operating leases 108,061 23,755 35,984 20,620 27,702 Purchase obligations (3) 5,800 5,800 — — — Other liabilities (4) 2,703 2,703 — — — $ 1,920,494 $ 159,418 $ 273,532 $ 698,721 $ 788,823 ______________________ 41 Table of Contents (1) Excludes the $13.2 and $1.6 million reduction to long-term borrowings from debt issuance costs and debt discount, respectively. (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 27, 2024 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 Consolidated and 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 Consolidated and 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. Revenue Recognition We generate and recognize over 94% 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 a discounted cash flow method or market method for each reporting unit with its estimated net book value. Historically, Vestis represented one reporting unit under Aramark’s structure for fiscal years ended September 29, 2023 and September 30, 2022. For the fiscal year ended September 27, 2024, Vestis had two reporting units, Unites States and Canada. During the fourth quarter of fiscal 2024, 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 units exceeded their respective carrying amount, and therefore, we determined that goodwill was not impaired. The determination of fair value for the Vestis reporting units 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. The market method is dependent on several subjective factors including the determination of market multiples and future cash flows. 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. 42 Table of Contents 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 Consolidated and 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; • 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. 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 Consolidated and Combined Financial Statements. Material differences may result in the amount and timing of operating income if management makes significant changes to these estimates. 43 Table of Contents 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. Income Taxes Prior to the Separation, our operations were included in Aramark’s U.S. federal and state tax returns for those taxable periods. With respect to such taxable periods, income taxes on our financial statements were calculated on a separate tax return basis. Beginning after the Separation, we file tax returns separate from Aramark, and our deferred taxes and effective tax rates may differ from those of the historical periods. Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities, reserves for unrecognized tax benefits and any valuation allowances recorded against net deferred tax assets. Our effective income tax rate is based on annual income, statutory tax rates and other adjustments in the jurisdictions in which we operate. Our annual effective income tax rate includes the impact of discrete income tax matters including adjustments to reserves for uncertain tax positions. Tax regulations require items to be included in our tax returns at different times than these same items are reflected in our consolidated financial statements. As a result, the effective income tax rate in our consolidated financial statements differs from that reported in our tax returns. Some of these differences are permanent, such as expenses that are not tax deductible, while others are temporary differences, such as amortization and depreciation expenses. Temporary differences create deferred tax assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not large enough to utilize the entire deduction or credit. Relevant factors in determining the realizability of deferred tax assets include future taxable income, the expected timing of the reversal of temporary differences, tax planning strategies and the expiration dates of the various tax attributes. Refer to Note 11, “Income Taxes”, of our Consolidated and Combine Financial Statements for further discussion regarding our accounting for income taxes and our uncertain tax positions for financial accounting purposes. New Accounting Standards Updates See Note 1 to the audited Consolidated and Combined Financial Statements for a full description of recent accounting standards updates, including the expected dates of adoption.