Aramark Q2 FY2022 10-Q Summary
Business context and reporting period. Aramark provides food, facilities and uniform services across the United States and 18 other countries. The quarter and six-month period ended April 1, 2022; comparisons are with the periods ended April 2, 2021. Results improved as COVID-19 restrictions eased and client operations reopened. The filing cautions that interim results may be affected by seasonality and are not necessarily indicative of full-year results.
Key financial results
| Metric | Three months ended April 1, 2022 | Three months ended April 2, 2021 | Six months ended April 1, 2022 | Six months ended April 2, 2021 |
|---|---|---|---|---|
| Revenue | $3.861 billion | $2.820 billion | $7.809 billion | $5.563 billion |
| Operating income (loss) | $142.0 million | $5.3 million | $282.2 million | $(15.1) million |
| Net income (loss) attributable to Aramark stockholders | $35.7 million | $(77.6) million | $78.4 million | $(158.8) million |
| Diluted earnings (loss) per share | $0.14 | $(0.30) | $0.30 | $(0.63) |
Quarterly revenue rose 36.9%; six-month revenue rose 40.4%. Operating margin was approximately 3.7% for the quarter and 3.6% for the six-month period, versus approximately 0.2% and negative 0.3%, respectively, in the prior-year periods. Cost of services provided was 90.4% of revenue for both current periods, compared with 91.9% for the quarter and 92.2% for six months in the prior year. Interest and other financing costs declined 6.8% for the quarter and 7.1% for six months.
Segment performance. Quarterly revenue increased 50.8% in FSS United States to $2.338 billion, 28.5% in FSS International to $870.9 million, and 10.2% in Uniform to $651.3 million. Segment operating income improved across all three segments. FSS United States growth was particularly strong in Sports, Leisure & Corrections and Education. Uniform revenue exceeded pre-pandemic levels, according to management.
Cash flow, debt and liquidity
- Cash and cash equivalents were $429.3 million at April 1, 2022, down from $532.6 million at October 1, 2021.
- For the six months, operating activities used $128.3 million, compared with $221.9 million provided in the prior-year period. Management attributed the change chiefly to working-capital movements as operations recovered, including higher receivables and accrued-expense payments.
- Investing activities used $289.8 million, including $173.0 million for property and equipment and acquisitions of businesses and equity-method investments. Financing activities provided $317.8 million, including $300 million of net borrowing under the Receivables Facility. Cash dividends paid were $56.5 million.
- Long-term borrowings, net of current portion, were $7.727 billion; total borrowings, including current maturities, were approximately $7.794 billion, up from approximately $7.452 billion at October 1, 2021. No significant debt maturities were expected until 2025.
- Available capacity was approximately $1.044 billion on the senior secured revolving credit facility and $100 million on the Receivables Facility. Management said available cash and facilities should meet anticipated requirements for the foreseeable future, while noting uncertainty in its assumptions.
- Aramark reported covenant compliance. The Consolidated Secured Debt Ratio was 3.01x against a 5.125x maximum; the Interest Coverage Ratio was 3.14x against a 2.000x minimum. The secured-debt covenant calculation used a specially defined period under the prior amendment.
Changes, outlook and risks
Management attributed the rebound in revenue and operating income to reopening, new business and pricing pass-through. Profit improvement also reflected lower medical-program insurance expense and employee incentive costs. These benefits more than offset inflation, supply-chain disruption and lower COVID-related labor tax credits. Food and labor costs were inflationary, and management noted that pricing recovery may lag in some sectors, including Education. The company expected inflationary and supply-chain pressures to continue through FY2022.
COVID-19 recovery remained uneven: in-person activity was rising in several U.S. sectors, while Business & Industry remained below pre-pandemic levels and healthcare retail activity was still subdued. China faced renewed lockdown restrictions. Management also cited labor availability and retention, supply disruption and the Russia-Ukraine conflict as risks, including potential cyber risk. The filing provides no quantified full-year revenue or earnings guidance.
Aramark recorded $21.0 million of foreign labor-related COVID tax credits in the quarter and $33.2 million for six months, and said it did not expect significant additional credits in the remainder of FY2022. It paid $64.2 million of deferred Social Security taxes during the six-month period, with a further $64.2 million remaining deferred. A client-contract settlement resulted in a $5.7 million reversal of previously reserved costs; the settlement obligations totaled approximately $13.6 million.
After quarter-end, Aramark signed an agreement to acquire Union Supply, subject to customary conditions and approvals. On May 10, 2022, it announced its intention to spin off Uniform as a separate public company, targeted by the end of FY2023. The proposed spin-off is subject to approvals and tax-related conditions and could entail added costs, lost synergies, management distraction, financing risks and disruption to business relationships.
Other items include an $8.5 million six-month income tax benefit from reversing a foreign deferred-tax-asset valuation allowance. In the prior-year six-month period, results included CARES Act tax benefits and valuation allowances. Aramark reported no material changes to its previously disclosed risk factors other than the newly described spin-off risks; it stated that its disclosure controls were effective.
Most important facts for investors to verify
- Whether revenue and margins continue to improve as reopening progresses, and whether pricing offsets food, labor and other inflation.
- Whether working capital converts earnings into operating cash flow; first-half operating cash flow was negative despite a return to net income.
- Debt, facility availability and covenant headroom, including the special covenant measurement period and the effect of future borrowing.
- The scale and duration of remaining COVID-related support credits, deferred Social Security taxes, and other unusual or nonrecurring items.
- Whether the Union Supply acquisition closes as planned and the Uniform spin-off satisfies its approvals, tax conditions, financing needs and expected timetable.