Aramark 10-Q Summary
Business context and period: Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform segments. This unaudited report covers the three and nine months ended July 1, 2022; comparisons are with periods ended July 2, 2021 unless noted. Management attributed the recovery in results mainly to COVID-19 restrictions easing and operations reopening.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $4,127.4 million | $2,981.2 million | $11,936.2 million | $8,544.7 million |
| Operating income | $147.9 million | $74.2 million | $430.1 million | $59.1 million |
| Net income (loss) attributable to Aramark stockholders | $40.3 million | $32.6 million | $118.7 million | $(126.3) million |
| Diluted EPS | $0.16 | $0.13 | $0.46 | $(0.50) |
| Operating cash flow | Not separately presented for the quarter | $(142.0) million | $233.8 million |
Revenue increased 38.4% in Q3 and 39.7% year to date. Operating margin was approximately 3.6% in Q3 versus 2.5% a year earlier, and 3.6% year to date versus 0.7%. Cost of services was 90.8% of revenue in Q3 compared with 90.1%; management cited higher food and other inflationary costs, partly offset by pricing and operating improvements.
Q3 segment revenue was $2,481.5 million for FSS United States, $977.7 million for FSS International and $668.2 million for Uniform. Year-to-date segment revenue was $7,245.2 million, $2,721.8 million and $1,969.2 million, respectively. All three segments reported higher revenue and operating income year over year, with reopening, new business and pricing contributing; international results also faced unfavorable currency translation.
For the nine months, investing cash outflow was $641.4 million, including $260.1 million for property and equipment and acquisitions of businesses and equity-method investments. Financing provided $703.5 million, including $500 million drawn under the Receivables Facility. Cash declined by $93.7 million to $438.9 million.
At July 1, 2022, borrowings were $8,162.3 million, up from $7,452.3 million at October 1, 2021. Revolving-credit availability was approximately $848.2 million; the Receivables Facility had $500 million outstanding. Management reported no significant debt maturities until 2025 and stated it expected cash and available credit to cover foreseeable needs. The company was in compliance with debt covenants; its secured-debt ratio was 3.58x against a 5.125x maximum, and its interest-coverage ratio was 3.34x against a 2.000x threshold.
Material changes and notable items
- The year-to-date return to profitability compares with a prior-year loss. The prior period included a $137.9 million noncash equity-investment gain and a $60.9 million pension-plan termination loss; neither recurred in 2022. Prior-year CARES Act tax benefits also affected comparability.
- Operating cash flow swung to an outflow despite positive net income. Management cited higher receivables as activity recovered and timing of collections, accrued-expense payments, inventory needs and other working-capital movements.
- Food, labor and supply-chain inflation, labor availability, and delayed pricing pass-throughs in some sectors remain pressures. Management said it was using supply-chain measures and pricing actions to mitigate costs.
- Aramark announced its intention to spin off Uniform as a separate public company, targeted by the end of fiscal 2023, subject to board approval, tax opinions and rulings, SEC registration effectiveness and other approvals. The filing warns of possible delay or failure, execution costs, lost synergies, financing risks and disruption to business relationships.
- The June 2022 Union Supply acquisition cost $202.6 million in cash, with $40.2 million of contingent consideration recorded; its purchase-price allocation remained preliminary. The filing also reports $69.1 million of contingent consideration for the Next Level acquisition.
- COVID-related labor tax credits were lower than in the prior year; management did not expect significant additional credits in the remainder of fiscal 2022. The company paid approximately $64.2 million of deferred social-security taxes during the first nine months, with approximately $64.2 million remaining payable.
Outlook, risks and contingencies
The filing gives no numerical revenue, earnings or cash-flow guidance. Management described ongoing recovery across served markets, while noting uncertainty from COVID-19 developments, inflation, supply-chain disruption, labor challenges and the Russia-Ukraine conflict. It also cited client retention and contract pricing, food safety, cybersecurity, leverage and the proposed Uniform spin-off among material risks. Management did not believe the ordinary-course legal matters disclosed were likely to be material, but said an unfavorable resolution could have a material adverse effect. A client-contract settlement resolved in the second quarter resulted in a $5.7 million reversal of previously reserved costs.
Investor facts to verify
- Whether reopening-related revenue and operating-income gains persist as comparisons normalize, and whether pricing keeps pace with food, labor and other cost inflation.
- Whether working-capital outflows, especially receivables and accrued expenses, convert into operating cash flow in subsequent periods.
- Debt levels, borrowing costs and covenant headroom, including the effect of variable-rate exposure and interest-rate hedges.
- Progress, conditions, costs, financing and tax treatment of the proposed Uniform spin-off and its potential effect on clients, employees and operating performance.
- Final purchase accounting and performance-based contingent consideration for Union Supply, as well as the valuation and payment terms of acquisition earnouts.