Aramark — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2023; comparative periods ended April 1, 2022. The financial statements are unaudited. Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform segments.
Financial results
Amounts are in U.S. dollars. Quarterly figures refer to the three months ended March 31; six-month figures refer to the six months ended that date.
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $4.602B | $3.861B | $9.203B | $7.809B |
| Operating income | $182.0M | $142.0M | $381.6M | $282.2M |
| Operating margin | 4.0% | 3.7% | 4.1% | 3.6% |
| Net income attributable to Aramark stockholders | $56.0M | $35.7M | $130.2M | $78.4M |
| Diluted EPS | $0.21 | $0.14 | $0.50 | $0.30 |
| Interest and other financing costs, net | $114.0M | $89.7M | $215.4M | $182.7M |
For the six months, operating cash flow was a use of $292.7M, versus a use of $128.3M a year earlier. Investing activities used $225.9M, including $202.9M for property and equipment and other purchases. Financing activities provided $477.3M, including increased borrowing under the Receivables Facility and revolving credit facility. Cash and cash equivalents were $302.7M at March 31, compared with $329.5M at September 30, 2022.
Borrowings totaled $8.017B at March 31, 2023, versus $7.411B at September 30, 2022. The company reported $935.3M available under its revolving credit facility and approximately $945.1M of foreign-currency borrowings. Current assets were $3.597B and current liabilities were $2.968B. The filing states that liquidity is expected to be adequate for anticipated requirements and identifies no significant debt maturities until 2025.
Material changes and segment performance
- Quarterly revenue rose 19.2%; six-month revenue rose 17.9%. Management attributed growth primarily to base-business and net-new-business growth, pricing pass-throughs and recovery in activity. Foreign currency translation reduced reported revenue growth.
- FSS United States revenue increased 21.6% for the quarter and 21.0% for six months. Quarterly segment operating income rose to $156.0M from $82.1M.
- FSS International revenue increased 23.2% for the quarter and 18.4% for six months, but quarterly operating income fell to $6.8M from $37.1M. The filing cites severance, prior-year labor-related tax credits, inflation and unfavorable currency translation among the factors.
- Uniform revenue increased 5.3% for the quarter and 5.6% for six months. Operating income was essentially flat for the quarter at $55.9M, and fell 10.9% for the six-month period to $102.4M.
- Interest and financing costs increased, primarily because of higher interest rates and greater borrowing under the Receivables Facility and revolving credit facility.
Outlook, unusual items and risks
- Management expected inflationary pressure on product, energy and labor costs, labor challenges and uncertainty in some clients’ financial condition to continue through the rest of fiscal 2023. It cited cost management, supply-chain initiatives and pricing pass-throughs as mitigation measures. The filing provides no quantified earnings or revenue guidance.
- Aramark expected to complete the proposed spin-off of Uniform in the fourth quarter of fiscal 2023, subject to board approval, tax-related conditions, regulatory approvals and other customary conditions. The transaction was intended to be tax-free for U.S. federal income tax purposes.
- Reported results included $36.3M of severance charges, $26.7M of six-month impairment charges related to certain real estate assets, and $48.1M of quarterly non-cash income from reductions in acquisition-related contingent consideration liabilities, net of specified expenses. These items affect comparisons of underlying performance.
- Other unusual or period-specific factors included a $3.8M tax benefit from reversing a foreign-subsidiary valuation allowance and a higher six-month gain from recovery of an investment at a National Park Service site.
- After quarter-end, Aramark sold its 50% interest in Japan’s AIM Services for $535M in a taxable transaction and repaid $468M of U.S.-dollar term debt and $63M of yen-denominated term debt. It also agreed to sell part of another equity investment; closing was anticipated in fiscal Q3.
- Key risks include inflation and cost-recovery limits in client contracts, labor availability and costs, client retention and contract renewals, leverage and variable-rate debt, foreign currency exposure, supply-chain disruption, food safety, cybersecurity, legal and regulatory matters, and execution and conditions of the proposed spin-off. The company reported compliance with debt covenants at March 31 and no material changes to its previously disclosed risk factors.
- Aramark reported that pending legal matters were not expected to be material based on information then available, while noting an unfavorable resolution could have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and margin performance persist after adjusting for pricing, volume recovery, acquisitions, currency effects and nonrecurring items.
- How inflation, labor costs and pricing pass-throughs affect segment profitability, particularly the recent decline in FSS International operating income.
- Working-capital trends and the drivers of operating cash outflow, including payables, receivables, inventory and payments to clients.
- Debt, interest expense and liquidity following the post-quarter AIM Services sale and debt repayments; also verify the final use of sale proceeds.
- Whether the proposed Uniform spin-off meets its conditions and proceeds on the expected timetable and terms.
- The cash, tax and earnings consequences of the investment sale and the continuing impact of contingent consideration adjustments, severance and impairments.