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Item 7. Management’s Discussion and Analysis

2024-11-22 compared with 2023-12-21 · 154 added, 111 removed, 227 unchanged (54% of the section changed)

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.

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.

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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 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.

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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.

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.

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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.

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.

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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.

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

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.

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.

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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.

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 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.

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 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.

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.

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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 Investments to our Combined Financial Statements).

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.

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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.

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 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.

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.

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.

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

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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.

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

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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.

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.

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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 2024.

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,

along with the implementation of targeted and strategic price increases under the terms of our customer contracts.

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.

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Gain on Sale of Equity Investment, net — (51,831) 51,831 (100.0 %)

Interest Expense and Other, net 10 2,284 (2,274) (99.6 %)

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 %)

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(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.

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.

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

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 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.

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.

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(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

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Segment Operating Income % 10.4 % 11.8 %

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.

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 $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;

• 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.

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;

• 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.

Results of Operations—Canada Results

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Segment Operating Income % 3.3 % 5.5 %

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.

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

• 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;

• incremental labor costs of approximately $4.0 million;

• higher rental merchandise in service costs of $2.1 million;

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.

• 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.

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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.

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 periods presented.

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 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 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.

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”).

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.

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

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.

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Net cash used in financing activities (402,975) (230,269)

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

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 $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:

• 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.

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;

• 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.

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.

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 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);

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);

• cash distributions to Aramark ($6.1 million);

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

• cash transferred to Aramark ($134.5 million);

• 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);

• 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

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sell or dispose of assets;

pay dividends, make distributions or repurchase its capital stock;

pay dividends, make distributions or repurchase capital stock;

engage in certain transactions with affiliates;

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create restrictions on the payment of dividends or other amounts to the Company from its restricted subsidiaries;

amend material agreements governing our subordinated debt;

amend material agreements

governing our subordinated debt;

repay or repurchase any subordinated debt, except as scheduled or at maturity;

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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.

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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.

At September 27, 2024, we were in compliance with all covenants under the Credit Agreement.

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.

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.

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 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.

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______________________

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

(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.

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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.

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.

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.

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.

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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.

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 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.

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.

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

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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.

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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.

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.

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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.

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 Combined Financial Statements for a full description of recent accounting standards updates, including the expected dates of adoption.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis