Aramark Q1 FY2021 10-Q Summary
Reporting period: Three months ended January 1, 2021; compared with the three months ended December 27, 2019. Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform segments. Results were significantly affected by COVID-19.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $2.744 billion | $4.254 billion | Down 35.5% |
| Operating income (loss) | $(20.5) million | $254.3 million | Down $274.8 million |
| Operating margin | (0.7)% | 6.0% | Down about 6.7 percentage points |
| Net income (loss) attributable to Aramark | $(81.2) million | $145.8 million | EPS: $(0.32) vs. $0.59 basic |
| Net cash used in operating activities | $(115.2) million | $(309.5) million | Use of cash decreased $194.3 million |
Costs of services were 92.4% of revenue versus 88.6% a year earlier, reflecting weaker utilization and some labor costs that persisted despite reduced client activity. Interest and other financing costs rose 26.2% to $100.4 million, primarily following the issuance of $1.5 billion of 6.375% senior notes in fiscal 2020. The reported income tax benefit was $39.5 million, including a $22.2 million CARES Act benefit.
Revenue fell across all segments: FSS United States declined 45.2% to $1.446 billion, FSS International declined 26.6% to $694.5 million, and Uniform declined 9.7% to $603.5 million. Segment operating results were losses of $14.8 million for FSS United States and $3.0 million for FSS International, while Uniform earned $32.1 million.
Balance sheet, liquidity and debt
At January 1, 2021, cash and cash equivalents were $1.166 billion, down from $2.509 billion at October 2, 2020. Total borrowings were $8.209 billion, including $98.3 million current, compared with $9.278 billion at fiscal year-end. During the quarter, Aramark used cash on hand to repay $780.0 million under its revolving credit facility, $315.6 million under its Receivables Facility and $16.5 million of term loans.
Available liquidity included approximately $850.4 million under the revolving credit facility and $351.2 million under the Receivables Facility; neither facility’s stated availability is cash on hand. Investing activities used $90.8 million, including $69.2 million for property and equipment and other purchases. Cash used in financing activities was $1.148 billion. Management said it believes cash, facility availability and other resources will be adequate for anticipated requirements, while cautioning that pandemic-related assumptions remain uncertain.
Material developments, outlook and risks
- COVID-19 reduced or halted activity at client locations, notably in Business & Industry, Education, and Sports, Leisure & Corrections. Management described varied conditions by sector and geography and continued cost reductions, workforce adjustments and service changes.
- Government assistance supported results: the company recorded approximately $35.1 million of foreign labor-related tax credits and $1.9 million of U.S. employee-retention credits in cost of services. Approximately $128.5 million of employer Social Security taxes remained deferred at quarter-end.
- The credit agreement’s Consolidated Secured Debt Ratio covenant waiver was in effect through the third quarter of fiscal 2021. The trailing-twelve-month interest coverage ratio was 2.06x against a 2.00x requirement. Management warned the ratio could fall below 2.00x as early as Q2 FY2021; failure to meet it could restrict certain debt incurrence and restricted payments, but would not itself trigger a default.
- The company reported $1.166 billion of cash and approximately $966.3 million of foreign-currency borrowings. Cash held by its regulated captive insurer was $118.7 million and may be restricted to insurance-related uses.
- A client contract dispute was being litigated while settlement discussions continued; Aramark accrued its estimated probable loss of $19.7 million and said exposure could change. The filing also describes other ordinary-course legal matters and a maximum $28.9 million residual-value guarantee exposure on certain vehicle leases, for which no liability was accrued.
- No quantitative revenue or earnings guidance was provided in the supplied filing text. Management emphasized uncertainty around the pandemic, reopening conditions and vaccine distribution. A $0.11-per-share dividend was declared after quarter-end, subject to the stated liquidity and covenant restrictions.
Important facts for investors to verify
- Whether client activity and revenue recover, particularly in Education, Business & Industry, and Sports, Leisure & Corrections.
- Cash generation, use of cash and remaining availability under the revolving credit and Receivables facilities.
- Compliance with debt covenants and the duration and terms of the covenant waiver, including implications for dividends and other restricted payments.
- The continuation and cash timing of government tax credits, deferred payroll taxes and CARES Act tax refunds.
- Developments in the client contract dispute and any change to the $19.7 million accrued estimate.