Aramark — Form 10-Q summary
Reporting period: Third quarter and first nine months of fiscal 2021, ended July 2, 2021; comparisons are to the periods ended June 26, 2020. Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform segments. Amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $2,981.2 | $2,152.3 | $8,544.7 | $10,137.4 |
| Operating income (loss) | $74.2 | $(327.6) | $59.1 | $(171.0) |
| Net income (loss) | $32.6 | $(256.3) | $(126.5) | $(312.4) |
| Net income (loss) per diluted share | $0.13 | $(1.01) | $(0.50) | $(1.25) |
Revenue rose 38.5% in the quarter as client locations reopened, but fell 15.7% year to date because pandemic-related disruption affected the current nine-month period for longer than the prior-year comparison. Approximate operating margin was 2.5% for Q3 and 0.7% year to date; the corresponding prior-year periods were negative. Nine-month net loss narrowed year over year.
Q3 results included a $137.9 non-cash gain on an equity investment and a $60.9 non-cash loss from terminating certain Canadian defined-benefit pension plans. The equity gain is presented below operating income. Nine-month tax benefit was $45.7, including CARES Act-related benefits. These items affect interpretation of reported earnings.
| Segment | Q3 revenue change | Q3 operating income (loss) | Nine-month revenue change | Nine-month operating income (loss) |
|---|---|---|---|---|
| FSS United States | +54.5% | $44.0 (prior year $(193.8)) | -21.7% | $30.1 (prior year $57.9) |
| FSS International | +40.9% | $21.0 (prior year $(138.3)) | -9.3% | $30.3 (prior year $(285.8)) |
| Uniform | +6.3% | $35.0 (prior year $21.9) | -4.5% | $88.8 (prior year $122.0) |
Cash flow and liquidity: Nine-month operating cash flow was $233.8, compared with cash use of $74.8 a year earlier. Investing activities used $503.2, including the Next Level Hospitality acquisition; financing activities used $1,767.0, mainly reflecting debt repayments. Cash and equivalents were $483.4 at July 2, 2021, down from $2,509.2 at October 2, 2020. The company reported $1,057.3 of revolver availability and $380.4 under its receivables facility.
Debt: Borrowings, net, totaled $7,665.9, down from $9,278.4 at October 2, 2020. The company repaid $780.0 on its U.S. revolver, redeemed $500.0 of 4.750% notes and repaid $315.6 under its receivables facility. It extended or refinanced certain maturities and increased revolving commitments by approximately $200.0; management reported no significant debt maturities until 2025. The secured debt ratio covenant waiver applied through Q3 FY2021, with compliance required beginning in Q4. The reported interest coverage ratio was 2.36 against a 2.00 minimum for actions subject to that test; the company stated it was in compliance with applicable covenants.
Changes, outlook, risks and unusual items
- Management attributed quarterly recovery to reopening across client sectors, cost actions and adaptations to the pandemic. Education, sports and leisure, business and industry, and international operations remained sensitive to local reopening conditions. The nine-month revenue decline reflected pandemic disruption, especially in U.S. business and industry, education, and sports and leisure.
- The June 2021 acquisition of Next Level Hospitality, a senior-living services provider, was funded with cash. Cash consideration was $226.2, with $78.4 of contingent consideration tied to future performance. Its reported revenue and earnings contribution through quarter-end was not material.
- COVID-19, including variants, restrictions, client activity, labor availability and the continuation of government relief programs, remained a material source of uncertainty. Management said available cash and facility capacity were expected to cover anticipated working capital, capital spending, debt service, dividends and other needs, while cautioning that its assumptions were uncertain. No numerical earnings or revenue guidance was provided in the filing text.
- Government labor-related tax credits reduced service costs: approximately $29.0 in Q3 and $105.2 year to date in FY2021. The company expected to continue qualifying for certain U.S. and foreign credits through 2021. Approximately $128.5 of employer Social Security taxes remained deferred, with half classified current and half noncurrent.
- A client contract dispute had a recorded reserve of $19.7; the company said the exposure could change as settlement discussions or litigation proceed. Other disclosed risks include contract retention and renewals, food safety, labor costs, cybersecurity, regulation and leverage. Management did not consider other disclosed legal matters likely to be material, while noting an unfavorable resolution could be adverse.
Important facts for investors to verify
- Whether reopening and revenue recovery continued after July 2, especially in education, sports and leisure, business and industry, and international markets.
- How much reported profitability depends on temporary government credits, cost reductions and the non-cash equity gain, and whether the underlying recovery is sustainable.
- Cash availability and debt levels after substantial repayments, alongside the return to secured-debt covenant testing in Q4 FY2021.
- The final purchase-price allocation and contingent-payment outcome for Next Level Hospitality.
- Any change in the $19.7 client-dispute reserve, deferred payroll-tax obligations or COVID-related credit-loss assumptions.