Aramark — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended April 2, 2021. Aramark provides food, facilities and uniform services across the United States and 18 other countries. Results are unaudited and compared with the three and six months ended March 27, 2020.
Financial results
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $2,819.7M | $3,731.6M | $5,563.5M | $7,985.2M |
| Operating income (loss) | $5.3M | $(97.7)M | $(15.1)M | $156.6M |
| Net loss attributable to Aramark | $(77.6)M | $(202.3)M | $(158.8)M | $(56.5)M |
| Loss per share | $(0.30) | $(0.80) | $(0.63) | $(0.23) |
| Operating margin | 0.2% | (2.6)% | (0.3)% | 2.0% |
Revenue fell 24.4% in the quarter and 30.3% year to date, chiefly because COVID-19 reduced or halted client operations. Quarterly operating results improved year over year, primarily because the prior-year quarter included a $198.6M goodwill impairment and FY2021 benefited from government labor-related tax credits and cost reductions. For the six-month period, operating income turned to a loss and net loss widened. Cost of services was 92.2% of revenue year to date, versus 89.9% a year earlier.
Q2 segment revenue was $1,551.0M for FSS United States, $677.7M for FSS International and $591.0M for Uniform. Year-to-date revenue declined across all segments: 38.5% in FSS United States, 23.8% in FSS International and 9.2% in Uniform.
Cash flow and liquidity: Six-month operating cash flow was $221.9M, compared with cash used of $91.6M in the prior-year period. Investing used $175.7M and financing used $1,163.6M, including repayment of $780.0M on the U.S. revolving facility and $315.6M under the Receivables Facility. Cash was $1,400.0M at quarter-end, down from $2,509.2M at October 2, 2020. The company reported $819.6M of revolver availability and $389.7M of Receivables Facility availability.
Debt: Borrowings were $8,186.4M at April 2, 2021, down from $9,278.4M at October 2, 2020. Aramark reported a 1.79x interest coverage ratio against a 2.00x incurrence threshold. The shortfall does not itself constitute a default, but may restrict additional borrowing and certain restricted payments. A separate secured-debt-ratio covenant waiver was in effect through the third quarter of fiscal 2021. The filing reports no significant debt maturities before 2025 following subsequent refinancing actions.
Outlook, risks and notable items
- Management gave no quantified revenue, earnings or cash-flow guidance. It said the recovery remained uncertain and dependent on pandemic developments, vaccination progress, reopening and government relief. It expected available cash and credit capacity to meet anticipated needs, while cautioning that assumptions were uncertain.
- Management described gradual improvement in some activities, including healthcare, in-person education and certain sports and leisure operations. Business & Industry remained affected by work-from-home arrangements; some international markets continued to face restrictions.
- COVID-19 remained the central operating risk, alongside client retention and contract renewals, labor availability and costs, leverage and cash generation, food safety, cybersecurity, regulation and legal claims. Management continued cost controls, flexible operating measures and use of government relief.
- Government labor-related tax credits reduced costs by approximately $39.5M in Q2 and $74.0M year to date. CARES Act employee-retention credits contributed $2.0M and $3.1M, respectively. The company also recorded CARES Act income-tax benefits of $12.1M for Q2 and $34.3M year to date. These relief-related benefits are not necessarily recurring.
- Aramark accrued $19.7M for a client contract dispute that it was litigating while seeking a negotiated resolution; the potential exposure could change. It reported no other legal matters expected to be material based on information available, while noting unfavorable developments could have a material impact.
- Subsequent to quarter-end, the company amended its credit agreement on April 6, increasing revolver commitments by approximately $200M and extending maturities on specified facilities. It announced redemption of $500M of 4.750% notes effective June 2, 2021, at 102.375% plus accrued interest. It also agreed on April 28 to acquire Next Level Hospitality, subject to customary conditions.
- The company said it could not make share repurchases while the covenant waiver remained in effect. The board declared a $0.11-per-share dividend on May 10, payable June 9, 2021, subject to applicable restrictions.
Most important facts for investors to verify
- Whether reopening and client activity restore revenue and operating margins, especially in education, Business & Industry, and sports and leisure.
- How much reported performance and cash generation depend on government credits, tax refunds, deferred payroll taxes and working-capital timing.
- Progress against the 2.00x interest-coverage threshold, the duration and terms of covenant relief, and related limits on borrowing, dividends and repurchases.
- Cash availability after debt repayments, the announced note redemption and refinancing, and the company’s capacity to service its substantial debt.
- The outcome and possible change in exposure from the accrued $19.7M client dispute, and the completion and financial effect of the Next Level Hospitality acquisition.