Aramark (10-Q) — Fiscal 2020 Third Quarter
Reporting period: The quarter and nine-month periods ended June 26, 2020; comparisons are to the periods ended June 28, 2019. Aramark provides food, facilities and uniform services across the United States and 18 other countries.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $2.152 billion | $4.011 billion | $10.137 billion | $12.276 billion |
| Operating income (loss) | $(327.6) million | $188.8 million | $(171.0) million | $685.0 million |
| Net income (loss) attributable to Aramark | $(256.4) million | $83.0 million | $(312.9) million | $363.0 million |
| Diluted EPS | $(1.01) | $0.33 | $(1.25) | $1.44 |
| Operating cash flow | Not separately reported for the quarter | $(74.8) million | $208.2 million |
Margins: Operating margin was approximately negative 15.2% in Q3, versus 4.7% a year earlier; for the nine months it was approximately negative 1.7%, versus 5.6%. Costs of services provided were 105.3% of revenue in Q3 and 93.1% year to date, reflecting the severe volume decline and costs that did not fall in line with revenue.
Segments and major period changes
- Q3 revenue: FSS United States fell 55.8% to $1.068 billion; FSS International fell 45.6% to $517.1 million; Uniform fell 12.3% to $567.5 million. Education and Sports, Leisure & Corrections were especially affected, with revenue down 70.7% and 71.5%, respectively. Healthcare revenue declined 21.2%.
- Q3 segment operating results: FSS United States recorded a $193.8 million loss and FSS International a $138.3 million loss; Uniform earned $21.9 million. All segments were affected by COVID-19.
- Nine-month results: Revenue declined 17.4%. Operating results also included a $198.6 million noncash goodwill impairment in FSS International; the prior-year period included a $156.3 million gain on the sale of Healthcare Technologies.
Financial position, debt and liquidity
- At June 26, 2020, cash and cash equivalents were $2.417 billion, compared with $246.6 million at September 27, 2019. Total borrowings were $9.260 billion, versus $6.682 billion; cash, receivables-facility and revolving-credit borrowings were used to bolster liquidity amid COVID-19 uncertainty.
- Aramark reported $85.7 million available under its revolving credit facility, in addition to cash. Approximately $59.9 million of cash was held by its regulated captive insurance subsidiary and may be limited to insurance-related uses.
- The company issued $1.5 billion of 6.375% senior notes due 2025, increased revolving-credit borrowings, and extended the Receivables Facility maturity to June 2022. The credit agreement waives its secured-debt-ratio covenant from Q4 FY2020 through Q3 FY2021, subject to conditions including minimum liquidity of $400 million. The company reported covenant compliance at quarter-end.
- For the nine months, operating cash flow was negative $74.8 million; investing cash outflow was $251.3 million, and financing cash inflow was $2.496 billion. Capital purchases and other investing outlays were $298.7 million. Cash generation was affected by the downturn and working-capital movements, including payments of accounts payable and accrued expenses.
- Nine-month interest and other financing costs were $273.6 million, up from $249.4 million; this included $20.9 million of net refinancing expense. Cash dividends paid were $83.1 million. The board subsequently declared a $0.11-per-share dividend payable September 2, 2020.
Management commentary, outlook and notable items
- Management said COVID-19 materially deteriorated revenue, operating income and net income, with the downturn beginning late in Q2 and continuing in Q3. It expected disruption to continue into Q4 and said the longer-term impact was uncertain and could not be reliably predicted. No quantified earnings or revenue guidance was provided.
- Management described some reopening and improving activity in certain markets, including China and parts of Europe and Canada, but emphasized that renewed closures, client demand, public-health conditions and government responses could hinder recovery. It cited the flexibility to reduce costs and defer some capital spending, and believed available cash and borrowing capacity were adequate for anticipated needs under current assumptions.
- Actions included cost reductions, contract renegotiations, compensation changes, headcount reductions, increased borrowing and use of government relief programs. Severance charges were $124.9 million, expected to be paid within two years. U.S. and foreign labor-related credits totaled approximately $71.2 million for the quarter ($10.1 million under the CARES Act and $61.1 million in foreign credits).
- Other unusual items included $198.6 million of goodwill impairment; $28.5 million of abandonment-related asset charges; IT asset write-downs of $17.8 million for the quarter and $21.9 million year to date; and a $16.3 million insurance gain related to tornado damage. The CARES Act contributed income tax benefits, including $68.1 million in Q3 and $58.8 million year to date.
- Key risks include prolonged or renewed pandemic disruptions, client closures and payment capacity, the ability to restart operations and retain clients, labor and supply-chain constraints, debt service and compliance with amended credit terms, and potential further impairment charges. Aramark said existing legal matters were not expected to be material based on information available, while noting unfavorable outcomes could be adverse.
Important facts for investors to verify
- Whether reopening and client activity recover sufficiently to restore revenue and operating margins, especially in education, sports, leisure and business dining.
- Cash conversion and working-capital trends, given negative nine-month operating cash flow and the substantial cash balance partly funded through new debt.
- Debt costs, the $400 million minimum-liquidity condition and compliance with the covenant waiver’s restrictions and post-waiver requirements.
- The duration and recurring effects of severance, government credits, asset charges and other unusual items on normalized profitability.
- Potential additional goodwill impairment if COVID-19 assumptions or the affected reporting unit’s projected cash flows worsen.