Business context and reporting period
Aramark provides food, facilities and uniform services across the United States and 18 other countries. This Form 10-Q covers the fiscal second quarter and six months ended March 27, 2020; comparisons are with the periods ended March 29, 2019. COVID-19 disrupted operations during the quarter, particularly in education, sports and leisure, business and industry, and international markets.
Financial performance and liquidity
| Metric | Three months ended March 27, 2020 | Six months ended March 27, 2020 |
|---|---|---|
| Revenue | $3.732 billion, down 6.7% | $7.985 billion, down 3.4% |
| Operating income (loss) | $(97.7) million; prior year $122.8 million | $156.6 million, down 68.4% |
| Net income (loss) attributable to Aramark | $(202.3) million; prior year $29.4 million | $(56.5) million; prior year $280.0 million |
| Diluted earnings (loss) per share | $(0.80); prior year $0.12 | $(0.23); prior year $1.11 |
| Operating cash flow | Not reported separately for the quarter | $(91.6) million; prior year $89.0 million |
Revenue fell across FSS United States and FSS International; Uniform revenue increased 0.9% for the quarter and 1.7% for the six-month period. Quarterly segment operating income was $65.8 million for FSS United States, $(191.2) million for FSS International and $46.8 million for Uniform. The International result included a $198.6 million non-cash goodwill impairment.
For the six months, investing cash outflow was $196.6 million and financing cash inflow was $1.245 billion. Cash and cash equivalents were $1.203 billion at quarter-end, versus $246.6 million at September 27, 2019. Long-term borrowings were $7.863 billion, with total borrowings carrying value of $7.966 billion including current maturities. Revolver availability was approximately $4.7 million. Cash held by the captive insurance subsidiary included $68.7 million that may be restricted to insurance-related uses.
Material changes versus prior period
- Management estimated COVID-19 reduced revenue by approximately $325 million and operating income by approximately $70 million in both the three- and six-month periods; the operating-income estimate is net of lower personnel costs and share-based compensation expense.
- The $198.6 million goodwill impairment followed a pandemic-related decline in the company’s share price and reduced FSS International goodwill. The charge was not tax deductible.
- Operating cash flow shifted from positive to negative, primarily reflecting less favorable changes in operating assets and liabilities, including accrued expenses and accounts payable.
- Six-month results in the prior year included a $156.3 million pretax gain on the sale of Healthcare Technologies; current-period results also included $20.9 million of refinancing charges in interest and other financing costs.
- At quarter-end, the company had increased borrowings under its revolving credit facility and receivables facility by $948.8 million and $400.0 million, respectively, to bolster cash availability.
Outlook, risks and unusual items
Management said the full effect of COVID-19 remained uncertain and provided no quantitative earnings or revenue guidance. It cited a flexible, low-fixed-cost model, diversified services and liquidity as supports, while noting that the pandemic could materially affect results, cash flows and financial condition for an extended period. Cost actions included client-contract renegotiations, compensation adjustments and corporate expense reductions; the company also redeployed production lines to make personal protective equipment.
Subsequent to quarter-end, Amendment No. 9 to the credit agreement waived the secured-debt-ratio covenant for four fiscal quarters, subject to a minimum-liquidity condition of $400 million and other restrictions. Noncompliance could trigger an event of default and possible acceleration. The amendment also bars share repurchases while the waiver is in effect. On April 27, 2020, Aramark issued $1.5 billion of 6.375% senior notes due 2025 for general corporate purposes. These transactions occurred after March 27 and are not included in quarter-end cash or debt balances.
Other risks and items include potential further goodwill impairments if pandemic assumptions worsen; client closures and reduced demand; restart, staffing and supply-chain challenges; and the company’s substantial leverage. Management reported compliance with debt covenants as of March 27, before the subsequent waiver. It expected available cash and additional borrowings to meet anticipated needs, but cautioned that its assumptions were uncertain. The company reported no legal matters believed likely to be material, while noting unfavorable outcomes could still have a material effect.
Investor verification points
- Track the duration and financial impact of COVID-19, including recovery in education, sports and leisure, and international operations.
- Assess cash generation, working-capital movements, available liquidity and the restrictions on cash held by the captive insurer.
- Review total debt, interest expense, the $400 million minimum-liquidity covenant condition, and compliance with the amended credit agreement.
- Monitor assumptions underlying the FSS International goodwill valuation and the possibility of additional impairment charges.
- Distinguish quarter-end financial results from the post-quarter-end covenant amendment and $1.5 billion notes issuance.