Aramark (10-K) — Fiscal 2020 Summary
Business context and reporting period
Aramark provides food, facilities and uniform services across the United States and 18 other countries. Its reportable segments are FSS United States, FSS International and Uniform. This 10-K covers the 53-week fiscal year ended October 2, 2020; the comparable fiscal 2019 year had 52 weeks. The filing also reports fourth-quarter results.
Financial performance
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Revenue | $12.830 billion | $16.227 billion |
| Operating income (loss) | $(264.9) million | $891.2 million |
| Interest and financing costs, net | $382.8 million | $335.0 million |
| Net income (loss) | $(461.4) million | $448.5 million |
| Diluted EPS | $(1.83) | $1.78 |
| Cash from operating activities | $176.7 million | $984.2 million |
| Capital expenditures and other | $419.8 million | $506.4 million |
Revenue fell 20.9%, mainly because COVID-19 closures and reduced activity affected all segments. Operating results also reflected a $198.6 million non-cash goodwill impairment, $145.8 million of COVID-related severance, and the absence of the prior-year $156.3 million gain on the sale of Healthcare Technologies. The income-tax benefit was $186.3 million, including a $58.4 million benefit related to the CARES Act.
Fourth-quarter revenue was $2.692 billion, versus $3.951 billion a year earlier. Aramark reported a quarterly net loss attributable to stockholders of $148.6 million, or $0.59 per diluted share, compared with net income of $85.6 million, or $0.34 per diluted share, in fiscal 2019’s fourth quarter.
Segment revenue and operating income (loss) were: FSS United States, $7.367 billion and $5.3 million; FSS International, $2.946 billion and $(344.2) million; and Uniform, $2.517 billion and $171.5 million. U.S. sports/leisure and business dining were particularly affected; international results also included the goodwill impairment.
Debt, liquidity and cash flow
At October 2, 2020, cash and cash equivalents were $2.509 billion and total borrowings were $9.278 billion, implying approximate net debt of $6.769 billion. Long-term borrowings on the balance sheet were $9.179 billion. Revolving-credit availability was $80.1 million at fiscal year-end. On October 30, 2020, Aramark used cash to repay $680 million of revolver borrowings; it reported subsequent availability of approximately $753.9 million.
Operating cash flow declined to $176.7 million from $984.2 million, reflecting the net loss and working-capital movements. Investing activities used $361.1 million; financing activities provided $2.438 billion, largely from new debt and increased facility borrowings. The company issued $1.5 billion of 6.375% senior notes due 2025 and had $315.6 million outstanding under its receivables facility.
Material changes, outlook and risks
- COVID-19 reduced revenue and profitability through client closures, lower attendance, remote work and limits on education and event operations. Management said the duration and longer-term financial impact remained highly uncertain and did not provide a numerical earnings or revenue forecast.
- Management described cost reductions, client-contract renegotiations, workforce changes, liquidity measures and service diversification as responses to the disruption. Approximately 42,650 employees were furloughed or otherwise affected as operating needs changed; total reported headcount, including seasonal and furloughed staff, was approximately 247,900 at year-end.
- A credit-agreement amendment suspended the secured-debt-ratio covenant from fiscal Q4 2020 through fiscal Q3 2021, subject to conditions including minimum liquidity of $400 million. During the waiver period, dividends of up to $29 million per quarter require at least $600 million of liquidity; otherwise quarterly dividends are limited to $10 million. Share repurchases are restricted during the waiver.
- Aramark reported a $400 million minimum-liquidity condition under the waiver and a 2.58x interest-coverage ratio against a 2.00x minimum. It warned that failure to comply with waiver conditions or future covenants could trigger default and acceleration. The company said it believed liquidity was adequate, while cautioning that its assumptions were uncertain.
- The board declared a $0.11-per-share dividend in November 2020. Future dividends remain subject to board discretion, liquidity and debt restrictions.
- Other material exposures include client retention and contract pricing, labor and pension obligations, food safety, regulation, cybersecurity and data privacy, supplier/distributor concentration, foreign currency, and possible further impairments if operating assumptions weaken. Aramark said pending legal matters were not expected to be material based on information then available, but unfavorable developments could change that assessment.
Investor verification points
- Track quarterly revenue, utilization and margins by segment, especially the pace of recovery in sports/leisure, education and business dining.
- Reconcile cash generation with reported liquidity, borrowings and the post-year-end revolver repayment; assess whether cash is available across entities and geographies.
- Monitor covenant-waiver conditions, the return of the secured-debt-ratio test, and the company’s ability to service and refinance its debt.
- Assess whether government credits and other temporary relief, contract amendments and cost reductions are recurring or masking underlying operating performance.
- Review the assumptions behind the FSS International goodwill impairment and monitor customer credit quality, severance payments, pension obligations and other contingencies.