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Aramark (ARMK)·Q2 2020 Earnings Summary
Executive Summary
- Q2 FY2020 revenue was approximately $3.7B with GAAP EPS between ($0.81) and ($0.39); adjusted EPS was $0.24–$0.26, reflecting COVID-19 impacts and a non-cash goodwill impairment in International of $100–$200M .
- Organic revenue declined ~5.4% YoY, with a ~$325M revenue hit and ~$70M AOI impact from COVID-19; management flexed costs to limit decrementals to ~20% near term, with potential to ~15% if needed .
- Liquidity actions included drawing the $1.0B revolver, issuing $1.5B senior notes, and amending credit covenants to suspend the senior secured leverage test through June 2021; cash was $1.203B and net debt $6.763B at quarter end .
- Management withdrew FY2020 guidance given uncertainty; near-term catalysts include PPE production in Uniforms, higher education reopening strategies, and increased hygiene/facilities demand supporting outsourcing .
What Went Well and What Went Wrong
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What Went Well
- Rapid cost flexing (COGS, hourly labor, direct unit costs) limited AOI impact to ~$70M despite ~$325M revenue decline; adjusted AOI was $157–$167M with adjusted margin 4.16–4.43% .
- Liquidity strengthened: full revolver draw ($1.0B), $1.5B notes issuance, and covenant suspension provided flexibility; debt/EBITDA ~4.2–4.3x LTM .
- Strategic wins and resilience: Uniforms organic growth +1% despite COVID; new business signed (> $75M in Asia/Europe since Feb; > $100M internationally since Feb), PPE manufacturing pivot to “millions of masks” .
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What Went Wrong
- GAAP operating income swung to a loss (range: -$106M to $4M) and included a non-cash goodwill impairment (~$199M Northern Europe in International), driving GAAP EPS to ($0.81)–($0.39) .
- U.S. Food & Facilities organic revenue -7.7% ($186M) and AOI -39% ($59M); International revenue -4.1% ($38M), AOI -67% ($29M) as labor laws limited near-term variability .
- April flash indicated revenue down roughly ~50% amid widespread closures; management withdrew FY2020 guidance due to uncertainty, constraining estimate visibility .
Financial Results
Headline P&L vs Prior Year (Q2 YoY)
EPS vs Prior Quarter
Organic Revenue Trend
Segment Performance (Q2 2020)
KPIs and Balance Sheet
Guidance Changes
Earnings Call Themes & Trends
Management Commentary
- “We are taking timely, proactive steps to adapt the Company to the current environment, and to further bolster our strong financial position.” — John Zillmer, CEO .
- “With these additional mitigating initiatives now in place, we continue to expect the AOI drop through rate to ratably improve to approximately 20% over the near term… managed lower to near 15%.” — Tom Ondrof, CFO .
- “We have switched over production in our Mexican manufacturing operations to manufacture PPE… we can literally make millions of masks going forward.” — John Zillmer, CEO .
- “The amendment suspends Aramark’s senior secured debt covenant for four quarters… intended to prevent the effects of COVID-19 from distorting the covenant calculations.” — Company disclosure .
- “We are prepared literally to customize a solution for every customer location… to ensure the safest, most hygienic environments.” — John Zillmer, CEO .
Q&A Highlights
- Reopening cadence and service models: staged employee returns, grab-and-go, mobile ordering, PPE for staff, daily temperature checks, deep sanitation; tailored by site .
- Uniforms PPE and hygiene adjacencies: pivot to PPE manufacturing; expanding capacity; long-term opportunity aligned with “cleaner, safer, healthier” value proposition .
- April trends and visibility: revenue down ~50%; declines steady through month; Uniforms less impacted than Food & Facilities; uncertainty drove guidance withdrawal .
- Free cash flow outlook: Q3 moderate use expected; neutral working capital as steady state returns; CapEx deferrable without compromising business; Q2 FCF +$108M .
- Labor flexibility: active communication with furloughed staff; ramp aligned to demand; higher ed seasonality aids reactivation .
Estimates Context
- Wall Street consensus (S&P Global) was not retrievable at the time of analysis due to access limitations; therefore, we do not present “vs estimates” comparisons for Q2 FY2020. If needed, we can refresh and incorporate consensus EPS and revenue post-access restoration.
Key Takeaways for Investors
- Near-term resilience: cost variability and targeted actions limited decrementals to ~20% despite large COVID revenue impacts; adjusted AOI/adjusted margins held up better than GAAP given impairment .
- Liquidity and covenant relief substantially de-risk the balance sheet through FY2021, enabling operational focus and opportunistic wins as markets reopen .
- Uniforms pivot to PPE and hygiene services is a tangible growth/cash flow offset to Food & Facilities closures; expect outsized demand for sanitization services .
- Higher education and B&I reopening strategies, combined with outsourcing tailwinds, are likely to re-accelerate organic revenue as confidence returns; watch fall semester execution .
- International recovery in Asia (China healthcare) and ongoing wins in Europe bolster medium-term trajectory despite near-term labor rigidity on margins .
- Withdrew FY2020 guidance; use intra-quarter indicators (April down ~50%) and sector reopen timelines rather than static models; estimates need recalibration post-call .
- Tactical positioning: focus on liquidity and selective growth investments (salesforce, client retention) should support share gain on recovery and potential margin rebuild .