Aramark — Q3 FY2018 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended June 29, 2018; comparisons are with the periods ended June 30, 2017. Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform. The quarter includes contributions from Avendra, acquired in December 2017, and AmeriPride, acquired in January 2018.
Key financial metrics
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $3.972 billion, up 11% | $11.876 billion, up 8% |
| Operating income | $188.2 million, up 22%; operating margin 4.7% versus 4.3% | $543.7 million, down 8%; operating margin 4.6% versus 5.4% |
| Net income attributable to Aramark stockholders | $72.6 million versus $65.3 million; diluted EPS $0.29 versus $0.26 | $392.4 million versus $260.8 million; diluted EPS $1.56 versus $1.04 |
| Cash from operations | Not presented for the quarter | $141.4 million versus $449.2 million |
| Cash and debt at June 29, 2018 | Cash $166.0 million; long-term borrowings, including current maturities, $7.870 billion, versus $5.269 billion at September 29, 2017 | |
| Liquidity | Approximately $932.4 million available under the senior secured revolving facility; current assets $2.910 billion and current liabilities $2.143 billion |
Cost of services was 89% of sales in both nine-month periods. The nine-month effective tax rate was negative 39.3%, versus 28.6% a year earlier, reflecting a reported $183.8 million tax benefit related to U.S. tax reform and other tax adjustments. The filing reports no quarterly cash-flow statement.
Material changes versus prior period
- Sales growth reflected growth across segments, acquisition contributions (approximately 5 percentage points in Q3 and 3 points for nine months) and favorable currency translation (approximately 1 and 2 points, respectively).
- Q3 operating income rose, while nine-month operating income fell. Nine-month pressure included acquisition and integration costs, higher severance, depreciation and amortization, share-based compensation and streamlining consulting costs.
- Interest and other financing costs rose 48% for Q3 and 16% for nine months, mainly from debt issued to finance Avendra and AmeriPride.
- Nine-month operating cash flow declined substantially, principally due to working-capital movements, including accrued expenses, receivables and accounts payable.
- Acquisition financing and spending materially increased debt and investing outflows. Nine-month investing cash use was $2.672 billion, including $2.240 billion for acquisitions, net of cash acquired.
Outlook, commentary and risks
- Management expects acquisition-related integration, purchase-accounting depreciation and amortization, and higher financing costs to affect earnings after the acquisitions. It expects approximately $80 million of additional merger and integration charges over three years.
- The company reported approximately $62 million of fiscal 2018 year-to-date charges for streamlining initiatives and expected up to approximately $45 million of additional charges. Severance obligations of approximately $27.9 million were expected to be paid through the first half of fiscal 2019.
- No specific full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management said cash, operating cash generation and committed credit availability were expected to be adequate for anticipated needs.
- Debt covenants were met at quarter-end: secured debt ratio 2.52x against a 5.125x maximum; interest coverage ratio 4.66x against a 2.000x minimum. The company cautions that leverage, cash generation, covenant compliance and debt-service capacity remain risks.
- Other cited risks include client retention and contract renewals, labor and food costs, food safety, seasonality, foreign currency exposure, regulation, litigation, and successful integration and realization of acquisition benefits. Legal matters were not believed likely to be material based on information then available, but unfavorable outcomes could be adverse.
- Unusual items include the tax-reform benefit, a $18.9 million increase in expected PSU attainment-related compensation expense during Q3, and preliminary acquisition purchase-price allocations that may change materially.
Most important facts for investors to verify
- Whether the acquisitions deliver the expected growth and synergies after integration costs, purchase-accounting charges and financing expense.
- Whether operating cash flow recovers from the nine-month decline and supports capital spending, dividends and debt service.
- Debt reduction progress, interest-rate exposure and continued covenant headroom; borrowings were $7.870 billion at quarter-end.
- The final tax-reform accounting and its effect on reported earnings, deferred taxes and future effective tax rates.
- Final acquisition valuations and whether announced restructuring and integration charges remain within management’s estimates.