Aramark Q2 2018 Form 10-Q Summary
Business context and reporting period. Aramark provides food, facilities and uniform services, primarily in the U.S. and 18 other countries. This unaudited report covers the three and six months ended March 30, 2018; comparisons are with the periods ended March 31, 2017. Fiscal 2018 includes Avendra, acquired December 11, 2017, and AmeriPride, acquired January 19, 2018.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $3.939 billion | $3.622 billion | $7.904 billion | $7.357 billion |
| Operating income | $136.5 million | $191.4 million | $355.5 million | $435.5 million |
| Operating margin | 3.5% | 5.3% | 4.5% | 5.9% |
| Net income attributable to Aramark stockholders | $27.6 million | $70.2 million | $319.9 million | $195.5 million |
| Diluted EPS | $0.11 | $0.28 | $1.27 | $0.78 |
For the six months, cash provided by operations was $24.2 million, versus $428.2 million a year earlier. Investing used $2.476 billion, largely reflecting acquisitions; financing provided $2.399 billion. Cash and cash equivalents were $185.5 million at March 30, 2018, down from $238.8 million at September 29, 2017.
Borrowings totaled $7.822 billion, compared with $5.268 billion at September 29, 2017. Aramark reported $979.2 million of availability under its revolving credit facility. The current portion of debt was $72.5 million. Covenant ratios were within stated requirements: secured debt ratio 2.54x versus a 5.125x maximum, and interest coverage 4.56x versus a 2.000x minimum.
Material changes versus prior comparable periods
- Sales rose 9% in Q2 and 7% for the six months. Management attributed growth to underlying business growth, acquisitions and favorable foreign currency translation. Acquisitions contributed approximately 4% and 2% to growth, respectively; currency translation contributed approximately 2% in each period.
- Operating income fell 29% in Q2 and 18% for the six months. Cost of services was 90% of sales in both 2018 periods, compared with 89% in the prior-year periods.
- Q2 sales grew across all segments: FSS United States 3%, FSS International 15% and Uniform 31%. Operating income declined 3%, 61% and 33%, respectively. For the six months, segment operating income was approximately flat in FSS United States, down 24% in FSS International and down 25% in Uniform.
- Six-month net income increased despite lower operating income, primarily because the income-tax line included a substantial tax-reform benefit. The six-month tax benefit was $135.1 million, versus a $76.5 million tax provision in the prior year. The reported six-month result is therefore not a straightforward indication of recurring earnings growth.
- Debt increased substantially to fund the acquisitions. Q2 interest expense decreased 4% year over year, partly because the prior-year quarter included $30.0 million of refinancing-related charges; six-month interest expense increased 4%, reflecting new acquisition debt.
Outlook, commentary, risks and unusual items
- The filing does not provide a specific full-year earnings or revenue guidance range. Management said cash, operating cash generation and unused committed credit availability were expected to meet anticipated working-capital, capital-spending, debt-service, dividend and other needs.
- Management expects acquisition-related integration and purchase-accounting effects, including added depreciation and amortization and higher interest expense, to affect earnings for some time. It expects approximately $90 million of additional merger and integration charges over three years.
- A new cost and reorganization program generated approximately $55 million of charges year to date; management expected up to approximately $50 million of additional charges over the next several years. The quarter included approximately $39.5 million of net severance expense.
- Reported operating income also reflected acquisition and integration costs, increased depreciation and amortization, and consulting costs. These were partly offset by favorable prior-year casualty-insurance loss experience.
- The Tax Cuts and Jobs Act produced a provisional, noncash tax benefit of approximately $207.5 million in Q1 from remeasuring deferred tax balances, alongside other tax adjustments. Management said the estimate remained subject to revision.
- Key risks cited include client retention and contract renewals, labor and food costs, food safety, regulation, seasonality, foreign currency, integration and realization of acquisition benefits, and the company’s leverage and ability to generate cash to service debt. Legal matters were not considered likely to be material based on information then available, but an unfavorable resolution could have a material adverse effect.
Important facts for investors to verify
- How much of reported sales growth is sustainable organic growth, apart from acquisitions and currency effects.
- Whether segment margins recover as severance, acquisition and integration costs subside, particularly in International and Uniform.
- Whether operating cash flow improves after the working-capital outflows and acquisition-related payments seen in the first half.
- Progress on integrating Avendra and AmeriPride, realizing expected synergies and finalizing their preliminary purchase-price allocations.
- The durability of earnings excluding the large, nonrecurring tax benefit, and any subsequent revisions to provisional tax estimates.
- Debt reduction, interest-rate exposure, liquidity and continued compliance with debt covenants.