Aramark Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2019, ended March 29, 2019; comparisons are with the periods ended March 30, 2018. Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform segments.
Key financial metrics
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $4.00 billion, up 2% (from $3.94 billion) | $8.27 billion, up 5% (from $7.90 billion) |
| Operating income | $122.8 million, down 9% (from $135.0 million) | $496.2 million, up 41% (from $351.9 million) |
| Net income attributable to Aramark stockholders | $29.4 million (from $27.6 million) | $280.0 million (from $319.9 million) |
| Diluted EPS | $0.12 (from $0.11) | $1.11 (from $1.27) |
| Operating margin | Approximately 3.1% (from 3.4%) | Approximately 6.0% (from 4.5%); excluding the $156.3 million HCT sale gain, approximately 4.1% |
| Operating cash flow | Not provided separately for the quarter | $89.0 million (from $21.6 million) |
| Capital spending | Not provided separately for the quarter | $230.4 million |
| Cash and debt at period end | Cash: $195.4 million; borrowings: $7.19 billion | Cash declined $19.6 million from fiscal year-end |
Liquidity and debt
- Aramark reported $893.5 million of availability under its revolving credit facility. Cash plus stated revolver availability totaled approximately $1.09 billion.
- Current assets were $2.63 billion and current liabilities $2.31 billion. Borrowings included $205 million outstanding under the Receivables Facility.
- The company repaid $200 million of term debt using HCT divestiture proceeds and made additional debt repayments. It also extended the maturities of specified revolving and term facilities to October 2023.
- Aramark said it was in compliance with debt covenants. Covenant Adjusted EBITDA for the trailing twelve months was $1.69 billion; the secured debt ratio was 2.08x against a 5.125x maximum, and the interest coverage ratio was 4.85x against a 2.000x minimum.
Material changes and drivers
- Quarterly revenue growth reflected international and uniform growth and the AmeriPride acquisition, partly offset by the HCT divestiture and adverse currency translation. The new revenue standard also reclassified certain uniform fees from costs to revenue, increasing reported revenue by approximately 2% in both reported periods; comparisons were not restated.
- Uniform revenue rose 26% in the quarter and 42% year to date, reflecting AmeriPride, business growth and the revenue-standard presentation change. FSS United States revenue fell 4% in the quarter, principally due to the HCT sale; International revenue rose 2%.
- Quarterly operating income declined amid $65.5 million of one-time employee reinvestment compensation and weaker Business & Industry results. Lower acquisition-related costs, severance and other items partly offset those pressures.
- Year-to-date operating income included the $156.3 million pretax gain on the November 2018 HCT sale. The prior-year six-month tax benefit of $183.8 million from U.S. tax reform also makes the net-income comparison materially non-comparable.
- Six-month cash from operations improved year over year, while working-capital movements, including receivables and timing of payments, affected cash generation. Investing cash flow included $293.7 million of HCT proceeds; financing cash flow included debt repayments, a $205 million increase in Receivables Facility funding, dividends and share repurchases.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management stated that cash from operations, available cash and committed credit availability should be adequate for anticipated working capital, capital spending, debt service, dividends and other needs.
- Aramark announced a $90 million workforce investment, primarily expected in fiscal 2019; $62.2 million of one-time special recognition awards had been paid in the second quarter. It expected another $5–$10 million of charges for streamlining initiatives during the rest of fiscal 2019, and approximately $35–$40 million of additional Avendra and AmeriPride integration charges over two years.
- The HCT sale generated $293.7 million in cash and a $156.3 million pretax gain; it was not classified as discontinued operations. Year-to-date results also included a $16.2 million recovery of an investment at a National Park Service site.
- Risks highlighted include client retention and contract renewals, labor and food costs, food safety, regulation, seasonality, foreign currency exposure, leverage and debt-service capacity, and integrating acquisitions. The company disclosed routine legal, employment, environmental and other proceedings; it did not believe these were likely to be material based on information then available, but noted unfavorable outcomes could be material. No material change to previously disclosed risk factors was reported.
- Adoption of the lease accounting standard in fiscal 2020 was expected to materially increase lease-related assets and liabilities, with no significant expected effect on income or cash flows.
Investor verification priorities
- Separate underlying operating performance from HCT sale gains, tax effects, revenue-standard reclassifications and acquisition contributions.
- Review segment trends, especially the quarterly decline in FSS United States operating income and the drivers of Uniform growth.
- Assess whether operating cash flow can support capital spending, debt service, dividends and planned workforce and integration investments.
- Monitor debt, Receivables Facility usage, covenant headroom and the expected balance-sheet impact of lease accounting adoption.
- Track execution of acquisition integration, cost-saving initiatives, client retention and the resolution of legal and regulatory matters.