Aramark — Q1 Fiscal 2019 Form 10-Q
Reporting period: Three months ended December 28, 2018, compared with the three months ended December 29, 2017. Aramark provides food, facilities and uniform services across the United States and 18 other countries, through FSS United States, FSS International and Uniform segments.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $4.265 billion | $3.965 billion | Up 8% (7.6% by calculation) |
| Operating income | $373.4 million | $216.9 million | Up 72%; includes a $157.3 million HCT sale gain |
| Net income attributable to Aramark | $250.7 million | $292.3 million | Down 14% |
| Diluted EPS | $0.99 | $1.16 | Down 15% |
| Interest and other financing costs | $83.0 million | $74.1 million | Up 12%, primarily from acquisition-related debt |
| Cash from operating activities | $(207.4) million | $(311.4) million | Use of cash improved by $104.0 million |
| Cash from investing activities | $194.2 million | $(1.443) billion | Includes $293.7 million HCT sale proceeds |
| Cash from financing activities | $48.1 million | $1.701 billion | Prior period included substantial acquisition financing |
Reported operating margin was approximately 8.8%, versus 5.5% a year earlier; the current quarter’s margin includes the HCT gain. Revenue growth reflected acquisitions (about 5%) and revenue-recognition presentation changes (about 2%), partly offset by the HCT divestiture (about 2%) and foreign currency translation (about 1%).
Segments and material period changes
- FSS United States: Revenue was $2.660 billion, essentially flat; operating income rose to $363.7 million from $180.1 million. The HCT gain and $16.2 million NPS investment recovery materially benefited current results.
- FSS International: Revenue rose 4% to $953.1 million, while operating income fell 74% to $11.5 million. Management cited severance and business-exit costs, currency effects, personnel costs and new-business start-up costs.
- Uniform: Revenue rose 62% to $651.9 million and operating income increased to $52.7 million from $44.5 million. Growth includes AmeriPride and ASC 606 reclassification; the filing attributes approximately 36% and 24% of revenue growth, respectively, to those factors.
Although operating income increased, the HCT gain largely explains the increase: excluding that gain, operating income was approximately $216.1 million. Net income comparisons are also affected by the prior-year quarter’s approximately $183.8 million tax benefit associated with U.S. tax reform. The effective tax rate was 13.7%, compared with (104.9)% in the prior-year quarter; the current period included a tax provision related to the HCT sale.
Cash, debt and liquidity
- Cash and cash equivalents were $249.9 million at December 28, 2018. The company reported approximately $916.7 million of availability under its senior secured revolver.
- Total borrowings were $7.377 billion, including $390 million drawn under the Receivables Facility; cash less borrowings was approximately $7.127 billion. Borrowings increased from $7.244 billion at September 28, 2018.
- Operating cash use remained substantial, reflecting working-capital outflows, including receivables, accounts payable and accrued expenses. Capital expenditures and other property purchases were $114.4 million.
- Aramark made approximately $200 million of optional term-loan prepayments and extended certain revolving and term-loan maturities to October 1, 2023. It reported compliance with debt covenants; the secured debt ratio was 2.14x against a maximum of 5.125x, and interest coverage was 4.92x against a 2.000x minimum.
- The company had approximately $938.3 million of foreign-currency borrowings and uses interest-rate, currency and fuel derivatives. Outstanding interest-rate swaps covered approximately $2.6 billion of variable-rate borrowings through fiscal Q1 2023.
Outlook, management commentary and risks
- No specific revenue, earnings or cash-flow guidance for the fiscal year is provided in the supplied filing text. Management said available cash, operating cash generation and committed credit availability should be adequate for anticipated needs.
- Aramark expects approximately $45 million of additional Avendra and AmeriPride integration charges over two years. For its streamlining and reorganization phase, it reported approximately $34 million of charges in the quarter and expected about $10 million more in fiscal 2019. Severance obligations were expected to be paid through fiscal 2019.
- On February 5, 2019, the company announced a planned $90 million workforce investment in wages, retirement contributions, recognition, training and scholarships, with most expected to be funded in fiscal 2019.
- Key risks include client retention and contract renewals, labor and food costs, food safety, regulation, seasonality, currency exposure, leverage and debt-service capacity, and successful integration and realization of acquisition benefits. The filing reported no material change to the risk factors in the prior Form 10-K.
- Legal matters include employment, environmental, food safety, contract and other business-related claims. Management did not consider pending matters likely to be material based on information available, but noted an unfavorable resolution could be materially adverse. Vehicle lease residual-value guarantees had a maximum potential exposure of $81.6 million; no accrual was recorded and significant payments were not expected.
- Other unusual items included a $9.2 million loss from changes in fair value of fuel agreements and approximately $22.0 million of net severance charges. The HCT sale generated a $157.3 million pretax gain. ASC 606 adoption increased opening retained earnings by approximately $58.4 million and changed certain balance-sheet and income-statement classifications, without a material effect on revenue timing or net income overall.
Investor verification points
- Separate recurring operating performance from the HCT gain and NPS recovery; verify segment trends excluding these items and other restructuring or acquisition costs.
- Reconcile reported revenue growth for acquisitions, ASC 606 presentation changes, divestiture and foreign exchange, particularly in Uniform.
- Assess the sustainability of operating cash flow and working-capital movements, and confirm funding needs after the announced workforce investment.
- Track total debt, Receivables Facility usage, refinancing maturities, covenant headroom and interest-rate exposure.
- Review progress on Avendra and AmeriPride integration, expected charges and realized synergies, as well as the continuing FSS International profit decline.