Aramark 10-Q Summary — Fiscal 2020 First Quarter
Reporting period: Three months ended December 27, 2019, compared with the three months ended December 28, 2018. Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform segments. Results are unaudited; the company notes that seasonality means quarterly results may not indicate full-year performance.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $4,253.6 million | $4,265.3 million | Down $11.7 million; essentially flat |
| Operating income | $254.3 million | $373.4 million | Down $119.1 million |
| Income before taxes | $174.7 million | $290.4 million | Down $115.7 million |
| Net income attributable to Aramark stockholders | $145.8 million | $250.7 million | Down $104.9 million |
| Diluted EPS | $0.57 | $0.99 | Down $0.42 |
| Operating cash flow | $(309.5) million | $(203.7) million | Cash use increased $105.8 million |
| Cash and cash equivalents | $264.6 million | $246.6 million at September 27, 2019 | Up $18.0 million |
| Borrowings, net | $7,170.7 million | $6,682.2 million at September 27, 2019 | Up $488.5 million |
Reported operating margin was approximately 6.0%, versus 8.8% in the prior-year quarter; the comparison includes a $157.3 million prior-year gain on the sale of Healthcare Technologies (HCT). The filing does not present an adjusted operating margin. Interest and other financing costs were $79.6 million, down 4%. Capital purchases and other investing outflows were $99.2 million. Net cash provided by financing activities was $411.6 million, including a $450.0 million increase in Receivables Facility funding.
At December 27, 2019, current assets were $2,828.9 million and current liabilities were $2,297.5 million. Aramark reported $874.3 million of availability under its senior secured revolving credit facility. Its $59.9 million of cash held by a regulated captive insurer may be restricted to insurance claims and related costs.
Material Changes Versus the Prior Comparable Period
- Revenue was nearly unchanged: FSS United States declined 1% to $2,639.0 million, FSS International declined 1% to $946.2 million, and Uniform grew 3% to $668.4 million.
- Operating income fell sharply, primarily because the prior-year period included the HCT sale gain. FSS United States operating income declined to $185.9 million from $363.7 million; FSS International increased to $43.7 million from $11.5 million; Uniform was broadly stable at $53.3 million.
- Management also cited U.S. profit pressure from education net new business, medical insurance claims, lower possessory-interest income and spending on sales-growth initiatives. International profit benefited from cost containment, timing of incentive compensation and lower severance costs.
- Operating cash use increased, mainly due to less favorable working-capital movements, including timing of receivable collections, accounts-payable disbursements and accrued-expense payments. The company also paid $27.5 million in dividends.
- Prior-year investing cash flow included $293.7 million of HCT sale proceeds; there were no such proceeds in the current quarter.
Outlook, Management Commentary, Risks and Unusual Items
- No specific full-year revenue, earnings or cash-flow guidance is provided in the filing. Management said cash, operating cash generation and unused revolver capacity were expected to meet anticipated working-capital, capital-spending, debt-service, dividend and other cash needs.
- Aramark had incurred $102 million in Avendra and AmeriPride integration charges and expected approximately $20 million to $25 million of additional charges over the next nine months.
- On January 15, 2020, after quarter-end, the company arranged a $900 million term loan due 2027 and used the proceeds to redeem $900 million of 5.125% notes due 2024 at 102.563% of principal. The redemption included a $23.1 million call premium and approximately $6.5 million of fees and expenses.
- Lease-accounting adoption added approximately $416.1 million of operating lease liabilities and $558.5 million of right-of-use assets at September 28, 2019; the company reported no material income-statement or cash-flow impact from adoption.
- Debt covenants were in compliance at quarter-end. Covenant Adjusted EBITDA for the trailing twelve months was $1,648.4 million; the secured-debt ratio was 2.07x against a 5.125x maximum, and the interest-coverage ratio was 4.94x against a 2.000x minimum.
- Risks cited include client retention and contract renewals, labor and food costs, food safety, regulation, foreign currency, leverage and debt-service capacity, integration execution, cyber and privacy incidents, and adverse events including natural disasters or pandemics. Management reported no material change to the risk factors in its latest Form 10-K.
- Aramark settled two employee incentive-bonus class actions in November 2019 for approximately $21 million; the settlement was accrued at quarter-end. It also reported $8.8 million of unpaid obligations related to the former CEO’s separation. Management did not believe other disclosed legal matters were likely to be material, while noting unfavorable outcomes could be adverse.
Most Important Facts for Investors to Verify
- How much of the year-over-year earnings decline reflects the prior-year HCT gain versus current operating performance and the cited U.S. segment pressures.
- Whether working-capital cash outflows normalize and how seasonal cash flows affect full-year liquidity.
- Net debt and financing costs after the post-quarter $900 million refinancing, including the premium and transaction costs.
- Progress and remaining costs in Avendra and AmeriPride integration, and whether expected benefits are achieved.
- Developments in education-sector client wins, medical insurance claims, labor costs and contract renewals.
- Potential restrictions on cash held by the captive insurer and the effect of debt covenants on borrowing, dividends and repurchases.