Aramark — fiscal 2019 Form 10-K
Reporting period: Fiscal year ended September 27, 2019 (52 weeks). The requested “2019 Q4” is the final quarter of that year; the filing also reports full-year results. Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform segments.
Financial performance
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Revenue | $16.227 billion | $15.790 billion |
| Operating income | $891.2 million | $818.4 million |
| Operating margin | 5.5% | 5.2% |
| Net income attributable to Aramark stockholders | $448.5 million | $567.9 million |
| Diluted EPS | $1.78 | $2.24 |
| Cash from operating activities | $984.2 million | $1.052 billion |
| Capital expenditures and other property purchases | $503.1 million | $628.6 million |
| Cash and cash equivalents at year-end | $246.6 million | $215.0 million |
| Borrowings at year-end | $6.682 billion | $7.244 billion |
Fiscal 2019 fourth-quarter revenue was $3.951 billion, versus $3.914 billion in the prior-year quarter. Net income attributable to stockholders was $85.6 million ($0.34 diluted EPS), compared with $175.5 million ($0.69 diluted EPS) in Q4 2018.
Full-year cost of services was 90% of revenue, versus 89% in fiscal 2018; net margin was approximately 2.8%, versus 3.6%. Year-end current assets were $2.658 billion and current liabilities were $2.705 billion. Aramark reported $897.8 million of availability under its revolving credit facility; no borrowings were outstanding under its $400 million receivables facility.
Material changes versus the prior year
- Revenue rose 3% and operating income rose 9%, but net income fell 21%. Fiscal 2018 included a $237.8 million noncash tax benefit from U.S. tax reform, making the net-income comparison less favorable.
- Operating income included a $156.3 million pretax gain on the November 2018 sale of Healthcare Technologies (HCT); sale proceeds were $293.7 million. The divestiture reduced FSS United States healthcare revenue.
- FSS United States revenue declined 2%, partly due to HCT’s sale. FSS International revenue increased 2%, with currency translation a significant offset. Uniform revenue increased 30%, substantially reflecting ASC 606 presentation changes and the AmeriPride acquisition; the new standard reclassified certain Uniform fees into revenue.
- Cash from operations decreased $67.6 million. Investing cash outflow narrowed substantially from fiscal 2018, which included the Avendra and AmeriPride acquisitions. Aramark made $500 million of optional term-loan prepayments in fiscal 2019.
Outlook, commentary, risks and unusual items
- The filing gives no specific fiscal 2020 revenue, earnings or margin guidance. Management said available operating cash, cash balances and committed revolver capacity should cover anticipated working capital, capital spending, debt service, dividends and other needs.
- Aramark had incurred $92 million of Avendra and AmeriPride integration charges and expected another $25–$30 million over the next 12 months. The fiscal 2019 cost-savings phase was completed; related charges were approximately $46 million during the year.
- CEO Eric Foss stepped down in August 2019; John Zillmer became CEO and joined the Board in October 2019. Aramark also entered a governance framework agreement with Mantle Ridge, whose group reported approximately 9.7% beneficial ownership plus an additional economic interest of approximately 10%.
- Fiscal 2019 included $74.9 million of employee reinvestment expenses funded by U.S. tax reform benefits, approximately $27.9 million of legal-settlement charges, $14.8 million of noncash impairment charges and $10.4 million of cash compensation charges related to the former CEO’s separation. In November 2019, the company settled employee bonus class actions for approximately $21 million; the filing says $21 million was charged to fiscal 2019.
- Key disclosed risks include leverage and variable-rate exposure, labor and food-cost inflation with limited ability to pass costs through on many contracts, client retention and contract renewals, food safety, cybersecurity and privacy, regulatory compliance, foreign currency effects, and multiemployer pension-plan withdrawal liabilities. Sysco distributed approximately 48% of Aramark’s food and non-food products in the U.S. and Canada.
- At year-end, Aramark reported compliance with debt covenants: secured-debt ratio of 1.78x against a 5.125x maximum, and interest coverage of 5.02x against a 2.00x minimum. The company reported no goodwill impairment, although the auditor identified the valuation of one FSS International reporting unit’s goodwill as a critical audit matter; its fair value exceeded carrying value by approximately 22%.
- Auditor KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting. ASC 606 adoption affected presentation and balance-sheet classifications; the filing says it did not materially affect revenue timing or net income overall.
Important facts for investors to verify
- How much of operating-income growth is sustainable excluding the HCT sale gain and other unusual items, and how integration costs and expected synergies develop.
- Underlying organic growth and profitability by segment, particularly the effects of HCT’s divestiture, currency movements and ASC 606 presentation changes.
- Debt reduction, interest costs and covenant headroom, including sensitivity to interest rates and the company’s ability to maintain cash generation and dividends.
- Outcomes of the CEO and governance transition, and whether the Avendra and AmeriPride integrations deliver expected benefits.
- Potential exposure from legal matters, multiemployer pension plans, contract guarantees and cost increases that cannot be recovered from clients.