Aramark — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 28, 2019; comparisons are with the quarter ended June 29, 2018. Year-to-date figures cover nine months. Aramark provides food, facilities and uniform services through FSS United States, FSS International and Uniform segments.
Financial performance
| Metric | Three months ended June 28, 2019 | Nine months ended June 28, 2019 |
|---|---|---|
| Revenue | $4.011 billion; up 1% | $12.276 billion; up 3% |
| Operating income | $188.8 million; up 1% | $685.0 million; up 27% |
| Net income attributable to Aramark | $83.0 million; up 14% | $363.0 million; down 7.5% |
| Diluted EPS | $0.33, versus $0.29 | $1.44, versus $1.56 |
| Operating margin | 4.7%, versus 4.7% | 5.6%, versus 4.5% |
| Net cash from operating activities | Not separately stated for the quarter | $208.2 million, versus $145.5 million |
Quarterly operating income was nearly flat as higher personnel and other costs offset lower corporate expenses. For the nine months, operating income benefited substantially from the $156.3 million pretax gain on the Healthcare Technologies sale. Prior-year nine-month net income included a large one-time tax benefit; the filing reports a $183.8 million benefit from U.S. tax reform and related items, making the year-over-year net-income comparison less indicative of underlying operations.
Segments and material changes
- FSS United States: Revenue declined 3% in the quarter and 2% year to date, mainly reflecting the Healthcare Technologies divestiture. Quarterly operating income fell 6%; nine-month operating income rose 24%, including the sale gain and a $16.2 million National Park Service-related recovery.
- FSS International: Revenue increased 2% in the quarter and 3% year to date, despite an approximately 8% negative currency-translation effect. Operating income fell 8% in both periods, with personnel and customer-contract closing costs among the pressures.
- Uniform: Revenue increased 20% in the quarter and 34% year to date; growth reflects both AmeriPride and ASC 606 presentation changes. Operating income declined 6% for the quarter and increased 10% year to date.
ASC 606, adopted in fiscal 2019, shifted certain Uniform fees from a reduction of service costs to revenue. On the prior accounting basis, revenue would have been $3.930 billion for the quarter and $12.016 billion year to date, versus reported $4.011 billion and $12.276 billion. The adoption also changed balance-sheet classifications, including moving uniform rental items out of inventory. Accordingly, reported revenue growth and some balance-sheet movements are not directly comparable without adjustment.
Cash, debt and liquidity
- Cash and cash equivalents were $220.1 million at June 28, 2019. Long-term borrowings, net of current maturities, were $7.199 billion; total borrowings before current-maturity classification were approximately $7.253 billion.
- Working capital was approximately $482.7 million (current assets of $2.642 billion less current liabilities of $2.159 billion). The company reported approximately $891 million of availability under its senior secured revolving credit facility.
- Nine-month investing cash outflow was $49.4 million, including $340.4 million of property and equipment purchases and $293.7 million of divestiture proceeds. Financing cash outflow was $150.7 million. Cash increased $5.0 million from the beginning of the fiscal year.
- The company reported covenant-adjusted EBITDA of $1.703 billion for the trailing twelve months. Its secured debt ratio was 2.08x against a 5.125x maximum; its interest coverage ratio was 4.89x against a 2.000x minimum. Aramark stated it was in compliance with covenants.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management said operating cash, cash on hand and unused committed credit availability were expected to meet anticipated working-capital, capital-spending, debt-service, dividend and other cash needs.
- Aramark expected $30–$35 million of additional Avendra and AmeriPride integration charges over the following 15 months. Its streamlining and reinvestment initiatives had generated approximately $47 million of charges in the first nine months, with about $5 million of additional charges expected during the remainder of fiscal 2019.
- The company announced a $90 million workforce investment; $62.5 million had been paid during the nine-month period, primarily for recognition awards and training. Seasonality affects results, particularly activity in sports and leisure and education.
- Key disclosed risks include leverage and the ability to generate cash to service debt; client retention, renewals and contract disputes; labor availability and costs; food safety; regulatory and legal matters; foreign currency exposure; and successful integration of acquired businesses. Management said there were no material changes to the risk factors in the prior Form 10-K. It did not consider pending legal matters likely to be material based on information then available, while cautioning that unfavorable developments could have a material effect.
Important facts for investors to verify
- How much of reported year-to-date operating-income growth remains after excluding the Healthcare Technologies gain and other unusual or nonrecurring items.
- The organic, acquisition, foreign-exchange and ASC 606 components of revenue growth, especially in Uniform and FSS United States.
- Whether cash generation, working-capital movements and the increased use of the Receivables Facility support debt service and planned investment.
- Progress on integration, restructuring and workforce spending, including actual costs versus management’s estimates.
- Debt maturities, covenant headroom and the effect of interest rates and hedges; the filing reports approximately $2.5 billion of interest-rate swaps fixing rates on variable-rate borrowings through fiscal 2023.