Aramark — FY2018 Form 10-K
Reporting period: Fiscal year ended September 28, 2018 (52 weeks). The filing also reports fourth-quarter results for the quarter ended September 28, 2018; this is an annual report, not a standalone quarterly filing. Aramark provides food, facilities and uniform services, principally in the U.S., with operations in 18 countries outside the U.S.
Key financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Sales | $15,789.6 million | $14,604.4 million | +8% |
| Operating income | $826.1 million | $808.1 million | +2% |
| Operating margin | 5.2% | 5.5% | Down approximately 0.3 percentage points |
| Net income attributable to Aramark stockholders | $567.9 million | $373.9 million | +52% |
| Diluted EPS | $2.24 | $1.49 | +50% |
| Net cash provided by operating activities | $1,047.4 million | $1,053.4 million | Down $6.0 million |
Annual net income benefited from a $237.8 million noncash tax benefit related to U.S. tax reform; pretax income declined 9% to $471.9 million. Interest and other financing costs rose 23% to $354.3 million, primarily reflecting debt issued to fund acquisitions. Cost of services provided was 88.6% of sales versus 88.9% in FY2017; depreciation and amortization increased to $596.2 million from $508.2 million.
Fourth-quarter sales were $3,913.6 million versus $3,654.1 million in the prior-year quarter. Net income attributable to Aramark stockholders was $175.5 million versus $113.1 million; diluted EPS was $0.69 versus $0.45.
Segments and material changes
- FSS United States: Sales of $10,137.8 million, up 4%; operating income of $680.5 million, up 14%. Growth included base and new business, Avendra, and lower personnel costs. Yosemite-area wildfires reduced sales by about $28 million and operating income by about $9 million, net of $5 million in insurance recoveries.
- FSS International: Sales of $3,655.8 million, up 11%, including approximately 5% from currency translation; operating income fell 7% to $150.9 million. Reported headwinds included severance, a joint-venture-related charge and weaker Northern Europe results.
- Uniform: Sales of $1,996.0 million, up 28%, primarily due to AmeriPride; operating income was essentially flat at $182.6 million, with acquisition integration and depreciation costs offsetting other gains.
- Sales growth included approximately 4% from the Avendra and AmeriPride acquisitions and approximately 1% from foreign currency translation. The segment presentation changed: most Canadian FSS operations moved from North America to FSS International; prior periods were restated.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $215.0 million at year-end; current assets were $2,901.4 million and current liabilities $2,490.2 million. Available borrowing under the revolving credit facility was $902.8 million.
- Total borrowings were $7,244.0 million, compared with $5,268.5 million a year earlier. Long-term borrowings were $7,213.1 million. Debt increased principally to finance the acquisitions. The company reported $913.8 million of foreign-currency borrowings.
- Operating cash flow was $1,047.4 million. Investing cash outflow was $2,865.3 million, principally reflecting acquisitions; financing cash inflow was $1,794.2 million. Purchases of property, equipment and client contract investments were $628.6 million.
- Management said operating cash, cash on hand and committed credit availability were expected to meet anticipated working-capital, capital-spending, debt-service and other needs. The company was in compliance with debt covenants at year-end; its secured debt ratio was 2.05x against a 5.125x maximum, and its interest coverage ratio was 4.80x against a 2.00x minimum.
- FY2018 dividends paid were $103.1 million; dividends declared were $0.43 per share. The company repurchased $24.4 million of stock during FY2018.
Outlook, unusual items and risks
- No quantified company-wide FY2019 revenue or earnings guidance is provided in the supplied filing text. Management expected acquisition-related integration costs, purchase-accounting depreciation and amortization, and higher interest expense to affect earnings after the transactions.
- Management expected approximately $50 million of additional Avendra and AmeriPride integration charges over two years. A separate streamlining initiative generated about $63 million of FY2018 charges, with approximately $40 million of additional charges expected in FY2019.
- Aramark signed an agreement to sell its Healthcare Technologies business for $300 million; the sale closed in the first quarter of FY2019. The company intended to use most proceeds to repay debt and planned a $50 million share repurchase.
- Primary risks include high leverage and variable-rate exposure; client retention, renewals and contract pricing; labor availability and wage inflation; food safety and regulatory compliance; seasonality and natural disasters; cybersecurity and privacy; international currency and operating risks; and integration and realization of acquisition synergies. Sysco distributed approximately 49% of Aramark’s food and non-food products in the U.S. and Canada.
- The filing describes ordinary-course legal, regulatory and environmental matters and says none was expected to be material based on information then available; unfavorable developments could nevertheless have a material effect. Goodwill was not impaired in the FY2018 annual test. Internal controls were reported effective, but controls of the acquired businesses were excluded from management’s year-end assessment while integration assessments continued.
Important facts for investors to verify
- How much of the reported earnings growth reflects the one-time tax benefit, and what are normalized earnings and the recurring effective tax rate?
- Whether Avendra and AmeriPride deliver expected synergies and returns after integration costs, added amortization and acquisition debt.
- Debt repayment progress, refinancing needs, interest-rate exposure and covenant headroom, including the treatment of the post-year-end HCT sale proceeds.
- Whether underlying segment margins and organic growth sustain improvement, particularly in International and Uniform, and how much reported growth depends on acquisitions and currency.
- Whether the planned FY2019 restructuring charges, HCT proceeds deployment and $50 million repurchase proceeded as described; the filing’s statements were plans or expectations at the time.
- The scale and financial effects of contingencies, pension-plan exposure, environmental reserves and integration-related control work as they develop.