Aramark — Fiscal 2018 First-Quarter 10-Q
Reporting period: Three months ended December 29, 2017; comparative period ended December 30, 2016. Aramark provides food, facilities and uniform services across the U.S. and 18 other countries. Results are unaudited, and the company cautions that seasonality means interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Sales | $3,965.1 million | $3,735.4 million | +6% |
| Operating income | $219.0 million | $244.1 million | -10% |
| Operating margin | 5.5% | 6.5% | -1.0 percentage point |
| Interest and other financing costs | $76.3 million | $65.7 million | +16% |
| Income before taxes | $142.7 million | $178.4 million | -20% |
| Income tax benefit | $149.7 million | Tax expense of $52.9 million | — |
| Net income attributable to Aramark stockholders | $292.3 million | $125.3 million | +133% |
| Diluted EPS | $1.16 | $0.50 | +$0.66 |
| Net cash used in operating activities | $311.4 million | $26.0 million | Greater cash use |
Sales growth included approximately $55 million of favorable foreign-currency translation. Cost of services was 89% of sales versus 88% a year earlier. The reported earnings increase largely reflects a noncash tax benefit following U.S. tax reform, rather than improved operating income; the filing reports a provisional $207.5 million benefit from tax-rate remeasurement and related adjustments, while MD&A attributes approximately $183.8 million to tax reform and specified adjustments.
Segments and key changes
- FSS United States: Sales rose 5% to $2,649.5 million; operating income increased 2% to $180.1 million. Growth across several sectors and productivity gains were partly offset by acquisition costs and weaker performance in Business & Industry and Healthcare.
- FSS International: Sales rose 13% to $913.0 million and operating income rose 13% to $46.0 million. Foreign exchange contributed about 7% to sales growth; results also reflected broad regional growth, stronger Canada and weaker Ireland profit.
- Uniform: Sales rose 2% to $402.6 million, but operating income fell 17% to $44.5 million. Management cited rental-market pricing pressure, AmeriPride-related costs and multiemployer pension withdrawal charges.
- Corporate costs increased to $51.6 million from $26.6 million, principally reflecting acquisition/integration and consulting costs and lower favorable insurance experience.
Cash, debt and liquidity
- Operating cash flow was negative $311.4 million, versus negative $26.0 million. Management cited the timing of prepayments and accrued-expense payments, plus higher receivables associated with revenue growth and collection timing.
- Investing cash outflow was $1,442.8 million, primarily reflecting the Avendra acquisition. Financing provided $1,701.1 million, including acquisition-related borrowing. Cash ended the quarter at $185.7 million.
- Long-term borrowings were $6,976.5 million, with total borrowings including current maturities of $7,047.7 million, up from $5,268.5 million total at September 29, 2017. The increase chiefly reflects acquisition financing. Debt fair value was $7,213.0 million.
- At quarter-end, Aramark reported approximately $512.9 million available under its revolving facility. It said cash and committed availability should cover anticipated working capital, capital spending, debt service, dividends and other needs.
- The company was in compliance with debt covenants. Its reported secured-debt ratio was 2.96x against a 5.125x maximum; interest coverage was 5.41x against a 2.000x minimum.
Acquisitions, outlook and risks
- Aramark completed its $1.386 billion Avendra acquisition on December 11, 2017, financing it primarily with a new $1.785 billion term loan due 2025 and revolving-credit borrowings. Avendra’s post-close contribution to quarterly sales and net income was not material; its purchase-price allocation remained preliminary.
- AmeriPride was acquired on January 19, 2018, after quarter-end, for $1.0 billion. Aramark issued $1.15 billion of 5.000% notes due 2028 to fund the transaction and repay revolving borrowings. Purchase accounting was not yet available in this filing.
- Management expected acquisition-related transaction and integration costs, purchase-accounting depreciation and amortization, and higher interest expense to affect earnings for some period after the acquisitions. No specific full-year earnings or sales guidance is provided in the supplied filing text.
- Aramark expected $30–$35 million of net severance charges in Q2 FY2018 from a new phase of administrative streamlining and reorganization.
- Key disclosed risks include leverage and debt-service capacity; successful integration and realization of acquisition benefits; client retention and contract economics; labor availability and cost, including union and multiemployer-pension exposure; food safety; seasonality; foreign exchange; regulatory and legal matters; and systems, privacy and internal-control risks. Management said ordinary-course legal matters were not expected to be material, but unfavorable developments could have a material adverse effect. No material changes to the prior annual-report risk factors were reported.
- The company adopted the tax-reform accounting provision provisionally and said estimates could change. It also expected the forthcoming lease-accounting standard to materially increase reported lease assets and liabilities, without expecting a significant income-statement or cash-flow impact.
Important facts for investors to verify
- How much of reported net income and EPS reflects the one-time, noncash tax benefit, and what the normalized tax rate and earnings are after final tax-reform calculations.
- Whether operating margins and Uniform profitability stabilize, given the lower operating income despite sales growth.
- Post-close Avendra and AmeriPride performance, final purchase-price allocations, integration costs, synergies and incremental amortization and interest expense.
- Cash conversion and working-capital trends, alongside debt levels, refinancing needs and covenant headroom after both acquisitions.
- Progress and final charges for the announced $30–$35 million severance program, and any material developments in legal, pension or other contingencies.