Aramark — FY2017 Form 10-K
Reporting period: Fiscal year ended September 29, 2017 (52 weeks). This is an annual report, not a standalone fourth-quarter filing. Aramark provides food, facilities and uniform services through FSS North America, FSS International and Uniform.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Sales | $14,604.4 million | $14,415.8 million | +1% |
| Operating income | $808.1 million | $746.3 million | +8% |
| Operating margin | 5.5% | 5.2% | +0.3 percentage points |
| Net income | $374.2 million | $288.2 million | +30% |
| Net income attributable to Aramark stockholders | $373.9 million | $287.8 million | +30% |
| Diluted EPS | $1.49 | $1.16 | +28% |
| Net cash from operating activities | $1,053.4 million | $867.3 million | +$186.1 million |
| Cash and cash equivalents at year-end | $238.8 million | $152.6 million | +$86.2 million |
| Total borrowings | $5,268.5 million | $5,270.0 million | Nearly flat |
Net margin was approximately 2.6%, compared with 2.0% in FY2016. Cash used in investing activities was $678.5 million, including $552.7 million for property, equipment, client contract investments and other items. Cash used in financing activities was $288.7 million. The company reported $998.5 million available under its revolving credit facility and stated that cash, operating cash flow and committed credit availability should meet anticipated cash needs.
Segments
- FSS North America: Sales of $10,231.5 million (+1%); operating income of $621.9 million (+14%). Sports, Leisure & Corrections sales grew about 7%; Healthcare sales declined about 6% amid lost business.
- FSS International: Sales of $2,808.2 million (+3%); operating income of $137.0 million (+6%). Reported sales included an approximately $77 million adverse foreign-currency effect.
- Uniform: Sales of $1,564.7 million, essentially flat; operating income of $182.3 million, down 7%.
Material changes versus FY2016
- Sales growth was modest; reported sales were adversely affected by approximately $72 million of foreign-currency translation and an estimated $25 million impact from natural disasters.
- Operating income rose $61.8 million. Drivers included segment profit growth, lower acquisition-related amortization and prior-year charges; offsets included disaster impacts, weaker Uniform profit, higher fuel-agreement fair-value losses and higher share-based compensation.
- Interest and other financing costs fell 9% to $287.4 million, primarily reflecting lower weighted-average rates after refinancing. FY2017 still included approximately $31.5 million of refinancing-related charges.
- The effective tax rate declined to 28.1% from 33.1%, including a $23.3 million benefit from adopting updated share-based payment accounting and effects of permanently reinvested foreign earnings.
- Operating cash flow increased, with working-capital timing contributing to the year-over-year change. Capital expenditures, client contract investments and other cash spending totaled $552.7 million.
Outlook, transactions and risks
- No specific FY2018 revenue or earnings guidance is provided in the supplied filing text. Management said it expected additional interest costs from acquisition financing and that transaction and integration costs, as well as purchase-accounting depreciation and amortization, would affect earnings after closing; near-term costs were expected to exceed initial savings.
- On October 13, 2017, Aramark agreed to acquire Avendra for $1.35 billion and AmeriPride for $1.00 billion, subject to adjustments and regulatory and other closing conditions. The company expected to fund both primarily with new debt and had lender commitments for up to $2.35 billion. These were pending transactions as of the filing.
- Indebtedness was $5.27 billion, with substantial scheduled interest and other contractual commitments. The company was in compliance with debt covenants; its reported secured-debt ratio was 1.87x against a 5.125x maximum, and interest coverage was 5.82x against a 2.00x threshold.
- Principal risks include leverage and variable-rate exposure; labor availability, wage inflation and union obligations; client retention and contract pricing limits; food safety; economic and seasonal variability; foreign-currency and international risks; dependence on Sysco, which distributed about 51% of U.S. and Canadian food and non-food products; cyber and privacy incidents; and environmental, regulatory and litigation exposure.
- Hurricanes Harvey, Irma and Maria affected FY2017 results; management estimated approximately $17 million of adverse operating-income impact, including about $6.1 million of asset write-downs. Goodwill was not impaired, though one international reporting unit’s estimated fair value exceeded carrying value by only about 9%.
- Management and the auditor reported effective internal control over financial reporting. KPMG issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Whether and when the Avendra and AmeriPride acquisitions closed, their final financing terms, integration costs, synergies and effect on leverage and earnings.
- Whether modest sales growth and segment profit trends—especially Healthcare, Facilities & Other, the U.K. and Uniform—continued after FY2017.
- How much of the operating cash-flow increase is sustainable versus attributable to working-capital timing, and the ongoing level of capital and client-contract investment.
- Debt maturities, variable-rate exposure, covenant headroom and the effect of new acquisition debt on liquidity and dividends.
- Whether customer retention, labor costs, food-safety controls, major-distributor continuity and disaster recovery remain manageable.