Aramark — Form 10-Q Summary
Business context and reporting period
Aramark provides food, facilities and uniform services, principally in North America, through FSS North America, FSS International and Uniform. This unaudited report covers the third quarter and first nine months of fiscal 2016, ended July 1, 2016; comparisons are with periods ended July 3, 2015.
Financial performance and liquidity
- Third-quarter sales: $3.587 billion, up 2.9%. Operating income was $169.3 million versus $116.9 million; net income attributable to Aramark stockholders was $44.8 million versus $33.8 million. Diluted EPS was $0.18 versus $0.14.
- First-nine-month sales: $10.872 billion, up 0.8%. Operating income was $555.6 million, up 17%; stockholder net income was $204.5 million, up 14%. Diluted EPS was $0.82 versus $0.73.
- Margins: Operating margin was approximately 4.7% versus 3.4% in the quarter and 5.1% versus 4.4% for nine months. Cost of services was 90% of sales in both nine-month periods; in the quarter it improved to 90% from 91%.
- Cash flow, nine months: Operating cash flow was $364.9 million versus $157.6 million. Investing used $384.3 million, including $350.2 million for property, client-contract investments and other purchases; financing provided $93.5 million. Cash rose to $196.5 million from $122.4 million at fiscal year-end.
- Debt and liquidity: Borrowings, including current maturities, totaled $5.433 billion at July 1, compared with $5.266 billion at October 2, 2015. Cash was $196.5 million, and revolving-credit availability was approximately $713.4 million. Management said available cash and committed credit were expected to meet anticipated needs. The company reported compliance with debt covenants; its secured-debt ratio was 2.79x against a 5.125x maximum.
Material changes versus the prior comparable period
- Quarterly revenue growth was led by FSS North America (+4%) and Uniform (+2%); FSS International declined 2%. For nine months, North America grew 2% and Uniform 3%, while International declined 5%.
- Education and Sports, Leisure & Corrections grew; Business & Industry and Healthcare weakened. International growth in several markets was offset by declines in the U.K. and South America and unfavorable currency translation.
- Foreign exchange reduced sales by approximately $45 million in the quarter and $225 million for nine months. Operating income benefited from cost reductions, lower acquisition-related amortization and lower share-based compensation, among other items.
- Interest and other financing costs rose 46% in the quarter and 15% for nine months. The company recorded approximately $30.2 million of refinancing-related charges, including a $22.2 million call premium and $8.0 million of noncash debt-cost and discount write-offs.
- In May, Aramark issued $500 million of 5.125% notes due 2024 and $500 million of 4.75% notes due 2026. Proceeds were used principally to repay 2020 notes and term loans. The receivables facility was extended to May 2019.
Outlook, commentary, risks and unusual items
- Management estimated another $20–$30 million of costs during the remainder of fiscal 2016 for its transformation plan, including streamlining and improving administrative functions. The filing provides no explicit full-year revenue or earnings guidance.
- Management cited seasonality, economic conditions, client retention and contract renewals, labor and food costs, food safety, regulation, currency exposure and leverage among the risks to results and cash generation. It said routine legal matters were not expected to be material based on information then available, but unfavorable developments could have a material effect.
- Quarterly operating results included a $5.1 million loss related to a building sale and other asset write-offs. Fuel-contract fair-value changes benefited corporate results; the filing cites an approximately $8.3 million year-over-year increase in the gain for the quarter.
- After quarter-end, the company acquired HPSI assets for $140 million. It also declared a $0.095-per-share dividend payable September 6, 2016.
- The company disclosed a maximum potential $121.9 million residual-value guarantee on certain vehicle leases, but management did not expect significant payments and recorded no accrual. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether operating-income gains and margin improvement persist after accounting for cost savings, lower amortization and share-based compensation, and fuel-derivative fair-value effects.
- How the refinancing affects ongoing interest expense, maturity exposure and leverage; verify debt balances and covenant headroom against the debt agreements.
- Whether operating cash flow continues to improve and covers capital and client-contract investment, dividends and debt service.
- How foreign exchange, weaker Business & Industry and Healthcare activity, and the additional transformation costs affect full-year performance; the filing gives no explicit earnings outlook.
- The final impact and integration of the HPSI acquisition, completed after the reporting date.