Aramark — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 3, 2015; comparisons are to the periods ended March 28, 2014. Aramark provides food, facilities and uniform services through FSS North America, FSS International and Uniform segments. Fiscal 2015 is a 52-week year, versus 53 weeks in fiscal 2014.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $3.595 billion, up 3% | $7.297 billion, approximately flat |
| Operating income | $154.9 million, up 28%; 4.3% sales margin | $356.8 million, up 28%; 4.9% sales margin |
| Net income attributable to Aramark | $59.8 million vs. $12.9 million; diluted EPS $0.24 vs. $0.05 | $145.3 million vs. $57.7 million; diluted EPS $0.59 vs. $0.25 |
| Interest and financing costs | $71.2 million, down 30% | $143.1 million, down 23% |
| Operating cash flow | Not separately reported | $78.7 million vs. cash use of $127.4 million |
For the six months, investing activities used $220.0 million, including $225.3 million of purchases of property, equipment, client contract investments and other items. Financing activities provided $164.3 million. Cash rose to $134.8 million from $111.7 million at fiscal year-end. At April 3, total borrowings were $5.567 billion ($98.2 million current and $5.469 billion long-term), compared with $5.446 billion at October 3, 2014. The balance sheet reported $2.459 billion of current assets and $1.991 billion of current liabilities.
Management reported $555.6 million of availability under the senior secured revolving credit facility and said cash and available credit should be adequate for anticipated working capital, investment, debt service, dividends and other needs. The company was in compliance with debt covenants; its secured debt ratio was 3.55x against a 5.50x limit, and its interest coverage ratio was 4.24x against a 2.00x minimum.
Changes versus prior year
- Second-quarter sales growth reflected an estimated $75 million benefit from the calendar shift, growth in North American Education, Healthcare and Sports, Leisure and Corrections, and Uniform, partly offset by about $125 million of unfavorable foreign currency translation.
- Six-month sales were nearly flat despite growth in several sectors; management cited approximately $215 million of adverse currency translation and an estimated $20 million negative calendar-shift effect.
- Operating income benefited from lower acquisition-related amortization, lower share-based compensation charges tied to modified performance options, lower branding costs, segment growth and productivity measures. Lower interest costs also supported earnings.
- International sales declined 8% for the quarter and 6% for the half, primarily because of currency translation; segment operating income nevertheless increased to $20.3 million and $51.0 million, respectively.
- Operating cash flow improved year over year, with management citing higher earnings and working-capital timing, including collections related to a non-recurring Business & Industry project. Investing outflows increased, mainly due to client contract investments.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management estimated approximately $85 million of additional costs during the second half of fiscal 2015 and fiscal 2016 for productivity, consolidation and centralization initiatives.
- Management said sustained U.S. dollar strength would continue to weigh on reported results. Oil and gas exposure was less than 5% of annual sales and was not expected to have a material impact. A client lost in the Sports, Leisure and Corrections sector represented approximately 1% of annual sales, concentrated in the third and fourth quarters.
- The India subsidiary sale closed April 1, 2015, with no proceeds and an approximately $4.3 million pretax loss; the transaction produced an approximately $1.8 million after-tax gain due to tax effects, including use of previously reserved net operating losses.
- Results included favorable six-month risk-insurance adjustments of about $4.4 million. Prior-year comparisons included approximately $5.0 million of IPO-related costs and a $6.7 million pretax loss on the McKinley Chalet Hotel sale.
- Interest-rate swaps covered $2.9 billion of variable-rate borrowings. The company also hedged some currency and fuel-price exposures. Derivative fair-value movements and currency translation contributed to other comprehensive losses.
- Management did not expect material legal claims based on information available, but noted unfavorable outcomes could be materially adverse. It reported no material change in previously disclosed risk factors and said disclosure controls were effective.
- The board declared a quarterly dividend of $0.08625 per share on May 6, payable June 9, 2015, after quarter-end.
Investor facts to verify
- How much reported sales and operating-income growth reflects calendar timing, foreign exchange, and recurring underlying performance.
- Whether the expected $85 million of initiative costs are incurred as planned and produce sustainable savings.
- Cash conversion and working-capital trends, including the timing and repeatability of receivable collections and client contract investments.
- Debt levels, interest-rate exposure, revolving-credit availability and continued compliance with covenant requirements.
- The operating and cash-flow implications of the India divestiture, client losses, and ongoing legal and regulatory contingencies.