Aramark (10-Q): quarter ended March 31, 2017
Business context: Aramark provides food, facilities and uniform services through FSS North America, FSS International and Uniform. The filing reports fiscal second-quarter and first-six-month results; the comparable periods ended April 1, 2016. Results are unaudited and subject to seasonality.
Key financial results
| Metric | Three months | Six months |
|---|---|---|
| Sales | $3.622 billion, up 1% | $7.357 billion, up 1% |
| Operating income | $191.4 million, up 11%; margin 5.3% versus 4.8% | $435.5 million, up 13%; margin 5.9% versus 5.3% |
| Net income attributable to Aramark stockholders | $70.2 million, up 6%; diluted EPS $0.28 versus $0.27 | $195.5 million, up 22%; diluted EPS $0.78 versus $0.64 |
| Interest and other financing costs | $97.6 million, up 36% | $163.3 million, up 14% |
| Operating cash flow | Not separately presented for the quarter | $428.2 million versus $251.5 million |
| Investing cash flow | Not separately presented for the quarter | $(276.0) million versus $(289.3) million |
Six-month financing cash flow was $(159.3) million versus positive $63.2 million, including $100 million of share repurchases and $50.4 million of dividends. Cash declined to $145.5 million from $152.6 million at fiscal year-end.
Balance sheet, debt and liquidity
- At March 31, 2017, total borrowings were $5.294 billion carrying value, including $79.6 million current maturities; debt fair value was $5.419 billion. Borrowings were $5.270 billion at September 30, 2016.
- Current assets were $2.395 billion and current liabilities $2.052 billion, for a current ratio of approximately 1.17. Cash was $145.5 million, and approximately $998.5 million was available on the revolving credit facility.
- The company reported covenant secured leverage of 2.03x against a 5.125x maximum. Its 5.04x interest coverage ratio exceeded the 2.00x minimum applicable to specified additional debt and restricted-payment actions. Aramark said it was in compliance with its covenants.
Changes and management commentary
- North America sales rose 2% in both reported periods. Sports, Leisure & Corrections grew 16% in the quarter and 14% over six months, while Healthcare declined 8% and 7%, respectively. International sales rose 2% for the quarter but fell 1% for six months; Uniform sales declined 1% for the quarter and were approximately flat for six months.
- Operating income improved across all three segments. Management cited productivity gains, lower acquisition-related amortization and reduced severance costs; six-month results also benefited from approximately $6.5 million of casualty-insurance income. Higher share-based compensation partly offset these benefits.
- Reported sales included unfavorable currency translation of approximately $22 million in the quarter and $64 million over six months. International translation effects were approximately $28 million and $70 million, respectively.
- Management attributed much of the quarter’s higher financing costs to approximately $30 million of refinancing-related charges, including deferred financing-cost and original-issue-discount write-offs, a call premium and interest-rate-swap fair-value adjustments.
Outlook, unusual items and risks
- The filing provides no specific earnings or revenue guidance. Management said cash and unused committed revolver capacity should be adequate for working capital, capital spending, debt service, dividends and other anticipated cash needs.
- In March 2017, Aramark refinanced its prior credit agreement and term loans, issued $600 million of 5.000% senior notes due 2025 and €325 million of 3.125% senior notes due 2025, and redeemed $228.8 million of 5.750% notes due 2020. The refinancing generated the charges described above. The new revolving facility has $1 billion of commitments and matures in 2022.
- The board authorized a $250 million repurchase program; the company repurchased approximately 2.8 million shares for $100 million during the quarter. A $0.103-per-share dividend was declared after quarter-end.
- The effective tax rate fell to 25.1% for the quarter and 28.1% for six months, partly reflecting share-based-payment tax benefits of $5.9 million and $12.2 million, respectively, and the treatment of certain foreign earnings as indefinitely reinvested.
- Key disclosed risks include client retention and contract renewals, labor costs and staffing, food safety, regulation, foreign currency, seasonality, leverage and the ability to generate cash for debt service. Aramark said there were no material changes to the risk factors in its prior Form 10-K. It did not believe pending legal matters were likely to be material, while noting an unfavorable resolution could have a material adverse effect.
- The company expects the lease-accounting standard, effective for it in fiscal 2020, to materially increase lease-related assets and liabilities, but not significantly affect income or cash flows. Revenue-standard adoption is scheduled for fiscal 2019; the impact remained under evaluation.
Investor verification points
- Check whether North America’s Sports, Leisure & Corrections growth can offset continuing Healthcare weakness and whether client retention improves.
- Assess recurring operating performance separately from refinancing charges, insurance proceeds, lower amortization and severance costs, and share-based-payment tax benefits.
- Review debt terms, variable-rate exposure, refinancing benefits and future maturities; verify covenant headroom and revolver availability.
- Monitor operating cash conversion and working-capital timing, including the impact of client contract investments and acquisitions.
- Confirm the sustainability of repurchases and dividends given leverage, capital requirements and contractual restrictions.