Aramark — Fiscal 2017 First-Quarter Form 10-Q
Business context and reporting period. Aramark provides food, facilities and uniform services through FSS North America, FSS International and Uniform. This unaudited quarter covers the three months ended December 30, 2016; comparison is with the three months ended January 1, 2016. Results are seasonal and interim performance is not necessarily indicative of the full year.
Financial performance and liquidity
| Metric | Quarter ended Dec. 30, 2016 | Prior comparable quarter | Change |
|---|---|---|---|
| Sales | $3.735 billion | $3.710 billion | Up 1% |
| Operating income | $244.1 million | $214.1 million | Up 14% |
| Operating margin | Approximately 6.5% | Approximately 5.8% | Up about 0.8 percentage points |
| Net income attributable to Aramark stockholders | $125.3 million | $93.3 million | Up 34% |
| Diluted EPS | $0.50 | $0.38 | Up 32% |
| Net cash used in operating activities | $26.0 million | $169.0 million | Outflow reduced by $143.0 million |
| Net cash used in investing activities | $106.1 million | $86.1 million | Outflow increased by $20.0 million |
Net margin was approximately 3.4%, compared with 2.5% in the prior quarter. Cost of services was 88% of sales versus 89%; personnel costs remained 46% of sales.
Balance sheet at Dec. 30, 2016: Cash was $147.0 million; total borrowings were $5.412 billion, including $47.6 million current maturities. Cash and cash equivalents plus approximately $671.1 million of available revolving credit capacity were identified as liquidity sources. Current assets were $2.374 billion and current liabilities $1.779 billion (calculated current ratio approximately 1.33). Borrowings increased from $5.270 billion at September 30, 2016. The company reported $355.3 million of foreign-currency borrowings.
Quarter-end covenant measures were 2.70x secured debt ratio against a 5.125x maximum, and 4.67x interest coverage against a 2.00x minimum. Aramark reported compliance with its debt covenants.
Material changes versus the prior period
- North American FSS sales rose 2% to $2.663 billion; operating income increased 10% to $185.2 million. Education sales rose 2% and Sports, Leisure & Corrections rose 12%, while Healthcare fell 6%, Business & Industry fell 2%, and Facilities & Other fell 2%.
- International sales declined 3% to $677.1 million, affected by approximately $42 million of unfavorable currency translation and declines in the U.K. and South America; Avoca contributed approximately $19 million of sales. Segment operating income rose 6% to $31.7 million.
- Uniform sales increased 1% to $395.5 million and operating income rose 7% to $53.8 million.
- Interest and other financing costs fell 8% to $65.7 million, attributed primarily to lower average debt and the maturity of interest-rate swaps.
- Operating cash outflow improved year over year, mainly reflecting timing of working-capital items, including prepayments, payables and receivables. Investing outflow rose primarily because of the timing of client contract investments.
Management commentary, outlook and risks
Management said available cash and committed revolver capacity should be adequate for working capital, capital spending, debt service, refinancing, dividends and other cash needs. The filing provides no specific earnings or revenue guidance. Management cited foreign exchange, client retention and contract wins, labor and operating costs, food safety, regulation, seasonality, leverage and the ability to generate cash to service debt among material risks. It reported no material change to the risk factors in the prior Form 10-K.
Operating-income growth included several favorable or period-specific items: approximately $10.3 million lower acquisition-related amortization, a roughly $5.5 million year-over-year increase in gains on fuel agreements, and favorable prior-year casualty insurance experience (approximately $6.5 million consolidated, including about $4.0 million in North America). The effective tax rate declined to 29.7% from 34.6%; the filing attributes this partly to a $6.3 million tax benefit from early adoption of share-based-payment accounting and treatment of certain foreign earnings as indefinitely reinvested.
In the second quarter, the board authorized a share repurchase program of up to $250 million over two years. A $0.103-per-share dividend was declared for payment March 1, 2017. The company had paid $25.2 million of dividends in the reported quarter. Legal matters and investigations were described as not expected to be material based on information available, though an unfavorable outcome could be material. Management also disclosed up to $110.6 million of potential vehicle lease residual-value guarantees, but expected no significant payments and recorded no accrual.
Important facts for investors to verify
- Whether earnings growth persists after accounting for lower amortization, favorable casualty experience, fuel-derivative gains and the one-time share-based-payment tax benefit.
- Whether North American client losses in Healthcare and Business & Industry, and weakness in International markets and currency, continue or improve.
- How seasonal working-capital movements affect operating cash flow and the company’s ability to fund client investments, dividends and repurchases while carrying more than $5.4 billion of borrowings.
- Future covenant headroom, refinancing and interest-rate exposure; $2.4 billion of variable-rate borrowings were covered by interest-rate swaps.
- Execution and use of the newly authorized repurchase program, alongside the stated liquidity needs and debt restrictions.
- Potential developments in legal, regulatory, food-safety, labor and vehicle residual-value matters; the filing does not quantify a likely aggregate loss for legal contingencies.