Aramark — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2017, ended June 30, 2017; comparisons are to periods ended July 1, 2016. Figures are unaudited. Aramark provides food, facilities and uniform services through FSS North America, FSS International and Uniform.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $3,593.3 million, up 0.2% | $10,950.3 million, up 0.7% |
| Operating income | $154.7 million, down 8.7% | $590.2 million, up 6.2% |
| Operating margin | 4.3%, versus 4.7% | 5.4%, versus 5.1% |
| Net income attributable to Aramark stockholders | $65.3 million, versus $44.8 million | $260.8 million, versus $204.5 million |
| Diluted EPS | $0.26, versus $0.18 | $1.04, versus $0.82 |
| Operating cash flow | Not presented separately for the quarter | $449.2 million, versus $410.5 million |
Cost of services was 90% of sales in the quarter, unchanged year over year; for the nine months it was 89%, versus 90%. Quarterly operating income declined despite nearly flat sales. Lower interest and financing costs more than offset the operating-income decline, lifting quarterly net income. Effective tax rates were 29.9% for the quarter and 28.6% year to date, down from 31.6% and 33.7%, respectively.
Segments and operating drivers
- FSS North America: Sales were essentially flat in the quarter and up 1% year to date. Operating income rose 19% and 13%, respectively, aided by productivity improvements and lower acquisition-related amortization. Sports, Leisure & Corrections grew; Healthcare and Facilities & Other declined.
- FSS International: Sales rose 1% in the quarter and were approximately flat year to date; operating income fell 33% and 5%. Management cited weaker U.K. and South American results, higher severance, and foreign-currency effects, partly offset by growth in China and Ireland and an equity-method investment.
- Uniform: Sales were approximately flat; operating income declined 14% in the quarter and 1% year to date, mainly due to costs of onboarding new business.
Cash, debt and liquidity
- Cash was $154.7 million at June 30, 2017, compared with $152.6 million at September 30, 2016. Current assets were $2.46 billion and current liabilities $1.90 billion; the derived current ratio was approximately 1.30.
- Debt carrying value was $5.51 billion, up from $5.27 billion at fiscal year-end; net debt was approximately $5.36 billion. The fair value of debt was $5.68 billion. Debt maturities are concentrated after five years, with $4.03 billion due thereafter.
- Aramark reported $842.8 million available on its $1.0 billion revolving credit facility and said cash and committed availability should cover anticipated working capital, capital spending, debt service, dividends and other needs. It reported covenant compliance; secured-debt ratio was 2.14x against a 5.125x maximum.
- Nine-month investing cash outflow was $453.8 million, including $340.3 million for property, equipment, client contract investments and other purchases, and $130.1 million for acquisitions. Operating cash flow less the stated purchases was approximately $108.9 million; this is a simple derived measure, not company-reported free cash flow.
Changes, unusual items and outlook
- Fiscal 2017 refinancing replaced prior term loans, issued $600 million of 5.0% senior notes due 2025 and €325 million of 3.125% notes due 2025, and redeemed the 5.75% notes due 2020. The company recorded $27.0 million of refinancing charges year to date, including a $3.3 million call premium and $23.7 million of noncash write-offs. The new financing reduced weighted-average borrowing costs, according to management.
- Quarterly operating income was affected by approximately $18.4 million of net severance charges for the nine-month period, including $16.6 million more severance costs than the prior-year quarter, and a year-over-year adverse change of about $14.2 million in fuel-derivative fair value losses. Corporate expenses also increased.
- Year-to-date results included benefits from lower acquisition-related amortization and a $6.5 million casualty-insurance refund; these partly offset higher severance, share-based compensation and fuel-derivative losses. The share-based-payment accounting adoption reduced tax expense by $6.2 million in the quarter and $18.4 million year to date.
- Foreign-currency translation reduced sales by approximately $33 million for the quarter and $96 million year to date. Management identified growth in North American Sports, Leisure & Corrections and weakness in Healthcare as notable underlying trends.
- No specific numerical earnings or revenue guidance is provided in the filing. Management described seasonality, including higher sports and leisure activity generally in the third and fourth fiscal quarters, partly offset by school and college summer recess.
- The board authorized a $250 million share-repurchase program over two years; $100 million was used to repurchase approximately 2.8 million shares during the second quarter. A $0.103-per-share dividend was declared August 2, payable September 5, 2017.
Risks and contingencies
The filing highlights risks including client retention and contract renewals, labor and food costs, food safety, regulatory and employment-law compliance, seasonality, foreign exchange, cybersecurity, leverage and debt-service capacity. Aramark reported various routine legal, employment, environmental and regulatory matters; management did not expect them to be material based on information then available, while cautioning that unfavorable developments could have a material adverse effect. Vehicle leases carried maximum residual-value guarantees of $94.6 million, for which no accrual was recorded and management expected no significant payments. The company expected adoption of the lease-accounting standard to materially increase balance-sheet lease assets and liabilities, without significant income-statement or cash-flow effects.
Investor verification priorities
- Assess whether North American segment productivity and Sports, Leisure & Corrections growth can offset continued Healthcare weakness and declines in Facilities & Other.
- Track the sustainability of quarterly earnings growth, given lower interest expense and tax benefits alongside lower operating income and higher severance and fuel-hedge losses.
- Review debt refinancing terms, future interest expense, maturity concentration, covenant headroom and the company’s ability to manage leverage and cash requirements.
- Monitor working-capital movements and cash conversion, as well as acquisition, capital and client-contract investment spending.
- Check subsequent filings for developments in legal contingencies, share repurchases, dividends, and the impact of new accounting standards.