Aramark — FY 2016 Form 10-K Summary
Business context and reporting period
Aramark provides food, facilities and uniform services across education, healthcare, business and industry, and sports, leisure and corrections. It reports three segments: FSS North America, FSS International and Uniform. This 10-K covers the 52 weeks ended September 30, 2016; fiscal 2015 was also 52 weeks. The filing is annual, not a standalone fourth-quarter report.
| FY 2016 segment | Sales | Operating income |
|---|---|---|
| FSS North America | $10,122.3 million | $546.4 million |
| FSS International | $2,729.8 million | $129.1 million |
| Uniform | $1,563.7 million | $195.3 million |
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Sales | $14,415.8 million | $14,329.1 million |
| Operating income | $746.3 million | $627.9 million |
| Net income | $288.2 million | $237.0 million |
| Diluted EPS | $1.16 | $0.96 |
| Cash from operations | $806.6 million | $683.0 million |
Sales rose about 1% as reported; operating income increased 19% and net income 22%. Operating margin was approximately 5.2% versus 4.4%; net margin was approximately 2.0% versus 1.7%. Cost of services provided was $12,890.4 million, about 89% of sales, compared with 90% in FY 2015. Cash used in investing was $679.7 million, including acquisitions; cash used in financing was $96.7 million. Cash and cash equivalents were $152.6 million at year-end.
Debt was $5,270.0 million at September 30, 2016, including $46.5 million of current maturities. Revolving-credit availability was approximately $713.5 million. The company reported compliance with debt covenants; its secured debt ratio was 2.64x against a 5.125x maximum, and interest coverage was 4.51x against a 2.00x threshold. Dividends paid were $92.1 million, or $0.095 per share per quarter.
For the fourth quarter, sales were $3,543.8 million, net income attributable to Aramark stockholders was $83.3 million and diluted EPS was $0.33. The comparable FY 2015 quarter reported sales of $3,546.0 million, net income attributable to stockholders of $56.9 million and diluted EPS of $0.23.
Material changes versus prior period
- FSS North America sales increased 2% and operating income increased 10%, with growth in Education and Sports, Leisure & Corrections; Healthcare and Business & Industry sales declined.
- FSS International sales fell 4%, including an approximately $204 million adverse foreign-currency impact; operating income increased 35%, partly reflecting prior-year exit and divestiture charges.
- Uniform sales increased 3% and operating income increased 2%, supported by rental growth and productivity initiatives.
- Foreign-currency translation reduced consolidated sales by approximately $259 million. The company attributed operating-income growth to segment profit gains, overhead reductions and lower acquisition-related amortization, among other items.
- Interest and other financing costs rose to $315.4 million, including $30.2 million of charges associated with debt repayment and refinancing. The effective tax rate increased to 33.1% from 30.7%.
Outlook, commentary, risks and unusual items
The filing provides no specific quantified earnings or sales guidance. Management said cash, operating cash generation and available revolving credit were expected to be adequate for anticipated working capital, capital spending, debt service, refinancing, dividends and other needs, and described plans to invest selectively while continuing growth and productivity initiatives.
- FY 2016 acquisitions included HPSI for $140.0 million and Avoca for approximately $65.8 million; management said neither materially affected consolidated results.
- The company continued streamlining and recorded $24.9 million of severance charges. It expected to complete exits from certain FSS International operations in the first half of FY 2017.
- Risks include substantial leverage and variable-rate exposure; labor, food, fuel and other cost inflation; limited cost pass-through under profit-and-loss contracts (about 70% of FSS sales); client retention and contract-renewal risk; foreign exchange; and reliance on Sysco, which distributed about 52% of North American food and non-food products.
- Other significant exposures include food safety, regulation, cybersecurity, multiemployer pension withdrawal liability and environmental or other litigation. The company said existing legal matters were not expected to be material based on information then available, while noting unfavorable outcomes could be adverse.
- Goodwill impairment testing found no impairment. FY 2016 also included a $6.0 million Uniform asset impairment and a loss related to the sale of a North American building.
Important facts for investors to verify
- Debt maturities, borrowing costs, covenant headroom and the capacity to service debt while funding investment and dividends.
- Whether operating cash flow remains robust after working-capital movements, pension contributions, capital spending and client-contract investments.
- Underlying organic sales and profit trends by segment, separated from foreign exchange, acquisitions, exits and prior-year unusual items.
- Execution and financial effects of cost-reduction initiatives and the planned International operations exits.
- Exposure to client losses, labor and input-cost inflation, Sysco distribution continuity, pension obligations and outstanding legal or regulatory matters.
- Dividend sustainability and restrictions imposed by subsidiary debt agreements.