Business context and reporting period
Aramark provides food, facilities and uniform services across North America and 19 other countries. This unaudited Form 10-Q covers the first quarter of fiscal 2016, the three months ended January 1, 2016, compared with the three months ended January 2, 2015. Its segments are Food and Support Services North America (FSS North America), Food and Support Services International (FSS International), and Uniform and Career Apparel.
Financial performance and liquidity
Amounts are in millions except per-share data. Sales were $3,710.3, up 0.2% from $3,702.4. Operating income rose 6% to $214.1; net income attributable to Aramark stockholders increased to $93.3 from $85.5. Diluted EPS was $0.38, versus $0.35. Operating margin was approximately 5.8% versus 5.5%; cost of services remained 89% of sales. Interest and other financing costs were $71.3, slightly below the prior-year $71.9.
- Operating cash flow was an outflow of $195.3, compared with an outflow of $243.8. Investing cash outflow was $86.1, versus $124.6; financing provided $274.4, versus $377.6.
- Cash was $115.4 at quarter-end. Total borrowings were $5,540.2, compared with $5,266.0 at October 2, 2015. Management reported $669.2 of availability under the revolving credit facility and stated liquidity was adequate for anticipated needs.
- Aramark reported covenant ratios of 3.19 against a maximum secured-debt ratio of 5.25, and interest coverage of 4.32 against a 2.00 minimum. It stated that it was in compliance with debt covenants.
Changes versus the prior comparable period
- Sales were nearly flat despite approximately $113 of unfavorable foreign-currency translation. FSS North America sales increased 2% and Uniform sales increased 4%; FSS International sales decreased 8%.
- Operating income improved 6%, supported by FSS North America growth and lower corporate costs. Segment operating income increased 4% in FSS North America, declined 2% in FSS International and declined 8% in Uniform.
- FSS International was affected by currency translation and a U.K. decline tied mainly to weaker oil and gas markets. Uniform’s income was pressured by plant costs associated with capacity expansion.
- Operating cash outflow improved year over year, while cash remained lower than at the beginning of the quarter. The company issued $400 of 5.125% senior notes due 2024, repaid a $74.1 term loan and reduced revolving-credit borrowings by $25.7.
Outlook, management commentary and risks
Management estimated an additional $40–$50 of costs during the remainder of fiscal 2016 for its transformation plan. The filing provides no clear full-year earnings or revenue guidance. Management cited continued growth and productivity initiatives, alongside streamlining and centralizing administrative functions. It cautioned that results are seasonal and interim results may not indicate full-year performance.
Risks highlighted include client retention and contract renewals, economic weakness, labor and food costs, food safety, regulation, foreign-currency exposure, workforce availability, leverage and ability to generate cash for debt service. The filing says risk factors were not materially changed from the prior Form 10-K. Legal matters are described as incidental and not expected to be material based on currently available information, although an unfavorable outcome could be material.
- Unusual or notable items included a $1.7 impairment charge on a North American building being prepared for sale and a $1.1 pre-tax charge related to terminating cross-currency swaps after repaying the Canadian subsidiary loan.
- The company received $5.7 in proceeds from that swap termination. Foreign-currency translation reduced reported sales by approximately $113.
- In the second quarter, after the reporting period, Aramark completed an acquisition of an Irish retail and cafe business; the filing does not state the cash consideration in the provided text.
- A maximum potential vehicle residual-value guarantee liability of $124.2 was disclosed, but management did not expect significant payments and recorded no accrual.
- The board declared a $0.095-per-share dividend payable March 7, 2016. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether underlying sales and operating performance continue to offset currency effects, especially in FSS International and the oil-and-gas-exposed businesses.
- Whether the $40–$50 transformation-plan costs produce expected efficiencies, and how those costs affect reported results and cash flow.
- Working-capital trends and seasonal cash conversion, given the quarterly operating cash outflow.
- Debt balances, refinancing and interest costs following the 2024 note issuance, as well as continued covenant compliance and revolver availability.
- The economics and subsequent financial impact of the Irish retail and cafe acquisition, and any developments in disclosed legal or guarantee exposures.