Aramark Holdings Corporation — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 27, 2013; comparisons are with the three months ended December 28, 2012, unless otherwise noted. Aramark provides food, facilities and uniform services through FSS North America, FSS International and Uniform. The quarter included the company’s December 17, 2013 initial public offering (IPO).
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Sales | $3.763 billion | $3.536 billion |
| Operating income | $157.2 million | $175.3 million |
| Operating margin | 4.2% | 5.0% |
| Net income | $44.9 million | $43.2 million |
| Net income attributable to Holdings stockholders | $44.8 million | $42.8 million |
| Diluted EPS | $0.21 | $0.20 |
| Net cash used in operating activities | $281.3 million | $198.9 million |
| Net cash used in investing activities | $58.8 million | $78.7 million |
| Net cash provided by financing activities | $344.7 million | $269.9 million |
- Sales increased 6%. Cost of services provided was 89% of sales, compared with 90% in the prior-year quarter.
- Interest and other financing costs fell $30.0 million to $83.4 million, primarily reflecting prior-year refinancing and lower average debt. The effective tax rate rose to 39.2% from 30.3%, mainly because the Chalet sale generated a nondeductible goodwill reduction.
- Cash and cash equivalents were $115.6 million at quarter-end. Total borrowings were $5.645 billion, compared with $5.824 billion at September 27, 2013; debt fair value was $5.716 billion. The company reported approximately $399.7 million of availability under its senior secured revolving credit facility.
- Operating cash use reflected a $493.5 million use of noncash working capital, which management described as consistent with historical first-quarter patterns. The filing attributes working-capital movements to business growth and timing of collections, disbursements, customer advances, commissions and tax payments.
Material changes and drivers
- Segment sales grew 7% in FSS North America, 7% in FSS International and 4% in Uniform. Segment operating income increased to $163.1 million, $27.1 million and $40.3 million, respectively. Growth reflected stronger Education and Sports, Leisure and Corrections activity, international growth, and uniform rental business gains and cost controls.
- Consolidated operating income declined 10%, despite segment improvement, as corporate expenses rose to $73.3 million from $16.6 million. Key items included $36.9 million of expense from modifying performance-based options, $5.0 million of IPO-related bonuses and other costs, and $10.2 million of transformation and rebranding costs.
- Other notable items included a $6.7 million pretax loss on the sale of the McKinley Chalet Hotel, partly offset by $3.9 million of favorable risk-insurance adjustments. Prior-year results included the effects of Hurricane Sandy and the NHL lockout, as well as $6.0 million of severance costs in Uniform and FSS International.
- The company completed an IPO of 28 million newly issued shares at $20 per share, receiving $524.1 million net. Proceeds were used to repay approximately $154.1 million drawn on the revolver and $370 million of the term loan due July 2016. Selling stockholders also sold shares but received no proceeds for those sales. The IPO terminated a management share-repurchase provision; $158.7 million previously classified outside equity was reclassified into stockholders’ equity.
Outlook, risks and unusual items
- Management estimated an additional $15 million to $40 million of costs over the next 12 months for efficiency, consolidation, centralization and related initiatives. The filing provides no specific revenue, earnings or EPS guidance.
- Management said available cash and revolver capacity should be adequate for anticipated working capital, capital spending, debt service, refinancing, dividends and other cash needs. It cautioned that results are seasonal: sports and recreation activity typically rises in the third and fourth fiscal quarters, while education activity is affected by summer recess.
- At December 27, 2013, the company reported compliance with debt covenants. Its trailing-12-month secured debt ratio was 3.78x against a reported maximum of 5.75x, and its interest coverage ratio was 3.86x against a 2.00x minimum. Covenant Adjusted EBITDA was $1.197 billion for the trailing 12 months; this is a debt-agreement measure, not GAAP earnings or cash flow.
- Risks identified include economic weakness, client retention and contract renewals, labor and food costs, food safety, regulation and litigation, foreign currency and international operations, seasonality, leverage and the ability to generate cash to service debt. The company said it did not expect known legal matters to be material based on information available, but noted unfavorable developments could have a material adverse effect. Vehicle lease residual-value guarantees had a maximum potential exposure of $117.4 million; management did not expect significant payments and had accrued nothing.
- A $0.075-per-share dividend was declared on February 4, 2014, payable March 11 to shareholders of record February 18. The company also disclosed approximately $45.4 million of share-based compensation expense in the quarter, versus $4.0 million a year earlier; $36.9 million related to modified performance options.
Important facts for investors to verify
- How much of the sales growth reflects durable new business and underlying demand versus prior-year comparability effects, seasonal activity and foreign exchange.
- Whether elevated corporate costs, especially option-related compensation and transformation and rebranding costs, recur or decline; assess their effect on operating income and diluted EPS.
- Working-capital trends and operating cash conversion, including the timing of customer advances, collections and payments.
- Debt maturities, interest-rate exposure, revolver availability and covenant headroom; also confirm the January 2015 expiry of the $300 million Receivables Facility.
- Progress and actual spending against the stated $15 million to $40 million cost estimate, plus developments in litigation, lease guarantees and other contingencies.