Aramark — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2016, ended April 1, 2016. Comparisons are with the three and six months ended April 3, 2015, unless noted. Aramark provides food, facilities and uniform services through FSS North America, FSS International and Uniform.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $3,574.8 million, down 1% | $7,285.1 million, approximately flat |
| Operating income | $172.1 million, up 11% | $386.2 million, up 8% |
| Operating margin | 4.8%, versus 4.3% | 5.3%, versus 4.9% |
| Net income | $66.5 million, up 11% | $159.9 million, up 10% |
| Diluted EPS attributable to Aramark stockholders | $0.27, versus $0.24 | $0.64, versus $0.59 |
Six-month net cash from operations was $209.8 million, versus $78.7 million. Investing activities used $289.3 million, including $237.8 million for property, equipment, client contract investments and other purchases, plus $58.1 million for acquisitions. Financing activities provided $104.8 million. Cash at period-end was $147.7 million, versus $122.4 million at fiscal year-end.
At April 1, 2016, total borrowings had a carrying value of $5.408 billion, compared with $5.266 billion at October 2, 2015; fair value was $5.517 billion. Current maturities were $42.2 million. Current assets were $2.421 billion and current liabilities $1.899 billion. The filing reports $713.5 million of availability under the senior secured revolver.
Changes and operating drivers
- Sales were affected by adverse currency translation of approximately $67 million in the quarter and $180 million for six months. North American and Uniform growth was offset by lower International sales and declines in North American Healthcare and Business & Industry.
- Operating income improved across FSS North America and FSS International in both periods. Uniform operating income rose 5% in the quarter but declined 2% for six months, partly reflecting less favorable insurance adjustments.
- Reported operating income benefited from lower consulting and corporate costs, efficiency measures and lower acquisition-related amortization. The prior-year comparison also included a $4.3 million loss on the India divestiture. Higher severance costs and currency effects partly offset these benefits.
- The effective tax rate increased to 33.7% for the quarter and 34.2% for six months, from 28.1% and 31.8%, respectively; the prior-year periods benefited from approximately $6.1 million related to the India sale.
Outlook, risks and unusual items
- Management estimated an additional $25–$35 million of transformation-plan costs during the remainder of fiscal 2016. The filing provides no specific revenue or earnings guidance.
- Aramark acquired Irish retail and café business Avoca for approximately $57.9 million in cash; its results were not material. The company recorded an $8.0 million net severance charge in the quarter and six-month period, and a $1.7 million impairment charge on a North American building being prepared for sale.
- In December 2015, a subsidiary issued $400 million of 5.125% senior notes due 2024. During the first half, Aramark also repaid a $74.1 million term loan, repaid $70 million drawn on the revolver and made a $60 million optional term-loan prepayment. The Receivables Facility was extended in May 2016 to May 2019.
- Management said cash and committed credit availability should be sufficient for anticipated working capital, capital spending, debt service, refinancing, dividends and other needs. The company was in compliance with debt covenants at quarter-end: secured debt ratio 3.02 against a 5.25 maximum, and interest coverage ratio 4.56 against a 2.00 minimum.
- Risks include client retention and contract renewals, economic weakness, labor and food costs, food safety, regulation, foreign currency, leverage and cash generation. Legal and regulatory matters are described as not expected to be material based on information currently available, though an unfavorable resolution could have a material effect. Management reported no material change to the previously disclosed risk factors.
- Other notable items include a $1.1 million pre-tax charge on terminated cross-currency swaps and $45.8 million of dividends paid in the first half. A $0.095-per-share dividend was declared after quarter-end.
Key facts for investors to verify
- Whether operating-income gains persist as sales remain flat and foreign-exchange pressure continues, particularly in International and North American Business & Industry.
- How much of the operating cash-flow improvement reflects sustainable earnings versus timing of working-capital movements; operating assets and liabilities were a $260.2 million use of cash in the first half.
- Progress and total cost of the transformation plan, including the remaining estimated $25–$35 million of fiscal 2016 costs.
- Debt repayment, refinancing and liquidity developments, including the effect of the 2024 notes and continued covenant headroom.
- Potential outcomes of legal, employment, environmental and regulatory matters, and exposure under vehicle residual-value guarantees, whose maximum potential liability was $121 million; management expected no significant payments.