Business context and reporting period
Aramark provides food, facilities and uniform services across education, healthcare, business and industry, sports, leisure and corrections. This unaudited Form 10-Q covers the quarter and nine months ended July 3, 2015; comparisons are to the periods ended June 27, 2014. Results are affected by seasonality and the prior year’s 53rd fiscal week.
Operations are reported in FSS North America, FSS International and Uniform. Management attributed reported sales pressure in part to a stronger U.S. dollar and the calendar shift.
Financial performance and position
| Metric | Three months ended July 3, 2015 | Nine months ended July 3, 2015 |
|---|---|---|
| Sales | $3.486 billion, down 4% | $10.783 billion, down 1% |
| Operating income | $116.9 million, down 17%; approximately 3.4% margin | $473.6 million, up 13%; approximately 4.4% margin |
| Net income attributable to Aramark stockholders | $33.8 million, down from $46.9 million | $179.1 million, up from $104.6 million |
| Diluted EPS | $0.14, versus $0.19 | $0.73, versus $0.45 |
| Interest and other financing costs, net | $71.2 million, approximately flat | $214.4 million, down 16% |
| Operating cash flow | Not presented separately | $157.6 million, versus cash use of $17.4 million |
Cost of services was 91% of sales in the quarter and 90% for the nine-month period, versus 90% in both prior-year comparisons. Nine-month reported results benefited from lower share-based compensation and acquisition-related amortization, lower financing costs, and the prior-year hotel-divestiture loss; the filing does not provide a single adjusted measure isolating these effects.
At July 3, cash was $117.8 million. Long-term borrowings were $5.532 billion and current maturities were $86.0 million, for total borrowings of approximately $5.618 billion. Revolving-credit availability was approximately $482.7 million; $342.1 million was outstanding under the receivables facility. Stockholders’ equity was $1.866 billion. Nine-month investing cash use was $346.8 million, primarily reflecting property, equipment and client-contract investments; financing cash provided was $195.4 million, including borrowing proceeds and offset by dividends.
Material changes versus prior comparable periods
- Quarterly sales fell $133.9 million. Management cited approximately $126 million of adverse foreign-currency translation and an estimated $70 million calendar-shift impact, alongside weakness in Business & Industry and Sports, Leisure and Corrections. Healthcare and Uniform growth partly offset declines.
- Nine-month sales declined $101.9 million despite growth in Education, Healthcare and Uniform. Management estimated an approximately $340 million adverse currency effect and $90 million adverse calendar-shift effect; FSS International sales declined 7% as reported.
- Quarterly operating income declined $24.4 million, reflecting, among other items, the $8.7 million building impairment, an estimated $10 million calendar effect, higher severance and share-based compensation, and currency effects. Nine-month operating income increased $54.3 million, with lower corporate expense and financing costs contributing to improved reported earnings.
- FSS North America operating income fell 22% for the quarter and 5% for nine months. Uniform operating income rose 6% and 18%, respectively. FSS International operating income fell 13% for the quarter but rose 6% for nine months.
- Operating cash flow improved from use of $17.4 million to generation of $157.6 million. Management cited higher earnings and working-capital timing, including receivable collections; the improvement should be considered alongside the timing-related cash movements described in the filing.
Outlook, commentary and risks
- No specific revenue, earnings or EPS guidance is provided. Management estimated another $70–$75 million of transformation-plan costs over the remainder of fiscal 2015 and fiscal 2016.
- Management said it expects cash, operating cash generation and unused committed credit capacity to meet anticipated working capital, capital spending, debt service, dividends and other needs. The company was in compliance with debt covenants at quarter-end; its secured-debt ratio was 3.62 against a maximum of 5.25, and its interest-coverage ratio was 4.16 against a minimum of 2.00.
- The company lost a Sports, Leisure and Corrections client representing approximately 1% of annual sales. Oil-and-gas exposure was less than 5% of annual sales; management did not expect the sector downturn to have a material overall impact, while noting declines in Canadian remote services and Business & Industry.
- Other material factors include foreign-exchange pressure, client retention and contract renewals, labor and food costs, seasonality, leverage and the ability to generate cash for debt service. The filing warns that legal and regulatory matters, including employment, food safety, environmental and compliance claims, could have an adverse effect if resolved unfavorably, though management did not consider existing matters likely to be material based on information available.
- Unusual items included an $8.7 million building impairment, a $4.3 million pretax loss on the sale of the India subsidiary with no proceeds, and a $2.9 million quarterly gain on fuel-derivative fair value. A $0.08625-per-share dividend was declared after quarter-end, payable September 8, 2015.
Important facts for investors to verify
- How much of reported sales and operating-income movement reflects currency translation and the 53rd-week calendar shift versus underlying organic growth and client losses.
- Whether the improvement in nine-month operating cash flow is repeatable, given significant working-capital timing effects and ongoing client-contract investment.
- Debt, revolving-credit availability, receivables-facility usage and covenant headroom, particularly as borrowing needs and interest rates change.
- Execution and total costs of the transformation plan, and whether expected efficiencies offset severance, consulting and other implementation costs.
- Underlying segment trends, especially Business & Industry, Healthcare and FSS International, and the sustainability of Uniform growth and cost savings.