Aramark Q1 FY2015 10-Q Summary
Business context and reporting period
Aramark provides food, facilities and uniform services across education, healthcare, business and industry, sports and leisure, and corrections markets. This unaudited report covers the three months ended January 2, 2015; comparisons are with the three months ended December 27, 2013. The company operates FSS North America, FSS International and Uniform segments.
Financial performance and liquidity
| Metric | Q1 FY2015 | Prior comparable quarter |
|---|---|---|
| Sales | $3.702 billion | $3.763 billion |
| Operating income | $201.9 million | $157.2 million |
| Net income attributable to Aramark stockholders | $85.5 million | $44.8 million |
| Diluted earnings per share | $0.35 | $0.21 |
| Net cash used in operating activities | $243.8 million | $281.3 million |
| Net cash used in investing activities | $124.6 million | $58.8 million |
- Sales decreased 2%; operating income rose 28% and net income attributable to Aramark rose 91%. Operating margin increased to approximately 5.5% from 4.2%; net margin rose to approximately 2.3% from 1.2%.
- Cost of services provided remained 89% of sales. Interest and other financing costs declined 14% to $71.9 million. The effective tax rate was 34.1%, versus 39.2%.
- At January 2, cash was $120.8 million, total borrowings were approximately $5.808 billion, and stockholders’ equity was $1.755 billion. The company reported $389.5 million of availability under its senior secured revolving credit facility. Current assets were $2.410 billion and current liabilities $1.830 billion.
- Operating cash use remained substantial and reflects working-capital timing and seasonality. Investing outflows increased, mainly due to client contract investments. Financing provided $377.6 million, including new borrowings; cash ended the quarter at $120.8 million.
Material changes and management commentary
- Reported sales were pressured by the prior-year 53rd fiscal week, which shifted service days and events, and unfavorable currency translation. Management estimated these effects reduced sales by approximately $100 million and $90 million, respectively; together, they exceeded the reported year-over-year sales decline.
- FSS North America sales fell 1% and operating income was essentially flat at $162.4 million. FSS International sales fell 4%, largely due to currency, while operating income increased 11% to $30.7 million. Uniform sales rose 3% and operating income increased 35% to $54.5 million.
- Higher operating income reflected segment growth and efficiencies, lower acquisition-related amortization, favorable insurance adjustments, and comparison with prior-year charges: $36.9 million of modified performance-option compensation, a $6.7 million Chalet sale loss, and approximately $5.0 million of IPO-related costs. Current-quarter offsets included an estimated $15 million calendar-shift impact on operating income, currency headwinds and a $3.6 million fuel-derivative fair-value loss.
- Management said the stronger U.S. dollar could continue to weigh on reported results if sustained. Oil and gas exposure is less than 5% of annual sales, and the company did not expect a material impact from that sector’s downturn. A recently lost client represented approximately 1% of annual sales, concentrated in the third and fourth quarters.
Outlook, risks and contingencies
- No specific quarterly or full-year earnings guidance is provided in the filing. Aramark estimated approximately $100 million of costs in fiscal 2015 and 2016 for productivity, consolidation and efficiency initiatives.
- Management stated that cash, operating cash generation and available committed credit were expected to cover anticipated working capital, capital spending, debt service, refinancing, dividends and other needs. The company was in compliance with debt covenants at quarter-end. Its actual secured debt ratio was 3.80 against a maximum of 5.50; its interest coverage ratio was 4.18 against a minimum of 2.00.
- Risks discussed include client retention and contract renewals, competition, labor and food costs, seasonality, foreign currency, leverage and debt-service capacity, regulatory and food-safety matters, and operational and privacy risks. The filing reported no material change to the prior annual report’s risk factors.
- Routine legal matters and environmental discussions were not expected by management to be material based on information available, but an unfavorable resolution or unexpected developments could have a material adverse effect. Vehicle lease residual-value guarantees had a maximum potential exposure of $121.1 million if terminal vehicle values were zero; management expected no significant payments and recorded no accrual.
- The company paid approximately $20.2 million in dividends during the quarter. On February 3, 2015, the board declared a $0.08625-per-share dividend payable March 9, 2015.
Important facts for investors to verify
- Whether sales and operating trends improve when the fiscal calendar shift and currency effects are separated from underlying performance.
- Whether operating-income growth persists after accounting for prior-year unusual charges, favorable insurance adjustments and current-period fuel-derivative losses.
- How seasonal working-capital requirements affect operating cash flow, and the level and return of client contract investments.
- Borrowing levels, revolving-credit availability, covenant headroom and the company’s capacity to service debt and maintain dividends.
- Execution and total cost of the estimated $100 million fiscal 2015–2016 efficiency initiatives, alongside client-retention and legal or regulatory developments.