Aramark — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended June 27, 2014; comparative periods ended June 28, 2013. Unaudited. Aramark provides food, facilities, and uniform services across North America and internationally. The company completed its IPO in December 2013 and changed its name from ARAMARK Holdings Corporation in May 2014.
Financial performance
| Metric | Three months ended June 27, 2014 | Nine months ended June 27, 2014 |
|---|---|---|
| Sales | $3.620 billion, up 4% | $10.885 billion, up 4% |
| Operating income | $141.3 million, up 14% | $419.3 million, up 11% |
| Operating margin | 3.9%, versus 3.5% | 3.9%, versus 3.6% |
| Net income attributable to Aramark stockholders | $46.9 million, versus $27.7 million | $104.6 million, versus $30.5 million |
| Diluted EPS | $0.19, versus $0.13 | $0.45, versus $0.15 |
| Interest and other financing costs, net | $71.2 million, down from $80.9 million | $256.6 million, down from $341.4 million |
Cost of services was 90% of sales in both the quarter and nine-month period, compared with 91% in each prior-year period. Sales growth reflected gains in Education and Sports, Leisure and Corrections, international markets, and uniform rental; foreign currency translation reduced growth by about 1% in both comparison periods.
- Segments: For the quarter, sales increased 3% in FSS North America, 5% in FSS International, and 3% in Uniform. Nine-month sales rose 4%, 6%, and 4%, respectively. Operating income improved in all three segments in both periods.
- Cash flow: Operating activities used $17.4 million in the first nine months, versus $136.3 million generated a year earlier. Noncash working-capital changes used $562.4 million, compared with $328.1 million. Investing activities used $298.3 million, including $326.3 million for property, equipment, client contract investments, and other purchases.
- Debt and liquidity: Total borrowings were $5.690 billion, including $104.1 million current; cash was $122.4 million. Management reported $591.4 million available under the senior secured revolving facility. The company reported covenant compliance; its secured debt ratio was 3.78x against a 5.50x requirement shown in the filing, and its interest coverage ratio was 4.22x against a 2.00x threshold.
Material changes and notable items
- The February 2014 refinancing established about $3.982 billion of new term loans, principally due in 2019 and 2021, and extended and increased revolving commitments to $770 million. Related nine-month financing charges included $25.7 million. The IPO generated $524.1 million net, used to repay revolving and term-loan borrowings.
- Nine-month corporate expenses rose to $165.5 million from $47.5 million. The increase included $70.7 million of additional share-based compensation, including $50.9 million tied to modified performance options, and about $37.9 million for transformation and rebranding. The quarter included about $12.8 million of transformation and rebranding costs.
- Fiscal 2014 results included a $6.7 million pretax loss on the sale of the McKinley Chalet Hotel. Prior-year results included severance and asset impairment charges, transformation costs, and a $14.0 million recovery related to a National Park Service site; refinancing charges also differed substantially between periods.
- The nine-month effective tax rate was 35.5%, versus 17.2% a year earlier; the company cited, among other factors, nondeductible goodwill associated with the Chalet sale and prior-year tax items.
Outlook, risks, and contingencies
Management said it expects to incur approximately $20 million of additional costs through the first half of the next fiscal year under its existing efficiency and transformation plans. The filing does not provide specific sales or earnings guidance. Management said cash, operating cash generation, and unused committed credit availability are expected to meet anticipated working-capital, capital-spending, debt-service, dividend, and other cash needs. Results are seasonal: sports and leisure activity typically rises in the third and fourth fiscal quarters, partly offset by school and university summer recess. Fiscal 2014 nine-month results were affected by severe winter weather.
Risks identified include economic weakness, client retention and contract renewals, competitive and labor costs, food safety, regulation, international currency and compliance exposure, seasonality, leverage, and the ability to generate sufficient cash to service debt. The company described routine legal claims and investigations and did not expect them to be material based on information available, but said an unfavorable resolution could have a material adverse effect. Vehicle lease residual-value guarantees had a maximum potential exposure of $127.2 million; management expected no significant payments and recorded no accrual. 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 operating improvement is sustainable after adjusting for prior-year unusual charges, favorable insurance experience, and current-year transformation and stock-compensation costs.
- Whether working-capital outflows reverse and operating cash flow recovers, given negative operating cash flow despite higher reported earnings.
- Debt maturities, refinancing terms, interest-rate exposure, covenant headroom, and the company’s capacity to service debt and sustain dividends.
- The progress and remaining cost of transformation initiatives, and the effect of ongoing share-based compensation and dilution.
- Segment growth and margins, including the effects of seasonality, weather, foreign exchange, client wins or losses, and international performance.