Aramark Holdings Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2014, ended March 28, 2014. Comparisons are with the periods ended March 29, 2013. Aramark provides food and support services and uniform services through FSS North America, FSS International and Uniform. The company completed its IPO in December 2013.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $3.502 billion, up 3% | $7.265 billion, up 5% |
| Operating income | $120.8 million, versus $80.2 million | $278.0 million, versus $255.5 million |
| Operating margin | 3.4%, versus 2.4% | 3.8%, versus 3.7% |
| Net income attributable to Holdings stockholders | $12.9 million, versus a $40.1 million loss | $57.7 million, versus $2.7 million |
| Diluted earnings per share | $0.05, versus a loss of $0.20 per share | $0.25, versus $0.01 |
| Net cash from operating activities | Not stated separately | Cash used of $127.4 million, versus cash provided of $51.1 million |
For the six months, cost of services was 90% of sales, versus 91% a year earlier. Net interest and other financing costs were $185.4 million for the six months, down from $260.5 million; the current period included $25.7 million of refinancing-related charges. Segment sales grew across all three segments. Six-month operating income improved in FSS North America and Uniform, while FSS International also improved; corporate expense increased substantially.
Cash, debt and liquidity
- At March 28, 2014, cash was $139.2 million; total borrowings were $5.638 billion, including $89.6 million of current maturities. Approximate net debt was $5.498 billion.
- Current assets were $2.416 billion and current liabilities $2.054 billion. The company reported approximately $580.8 million available under its senior secured revolving credit facility.
- Operating cash flow was negative mainly because of working-capital needs, which management said were consistent with the usual first-half seasonal pattern. Investing cash use was $141.3 million, including $172.2 million for property, equipment and client contract investments. Financing provided $296.9 million, including $524.1 million of net IPO proceeds and substantial debt repayments.
- The February 2014 refinancing replaced most term loans due in 2016 and 2019 with new loans due in 2019 and 2021, and extended and increased revolving commitments to $770 million. The company reported compliance with debt covenants; its secured debt ratio was 3.76x against a reported maximum of 5.75x, and its interest coverage ratio was 4.15x against a 2.00x minimum.
Material changes and management commentary
- Sales growth reflected expansion in education, sports and leisure, corrections, international markets and uniform rental. Severe winter weather reduced sales and operating income in FSS North America. Foreign-currency translation also weighed on reported growth.
- Operating income benefited from segment profit growth and cost-control efforts. Comparisons were affected by prior-year severance, impairment and transformation charges, as well as prior-year recovery income; current-year results included significant share-based compensation and transformation costs.
- Six-month share-based compensation expense was $73.0 million, versus $8.8 million in the prior-year period, including $50.9 million associated with modified performance-based options. Transformation and rebranding initiatives accounted for approximately $28.7 million in the six-month period.
- The company recorded a $6.7 million pretax loss on the October 2013 sale of the McKinley Chalet Hotel. Fiscal 2014 results also included approximately $5.0 million of IPO-related bonuses and other costs.
- Management said it expected to incur a further $30–$40 million of costs over the remainder of fiscal 2014 for growth, cost-control and efficiency initiatives. The filing provides no specific full-year earnings or revenue guidance.
- Seasonality is significant: sports and leisure activity generally rises in the third and fourth fiscal quarters, while educational activity is affected by summer recess. Management said cash and committed credit availability should meet anticipated needs, including working capital, capital spending and debt service.
Risks, contingencies and subsequent events
- Key stated risks include economic weakness, client retention and contract renewals, labor and food costs, food safety, regulation, seasonality, foreign currency exposure, leverage and the ability to generate cash to service debt. Management said there were no material changes to previously disclosed risk factors.
- The company is involved in routine legal claims and investigations. Management did not expect these matters to be material based on information available, but noted an unfavorable resolution could materially affect results or cash flows. Vehicle lease residual-value guarantees had a maximum potential exposure of $128.1 million if vehicles had no terminal value; no liability was accrued and management did not expect significant payments.
- After quarter-end, the company amended its receivables facility, increasing its maximum capacity from $300 million to $350 million and extending maturity to May 2017, with an additional seasonal tranche of $25 million. The board also declared a $0.075-per-share dividend, payable June 9, 2014.
Important facts for investors to verify
- Whether sales and operating-income growth persist after adjusting for weather, foreign exchange, seasonality and one-time items.
- How quickly working capital converts to operating cash flow, given the first-half cash outflow.
- The ongoing level of share-based compensation and transformation costs, and their impact on reported and adjusted profitability.
- Debt refinancing terms, covenant headroom, interest-rate exposure and the company’s capacity to service debt and maintain dividends.
- The assumptions and ultimate outcomes for legal claims, insurance reserves and lease guarantees.