Aramark — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended October 3, 2014, a 53-week year; comparisons are with the 52-week year ended September 27, 2013. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
Aramark provides food, facilities and uniform services across education, healthcare, business and industry, sports and leisure, and corrections. Its three reporting segments are FSS North America, FSS International and Uniform. Fiscal 2014 sales were approximately 69%, 21% and 10% of total sales, respectively. The company completed its IPO in December 2013 and used its net proceeds to repay debt.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $14.833 billion | $13.946 billion |
| Operating income | $564.6 million | $514.5 million |
| Net income attributable to Aramark stockholders | $149.0 million | $69.4 million |
| Diluted EPS | $0.63 | $0.33 |
| Net cash provided by operating activities | $398.2 million | $695.9 million |
- Sales increased 6% as reported; management attributed approximately 2% of the increase to the extra week and approximately 1% negative impact to foreign currency translation. Growth was reported across all segments.
- Operating margin was approximately 3.8% of sales, versus approximately 3.7% in FY2013. Cost of services provided was 90% of sales, compared with 91%.
- Operating cash flow fell by $297.7 million, with working capital a use of cash in FY2014. Purchases of property, equipment and client contract investments were $545.2 million; the filing does not present a free-cash-flow measure.
- At year-end, cash and cash equivalents were $111.7 million; current assets were $2.465 billion and current liabilities $2.379 billion. Revolver availability was approximately $753.9 million.
- Total borrowings were $5.446 billion, including $350 million under the receivables facility; long-term borrowings on the balance sheet were $5.356 billion. Debt maturities are concentrated in 2019 and thereafter. FY2014 interest and other financing costs, net, were $334.9 million.
- Aramark Services reported compliance with debt covenants: secured debt ratio was 3.50x against a 5.50x maximum; interest coverage was 4.16x against a 2.00x minimum. Management said available cash and committed borrowing capacity should cover anticipated needs.
- Segment operating income rose to $501.3 million in FSS North America, $106.2 million in FSS International and $172.1 million in Uniform. Corporate expense increased to $215.0 million from $74.2 million.
Material changes and unusual items
- Net income improved substantially year over year, alongside lower financing costs and higher segment operating income. Interest and financing costs declined by about $89 million, primarily due to refinancing, lower average debt and lower refinancing fees.
- FY2014 operating income included approximately $96.3 million of share-based compensation expense, including $50.9 million related to modified performance options; $26.9 million in rebranding costs; $32.3 million in transformation costs; $21.3 million in net severance costs; and a $6.7 million loss on the sale of the McKinley Chalet Hotel. The extra week also benefited results.
- FY2013 included $63.9 million of severance and related charges, $11.7 million of goodwill impairment, approximately $12.0 million of other asset write-downs, and $20.7 million of transformation costs. Comparability was also affected by the NHL lockout and Hurricane Sandy in FY2013, and severe winter weather in FY2014.
- Operating cash flow was affected by working-capital movements, including receivables growth and accrued-expense payments. Capital expenditures and client contract investments increased to $551.9 million from $393.1 million.
- The company expects to incur approximately $100 million of additional costs over the next two fiscal years for productivity and transformation initiatives. The filing does not provide a quantified consolidated revenue or earnings forecast.
Outlook, risks and contingencies
- Management described continued focus on growth, productivity, cost reduction and streamlining administrative functions, including establishing a shared services center. It also stated its intention to invest selectively in sectors and geographies.
- Key risks include high leverage and variable-rate exposure; cost inflation in food, wages, fuel and utilities; limits on passing costs through to clients; client contract renewals, cancellations and competitive pricing; and dependence on outsourcing demand.
- Other material risk areas include food safety and regulatory compliance, foreign currency and international operations, labor availability and union obligations, multiemployer pension exposure, supplier and distributor disruption (SYSCO distributed about 57% of North American food and non-food products), cybersecurity, and seasonal demand.
- Management did not expect disclosed legal matters, individually or collectively, to be material based on information available, reserves, insurance and counsel; it cautioned that an unfavorable resolution or further developments could have a material adverse effect.
- The filing reports that controlling owners held approximately 66.8% of common stock as of November 28, 2014. It also notes potential sales of management-held shares after December 18, 2014, which could affect the share price.
Most important facts for investors to verify
- Whether the cash-flow decline and working-capital use reverse, and how much operating cash flow converts to earnings after client investments and capital spending.
- How much FY2014 profit growth reflects recurring operations versus the extra week, refinancing effects, productivity gains, share-based compensation and other unusual items.
- Debt repayment capacity, refinancing needs, variable-rate sensitivity and headroom under covenant limits.
- Whether the planned transformation and shared-services costs deliver the projected savings; the filing does not quantify the expected savings.
- Client retention and contract economics, particularly given that approximately 73% of FSS sales came from profit-and-loss contracts with limited ability to pass through cost increases.
- Potential dilution or market overhang from outstanding equity awards and permitted sales by controlling owners and management holders.