Aramark Corporation
Pro Forma
Olayemi Bamisile
I. Background
Aramark Corporation is a professional service leader that provides food
services, facilities management and uniform and career apparel to the healthcare
industry, universities, school districts, as well as stadiums and arenas. Aramark’s
headquarters is in Philadelphia, Pennsylvania. The company provides services in as
many as twenty-two countries around the world while serving over twelve different
industries including correctional institutions, senior living and sports and
entertainment. Some of Aramark’s competitors include Soxedo and Compass Group.
Aramark stands as one of the leaders in its industry despite significant competition
it has the company has recently been rated in Fortune Magazine’s “World’s Most
Admired Companies” as the leader of its industry. The company feels that they have
a competitive advantage because of their quality of service and management talent,
service innovation, its current place within the industry, pricing and financial
strength and stability.
To provide themselves with an outlook on their future the company looks at
the following: the intended use of assets and the expected cash flow for the usage of
those assets, comparable valuations of companies similar to itself, industry specific
economic conditions, competitor activities and regulatory initiatives and client
preferences and behavioral patterns. In the management discussion and analysis a
few things highlighted that I found important were the 2% increase in sales relative
to the previous years 9% decrease in sales. These increases and decreases are
explained by the company in understanding acquisitions, fluctuation of currency
exchange rates as they are a global company, employment levels, consumer
spending due to the economy, and the reduced spending in the entertainment
sector, higher taxes and lower interest rates. From management discussion and
analysis at this point I do agree with them. I think there most important highlights
and things that will impact their soundness in the future are its acquisitions, the
economy, the rates of exchange on their currencies and consumer spending. They
are a company that makes mergers often I believe that Goodwill is one the things
that also affects the company in either having growth or losses.
II. Trends & Assumptions
In forecasting for the future the company expects the beginning of the year to
potentially incur losses due to changes made to lower their overhead costs. Because
of these changes I believe I can make an assumption that costs will be decreasing.
Aramark is a company that is always making mergers with that being known I
believe we can assume that goodwill will rise as well. The company feels as though
the market has been relatively sticky and will continue to be that way for a while
because of economy and reduced consumer and client spending. The company is
also concerned about the scarcity of land labor and capital. They are also trying to
reduce the number of employees they have as a method of cost reduction. Selling
General and Administrative cost are expected to increase because the company is
looking to acquire more clientele through marketing.
Exhibit one and two show the common size balance sheets for the years 2008
through 2010. In all three analyzed years over 40% of the companies assets were in
Goodwill, followed by plant property and equipment and other intangible assets,
which in all three years ranged from a high of just above 21% and a low of just
above 10%. Cash was 1.57% of assets in 2010 while in 2009 it was 2.18% and in
2008 it was 1.42% while accounts receivable in 2010 was 9.22% of assets, 8.09% in
2009 and 9.02% in 2008. It makes sense that goodwill makes up a large amount of
assets as the company is constantly making mergers and acquiring new companies.
Also seen in the common size balance sheet over 60% of liabilities are from longterm borrowing. This was true in all three years however slightly higher than 60%
in 2009 and 2008.
The next significant amounts of liabilities are in accrued
expenses, accounts payable and deferred taxes for a high ringing from 15.20% and a
low of 6.74%. Common stock was also just above 16% in 2010 and 2009 and
15.15% in 2008. As a company that makes mergers and acquisitions often it can be
understood that long-term borrowing is the companies biggest liability. We can see
that long-term borrowing is a major source of finance for those types of
transactions. This also tells us that relative to stock the company uses loans as a
more significant source of funds then stock.
If you observe exhibit two which is the common size income statement you
can see that cost of goods sold is about 90% of sales in all three analyzed years. This
tells us that an overwhelming majority of the costs the company incurs involve
paying suppliers for goods and services. Interest expense and other financing costs
as well as depreciation and amortization account for the nest biggest allocations of
sales. Net income in 2010 was 0.24% of sales, in 2009 it was -0.51% and in 2008
0.29% of sales. The loss due to marketing and other factors mentioned earlier can
explain the figures from 2009. It is important to not the income statement trends
from 2009 to 2010. Overall sales increased 2.23%, which was a 0.24% higher
increase than the 1.99% increase in cost of goods sold. The company came back
from a net loss of $62641 in 2009 to a net income of 30688 in 2010. The company
had about a 2% increase in sales as discussed in management discussion and
analysis, which can explain the relative rise in depreciation and other costs.
Exhibit three shows a table of industry ratios along side the company’s ratios.
Overall compared to the industry as a whole Aramark is doing worse. Exhibit four
the DuPont Analysis which helps to understand return on equity further by breaking
it down to see the most volatile and non volatile aspects of the ratio. Return on
equity is comprised of three ratios, which are profit margin, asset turnover and the
equity multiplier. From exhibit four you can see that the equity multiplier is the
largest contributing number however the profit margin is actually the most volatile
element. For example in 2009 a year where the company had a net loss the drastic
change in profit margin from 2008 to 2009 effected return on equity the most.
III. Explanation of Fiscal Year 2011 Forecast
In creating forecast balance sheet and income statements for Aramark’s fiscal
year 2011 I looked at the following closely. The company expressed in management
discussion and analysis that they expected to have a positive year despite a ruff start
projected for the first quarter. Because of the nature of the contracts made with the
company I made the assumption that sales would not decrease in value. Over fiscal
year 2010 the company had a 2% increase in sales. Because of the projected
potential loss in the first quarter I assumed sales would continue to grow but at ma
slower rate. Therefore in the projected forecast income statement for fiscal year
2011 sales increased by 1.02%. There was also a decrease in the cost of goods sold
of 1.28%. There was also an 11.24% increase in plant property and equipment in
the forecast. This can be explained by the project acquirement of new technology as
the company expressed acquiring a cost reduction technique as a method of
reducing their overhead costs. Selling, general and administrative saw an increase
of 3.60%, which can be attributed to the projected increase in marketing as the
company is trying to acquire more clientele. Goodwill also increased over 43% in
the forecasted balance sheet.
Overall the forecast is in line with Aramark’s
projections for its future although they might not expect to have as strong of a net
income in fiscal 2011 as projected in the forecast. Averages over the years were also
used in calculating some of the values of the accounts in the forecasted statements.
The companies overall perceived competitive position lead me to believe that fiscal
2011 will be a successful year for the company. I believe the forecast is in line with
the discussion outlook for management.
IV. Appendix
A. Exhibit 1: Common Size Balance Sheet
B. Exhibit 2: Common Size Income Statement
C. Exhibit 3: Ratio Table
D. Exhibit 4: DuPont Analysis
E. Exhibit 5: Forecasted Common Size Balance Sheet
F. Exhibit 6: Forecasted Common Size Income Statement
V. References
Aramark 2010 & 2009 10-k
1. http://phx.corporate-ir.net/phoenix.zhtml?c=130030&p=irol-sec