Aramark Reports Fourth Quarter and Full Year 2019 Earnings

Q4 SUMMARY

  • Revenue +1.0%; Legacy Business Revenue +3.0%

    • Legacy growth across all segments
  • Operating Income (26)%; Adjusted Operating Income (2)%1

    • Increased incentive-based compensation; Solid operational performance
  • EPS of $0.34, (51)%; Adjusted EPS of $0.68, +1%1

FISCAL 2019 SUMMARY

  • Revenue +2.8%; Legacy Business Revenue +3.6%
  • Operating Income +9%; Adjusted Operating Income +5%1
  • EPS of $1.78, (21)%; Adjusted EPS of $2.24, +8%1
  • Net Cash from Operating Activities of $984 million; Free Cash Flow of $499 million

    • Net debt reduced by $593 million; Leverage ratio improved to 3.86x

 

PHILADELPHIA–(BUSINESS WIRE)–$ARMK #earnings–Aramark (NYSE: ARMK) today reported fourth quarter and full-year fiscal 2019 results.

“Aramark is an iconic company with a promising future. I am incredibly inspired by the many talented field leaders and valued client partners I have met in just 45 days back with the Company,” said John Zillmer, Chief Executive Officer, Aramark. “My immediate priority is to elevate the Company’s hospitality culture and drive the business forward in a way that unlocks meaningful value for all stakeholders.”

 

1 Constant Currency

FOURTH QUARTER RESULTS*

Consolidated revenue was $4.0 billion in the quarter, an increase of 1.0% over the prior year. Adjusted Revenue grew 4.9% compared to the prior year attributed to 3.0% growth in the legacy business and a 1.9% increase related to an accounting rule change. Legacy Revenue growth was driven by new business wins and base business growth across the segments:

  • FSS United States increased 1.9% led by continued strong performance in stadiums and arenas as well as growth in national parks and healthcare, partially offset by education.
  • FSS International grew 6.3% with continued strong performance in South America and China, as well as Europe despite the strategic exit of non-core custodial accounts in the region that occurred in the previous quarter.
  • Uniform & Career Apparel increased 2.7% from pricing and volume as the business focuses on expanding adjacency products and services.

 

Revenue

 

Q4 ’19

 

 

Q4 ’18

 

 

Change

 

 

Adjusted

Revenue

Change

 

 

Legacy

Revenue

Change

FSS United States1

$2,408M

 

 

$2,481M

 

 

(2.9)%

 

 

1.1%

 

 

1.9%

FSS International

898

 

 

888

 

 

1.2%

 

 

6.5%

 

 

6.3%

Uniform & Career Apparel

646

 

 

545

 

 

18.4%

 

 

18.5%

 

 

2.7%

Total Company

$3,951M

 

 

$3,914M

 

 

1.0%

 

 

4.9%

 

 

3.0%

Difference between GAAP Revenue and Adjusted Revenue reflects the elimination of currency translation and divestitures impact. Difference between Adjusted Revenue and Legacy Revenue reflects the accounting rule changes pursuant to ASC 606.

1 Q4 ’18 GAAP results include divested Healthcare Technologies revenue of $100 million. This has been excluded from the calculation of adjusted revenue change and legacy revenue change for comparison purposes.

Operating Income was $206 million and Adjusted Operating Income was $320 million in the fourth quarter. Operational results included higher total incentive-based compensation that had a particularly significant impact on the FSS United States segment compared to the prior year period. Excluding this consideration, the Company continued to benefit from overall operational improvements and acquisition synergies, as follows:

  • FSS United States exhibited overall operational efficiencies from greater purchasing scale and business productivity improvement, despite lower volume in education.
  • FSS International demonstrated broad-based growth with particular strength in Emerging Markets; the financial profile of the business in Europe has strengthened following the strategic exit of non-core custodial accounts.
  • Uniform & Career Apparel captured synergies related to the AmeriPride acquisition and additional efficiencies from operational performance.

Total incentive-based compensation, referenced above, included both share-based and cash incentives for employees. The Corporate segment reflected lower share-based compensation with the other segments affected by higher cash compensation.

 

 

Operating Income

 

 

 

 

Adjusted Operating Income

 

 

Q4 ’19

 

 

Q4 ’18

 

 

Change

 

 

 

 

Q4 ’19

 

 

Q4 ’18

 

 

Constant-

Currency

Change

 

FSS United States2

$156M

 

 

$229M

 

 

(32)%

 

 

 

 

$205M

 

 

$249M

 

 

(18)%

 

FSS International

49

 

 

41

 

 

21%

 

 

 

 

56

 

 

44

 

 

31%

 

Uniform & Career Apparel

47

 

 

50

 

 

(7)%

 

 

 

 

71

 

 

71

 

 

—%

 

Corporate

(46)

 

 

(40)

 

 

(15%)

 

 

 

 

(13)

 

 

(35)

 

 

64%

 

Total Company

$206M

 

 

$280M

 

 

(26)%

 

 

 

 

$320M

 

 

$330M

 

 

(2)%

2 Q4 ’18 GAAP results include divested Healthcare Technologies operating income of $8 million. This has been excluded from the calculation of Adjusted Operating Income constant-currency change for comparison purposes.

* May not total due to rounding.

FOURTH QUARTER GAAP SUMMARY

On a GAAP basis, revenue was $4.0 billion, operating income was $206 million, net income attributable to Aramark stockholders was $86 million and diluted earnings per share were $0.34. This compared to the fourth quarter of 2018 where, on a GAAP basis, revenue was $3.9 billion, operating income was $280 million, net income attributable to Aramark stockholders was $175 million and diluted earnings per share were $0.69. Fourth quarter 2019 GAAP diluted earnings per share decreased (50.7)% year-over-year. These results included the impact of costs associated with 1) higher incentive-based compensation; 2) legal settlements; 3) the retirement of the Company’s former Chief Executive Officer; and 4) Advisory Fees related to Shareholder Matters. EPS was further affected due to lapping the benefit from Effect of Tax Reform on Provision for Income Taxes in the prior year. A reconciliation of GAAP to Non-GAAP measures is included in the appendix. As of the end of the fourth quarter, net cash provided by operating activities was $984 million year-to-date compared to the prior year total of $1.1 billion.

FISCAL 2019 SUMMARY

On a GAAP basis, revenue was $16.2 billion, operating income was $891 million, net income attributable to Aramark stockholders was $449 million and diluted earnings per share were $1.78. This compared to fiscal 2018 where revenue was $15.8 billion, operating income was $818 million, net income attributable to Aramark stockholders was $568 million and diluted earnings per share were $2.24. Full-year 2019 GAAP diluted earnings per share decreased (20.5)% year-over-year, primarily as a result of employee reinvestments in fiscal 2019 and changes to the Provision (Benefit) for Income Taxes related to tax reform in fiscal 2018, offset by the gain from the sale of the Healthcare Technologies business in the current year.

Adjusted net income was $564 million, or $2.24 per share, versus adjusted net income of $534 million, or $2.11 per share, in fiscal 2018. A stronger U.S. dollar decreased revenue by approximately $275 million, Adjusted Operating Income by $12 million, and Adjusted Earnings Per Share by three cents.

CAPITAL STRUCTURE AND FREE CASH FLOW

The Company realized strong cash flow performance in fiscal 2019, generating $499 million of Free Cash Flow which included $36 million in integration spending associated with the AmeriPride and Avendra and $47 million in divestiture closing costs from the sale of the Healthcare Technologies business. Free Cash Flow does not include $23 million of proceeds from governmental agencies related to property and equipment. The total trailing 12-month net debt to covenant adjusted EBITDA improved by 21 basis points versus the end of the fourth quarter of 2018 to 3.86x driven by $593 million of net debt reductions over the course of the year and a continued disciplined focus on working capital management. At year-end, the Company had approximately $1.1 billion in cash and availability on its revolving credit facility.

DIVIDEND DECLARATION

The Company’s Board of Directors approved a quarterly dividend of 11 cents per share of common stock. The first quarter fiscal 2020 dividend will be payable on December 9, 2019, to stockholders of record at the close of business December 2, 2019.

BUSINESS UPDATE

Aramark has made extensive progress improving profitability, increasing procurement scale, evolving its portfolio, and driving free cash flow to strengthen the balance sheet and enhance financial flexibility. The Company is well-positioned to accelerate revenue growth that will include consideration of select investment opportunities while maintaining a long-term balanced focus on margin progression, Adjusted EPS growth, return on capital improvement and strong cash flow generation.

“I am confident that now is the time to pursue a more accelerated revenue growth strategy, while appropriately balancing other important financial drivers. We expect to initiate targeted investments that will support new account sales efforts and client retention; enhanced product and service offerings; and value-added innovation and technology,” Zillmer added. “Our diverse portfolio affords us the financial flexibility to activate this strategic approach while simultaneously propelling business performance. I look forward to working with the Board as we chart our dynamic path forward.”

2020 OUTLOOK

Aramark provides its expectations for organic revenue growth, full-year adjusted EPS and full-year free cash flow on a non-GAAP basis, and does not provide a reconciliation of such forward-looking non-GAAP measures to GAAP due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliations, including adjustments that could be made for the impact of the change in fair value related to certain gasoline and diesel agreements, severance and other charges and the effect of currency translation.

Aramark’s 2020 Fiscal Year and fourth quarter results contain an extra, or 53rd, week, when compared to prior period results. The guidance provided below is based on 52 weeks for year-over-year comparability purposes.

  • Organic Revenue Growth of approximately 3% that is expected to consistently improve as the year progresses.
  • Adjusted EPS growth led by further synergy capture from the Avendra and AmeriPride integration; business operating improvements; and reduced interest expense, while considering select investment opportunities.
  • Free Cash Flow generation of at least $600M.
  • Net debt to covenant adjusted EBITDA approximately 3.5x to 3.6x by the end of the fiscal year.

Organic Revenue, Adjusted Operating Income, Adjusted Net Income and Adjusted Earnings Per Share Growth will be adjusted for the 53rd week. Prior to the adjustment, the 53rd week is expected to have a full year benefit of approximately 2% on these metrics. Due to certain outflows from the natural cadence of the business including interest and tax payments, employee and client payments and commissions, Free Cash Flow is expected to be modestly unfavorable in the 53rd week period, with the Company diligently managing offset opportunities over the course of the year.

CONFERENCE CALL SCHEDULED

The Company has scheduled a conference call at 8:30 a.m. ET today to discuss its earnings. This call and related materials can be heard and reviewed, either live or on a delayed basis, on the Company’s web site, www.aramark.com on the investor relations page.

About Aramark

Aramark (NYSE: ARMK) proudly serves Fortune 500 companies, world champion sports teams, state-of-the-art healthcare providers, the world’s leading educational institutions, iconic destinations and cultural attractions, and numerous municipalities in 19 countries around the world. Our 280,000 team members deliver experiences that enrich and nourish millions of lives every day through innovative services in food, facilities management and uniforms. We work to put our sustainability goals into action by focusing on initiatives that engage our employees, empower healthy living, preserve our planet and build local communities. Aramark is recognized as one of the World’s Most Admired Companies by FORTUNE, as well as an employer of choice by the Human Rights Campaign and DiversityInc. Learn more at www.aramark.com or connect with us on Facebook and Twitter.

Selected Operational and Financial Metrics

Adjusted Revenue

Adjusted Revenue represents revenue growth, adjusted to eliminate the impact of currency translation and divestitures.

Adjusted Revenue (Organic)

Adjusted Revenue (Organic) represents revenue growth, adjusted to eliminate the effects of material acquisitions and divestitures and the impact of currency translation.

Legacy Business Revenue

Legacy Business Revenue represents Adjusted Revenue, adjusted to exclude the revenue of AmeriPride and Avendra that is not comparable to the prior year periods and the impact of the adoption of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.

Adjusted Operating Income

Adjusted Operating Income represents operating income adjusted to eliminate the change in amortization of acquisition-related intangible assets; the impact of the change in fair value related to certain gasoline and diesel agreements; severance and other charges; the effect of divestitures (including the gain on the sale); merger and integration related charges; tax reform related employee reinvestments; advisory fees related to shareholder matters; and other items impacting comparability.

Adjusted Operating Income (Constant Currency)

Adjusted Operating Income (Constant Currency) represents Adjusted Operating Income adjusted to eliminate the impact of currency translation.

Adjusted Net Income

Adjusted Net Income represents net income attributable to Aramark stockholders adjusted to eliminate the change in amortization of acquisition-related intangible assets; the impact of changes in the fair value related to certain gasoline and diesel agreements; severance and other charges; merger and integration related charges; the effect of divestitures (including the gain on the sale); the effects of refinancings on interest and other financing costs, net; the impact of tax reform; advisory fees related to shareholder matters and other items impacting comparability, less the tax impact of these adjustments. The tax effect for adjusted net income for our U.S. earnings is calculated using a blended U.S. federal and state tax rate. The tax effect for adjusted net income in jurisdictions outside the U.S. is calculated at the local country tax rate.

Adjusted Net Income (Constant Currency)

Adjusted Net Income (Constant Currency) represents Adjusted Net Income adjusted to eliminate the impact of currency translation.

Adjusted EPS

Adjusted EPS represents Adjusted Net Income divided by diluted weighted average shares outstanding.

Adjusted EPS (Constant Currency)

Adjusted EPS (Constant Currency) represents Adjusted EPS adjusted to eliminate the impact of currency translation.

Covenant Adjusted EBITDA

Covenant Adjusted EBITDA represents net income attributable to Aramark stockholders adjusted for interest and other financing costs, net; provision (benefit) for income taxes; depreciation and amortization; and certain other items as defined in our debt agreements required in calculating covenant ratios and debt compliance. The Company also uses Net Debt for its ratio to Covenant Adjusted EBITDA, which is calculated as total long-term borrowings less cash and cash equivalents.

Free Cash Flow

Free Cash Flow represents net cash provided by operating activities less net purchases of property and equipment and other. Management believes that the presentation of free cash flow provides useful information to investors because it represents a measure of cash flow available for distribution among all the security holders of the Company.

We use Adjusted Revenue, Legacy Business Revenue, Adjusted Operating Income (including on a constant currency basis), Covenant Adjusted EBITDA, Adjusted Net Income (including on a constant currency basis), Adjusted EPS (including on a constant currency basis) and Free Cash Flow as supplemental measures of our operating profitability and to control our cash operating costs. We believe these financial measures are useful to investors because they enable better comparisons of our historical results and allow our investors to evaluate our performance based on the same metrics that we use to evaluate our performance and trends in our results. These financial metrics are not measurements of financial performance under generally accepted accounting principles, or GAAP. Our presentation of these metrics has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. You should not consider these measures as alternatives to revenue, operating income, net income, or earnings per share, determined in accordance with GAAP. Adjusted Revenue, Legacy Business Revenue, Adjusted Operating Income, Covenant Adjusted EBITDA, Adjusted Net Income, Adjusted EPS and Free Cash Flow as presented by us, may not be comparable to other similarly titled measures of other companies because not all companies use identical calculations.

Explanatory Notes to the Non-GAAP Schedules

Amortization of acquisition-related intangible assets – adjustments to eliminate the change in amortization resulting from the purchase accounting applied to the January 26, 2007 going-private transaction executed with investment funds affiliated with GS Capital Partners, CCMP Capital Advisors, LLC and J.P. Morgan Partners, LLC, Thomas H. Lee Partners, L.P. and Warburg Pincus LLC as well as approximately 250 senior management personnel ($7.7 million for the fourth quarter of 2019, $30.9 million for fiscal 2019, $7.8 million for the fourth quarter of 2018 and $37.8 million for fiscal 2018) and amortization expense recognized on other acquisition-related intangible assets ($21.6 million for the fourth quarter of 2019, $86.1 million for fiscal 2019, $21.0 million for the fourth quarter of 2018 and $70.0 million for fiscal 2018).

Severance and other charges – adjustments to eliminate severance expenses and other costs incurred in the applicable period related to streamlining initiatives ($1.1 million net expense reduction for the fourth quarter of 2019, $18.7 million for fiscal 2019, $3.1 million net expense reduction for the fourth quarter of 2018 and $36.6 million for fiscal 2018), adjustments to eliminate consulting costs incurred in the applicable period related to streamlining and general administrative initiatives ($1.5 million for the fourth quarter of 2019, $14.5 million for fiscal 2019, $2.9 million for the fourth quarter of fiscal 2018 and $20.2 million for fiscal 2018), adjustments to eliminate costs associated with the retirement of the Company’s former chief executive officer ($12.1 million for the fourth quarter and fiscal 2019, of which $10.4 million relates to cash compensation), incurring duplicate rent charges, moving costs, opening costs to build out and ready the Company’s new headquarters while occupying its then existing headquarters and closing costs ($8.2 million for fiscal 2019, $2.8 million for the fourth quarter of 2018 and $7.7 million for fiscal 2018), incurring charges related to information technology related initiatives ($1.2 million net expense reduction for the fourth quarter of 2019 and $5.0 million for fiscal 2019) and other charges ($0.3 million net expense reduction for the fourth quarter and fiscal 2019 and $3.1 million for fiscal 2018).

Effects of divestitures – adjustments to eliminate the impact that the Healthcare Technologies divestiture had on comparative periods.

Merger and Integration Related Charges – adjustments to eliminate merger and integration charges primarily related to the Avendra and AmeriPride acquisitions, including deal costs, costs for transitional employees and integration related consulting costs ($9.8 million for the fourth quarter of 2019, $36.1 million for fiscal 2019, $13.3 million for the fourth quarter of 2018 and $78.1 million for fiscal 2018)

Gain on sale of Healthcare Technologies – adjustment to eliminate the impact of the gain on sale of the Healthcare Technologies business.

Tax Reform Related Employee Reinvestments – adjustments to eliminate certain reinvestments associated with tax savings created by the Tax Cuts and Jobs Act of 2017, including employee training expenses, special recognition awards and retirement contributions ($4.4 million for the fourth quarter of 2019 and $74.9 million for fiscal 2019).

Advisory Fees Related to Shareholder Matters – adjustments to eliminate third party advisory, legal and other professional service fees incurred related to conversations initiated by Mantle Ridge LP in connection with the Company’s business, operations, strategies, governance and the composition of the Board of Directors ($7.7 million for the fourth quarter and fiscal 2019).

Gains, losses and settlements impacting comparability – adjustments to eliminate certain transactions that are not indicative of our ongoing operational performance, primarily for expenses related to legal settlements ($27.9 million for the fourth quarter and fiscal 2019), impairment charges related to various assets ($14.8 million for the fourth quarter and fiscal 2019), income/loss from prior years’ loss experience under our casualty insurance program ($2.1 million loss for the fourth quarter of 2019, $9.2 million gain for fiscal 2019, $3.3 million loss for the fourth quarter of 2018 and $14.9 million gain for fiscal 2018), banker fees and other charges related to the sale of Healthcare Technologies ($7.7 million for fiscal 2019), charges related to hyperinflation in Argentina ($4.9 million for the fourth quarter and fiscal 2019, $3.8 million for the fourth quarter and fiscal 2018), the impact of the change in fair value related to certain gasoline and diesel agreements ($0.8 million loss for the fourth quarter of 2019, $4.7 million loss for fiscal 2019, $0.3 million loss for the fourth quarter of 2018 and $0.2 million gain for fiscal 2018), settlement charges related to exiting a joint venture arrangement ($4.5 million for fiscal 2019), pension plan charges ($1.2 million loss for fiscal 2019, $0.4 million loss for the fourth quarter of 2018 and $2.9 million loss for fiscal 2018), charges related to a joint venture liquidation and acquisition ($7.5 million for fiscal 2018), certain environmental charges ($5.0 million for the fourth quarter and fiscal 2018), certain consulting costs ($0.7 million for the fourth quarter of 2018 and $1.0 million for fiscal 2018) and other charges ($1.1 million for the fourth quarter of 2019 and $4.0 million for fiscal 2019).

Effect of currency translation – adjustments to eliminate the impact that fluctuations in currency translation rates had on the comparative results by presenting the periods on a constant currency basis. Assumes constant foreign currency exchange rates based on the rates in effect for the prior year period being used in translation for the comparable current year period.

Effect of refinancing and other on interest and other financing costs, net – adjustments to eliminate expenses associated with refinancing activities undertaken by the Company in the applicable period such as third party costs and non-cash charges for the write-offs of deferred financing costs and debt discounts, non-cash charges for the write-off of deferred financing costs related to debt payments and other pension plan charges.

Effect of tax reform on provision for income taxes – adjustments to eliminate the impact of tax reform that is not indicative of our ongoing tax position based on the new tax policies and certain other adjustments.

Contacts

Media Inquiries:
Karen Cutler

(215) 238-4063

Cutler-Karen@aramark.com

Investor Inquiries:
Felise Kissell

(215) 409-7287

Kissell-Felise@aramark.com

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