Aramark Reports Fourth Quarter and Full Year 2020 Earnings
November 17, 2020 at 06:30 AM EST
Aramark (NYSE: ARMK) today reported fourth quarter and full-year fiscal 2020 results.
“I am incredibly proud of our teams across the globe for their tireless work serving clients and communities in this extraordinary time of need,” said John Zillmer, Aramark’s Chief Executive Officer. “This dedication, combined with our resilient platform, flexible operating model and steadfast commitment to effectively manage cash flow and liquidity, enabled us to deliver quarter-over-quarter business improvement and cash availability of $2.6 billion at quarter-end. While navigating the unusual challenges of the current environment, we remain focused on fully realizing Aramark’s potential for accelerated long-term growth and enhanced efficiency.”
FOURTH QUARTER RESULTS*
Client reopenings as well as Aramark's expanded service offerings contributed to sequential improvement in business performance across all segments compared to the third quarter:
Q3 '20 performance reflects year-over-year results identified in the Non-GAAP schedules.
Difference between Change (%) and Organic Revenue Change (%) reflects the elimination of currency translation and the impact of the 53rd week of operations.
Operating Loss of $94 million and Adjusted Operating Loss of $12 million in the quarter were due to the impact of COVID-19. Adjusted Operating Income (AOI) drop-through was managed to 23% of the corresponding revenue decline, on a constant-currency basis, driven by the Company's ongoing cost-reduction efforts and flexible operating model, offset by restart costs from increased business activity.
Operating (Loss) Income results include a 53rd week of operations.
FOURTH QUARTER GAAP SUMMARY
FISCAL 2020 SUMMARY
Organic Revenue for the year declined 21% compared to fiscal 2019 with underlying growth in the first half of the year more than offset by the impact from COVID-19 throughout the remainder of the year. Adjusted Operating Income of $294 million was similarly affected by COVID-19 that led the Company to implement cost-reduction strategies, including renegotiation of client contracts, adjustment to salaries and other compensation as well as reduction to general corporate expenses.
CAPITAL STRUCTURE AND FREE CASH FLOW
In the fiscal year, Cash provided by operating activities totaled $177 million and Free Cash Flow was a use of $188 million driven by the reduction of earnings related to COVID-19. After the seasonal use of cash in the first fiscal quarter associated with Higher Education, the subsequent three quarters collectively generated positive cash flow.
At year-end, the Company had approximately $2.6 billion in cash and availability on its revolving credit facility. Subsequent to the end of the fourth quarter, Aramark repaid $680 million on its revolving credit facility.
These timely actions allowed Aramark to adapt quickly in the challenging environment, while preserving the ability to maximize future performance. The Company remains focused on offering safe and hygienic solutions for clients as well as innovation that creates seamless experiences, including cash-less and contact-free payment options. Through the launch of EverSafe™, Aramark is supporting the safe reopening and ongoing management of client locations. The Company also shifted certain production lines to manufacture PPE as well as continued to provide local communities essential meals and health supplies.
In fiscal 2021, Aramark will continue to leverage its resilient operating model, while managing the business with a long-term mindset. The Company believes it is well-positioned to navigate the ever-changing environment with current performance expectations as follows:
As Aramark did through the COVID-19 challenges in fiscal 2020, the Company will continue executing its growth acceleration strategies throughout fiscal 2021, including initiatives expected to drive base business, increase retention rates and win new clients, while gaining ongoing efficiencies from the Company's fit-for-purpose actions.
"I am extremely encouraged by a number of positive trends across our business and expect ongoing improvement as the year progresses, with Aramark playing a key role in the broader recovery," Zillmer added. "The passion and energy inside the organization fuels my confidence in Aramark's ability to create a promising future for our valued employees, partners and shareholders."
CONFERENCE CALL SCHEDULED
Selected Operational and Financial Metrics
Adjusted Revenue (Organic)
Adjusted Operating (Loss) Income
Adjusted Operating (Loss) Income (Constant Currency)
Adjusted Net (Loss) Income
Adjusted Net (Loss) Income (Constant Currency)
Adjusted EPS (Constant Currency)
Covenant Adjusted EBITDA
Free Cash Flow
We use Adjusted Revenue (Organic), Adjusted Operating (Loss) Income (including on a constant currency basis), Adjusted Net (Loss) Income (including on a constant currency basis), Adjusted EPS (including on a constant currency basis), Covenant Adjusted EBITDA 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 (loss) income, net (loss) income, or (loss) earnings per share, determined in accordance with GAAP. Adjusted Revenue (Organic), Adjusted Operating (Loss) Income, Adjusted Net (Loss) Income, Adjusted EPS, Covenant Adjusted EBITDA 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 ($8.3 million for the fourth quarter of 2020, $31.6 million for fiscal 2020, $7.7 million for the fourth quarter of 2019 and $30.9 million for fiscal 2019) and amortization expense recognized on other acquisition-related intangible assets ($20.8 million for the fourth quarter of 2020, $84.9 million for fiscal 2020, $21.6 million for the fourth quarter of 2019 and $86.1 million for fiscal 2019).
Severance and Other Charges - adjustments to eliminate severance expenses in the applicable period ($20.9 million for the fourth quarter of 2020, $152.7 million for fiscal 2020, $1.1 million net expense reduction for the fourth quarter of 2019 and $18.7 million for fiscal 2019), 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 fiscal 2019 and $14.5 million for fiscal 2019), 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), 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.
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 costs for transitional employees and integration related consulting costs ($6.5 million for the fourth quarter of 2020, $28.9 million for fiscal 2020, $9.8 million for the fourth quarter of 2019 and $36.1 million for fiscal 2019)
Goodwill Impairment - adjustment to eliminate the impact of a non-cash impairment charge to goodwill.
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 ($1.4 million for fiscal 2020, $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).
Estimated Impact of 53rd Week - adjustments to eliminate the estimated impact of a 53rd week of operations during fiscal 2020.
Gains, Losses and Settlements impacting comparability - adjustments to eliminate certain transactions that are not indicative of our ongoing operational performance, primarily for non-cash impairment charges related to various assets ($30.6 million for the fourth quarter and fiscal 2020 and $14.8 million for the fourth quarter and fiscal 2019), a non-cash charge related to operating lease right-of-use assets, property and equipment and other assets from disposal by abandonment of certain rental properties ($28.5 million for fiscal 2020), non-cash charges related to information technology assets ($4.2 million for the fourth quarter of 2020 and $26.1 million for fiscal 2020), gain from the insurance proceeds received related to the impact of property damage from a tornado in Nashville ($16.3 million gain for fiscal 2020), income/loss from prior years' loss experience under our casualty insurance program ($10.3 million gain for fiscal 2020, $2.1 million loss for the fourth quarter of 2019 and $9.2 million gain for fiscal 2019), pension plan charges ($6.7 million gain for the fourth quarter and fiscal 2020 and $1.2 million loss for fiscal 2019), eliminate external consulting fees related to growth initiatives ($3.2 million for fiscal 2020), charges related to hyperinflation in Argentina ($1.4 million for the fourth quarter of 2020, $2.5 million fiscal 2020, $4.9 million for the fourth quarter and fiscal 2019), payroll tax charges related to equity award exercises by the Company's former chief executive officer ($1.7 million for fiscal 2020), expenses related to legal settlements ($1.0 million net expense reduction for the fourth quarter and fiscal 2020 and $27.9 million for the fourth quarter and fiscal 2019), the impact of the change in fair value related to certain gasoline and diesel agreements ($3.1 million gain for the fourth quarter of 2020, $0.5 million loss for fiscal 2020, $0.8 million loss for the fourth quarter of 2019 and $4.7 million loss for fiscal 2019), banker fees and other charges related to the sale of Healthcare Technologies ($7.7 million for fiscal 2019), settlement charges related to exiting a joint venture arrangement ($4.5 million for fiscal 2019) and other miscellaneous charges ($0.8 million for the fourth quarter of 2020, $2.4 million for fiscal 2020, $1.1 million for the fourth quarter of 2019 and $4.0 million for fiscal 2019).
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 charges related to the payment of a call premium ($23.1 million for fiscal 2020) and non-cash charges for the write-offs of unamortized debt issuance costs and debt premiums ($2.2 million gain for fiscal 2020 and $2.2 million loss for the fourth quarter and fiscal 2019).
Effect of Tax Legislation on (Benefit) Provision for Income Taxes - adjustments to eliminate the impact of tax legislation that is not indicative of our ongoing tax position based on the new tax policies, including the CARES Act and U.S. Tax Reform.
Tax Impact Related to Shareholder Transactions - adjustments to eliminate the tax impact of equity award exercises by the Company's former chief executive officer ($2.3 million expense for the fourth quarter of 2020 and $22.3 million net benefit for fiscal 2020) and the tax impact related to cash proceeds received from Mantle Ridge for short-swing profits earned through transactions in the Company's common stock ($4.1 million expense for fiscal 2020).
Tax Impact of Adjustments to Adjusted Net (Loss) Income - adjustments to eliminate the net tax impact of the adjustments to adjusted net (loss) income calculated based on a blended U.S. federal and state tax rate for U.S. adjustments and the local country tax rate for adjustments in jurisdictions outside the U.S. Adjustment also eliminates the valuation allowance recorded against deferred tax assets in a foreign subsidiary that is deemed not realizable (approximately $8.6 million for fiscal 2020).
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.
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations as to future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements regarding the potential future impact of the COVID-19 pandemic on our business, financial performance and operating results are forward-looking statements. These statements also include, but are not limited to, statements related to our expectations regarding performance of our business, our financial results, our operations, conditions in our industry and our business and growth strategy. Forward-looking statements can also be identified by words such as "outlook," "aim," "anticipate," "are or remain or continue to be confident," "have confidence," "estimate," "expect," "will be," "will continue," "will likely result," "project," "intend," "plan," "believe," "see," "look to" and other words and terms of similar meaning or the negative versions of such words.
Forward-looking statements speak only as of the date made. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.
Some of the factors that we believe could affect or continue to affect our results or the costs and benefits of the acquisitions include without limitation: the severity and duration of the COVID-19 pandemic; the pandemic's impact on the U.S. and global economies, including particularly the client sectors we serve, and governmental responses to the pandemic; unfavorable economic conditions; natural disasters, global calamities, new pandemics, sports strikes and other adverse incidents; the failure to retain current clients, renew existing client contracts and obtain new client contracts; the manner and timing of benefits we expect to receive under the CARES Act or other government programs; a determination by clients to reduce their outsourcing or use of preferred vendors; competition in our industries; increased operating costs and obstacles to cost recovery due to the pricing and cancellation terms of our food and support services contracts; our expansion strategy; our ability to successfully integrate the businesses we acquire and costs and timing related thereto; the risk of unanticipated restructuring costs or assumption of undisclosed liabilities; the risk that we are unable to achieve the anticipated benefits (including tax benefits) and synergies of acquisitions, including whether such transactions will be accretive and within the expected timeframes; the availability of sufficient cash to repay certain indebtedness and our decision to utilize the cash for that purpose; the failure to maintain food safety throughout our supply chain, food-borne illness concerns and claims of illness or injury; governmental regulations including those relating to food and beverages, the environment, wage and hour and government contracting; liability associated with noncompliance with applicable law or other governmental regulations; new interpretations of or changes in the enforcement of the government regulatory framework; currency risks and other risks associated with international operations, including Foreign Corrupt Practices Act, U.K. Bribery Act and other anti-corruption law compliance; continued or further unionization of our workforce; liability resulting from our participation in multiemployer defined benefit pension plans; risks associated with suppliers from whom our products are sourced; disruptions to our relationship with, or to the business of, our primary distributor and other distribution partners; the inability to hire and retain sufficient qualified personnel or increases in labor costs; healthcare reform legislation; the contract intensive nature of our business, which may lead to client disputes; seasonality; a cybersecurity incident or other disruptions in the availability of our computer systems or privacy breaches; our leverage, including our recent significantly increased borrowings; the inability to generate sufficient cash to service all of our indebtedness; debt agreements that limit our flexibility in operating our business; our ability to attract new or maintain existing customer and supplier relationships at reasonable cost; our ability to retain key personnel and other factors set forth under the headings Item 1A "Risk Factors," Item 3 "Legal Proceedings" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of our Annual Report on Form 10-K, filed with the SEC on November 26, 2019 as such factors may be updated from time to time in our other periodic filings with the SEC, which are accessible on the SEC's website at www.sec.gov and which may be obtained by contacting Aramark's investor relations department via its website www.aramark.com. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this press release and in our other filings with the SEC. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, us. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, changes in our expectations, or otherwise, except as required by law.