Aramark Reports Third Quarter Earnings
SUMMARY
- Revenue +39%; Organic Revenue +34%
- Increased levels of business activity led by accelerated pace of client reopenings
- Sequential quarterly improvement across all business segments
- Operating Income increased by $402 million; Adjusted Operating Income (AOI) increased by $250 million versus prior year
- Higher profitability as a result of rebounding sales volumes and effective cost management
- Ongoing investment in growth resources
- EPS improved $1.14 to $0.13; Adjusted EPS improved $0.72 to $0.03
- GAAP EPS included non-cash gain on an equity investment, partially offset by non-cash loss from a defined benefit pension plan termination
- Strengthened balance sheet; Enhanced platform for growth
- Repaid $500 million in debt; proactively extended maturities on $2.6 billion of borrowings; and increased revolver capacity by over $200 million
- Completed acquisition of Next Level Hospitality, expanding into high-growth senior living industry
- Over $1.9 billion cash availability at quarter-end
PHILADELPHIA–(BUSINESS WIRE)–Aramark (NYSE: ARMK) today reported third quarter fiscal 2021 results.
“Our third quarter performance continues to reflect Aramark’s strong competitive position and flexible business model as we help clients reopen within various stages of recovery, while also driving growth initiatives that resulted in meaningful new business wins and high levels of client retention,” said John Zillmer, Aramark’s Chief Executive Officer. “I am extremely proud of our team’s dedication to serving clients and focusing on our growth agenda.”
THIRD QUARTER RESULTS*
Consolidated revenue was $3.0 billion in the quarter, an increase of 39% year-over-year, that reflected increased levels of business activity compared to the prior year and lapping the first full quarter of COVID-impacted revenue. Organic Revenue, which adjusts for the effect of currency and the revenue contribution from the Next Level Hospitality acquisition that closed on June 4, 2021, grew 34% compared to the prior year.
The accelerated pace of client reopenings contributed to ongoing sequential quarterly improvement with organic revenue reaching 73% of pre-COVID levels. The upward trend was broad-based, led by the Leisure and Sports & Entertainment businesses within the FSS U.S. segment.
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| Revenue Change |
| Organic Revenue Change | ||||||||
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| Q3 ’20 | Q4 ’201 | Q1 ’21 | Q2 ’21 | Q3 ’21 |
| Q3 ’20 | Q4 ’20 | Q1 ’21 | Q2 ’21 | Q3 ’21 |
| FSS United States | (56)% | (41)% | (45)% | (30)% | 55% |
| (56)% | (45)% | (45)% | (31)% | 52% |
| FSS International | (46)% | (30)% | (27)% | (21)% | 41% |
| (41)% | (31)% | (29)% | (26)% | 28% |
| Uniform & Career Apparel | (12)% | (2)% | (10)% | (9)% | 6% |
| (12)% | (9)% | (10)% | (9)% | 5% |
| Total Company | (46)% | (32)% | (35)% | (24)% | 39% |
| (45)% | (36)% | (36)% | (26)% | 34% |
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| % of Fiscal ’19 |
| % of Fiscal ’19 | ||||||||
| Total Company | 54% | 68% | 64% | 70% | 74% |
| 55% | 64% | 65% | 71% | 73% |
| 1Q4 ’20 Revenue Change (%) benefits from the inclusion of a 53rd week. | |||||||||||
- FSS United States drove a year-over-year organic revenue increase of 52% and strong improvement compared to the preceding quarter as a result of the following drivers in each sector:
| Sector | Q3 Activity | |
| Education | Began notable recovery through the end of the academic year. Preparing for upcoming Fall semester with expectations that essentially all clients return to in-person learning. Higher Education implemented new offerings and digital innovation, while providing additional meal flexibility. K-12 continued to benefit from universal government-sponsored meal programs extended through June 2022. | |
| Sports, Leisure & Corrections | Demonstrated significant improvement, especially at the end of the quarter. Sports & Entertainment quickly increased fan counts in the NBA playoffs and MLB season. Leisure began the recreational season in late May with strong visitor attendance at National Parks. Corrections already has returned to pre-COVID levels. Both Sports & Entertainment and Leisure prepared for increased levels of activity in the coming months, including full capacity in NFL stadiums and benefits of record reservation demand in recreation, respectively. | |
| Business & Industry | Experienced an uptick in activity throughout the quarter as companies executed return-to-work strategies. Greater proportion of in-person activity expected after Labor Day. | |
| Facilities & Other | Outperformed pre-COVID levels driven by more frequent and comprehensive services. Strong success in vertical sales that expanded offerings for existing clients. | |
| Healthcare | Steady improvement largely reflecting increased retail activity as visitor restrictions eased. Integration of Next Level Hospitality underway with strong early performance indicative of the expected growth opportunities ahead. |
- FSS International grew organic revenue 28% compared to prior year with solid quarter-over-quarter improvement that balanced strong performance from healthcare in China and mining in Chile with government-imposed restrictions, particularly in Canada. The International team continued to effectively manage through various stages of geographic recovery with agility and responsiveness in addressing real-time client needs.
- Uniform & Career Apparel increased organic revenue 5% year-over-year, exhibiting strength in the back half of the quarter. Most customer categories and geographies demonstrated consistent improvement as the quarter progressed and adjacency services delivered double-digit growth, partially offset by a slower recovery from hospitality clients and government-imposed restrictions in Canada.
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| Revenue | ||||
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| Q3 ’21 | Q3 ’20 | Change $ | Change % | Organic Change % |
| FSS United States | $1,650M | $1,068M | $582M | 55% | 52% |
| FSS International | 729 | 517 | 211 | 41% | 28% |
| Uniform & Career Apparel | 603 | 568 | 36 | 6% | 5% |
| Total Company | $2,981M | $2,152M | $829M | 39% | 34% |
| Difference between GAAP Revenue Change and Organic Revenue Change reflects the elimination of currency translation and the effect of the Next Level Hospitality acquisition. | |||||
| *May not total due to rounding. | |||||
Operating Income was $74 million, an increase of $402 million compared to prior year. Adjusted Operating Income was $106 million, a year-over-year increase of $250 million, resulting in an AOI margin of 3.6% on a constant-currency basis. Performance in the quarter reflected improved business trends led by increased sales volumes and scalable operating efficiencies, while the Company managed through the impact of COVID-19 with cost discipline.
- FSS United States effectively controlled costs that drove profitability as additional client locations reopened in the quarter, particularly in the Sports & Entertainment and Leisure businesses, while remaining focused on investments to accelerate growth.
- FSS International benefited from previously implemented cost savings actions, while closely managing government-imposed restrictions and reimbursement programs.
- Uniform & Career Apparel experienced higher volume levels and improved efficiencies as a result of the early progress from the roll-out of the Company’s route accounting system, offset partially by inventory write-downs for certain Personal Protective Equipment (PPE).
- Corporate primarily reflected higher equity-based compensation associated with the Company’s incentive strategies to align the organization with shareholders.
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| Operating Income (Loss) |
| Adjusted Operating Income (Loss) | ||||
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| Q3 ’21 | Q3 ’20 | Change $ |
| Q3 ’21 | Q3 ’20 | Change $ |
| FSS United States | $44M | ($194M) | $238M |
| $64M | ($78M) | $142M |
| FSS International | 21 | (138) | 159 |
| 23 | (62) | 85 |
| Uniform & Career Apparel | 35 | 22 | 13 |
| 45 | 17 | 28 |
| Corporate | (26) | (17) | (8) |
| (26) | (21) | (5) |
| Total Company | $74M | ($328M) | $402M |
| $106M | ($144M) | $250M |
| * May not total due to rounding. | |||||||
GAAP SUMMARY
Third quarter fiscal 2021 GAAP results across all metrics demonstrated increased levels of business activity while still recovering from COVID-19. On a GAAP basis, revenue was $3.0 billion, operating income was $74 million, net income attributable to Aramark stockholders was $33 million and diluted earnings per share was $0.13. Net income attributable to Aramark stockholders and diluted earnings per share included the benefit of a non-cash gain on an equity investment of $138 million and a non-cash loss from a defined benefit pension plan termination of $61 million. For the third quarter of fiscal 2020, on a GAAP basis, revenue was $2.2 billion, operating loss was $328 million, net loss attributable to Aramark stockholders was $256 million and diluted loss per share was $1.01. A reconciliation of GAAP to Non-GAAP measures is included in the Appendix.
CURRENCY
Revenue and Adjusted Operating Income were favorably impacted in the quarter by $75 million and $3 million, respectively, due to a weaker U.S. dollar. Adjusted earnings per share benefited by less than $0.02 in the quarter.
CASH FLOW
In the quarter, the Company generated Net Cash provided by operating activities of $12 million and a use of $89 million in Free Cash Flow that reflected the seasonal cadence of the period. Capital expenditures were higher than preceding quarters as a result of investment primarily related to new business wins.
Through nine months, Aramark drove year-over-year improvements of $309 million in Net Cash provided by operating activities and $324 million in Free Cash Flow led by effective working capital management with continued improvement in collections as well as the benefit of federal tax refunds and deferred payroll taxes related to the CARES Act.
CAPITAL STRUCTURE
As previewed in the second quarter earnings disclosures, Aramark implemented strategies that advanced its capital allocation priorities, including:
- Redeemed in full the $500 million outstanding principal amount of its 4.75% Senior Notes due 2026
- Refinanced its $833 million 2024 Term Loan B credit facility to extend maturity to 2028
- Closed a 3-year extension on substantially all of its Revolving Credit Facility and Term Loans A and C to 2026 as well as upsized its Revolving Credit Facility to $1.2 billion that increased the Company’s cash availability by over $200 million
- Completed the acquisition of Next Level Hospitality, a premier provider of culinary and environmental services in the senior living industry
In addition to the actions previously communicated, the Company proactively extended its existing Receivables Facility by two years through June 2024.
These focused measures collectively strengthened the balance sheet and enhanced financial flexibility, while providing a platform to drive the Company’s growth agenda. At quarter-end, Aramark had approximately $1.9 billion in cash availability.
DIVIDEND DECLARATION
The Company’s Board of Directors approved a quarterly dividend of 11 cents per share of common stock. The fiscal fourth quarter 2021 dividend will be payable on September 8, 2021 to stockholders of record at the close of business on August 25, 2021.
BUSINESS UPDATE
Aramark remains committed to the pursuit of accelerated growth through profitable new business wins, high retention rates and driving performance in existing client locations. The Company continues to invest in growth-oriented resources that have created additional sales opportunities in the immediate pipeline.
Throughout the year, and particularly as the third quarter progressed, Aramark partnered closely with clients to develop and execute reopening strategies in a safe and effective manner that included new service offerings and applicable innovation. The Company continues to apply disciplined cost management while driving operating efficiencies through leveraging scale and flexibility across the portfolio. Aramark remains focused on further pursuing opportunities to advance its capital allocations priorities through purposeful investment in growth, debt repayment and return to shareholders. The transformational actions underway are expected to increasingly provide sustained value creation.
As previously referenced, Aramark closed on the acquisition of Next Level Hospitality on June 4, 2021 for $226.2 million of up-front consideration that includes a modest working capital adjustment. The Company may have additional contingent consideration based on favorable performance. In its first four weeks as part of Aramark, Next Level Hospitality generated over $23 million in revenue that the Company believes is indicative of the extensive growth opportunities ahead in the largely under-penetrated, highly self-operated senior living industry. New contracts require minimal startup costs and have strong profitability with high single-digit margins.
On June 30, 2021, Aramark completed its inaugural offering period for its Employee Stock Purchase Plan (ESPP) with strong participation from eligible employees. The ESPP experienced an approximate 20% increase in its second offering period that commenced on July 1, 2021. The program continues to reinforce the ownership mindset within the organization in a way that aligns people, values and performance.
2021 OUTLOOK
The Company provides its expectations for organic revenue growth, Adjusted Operating Income margin and 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. The fiscal 2021 outlook reflects management’s current assumptions regarding the pace of recovery from COVID-19 for Aramark and its clients. The extent to which COVID-19 impacts business, operations, and financial results, including the duration and magnitude of such impact, will depend on numerous evolving factors that are difficult to accurately predict, including those discussed in the Risk Factors set forth in the Company’s filings with the U.S. Securities and Exchange Commission.
In the fourth quarter, Aramark expects ongoing business performance progress led by an accelerated pace of client reopenings, including essentially all Education clients returning to in-person learning for the start of the academic year. The Company currently expects fourth quarter performance as follows:
- Continued organic revenue improvement, reaching 80% to 85% of 2019 levels
- Adjusted Operating Income (AOI) margin in a range of 4.5% to 5.0%
- Free Cash Flow outlook raised to generating $150 million to $250 million for fiscal 2021, driven by an expected strong seasonal cash inflow in the fourth quarter associated with the Higher Education business. Comparatively, Free Cash Flow was a use of $188 million in fiscal 2020.
“I am confident that Aramark is well-positioned to execute on the numerous attractive strategic opportunities ahead and deliver strong performance for our stakeholders by continuing to drive growth and innovation designed to win new business, actively maintain balance sheet flexibility, and pursue cost discipline throughout the organization,” Zillmer concluded.
CONFERENCE CALL SCHEDULED
The Company has scheduled a conference call at 8:30 a.m. ET today to discuss its earnings and outlook. This call and related materials can be heard and reviewed, either live or on a delayed basis, on the Company’s website, www.aramark.com on the investor relations page.
About Aramark
Aramark (NYSE: ARMK) proudly serves the world’s leading educational institutions, Fortune 500 companies, world champion sports teams, prominent healthcare providers, iconic destinations and cultural attractions, and numerous municipalities in 19 countries around the world with food, facilities, and uniform services. Because our culture is rooted in service, our employees strive to do great things for each other, our partners, our communities, and our planet. Aramark has been named to DiversityInc’s “Top 50 Companies for Diversity” list, the Forbes list of “America’s Best Employers for Diversity,” the Human Rights Campaign Foundation’s “Best Place to Work for LGBTQ Equality” and scored 100% on the Disability Equality Index. Learn more at www.aramark.com and connect with us on Facebook, Twitter, and LinkedIn.
Selected Operational and Financial Metrics
Adjusted Revenue (Organic)
Adjusted Revenue (Organic) represents revenue growth, adjusted to eliminate the estimated impact of the 53rd week, the effect of the Next Level acquisition, the effect of material divestitures and the impact of currency translation.
Adjusted Operating Income (Loss)
Adjusted Operating Income (Loss) represents operating income (loss) 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 the Next Level acquisition; merger and integration related charges; asset impairments 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 (Loss)
Adjusted Net Income (Loss) represents net income (loss) 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; the effect of the Next Level acquisition; merger and integration related charges; asset impairments; gain on an equity investment; loss on defined benefit pension plan termination; the effect of debt refinancings, less the tax impact of these adjustments; the impact of tax legislation; the tax benefit attributable to the former CEO’s equity award exercises; the tax impact related to shareholder contribution and other items impacting comparability. The tax effect for adjusted net income (loss) for our U.S. earnings is calculated using a blended U.S. federal and state tax rate. The tax effect for adjusted net income (loss) in jurisdictions outside the U.S. is calculated at the local country tax rate.
Adjusted Net Income (Loss) (Constant Currency)
Adjusted Net Income (Loss) (Constant Currency) represents Adjusted Net Income (Loss) adjusted to eliminate the impact of currency translation.
Adjusted EPS
Adjusted EPS represents Adjusted Net Income (Loss) 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 loss attributable to Aramark stockholders adjusted for interest and other financing costs, net; 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 (used in) 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 (Organic), Adjusted Operating Income (Loss) (including on a constant currency basis), Adjusted Net Income (Loss) (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 income (loss), net income (loss), or earnings (loss) per share, determined in accordance with GAAP. Adjusted Revenue (Organic), Adjusted Operating Income (Loss), Adjusted Net Income (Loss), 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 expense resulting from the purchase accounting applied to the January 26, 2007 going-private transaction and amortization expense recognized on other acquisition-related intangible assets.
Severance and Other Charges – adjustments to eliminate severance expenses in the applicable period ($5.4 million expense reversal for year-to-date 2021, $124.9 million for the third quarter of 2020 and $131.8 million for year-to-date 2020).
Effect of Next Level Acquisition – adjustments to eliminate the operating results of Next Level that are not comparable to the prior year 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, and charges related to plant consolidation, the implementation of a new revenue accounting system, rebranding and other expenses.
Goodwill Impairment – adjustment to eliminate the impact of a non-cash impairment charge to goodwill.
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 and retirement contributions.
Gains, Losses and Settlements impacting comparability – adjustments to eliminate certain transactions that are not indicative of our ongoing operational performance, primarily for income from prior years’ loss experience under our general liability, automobile liability and workers’ compensation programs ($18.1 million for year-to-date 2021 and $10.3 million for year-to-date 2020), the impact of the change in fair value related to certain gasoline and diesel agreements ($0.1 million loss for the third quarter of 2021, $5.6 million gain for year-to-date 2021, $5.2 million gain for the third quarter of 2020 and $3.6 million loss for year-to-date 2020), charges related to hyperinflation in Argentina ($1.0 million for year-to-date 2021 and $1.1 million for year-to-date 2020), pension withdrawal charges ($0.7 million for year-to-date 2021 and $0.1 million for year-to-date 2020), 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.
Contacts
Inquiries:
Felise Kissell
(215) 409-7287
[email protected]
Scott Sullivan
(215) 238-3953
[email protected]
