Nov. 26, 2019, 4:20 p.m. EST

10-K: ARAMARK

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(EDGAR Online via COMTEX) -- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of Aramark's (the "Company, "we," "our" and "us") financial condition and results of operations for the fiscal years ended September 27, 2019 and September 28, 2018 should be read in conjunction with Selected Consolidated Financial Data and our audited consolidated financial statements and the notes to those statements. Discussion and analysis of our financial condition and results of operations for the fiscal year ended September 28, 2018 compared to the fiscal year ended September 29, 2017 is included under the heading Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Fiscal 2018 Compared to Fiscal 2017 and - Liquidity and Capital Resources" in our Annual Report on Form 10-K filed for the fiscal year ended September 28, 2018 with the Securities and Exchange Commission ("SEC") on November 21, 2018. Our discussion contains forward-looking statements, such as our plans, objectives, opinions, expectations, anticipations, intentions and beliefs, that are based upon our current expectations but that involve risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in those forward-looking statements as a result of a number of factors, including those set forth under "Risk Factors," "Special Note About Forward-looking Statements" and "Business" sections and elsewhere in this Annual Report on Form 10-K ("Annual Report"). In the following discussion and analysis of financial condition and results of operations, certain financial measures may be considered "non-GAAP financial measures" under SEC rules. These rules require supplemental explanation and reconciliation, which is provided elsewhere in this Annual Report on Form 10-K. Overview We are a leading global provider of food, facilities and uniform services to education, healthcare, business & industry and sports, leisure & corrections clients. Our core market is the United States, which is supplemented by an additional 18-country footprint. Through our established brand, broad geographic presence and employees, we anchor our business in our partnerships with thousands of education, healthcare, business, sports, leisure and corrections clients. Through these partnerships we serve millions of consumers including students, patients, employees, sports fans and guests worldwide. We operate our business in three reportable segments: Food and Support Services United States ("FSS United States") - Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, leisure and other facilities serving the general public in the United States. Food and Support Services International ("FSS International") - Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, leisure and other facilities serving the general public. We have operations in 18 countries outside the United States. Our largest international operations are in Canada, Chile, China, Germany, Ireland and the United Kingdom, and in a majority of these countries we are one of the leading food and/or facility services providers. We also have operations in Japan through our 50% ownership of AIM Services Co., Ltd., which is a leader in providing outsourced food services in Japan. Uniform and Career Apparel ("Uniform") - Provides a full service employee uniform solution, including design, sourcing and manufacturing, delivery, cleaning and maintenance on a contract basis. We directly market personalized uniforms and accessories, provide managed restroom services and rent uniforms, work clothing, outerwear, particulate-free garments and non-garment items and related services, including mats, shop towels and first aid supplies, to clients in a wide range of industries in the United States, Canada, Puerto Rico and through a joint venture in Japan, including the manufacturing, transportation, construction, restaurant and hotel, healthcare and pharmaceutical industries.

Our Food and Support Services operations focus on serving clients in five principal sectors: Business & Industry, Education, Healthcare, Sports, Leisure & Corrections and Facilities & Other. Our FSS International reportable segment provides a similar range of services as those provided to our FSS United States clients and operates in the same sectors. Administrative expenses not allocated to our three reportable segments are presented separately as corporate expenses. During fiscal 2018, we acquired Avendra, LLC ("Avendra") and AmeriPride Services, Inc. ("AmeriPride") in separate transactions (see Note 2 to the audited consolidated financial statements). The Avendra acquisition consideration was $1,386.4 million, partially offset by $87.3 million of cash and restricted investments acquired. The AmeriPride acquisition consideration was $995.4 million, partially offset by $84.9 million of cash acquired. We incurred new debt to finance both the Avendra and AmeriPride acquisitions. Our earnings have been impacted and we expect to continue to be impacted for some period following

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the closings as a result of these acquisitions, due to, among other factors, merger and integration costs as well as depreciation and amortization resulting from purchase accounting and higher interest expense as a result of the new debt to finance the transactions. As a part of the integration of Avendra and AmeriPride, we have incurred $92 million of charges and expect to incur approximately $25 million to $30 million of additional charges over the next 12 months.

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Interest and Other Financing Costs, net

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Results of Operations







        Fiscal 2019 Compared to Fiscal 2018
        The following tables present an overview of our results on a consolidated and
        segment basis with the amount of and percentage change between periods for the
        fiscal years 2019 and 2018 (dollars in millions).
                                                        Fiscal Year Ended
                                            September 27, 2019     September 28, 2018         $              %
        Revenue                            $         16,227.3     $         15,789.6     $    437.7            3  %
        Costs and Expenses:
        Cost of services provided                    14,532.7               13,997.9          534.8            4  %
        Other operating expenses                        959.7                  973.3          (13.6 )         (1 )%
        Gain on sale of Healthcare
        Technologies                                   (156.3 )                    -         (156.3 )          -  %
                                                     15,336.1               14,971.2          364.9            2  %
        Operating income                                891.2                  818.4           72.8            9  %
        Interest and Other Financing
        Costs, net                                      335.0                  346.6          (11.6 )         (3 )%
        Income Before Income Taxes                      556.2                  471.8           84.4           18  %
        Provision (Benefit) for Income
        Taxes                                           107.7                  (96.6 )        204.3         (212 )%
        Net income                         $            448.5     $            568.4     $   (119.9 )        (21 )%
                                                        Fiscal Year Ended
        Revenue by Segment(1)               September 27, 2019     September 28, 2018         $              %
        FSS United States                  $          9,898.6     $         10,137.8     $   (239.2 )         (2 %)
        FSS International                             3,742.9                3,655.8           87.1            2 %
        Uniform                                       2,585.8                1,996.0          589.8           30 %
                                           $         16,227.3     $         15,789.6     $    437.7            3 %
                                                        Fiscal Year Ended
        Operating Income by Segment(1)      September 27, 2019     September 28, 2018         $              %
        FSS United States                  $            716.8     $            682.7     $     34.1            5 %
        FSS International                               142.7                  142.2            0.5            - %
        Uniform                                         191.3                  181.4            9.9            5 %
        Corporate                                      (159.6 )               (187.9 )         28.3          (15 %)
                                           $            891.2     $            818.4     $     72.8            9 %
        


(1) As a percentage of total revenue, FSS United States represented 61% and 64%, FSS International represented 23% and 23% and Uniform represented 16% and 13% for fiscal 2019 and fiscal 2018, respectively. The fiscal 2019 percentages were impacted by the adoption of Accounting Standards Codification ("ASC") 606 (see Note 7 to the audited consolidated financial statements). Revenue and operating income in fiscal 2019 for the FSS United States segment were also impacted by the sale of HCT in the first quarter of fiscal 2019 (see Note 2 to the audited consolidated financial statements). Fiscal 2018 operating income was impacted by the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715):

growth in the Sports, Leisure & Corrections sector in our FSS United States segment (approximately 1%);

the adoption of the new revenue recognition standard mainly from certain fees previously recognized as a reduction to "Cost of services provided," that are now recognized in "Revenue" in our Uniform segment (approximately 2%); and

growth due to the Avendra and AmeriPride acquisitions (approximately 1%); which more than offset

the effect of the divestiture of HCT (approximately -2%); and

the negative impact of foreign currency translation (approximately -2%).

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The following table presents the cost of services provided by segment and as a percent of revenue for the fiscal years ended September 27, 2019 and September 28, 2018.







                                                                               Fiscal Year Ended
                                                            September 27, 2019                  September 28, 2018
        Cost of services provided                            $           % of Revenue            $           % of Revenue
        FSS United States                            $       8,851.5           89 %      $       8,956.9           88 %
        FSS International                                    3,517.1           94 %              3,428.8           94 %
        Uniform                                              2,164.1           84 %              1,612.2           81 %
                                                     $      14,532.7           90 %      $      13,997.9           89 %
        


The following table presents the percentages attributable to the components in cost of services provided for fiscal 2019 and fiscal 2018.







                                                            Fiscal Year Ended
        Cost of services provided components    September 27, 2019      September 28, 2018
        Food and support service costs                     28 %                      26 %
        Personnel costs                                    47 %                      47 %
        Other direct costs                                 25 %                      27 %
                                                          100 %                     100 %
        


Operating income increased by approximately $72.8 million during fiscal 2019 compared to the prior year period. The increase in operating income was attributable to:

an increase in profit related to the acquisitions of Avendra and AmeriPride and lower merger and integration costs (approximately $41.1 million);

a decrease in share-based compensation expense primarily related to an increase in the prior year actual and expected attainment percentages related to the fiscal 2016 and fiscal 2017 Performance Stock Unit ("PSU") grants, respectively, and a decrease in the actual and expected attainment percentages in the current year related to the fiscal 2017 and fiscal 2018 PSU grants, respectively, (approximately $33.0 million);

lower severance and consulting costs related to streamlining initiatives (approximately $22.2 million);

an increase in profit in the Sports, Leisure and Corrections sector in our FSS United States segment, including income relating to the recovery of our investment (possessory interest) at one of the National Park Service ("NPS") sites (approximately $16.2 million); partially offset by

higher personnel costs, including employee incentive expenses related to the annual bonus (approximately $87.6 million) and employer retirement matching contributions (approximately $12.4 million) and expenses for employee reinvestments funded by benefits from U.S. tax reform (approximately $74.9 million);

profit decline in the Business & Industry sector and from the divestiture of HCT (approximately $30.2 million);

charges related to certain legal settlements (approximately $27.9 million);

non cash impairment charges related to various assets (approximately $14.8 million);

cash compensation charges related to the retirement of our former chief executive officer (approximately $10.4 million);

closing costs mainly related to customer contracts within our FSS International segment (approximately $10.3 million); and

advisory, legal and other professional fees related to the Mantle Ridge Group (approximately $7.7 million).

Interest and Other Financing Costs, net, decreased 3% during fiscal 2019 compared to the prior year period. The decrease for fiscal 2019 was primarily due to lower refinancing activity expenses compared to fiscal 2018 of $15.6 million and an increase in favorable returns on our interest rate swaps of $11.7 million, partially offset by higher borrowings from the financing in fiscal 2018 for the Avendra and AmeriPride acquisitions.

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The effective income tax rate for fiscal 2019 was 19.4% compared to (20.5)% in the prior year. The increase in the effective tax rate in fiscal 2019 was driven by prior year one-time benefits resulting from a reduction in the U.S. federal statutory rate from 35% to 21% and the re-measurement of our deferred tax assets and liabilities as a result of the "Tax Cuts and Jobs Act." A non cash benefit of approximately $237.8 million was recorded to the provision (benefit) for income taxes for fiscal 2018 in the Consolidated Statements of Income as a result of U.S. tax reform, the impact of certain permanently reinvested foreign earnings and certain other tax adjustments. The effective tax rate for fiscal 2019 also includes a tax benefit of approximately $10.4 million, mainly as a result of U.S. tax reform (see Note 9 to the audited consolidated financial statements) and a $17 million tax provision related to the sale of HCT (see Note 2 to the audited consolidated financial statements). Segment Results







                                                     Fiscal Year Ended                 Change
                                         September 27, 2019      September 28, 2018       %
        Business & Industry             $            1,587.0    $           1,550.6       2  %
        Education                                    3,228.8                3,239.6       -  %
        Healthcare                                     933.5                1,292.1     (28 )%
        Sports, Leisure & Corrections                2,557.5                2,445.1       5  %
        Facilities & Other                           1,591.8                1,610.4      (1 )%
                                        $            9,898.6    $          10,137.8      (2 )%
        


The Healthcare, Education and Facilities & Other sectors generally have high-single digit operating income margins and the Business & Industry and Sports, Leisure & Corrections sectors generally have mid-single digit operating income margins.

a decrease in Facilities & Other sector revenue resulting from a decline in base business within our facilities business; which more than offset

an increase in Sports, Leisure & Corrections sector revenue resulting from new business and base business growth in stadiums and arenas; and

an increase in Business & Industry sector revenue resulting from new business and base business growth.

Operating income increased by approximately $34.1 million during fiscal 2019 compared to the prior year period. The increase in operating income was attributable to:

an increase in profit in the Sports, Leisure and Corrections sector, including income relating to the recovery of our investment (possessory interest) at one of the NPS sites (approximately $16.2 million);

lower severance charges related to streamlining initiatives (approximately $9.3 million); and

an increase in profit related to the acquisition of Avendra and lower merger and integration costs (approximately $7.9 million); which more than offset

higher personnel costs, including employee incentive expenses related to the annual bonus (approximately $45.0 million) and employer retirement matching contributions (approximately $7.8 million) and expenses for employee reinvestments funded by benefits from U.S. tax reform (approximately $58.7 million);

profit decline in the Business & Industry sector and from the divestiture of HCT (approximately $30.2 million);

charges related to certain legal settlements (approximately $11.1 million); and

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non cash impairment charges related to various assets ($11.1 million).

Revenue and operating income were both negatively impacted during fiscal 2018 by natural disasters, specifically the wildfires at Yosemite National Park. The impact to the FSS United States segment was an approximate $28 million decline in revenue and an approximate $9 million decline in operating income, which includes $5 million of recoveries under our insurance program. FSS International Segment

Nov 26, 2019

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