Cintas Corporation — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2017. The supplied filing is not a fiscal 2016 fourth-quarter filing; it is the FY2017 annual report, with FY2016 and FY2015 comparatives.
Business context
Cintas provides uniform rental and facility services, first aid and safety products, fire protection services, and uniform direct sales to more than one million businesses, primarily in North America. Its reportable segments are Uniform Rental and Facility Services, First Aid and Safety Services, and All Other.
Cintas completed the approximately $2.1 billion acquisition of G&K Services on March 21, 2017. G&K operates within Uniform Rental and Facility Services and contributed $187.7 million of revenue and $5.7 million of net income from acquisition through year-end.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $5.323 billion | $4.796 billion | +11.0% |
| Operating income | $773.7 million | $768.9 million | +0.6% |
| Income before taxes | $687.4 million | $705.3 million | -2.5% |
| Income from continuing operations | $457.3 million | $448.6 million | +1.9% |
| Net income | $480.7 million | $693.5 million | -30.7% |
| Diluted EPS from continuing operations | $4.17 | $4.02 | +3.7% |
| Diluted EPS | $4.38 | $6.21 | -29.5% |
- Revenue mix: Uniform Rental and Facility Services revenue was $4.202 billion, First Aid and Safety Services was $508.2 million, and All Other was $612.7 million.
- Growth: Organic revenue growth was 6.7%; acquisitions contributed 4.8%, foreign exchange reduced growth by 0.1%, and one fewer workday reduced growth by 0.4%.
- Margins: Consolidated gross margin was 44.7%, compared with 43.8% in FY2016. Operating margin was approximately 14.5%, compared with 16.0% in FY2016, reflecting acquisition-related costs and higher interest expense. The continuing-operations pretax margin was 12.9%, compared with 14.7%.
- Cash flow: Operating cash flow was $763.9 million, versus $465.8 million in FY2016. Capital expenditures were $273.3 million. Investing cash flow was negative $2.310 billion, primarily due to $2.102 billion of acquisition spending.
- Liquidity: Cash and cash equivalents were $169.3 million and marketable securities were $22.2 million at May 31, 2017. Cash and securities held outside the United States totaled $125.5 million.
- Debt: Debt carrying value was approximately $3.156 billion, including $362.9 million due within one year. The company issued approximately $2.1 billion of debt to finance G&K. It had $50.5 million of commercial paper outstanding and no revolving-credit borrowings at year-end.
- Equity returns: The annual dividend increased 26.7% to $1.33 per share. A $500 million share-repurchase authorization remained available; FY2017 program repurchases were $3.7 million, excluding shares acquired for employee tax withholding.
- Balance sheet: Total assets increased to $6.844 billion from $4.099 billion, primarily due to G&K. Shareholders’ equity increased to $2.303 billion from $1.843 billion.
Material changes versus the prior comparable period
- Revenue growth accelerated, but pretax income declined because of $79.2 million of G&K transaction and integration expenses and higher net interest expense of $86.3 million versus $63.6 million.
- G&K-related expenses included $23.3 million of asset impairment charges, $17.4 million of legal and professional fees, $31.0 million of employee termination costs, $5.5 million of excess-inventory write-offs, and $2.0 million of other costs.
- The effective tax rate declined to 33.5% from 36.4%, largely because adoption of ASU 2016-09 generated a $29.4 million excess tax benefit. Management reported a $0.19 per-share benefit to FY2017 diluted EPS from the adoption.
- Uniform Rental and Facility Services gross margin improved to 45.1% from 44.3%. First Aid and Safety Services gross margin improved to 45.3% from 42.7%, primarily due to ZEE integration benefits, while selling and administrative expense ratios increased in both segments.
- Reported net income and total EPS were lower because FY2016 included $244.9 million of discontinued-operations income, principally gains related to the Shred-it divestiture. FY2017 discontinued-operations income was $23.4 million.
- Discontinued Services was classified as held for sale at May 31, 2017 and was sold on July 11, 2017 for $130.0 million.
Outlook, commentary, risks and unusual items
- Management’s strategy emphasizes organic growth through customer penetration, sales-force productivity, geographic expansion, new products and services, and selective acquisitions. The filing does not provide specific FY2018 revenue or earnings guidance.
- Management expected to realize benefits from G&K integration, but identified uncertainty regarding the timing and amount of cost synergies and whether the transaction would be accretive within the expected timeframe.
- Principal risks include integration of G&K and prior acquisitions, increased leverage and debt-service requirements, competition and customer insourcing, labor and unionization matters, wage and benefit inflation, fuel and energy costs, supplier and foreign-exchange exposure, regulatory compliance, litigation, environmental liabilities, cybersecurity and SAP implementation risks.
- Cintas reported compliance with all debt covenants. Its revolving credit facility capacity was $600 million, with an additional $250 million term-loan facility and an accordion feature of up to $250 million, subject to customary conditions.
- Management and Ernst & Young concluded that internal control over financial reporting was effective. However, controls for G&K were excluded from the assessment; G&K represented 37.6% of total assets, including acquired goodwill and identifiable intangible assets, and 3.5% of FY2017 revenue.
- The company reported ordinary-course personal injury, customer contract, environmental and employment claims, but management did not expect aggregate liabilities to have a material adverse effect. The filing does not provide a clear quantified total exposure.
- Cintas planned to adopt the new revenue-recognition standard in the first quarter of fiscal 2019 using the modified retrospective method; the financial impact had not yet been determined.
Most important facts for investors to verify
- Confirm the requested period: the source is FY2017, not 2016 Q4.
- Assess whether G&K integration delivers expected cost synergies and supports margin recovery after the $79.2 million of one-time costs.
- Monitor leverage, debt maturities, variable-rate exposure, credit ratings and compliance with debt covenants.
- Separate recurring operating performance from discontinued-operations gains, acquisition accounting effects, and the FY2017 tax benefit from ASU 2016-09.
- Review the final purchase-price allocation for G&K, including approximately $1.493 billion of goodwill and $519.0 million of service-contract assets, which were preliminary at filing.
- Evaluate the effect of excluding G&K from the internal-control assessment and the company’s ability to integrate G&K systems and operations.