Cintas Corporation — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended November 30, 2015, compared with the corresponding periods ended November 30, 2014. The filing was signed January 8, 2016. Cintas provides uniform rental, facility, first aid and safety, fire protection and related business services, primarily in North America.
Financial performance
| Metric | Three months ended Nov. 30, 2015 | Prior year | Change |
|---|---|---|---|
| Revenue | $1,219.1 million | $1,123.4 million | 8.5% |
| Operating income | $200.3 million | $181.6 million | 10.3% |
| Operating margin | 16.4% | 16.2% | Up approximately 30 bps |
| Income from continuing operations | $115.5 million | $103.7 million | 11.3% |
| Diluted EPS from continuing operations | $1.03 | $0.86 | 19.8% |
| Net income | $345.1 million | $120.4 million | 186.6% |
| Diluted EPS | $3.06 | $1.00 | 206.0% |
Net income and total EPS include a substantial gain from discontinued operations, principally the sale of Cintas’s Shred-it investment. Continuing-operations results are more representative of ongoing performance.
| Metric | Six months ended Nov. 30, 2015 | Prior year | Change |
|---|---|---|---|
| Revenue | $2,418.0 million | $2,225.5 million | 8.7% |
| Operating income | $385.9 million | $345.1 million | 11.8% |
| Operating margin | 16.0% | 15.5% | Up approximately 50 bps |
| Income from continuing operations | $221.7 million | $209.6 million | 5.7% |
| Diluted EPS from continuing operations | $1.96 | $1.75 | 12.0% |
| Net income | $445.3 million | $230.5 million | 93.2% |
| Diluted EPS | $3.94 | $1.93 | 104.1% |
Segment and margin developments
- Uniform Rental and Facility Services: Second-quarter revenue increased 5.2% to $937.7 million, with organic growth of 6.2%. Gross margin improved to 43.9% from 43.3%, aided by lower energy costs and process efficiency. Income before taxes increased 6.1% to $169.3 million.
- First Aid and Safety Services: Second-quarter revenue increased 46.4% to $120.4 million, including 9.8% organic growth and significant acquisition contribution from ZEE Medical. Gross margin declined to 43.2% from 46.7% because of ZEE integration costs and lower route efficiency. Income before taxes increased to $14.8 million, but pretax margin fell to 12.3% from 14.3%.
- Six-month trend: Uniform Rental and Facility Services revenue rose 6.3%, while First Aid and Safety Services revenue rose 35.6%. The First Aid and Safety gross margin declined 350 basis points to 42.8% for the six-month period.
Cash flow, liquidity and debt
- Six-month operating cash flow was $265.0 million, down from $292.6 million, primarily because of working-capital changes.
- Investing cash flow was $313.3 million, including $578.3 million of proceeds from the Shred-it sale, $35.3 million from Storage transactions and $121.2 million of acquisitions. Capital expenditures were $121.8 million.
- Financing cash flow was negative $384.2 million, primarily reflecting $402.3 million of share repurchases.
- Cash and cash equivalents were $606.8 million at November 30, 2015, compared with $417.1 million at May 31, 2015. Marketable securities were $65.8 million.
- Total senior notes were $1.3 billion, including $250.0 million due within one year and $1.05 billion due thereafter. No commercial paper or revolving-credit borrowings were outstanding.
- The commercial paper program has $300.0 million of capacity and is supported by a revolving facility expandable to $450.0 million, maturing May 28, 2019. Cintas reported compliance with all debt covenants.
- Credit ratings were stable: Standard & Poor’s commercial paper A-2 and long-term debt A-; Moody’s commercial paper P-1 and long-term debt A2.
Material changes and unusual items
- Cintas acquired ZEE Medical on August 1, 2015, for estimated consideration of $134.0 million, including $120.6 million in cash and $13.4 million of contingent consideration. ZEE was included in First Aid and Safety Services.
- Cintas completed the sale of its Shred-it investment during the quarter for $578.3 million of proceeds. The transaction produced a $374.0 million pretax gain and $229.6 million of after-tax discontinued-operation income for the quarter. Up to $34.0 million of additional consideration remains contingent and was not recorded.
- Storage operations and related transactions remained classified as discontinued operations. Storage transactions generated $10.9 million of pretax gain in the quarter and $15.8 million for the six-month period.
- Reportable segments were realigned effective June 1, 2015 into Uniform Rental and Facility Services, First Aid and Safety Services, and All Other; prior periods were restated for comparison.
- Cintas repurchased $382.9 million of shares under its January 13, 2015 and August 4, 2015 programs during the six months, and separately acquired $19.4 million of shares for employee tax withholding. The January 13 program was completed; $380.0 million remained available under the August 4 program at November 30, 2015.
- The company declared an annual dividend of $1.05 per share, a 23.5% increase from the prior year.
Outlook, risks and contingencies
Management stated that operating cash flow, cash balances, commercial paper capacity and the revolving facility should provide adequate funding for operations, expansion, acquisitions, dividends and share repurchases. The filing does not provide formal numerical revenue or earnings guidance.
- Key execution risk is the integration of ZEE and other acquisitions, including realizing expected synergies and improving acquired-route efficiency.
- Other disclosed risks include lower sales volumes, customer outsourcing, energy, fuel, labor and medical costs, foreign-exchange movements, regulatory and tax changes, cybersecurity or system disruptions, environmental liabilities, litigation and labor-related matters.
- The EEOC systemic gender-discrimination litigation was settled through a consent decree approved November 25, 2015; the settlement was not material to continuing operations. Management stated that other litigation could nevertheless result in material liability, although any estimated liability was not determinable.
- Cintas is subject to tax audits in the United States and foreign jurisdictions. Management indicated that unrecognized tax benefits could decrease by approximately $1.0 million during fiscal 2016, although final outcomes remain uncertain.
- Forward-looking results depend partly on maintaining investment-grade credit ratings and continued access to commercial paper and long-term debt markets.
Investor verification points
- Separate recurring continuing-operations performance from the $229.6 million quarterly and $223.6 million six-month after-tax contribution from discontinued operations.
- Track ZEE integration progress, route productivity and the recovery of First Aid and Safety gross margins.
- Reconcile operating cash flow with reported earnings and monitor working-capital requirements and capital expenditures.
- Review the maturity schedule for the $250.0 million of debt due within one year and ongoing compliance with leverage and interest-coverage covenants.
- Assess the use of the remaining $380.0 million share-repurchase authorization against acquisition, capital-investment and liquidity needs.
- Evaluate the contingent Shred-it consideration of up to $34.0 million separately from recognized earnings.
- Confirm the impact of foreign-exchange exposure, labor and medical costs, tax audits, litigation and cybersecurity risks in subsequent filings.