Cintas Corporation — Fiscal 2015 Form 10-K
Reporting period: Fiscal year ended May 31, 2015. The request references 2014 Q4, but the supplied filing is the fiscal 2015 annual report; it includes quarterly data for the fourth quarter ended May 31, 2015 and comparative fourth-quarter data for fiscal 2014.
Business context
Cintas provides rental and direct-sale uniforms, ancillary facility services, first aid, safety and fire protection products and services, primarily in North America. It served more than one million businesses through approximately 8,000 delivery routes, 364 operational facilities and eight distribution centers, with approximately 32,000 employees.
- Rental Uniforms and Ancillary Products: $3.455 billion of fiscal 2015 revenue.
- Uniform Direct Sales: $453.7 million of revenue.
- First Aid, Safety and Fire Protection Services: $568.3 million of revenue.
Fiscal 2015 results exclude consolidated Shredding revenue following the April 30, 2014 Shredding Transaction. Storage was classified as a discontinued operation and sold during fiscal 2015.
Financial performance and liquidity
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $4.477 billion | $4.470 billion | 0.2% |
| Operating income | $696.4 million | $564.2 million | 23.4% |
| Income before taxes | $658.3 million | $605.0 million | 8.8% |
| Net income from continuing operations | $408.1 million | $374.3 million | 9.0% |
| Net income | $430.6 million | $374.4 million | 15.0% |
| Diluted EPS from continuing operations | $3.44 | $3.05 | 12.8% |
| Diluted EPS | $3.63 | $3.05 | 19.0% |
| Total gross margin | 42.9% | 41.9% | Up 100 basis points |
| Income before taxes as a percentage of revenue | 14.7% | 13.5% | Up 120 basis points |
| Net cash from operations | $580.3 million | $606.0 million | Down $25.7 million |
| Capital expenditures | $217.7 million | $145.6 million | Up $72.1 million |
Organic revenue growth was 7.1%, offset by a 6.6% negative effect from Shredding deconsolidation, a 0.5% foreign-exchange impact and a 0.2% acquisition contribution. Rental Uniforms and Ancillary Products revenue rose 7.2%, while First Aid, Safety and Fire Protection Services revenue rose 10.5%. Uniform Direct Sales revenue declined 0.4%.
At May 31, 2015, Cintas held $417.1 million of cash and cash equivalents and $16.1 million of marketable securities. Total assets were $4.192 billion and shareholders’ equity was $1.932 billion.
Long-term debt was $1.300 billion, consisting of fixed-rate senior notes with maturities from 2016 through 2036. No commercial paper or revolving-credit borrowings were outstanding. The company had a $300.0 million commercial paper program supported by a revolving facility with maximum capacity of $450.0 million, and was in compliance with debt covenants.
Fourth-quarter information
| Quarter ended May 31 | 2015 | 2014 |
|---|---|---|
| Revenue | $1.143 billion | $1.134 billion |
| Gross margin | $486.7 million | $480.8 million |
| Net income from continuing operations | $101.2 million | $128.1 million |
| Diluted EPS from continuing operations | $0.86 | $1.04 |
Fourth-quarter fiscal 2015 organic growth was 6.0%. Fourth-quarter continuing-operations earnings were affected by a $1.0 million net loss related to settlement of a Shredding-related legal claim.
Material changes versus the prior comparable period
- Revenue was essentially flat on a reported basis because strong organic growth was offset by the loss of consolidated Shredding revenue.
- Gross margin improved to 42.9%, driven primarily by operating efficiencies, improved sales mix and lower energy-related expenses.
- Operating income benefited from the absence of fiscal 2014 Shredding Transaction impairment and transaction costs totaling $44.6 million.
- Fiscal 2015 included a $21.7 million gain on the sale of stock in an equity-method investment and a $5.0 million gain related to the Shredding Transaction.
- Cintas recorded a $5.5 million net loss on its Shred-it Partnership investment, compared with a $1.2 million net gain in fiscal 2014.
- Storage generated $22.5 million of discontinued-operation income, including a $38.6 million pretax gain on sale.
- Capital expenditures and share repurchases increased. Cintas repurchased approximately 6.9 million shares under buyback programs for $538 million during fiscal 2015, excluding employee tax-withholding repurchases.
- The annual dividend increased to $0.85 per share, supplemented by a $0.85 per-share special dividend related to Shredding proceeds.
Outlook, risks and unusual items
No quantitative fiscal 2016 revenue or earnings guidance is provided in the filing. Management emphasizes organic growth through greater customer penetration, broader customer coverage, geographic expansion and acquisitions.
- On June 29, 2015, Cintas agreed to acquire a First Aid, Safety and Fire Protection Services business for approximately $130 million, subject to regulatory approval. Expected annual revenue was $110 million to $120 million.
- On July 15, 2015, Cintas announced an agreement to sell its Shred-it Partnership investment to Stericycle for approximately $550 million to $600 million before taxes, subject to closing conditions and regulatory approvals. The filing states that closing was expected in the second quarter of fiscal 2016.
- Key risks include energy and fuel costs, labor and healthcare costs, competition, acquisitions and integration, unionization activity, regulatory and environmental compliance, litigation, cybersecurity and system disruptions, foreign exchange, credit-market access and impairment of goodwill or other assets.
- The Serrano systemic gender-discrimination litigation remained pending; management stated that an adverse outcome could be material, but any estimated liability was not determinable.
- Environmental remediation, insurance liabilities, tax audits and unrecognized tax benefits remain contingent exposures. Management stated that ordinary-course litigation and environmental reserves were adequate based on information then available.
- Management and Ernst & Young concluded that internal control over financial reporting was effective as of May 31, 2015, and the auditors issued unqualified opinions.
Investor verification checklist
- Reconcile organic growth with reported revenue after removing Shredding and Storage effects.
- Assess the sustainability of margin gains, particularly lower energy costs and rental-route efficiencies.
- Verify the timing, regulatory approvals, tax consequences and final proceeds from the proposed Shred-it Partnership sale.
- Evaluate the financing impact of the planned $130 million acquisition and the $250 million senior-note maturity in fiscal 2016.
- Review cash conversion, capital expenditures, share repurchases and the effect of the special dividend on liquidity.
- Review the Shred-it investment’s carrying value, basis difference and potential impairment risk before the proposed sale closes.
- Examine the Serrano litigation, environmental matters, tax audits and other contingencies for potential outcomes beyond recorded reserves.