Cintas Corporation — Fiscal 2018 First Quarter Form 10-Q
Business context and reporting period
Cintas provides uniform rental and facility services, first aid and safety products, fire protection services and uniform sales primarily in North America. This filing covers the three months ended August 31, 2017, compared with the three months ended August 31, 2016.
The period reflects the March 21, 2017 acquisition of G&K Services for approximately $2.1 billion. G&K results are included from the acquisition date and primarily affect the Uniform Rental and Facility Services segment.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $1.612 billion | $1.267 billion | 27.2% increase |
| Operating income | $249.1 million | $203.9 million | 22.1% increase |
| Operating margin | 15.5% | 16.1% | Down approximately 70 bps |
| Income from continuing operations | $161.1 million | $136.2 million | 18.3% increase |
| Diluted EPS from continuing operations | $1.45 | $1.24 | 16.9% increase |
| Net income | $217.2 million | $138.1 million | 57.3% increase |
| Diluted EPS | $1.96 | $1.26 | 55.6% increase |
| Cash flow from operations | $254.4 million | $157.6 million | $96.8 million increase |
| Capital expenditures | $62.5 million | $78.6 million | Decrease |
Net income included $56.1 million from discontinued operations, including a $100.3 million pretax gain on the sale of Discontinued Services. The prior-year period included $1.9 million from discontinued operations. Excluding this item, continuing-operations earnings provide the more relevant period comparison.
At August 31, 2017, cash and cash equivalents were $191.4 million and marketable securities were $21.6 million. Current assets were $1.925 billion versus current liabilities of $1.045 billion. Debt due within one year was $307.5 million and debt due after one year was $2.534 billion. The company reported debt carrying value of $2.863 billion and fair value of $3.026 billion. The revolving credit facility had no borrowings, and commercial paper outstanding was $7.5 million.
Material changes versus the prior comparable period
- Total revenue growth was driven by 8.3% organic growth and a 18.9% acquisition contribution, primarily from G&K.
- Uniform Rental and Facility Services revenue increased 31.9% to $1.312 billion, including 8.1% organic growth and a 23.8% acquisition impact.
- Other revenue increased 10.0% to $299.7 million, including 8.9% organic growth.
- Uniform Rental and Facility Services gross margin improved modestly to 46.1% from 46.0%, but pretax margin declined to 16.7% from 18.6% because of higher labor, amortization, enterprise resource planning investment and integration costs.
- First Aid and Safety Services revenue increased 12.6% to $140.6 million, while pretax margin increased to 13.8% from 9.2%, aided by improved sourcing, warehouse utilization and route optimization.
- Net interest expense increased to $30.0 million from $14.1 million, primarily because of debt issued to finance the G&K acquisition.
- Operating cash flow increased substantially, while investing cash flow turned positive primarily because of $128.5 million of proceeds from the sale of Discontinued Services.
- Cintas repaid $250.0 million of term-loan borrowings and reduced commercial paper by $43.0 million during the quarter.
Outlook, risks, contingencies and unusual items
The filing does not provide specific numerical revenue or earnings guidance. Management expects operating cash flow, debt markets and available liquidity to fund operations, expansion, dividends, debt repayment and potential share repurchases. Management stated that it expects to fund the $300.0 million senior-note maturity due December 1, 2018 with cash on hand and commercial paper proceeds.
- G&K integration, expected synergies, future integration expenses and the timing of earnings accretion remain significant execution factors.
- The G&K purchase-price allocation remained preliminary at August 31, 2017, including valuation of goodwill and acquired intangible assets.
- Discontinued Services generated $128.5 million of sale proceeds and may generate additional consideration subject to holdback provisions; this potential amount was not recorded because of uncertainty.
- Management reported compliance with all debt covenants. Covenant defaults could accelerate debt maturities and impair liquidity.
- Key disclosed risks include labor, energy, fuel, materials and medical costs; customer losses; union activity; regulatory and tax changes; foreign exchange; litigation; cybersecurity and systems disruptions; SAP implementation costs; acquisition integration; and catastrophic events, including hurricanes Harvey and Irma.
- Ordinary-course litigation and claims include personal injury, customer contract, environmental and employment matters. Management does not expect these matters to have a material adverse effect, although the filing does not quantify possible exposure.
- Cintas adopted the pension-cost presentation standard in fiscal 2018 and is evaluating the future revenue-recognition and lease standards. The filing states that the impact of the revenue-recognition standard could not yet be estimated.
- Disclosure controls and procedures were effective as of August 31, 2017, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether G&K integration delivers the expected operating efficiencies without further material costs or margin pressure.
- The sustainability of the reported organic growth rates, particularly in Uniform Rental and Facility Services.
- Debt reduction progress, refinancing of the $300.0 million 2018 maturity and sensitivity to interest rates and credit ratings.
- The extent to which reported net-income growth depends on the nonrecurring gain from Discontinued Services.
- The final G&K purchase-price allocation, goodwill and intangible-asset amortization assumptions.
- Potential additional consideration from the Discontinued Services holdback and the outcome of disclosed tax audits and other contingencies.