Cintas Corporation Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2016. The request metadata references 2015 Q4, but the provided filing is the fiscal 2016 annual report, filed July 29, 2016.
Business Context
Cintas provides uniforms, facility services, first aid and safety products, fire protection services, and related products to more than 900,000 businesses, primarily in North America. Effective June 1, 2015, the company realigned its reportable segments into Uniform Rental and Facility Services, First Aid and Safety Services, and All Other. Results for prior periods were recast. Shred-it, Shredding, and Storage are presented as discontinued operations.
Key Financial Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $4.905 billion | $4.477 billion | 9.6% increase |
| Operating income | $781.7 million | $696.4 million | 12.3% increase |
| Income before taxes | $718.1 million | $653.3 million | 9.9% increase |
| Net income from continuing operations | $456.9 million | $410.5 million | 11.3% increase |
| Net income | $693.5 million | $430.6 million | 61.0% increase |
| Diluted EPS from continuing operations | $4.09 | $3.46 | 18.2% increase |
| Total diluted EPS | $6.21 | $3.63 | 71.1% increase |
| Gross margin | 43.4% | 42.9% | 50 basis-point increase |
| Income from continuing operations before tax margin | 14.6% | 14.6% | Stable |
Revenue growth included 6.7% organic growth, 2.7% from acquisitions, 0.9% from two additional workdays, and a 0.7% foreign-exchange headwind. Uniform Rental and Facility Services revenue increased 6.7%, with gross margin rising to 44.2% from 43.3%. First Aid and Safety Services revenue increased 41.4%, primarily due to the ZEE Medical acquisition, but gross margin declined to 42.7% from 46.6% because of ZEE integration costs and lower route efficiency.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $465.8 million, down from $580.3 million. The decline primarily reflected a $229.5 million tax payment related to the Shred-it sale; excluding that payment, operating cash flow increased by approximately $115.0 million.
- Capital expenditures were $275.4 million, compared with $217.7 million in FY2015. Cash paid for acquisitions was $156.6 million, including the $134.0 million ZEE acquisition.
- Investing cash flow was $128.4 million, including $580.8 million of proceeds from the sale of Shred-it.
- Financing cash outflows were $866.7 million, including $780.2 million of share repurchases and $115.3 million of dividends.
- Cash and cash equivalents were $139.4 million and marketable securities were $70.4 million at May 31, 2016, compared with combined cash and marketable securities of $433.2 million at May 31, 2015.
- Long-term debt totaled $1.300 billion, consisting of fixed-rate senior notes. No commercial paper or revolver borrowings were outstanding at year-end. The company was in compliance with all debt covenants.
- The commercial paper program had $300 million of capacity, supported by a revolving credit facility with a maximum capacity of $450 million at year-end; the facility was amended after year-end to increase capacity to $600 million and extend maturity to June 2021.
Material Changes Versus the Prior Comparable Period
- Revenue and operating income increased, supported by organic volume growth, higher sales productivity, process efficiencies, and lower energy-related expenses.
- First Aid and Safety Services expanded substantially through the ZEE acquisition, but integration costs compressed segment profitability.
- Net income benefited materially from discontinued operations, including a $378.4 million gain on the Shred-it sale. The discontinued-operations contribution increased to $236.6 million from $20.1 million.
- The effective tax rate on continuing operations declined to 36.4% from 37.2%, primarily due to the benefit from closing a prior-year federal tax audit.
- Share repurchases reduced weighted-average shares outstanding. The company repurchased 8.7 million shares during FY2016 for approximately $759.2 million under its authorized programs, excluding shares withheld for employee taxes.
- The annual dividend was $1.05 per share, a 23.5% increase from the regular prior-year dividend. FY2015 included a $0.85 per share special dividend related to Shred-it proceeds.
- Shareholders’ equity declined to $1.843 billion from $1.932 billion, primarily reflecting share repurchases, dividends, and other comprehensive losses.
Outlook, Risks and Unusual Items
Management’s strategy is to grow through increased penetration of existing customers, broader customer coverage, geographic expansion, additional products and services, and acquisitions. The filing does not provide explicit numerical revenue or earnings guidance.
- Key risks include acquisition integration, particularly ZEE; realization of expected synergies; labor, healthcare, material, fuel, energy, and insurance costs; competition and customer insourcing; foreign-exchange movements; regulatory and environmental compliance; unionization activity; cybersecurity and information-technology disruptions, including SAP implementation; litigation; and access to debt markets.
- At May 31, 2016, Cintas had a potential gain contingency of up to $30 million related to Shred-it holdback provisions; this amount was not recorded because realization was uncertain.
- Environmental spending was approximately $13 million for water treatment and waste removal, with approximately $3 million of related capital expenditures. Management did not identify material environmental noncompliance.
- Ordinary-course litigation, including personal injury, contract, environmental, and employment claims, was not expected by management to have a material adverse effect, although adverse outcomes remain possible.
- Goodwill impairment testing, including an interim test following the segment realignment, resulted in no impairment charge for FY2016, FY2015, or FY2014.
- Management and Ernst & Young concluded that internal control over financial reporting and disclosure controls were effective as of May 31, 2016. The audit opinion was unqualified.
Investor Verification Items
- Separate recurring operating performance from the large, nonrecurring Shred-it divestiture gain and other discontinued-operation items.
- Assess whether ZEE integration can restore First Aid and Safety Services margins toward historical levels.
- Reconcile reported operating cash flow with the $229.5 million Shred-it-related tax payment and evaluate ongoing cash conversion.
- Review the debt maturity schedule, including the $250 million note repaid on June 1, 2016 and subsequent commercial paper funding.
- Monitor the effects of continued share repurchases, dividend growth, and reduced cash balances on liquidity.
- Review acquisition accounting, goodwill, service-contract valuations, and potential future impairment exposure.
- Evaluate contingencies related to litigation, environmental matters, taxes, cybersecurity, SAP implementation, labor costs, and the unrecorded Shred-it holdback.