Cintas Corporation — Form 10-Q Summary
Reporting period: Three months ended August 31, 2015, the first quarter of fiscal 2016. Financial statements are unaudited and should be read with the fiscal 2015 Form 10-K. Cintas provides uniform rental, facility, first aid and safety, fire protection, and related services primarily in North America.
Financial performance and key metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $1,198.9 million | $1,102.1 million | +8.8% |
| Operating income | $185.5 million | $163.5 million | +13.5% |
| Operating margin | 15.5% | 14.8% | +70 basis points |
| Income from continuing operations | $106.2 million | $105.9 million | +0.3% |
| Net income | $100.2 million | $110.1 million | -9.0% |
| Diluted EPS from continuing operations | $0.93 | $0.89 | +4.5% |
| Diluted EPS | $0.88 | $0.93 | -5.4% |
| Net cash from operating activities | $143.1 million | $148.2 million | -3.5% |
Revenue growth included 6.8% organic growth, a 1.2% acquisition contribution, a 1.7% benefit from one additional workday, and a 0.9% foreign-currency headwind. Continuing-operations income was broadly stable, while diluted EPS benefited from lower share count following repurchases. The reported net-income decline reflects a $6.0 million loss from discontinued operations versus $4.2 million of discontinued-operations income in the prior-year quarter.
Operating income increased as revenue growth outpaced expense growth. Uniform Rental and Facility Services generated $938.4 million of revenue and $165.4 million of pretax income, with a 44.7% gross margin and a 17.6% pretax margin. First Aid and Safety Services generated $99.5 million of revenue and $8.6 million of pretax income; its gross margin declined to 42.3% from 45.9%, principally because of acquisition integration costs.
Liquidity, cash flow, debt and capital allocation
- Cash and cash equivalents were $146.9 million at August 31, 2015, compared with $417.1 million at May 31, 2015. Marketable securities were $53.4 million, resulting in cash and marketable securities of $200.2 million.
- Operating cash flow was $143.1 million. Investing cash flow used $201.9 million, including $62.6 million of capital expenditures and $121.4 million for acquisitions. Financing cash flow used $209.7 million, primarily for $221.6 million of share repurchases.
- Total senior debt was $1.3 billion, consisting of $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 credit facility with maximum capacity of $450.0 million and a May 2019 maturity.
- Cintas was in compliance with all debt covenants. Standard & Poor’s ratings were A-2 for commercial paper and A- for long-term debt; Moody’s ratings were P-1 and A2, respectively, with stable outlooks.
- The company repurchased 2.4 million shares for $202.5 million during the quarter. The January 2015 $500.0 million authorization was completed after quarter-end, and a new $500.0 million authorization was announced in August 2015.
Material changes versus the prior comparable period
- Effective June 1, 2015, Cintas changed its reportable segments to Uniform Rental and Facility Services, First Aid and Safety Services, and All Other, partly in connection with the ZEE Medical acquisition.
- On August 1, 2015, Cintas acquired ZEE Medical for preliminary consideration of $134.0 million, including $120.6 million in cash and $13.4 million of contingent consideration. The acquisition added $77.6 million of goodwill and $35.0 million of service contracts.
- Shred-it was classified as held for sale and discontinued operations following a definitive sale agreement. Storage operations were also presented as discontinued operations. The Shred-it investment generated a $14.5 million pretax loss in the quarter.
- On October 1, 2015, after the reporting date, Cintas completed the sale of Shred-it for $578.0 million of proceeds, with potential additional consideration of up to $34.0 million. The transaction’s financial impact was expected in the second quarter.
- The prior-year quarter included a $21.7 million gain on the sale of stock in an equity-method investment; no comparable gain occurred in the current quarter.
- Other comprehensive loss increased to $11.5 million from $1.6 million, primarily due to foreign-currency translation losses.
Outlook, risks and unusual items
Management stated that operating cash flow, existing liquidity, the commercial paper program and access to debt markets should provide adequate funding for operations, expansion and other cash requirements. The filing does not provide quantitative earnings or revenue guidance.
- Key execution risks include integrating ZEE Medical, achieving expected synergies, acquisition-related costs, labor and material inflation, energy and fuel costs, customer losses, and foreign-exchange movements.
- Additional risks include employment and regulatory compliance, cybersecurity and systems disruptions, environmental matters, tax audits, competition, healthcare and labor-law changes, and litigation.
- The Serrano systemic gender-discrimination litigation remains pending. Management states that an adverse outcome could be material, but any estimated liability is not currently determinable.
- Foreign and state tax audits remain ongoing. Unrecognized tax benefits could decrease by approximately $3.4 million during fiscal 2016, although final audit outcomes could produce either benefits or additional expense.
- Contingent consideration related to the Storage disposals and the Shred-it sale has not been fully recorded because future events and amounts remain uncertain.
- Management concluded that disclosure controls were effective as of August 31, 2015, and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ZEE Medical integration costs subside and whether First Aid and Safety margins recover from the 360-basis-point decline.
- The final accounting impact, including gain or loss, tax effects and contingent consideration, from the completed Shred-it sale.
- Cash generation after substantial acquisitions, capital expenditures and continued share repurchases.
- The timing and funding of the $250.0 million senior-note maturity due within one year.
- Developments in the Serrano litigation, tax audits and other legal or regulatory contingencies.
- The effect of foreign-currency movements, energy costs, labor costs and customer demand on future margins.