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Cintas Corporation Announces Fiscal 2015 First Quarter Results

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Cintas Corporation (Nasdaq: CTAS) today reported revenue for its first quarter ended August 31, 2014, of $1.10 billion, a 0.2% increase compared to last year’s first quarter. This year’s first quarter revenue does not include any Document Shredding revenue as a result of the transaction with Shred-it International Inc. (the “Shred-it Transaction”) that closed on April 30, 2014, whereas last year’s first quarter does. Organic growth, which adjusts for the impacts of acquisitions and the Shred-it Transaction, was 7.2%.

Operating income for the fiscal 2015 first quarter was $163.5 million, an increase of 17.1% compared to last fiscal year’s first quarter. Net income for the fiscal 2015 first quarter was $110.1 million, and earnings per diluted share (EPS) for the fiscal 2015 first quarter were $0.93. Fiscal 2015 first quarter EPS was positively impacted by $0.15 due to a gain from the sale of stock in an equity method investment (EPS of $0.11) and a gain from receiving additional proceeds relating to the Shred-it Transaction (EPS of $0.04). Operating income, net income and EPS are discussed in more detail in the Fiscal 2015 First Quarter Results section below.

“Our first quarter results reflect the continued good execution by our employees, who we call partners,” said Scott D. Farmer, Cintas’ Chief Executive Officer. “We have focused on selling good, profitable business over the past few years, as well as managing our cost structure and continuously improving the efficiency of our processes. This focus has resulted in improved margins and better customer retention.”

The fiscal 2015 first quarter results reflect a change in the classification of the Document Storage and Imaging business to discontinued operations. We are evaluating strategic opportunities for this business and will provide additional details in the future as appropriate.

FISCAL 2015 FIRST QUARTER RESULTS

The table below labeled “1st Quarter Revenue Results” shows first quarter revenue for Cintas, reflecting the fiscal 2015 first quarter reporting change of the Document Storage and Imaging business to discontinued operations and presented to exclude fiscal 2014 first quarter Document Shredding revenue. Effective April 30, 2014, Cintas entered into a partnership transaction with the shareholders of Shred-it International Inc. to combine Cintas’ Document Shredding business with Shred-it’s Document Shredding business. Subsequent to the closing of the Shred-it Transaction, Cintas no longer includes Document Shredding revenue in its reported revenue. As a result, we believe that revenue excluding Document Shredding revenue is more representative of the ongoing revenue of Cintas.

1st Quarter Revenue Results

(dollar amounts in millions)

Q1, FY15
(See Note 1)

Q1, FY14
(See Note 1)

Growth %

Organic
Growth %
(See Note 2)

Rental Uniforms & Ancillary Products $ 856.9 $ 792.9 8.1 % 8.1 %
Uniform Direct Sales 105.1 107.4 (2.2 %) (2.2 %)
First Aid, Safety & Fire Protection 140.1 125.9 11.3 % 10.1 %

Revenue, excluding Document Shredding

$

1,102.1

$

1,026.2

7.4

%

7.2

%

Document Shredding – (See Note 3) 74.0

Total Cintas Revenue

$

1,102.1

$

1,100.2

0.2

%

7.2

%

Note 1 – Both fiscal 2015 and 2014 first quarter revenue reflect the change in classification of the Document Storage and Imaging business to discontinued operations.
Note 2 – Organic growth reflects the revenue growth for the first quarter of fiscal 2015 when adjusting for the impact of acquisitions and the Shred-it Transaction, compared to the first quarter of fiscal 2014.
Note 3 – As a result of the Shred-it Transaction, Cintas no longer includes Document Shredding revenue in its reported revenue. However, the fiscal 2014 first quarter Document Shredding revenue must continue to be included in the reported fiscal 2014 first quarter revenue in accordance with generally accepted accounting principles (“GAAP”).

The tables below show revenue, gross margin, operating income, net income and EPS for the first quarter of fiscal 2015 and fiscal 2014, as reported and as adjusted. The adjustments between results as reported and as adjusted are explained below. We present revenue, gross margin, operating income, net income and EPS figures, as adjusted, because we believe they are more representative of the ongoing performance of Cintas.

Gain on Document
Investment Shredding Percent
As reported Sale Impact Gain on sale of
Q1, Fiscal 2015 (see Note 1) (see Note 2) (see Note 3) (see Note 4) As adjusted Revenue
(dollar amounts in millions, except EPS)
Revenue $ 1,102.1 $ 1,102.1 100.0 %
Gross Margin 477.9 477.9 43.4 %
Operating Income 163.5 163.5 14.8 %
Net Income 110.1 $ 13.6 $ 4.1 92.4 8.4 %
EPS $ 0.93 $ 0.11 $ 0.04 $ 0.78

Gain on Document
Investment Shredding Percent
As reported Sale Impact Gain on sale of
Q1, Fiscal 2014 (see Note 1) (see Note 2) (see Note 3) (see Note 4) As adjusted Revenue
(dollar amounts in millions, except EPS)
Revenue $ 1,100.2

$

74.0

$ 1,026.2 100.0 %
Gross Margin 456.1 33.3 422.8 41.2 %
Operating Income 139.6 2.1 137.5 13.4 %
Net Income 77.8 1.3 76.5 7.5 %
EPS $ 0.63 $ 0.01 $ 0.62
Note 1 – The “As reported” figures for both fiscal 2015 and 2014 first quarters reflect the change in classification of the Document Storage and Imaging business to discontinued operations within the Statements of Income.
Note 2 – During the fiscal 2015 first quarter, Cintas recognized a gain on the sale of stock in an equity method investment.
Note 3 – As a result of the Shred-it Transaction, Cintas no longer includes Document Shredding results in its reported revenue and gross margin. During fiscal 2015, Cintas will recognize its share of the Shred-it partnership income in operating income, net income and EPS. There was no impact on operating income, net income or EPS recorded during the fiscal 2015 first quarter. In accordance with GAAP, the fiscal 2014 first quarter Document Shredding revenue, gross margin, operating income, net income and EPS results must continue to be included in the reported fiscal 2014 results because of Cintas’ continuing ownership in the Shred-it partnership.
Note 4 – Cintas recorded an additional gain related to the Shred-it Transaction completed in fiscal 2014 due to receiving additional proceeds during the fiscal 2015 first quarter.

Fiscal 2015 first quarter gross margin, as adjusted, was $477.9 million, or 43.4% of first quarter revenue, compared to the fiscal 2014 first quarter gross margin, as adjusted, of $422.8 million, or 41.2% of last year’s first quarter revenue. Fiscal 2015 gross margin, as adjusted, increased 13.0% compared to last year’s first quarter. Mr. Farmer added, “The gross margin as a percentage of revenue improved in each of our businesses, reflecting the efficiency of our operations and the continued leveraging of our infrastructure.” Fiscal 2015 first quarter operating income, net income and EPS, as adjusted, increased over the fiscal 2014 first quarter by 18.9%, 20.8% and 25.8%, respectively.

FISCAL YEAR 2015 GUIDANCE

Mr. Farmer concluded, “We are encouraged by the solid start to our fiscal 2015 year. When we introduced our fiscal 2015 guidance in July, we indicated that we were still looking for more consistency in the U.S. economy. We continue to see inconsistent employment figures resulting in no real change to our customers’ hiring patterns, and we see heightened global uncertainty that may affect U.S. businesses. We are updating our fiscal 2015 guidance based on our first quarter results and the change in classification of the Document Storage and Imaging business to discontinued operations, but also based on our views of the U.S. economic situation. We now expect fiscal 2015 revenue to be in the range of $4.40 billion to $4.475 billion, and fiscal 2015 EPS to be in the range of $3.20 to $3.29. This guidance continues to assume no income contribution from the partnership with Shred-it International Inc. due to the expectation of first year integration and transition expenses.”

As mentioned earlier in this press release, subsequent to the closing of the Shred-it Transaction on April 30, 2014, we no longer include Document Shredding revenue in our reported revenue. The table below shows a comparison of fiscal 2014 revenue to our updated 2015 revenue guidance.

Fiscal 2015 Fiscal 2015
Updated Revenue Guidance Low End Growth vs. High End Growth vs.

(dollar amounts in millions)

Fiscal 2014 of Range Fiscal 2014 of Range Fiscal 2014
Revenue, excluding Document Shredding

$

4,193.9

$

4,400.0

4.9

%

$

4,475.0

6.7

%

Document Shredding Revenue 275.7

Total Cintas Revenue

$

4,469.6

The table below shows a comparison of fiscal 2014 EPS to our updated 2015 EPS guidance.

Fiscal 2015 Fiscal 2015
Low End Growth vs. High End Growth vs.

Updated EPS Guidance

Fiscal 2014 of Range Fiscal 2014 of Range Fiscal 2014
EPS, excluding Special Items $ 2.75 $ 3.05 10.9 % $ 3.14 14.2 %
Impact of Shredding business 0.04
Impact of sale of stock in equity investment 0.11 0.11
Impact of Shred-it Transaction 0.26 0.04 0.04

Total Reported Cintas EPS

$

3.05

$

3.20

4.9

%

$

3.29

7.9

%

The updated fiscal 2015 EPS guidance assumes no deterioration in the U.S. economy and does not assume any additional share buybacks.

About Cintas

Headquartered in Cincinnati, Cintas Corporation provides highly specialized services to businesses of all types primarily throughout North America. Cintas designs, manufactures and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, first aid, safety and fire protection products and services. Cintas is a publicly held company traded over the Nasdaq Global Select Market under the symbol CTAS and is a component of the Standard & Poor’s 500 Index.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “predicts,” “projects,” “plans,” “expects,” “intends,” “target,” “forecast,” “believes,” “seeks,” “could,” “should,” “may” and “will” or the negative versions thereof and similar words, terms and expressions and by the context in which they are used. Such statements are based upon current expectations of Cintas and speak only as of the date made. You should not place undue reliance on any forward-looking statement. We cannot guarantee that any forward-looking statement will be realized. These statements are subject to various risks, uncertainties, potentially inaccurate assumptions and other factors that could cause actual results to differ from those set forth in or implied by this Press Release. Factors that might cause such a difference include, but are not limited to, the Shred-it partnership’s ability to promptly and effectively integrate the Cintas Document Shredding business with Shred-it’s Document Shredding business; the Shred-it partnership’s ability to realize any synergies from the combination of the Cintas Document Shredding business with Shred-it’s Document Shredding business; the ability to successfully explore strategic opportunities for the Cintas Global Document Storage and Imaging business; the possibility of greater than anticipated operating costs including energy and fuel costs; lower sales volumes; loss of customers due to outsourcing trends; the performance and costs of integration of acquisitions; fluctuations in costs of materials and labor including increased medical costs; costs and possible effects of union organizing activities; failure to comply with government regulations concerning employment discrimination, employee pay and benefits and employee health and safety; uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation; the cost, results and ongoing assessment of internal controls for financial reporting required by the Sarbanes-Oxley Act of 2002; disruptions caused by the inaccessibility of computer systems data; the initiation or outcome of litigation, investigations or other proceedings; higher assumed sourcing or distribution costs of products; the disruption of operations from catastrophic or extraordinary events; the amount and timing of repurchases of our common stock, if any; changes in federal and state tax and labor laws; the reactions of competitors in terms of price and service; the ultimate impact of the Affordable Care Act; and the finalization of our financial statements for the quarter ended August 31, 2014. Cintas undertakes no obligation to publicly release any revisions to any forward-looking statements or to otherwise update any forward-looking statements whether as a result of new information or to reflect events, circumstances or any other unanticipated developments arising after the date on which such statements are made. A further list and description of risks, uncertainties and other matters can be found in our Annual Report on Form 10-K for the year ended May 31, 2014 and in our reports on Forms 10-Q and 8-K. The risks and uncertainties described herein are not the only ones we may face. Additional risks and uncertainties presently not known to us or that we currently believe to be immaterial may also harm our business.

Cintas Corporation
Consolidated Condensed Statements of Income
(Unaudited)
(In thousands except per share data)
Three Months Ended

August 31,
2014

August 31,
2013

% Chng.
Revenue:
Rental uniforms and ancillary products $ 856,872 $ 792,866 8.1
Other services 245,205 307,380 -20.2
Total revenue $ 1,102,077 $ 1,100,246 0.2
Costs and expenses:
Cost of rental uniforms and ancillary products $ 470,609 $ 454,731 3.5
Cost of other services 153,522 189,420 -19.0
Selling and administrative expenses 314,458 316,483 -0.6
Operating income $ 163,488 $ 139,612 17.1
Gain on deconsolidation of Shredding business 6,619
Gain on sale of stock of an equity method investment 21,739
Interest income (53 ) (68 ) -22.1
Interest expense 16,583 16,523 0.4
Income before income taxes $ 175,316 $ 123,157 42.4
Income taxes 65,525 45,759 43.2
Income from continuing operations $ 109,791 $ 77,398 41.9
Income from discontinued operations, net of tax 317 356 -11.0
Net income $ 110,108 $ 77,754 41.6
Basic earnings per share:
Continuing operations $ 0.94 $ 0.63 49.2
Discontinued operations
Basic earnings per share $ 0.94 $ 0.63 49.2
Diluted earnings per share:
Continuing operations $ 0.93 $ 0.63 47.6
Discontinued operations
Diluted earnings per share $ 0.93 $ 0.63 47.6
Weighted average number of shares outstanding 116,659 122,130
Diluted average number of shares outstanding 118,030 122,892
CINTAS CORPORATION SUPPLEMENTAL DATA
Three Months Ended

August 31,
2014

August 31,
2013

Rental uniforms and ancillary products gross margin 45.1 % 42.6 %
Other services gross margin* 37.4 % 38.4 %
Total gross margin* 43.4 % 41.5 %
Net margin* 10.0 % 7.0 %
Depreciation and amortization $ 39,654 $ 48,394
Capital expenditures $ 68,050 $ 37,462

* Amounts presented for the three months ended August 31, 2013 have been adjusted to reflect the results of continuing operations.

Computation of Diluted Earnings Per Share from Continuing Operations
Three Months Ended

August 31,
2014

August 31,
2013

Income from continuing operations $ 109,791 $ 77,398
Less: income from continuing operations allocated to participating securities 613 461
Income from continuing operations available to common shareholders $ 109,178 $ 76,937
Basic weighted average common shares outstanding 116,659 122,130
Effect of dilutive securities – employee stock options & awards 1,371 762
Diluted weighted average common shares outstanding 118,030 122,892
Diluted earnings per share from continuing operations $ 0.93 $ 0.63

Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure

The press release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. To supplement its consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP), the Company provides additional measures of revenue and related growth, gross margin, operating income, net income, earnings per diluted share, and cash flow. The Company believes that these non-GAAP financial measures are appropriate to enhance understanding of its past performance as well as prospects for future performance. Reconciliations of the differences between these non-GAAP financial measures with the most directly comparable financial measures calculated in accordance with GAAP are shown in the tables within the narrative of the press release or below.

Computation of Free Cash Flow
Three Months Ended

August 31,
2014

August 31,
2013

Net Cash Provided by Operations $ 148,201 $ 82,559
Capital Expenditures $ (68,050 ) $ (37,462 )
Free Cash Flow $ 80,151 $ 45,097

Management uses free cash flow to assess the financial performance of the Company. Management believes that free cash flow is useful to investors because it relates the operating cash flow of the Company to the capital that is spent to continue, improve and grow business operations.

SUPPLEMENTAL SEGMENT DATA

Rental
Uniforms and
Ancillary
Products

Uniform Direct
Sales

First Aid, Safety
and Fire
Protection

Document
Management*

Corporate** Total
As of and for the three months ended August 31, 2014
Revenue $ 856,872 $ 105,145 $ 140,060 $ $ $ 1,102,077
Gross margin $ 386,263 $ 30,464 $ 61,219 $ $ $ 477,946
Selling and administrative expenses $ 243,582 $ 21,277 $ 49,599 $ $ $ 314,458
Gain on deconsolidation of Shredding business $ $ $ $ $ 6,619 $ 6,619
Gain on sale of stock of an equity investment $ $ $ $ $ 21,739 $ 21,739
Interest income $ $ $ $ $ (53 ) $ (53 )
Interest expense $ $ $ $ $ 16,583 $ 16,583
Income before income taxes $ 142,681 $ 9,187 $ 11,620 $ $ 11,828 $ 175,316
Assets $ 2,913,437 $ 133,409 $ 429,783 $ $ 1,079,641 $ 4,556,270
As of and for the three months ended August 31, 2013
Revenue $ 792,866 $ 107,462 $ 125,875 $ 74,043 $ $ 1,100,246
Gross margin $ 338,135 $ 29,714 $ 54,897 $ 33,349 $ $ 456,095
Selling and administrative expenses $ 220,742 $ 21,033 $ 43,451 $ 31,257 $ $ 316,483
Interest income $ $ $ $ $ (68 ) $ (68 )
Interest expense $ $ $ $ $ 16,523 $ 16,523
Income (loss) before income taxes $ 117,393 $ 8,681 $ 11,446 $ 2,092 $ (16,455 ) $ 123,157
Assets $ 2,842,058 $ 143,993 $ 410,633 $ 479,378 $ 435,115 $ 4,311,177

* As a result of the Shred-it partnership transaction and the classification of the document storage and imaging business to discontinued operations, we will no longer have a Document Management Services Operating Segment. For illustrative purposes in this press release, we have shown the results of the document destruction business within the Document Management Services Operating Segment as of and for the three months ended August 31, 2013. However, this information will be combined into the Corporate Operating Segment for reporting purposes in the Form 10-Q.

** Corporate assets as of August 31, 2014 include the investment in the Shred-it partnership. Corporate assets as of August 31, 2014 and 2013 include the assets of the document storage and imaging business, which has been classified as held for sale.

Cintas Corporation

Consolidated Balance Sheets

(In thousands except share data)

ASSETS

August 31,
2014

May 31,
2014

(unaudited)
Current assets:
Cash and cash equivalents $ 581,453 $ 513,288
Accounts receivable, net 489,211 508,427
Inventories, net 249,817 251,239
Uniforms and other rental items in service 513,615 506,537
Assets held for sale 151,263
Prepaid expenses and other current assets 27,590 26,190
Total current assets 2,012,949 1,805,681
Property and equipment, at cost, net 838,493 855,702
Investments 451,897 458,357
Goodwill 1,189,968 1,267,411
Service contracts, net 44,185 55,675
Other assets, net 18,778 19,626
$ 4,556,270 $ 4,462,452

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable $ 141,795 $ 150,070
Accrued compensation and related liabilities 44,060 85,026
Accrued liabilities 292,548 299,727
Income taxes, current 54,595 5,960
Deferred tax liability 87,842 88,845
Liabilities held for sale 15,171
Long-term debt due within one year 503
Total current liabilities 636,011 630,131
Long-term liabilities:
Long-term debt due after one year 1,300,000 1,300,477
Deferred income taxes 242,459 246,044
Accrued liabilities 105,826 92,942
Total long-term liabilities 1,648,285 1,639,463
Shareholders’ equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding
Common stock, no par value: 294,795 251,753
425,000,000 shares authorized
FY15: 177,315,907 issued and 116,991,574 outstanding
FY14: 176,378,412 issued and 117,037,784 outstanding
Paid-in capital 123,954 134,939
Retained earnings 4,109,001 3,998,893
Treasury stock: (2,282,594 ) (2,221,155 )
FY15: 60,324,333 shares
FY14: 59,340,628 shares
Accumulated other comprehensive income 26,818 28,428
Total shareholders’ equity 2,271,974 2,192,858
$ 4,556,270 $ 4,462,452

Cintas Corporation

Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended

Cash flows from operating activities:

August 31,
2014

August 31,
2013

Net income $ 110,108 $ 77,754
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 35,448 42,571
Amortization of intangible assets 4,206 5,823
Stock-based compensation 12,280 6,984
Gain on deconsolidation of Shredding business (6,619 )
Gain on sale of stock of an equity method investment (21,739 )
Deferred income taxes 2,108 7,373
Change in current assets and liabilities, net of
acquisitions of businesses:
Accounts receivable, net 8,222 (14,903 )
Inventories, net 1,377 (5,258 )
Uniforms and other rental items in service (7,112 ) (4,150 )
Prepaid expenses and other current assets (5,884 ) (7,216 )
Accounts payable (1,325 ) 2,915
Accrued compensation and related liabilities (41,262 ) (34,777 )
Accrued liabilities 10,384 (27,215 )
Income taxes, current 48,009 32,658
Net cash provided by operating activities 148,201 82,559

Cash flows from investing activities:

Capital expenditures (68,050 ) (37,462 )
Proceeds from redemption of marketable securities 35,233
Purchase of marketable securities and investments (6,981 ) (32,941 )
Proceeds from Shredding transaction 3,344
Proceeds from sale of stock of an equity method investment 29,933
Dividends received on equity method investment 5,247
Acquisitions of businesses, net of cash acquired (2,328 ) (32,216 )
Other, net 16 382
Net cash used in investing activities (38,819 ) (67,004 )

Cash flows from financing activities:

Repayment of debt (180 ) (167 )
Proceeds from exercise of stock-based compensation awards 13,623 14,085
Repurchase of common stock (61,439 ) (106,977 )
Other, net 6,798 4,126
Net cash used in financing activities (41,198 ) (88,933 )
Effect of exchange rate changes on cash and cash equivalents (19 ) (225 )
Net increase (decrease) in cash and cash equivalents 68,165 (73,603 )
Cash and cash equivalents at beginning of period 513,288 352,273
Cash and cash equivalents at end of period $ 581,453 $ 278,670

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