Cintas Corporation Announces Fiscal 2017 First Quarter Results

CINCINNATI–(BUSINESS WIRE)–Cintas Corporation (Nasdaq: CTAS) today reported results for its
first quarter of fiscal year 2017 which ended August 31, 2016.

Revenue for the first quarter was $1.29 billion, an increase of 7.9%
over the prior year period. Organic growth, which adjusts for the
impacts of acquisitions and foreign currency exchange rate fluctuations,
was 5.7%.

Operating income for the first quarter of fiscal year 2017 of $207.0
million increased 11.6% from the prior year period. Operating income
margin improved to 16.0% from 15.5% of revenue in last year’s first
quarter. Fiscal year 2017 operating income includes $2.8 million of
transaction expenses related to the recently announced agreement to
acquire G&K Services, Inc. (G&K).

Net income from continuing operations for the first quarter of fiscal
2017 was $138.1 million compared to $106.2 million in the prior year
period, and earnings per diluted share (EPS) from continuing operations
for the first quarter of fiscal year 2017 were $1.26 compared to $0.93
for last year’s first quarter. First quarter of fiscal 2017 net income
and EPS from continuing operations increased 30.0% and 35.5%,
respectively, compared to the prior year period. Net income from
continuing operations as a percent of revenue improved to 10.7% from
8.9% in last year’s first quarter.

During the first quarter of fiscal 2017, Accounting Standards Update
2016-09 (ASU 2016-09), Improvements to Employee Share-Based Payment
Accounting
, was adopted. Under ASU 2016-09, excess tax benefits and
deficiencies associated with employee share-based payments are no longer
recognized as additional paid-in capital on the balance sheet but
instead recognized directly to income tax expense or benefit in the
income statement in the reporting period in which they occur. Other
financial statement items impacted include share-based compensation
expense and the computation of fully diluted shares outstanding. The
first quarter of fiscal 2017 net benefit to EPS from the adoption of ASU
2016-09 was $0.14, consisting of a reduction of income tax expense of
$0.16 partially offset by a $0.01 negative impact from additional
employee share-based compensation expense reducing operating income and
a $0.01 negative impact from an increase in the number of dilutive
shares outstanding.

Scott D. Farmer, Cintas’ Chief Executive Officer, stated, “In our
recently ended fiscal year 2016, we achieved record revenue and EPS and
increased EPS by double-digits for the sixth consecutive year. We are
pleased to report a continuation of strong results into the first
quarter of fiscal 2017. This solid start positions us for another year
of record-breaking results.”

Mr. Farmer concluded, “As a result of our first quarter results, we are
updating our annual guidance. We expect fiscal 2017 revenue to be in the
range of $5.160 billion to $5.225 billion and fiscal 2017 EPS from
continuing operations to be in the range of $4.55 to $4.63. This
guidance does not include any potential deterioration in the U.S.
economy, future share buybacks, or any future financial impact from our
acquisition of G&K, including transaction expenses. It does include the
impact of one less workday in fiscal 2017 compared to fiscal 2016, and
it assumes a negative impact in the remaining quarters of fiscal 2017
from adoption of ASU 2016-09 such that we end fiscal 2017 with an
estimated net benefit to EPS of $0.07.”

The table below provides a comparison of fiscal 2016 revenue and EPS
from continuing operations to our fiscal 2017 guidance.

         

 

 

Fiscal 2016

Fiscal 2017
Low End
of Range

Growth vs.
Fiscal 2016

Fiscal 2017
High End
of Range

Growth vs.
Fiscal 2016

 

Revenue (dollar amounts in millions)

$4,905.5

$5,160.0

5.2%

$5,225.0

6.5%

 

EPS from continuing operations

$4.09

$4.55

11.2%

$4.63

13.2%

 

About Cintas

Cintas Corporation helps more than 900,000 businesses of all types and
sizes get Ready™ to open their doors with confidence every day by
providing a wide range of products and services that enhance our
customers’ image and help keep their facilities and employees clean,
safe and looking their best. With products and services including
uniforms, floor care, restroom supplies, first aid and safety products,
fire extinguishers and testing, and safety and compliance training,
Cintas helps customers get Ready for the Workday™. Headquartered
in Cincinnati, 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
failure to obtain G&K stockholder approval of the proposed transaction;
the possibility that the closing conditions to the contemplated
transaction may not be satisfied or waived, including that a
governmental entity may prohibit, delay or refuse to grant a necessary
regulatory approval; delay in closing the proposed transaction or the
possibility of non-consummation of the proposed transaction; the
potential for regulatory authorities to require divestitures in
connection with the proposed transaction; the occurrence of any event
that could give rise to termination of the merger agreement; the risk
that stockholder litigation in connection with the contemplated
transaction may affect the timing or occurrence of the contemplated
transaction or result in significant costs of defense, indemnification
and liability; risks inherent in the achievement of cost synergies and
the timing thereof, including whether the proposed transaction will be
accretive and within the expected timeframe; risks related to the
disruption of the transaction to G&K and its management; the effect of
announcement of the transaction on G&K’s ability to retain and hire key
personnel and maintain relationships with customers, suppliers and other
third parties; our ability to promptly and effectively integrate
acquisitions, including G&K and ZEE Medical; 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, including G&K and
ZEE Medical; 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; the effect on operations of exchange rate fluctuations,
tariffs and other political, economic and regulatory risks;
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; costs of our SAP
system implementation; disruptions caused by the inaccessibility of
computer systems data, including cybersecurity risks; 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; and the finalization of our financial statements for
the quarter ended August 31, 2016. 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, 2016 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,
2016

 

August 31,
2015

  % Change
 
Revenue:
Uniform rental and facility services $ 999,596 $ 938,408 6.5
Other   294,534       260,482   13.1
Total revenue 1,294,130 1,198,890 7.9
 
Costs and expenses:
Cost of uniform rental and facility services 540,932 518,503 4.3
Cost of other 169,424 156,243 8.4
Selling and administrative expenses 374,026 338,637 10.5
G&K Services acquisition expenses   2,787         100.0
 
Operating income 206,961 185,507 11.6
 
Interest income (65 ) (119 ) -45.4
Interest expense   14,172       16,412   -13.6
 
Income before income taxes 192,854 169,214 14.0
Income taxes   54,763       63,016   -13.1
Income from continuing operations 138,091 106,198 30.0
Loss from discontinued operations, net of tax         (6,017 ) 100.0
Net income $ 138,091     $ 100,181   37.8
 
Basic earnings (loss) per share:
Continuing operations $ 1.29 $ 0.94 37.2
Discontinued operations   0.00       (0.05 ) 100.0
Basic earnings per share $ 1.29     $ 0.89   44.9
 
Diluted earnings (loss) per share:
Continuing operations $ 1.26 $ 0.93 35.5
Discontinued operations   0.00       (0.05 ) 100.0
Diluted earnings per share $ 1.26     $ 0.88   43.2
 
Weighted average number of shares outstanding 104,483 110,597
Diluted average number of shares outstanding 107,114 112,229
 
 
CINTAS CORPORATION SUPPLEMENTAL DATA
   
Three Months Ended

August 31,
2016

 

August 31,
2015

Uniform rental and facility services gross margin 45.9 % 44.7 %
Other gross margin 42.5 % 40.0 %
Total gross margin 45.1 % 43.7 %
Net margin, continuing operations 10.7 % 8.9 %
 
 
Computation of Diluted Earnings Per Share from Continuing
Operations
   
Three Months Ended

August 31,
2016

 

August 31,
2015

 
Income from continuing operations $ 138,091 $ 106,198
Less: income from continuing operations allocated to participating
securities
  2,727     1,742
Income from continuing operations available to common shareholders $ 135,364   $ 104,456
 
Basic weighted average common shares outstanding 104,483 110,597
Effect of dilutive securities – employee stock options   2,631     1,632
Diluted weighted average common shares outstanding   107,114     112,229
 
Diluted earnings per share from continuing operations $ 1.26   $ 0.93
 
 
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 non-GAAP
financial measures of revenue and related growth, 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,
2016

 

August 31,
2015

 
Net Cash Provided by Operations $ 157,588 $ 143,083
 
Capital Expenditures   (78,580 )     (62,631 )
 
Free Cash Flow $ 79,008     $ 80,452  
 
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

Uniform Rental
and Facility
Services

 

First Aid
and Safety
Services

 

All
Other

  Corporate(1)   Total
As of and for the three months ended August 31, 2016
Revenue $ 999,596 $ 124,839 $ 169,695 $ $ 1,294,130
Gross margin $ 458,664 $ 57,126 $ 67,984 $ $ 583,774
Selling and administrative expenses $ 270,632 $ 45,615 $ 57,779 $ $ 374,026
G&K Services acquisition expenses $ 2,787 $ $ $ $ 2,787
Interest income $ $ $ $ (65 ) $ (65 )
Interest expense $ $ $ $ 14,172 $ 14,172
Income (loss) before income taxes $ 185,245 $ 11,511 $ 10,205 $ (14,107 ) $ 192,854
Assets $ 3,109,120 $ 578,855 $ 315,403 $ 163,767 $ 4,167,145
 
As of and for the three months ended August 31, 2015
Revenue $ 938,408 $ 99,488 $ 160,994 $ $ 1,198,890
Gross margin $ 419,905 $ 42,111 $ 62,128 $ $ 524,144
Selling and administrative expenses $ 254,524 $ 33,519 $ 50,594 $ $ 338,637
Interest income $ $ $ $ (119 ) $ (119 )
Interest expense $ $ $ $ 16,412 $ 16,412
Income (loss) before income taxes $ 165,381 $ 8,592 $ 11,534 $ (16,293 ) $ 169,214
Assets $ 2,865,675 $ 397,573 $ 341,839 $ 511,378 $ 4,116,465
 
(1) Corporate assets include cash and marketable
securities in all periods. Corporate assets as of August 31, 2015
include the investment in the Shred-it Partnership.
 
         
Cintas Corporation
Consolidated Condensed Balance Sheets
(In thousands except share data)
 
 

ASSETS

August 31,
2016

May 31,
2016

(unaudited)
Current assets:
Cash and cash equivalents $ 99,209 $ 139,357
Marketable securities 64,558 70,405
Accounts receivable, net 586,372 563,178
Inventories, net 262,156 249,362
Uniforms and other rental items in service 542,124 539,956
Income taxes, current 1,712
Prepaid expenses and other current assets   40,329     26,065  
Total current assets 1,594,748 1,590,035
 
Property and equipment, at cost, net 1,033,160 994,237
 
Investments 140,876 124,952
Goodwill 1,298,375 1,291,593
Service contracts, net 84,792 83,715
Other assets, net   15,194     14,283  
 
$ 4,167,145   $ 4,098,815  
 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 
Current liabilities:
Accounts payable $ 129,650 $ 114,514
Accrued compensation and related liabilities 64,692 101,976
Accrued liabilities 313,888 349,065
Income taxes, current 38,829
Debt due within one year   163,800     250,000  
Total current liabilities 710,859 815,555
 
Long-term liabilities:
Debt due after one year 1,044,628 1,044,422
Deferred income taxes 255,380 259,475
Accrued liabilities   168,876     136,704  
Total long-term liabilities 1,468,884 1,440,601
 
Shareholders’ equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding
Common stock, no par value: 463,375 409,682
425,000,000 shares authorized
FY17: 180,482,036 issued and 104,905,807 outstanding
FY16: 179,598,516 issued and 104,213,479 outstanding
Paid-in capital 161,938 205,260
Retained earnings 4,970,647 4,805,867
Treasury stock: (3,572,146 ) (3,553,276 )
FY17: 75,576,229 shares
FY16: 75,385,037 shares
Accumulated other comprehensive loss   (36,412 )   (24,874 )
Total shareholders’ equity   1,987,402     1,842,659  
 
$ 4,167,145   $ 4,098,815  
 
         
Cintas Corporation
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
Three Months Ended

August 31,
2016

August 31,
2015

Cash flows from operating activities:

Net income $ 138,091 $ 100,181
 

Adjustments to reconcile net income to net cash provided by
operating activities:

Depreciation 39,679 36,165
Amortization of intangible assets 3,489 3,603
Stock-based compensation 20,779 23,917
Gain on Storage transaction (4,843 )
Loss on Shred-it 14,516
Deferred income taxes 1,970 5,632

Change in current assets and liabilities, net of acquisitions of
businesses:

Accounts receivable, net (22,946 ) (19,255 )
Inventories, net (13,017 ) (8,109 )
Uniforms and other rental items in service (1,872 ) (4,939 )
Prepaid expenses and other current assets (5,655 ) (6,024 )
Accounts payable 17,480 15,531
Accrued compensation and related liabilities (37,276 ) (35,579 )
Accrued liabilities and other (23,676 ) (26,253 )
Income taxes, current   40,542     48,540  
 
Net cash provided by operating activities 157,588 143,083
 

Cash flows from investing activities:

 
Capital expenditures (78,580 ) (62,631 )
Proceeds from redemption of marketable securities 109,612 152,907
Purchase of marketable securities and investments (119,729 ) (196,020 )
Proceeds from Storage transaction 24,395
Acquisitions of businesses, net of cash acquired (10,991 ) (121,434 )
Other, net   (918 )   921  
 
Net cash used in investing activities (100,606 ) (201,862 )
 

Cash flows from financing activities:

 
Proceeds from issuance of commercial paper, net 163,800
Repayment of debt (250,000 ) (16 )
Prepaid short-term debt financing fees (8,625 )
Proceeds from exercise of stock-based compensation awards 16,282 11,844
Repurchase of common stock (18,870 ) (221,598 )
Other, net   385     51  
 
Net cash used in financing activities (97,028 ) (209,719 )
 
Effect of exchange rate changes on cash and cash equivalents   (102 )   (1,715 )
 
Net decrease in cash and cash equivalents (40,148 ) (270,213 )
 
Cash and cash equivalents at beginning of year   139,357     417,073  
 
Cash and cash equivalents at end of year $ 99,209   $ 146,860  

Contacts

Cintas Corporation
J. Michael Hansen, 513-701-2079
Senior Vice
President-Finance and Chief Financial Officer
or
Paul F.
Adler, 513-573-4195
Vice President and Treasurer