Cintas Corporation (Nasdaq: CTAS) today reported results for its third quarter of fiscal year 2017 which ended February 28, 2017. Revenue for the third quarter was $1.28 billion, an increase of 5.3% over last year’s third quarter. The organic growth rate, which adjusts for the impacts of acquisitions, foreign currency exchange rate fluctuations and differences in the number of workdays, was 6.5%. Organic growth for the Uniform Rental and Facility Services segment accelerated to a rate of 7.3%.

Third quarter gross margin improved to 44.2% from 43.1% last year. Scott D. Farmer, Cintas’ Chairman and Chief Executive Officer, stated, “This is our 14th consecutive quarter of year-over-year gross margin improvement. This and our industry-leading revenue growth are indicative of a healthy company with significant opportunities ahead. I thank our employees, whom we call partners, for the continuous commitment to improvement that leads to best-in-class execution and results.” Third quarter gross margin for the Uniform Rental and Facility Services segment improved to 45.0%, an increase of 100 basis points compared to last year’s third quarter. The First Aid and Safety Services segment third quarter gross margin improved to 44.8%, an increase of 260 basis points compared to last year’s third quarter primarily due to the realization of synergies from the acquisition of ZEE Medical in fiscal 2016.

Selling and administrative expenses as a percentage of revenue were 28.3% in the third quarter compared to 27.3% in last year’s third quarter. Fifty basis points of the increase was the result of favorable workers’ compensation experience in last year’s third quarter. In addition, labor and related expenses increased as a percentage of revenue as we continue to prepare for the acquisition of G&K Services, Inc. (G&K).

Operating income for the third quarter of $195 million increased 0.9% from last year’s third quarter. Operating income margin was 15.2% compared to 15.9% in last year’s third quarter. Third quarter operating income included $9 million, or 0.7% of third quarter revenue, of transaction expenses related to the acquisition of G&K.

Net income and earnings per diluted share (EPS) from continuing operations for the third quarter were $119 million and $1.08, respectively. This quarter’s EPS includes a positive impact from a change in the accounting for equity compensation as required under ASU 2016-09, which was adopted in the first quarter of fiscal 2017, as well as a negative impact from transaction expenses such as legal and professional expenses associated with the regulatory review related to the acquisition of G&K. The following table provides a comparison of fiscal 2017 EPS to the comparable period of fiscal 2016:

    Three Months Ended     Nine Months Ended
Earnings Per Share Results 2/28/17     2/29/16     2/28/17     2/29/16
           
EPS-Continuing Operations $ 1.08 $ 1.05 $ 3.47 $ 3.01
 
Impact of ASU 2016-09 $ (0.03 ) $ - $ (0.17 ) $ -
 
G&K transaction expenses $ 0.06       $ -     $ 0.10       $ -
 
EPS after above items $ 1.11 $ 1.05 $ 3.40 $ 3.01
 

Mr. Farmer concluded, “Yesterday we completed the acquisition of G&K. We are excited to have the G&K employees join us as Cintas partners and now begin the process of integration. We expect to realize annual synergies in the range of $130 million to $140 million in the fourth full year following the acquisition. The integration process needed to achieve the annual synergies will result in certain non-recurring costs. In addition, we will continue the purchase accounting process, including certain third-party valuations, which may have a significant impact on our future results. While we have estimated these integration costs and the impact of the purchase price accounting results using assumptions from our due diligence, we must confirm our assumptions and complete the purchase accounting process. Therefore, we are pulling our guidance for the remainder of our 2017 fiscal year. We will provide our expectations for results when the impact of these items becomes clearer.”

About Cintas

Cintas Corporation helps more than one million 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 both the Standard & Poor’s 500 Index and the Nasdaq-100 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, risks inherent with the G&K transaction in the achievement of cost synergies and the timing thereof, including whether the transaction will be accretive and within the expected timeframe; 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 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; and the reactions of competitors in terms of price and service. 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

February 28,

February 29,
2017     2016     % Change
 
Revenue:
Uniform rental and facility services $ 993,398 $ 936,565 6.1
Other   287,737         279,518   2.9
Total revenue 1,281,135 1,216,083 5.3
 
Costs and expenses:
Cost of uniform rental and facility services 546,538 524,656 4.2
Cost of other 168,173 166,819 0.8
Selling and administrative expenses 362,385 331,656 9.3
G&K Services, Inc. transaction expenses   9,344         -   100.0
 
Operating income 194,695 192,952 0.9
 
Interest income (11 ) (335 ) -96.7
Interest expense   13,696         16,163   -15.3
 
Income before income taxes 181,010 177,124 2.2
Income taxes   62,363         59,845   4.2
Income from continuing operations 118,647 117,279 1.2
(Loss) income from discontinued operations, net of tax   (642 )       62   -1135.5
Net income $ 118,005       $ 117,341   0.6
 
Basic earnings (loss) per share:
Continuing operations $ 1.11 $ 1.07 3.7
Discontinued operations   (0.01 )       0.00   -100.0
Basic earnings per share $ 1.10       $ 1.07   2.8
 
Diluted earnings (loss) per share:
Continuing operations $ 1.08 $ 1.05 2.9
Discontinued operations   (0.01 )       0.00   -100.0
Diluted earnings per share $ 1.07       $ 1.05   1.9
 
Weighted average number of shares outstanding 105,093 107,843
Diluted average number of shares outstanding 107,892 109,463
 
Nine Months Ended
February 28, February 29,
2017     2016     % Change
 
Revenue:
Uniform rental and facility services $ 2,998,559 $ 2,812,677 6.6
Other   873,629         821,376   6.4
Total revenue 3,872,188 3,634,053 6.6
 
Costs and expenses:
Cost of uniform rental and facility services 1,643,222 1,569,250 4.7
Cost of other 507,341 488,651 3.8
Selling and administrative expenses 1,101,633 997,344 10.5
G&K Services, Inc. transaction expenses   15,478         -   100.0
 
Operating income 604,514 578,808 4.4
 
Interest income (107 ) (565 ) -81.1
Interest expense   41,135         48,746   -15.6
 
Income before income taxes 563,486 530,627 6.2
Income taxes   183,294         191,697   -4.4
Income from continuing operations 380,192 338,930 12.2
Income from discontinued operations, net of tax   16,281         223,692   -92.7
Net income $ 396,473       $ 562,622   -29.5
 
Basic earnings per share:
Continuing operations $ 3.56 $ 3.06 16.3
Discontinued operations   0.15         2.02   -92.6
Basic earnings per share $ 3.71       $ 5.08   -27.0
 
Diluted earnings per share:
Continuing operations $ 3.47 $ 3.01 15.3
Discontinued operations   0.15         1.99   -92.5
Diluted earnings per share $ 3.62       $ 5.00   -27.6
 
Weighted average number of shares outstanding 104,842 108,923
Diluted average number of shares outstanding 107,508 110,612
       
CINTAS CORPORATION SUPPLEMENTAL DATA
Three Months Ended

February 28,

February 29,
2017     2016
Uniform rental and facility services gross margin 45.0 % 44.0 %
Other gross margin 41.6 % 40.3 %
Total gross margin 44.2 % 43.1 %
Net income margin, continuing operations 9.3 % 9.6 %
 
 
Nine Months Ended

February 28,

February 29,
2017     2016
Uniform rental and facility services gross margin 45.2 % 44.2 %
Other gross margin 41.9 % 40.5 %
Total gross margin 44.5 % 43.4 %
Net income margin, continuing operations 9.8 % 9.3 %
 
Computation of Diluted Earnings Per Share from Continuing Operations
     
Three Months Ended

February 28,

February 29,
2017     2016
 
Income from continuing operations $ 118,647 $ 117,279
Less: income from continuing operations allocated to participating securities   2,262       1,871
Income from continuing operations available to common shareholders $ 116,385     $ 115,408
 
Basic weighted average common shares outstanding 105,093 107,843
Effect of dilutive securities - employee stock options   2,799       1,620
Diluted weighted average common shares outstanding   107,892       109,463
 
Diluted earnings per share from continuing operations $ 1.08     $ 1.05
 
Nine Months Ended
February 28, February 29,
2017     2016
 
Income from continuing operations $ 380,192 $ 338,930
Less: income from continuing operations allocated to participating securities   7,217       5,500
Income from continuing operations available to common shareholders $ 372,975     $ 333,430
 
Basic weighted average common shares outstanding 104,842 108,923
Effect of dilutive securities - employee stock options   2,666       1,689
Diluted weighted average common shares outstanding   107,508       110,612
 
Diluted earnings per share from continuing operations $ 3.47     $ 3.01
 
Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure
 
The press release contains a non-GAAP financial measure 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 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 these difference between these non-GAAP financial measures with the most directly comparable financial measures calculated in accordance with GAAP are shown below.
           
Computation of Workday Adjusted Revenue Growth
 
 
Three Months Ended Nine Months Ended

February 28,

February 29,

February 28,

February 29,

2017   2016   Growth % 2017   2016   Growth %
 
ABGIJO
Revenue $ 1,281,135 $ 1,216,083 5.3 % $ 3,872,188 $ 3,634,053 6.6 %
G=(A-B)/BO=(I-J)/J
CDKL
Workdays in the period 64 65 195 196
 
EFHMNP
Revenue adjusted for workday difference 1,301,153 $ 1,216,083 7.0 % $ 3,892,045 $ 3,634,053 7.1 %
H=(E-F)/FP=(M-N)/N
E=(A/C)*DF=(B/D)*DM=(I/K)*LN=(J/L)*L
 
Management believes that workday adjusted revenue growth is valuable to investors because it reflects the revenue performance compared to a prior period with the same number of revenue generating days.
 
Computation of Free Cash Flow
 
Nine Months Ended
February 28, February 29,
2017 2016
 
Net cash provided by operations $ 483,758 $ 297,154
 
Capital expenditures   (218,621 )   (207,502 )
 
Free cash flow $ 265,137   $ 89,652  
 
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 First Aid
Facility and Safety All
Services     Services     Other     Corporate     Total
For the three months ended February 28, 2017
Revenue $ 993,398 $ 124,239 $ 163,498 $ - $ 1,281,135
Gross margin $ 446,860 $ 55,681 $ 63,883 $ - $ 566,424
Selling and administrative expenses $ 264,973 $ 43,446 $ 53,966 $ - $ 362,385
G&K Services, Inc. transaction expenses $ 9,344 $ - $ - $ - $ 9,344
Interest income $ - $ - $ - $ (11 ) $ (11 )
Interest expense $ - $ - $ - $ 13,696 $ 13,696
Income (loss) before income taxes $ 172,543 $ 12,235 $ 9,917 $ (13,685 ) $ 181,010
 
For the three months ended February 29, 2016
Revenue $ 936,565 $ 119,064 $ 160,454 $ - $ 1,216,083
Gross margin $ 411,909 $ 50,241 $ 62,458 $ - $ 524,608
Selling and administrative expenses $ 244,407 $ 37,607 $ 49,642 $ - $ 331,656
Interest income $ - $ - $ - $ (335 ) $ (335 )
Interest expense $ - $ - $ - $ 16,163 $ 16,163
Income (loss) before income taxes $ 167,502 $ 12,634 $ 12,816 $ (15,828 ) $ 177,124
 
For the nine months ended February 28, 2017
Revenue $ 2,998,559 $ 373,875 $ 499,754 $ - $ 3,872,188
Gross margin $ 1,355,337 $ 170,352 $ 195,936 $ - $ 1,721,625
Selling and administrative expenses $ 804,710 $ 131,827 $ 165,096 $ - $ 1,101,633
G&K Services, Inc. transaction expenses $ 15,478 $ - $ - $ - $ 15,478
Interest income $ - $ - $ - $ (107 ) $ (107 )
Interest expense $ - $ - $ - $ 41,135 $ 41,135
Income (loss) before income taxes $ 535,149 $ 38,525 $ 30,840 $ (41,028 ) $ 563,486
 
For the nine months ended February 29, 2016
Revenue $ 2,812,677 $ 338,990 $ 482,386 $ - $ 3,634,053
Gross margin $ 1,243,427 $ 144,379 $ 188,346 $ - $ 1,576,152
Selling and administrative expenses $ 741,249 $ 108,306 $ 147,789 $ - $ 997,344
Interest income $ - $ - $ - $ (565 ) $ (565 )
Interest expense $ - $ - $ - $ 48,746 $ 48,746
Income (loss) before income taxes $ 502,178 $ 36,073 $ 40,557 $ (48,181 ) $ 530,627
 
Cintas Corporation
Consolidated Condensed Balance Sheets
(In thousands except share data)
 
 

ASSETS

    February 28,     May 31,
2017 2016
(Unaudited)
Current assets:
Cash and cash equivalents $ 147,244 $ 139,357
Marketable securities - 70,405
Accounts receivable, net 606,209 563,178
Inventories, net 272,181 249,362
Uniforms and other rental items in service 539,730 539,956
Income taxes, current 20,560 1,712
Deferred tax asset
Assets held for sale -
Prepaid expenses and other current assets   44,017     26,065  
Total current assets 1,629,941 1,590,035
 
Property and equipment, at cost, net 1,090,209 994,237
 
Investments 148,168 124,952
Goodwill 1,303,038 1,291,593
Service contracts, net 83,720 83,715
Other assets, net   16,088     14,283  
 
$ 4,271,164   $ 4,098,815  
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 
Current liabilities:
Accounts payable $ 127,940 $ 114,514
Accrued compensation and related liabilities 95,353 101,976
Accrued liabilities 321,324 349,065
Income taxes, current -
Deferred tax liability
Debt due within one year   399,351     250,000  
Total current liabilities 943,968 815,555
 
Long-term liabilities:
Debt due after one year 745,189 1,044,422
Deferred income taxes 267,065 259,475
Accrued liabilities   136,684     136,704  
Total long-term liabilities 1,148,938 1,440,601
 
Shareholders' equity:
Preferred stock, no par value: - -
100,000 shares authorized, none outstanding
Common stock, no par value: 476,373 409,682
425,000,000 shares authorized
FY17: 180,777,903 issued and 105,191,298 outstanding
FY16: 179,598,516 issued and 104,213,479 outstanding
Paid-in capital 200,572 205,260
Retained earnings 5,086,584 4,805,867
Treasury stock: (3,573,330 ) (3,553,276 )
FY17: 75,586,605 shares
FY16: 75,385,037 shares
Accumulated other comprehensive loss   (11,941 )   (24,874 )
Total shareholders' equity   2,178,258     1,842,659  
 
$ 4,271,164   $ 4,098,815  
 
Cintas Corporation
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
    Nine Months Ended
February 28,   February 29,
2017 2016

Cash flows from operating activities:

Net income $ 396,473 $ 562,622
 

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

Depreciation 120,493 110,535
Amortization of intangible assets 11,221 12,136
Stock-based compensation 63,578 57,169
Gain on Storage transactions - (15,786 )
Gain on Shred-it (25,876 ) (349,738 )
Deferred income taxes (3,472 ) (74,540 )

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

Accounts receivable, net (35,992 ) (41,523 )
Inventories, net (23,364 ) (24,009 )
Uniforms and other rental items in service (53 ) (6,905 )
Prepaid expenses and other current assets (4,041 ) (1,580 )
Accounts payable 15,538 37,370
Accrued compensation and related liabilities (5,812 ) (3,731 )
Accrued liabilities and other (6,079 ) (18,301 )
Income taxes, current   (18,856 )   53,435  
 
Net cash provided by operating activities 483,758 297,154
 

Cash flows from investing activities:

 
Capital expenditures (218,621 ) (207,502 )
Proceeds from redemption of marketable securities 172,506 327,779
Purchase of marketable securities and investments (125,634 ) (384,796 )
Proceeds from Storage transactions - 35,338
Proceeds from sale of investment in Shred-it 25,876 578,257
Acquisitions of businesses, net of cash acquired (19,630 ) (151,731 )
Other, net   28     4,433  
 
Net cash (used in) provided by investing activities (165,475 ) 201,778

 

Cash flows from financing activities:

 
Proceeds from issuance of commercial paper, net 99,500 -
Repayment of debt (250,000 ) (16 )
Prepaid short-term debt financing fees (13,949 ) -
Proceeds from exercise of stock-based compensation awards 25,114 22,260
Dividends paid (142,444 ) (115,273 )
Repurchase of common stock (20,054 ) (502,439 )
Other, net   (5,801 )   1,153  
 
Net cash used in financing activities (307,634 ) (594,315 )
 
Effect of exchange rate changes on cash and cash equivalents   (2,762 )   (6,574 )
 
Net increase (decrease) in cash and cash equivalents 7,887 (101,957 )
 
Cash and cash equivalents at beginning of period   139,357     417,073  
 
Cash and cash equivalents at end of period $ 147,244   $ 315,116