10-QPeriod: Q2 FY2017

CINTAS CORP Quarterly Report for Q2 Ended Nov 30, 2016

Filed January 6, 2017For Securities:CTAS

Summary

Cintas Corporation (CTAS) reported solid financial results for the six months ended November 30, 2016, demonstrating continued revenue growth and profitability. Total revenue increased by 7.2% year-over-year, driven by a robust 5.7% organic growth, supplemented by strategic acquisitions. The core Uniform Rental and Facility Services segment showed strength with a 6.9% revenue increase, while the First Aid and Safety Services segment also experienced significant growth of 13.4%, largely due to the ZEE acquisition. Net income from continuing operations saw a substantial increase of 18.0%, and diluted earnings per share from continuing operations grew by 21.9%, reflecting effective operational management and improved financial performance. The company is actively pursuing growth through increased market penetration and customer base expansion, supported by strategic investments in systems and branding. Importantly, Cintas is also in the process of acquiring G&K Services for approximately $2.2 billion, a significant move that is expected to be financed through debt. While this acquisition presents integration challenges and adds leverage, the company's consistent operational execution and ongoing share repurchase program underscore a commitment to shareholder value.

Financial Highlights

51 data points
Beta

Revenue

$1.27B

44.5% Gross Margin

Net Income

$140.38M

11.0% Net Margin

EPS (Diluted)

$0.32

Total Assets

$4.21B

Cash & Equivalents

$143.57M

Free Cash Flow

$67.54M

Financial Statements
Beta
Revenue$1.27B
Gross Profit$565.22M
SG&A Expenses$361.42M
Operating Income$200.46M
Interest Expense$13.27M
Net Income$140.38M
EPS (Basic)$0.33
EPS (Diluted)$0.32
Shares Outstanding (Basic)419.83M
Shares Outstanding (Diluted)430.59M

Key Highlights

  • 1Total revenue increased by 7.2% to $2.59 billion for the six months ended November 30, 2016, compared to the prior year, with 5.7% attributed to organic growth.
  • 2Uniform Rental and Facility Services segment revenue grew 6.9% to $2.01 billion, with a gross margin improvement of 100 basis points.
  • 3First Aid and Safety Services segment revenue surged by 13.4% to $249.6 million, largely driven by acquisitions, and saw a gross margin increase of 310 basis points.
  • 4Net income from continuing operations increased by 18.0% to $261.5 million for the six months ended November 30, 2016.
  • 5Diluted earnings per share from continuing operations rose by 21.9% to $2.39 for the six months ended November 30, 2016.
  • 6The company announced a pending acquisition of G&K Services for approximately $2.2 billion, subject to regulatory approvals.
  • 7Cintas repurchased $3.7 million of its common stock under its new $500 million share buyback program during the period.

Frequently Asked Questions

Cintas Corporation appears to be in strong financial health. Revenue and net income from continuing operations are growing, driven by both organic growth and strategic acquisitions. The company is managing its costs effectively, improving gross margins in key segments. Its liquidity position is solid, supported by strong operating cash flows. However, the pending acquisition of G&K Services will significantly increase debt levels, which is being monitored by rating agencies.

The primary growth drivers for Cintas are increasing penetration of its services at existing customers and broadening its customer base. This is achieved through a strong sales force that builds close customer relationships and offers a wider range of products and services. Strategic acquisitions, such as the recent acquisition of ZEE Medical and the pending acquisition of G&K Services, are also significant contributors to revenue growth, particularly in the First Aid and Safety Services segment.

The acquisition of G&K Services, valued at approximately $2.2 billion, is expected to be financed with short-term and long-term debt. This will significantly increase Cintas' leverage. The company has amended its credit facilities and secured bridge loan financing. The increased debt load has led credit rating agencies like Moody's to place Cintas' ratings under review, indicating potential concerns about the post-acquisition capital structure and credit metrics. Investors should monitor the integration process and the company's ability to manage its increased debt burden.

For the six months ended November 30, 2016, income from discontinued operations was $16.9 million. This primarily relates to the sale of the Shred-it investment, where the company recognized a gain during the prior year and received additional proceeds in the current period. While these are reported separately, the substantial gains from past divestitures (Shred-it and Storage) have significantly influenced historical reported net income, making it important to focus on 'income from continuing operations' for ongoing business performance.