10-QPeriod: Q3 FY2018

CINTAS CORP Quarterly Report for Q3 Ended Feb 28, 2018

Filed April 6, 2018For Securities:CTAS

Summary

Cintas Corporation's (CTAS) 10-Q filing for the period ending February 28, 2018, demonstrates robust financial performance, largely driven by the strategic acquisition of G&K Services, Inc. (G&K). Total revenue saw a significant increase of 26.6% year-over-year for the quarter and 26.7% for the nine-month period, with organic growth contributing positively. The Uniform Rental and Facility Services segment, significantly bolstered by the G&K integration, showed strong revenue growth. Profitability experienced a substantial boost, with net income from continuing operations increasing by 152.9% for the quarter and 58.5% for the nine-month period. This was partly influenced by a significant provisional tax benefit resulting from the Tax Cuts and Jobs Act. While the G&K acquisition and related integration costs, along with a one-time employee bonus related to tax reform, impacted operating expenses, the company demonstrated strong operational leverage and managed expenses effectively. The company's liquidity remains strong, with significant cash flow from operations. Cintas also continues to manage its capital structure, with notable debt repayments and commercial paper issuances. The company's strategic focus on increasing customer penetration and broadening its customer base, coupled with a proactive approach to acquisitions and operational efficiency, positions it for continued growth.

Financial Highlights

53 data points
Beta

Revenue

$1.59B

44.1% Gross Margin

Net Income

$302.10M

19.0% Net Margin

EPS (Diluted)

$0.68

Total Assets

$6.93B

Cash & Equivalents

$152.56M

Free Cash Flow

$218.28M

Financial Statements
Beta
Revenue$1.59B
Gross Profit$700.46M
SG&A Expenses$490.62M
Operating Income$200.02M
Interest Expense$25.90M
Net Income$302.10M
EPS (Basic)$0.70
EPS (Diluted)$0.68
Shares Outstanding (Basic)426.23M
Shares Outstanding (Diluted)440.70M

Key Highlights

  • 1Total revenue increased by 26.6% to $1,589.1 million for the three months ended February 28, 2018, and by 26.7% to $4,807.1 million for the nine months ended February 28, 2018, driven by a combination of organic growth (7.8% and 7.9% respectively) and the G&K acquisition.
  • 2Uniform Rental and Facility Services segment revenue grew by 30.0% year-over-year for the quarter and 30.9% for the nine months, benefiting significantly from the G&K acquisition and showing organic growth of 6.5% and 7.3% respectively.
  • 3Net income from continuing operations surged by 152.9% to $295.8 million for the three months ended February 28, 2018, and by 58.5% to $594.6 million for the nine months, significantly boosted by tax reform benefits.
  • 4Diluted earnings per share from continuing operations increased by 150.9% to $2.66 for the quarter and by 56.4% to $5.35 for the nine months.
  • 5Operating income was impacted by $9.8 million in G&K integration expenses for the quarter and $26.9 million for the nine months, as well as a $40 million one-time employee bonus related to the Tax Cuts and Jobs Act.
  • 6Net cash provided by operating activities increased by $177.1 million to $660.9 million for the nine months ended February 28, 2018.
  • 7The company benefited from the Tax Cuts and Jobs Act, recognizing a provisional tax benefit of $150.5 million during the quarter, primarily from the revaluation of deferred tax liabilities due to the lower corporate tax rate.

Frequently Asked Questions

The primary driver of Cintas' significant revenue growth was the acquisition of G&K Services, Inc. (G&K), which significantly boosted the Uniform Rental and Facility Services segment. This acquisition contributed 18.5% to total revenue growth for the quarter and 18.6% for the nine-month period, in addition to positive organic growth.

While the G&K acquisition significantly increased revenue, it also led to higher costs, including integration expenses and increased selling and administrative expenses related to the acquisition. The Uniform Rental and Facility Services segment's gross margin was impacted by the lower margins of G&K compared to legacy Cintas operations. Despite these integration costs and a one-time employee bonus related to tax reform, overall net income and EPS from continuing operations saw substantial increases, partly due to benefits from tax reform.

The Tax Cuts and Jobs Act (Tax Act) had a significant positive impact on Cintas' financial results for this period. The company recognized a provisional tax benefit of $150.5 million, primarily due to the revaluation of deferred tax liabilities at the new, lower U.S. corporate tax rate of 21%. This significantly reduced the effective tax rate for the period. The company also made a one-time $40 million bonus payment to employees as a result of the Tax Act.

Cintas' liquidity remains strong, supported by robust operating cash flow. The company actively managed its debt during the period. For the nine months ended February 28, 2018, net cash used in financing activities was $592.3 million, reflecting debt repayments and commercial paper issuances. The company repaid a $250.0 million term loan and a $300.0 million senior note maturity, while also issuing $137.0 million in net commercial paper. Cintas confirmed compliance with all debt covenants.