On July 15, 2014, Cincinnati-based Cintas Corporation reported results for its fourth quarter and full fiscal year ended May 31, 2014. Revenue for the fourth quarter and for the fiscal year was $1.16 billion and $4.55 billion, respectively. The fiscal year revenue of $4.55 billion is a record level for Cintas. Net income for the fourth quarter and for the fiscal year was $127.2 million and $374.4 million, respectively. Earnings per diluted share (EPS) for the fourth quarter and the fiscal year were $1.03 and $3.05, respectively. Fourth quarter net income and EPS figures included a positive impact of $32.9 million and $0.27, net of tax, respectively, related to the closing of the previously announced partnership transaction with Shred-it International Inc. (the “Shred-it Transaction”), which closed on April 30, 2014. The impact of the Shred-it Transaction will be further explained in the Operating Income and Net Income Results section below.
Revenue Results
Fourth quarter revenue of $1.16 billion grew 2.5 percent compared to last year’s fourth quarter revenue of $1.13 billion. However, this revenue growth rate was negatively affected by the impact of the Shred-it Transaction. With the closing of the Shred-it Transaction effective April 30, 2014, Cintas will no longer include Document Shredding revenue in its reported revenue. As a result, we believe that revenue unaffected by the Shred-it Transaction is more representative of the ongoing revenue stream of Cintas.
For the businesses unaffected by the Shred-it Transaction, fourth quarter revenue grew 4.7 percent over last year’s fourth quarter. When adjusting for one fewer workday in this year’s fourth quarter compared to last year’s fourth quarter, revenue for the businesses unaffected by the Shred-it Transaction grew 6.3 percent. Organic growth for those businesses, which adjusts for both the impact of acquisitions and the difference in workdays, was 6.1 percent. Scott D. Farmer, Chief Executive Officer, stated, “After very challenging weather in our third quarter, we are pleased to see our revenue growth rate rebound in the fourth quarter. Our Rental operating segment organic growth rate, in particular, improved from a third quarter rate of 5.4 percent to 6.7 percent in the fourth quarter.”
Operating Income and Net Income Results
Fourth quarter operating income was $123.8 million, but was negatively affected by the impact of the Shred-it Transaction. With the closing of the Shred-it Transaction effective April 30, 2014, we recognized an asset impairment charge and transaction costs associated with the Shred-it Transaction. As a result, we believe that operating income unaffected by the Shred-it Transaction is more representative of our fourth quarter operating performance.
For the businesses unaffected by the Shred-it Transaction, fourth quarter operating income was $165.4 million and grew 10.3 percent over last year’s fourth quarter. Fourth quarter operating income as a percent of revenue for these businesses was 15.0 percent, which was an improvement from the 14.2 percent in last year’s fourth quarter. Mr. Farmer added, “We continue to see good leveraging of our infrastructure as our revenue grows, and the route capacity added last fiscal year continues to improve in efficiency and allows our service teams to add more products and services for our customers.”
The asset impairment charge primarily related to the write-off of certain Document Shredding information technology assets used specifically in the Document Shredding business. The shredding transaction costs primarily related to legal and professional fees and the early vesting of restricted stock grants and stock options associated with the employees who transferred employment from Cintas to Shred-it.
Upon the closing of the Shred-it Transaction, Cintas contributed its Document Shredding business to a partnership with Shred-it International Inc. As a result, Cintas will no longer reflect the assets or liabilities associated with that business in its balance sheet after April 30, 2014. Instead, we will report the investment in the partnership with Shred-it International Inc. in the line item on our balance sheet entitled “Investments.” U.S. generally accepted accounting principles require us to initially record this investment at fair market value, which has resulted in a gain of $106.4 million. Somewhat offsetting this gain are the $16.1 million asset impairment charge and the $28.5 million shredding transaction costs described above. The combined net income and EPS impact of the Shred-it Transaction on the fiscal 2014 results was $31.5 million and $0.26, net of tax, respectively.
Net income was $127.2 million and $374.4 million for the fourth quarter and fiscal 2014, respectively. However, as noted above, the Shred-it Transaction positively impacted these figures. Net income, adjusted for the Shred-it Transaction, which is more representative of the operating performance of Cintas, was $94.3 million and $342.9 million for the fourth quarter and fiscal 2014, respectively. Net income growth over last fiscal year, adjusted for the Shred-it Transaction, for the fourth quarter and fiscal 2014 was 9.7 percent and 8.7 percent, respectively. EPS, adjusted for the Shred-it Transaction, was $0.76 and $2.79 for the fourth quarter and fiscal 2014, respectively. EPS growth over last fiscal year, adjusted for the Shred-it Transaction, for the fourth quarter and fiscal 2014 was 10.1 percent and 10.7 percent, respectively.
During the fourth quarter and into June 2014, Cintas purchased 4.1 million shares of common stock at a cost of $250.0 million. This share buyback had an impact of less than $0.01 on fourth quarter EPS since it occurred so late in the quarter. However, it is expected to benefit fiscal year 2015 EPS by approximately $0.09. As of July 15, 2014, the Company has $254.4 million available under the current Board stock repurchase authorization. The total share purchases included acquiring 3.4 million shares at an aggregate cost of approximately $204.2 million during the fourth quarter, and the remaining 0.7 million shares were purchased during June 2014 at an aggregate cost of approximately $45.8 million.
Fiscal Year 2015 Guidance
Mr. Farmer concluded, “As we enter fiscal 2015, we remain encouraged by the performance of our businesses and the execution of our strategies by our employees, who we call partners, but we continue to look for more consistency from the U.S. economy. While the U.S. employment performance has improved during the past few months, we still see narrowness in that performance and are uncertain that the improved performance can continue. We have developed our guidance for fiscal 2015 with the assumption that generally inconsistent U.S. economic performance will continue. We expect fiscal 2015 revenue to be in the range of $4.425 billion to $4.525 billion, and fiscal 2015 EPS to be in the range of $3.06 to $3.15. This guidance assumes 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, upon the closing of the Shred-it Transaction on April 30, 2014, we will no longer include Document Shredding revenue in our reported revenue.
The fiscal 2015 EPS guidance incorporates the impact of the share buybacks that occurred in May and June 2014. It does not assume any additional share buybacks.
For additional information or to view the full release, visit www.cintas.com.
