For the businesses unaffected by the Shred-it Transaction, fourth quarter revenue grew 4.7% 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%. Organic growth for those businesses, which adjusts for both the impact of acquisitions and the difference in workdays, was 6.1%. 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% to 6.7% in the fourth quarter.”
Document Shredding – See Note 3
For the businesses unaffected by the Shred-it Transaction, fourth quarter operating income was $165.4 million and grew 10.3% over last year’s fourth quarter. Fourth quarter operating income as a percent of revenue for these businesses was 15.0%, which was an improvement from the 14.2% 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. The table below shows the total impact of the Shred-it Transaction on the fourth quarter results and the fiscal year 2014 results.
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, these figures were positively impacted by the Shred-it Transaction as noted above. 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% and 8.7%, 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% and 10.7%, 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.
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 table below shows a comparison of fiscal 2014 revenue to 2015 revenue guidance.
Total Cintas Revenue
The table below shows a comparison of fiscal 2014 EPS to 2015 EPS guidance.
Total Cintas EPS
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.
Headquartered in Cincinnati, Cintas Corporation provides highly specialized services to businesses of all types primarily throughout North America. Cintas designs, manufactures and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, first aid, safety, fire protection products and services and document management services for over one million businesses. 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.
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 measures of revenue and related growth, operating income and related growth, net income, earnings per diluted share, debt 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.
Management believes the ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) is valuable to investors, particularly investors of the company’s debt, because it is a common metric that reflects the company’s earnings and cash flow available for debt service payments.
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.