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G&K Acquisition Hits Cintas Earnings, but Organic Growth Remains Strong

By Dan Caplinger – Jul 20, 2017 at 6:06PM

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The uniform rental services company still boosted its revenue and income from its legacy business.

Acquisitions are important events in the lives of companies, and they often involve accepting short-term pain in the hope of long-term gain. Cintas (CTAS 1.77%) recently completed the acquisition of G&K Services, complementing its uniform rental business and expanding its exposure to facility services, and investors were looking forward to seeing how the merger would impact the company's financials.

Coming into Thursday's fiscal fourth-quarter financial report, Cintas shareholders expected substantial sales gains and modest earnings growth. The company delivered on the top line, and investors should have been pleased with Cintas' net income despite some one-time charges related to integrating G&K's operations. Let's take a closer look at Cintas to see how it did and what lies ahead.

Cintas hand washing machine.

Image source: Cintas.

Cintas moves forward

Cintas' fiscal fourth-quarter results had good news and bad news for those following the stock. Sales came in at $1.53 billion, up 23% from year-ago levels and matching the consensus forecast among investors. Reported net income fell almost 30% to $82.1 million, but after accounting for one-time items, adjusted earnings of $1.18 per share topped the $1.10 figure that most investors were looking to see.

Taking a closer look at the number, Cintas broke out the impact of the G&K acquisition. Organic sales growth from Cintas' legacy operations came in at 8%, with G&K adding another $188 million to the company's top line. Transaction and integration costs of $63.7 million sent the G&K division to a loss, but without those impacts, the unit would have added $0.05 per share to quarterly profits.

Cintas saw its strongest performance from its primary uniform rental and facility services segment. Sales there jumped 27%, and segment gross margin rose slightly. Cintas lumped the rest of its revenue into its "other" category, which enjoyed a 9% rise in sales and saw even better gross margin improvement. Cintas said that its organic growth from uniform rental and facility services was 8%, while first aid and safety services sales climbed at a 9% rate. Overhead expenses climbed at a slightly faster pace than revenue, eating into operating margin gains, but Cintas' legacy business had favorable moves in interest expense that helped support its bottom line.

CEO Scott Farmer celebrated a successful report. "Our strong finish to the fiscal year helped us to achieve a seventh consecutive year of organic growth in the mid to high single digits," Farmer said, and the CEO noted that revenue growth has dramatically exceeded the pace of gross domestic product and labor market growth in the U.S. economy.

What's ahead for Cintas?

Cintas thinks that the future is brighter than ever for the company going forward. In Farmer's words, "Significant opportunities exist in all of our businesses. In addition, long-term investments such as the S&K acquisition and the implementation of an enterprise resource planning system contribute to a long runway for continued growth."

However, Cintas' initial guidance for fiscal 2018 was mixed in some investors eyes. The company posted revenue projections between $6.27 billion and $6.36 billion, which was well short of the consensus forecast for $6.45 billion. Yet Cintas expects earnings from continuing operations to come in between $5.15 and $5.25 per share, which is well above the $4.90 that those following the stock came into the day expecting.

Cintas has high hopes for G&K. Expectations include contributions to earnings of $0.15 to $0.17 per share, with sales of $870 million to $900 million. Synergy-related savings should produce $50 million to $55 million in upward impact on earnings, offsetting the greater interest expense incurred from borrowing to finalize the acquisition.

Cintas investors seemed to be generally pleased with the report, and the stock climbed 2% in after-hours trading following the announcement. If the economy keeps doing well, then Cintas will be in a position to keep benefiting from strong employment trends and grow its business more aggressively in the future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.

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