Cintas Corporation Form 10-Q Summary
Business context and reporting period
Cintas provides uniform rental, facility, first aid and safety, fire protection, and related services primarily in North America. This unaudited Form 10-Q covers the three and nine months ended February 29, 2016, compared with February 28, 2015. The filing reflects revised operating segments: Uniform Rental and Facility Services, First Aid and Safety Services, and All Other.
Financial performance and key metrics
| Metric | Three months ended February 29, 2016 | Prior comparable period | Nine months ended February 29, 2016 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $1,216.1 million | $1,108.8 million | $3,634.1 million | $3,334.3 million |
| Operating income | $193.0 million | $173.6 million | $578.8 million | $518.7 million |
| Income from continuing operations | $117.3 million | $100.3 million | $338.9 million | $309.9 million |
| Net income | $117.3 million | $94.9 million | $562.6 million | $325.4 million |
| Diluted EPS | $1.05 | $0.80 | $5.00 | $2.73 |
- Quarterly revenue increased 9.7%, including 6.8% organic growth, a 3.6% acquisition contribution, and a 0.7% foreign-currency headwind. Nine-month revenue increased 9.0%, including 6.6% organic growth.
- Quarterly operating margin was approximately 15.9%, compared with 15.7% in the prior period. Continuing-operations net margin was approximately 9.6%, compared with 9.0%.
- Uniform Rental and Facility Services revenue increased 6.0% in the quarter and 6.2% year to date. Its pretax margin was 17.9% in both periods, up from 17.2% in the comparable prior periods.
- First Aid and Safety Services revenue increased 49.8% in the quarter and 40.3% year to date, primarily due to the ZEE acquisition. Its quarterly pretax margin declined to 10.6% from 14.2%; gross margin declined to 42.2% from 47.3% due to ZEE integration costs and lower acquired-route efficiency.
- Net cash provided by operating activities was $297.2 million, down from $377.6 million. The decline primarily reflected a $166.2 million tax payment related to the Shred-it sale.
- Capital expenditures were $207.5 million, compared with $163.0 million. Cash paid for acquisitions was $151.7 million, compared with $13.8 million.
- Cash and cash equivalents were $315.1 million at February 29, 2016, with marketable securities of $71.7 million. Total debt was $1.3 billion, including $250.0 million due June 1, 2016 and $1.05 billion due thereafter.
- The company had no commercial paper or revolving-credit borrowings outstanding. Its commercial paper capacity was $300.0 million, supported by a revolving facility with maximum capacity of $450.0 million and maturity in May 2019.
Material changes versus the prior comparable period
- The August 1, 2015 acquisition of ZEE Medical expanded First Aid and Safety Services but temporarily reduced segment margins because of integration costs and route inefficiencies.
- Cintas completed the sale of its Shred-it investment during the quarter ended November 30, 2015, receiving $578.3 million and recording a $374.0 million pretax gain. The transaction drove $223.7 million of nine-month income from discontinued operations and materially increased reported net income and EPS.
- Storage activities and Shred-it results were classified as discontinued operations for all periods presented. Reported nine-month comparisons therefore include significant disposal-related items and are not representative of recurring operating earnings.
- Share repurchases totaled $502.4 million during the nine months, reducing weighted-average diluted shares to 110.6 million from 118.2 million. The August 2015 repurchase authorization had $280.0 million remaining at February 29, 2016.
- The company adopted the amended deferred-tax presentation guidance, reclassifying $112.4 million from current to long-term liabilities as of May 31, 2015, without changing total liabilities.
Guidance, outlook, risks and unusual items
- Management expects to refinance the $250.0 million of senior notes maturing June 1, 2016 and believes operating cash flow, its commercial paper program, and debt markets will provide adequate funding.
- No formal quantitative revenue or earnings guidance is provided in the filing. Management’s strategy remains focused on organic growth, deeper penetration of existing customers, geographic expansion, and strategic acquisitions.
- Key risks include integrating ZEE and other acquisitions, elevated labor, material, energy and fuel costs, foreign-currency volatility, customer losses, regulatory and tax developments, cybersecurity and systems disruptions, litigation, environmental matters, and access to debt markets.
- Cintas was in compliance with all debt covenants. Ordinary-course litigation and claims were not expected by management to have a material adverse effect, although outcomes can vary.
- The company may receive up to $34.0 million of additional Shred-it consideration if specified future events occur; this gain contingency was not recorded because of uncertainty.
- Management stated that disclosure controls were effective as of February 29, 2016 and that no material changes affected internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm that the $223.7 million of discontinued-operations income and $374.0 million Shred-it gain are excluded when assessing recurring earnings and valuation.
- Monitor ZEE integration progress, acquired-route productivity, and the recovery of First Aid and Safety margins.
- Verify refinancing terms and interest-rate exposure for the $250.0 million maturity due June 1, 2016.
- Assess whether operating cash flow normalizes after the unusual $166.2 million Shred-it-related tax payment.
- Track remaining share-repurchase authorization, ongoing capital expenditures, acquisition spending, and the effect of reduced share count on EPS.