Cintas Corporation — Form 10-Q Summary
Business context and reporting period
Cintas provides corporate uniform rental and direct-sale programs, first aid, safety and fire protection services, document management, restroom services, and related business services across North America and internationally. The filing covers the three and six months ended November 30, 2013, representing the second quarter and first six months of fiscal 2014. Results are unaudited and interim results may not be indicative of the full fiscal year.
Key financial metrics
| Metric | Three months ended Nov. 30, 2013 | Three months ended Nov. 30, 2012 | Six months ended Nov. 30, 2013 | Six months ended Nov. 30, 2012 |
|---|---|---|---|---|
| Revenue | $1,143.8 million | $1,060.4 million | $2,264.1 million | $2,111.7 million |
| Operating income | $153.0 million | $139.0 million | $293.0 million | $278.3 million |
| Net income | $84.9 million | $78.0 million | $162.6 million | $154.8 million |
| Diluted EPS | $0.70 | $0.63 | $1.33 | $1.23 |
| Operating margin | 13.4% | 13.1% | 12.9% | 13.2% |
| Effective tax rate | 37.9% | 36.5% | 37.5% | 37.0% |
Six-month cash flow from operations was $222.3 million, compared with $227.3 million in the prior-year period. Investing cash outflow was $120.5 million, including $76.8 million of capital expenditures and $32.5 million for acquisitions. Financing cash outflow was $144.4 million, primarily reflecting $164.2 million of common-stock repurchases. Cash and cash equivalents totaled $309.3 million at November 30, 2013, with $4.2 million of marketable securities.
Total debt was approximately $1.30 billion, consisting primarily of fixed-rate senior notes. No commercial paper or revolving-credit borrowings were outstanding. The company had a $300.0 million commercial paper program supported by a revolving credit facility expandable to $450.0 million, maturing October 6, 2016. Cintas reported compliance with all significant debt covenants.
Dividends declared were $0.77 per share, up from $0.64 per share. Shareholders’ equity was $2.15 billion at November 30, 2013, compared with $2.20 billion at May 31, 2013.
Material changes versus the prior comparable period
- Second-quarter revenue increased 7.9% and six-month revenue increased 7.2%. Organic revenue growth was 7.1% in both periods, with additional growth from acquisitions.
- Second-quarter net income increased 8.8% and diluted EPS increased 11.1%; six-month net income increased 5.1% and diluted EPS increased 8.1%. Lower weighted-average shares from repurchases supported EPS growth.
- Rental Uniforms and Ancillary Products revenue grew 6.4% in the quarter and 5.7% year to date. Second-quarter gross margin improved to 42.9%, primarily from route efficiencies and better absorption of fixed costs.
- Other Services revenue grew 11.5% in the quarter and 11.0% year to date. Uniform Direct Sales benefited from large customer roll-outs, while First Aid, Safety and Fire Protection benefited from acquisitions and favorable mix.
- Document Management revenue increased 12.2% in the quarter and 11.2% year to date, but profitability declined because recycled-paper prices fell approximately 17% in the quarter and 16% year to date.
- Prior-year results included an $8.5 million gain on the sale of stock of an equity-method investment and a $1.6 million garment-processing-system write-off. These items affected comparability, particularly selling and administrative expense and prior-year margins.
- Operating cash flow declined $5.0 million year over year, largely because of the timing of vendor payments. Capital expenditures and acquisition spending were lower than in the prior-year period.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management expects operating cash flow, existing cash, and available debt-market resources to fund operations, expansion, dividends, acquisitions, and potential share repurchases. The company stated that no shares were repurchased from December 1, 2013 through January 9, 2014.
Management highlighted growth opportunities from increasing penetration of existing customers, expanding the customer base, geographic expansion, and strategic acquisitions. Risks include energy, fuel, materials, labor and medical costs; customer outsourcing trends; acquisition integration; union activity; employment, tax, environmental and safety regulations; information-system disruptions; litigation; catastrophic events; paper-recycling prices; foreign-currency movements; and changes in the amount and timing of share repurchases.
Material contingencies include the Serrano and Avalos employment-discrimination litigation. The filing states that an adverse outcome could result in material liability, but any estimated liability was not determinable at the reporting date. Cintas also reported ongoing tax audits in foreign jurisdictions and certain states; unrecognized tax benefits could decrease by approximately $0.6 million during fiscal 2014.
Cintas adopted the required disclosure changes under ASU 2013-02 for accumulated other comprehensive income and early adopted certain tangible-property tax regulations. Management stated that full adoption of the tax regulations is not expected to have a material consolidated financial statement impact. Disclosure controls were assessed as effective as of November 30, 2013.
Important facts for investors to verify
- Whether organic revenue growth and sales productivity remain strong, particularly in Rental Uniforms and Ancillary Products.
- The sustainability of margin performance after excluding the prior-year investment-sale gain and processing-system write-off.
- Document Management profitability and sensitivity to recycled-paper prices.
- Cash conversion, working-capital timing, capital expenditures, acquisition spending, dividends, and share repurchases.
- Debt maturities, credit ratings, covenant compliance, and continued access to commercial paper and long-term debt markets.
- Developments and potential financial exposure in the Serrano and Avalos litigation and outstanding tax audits.
- Whether the higher effective tax rate persists and whether foreign-currency or interest-rate movements materially affect results.