Cintas Corporation Form 10-Q Summary
Business Context and Reporting Period
Cintas provides rental and direct-sale uniforms, ancillary facility services, first aid, safety and fire protection services, and document management services, primarily in North America. This unaudited Form 10-Q covers the three and six months ended November 30, 2012, the second quarter and first half of fiscal 2013, compared with the corresponding fiscal 2012 periods.
Financial Performance and Liquidity
| Metric | Three Months Ended Nov. 30, 2012 | Three Months Ended Nov. 30, 2011 | Six Months Ended Nov. 30, 2012 | Six Months Ended Nov. 30, 2011 |
|---|---|---|---|---|
| Revenue | $1.060 billion | $1.019 billion | $2.112 billion | $2.036 billion |
| Operating income | $139.0 million | $132.7 million | $278.3 million | $261.3 million |
| Net income | $78.0 million | $74.4 million | $154.8 million | $143.0 million |
| Diluted EPS | $0.63 | $0.57 | $1.23 | $1.09 |
| Operating margin | 13.1% | 13.0% | 13.2% | 12.8% |
| Net margin | 7.4% | 7.3% | 7.3% | 7.0% |
| Operating cash flow | Not separately provided | Not separately provided | $227.3 million | $176.0 million |
- Revenue increased 4.0% year over year in the quarter and 3.7% for the six-month period. Organic revenue growth was 3.4% and 3.3%, respectively, with the remainder primarily from acquisitions.
- Net income increased 4.9% in the quarter and 8.2% year to date. Diluted EPS increased 10.5% and 12.8%, respectively, aided by share repurchases that reduced weighted-average shares outstanding.
- Operating cash flow increased $51.3 million year to date, reflecting higher net income and favorable inventory changes. Capital expenditures were $99.1 million and acquisitions used $53.2 million.
- Cash and cash equivalents were $242.5 million at November 30, 2012, compared with $339.8 million at May 31, 2012. Marketable securities totaled $33.9 million, versus none at fiscal year-end.
- Total debt was approximately $1.309 billion, including $661,000 due within one year. Cash and marketable securities totaled approximately $276.3 million. No commercial paper or revolving-credit borrowings were outstanding.
- The company had a $300 million commercial paper program supported by a revolving credit facility with borrowing capacity of up to $450 million and a maturity date of October 6, 2016.
- Shareholders’ equity declined to $2.081 billion from $2.139 billion, primarily reflecting share repurchases and dividends. The quarterly dividend declared was $0.64 per share, an 18.5% increase from the prior year.
Material Changes Versus the Prior Comparable Period
- Rental Uniforms and Ancillary Products revenue increased 4.6% in the quarter and 4.7% year to date. Its quarterly gross margin declined to 41.9% from 43.2%, partly due to higher material costs and a $1.6 million garment-processing-system write-off, although pretax income increased.
- Uniform Direct Sales revenue declined 1.6% in the quarter and 1.5% year to date. Margin pressure reflected unfavorable product mix and costs incurred ahead of expected large rollouts in the second half of fiscal 2013.
- First Aid, Safety and Fire Protection revenue increased 9.7% in the quarter and 8.2% year to date, supported by organic growth and acquisitions. Margins were pressured by a mix shift toward lower-margin national accounts.
- Document Management revenue was essentially flat in the quarter and declined 3.9% year to date. Lower recycled-paper prices, approximately 28% lower in the quarter and 31% lower year to date, materially reduced margins and pretax income.
- Selling and administrative expense declined 1.4% in the quarter and 1.3% year to date, partly due to a gain on the sale of an equity-method investment and lower amortization of acquisition-related intangibles.
- Net interest expense declined to $16.1 million in the quarter and $32.7 million year to date, following repayment of $225 million of 6.00% senior notes and issuance of $250 million of 3.25% senior notes due 2022.
- The company repurchased approximately 3.8 million shares for $151.7 million during the first six months. Through January 9, 2013, cumulative purchases under the $500 million program totaled approximately 7.1 million shares for $281.3 million, leaving approximately $218.7 million available at November 30, 2012.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific consolidated revenue, earnings or margin guidance. Management expects to pursue growth through greater penetration of existing customers, customer-base expansion, geographic expansion, acquisitions and additional products and services.
- Management believes operating cash flow, existing cash, debt-market access and available credit capacity will fund operations, expansion, dividends and potential repurchases. The company reported compliance with all significant debt covenants.
- Key risks include operating-cost inflation, energy and fuel costs, labor and medical costs, lower sales volumes, customer outsourcing, acquisition integration, union activity, regulatory and employment matters, environmental liabilities, technology disruptions, tax-law changes, foreign-currency movements and adverse litigation outcomes.
- Cintas faces employment-discrimination litigation, including the Serrano matter. A Sixth Circuit panel reversed a prior district-court decision in November 2012; Cintas petitioned for rehearing, and the petition remained unresolved as of January 9, 2013. Potential liability was not determinable and could be material if proceedings are resolved adversely.
- Unrecognized tax benefits decreased by approximately $32.1 million year to date because of a change related to IRS capitalization regulations, with a corresponding reclassification between accrued liabilities and deferred tax liabilities.
- Foreign currency translation produced a $9.5 million gain in other comprehensive income year to date, compared with a $19.6 million loss in the prior-year period. The company uses limited Canadian-dollar options to mitigate part of its translation exposure.
- Management concluded that disclosure controls were effective as of November 30, 2012, and reported no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether growth in Rental Uniforms and First Aid, Safety and Fire Protection offsets weakness in Uniform Direct Sales and Document Management.
- The sustainability of margin performance amid higher material, labor and medical costs and continued low recycled-paper prices.
- The effect of acquisitions, integration costs and future acquisition spending on revenue growth, goodwill and cash flow.
- Future capital allocation among share repurchases, the $0.64 per-share dividend, capital expenditures, acquisitions and debt reduction.
- Debt maturity requirements, covenant headroom, credit ratings and continued access to commercial paper and long-term debt markets.
- Developments and potential financial exposure in the Serrano and related employment-discrimination litigation.
- The filing’s interim results are unaudited and may not be indicative of full-year results.