CINTAS CORP annual report, FY2011

Cintas Corporation: Fiscal 2011 Form 10-K Summary

Business context and reporting period

Cintas provides uniform rental and direct-sale programs, first aid, safety and fire protection services, document management, facility services and related products primarily in North America, with additional international operations. The filing is the Form 10-K for the fiscal year ended May 31, 2011, filed July 29, 2011. The requested “2010 Q4” period appears inconsistent with the filing; the fourth quarter of fiscal 2011 ended May 31, 2011 and is included in the quarterly data.

Approximately 900,000 business customers, 30,000 employees, 423 operations and approximately 7,700 local delivery routes.
Four operating segments: Rental Uniforms and Ancillary Products; Uniform Direct Sales; First Aid, Safety and Fire Protection Services; and Document Management Services.
No individual customer represented more than 1% of consolidated revenue.

Financial performance and key metrics

Metric	Fiscal 2011	Fiscal 2010	Change
Revenue	$3.810 billion	$3.547 billion	+7.4%
Operating income	$440.3 million	$390.8 million	+12.7%
Income before taxes	$392.7 million	$343.9 million	+14.2%
Net income	$247.0 million	$215.6 million	+14.5%
Diluted EPS	$1.68	$1.40	+20.0%
Gross margin	42.2%	42.2%	Flat
Income before tax margin	10.3%	9.7%	+60 basis points
Effective tax rate	37.1%	37.3%	Down 20 basis points

Revenue growth was 5.1% organic and 2.3% acquisition-related. Organic growth accelerated from 2.8% in the first quarter to 8.0% in the fourth quarter.
Segment revenue was $2.692 billion for Rental Uniforms and Ancillary Products, $419.2 million for Uniform Direct Sales, $377.7 million for First Aid, Safety and Fire Protection Services, and $321.3 million for Document Management Services.
Document Management Services grew 27.0%, First Aid, Safety and Fire Protection Services grew 11.5%, Uniform Direct Sales grew 8.5%, and Rental Uniforms and Ancillary Products grew 4.8%.
Net cash provided by operating activities was $340.9 million, compared with $565.7 million in fiscal 2010. The decline reflected higher working-capital requirements, including increases in accounts receivable, inventory and uniforms in service.
Capital expenditures were $182.6 million, and cash paid for acquisitions was $171.6 million. Net cash used in investing activities was $298.6 million.
Cash and cash equivalents were $438.1 million and marketable securities were $87.2 million at May 31, 2011. Approximately $160.3 million of cash, cash equivalents and marketable securities was held outside the United States.
Long-term debt was $1.286 billion, including $1.275 billion of senior notes. Total debt to capitalization increased to 35.8% from 23.7%.
The company had no commercial paper or revolving-credit borrowings outstanding at year-end. Its commercial paper program had $300 million of capacity, supported by a revolving facility with maximum capacity of $450 million through an accordion feature.
The annual dividend increased to $0.49 per share from $0.48, marking the 28th consecutive annual increase.
Fiscal 2011 fourth-quarter revenue was $1.012 billion, gross margin was $433.0 million, net income was $70.8 million and diluted EPS was $0.49.

Material changes versus comparable periods

Fiscal 2011 represented a recovery from fiscal 2010’s economic downturn: fiscal 2010 revenue had declined 6.0%, while fiscal 2011 revenue increased 7.4%.
Operating income benefited from higher revenue, improved capacity utilization and the absence of fiscal 2010 legal settlements. Fiscal 2010 included $23.5 million of legal settlements, net of insurance proceeds, while fiscal 2011 included none.
Selling and administrative expenses increased $82.6 million, or 7.6%, driven primarily by $47.5 million of higher labor and payroll-tax costs, $10.9 million of enterprise-system conversion professional services and $6.7 million of higher bad-debt expense.
Rental Uniforms and Ancillary Products gross margin declined to 43.2% from 43.6% because of higher maintenance and energy costs. First Aid, Safety and Fire Protection Services gross margin increased to 41.3% from 38.9% due partly to improved capacity utilization.
Document Management Services benefited from acquisitions and a roughly 31% increase in the average selling price of recycled paper. Excluding recycled paper revenue, organic growth was 8.2%.
Goodwill increased to $1.488 billion from $1.357 billion, principally from fiscal 2011 acquisitions. No goodwill impairment was recorded for fiscal 2009, 2010 or 2011.
On May 18, 2011, Cintas issued $250 million of 2.85% senior notes due 2016 and $250 million of 4.30% senior notes due 2021. Proceeds were used to repay commercial paper, fund share repurchases and for general corporate purposes.
Fiscal 2011 share repurchases totaled approximately $443.7 million, or 15.4 million shares. The $500 million October 2010 authorization was completed through July 2011, including approximately $259.5 million of purchases after fiscal year-end.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide a clear quantitative fiscal 2012 revenue or earnings guidance range. Management described improved economic conditions, expansion opportunities, increased sales productivity and continued evaluation of acquisitions as growth drivers.
Management expects operating cash flows, debt-market access and the revolving credit facility to provide liquidity for operations, expansion, dividends and share repurchases, but future access and borrowing costs depend partly on credit ratings.
Key risks include economic weakness, unemployment and outsourcing trends; competition and pricing pressure; fuel, energy, labor, medical and material-cost inflation; acquisition integration; supplier and foreign-currency risks; unionization campaigns; information-system disruption and data-security breaches; environmental and workplace-safety compliance; litigation; and potential asset impairments.
Cintas reported investment-grade ratings with stable outlooks at May 31, 2011: S&P commercial paper A-2 and long-term debt BBB+; Moody’s commercial paper P-1 and long-term debt A2.
Pending employment-discrimination litigation, including Serrano and Avalos, remained subject to appeals. Potential liability was not determinable and could be material if resolved adversely.
The Veliz wage-and-hour settlement received final approval in June 2011; Cintas paid $22.8 million in December 2010, with a fiscal 2010 pre-tax impact of approximately $19.5 million net of insurance proceeds.
Environmental water-treatment and waste-removal spending was approximately $18 million in both fiscal 2011 and 2010. Fiscal 2011 capital spending to limit or monitor hazardous substances was approximately $2 million.
Management and Ernst & Young concluded that internal control over financial reporting was effective as of May 31, 2011, and Ernst & Young issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

Whether the requested period should be interpreted as fiscal 2011 fourth quarter rather than fiscal 2010 fourth quarter.
The sustainability of accelerating organic growth, particularly the 8.0% fourth-quarter rate, and the contribution from acquisitions and recycled-paper pricing.
The effect of substantially higher working-capital investment on recurring free cash flow.
Debt maturities, refinancing requirements and the effect of the higher 35.8% debt-to-capitalization ratio.
Whether share repurchases funded with new debt materially improve EPS while increasing leverage.
Exposure to energy, labor, medical, material and bad-debt costs, including the decline in Rental Uniforms and Ancillary Products margin.
The status and potential financial exposure of Serrano, Avalos and other litigation, environmental matters and tax audits.
The reliability of Document Management Services growth after adjusting for recycled-paper price changes and acquisitions.