Cintas Corporation: Fiscal 2023 Second-Quarter Form 10-Q Summary
Business context and reporting period
Cintas provides uniform rental and facility services, first aid and safety products and services, fire protection services, and direct uniform sales primarily in North America. This unaudited Form 10-Q covers the three and six months ended November 30, 2022, representing fiscal 2023 second-quarter and year-to-date results. Interim results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Three months ended November 30, 2022 | Six months ended November 30, 2022 |
|---|---|---|
| Total revenue | $2.175 billion, up 13.1% | $4.341 billion, up 13.7% |
| Organic revenue growth | 12.8% | 13.4% |
| Operating income | $444.9 million; 20.5% margin | $885.1 million; 20.4% margin |
| Net income | $324.3 million, up 10.1% | $676.0 million, up 8.0% |
| Diluted EPS | $3.12, up 13.0% | $6.51, up 10.9% |
| Operating cash flow | Not separately provided for the quarter | $619.1 million, versus $593.8 million |
- Revenue growth was driven by new business, increased penetration of products and services at existing customers, pricing, sales-force productivity and acquisitions. Foreign currency reduced reported growth.
- Uniform Rental and Facility Services revenue increased 11.4% in the quarter and 12.0% year to date. First Aid and Safety Services revenue increased 16.7% in the quarter and 17.2% year to date.
- Quarterly operating margin improved from 19.8% to 20.5%; year-to-date margin improved from 20.3% to 20.4%.
- The effective tax rate increased to 22.1% from 18.0% in the quarter and to 18.4% from 14.5% year to date, primarily reflecting discrete tax items, including stock-based compensation.
- Capital expenditures were $146.4 million year to date, compared with $108.6 million in the prior-year period. Acquisition spending was $15.5 million, compared with $45.7 million.
- Cash and cash equivalents were $89.8 million at November 30, 2022, compared with $90.5 million at May 31, 2022.
- Total debt was $2.921 billion, consisting of $435.4 million due within one year and $2.485 billion due thereafter. Commercial paper outstanding was $385.2 million at a 4.30% weighted-average rate, compared with $261.2 million at 1.20% at May 31, 2022.
- Cintas had no borrowings under its $2.0 billion revolving credit facility, which matures in March 2027. Management stated that liquidity is sufficient for at least the next 12 months and the foreseeable future.
Material changes versus the prior comparable period
- Revenue and organic revenue growth accelerated, with particularly strong performance in First Aid and Safety Services.
- First Aid and Safety Services gross margin increased to 50.5% from 43.5% in the quarter and to 50.0% from 44.2% year to date, primarily due to favorable sales mix and fixed-cost leverage.
- Uniform Rental and Facility Services quarterly gross margin increased modestly to 47.0% from 46.8%, but year-to-date gross margin declined to 47.3% from 47.5% because of higher energy costs.
- Selling and administrative expense increased faster than revenue in the quarter, rising to 26.6% of revenue from 26.2%, driven primarily by employee-partner and medical costs. Year-to-date expense ratio increased to 26.8% from 26.5%.
- Net interest expense increased to $28.6 million in the quarter and $56.1 million year to date, primarily because of higher commercial-paper rates and greater commercial-paper borrowings.
- Operating cash flow increased modestly, but working capital absorbed cash through higher accounts receivable, inventories, uniforms and rental items in service, and prepaid assets.
- Financing cash usage declined to $446.4 million from $819.9 million, mainly because prior-year debt repayment and share repurchases were higher. Year-to-date share repurchases were $348.7 million, compared with $664.7 million.
- Dividends paid increased to $215.0 million from $177.9 million. The quarterly dividend declared was $1.15 per share, compared with $0.95 per share.
Guidance, outlook, risks and unusual items
- The filing does not provide explicit full-year revenue, earnings or EPS guidance. Management expects operating cash flow to remain sufficient and continues to view acquisitions, share repurchases and dividends as strategic objectives, subject to economic conditions and liquidity.
- Management cited risks from higher energy, fuel, materials, labor and medical costs; inflation; interest-rate volatility; lower sales volumes; customer losses; acquisition integration; foreign exchange; tariffs; cybersecurity and systems disruptions; regulatory and tax changes; labor and union matters; catastrophic events; and litigation.
- The company reported a purported class action, City of Laurel, Mississippi v. Cintas Corporation No. 2, involving alleged contract breaches with public agencies. Cintas is appealing the denial of its motion to compel arbitration. Liability was not considered probable or estimable, but an adverse outcome or settlement could be material.
- Cintas was in compliance with all debt covenants. A significant covenant default could accelerate debt maturities and impair liquidity.
- The effective tax rate comparison was affected by discrete tax items. The prior-year six-month results also included a $12.1 million gain on the sale of certain operating assets, reducing prior-year selling and administrative expense.
- Foreign currency translation produced a $29.1 million year-to-date reduction in other comprehensive income. Interest-rate lock agreements had a $68.1 million fair value asset at November 30, 2022.
- Management reported effective disclosure controls as of November 30, 2022, with no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify whether strong organic growth, especially in First Aid and Safety Services, is sustained after adjusting for pricing, acquisitions and mix.
- Monitor labor, medical, energy and material costs and their effect on selling and administrative expense and operating margins.
- Assess commercial-paper refinancing exposure, rising interest expense and the $435.4 million of debt due within one year.
- Reconcile operating cash flow with increasing accounts receivable, inventory and rental-item investments, as well as capital expenditures.
- Track remaining authorization under the July 27, 2021 and July 26, 2022 share-repurchase programs and the effect of repurchases on diluted EPS.
- Review developments in the City of Laurel litigation and any potential tax audit or regulatory contingencies.
- Confirm the absence or issuance of formal full-year guidance in subsequent filings, because this Form 10-Q does not provide explicit numerical guidance.