Cintas Corporation — Q1 FY2022 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 uniform direct sales primarily in North America. This unaudited Form 10-Q covers the three months ended August 31, 2021, compared with the three months ended August 31, 2020.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $1,897.0 million | $1,746.6 million | +8.6% |
| Operating income | $394.1 million | $349.7 million | +12.7% |
| Operating margin | 20.8% | 20.0% | +80 basis points |
| Net income | $331.2 million | $300.0 million | +10.4% |
| Diluted EPS | $3.11 | $2.78 | +11.9% |
| Operating cash flow | $262.1 million | $312.3 million | −16.1% |
| Capital expenditures | $48.7 million | $30.9 million | Higher |
| Cash and cash equivalents | $79.7 million | $421.5 million at prior-year quarter-end | Lower |
Revenue consisted of $1,508.2 million from Uniform Rental and Facility Services, $199.1 million from First Aid and Safety Services, and $189.7 million from All Other activities. Approximately 95% of revenue was generated from route-servicing contracts.
The effective tax rate increased to 11.0% from 7.8%, with both periods affected by discrete items, primarily stock-based compensation tax accounting. Net interest expense declined to $21.8 million from $24.5 million.
Material changes versus the prior comparable period
- Uniform Rental and Facility Services revenue increased 8.2% organically, driven by new business, greater penetration of existing accounts and price increases, partly offset by lost business.
- Uniform Rental and Facility Services gross margin declined to 48.3% from 48.7%, primarily because of higher labor and energy costs. Segment income before taxes increased 4.6% but fell to 21.8% of revenue from 22.6%.
- First Aid and Safety Services revenue decreased 2.6%, including a 3.3% organic decline, due to lower personal protective equipment demand. Gross margin improved to 44.8% from 40.2% as the sales mix shifted away from lower-margin protective equipment.
- Selling and administrative expense increased 6.7%, but declined to 26.8% of revenue from 27.3%. The improvement reflected revenue growth outpacing expense growth and included a gain on the sale of operating assets.
- Operating cash flow decreased primarily because of higher accounts receivable and uniforms and rental items in service, along with timing-related reductions in accrued compensation and accounts payable.
- Financing activities used $590.1 million, including $581.2 million of share repurchases, $79.1 million of dividends paid and $250.0 million of debt repayment, partly offset by $326.0 million of commercial paper issuance.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management stated that operating cash flow is expected to remain sufficient for short-term liquidity and that long-term liquidity remains strong. Acquisitions and dividends remain strategic objectives but depend on the economic outlook and liquidity.
Cintas expects to issue long-term debt during the next 12 months to fund the $650.0 million maturity of 2.90% senior notes in the fourth quarter of fiscal 2022 and the $300.0 million maturity of 3.25% senior notes in the first quarter of fiscal 2023. At August 31, 2021, debt due within one year was $1,275.2 million, total debt carrying value was approximately $2,626.0 million, commercial paper outstanding was $326.0 million, and the company had no revolving-credit borrowings. The revolving credit facility had $1.0 billion of capacity and matures May 23, 2024.
COVID-19 vaccination and easing restrictions benefited results during the quarter, but management stated that the pandemic remains fluid and its ultimate effect cannot be predicted. Risks include higher labor, energy, fuel and sourcing costs; lower sales volumes; customer losses; acquisition integration; supply-chain and inventory exposure; foreign exchange; tax and regulatory matters; cybersecurity; litigation; and disruption from future pandemics or other extraordinary events.
Inventory increased during the pandemic, particularly personal protective equipment and facility-services inventory. Management noted that additional inventory reserves could be required if demand for protective equipment declines materially. Cintas remained in compliance with all debt covenants. Ordinary-course legal proceedings are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth and margin performance remain durable as pandemic-related demand normalizes and labor and energy costs rise.
- The refinancing terms and execution for the $950.0 million of senior-note maturities due within the next 12 months.
- Liquidity after share repurchases, dividends, acquisitions and debt maturities, including reliance on commercial paper markets.
- Progress under the newly authorized $1.5 billion share-repurchase program and the effect of repurchases on diluted EPS.
- Potential inventory write-downs related to personal protective equipment and other pandemic-driven inventory.
- Changes in the effective tax rate and the impact of discrete tax items.
- Foreign currency effects, interest-rate exposure and the fair-value impact of interest-rate lock agreements.