Cintas Corporation: Fiscal 2022 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 uniform direct sales, primarily in North America. This unaudited Form 10-Q covers the three and six months ended November 30, 2021, compared with the corresponding periods ended November 30, 2020.
Financial performance and key metrics
| Metric | Three months ended Nov. 30, 2021 | Year-over-year change | Six months ended Nov. 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $1.922 billion | 9.4% | $3.819 billion | 9.0% |
| Operating income | $381.2 million | 8.0% | $775.3 million | 10.4% |
| Operating margin | 19.8% | Down 30 bps | 20.3% | Up 20 bps |
| Net income | $294.7 million | 3.4% | $625.8 million | 7.0% |
| Diluted EPS | $2.76 | 5.3% | $5.87 | 8.7% |
| Operating cash flow | Not separately disclosed | — | $593.8 million | 3.6% |
Uniform Rental and Facility Services revenue increased 8.8% in the quarter and 8.5% year to date, with organic growth of 8.5% and 8.3%, respectively. First Aid and Safety Services revenue increased 4.0% in the quarter and 0.6% year to date; year-to-date organic revenue declined 0.1%. Fire Protection Services and Uniform Direct Sales contributed to All Other revenue growth.
Quarterly gross margin for Uniform Rental and Facility Services was 46.8%, down from 47.5%, primarily because of higher energy costs and labor investments. First Aid and Safety Services gross margin increased to 43.5% from 43.0% in the quarter and to 44.2% from 41.5% year to date, reflecting lower sales of lower-margin personal protective equipment. Selling and administrative expense declined to 26.2% of revenue from 26.6% in the quarter and to 26.5% from 26.9% year to date.
Net interest expense was $21.8 million in the quarter and $43.6 million year to date, down from $24.3 million and $48.8 million, respectively, primarily because lower-cost commercial paper replaced $250 million of senior notes that matured June 1, 2021. Effective tax rates increased to 18.0% from 13.3% in the quarter and to 14.5% from 10.5% year to date, partly because the prior-year periods benefited from a one-time tax benefit related to asset sales.
Cash flow, debt and liquidity
- Six-month operating cash flow was $593.8 million; investing cash outflow was $151.6 million, including $108.6 million of capital expenditures and $45.7 million for acquisitions.
- Financing cash outflow was $819.9 million, driven primarily by $581.2 million of share repurchases, $177.9 million of dividends paid and $250.0 million of debt repayment, partly offset by $167.0 million of commercial paper issuance.
- Cash and cash equivalents declined to $113.2 million at November 30, 2021 from $493.6 million at May 31, 2021. Approximately $64.8 million was held outside the United States.
- Total debt carrying value was approximately $2.467 billion, including $1.117 billion due within one year and $1.343 billion due thereafter. Debt fair value was $2.541 billion.
- The company had $167.0 million of commercial paper outstanding, no revolving-credit borrowings, and access to a $1.0 billion revolving credit facility maturing May 23, 2024, with an additional $250 million accordion feature subject to customary conditions.
- Cintas expects to issue long-term debt during the next 12 months to fund the $650 million of senior notes maturing in fiscal 2022 and the $300 million of senior notes maturing in fiscal 2023.
- Cintas reported compliance with all debt covenants. Ratings were stable at S&P A-2/A- and Moody’s P-2/A3 for commercial paper and long-term debt, respectively.
Material changes, outlook and risks
- Revenue benefited from new business, greater penetration of products and services, price increases, improved customer activity as COVID-19 restrictions eased, and acquisitions. Growth was partially offset by lost business and the comparison against prior-year personal protective equipment sales.
- Management stated that operating cash flow should remain sufficient for short-term liquidity and that the long-term liquidity position remains strong. Acquisitions, share repurchases and dividends remain strategic objectives but depend on economic conditions and liquidity.
- The board authorized a new $1.5 billion share repurchase program on July 27, 2021. No purchases were made under that program through November 30, 2021; fiscal-year repurchases primarily completed the prior $1.0 billion program.
- COVID-19, including the emergence of the Omicron variant, remained a material uncertainty. Potential effects include customer demand, employee availability, supply-chain conditions, inventory reserves, collections, capital-market access and operating costs.
- Management identified risks from higher energy, fuel, labor, materials and distribution costs; customer losses; acquisition integration; foreign currency, tariffs and regulatory changes; cybersecurity and systems disruptions; litigation; environmental matters; tax and labor-law changes; and reduced access to debt markets.
- Ordinary-course legal proceedings, including personal injury, customer contract, environmental and employment claims, were not expected by management to have a material adverse effect. The filing text does not identify a specific material litigation contingency.
- Subsequent to November 30, 2021, Cintas acquired the remaining interest in an equity-method investment for $47.7 million in cash.
Important facts for investors to verify
- Verify the company’s ability to refinance the $650 million and $300 million senior-note maturities and maintain favorable investment-grade credit ratings.
- Monitor cash balances, commercial paper usage and the impact of substantial share repurchases and dividends on liquidity.
- Assess whether energy, labor, supply-chain and inflationary pressures continue to reduce Uniform Rental and Facility Services margins.
- Evaluate the sustainability of organic revenue growth after the normalization of COVID-related demand and the prior-year personal protective equipment comparison.
- Review the effects of the higher effective tax rate and the absence of the prior-year one-time asset-sale tax benefit.
- Confirm the financial and operational impact of the $47.7 million subsequent acquisition and other acquisitions included in the six-month results.