Cintas Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended February 28, 2015. The request identifies “2014 Q3,” but the filing is Cintas’ fiscal third quarter of 2015, filed April 2, 2015. Financial statements are unaudited.
Business Context
Cintas provides uniform rental and ancillary products, direct-sale uniforms, and first aid, safety and fire protection services primarily in North America. During fiscal 2015, the company operated three reportable segments after deconsolidating its document shredding business into the Shred-it partnership and classifying its Storage business as discontinued operations.
Key Financial Metrics
| Metric | Three months ended Feb. 28, 2015 | Prior comparable period | Nine months ended Feb. 28, 2015 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $1,108.8 million | $1,111.0 million | $3,334.3 million | $3,335.2 million |
| Operating income | $173.6 million | $149.6 million | $518.7 million | $441.4 million |
| Operating margin | 15.7% | 13.5% | 15.6% | 13.2% |
| Income from continuing operations | $93.6 million | $84.3 million | $306.9 million | $246.2 million |
| Net income | $94.9 million | $84.6 million | $325.4 million | $247.2 million |
| Diluted EPS | $0.80 | $0.69 | $2.73 | $2.02 |
- Quarterly net margin was approximately 8.6%, compared with 7.6% in the prior year; nine-month net margin was approximately 9.8%, compared with 7.4%.
- Quarterly rental uniforms and ancillary products revenue increased 7.2% to $859.5 million; organic growth was 7.8%. First aid, safety and fire protection revenue increased 8.2% to $137.1 million.
- Nine-month rental uniforms and ancillary products revenue increased 7.6% to $2,581.8 million, while first aid, safety and fire protection revenue increased 10.7% to $417.6 million.
- Quarterly organic revenue increased 7.5% and nine-month organic revenue increased 7.4%, but reported revenue was reduced by the deconsolidation of shredding and foreign exchange effects.
- Net cash provided by operating activities was $377.6 million for the nine months, compared with $385.8 million in the prior year.
- Capital expenditures were $163.0 million, including $139.3 million for Rental Uniforms and Ancillary Products expansion. Investing cash flow was an outflow of $43.1 million.
- Financing cash flow was an outflow of $482.0 million, including $201.9 million of dividends and $314.6 million of common-stock repurchases.
- Cash and cash equivalents were $358.3 million at February 28, 2015, and marketable securities were $44.9 million. Approximately $103.5 million of cash and marketable securities was held outside the United States.
- Long-term debt was $1.300 billion, with no commercial paper or revolving-credit borrowings outstanding. The revolving facility supports a $300.0 million commercial paper program and has maximum capacity of $450.0 million through its accordion feature.
Material Changes Versus Prior Comparable Period
- Operating income increased 16.1% in the quarter and 17.5% for the nine months, driven by volume growth, improved gross margins, lower energy-related expenses and operating leverage.
- Income from continuing operations increased 11.0% in the quarter and 24.7% for the nine months. Diluted continuing-operations EPS increased 14.5% and 28.4%, respectively, aided by lower weighted-average shares following repurchases.
- Reported revenue was essentially flat because the 2014 comparable period included $74.9 million of shredding revenue in the quarter and $222.0 million for the nine months. On an organic basis, the continuing businesses grew.
- The Rental Uniforms and Ancillary Products segment’s quarterly gross margin improved to 44.6% from 43.9%; its nine-month gross margin improved to 44.8% from 43.1%.
- Uniform Direct Sales revenue declined 0.6% for the nine months because of fewer large customer roll-outs, although quarterly revenue increased 4.2%.
- The company completed the prior $500.0 million repurchase program in February 2015 and authorized a new $500.0 million program with no expiration date. No shares had been purchased under the new program through April 2, 2015.
- Fiscal 2015 included a $6.6 million gain related to additional Shred-it transaction consideration, a $21.7 million gain on the sale of stock in an equity-method investment, and a $7.0 million after-tax loss on the Shred-it investment.
Outlook, Risks and Unusual Items
- Management expects operating cash flow, existing cash, commercial paper capacity and debt-market access to fund operations, expansion, dividends and other requirements. The filing does not provide specific earnings or revenue guidance.
- Management cited growth opportunities from increased penetration of existing customers, expansion of the customer base, geographic expansion, acquisitions and additional products and services.
- The Shred-it partnership was adversely affected by integration costs and the weakened Canadian dollar. Key risks include integration execution, realization of synergies, foreign exchange, energy and fuel costs, labor and medical costs, customer losses, acquisitions, regulatory compliance, cybersecurity and systems disruptions, taxes and litigation.
- The Storage business was sold in three transactions for $154.9 million of net proceeds during the nine months. Additional contingent consideration has not been recorded because the required future events remain uncertain. Certain related real estate assets and liabilities remained held for sale.
- Cintas was in compliance with all debt covenants. A significant covenant default could accelerate debt maturities and impair liquidity.
- The Serrano employment-discrimination litigation remains pending. Potential liability is not determinable and, if resolved adversely, could be material.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile reported revenue stability with 7.5% quarterly and 7.4% nine-month organic growth after removing shredding deconsolidation and foreign exchange effects.
- Assess whether margin expansion, particularly in the Rental Uniforms and Ancillary Products segment, is sustainable after energy-cost benefits and operating leverage.
- Monitor the Shred-it partnership’s integration, profitability, foreign exchange exposure and future investment valuation.
- Evaluate cash deployment, including $482.0 million of financing outflows, the completed repurchase program and the newly authorized $500.0 million program.
- Review debt maturities from 2016 through 2036, credit ratings, covenant compliance and available revolving-credit capacity.
- Track the Serrano litigation, Storage contingent consideration and other legal, tax and regulatory contingencies.