Cintas Corporation — Form 10-Q Summary
Business context and reporting period
Cintas provides uniform rental and direct sales, first aid and safety, fire protection, document management, and related business services primarily in North America. This unaudited Form 10-Q covers the three months ended August 31, 2012, the first quarter of fiscal 2013, compared with the three months ended August 31, 2011. The filing was signed October 10, 2012.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $1,051.3 million | $1,017.2 million | 3.4% |
| Operating income | $139.3 million | $128.6 million | 8.3% |
| Operating margin | 13.2% | 12.6% | Up approximately 60 bps |
| Income before taxes | $122.8 million | $111.6 million | 10.0% |
| Net income | $76.7 million | $68.6 million | 11.8% |
| Net margin | 7.3% | 6.7% | Up approximately 50 bps |
| Diluted EPS | $0.60 | $0.52 | 15.4% |
| Operating cash flow | $94.9 million | $56.6 million | Up $38.3 million |
| Capital expenditures | $47.4 million | $44.4 million | Up $3.0 million |
Revenue growth was driven by 4.9% growth in Rental Uniforms and Ancillary Products. Other Services revenue declined 0.4%. Selling and administrative expenses decreased 1.3%, primarily because of lower amortization of acquisition-related intangible assets. The effective tax rate declined to 37.5% from 38.5%.
At August 31, 2012, cash and cash equivalents were $319.2 million and marketable securities were $10.9 million, compared with cash of $339.8 million and no marketable securities at May 31, 2012. Approximately $49.1 million of cash and marketable securities was located outside the United States.
Total debt was approximately $1.31 billion, consisting primarily of long-term senior notes. Cintas repaid $225.0 million of 6.00% senior notes due June 1, 2012, and issued $250.0 million of 3.25% senior notes due June 1, 2022. No commercial paper or revolving-credit borrowings were outstanding. The company had a $300.0 million commercial paper program supported by a revolving facility with maximum borrowing capacity of $450.0 million, maturing October 6, 2016.
Material changes versus the prior comparable period
- Revenue increased $34.1 million, or 3.4%, including 3.2% organic growth and 0.2% acquisition-related growth.
- Rental Uniforms and Ancillary Products revenue rose 4.9%; its gross margin declined to 43.3% from 43.9% because higher material costs more than offset lower energy costs.
- Uniform Direct Sales revenue declined 1.4%, although gross margin improved to 29.4% from 28.6% due to product mix.
- First Aid, Safety and Fire Protection revenue increased 6.8%, with pretax margin remaining 8.1%.
- Document Management revenue declined 7.5%, primarily because average recycled-paper prices were approximately 34% below the prior-year quarter. Segment gross margin fell to 49.1% from 53.2%, and pretax margin fell to 5.4% from 13.4%.
- Operating cash flow increased substantially, helped by higher net income, lower inventory, and higher accounts payable.
- Financing cash outflows declined to $55.5 million from $262.2 million, primarily because prior-year share repurchases were significantly larger.
- Cintas repurchased approximately 1.8 million shares under its $500 million authorization during July and August 2012 for $70.6 million. Approximately $299.8 million remained available under the program at August 31, 2012.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management expects operating cash flows, available cash, debt-market access, and the revolving facility to fund operations, expansion, acquisitions, and share repurchases.
Management’s strategy emphasizes increased penetration of existing customers, improved sales productivity, customer retention, geographic and customer-base expansion, new services, and selective acquisitions. The filing attributes growth primarily to improved sales representative productivity and customer retention.
- Key operating risks include energy, fuel, material, labor, medical, sourcing, and distribution costs; lower sales volumes; customer loss from outsourcing; and acquisition integration performance.
- Document Management results remain sensitive to recycled-paper prices.
- Debt agreements include leverage and interest-coverage covenants, limitations on liens and sale-leasebacks, and cross-default provisions. Cintas reported compliance with significant covenants.
- Litigation includes the Serrano and Avalos employment-discrimination matters. Class certification was denied, but appeals remained pending; any potential liability was not determinable and could be material if resolved adversely.
- Tax audits and uncertain tax positions could affect future results. Management stated that a decrease of approximately $3.7 million in unrecognized tax benefits was reasonably possible during fiscal 2013.
- Foreign currency exposure, principally to the Canadian dollar, is partially hedged. No material change in interest-rate market risk was reported.
- Disclosure controls were effective as of August 31, 2012, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether continued revenue growth and sales-productivity improvements offset weakness in Uniform Direct Sales and Document Management.
- The sensitivity of Document Management profitability to recycled-paper prices.
- Debt maturities, refinancing requirements, covenant compliance, and the effect of replacing 6.00% notes with 3.25% notes.
- The pace and valuation of share repurchases and their effect on diluted EPS and liquidity.
- International cash balances, repatriation restrictions, and foreign-currency exposure.
- The status and potential financial exposure of the Serrano and Avalos litigation and pending appeals.
- Tax-audit developments and changes in unrecognized tax benefits.
- The filing’s caution that interim results may vary and are not necessarily indicative of full-year performance.