Cintas Corporation Form 10-Q Summary
Business Context and Reporting Period
Cintas provides uniform rental and ancillary products, uniform direct sales, first aid and safety services, fire protection services, document management services and related business services primarily in North America, with additional international operations. The filing covers the third quarter and first nine months of fiscal 2012, ended February 29, 2012, compared with the corresponding periods ended February 28, 2011.
Financial Performance and Liquidity
| Metric | Three Months Ended February 29, 2012 | Prior Comparable Period | Nine Months Ended February 29, 2012 | Prior Comparable Period |
|---|---|---|---|---|
| Revenue | $1.012 billion | $937.8 million | $3.048 billion | $2.798 billion |
| Operating income | $137.5 million | $108.9 million | $398.8 million | $311.5 million |
| Net income | $76.0 million | $59.1 million | $219.0 million | $176.2 million |
| Diluted EPS | $0.58 | $0.41 | $1.67 | $1.19 |
| Operating margin | 13.6% | 11.6% | 13.1% | 11.1% |
| Net margin | 7.5% | 6.3% | 7.2% | 6.3% |
- Quarterly revenue increased 7.9%, including 5.9% organic growth, a 1.6% benefit from one additional workday and 0.4% from acquisitions. Nine-month revenue increased 8.9%, including 6.8% organic growth, a 0.6% workday benefit and 1.5% acquisition growth.
- Quarterly net income increased 28.7%; nine-month net income increased 24.3%. Diluted EPS increased 41.5% and 40.3%, respectively, helped by lower weighted-average shares following stock repurchases.
- Selling and administrative expense was 28.5% of quarterly revenue and 29.4% for the nine-month period, down 170 and 150 basis points, respectively, due to productivity improvements and cost controls.
- Net interest expense increased to $16.8 million for the quarter and $51.1 million for the nine-month period, primarily because of $500 million of senior notes issued in the fourth quarter of fiscal 2011.
- Operating cash flow for the first nine months was $307.7 million, compared with $208.0 million in the prior period. Investing cash outflow was $193.2 million, including $117.7 million of capital expenditures and $20.9 million for acquisitions. Financing cash outflow was $333.0 million, including $262.7 million of share repurchases and $70.8 million of dividends.
- Cash and cash equivalents were $218.0 million and marketable securities were $134.6 million at February 29, 2012, for combined liquidity of $352.6 million. Approximately $171.8 million was located outside the United States.
- Total debt was approximately $1.285 billion, including $225.6 million due within one year and $1.059 billion due thereafter. The debt-to-EBITDA ratio was 1.9 to 1.0, compared with 2.1 to 1.0 at May 31, 2011.
- The company had no commercial paper or revolving-credit borrowings outstanding. Its commercial paper program has $300.0 million of capacity and is supported by a revolving facility with an accordion feature allowing capacity of up to $450.0 million.
Material Changes Versus the Prior Comparable Period
- Rental Uniforms and Ancillary Products revenue rose 8.4% in the quarter and 9.2% year to date. Quarterly segment income before taxes increased to $112.5 million, with margin improving to 15.6% from 13.0%.
- Uniform Direct Sales revenue increased 6.4% in the quarter and 4.1% year to date. Quarterly pretax margin improved to 13.3%, while year-to-date margin declined modestly to 11.2% because of garment material, freight and energy costs.
- First Aid, Safety and Fire Protection revenue increased 11.2% in the quarter and 10.3% year to date. Quarterly pretax margin increased to 7.6% from 5.1%, and year-to-date margin increased to 8.2% from 4.9%.
- Document Management revenue increased only 2.0% in the quarter, as a 1.3% organic decline and sharply lower recycled-paper prices offset acquisition growth. Quarterly pretax margin fell to 3.5% from 8.0%. For the nine months, revenue increased 11.3%, but pretax margin declined to 8.3% from 8.9%.
- Shareholders’ equity declined to $2.197 billion from $2.303 billion at May 31, 2011, primarily reflecting share repurchases and dividends. Treasury stock increased to $1.505 billion from $1.243 billion.
Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide specific revenue or earnings guidance. Management expects operating cash flow, existing liquidity and available borrowing capacity to fund operations, expansion, dividends and other cash requirements.
- A $225 million senior-notes maturity was scheduled for June 2012. Management intended to repay it using cash and short-term borrowings, while retaining the option to refinance with long-term debt if market rates remained attractive.
- Management identified risks from energy, fuel, material, freight, labor and medical costs; customer losses and outsourcing trends; acquisition integration; labor and employment regulations; environmental liabilities; information-system disruptions; tax-law changes; foreign currency movements; litigation; and catastrophic events.
- Cintas remained in compliance with significant debt covenants. The revolving-credit agreement requires a debt-to-EBITDA ratio of no more than 3.5 to 1.0 and includes cross-default provisions.
- Pending employment-discrimination litigation, including the Serrano and Avalos matters and related appeals, could result in material liability if resolved adversely. The company stated that any potential liability was not determinable.
- Tax audits in certain foreign jurisdictions and domestic states could reduce unrecognized tax benefits by approximately $12.8 million during fiscal 2012. The filing does not state that this amount represents a probable cash payment.
- Document Management results were unusually affected by recycled-paper prices, which were approximately 30% below the prior-year quarter and approximately 47% below the first fiscal quarter average.
Important Facts for Investors to Verify
- Confirm the timing and funding source for repayment or refinancing of the $225 million senior-notes maturity due in June 2012.
- Monitor recycled-paper prices and their effect on Document Management revenue, gross margin and profitability.
- Assess whether organic growth and sales-productivity improvements persist after the additional-workday benefit in the quarter.
- Review the pace and valuation of share repurchases under the new $500 million authorization and the resulting effect on leverage and EPS.
- Track the Serrano/Avalos litigation, related appeals and any potential settlement exposure.
- Evaluate international liquidity concentration, including the $171.8 million held outside the United States, and potential repatriation or foreign-currency effects.
- Review the filing’s unaudited interim financial statements together with the fiscal 2011 Form 10-K because interim results may not be indicative of the full fiscal year.