Cintas Corporation — Fiscal 2021 First-Quarter Form 10-Q
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 to more than one million businesses, primarily in North America. This unaudited Form 10-Q covers the three months ended August 31, 2020, compared with the three months ended August 31, 2019.
Key financial metrics
| Metric | Three months ended August 31, 2020 | Prior comparable period |
|---|---|---|
| Total revenue | $1.747 billion | $1.811 billion |
| Operating income | $349.7 million | $306.1 million |
| Income before taxes | $325.2 million | $279.0 million |
| Net income | $300.0 million | $250.8 million |
| Diluted EPS | $2.78 | $2.32 |
| Net cash from operating activities | $312.3 million | $276.9 million |
| Capital expenditures | $30.9 million | $64.7 million |
| Cash and cash equivalents at period end | $421.5 million | $102.1 million |
- Total revenue declined 3.6%; organic revenue declined 5.0% after excluding acquisitions, foreign exchange and workday differences.
- Operating income increased 14.2%, and net income increased 19.6%. Diluted EPS increased 19.8%.
- The effective tax rate decreased to 7.8% from 10.1%, primarily reflecting discrete items related to stock-based compensation.
- Uniform Rental and Facility Services revenue declined 4.1% to $1.394 billion, while income before taxes increased 17.1% to $315.0 million. Segment gross margin improved to 48.7% from 47.2%.
- First Aid and Safety Services revenue increased 18.8% to $204.5 million, supported partly by personal protective equipment sales. Income before taxes declined to $18.5 million from $24.8 million, and gross margin fell to 40.2% from 49.0% because of the lower-margin product mix.
- Cash flow from operations increased 12.8%. Net cash used in investing activities was $39.9 million, and financing activities provided $2.2 million.
Debt, liquidity and balance sheet
- Total debt carrying value was approximately $2.540 billion at August 31, 2020, including $249.8 million due within one year and $2.290 billion due thereafter.
- Cintas had no commercial paper outstanding and no borrowings under its $1.0 billion revolving credit facility. The facility matures May 23, 2024 and includes an aggregate accordion feature of up to $250 million, subject to customary conditions.
- Cash increased to $421.5 million from $145.4 million at May 31, 2020. Current assets were $2.666 billion and current liabilities were $1.093 billion.
- The company was in compliance with all debt covenants. Debt covenants include leverage and interest-coverage requirements, and cross-default provisions could accelerate indebtedness following a significant default.
- The company repurchased no shares under its announced buyback programs during the quarter. It acquired 230,000 shares for employee payroll-tax obligations related to vested awards, at a total cost of $69.0 million. Approximately $1.061 billion remained available under the applicable publicly announced plans at August 31, 2020.
Material changes, outlook and risks
- COVID-19 business closures reduced customer activity and service volumes, particularly in Uniform Rental and Facility Services. Management stated that the company remained an essential business and that health and safety measures had not materially impaired customer service.
- Management reported minimal supply-chain disruption but increased inventory, primarily personal protective equipment and facility-services inventory. Inventory rose to $488.2 million from $408.9 million at May 31, 2020.
- Management characterized short-term liquidity as solid and expected operating cash flow to remain sufficient for near-term needs. The long-term liquidity outlook remained unclear because the scope and duration of COVID-19 impacts were evolving.
- No specific revenue or earnings guidance was provided in the filing. Management stated that the pace of economic recovery and the future impact of COVID-19 on results could not be predicted.
- Standard & Poor’s outlook was negative, with commercial-paper and long-term-debt ratings of A-2 and A-, respectively. Moody’s outlook was stable, with ratings of P-2 and A3.
- Additional risks include customer closures or payment difficulties, capital-market disruption and higher financing costs, interest-rate and foreign-currency exposure, cybersecurity and SAP system implementation risks, supply and labor costs, litigation, tax audits, acquisitions and regulatory or environmental matters.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The company adopted the expected-credit-loss standard effective June 1, 2020, with no material impact on the financial statements.
Important facts for investors to verify
- Whether COVID-19-related customer closures and economic conditions continue to pressure organic revenue and service volumes.
- Whether First Aid and Safety growth, particularly personal protective equipment sales, can offset lower margins and weaker Uniform Rental demand.
- The timing and financing terms of upcoming debt maturities, including the $250 million senior notes due in fiscal 2022 and the $650 million senior notes also maturing in fiscal 2022.
- Compliance with leverage and interest-coverage covenants, especially given the negative S&P outlook and potential capital-market disruption.
- Inventory levels, potential obsolescence and working-capital requirements as demand and PPE sales normalize.
- Progress and potential disruption associated with the SAP enterprise-system conversion and broader cybersecurity controls.