Cintas Corporation — Fiscal 2024 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 primarily in the United States, Canada and Latin America. This unaudited Form 10-Q covers the three months ended August 31, 2023, compared with the three months ended August 31, 2022.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Total revenue | $2.342 billion | $2.166 billion | 8.1% |
| Operating income | $500.6 million | $440.1 million | 13.7% |
| Operating margin | 21.4% | 20.3% | 110 basis points |
| Net income | $385.1 million | $351.7 million | 9.5% |
| Diluted EPS | $3.70 | $3.39 | 9.1% |
| Net cash provided by operating activities | $336.9 million | $298.2 million | 13.0% |
- Uniform Rental and Facility Services revenue increased 7.6% to $1.827 billion, with a 48.1% gross margin versus 47.5% in the prior-year quarter.
- First Aid and Safety Services revenue increased 11.3% to $260.7 million; its gross margin improved to 55.9% from 49.6%.
- Capital expenditures were $106.7 million, compared with $70.0 million. Acquisition spending was $55.7 million, compared with $7.1 million.
- Net cash used in investing activities was $169.8 million. Net cash used in financing activities was $202.4 million, including $117.6 million of dividends paid and $73.3 million of share repurchases for employee tax withholding.
- Cash and cash equivalents were $88.1 million at August 31, 2023, down from $124.1 million at May 31, 2023.
- Debt due after one year was $2.477 billion. The company had no commercial paper outstanding and no borrowings under its $2.0 billion revolving credit facility. Cintas remained compliant with all debt covenants.
- The effective tax rate increased to 19.2% from 14.8%, primarily reflecting discrete items, including stock-based compensation tax accounting.
Material changes versus the prior comparable period
- Revenue growth was driven by new business, increased penetration of products and services among existing customers, pricing, customer retention and higher sales productivity. Organic revenue growth was 8.1% company-wide.
- Operating margin expanded because of operating leverage and productivity initiatives. Uniform Rental and Facility Services pretax margin increased to 22.3% from 21.5%; First Aid and Safety Services pretax margin increased to 22.9% from 17.4%.
- Cost of other services improved to 49.1% of related revenue from 52.8%, primarily due to sales mix, sourcing, productivity and fixed-cost leverage.
- Selling and administrative expenses increased 9.0% and rose to 27.4% of revenue from 27.1%, reflecting higher labor and employee-partner costs.
- Financing cash use declined from $226.2 million to $202.4 million because of lower repurchase activity. The prior-year period included $196.0 million of net commercial paper issuance.
- Cintas repurchased and retired $10.0 million of 6.15% senior notes and recognized a $0.8 million loss in interest expense.
- The company declared a quarterly dividend of $1.35 per share, compared with $1.15 per share in the prior-year quarter. Subsequent to quarter-end through October 5, 2023, it purchased 0.5 million shares for $225.5 million.
Guidance, outlook, commentary, risks and unusual items
Management expects operating cash flow to remain sufficient and believes the company has adequate liquidity for at least the next 12 months and the foreseeable future. Acquisitions, share repurchases and dividends remain strategic objectives but depend on the economic outlook and liquidity. The filing does not provide specific numerical revenue, earnings or margin guidance.
- Key risks include higher energy, fuel, material, labor and medical costs; inflation; interest-rate volatility; customer loss; acquisition integration; foreign exchange, tariffs and regulatory developments; cybersecurity and system disruptions; tax and labor-law changes; and catastrophic events.
- Cintas is defending a purported class action brought by the City of Laurel, Mississippi, alleging contract breaches and seeking unspecified damages. The Ninth Circuit affirmed denial of Cintas’s motion to compel arbitration. Management states that any liability is not probable or estimable; an adverse outcome could nevertheless be material.
- Ordinary-course litigation, environmental, employment and customer claims are not expected by management to have a material adverse effect, although outcomes can vary.
- Interest-rate locks had a $81.5 million fair value at August 31, 2023 and a $500.0 million aggregate notional value. Foreign currency exposure is primarily related to the Canadian dollar.
- Disclosure controls were effective as of August 31, 2023, and the filing reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth, pricing and customer retention remain strong while labor and other employee-partner costs moderate.
- Whether the substantial improvement in First Aid and Safety Services gross margin is sustainable.
- The pace and return on increased capital expenditures and acquisitions.
- Debt maturities beginning in 2025, refinancing conditions, interest rates and continued access to commercial paper and debt markets.
- The timing and financial impact of share repurchases and dividend declarations.
- Developments and potential exposure in the City of Laurel litigation and other legal contingencies.
- The effect of the higher effective tax rate and future discrete tax items on earnings.