Cintas Corporation — Fiscal 2021 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended November 30, 2020, compared with the corresponding periods ended November 30, 2019. The interim financial statements are unaudited. Cintas provides uniform rental, facility, first aid and safety, fire protection, and related services, primarily in North America.
Financial performance and liquidity
| Metric | Three months ended Nov. 30, 2020 | Prior year | Six months ended Nov. 30, 2020 | Prior year |
|---|---|---|---|---|
| Total revenue | $1.757 billion | $1.844 billion | $3.504 billion | $3.655 billion |
| Operating income | $352.9 million | $334.5 million | $702.6 million | $640.6 million |
| Net income | $284.9 million | $246.1 million | $584.9 million | $496.9 million |
| Diluted EPS | $2.62 | $2.27 | $5.40 | $4.60 |
| Operating margin | 20.1% | 18.1% | 20.1% | 17.5% |
| Net cash from operations | Six-month measure: $573.0 million | $571.4 million prior year |
- Revenue declined 4.7% in the quarter and 4.1% year to date, primarily because COVID-19-related business closures reduced customer activity and service volumes.
- Uniform Rental and Facility Services revenue fell 4.0% in the quarter and 4.1% year to date. First Aid and Safety Services revenue increased 14.6% in the quarter and 16.7% year to date, supported partly by personal protective equipment demand.
- Operating income increased despite lower revenue because of cost controls, labor and energy efficiencies, lower discretionary spending, and a one-time gain on the sale of operating assets.
- The effective tax rate declined to 13.3% from 20.1% in the quarter and to 10.5% from 15.4% year to date. The 2020 rates included discrete tax items and a one-time tax benefit related to the asset sale.
- Cash and cash equivalents were $703.2 million at November 30, 2020, compared with $145.4 million at May 31, 2020. Operating cash flow substantially funded operations, capital expenditures, dividends, and other requirements.
- Six-month capital expenditures were $57.7 million, compared with $126.2 million in the prior-year period. Acquisition spending was $6.9 million.
- Total debt carrying value was approximately $2.540 billion, including $249.9 million due within one year and $2.291 billion due thereafter. No commercial paper was outstanding and no revolving credit facility borrowings were outstanding.
- Cintas had access to a $1.0 billion revolving credit facility maturing in May 2024 and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- COVID-19 reduced demand in the core Uniform Rental and Facility Services business, while First Aid and Safety Services benefited from increased safety and personal protective equipment sales.
- First Aid and Safety Services gross margin declined to 43.0% in the quarter and 41.5% year to date, from 48.4% and 48.7%, respectively, because personal protective equipment generally carries lower margins.
- Uniform Rental and Facility Services gross margin improved to 47.5% in the quarter and 48.1% year to date, reflecting cost controls and lower labor and energy costs.
- Share repurchases under the publicly announced programs were suspended during the period. Treasury-share purchases were limited to shares acquired for employee payroll-tax obligations. The company paid $371.8 million of dividends and changed from an annual to a quarterly dividend policy.
- Inventory increased to $534.1 million from $408.9 million at May 31, 2020, primarily reflecting increased inventory, including personal protective equipment and facility-services inventory, to meet pandemic-related demand.
- The company adopted the expected-credit-loss standard, ASU 2016-13, effective June 1, 2020; adoption did not materially affect the financial statements.
Outlook, risks, contingencies, and unusual items
- Management did not provide specific revenue or earnings guidance in the filing. It stated that the pace of economic recovery and the ultimate effect of COVID-19 remain uncertain.
- Management expects operating cash flow to remain sufficient for short-term liquidity and believes its long-term liquidity position remains strong. Acquisitions and dividends remain strategic objectives but depend on the economic outlook and liquidity.
- COVID-19 could adversely affect customer demand, collections, employee availability, facility operations, supply chains, and access to capital markets. The company increased inventory to address customer safety and cleanliness needs.
- Standard & Poor’s maintained a negative outlook, citing uncertainty surrounding COVID-19 and the possibility of pressure on leverage. Ratings were S&P A- / A-2 and Moody’s A3 / P-2.
- Unrecognized tax benefits were $37.7 million at November 30, 2020. Management stated that ordinary-course legal proceedings and claims are not expected to have a material adverse effect, although litigation, tax audits, environmental matters, employment claims, and other contingencies remain possible.
- Interest-rate locks and related accumulated other comprehensive loss remained significant; the filing reports a $138.1 million fair-value liability for interest-rate-lock agreements at November 30, 2020.
- Material identified risks include cybersecurity and SAP system implementation risks, dependence on third-party technology providers, labor and material-cost inflation, customer losses, acquisition integration, regulatory and tax changes, foreign-exchange exposure, and further pandemic disruption.
Investor verification checklist
- Verify whether revenue recovery in Uniform Rental and Facility Services offsets continued COVID-19-related volume pressure.
- Assess the durability of margin gains after excluding the one-time operating-asset gain and related tax benefit.
- Monitor First Aid and Safety Services growth against its lower personal protective equipment gross margins.
- Review the timing and funding plan for the $250 million senior-note maturity due in fiscal 2022 and other upcoming maturities.
- Track leverage, credit ratings, covenant compliance, and access to commercial paper and debt markets.
- Evaluate inventory levels, obsolescence reserves, customer payment performance, and working-capital requirements.
- Confirm future dividend declarations, capital allocation, and any resumption of share repurchases.
- Monitor COVID-19 developments, cybersecurity and SAP implementation risks, tax audits, and other disclosed contingencies.