Cintas Corporation Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2020, filed July 29, 2020. The request metadata identifies “2019 Q4,” but the supplied filing is Cintas’s fiscal 2020 annual report, including the quarter ended May 31, 2020.
Business Context
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 the United States. Its reportable segments are Uniform Rental and Facility Services and First Aid and Safety Services; fire protection and uniform direct sales are included in All Other.
Cintas operated approximately 11,100 delivery routes, 472 operational facilities and 12 distribution centers and employed approximately 40,000 people at May 31, 2020. No individual customer represented more than 1% of total revenue.
Financial Performance and Key Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $7.085 billion | $6.892 billion | +2.8% |
| Operating income | $1.163 billion | $1.134 billion | +2.6% |
| Income before taxes | $1.058 billion | $1.102 billion | -4.0% |
| Net income from continuing operations | $876.4 million | $882.6 million | -0.7% |
| Diluted EPS from continuing operations | $8.11 | $7.97 | +1.8% |
| Net cash from operating activities | $1.291 billion | $1.068 billion | +$223.6 million |
| Cash and equivalents | $145.4 million | $96.6 million | +$48.8 million |
- Total gross margin increased to 45.6% from 45.4%. Operating income margin was approximately 16.4%, compared with approximately 16.5% in fiscal 2019.
- Uniform Rental and Facility Services revenue increased 1.6% to $5.643 billion, with a 45.9% gross margin versus 45.5% in fiscal 2019.
- First Aid and Safety Services revenue increased 14.4% to $708.6 million; its gross margin declined to 47.8% from 48.0%, primarily because of a greater proportion of personal protective equipment sales.
- Capital expenditures were $230.3 million, down from $276.7 million. Acquisitions totaled $53.7 million, net of cash acquired.
- Total assets were $7.670 billion and shareholders’ equity was $3.235 billion at May 31, 2020.
- The annual dividend increased 24.4% to $2.55 per share, marking the 37th consecutive annual increase.
Debt, Liquidity and Capital Allocation
- Debt due after one year was $2.540 billion at May 31, 2020; total carrying value of debt was approximately $2.550 billion. Average interest rate on debt was 3.8%, with maturities extending through fiscal 2037.
- Cintas repaid $200.0 million of term debt and $112.5 million of commercial paper during fiscal 2020. No commercial paper or revolving-credit borrowings were outstanding at year-end.
- The company had access to approximately $1.0 billion under its revolving credit facility, maturing May 23, 2024, and was in compliance with all debt covenants.
- Cash provided by operations exceeded capital expenditures by approximately $1.061 billion before acquisitions and other investing activity.
- Cintas repurchased $464.5 million of common stock in fiscal 2020, compared with $1.016 billion in fiscal 2019. Management stated that buybacks would be limited until there was greater certainty regarding COVID-19.
- Credit ratings at May 31, 2020 were S&P A-2/A- with a negative outlook and Moody’s P-2/A3 with a stable outlook.
Material Changes Versus the Prior Comparable Period
- Organic growth was 3.1% for the year, but quarterly organic growth declined from 8.3%, 7.3% and 5.7% in the first three quarters to negative 8.4% in the fourth quarter as COVID-19 restrictions reduced customer activity.
- COVID-19 adversely affected fourth-quarter revenue, customer collections, inventory levels and certain operating costs. Cintas recorded $24.5 million of employee termination costs and $9.2 million of long-lived asset impairment costs.
- Fiscal 2019 included a $69.4 million pretax gain from selling a cost-method investment and $14.4 million of G&K integration expenses. Neither item was material in fiscal 2020, contributing to the year-over-year decline in pretax income despite higher operating income.
- The effective tax rate on continuing operations declined to 17.2% from 19.9%, principally reflecting permanent tax differences, including stock-based compensation.
- Operating cash flow increased substantially, aided by favorable working-capital changes, while inventories increased to $408.9 million from $334.6 million and the allowance for doubtful accounts increased to $62.2 million from $37.8 million.
- Cintas adopted lease accounting guidance on June 1, 2019, recognizing $168.0 million of right-of-use assets and $173.4 million of lease liabilities at adoption. The adoption did not materially affect income or operating cash flow.
Outlook, Risks and Unusual Items
Management did not provide a quantitative fiscal 2021 revenue or earnings forecast in the supplied filing. It stated that the duration and economic effects of COVID-19 remained uncertain and that long-term liquidity and the pace of recovery could not be predicted. Management believed short-term liquidity was adequate, planned to limit capital expenditures to essential needs, and indicated that acquisitions and dividends would remain strategic objectives but would depend on the economic outlook and liquidity.
- Key risks include prolonged or renewed COVID-19 disruption, customer closures or defaults, labor and medical-cost inflation, fuel and energy costs, competition, acquisition integration, supply-chain and tariff exposure, cybersecurity and information-technology disruptions, regulatory compliance, litigation, environmental liabilities, tax audits and potential impairment charges.
- Goodwill was $2.870 billion. COVID-19 triggered a quantitative goodwill impairment analysis, but no goodwill impairment was recorded.
- Unrecognized inventory purchase commitments related to COVID-19 totaled $117.6 million at year-end; the company expected to purchase the remaining commitments within 12 months.
- An ERISA class action remained pending against the company, board, CEO and Investment Policy Committee. A separate securities class action filed in December 2019 was dismissed without prejudice in April 2020.
- The critical audit matter was valuation of insurance reserves, which totaled $165.4 million at May 31, 2020 and relies on actuarial estimates.
- Management and Ernst & Young concluded that internal control over financial reporting was effective, and the auditor issued unqualified opinions on the financial statements and internal controls.
Investor Verification Checklist
- Verify the filing period: fiscal 2020 ended May 31, 2020, rather than fiscal 2019 fourth quarter.
- Assess the durability of the fourth-quarter organic revenue decline of 8.4% and the pace of post-pandemic customer recovery.
- Review customer receivable collection trends, the $62.2 million allowance for doubtful accounts and the $45.5 million inventory obsolescence reserve.
- Monitor debt maturities, including approximately $900 million due in the next two fiscal years, refinancing costs and credit-rating outlooks.
- Evaluate the impact of the $117.6 million inventory purchase commitments and management’s planned reduction in capital expenditures and share repurchases.
- Reconcile reported earnings with fiscal 2019’s $69.4 million investment gain and $14.4 million of G&K integration expenses when assessing underlying growth.
- Review the pending ERISA litigation, insurance-reserve assumptions, environmental matters and COVID-19 sensitivity of goodwill valuations.