Cintas Corporation: Fiscal 2020 Second-Quarter Form 10-Q Summary
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 North America. The filing covers the unaudited three and six months ended November 30, 2019, compared with the corresponding periods ended November 30, 2018. Cintas reports Uniform Rental and Facility Services, First Aid and Safety Services, and All Other operating categories.
Key Financial Metrics
| Metric | Three Months Ended November 30, 2019 | Three Months Ended November 30, 2018 | Six Months Ended November 30, 2019 | Six Months Ended November 30, 2018 |
|---|---|---|---|---|
| Total revenue | $1.844 billion | $1.718 billion | $3.655 billion | $3.416 billion |
| Operating income | $334.5 million | $275.6 million | $640.6 million | $540.9 million |
| Operating margin | 18.1% | 16.0% | 17.5% | 15.8% |
| Income from continuing operations | $246.4 million | $243.0 million | $497.3 million | $455.5 million |
| Net income | $246.1 million | $243.0 million | $496.9 million | $455.5 million |
| Diluted EPS from continuing operations | $2.27 | $2.18 | $4.60 | $4.07 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $571.4 million | $344.6 million |
Six-month revenue increased 7.0%, while organic revenue growth was 7.8%, including a 0.8% negative effect from one fewer workday. Six-month operating income increased 18.5%, and diluted EPS from continuing operations increased 13.0%. The six-month effective tax rate declined to 15.4% from 18.9%, principally reflecting discrete items, including stock-based compensation tax accounting.
Revenue and Segment Performance
- Uniform Rental and Facility Services revenue increased 5.7% in both the quarter and six-month period. Organic growth was 5.8% for the quarter and 6.6% for six months.
- First Aid and Safety Services revenue increased 10.6% in the quarter and 11.4% for six months. Six-month organic growth was 12.2%.
- Other revenue, including First Aid and Safety and All Other activities, increased 14.1% in the quarter and 12.3% for six months, supported partly by acquisitions in fire protection.
- Uniform Rental and Facility Services gross margin improved to 46.6% in the quarter and 46.9% for six months, up 130 and 140 basis points, respectively, driven by volume and process efficiency.
- First Aid and Safety gross margin improved to 48.4% in the quarter and 48.7% for six months, supported by sourcing, warehouse leverage and delivery-route optimization.
Cash Flow, Liquidity and Capital Structure
- Six-month operating cash flow was $571.4 million, up from $344.6 million, primarily because of higher net income and more favorable working-capital changes.
- Capital expenditures were $126.2 million, including $101.7 million related to Uniform Rental and Facility Services expansion. Investing cash outflow was $131.7 million.
- Financing cash outflow was $310.0 million, including $258.7 million of share repurchases and $112.5 million of net commercial-paper repayment.
- Cash and cash equivalents were $226.5 million at November 30, 2019, compared with $96.6 million at May 31, 2019. Approximately $47.9 million was held outside the United States.
- Total debt was approximately $2.738 billion at November 30, 2019, consisting of $199.8 million due within one year and $2.539 billion due thereafter. Commercial paper outstanding was zero; the $200.0 million term loan was due in 2020.
- The revolving credit facility capacity was increased to $1.0 billion. No revolving-facility borrowings were outstanding, and Cintas reported compliance with all debt covenants.
- Cintas had investment-grade ratings: Standard & Poor’s A-2 commercial paper and A- long-term debt; Moody’s P-2 commercial paper and A3 long-term debt, each with a stable outlook.
Material Changes Versus the Prior Comparable Period
- Revenue growth and improved cost performance increased operating income, while the prior-year period included $7.8 million of G&K integration expenses in the quarter and $12.7 million for six months.
- The prior-year period included a $69.4 million pretax gain from the sale of a cost-method investment; no comparable gain occurred in 2019. This limited reported net-income growth in the quarter despite substantially higher operating income.
- Six-month operating cash flow increased by $226.8 million, while capital expenditures declined by $11.4 million.
- Share repurchases declined to $258.7 million for six months from $508.1 million in the prior-year period. Cintas authorized a new $1.0 billion repurchase program on October 29, 2019, but had made no purchases under that program through November 30.
- The company adopted the new lease standard on June 1, 2019, recognizing $168.0 million of right-of-use assets and $173.4 million of lease liabilities. Management reported no material income-statement or cash-flow impact.
- The annual cash dividend was increased 24.4% to $2.55 per share.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide a clear new numerical revenue or earnings guidance update. Management describes continued growth through customer penetration, sales-force expansion, geographic expansion, acquisitions and additional products and services.
- Key risks include lower sales volumes, customer loss from outsourcing, labor, medical, energy and fuel-cost increases, material costs, union activity, regulatory compliance, foreign exchange, tariffs, cybersecurity, information-system disruptions, tax-law changes, litigation and acquisition-integration costs.
- Management states that ordinary-course legal proceedings are not expected to have a material adverse effect. However, two purported class actions were filed in December 2019: one alleging securities-law violations related to margins, earnings guidance and regulatory compliance, and another alleging ERISA fiduciary breaches concerning the employee retirement plan. The defendants deny liability.
- Unrecognized tax benefits were $34.7 million at November 30, 2019. Management stated that the balance was not reasonably expected to change materially during fiscal 2020, although audits remain ongoing.
- Cintas was evaluating the expected-credit-loss accounting standard, whose adoption could require a cumulative-effect adjustment to retained earnings. The filing does not provide a quantified expected impact.
- Interest-rate locks had a $12.2 million asset balance and a $58.3 million liability balance at November 30, 2019, associated with forecasted and existing debt issuances.
Important Facts for Investors to Verify
- Confirm the effect and potential financial exposure of the securities and ERISA class actions filed after the quarter-end balance-sheet date.
- Assess whether organic growth and margin improvements remain sustainable after considering labor, medical, fuel, material and competitive pricing pressures.
- Monitor refinancing of the $200.0 million term loan due in 2020 and the company’s continued access to commercial-paper and debt markets.
- Evaluate the effect of share repurchases and the new $1.0 billion authorization on diluted share count, leverage and capital allocation.
- Review subsequent guidance, if any, because this filing does not state a clear updated numerical outlook.
- Verify the future impact of lease accounting, expected-credit-loss accounting and any additional G&K integration or acquisition-related costs.