Cintas Corporation — Q1 Fiscal 2020 Form 10-Q Summary
Reporting period: Three months ended August 31, 2019, compared with the three months ended August 31, 2018. The filing was dated October 8, 2019. Cintas provides uniform rental, facility, first aid and safety, fire protection, and uniform direct-sale services, primarily in North America.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1.811 billion | $1.698 billion | +6.7% |
| Operating income | $306.1 million | $265.2 million | +15.4% |
| Operating margin | 16.9% | 15.6% | +130 bps |
| Net income | $250.8 million | $212.5 million | +18.0% |
| Diluted EPS | $2.32 | $1.89 | +22.8% |
| Net cash from operating activities | $276.9 million | $163.0 million | +$113.9 million |
- Uniform Rental and Facility Services revenue increased 5.8% to $1.455 billion, with 7.5% organic growth. Segment income before taxes increased 16.2% to $269.0 million, and segment margin increased to 18.5% from 16.8%.
- First Aid and Safety Services revenue increased 12.2% to $172.1 million, with 13.8% organic growth. Gross margin increased to 49.0% from 47.9%.
- Total revenue growth reflected 8.3% organic growth, a 0.1% acquisition benefit, a 0.1% foreign-currency headwind, and a 1.6% headwind from one fewer workday.
- Net margin was approximately 13.8%, compared with 12.5% in the prior-year quarter. The effective tax rate declined to 10.1% from 12.0%, with both periods affected by discrete items, primarily stock-based compensation tax accounting.
- Capital expenditures were $64.7 million, including $53.0 million for Uniform Rental and Facility Services expansion. Cash paid for acquisitions was $3.9 million.
- Cash and cash equivalents were $102.1 million at August 31, 2019, compared with $96.6 million at May 31, 2019 and $118.4 million at August 31, 2018.
Debt, Liquidity, and Capital Allocation
- Total debt was approximately $2.877 billion, consisting of $338.8 million due within one year and $2.538 billion due thereafter. Debt increased from approximately $2.850 billion at May 31, 2019, primarily because commercial paper increased to $139.0 million from $112.5 million.
- The company had no borrowings under its revolving credit facility. The facility capacity was increased to $1.0 billion, and a new $200.0 million term loan was established under the May 24, 2019 amended credit agreement.
- Cintas was in compliance with all debt covenants. The revolving facility matures in May 2024; the term loan matures in May 2020 and may be extended annually for up to four years, subject to conditions.
- Operating cash flow exceeded capital expenditures by approximately $212.2 million. Financing cash outflows included $256.8 million of common-stock repurchases, partly offset by $26.5 million of commercial paper issuance and $37.9 million of proceeds from stock-based compensation exercises.
- Under the $1.0 billion repurchase authorization announced in October 2018, Cintas had repurchased 3.5 million shares for $736.5 million through October 8, 2019. The company did not disclose a dividend payment in the current quarter.
Material Changes and Unusual Items
- Operating income benefited from stronger revenue, lower cost of sales as a percentage of revenue, process-efficiency improvements, and the absence of $4.9 million of G&K Services integration expenses recorded in the prior-year quarter.
- Selling and administrative expenses increased 7.6%, primarily due to higher employee-partner costs, particularly medical expenses.
- Net interest expense increased to $27.2 million from $23.8 million, primarily because of commercial paper borrowings.
- Effective June 1, 2019, Cintas adopted ASC 842 for leases, recognizing $168.0 million of operating lease right-of-use assets and $173.4 million of related lease liabilities. The adoption did not materially affect earnings or cash flows.
- The company recorded a $23.5 million other comprehensive loss, primarily from a $29.9 million after-tax decline in the fair value of interest-rate lock agreements, partially offset by a $6.7 million foreign-currency translation gain.
- There were no material G&K integration expenses in the current quarter, and discontinued operations were immaterial.
Outlook, Risks, and Contingencies
The filing does not provide a specific quantitative revenue, earnings, or cash-flow guidance range. Management expects operating cash flows and access to commercial paper and long-term debt markets to remain important sources of liquidity, but future access and borrowing costs depend in part on credit ratings. Standard & Poor’s ratings were A-2 for commercial paper and A- for long-term debt; Moody’s ratings were P-2 and A3, respectively, with stable outlooks.
- Key risks include lower sales volumes, customer losses, pricing and competitive responses, higher labor, medical, fuel, material, sourcing, and distribution costs, union activity, and acquisition-integration challenges.
- Additional risks include foreign-currency movements, tariffs, regulatory and tax changes, environmental matters, cybersecurity and system disruptions, SAP implementation costs, litigation, catastrophic events, and changes in the timing or amount of share repurchases.
- Cintas is subject to ordinary-course personal injury, customer contract, environmental, employment, and other claims. Management believes potential aggregate liabilities will not materially affect consolidated financial position or results of operations.
- Unrecognized tax benefits were $38.6 million at August 31, 2019. The company was involved in various foreign and domestic state tax audits, and management stated that the balance was reasonably possible not to change during fiscal 2020.
- The company was evaluating the future impact of ASU 2016-13 on expected credit losses. Management stated that ASU 2017-04 was not expected to materially affect the financial statements.
Important Investor Verification Items
- Verify whether organic revenue growth and margin expansion remain sustainable after adjusting for workday effects, pricing, acquisitions, and the absence of G&K integration costs.
- Monitor medical, labor, fuel, material, and distribution costs, which could pressure selling and administrative expense and gross margins.
- Assess leverage, commercial paper refinancing, the May 2020 term-loan maturity, credit-ratings sensitivity, and compliance with debt covenants.
- Track remaining authorization and pace of share repurchases relative to operating cash flow and debt levels.
- Evaluate exposure to interest-rate-lock fair-value changes, foreign currency, tax audits, litigation, cybersecurity, and acquisition-related risks.
- Review subsequent filings for quantitative fiscal 2020 guidance, changes in credit facilities, additional acquisitions, and developments in tax or legal contingencies.