Cintas Corporation Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2019. The filing also provides unaudited fourth-quarter data for the quarter ended May 31, 2019; the request metadata references “2018 Q4,” but the supplied filing is the fiscal 2019 Form 10-K.
Business Context
Cintas provides uniform rental and facility services, first aid and safety products, fire protection services, and uniform direct sales to more than one million businesses, primarily in North America. Reportable segments are Uniform Rental and Facility Services, First Aid and Safety Services, and All Other, which includes fire protection and uniform direct sales. The company had approximately 45,000 employee-partners, 481 facilities, 11 distribution centers, and approximately 11,400 local delivery routes at May 31, 2019.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $6.892 billion | $6.477 billion | +6.4% |
| Operating income | $1.134 billion | $950 million | +19.3% |
| Income before taxes | $1.102 billion | $841 million | +31.1% |
| Net income | $885.0 million | $842.6 million | +5.0% |
| Continuing-operations net income | $882.6 million | $783.9 million | +12.6% |
| Diluted EPS from continuing operations | $7.97 | $7.03 | +13.4% |
| Gross margin | 45.4% | 44.9% | +50 bps |
| Operating margin | 16.5% | 14.7% | Improved |
| Effective tax rate | 19.9% | 6.8% | Higher |
Fiscal 2019 organic revenue growth was 6.5%, with quarterly organic growth of 5.2%, 7.0%, 6.0%, and 7.6%, respectively. Uniform Rental and Facility Services revenue increased 5.8% to $5.552 billion, while First Aid and Safety Services revenue increased 9.7% to $619.5 million. All Other revenue was $720.4 million.
Net cash provided by operating activities was $1.068 billion, compared with $964.2 million in fiscal 2018. Capital expenditures were $276.7 million, and net cash used in investing activities was $235.6 million. Net cash used in financing activities was $873.3 million, including $1.016 billion of share repurchases and $220.8 million of dividends. Cash and cash equivalents declined to $96.6 million from $138.7 million.
Total debt was approximately $2.850 billion at May 31, 2019, including $312.3 million due within one year and $2.538 billion due thereafter. The company had $112.5 million of commercial paper outstanding, a $200.0 million term loan, and no borrowings under its revolving credit facility. The revolving facility capacity was increased to $1.0 billion. Cintas was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher sales volume, new business, increased penetration of existing customers, price increases, and improved sales productivity.
- Gross margins improved in both major reportable segments. Uniform Rental and Facility Services margin increased to 45.5% from 45.0%; First Aid and Safety Services increased to 48.0% from 47.1%.
- G&K acquisition integration expenses declined to $14.4 million from $41.9 million. Management expects the remaining employee termination benefits, with a liability of $2.8 million at year-end, to be paid by the end of fiscal 2020.
- Cintas recorded a $69.4 million pretax gain on the sale of a cost-method investment, contributing $0.47 to diluted EPS.
- Net interest expense declined to $100.5 million from $108.8 million following debt repayments in fiscal 2018.
- The effective tax rate increased because fiscal 2018 benefited from the one-time $175.6 million deferred-tax remeasurement benefit related to the Tax Cuts and Jobs Act.
- The company adopted ASC 606 using the modified retrospective method. The adoption increased reported fiscal 2019 net income by $16.9 million and diluted EPS by $0.15 versus historical guidance, with no impact on operating cash flow.
- Cintas increased its annual dividend 26.5% to $2.05 per share and repurchased approximately 4.8 million shares for $953.4 million under its authorized programs.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a specific fiscal 2020 revenue or earnings outlook. Management describes a strategy focused on organic growth through customer penetration, broader market coverage, sales-force productivity, geographic expansion, and selective acquisitions.
- Key risks include economic weakness, competitive pricing, customer outsourcing or insourcing, labor and healthcare costs, fuel and energy prices, tariffs, foreign exchange, supplier disruptions, and labor shortages.
- Acquisition-related risks include integration execution, realization of anticipated synergies, unforeseen liabilities, and impairment of goodwill or other acquired assets. Goodwill impairment was not recorded for fiscal 2019, 2018, or 2017.
- Environmental, employment, personal injury, customer contract, tax, and other legal claims arise in the ordinary course. Management believes existing matters will not have a material adverse effect, but environmental remediation liabilities could exceed current estimates.
- Cybersecurity, computer-system availability, and the ongoing SAP implementation could disrupt operations or expose the company to financial, legal, and reputational costs.
- ASC 842 lease adoption began June 1, 2019 and was expected to add approximately $160 million to $185 million of lease assets and liabilities, with no material expected effect on income or cash flow.
- Contractual cash obligations totaled $3.795 billion, including $2.863 billion of debt, $223.2 million of operating leases, and $709.0 million of interest payments.
Investor Verification Points
- Reconcile continuing-operations performance with reported net income, discontinued operations, the investment-sale gain, and G&K integration expenses.
- Assess the sustainability of 6.5% organic growth and the improvement in segment gross margins.
- Review debt maturities, including $312.5 million due in fiscal 2020 and $900 million due in fiscal 2022, together with commercial paper refinancing needs.
- Evaluate cash deployment, particularly the $1.016 billion of fiscal 2019 repurchases versus $1.068 billion of operating cash flow.
- Consider the comparability effects of ASC 606, including $275.1 million of balance-sheet impact and capitalized contract costs of $275.6 million gross and $206.0 million net.
- Monitor SAP implementation, cybersecurity, labor relations, environmental matters, tax audits, and acquisition integration.
- Confirm that management and Ernst & Young reported effective internal control over financial reporting and an unqualified audit opinion as of May 31, 2019.