Cintas Corporation 10-Q Summary
Business Context and Reporting Period
Cintas provides uniform rental and direct-sales programs, ancillary facility services, and first aid, safety and fire protection services primarily in North America. This unaudited Form 10-Q covers the quarter and six months ended November 30, 2014, corresponding to fiscal 2015. Results exclude the document imaging and document retention business, which was classified as discontinued operations and sold during the quarter. The document shredding business was deconsolidated following the April 2014 Shred-it partnership transaction.
Financial Performance and Key Metrics
| Metric | Three months ended November 30, 2014 | Three months ended November 30, 2013 | Six months ended November 30, 2014 | Six months ended November 30, 2013 |
|---|---|---|---|---|
| Revenue | $1,123.4 million | $1,123.9 million | $2,225.5 million | $2,224.2 million |
| Operating income | $181.2 million | $152.2 million | $344.7 million | $291.8 million |
| Operating margin | 16.1% | 13.5% | 15.5% | 13.1% |
| Income from continuing operations | $103.4 million | $84.5 million | $213.2 million | $161.9 million |
| Net income | $120.4 million | $84.9 million | $230.5 million | $162.6 million |
| Diluted EPS from continuing operations | $0.86 | $0.69 | $1.79 | $1.32 |
| Diluted EPS | $1.00 | $0.70 | $1.93 | $1.33 |
Quarterly revenue was essentially flat as reported, but organic revenue increased 7.2%. Six-month revenue increased 0.1% as reported, while organic revenue increased 7.3%. The reported results were reduced by the shredding deconsolidation and modestly affected by foreign currency movements.
For the six months, net cash provided by operating activities was $292.6 million, compared with $222.3 million in the prior-year period. Capital expenditures were $113.0 million, including $96.4 million for the Rental Uniforms and Ancillary Products segment. Net cash provided by investing activities was $66.2 million, including $154.0 million of proceeds from the Storage sale and $35.2 million from the sale of stock and receipt of dividends related to an equity method investment. Financing activities used $39.7 million, including $63.6 million for share repurchases.
Cash and cash equivalents were $826.7 million at November 30, 2014, compared with $513.3 million at May 31, 2014. Long-term debt was $1.3 billion, with no commercial paper or revolving-credit borrowings outstanding. The company had a $300.0 million commercial paper program supported by a revolving facility expandable to $450.0 million, maturing May 28, 2019.
Material Changes Versus the Prior Comparable Period
- Rental Uniforms and Ancillary Products: Quarterly revenue increased 7.6% to $865.4 million, with organic growth of 8.1%. Segment income before taxes increased 24.1% to $156.5 million, and segment operating profitability improved to 18.1% of revenue from 15.7%.
- Uniform Direct Sales: Quarterly revenue decreased 3.6% to $117.5 million because of fewer large customer roll-outs. Gross margin declined to 27.6% from 28.8%, and income before taxes decreased to $10.4 million.
- First Aid, Safety and Fire Protection: Quarterly revenue increased 12.7% to $140.4 million, with organic growth of 12.1%. Income before taxes increased to $14.7 million, supported by volume growth and improved mix.
- Quarterly selling and administrative expenses declined 4.6%, primarily because of the shredding deconsolidation. Net interest expense declined to $15.9 million from $16.4 million.
- Six-month results included a $6.6 million gain on additional consideration from the Shred-it transaction and a $21.7 million gain on the sale of stock in an equity method investment.
- Discontinued operations contributed $17.0 million of quarterly net income and $17.3 million for the six months, primarily reflecting a $34.1 million pre-tax gain on the Storage sale.
- The company declared $1.70 per share of dividends, consisting of a $0.85 annual dividend and a $0.85 special dividend. The total was paid on December 5, 2014.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that operating cash flow, existing cash, and available debt facilities should provide adequate funding for operations, expansion, dividends, and share repurchases. Management’s strategy emphasizes organic growth through new customer wins, increased penetration of existing accounts, geographic expansion, and selective acquisitions.
- The Shred-it partnership must integrate the contributed shredding businesses, realize expected synergies, and provide reliable financial information.
- Key operating risks include lower sales volumes, customer losses from outsourcing, labor and material cost inflation, energy and fuel costs, acquisition integration, union activity, regulatory compliance, system disruptions, foreign currency movements, and litigation.
- The Serrano employment-discrimination litigation remains pending. An adverse outcome could result in material liability, but any potential liability was not determinable at the filing date.
- Cintas was in compliance with all debt covenants. A significant covenant default could accelerate debt maturities and impair liquidity.
- Storage-sale proceeds included contingent consideration that was not recognized because future events remained uncertain.
- Foreign currency translation reduced other comprehensive income by $11.9 million for the six months, primarily reflecting currency movements.
- The company was evaluating the impact of the new revenue-recognition standard, ASU 2014-09; no material impact had been determined at the filing date.
Most Important Facts for Investors to Verify
- Whether organic growth in the Rental Uniforms and First Aid, Safety and Fire Protection businesses continues to offset the loss of reported shredding revenue.
- The sustainability of improved gross and operating margins, particularly in Rental Uniforms and Ancillary Products.
- The financial performance, integration progress, and valuation of Cintas’s 42% Shred-it partnership investment.
- Cash conversion after elevated capital expenditures and the effect of future share repurchases and dividends on liquidity.
- Debt maturities, covenant compliance, credit ratings, and access to commercial paper and long-term debt markets.
- The ultimate outcome and potential exposure from the Serrano litigation and other legal, tax, environmental, and employment contingencies.
- The treatment and potential recovery of contingent consideration and retained real estate associated with the Storage divestiture.