Cintas Corporation — Form 10-Q Summary
Business context and reporting period
Cintas provides uniform rental and direct-sales programs, first aid, safety and fire protection services, document management, and related business services primarily in North America and selected international markets. The filing covers the three and nine months ended February 28, 2011, representing fiscal 2011 third quarter and year-to-date results, compared with the corresponding fiscal 2010 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Feb. 28, 2011 | Prior-year comparable | Nine months ended Feb. 28, 2011 | Prior-year comparable |
|---|---|---|---|---|
| Revenue | $937.8 million | $861.8 million | $2.798 billion | $2.638 billion |
| Operating income | $108.9 million | $84.0 million | $311.5 million | $289.3 million |
| Net income | $59.1 million | $49.0 million | $176.2 million | $160.1 million |
| Diluted EPS | $0.41 | $0.32 | $1.19 | $1.04 |
| Net cash from operations | Not provided for the quarter | Not provided for the quarter | $208.0 million | $429.2 million |
- Third-quarter revenue increased 8.8%, including 5.5% organic growth and 3.3% acquisition-related growth. Nine-month revenue increased 6.1%, including 4.2% organic growth.
- Third-quarter operating margin was approximately 11.6%, versus approximately 9.7% in the prior-year quarter. Net margin was approximately 6.3%, versus 5.7%.
- For the nine months, operating margin was approximately 11.1%, versus approximately 11.0% in the prior-year period; net margin was approximately 6.3%, versus 6.1%.
- At February 28, 2011, cash and cash equivalents were $184.7 million and marketable securities were $32.0 million, compared with combined cash and securities of $566.1 million at May 31, 2010.
- Total debt was approximately $808.1 million, including $1.6 million due within one year and $806.4 million due thereafter. Debt-to-capitalization was 24.6%, compared with 23.7% at May 31, 2010.
- Cintas had $21.5 million of commercial paper outstanding and access to a $300 million commercial paper program supported by a revolving facility with accordion capacity up to $450 million, expiring September 26, 2014. The company was in compliance with significant debt covenants.
Material changes versus the prior comparable period
- Third-quarter performance benefited from improved sales representative productivity, customer retention, capacity utilization, and faster revenue growth than expense growth.
- Rental Uniforms and Ancillary Products revenue rose 6.8%; segment pretax margin improved to 12.9% from 10.3%.
- Uniform Direct Sales revenue rose 8.7%, and pretax margin improved to 12.1% from 8.7%.
- First Aid, Safety and Fire Protection revenue rose 15.1%, and pretax margin improved to 5.1% from 2.6%.
- Document Management revenue rose 20.3%, but pretax margin declined to 8.0% from 14.3% due to storage-business start-up costs, higher energy costs, and increased selling and administrative expenses.
- Nine-month selling and administrative expense increased 8.2%, driven by higher labor and payroll taxes, bad-debt expense, and professional services related to an enterprise-wide system conversion.
- Operating cash flow declined $221.2 million year over year. The filing attributes the decrease primarily to higher working-capital requirements from increased sales volume and additional inventory held for a planned supply-chain system conversion.
- Capital expenditures increased to $142.3 million from $78.9 million, and acquisitions increased to $158.5 million from $41.4 million.
- The company repurchased $203.2 million of common stock, paid a $71.8 million annual dividend, and completed its prior buyback authorization. A new $500 million authorization was announced in October 2010, but no purchases had been made under it as of the filing.
Outlook, risks, contingencies, and unusual items
- No quantitative financial guidance is provided in the filing. Management states that it expects operating cash flow, debt capacity, and the commercial paper and revolving-credit programs to fund operations, expansion, dividends, and other requirements.
- Management identifies risks including energy, labor, medical and materials costs; lower sales volumes or customer losses; acquisition integration; regulatory and employment matters; system-conversion disruptions; foreign-exchange exposure; litigation; environmental liabilities; and changes in tax and labor laws.
- The Veliz wage-and-hour litigation settlement had an aggregate cash payment of approximately $24.0 million and a pretax impact of $19.5 million, net of insurance. Cintas paid $22.8 million into escrow in December 2010 pending final court approval.
- Separate Serrano and Avalos employment-discrimination matters remained subject to appeals. Management stated that any potential liability was not determinable and that an adverse outcome could be material.
- Effective tax rate was 38.9% in the quarter, compared with 32.8% in the prior-year quarter, but 36.1% for the nine months, compared with 37.0% in the prior-year period. The filing attributes the changes partly to tax-audit closures.
- The company reported effective disclosure controls as of February 28, 2011, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether working-capital investment and the supply-chain system conversion continue to depress operating cash flow or require additional borrowing.
- The timing and performance of acquisitions, particularly in Document Management and First Aid, Safety and Fire Protection.
- Whether Document Management margins recover from start-up and energy-related pressures.
- The final approval and cash distribution of the Veliz settlement and the status of Serrano and Avalos appeals.
- Future utilization of the new $500 million share-repurchase authorization and its effect on leverage and liquidity.
- Current debt ratings, covenant headroom, commercial-paper usage, and refinancing requirements for notes maturing from 2012 onward.