Cintas Corporation: Fiscal 2011 Form 10-K Summary
Business context and reporting period
Cintas provides uniform rental and direct-sale programs, first aid, safety and fire protection services, document management, facility services and related products primarily in North America, with additional international operations. The filing is the Form 10-K for the fiscal year ended May 31, 2011, filed July 29, 2011. The requested “2010 Q4” period appears inconsistent with the filing; the fourth quarter of fiscal 2011 ended May 31, 2011 and is included in the quarterly data.
- Approximately 900,000 business customers, 30,000 employees, 423 operations and approximately 7,700 local delivery routes.
- Four operating segments: Rental Uniforms and Ancillary Products; Uniform Direct Sales; First Aid, Safety and Fire Protection Services; and Document Management Services.
- No individual customer represented more than 1% of consolidated revenue.
Financial performance and key metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $3.810 billion | $3.547 billion | +7.4% |
| Operating income | $440.3 million | $390.8 million | +12.7% |
| Income before taxes | $392.7 million | $343.9 million | +14.2% |
| Net income | $247.0 million | $215.6 million | +14.5% |
| Diluted EPS | $1.68 | $1.40 | +20.0% |
| Gross margin | 42.2% | 42.2% | Flat |
| Income before tax margin | 10.3% | 9.7% | +60 basis points |
| Effective tax rate | 37.1% | 37.3% | Down 20 basis points |
- Revenue growth was 5.1% organic and 2.3% acquisition-related. Organic growth accelerated from 2.8% in the first quarter to 8.0% in the fourth quarter.
- Segment revenue was $2.692 billion for Rental Uniforms and Ancillary Products, $419.2 million for Uniform Direct Sales, $377.7 million for First Aid, Safety and Fire Protection Services, and $321.3 million for Document Management Services.
- Document Management Services grew 27.0%, First Aid, Safety and Fire Protection Services grew 11.5%, Uniform Direct Sales grew 8.5%, and Rental Uniforms and Ancillary Products grew 4.8%.
- Net cash provided by operating activities was $340.9 million, compared with $565.7 million in fiscal 2010. The decline reflected higher working-capital requirements, including increases in accounts receivable, inventory and uniforms in service.
- Capital expenditures were $182.6 million, and cash paid for acquisitions was $171.6 million. Net cash used in investing activities was $298.6 million.
- Cash and cash equivalents were $438.1 million and marketable securities were $87.2 million at May 31, 2011. Approximately $160.3 million of cash, cash equivalents and marketable securities was held outside the United States.
- Long-term debt was $1.286 billion, including $1.275 billion of senior notes. Total debt to capitalization increased to 35.8% from 23.7%.
- The company had no commercial paper or revolving-credit borrowings outstanding at year-end. Its commercial paper program had $300 million of capacity, supported by a revolving facility with maximum capacity of $450 million through an accordion feature.
- The annual dividend increased to $0.49 per share from $0.48, marking the 28th consecutive annual increase.
- Fiscal 2011 fourth-quarter revenue was $1.012 billion, gross margin was $433.0 million, net income was $70.8 million and diluted EPS was $0.49.
Material changes versus comparable periods
- Fiscal 2011 represented a recovery from fiscal 2010’s economic downturn: fiscal 2010 revenue had declined 6.0%, while fiscal 2011 revenue increased 7.4%.
- Operating income benefited from higher revenue, improved capacity utilization and the absence of fiscal 2010 legal settlements. Fiscal 2010 included $23.5 million of legal settlements, net of insurance proceeds, while fiscal 2011 included none.
- Selling and administrative expenses increased $82.6 million, or 7.6%, driven primarily by $47.5 million of higher labor and payroll-tax costs, $10.9 million of enterprise-system conversion professional services and $6.7 million of higher bad-debt expense.
- Rental Uniforms and Ancillary Products gross margin declined to 43.2% from 43.6% because of higher maintenance and energy costs. First Aid, Safety and Fire Protection Services gross margin increased to 41.3% from 38.9% due partly to improved capacity utilization.
- Document Management Services benefited from acquisitions and a roughly 31% increase in the average selling price of recycled paper. Excluding recycled paper revenue, organic growth was 8.2%.
- Goodwill increased to $1.488 billion from $1.357 billion, principally from fiscal 2011 acquisitions. No goodwill impairment was recorded for fiscal 2009, 2010 or 2011.
- On May 18, 2011, Cintas issued $250 million of 2.85% senior notes due 2016 and $250 million of 4.30% senior notes due 2021. Proceeds were used to repay commercial paper, fund share repurchases and for general corporate purposes.
- Fiscal 2011 share repurchases totaled approximately $443.7 million, or 15.4 million shares. The $500 million October 2010 authorization was completed through July 2011, including approximately $259.5 million of purchases after fiscal year-end.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide a clear quantitative fiscal 2012 revenue or earnings guidance range. Management described improved economic conditions, expansion opportunities, increased sales productivity and continued evaluation of acquisitions as growth drivers.
- Management expects operating cash flows, debt-market access and the revolving credit facility to provide liquidity for operations, expansion, dividends and share repurchases, but future access and borrowing costs depend partly on credit ratings.
- Key risks include economic weakness, unemployment and outsourcing trends; competition and pricing pressure; fuel, energy, labor, medical and material-cost inflation; acquisition integration; supplier and foreign-currency risks; unionization campaigns; information-system disruption and data-security breaches; environmental and workplace-safety compliance; litigation; and potential asset impairments.
- Cintas reported investment-grade ratings with stable outlooks at May 31, 2011: S&P commercial paper A-2 and long-term debt BBB+; Moody’s commercial paper P-1 and long-term debt A2.
- Pending employment-discrimination litigation, including Serrano and Avalos, remained subject to appeals. Potential liability was not determinable and could be material if resolved adversely.
- The Veliz wage-and-hour settlement received final approval in June 2011; Cintas paid $22.8 million in December 2010, with a fiscal 2010 pre-tax impact of approximately $19.5 million net of insurance proceeds.
- Environmental water-treatment and waste-removal spending was approximately $18 million in both fiscal 2011 and 2010. Fiscal 2011 capital spending to limit or monitor hazardous substances was approximately $2 million.
- Management and Ernst & Young concluded that internal control over financial reporting was effective as of May 31, 2011, and Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the requested period should be interpreted as fiscal 2011 fourth quarter rather than fiscal 2010 fourth quarter.
- The sustainability of accelerating organic growth, particularly the 8.0% fourth-quarter rate, and the contribution from acquisitions and recycled-paper pricing.
- The effect of substantially higher working-capital investment on recurring free cash flow.
- Debt maturities, refinancing requirements and the effect of the higher 35.8% debt-to-capitalization ratio.
- Whether share repurchases funded with new debt materially improve EPS while increasing leverage.
- Exposure to energy, labor, medical, material and bad-debt costs, including the decline in Rental Uniforms and Ancillary Products margin.
- The status and potential financial exposure of Serrano, Avalos and other litigation, environmental matters and tax audits.
- The reliability of Document Management Services growth after adjusting for recycled-paper price changes and acquisitions.