Cintas Corporation Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2021. The request metadata references “2020 Q4,” but the supplied filing is Cintas’ fiscal 2021 annual Form 10-K, filed July 28, 2021, and includes fiscal 2020 and 2019 comparisons.
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 the United States. Reportable segments are Uniform Rental and Facility Services and First Aid and Safety Services; Fire Protection and Uniform Direct Sales are included in All Other. Cintas employed approximately 40,000 people and operated 473 facilities, 13 distribution centers and approximately 11,000 delivery routes at May 31, 2021.
Financial Performance and Key Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $7.116 billion | $7.085 billion | +0.4% |
| Operating income | $1.385 billion | $1.163 billion | +19.2% |
| Income before taxes | $1.288 billion | $1.058 billion | +21.7% |
| Net income | $1.111 billion | $876.0 million | +26.8% |
| Diluted EPS | $10.24 | $8.11 | +26.3% |
| Operating cash flow | $1.361 billion | $1.291 billion | +5.4% |
| Cash and equivalents | $493.6 million | $145.4 million | +$348.2 million |
- Margins: Gross margin increased to 46.6% from 45.6%; income before taxes as a percentage of revenue increased to 18.1% from 14.9%.
- Segment performance: Uniform Rental and Facility Services revenue increased 0.8% to $5.690 billion, with gross margin rising to 47.6% from 45.9%. First Aid and Safety Services revenue increased 10.7% to $784.3 million, but gross margin declined to 42.4% from 47.8% because personal protective equipment represented a larger, lower-margin share of sales.
- Organic revenue: Full-year organic growth was 0.2%, with quarterly results of negative 5.0%, negative 4.4%, negative 0.1% and positive 11.5% from the first through fourth quarters, respectively.
- Cost structure: Selling and administrative expense declined to 27.1% of revenue from 29.2%. Fiscal 2020 included $24.5 million of employee termination costs and $9.2 million of long-lived asset impairment charges; no employee termination costs were recorded in fiscal 2021.
- Taxes and interest: The effective tax rate declined to 13.7% from 17.2%, benefiting from discrete items and a one-time tax benefit related to the sale of operating assets. Net interest expense decreased to $97.7 million from $104.4 million.
Cash Flow, Liquidity and Debt
- Operating cash flow was $1.361 billion. Capital expenditures were $143.5 million, down from $230.3 million, and acquisitions used $10.0 million versus $53.7 million in fiscal 2020.
- Financing cash outflows were $879.9 million, including $451.3 million of dividends paid and $554.1 million of share repurchases.
- Total debt carrying value was approximately $2.550 billion, consisting primarily of senior notes. Debt due within one year was $899.1 million, including $250.0 million of 4.30% notes and $650.0 million of 2.90% notes.
- Cintas had no commercial paper outstanding and no borrowings under its $1.0 billion revolving credit facility at May 31, 2021. The company was in compliance with all debt covenants.
- The $250.0 million 4.30% senior notes were repaid on June 1, 2021. Management expected to issue long-term debt during fiscal 2022 to refinance the $650.0 million of 2.90% senior notes maturing in fiscal 2022.
- Contractual obligations included $2.550 billion of debt principal, $185.8 million of operating lease payments and $510.7 million of interest payments. Management stated that operating cash flows and available credit provided sufficient liquidity.
Material Changes Versus Fiscal 2020
- Revenue was broadly stable as pandemic-related customer closures reduced activity for much of the year, while the fourth quarter benefited from vaccine rollout, lower case counts and easing restrictions.
- Profitability improved substantially through cost controls, lower labor and discretionary spending, improved Uniform Rental and Facility Services margins, lower interest expense and favorable tax items.
- Inventory increased to $481.8 million from $408.9 million. The COVID-19-related obsolescence reserve increased by $43.6 million, primarily for excess personal protective equipment inventory.
- The allowance for doubtful accounts declined to $12.1 million from $35.4 million after a $14.2 million incremental COVID-19-related reserve was reversed as customer collections improved.
- The Board changed the dividend policy from annual to quarterly payments. Dividends declared increased to $5.01 per share from $2.55 per share.
- Cintas repurchased $554.1 million of common stock during fiscal 2021. The October 29, 2019 $1.0 billion repurchase authorization was completed after year-end through July 28, 2021.
- The company adopted the expected-credit-loss standard on June 1, 2020, with no material impact on the consolidated financial statements.
Outlook, Risks and Unusual Items
Management did not provide quantitative fiscal 2022 revenue or earnings guidance in the supplied filing. Management expected operating cash flow to remain sufficient and described long-term liquidity as strong, while noting that acquisitions and dividends would depend on the economic outlook and liquidity.
- The COVID-19 pandemic remained the principal near-term uncertainty. Continued closures, customer financial stress, supply-chain disruption, labor constraints or reduced demand for personal protective equipment could affect revenue, margins, inventory reserves and liquidity.
- Other principal risks include competition and pricing pressure, labor and healthcare costs, fuel and energy costs, acquisition integration, supplier and tariff exposure, cybersecurity and system disruptions, environmental compliance, litigation, tax audits and impairment of goodwill or other assets.
- The company was defending a purported ERISA class action concerning management of its employee retirement plan. Management denied liability and stated that ordinary-course legal matters were not expected to have a material adverse effect.
- Insurance reserves were $156.4 million at May 31, 2021; valuation of these reserves was identified as the audit’s critical audit matter because of actuarial estimation uncertainty.
- Cintas recognized a $5.1 million long-lived asset impairment in fiscal 2021 and a one-time net gain on the sale of certain operating assets. No goodwill impairment was recorded.
- Management and Ernst & Young concluded that internal control over financial reporting was effective, and the independent auditor issued unqualified opinions on the financial statements and internal controls.
Investor Verification Checklist
- Verify the filing period: this is a fiscal 2021 Form 10-K, not a 2020 fourth-quarter filing.
- Assess whether the strong fiscal 2021 earnings growth reflects sustainable operating improvement versus one-time gains, tax benefits and the easy comparison with fiscal 2020 pandemic charges.
- Monitor recovery in Uniform Rental and Facility Services and whether the 11.5% fourth-quarter organic growth continued.
- Evaluate First Aid and Safety Services margin recovery as personal protective equipment demand and mix normalize.
- Review excess personal protective equipment inventory and the potential for additional obsolescence reserves.
- Confirm refinancing and repayment of the $900 million of debt due in fiscal 2022 and the effect on interest expense and leverage.
- Review the sustainability of the quarterly dividend and share repurchase program relative to cash flow and refinancing needs.
- Track COVID-19 developments, customer collections, labor and material costs, cybersecurity exposure, litigation and environmental contingencies.