Cintas Corporation — Form 10-Q Summary
Business context and reporting period
Cintas provides uniform rental and facility services, first aid and safety products and services, fire protection services, and uniform direct sales, primarily in North America. The filing covers the three and nine months ended February 28, 2019, representing fiscal 2019 third-quarter and year-to-date results. The filing is unaudited. Discontinued Services is presented as discontinued operations for all periods.
Financial performance and position
| Metric | Three months ended Feb. 28, 2019 | Prior comparable period | Nine months ended Feb. 28, 2019 | Prior comparable period |
|---|---|---|---|---|
| Total revenue | $1.682 billion | $1.589 billion | $5.099 billion | $4.807 billion |
| Operating income | $278.3 million | $200.0 million | $819.1 million | $684.3 million |
| Net income | $203.3 million | $302.1 million | $658.9 million | $656.4 million |
| Diluted EPS | $1.85 | $2.71 | $5.93 | $5.90 |
| Diluted EPS from continuing operations | $1.83 | $2.66 | $5.91 | $5.35 |
| Operating margin | 16.5% | 12.6% | 16.1% | 14.2% |
| Effective tax rate from continuing operations | 20.1% | (69.5%) | 19.3% | 0.9% |
Third-quarter revenue increased 5.9%, including 6.0% organic growth. Uniform Rental and Facility Services revenue rose 5.7% to $1.358 billion, while First Aid and Safety Services revenue rose 8.6% to $149.2 million. Nine-month revenue increased 6.1%, with 6.1% organic growth.
Third-quarter operating income benefited from higher sales volume, lower selling and administrative expenses, improved segment margins, and reduced G&K integration costs. Operating income increased 39.1%, while net income declined 32.0% because the prior-year quarter included a substantial tax benefit associated largely with the Tax Act. Nine-month continuing-operations income increased 10.4%, and diluted continuing-operations EPS increased 10.5%.
- Third-quarter Uniform Rental and Facility Services gross margin was 44.9%, up 80 basis points; segment income before taxes was $239.1 million, or 17.6% of revenue.
- Third-quarter First Aid and Safety Services gross margin was 48.2%, up 130 basis points; segment income before taxes was $21.6 million, or 14.5% of revenue.
- Nine-month operating cash flow was $670.7 million, compared with $660.9 million in the prior year.
- Nine-month capital expenditures were $207.8 million, including $165.6 million for Uniform Rental and Facility Services expansion.
- Cash and cash equivalents were $80.9 million at February 28, 2019, versus $138.7 million at May 31, 2018. Marketable securities were zero.
- Total debt was approximately $2.754 billion, consisting of $217.5 million of commercial paper and $2.537 billion of long-term debt, net of issuance costs. The company had no revolving-credit borrowings and was in compliance with all debt covenants.
- Share repurchases totaled $608.2 million during the nine months, and dividends paid totaled $220.8 million. Dividends declared per share increased to $2.05 from $1.62.
Material changes versus the prior comparable period
- Revenue growth and operating leverage materially improved profitability, particularly in Uniform Rental and Facility Services.
- Selling and administrative expense declined 3.0% in the quarter, partly because the prior-year period included a one-time cash payment to employees. Year-to-date selling and administrative expense increased 1.9%.
- G&K integration expenses declined to $0.8 million in the quarter and $13.5 million year to date, from $9.8 million and $26.9 million, respectively.
- The company recognized a $69.4 million pretax gain on the sale of a cost-method investment during the second quarter, contributing approximately $0.47 to year-to-date diluted EPS.
- Discontinued operations contributed $2.4 million of net income year to date, compared with $61.8 million in the prior year, which included a larger gain on the sale of a business.
- Cintas adopted ASC 606 on June 1, 2018 using the modified retrospective method. The adoption increased reported nine-month net income by $14.2 million and diluted EPS by $0.13 versus historical guidance, with no impact on operating cash flow. Comparative periods were not restated.
- Balance-sheet assets increased to $7.434 billion from $6.958 billion, substantially reflecting capitalized contract costs and other assets associated with ASC 606.
Outlook, risks, contingencies and unusual items
The filing does not provide specific quantitative revenue, earnings, margin, or cash-flow guidance. Management describes its strategy as increasing penetration at existing customers, broadening the customer base, expanding product and service offerings, pursuing geographic growth, and evaluating acquisitions.
- Management expects adoption of the new lease standard on June 1, 2019 to materially increase balance-sheet assets and liabilities, but does not expect a material impact on income or cash flow.
- Remaining accrued G&K employee termination benefits were $6.2 million and are expected to be paid by the end of the next fiscal year.
- Ordinary-course litigation, environmental, employment, customer-contract, and personal-injury claims are not expected by management to have a material adverse effect, although outcomes remain uncertain.
- Key disclosed risks include G&K integration and synergy execution, labor and material costs, customer losses and outsourcing, tariffs and foreign exchange, regulatory and tax changes, cybersecurity and systems disruptions, SAP implementation costs, litigation, catastrophic events, and the timing of share repurchases.
- The company entered into interest-rate locks with a $500.0 million notional value; their February 28, 2019 fair value was an $8.5 million liability recorded in accrued liabilities and other comprehensive income.
- Unrecognized tax benefits were $31.5 million at February 28, 2019. The company stated that the Tax Act accounting was finalized during the period.
Most important facts for investors to verify
- Confirm that revenue growth and margin expansion remain organic and sustainable after separating acquisitions, foreign exchange, and prior-year one-time employee costs.
- Assess the effect of the favorable prior-year tax items and unusual gains on the comparability of net income and EPS.
- Monitor leverage, commercial-paper refinancing, interest rates, credit ratings, covenant compliance, and the maturity profile of approximately $2.75 billion of debt.
- Evaluate cash conversion after capital expenditures, dividends, and more than $608 million of year-to-date share repurchases.
- Review the effects of ASC 606 capitalized contract costs and the upcoming lease-standard adoption on reported assets, liabilities, earnings, and cash flow.
- Verify the timing and ultimate cost of remaining G&K integration activities and related contingencies.