Cintas Corporation Fiscal 2022 Third-Quarter 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. This unaudited quarterly report covers the three and nine months ended February 28, 2022, compared with the corresponding periods ended February 28, 2021. The filing date was April 7, 2022.
Key financial metrics
| Metric | Three months ended February 28, 2022 | Change | Nine months ended February 28, 2022 | Change |
|---|---|---|---|---|
| Total revenue | $1.961 billion | +10.3% | $5.780 billion | +9.5% |
| Operating income | $407.6 million | +24.8% | $1.183 billion | +14.9% |
| Operating margin | 20.8% | +240 bps | 20.5% | +100 bps |
| Net income | $315.4 million | +22.1% | $941.3 million | +11.6% |
| Diluted EPS | $2.97 | +25.3% | $8.84 | +13.6% |
| Operating cash flow | Not provided for the quarter | — | $987.1 million | +9.1% |
Uniform Rental and Facility Services generated $1.553 billion of third-quarter revenue, up 9.6%, with 8.9% organic growth. First Aid and Safety Services revenue rose 7.3% to $213.0 million, with 6.2% organic growth. Fire Protection Services and Uniform Direct Sales are included in All Other.
Third-quarter selling and administrative expense was 25.0% of revenue versus 27.2% in the prior-year quarter. The improvement included operating leverage and a $30.2 million one-time gain from acquiring the remaining interest in an equity-method investment. The effective tax rate was 18.2%, compared with 14.4% in the prior-year quarter; the current period included a one-time tax benefit related to that transaction.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $84.1 million at February 28, 2022, down from $493.6 million at May 31, 2021.
- Total debt carrying value was approximately $2.853 billion, consisting of $1.509 billion due within one year and $1.344 billion due thereafter. Debt fair value was approximately $2.994 billion.
- The company had $559.2 million of commercial paper outstanding at a weighted-average rate of 0.43%; no revolving-credit borrowings were outstanding.
- On March 23, 2022, the revolving credit facility capacity was increased from $1.0 billion to $2.0 billion, with an additional $500 million accordion feature and a March 2027 maturity.
- Management expects to issue long-term debt to fund the $650.0 million of senior notes maturing in the fourth quarter of fiscal 2022 and the $300.0 million maturing in the first quarter of fiscal 2023.
- Investing cash outflows included $165.9 million of capital expenditures and $150.8 million of cash paid for acquisitions. Financing outflows included $1.222 billion of share repurchases and $276.9 million of dividends, partially offset by $559.2 million of net commercial-paper issuance.
- The board-authorized $1.5 billion share-repurchase program had $962.3 million remaining at February 28, 2022. Through April 7, 2022, the company had repurchased an additional $46.5 million of shares under the program.
Material changes versus the prior comparable periods
- Revenue growth reflected new business, increased penetration of products and services, pricing, stronger customer activity as COVID-19 restrictions eased, and acquisitions.
- Uniform Rental and Facility Services maintained a 46.3% third-quarter gross margin, while its nine-month gross margin declined to 47.1% from 47.5%, primarily because of higher energy costs.
- First Aid and Safety Services gross margin improved to 44.2% for both the quarter and nine months, aided by lower sales of lower-margin personal protective equipment relative to the prior year.
- Net interest expense declined to $22.0 million for the quarter and $65.6 million for the nine months, primarily because lower-cost commercial paper replaced matured 4.30% senior notes.
- Acquisition spending increased substantially from $7.6 million to $150.8 million for the nine months. Goodwill increased to $3.033 billion from $2.913 billion at May 31, 2021.
- Share repurchases increased to $1.222 billion from $154.5 million in the prior-year nine-month period, reducing diluted weighted-average shares and contributing to EPS growth.
Outlook, commentary, risks and unusual items
Management expects operating cash flow to remain sufficient and believes liquidity is strong, supported by operating cash flow, commercial-paper and long-term debt markets, and the expanded revolving credit facility. Acquisitions, share repurchases and dividends remain strategic priorities but depend on the economic outlook and liquidity.
The filing does not provide quantitative revenue or earnings guidance. Management identified risks from the evolving COVID-19 pandemic, including the Omicron variant, inflation and higher energy, fuel, labor, sourcing and distribution costs, customer volume and retention, acquisition integration, interest-rate and foreign-currency volatility, debt-market access, cybersecurity, regulatory matters, litigation, environmental obligations and tax audits.
Management reported compliance with all debt covenants and stated that ordinary-course legal proceedings are not expected to have a material adverse effect. Disclosure controls were effective as of February 28, 2022, and no material changes to internal control over financial reporting were identified.
Investor verification points
- Assess the sustainability of reported margins after excluding the $30.2 million one-time acquisition-related gain and considering higher energy, labor and other input costs.
- Verify the refinancing plan and execution for the $950.0 million of senior notes maturing during fiscal 2022 and fiscal 2023.
- Monitor cash balances, commercial-paper dependence and the effect of continued share repurchases on leverage and liquidity.
- Evaluate whether organic growth can persist as COVID-related demand effects and prior-year personal protective equipment sales normalize.
- Review acquisition purchase-price allocations, goodwill and service-contract amortization for potential valuation or integration risks.