Cintas Corporation — Form 10-Q Summary
Business context and reporting period
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 North America. This unaudited Form 10-Q covers the three and nine months ended February 28, 2021, Cintas’ fiscal 2021 third quarter, compared with February 29, 2020.
Financial performance and position
| Metric | Three months ended Feb. 28, 2021 | Year-over-year change | Nine months ended Feb. 28, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $1.777 billion | Down 1.9% | $5.281 billion | Down 3.4% |
| Operating income | $326.5 million; 18.4% margin | Up from 17.4% | $1.029 billion; 19.5% margin | Up from 17.5% |
| Net income | $258.4 million | Up 10.2% | $843.2 million | Up 15.3% from continuing operations |
| Diluted EPS | $2.37 | Up 9.7% | $7.78 | Up 15.1% |
| Operating cash flow | Not separately reported | — | $904.8 million | Down from $934.5 million |
- Uniform Rental and Facility Services revenue declined 2.1% in the quarter and 3.4% year to date. Organic revenue declined 0.1% and 3.1%, respectively.
- First Aid and Safety Services revenue increased 16.4% in the quarter and 16.6% year to date, driven partly by personal protective equipment demand. However, its gross margin fell to 43.5% in the quarter and 42.2% year to date because personal protective equipment generally carries lower margins.
- Selling and administrative expense declined 5.2% in the quarter and 9.2% year to date, reflecting labor efficiencies, lower employee-partner costs and reduced discretionary spending.
- The effective tax rate was 14.4% for the quarter and 11.8% year to date, compared with 18.9% and 16.5%, respectively. The year-to-date rate included a one-time tax benefit related to the sale of certain operating assets.
- Cash and cash equivalents were $553.6 million at February 28, 2021, compared with $145.4 million at May 31, 2020.
- Capital expenditures were $100.4 million year to date, compared with $189.4 million in the prior-year period. Investing cash use was $88.7 million.
- Financing cash use was $410.1 million, including $371.8 million of dividends and $154.5 million of share repurchases.
- Total debt carrying value was approximately $2.55 billion, including $249.9 million due within one year and $2.291 billion due thereafter. No commercial paper or revolving-credit borrowings were outstanding.
- Cintas had access to a $1.0 billion revolving credit facility maturing May 23, 2024 and remained in compliance with all debt covenants.
Material changes versus the prior comparable periods
- COVID-19-related business closures reduced customer activity and revenue, particularly in Uniform Rental and Facility Services, but cost controls materially improved consolidated margins.
- Quarterly operating margin expanded 100 basis points to 18.4%; year-to-date operating margin expanded 200 basis points to 19.5%.
- Organic revenue was approximately flat in the quarter but declined 3.2% year to date, indicating sequential improvement from the pandemic-related downturn.
- Operating cash flow declined modestly because of increased inventory, primarily personal protective equipment and facility-services inventory, purchased to meet customer demand.
- The $1.0 billion share repurchase authorization announced in October 2018 was completed in January 2021. A separate $1.0 billion authorization announced in October 2019 remained available, with $978.9 million remaining at February 28, 2021.
- Cintas changed from an annual dividend policy to quarterly dividends. It declared a quarterly dividend of $0.75 per share in January 2021, following a $0.70 quarterly dividend declared in October 2020.
- On March 31, 2021, Scott D. Farmer announced his retirement as CEO effective May 31, 2021. Todd M. Schneider was elected CEO effective June 1, 2021, while Mr. Farmer became Executive Chairman.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative revenue, earnings or margin guidance. Management stated that vaccine rollout and lower COVID-19 case counts were encouraging, but the pandemic’s duration, economic recovery pace and ultimate financial impact remained uncertain.
- Management expected operating cash flows to remain sufficient for short-term liquidity and characterized the long-term liquidity position as strong, while noting that acquisitions and dividends depend on economic conditions and liquidity.
- Potential inventory obsolescence reserves could increase if demand for personal protective equipment declines materially.
- Debt-market access could become more difficult or expensive if COVID-19 disrupts capital markets or credit ratings decline. Ratings at February 28, 2021 were A- and A-2 from S&P and A3 and P-2 from Moody’s for long-term debt and commercial paper, respectively.
- Other risks include customer closures or payment difficulties, labor and material cost inflation, acquisition integration, foreign exchange, cybersecurity and SAP system implementation disruptions, regulatory and tax matters, litigation, and environmental claims.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Unrecognized tax benefits were $35.8 million, and outstanding inventory purchase commitments were $10.1 million.
- Year-to-date results benefited from a one-time gain on the sale of certain operating assets and the related tax benefit. The filing also reported significant fair-value changes in interest-rate-lock agreements through other comprehensive income.
Important facts for investors to verify
- Whether Uniform Rental and Facility Services revenue and organic growth recover as customer businesses reopen.
- Whether the unusually strong First Aid and Safety Services growth persists after pandemic-driven personal protective equipment demand moderates, and whether its gross margin normalizes.
- The recurring versus nonrecurring components of the year-to-date margin expansion, tax-rate reduction and operating-asset sale gain.
- Inventory levels and reserves, particularly the $533.2 million inventory balance and $63.6 million obsolescence reserve at February 28, 2021.
- Liquidity and refinancing requirements associated with the $250 million senior-note maturity in fiscal 2022 and the $650 million senior-note maturity in fiscal 2022.
- Future share repurchases, dividend sustainability and the effect of the CEO succession on strategy and execution.