Cintas Corporation — Fiscal 2013 Form 10-K
Reporting period: Fiscal year ended May 31, 2013. The filing also provides unaudited fourth-quarter data; fiscal Q4 2013 ended May 31, 2013. The filing is not a 2012 Q4 report.
Business Context
Cintas provides rental and direct-sale uniforms, ancillary facility services, first-aid and safety products, fire protection services, and document management services primarily in North America, with additional international operations. It serves more than one million businesses through four operating segments and has no customer representing more than 1% of total revenue.
- Approximately 32,000 employees, 446 operating facilities and 8,200 local delivery routes at May 31, 2013.
- Revenue mix: Rental Uniforms and Ancillary Products 70.5%; Uniform Direct Sales 10.7%; First Aid, Safety and Fire Protection 10.7%; Document Management 8.1%.
Financial Performance and Key Metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $4.316 billion | $4.102 billion | +5.2% |
| Operating income | $565.2 million | $539.6 million | +4.7% |
| Income before taxes | $499.9 million | $470.9 million | +6.2% |
| Net income | $315.4 million | $297.6 million | +6.0% |
| Diluted EPS | $2.52 | $2.27 | +11.0% |
| Gross margin | 41.4% | 42.4% | Down 100 bps |
| Selling and administrative expenses as a percentage of revenue | 28.3% | 29.2% | Down 90 bps |
| Effective tax rate | 36.9% | 36.8% | Essentially unchanged |
- Fourth quarter: Revenue was $1.129 billion, gross margin was $467.2 million, net income was $86.0 million and diluted EPS was $0.69, compared with fiscal Q4 2012 revenue of $1.054 billion, net income of $78.6 million and diluted EPS of $0.60.
- Cash flow: Operating cash flow was $552.7 million, up from $469.9 million. Capital expenditures were $196.5 million and cash acquisitions were $69.4 million.
- Liquidity: Cash and cash equivalents were $352.3 million and marketable securities were $5.7 million at year-end; $50.7 million of cash was held outside the United States. No commercial paper or revolving-credit borrowings were outstanding.
- Debt: Long-term debt totaled $1.309 billion, including $1.300 billion due after one year. Cintas issued $250 million of 3.25% senior notes due 2022 and repaid $225 million of 6.00% notes due 2012.
- Shareholder returns: The annual dividend increased to $0.64 per share from $0.54. Cintas repurchased 5.1 million shares for $208.0 million during fiscal 2013, with $162.5 million remaining under the authorized program at May 31, 2013.
Material Changes Versus Fiscal 2012
- Organic revenue growth was 4.9%, partly offset by one fewer workday; acquisitions contributed approximately 0.7% to consolidated revenue growth.
- First Aid, Safety and Fire Protection revenue increased 10.8%, including 6.8% organic growth and 4.4% acquisition growth. Segment pretax income increased 22.6%.
- Rental Uniforms and Ancillary Products revenue increased 4.5%; segment pretax income increased to $453.0 million from $429.5 million.
- Uniform Direct Sales revenue increased 6.3%, but gross margin declined to 29.3% from 29.9% because of product mix and costs associated with large customer uniform roll-outs.
- Document Management revenue increased 2.9%, primarily from acquisitions, but pretax income declined to $15.8 million from $26.0 million. The average recycled-paper selling price fell approximately 19%, reducing revenue and gross margin.
- Consolidated gross margin declined because of higher rental-inventory, route-expansion and processing-system costs, lower direct-sales margins and weaker recycled-paper pricing. Selling and administrative leverage and lower amortization partly offset these pressures.
- Capital expenditures increased from $160.8 million to $196.5 million, and acquisition spending increased from $24.9 million to $69.4 million.
Outlook, Risks and Unusual Items
Management emphasized growth through higher penetration of existing customers, broader customer coverage, geographic expansion, additional products and services, and selective acquisitions. The filing does not provide specific fiscal 2014 revenue or earnings guidance.
- Principal risks include economic weakness, competition and customer insourcing, labor and healthcare costs, fuel and energy prices, material and sourcing costs, unionization activity, acquisition integration, regulatory compliance, environmental liabilities, litigation, cybersecurity and information-system disruptions.
- Management reported no material environmental non-compliance and expects no material change in environmental compliance costs. Fiscal 2013 environmental operating spending was approximately $19 million and related capital expenditures were approximately $2 million.
- A $1.6 million write-off of a garment processing system affected Rental Uniforms and Ancillary Products results.
- Cintas recognized an $8.5 million gain on the sale of stock of an equity-method investment.
- Goodwill and other intangible assets were not impaired in fiscal 2013, 2012 or 2011.
- Material employment-discrimination litigation remains pending, including the Serrano matter. Potential liability was not determinable and could be material if resolved adversely.
- Debt covenants were satisfied at year-end. The revolving facility supports a $300 million commercial-paper program and permits maximum borrowing capacity of $450 million.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Investor Verification Priorities
- Verify the filing period and distinguish fiscal 2013 full-year results from the unaudited fiscal Q4 2013 figures.
- Assess whether Document Management profitability can recover from lower recycled-paper prices and higher costs.
- Review the sustainability of organic growth, sales productivity improvements and acquisition contribution.
- Reconcile debt maturities, interest obligations, credit-facility capacity and the timing of significant maturities beginning in fiscal 2016.
- Evaluate the cash allocation tradeoff among capital expenditures, acquisitions, dividends and share repurchases.
- Review the Serrano and other employment-related litigation, environmental reserves and tax contingencies, for which the filing does not provide a clear maximum exposure.