Cintas Corporation — Form 10-Q Summary
Business context and reporting period
Cintas provides corporate uniform rental and direct sales, facility services, first aid, safety and fire protection services, and document management services across North America and internationally. This unaudited Form 10-Q covers the three and six months ended November 30, 2011, the second quarter and first half of fiscal 2012, compared with the corresponding fiscal 2011 periods.
Financial performance and key metrics
| Metric | Three months ended Nov. 30, 2011 | Prior year | Six months ended Nov. 30, 2011 | Prior year |
|---|---|---|---|---|
| Revenue | $1.019 billion | $936.6 million | $2.036 billion | $1.860 billion |
| Operating income | $132.7 million | $102.3 million | $261.3 million | $202.6 million |
| Net income | $74.4 million | $55.9 million | $143.0 million | $117.1 million |
| Diluted EPS | $0.57 | $0.38 | $1.09 | $0.78 |
| Operating cash flow | Not separately provided | Not separately provided | $176.0 million | $109.2 million |
- Quarterly revenue increased 8.8%, including 7.0% organic growth and 1.8% acquisition-related growth. First-half revenue increased 9.5%, including 7.3% organic growth and 2.2% acquisition-related growth.
- Quarterly operating margin was approximately 13.0%, compared with 10.9% in the prior year. First-half operating margin was approximately 12.8%, compared with 10.9%.
- Quarterly net margin was approximately 7.3%, compared with 6.0%; first-half net margin was approximately 7.0%, compared with 6.3%.
- Quarterly selling and administrative expenses declined to 29.2% of revenue from 30.8%. First-half selling and administrative expenses declined to 29.8% from 31.3%.
- Net interest expense increased to $17.3 million for the quarter and $34.3 million for the first half, primarily because of $500 million of senior notes issued in the fourth quarter of fiscal 2011.
- Effective tax rate was 35.5% for the quarter, down from 38.3%, but 37.0% for the first half, up from 34.6%. Quarterly improvement reflected the closure of several tax audits.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $207.8 million at November 30, 2011, down from $438.1 million at May 31, 2011. Marketable securities increased to $129.8 million from $87.2 million, producing cash and marketable securities of approximately $337.6 million versus $525.3 million at fiscal year-end.
- Operating cash flow increased $66.7 million year over year, helped by higher earnings, accrued-liability changes and the timing of income-tax payments.
- Investing cash outflows were $142.0 million, including $79.8 million of capital expenditures, $14.6 million for acquisitions and $193.5 million of purchases of marketable securities and investments, partly offset by $140.2 million of securities redemptions.
- Financing cash outflows were $262.1 million, primarily reflecting $262.7 million of common-stock repurchases. Cintas completed its prior $500.0 million repurchase authorization and announced a new $500.0 million authorization in October 2011.
- Total debt was approximately $1.285 billion at November 30, 2011, substantially unchanged from May 31, 2011. Debt due within one year increased to $225.7 million from $1.3 million because of senior notes maturing in June 2012; long-term debt due after one year declined to $1.059 billion from $1.285 billion.
- The company had no commercial paper or revolving-credit borrowings outstanding. Its commercial paper capacity was $300.0 million, supported by a revolving credit facility with an accordion feature up to $450.0 million. The facility maturity was extended to October 6, 2016.
- Management expected to repay the $225 million of senior notes maturing in June 2012 with cash and short-term borrowings, while retaining the option to refinance with long-term debt. Debt-to-EBITDA was 2.0-to-1.0 at November 30, 2011, and the company was in compliance with significant debt covenants.
Material changes versus the prior comparable period
- Rental Uniforms and Ancillary Products revenue rose 9.9% in the quarter and 9.6% year to date. Its quarterly gross margin increased to 43.2% from 42.6%, and pretax margin increased to 14.5% from 11.9%, driven by productivity, customer retention and capacity utilization.
- Uniform Direct Sales revenue increased 2.9% in both periods, but pretax income declined 6.4% for the first half. Margins were pressured by higher cotton, freight and energy costs.
- First Aid, Safety and Fire Protection revenue increased 9.0% in the quarter and 9.9% year to date. Quarterly pretax margin improved to 8.8% from 5.5%, primarily from higher volume and capacity utilization.
- Document Management revenue increased 7.9% in the quarter and 16.2% year to date. Quarterly results were affected by a 16% sequential decline in recycled-paper prices, higher energy costs and a 7.5% decline in European revenue. First-half growth benefited from higher recycled-paper prices and acquisitions.
- Weighted-average diluted shares declined to 129.7 million in the quarter and 130.5 million year to date, compared with 145.5 million and 148.9 million, respectively, primarily because of share repurchases. This amplified EPS growth.
- Comprehensive income declined to $54.0 million for the quarter and $123.4 million for the first half, compared with $66.1 million and $130.3 million, largely because of unfavorable foreign-currency translation adjustments.
Guidance, outlook, risks and unusual items
The filing does not provide specific numerical revenue or earnings guidance. Management stated that operating cash flow, cash resources and available borrowing capacity should fund operations, expansion, debt repayment and other cash requirements.
- Key operating risks include higher energy, fuel, material, labor and medical costs; lower sales volumes; customer losses from outsourcing; acquisition integration costs; union activity; regulatory compliance; foreign-currency movements; and adverse economic conditions, particularly in Europe.
- Document Management is exposed to recycled-paper price volatility. European operations experienced weaker revenue and margins during the quarter.
- Cintas faces employment-discrimination litigation, including the Serrano and Avalos matters. Appeals remained pending, and any potential liability was not determinable. Management stated that ordinary-course claims were not expected to materially affect results, but the specified litigation could be material if resolved adversely.
- Unrecognized tax benefits could decrease by approximately $11.6 million during fiscal 2012 based on possible audit resolutions. The filing does not state that this amount will be realized.
- Management reported effective disclosure controls as of November 30, 2011, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the company funds or refinances the $225 million senior-note maturity due in June 2012 and the effect on interest expense and liquidity.
- Whether organic revenue growth and productivity gains persist amid economic weakness and customer outsourcing trends.
- Exposure to energy, cotton, freight, labor and recycled-paper price inflation, particularly in the Document Management and Uniform Direct Sales segments.
- The outcome and potential financial exposure from the Serrano/Avalos employment litigation and ongoing tax audits.
- The pace and valuation of repurchases under the new $500.0 million authorization, including the impact on diluted EPS and balance-sheet liquidity.
- Foreign-currency effects, especially Canadian-dollar translation, and the availability of cash held outside the United States.