Cintas Corporation — Fiscal 2014 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Cintas provides rental and direct-sale uniforms, first aid, safety and fire protection products and services, document management, restroom and facility services, and related business services primarily in North America. This unaudited Form 10-Q covers the three months ended August 31, 2013, compared with the three months ended August 31, 2012. The quarter had one fewer workday than the prior-year comparable period.
Financial Performance and Key Metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $1,120.3 million | $1,051.3 million | +6.6% |
| Operating income | $140.1 million | $139.3 million | +0.6% |
| Operating margin | 12.5% | 13.3% | Down approximately 80 basis points |
| Income before taxes | $123.6 million | $122.8 million | +0.7% |
| Net income | $77.8 million | $76.7 million | +1.3% |
| Diluted EPS | $0.63 | $0.60 | +5.0% |
| Effective tax rate | 37.1% | 37.5% | Down 40 basis points |
| Operating cash flow | $82.6 million | $94.9 million | Down $12.3 million |
Revenue growth was described as 7.1% organically after adjusting for acquisitions and the one fewer workday. The Rental Uniforms and Ancillary Products segment generated $792.9 million of revenue and $117.4 million of pretax income. Other Services revenue was $327.5 million, including $107.5 million from Uniform Direct Sales, $125.9 million from First Aid, Safety and Fire Protection, and $94.1 million from Document Management.
Revenue growth did not translate proportionally into earnings growth because of higher energy, labor, route-service and other operating costs, as well as the lost workday. Selling and administrative expenses increased 6.3%, below revenue growth, providing some cost leverage.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $278.7 million at August 31, 2013, down from $352.3 million at May 31, 2013. Marketable securities were $4.2 million.
- Operating cash flow of $82.6 million was lower than the prior-year period, primarily because of timing of customer collections and vendor payments.
- Investing cash outflows were $67.0 million, including $37.5 million of capital expenditures and $32.2 million for acquisitions, compared with $2.1 million of acquisition spending in the prior-year quarter.
- Financing cash outflows were $88.9 million, including $107.0 million of common-stock repurchases.
- Long-term debt was approximately $1.309 billion, consisting principally of fixed-rate senior notes. No commercial paper or revolving-credit borrowings were outstanding.
- The company had a $300 million commercial paper program supported by a revolving credit facility with an accordion capacity of up to $450 million and a maturity date of October 6, 2016.
- Cintas stated that it was in compliance with all significant debt covenants. The company’s disclosed ratings had stable outlooks: S&P commercial paper A-2 and long-term debt BBB+; Moody’s commercial paper P-1 and long-term debt A2.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 6.6%, with growth across all operating segments. Acquisitions contributed to growth in First Aid, Safety and Fire Protection and Document Management.
- Rental Uniforms and Ancillary Products gross margin declined to 42.6% from 43.3%, primarily due to the one fewer workday, higher energy costs and higher route-service costs.
- Uniform Direct Sales gross margin declined to 27.7% from 29.4%, primarily because of a greater mix of lower-margin national-account revenue.
- First Aid, Safety and Fire Protection gross margin improved to 43.6% from 43.1%, supported by lower energy costs, fixed-cost leverage and a more favorable revenue mix.
- Document Management gross margin declined to 45.9% from 49.1%, primarily because average recycled-paper prices fell approximately 25%, reducing recycled-paper revenue.
- Net income increased only 1.3%, while diluted EPS rose 5.0%, aided by the reduction in weighted-average shares from share repurchases.
- The company purchased 2.1 million shares for $100.8 million during the quarter. A new $500 million repurchase authorization was approved on July 30, 2013, without an expiration date.
- Cintas adopted ASU 2013-02 regarding presentation of accumulated other comprehensive income. Management stated that there were no material changes in accounting policies.
Guidance, Outlook, Commentary and Risks
The filing does not provide specific quantitative revenue or earnings guidance. Management described its strategy as increasing penetration of existing customers, expanding the customer base, broadening product and service offerings, pursuing geographic expansion and evaluating acquisitions. Management stated that operating cash flows, existing liquidity and access to debt markets were expected to fund operations, expansion, dividends and share repurchases.
Management identified risks including higher energy, fuel, labor, medical and sourcing costs; lower sales volumes; customer outsourcing; acquisition integration; union activity; employment and safety regulations; environmental liabilities; information-system disruptions; litigation; tax and labor-law changes; extraordinary events; and the timing of share repurchases.
Cintas remains involved in employment-discrimination litigation, including the Serrano matter involving alleged discrimination against women in hiring. The Supreme Court denied Cintas’s petition for review on October 7, 2013, leaving the claims to proceed in the district court. Management stated that potential liability is not currently determinable and that an adverse outcome could be material. In the Avalos matter, the Sixth Circuit affirmed denial of class certification on May 30, 2013.
The company reported effective disclosure controls as of August 31, 2013, with no changes in internal control over financial reporting that materially affected or were reasonably likely to materially affect those controls.
Most Important Facts for Investors to Verify
- Whether revenue growth and acquisition activity can offset pressure on Rental and Document Management margins.
- The sustainability of operating cash flow, particularly after the increase in acquisition spending and continued share repurchases.
- Debt covenant compliance, refinancing needs and continued access to commercial paper and long-term debt markets.
- The financial impact and timing of the Serrano and other employment-related litigation.
- Whether recycled-paper prices, energy costs, labor costs and route-service expenses continue to affect segment profitability.
- The remaining authorization and actual pace of share repurchases, including the new $500 million program.
- The effect of the one fewer workday in the quarter and whether subsequent periods normalize that comparison.