Cintas Corporation — Form 10-Q Summary
Business context and reporting period
Cintas provides uniform rental and direct sales, first aid, safety and fire protection, document management, and related business services primarily in North America. This unaudited Form 10-Q covers the three months ended August 31, 2011, the first quarter of fiscal 2012, compared with the quarter ended August 31, 2010.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $1,017.2 million | $923.9 million | 10.1% increase |
| Operating income | $128.6 million | $100.2 million | 28.3% increase |
| Operating margin | 12.6% | 10.9% | Approximately 180 basis-point increase |
| Income before taxes | $111.6 million | $88.6 million | 26.0% increase |
| Net income | $68.6 million | $61.3 million | 12.0% increase |
| Diluted EPS | $0.52 | $0.40 | 30.0% increase |
| Net margin | 6.7% | 6.6% | Approximately 10 basis-point increase |
| Operating cash flow | $56.6 million | $35.3 million | $21.3 million increase |
Revenue growth included 7.6% organic growth and 2.5% acquisition-related growth. Rental Uniforms and Ancillary Products revenue rose 9.4% to $719.4 million. Other services revenue rose 11.8% to $297.8 million, including strong growth in Document Management Services and First Aid, Safety and Fire Protection Services.
Cash and cash equivalents were $150.3 million at August 31, 2011, compared with $438.1 million at May 31, 2011. Marketable securities were $126.7 million, producing cash and marketable securities of $277.0 million. Approximately $166.9 million of cash and marketable securities was located outside the United States and was expected to support international operations and expansion.
Investing cash outflows were $82.3 million, including $44.4 million of capital expenditures and $0.9 million for acquisitions. Financing cash outflows were $262.2 million, primarily reflecting $262.6 million of common-stock repurchases. Total debt was approximately $1.286 billion, consisting of $226.0 million due within one year and $1.060 billion due thereafter. The debt-to-capitalization ratio was 37.8%, compared with 35.8% at May 31, 2011.
Cintas had $1.275 billion of fixed-rate senior notes outstanding, with maturities from 2012 through 2036. Its commercial paper program had $300 million of capacity and was supported by a revolving credit facility expandable to $450 million through September 26, 2014. No commercial paper or revolving-credit borrowings were outstanding at August 31, 2011. The company reported compliance with significant debt covenants.
Material changes versus the prior comparable period
- Operating income increased faster than revenue, supported by productivity improvements, customer retention, capacity utilization and cost controls.
- Selling and administrative expenses increased 5.8%, but declined to 30.5% of revenue from 31.8% in the prior-year quarter.
- Net interest expense increased to $17.0 million from $11.7 million, primarily because of the $500 million senior-notes issuance in the fourth quarter of fiscal 2011.
- The effective tax rate increased to 38.5% from 30.8%; the prior-year rate benefited from the closure of certain tax audits.
- Weighted-average diluted shares declined to 131.3 million from 152.2 million because of share repurchases, increasing the benefit to diluted EPS.
- Uniform Direct Sales revenue increased 3.0%, but its gross margin declined to 28.6% from 30.3% because of higher garment material, freight and energy costs. Segment income before taxes declined to $8.4 million from $9.8 million.
- First Aid, Safety and Fire Protection revenue increased 10.9% to $103.7 million, while income before taxes increased to $8.4 million from $3.8 million.
- Document Management Services revenue increased 24.7% to $92.3 million. Growth benefited from acquisitions and a 38% increase in average recycled-paper selling prices; excluding recycled-paper revenue, organic growth was 7.7%.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management stated that it intends to pursue organic growth through greater penetration of existing customers, broader customer coverage, geographic expansion, additional products and services, and selective acquisitions.
Management believed operating cash flow, existing liquidity, and access to commercial-paper and long-term debt markets would be adequate for operating, expansion, dividend and other cash requirements. Credit ratings at August 31, 2011 were Stable/A-2/BBB+ from Standard & Poor’s and Stable/P-1/A2 from Moody’s for commercial paper and long-term debt, respectively.
Key risks include higher energy, material, labor and medical costs; lower sales volumes or customer losses from outsourcing; acquisition integration risks; union activity; employment, labor, safety and environmental compliance; information-system disruptions; tax changes; foreign-currency movements; litigation; and adverse changes in debt ratings or capital-market access.
Cintas completed its $500 million October 2010 share-buyback authorization by purchasing approximately 15.8 million shares through July 29, 2011. The company also paid $1.9 million in July 2011 for future income-tax liabilities of class members related to the Veliz wage-and-hour settlement. The filing states that certain discrimination-related litigation could result in material liability if resolved adversely, although any estimated liability was not determinable.
The company reported effective disclosure controls as of August 31, 2011 and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, particularly Document Management Services growth tied to recycled-paper prices, remains sustainable.
- The effect of higher interest expense and the 2012 maturity of a portion of the senior notes on future cash requirements.
- Cash availability by jurisdiction, including the approximately $166.9 million held outside the United States.
- Future capital allocation following completion of the $500 million share-buyback program.
- Developments and potential financial exposure from the Serrano/Avalos and other employment-related litigation.
- Changes in energy, cotton, freight, labor and other operating costs, especially in Uniform Direct Sales.
- Future tax-audit resolutions and the possible reduction of unrecognized tax benefits, estimated by the filing at up to $13.8 million for fiscal 2012.