Cintas Corporation — Form 10-Q Summary
Business Context and Reporting Period
Cintas provides uniform rental and direct-sales programs, first aid, safety and fire protection services, document management, and related business services primarily in North America. This unaudited quarterly report covers the three and six months ended November 30, 2010, the second quarter of fiscal 2011, compared with the corresponding fiscal 2010 periods.
Key Financial Metrics
| Metric | Three Months Ended Nov. 30, 2010 | Year-over-Year Change | Six Months Ended Nov. 30, 2010 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $936.6 million | +5.9% | $1.860 billion | +4.8% |
| Operating income | $102.3 million | -3.8% | $202.6 million | -1.3% |
| Net income | $55.9 million | -2.3% | $117.1 million | +5.4% |
| Diluted EPS | $0.38 | +2.7% | $0.78 | +8.3% |
| Net cash from operations | Not separately provided | — | $109.2 million | Down from $294.2 million |
- Approximate operating margin was 10.9% for the quarter and 10.9% for the six-month period, versus approximately 12.0% and 11.6%, respectively, in the prior comparable periods.
- Approximate net margin was 6.0% for the quarter and 6.3% for the six-month period.
- Net interest expense was $11.8 million for the quarter and $23.5 million for the six-month period, modestly below the prior-year amounts.
- The effective tax rate decreased to 38.3% for the quarter and 34.6% for the six months, compared with 39.3% and 38.7%, respectively, primarily due to the closure of certain tax audits.
- Cash, cash equivalents and marketable securities totaled $284.6 million at November 30, 2010, including approximately $152 million held outside the United States.
- Total debt was approximately $787.0 million, consisting primarily of $775.0 million of fixed-rate notes; the debt-to-capitalization ratio was 24.7%, compared with 23.7% at May 31, 2010.
- The company had no commercial paper or revolving-credit borrowings outstanding at November 30, 2010. Its renewed revolving facility provided $300 million of availability, with an accordion feature permitting capacity of up to $450 million through September 2014.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue growth consisted of 4.2% organic growth and 1.7% acquisition-related growth. Six-month growth consisted of 3.5% organic growth and 1.3% acquisition-related growth.
- Rental Uniforms and Ancillary Products revenue increased 2.2% for the quarter and 1.2% for six months, but segment pretax income declined to $78.1 million and $156.3 million, respectively. Lower margins reflected higher maintenance, energy and selling costs.
- Other Services revenue increased 15.7% for the quarter and 14.3% for six months. Document Management revenue increased 27.9% and 29.3%, respectively, aided by acquisitions and higher recycled-paper prices.
- Uniform Direct Sales revenue increased 9.4% for the quarter and 10.0% for six months, while First Aid, Safety and Fire Protection revenue increased 14.4% and 8.9%, respectively.
- Selling and administrative expense increased 11.1% in both the quarter and six-month period, driven by additional sales personnel, higher professional-services costs related to an enterprise-wide system conversion, and increased bad-debt expense.
- Operating cash flow declined primarily because of increased working-capital requirements as sales volumes improved and the company built inventory ahead of a planned global supply-chain system conversion.
- Investing cash outflows included $88.1 million of capital expenditures and $88.8 million for acquisitions, compared with $48.1 million and $6.6 million, respectively, in the prior-year period.
- Financing cash outflows included $203.2 million of share repurchases. The existing repurchase authorization was completed, and a new $500 million authorization was announced on October 26, 2010; no purchases had been made under the new program as of the filing.
- The company declared a $0.49 annual cash dividend per share, described as a 2% increase from the prior year.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific quantified revenue, earnings or margin guidance. Management expects operating cash flows, debt-market access and available credit to support operations, expansion, acquisitions, dividends and potential share repurchases.
- Subsequent to November 30, 2010, Cintas issued commercial paper for acquisition-related cash needs, with maximum outstanding issuance of approximately $90 million.
- The company accrued approximately $24 million for the Veliz wage-and-hour litigation settlement, with a pretax impact net of insurance proceeds of approximately $19.5 million. Second-quarter fiscal 2010 also included $4.1 million of other legal settlements, net of insurance proceeds.
- Pending employment-discrimination litigation, including Serrano and Avalos, could result in material liability if resolved adversely; the company states that any related estimated liability is not currently determinable.
- Key risks include higher energy, labor, materials and medical costs; lower sales volumes; customer loss from outsourcing; acquisition integration; system-conversion disruptions; bad-debt deterioration; litigation and regulatory matters; tax and labor-law changes; foreign-currency movements; and potential loss of investment-grade credit ratings.
- Management stated that the company was in compliance with all significant debt covenants and that disclosure controls were effective as of November 30, 2010. No material changes to internal control over financial reporting were reported.
Investor Verification Checklist
- Verify the sustainability of organic growth, particularly in Document Management and other non-rental services, excluding the temporary benefit from higher recycled-paper prices.
- Assess whether rental-segment margin pressure from maintenance, energy and selling costs persists.
- Review the conversion-related inventory build, working-capital requirements and subsequent operating cash flow.
- Confirm acquisition purchase prices, integration progress and contribution to revenue and earnings.
- Monitor commercial-paper usage, debt maturities, covenant compliance and credit ratings.
- Track the Veliz settlement and remaining Serrano/Avalos litigation, including potential additional costs.
- Evaluate the impact of share repurchases and the new $500 million authorization on liquidity, leverage and per-share results.