Cintas Corporation — Fiscal 2019 Second-Quarter Form 10-Q Summary
Business context and reporting period
Cintas provides uniform rental and facility services, first aid and safety services, fire protection services, and uniform direct sales, primarily in North America. This filing covers the three and six months ended November 30, 2018, compared with the corresponding periods in 2017. The financial statements are unaudited. The former Discontinued Services business is presented as discontinued operations for all periods.
Key financial metrics
| Metric | Three months ended Nov. 30, 2018 | Three months ended Nov. 30, 2017 | Six months ended Nov. 30, 2018 | Six months ended Nov. 30, 2017 |
|---|---|---|---|---|
| Total revenue | $1.718 billion | $1.606 billion | $3.416 billion | $3.218 billion |
| Operating income | $275.6 million | $235.2 million | $540.9 million | $484.3 million |
| Operating margin | 16.0% | 14.6% | 15.8% | 15.0% |
| Net income | $243.0 million | $137.1 million | $455.5 million | $354.3 million |
| Diluted EPS | $2.18 | $1.23 | $4.07 | $3.19 |
| Cash flow from operations | Not separately reported | Not separately reported | $344.6 million | $379.0 million |
- Six-month revenue increased 6.2%; management reported organic growth of 6.1%, with a 0.3% acquisition benefit and a 0.2% foreign-currency headwind.
- Uniform Rental and Facility Services revenue increased 5.6% for the six-month period, while First Aid and Safety Services revenue increased 9.7%.
- Six-month net income from continuing operations was $455.5 million, up 52.4%; diluted continuing-operations EPS increased 51.3% to $4.07.
- The effective tax rate on continuing operations declined to 18.9% from 29.8% for the six-month period, reflecting the Tax Cuts and Jobs Act and discrete items.
- Capital expenditures were $137.6 million, including $109.8 million for Uniform Rental and Facility Services expansion.
- Cash and cash equivalents were $88.5 million at November 30, 2018, versus $138.7 million at May 31, 2018. No marketable securities were held at quarter-end.
- Total debt was approximately $2.710 billion, including $173.5 million of commercial paper and $2.536 billion of debt due after one year. The company had no revolving-credit borrowings and access to a $600 million revolving facility.
Material changes versus the prior comparable period
- Second-quarter revenue rose 7.0% and operating income rose 17.2%. The six-month increases were 6.2% and 11.7%, respectively.
- Uniform Rental and Facility Services second-quarter gross margin improved to 45.3% from 44.7%; segment income before taxes increased 19.2% to $242.9 million.
- First Aid and Safety Services second-quarter revenue rose 10.3% and gross margin improved to 48.0% from 46.9%; segment income before taxes increased 18.6% to $21.3 million.
- Net interest expense declined to $24.5 million from $28.8 million in the quarter and to $48.3 million from $58.9 million for six months, primarily because of lower debt following repayment of $300 million of senior notes maturing in December 2017.
- Operating cash flow declined $34.4 million for six months, primarily because of unfavorable working-capital changes, including increases in receivables, inventory, rental items in service, and capitalized contract costs.
- Financing cash outflows included $508.1 million of common-stock repurchases. A new $1.0 billion repurchase authorization was approved in October 2018 after completion of the prior $500 million program.
Guidance, outlook, risks and unusual items
- The filing does not provide specific quantitative revenue, earnings, or margin guidance. Management describes continued growth through customer retention, new business, cross-selling, geographic expansion, and acquisitions.
- Cintas adopted ASC 606 effective June 1, 2018 using the modified-retrospective method. The adoption increased reported six-month net income by $8.9 million and diluted EPS by $0.08 versus historical guidance, with no impact on operating cash flow.
- The company recorded a $69.4 million pretax gain on the sale of a cost-method investment, contributing approximately $0.47 to quarterly and year-to-date diluted EPS after tax.
- G&K Services integration expenses were $7.8 million for the quarter and $12.7 million for six months, reducing six-month diluted EPS by approximately $0.09. Remaining employee termination benefits were expected to be paid during the remainder of fiscal 2019.
- The company expects adoption of the new lease standard on June 1, 2019 to materially increase balance-sheet assets and liabilities, but does not expect a material effect on income or cash flow statements.
- Key disclosed risks include G&K integration and synergy execution, labor and material costs, fuel and energy costs, customer loss, acquisitions, foreign exchange, tariffs, regulatory and tax changes, cybersecurity, SAP implementation, litigation, environmental matters, and access to debt markets.
- Management stated that ordinary-course litigation and claims are not expected to have a material adverse effect. Cintas was in compliance with its debt covenants at November 30, 2018.
- The annual cash dividend was increased 26.5% to $2.05 per share and paid December 7, 2018.
Most important facts for investors to verify
- Separate recurring operating performance from the $69.4 million investment-sale gain, lower tax rate, and declining G&K integration costs.
- Assess whether organic growth and segment margin improvements continue after the effects of acquisitions, currency movements, and ASC 606 adoption.
- Monitor working-capital investment and the conversion of higher earnings into operating cash flow.
- Evaluate leverage, commercial-paper reliance, debt maturities, covenant headroom, and continued access to investment-grade debt markets.
- Track the pace and valuation of the new $1.0 billion share-repurchase program and its effect on liquidity and share count.
- Review the eventual balance-sheet impact of ASC 842 lease adoption and the remaining costs and benefits of G&K integration.