CINTAS CORP quarterly report, Q3 FY2014

Cintas Corporation Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended February 28, 2014, compared with the corresponding periods ended February 28, 2013. The request labels this as “2013 Q3,” but the filing reports fiscal 2014 third-quarter results. Financial statements are unaudited.

Business Context

Cintas provides uniform rental and direct-sales programs and related business services, including facility services, first aid, safety and fire protection, and document management. Operations are organized into four operating segments: Rental Uniforms and Ancillary Products; Uniform Direct Sales; First Aid, Safety and Fire Protection Services; and Document Management Services.

Financial Performance and Liquidity

Metric	Three months ended Feb. 28, 2014	Three months ended Feb. 28, 2013	Nine months ended Feb. 28, 2014	Nine months ended Feb. 28, 2013
Revenue	$1,130.2 million	$1,075.7 million	$3,394.3 million	$3,187.4 million
Operating income	$150.2 million	$133.0 million	$443.2 million	$411.3 million
Net income	$84.6 million	$74.7 million	$247.2 million	$229.5 million
Diluted EPS	$0.69	$0.60	$2.02	$1.83
Cash flow from operations	Not separately provided	Not separately provided	$385.8 million	$368.3 million

Third-quarter revenue increased 5.1%, including a 1.6% benefit from one additional workday. Organic growth was 3.1%, while acquisitions contributed 0.4%.
Nine-month revenue increased 6.5%, consisting of 5.8% organic growth and 0.7% acquisition-related growth.
Third-quarter operating margin increased to approximately 13.3% from 12.4%; net margin increased to approximately 7.5% from 6.9%. Nine-month operating margin was approximately 13.1% versus 12.9%, and net margin was approximately 7.3% versus 7.2%.
Third-quarter net income rose 13.2% and diluted EPS rose 15.0%. Nine-month net income increased 7.7% and diluted EPS increased 10.4%, aided by lower weighted-average shares following repurchases.
Operating cash flow increased $17.4 million, or approximately 4.7%, for the nine-month period. Capital expenditures were $113.6 million and acquisitions used $33.0 million.
Cash and cash equivalents were $348.9 million at February 28, 2014, compared with $352.3 million at May 31, 2013. Marketable securities were $4.8 million. Approximately $42.9 million of cash and marketable securities was held outside the United States.
Long-term debt, including current maturities, was approximately $1.301 billion. The company had no commercial paper or revolving-credit borrowings outstanding and had access to a $300.0 million commercial paper program backed by a revolving facility expandable to $450.0 million.
Cintas paid $93.3 million in dividends and repurchased $164.5 million of common stock during the first nine months. Approximately $500 million remained available under the October 2011 repurchase authorization; a separate $500 million authorization approved in July 2013 had no activity.

Material Changes Versus Prior Comparable Period

Rental Uniforms and Ancillary Products revenue increased 7.1% in the quarter and 6.2% for nine months. The segment benefited from new business, route efficiencies and greater coverage of fixed costs; its third-quarter pretax margin increased to 16.0% from 13.7%.
Uniform Direct Sales revenue decreased 14.6% in the quarter because the prior-year period included Cintas’s largest uniform-program rollout. Nine-month revenue was essentially flat, while nine-month pretax margin declined to 9.4% from 10.5%.
First Aid, Safety and Fire Protection Services revenue increased 12.3% in the quarter and 12.5% for nine months, including acquisition growth. Severe winter weather constrained activity and pressured quarterly margins.
Document Management Services revenue increased 7.2% in the quarter and 9.9% for nine months, but lower recycled-paper prices reduced gross margins and pretax profitability. Nine-month pretax margin declined to 2.4% from 4.5%.
Quarterly selling and administrative expense increased 6.5%, primarily from labor and employee-related costs and legal and professional fees associated with the proposed Shred-it transaction.
The effective tax rate increased to 36.8% from 36.1% for the quarter and to 37.3% from 36.7% for nine months, partly because the prior-year rate benefited from a favorable tax-regulation change.
Foreign currency translation produced a $3.7 million year-to-date other comprehensive loss, compared with a $0.5 million gain in the prior-year period.

Outlook, Unusual Items, Risks and Contingencies

No specific earnings or revenue guidance is provided in the filing. Management expects operating cash flow, existing cash, debt-market access and available credit facilities to fund operations, expansion, dividends and potential repurchases.
On March 18, 2014, Cintas agreed to combine its document-shredding business with Shred-it’s business in a new partnership. Cintas is expected to own 42%, receive approximately $180 million in cash at closing, and account for the investment under the equity method. Closing was expected before May 31, 2014, subject to customary conditions. Any gain would be recognized when the transaction closes.
Cintas’s document-shredding business represented approximately 76% of Document Management Services assets, 80% of revenue and 70% of pretax income for the quarter.
Key operating risks include severe weather, lower sales volumes, labor and energy costs, recycled-paper prices, foreign-exchange movements, acquisition integration, customer outsourcing, regulatory compliance, information-system disruptions and litigation.
The Serrano employment-discrimination litigation remains pending after the Supreme Court declined review and the matter was remanded. Management states that any potential liability is not currently determinable and could be material if resolved adversely.
In April 2014, Cintas agreed in principle to settle EPA allegations involving permitting requirements at three rental-processing plants. The settlement is expected to include a $150,000 civil penalty and additional permitting and recordkeeping requirements.
Management represented that Cintas was in compliance with significant debt covenants and that disclosure controls were effective as of February 28, 2014. No material changes to internal control over financial reporting were identified.

Facts Investors Should Verify

Whether the Shred-it partnership closed on the expected timetable, the amount and accounting treatment of any transaction gain, and the partnership’s subsequent contribution to earnings.
The sustainability of Rental Uniforms’ margin expansion and the effect of workday timing on reported growth.
Recovery in Uniform Direct Sales following the prior-year one-time national rollout comparison.
Trends in recycled-paper prices and profitability in Document Management Services.
Impact of weather, acquisitions, labor and fuel costs, foreign-exchange movements and enterprise-software investments on future margins.
Status and potential exposure from the Serrano litigation and other employment, environmental and regulatory matters.
Future capital allocation among debt repayment, dividends, acquisitions and share repurchases, together with compliance with debt covenants and access to investment-grade financing.