Cintas Corporation Form 10-Q Summary
Reporting period: Three and nine months ended February 29, 2020, compared with February 28, 2019. Although the request identifies 2019 Q3, the filing is Cintas’ fiscal 2020 third-quarter report. Results are unaudited and presented in thousands except per-share data.
Business Context and Reporting Period
Cintas provides uniform rental and facility services, first aid and safety products and services, fire protection services, and uniform direct sales. More than 95% of revenue is generated from recurring route-based servicing contracts. Reportable segments are Uniform Rental and Facility Services and First Aid and Safety Services; fire protection and uniform direct sales are included in All Other.
Financial Performance and Position
| Metric | Q3 FY2020 | Q3 FY2019 | Change |
|---|---|---|---|
| Total revenue | $1,810.6 million | $1,682.3 million | +7.6% |
| Operating income | $314.7 million | $278.3 million | +13.1% |
| Operating margin | 17.4% | 16.5% | +90 bps |
| Net income | $234.5 million | $203.3 million | +15.3% |
| Diluted EPS | $2.16 | $1.85 | +16.8% |
| Metric | Nine months FY2020 | Nine months FY2019 | Change |
|---|---|---|---|
| Total revenue | $5,465.5 million | $5,098.6 million | +7.2% |
| Operating income | $955.3 million | $819.1 million | +16.6% |
| Operating margin | 17.5% | 16.1% | +140 bps |
| Income from continuing operations | $731.8 million | $656.5 million | +11.5% |
| Diluted EPS from continuing operations | $6.76 | $5.91 | +14.4% |
- Q3 Uniform Rental and Facility Services revenue increased 6.6% to $1,448.0 million, with 4.8% organic growth. Segment gross margin increased to 45.8% from 44.9%.
- Q3 First Aid and Safety Services revenue increased 14.3% to $170.5 million, with 12.5% organic growth. Gross margin declined slightly to 48.0% from 48.2% because lower-margin safety and personal protective equipment sales grew faster.
- Nine-month revenue growth was primarily organic: 7.1% overall, including 6.0% for Uniform Rental and Facility Services and 12.3% for First Aid and Safety Services.
- Nine-month net cash provided by operating activities was $934.5 million, compared with $670.7 million in the prior-year period. Capital expenditures were $189.4 million, and acquisitions used $47.9 million.
- Cash and cash equivalents were $234.4 million at February 29, 2020, compared with $96.6 million at May 31, 2019.
- Total debt was approximately $2.74 billion, consisting of $199.8 million due within one year and $2.54 billion due thereafter. No commercial paper or revolving-credit borrowings were outstanding at quarter-end.
- The revolving credit facility capacity was increased to $1.0 billion. The company had a $200.0 million term loan maturing May 23, 2020 and stated that it intended to seek a 12-month extension, subject to lender agreement.
- The company was in compliance with all debt covenants. Debt ratings were investment grade: S&P commercial paper A-2 and long-term debt A-; Moody’s commercial paper P-2 and long-term debt A3.
- The effective tax rate on continuing operations was 18.9% in Q3 and 16.5% for the nine-month period, compared with 20.1% and 19.3%, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, net income and diluted EPS increased, supported by higher sales volume, new business, deeper penetration of products and services, pricing, and process efficiencies.
- Operating margins improved as cost of sales and selling and administrative expenses declined as percentages of revenue.
- Prior-year results included $0.8 million of Q3 and $13.5 million of nine-month G&K Services integration expenses; no such expenses were recorded in FY2020.
- The prior-year nine-month period included a $69.4 million pretax gain on the sale of a cost-method investment, which did not recur in FY2020.
- Cash flow from operations increased by $263.8 million, while share repurchases declined substantially from the prior-year period. Nine-month FY2020 repurchases totaled $261.3 million, compared with $608.2 million in FY2019.
- Cintas adopted the new lease standard on June 1, 2019, recognizing $168.0 million of right-of-use assets and $173.4 million of lease liabilities. Management stated that adoption did not materially affect income or cash flow.
- The company authorized a new $1.0 billion share-repurchase program in October 2019. No purchases had been made under that program through February 29, 2020.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear quantitative revenue, earnings or margin guidance target.
- COVID-19 had not significantly affected results through February 29, 2020, but management stated that the pandemic began affecting operations in March 2020 and could materially adversely affect demand, customers, employees, facilities, supply chains, results of operations and liquidity. Cintas stated that its U.S. business was designated essential, allowing it to serve customers that remained open.
- Management identified potential difficulty or higher cost in accessing commercial paper and long-term debt markets because of COVID-19-related capital-market disruption. The company also identified refinancing of the $200.0 million term loan as an upcoming liquidity consideration.
- Key continuing risks include economic weakness, customer shutdowns, labor and medical costs, fuel and energy prices, supplier and sourcing disruptions, tariffs, foreign currency exposure, cybersecurity and systems interruptions, litigation, regulatory compliance, acquisition integration and catastrophic events.
- Two purported class actions were disclosed: a securities action alleging misstatements concerning margins, earnings guidance and regulatory compliance, and an ERISA action alleging improper management of employee retirement-plan costs. The company and other defendants deny liability.
- Management stated that ordinary-course legal proceedings and claims are not expected to have a material adverse effect, but the filing does not provide a quantified exposure for the disclosed class actions.
- Other unusual items include a $57.6 million nine-month other comprehensive loss, primarily from changes in the fair value of interest-rate locks, and $116.9 million of interest-rate-lock liabilities at quarter-end.
Most Important Facts for Investors to Verify
- Subsequent-quarter revenue, margins, customer retention and service volumes after COVID-19-related business closures began.
- Whether the $200.0 million term loan was extended or refinanced by its May 23, 2020 maturity date.
- Actual liquidity availability and commercial-paper access during capital-market disruption.
- Progress and remaining authorization under the October 2018 and October 2019 share-repurchase programs.
- Developments, potential costs and insurance coverage related to the securities and ERISA class actions.
- The eventual impact of COVID-19 on accounts receivable, inventory, supply availability, deferred contract costs and goodwill impairment risk.
- The impact of adopting the expected-credit-loss standard scheduled for June 1, 2020; the filing states that the effect was still under evaluation.