Cintas Corporation No. 2 -- Moody's affirms Cintas' senior unsecured at A3, short term at Prime-2; outlook stable
Rating Action: Moody's affirms Cintas' senior unsecured at A3, short term at Prime-2; outlook stable
Global Credit Research - 13 Aug 2020
$2.45 billion of rated debt affirmed
New York, August 13, 2020 -- Moody's Investors Service ("Moody's") affirmed Cintas Corporation No. 2's (together with indirect parent and publicly traded Cintas Corporation, "Cintas") long term senior unsecured rating at A3 and the short term commercial paper rating at Prime-2. The outlook remains stable.
RATINGS RATIONALE
"Despite anticipated revenue pressure from the impact of the coronavirus pandemic to its uniform services customer base, we anticipate modest financial leverage and solid free cash flow generation over the next 12 to 18 months, leading to the affirmation of the A3 long term and Prime-2 short term ratings and stable outlook," said Edmond DeForest, Moody's Vice President and Senior Credit Officer.
The A3 senior unsecured rating reflects Cintas's leadership position in the specialized uniform rental sector, a diverse and national customer base and good revenue visibility derived from long term customer contracts. Moody's anticipates debt to EBITDA of around 1.7 as of May 31, 2020 will rise toward 2 times over the next 12 to 18 months, driven by expected 6% to 8% revenue declines. Reduced demand from uniform services customers whose operations have been adversely impacted by the coronavirus will pressure revenue until the effects of the pandemic wane. However, Moody's expects expense management initiatives, capital investment reductions and working capital liquidation should drive free cash flow of well over $500 million, approaching 20% of debt. EBITA margins around 18% reflect full recognition of cost and efficiency gains related to the integration of G&K Services, Inc. ("G&K"), purchased for $2.2 billion in 2017. Profits are concentrated as Cintas relies on its uniform businesses for over 75% of its revenue and profitability. Although smaller than the uniform segment, the First Aide & Safety business has experienced growth driven in part by increased demand for personal protective equipment and sanitization products following the rise of the pandemic.
All financial metrics cited reflect Moody's standard analytical adjustments.
The rapid spread of the coronavirus outbreak, weak global economic outlook, low oil prices and other asset price volatility have created a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The uniform services sector has been significantly and adversely impacted by the shock. Cintas's revenue is concentrated in the uniform services sector, leaving it vulnerable to shifts in market sentiment in these unprecedented operating conditions. Cintas remains vulnerable to the outbreak continuing to spread. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
Although Cintas operates with a more moderate revenue scale than many other companies also rated at A3, its extensive network of almost 500 mostly-owned laundry and manufacturing facilities and distribution centers throughout North America, thousands of vehicles and Moody's estimates a roster of approaching 1 million customers, most of whom are under long term contracts, evidences deep operating scale. Cintas' infrastructure and scale are key competitive advantages over smaller providers. Moody's expectation for Cintas to maintain higher rates of profitability than its direct competitors provides additional support for the ratings.
Cintas operates hundreds of facilities and thousands of trucks and other vehicles and must comply with a variety of national, state and local regulations governing its use and disposal of water, consumption of energy and generation of noise and vibration in its facilities. The most restrictive of these laws and rules concern the treatment and disposal of waste water. Cintas has a solid compliance track record with respect to environmental matters. Moody's considers environmental risks moderate and well managed.
Cintas is a business services company with limited consumer interaction. In addition to the social risk impacts from the coronavirus pandemic, there are social risks associated with labor relations and the potential for wider unionization of its workforce. Only about 1,600 of Cintas's approximately 40,000 employees are unionized. Cintas believes that an increase in union representation could reduce the company's flexibility to interact with its employees directly and manage its cost structure, which could lead to increased operating costs.
Although Cintas is a public company, the founding family retains an over 15% equity stake, with the remainder publicly-held, mostly by large, institutional investors. The founding family also has a leading role in the management of the company, including its CEO and board chair. However, the board of directors is controlled by independent directors.
The company incurred or assumed around $2.2 billion of debt when it acquired G&K in 2017, which Moody's considered opportunistic and aggressive, and is a frequent and large buyer of its own shares. However, Moody's considers Cintas's debt burden modest given the company's strong business and financial profile. Cintas also pays a regular annual cash dividend to shareholders. Given the company's long history of transparency, Moody's considers governance risk low despite the company's emphasis on returning cash to its shareholders through dividends and share repurchases and recent debt-financed acquisition activity.
Moody's considers Cintas's liquidity profile excellent. Moody's expects free cash flow of over $500 million, full availability under the company's $1 billion revolver due 2024 (unrated) and balance sheet cash and short term investments of at least $100 million throughout fiscal 2021.
The stable rating outlook reflects Moody's expectations for over $500 million of free cash flow and debt to EBITDA around 2 times.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if: 1) Cintas demonstrates sustained revenue and earnings growth over a period of years; 2) business line diversity increases substantially through the growth of existing or addition of new business segments; 3) Moody's expects debt to EBITDA will be maintained below 1.5 times; and 4) Moody's anticipates Cintas will maintain conservative financial policies.
The ratings could be downgraded if: 1) Cintas fails to generate anticipated levels of revenue, profitability or free cash flow; 2) EBIT margins are sustained below 12%, or become volatile; 3) Moody's expects debt to EBITDA to remain above 2.5 times; or 4) Cintas shifts to more aggressive financial policies.
Moody's took the following rating actions and made the following outlook statement:
..Issuer: Cintas Corporation No. 2
....Backed Senior Unsecured Commercial Paper, Affirmed at P-2
....Backed Senior Unsecured Regular Bond, Affirmed at A3
....Outlook, Remains Stable
Cintas is the largest provider of uniform programs in North America, as well as a provider of entrance mats, restroom products and services, first aid, safety and fire protection products and services and branded promotional products to business customers. Moody's expects revenues for fiscal 2021 (ends May 31) of over $6.5 billion.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Edmond DeForest VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Karen Nickerson Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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