Cintas' Q1 Earnings Miss by a Penny

Zacks

Cintas Corporation (CTAS) reported first quarter fiscal 2014 (ended Aug 31, 2013) net income of $77.8 million or 63 cents per share compared with $76.7 million or 60 cents per share in the year-earlier quarter. While absolute earnings increased 1.3% year over year, it increased 5.0% on a per share basis. However, the reported earnings missed the Zacks Consensus Estimate by a penny.

Total quarterly revenue increased 6.6% year over year to $1.12 billion, slightly ahead of the Zacks Consensus Estimate of $1.11 billion. Taking into account the effect of one less workday in the reported quarter compared with prior-year, total revenue improved 8.2% year over year.

Organic growth (adjusted for the impact of acquisitions and one less workday) was 7.1% with a strong execution of operational plans, stringent cost-control measures and improvement in efficiency levels. Each of the four operating segments reported organic growth of over 6%.

Operating income in the reported quarter climbed 0.6% to $140.1 million. Operating margin was 12.5% in first quarter fiscal 2014 compared with 13.2% in the year-ago quarter due to adverse effects of one less workday, added route capacity and lower recycled paper prices.

Segment Performance

Rental Uniforms and Ancillary Products revenues for the quarter improved 5% year over year to $792.9 million, accounting for 71% of the total company revenue. Organic growth of the segment was 6.7%. Gross margin decreased to 42.6% from 43.3% in the year-ago quarter due to the adverse effect of higher material and service costs associated with added route capacity.

Revenues for Uniform Direct Sales were $107.5 million (up 7.2% year over year) and accounted for 10% of the company’s revenues. Gross margin decreased to 27.7% from 29.4% in the year-ago quarter.

First Aid, Safety and Fire Protection Services revenues climbed 13.6% to $125.9 million, representing 11% of the company’s total revenue. Gross margin improved 50 bps year over year to 43.1% by leveraging infrastructure facilities for an improved mix of higher-margin sale items.

Revenues for Document Management Services segment increased 10.3% year over year to $94.1 million, accounting for 8% of the total company revenue. Gross margin for the segment was 45.9%, down from prior-year tally of 49.1%.

Financial Position

Cintas has a solid financial position with adequate liquidity. Cash and cash equivalents were $278.7 million at quarter-end. Long-term debt was $1.31 billion as of Aug 31, 2013. Cash flow from operations was $82.6 million for the reported quarter compared with $94.9 million in the year-ago period. Free cash flow decreased to $45.1 million in the quarter from $47.4 million in the year-earlier quarter.

During the reported quarter, Cintas purchased 2.1 million shares for $100.7 million as part of its share repurchase program. Subsequent to the quarter-end, the company purchased 0.9 million shares for approximately $46.3 million. The share buyback is likely to positively benefit fiscal year 2014 earnings by approximately 4 cents per share. As of Sep 19, 2013, Cintas had $15.4 million worth of shares available to purchase under the Oct 2011 share buyback program and $500.0 million under the Jul 2013 program.

Fiscal 2014 Outlook

For fiscal 2014, Cintas reiterated its revenue guidance in the range of $4.5 billion-$4.6 billion with continued softness in the market due to several factors including the Affordable Care Act. However, keeping in view its share repurchases, earnings guidance were increased from its earlier range of $2.66-$2.75 to $2.70-$2.79 per share.

Moving Forward

Cintas continues to deliver organic growth through superior execution of its operational plans. The company witnessed top-line growth across all the segments in the reported quarter and expects to continue this bull run in the coming quarters as well, albeit at a moderate pace. We also remain encouraged about the relatively strong quarterly and fiscal performances of the company.

Cintas presently has a Zacks Rank #3 (Hold). Other notable companies in the industry include ITT Corporation (ITT), LSB Industries Inc. (LXU) and Federal Signal Corp. (FSS), each carrying a Zacks Rank #2 (Buy).

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