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Cintas' 4Q Earnings Miss by a Whisker

Zacks Equity Research

Cintas Corporation (CTAS) reported strong fiscal fourth quarter 2013 (ended May 31, 2013) results with record revenue and healthy year-over-year increase in earnings. Net income for the reported quarter was $86.0 million or 69 cents per share compared with $78.6 million or 60 cents per share in the year-earlier quarter. While absolute earnings increased 9.4% year over year, it increased 15.0% on a per share basis due to a positive impact from the share buyback program. However, the reported earnings marginally missed the Zacks Consensus Estimate by a penny.

For fiscal 2013, net income rose 6.0% to $315.4 million from $297.6 million in fiscal 2012. On a per share basis, earnings surged 11.0% year over year to $2.52 from $2.27 in fiscal 2012. This is the third consecutive fiscal year in which Cintas recorded a double-digit increase in earnings despite a challenging macroeconomic environment.

Operational Update

Total quarterly revenue increased 7.2% year over year to $1.13 billion, slightly ahead of the Zacks Consensus Estimate of $1.12 billion. Organic growth (adjusted for the impact of acquisitions) was 6.2% with a strong execution of operational plans, which include a diligent focus on stringent cost-control measures and improvement in efficiency levels.  

For fiscal 2013, Cintas generated record revenues of $4.32 billion, which represented a 5.2% increase from the prior fiscal. Taking into account the effect of one less workday in the reported fiscal compared with fiscal 2012, total revenue improved 5.6% year over year. Organic growth for fiscal 2013 was 4.9%.

Segment Performance

Rental Uniforms and Ancillary Products revenues for the quarter improved 4.8% year over year to $785.0 million, accounting for 70% of the total company revenue. Gross margin decreased to 42.1% 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 aggregated $124.7 million (up 12.1% year over year) and accounted for 11% of the company’s revenues. Gross margin remained relatively flat at 30.8%.

First Aid, Safety and Fire Protection Services revenues climbed 15.1% to a record quarterly tally of $125.4 million, representing 11% of the company’s total revenue. Gross margin improved 110 bps year over year to 43.5% by leveraging infrastructure facilities for an improved mix of higher-margin sale items.

Revenues for Document Management Services segment increased 11.3% year over year to a record quarterly total of $94.0 million, accounting for 8% of the total company revenue. Gross margin for the segment was 46.4%.

Financial Position

Cintas has a solid financial position with adequate liquidity. Cash and cash equivalents were $352.3 million at fiscal-end 2013 compared with $339.8 million at fiscal-end 2012. Long-term debt was $1.31 billion as of May 31, 2013 compared with $1.28 billion in the year-ago period. Cash flow from operations was $552.7 million for fiscal 2013, representing a 17.6% increase from the comparable period in the previous fiscal. Cash from operating activities in the reported quarter was $184 million, compared with $162 million in the year-ago quarter.

Fiscal 2014 Outlook

For fiscal 2014, Cintas expects revenue to be 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. Earnings are expected to be in the range of $2.66-$2.75 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 with the relatively strong quarterly and fiscal performances of the company.

Cintas presently has a Zacks Rank #3 (Hold). Other companies in the industry worth reckoning include Macquarie Infrastructure Company LLC (MIC) and Harte-Hanks Inc. (HHS), both carrying a Zacks Rank #2 (Buy), and Heartland Payment Systems, Inc. (HPY) that carries a Zacks Rank #1 (Strong Buy).

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