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Cintas Comfortably Beats on Q2 Earnings

Zacks Equity Research

Cintas Corporation’s (CTAS) record second quarter fiscal 2014 (ended Nov 30, 2013) earnings of 70 cents per share beat the Zacks Consensus Estimate by a couple of cents and compared favorably with the year-ago tally of 63 cents a share. The 11.1% year-over-year increase in earnings was primarily attributable to a healthy improvement in the top-line and reduced outstanding shares. Net income for the reported quarter aggregated $84.9 million compared with $78.0 million in the year-earlier quarter.

Total quarterly revenue increased 7.9% year over year to $1.14 billion, slightly ahead of the Zacks Consensus Estimate of $1.11 billion. Organic growth (adjusted for the impact of acquisitions) aggregated 7.1% with a strong execution of operational plans, stringent cost-control measures and improvement in efficiency levels.

Operating income in the reported quarter climbed 10.0% to $153.0 million. Operating margin was 13.4% compared with 13.1% in the year-earlier quarter.

Segment Performance

Rental Uniforms and Ancillary Products revenues for the quarter improved 6.4% year over year to $804.3 million, accounting for 70% of the total company revenue. Organic growth of the segment was 6.4%. Gross margin increased to 42.9% from 41.9% in the year-ago quarter due to improved efficiency levels from added route capacity.

Revenues for Uniform Direct Sales were $121.9 million (up 10.6% year over year) and accounted for 11% of the company’s revenues. Gross margin improved to 28.8% from 27.4% in the year-ago quarter due to a greater mix of hospitality account sales and better leveraging of distribution network infrastructure.

First Aid, Safety and Fire Protection Services revenues climbed 11.7% to $124.6 million, representing 11% of the company’s total revenue. Gross margin improved 100 bps year over year to 43.4% by leveraging infrastructure facilities for an improved mix of higher-margin sale items. Organic growth for the segment totaled 8.8%.

Revenues for Document Management Services segment increased 12.2% year over year to $93.0 million, accounting for 8% of the total company revenue. Gross margin for the segment was 45.7%, up from prior-year tally of 45.4%. Organic revenue increased 6.9% year over year. Average recycled paper prices were $125 per ton, down 17% from the year-ago period.

Financial Position

Cintas has a solid financial position with adequate liquidity. Cash and cash equivalents were $309.3 million at quarter-end. Capital expenditures for the quarter were $39.3 million. Cintas expects capital expenditures for fiscal 2014 to be in the range of $225 million to $250 million. Long-term debt was $1.31 billion as of Nov 30, 2013. Cash flow from operations totaled $140.0 million for the reported quarter compared with $132.0 million in the year-ago period. Free cash flow for the first half of fiscal 2014 increased to $145.5 million from $128.2 million in the year-earlier period.

During the reported quarter, Cintas purchased 1.2 million shares as part of its share repurchase program. As of Dec 19, 2013, Cintas had $505 million worth of shares available to purchase under the July 2013 program.

Cintas paid an annual dividend of 77 cents per share, which represented a 20.3% year-over-year increase from last year’s annual payout of 64 cents. Since its inception, Cintas has consistently increased its dividend and the current dividend payout is its 31st consecutive dividend.

Fiscal 2014 Outlook

For fiscal 2014, Cintas updated its revenue guidance in the range of $4.525 billion-$4.575 billion from $4.5 billion-$4.6 billion expected earlier, assuming no further deterioration of the U.S. economy and no additional share repurchases. Earnings guidance was also revised from its earlier range of $2.70-$2.79 per share to $2.73-$2.79.

Moving Forward

Although Cintas’ second quarter fiscal 2014 results beat the overall estimates, it failed to generate much interest among investors as share pries remained almost flat after the earnings release.

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. We also remain encouraged about the relatively strong quarterly performance of the company.

Cintas presently has a Zacks Rank #2 (Buy). Other companies in the industry worth reckoning include ITT Corporation (ITT), CLARCOR Inc. (CLC) and Raven Industries Inc. (RAVN), each carrying a Zacks Rank #2 (Buy).

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