Cintas Marginally Misses on Q3 Earnings

Zacks Equity Research

Cintas Corporation (CTAS) reported third quarter fiscal 2014 (ended Feb 28, 2014) earnings of 69 cents per share versus 60 cents in the year-ago quarter. The 15.0% year-over-year increase in earnings was primarily attributable to a healthy improvement in the top line. However, the reported earnings marginally missed the Zacks Consensus Estimate by a penny. Net income for the reported quarter was $84.6 million compared with $74.7 million in the year-earlier quarter.

Total quarterly revenue increased 5.1% year over year to $1,130 million, slightly below the Zacks Consensus Estimate of $1,137 million. Organic growth (adjusted for the impact of acquisitions) aggregated 3.1%. The improvement in revenue was driven by an increase in sales across all segments, except Uniform Direct Sales.

Operating income in the reported quarter climbed 12.9% to $150.2 million. Operating margin was 90 basis points higher than 12.4% in the year-earlier quarter.

Segment Performance

Rental Uniforms and Ancillary Products revenues for the quarter improved 7.1% year over year to $801.7 million, accounting for 71% of the total revenue. Organic growth of the segment was 5.4%. Gross margin increased to 43.9% from 41.9% in the year-ago quarter due to improved efficiency levels from added route capacity.

Revenues for Uniform Direct Sales were $107.7 million (down 14.6% year over year), accounting for 10% of the company’s revenues. Gross margin was 27.5%, down from 29.2% in the year-ago quarter.

First Aid, Safety and Fire Protection Services revenues climbed 12.3% to $126.7 million, representing 11% of the company’s total revenue. Gross margin fell to 43.5% in the reported quarter from 44.0% in the year-ago quarter due to severe weather conditions, which impacted margin. Organic growth for the segment totaled 9.2%

Revenues for Document Management Services segment stood at $94.1 million, up 7.1% year over year and represented 8% of total revenue.

Cintas announced an agreement for the formation of a new partnership with the shareholders of privately-held document management firm Shred-it International Inc. The agreement provides for the formation of a new company, 42% of which will be owned by Cintas and 58% by the shareholders of Shred-it. Additionally, Cintas will receive approximately $180 million in cash at the closing of the transaction, which is expected to occur before May 31, 2014. The new entity will operate under the Shred-it brand, combining the Document Shredding businesses of both the companies and is expected to have annual revenues in excess of $600 million.

Financial Position

Cintas has a solid financial position with adequate liquidity. Cash and cash equivalents were $348.9 million at quarter end. Capital expenditures for the quarter were $113.6 million. Cintas expects capital expenditures for fiscal 2014 to be in the range of $150 million to $180 million. Long-term debt was $1.4 billion as of Feb 28, 2014. Cash flow from operations totaled $385.8 million for the first nine months of fiscal 2014 compared with $368.3 million in the year-ago period. Free cash flow increased to $272.1 million from $216.5 million in the year-earlier period.

Moving Forward

For fiscal 2014, Cintas updated its revenue guidance in the range of $4.550 billion–$4.575 billion from its previous guidance of $4.525 billion–$4.575 billion. Earnings guidance was also revised from its earlier range of $2.73–2.79 per share to $2.75–$2.79.

Cintas continues to deliver organic growth through superior execution of its operational plans. The company witnessed top-line growth and expects to continue this bull run in the coming quarters as well. We also remain encouraged by the company’s relatively strong quarterly performance.

Cintas currently has a Zacks Rank #3 (Hold). Other stocks that look promising and are worth a look are 3M Company (MMM), Global Payments Inc. (GPN) and CLARCOR Inc. (CLC), each carrying a Zacks Rank #2 (Buy).

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