GKSR G&K Services - Class A (MM)

Cintas Corporation (CTAS) reported first-quarter fiscal 2013 (ended August 31, 2012) earnings of 60 cents per share, beating the Zacks Consensus Estimate by a penny. Results improved 15.4% from the prior year quarter earnings of 52 cents per share.

Operational Update

Total revenue in the quarter increased 3.4% year over year to $1.05 billion, missing the Zacks Consensus Estimate of $1.06 billion. Organic growth in the quarter was 3.2%.

Cost of rental uniforms and ancillary products increased 6.1% year over year to $428.1 million and cost of other services rose 1.5% to $177.3 million during the quarter. Selling, general and administrative expenses decreased 1.3% on a year-over-year basis to $306.6 million.

Operating income for the quarter improved 8.3% to $139.3 million. Consequently, operating margin expanded 60 basis points (bps) year over year to 13.2%.

Segment Update

Rental uniforms and ancillary product revenues for the quarter improved 4.9% year over year to $754.8 million. Gross profit increased 3.4% to $326.7 million from $316 million in the prior-year quarter. Gross margin decreased 60 bps year over year to 43.3%.

Uniform Direct Sales revenues grossed $100.3 million, decreasing 1.4% from $101.7 million in the year-ago quarter. Gross profit for the segment increased 1.3% to $29.5 million from $29.1 in the year ago quarter. Gross margin dropped 80 bps year over year to 29.4%.

First Aid, Safety and Fire Protection revenues went up 6.8% to $110.8 million from the year-earlier quarter. Gross profit increased 6.7% to $47.8 million from the year ago quarter. Gross margin declined 10 bps year over year to 43.1% in the quarter.

Document Management revenues fell 7.5% to $85.4 million from the year-ago quarter. Consequently, gross profit declined 17.2% to $41.9 million from the prior-year quarter of $49.1 million. The gross margin of the segment decreased 410 bps year over year to 49.1%.

Financial Position

Cash and cash equivalents were $319.2 million as of August 31, 2012, decreasing from $339.8 million as of May 31, 2012. Long-term debt was $1.31 billion as of August 31, 2012, compared to $1.06 billion as of May 31, 2012.

The debt-to-capitalization ratio increased to 37.8% as of August 31, 2012, from 37.5% as of May 31, 2012. Cash flow from operations was $94.9 million during the three months ended August 31, 2012, up from $56.6 million during the three months ending August 31, 2011.

Share Repurchase

During the reported quarter, Cintas purchased 1.8 million shares of its common stock at an aggregate price of $70.6 million. The company has $299.8 million available for share buyback program under its authorization as of August 31, 2012.

Outlook for Fiscal 2013

The company reiterated revenue guidance in the range of $4.25-$4.35 billion. Earnings are now expected to lie within the band of $2.50-$2.58, up from the previous guidance of $2.47-$2.55 per share. The share buy back program during the fourth quarter will benefit earnings by roughly 3 cents per share.

Our Take

Cintas faces severe challenges from the soft European market. The document management segment was negatively affected during the reported quarter due to lower recycled paper prices. If paper price remains low, it may weigh on margins going forward. Moreover, higher cotton price remain a headwind for the company in the coming quarters.

However, Cintas continues with its focus on selling profitable business and cost cutting initiatives which bodes well for its future performance. Moreover, the company has a healthy balance sheet as required to finance future acquisitions.

Cintas faces competition from companies like G&K Services, Inc. (GKSR) and ABM Industries Incorporated (ABM). The company retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.

 
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