CTAS Cintas Corporation

Cintas Corporation (CTAS) reported earnings of 57 cents per share for fiscal second quarter 2012 ending November 30. Results comfortably surpassed the Zacks Consensus Estimate of 48 cents and were 50% higher than the 38 cents earned in the year-ago quarter.

Strong performance at all the segments except Document Management Services helped in the better-than-forecast results. However, the Document Management Services segment was affected by a steep drop in recycled paper prices and poor results at its European business due to the difficult economic environment.

Operational Update

Total revenue in the quarter under review increased 9% to a record $1.02 billion, striding ahead of the Zacks Consensus Estimate of $1 billion. Organic growth in the quarter was 7.0%.

Cost of rental uniforms and ancillary products increased 9% year over year to $410 million and cost of services rose 6% to $179 million during the quarter. Selling general and administrative expenses flared 3% on a year-over-year basis to $297 million.

Operating income during the quarter improved 25% to $133 million. Operating margin expanded 200 basis points year over year to 13%.

Segment Update

Rental uniform and ancillary products revenue of $722.8 million in the quarter increased 10% from $657.8 million in the year-ago quarter. Uniform Direct Sales revenue grossed $111.9 million, up 3% from $108.8 million in the year-ago quarter.

First Aid, Safety and Fire Protection revenue was $101.7 million, up 9% from the year-earlier quarter. Document Management revenue of $82.75 million in the quarter increased 8% from $77 million in the year-ago quarter.

Financial Position

Cintas exited the quarter with cash and cash equivalent of $207.8 million, an improvement from $150.3 million at first quarter end. Long-term debt, at $1.06 billion, was flat sequentially. As of November 30, 2011, the debt-to-capitalization ratio increased marginally to 37.9% from 37.8% as of August 31, 2011.

Cash flow from operations was $176 million during the first half of fiscal 2012, up from $109 million in the year-ago comparable period. Free cash flow improved substantially to $96.2 million in the fiscal first half from $21 million in the first half of 2011.

Cintas’ Board of Directors approved a new $500 million share buyback authorization in October, but the company has not made any purchases under the program during the quarter.

Looking Ahead

Cintas, in fiscal 2012, expects to generate revenue in the band of $4.075 billion to $4.125 billion, up from the previous expectation of $4.0 billion to $4.1 billion. Earnings are now projected in the range of $2.16 to $2.20 per share in place of the prior range of $1.97 to $2.05 per share.

The company expects capital expenditure to be between $180 million and $200 million in fiscal 2012.

Our Take

We are encouraged by the solid organic growth and margin expansion displayed by Cintas. Furthermore, Cintas’ solid balance sheet and cash flow characteristics support a renewed repurchase authorization and a dividend hike. However, cost headwinds from cotton and energy and the uncertain economic environment remain concerns.

We retain our Neutral rating on Cintas Corporation. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Cincinnati, Ohio-based Cintas Corporation designs, manufactures and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products, and first aid and safety products for approximately 900,000 businesses. Cintas competes with G&K Services Inc. (GKSR) and privately held Alsco Inc. and ARAMARK Corporation.

 
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