GKSR G&K Services - Class A (MM)

Cintas Corporation (CTAS) reported fourth-quarter fiscal 2012 (ending May 31, 2012) earnings of 60 cents per share, in line with the Zacks Consensus Estimate. Results improved 22.4% from the prior year quarter earnings of 49 cents per share.

Operational Update

Total revenue in the quarter increased 4.1% year over year to $1.05 billion, missing the Zacks Consensus Estimate of $1.07 billion. Organic growth in the quarter was 4%.

Cost of rental uniforms and ancillary products increased 5.9% year over year to $424.9 million and cost of services rose 3.9% to $184.8 million during the quarter. Selling, general and administrative expenses decreased 0.4% on a year-over-year basis to $303 million.

Operating income for the quarter improved 9.3% to $140.8 million. Consequently, operating margin expanded 70 basis points (bps) year over year to 13.4%.

Fiscal 2012 Performance

Cintas’ full year 2012 earnings of $2.27 per share improved 35.1% from the prior year earnings of $1.68 and were in line with the Zacks Consensus Estimate.  

Total revenue increased 7.7% year-over-year to $4.10 billion, missing the Zacks Consensus Estimate of $4.11 billion.  

Segment Update

Rental uniforms and ancillary product revenues for the quarter improved 5.2% to $749 million from $711.9 million in the year-ago quarter. Gross profit increased 4.3% to $324.1 million from $310.6 million in the prior-year quarter. Gross margin decreased 30 bps year-over-year to 43.3%.

Uniform Direct Sales revenues grossed $111.2 million, increasing 2% from $109.1 million in the year-ago quarter. Gross profit for the segment increased 1.2% to $34.2 million from $33.8 in the year ago quarter. Gross margin decreased 20 bps year over year to 30.7%.

First Aid, Safety and Fire Protection revenues were $108.9 million, up 9.3% from the year-earlier quarter. Gross profit increased 10.9% to $46.1 million from the year ago quarter of $41.6 million. Gross margin improved 70 bps year over year to 42.4% in the quarter.

Document Management revenues fell 8.5% to $84.4 million for the quarter from $91.6 million in the year-ago quarter. Consequently, gross profit declined 19.2% to $34.5 million from the prior-year quarter of $47.1 million. The segment’s gross margin decreased 470 bps year over year to 46.7%.

Financial Position

Cash and cash equivalents were $339.8 million as of May 31, 2012, decreasing from $438.1 million as of May 31, 2011. Long-term debt was $1.06 billion as of May 31, 2012, compared to $1.28 billion as of May 31, 2011.

The debt-to-capitalization ratio increased to 37.5% as of May 31, 2012, from 35.8% as of May 31, 2011. Cash flow from operations was $469.9 million during the twelve months of fiscal 2012, up from $340.9 million during the twelve months of fiscal 2011.

Share Repurchase

During the fourth quarter, Cintas purchased 3.3 million shares of its common stock at an aggregate price of $129.6 million. The company has $370.4 million available for share buyback program under its authorization as of May 31, 2012.

Outlook for Fiscal 2013

The company expects revenues to be in the range of $4.25-$4.35 billion. Earnings are expected to lie within the band of $2.47-$2.55 per share. The share buy back program during the fourth quarter will benefit earnings by roughly 6 cents per share.

Our View

The company had experienced poor job creation for three consecutive months of fourth quarter of fiscal 2012. The current macro economic conditions remain soft with weak customer confidence. Moreover, lower recycle prices may create headwinds for margins moving forward.

Cintas faces competition from companies like G&K Services Inc. (GKSR) and privately held Alsco Inc. and ARAMARK Corporation. Cintas retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.
 

 
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