Cintas Reports In Line in 2Q (ABM) (CTAS)

Operational Update

Total revenue in the quarter increased 4% year over year to $1.06 billion, at par with the Zacks Consensus Estimate. Organic growth in the quarter was 3.4%.

Lower recycled paper prices had a negative impact of $5.5 million on revenues in the quarter. The average price for recycled paper prices was slightly over $150 per ton, a 32% decline from second quarter 2011 average price of just over $220 per ton

Cost of rental uniforms and ancillary products increased 7% year over year to $438.9 million and cost of other services rose 6% to $189 million during the quarter. Selling, general and administrative expenses decreased 1% on a year-over-year basis to $293 million. Operating income for the quarter improved 5% to $139 million. Operating margin remained flat at 13%.

Segment Update

Rental uniforms and ancillary product revenues for the quarter improved 5% year over year to $755.8 million. Gross profit inched up 1% to $316.9 million from $312 million in the prior-year quarter. Gross margin decreased 130 bps year over year to 41.9%.

Uniform Direct Sales revenues grossed $100.2 million, down 2% from $111.9 million in the year-ago quarter. Gross profit for the segment decreased 9% to $30.2 million from $29.1 in the year-ago quarter. Gross margin contracted 220 bps year over year to 27.4%.

First Aid, Safety and Fire Protection revenues went up 10% to $111.5 million from the year-earlier quarter. Gross profit increased 8% to $47.3 million from the year-ago quarter. Gross margin declined 70 bps year over year to 42.4% in the quarter.

Document Management revenues remained flat at $82.8 million. Gross profit declined 6.7% to $37.6 million from the prior-year quarter of $40.3 million. The gross margin decreased 340 bps year over year to 45.4%.

Financial Position

Cash and cash equivalents were $242. 5 million as of the second quarter end, decreasing from $319.2 million as of the first quarter end. Long-term debt was $1.31 billion as of the second quarter end, flat compared with the first quarter end.

The company’s debt-to-capitalization ratio increased to 38.6% as of November 30, 2012 from 37.8% as of August 31, 2012. Cash flow from operations was $227.3 million during the first half of fiscal 2013 compared with $175.9 million in the comparable period of fiscal 2012. Free cash flow for the same period increased to $128.2 million from $96 million in the year-ago comparable period.

Share Repurchase

During the reported quarter, Cintas purchased 1.9 million shares of its common stock at an aggregate price of $81.1 million. The company has $218.7 million remaining under its existing share repurchase authorization as of November 30, 2012.

Outlook for Fiscal 2013

Citing an uncertain U.S. economic outlook, the company revised its revenue guidance to the range of $4.275 billion-$4.325 billion from its previous guidance of $4.25-$4.35 billion. The company also reiterated its earnings guidance of $2.50-$2.58.

Our Take

Cintas continues to deliver organic growth by winning new businesses and selling newer services. Margins at Cintas continue to expand based on cost efficiencies despite headwinds from higher input costs. In the first half of fiscal 2013, operating margin expansion was driven by lower selling, general and administrative expenses (SG&A). Management sees the opportunity for modest SG&A leverage for the balance of fiscal 2013.

So far in fiscal 2013, the company witnessed top-line growth across all the segments except Uniform Direct Sales and the Document Management segments. Results were negatively affected by lower recycle paper prices and weakness in Europe.

If recycled paper price remains low then it may weigh on results going forward. To add to the woes, employment growth has been choppy and disappointing over the past few months and leading indicators of US labor demand are weakening. This raises concern that Cintas uniform segment growth may be affected in the coming quarters.

Cincinnati, Ohio-based Cintas Corporation provides specialized services to businesses of all types throughout North America. The company designs, manufactures, implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products and first aid and safety products for approximately 800,000 businesses.

Cintas competes with ABM Industries Incorporated (ABM). The company retains a short-term Zacks #4 Rank (Sell).