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Cintas Q4 Earnings Beat by a Whisker, FY14 Revs Best Ever

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Business services provider Cintas Corporation (CTAS - Free Report) reported fourth-quarter fiscal 2014 (ended May 31, 2014) earnings of $127.2 million or $1.03 per share, significantly up from $86.0 million or 69 cents in the year-ago quarter. The nearly 50% year-over-year improvement in earnings was primarily attributable to a positive impact of $32.9 million and 27 cents per share (net of tax) related to the closing of the previously announced partnership transaction with Shred-it International Inc.

Excluding non-recurring items, earnings for the reported quarter were $94.3 million or 76 cents per share, representing year-over-year growth of 9.7% and 10.1%, respectively. The recurring earnings marginally exceeded the Zacks Consensus Estimate by a penny.




For fiscal 2014, Cintas reported net income of $374.4 million or $3.05 per share compared with $315.4 million or $2.52 per share in fiscal 2013. Recurring earnings for fiscal 2014, excluding the Shred-it transaction, were $342.9 million or $2.79 per share, representing a year-over-year increase of 8.7% and 10.7%, respectively. The recurring earnings for fiscal 2014 surpassed the Zacks Consensus Estimate by a penny.

Total quarterly revenue was up 2.5% year over year to $1,157.5 million, slightly below the Zacks Consensus Estimate of $1,166.0 million. The year-over-year improvement in revenue was driven by an increase in sales across all segments, except Uniform Direct Sales. Revenues unaffected by the Shred-it transaction were up 4.7% year over year to $1,103.8 million. Organic growth (adjusted for the impact of acquisitions and workdays) aggregated 6.1% for the reported quarter.

For fiscal 2014, Cintas reported record revenues of $4,551.8 million compared with $4,316.5 million in the previous fiscal year. The Rental segment achieved record annual revenues of $3.2 billion, while First Aid, Safety and Fire segment revenue topped $500 million for the first time for a record annual level of $514 million.

Operating income in the reported quarter declined 19.6% to $123.8 million largely due to the Shred-it transaction. Excluding this, quarterly operating income was up 10.3% year over year to $165.4 million. For fiscal 2014, operating income was $567.0 million compared with $565.2 million in fiscal 2013. Excluding the Shred-it transaction, operating income for the reported fiscal was $603.5 million.

Segment Performance

Rental Uniforms and Ancillary Products revenues for the quarter improved 5.1% year over year to $825.0 million, buoyed by new businesses. Organic growth of the segment was 6.7%. Gross margin increased to 43.6% from 42.1% in the year-ago quarter due to improved efficiency levels from added route capacity.

Revenues for Uniform Direct Sales were $118.5 million (down 5.0% year over year) as large national account rollouts were not repeated. Gross margin was 30.0%, down from 30.8% in the year-ago quarter owing to lower volumes in the reported quarter.

First Aid, Safety and Fire Protection Services revenues climbed 9.5% to $137.2 million backed by healthy new adoption rates and repeat sales. Gross margin improved to 44.6% in the reported quarter from 43.5% in the year-ago quarter due to improved sales mix and better utilization of infrastructure. Organic growth for the segment totaled 10.2%

Revenues for Document Management Services segment stood at $23.1 million, up 20.7% year over year. Organic growth of the segment was 15.4%.

During the quarter, Cintas divested its Document Shredding business by forming 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. 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.

Going forward, Cintas will record its 42% share of the partnership income within SG&A line on the income statement and will no longer record the revenue from this business under its Document Management Services segment.

Financial Position

Cintas has a solid financial position with adequate liquidity. Cash and cash equivalents were $513.3 million at fiscal-end 2014 compared with $352.3 million in the year-ago period. Capital expenditures for fiscal 2014 were $145.6 million, significantly down from $196.5 million in fiscal 2013.

Long-term debt remained steady at $1.3 billion. Cash flow from operations totaled $608.0 million in fiscal 2014 compared with $552.7 million in the year-ago period. Free cash flow increased to $462.4 million from $356.3 million in the year-earlier period.

During the quarter and subsequent to the quarter end, Cintas purchased 4.1 million shares for $250.0 million. These included 3.4 million shares at an aggregate cost of approximately $204.2 million during the fourth quarter and 0.7 million shares at an aggregate cost of approximately $45.8 million in Jun 2014. Currently, the company has $254.4 million available under the current stock repurchase authorization.

Moving Forward

Cintas provided its initial revenue and earnings guidance for fiscal 2015. The company expects fiscal earnings to be within $3.06–$3.15 per share on revenues of $4.425 billion–$4.525 billion.

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 despite the inconsistent performance of the U.S. economy. We also remain encouraged by the company’s relatively strong quarterly and fiscal performance.

Cintas currently has a Zacks Rank #3 (Hold). Other stocks that look promising and are worth a look include Fiserv, Inc. (FISV - Free Report) , Global Payments Inc. (GPN - Free Report) and Visa Inc. (V - Free Report) , each carrying a Zacks Rank #2 (Buy).

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