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CTAS > SEC Filings for CTAS > Form 10-Q on 9-Apr-2013All Recent SEC Filings

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Form 10-Q for CINTAS CORP


9-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

BUSINESS STRATEGY

Cintas provides highly specialized products and services to businesses of all types primarily throughout North America, as well as Latin America, Europe and Asia. We bring value to our customers by helping them provide a cleaner, safer and more pleasant atmosphere for their customers and employees. Our products and services are designed to improve our customers' images. We also help our customers protect their employees and their company by enhancing workplace safety and helping to ensure legal compliance in key areas of their business.

We are North America's leading provider of corporate identity uniforms through rental and sales programs, as well as a significant provider of related business services, including entrance mats, restroom cleaning services and supplies, carpet and tile cleaning services, first aid, safety and fire protection products and services, and document management services.

Cintas' principal objective is "to exceed customers' expectations in order to maximize the long-term value of Cintas for shareholders and working partners," and it provides the framework and focus for Cintas' business strategy. This strategy is to achieve revenue growth for all of our products and services by increasing our penetration at existing customers and by broadening our customer base to include business segments that we have not historically served. We will also continue to identify additional product and service opportunities for our current and future customers.

To pursue the strategy of increasing penetration, we have a highly talented and diverse team of service professionals visiting our customers on a regular basis. This frequent contact with our customers enables us to develop close personal relationships. The combination of our distribution system and these strong customer relationships provides a platform from which we launch additional products and services.

We pursue the strategy of broadening our customer base in several ways. Cintas has a national sales organization introducing all of its products and services to prospects in all business segments. Our broad range of products and services allows our sales organization to consider any type of business a prospect. We also broaden our customer base through geographic expansion, especially in our emerging businesses of first aid and safety, fire protection and document management. Finally, we evaluate strategic acquisitions as opportunities arise.

RESULTS OF OPERATIONS

Cintas classifies its businesses into four operating segments based on the types of products and services provided. The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops and shop towels and other ancillary items. In addition to these rental items, restroom cleaning services and supplies and carpet and tile cleaning services are also provided within this operating segment. The Uniform Direct Sales operating segment consists of the direct sale of uniforms and related items. The First Aid, Safety and Fire Protection Services operating segment consists of first aid, safety and fire protection products and services. The Document Management Services operating segment consists of document destruction, document imaging and document retention services. Revenue and income before income taxes for each of these operating segments for the three and nine months ended February 28, 2013 and February 29, 2012, are presented in Note 8 entitled Segment Information of "Notes to Consolidated Condensed Financial Statements."

Consolidated Results

Three Months Ended February 28, 2013 Compared to Three Months Ended February 29, 2012

Total revenue increased 6.3% for the three months ended February 28, 2013, over the same period in the prior fiscal year from $1,012.1 million to $1,075.7 million. Revenue was negatively impacted by 1.6% due to one fewer workday in the three months ended February 28, 2013, compared to the three months ended February 29, 2012. Revenue increased organically (adjusts for the impact of acquisitions and the impact of fewer workdays in the current period) by 6.9%. The remaining 1.0% increase represents growth derived through acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment.


Rental Uniforms and Ancillary Products operating segment revenue increased 3.9% for the three months ended February 28, 2013, over the same period in the prior fiscal year from $721.0 million to $748.9 million. The increase resulted from an organic growth increase in revenue of 5.5% primarily due to improvements in sales representative productivity and an increase in the number of sales representatives. Generally, sales productivity improvements are the result of increased tenure and improved training, which result in a higher number of products and services sold. Revenue was negatively impacted by 1.6% due to one fewer workday in the three months ended February 28, 2013, compared to the three months ended February 29, 2012.

Other Services revenue, consisting of revenue from the reportable operating segments of Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services, increased 12.3% for the three months ended February 28, 2013, over the same period in the prior fiscal year from $291.1 million to $326.8 million. Other Services revenue increased organically by 10.5%. The positive organic growth for Other Services revenue was related to organic growth in each of the operating segments. Acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment resulted in growth of 3.5% in the quarter. Revenue was negatively impacted by 1.7% due to one fewer workday in the three months ended February 28, 2013, compared to the three months ended February 29, 2012.

Cost of rental uniforms and ancillary products consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other ancillary items. Cost of rental uniforms and ancillary products increased $24.9 million, or 6.1%, for the three months ended February 28, 2013, compared to the three months ended February 29, 2012. This increase was due to higher Rental Uniforms and Ancillary Products operating segment sales volume, an increase in material cost due to an increase in customer accounts which require the injection of inventory into in service inventory and higher service costs associated with expanded route capacity.

Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid, safety and fire protection products), delivery expenses and distribution expenses in the Uniform Direct Sales operating segment, the First Aid, Safety and Fire Protection Services operating segment and the Document Management Services operating segment. Cost of other services increased $22.7 million, or 12.9%, for the three months ended February 28, 2013, compared to the three months ended February 29, 2012. This increase was primarily due to increased Uniform Direct Sales operating segment volume. In addition, increases in sales volume for both the First Aid, Safety and Fire Protection Services operating segment and the Document Management Services operating segment also contributed to the quarter increase.

Selling and administrative expenses increased $20.6 million, or 7.1%, for the three months ended February 28, 2013, compared to the three months ended February 29, 2012, primarily as a result of increases in employee-partner medical claims and auto and other self insurance claims during the quarter.

Net interest expense (interest expense less interest income) was $16.2 million for the three months ended February 28, 2013, compared to $16.8 million for the three months ended February 29, 2012. The decrease in interest expense is due to the maturity of the $225.0 million aggregate principal amount of 6.0% senior notes on June 1, 2012, offset by the issuance of $250.0 million aggregate principal amount of 3.25% senior notes due 2022 in the first quarter of fiscal 2013.

Cintas' effective tax rate was 36.1% for the three months ended February 28, 2013, compared to 37.0% for the three months ended February 29, 2012. The effective tax rate can fluctuate from quarter to quarter based on specific discrete items.

Net income decreased $1.3 million, or 1.7%, for the three months ended February 28, 2013, from the same period in the prior fiscal year. This decrease was the result of a number of factors. First, there was one fewer workday in the three months ended February 28, 2013 when compared to the same period in the prior fiscal year. Several large expenses, including rental material cost, depreciation and amortization, are determined on a monthly basis instead of a workday basis, and one fewer workday results in one less day of revenue to cover these expenses. As noted above, the other factors contributing to the lower net income were increased cost of rental uniforms and ancillary products and increased selling and administrative expenses. Diluted earnings per share were $0.60 for the three months ended February 28, 2013, which was an increase of 3.4% compared to the same period in the prior fiscal year. Diluted earnings per share increased despite the decrease in net income due to a decrease in weighted average common stock outstanding as a result of purchasing 7.7 million shares of common stock under the October 18, 2011 share buyback program during the fourth quarter of fiscal 2012 and the first three quarters of fiscal 2013.


Rental Uniforms and Ancillary Products Operating Segment

Three Months Ended February 28, 2013 Compared to Three Months Ended February 29, 2012

As discussed above, Rental Uniforms and Ancillary Products operating segment revenue increased from $721.0 million to $748.9 million, or 3.9%, and the cost of rental uniforms and ancillary products increased $24.9 million, or 6.1%, for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012. The operating segment's gross margin was $314.1 million, or 41.9% of revenue, for the third quarter of fiscal 2013. This gross margin as a percent of revenue of 41.9% was 120 basis points lower than the prior fiscal year's third quarter of 43.1%, primarily due to the impact of one fewer workday in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012, an increase in material cost due to an increase in customer accounts which require the injection of inventory into in service inventory and higher service costs associated with expanded route capacity.

Selling and administrative expenses as a percent of revenue, at 28.2%, increased 70 basis points, or $12.9 million, compared to the third quarter of the prior fiscal year due to higher employee-partner medical expenses and higher auto and other self insurance claims.

Income before income taxes decreased $9.9 million to $102.5 million for the Rental Uniforms and Ancillary Products operating segment for the third quarter of fiscal 2013 compared to the same quarter last fiscal year. Income before income taxes was 13.7% of the operating segment's revenue, which is a 190 basis point decrease compared to the third quarter of the prior fiscal year. This decrease is due to the decrease in gross margin and the increase in selling and administrative expenses as discussed above.

Uniform Direct Sales Operating Segment

Three Months Ended February 28, 2013 Compared to Three Months Ended February 29, 2012

Uniform Direct Sales operating segment revenue increased from $109.1 million to $126.1 million, or 15.6%, for the three months ended February 28, 2013, over the same quarter in the prior fiscal year due to several large customer roll-outs.

Cost of uniform direct sales increased $13.4 million, or 17.7%, for the three months ended February 28, 2013, over the same quarter in the prior fiscal year. The gross margin as a percent of revenue was 29.2% for the three months ended February 28, 2013, which is a 130 basis point decrease compared to the gross margin percent of revenue of 30.5% in the same quarter of the prior fiscal year. The increase in cost of uniform direct sales and the gross margin percent to revenue decrease are due to a less profitable mix of products being sold as well as costs incurred in connection with the large customer roll-outs noted above.

Selling and administrative expenses increased $2.0 million compared to the third quarter of the prior fiscal year, primarily due to an increase in labor and other employee-partner related expenses. Selling and administrative expenses as a percent of revenue, at 16.5%, decreased 70 basis points compared to the three months ended February 28, 2013. This decrease in percent of revenue is mainly due to higher revenue for the third quarter of fiscal 2013 compared to the same quarter in the prior fiscal year.

Income before income taxes increased $1.6 million for the Uniform Direct Sales operating segment for the third quarter of fiscal 2013 compared to the same quarter last fiscal year. Income before income taxes was 12.7% of the operating segment's revenue, which is a 60 basis point decrease compared to the same quarter last fiscal year. This decrease in income before income taxes is primarily due to the decline in gross margin as discussed above.

First Aid, Safety and Fire Protection Services Operating Segment

Three Months Ended February 28, 2013 Compared to Three Months Ended February 29, 2012

First Aid, Safety and Fire Protection Services operating segment revenue increased from $101.4 million to $112.9 million, or 11.3%, for the three months ended February 28, 2013. Revenue increased organically by 6.9% due to improvements in sales representative productivity. Acquisitions resulted in growth of 6.2%. Revenue was negatively impacted by 1.8% due to one fewer workday in the three months ended February 28, 2013, compared to the three months ended February 29, 2012.


Cost of first aid, safety and fire protection services increased $5.6 million, or 9.7%, for the three months ended February 28, 2013, over the three months ended February 29, 2012, due to increased First Aid, Safety and Fire Protection Services operating segment volume. Gross margin for the First Aid, Safety and Fire Protection Services operating segment is defined as revenue less cost of goods, warehouse expenses, service expenses and training expenses. The gross margin as a percent of revenue was 44.0% for the quarter ended February 28, 2013, which is an 80 basis point increase compared to the gross margin as a percent of revenue of 43.2% in the same quarter of the prior fiscal year. This increase is due to higher revenue per customer stop and improved capacity utilization from the higher revenue level.

Selling and administrative expenses increased $3.1 million compared to the third quarter of the prior fiscal year, primarily due to an increase in labor and other employee-partner related expenses. Selling and administrative expenses as a percent of revenue, at 34.7%, decreased 80 basis points compared to the third quarter of the prior fiscal year due to revenue growing at a faster rate than selling and administrative expenses.

Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment increased $2.8 million to $10.5 million for the three months ended February 28, 2013, compared to the same quarter in the prior fiscal year, primarily due to the increase in First Aid, Safety and Fire Protection Services operating segment revenue. Income before income taxes, at 9.3% of the operating segment's revenue is a 170 basis point increase compared to the same quarter last fiscal year. This increase in income before income taxes is primarily due to the increase in gross margin as discussed above.

Document Management Services Operating Segment

Three Months Ended February 28, 2013 Compared to Three Months Ended February 29, 2012

Document Management Services operating segment revenue increased from $80.6 million to $87.8 million, or 8.9%, for the quarter ended February 28, 2013, over the same quarter in the prior fiscal year. Revenue was negatively impacted by 1.7% due to one fewer workday in the three months ended February 28, 2013, compared to the three months ended February 29, 2012. Document Management Services operating segment revenue increased organically by 5.8% due to sales productivity improvements and an increase in recycled paper revenue based on increased sales volume. The remaining 4.8% increase represents growth due to acquisitions. This operating segment derives a portion of its revenue from the sale of shredded paper to paper recyclers. Paper prices for the quarter ended February 28, 2013, were consistent with paper prices in the same quarter in the prior fiscal year.

Cost of document management services increased $3.7 million, or 8.5%, for the three months ended February 28, 2013, over the same quarter in the prior fiscal year due to increased Document Management Services operating segment volume. Gross margin for the Document Management Services operating segment is defined as revenue less production and service costs. The gross margin as a percent of revenue was 47.1% for the three months ended February 28, 2013, which was consistent with last year's third quarter gross margin as a percent of revenue of 47.0%.

Selling and administrative expenses increased $2.5 million compared to the third quarter of the prior fiscal year, primarily due to an increase in labor and other employee-partner related expenses. Selling and administrative expenses as a percent of revenue, at 42.7%, decreased 70 basis points compared to the three months ended February 28, 2013. This decrease in percent of revenue is mainly due to revenue growing at a faster rate than selling and administrative expenses.

Income before income taxes for the Document Management Services operating segment increased $1.0 million to $3.9 million for the three months ended February 28, 2013, compared to the same period in the prior fiscal year. Income before income taxes as a percentage of the operating segment's revenue increased from 3.5% in last year's third quarter to 4.4% for the quarter ended February 28, 2013, primarily as a result of the revenue growth.


Consolidated Results

Nine Months Ended February 28, 2013 Compared to Nine Months Ended February 29, 2012

Total revenue increased 4.6% for the nine months ended February 28, 2013, over the same period in the prior fiscal year from $3.0 billion to $3.2 billion. Revenue was negatively impacted by 0.5% due to one fewer workday in the nine months ended February 28, 2013, compared to the nine months ended February 29, 2012. Revenue increased organically by 4.5%. The remaining 0.6% increase represents growth derived through acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment.

Rental Uniforms and Ancillary Products operating segment revenue increased 4.5% for the nine months ended February 28, 2013 , over the same period in the prior fiscal year from $2.2 billion to $2.3 billion. The increase primarily resulted from an organic growth increase in revenue of 4.9% primarily due to improvements in sales representative productivity. Generally, sales productivity improvements are the result of increased tenure and improved training, which result in a higher number of products and services sold. Revenue increased 0.1% due to acquisitions. Revenue was negatively impacted by 0.5% due to one fewer workday in the nine months ended February 28, 2013, compared to the nine months ended February 29, 2012.

Other Services revenue, consisting of revenue from the reportable operating segments of Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services, increased 4.8% for the nine months ended February 28, 2013, over the same period in the prior fiscal year from $885.2 million to $927.8 million. Other
Services revenue increased organically by 3.4%. Revenue increased 2.0% as a result of growth derived through acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment. Revenue was negatively impacted by 0.6% due to one fewer workday in the nine months ended February 28, 2013, compared to the nine months ended February 29, 2012.

Cost of rental uniforms and ancillary products consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other ancillary items. Cost of rental uniforms and ancillary products increased $78.2 million, or 6.4%, for the nine months ended February 28, 2013, compared to the nine months ended February 29, 2012. This increase was due to higher Rental Uniforms and Ancillary Products operating segment sales volume.

Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid, safety and fire protection products), delivery expenses and distribution expenses in the Uniform Direct Sales operating segment, the First Aid, Safety and Fire Protection Services operating segment and the Document Management Services operating segment. Cost of other services increased $35.6 million, or 6.7%, for the nine months ended February 28, 2013, compared to the nine months ended February 29, 2012. This increase was primarily due to increased Uniform Direct Sales and First Aid, Safety and Fire Protection Services operating segment sales volumes.

Selling and administrative expenses increased $12.6 million, or 1.4%, for the nine months ended February 28, 2013, compared to the nine months ended February 29, 2012, due to an increase in labor and other employee-partner related expenses.

Net interest expense (interest expense less interest income) was $48.8 million for the nine months ended February 28, 2013, compared to $51.1 million for the nine months ended February 29, 2012. The decrease in interest cost is due to the maturity of the $225.0 million aggregate principal amount of 6.0% senior notes on June 1, 2012, offset by the issuance of $250.0 million aggregate principal amount of 3.25% senior notes due 2022 in the first quarter of fiscal 2013.

Cintas' effective tax rate was 36.7% for the nine months ended February 28, 2013, compared to 37.0% for the nine months ended February 29, 2012. The effective tax rate can fluctuate from period to period based on specific discrete items.

Net income increased $10.4 million, or 4.8%, for the nine months ended February 28, 2013, from the same period in the prior fiscal year. The increase was primarily due to the 4.6% growth in revenue. The impact of the increase in revenue was partially offset by one fewer workday in the nine months ended February 28, 2013 compared to the same period in the prior fiscal year. Diluted earnings per share were $1.83 for the nine months ended February 28, 2013, which was an increase of 9.6% compared to the same period in the prior fiscal year. The increase in diluted earnings per share is higher than the increase in net income due to a decrease in weighted average common stock outstanding


as a result of purchasing 7.7 million shares of common stock under the October 18, 2011 share buyback program during the fourth quarter of fiscal 2012 and the first three quarters of fiscal 2013.

Rental Uniforms and Ancillary Products Operating Segment

Nine Months Ended February 28, 2013 Compared to Nine Months Ended February 29, 2012

As discussed above, Rental Uniforms and Ancillary Products operating segment revenue increased from $2.2 billion to $2.3 billion, or 4.5%, and the cost of rental uniforms and ancillary products increased $78.2 million, or 6.4%, for the nine months ended February 28, 2013, compared to the nine months ended February 29, 2012. The operating segment's gross margin was $957.7 million, or 42.4% of revenue, for the nine months ended February 28, 2013. This gross margin percent of revenue of 42.4% was 100 basis points lower than the same period of the prior fiscal year of 43.4%. This decrease is due primarily to an increase in material cost due to an increase in customer accounts which requires an increase in inventory, costs associated with route expansion and a $1.6 million write-off of a garment processing system.

Selling and administrative expenses as a percent of revenue, at 27.5%, decreased 130 basis points, or $1.0 million compared to the same period of the prior fiscal year. This decrease is primarily due to a gain on the sale of stock of an equity method investment that has been offset by higher labor and other employee-partner related expenses.

Income before income taxes increased $19.1 million to $335.5 million for the Rental Uniforms and Ancillary Products operating segment compared to the same period last fiscal year. Income before income taxes was 14.8% of the operating segment's revenue, which is a 20 basis point increase compared to the same period of the prior fiscal year. This improvement is primarily due to revenue increasing at a faster rate of 4.5% compared to a 4.2% increase in operating expenses. Revenue grew at a faster rate due primarily to improvements in sales representative productivity and improved customer retention.

Uniform Direct Sales Operating Segment

Nine Months Ended February 28, 2013 Compared to Nine Months Ended February 29, 2012

Uniform Direct Sales operating segment revenue increased from $322.8 million to $336.6 million, or 4.3%, for the nine months ended February 28, 2013, over the same period in the prior fiscal year due to increased customer orders for uniforms and several large customer roll-outs.

Cost of uniform direct sales increased $12.8 million, or 5.6%, for the nine months ended February 28, 2013, compared to the nine months ended February 29, 2012. due to increased uniform direct sales operating segment volume. The gross margin as a percent of revenue was 28.7% for the nine months ended February 28, 2013, which is a 90 basis point decrease compared to the gross margin percentage of 29.6% in the same period of the prior fiscal year. This decrease is due to a less profitable mix of products being sold and costs incurred in conjunction with the large roll-outs that occurred in the third quarter.

Selling and administrative expenses increased $2.0 million, or 3.3% compared to the nine months ended February 29, 2012, primarily due to an increase in labor and other employee-partner related expenses. However, selling and administrative expenses as a percent of revenue, at 18.2%, decreased 20 basis points compared to the same period of the prior fiscal year due to the increase in revenue for the nine months ended February 28, 2013 compared to the same period in the prior fiscal year.

Income before income taxes decreased $0.9 million to $35.2 million for the Uniform Direct Sales operating segment for the nine months ended February 28, 2013. Income before income taxes was 10.5% of the operating segment's revenue compared to 11.2% for the same period last fiscal year, which is a 70 basis point decrease compared to the same period last fiscal year. This decrease in income before income taxes is primarily due to the decline in gross margin as discussed above.


First Aid, Safety and Fire Protection Services Operating Segment

Nine Months Ended February 28, 2013 Compared to Nine Months Ended February 29, 2012

First Aid, Safety and Fire Protection Services operating segment revenue . . .

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