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CTAS > SEC Filings for CTAS > Form 10-Q on 9-Jan-2014All Recent SEC Filings

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Form 10-Q for CINTAS CORP


9-Jan-2014

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 to which 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 first aid, safety and fire protection and document management businesses. 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 six months ended November 30, 2013 and 2012 are presented in Note 10 entitled Segment Information of "Notes to Consolidated Condensed Financial Statements."

Consolidated Results

Three Months Ended November 30, 2013 Compared to Three Months Ended November 30, 2012

Total revenue increased 7.9% for the three months ended November 30, 2013 over the same period in the prior fiscal year, from $1,060.4 million to $1,143.8 million. The increase primarily resulted from an organic growth increase (excludes the impact of acquisitions) in revenue of 7.1%. The 0.8% difference in growth rates represents growth derived through acquisitions in our First Aid, Safety and Fire Protection Services and our Document Management Services operating segments.


Rental Uniforms and Ancillary Products operating segment revenue increased 6.4% for the three months ended November 30, 2013 over the same period in the prior fiscal year, from $755.8 million to $804.3 million, all due to organic growth. The amount of new business sold by our sales representatives was strong, resulting from an increase in the number and productivity 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.

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 11.5% for the three months ended November 30, 2013 over the same period in the prior fiscal year, from $304.5 million to $339.4 million. Revenue increased organically by 8.9%. The 2.6% difference in growth rates represents growth derived through acquisitions in our First Aid, Safety and Fire Protection Services and our Document Management Services operating segments.

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 $20.2 million, or 4.6%, for the three months ended November 30, 2013, compared to the three months ended November 30, 2012. This increase was due to higher Rental Uniforms and Ancillary Products operating segment sales volume. The three month period ended November 30, 2012 included a $1.6 million expense related to the write-off of a garment processing system.

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 $18.3 million, or 9.6%, for the three months ended November 30, 2013, compared to the three months ended November 30, 2012. This increase was primarily due to increased sales volume in all segments.

Selling and administrative expenses increased $30.9 million, or 10.6%, for the three months ended November 30, 2013, compared to the three months ended November 30, 2012. In the three months ended November 30, 2012, a gain on sale of stock of an equity method investment was realized, reducing selling and administrative expenses by $8.5 million. This gain was allocated to each operating segment. The remainder of the increase was primarily due to increases in labor and other employee-partner related expenses.

Net interest expense (interest expense less interest income) was $16.4 million for the three months ended November 30, 2013, compared to $16.1 million for the three months ended November 30, 2012.

Cintas' effective tax rate was 37.9% for the three months ended November 30, 2013, compared to 36.5% for the three months ended November 30, 2012. The rate for the three months ended November 30, 2012 reflected the favorable impact of a change to certain tax regulations.

Net income increased $6.8 million, or 8.8%, for the three months ended November 30, 2013, from the same period in the prior fiscal year. This increase was primarily due to the growth in sales volume. Diluted earnings per share were $0.70 for the three months ended November 30, 2013, which was an increase of 11.1% compared to the same period in the prior fiscal year. Diluted earnings per share increased due to an increase in earnings combined with a decrease in weighted average common stock outstanding. The decrease in common stock outstanding resulted from purchasing 4.6 million shares of common stock under the October 18, 2011 share buyback program since the beginning of the third quarter of fiscal 2013 through the second quarter of fiscal 2014.

Rental Uniforms and Ancillary Products Operating Segment

Three Months Ended November 30, 2013 Compared to Three Months Ended November 30, 2012

Rental Uniforms and Ancillary Products operating segment revenue increased from $755.8 million to $804.3 million, or 6.4%, and the cost of rental uniforms and ancillary products increased $20.2 million, or 4.6%. The operating segment's gross margin was $345.2 million, or 42.9% of revenue. The gross margin as a percent of revenue of 42.9% was 100 basis points higher than the prior fiscal year's second quarter of 41.9%, primarily due to route efficiencies and increased revenue covering fixed costs including our plant infrastructure. The three month period ended November 30, 2012 included expense of $1.6 million amounting to 20 basis points related to the write-off of a garment processing system.


Selling and administrative expenses increased $18.2 million, or 60 basis points, to 27.2% of revenue, compared to 26.6% in the second quarter of the prior fiscal year. The prior year period benefited from the gain on sale of stock of an equity method investment previously mentioned, which reduced selling and administrative expenses by 80 basis points.

Income before income taxes increased $10.0 million to $126.1 million for the Rental Uniforms and Ancillary Products operating segment for the second quarter of fiscal 2014 compared to the same quarter last fiscal year. Income before income taxes was 15.7% of the operating segment's revenue, which is a 30 basis point increase compared to the second quarter of the prior fiscal year. This increase is due primarily to the increase in gross margin previously discussed.

Uniform Direct Sales Operating Segment

Three Months Ended November 30, 2013 Compared to Three Months Ended November 30, 2012

Uniform Direct Sales operating segment revenue increased from $110.2 million to $121.9 million, or 10.6%, for the three months ended November 30, 2013, over the same quarter in the prior fiscal year due to large uniform customer roll-outs.

Cost of uniform direct sales increased $6.7 million, or 8.4%, for the three months ended November 30, 2013, over the same quarter in the prior fiscal year. The gross margin as a percent of revenue was 28.8% for the three months ended November 30, 2013, which is a 140 basis point increase compared to the gross margin percent of revenue of 27.4% in the same quarter of the prior fiscal year. The increase is mainly due to additional revenue covering fixed costs and a greater percentage of revenue derived from higher-margin hospitality accounts.

Selling and administrative expenses increased $1.5 million compared to the second 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 17.5%, decreased 50 basis points compared to the three months ended November 30, 2012. This decrease as a percent of revenue is mainly due to higher revenue for the second quarter of fiscal 2014 compared to the same quarter in the prior fiscal year.

Income before income taxes increased $3.5 million for the Uniform Direct Sales operating segment for the second quarter of fiscal 2014 compared to the same quarter last fiscal year. Income before income taxes was 11.4% of the operating segment's revenue, which is a 200 basis point increase compared to the same quarter last fiscal year. This increase is primarily due to the increase in gross margin and the reduction in selling and administrative expenses as a percent of revenue as discussed above.

First Aid, Safety and Fire Protection Services Operating Segment

Three Months Ended November 30, 2013 Compared to Three Months Ended November 30, 2012

First Aid, Safety and Fire Protection Services operating segment revenue increased from $111.5 million to $124.6 million, or 11.7%, for the three months ended November 30, 2013. Revenue increased organically by 8.8%. The 2.9% difference in growth rates represents growth derived through acquisitions.

Cost of first aid, safety and fire protection services increased $6.3 million, or 9.8%, for the three months ended November 30, 2013, over the three months ended November 30, 2012, due to increased First Aid, Safety and Fire Protection Services operating segment revenue. 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 43.4% for the quarter ended November 30, 2013, which is a 100 basis point increase compared to the gross margin as a percent of revenue of 42.4% in the same quarter of the prior fiscal year. The improvement is primarily due to a more favorable mix of customer accounts in the second quarter of fiscal 2014. In addition, energy costs decreased approximately 20 basis points from the comparable period in the prior fiscal year.

Selling and administrative expenses increased $5.8 million, to 34.9% of revenue, compared to 33.7% in the same quarter in the prior fiscal year. Of the 120 basis point increase, 80 basis points are attributable to the gain on sale of stock of an equity method investment previously mentioned. The remaining amount is due primarily to an increase in labor and other employee-partner related expenses and our continued investment in an enterprise software system.


Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment increased $0.9 million to $10.6 million for the three months ended November 30, 2013, compared to the same quarter in the prior fiscal year, due to the increase in First Aid, Safety and Fire Protection Services operating segment revenue and gross margin. Income before income taxes, at 8.5% of the operating segment's revenue, is a 20 basis point decrease compared to the same quarter last fiscal year. As previously mentioned, the second quarter of last fiscal year benefited 80 basis points from the gain on sale of stock of an equity method investment.

Document Management Services Operating Segment

Three Months Ended November 30, 2013 Compared to Three Months Ended November 30, 2012

Document Management Services operating segment revenue increased from $82.8 million to $93.0 million, or 12.2%, for the quarter ended November 30, 2013, over the same quarter in the prior fiscal year. Revenue increased organically by 6.9% due to an increase in the number and productivity of sales representatives. The 5.3% difference in growth rates represents growth derived through acquisitions. This operating segment derives a portion of its revenue from the sale of shredded paper to paper recyclers. The average price from these paper sales for the quarter ended November 30, 2013 decreased about 17% from last year's second quarter average.

Cost of document management services increased $5.2 million, or 11.6%, for the three months ended November 30, 2013, over the same quarter in the prior fiscal year due to increased Document Management Services operating segment revenue. 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 45.7% for the three months ended November 30, 2013, which is an increase from last year's second quarter gross margin as a percent of revenue of 45.4%. The increase is attributable primarily to decreased energy costs.

Selling and administrative expenses increased $5.4 million, to 43.1% of revenue, compared to 41.9% in the same quarter in the prior fiscal year. Of the 120 basis point increase, 80 basis points are attributable to the gain on sale of stock of an equity method investment. The remaining amount is due primarily to an increase in labor and other employee-partner related expenses and our continued investment in an enterprise software system.

Income before income taxes for the Document Management Services operating segment decreased $0.5 million to $2.5 million for the three months ended November 30, 2013, compared to the same period in the prior fiscal year. Income before income taxes as a percentage of the operating segment's revenue decreased from 3.5% in last year's second quarter to 2.6% for the quarter ended November 30, 2013. As previously mentioned, the second quarter of last fiscal year benefited 80 basis points from the gain on sale of stock of an equity method investment. In addition, lower paper prices had a negative impact on income.

Consolidated Results

Six Months Ended November 30, 2013 Compared to Six Months Ended November 30, 2012

Total revenue increased 7.2% for the six months ended November 30, 2013, over the same period in the prior fiscal year, from $2.1 billion to $2.3 billion. Revenue growth was negatively impacted by 0.8% due to one fewer workday in the period ended November 30, 2013 compared to the period ended November 30, 2012. Revenue increased organically by 7.1%. The 0.9% difference in growth rates represents growth derived through acquisitions in our First Aid, Safety and Fire Protection Services and our Document Management Services operating segments.

Rental Uniforms and Ancillary Products operating segment revenue increased 5.7% for the six months ended November 30, 2013, over the same period in the prior fiscal year, from $1.5 billion to $1.6 billion. Revenue growth was negatively impacted by 0.8% due to one fewer workday in the period ended November 30, 2013 compared to the period ended November 30, 2012. Revenue increased organically by 6.5% due to the amount of new business sold by our sales representatives, resulting from an increase in the number and productivity of sales representatives.

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 11.0% for the six months ended November 30, 2013, over the same period in the prior fiscal year, from $601.0 million to $666.9 million. Revenue growth was negatively impacted by 0.8% due to one fewer workday in the period ended November 30, 2013 compared to the period ended November 30, 2012. Revenue increased organically by 8.6%. The 3.2% difference in growth rates


represents growth derived through acquisitions in our First Aid, Safety and Fire Protection Services and our Document Management Services operating segments.

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 $46.8 million, or 5.4%, for the six months ended November 30, 2013, compared to the six months ended November 30, 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 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 $40.6 million, or 11.1%, for the six months ended November 30, 2013, compared to the six months ended November 30, 2012. This increase was primarily due to increased sales volume in each of the operating segments.

Selling and administrative expenses increased $50.3 million, or 8.4%, for the six months ended November 30, 2013, compared to the six months ended November 30, 2012. In the six months ended November 30, 2012, a gain on sale of stock of an equity method investment was realized, reducing selling and administrative expenses by $8.5 million. This gain was allocated to each operating segment. The remainder of the increase was primarily due to increases in labor and other employee-partner related expenses.

Net interest expense (interest expense less interest income) was $32.9 million for the six months ended November 30, 2013, which is materially consistent with the $32.7 million for the six months ended November 30, 2012.

Cintas' effective tax rate was 37.5% for the six months ended November 30, 2013, compared to 37.0% for the six
months ended November 30, 2012. The effective tax rate can fluctuate from quarter to quarter based on specific discrete items.

Net income increased $7.9 million, or 5.1%, for the six months ended November 30, 2013, from the same period in the prior fiscal year. This increase was primarily due to the growth in revenue. Diluted earnings per share were $1.33 for the six months ended November 30, 2013, which was an increase of 8.1% compared to the same period in the prior fiscal year. Diluted earnings per share increased due to an increase in earnings combined with a decrease in weighted average common stock outstanding. The decrease in common stock outstanding resulted from purchasing 4.6 million shares of common stock under the October 18, 2011 share buyback program since the beginning of the third quarter of fiscal 2013 through the second quarter of fiscal 2014.

Rental Uniforms and Ancillary Products Operating Segment

Six Months Ended November 30, 2013 Compared to Six Months Ended November 30, 2012

As discussed above, Rental Uniforms and Ancillary Products operating segment revenue increased from $1.5 billion
to $1.6 billion, or 5.7%, and the cost of rental uniforms and ancillary products increased $46.8 million, or 5.4%, for the six months ended November 30, 2013, compared to the six months ended November 30, 2012. The operating segment's gross margin was $683.3 million, or 42.8% of revenue, for the six months ended November 30, 2013. This gross margin percent of revenue of 42.8% was 20 basis points higher than the same period of the prior fiscal year of 42.6%. The six month period ended November 30, 2012 included a $1.6 million expense amounting to 10 basis points related to the write-off of a garment processing system. The remaining 10 basis point increase in gross margin is due primarily to increased revenue covering fixed costs including our plant infrastructure.

Selling and administrative expenses as a percent of revenue at 27.5% increased 30 basis points, or $29.2 million, compared to the same period of the prior fiscal year. The prior year period expense as a percent of revenue of 27.2% was positively impacted by 40 basis points from the gain on sale of stock of an equity method investment previously mentioned.

Income before income taxes increased $10.5 million to $243.5 million for the Rental Uniforms and Ancillary Products operating segment compared to the same period last fiscal year. Income before income taxes was 15.2% of the operating segment's revenue, which is a 20 basis point decrease from the 15.4% margin in the same period of the


prior fiscal year. As previously mentioned, the six month period of last fiscal year benefited 40 basis points from the gain on sale of stock of an equity method investment.

Uniform Direct Sales Operating Segment

Six Months Ended November 30, 2013 Compared to Six Months Ended November 30, 2012

Uniform Direct Sales operating segment revenue increased from $210.5 million to $229.3 million, or 9.0%, for the six months ended November 30, 2013, over the same period in the prior fiscal year due to several large uniform customer roll-outs.

Cost of uniform direct sales increased $13.7 million to $164.5 million for the six months ended November 30, 2013. The gross margin as a percent of revenue was 28.3% for the six months ended November 30, 2013, which is a 10 basis point decrease compared to the gross margin percentage of 28.4% in the same period of the prior fiscal year. The change is mainly due to a greater mix of national account revenue in the first half of this fiscal year compared to last fiscal year. National accounts generally have a lower gross margin than other types of accounts.

Selling and administrative expenses increased $1.8 million compared to the first half 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 were 18.4% for the six months ended November 30, 2013, which is a decrease of 90 basis points compared to 19.3% for the six months ended November 30, 2012. This decrease in percent of revenue is mainly due to higher revenue for the first six months of fiscal 2014 compared to the same period in the prior fiscal year.

Income before income taxes increased $3.4 million to $22.5 million for the Uniform Direct Sales operating segment for the six months ended November 30, 2013. Income before income taxes was 9.8% of the operating segment's revenue, compared to 9.1% for the same period last fiscal year, which is a 70 basis point increase. This increase is primarily due to revenue growing faster than expenses.

First Aid, Safety and Fire Protection Services Operating Segment

Six Months Ended November 30, 2013 Compared to Six Months Ended November 30, 2012

First Aid, Safety and Fire Protection Services operating segment revenue increased from $222.4 million to $250.5 million, or 12.6%, for the six months ended November 30, 2013. Revenue growth was negatively impacted by 0.8% due to one less workday in the period ended November 30, 2013 compared to the period ended November 30, 2012. Revenue increased organically by 9.0%. The remaining 4.4% increase represents growth through acquisitions.

Cost of first aid, safety and fire protection services increased $14.2 million, or 11.2%, for the six months ended November 30, 2013, over the same period in the prior fiscal year, 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, at 43.5% for the six months ended November 30, 2013, is a 70 basis point increase compared to the gross margin percent of revenue of 42.8% for the six months ended November 30, 2012. The margin improvement is primarily due to an improved mix of higher gross margin revenue. In addition, energy costs decreased approximately 20 basis points.

Selling and administrative expenses increased $10.5 million compared to the six months ended November 30, 2012, primarily due to an increase in labor and other employee-partner related expenses and our continued investment in an enterprise software system. Selling and administrative expenses as a percent of revenue, at 34.7%, increased 30 basis points compared to the same period of the prior fiscal year. The prior year period expense as a percent of revenue of 34.4% was positively impacted by 40 basis points from the gain on sale of stock of an equity method investment.

Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment increased $3.4 million to $22.0 million for the six months ended November 30, 2013, compared to the same period 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 8.8% of the operating segment's revenue, is a 40 basis point increase compared to the same period last fiscal year due to the improvements discussed above.

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