Cintas Corporation (CTAS) announced its first-quarter fiscal 2011 results with operating earnings of 40 cents per share, which surpassed the Zacks Consensus Estimate of 37 cents. The company had reported operating earnings of 43 cents per share in the year-ago quarter.
 
On a GAAP basis, Cintas’ earnings for the first quarter of fiscal 2011 were 40 cents per share versus 35 cents per share recorded in the year-ago period.
 
Total Revenue
 
Cintas’ total operating revenue for first-quarter fiscal 2011 was $923.9 million versus $891.6 million reported in the year-ago period, reflecting a growth of 3.6%. The year-over-year growth was driven by better performance from its Document Management and Uniform Direct Sales segment. Sales on the whole improved as the company was able to add new consumers as well as sell more products to its existing client base.
 
The results of the company surpassed of the Zacks Consensus Estimate of $915 million.
 
Operational Update
 
Cost of goods sold, as a percentage of revenue, during the first quarter 2011 increased by 30 basis points from the comparable period in the previous year. The increase in input costs led to a 30 basis point decline in the gross margin of the company, dropping to 42.6% from 42.9% reported in the year-earlier period.
 
Selling and administrative expenses during the quarter increased by 11% year over year.
 
The first quarter 2010 results were negatively impacted by legal settlement charges of $19.5 million, which was missing in first quarter fiscal 2011.
 
Financial Update
 
Cintas continues to enjoy a strong cash balance, ending the first quarter of fiscal 2011 with $290 million in cash versus $227.3 million at the end of the year-ago quarter.
 
During the quarter, Cintas repurchased 4.9 million shares at an average price of $26.53 per share, amounting to $130 million. Cintas followed it up by purchasing another 2.7 million shares, worth $72 million, in September at an average price of $26.67.
 
Capital expenditure at the end of the first quarter of 2011 climbed 94.3% to $48.2 million compared with $24.8 million in the comparable period, a year ago. The company invested $48 million during the quarter for strategic acquisitions, which include the Document Management business in the U.K., as announced in July 2010.
 
Cintas ended the first quarter of fiscal 2011 with a long-term debt of $785.7 million, which declined marginally from $785.9 million at the end of the first quarter 2010. Consequently, the debt-to-capital ratio of the company at the end of the reported quarter, at 24.2%, improved by a slender 30 basis point from 24.5% a year ago.
 
Outlook
 
Cintas guides total revenue for fiscal 2011 to be in the range of $3.55 billion to $3.75 billion.
 
The company was yet to benefit from share repurchases executed in the reported quarter. Cintas expects to receive the positive impact of the share buyback in the balance of the fiscal year. Earnings per share for fiscal 2011 are now expected in the range of $1.55 to $1.63 per share, up from $1.50 to $1.58 per share guided earlier.
 
Our Take
 
Cintas’ strong financial position enabled it to repurchase shares in the first quarter of 2011, and carry the momentum into September as well, without incurring any additional debt, a feat to be much appreciated.
 
Although the company has taken steps to control costs and improve profitability, it is yet to realize the benefit there from. We also believe the sluggish growth in the economy will deter growth and profitability. Hence we maintain a Neutral rating on the company. Cintas currently retains a Zacks #4 Rank (short-term Sell rating).  
 
Cincinnati, Ohio-based Cintas Corporation designs, manufactures, and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products, and first aid and safety products for approximately 800,000 businesses.
 
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