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Cintas Reports Sound 3Q

CTAS

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Cintas Corporation ((CTAS - Analyst Report) reported third-quarter fiscal 2012 (ending February 29, 2012) earnings of 58 cents per share, 41.5% higher than 41 cents earned in the year-ago quarter. The results surpassed the Zacks Consensus Estimate of 52 cents.

Operational Update

Total revenues in the reported quarter increased 7.9% year over year to $1.012 billion, beating the Zacks Consensus Estimate of $1.008 billion. Organic growth in the quarter was 5.9%.

Cost of rental uniforms and ancillary products increased 7.8% year over year to $409.9 million and cost of services rose 6.4% to $176.2 million during the quarter. Selling, general and administrative expenses increased 1.9% on a year-over-year basis to $288.4 million.

Operating income for the third quarter also improved 26.3% to $137.5 million. Consequently, operating margin expanded 200 basis points (bps) year over year to 13.6%.

Segment Update

Rental uniforms and ancillary product revenues of $721 million for the quarter increased 8.4% from $665 million in the year-ago quarter. Gross profit increased to $311.1 million in the quarter from $284.8 million in the prior-year quarter. Gross margin increased 30 bps year over year to 43.1%.

Uniform Direct Sales revenues grossed $109.1 million, increasing 6.4% from $102.6 million in the year-ago quarter. Gross profit for the segment was $33.2 million, up from $30.2 in the year ago quarter. Gross margin increased 100 bps year over year to 30.5%.

First Aid, Safety and Fire Protection revenues were $101.4 million, up 11.2% from the year-earlier quarter. Gross profit increased to $43.8 million from the year ago quarter of $37.9 million. Gross margin improved 170 bps year over year to 43.2% in the quarter.

Document Management revenues of $80.6 million for the quarter increased 2% from $79.1 million in the year-ago quarter. Gross profit, however, declined to $37.9 million from the prior-year quarter of $39.1 million. The segment’s gross margin decreased 240 bps year over year to 47%.

Financial Position

Cash and cash equivalents were $217.9 million as of February 29, 2012, decreasing from $438.1 million as of May 31, 2011. Long-term debt was $1.06 billion as of February 29, 2012 compared to $1.28 billion as of May 31, 2011. As of February 29, 2012, the debt-to-capitalization ratio decreased to 36.9% from 37.9% as of November 30, 2011. Cash flow from operations was $307.7 million during the first nine months of fiscal 2012, up from $207.9 million in the year-ago comparable period.

Looking Ahead

Cintas, in fiscal 2012, expects to generate revenues in the band of $4.9 billion to $4.12 billion, up from the previous expectation of $4.075 billion to $4.125 billion. Earnings are now expected in the range of $2.24 to $2.27 versus the prior range of $2.16 to $2.20 per share.

The company expects capital expenditure to be between $160 million and $170 million in fiscal 2012.

Our Take

Cintas performed well in the third quarter of fiscal 2012. The company experienced robust organic growth and improved margin expansion in almost all the segments except Document Management. Lower prices of recycled paper negatively affected the Document Management segment.

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 900,000 businesses. Cintas competes with G&K Services Inc. ( and privately held Alsco Inc. and ARAMARK Corporation.

Currently, we have an Outperform recommendation on Cintas, which is backed by a short-term Zacks #2 Rank (Buy).

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