Cintas Corporation (CTAS) delivered third quarter EPS of 41 cents surpassing the Zacks Consensus Estimate of 36 cents and 32 cents  reported during the prior-year quarter.

Cintas’ total revenue increased 8.8% to $937.8 million in the reported quarter, outperforming the Zacks Consensus Estimate of $909 million and $861.8 million in the year-earlier quarter. The improvement in revenue can be attributed to continued momentum in sales productivity and customer retention.

Costs and Margins

Cintas reported an increase of 6.6% in cost of rental uniforms, which rose to $380.2 million in the reported quarter from $356.7 million in the prior-year quarter. Cost of other revenues surged 13.9% to $165.7 million in the reported quarter from $145.4 million in the year-ago quarter.

Selling and administrative expenses increased 2.7% to $283 million in the third quarter compared with $275.6 million in the year-ago quarter.

The company also reported an increase of 29.6% in operating income amounting to $108.9 million in the third quarter compared with $84 million in the prior-year quarter. Consequently, operating margins also increased 200 basis points year over year to 12% in the reported quarter.

Segmental Performance

Rental Uniforms and Ancillary Products: Revenue in this segment increased to $665 million in the reported quarter from $622.5 million in the year-earlier quarter. Selling and administrative expenses as reported by the segment plummeted to $199.2 million in the third quarter from $201.4 million in the year-ago quarter.

Uniform Direct Sales: Revenue in this segment amounted to $102.6 million in the third quarter compared with $94.4 million in the year-ago quarter. Selling and administrative expenses increased to $30.2 million in the third quarter compared with $19.7 million in the reported quarter.

First Aid, Safety and Fire Protection: This segment reported sales of $91.2 million in the quarter under review compared with $79.2 million in the prior-year quarter. Selling and administrative expenses also increased to $33.3 million in the reported quarter from $29.3 million in the prior-year quarter.

Document Management: Revenue in this segment increased to $79.1 million in the reported quarter compared with $65.7 million in the year-earlier quarter. Selling and administrative expenses also increased to $32.7 million from $25.2 million in the year-ago quarter.

Financial Position

Cash from operating activities, as reported by Cintas, amounted to $207.9 million at the end of third quarter compared with $429.2 million at the end of prior-year quarter. Free cash flow also decreased to $65.7 million in the reported quarter from $3503 million in the year-ago quarter.

Cintas’ reported cash and marketable securities of $216.7 million as of February 28, 2011 compared with $566.1 million as of May 31, 2011. Current ratio of the company was 3.4:1. Debt-to-capitalization ratio was 24.6% as of February 28, 2011, 24.7% as of November and 24.2% as of August 31, 2011.

Outlook

Encouraged by its third quarter performance the company increased its guidance for fiscal 2011. The company now expects full year revenue in the range of $3.75 billion – $3.77 billion. Management also expects an increase in gasoline and diesel cost to impact its fourth quarter results. Thus, the company expects fiscal 2011 earnings in the range of $1.60 – $1.63 per share.

Our Take

Cintas Corporation is also making a steady recovery through consistent increases in revenue. With a sound financial position and strong cash flow, the company is looking for opportunities to improve its long-term profitability. Though Cintas did not purchase any shares during the quarter, the buy-back done during the last quarter is likely to have a positive effect on fiscal 2011 performance.

However, Cintas’ revenue stream, largely dependent upon the services industry, would be threatened by a lack of substantial recovery in the employment rate. Cintas currently retains a Zacks #2 Rank (short-term Buy 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. Cintas competes with G&K Services Inc. (GKSR) and privately held Alsco Inc. and ARAMARK Corporation.

 
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