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Cintas Third Quarter Earnings Call
Author: Albena Toncheva
Last Update: 4:06 AM EDT March 26 2008


The leading uniform supplier reported revenue of $976 million as against $905.4 million in the prior year. The rental organic growth improved to 3.8% in Q3, a 55 basis point improvement over Q2. With additional deterioration expected in commercial construction, the firm is focusing on new business opportunities in the fire installation business, which is dependent on commercial construction. For fiscal 2008, the firm expects revenues to be in the range of $3.93 billion to $3.96 billion.

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This summary is based on the third quarter fiscal 2008 earnings call conducted by Cintas Corp. (CTAS) on March 19, 2008.

Sr. VP & CFO: William Gale
Vice President, Treasurer: Michael Thompson

Key Investors Issues

- Earnings per diluted share were 53 cents, an increase of 10.4% over last year.
- The revenue for the quarter grew 7.8% over last year to $976 million.
- The firm revised its EPS guidance downwards and expects EPS to range between $2.12 and $2.16.

Third Quarter Fiscal 2008 Financial Highlights

Total revenues were $976 million for the quarter, a 7.8% increase over the $905.4 million in the third quarter of fiscal 2007.

The rental organic growth improved to 3.8% for the third quarter, a 55 basis point improvement over the second quarter when adjusted for the additional work day. Total company third quarter internal growth however decreased slightly to 4.5% from 4.8% in the second quarter. Year to date, total company internal growth was also 4.5%. The companyís third quarter had 65 work days which was one more work day than the third quarter of fiscal 2007.

Rental uniforms and ancillary products is the largest operating segment, accounting for 72% of total company revenues during the third quarter.

Uniform and ancillary product revenues were $703.6 million for the quarter, compared to $665.6 million in the third quarter of last year, a 5.7% increase. Year to date, revenues for this segment were up 4.2% over last yearís first nine months. Factoring out acquisitions made over the last 12 months, rental organic growth rate was 3.8% for the third quarter, which is a 55 basis point improvement over the 3.25% internal growth in the second quarter.

The firm continues to see improvement in new business within its uniform and ancillary product segment, resulting from new sales organization and it is encouraged by these results. The new business generated through the quarter and year to date has bet the firmís expectations. The weakness experienced with existing customers late in second quarter continued through the third quarter, causing the total uniform and ancillary product internal growth to be below original expectations.

During the third quarter, uniform direct sales revenue declined 0.7%, as the firm experienced weak sales in both national account direct sale business and direct sale catalogue.

During challenging economic conditions, these direct sale businesses tend to move with greater volatility than rental business, as many of the direct sale customers will delay purchasing during economic downturns. The firm expects to continue experiencing weakness in this segment in the fourth quarter.

During the quarter, revenues within the first aid, safety and fire protection operating segment grew 10.3%.

On an organic basis, this segment grew approximately 5.3% as compared to 6.2% in the second quarter. The first aid and safety business continues to provide double-digit internal growth. However this growth was offset by a combination of lower than anticipated recurring fire service revenue and continued pressure on fire installation sales. The firm is allocating its sales resources within fire protection with a focus on the recurring service business and away from the sale and installation of fire suppression systems.

The fire installation business is dependent on commercial construction, which is facing difficult business conditions. With additional deterioration expected in commercial construction, the firm is focusing on new business opportunities elsewhere in the fire protection space. The firm continues to evaluate and make strategic acquisitions within this segment, but with a defined focus on expanding the geographic coverage of the firmís fire protection service business. As with the other businesses, the firm believes that a full national presence will provide it unique opportunities with large national customers and prospects, while it will still evaluate other acquisitions in this space. The evaluation would have to be compelling for the firm to more forward.

The document management services operating segment continues to grow at a very rapid rate.

Third quarter revenues for the document management operating segment grew 71.2% as compared to 77.4% in the second quarter. Internal growth for the segment was 41%, down slightly from 43% in the second quarter. This divisionís growth continues to exceed the companyís expectations and current annual revenue run rate is over $185 million.

The firmís small document management business in The Netherlands, which was purchased approximately six months ago, continues to meet the expectations while providing the firm a nice international proving ground. The firm continues to make strategic acquisitions in document management. While the firm now services customers in over 85 of the top 100 markets in the United States and Canada, it continues to emphasize obtaining additional coverage in significant markets in order to be a true national provider.

Consolidated margins declined as compared to last quarterís margins and last yearís third quarter margins.

The main reason for the decline in margins as compared to both periods was energy costs, which increased to 3.7% of total company revenues. Energy costs increased 50 basis points as compared to the second quarter due to an increase in delivery fuel costs and increased seasonal usage of natural gas. Delivery fuel increased 50 basis points over the third quarter of last year. The only other time energy costs reached this level was for third quarter of fiscal 2006. Energy costs at that time were related to a combination of run up in natural gas and delivery fuel prices. Current quarter costs are related to delivery fuel.
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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