Cintas (CTAS) Q2 Earnings Beat, Updates Fiscal Guidance - Analyst Blog

Cintas Corporation (CTAS) reported solid second-quarter fiscal 2015 (ended Nov 30, 2014) results with adjusted earnings of 86 cents per share versus 69 cents in the year-ago quarter. The 24.6% year-over-year increase in earnings was primarily attributable to increased cost efficiency that led to operating margin expansion. The adjusted earnings for the reported quarter also comfortably beat the Zacks Consensus Estimate of 78 cents.

 

 

On a GAAP basis, Cintas reported net income of $120.4 million or $1.00 per share compared with $84.9 million or 70 cents per share in the year-earlier quarter.

Quarterly revenues remained steady year over year at $1.1 billion, in line with the Zacks Consensus Estimate. Organic growth (adjusted for the impact of acquisitions) was impressive at 7.2%.

Adjusted gross margin was 42.9% compared with 41.3% in the prior-year quarter. Adjusted operating income in the reported quarter climbed 20.7% year over year to $181.6 million. Operating margin was 16.2%, 190 basis points higher than 14.3% in the year-earlier quarter.

Segment Performance

Rental Uniforms and Ancillary Products revenues for the quarter improved 7.6% year over year to $865.4 million, driven by the improved pricing environment. The segment accounted for 77.0% of the total revenue, with organic growth of 8.1%. Gross margin increased to 44.8% from 42.9% in the year-ago quarter due to improved operating efficiency.

Revenues for Uniform Direct Sales were $117.5 million (down 3.6% year over year), as lower sales to national accounts continued to be a drag. The segment accounted for 10.5% of the company's revenues. First Aid, Safety and Fire Protection Services revenues improved 12.7% to $140.5 million, representing 12.5% of the company's total revenue.

Divestiture

During the quarter, Cintas sold its Document Storage and Imaging businesses in three separate transactions to three separate buyers for an aggregate sum of approximately $180 million. Consequently, the company classified its Document Storage and Imaging businesses as discontinued operations in this quarter. The transactions marked the exit of the company from this business line.

Financial Position

Cintas has a solid financial position with adequate liquidity. Cash and cash equivalents stood at $826.7 million at quarter end. Capital expenditures for the quarter were $44.5 million.

Long-term debt remained steady at $1.3 billion. Cash flow from operations aggregated $292.6 million for the first half of fiscal 2015, compared with $222.3 million in the year-ago period. Free cash flow for the first six months of fiscal 2015 increased to $179.4 million from $145.5 million in the prior-year period.

Updated Fiscal Guidance

In concurrence with second-quarter fiscal 2015 results, Cintas revised its fiscal guidance taking into account the volatile yet somewhat positive and improving economic environment. For fiscal 2015, Cintas increased its revenue guidance to the range of $4.45 billion–$4.50 billion from its previous guidance of $4.40 billion–$4.475 billion.

Earnings guidance for fiscal 2015 was also revised upward from its earlier range of $3.20–3.29 per share to $3.49–$3.54.

Moving Forward

Cintas continues to deliver organic growth through superior execution of its operational plans. The company expects to build strong momentum in the coming quarters as it focuses on its rental first aid and direct sale businesses. We remain encouraged by the company's relatively strong quarterly performance and bullish guidance.

Cintas currently has a Zacks Rank #2 (Buy). Other stocks that look promising and are worth a look now include G&K Services Inc. (GK), Exponent Inc. (EXPO) and Towers Watson & Co. (TW), each sporting a Zacks Rank #2 (Buy).

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