Business services provider Cintas Corporation CTAS continued its bull run in fiscal 2016 by recording solid second-quarter results on the back of healthy top-line growth. The company reported second-quarter fiscal 2016 (ended Nov 30, 2015) net income of $115.5 million or $1.03 per share from continuing operations compared with $103.7 million or 86 cents per share in the year-earlier quarter. The reported earnings for the quarter comfortably beat the Zacks Consensus Estimate by 3 cents.
Quarterly revenues increased 8.5% year over year to $1,219.1 million and exceeded the Zacks Consensus Estimate of $1,218 million. Organic growth for the reported quarter improved 6.5% year over year. The superior top-line performance was primarily attributable to the addition of newer customers, higher product prices and higher penetration of existing customers through better and innovative products and services.
Gross margin for the quarter was 43.3% compared with 42.9% in the prior-year quarter. Operating income in the reported quarter was $200.3 million, up 10.3% year over year. Operating margin was 16.4%, slightly higher than 16.2% in the year-earlier quarter.
Segment Performance
Uniform Rental and Facility Services revenues for the quarter improved 5.2% year over year to $937.7 million. The segment accounted for 76.9% of the total revenue, with year-over-year organic growth of 6.2%. Gross margin for the segment increased 60 basis points to 43.9% in the reported quarter.
Revenues for First Aid and Safety Services were up 46.4% year over year to $120.4 million largely due to the Zee Medical acquisition. This segment recorded organic growth of 9.8% and accounted for 9.9% of the company’s revenues. Segment gross margin decreased to 43.2% in the reported quarter from 46.7% in the year-ago quarter due to acquisition and integration costs. The All Other segment recorded revenues of $161.0 million, representing 13.2% of total revenues of the company.
Financial Position
Cintas has a solid financial position with adequate liquidity. At quarter end, cash and cash equivalents were $606.8 million, while long-term debt was $1.1 billion.
During the reported quarter, Cintas completed the sale of its investment in Shred-it International Inc. The company received $578 million in proceeds from the divesture. In addition, Cintas is likely to receive up to $34 million in additional consideration in the future, subject to certain holdback provisions. The gain from the asset sale transaction is included in discontinued operations in the current quarterly results. The divesture completes the exit of the company from the document management business.
Net cash from operating activities was $265.0 million for the first six months of fiscal 2016 compared with $292.6 million in the prior-year period. Capital expenditures in the quarter were $59 million. Free cash flow for the first half of fiscal 2016 decreased to $143.2 million from $179.5 million in the year-ago period.
Cintas repurchased 4.5 million shares since the beginning of fiscal 2016 for $382.9 million, including $180.4 million in the reported quarter. The company currently has $380 million worth of shares available for repurchase
Updated Fiscal 2016 Guidance
Buoyed by the healthy second-quarter fiscal 2016 results, Cintas revised its guidance for fiscal 2016. The company expects fiscal 2016 revenues in the range of $4.825 billion to $4.880 billion, up 7.8%–9% year over year. Earnings from continuing operations are expected to be within $3.83–$3.90 per share, which represents a year-over-year improvement of 14.3%–16.4%.
Moving Forward
Cintas continues to deliver organic growth through superior execution of its operational plans. We remain encouraged by the company’s strong quarterly performance and its bullish guidance.
Cintas currently has a Zacks Rank #4 (Sell). Stocks in the industry worth reckoning include CBIZ, Inc CBZ and Towers Watson & Co. TW, both carrying a Zacks Rank #2 (Buy) and Navigant Consulting Inc. NCI, carrying a Zacks Rank #1 (Strong Buy).
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