CTAS

Cintas Corporation (CTAS)

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Cintas (CTAS)

Q2 2014 Earnings Call

December 19, 2013 5:00 pm ET

Executives

William C. Gale - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

J. Michael Hansen - Vice President and Treasurer

Analysts

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Gregory Bardi - Barclays Capital, Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

Hamzah Mazari - Crédit Suisse AG, Research Division

Joe Box - KeyBanc Capital Markets Inc., Research Division

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

John M. Healy - Northcoast Research

George K. Tong - Piper Jaffray Companies, Research Division

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Dan Dolev - Jefferies LLC, Research Division

Sean Sun-Il Kim - RBC Capital Markets, LLC, Research Division

Gregory W. Halter - LJR Great Lakes Review

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Presentation

Operator

Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Bill Gale, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

William C. Gale

Thank you for joining us this evening as we report our second quarter results for fiscal 2014. With me is Mike Hansen, Cintas' Vice President and Treasurer. After some commentary on the results, we will be happy to answer questions.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC.

We are pleased to report second quarter revenue of $1,144,000,000, which represents growth of 7.9% from last year's second quarter. The number of workdays in both this year's and last year's second quarters was 65. Organic growth, which adjusts for the impact of acquisitions, was 7.1%, the same organic growth we achieved in our first quarter. Mike will give more details by operating segment in a few minutes.

Our operating income for the second quarter was $153 million, which is 13.4% of revenue. This operating margin is 30 basis points higher than last year's second quarter operating margin of 13.1%. It should be noted that last year's second quarter included an $8.5 million gain on the sale of an investment and a $1.6 million write-off of a garment processing system used in one of our rental locations. When adjusting for these 2 items, our operating margin actually improved by almost a full percentage point. We are also very pleased with our results so far in fiscal 2014.

Second quarter net income was $84.9 million and earnings per diluted share were $0.70. It should be noted that our revenues and earnings per share were record quarterly amounts for Cintas and I wish to congratulate all of our Cintas employees who we call partners for this achievement.

We also just recently paid our annual dividend of $0.77 per share, which was a 20.3% increase over last year's dividend and was the 31st consecutive year in which we raised our dividend.

As Scott Farmer indicated in our press release, based on our second quarter results and our view of the U.S. economic climate, we are updating our fiscal 2014 guidance with revenue in the range of $4.525 billion to $4.575 billion and EPS in the range of $2.73 to $2.79. This guidance assumes no deterioration in the U.S. economy and does not consider any future share buybacks.

In July, when we provided our initial guidance, we gave our expectation that fiscal 2014 medical expense would be higher than fiscal 2013 by 10 to 30 basis points due to the effects of the Affordable Care Act and that this impact would be seen in the second half of the fiscal year. While there remains a great amount of uncertainty about the impact of this program in the future, we still expect it to increase our medical expense in the second half of this fiscal year. However, the impact will likely be at the lower end of the 10- to 30-basis-point range provided in July. This expectation is included in our updated guidance.

Now I would like to turn the call over to Mike for more details on the second quarter.

J. Michael Hansen

Thanks, Bill. As Bill mentioned, total revenue increased 7.9% from the second quarter of last year, with total company organic growth being 7.1%. Total company gross margin for the second quarter was 41.7%, which is an improvement from last year's second quarter gross margin of 40.7%. I will discuss these items in more detail by segment.

Before doing so, let me remind you that there were 65 workdays in our second quarter, which was the same as last year. As we look ahead to the remainder of the fiscal year, our third quarter will have 65 workdays, whereas last year's third quarter had 64, so we will have one additional day. Our fourth quarter will also have 65 workdays, whereas last year's fourth quarter has 66 workdays, so we will have one less workday in the fourth quarter. For the full fiscal year, we will have 260 workdays, which is one less than last year's total.

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