Business services provider Cintas Corporation (CTAS - Free Report) started fiscal 2017 on a positive note, recording solid first-quarter results on the back of healthy top-line growth. The company reported first-quarter fiscal 2017 (ended Aug 31, 2016) net income of $138.1 million or $1.26 per share from continuing operations compared with $106.2 million or 93 cents per share in the year-earlier quarter. Adjusted earnings for the reported quarter were $1.12 per share, which comfortably beat the Zacks Consensus Estimate by 3 cents.
Quarterly revenues increased 7.9% year over year to $1,294.1 million, exceeding the Zacks Consensus Estimate of $1,289 million. Organic growth for the reported quarter improved 5.7% year over year. The superior top-line performance was primarily attributable to the addition of new customers, strong customer retention and higher penetration of existing customers through better and innovative products and services.
Gross margin for the reported quarter was 45.1% compared with 43.7% in the prior-year quarter. Operating income in the quarter was $207.0 million, up 11.6% year over year. Operating margin was 16.0%, slightly higher than 15.5% in the year-earlier quarter.
Uniform Rental and Facility Services revenues for the quarter improved 6.5% year over year to $999.6 million. The segment accounted for 77.2% of the total revenue, with year-over-year organic growth of 5.9%. Gross margin increased 120 basis points to 45.9% in the reported quarter.
Revenues for First Aid and Safety Services were up 25% year over year to $125 million, largely due to the Zee Medical acquisition. This segment recorded organic growth of 5.4% and accounted for 9.7% of the total revenues. Segment gross margin increased to 45.8% in the reported quarter from 42.3% in the year-ago quarter due to improved sourcing and leverage from existing warehouses. The All Other segment recorded revenues of $294.5 million, representing 22.8% of total revenues of the company.
During the reported quarter, Cintas inked a definitive agreement to acquire rival G&K Services Inc. (GK - Free Report) to fuel its growth momentum. The transaction is expected to be completed within the next four to six months, subject to the fulfillment of mandatory closing conditions and regulatory approvals.
According to the terms of the agreement, Cintas would acquire all the outstanding shares of G&K for $97.50 per share, which represents a premium of about 19% to its closing price on Aug 15. The transaction equates to total enterprise value of approximately $2.2 billion, including acquired net debt.
Headquartered in Minneapolis, MN, G&K operates as a branded uniform and facility services program provider in the U.S. and Canada. With over 8,000 employees, serving customers from 165 facilities in North America, it reported annual revenues of $950 million in 2015.
Post acquisition, G&K would operate as a wholly-owned subsidiary of Cintas and is likely to retain its existing brand name. The combined company is likely to cater to over one billion business customers with an extended product portfolio and additional processing capacity. Customer service is also likely to improve with increased route density.
The synergies from the combined operations are likely to yield $130 million to $140 million in cost savings and the transaction is anticipated to be accretive to Cintas’ earnings from the second year of its operation.
Cintas has a solid financial position with adequate liquidity. At the quarter end, cash and cash equivalents were $99.2 million, while long-term debt was $1,044.6 million.
Net cash from operating activities was $157.6 million for the reported quarter compared with $143.1 million in the prior-year period. Capital expenditures in the quarter were $78.6 million compared with $62.6 million in the year-earlier quarter. Free cash flow for the quarter decreased marginally to $79.0 million from $80.4 million in the year-ago period.
Updated Fiscal 2017 Guidance
Buoyed by the healthy first-quarter fiscal 2017 results, Cintas increased its guidance for fiscal 2017. The company currently expects fiscal 2017 revenues in the range of $5.160 billion to $5.225 billion, up 5.2–6.5% year over year. Earnings from continuing operations are expected to be within $4.55–$4.63 per share, up from $4.35–$4.45 per share anticipated earlier. The current earnings per share guidance represents a year-over-year improvement of 11.2–13.2%. The guidance, however, has not taken into consideration any potential deterioration in the U.S. economy, future share repurchases or any future financial impact from the acquisition of G&K.
Cintas continues to deliver organic growth through superior execution of its operational plans. We remain encouraged by the company’s strong quarterly and fiscal performance and its bullish guidance.
Cintas currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include CBIZ, Inc. (CBZ - Free Report) and The Hackett Group, Inc. (HCKT - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CBIZ has a solid earnings history, beating earnings estimates thrice in the trailing four quarters. The stock is currently trading at a forward P/E of 15.1x.
With long-term earnings growth expectations of 17.5%, Hackett Group is another star performer in the Consulting industry.
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