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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

Cintas (CTAS) Q2 2014 Earnings Call December 19, 2013 5:00 PM ET

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.

We have 4 reportable operating segments: Rental Uniforms and Ancillary Products; Uniform Direct Sales; First Aid, Safety and Fire Protection Services; and Document Management Services. Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services are combined and presented as Other Services on the face of the income statement.

The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms, mats, towels and other related items. The segment also includes restroom supplies and other facility products and services. Rental Uniforms and Ancillary Products revenue accounted for 70% of company revenue in the second quarter and totaled $804.3 million, which is up 6.4% compared to last year's second quarter. Organic growth was also 6.4%. Sales rep new business and productivity continued to be strong. And similar to the first quarter, our national account revenue penetration was very good.

Our Rental segment gross margin was 42.9% for the second quarter, an increase from 41.9% in last year's second quarter. Energy-related costs were comparable to last year's second quarter. As Bill mentioned, we wrote off a garment processing system during last year's second quarter. Excluding this impact, Rental gross margin improved by 80 basis points. As we've discussed on previous calls, we began to increase our route capacity in last year's second quarter and we have now lapped that initial investment. The efficiency of these routes has improved throughout the past 12 months and has helped to improve Rental's gross margin. In addition, we continue to see improved leveraging of our plant infrastructure.

The Rental segment's second quarter gross margin of 42.9% was also an improvement from the 42.6% in the first quarter. Energy-related costs were about 10 basis points lower than the first quarter, but improved route efficiency and plant infrastructure leverage also contributed to the improvement.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms and other related products to national and regional customers. Uniforms and other related products are also sold to local customers, including products sold to rental customers through our direct sale catalog.

Uniform Direct Sales revenue accounted for 11% of company revenue in the second quarter and totaled $121.9 million, which represented sales growth of 10.6% compared to last year's second quarter. We've been very pleased with the Uniform Direct Sales revenue this fiscal year, which is up 9% for the 6 months ended November 30. In fact, Uniform Direct Sales revenue was up 11.5% for the trailing 12 months. Having said that, the nature of this business is that the revenue can be quite choppy based on the timing of large national account program rollouts.

As we've discussed on previous calls, we had several very large national account rollouts during the second half of last fiscal year, which will not repeat this year. As a result, we expect Uniform Direct Sale revenue for the second half of fiscal '14 to be down 5% to 10% compared to last year's second half.

Uniform Direct Sales gross margin was 28.8% for the second quarter, up from last year's second quarter gross margin of 27.4% and the first quarter gross margin of 27.7%. This increase is mainly due to a greater mix of hospitality account sales in the second quarter and better leveraging of our distribution network infrastructure.

Our First Aid, Safety and Fire Protection Services operating segment includes revenue from the sale and servicing of first aid products, safety products and training and fire protection products. First Aid, Safety and Fire Protection revenue, which accounted for 11% of company revenue in the second quarter, was $124.6 million. This represents an increase of 11.7% over last year's second quarter revenue. Organic growth was 8.8%.

This segment's gross margin was 43.4% in the second quarter, which is up 100 basis points from the 42.4% in last year's second quarter. Energy-related costs were lower by 20 basis points. The remaining improvement is due to better leveraging of the infrastructure, particularly at the warehouse level. The gross margin of 43.4% is relatively consistent with the first quarter gross margin of 43.6%.

Our Document Management Services operating segment includes document destruction, storage and imaging services and it accounted for 8% of second quarter total company revenue. Document Management revenue totaled $93 million, which is 12.2% higher than last year's second quarter. Revenue increased organically by 6.9% compared to last year. Average recycled paper prices remained at about $125 per ton, which is down about 17% from last year's second quarter average. Organic growth, excluding recycled paper revenue, was 9.4%.

The second quarter gross margin was 45.7%, which is an increase from last year's second quarter gross margin of 45.4%. Energy-related costs were 30 basis points lower than last year. The lower recycled paper prices had a negative impact of $1.9 million on Document Management's gross margin. Using the same recycled paper prices last year, the second quarter gross margin would have improved by about 140 basis points. This improvement is due to our continued migration from on-site to off-site shredding and better performance in both our North American and European storage businesses.

Switching to selling and administrative expenses, SG&A was 28.3% as a percentage of revenue in the second quarter, which is up from last year's second quarter figure of 27.6%. However, as Bill mentioned, last year's second quarter SG&A included an $8.5 million gain from the sale of stock in an investment. Adjusting for this onetime item, last year's second quarter SG&A percentage would have been 28.4% compared to this year's 28.3%.

Our effective tax rate was 37.9% for the quarter compared to 36.5% last year. Last year, our second quarter effective tax rate reflected the favorable impact of a change to certain tax regulations. We have no similar items in this year's second quarter. We expect the effective tax rate for the full fiscal 2014 year to be 37.3%.

Turning now to the balance sheet. Our cash and marketable securities were $313 million at November 30, an increase of $30 million from the $283 million at August 31. Accounts receivable increased $8.9 million since August 31. DSOs were slightly below 40, which was a nice improvement from the 43 in last year's second quarter.

New goods inventory and in-service inventory levels at November 30 were $249 million and $509 million, respectively, both up slightly from August 31 levels. Accrued liabilities at November 30 increased from the August 31 balance, primarily due to the accrual of our annual dividend that was paid on December 11. Long-term debt at November 30 was $1.3 billion compared to the amount -- comparable to the amount at August 31.

Net cash provided by operating activities for the second quarter was $140 million, an $8 million improvement over last year's second quarter. And CapEx for the second quarter was $39.3 million. Our CapEx by operating segment was as follows: $24.4 million in Rental; less than $1 million in Uniform Direct Sales; $4.4 million in First Aid, Safety and Fire Protection; and $10.1 million in Document Management. We expect CapEx for fiscal 2014 to be in the range of $225 million to $250 million.

This concludes our prepared remarks and we will now be glad to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Andrew Steinerman with JPMorgan.

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

Could you give us a sense of how you see organic growth proceeding through the balance of the year, particularly looking at year-over-year comps in the Rental business?

William C. Gale

Andrew, our expectation is that we should see mid single-digit growth, organic growth, in the Rental business, again, assuming that the economy kind of stays in the mode that it's in. We saw a decent jobs report in the month of November. However, it was choppy relative to the prior months. So our expectation is we're going to continue to see that choppiness and, therefore, as a result of that, we expect that most of our growth is going to come from new business, which is what has been happening so far this year. And therefore, we're targeting somewhere in that mid single-digit area.

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

Yes. I would also love for you to build and make a comment about add-stops. When I look at the end markets for uniforms and look within the labor report, it just seems like we've moved past the bottom and there's been a little bit of acceleration in the end markets that you guys served the most since the summertime. Do you characterize the fall in the same way?

William C. Gale

I don't -- I'm not as bullish on it as you have -- as you are, Andrew. I looked at it -- Mike and I have been looking at it. We study it every month. And I will agree with you, November looked good, as I just said earlier, but October was poor. There just is no consistency to our -- as we look at it. So I would hope that it might pick up and stay consistent, but right now, I have to be honest and say I'm not confident that, that level -- that it will continue. We saw -- if you look at our add-stops, we've kind of had some choppiness. We've talked about it being up one quarter and then down another quarter. And if you look at our add-stop in the second quarter, it was slightly down compared to the first quarter and to the second quarter last year. So we sure haven't seen any robust improvement in hiring among our existing customers yet.

Operator

And we'll take our next question from Manav Patnaik with Barclays.

Gregory Bardi - Barclays Capital, Research Division

This is actually Greg calling on for Manav. And going off of what Andrew said, could you give a little bit of your thoughts on which verticals you're starting to see improvement in, just comparing the different verticals and where the hiring environment has been picking up a little bit versus some of the others?

William C. Gale

I would say that we continue to see reasonable strength in the energy sector and we're seeing building strength in the health care arena.

Gregory Bardi - Barclays Capital, Research Division

Okay. And just one more. On the rollout of the ERP system, maybe just a little update there on how the rollouts work for First Aid and Document Management and when you think you're going to move on to some of the next stages?

William C. Gale

We are about 60% to 70% through the rollout in Document Management and First Aid -- the First Aid business. It has had a few bumps in the road, but we've overcome them. We've had some issues, technical issues, that we've been very -- working very closely with our ERP provider to rectify and I think we've gotten over that now. So our expectation is we will complete that rollout in those 2 businesses sometime in mid-calendar '14. At that point in time, we will be most likely embarking upon a design effort for 1 or 2 of our other businesses. We're going to be making that decision here over the next several months.

Operator

And we'll take our next question from Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch, Research Division

You've had a nice gross margin expansion, particularly on an underlying basis in Rental Uniforms. And I'm wondering if you think that 80-basis-point year-over-year expansion is a reasonable run rate for the second half of the year.

J. Michael Hansen

Well, we do believe that we will continue to see some expansion. As we say often, Sara, a lot depends on where the revenue comes from. And if new business continues to be the driver, the expansion will be a little more muted. If we do see continued -- a continued trend like we saw in November employment, then, and we have our customers hiring, we may see some better expansion. Built into our guidance, though, I would say probably something similar to the second quarter levels.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And how should we think about longer-term gross margin potential in that segment?

J. Michael Hansen

Well, we've talked a little bit. When we've talked earlier in the year about our CapEx expectations, we did discuss that, in some cases, in some markets, we're running out of plant capacity. So we will talk -- probably have to invest maybe at the end of this fiscal year or into next fiscal year. So there may be some investment that we have to do to add some capacity, but generally speaking, we expect continued margin improvement over time.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then last quarter, you talked about of your new business wins about 60% were no programmers and 40% you thought were market share. And I know that you don't look at that every quarter, but I'm just wondering, if there's any reason, as you look at, at the marketplace, to think that, that's changing?

J. Michael Hansen

No. I would say there's no reason to think that's changing. That's been pretty consistent as we've come out of the recession and I wouldn't expect that, that would change much.

Sara Gubins - BofA Merrill Lynch, Research Division

Great. And then just last question. So nice to hear that you think your health care increases will be at the low end of prior expectations. I'm just wondering why, what's driving those lower.

J. Michael Hansen

Well, when we thought about how this would impact us, there were a couple of different things. First, there are -- there's something called a transitional reinsurance fee, which we know will happen. There are other administrative costs and expenses that will happen. The other thing that we expected to happen was that more people would come onto our insurance plan, both for the higher dependent ages because of the individual mandate and also because we thought other companies may be eliminating their coverage or at least making it less beneficial. And while we did see an increase in the number of enrollments more than normal, it was less than we had originally feared. So yes, we think it's going to be the cost of the administration, the reinsurance and more participants.

Operator

And we'll take our next question from Hamzah Mazari with Crédit Suisse.

Hamzah Mazari - Crédit Suisse AG, Research Division

Just a question on the national account business. You've talked about that being pretty competitive. Could you give us a sense of how much of that is related to just the economy being choppy versus potential overcapacity in the industry?

William C. Gale

I'm not quite sure I understand your question.

Hamzah Mazari - Crédit Suisse AG, Research Division

I'm just asking on the national account business. Could you give us an update of how competitive pricing is in that business?

William C. Gale

Well, yes, it remains very competitive. We believe that part of the reason that our national account business continues to be strong is our relatively broad product offering that we have, especially compared to some of our other industry participants. So when we go to some of our national account customers, we are able to offer more than just one particular product offering, be it like a uniform program or an entrance mat program or whatever. So I think as a result of having a number of different things, we're able to be more successful with some of these national account customers and bundle different products and services for them and that enables us to probably have greater penetration than others.

Hamzah Mazari - Crédit Suisse AG, Research Division

Great. That's helpful. And just a follow-up. If you could give us a sense of sort of what your expectations are on sort of building out capacity going forward.

William C. Gale

Well, we certainly -- as Mike mentioned a few minutes ago, we certainly are seeing some pressure points in some of our geographic markets for need for some capacity in the Rental business. And as a result of that, we have several projects underway at various stages that anticipate the building of additional capacity. It takes a while to do that, in that you've got to find the right piece of land, negotiate for that and then, obviously, design and build out the facility. So based on where we're at today versus where we thought we would be, I would tell you that we're a little behind our original timetable on building some of that capacity. It certainly hasn't cost us to not be able to grow in a market, but we've been able to utilize what we have. But as a result of that, I would expect our CapEx to pick up in the latter part of this year and maybe bleed over into 2015. That is certainly going to require more cash flow to build the plants, but also as Mike said, could cause a little bit of short-term, a less robust improvement in gross margin as a result of that.

Operator

And we'll take our next question from Joe Box with KeyBanc.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Just a quick clarification on that. So you're -- it looks like you're taking down your CapEx guidance by about $10 million to $15 million or so. Is that all based on the new plants that you're constructing? And is it, basically, all just push-out into the next year?

William C. Gale

Yes, pretty much so. Yes, Joe.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay. Perfect. And then just switching over to the First Aid side. Over the last couple of quarters, you guys have put up pretty good margins performance there. And it sounded like you were starting to get some scale benefits. I guess it seems to me like you might have taken a little bit of a step back this quarter on an easy comp. Was there something specific there within First Aid?

J. Michael Hansen

Well -- the gross margin improved. And you're talking about sequentially or year-over-year, Joe?

Joe Box - KeyBanc Capital Markets Inc., Research Division

Year-over-year on the operating margin side.

J. Michael Hansen

Yes. So in the gross margin, we improved by about 100 basis points and I talked a little bit about that in my prepared remarks. On an SG&A basis, there is some reflection of the investment in SAP. And keep in mind, that's a pretty large endeavor in both Document Management and First Aid and Safety. And you do see a little bit of an increase in the SG&A this quarter year-over-year for both of those businesses. And while we certainly expect benefit from that system, it is not a 1- to 2-year payback. So that's the blip that you're seeing in SG&A that kind of falls down to that operating margin.

Joe Box - KeyBanc Capital Markets Inc., Research Division

I mean, is that something that we should expect to see, then, flow through over the next several quarters or is that a "blip?"

J. Michael Hansen

Well, I think what you'll -- I think you'll still see that level of investment as we implement the project. So while we're in the implementation phase, we do have some groups of people going around and training our new users. And so there are some additional costs that will likely, as Bill said, run through the rest of this fiscal year. And then we should be almost fully implemented by mid-calendar '14. So I wouldn't expect that incremental cost to continue, but certainly, there's the cost of SAP that will continue. Having said that, we expect to get benefit going forward. And that benefit will come through better information, better price reviews. And that should come, it's just not a quick turn.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Right. Just a quick question on pricing on your legacy Uniform Rental business. I know pricing is still probably very competitive, but we are starting to get some chatter that it could be loosening up for non-national accounts. Is that something that you've seen or is it still a bit premature?

William C. Gale

Joe, we have so many operations around the country and different customers we're going to. I hear anecdotally lots of different things. I cannot confirm for you that I've heard that take place. I mean, I hear some markets, it's -- "Oh, this is more aggressive. We've seen it." In other markets, "Yes, it's firming up." So from what I'm hearing, I can't confirm that, that's happening based on our experience.

Operator

We'll take our next question from Andrew Wittmann with Baird.

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

So just maybe a couple of bookkeeping things here. Maybe this is in the commentary, but can you comment on the number of shares repurchased and maybe the average price? It looks like -- I get about 961,000 shares, about $59 per share, but can you give us the real numbers?

J. Michael Hansen

We purchased about 1.2 million shares during the quarter. We talked about most of those purchases were prior to our first quarter earnings release. We have about $505 million remaining on the authorization. We bought about 3.2 million shares for the year. Andy, I don't have in front of me the average price. That will show up in our Q.

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

Yes. Okay. And then can you -- Mike, maybe a little bit of detail inside -- Mike, I think I ask this question every quarter, but can you give us some color inside the Rental segment between kind of core uniform wearing versus the facility services? Are you seeing any differentiation in the growth rates between those business? Maybe some color there.

J. Michael Hansen

We're seeing real good growth in all of the pieces within the Rental business. And while we don't disclose the different pieces individually, I'll say that garments are growing nicely. And the different businesses within the facility services: the dust; the chemicals; hygiene products and services; our deep clean business, all those businesses are growing fairly well and there's not any real overweighting of any of them.

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

Got it. The -- just in terms of, so, a year ago, we've now lapped the investments in human capital that you made in terms of routes and maybe some more salespeople. Can you just talk about kind of where you are in that curve right now? Are we still folding those and ramping those new routes up? Or are we at the point where, in addition to plant capacity, we need some more route capacity? Can you just talk about where we are in that today versus a year ago and if there's an expectation for growth there?

William C. Gale

We always are going to be adding routes. So as long as we grow, we're going to be adding routes. But we you don't anticipate, at this point, adding routes to the same degree we did a year ago. So the fact that we have gone a year now from the -- kind of the unusual surge in number of routes has certainly -- we're starting to feel the positive impact of that as those routes build up. And I think that was part of the reason you saw some improvement in the margin in the Rental business. Right now, Andy, unless there is a major increase in the revenue growth rate, I think routes capacity will be added at a -- kind of a nominal pace going forward.

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

That's very helpful. Maybe one last question here in the Affordable Care Act. With some of the provisions changed and others delayed, we've got the outlook for this fiscal year. Is there any way -- is there anything that's changing about your out-year look out from the -- outlook from the experience that you've had so far in rolling people for calendar 2014 that makes you think that maybe the longer-term effect in your fiscal '15 is maybe greater than or less than your previous expectation?

William C. Gale

I guess I'm somewhat encouraged by the fact that we didn't have as many participants coming onto the program that we had feared might happen. But there is so much yet to be played out on this whole thing with some of the delays and parts of the law and that certain businesses do not have to necessarily add or offer the service. I think we've got to wait and see. I just don't think we have enough information yet to know what the full effect of this thing is going to be. And therefore, while we kind of are set now for our enrollment for '14, we really don't know what's going to happen to the cost structure and the -- because we're self-insured, and what ends up happening from the standpoint of the cost per head. So I think we've just got to wait and see, Andy.

Operator

And we'll take our next question from John Healy with Northcoast Research.

John M. Healy - Northcoast Research

Guys, I wanted to ask a little bit about the fire resistant garments segment. There's been a little discussion in the industry that maybe that market is showing a little plateauing or just baselining of the growth rate. And I was curious to get your thoughts on what's happening in that end market from a demand perspective. And maybe some color in terms of what that might represent as a percentage of the uniform business today.

William C. Gale

I think there's been a little bit of a slowdown in that business, John, only because you were comparing it to that robust growth that we were seeing, as energy was just booming throughout the country here a couple of years ago and through most of last year. But given the fact that we've kind of seen a plateauing of that, obviously, our new business is not as big as it was. However, we are still the largest provider in that market. I don't think there's been, really, a reduction in the number of employees in the energy sector that are required to wear these garments. We really haven't seen any big competitive situation. It's just that you're not seeing that many -- as many oilfield workers going forward. But our FRC business is still one of the highlights of our Rental business and continues to be.

John M. Healy - Northcoast Research

Got you. And I want to ask you a big picture question. Bill, you're always good at giving us a read on how you feel about the economy. And just kind of as we move into the calendar year, I mean, you've had a great last 6 months of the business and your growth rates kind of organically show like there's a little bit of moderation. But I guess if you do the postmortem on calendar 2013, did the business and the economy maybe feel -- come out better than you might have thought? And then, I guess, as you look to calendar '14, are you feeling better about where we're at versus 6 months ago? Or -- I'd just appreciate any color or perspective you could provide there.

William C. Gale

Well, I would say '13 -- calendar '13 certainly turned out to be modestly better than what I had originally expected and I think we have seen similar results in many businesses. So I think many businesses were able to adapt to a slow growth environment and have done quite well in it. As we look into '14, we kind of see -- right now, I think our expectation is more of the same. We don't see any catalysts out there to really improve growth substantially, nor do we see anything on the horizon that would throw us yet into a recession. So right now, I guess we're kind of thinking, it should be comparable to what we saw this year. With that said, I think people have to keep in mind, though, it has not been a consistent year -- or month-over-month improvement. There's been some real choppiness that we've seen throughout '13. And I kind of think that maybe is what we'll see in '14. But when you step back and look at it, you'll say, "Oh, okay, that wasn't a bad result given what kind of pressures continue to exist out there in the economy."

John M. Healy - Northcoast Research

Okay, great. And just final question. In the first quarter, you guys were kind enough to call out the operating margin headwind associated with the lack of the workday. I think it was around 50 basis points or so. Is that a realistic type of benefit we should expect just from a comp standpoint in the third quarter, given the extra workday that should benefit you guys?

J. Michael Hansen

Yes, I think that's a reasonable way of looking at it, John. We'll get the same kind of impact in that we'll have an extra day of revenue to cover things like depreciation, amortization of the garments and other rental items. So I think that's a good way of looking at it.

William C. Gale

But then keep in mind, the fourth quarter, you're going to have that negative comparison again.

Operator

And we'll take our next question from George Tong with Piper Jaffray.

George K. Tong - Piper Jaffray Companies, Research Division

I'd love to revisit the margin discussion a little bit, particularly around the uniform rental business. On one hand, we're definitely seeing improvements in route productivity. That's balanced, I think, somewhat by the fact that the non-program [indiscernible] isn't really changing and isn't really expected to change over the next couple of quarters. So can you talk a little bit about how those dynamics are going to play out and how you expect margins to play out over the course of the fiscal year and into fiscal '15?

J. Michael Hansen

Well, as we talked a little bit earlier, we would expect that the routes that we added last year will continue to become more efficient. In probably the next 6 months, we'll see continued improved leveraging of our plant infrastructure. But probably, towards the end of the fiscal year, maybe in the next fiscal year, we will have some investments to make in different pockets for plant capacity. So that will certainly affect us going into fiscal '15. And, George, again, it just -- there's a lot of dependent -- a lot of dependence on how the revenue comes. And if we see the kind of year that Bill just kind of mapped out, then I would expect to see some continuing improvement, with a little bit of impact of the investment that I mentioned. Does that help?

George K. Tong - Piper Jaffray Companies, Research Division

That's helpful, Mike. And could you give us an updated view on what employment figures need to be [indiscernible] acceleration in organic performance?

William C. Gale

Well, we would -- I think we've kind of looked at it, George, and said that if we could see -- I'm going to throw out this as a general number because it really will depend where the job growth is coming -- but if you can see job growth consistently, 250,000 plus a month, that generally correlates to existing businesses adding employees. And as long as that's kind of across the whole economy, then we would see the impact of that happening on our customers and, therefore, we would see an improved add-over-stop rate.

Operator

We'll take our next question from Shlomo Rosenbaum with Stifel.

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

I don't have too many questions left, but we talked a lot about expanding the routes and how that's been productive. Can you talk a little bit more about products that you've added in the various lines of business that you have and in the last, say, year or 2 and how some of that is driving some of the growth? Or is it really just adding the routes and that's really what it is?

William C. Gale

Well, I think we've expanded some of our offerings in, like, the hygiene arena, Shlomo, which has helped us grow a little bit faster in certain segments. But I don't know if it's really any other significantly new products other than that. I think it's just been, generally, additional penetration of customers with some of those products. And we've talked, for example, of the chemical dispensing business, still a relatively small part of our business, but that has been an add-on to many of our hospitality-type customers. So that's been beneficial to us.

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

Okay. And then can you talk a little bit about the floor cleaning business and how many cities you're in? Are you continuing to expand that now?

William C. Gale

I don't know exactly how many cities we're in. We are in many of the major markets across the U.S. Right now, our focus has been on additional penetration within those markets that we're in as opposed to opening up new markets, because we'd like to take advantage of the management structure that's required to run that operation. But I would tell you that, I would think we're -- we've got to be in 50 of the top 100 MSAs.

Operator

We'll take our next question from Dan Dolev with Jefferies.

Dan Dolev - Jefferies LLC, Research Division

Just really quickly back to the economy. I did notice that on the press release, Scott said that he's seeing some signs of economic growth beginning to appear. And I looked back and I saw that this was compared to a previous press release which said that there's still no any evidence in the economy. Was that just November? Am I reading too much into that? And maybe you can please explain what he was saying versus what you were saying, that you're not that bullish.

William C. Gale

It's the holiday season, Dan. We were just trying to be optimistic. No, I'm teasing. I would tell you that it certainly feels a little better to us as we've gone through now 2 quarters of our fiscal year. The fact that, yes, it's still been choppy. And as I mentioned to Andrew at the top of the call, we still have no good consistency. But when you kind of look at the stock market and what's happening with that, you sense that maybe Washington is at least getting together -- or getting along a little bit better. I guess there's kind of a feeling that, "Okay, things are not going to be back like they were in the '90s, but maybe we're going to be okay." And so we kind of sense that in talking with our customers. And we looked at the November jobs report and we said, "Hey, that wasn't bad." So -- and I think we've had 2 quarters now in a row of each one of our business segments grew organically more than 6%. So I think that gives us some comfort to say, "Okay, maybe things will be all right."

Dan Dolev - Jefferies LLC, Research Division

That's good. I hope so. One other question on shredding. You are growing very fast. And Iron Mountain, I don't think, discloses the growth in shredding, but I'm estimating they're growing about 3%, which is well below you. So are you just -- can you maybe tell us what the market is growing at? And it looks like you're gaining a lot of share and who you're gaining share from.

William C. Gale

I do not have any statistics on what the market is growing, so I -- and I really can't comment on anything Iron Mountain does. All I can tell you, Dan, is that, yes, we've seen a nice pickup in our service revenue. And while the paper prices continue to be a little bit of a headwind, we are pleased with the business. We -- our model has been one of converting to more off-site shredding and that seems to be going very well. We've had some nice wins on some pretty good-sized national account customers. So I think that's been benefiting us. And I would say that we are taking business primarily from the smaller players because more and more companies realize that they're not really engaging a company to do waste pickup. They're engaging a company to do privacy protection. And they've got to be sure that it is securely handled and that companies have the standards to do that. And I think that has helped us with our growth rate.

Operator

We'll take our next question from Sean Kim with RBC Capital Markets.

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

First, on guidance. I think when you guys initially gave guidance, it assumes sort of mid single-digit organic growth in the Rental segment. It's come in a little bit ahead of that in the first half. So I guess it makes sense for you to raise the lower end, but just wondering why you guys lowered the top end of the guidance as well.

William C. Gale

Well, I think part of that is driven by the fact of paper prices. And the Document Management business have not rebounded as much as we had initially hoped. I think it also is attributable to what Mike was talking about in the direct sale business in that we are not going to have as good a second half as we did in the first half and as we did in the second half last year. And as we got closer to that period, we don't have any other big rollouts that are going to happen to replace that business. And I think it's just the general conservative view of what we see we might have to deal with. We get into the winter -- if we have a bad winter, that has a bit of an impact on our business. So I think it's just -- it's all those factors together, Sean. I wouldn't read too much into it, other than it's not as optimistic as we hoped it might have been when we started the fiscal year, but it's certainly not as pessimistic as we feared it might be when we started.

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

Okay, great. Just one more, if I may. I think, historically, you guys have done more share repurchases in the fiscal first quarter and the fourth quarter. Is that -- did you think that's something we should expect in fiscal '14 as well, sort of acceleration in buybacks towards the end of the fiscal year?

William C. Gale

Well, I will remind everyone that during the first quarter and into early the second quarter of fiscal '14, we did purchase 3.2 million shares. Whether or not we will purchase any shares in the fourth quarter is subject to our board's direction. And I can't predict at this time nor can I signal what we may do. So I -- all I would say is past practice is sometimes an indication of the future.

Operator

We'll take our next question from Greg Halter with Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

I noticed that in the quarter, I think there was only about $300,000 or so in M&A. I don't know if you addressed this, but I'm wondering what your thoughts are there going forward. And it kind of piggybacks on the question before that. You're obviously -- just boosted the dividend by over 20%. And if there were not to be any share repurchases, your cash would be growing very rapidly here, leading either to debt reduction or cash on the balance sheet that's not...

William C. Gale

That's not what?

[Technical Difficulty]

William C. Gale

All right, I'll try to answer his question. Hopefully, he can hear the answer. I think acquisitions always are going to be somewhat unpredictable. We did -- certainly, we do continue to have a very active full-time M&A staff within our company that is constantly looking for good acquisitions. And unfortunately, in the second quarter, we did not have a lot of meeting of the minds with sellers as to the appropriate valuations and, as result of that, we didn't make them. That doesn't necessarily mean that's going to happen in the third and fourth quarter because there's always ongoing discussions. And I don't know what will happen. I can't predict that. Regarding the cash buildup, it's a nice problem to have in that it gives us a lot of options for maximizing shareholder value. And I think our board has shown a pretty good process of putting that cash to appropriate use and I don't expect that to change.

Operator

And we'll take our next -- actually, at this time, we do have one question remaining in the queue. [Operator Instructions] We'll take our next question from Scott Schneeberger with Oppenheimer.

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

Following up on M&A, just on where you're looking there, Bill. Should we think you're primarily focused in Document Management, still? Is there activity in Rental? Just across your segments, thoughts on where you may be more or less active.

William C. Gale

Scott, we're actually active in all of the business segments, I'd say, with the exception of direct sale. There is not a lot of value to buying direct sale businesses, generally. So we don't spend a lot of effort there, but in all -- in the other 3 segments, we continue to evaluate different opportunities.

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

Great. And then last year, you said that the Superstorm Sandy had an adverse impact, but that it was not material. Curious, the weather has been solid this quarter, any benefit or risk on comparison from that? And then just taking that a step further, how would you kind of rank order the 3 biggest drivers of year-over-year margin expansion?

William C. Gale

Certainly, because of what we said last year, we knew there were a lot of concern that people thought that Hurricane Sandy might have an impact on us and that's why we made the comment that it was a minimal impact, it wasn't material. So I can't really say that we had any benefit this quarter of any -- because it wasn't material to begin with. Relative to the components of the gross margin improvement, I would say the most of it has come from the route, utilization of the leveraging off the route additions; and then, secondarily, probably from the plant utilization. And then we -- I think we had a minor energy pickup, didn't we, Mike, quarter-over-quarter?

J. Michael Hansen

It was minor, if there was one. Yes, it was comparable. It was primarily those 2 items.

Operator

And it appears there are no further questions at this time. I would like to turn the call back over to our speakers for any additional or closing remarks.

William C. Gale

I want to thank everyone for joining us during this very busy time of the year. Appreciate your interest in Cintas. And on behalf of all of the Cintas family, we want to wish everyone a very happy holiday season and a successful 2014.

Operator

And again, this does conclude today's Cintas Quarterly Earnings Results Conference Call. We thank you again for your participation.

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