CINTAS CORP - Quarter Report: 2006 November (Form 10-Q)

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

CINTAS CORPORATION

(Exact name of registrant as specified in its charter)

WASHINGTON				31-1188630
(State or other jurisdiction of				(I.R.S. Employer
incorporation or organization)				Identification No.)

6800 CINTAS BOULEVARD
P.O. BOX 625737
CINCINNATI, OHIO 45262-5737
(Address of principal executive offices)
(Zip Code)

(513) 459-1200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12 b-2 of the Exchange Act.

Large Accelerated Filer þ      Accelerated Filer o      Non-Accelerated Filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class				Outstanding December 31, 2006
Common Stock, no par value				159,707,836

 

 

CINTAS CORPORATION
INDEX

		Page No.
Part I. Financial Information
Item 1.   Financial Statements.
Consolidated Condensed Statements of Income — Three Months and Six Months Ended November 30, 2006 and 2005			3
Consolidated Condensed Balance Sheets — November 30, 2006 and May 31, 2006			4
Consolidated Condensed Statements of Cash Flows — Six Months Ended November 30, 2006 and 2005			5
Notes to Consolidated Condensed Financial Statements			6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.			25
Item 3.   Quantitative and Qualitative Disclosures About Market Risk.			33
Item 4.   Controls and Procedures.			33
Part II. Other Information			35
Item 1.   Legal Proceedings.			35
Item 1A. Risk Factors.			36
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.			36
Item 4.   Submission of Matters to a Vote of Security Holders.			37
Item 6.   Exhibits.			38
Signatures			38
Certifications			39
EX-31.1
EX-31.2
EX-32.1
EX-32.2

CINTAS CORPORATION

ITEM 1. FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share data)

		Three Months Ended								Six Months Ended
		November 30,								November 30,
		2006				2005				2006				2005
						(Restated)*								(Restated)*
Revenue:
Rentals		$	684,491			$	631,590			$	1,372,149			$	1,259,598
Other services			238,775				204,195				465,278				399,662
			923,266				835,785				1,837,427				1,659,260
Costs and expenses (income):
Cost of rentals			380,015				349,658				758,315				689,083
Cost of other services			152,178				135,666				297,558				264,228
Selling and administrative expenses			248,628				221,044				492,756				445,594
Interest income			(1,623	)			(1,332	)			(3,149	)			(3,034	)
Interest expense			12,483				7,484				24,915				14,820
			791,681				712,520				1,570,395				1,410,691
Income before income taxes			131,585				123,265				267,032				248,569
Income taxes			49,058				46,426				99,543				93,308
Net income		$	82,527			$	76,839			$	167,489			$	155,261
Basic earnings per share		$	.51			$	.46			$	1.04			$	.92
Diluted earnings per share		$	.51			$	.46			$	1.04			$	.92

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands except share data)

		November 30, 2006				May 31, 2006
		(Unaudited)				(Restated)*
ASSETS
Current assets:
Cash and cash equivalents		$	38,939			$	38,914
Marketable securities			133,282				202,539
Accounts receivable, net			405,042				389,905
Inventories, net			217,575				198,000
Uniforms and other rental items in service			347,021				337,487
Prepaid expenses			13,594				11,163
Total current assets			1,155,453				1,178,008
Property and equipment, at cost, net			880,955				863,783
Goodwill			1,170,480				1,136,175
Service contracts, net			171,391				179,965
Other assets, net			56,785				67,306
		$	3,435,064			$	3,425,237
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	79,144			$	71,635
Accrued compensation and related liabilities			50,649				50,134
Accrued liabilities			162,316				188,927
Income taxes:
Current			81,886				43,694
Deferred			56,493				51,669
Long-term debt due within one year			229,477				4,288
Total current liabilities			659,965				410,347
Long-term debt due after one year			561,796				794,454
Deferred income taxes			116,891				130,244
Shareholders’ equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding			—				—
Common stock, no par value:
425,000,000 shares authorized,
FY 2007: 172,743,841 issued and 159,947,356 outstanding
FY 2006: 172,571,083 issued and 163,181,738 outstanding			126,641				120,860
Paid in capital			45,696				47,644
Retained earnings			2,428,406				2,260,917
Treasury stock:
FY 2007: 12,796,485 shares
FY 2006:   9,389,345 shares			(523,573	)			(381,613	)
Other accumulated comprehensive income			19,242				42,384
Total shareholders’ equity			2,096,412				2,090,192
		$	3,435,064			$	3,425,237

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

		Six Months Ended
		November 30,
		2006				2005
						(Restated)*
Cash flows from operating activities:
Net income		$	167,489			$	155,261
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			66,074				61,982
Amortization of deferred charges			19,679				15,678
Stock-based compensation			1,250				3,045
Deferred income taxes			999				6,413
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable			(14,179	)			(27,567	)
Inventories			(19,254	)			3,096
Uniforms and other rental items in service			(9,534	)			(10,027	)
Prepaid expenses			(2,424	)			710
Accounts payable			7,506				(10,751	)
Accrued compensation and related liabilities			515				1,657
Accrued liabilities			(28,979	)			(43,231	)
Tax benefit on exercise of stock options			(97	)			(301	)
Income taxes payable			38,289				49,934
Net cash provided by operating activities			227,334				205,899
Cash flows from investing activities:
Capital expenditures			(81,321	)			(70,181	)
Proceeds from sale or redemption of marketable securities			80,485				73,171
Purchase of marketable securities			(10,218	)			(10,277	)
Acquisitions of businesses, net of cash acquired			(53,782	)			(87,078	)
Other			(2,740	)			3,111
Net cash used in investing activities			(67,576	)			(91,254	)
Cash flows from financing activities:
Proceeds from issuance of debt			252,460				—
Repayment of debt			(259,929	)			(6,403	)
Stock options exercised			5,781				7,152
Tax benefit on exercise of stock options			97				301
Purchase of common stock			(141,960	)			(114,170	)
Other			(16,182	)			7,875
Net cash used in financing activities			(159,733	)			(105,245	)
Net increase in cash and cash equivalents			25				9,400
Cash and cash equivalents at beginning of period			38,914				43,196
Cash and cash equivalents at end of period		$	38,939			$	52,596

See accompanying notes.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands except per share data)

1. Basis of Presentation

The consolidated condensed financial statements of Cintas Corporation (Cintas) included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequately presented, it is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes included in our most recent Form 10-K for the fiscal year ended May 31, 2006. A summary of our significant accounting policies is presented on page 36 of that report. There has been no material changes in the accounting policies followed by Cintas during the fiscal year, with the exception of the new accounting standard discussed in Note 2 below.

Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the consolidated results of the interim periods shown have been made.

Certain prior year amounts have been reclassified to conform to current year presentation.

2. New Accounting Standard

At November 30, 2006, Cintas had an equity compensation plan, which is described in Note 6. Prior to June 1, 2006, Cintas accounted for this plan under the intrinsic value method proscribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. Effective June 1, 2006, Cintas adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-retrospective transition method. Under that transition method, all prior periods have been restated based on the amounts previously calculated in the pro forma footnote disclosures required by Statement 123. Statement 123(R) requires all share-based payments to employees, including stock options, to be recognized as an expense in the statement of income based on their fair values. Due to this restatement, Cintas’ income before income taxes and net income decreased by $1,132 for the three months ended November 30, 2005, and $2,245 for the six months ended November 30, 2005. This adoption did not result in a change to basic and diluted earnings per share for the second quarter of fiscal 2006 as it remained at $0.46 per share for the quarter, but it did lower basic and diluted earnings per share year-to-date from $0.93 per share to $0.92 per share. The cumulative effect of the change on total shareholders’ equity as of May 31, 2006, was less than $1,000.

As a result of adopting Statement 123(R) on June 1, 2006, Cintas’ income before income taxes and net income for the six months ended November 30, 2006, are $1,250 and $552 lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the six months ended November 30, 2006, are less than $.01 lower than if Cintas had continued to account for share-based compensation under Opinion 25.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

3. Earnings per Share

The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective periods:

		Three Months Ended								Six Months Ended
		November 30,								November 30,
		2006				2005				2006				2005
						(Restated)*								(Restated)*
Numerator:
Net income		$	82,527			$	76,839			$	167,489			$	155,261
Denominator:
Denominator for basic earnings per share-weighted average shares			160,312				167,975				160,542				168,460
Effect of dilutive securities-employee stock options			409				636				390				623
Denominator for diluted earnings per share-adjusted weighted average shares and assuming conversions			160,721				168,611				160,932				169,083
Basic earnings per share		$	.51			$	.46			$	1.04			$	.92
Diluted earnings per share		$	.51			$	.46			$	1.04			$	.92

4. Goodwill, Service Contracts and Other Assets

Changes in the carrying amount of goodwill and service contracts for the six months ended November 30, 2006, by operating segment, are as follows:

						Other
		Rentals				Services				Total
Goodwill
Balance as of June 1, 2006		$	855,135			$	281,040			$	1,136,175
Goodwill acquired			(1,373	)			36,445				35,072
Foreign currency translation			(581	)			(186	)			(767	)
Balance as of November 30, 2006		$	853,181			$	317,299			$	1,170,480

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

						Other
		Rentals				Services				Total
Service Contracts
Balance as of June 1, 2006		$	132,391			$	47,574			$	179,965
Service contracts acquired			304				6,722				7,026
Service contracts amortization			(10,088	)			(4,626	)			(14,714	)
Foreign currency translation			(844	)			(42	)			(886	)
Balance as of November 30, 2006		$	121,763			$	49,628			$	171,391

Information regarding Cintas’ service contracts and other assets are as follows:

		As of November 30, 2006
		Carrying				Accumulated
		Amount				Amortization				Net
Service contracts		$	300,463			$	129,072			$	171,391
Noncompete and consulting agreements		$	49,791			$	18,968			$	30,823
Other			29,952				3,990				25,962
Total		$	79,743			$	22,958			$	56,785

		As of May 31, 2006
		Carrying				Accumulated
		Amount				Amortization				Net
Service contracts		$	295,929			$	115,964			$	179,965
Noncompete and consulting agreements		$	45,801			$	15,484			$	30,317
Other			40,512				3,523				36,989
Total		$	86,313			$	19,007			$	67,306

Amortization expense was $19,679 and $15,678 for the six months ended November 30, 2006 and November 30, 2005, respectively. Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $39,160, $36,170, $33,936, $30,938 and $27,267, respectively.

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

5. Debt, Derivatives and Hedging Activities

On August 15, 2006, Cintas issued $250,000 of senior notes due in 2036. This debt bears an interest rate of 6.15% paid semi-annually beginning February 15, 2007. The proceeds generated from the offering were used to repay a portion of our outstanding commercial paper borrowings.

Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Cintas’ hedging activities are transacted only with highly-rated institutions, reducing the exposure to credit risk in the event of nonperformance. Cintas periodically uses derivatives for fair value hedging and cash flow hedging purposes. There were no fair value hedges in place as of November 30, 2006.

Cash flow hedges are derivative instruments that hedge the exposure of variability in short-term interest rates. These agreements effectively convert a portion of the floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. The effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains or losses on the ineffective portion of the hedge are charged to earnings in the current period. When outstanding, the effectiveness of these derivative instruments is reviewed at least every fiscal quarter. Examples of cash flow hedging instruments that Cintas may use are interest rate swaps, lock agreements and forward starting swaps. There were no interest rate swap or lock agreements outstanding as of November 30, 2006. There was a cash settled forward starting swap in place as of November 30, 2006, which is discussed below.

During the third quarter of fiscal 2006, Cintas entered into a cash settled forward starting swap to protect forecasted interest payments from interest rate movement for an anticipated $200,000 debt issuance in fiscal 2008. The Hypothetical Derivative Method is used to measure hedge effectiveness. Cintas expects the forward starting swap to be perfectly effective as the critical terms of the anticipated debt issuance will perfectly offset the hedged cash flows of the forecasted interest payments. When the $200,000 of hedged debt is issued, the lender will make a payment to Cintas if the 30-year Treasury rate has increased since the inception of the cash settled forward starting swap. Conversely, if the 30-year Treasury rate decreases during that period, Cintas will pay the lender. The value of the cash settled forward starting swap prior to the debt issuance is recorded in other comprehensive income in shareholders’ equity and other assets or accrued liabilities depending on the value of the swap at the end of each reporting period. Once the debt is issued, the value of the forward starting swap will be settled with cash and will be amortized to earnings over the term of the debt issuance.

Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes, both for the senior notes issued in fiscal 2002 and the senior notes issued in fiscal 2007. The amortization of the cash flow hedges resulted in a credit to other comprehensive income of $104 for the three months ended November 30, 2006, and $177 for the six months ended November 30, 2006.

Cintas has certain significant covenants related to debt agreements. These covenants limit Cintas’ ability to incur certain liens, to engage in sale-leaseback transactions and to merge, consolidate or sell all or substantially all of Cintas’ assets. These covenants also require Cintas to maintain certain debt to capitalization and interest coverage ratios. Cross default provisions exist between certain debt instruments. Cintas is in compliance with all of the significant debt covenants for all periods presented. Were a default of a significant covenant to occur, the default could result in an acceleration of indebtedness, impair liquidity and limit the ability to raise future capital. Cintas’ debt, net of cash and marketable securities, is $619,052 as of November 30, 2006. For the six months ended November 30, 2006, net cash provided by operating activities was $227,334 and capital expenditures were $81,321.

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

6. Stock-Based Compensation

Under the 2005 equity compensation plan, which was approved by shareholders and adopted by Cintas in fiscal 2006, Cintas may grant officers and key employees equity compensation in the form of stock options, stock appreciation rights, restricted and unrestricted stock, performance awards and other stock unit awards up to an aggregate of 14,000,000 shares of Cintas’ common stock. The compensation cost charged against income was $1,847 and $1,432 for the three month periods ended November 30, 2006 and November 30, 2005, respectively. The compensation cost charged against income was $1,250 and $3,045 for the six month periods ended November 30, 2006 and November 30, 2005, respectively. The amount recorded in the six month period ended November 30, 2006, reflects a cumulative catch-up adjustment of $2,169 ($2,088 after tax), due to a change in the estimated forfeitures for certain existing stock option and restricted stock grants. Basic and diluted earnings per share for the six months ended November 30, 2006, are both $.01 higher, respectively, due to this change in estimated forfeitures. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $441 and $113 for the three month periods ended November 30, 2006 and 2005, respectively, and was $697 and $301 for the six month periods ended November 30, 2006 and 2005, respectively.

Stock Options

Stock options are granted at the fair market value of the underlying common stock on the date of grant. The option terms are determined by the Cintas Compensation Committee, but no stock option may be exercised later than ten years after the date of the grant. The option awards generally have ten year terms with graded vesting in years five through ten based on continuous service during that period. Cintas recognizes compensation expense for these options using the straight-line recognition method over the vesting period.

The fair value of these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:

		Three and Six Months Ended
		November 30,
		2006				2005
Risk-free interest rate			4.00	%			4.00	%
Dividend yield			.70	%			.50	%
Expected volatility of Cintas’ common stock			35	%			35	%
Expected life of the option in years			7.5				9

The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options. The determination of expected volatility is based on historical volatility of Cintas stock over the period commensurate with the expected term of stock options, as well as other relevant factors. The weighted average expected term was determined based on the historical employee exercise behavior of the options. The weighted-average grant date fair value of stock options granted during the three months ended November 30, 2006, was $17.47 and was $20.95 for the three months ended November 30, 2005. The weighted-average grant date fair value of stock options granted during the six months ended November 30, 2006, was $15.89 and was $20.95 for the six months ended November 30, 2005.

The information presented in the following table relates primarily to stock options granted and outstanding under either the plan adopted in fiscal 2006 or under previously adopted plans:

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

						Weighted Average
		Shares				Exercise Price
Outstanding May 31, 2006 (2,718,180 shares exercisable)			6,535,404			$	40.08
Granted			1,061,005				37.60
Forfeitures/Cancellations			(157,435	)			42.52
Exercised			(144,607	)			18.95
Outstanding August 31, 2006 (2,707,855 shares exercisable)			7,294,367			$	40.09
Granted			111,500				41.31
Forfeitures/Cancellations			(198,545	)			42.02
Exercised			(79,038	)			24.38
Outstanding November 30, 2006 (2,561,212 shares exercisable)			7,128,284			$	40.23

The intrinsic value of stock options exercised in the three and six months ended November 30, 2006, was $1,464 and $4,068, respectively.

The following table summarizes the information related to stock options outstanding at November 30, 2006:

			Outstanding Options											Exercisable Options
						Average				Weighted								Weighted
						Remaining				Average								Average
Range of		Number				Option				Exercise				Number				Exercise
Exercise Prices		Outstanding				Life				Price				Exercisable				Price
$18.00–$39.19			1,919,132				6.70			$	33.43				584,350			$	26.06
39.29 – 41.98			1,989,902				5.91				40.69				947,062				41.77
42.06 – 44.33			1,668,000				6.77				42.35				446,650				42.76
44.43 – 53.19			1,551,250				7.20				45.67				583,150				47.69
$18.00–$53.19			7,128,284				6.61			$	40.23				2,561,212			$	39.71

At November 30, 2006, the aggregate intrinsic value of stock options outstanding and exercisable was $19,974 and $9,825, respectively.

Restricted Stock

Restricted stock consists of Cintas’ common stock which is subject to such conditions, restrictions and limitations as the Cintas Compensation Committee determines to be appropriate. The vesting period is generally three years after the grant date.

The information presented in the following table relates to restricted stock granted and outstanding under the plan adopted in fiscal 2006:

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

						Weighted Average
		Shares				Price
Outstanding, unvested grants at May 31, 2006			128,075			$	36.08
Granted			230,365				38.06
Cancelled			—				—
Vested			—				—
Outstanding, unvested grants at August 31, 2006			358,440			$	37.36
Granted			15,866				38.97
Cancelled			(2,460	)			36.08
Vested			—				—
Outstanding, unvested grants at November 30, 2006			371,846			$	37.43

The remaining unrecognized compensation cost related to unvested stock options and restricted stock at November 30, 2006, was approximately $45,548, and the weighted-average period of time over which this cost will be recognized is 3.7 years.

Cintas reserves shares of common stock to satisfy share option exercises and/or future restricted stock grants. At November 30, 2006, 13,244,833 shares of common stock are reserved for future issuance under the 2005 plan.

During fiscal 2005, the Compensation Committee of the Board of Directors approved a resolution to accelerate the vesting for certain “out-of-the-money” options. The “out-of-the-money” options that were accelerated were provided to employees during fiscal 2000, 2001, 2002 and 2003. The Compensation Committee approved this acceleration in order to provide these employees the increased benefit of exercising these options when they become “in-the-money” and to avoid recognizing future compensation expense related to outstanding options under Statement 123(R). After amendment of all underlying option agreements, compensation expense to be recognized in the statement of income during the first year of adoption of Statement 123(R) was reduced by approximately $3,500.

7. Comprehensive Income

Total comprehensive income represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders and, as such, includes net earnings. For Cintas, the only components of total comprehensive income are the change in cumulative foreign currency translation adjustments, the change in the fair value of derivatives and the change in the fair value of available-for-sale securities. The components of comprehensive income for the three and six month periods ended November 30, 2006 and November 30, 2005 are as follows:

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

		Three Months Ended								Six Months Ended
		November 30,								November 30,
		2006				2005				2006				2005
						(Restated)*								(Restated)*
Net income		$	82,527			$	76,839			$	167,489			$	155,261
Other comprehensive income:
Foreign currency translation adjustment			(6,563	)			2,637				(7,094	)			10,787
Change in fair value of derivatives**			(6,258	)			73				(16,688	)			146
Change in fair value of available-for-sale securities, net of $164 and $375 of tax, respectively			292				—				640				—
Comprehensive income		$	69,998			$	79,549			$	144,347			$	166,194

8. Litigation and Other Contingencies

Cintas is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract, environmental and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such ordinary course of business actions, will not have a material adverse effect on the consolidated financial position or results of operations of Cintas. Cintas is party to additional litigation not considered in the ordinary course of business, including the litigation discussed below.

Cintas is a defendant in a purported class action lawsuit, Paul Veliz, et al. v. Cintas Corporation, filed on March 19, 2003, in the United States District Court, Northern District of California, Oakland Division, alleging that Cintas violated certain federal and state wage and hour laws applicable to its service sales representatives, whom Cintas considers exempt employees, and asserting additional related ERISA claims. On August 23, 2005, an amended complaint was filed alleging additional state law wage and hour claims under the following state laws: Arkansas, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Mexico, Ohio, Oregon, Pennsylvania, Rhode Island, Washington, West Virginia and Wisconsin. The plaintiffs are seeking unspecified monetary damages, injunctive relief or both. Cintas denies these claims and is defending the plaintiffs’ allegations. On February 14, 2006, the court ordered a majority of the opt-in plaintiffs to arbitrate their claims in accordance with the terms of their Cintas employment agreement. On February 14, 2006, the court also permitted plaintiffs to file a second amended complaint alleging state law claims in the 15 states listed above only with respect to the putative class members that may litigate their claims in court. No determination has been made by the court or an arbitrator regarding class certification. There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class. If a court or arbitrator certifies a class in this action and there is an adverse verdict on the merits, or in the event of a negotiated settlement of the action, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas. Any estimated liability relating to this lawsuit is not determinable at this time.

Cintas also is a defendant in a purported class action lawsuit, Mirna E. Serrano, et al. v. Cintas Corporation, filed on May 10, 2004, and pending in the United States District Court, Eastern District of Michigan, Southern Division (“Serrano”). Serrano alleges that Cintas discriminated against women in

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

hiring into various SSR positions across all divisions of Cintas throughout the United States. On November 15, 2005, the Equal Employment Opportunity Commission (“EEOC”) intervened in the Serrano lawsuit. The Serrano plaintiffs seek injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies. Cintas is a defendant in another purported class action lawsuit, Nelly Blanca Avalos, et al. v. Cintas Corporation, currently pending in the United States District Court, Eastern District of Michigan, Southern Division (“Avalos”). Avalos alleges that Cintas discriminated against women, African-Americans and Hispanics in hiring into various SSR positions in Cintas’ Rental division only throughout the United States. On April 27, 2005, the EEOC intervened in the claims asserted in Avalos. The Avalos plaintiffs seek injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies. The claims in Avalos originally were brought in the previously disclosed lawsuit captioned Robert Ramirez, et al. v. Cintas Corporation, filed on January 20, 2004, in the United States District Court, Northern District of California, San Francisco Division (“Ramirez”). On May 11, 2006, however, those claims were severed from Ramirez and transferred to the Eastern District of Michigan, Southern Division, where the case was re-named Avalos. On July 10, 2006, Avalos and Serrano were consolidated for all pretrial purposes, including proceedings on class certification. The consolidated case is known as Mirna E. Serrano/Blanca Nelly Avalos, et al. v. Cintas Corporation, and remains pending in the United States District Court, Eastern District of Michigan, Southern Division. No filings or determinations have been made in Serrano/Avalos as to class certification. There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class. The non-SSR hiring claims in the previously disclosed Ramirez case that have not been dismissed remain pending in the Northern District of California, San Francisco Division, but were ordered to arbitration and stayed pending the completion of arbitration. The Ramirez purported class action claims currently in arbitration include allegations that Cintas failed to promote Hispanics into supervisory positions, discriminated against African-Americans and Hispanics in SSR route assignments and discriminated against African-Americans in hourly pay in Cintas’ Rental division only throughout the United States. The Ramirez plaintiffs seek injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies. No filings or determinations have been made in Ramirez as to class certification. There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class. In addition, a class action lawsuit, Larry Houston, et al. v. Cintas Corporation, was filed on August 3, 2005, in the United States District Court for the Northern District of California on behalf of African-American managers alleging racial discrimination. On November 22, 2005, the court entered an order requiring the named plaintiffs in the Houston lawsuit to arbitrate all of their claims for monetary damages. If there is an adverse verdict or a negotiated settlement of all or any of these actions, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas. Any estimated liability relating to these proceedings is not determinable at this time.

Several other similar administrative proceedings are pending including two charges filed on November 30, 2004, by an EEOC Commissioner with the EEOC Systemic Litigation Unit alleging: (i) failure to hire and assign females to production job positions; and (ii) failure to hire females, African-Americans and Hispanics into the Management Trainee program. The investigations of these allegations are pending and no determinations have been made. On January 24, 2005, Jennifer Fargo filed a charge on behalf of herself and a similarly situated class with the Augusta Human Relations Commission and the EEOC Detroit District office alleging gender and equal pay discrimination against female sales representatives and sales associates. The investigation of these allegations is pending and no determinations have been made. On August 29, 2006, the EEOC Indianapolis District Office issued a dismissal and notice of rights and closed its file on the Clifton Cooper charge filed on March 23, 2005, by Cooper on behalf of himself and a similarly situated class with the EEOC Systemic Litigation Unit alleging discriminatory pay and treatment due to race. On May 26, 2006, the EEOC issued a dismissal and notice of rights and closed its file on the Melissa Schulz charge filed on April 25, 2005, on behalf of herself and a similarly situated class with the EEOC Systemic Litigation Unit and the Oregon Bureau of Labor and Industries, Civil Rights

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

Division alleging discriminatory pay and treatment due to race and gender, following a determination that it was unable to conclude that the information obtained established a violation of statute.

Cintas is also a defendant in a lawsuit, J. Lester Alexander, III vs. Cintas Corporation, et al., which was originally filed on October 25, 2004, and is currently pending in the Circuit Court of Randolph County, Alabama. The case was brought by J. Lester Alexander, III, the Chapter 7 Trustee (the “Trustee”) of Terry Manufacturing Company, Inc. (“TMC”) and Terry Uniform Company, LLC (“TUC”), against Cintas in Randolph County, Alabama. The Trustee seeks damages against Cintas for allegedly breaching fiduciary duties to TMC and TUC and for allegedly aiding and abetting breaches of fiduciary duties by others to those entities. The complaint also includes allegations that Cintas breached certain limited liability company agreements, or alternatively, misrepresented its intention to perform its obligations in those agreements and acted as alter egos of the bankrupt TMC and is therefore liable for all of TMC’s debts. The Trustee is seeking $50,000 in compensatory damages and $100,000 in punitive damages. Cintas denies these claims and is vigorously defending itself against all claims in the complaint. If there is an adverse verdict on the merits or in the event of a negotiated settlement of this lawsuit, the resulting liability could be material to Cintas. Any estimated liability relating to this lawsuit is not determinable at this time.

The litigation discussed above, if decided adversely to or settled by Cintas, may, individually or in the aggregate, result in liability material to Cintas’ financial condition or results of operations. Cintas may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements if it believes such settlement is in the best interests of Cintas’ shareholders.

9. Segment Information

Cintas classifies its businesses into two operating segments, Rentals and Other Services, based on the similar economic characteristics of the products and services within each segment. The Rentals operating segment reflects the rental and servicing of uniforms and other garments, mats, mops and shop towels. In addition to these rental items, restroom and hygiene products and services are also provided within this segment. The Other Services operating segment consists of the direct sale of uniforms and related items, first aid, safety and fire protection products and services, document management services and branded promotional products. Both segments provide these products and services throughout the United States and Canada to businesses of all types — from small service and manufacturing companies to major corporations that employ thousands of people.

Information as to the operations of Cintas’ different business segments is set forth below based on the distribution of products and services offered. Cintas evaluates performances based on several factors of which the primary financial measures are business segment revenue and income before income taxes.

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

						Other
		Rentals				Services				Corporate				Total
For the three months ended November 30, 2006
Revenue		$	684,491			$	238,775			$	—			$	923,266
Income (loss) before income taxes		$	117,797			$	24,648			$	(10,860	)		$	131,585
For the three months ended November 30, 2005 (Restated)*
Revenue		$	631,590			$	204,195			$	—			$	835,785
Income (loss) before income taxes		$	112,637			$	16,780			$	(6,152	)		$	123,265
As of and for the six months ended November 30, 2006
Revenue		$	1,372,149			$	465,278			$	—			$	1,837,427
Income (loss) before income taxes		$	241,877			$	46,921			$	(21,766	)		$	267,032
Total assets		$	2,531,085			$	731,758			$	172,221			$	3,435,064
As of and for the six months ended November 30, 2005 (Restated)*
Revenue		$	1,259,598			$	399,662			$	—			$	1,659,260
Income (loss) before income taxes		$	227,796			$	32,559			$	(11,786	)		$	248,569
Total assets		$	2,284,343			$	580,690			$	255,934			$	3,120,967

10. Supplemental Guarantor Information

Effective June 1, 2000, Cintas reorganized its legal structure and created Cintas Corporation No. 2 (Corp. 2) as its indirectly, wholly-owned principal operating subsidiary. Cintas and its wholly-owned, direct and indirect domestic subsidiaries, other than Corp. 2, unconditionally guaranteed, jointly and severally, debt of Corp. 2.

On May 13, 2002, Cintas completed the acquisition of Omni Services, Inc. (Omni). A portion of the purchase price for Omni was funded with $450,000 in long-term notes. Corp. 2 was the issuer of the long-term notes, which are unconditionally guaranteed, jointly and severally, by Cintas Corporation and the subsidiary guarantors.

As allowed by SEC rules, the following condensed consolidating financial statements are provided as an alternative to filing separate financial statements of the guarantors. Each of the subsidiaries presented in the condensed consolidating financial statements has been fully consolidated in Cintas’ financial statements. The condensed consolidating financial statements should be read in conjunction with the financial statements of Cintas and notes thereto of which this note is an integral part.

Condensed consolidating financial statements for Cintas, Corp. 2, the subsidiary guarantors and non-guarantors are presented below:

CONDENSED CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED NOVEMBER 30, 2006

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Revenue:
Rentals		$	—			$	502,623			$	138,631			$	43,389			$	(152	)		$	684,491
Other services			—				342,641				130,277				16,009				(250,152	)			238,775
Equity in net income of affiliates			82,527				—				—				—				(82,527	)			—
			82,527				845,264				268,908				59,398				(332,831	)			923,266
Costs and expenses (income):
Cost of rentals			—				318,314				79,434				25,428				(43,161	)			380,015
Cost of other services			—				265,011				84,905				9,673				(207,411	)			152,178
Selling and administrative expenses			—				225,676				11,815				12,697				(1,560	)			248,628
Interest income			—				(843	)			(3	)			(777	)			—				(1,623	)
Interest expense			—				12,538				(1,451	)			1,396				—				12,483
			—				820,696				174,700				48,417				(252,132	)			791,681
Income before income taxes			82,527				24,568				94,208				10,981				(80,699	)			131,585
Income taxes			—				9,397				35,995				3,666				—				49,058
Net income		$	82,527			$	15,171			$	58,213			$	7,315			$	(80,699	)		$	82,527

CONDENSED CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED NOVEMBER 30, 2005
(RESTATED)*

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Revenue:
Rentals		$	—			$	463,499			$	129,694			$	38,524			$	(127	)		$	631,590
Other services			—				290,925				102,980				14,035				(203,745	)			204,195
Equity in net income of affiliates			76,839				—				—				—				(76,839	)			—
			76,839				754,424				232,674				52,559				(280,711	)			835,785
Costs and expenses (income):
Cost of rentals			—				292,922				76,735				22,532				(42,531	)			349,658
Cost of other services			—				218,488				69,319				9,043				(161,184	)			135,666
Selling and administrative expenses			—				202,677				8,016				10,123				228				221,044
Interest income			—				(898	)			(106	)			(328	)			—				(1,332	)
Interest expense			—				7,403				(986	)			1,067				—				7,484
			—				720,592				152,978				42,437				(203,487	)			712,520
Income before income taxes			76,839				33,832				79,696				10,122				(77,224	)			123,265
Income taxes			—				12,808				29,874				3,744				—				46,426
Net income		$	76,839			$	21,024			$	49,822			$	6,378			$	(77,224	)		$	76,839

CONDENSED CONSOLIDATING INCOME STATEMENT
SIX MONTHS ENDED NOVEMBER 30, 2006

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Revenue:
Rentals		$	—			$	1,008,146			$	277,871			$	86,436			$	(304	)		$	1,372,149
Other services			—				662,760				260,504				29,046				(487,032	)			465,278
Equity in net income of affiliates			167,489				—				—				—				(167,489	)			—
			167,489				1,670,906				538,375				115,482				(654,825	)			1,837,427
Costs and expenses (income):
Cost of rentals			—				632,626				160,882				50,693				(85,886	)			758,315
Cost of other services			—				509,362				169,991				17,717				(399,512	)			297,558
Selling and administrative expenses			—				453,164				19,679				23,479				(3,566	)			492,756
Interest income			—				(1,694	)			(5	)			(1,450	)			—				(3,149	)
Interest expense			—				24,978				(2,834	)			2,771				—				24,915
			—				1,618,436				347,713				93,210				(488,964	)			1,570,395
Income before income taxes			167,489				52,470				190,662				22,272				(165,861	)			267,032
Income taxes			—				19,859				72,161				7,523				—				99,543
Net income		$	167,489			$	32,611			$	118,501			$	14,749			$	(165,861	)		$	167,489

CONDENSED CONSOLIDATING INCOME STATEMENT
SIX MONTHS ENDED NOVEMBER 30, 2005
(RESTATED)*

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Revenue:
Rentals		$	—			$	925,447			$	259,701			$	74,703			$	(253	)		$	1,259,598
Other services			—				587,496				201,936				27,088				(416,858	)			399,662
Equity in net income of affiliates			155,261				—				—				—				(155,261	)			—
			155,261				1,512,943				461,637				101,791				(572,372	)			1,659,260
Costs and expenses (income):
Cost of rentals			—				578,709				152,418				43,838				(85,882	)			689,083
Cost of other services			—				442,244				138,889				17,453				(334,358	)			264,228
Selling and administrative expenses			—				424,882				(998	)			22,186				(476	)			445,594
Interest income			—				(2,233	)			(197	)			(604	)			—				(3,034	)
Interest expense			—				14,717				(1,993	)			2,096				—				14,820
			—				1,458,319				288,119				84,969				(420,716	)			1,410,691
Income before income taxes			155,261				54,624				173,518				16,822				(151,656	)			248,569
Income taxes			—				20,902				66,395				6,011				—				93,308
Net income		$	155,261			$	33,722			$	107,123			$	10,811			$	(151,656	)		$	155,261

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF NOVEMBER 30, 2006

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	4,470			$	7,270			$	27,199			$	—			$	38,939
Marketable securities			—				77,644				—				55,638				—				133,282
Accounts receivable, net			—				269,760				128,971				23,372				(17,061	)			405,042
Inventories, net			—				190,279				27,385				7,693				(7,782	)			217,575
Uniforms and other rental items in service			—				277,926				82,359				19,785				(33,049	)			347,021
Prepaid expenses			—				6,886				5,951				757				—				13,594
Total current assets			—				826,965				251,936				134,444				(57,892	)			1,155,453
Property and equipment, at cost, net			—				600,950				230,088				49,917				—				880,955
Goodwill			—				308,170				841,733				20,577				—				1,170,480
Service contracts, net			—				104,998				61,146				5,247				—				171,391
Other assets, net			1,611,923				76,054				1,293,662				176,575				(3,101,429	)			56,785
		$	1,611,923			$	1,917,137			$	2,678,565			$	386,760			$	(3,159,321	)		$	3,435,064
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	(465,247	)		$	(314,011	)		$	828,255			$	(1,946	)		$	32,093			$	79,144
Accrued compensation and related liabilities			—				35,011				12,998				2,640				—				50,649
Accrued liabilities			—				203,635				(45,562	)			4,288				(45	)			162,316
Income taxes:
Current			—				8,707				72,756				423				—				81,886
Deferred			—				—				55,339				1,154				—				56,493
Long-term debt due within one year			—				228,563				1,101				—				(187	)			229,477
Total current liabilities			(465,247	)			161,905				924,887				6,559				31,861				659,965
Long-term debt due after one year			—				567,073				(57,256	)			86,572				(34,593	)			561,796
Deferred income taxes			—				10,263				102,005				4,623				—				116,891
Total shareholders’ equity			2,077,170				1,177,896				1,708,929				289,006				(3,156,589	)			2,096,412
		$	1,611,923			$	1,917,137			$	2,678,565			$	386,760			$	(3,159,321	)		$	3,435,064

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 31, 2006
(RESTATED)*

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	9,461			$	8,674			$	20,779			$	—			$	38,914
Marketable securities			—				154,711				—				47,828				—				202,539
Accounts receivable, net			—				256,602				124,143				21,378				(12,218	)			389,905
Inventories, net			—				172,279				27,582				8,256				(10,117	)			198,000
Uniforms and other rental items in service			—				272,197				77,636				19,996				(32,342	)			337,487
Prepaid expenses			—				8,169				2,539				455				—				11,163
Total current assets			—				873,419				240,574				118,692				(54,677	)			1,178,008
Property and equipment, at cost, net			—				604,813				208,684				50,286				—				863,783
Goodwill			—				292,969				822,165				21,041				—				1,136,175
Service contracts, net			—				112,016				61,324				6,625				—				179,965
Other assets, net			1,582,561				70,113				1,165,524				186,430				(2,937,322	)			67,306
		$	1,582,561			$	1,953,330			$	2,498,271			$	383,074			$	(2,991,999	)		$	3,425,237
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	(465,247	)		$	(205,605	)		$	716,714			$	(12,240	)		$	38,013			$	71,635
Accrued compensation and related liabilities			—				34,796				12,651				2,687				—				50,134
Accrued liabilities			—				190,728				(7,518	)			6,666				(949	)			188,927
Income taxes:
Current			—				4,081				37,355				2,258				—				43,694
Deferred			—				—				50,421				1,248				—				51,669
Long-term debt due within one year			—				3,549				911				—				(172	)			4,288
Total current liabilities			(465,247	)			27,549				810,534				619				36,892				410,347
Long-term debt due after one year			—				801,649				(61,312	)			89,770				(35,653	)			794,454
Deferred income taxes			—				10,263				115,187				4,794				—				130,244
Total shareholders’ equity			2,047,808				1,113,869				1,633,862				287,891				(2,993,238	)			2,090,192
		$	1,582,561			$	1,953,330			$	2,498,271			$	383,074			$	(2,991,999	)		$	3,425,237