CINTAS CORP - Annual Report: 2007 (Form 10-K)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for
Fiscal Year Ended May 31, 2007
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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Commission File No. 0-11399
CINTAS
CORPORATION
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||
(Exact
name of Registrant as specified in its charter)
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Incorporated
under the Laws of Washington
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6800
Cintas Boulevard
P.O.
Box 625737
Cincinnati,
Ohio 45262-5737
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IRS
Employer ID
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(State
or other jurisdiction of incorporation or organization)
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(Address
of principal executive offices)
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No.
31-1188630
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(513)
459-1200
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(Telephone
number of principal executive offices)
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Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Common
Stock, no par value
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The
NASDAQ Stock Market LLC
(NASDAQ
Global Select Market)
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by checkmark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
YES ü NO __
Indicate
by checkmark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES __
NO ü
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, and (2) has been subject to such filing requirements for
the past 90 days.
YES ü NO __
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained to the best
of
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
the
Form 10-K. ü
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the
Exchange Act).
Large
Accelerated Filer ü Accelerated
Filer
___ Non-Accelerated
Filer ___
Indicate
by checkmark whether the Registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ___ No ü
The
aggregate market value of the Common Stock held by non-affiliates as of November
30, 2006, was $6,749,778,423 based on a closing sale price of $42.20 per
share. As of June 30, 2007, 172,898,842 shares of Common Stock were
issued and 158,701,519 shares were outstanding.
Documents
Incorporated by Reference
Portions
of the Registrant's Proxy Statement to be filed with the Commission for its
2007
Annual Meeting of Shareholders are incorporated by reference in Part III as
specified.
2
Cintas
Corporation
Index
to Annual Report on Form 10-K
Page
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Part
I
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Item
1.
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Business.
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4
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Item
1A.
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Risk
Factors.
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6
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Item
1B.
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Unresolved
Staff Comments.
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9
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Item
2.
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Properties.
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10
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Item
3.
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Legal
Proceedings.
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11
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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11
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Part
II
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Item
5.
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Market
for Registrant’s Common Equity, Related
Stockholder
Matters and Issuer
Purchases of Equity
Securities.
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12
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Item
6.
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Selected
Financial Data.
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15
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Item
7.
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Management’s
Discussion and Analysis of Financial
Condition
and Results of
Operations.
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16
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Item
7A.
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Quantitative
and Qualitative Disclosure About Market Risk.
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28
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Item
8.
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Financial
Statements and Supplementary Data.
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28
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Item
9.
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Changes
in and Disagreements with Accountants on
Accounting
and Financial
Disclosure.
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59
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Item
9A.
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Controls
and Procedures.
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59
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Item
9B.
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Other
Information.
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59
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Part
III
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Item
10.
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Directors
and Executive Officers of the Registrant.
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59
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Item
11.
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Executive
Compensation.
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59
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Item
12.
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Security
Ownership of Certain Beneficial Owners and
Management
and Related
Stockholder Matters.
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59
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Item
13.
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Certain
Relationships and Related Transactions, and
Director
Independence.
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59
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Item
14.
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Principal
Accountant Fees and Services.
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59
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Part
IV
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|||
Item
15.
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Exhibits
and Financial Statement Schedules.
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60
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3
Part
I
Item
1. Business
Cintas
Corporation (Cintas), a Washington corporation, provides highly specialized
products and services to businesses of all types throughout the United States
and Canada. Cintas’ products and services are designed to enhance its
customers’ images and brand identification as well as provide a safe and
efficient work place. Cintas was founded in 1968 by Richard T.
Farmer, Chairman of the Board, when he left his family’s industrial laundry
business in order to develop uniform programs using an exclusive new
fabric. In the early 1970’s, Cintas acquired the family industrial
laundry business. Over the years, Cintas developed additional
products and services that complemented its core uniform business and broadened
the scope of products and services available to our customers.
The
products and services provided by Cintas are as follows:
|
·
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Uniforms
and Apparel
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|
·
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Mats,
Mops and Towels
|
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·
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Restroom
and Hygiene Service
|
|
·
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First
Aid
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|
·
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Safety
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|
·
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Fire
Protection
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·
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Branded
Promotional Products
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·
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Document
Shredding and Storage
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·
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Cleanroom
Resources
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·
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Flame
Resistant Clothing
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These
products and services are provided to approximately 800,000 businesses of all
types – from small service and manufacturing companies to major corporations
that employ thousands of people. This diversity in customer base
results in no individual customer accounting for greater than one percent of
Cintas’ total revenues. As a result, the loss of one account would
not have a significant financial impact on Cintas.
Cintas
classifies its business into two operating segments, Rentals and Other Services,
based on the similar economic and organizational characteristics of the products
and services within each segment. The Rentals segment reflects the rental and
servicing of uniforms and other garments, mats, mops and shop
towels. In addition to these rental items, we also provide restroom
and hygiene products and services within this segment. The Other
Services 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.
The
following table sets forth the revenues derived from each operating segment
provided by Cintas:
Year
Ended May 31, (in thousands)
|
2007
|
2006
|
2005
|
|||||||||
Rentals
|
$ |
2,734,629
|
$ |
2,568,776
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$ |
2,363,397
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||||||
Other
Services
|
972,271
|
834,832
|
703,886
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|||||||||
$ |
3,706,900
|
$ |
3,403,608
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$ |
3,067,283
|
See
Note
13 entitled Segment Information in “Notes to Consolidated Financial
Statements.”
The
primary markets served by both Cintas operating segments are local in nature
and
highly fragmented. Cintas competes with national, regional and local
providers, and the level of competition varies at each of Cintas’
locations. Product, design, price, quality, service and convenience
to the customer are the competitive elements in both operating
segments.
Within
the Rentals segment, Cintas provides its products and services to customers
via
local delivery routes originating from rental processing plants and
branches. Within the Other Services segment,
4
Cintas
provides its products and services via its distribution network and local
delivery routes or local representatives. In total, Cintas has
approximately 7,300 local delivery routes, 407 operations and 7 distribution
centers.
Cintas
sources finished products from many outside suppliers. In addition,
Cintas operates eleven manufacturing facilities which provide for a substantial
amount of its standard uniform needs. Cintas purchases fabric, used
in its manufacturing process, from several suppliers. Cintas is not
aware of any circumstances that would hinder its ability to continue obtaining
these materials.
Cintas
is
subject to various environmental laws and regulations, as are other companies
in
the uniform rental industry. While environmental compliance is not a
material component of our costs, Cintas must incur capital expenditures and
associated operating costs, primarily for water treatment and waste removal,
on
a regular basis. Environmental spending related to water treatment
and waste removal was approximately $16 million in fiscal 2007 and fiscal
2006. Capital expenditures to limit or monitor hazardous substances
were approximately $2 million in fiscal 2007 and fiscal 2006. These
expenditures were primarily related to the purchase of water treatment systems,
which are depreciated over a useful life of ten years. Cintas does
not expect a material change in the cost of environmental compliance on a
percent to revenue basis and is not aware of any material non-compliance with
environmental laws.
At
May
31, 2007, Cintas employed approximately 34,000 employees of which approximately
400 were represented by labor unions. Since January 2003, Cintas has
been the target of a corporate unionization campaign by Unite Here and the
Teamsters unions. These unions are attempting to pressure Cintas into
surrendering its employees’ rights to a government-supervised election and
unilaterally accept union representation. This is
unacceptable. Cintas’ philosophy in regard to unions is
straightforward: We believe that employees have the right to say yes
to union representation and the freedom to say no. This campaign
could be materially disruptive to our business and could materially adversely
affect results of operations. We will continue to vigorously oppose
this campaign and to defend our employees’ rights. Cintas considers
its relationships with its employees to be satisfactory.
Cintas
files annual and quarterly reports and proxy materials with the Securities
and
Exchange Commission (SEC). The public may copy these materials at the
SEC’s Public Reference Room at 100 F Street, N.E., Room 1580 Washington,
D.C. 20549 and may obtain further information concerning the
operation of the Public Reference Room by calling the SEC at (800)
SEC-0330. The SEC maintains an Internet site that contains the same
information regarding Cintas that is filed electronically with the
SEC. The address of that site is:
http://www.sec.gov. Cintas’ Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q and current reports on Form 8-K and amendments to those
reports are available free of charge as posted on its website, www.cintas.com,
as soon as reasonably practicable after electronically filing with the
SEC. Cintas is not including the other information contained on its
website as part of or incorporating it by reference into this Annual Report
on
Form 10-K.
5
Item
1A. Risk Factors
The
statements in this section, as well as statements described elsewhere in this
Form 10-K, or in other SEC filings, describe risks that could materially and
adversely affect our business, financial condition and results of operations,
and the trading price of our debt or equity securities could
decline. These risks are not the only risks that we
face. Our business, financial condition and results of operations
could also be affected by additional factors that are not presently known to
us
or that we currently consider to be immaterial to our operations.
In
addition, this section sets forth statements which constitute our cautionary
statements under the Private Securities Litigation Reform Act of
1995.
Forward-Looking
Statements
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor from
civil litigation for forward-looking statements. Forward-looking
statements may be identified by words such as “estimates,” “anticipates,”
“predicts,” “projects,” “plans,” “expects,” “intends,” “target,” “forecast,”
“believes,” “seeks,” “could,” “should,” “may” and “will” or the negative
versions thereof and similar expressions and by the context in which they are
used. Such statements are based upon current expectations of Cintas and
speak only as of the date made. We cannot guarantee that any
forward-looking statement will be realized. These statements are
subject to various risks, uncertainties and other factors that could cause
actual results to differ from those set forth in or implied by this Annual
Report. Factors that might cause such a difference include, but are not
limited to, the possibility of greater than anticipated operating costs
including energy costs, lower sales volumes, loss of customers due to
outsourcing trends, the performance and costs of integration of acquisitions,
fluctuations in costs of materials and labor including increased medical costs,
costs and possible effects of union organizing activities, failure to comply
with government regulations concerning employment discrimination, employee
pay
and benefits and employee health and safety, uncertainties regarding any
existing or newly-discovered expenses and liabilities related to environmental
compliance and remediation, the cost, results and ongoing assessment of internal
controls for financial reporting required by the Sarbanes-Oxley Act of 2002,
the
initiation or outcome of litigation, higher assumed sourcing or distribution
costs of products, the disruption of operations from catastrophic events,
changes in federal and state tax laws and the reactions of competitors in terms
of price and service. Cintas undertakes no obligation to update any
forward-looking statements whether as a result of new information or to reflect
events or circumstances arising after the date on which they are
made. You are advised, however, to consult any further disclosures we
make on related subjects in our Form 10-Q and 8-K reports to the
SEC.
Also
note
that we provide the following cautionary discussion of risks, uncertainties
and
possibly inaccurate assumptions relevant to our businesses. These are factors
that, individually or in the aggregate, we think could cause our actual results
to differ materially from expected and historical results. We note these factors
for investors as permitted by the Private Securities Litigation Reform Act
of
1995. You should understand that it is not possible to predict or identify
all
such factors. The risks and uncertainties described herein are not
the only ones we may face. Additional risks and uncertainties presently not
known to us or that we currently believe to be immaterial may also harm our
business. Consequently,
you should not consider the following to be a complete discussion of all
potential risks or uncertainties.
General
economic factors may adversely affect our financial
performance.
General
economic conditions, in North America and globally, may adversely affect our
financial performance. Higher levels of unemployment, inflation, tax
rates and other changes in tax laws and other economic factors could adversely
affect the demand for Cintas products and services. Increases in
labor costs including healthcare and insurance costs, labor shortages or
shortages of skilled labor, higher material costs for items such as fabrics
and
textiles, higher fuel and other energy costs, higher interest rates, inflation,
higher tax rates and other changes in tax laws and other economic factors could
increase our costs of rentals and other services and selling and administrative
expenses and could adversely affect our results of operations.
6
Increased
competition could adversely affect our financial performance.
We
operate in highly competitive industries and compete with national, regional
and
local providers. Product, design, price, quality, service and
convenience to the customer are the competitive elements in these
industries. If existing or future competitors seek to gain or retain
market share by reducing prices, Cintas may be required to lower prices, which
would hurt our results of operations. Cintas’ competitors also generally compete
with Cintas for acquisition candidates, which can increase the price for
acquisitions and reduce the number of available acquisition
candidates. In addition, our customers and prospects may decide to
perform certain services in-house instead of outsourcing these services to
Cintas. These competitive pressures could adversely affect our sales
and results of operations.
Risks
associated with the suppliers from whom our products are sourced could adversely
affect our results of operations.
The
products we sell are sourced from a wide variety of domestic and international
suppliers. Global sourcing of many of the products we sell is an important
factor in our financial performance. We require all of our suppliers
to comply with applicable laws, including labor and environmental laws, and
otherwise be certified as meeting our required supplier standards of conduct.
Our ability to find qualified suppliers who meet our standards, and to access
products in a timely and efficient manner is a significant challenge, especially
with respect to suppliers located and goods sourced outside the United States.
Political and economic stability in the countries in which foreign suppliers
are
located, the financial stability of suppliers, suppliers’ failure to meet our
supplier standards, labor problems experienced by our suppliers, the
availability of raw materials to suppliers, currency exchange rates, transport
availability and cost, inflation and other factors relating to the suppliers
and
the countries in which they are located are beyond our control. In addition,
United States and Canadian foreign trade policies, tariffs and other impositions
on imported goods, trade sanctions imposed on certain countries, the limitation
on the importation of certain types of goods or of goods containing certain
materials from other countries and other factors relating to foreign trade
are
beyond our control. These and other factors affecting our suppliers and our
access to products could adversely affect our results of
operations.
An
inability to open new, cost effective operating facilities may adversely affect
our expansion efforts.
We
plan
to expand our presence in existing markets and enter new markets. The
opening of new operating facilities is necessary to gain the capacity required
for this expansion. Our ability to open new operating facilities
depends on our ability to identify attractive locations, negotiate leases or
real estate purchase agreements on acceptable terms, identify and obtain
adequate utility and water sources, and comply with environmental regulations,
zoning laws and other similar factors. Any inability to effectively
identify and manage these items may adversely affect our expansion efforts,
and,
consequently, adversely affect our financial performance.
Unionization
campaigns could adversely affect our results of operations.
Cintas
continues to be the target of a corporate unionization campaign by several
unions. These unions are attempting to pressure Cintas into
surrendering our employees' rights to a government-supervised election by
unilaterally accepting union representation. We continue to
vigorously oppose this campaign and defend our employees' rights to a
government-supervised election. This campaign could be materially
disruptive to our business and could materially adversely affect our results
of
operations.
Within
our Document Management business, we handle customers’ confidential
information. Our failure to protect our customers’ confidential
information against security breaches could damage our reputation, harm our
business and adversely impact our results of operations.
Our Document
Management business includes both document destruction and document storage
services. These services involve the handling of our customers’
confidential information and the subsequent shredding or storage of this
information. Any compromise of security, accidental loss or theft of
customer data in our possession could damage our reputation and expose us to
risk of liability, which could harm our business and adversely impact our
results of operations.
7
Compliance
with environmental laws and regulations could result in significant costs that
adversely affect our results of operations.
Our
operating locations are subject to environmental laws and regulations relating
to the protection of the environment and health and safety matters, including
those governing discharges of pollutants to the air and water, the management
and disposal of hazardous substances and wastes and the clean-up of contaminated
sites. The operation of our businesses entails risks under environmental laws
and regulations. We could incur significant costs, including clean-up costs,
fines and sanctions and claims by third parties for property damage and personal
injury, as a result of violations of or liabilities under these laws and
regulations. We are currently involved in a limited number of remedial
investigations and actions at various locations. While, based on
information currently known to us, we believe that we maintain adequate reserves
with respect to these matters, our liability could exceed forecasted amounts,
and the imposition of additional clean-up obligations or the discovery of
additional contamination at these or other sites could result in additional
costs. In addition, potentially significant expenditures could be required
to
comply with environmental laws and regulations, including requirements that
may
be adopted or imposed in the future.
Under
environmental laws, an owner or operator of real estate may be required to
pay
the costs of removing or remediating hazardous materials located on or emanating
from property, whether or not the owner or operator knew of or was responsible
for the presence of such hazardous materials. While Cintas regularly
engages in environmental due diligence in connection with acquisitions, we
can
give no assurance that locations that have been acquired or leased have been
operated in compliance with environmental laws and regulations during prior
periods or that future uses or conditions will not make us liable under these
laws or expose us to third-party actions including tort suits.
We
are subject to legal proceedings that may adversely affect our financial
condition and results of operations.
We
are
party to various litigation claims and legal proceedings. Certain of
these lawsuits or potential future lawsuits, if decided adversely to us or
settled by us, may result in liability material to our financial condition
and
results of operations. We discuss these lawsuits and other litigation
to which we are party in greater detail below under the caption “Item 3. Legal
Proceedings” and in Note 12 entitled Litigation and Other Contingencies of
“Notes to Consolidated Financial Statements.”
Failure
to comply with the regulations of the U.S. Occupational Safety and Health
Administration and other state and local agencies that oversee safety compliance
could adversely affect our results of operations.
The
Occupational Safety and Health Act of 1970, as amended, or “OSHA”, establishes
certain employer responsibilities, including maintenance of a workplace free
of
recognized hazards likely to cause death or serious injury, compliance with
standards promulgated by the Occupational Safety and Health Administration
and
various record keeping, disclosure and procedural requirements. Various OSHA
standards may apply to our operations. We have incurred, and will continue
to
incur, capital and operating expenditures and other costs in the ordinary course
of our business in complying with OSHA and other state and local laws and
regulations. The failure to comply with these regulations could
result in fines by government authorities, payment of damages to private
litigants and affect our ability to service our customers.
Risks
associated with our acquisition policy could adversely affect our results of
operations.
Historically,
a portion of our growth has come from acquisitions. We continue to
evaluate opportunities for acquiring businesses that may supplement our internal
growth. However, there can be no assurance that we will be able to
locate and purchase suitable acquisitions. In addition, the success
of any acquisition depends in part on our ability to integrate the acquired
company. The process of integrating acquired businesses may involve
unforeseen difficulties and may require a disproportionate amount of our
management’s attention and our financial and other
resources. Although we conduct due diligence investigations prior to
each acquisition, there can be no assurance that we will discover all material
liabilities of an acquired business for which we may be responsible as a
successor owner or operator. The failure to successfully integrate
these acquired businesses or to discover such liabilities could adversely affect
our results of operations.
8
We
may experience difficulties in attracting and retaining competent personnel
in
key positions.
We
believe that a key component of our success is our corporate culture which
has
been imparted by management throughout our corporate
organization. This factor, along with our entire operation, depends
on our ability to attract and retain key employees. Competitive
pressures within and outside our industry may make it more difficult and
expensive for us to attract and retain key employees.
Unexpected
events could disrupt our operations and adversely affect our results of
operations.
Unexpected
events, including fires or explosions at facilities, natural disasters such
as
hurricanes and tornados, war or terrorist activities, unplanned outages, supply
disruptions, failure of equipment or systems or changes in laws and/or
regulations impacting our business, could adversely affect our results of
operations. These events could result in customer disruption,
physical damage to one or more key operating facilities, the temporary closure
of one or more key operating facilities or the temporary disruption of
information systems.
Failure
to achieve and maintain effective internal controls could adversely affect
our
business and stock price.
Effective
internal controls are necessary for us to provide reliable financial
reports. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. While we continue to evaluate
our internal controls, we cannot be certain that these measures will ensure
that
we implement and maintain adequate controls over our financial processes and
reporting in the future. If we fail to maintain the adequacy of our
internal controls or if we or our independent registered public accounting
firm
were to discover material weaknesses in our internal controls, as such standards
are modified, supplemented or amended, we may not be able to ensure that we
can
conclude on an ongoing basis that we have effective internal control over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act of 2002. Failure to achieve and maintain an effective internal
control environment could cause us to be unable to produce reliable financial
reports or prevent fraud. This may cause investors to lose confidence
in our reported financial information, which could have a material adverse
effect on our stock price.
Item
1B. Unresolved Staff Comments
Cintas
has not received any written comments from the SEC Staff regarding its periodic
or current reports within 180 days prior to the end of the fiscal year ended
May
31, 2007.
9
Item
2. Properties
Cintas
occupies 414 facilities located in 280 cities. Cintas leases 210 of
these facilities for various terms ranging from monthly to the year
2016. Cintas expects that it will be able to renew its leases on
satisfactory terms. Of the eleven manufacturing facilities listed
below, Cintas controls the operations of three of these manufacturing
facilities, but does not own or lease the real estate related to these
operations. All other facilities are owned. The corporate
office provides centrally located administrative functions including accounting,
finance, marketing and computer system development and support. Cintas operates
rental processing plants that house administrative, sales and service personnel
and the necessary equipment involved in the cleaning of uniforms and bulk items,
such as entrance mats and shop towels. Branch operations provide
administrative, sales and service functions. Cintas operates seven distribution
centers and eleven manufacturing facilities. Cintas also operates
first aid, safety and fire protection and document management facilities and
direct sales offices. Cintas considers the facilities it operates to
be adequate for their intended use. Cintas owns or leases
approximately 14,000 vehicles.
The
following chart provides additional information concerning Cintas'
facilities:
Type
of Facility
|
#
of Facilities
|
|||
Rental
Processing Plants
|
175
|
|||
Rental
Branches
|
96
|
|||
First
Aid, Safety and Fire Protection Facilities
|
61
|
|||
Document
Management Facilities
|
43
|
|||
Distribution
Centers
|
7 | * | ||
Manufacturing
Facilities
|
11
|
|||
Direct
Sales Offices
|
21
|
|||
Total
|
414
|
Rental
processing plants, rental branches, distribution centers and manufacturing
facilities are used in Cintas’ Rentals segment. Rental processing
plants, rental branches, first aid, safety and fire protection facilities,
document management facilities, distribution centers, manufacturing facilities
and direct sales offices are all used in the Other Services
segment.
*
Includes the corporate office, which is attached to the distribution center
in
Cincinnati, OH.
10
Item
3. Legal Proceedings
We
discuss certain legal proceedings pending against us in Part II of this Annual
Report on Form 10-K under the caption “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” under “Litigation and
Other Contingencies” and “Item 8. Financial Statements and Supplementary Data,”
in Note 12 entitled Litigation and Other Contingencies of “Notes to Consolidated
Financial Statements.” We refer you to those discussions for
important information concerning those legal proceedings, including the basis
for such actions and, where known, the relief sought. We provide the
following additional information concerning those legal proceedings which sets
forth the name of the lawsuit, the court in which the lawsuit is pending and
the
date on which the petition commencing the lawsuit was filed.
Wage
and
Hour Litigation: Paul Veliz, et al. v. Cintas Corporation, United
States District Court, Northern District of California, Oakland Division, March
19, 2003. 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. On February 14, 2006, the court 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.
Race
and
Gender Litigation and Related Charges: Robert Ramirez, et al. v. Cintas
Corporation, United States District Court, Northern District of California,
San Francisco Division, January 20, 2004, alleging class action claims of race,
national origin and gender discrimination in hiring, promotion and
pay; On April 27, 2005, the EEOC intervened in
Ramirez; Mirna E. Serrano, et al. v. Cintas Corporation, United
States District Court for the Eastern District of Michigan, Southern Division,
May 10, 2004, alleging class action claims of gender discrimination in hiring
into service sales representative positions; On November 15, 2005,
the EEOC intervened in Serrano; On May 11, 2006, the Ramirez
African-American, Hispanic and female failure to hire into service sales
representative positions claims and the EEOC’s intervention were transferred to
the Serrano case, the remaining claims in Ramirez were
dismissed or compelled to arbitration; Colleen Grindle, et al. v. Cintas
Corporation, Court of Common Pleas, Wood County, Ohio, February 20, 2007,
alleging class action claims on behalf of female employees at Cintas’
Perrysburg, Ohio rental location who allegedly were denied hire, promotion
or
transfer into SSR positions; Larry Houston, et al. v. Cintas
Corporation, United States District Court for the Northern
District of California, August 3, 2005; On November 22, 2005, the named
plaintiffs in Houston were ordered to arbitration; EEOC charge filed by
Clifton Cooper on March 23, 2005, with the EEOC Systemic Litigation Unit; Mr.
Cooper’s claims are now part of the Houston arbitration matter; EEOC
Commissioner’s charge filed on November 30, 2004, 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.
Breach
of
Fiduciary Duties: J. Lester Alexander, III vs. Cintas Corp., et
al., Circuit Court, Randolph County, Alabama, October 25,
2004.
Item
4. Submission of Matters to a Vote of Security
Holders
None
in
the fourth quarter of fiscal 2007.
11
Part
II
Item
5. Market for Registrant’s Common Equity,
Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Market
Information
Cintas’
Common Stock is traded on the NASDAQ Global Select Market under the symbol
“CTAS”. The
following table shows the high and low closing prices of shares of Cintas’
Common Stock by quarter during the last two fiscal years:
Fiscal
2007
|
||||||||
Quarter
Ended
|
High
|
|
Low
|
|||||
May
2007
|
$ |
40.51
|
$ |
35.95
|
||||
February
2007
|
42.81
|
39.71
|
||||||
November
2006
|
43.63
|
37.39
|
||||||
August
2006
|
42.54
|
34.92
|
Fiscal
2006
|
||||||||
Quarter
Ended
|
High
|
Low
|
||||||
May
2006
|
$ |
44.30
|
$ |
39.90
|
||||
February
2006
|
45.40
|
39.78
|
||||||
November
2005
|
45.17
|
38.31
|
||||||
August
2005
|
45.49
|
37.51
|
Holders
At
May
31, 2007, there were approximately 2,500 shareholders of record of Cintas’
Common Stock. Cintas believes that this represents approximately
65,000 beneficial owners.
Dividends
Dividends
on the outstanding Common Stock have been paid annually and amounted to $0.39
per share, $0.35 per share and $0.32 per share in fiscal 2007, fiscal 2006
and
fiscal 2005, respectively.
Stock
Performance Graph
The
following graph summarizes the cumulative return on $100 invested in Cintas’
Common Stock, the S&P 500 Stock Index and the common stocks of a selected
peer group of companies. Prior to fiscal 2007, Cintas compared its
common stock returns to the three largest publicly traded companies engaged
primarily in the uniform related industry determined by net assets at year
end
(Old Peer Group). The companies included in the Old Peer Group were
Aramark Corporation, G & K Services, Inc. and UniFirst
Corporation. On or about January 26, 2007, Aramark Corporation ceased
being listed on a public stock exchange. As a result, Cintas made the
change to a new peer group (New Peer Group). Because our products and
services are diverse, Cintas does not believe that any single published industry
index is appropriate for comparing shareholder return. Therefore, the
New Peer Group used in the performance graph combines four publicly traded
companies in the business services industry that have similar characteristics
as
Cintas, such as route based delivery of products and services. The
companies included in the New Peer Group are G & K Services, Inc., UniFirst
Corporation, ABM Industries and Ecolab, Inc.
12
Total
shareholder return was based on the increase in the price of the stock and
assumed reinvestment of all dividends. Further, total return was
weighted according to market capitalization of each company. The
companies in the New Peer Group are not the same as those considered by the
Compensation Committee of the Board of Directors.
![](https://www.sec.gov/Archives/edgar/data/0000723254/000089225107000154/chart2.jpg)
Recent
Sales of Unregistered Securities; Uses of Proceeds from Registered
Securities
None
in
the fourth quarter of fiscal 2007.
13
Purchases
of Equity Securities by the Issuer and Affiliated
Purchases
On
May 2,
2005, Cintas announced that the Board of Directors authorized a $500 million
stock buyback program at market prices. In July 2006, Cintas
announced that the Board of Directors approved the expansion of its share
buyback program by an additional $500 million. The Board of Directors
did not specify an expiration date for the stock buyback program.
During
fiscal 2007, Cintas purchased 4.8 million shares of Cintas stock at an average
price of $41.38 per share, for a total purchase price of approximately $199
million.
Period
|
Total
number of shares purchased
|
Average
price paid per share
|
Total
number of shares purchased as part of the publicly announced
plan
|
Maximum
approximate dollar value of shares that may yet be purchased under
the
plan
|
||||||||||||
March
2007
|
—
|
$ |
—
|
14,197,323
|
$ |
419,438,500
|
||||||||||
April
2007
|
—
|
$ |
—
|
14,197,323
|
$ |
419,438,500
|
||||||||||
May
2007
|
—
|
$ |
—
|
14,197,323
|
$ |
419,438,500
|
||||||||||
Total
|
—
|
$ |
—
|
14,197,323
|
$ |
419,438,500
|
In
fiscal
2007, Cintas also acquired 95,616 shares as payment received from employees
upon
the exercise of options under the stock option plan.
From
the
inception of the stock buyback program through July 27, 2007, Cintas has
purchased a total of approximately 14.2 million shares of Cintas stock at an
average price of $40.89 per share for a total purchase price of approximately
$580.6 million. The maximum approximate dollar value of shares that
may yet be purchased under the plan as of July 27, 2007, is $419.4
million.
14
Item
6. Selected Financial Data
Eleven
Year Financial Summary
(In
thousands except per share and percentage data)
Years
Ended May 31,
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
10-Year
Compd Growth
|
||||||||||||||||||||||||||||||||||||
Revenue
|
$ |
1,261,899
|
1,476,945
|
1,751,568
|
1,901,991
|
2,160,700
|
2,271,052
|
2,686,585
|
2,814,059
|
3,067,283
|
3,403,608
|
3,706,900
|
11.4 | %(3) | ||||||||||||||||||||||||||||||||||
Net
Income
|
$ |
117,207
|
130,797
|
136,796
|
190,386
|
218,665
|
229,466
|
243,191
|
265,078
|
292,547
|
323,382
|
334,538
|
11.1 | % | ||||||||||||||||||||||||||||||||||
Pro
Forma Net
Income(1)
|
$ |
111,413
|
125,847
|
136,796
|
190,386
|
218,665
|
229,466
|
243,191
|
265,078
|
292,547
|
323,382
|
334,538
|
11.6 | % | ||||||||||||||||||||||||||||||||||
Basic
EPS
|
$ |
0.75
|
0.81
|
0.83
|
1.14
|
1.30
|
1.35
|
1.43
|
1.55
|
1.70
|
1.93
|
2.09
|
10.8 | % | ||||||||||||||||||||||||||||||||||
Diluted
EPS
|
$ |
0.74
|
0.80
|
0.81
|
1.12
|
1.27
|
1.33
|
1.41
|
1.54
|
1.69
|
1.92
|
2.09
|
10.9 | % | ||||||||||||||||||||||||||||||||||
Pro
Forma Basic EPS
(1)
|
$ |
0.71
|
0.78
|
0.83
|
1.14
|
1.30
|
1.35
|
1.43
|
1.55
|
1.70
|
1.93
|
2.09
|
11.4 | % | ||||||||||||||||||||||||||||||||||
Pro
Forma Diluted EPS(1)
|
$ |
0.70
|
0.77
|
0.81
|
1.12
|
1.27
|
1.33
|
1.41
|
1.54
|
1.69
|
1.92
|
2.09
|
11.6 | % | ||||||||||||||||||||||||||||||||||
Dividends
Per Share
|
$ |
0.10
|
0.12
|
0.15
|
0.19
|
0.22
|
0.25
|
0.27
|
0.29
|
0.32
|
0.35
|
0.39
|
14.6 | % | ||||||||||||||||||||||||||||||||||
Total
Assets
|
$ |
1,101,182
|
1,305,400
|
1,407,818
|
1,581,342
|
1,752,224
|
2,519,234
|
2,582,946
|
2,810,297
|
3,059,744
|
3,425,237
|
3,570,480
|
12.5 | % | ||||||||||||||||||||||||||||||||||
Shareholders’
Equity
|
$ |
650,604
|
756,799
|
871,433
|
1,042,896
|
1,231,346
|
1,423,814
|
1,646,418
|
1,888,093
|
2,104,574
|
2,090,192
|
2,167,738
|
12.8 | % | ||||||||||||||||||||||||||||||||||
Return
on Average Equity (2)
|
18.5 | % | 17.9 | % | 16.8 | % | 19.9 | % | 19.2 | % | 17.3 | % | 15.8 | % | 15.0 | % | 14.7 | % | 15.4 | % | 15.7 | % | ||||||||||||||||||||||||||
Long-Term
Debt
|
$ |
227,799
|
307,633
|
283,581
|
254,378
|
220,940
|
703,250
|
534,763
|
473,685
|
465,291
|
794,454
|
877,074
|
Note:
|
Results
prior to June 1, 2007, have been restated to reflect the adoption
of FAS
123(R) using the modified-retrospective method.
|
Results
prior to March 24, 1999, have been restated to include Unitog Company,
acquired in a pooling of interests transaction.
|
|
Results
prior to April 8, 1998, have been restated to include Uniforms
To You
Companies, acquired in a pooling of interests
transaction.
|
(1)
|
Results
for 1998 and 1997 were adjusted on a pro forma basis to reflect
the true
tax impact of Uniforms To You as if it had been reported as a C
corporation prior to the merger with Cintas.
|
(2)
|
Return
on average equity using pro forma net income. Return on average
equity is computed as net income divided by the average of shareholders’
equity. We believe that this calculation gives management and
shareholders a good indication of Cintas’ historical
performance.
|
(3)
|
Represents
the 10-year compound annual growth rate based on revenue as restated
for
pooling of interests transactions noted
above.
|
15
Item
7. Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
Business
Strategy
Cintas
provides highly specialized products and services to businesses of all types
throughout the United States and Canada. We refer to ourselves as
“The Service Professionals.” We bring value to our customers by
helping them provide a cleaner, safer, more pleasant atmosphere for their
customers and employees. Our products and services are designed to
improve our customers’ image. We also help our customers protect
their employees and their company by enhancing workplace safety and helping
to
ensure legal compliance in key areas of their business.
We
are
North America's leading provider of corporate identity uniforms through rental
and sales programs, as well as a significant provider of related business
services, including entrance mats, restroom products and services, first aid,
safety and fire protection products and services, document management services
and branded promotional products.
Our
business strategy is to achieve revenue growth for all of our products and
services by increasing our penetration at existing customers and by broadening
our customer base to include business segments to which Cintas has not
historically served. We will also continue to identify additional
product and service opportunities for our current and future
customers. Our long-term goal is to provide a product or service to
every business in North America.
To
pursue
the strategy of increasing penetration, we have a highly talented and diverse
team of service professionals visiting our customers on a regular
basis. This frequent contact with our customers enables us to develop
close personal relationships. The combination of our distribution
system and these strong customer relationships provides a platform from which
we
launch additional products and services.
We
pursue
the strategy of broadening our customer base in a few ways. Cintas
has a national sales organization introducing all of our products and services
to prospects in all business segments. Our ever expanding range of
products and services allows our sales organization to consider any type of
business a prospect. We also broaden our customer base through
geographic expansion, especially in our emerging businesses of first aid and
safety, fire protection and document management. Finally, we will
continue to evaluate strategic acquisitions as opportunities arise.
Continuous
cost containment and product and process innovation are considered hallmarks
of
our organization. In order to sustain these efforts, we employ a Six
Sigma effort within Cintas. Six Sigma is an analytical process that
assists companies in improving quality and customer satisfaction while reducing
cycle time and operating costs. We are pleased with our progress in
this endeavor and are optimistic about the improved efficiencies that this
process will continue to yield to Cintas.
Results
of Operations
Fiscal
2007 marked the 38th consecutive
year
of uninterrupted growth in sales and profits for Cintas. In addition
to achieving this milestone, Cintas increased its diluted earnings per share
by
8.9% and its dividends paid to shareholders by 11.4%. During fiscal
2007, we reorganzied our sales efforts to become more efficient and
productive. This reorganization effort has taken longer and been more
costly in fiscal 2007 than anticipated. However, Cintas continues to
believe that this reorganization will benefit revenue growth results in the
long-term.
Cintas
classifies its businesses into two operating segments, Rentals and Other
Services, based on the similar economic and organizational characteristics
of
the products and services within each segment. The Rentals segment reflects
the
rental and servicing of uniforms and other garments, mats, mops and shop
towels. In addition to these rental items, we also provide our
restroom and hygiene products and services within this segment. The
Other Services 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.
16
The
following table sets forth certain consolidated statements of income data as
a
percentage of revenue by segment and in total for the periods
indicated:
2007
|
2006
|
2005
|
||||||||||
(Restated)*
|
(Restated)*
|
|||||||||||
Revenue:
|
||||||||||||
Rentals
|
73.8% | 75.5% | 77.1% | |||||||||
Other
services
|
26.2% | 24.5% | 22.9% | |||||||||
Total
revenue
|
100.0% | 100.0% | 100.0% | |||||||||
Cost
of sales:
|
||||||||||||
Rentals
|
55.4% | 54.8% | 54.8% | |||||||||
Other
services
|
62.8% | 64.9% | 66.3% | |||||||||
Total
cost of sales
|
57.3% | 57.3% | 57.5% | |||||||||
Gross
margin:
|
||||||||||||
Rentals
|
44.6% | 45.2% | 45.2% | |||||||||
Other
services
|
37.2% | 35.1% | 33.7% | |||||||||
Total
gross margin
|
42.7% | 42.7% | 42.5% | |||||||||
Selling
and administrative expenses
|
27.1% | 26.8% | 26.6% | |||||||||
Interest
income
|
-0.2% | -0.2% | -0.2% | |||||||||
Interest
expense
|
1.4% | 0.9% | 0.8% | |||||||||
Income
before income taxes
|
14.4% | 15.2% | 15.3% |
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting Policies in “Notes
to Consolidated Financial Statements."
As
evidenced above, our revenue growth continues to be higher in the Other Services
segment versus the Rentals segment, resulting in a moderate shift in the
percentage of revenue between our segments. This shift was mainly
driven by the acquisitions of first aid, safety and fire protection businesses
and document management businesses. Information related to
acquisitions is discussed in Note 8 entitled Acquisitions of “Notes to
Consolidated Financial Statements.”
Fiscal
2007 Compared to Fiscal 2006
Fiscal
2007 total revenue was $3.7 billion, an increase of 8.9% over fiscal
2006. Internal growth was 5.3% in fiscal 2007, compared to 7.8% in
fiscal 2006. This decline in internal growth is due to economic
pressure experienced throughout the year from the continued off-shoring of
manufacturing jobs as well as the ripple effect felt at other customers that
serve these manufacturing businesses. In addition, the reorganization
of our sales force has taken longer in the current year than we
anticipated. Our
internal growth continues to be generated mainly through the sale of uniform
rental programs to new customers and the increased penetration of ancillary
products to our existing customer base. The remaining growth in total
revenue was generated predominantly through acquisitions of rental, first aid,
safety and fire protection service businesses and document management
businesses. Information related to acquisitions is discussed in Note
8 entitled Acquisitions of “Notes to Consolidated Financial
Statements.”
Rentals
segment revenues consist predominantly of revenues derived from the rental
of
corporate identity uniforms and other garments, and the rental and/or sale
of
mats, mops, shop towels, restroom supplies and other rental
services. Revenue from the Rentals segment increased 6.5% over fiscal
2006. Internal growth for the Rentals segment was 4.2% in fiscal
2007. The increase in the Rentals segment revenue was primarily due
to growth in the customer base as well as the continued penetration of ancillary
products into our existing customer base. New business remained the
main driver of our internal growth as we continued to sell rental programs
to
new customers. We also continued to expand our rental market, with
over half of our new business being
17
comprised
of customers who were first time users of uniform rental
programs. The remaining growth of 2.3% in fiscal 2007 resulted from
the acquisition of rental volume.
Other
Services segment revenues are predominantly derived from the design, manufacture
and direct sale of uniforms and related items, first aid, safety and fire
protection products and services, document management services and branded
promotional products. The Other Services segment revenue increased
16.5% over fiscal 2006. Internal growth in the Other Services segment
was 8.6% in fiscal 2007. This internal growth was mainly due to an
increase in the customer base and through further penetration of first aid,
safety and fire protection products and services and document management
services into our existing customer base. The remaining revenue
growth of 7.9% was generated through the acquisitions of first aid, safety
and
fire protection businesses and document management businesses.
Cost
of
rentals increased 7.7% over fiscal 2006. Cost of rentals consists
primarily of production expenses, delivery expenses and the amortization of
in
service inventory, including uniforms, mats, shop towels and other rental
items. The cost increase over fiscal 2006 was primarily driven by the
growth in Rentals segment revenues. In addition, delivery labor
increased $34.1 million due to increased Rentals segment revenue and the
introduction of our restroom cleaning service. As a result, cost of
rentals as a percent of Rentals segment revenues increased to 55.4% in fiscal
2007 compared to 54.8% in fiscal 2006.
Cost
of
other services increased 12.6% over fiscal 2006. Cost of other
services consists primarily of cost of goods sold (predominantly uniforms and
first aid products), delivery expenses and distribution expenses. The
increase over fiscal 2006 was due to the growth in Other Services revenue,
derived through a combination of internal growth and
acquisitions. Gross margin within this segment may fluctuate
depending on the type of product or service sold, as more cost efficient
sourcing is employed and as products which require additional services or
specialization generate higher gross margins. For example, tailored
garments that incorporate high levels of design and customization tend to
generate higher gross margins than work wear and standard catalog
items. The gross margin for fiscal 2007 is 37.2%. The
gross margin for the Other Services segment has historically been in the 30%
to
35% range. However, a combination of economies of scale at growing
operations, Six Sigma, sourcing improvements and other cost containment
initiatives have allowed us to exceed this historical range. Due to
the success of these initiatives and our continued efforts, we believe the
future gross margins will be in the 35% to 40% range.
Selling
and administrative expenses increased 10.1% over fiscal 2006. Selling
and administrative expenses increased mainly due to higher selling
expenses. In fiscal 2007, we reorganized our sales efforts to become
more efficient and productive in the long-term. This reorganization,
as well as increased marketing plans and sales promotions, combined to increase
our selling costs by $32.6 million over the prior fiscal year. The
cost of providing medical and retirement benefits to our employees increased
$21.8 million, representing a 15.7% increase over the prior year. In
addition, administrative expenses increased by $7.1 million due to the
amortization of intangibles generated by new acquisitions and $6.2 million
as a
result of an increase in professional services relating to legal and the
outsourcing of certain human resource functions. We also terminated a
cash settled forward starting interest rate swap (forward starting swap)
resulting in a $6.2 million reduction of administrative
expenses. This forward starting swap is explained in more detail in
the Liquidity and Capital Resources section below.
Net
interest expense (interest expense less interest income) increased $18.8 million
from the prior fiscal year. This increase was primarily a result of
increased interest expense from higher debt outstanding as a result of our
share
buybacks.
Income
before income tax was $533.6 million, a 3.0% increase over fiscal
2006. Income before income tax from the Rentals segment decreased
0.1% over the prior year due to higher selling expenses associated with the
reorganization of the sales force and higher delivery labor primarily as a
result of our restroom cleaning service. Income before income tax for
the Other Services segment increased 45.7% from the prior year mainly due to
increased revenue and cost containment initiatives.
Cintas'
effective tax rate was 37.3% for fiscal 2007, as compared to 37.6% for fiscal
2006 (see also Note 7 entitled Income Taxes of “Notes to Consolidated Financial
Statements”).
Net
income for fiscal 2007 of $334.5 million was a 3.4% increase over fiscal 2006,
and diluted earnings per share of $2.09 was an 8.9% increase over fiscal
2006. The increase in diluted earnings per share was greater than the
increase in net income due to the impact of the share buyback program, which
is
discussed in more detail in the Liquidity and Capital Resources section
below. Return on average equity was 15.7% in fiscal 2007 and 15.4% in
fiscal 2006. Return on average equity is computed as net income
divided by the average of shareholders’ equity.
18
We
believe that this calculation gives management and shareholders a good
indication of Cintas’ historical performance.
Fiscal
2006 Compared to Fiscal 2005
Certain
amounts below have been restated for the effects of the adoption of Financial
Accounting Standards Board (FASB) Statement No. 123(R), Shared-Based
Payment, using the modified-retrospective method. See the
Stock-based compensation section below within Critical Accounting Policies
for
further information.
Fiscal
2006 total revenue was $3.4 billion, an increase of 11.0% over fiscal
2005. Internal growth improved in fiscal 2006 to 7.8%, up from 6.3%
in fiscal 2005. Our internal growth continues to be generated mainly
through the continued sale of uniform rental programs to new customers and
the
increased penetration of ancillary products to our existing customer
base. The remaining growth in total revenue was generated
predominantly through acquisitions of rental, first aid, safety and fire
protection service businesses and document management
businesses. Information related to acquisitions is discussed in Note
8 entitled Acquisitions of “Notes to Consolidated Financial
Statements.”
Rentals
segment revenues consist predominantly of revenues derived from the rental
of
corporate identity uniforms and other garments, and the rental and/or sale
of
mats, mops, shop towels, restroom supplies and other rental
services. Revenue from the Rentals segment increased 8.7% over fiscal
2005. The increase in Rentals segment revenue was primarily due to
growth in the customer base as well as the continued penetration of ancillary
products into our existing customer base. New business remained
healthy as we experienced continued success in selling rental programs to new
customers. We also continued to expand our rental market, with over
half of our new business being comprised of customers who were first time users
of uniform rental programs. Internal revenue growth for the Rentals
segment was 7.3% in fiscal 2006 compared to 6.8% in fiscal 2005. We
estimate that the effects of hurricanes Katrina, Rita and Wilma negatively
impacted our Rentals segment internal growth rate by approximately
0.3%. The 1.4% of remaining growth in fiscal 2006 resulted from the
acquisition of rental volume.
Other
Services segment revenues are predominantly derived from the design, manufacture
and direct sale of uniforms and related items, first aid, safety and fire
protection products and services, document management services and branded
promotional products. Other Services segment revenue increased 18.6%
over fiscal 2005, primarily due to acquisitions of first aid, safety and fire
protection businesses and document management businesses.
Internal
revenue in the Other Services segment increased 9.6% over fiscal
2005. This increase was mainly driven by the growth of the sale of
first aid, safety and fire protection products and services and document
management services. We estimate that the effects of hurricanes
Katrina, Rita and Wilma negatively impacted our Other Services segment internal
growth rate by approximately 0.4%. Growth in the Other Services
segment continues to be through an increase in the customer base and through
further penetration of additional products and services into our existing
customer base.
Cost
of
rentals increased 8.6% over fiscal 2005. Cost of rentals consists
primarily of production expenses, delivery expenses and the amortization of
in
service inventory, including uniforms, mats, shop towels and other rental
items. The cost increase over fiscal 2005 was primarily driven by the
growth in Rentals segment revenues. However, rising energy costs also
contributed to this increase. Rentals segment energy costs increased
31.7% in fiscal 2006, from $77.6 million in fiscal 2005 to $102.2 million in
fiscal 2006. Various cost containment initiatives implemented
throughout the year helped offset the significant increase in energy
costs. As a result, cost of rentals as of percent of Rentals segment
revenues remained at 54.8% in both fiscal 2006 and fiscal 2005.
Increases
in energy costs will continue to impact our results of operations negatively
in
coming quarters, except to the extent we are able to offset such costs with
price increases and increased operating efficiencies. Our New Orleans
rental operation and Gulf Coast direct sale business continue to be impacted
negatively by hurricanes Katrina, Rita and Wilma. While physical
damage to our facilities was minimal, many of our customers in the region have
yet to reopen or to return to pre-hurricane staffing levels. This
lower business volume will continue to have an impact on our
results. We are actively pursuing recoupment of our losses related to
these hurricanes with our insurance carrier. We do not yet have a
clear indication of when a recoupment agreement will be resolved, nor can we
be
sure of the amount we will receive.
19
Cost
of
other services increased 16.2% over fiscal 2005. Cost of other
services consists primarily of cost of goods sold (predominantly uniforms and
first aid products), delivery expenses and distribution expenses. The
increase over fiscal 2005 was due to the growth in Other Services segment
revenue, derived through a combination of internal growth and
acquisitions. Gross margin within this segment may fluctuate
depending on the type of product or service sold, as more cost efficient
sourcing is employed and as products which require additional services or
specialization generate higher gross margins. For example, tailored
garments that incorporate high levels of design and customization tend to
generate higher gross margins than work wear and standard catalog
items. The gross margin for fiscal 2006 is 35.1%. The
gross margin for the Other Services segment has historically been in the 30%
to
35% range. However, Six Sigma and other cost containment initiatives
have allowed us to exceed this historical range. Due to the success
of these initiatives and our continued efforts, we believe the future gross
margins will be in the 32% to 37% range.
Selling
and administrative expenses increased 11.4% over fiscal 2005. Selling
and administrative expenses increased mainly due to higher selling
expenses. In order to accelerate revenue growth, we have increased
our sales force, marketing plans and sales promotions. These measures
combined to increase our selling costs by $24.0 million over the prior fiscal
year. The cost of providing medical and retirement benefits to our
employees increased $17.0 million, representing a 13.9% increase over the prior
year. In addition, administrative expenses increased by $4.7 million
as a result of an increase in the bad debt reserve and by $11.8 million as
a
result of an increase in professional services relating to legal and the
outsourcing of certain human resource functions. Administrative
expenses also increased by $5.2 million due to the amortization of intangibles
generated by new acquisitions.
Net
interest expense (interest expense less interest income) increased $7.5 million
from the prior fiscal year. This increase in net interest expense is
due to increased interest rates on our outstanding debt and the increased level
of borrowing used to fund acquisitions and the stock buyback
program.
Income
before income tax was $518.0 million, a 10.4% increase over fiscal
2005. Income before income tax from the Rentals segment increased
9.5% over the prior year due to higher rental revenue and various cost
containment initiatives, which offset the increases in selling expenses, medical
and energy costs. Income before income tax for the Other Services
segment increased 27.0% from the prior year mainly due to increased revenue
and
cost containment initiatives.
Cintas'
effective tax rate was 37.6% for both fiscal 2006 and fiscal 2005 (see also
Note 7 entitled Income Taxes of “Notes to Consolidated Financial
Statements”).
Net
income for fiscal 2006 of $323.4 million was a 10.5% increase over fiscal 2005,
and diluted earnings per share of $1.92 was a 13.6% increase over fiscal
2005. The increase in diluted earnings per share was greater than the
increase in net income due to the impact of the share buyback program, which
is
discussed in more detail in the Liquidity and Capital Resources section
below. Return on average equity was 15.4% in fiscal 2006 and 14.7% in
fiscal 2005. Return on average equity is computed as net income
divided by the average of shareholders’ equity. We believe that this
calculation gives management and shareholders a good indication of Cintas’
historical performance.
Liquidity
and Capital Resources
At
May
31, 2007, Cintas had $155.4 million in cash, cash equivalents and marketable
securities, representing a decrease of $86.0 million from May 31, 2006, or
35.6%. This decrease is primarily due to acquisitions and the share
buyback program. Cash generated from operations was $449.4 million in
fiscal 2007 as compared to $461.0 million generated in fiscal
2006. This $11.6 million decrease was primarily due to increased
inventory levels and increased taxes paid, offset by increased net income and
lower rental items in service. Significant uses of cash in fiscal
2007 were capital expenditures of $180.8 million, acquisitions of $160.7 million
(net of cash acquired), repurchases of common stock of $198.9 million and
dividends of $62.0 million. Cash, cash equivalents and marketable
securities will be used to finance future acquisitions, capital expenditures,
expansion and share buybacks.
Marketable
securities consist primarily of municipal bonds and federal government
securities. Cintas' investment policy pertaining to marketable
securities is conservative. The criteria used in making investment
decisions is the preservation of principal, while earning an attractive
yield.
Accounts
receivable increased $19.0 million, primarily due to increased
revenues. The average collection period in fiscal 2007 remained
comparable with fiscal 2006.
20
Inventories
increased $33.7 million, or 17.0%. Inventory levels at May 31, 2006,
were relatively low due to strong uniform sales in the fourth quarter of fiscal
2006. The increase in inventory from May 31, 2006 to May 31, 2007,
reflects a replenishment of inventory to more normalized levels.
Working
capital decreased $14.0 million to $753.7 million in fiscal
2007. This decrease is primarily due to a decrease in marketable
securities for the execution of the share buyback program.
Net
property and equipment increased by $56.5 million due to continued investment
in
rental facilities and equipment and real estate purchased in conjunction with
the acquisitions of rental, first aid, safety and fire protection and document
management businesses. Capital expenditures for fiscal 2007 totaled
$180.8 million, including $132.8 million for the Rentals segment and $48.0
million for the Other Services segment, exceeding depreciation expense by
approximately $45.6 million. Cintas continues to reinvest in land,
buildings and equipment in an effort to expand capacity for future
growth. During the year, Cintas completed construction of two new
uniform rental facilities and has an additional five uniform rental facilities
in various stages of construction to accommodate growth in rental
operations. Cintas anticipates that capital expenditures for fiscal
2008 will be between $170.0 and $190.0 million.
Long-term
debt totaled $877.1 million at May 31, 2007. This amount includes
$225.0 million in long-term debt due on June 1, 2007, that was refinanced
effective June 1, 2007, under Cintas’ existing commercial paper
program. Long-term debt also includes $225.0 million of ten-year
senior notes at a rate of 6.0% which was borrowed in order to finance the Omni
acquisition in fiscal 2002 and $250.0 million of thirty-year senior notes issued
in August 2006 at a rate of 6.15%. Proceeds from the thirty-year
senior notes issuance were used to extinguish outstanding commercial paper
at
the time of that debt issuance. Cintas has earned credit ratings on
these notes of “A” from Standard & Poor’s and “A2” from Moody’s. In
addition, long-term debt also includes $168.0 million in commercial paper.
Cintas utilizes a $600.0 million commercial paper program, on which it has
earned credit ratings of “A-1” from Standard & Poor’s and “Prime-1” from
Moody’s. We believe these ratings are reflective of our commitment to
conservative financial policies, strong financial management and a disciplined
integration strategy for acquisitions. The commercial paper program is fully
supported by a long-term credit facility that matures in fiscal
2011.
During
the third quarter of fiscal 2006, Cintas entered into a forward starting swap
to
protect forecasted interest payments from interest rate movement in anticipation
of a $200.0 million, 30-year debt issuance in early fiscal
2008. During the fourth quarter of fiscal 2007, Cintas changed its
intent on issuing this 30-year debt. This decision was based on
current market conditions and interest rate environment as well as the
additional payment flexibility provided to Cintas under its commercial paper
program. As a result of this decision, Cintas terminated the forward
starting swap and recorded the resulting $6.2 million gain in fiscal 2007 as
a
reduction of administrative expenses.
Cintas’
total debt to capitalization ratio has increased from 27.6% at May 31, 2006,
to
28.9% at May 31, 2007. Total debt increased $82.4 million in fiscal 2007 through
the net activity of debt issuance noted above (see Note 5 entitled Long-Term
Debt and Note 8 entitled Acquisitions of “Notes to Consolidated Financial
Statements”). This additional indebtedness was used to execute the
share buyback program. During fiscal 2007, Cintas bought back $198.9 million
of
Cintas stock.
During
the year, Cintas paid dividends of $62.0 million, or $0.39 per
share. On a per share basis, this dividend is an increase of 11.4%
over the dividend paid in fiscal 2006. This marks the 24th consecutive
year
that Cintas has increased its annual dividend since going public in
1983.
On
May 2,
2005, Cintas announced that the Board of Directors authorized a $500.0 million
stock buyback program at market prices. In July 2006, Cintas
announced that the Board of Directors approved the expansion of its share
buyback program by an additional $500.0 million. During fiscal 2007,
Cintas purchased 4.8 million shares of Cintas stock at an average price of
$41.38 per share, for a total purchase price of approximately $198.9
million. From the inception of the stock buyback program through July
27, 2007, Cintas has purchased 14.2 million shares of Cintas stock at an average
price of $40.89 per share for a total purchase price of approximately $580.6
million. The Board of Directors did not specify an expiration date
for this program.
21
Following
is information regarding Cintas' long-term contractual obligations and other
commitments outstanding as of May 31, 2007:
Long-Term
Contractual Obligations
|
Payments
Due by Period
|
|||||||||||||||||||
(In thousands) |
Total
|
One
year
or
less
|
Two
to
three
years
|
Four
to
five
years
|
After
five
years
|
|||||||||||||||
Long-term
debt
(1)
|
$ |
879,454
|
$ |
3,521
|
$ |
1,379
|
$ |
394,251
|
$ |
480,303
|
||||||||||
Capital
lease obligations (2)
|
1,761
|
620
|
661
|
240
|
240
|
|||||||||||||||
Operating
leases
(3)
|
76,198
|
22,352
|
30,631
|
15,431
|
7,784
|
|||||||||||||||
Interest
payments
(4)
|
589,738
|
48,471
|
80,056
|
87,563
|
373,648
|
|||||||||||||||
Interest
swap agreements (5)
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
Unconditional
purchase obligations
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
Total
contractual cash obligations
|
$ |
1,547,151
|
$ |
74,964
|
$ |
112,727
|
$ |
497,485
|
$ |
861,975
|
Cintas
also makes payments to defined contribution plans. The amounts of
contributions made to the plans are made at the discretion of
Cintas. Future contributions are expected to increase 10%
annually. Assuming this 10% increase, payments due in one year or
less would be $31,986, two to three years would be $73,887 and four to five
years would be $89,404. Payments for years thereafter are expected to
continue increasing by 10% each year.
(1)
|
Long-term
debt primarily consists of $700,000 in long-term notes and $168,000
in
commercial paper. Reference Note 5 entitled Long-Term Debt of
“Notes to Consolidated Financial Statements” for a detailed discussion of
long-term debt.
|
(2)
|
Capital
lease obligations are included in long-term debt detailed in Note
5
entitled Long-Term Debt of “Notes to Consolidated Financial
Statements.”
|
(3)
|
Operating
leases consist primarily of building leases and a synthetic lease
on a
corporate jet.
|
(4)
|
Interest
payments include interest on both fixed and variable rate
debt. Rates have been assumed to increase 25 basis points for
fiscal 2008, an additional 25 basis points in fiscal 2009 and then
remain
constant in future years.
|
(5)
|
Reference
Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial
Statements” for a detailed discussion of interest swap
agreements.
|
Other
Commitments
|
Amount
of Commitment Expiration per Period
|
|||||||||||||||||||
(In thousands) |
Total
|
One
year
or
less
|
Two
to
three
years
|
Four
to
five
years
|
After
five
years
|
|||||||||||||||
Lines
of credit
(1)
|
$ |
600,000
|
$ |
—
|
$ |
—
|
$ |
600,000
|
$ |
—
|
||||||||||
Standby letters of credit (2) | 75,453 | 75,453 |
—
|
— |
—
|
|||||||||||||||
Guarantees
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
Standby
repurchase obligations
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
Other
commercial commitments
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
Total
commercial commitments
|
$ |
675,453
|
$ |
75,453
|
$ |
—
|
$ |
600,000
|
$ |
—
|
(1)
|
Back-up
facility for the commercial paper program (reference Note 5 entitled
Long-Term Debt of “Notes to Consolidated Financial Statements” for further
discussion).
|
(2)
|
Support
certain outstanding debt (reference Note 5 entitled Long-Term Debt
of
“Notes to Consolidated Financial Statements”), self-insured workers'
compensation and general liability insurance
programs.
|
Cintas
has no off-balance sheet arrangements other than the synthetic lease on a
corporate jet. The synthetic lease on the aircraft does not currently
have, and is not reasonably likely to have, a current or future material effect
on Cintas’ financial condition, changes in Cintas’ financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources.
22
Inflation
and Changing Prices
Changes
in wages, benefits and energy costs have the potential to materially impact
Cintas’ financial results. Medical benefits and energy costs, in
particular, continue to rise. Medical benefit costs have increased
due to a combination of rising healthcare costs and an increase in the number
of
covered participants. Medical benefits were 3.4% of total revenues in
fiscal 2007 and 3.2% of total revenues in fiscal 2006. Energy costs
were 3.3% of total revenues in fiscal 2007 and 3.4% of total revenues in fiscal
2006.
Management
believes inflation has not had a material impact on Cintas' financial condition
or a negative impact on operations.
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 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 hiring into various service sales representative
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 service
sales representative 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-service sales representative 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
23
include
allegations that Cintas failed to promote Hispanics into supervisory positions,
discriminated against African-Americans and Hispanics in service sales
representative 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. On February 24, 2006, a
motion to intervene in Serrano was filed by intervening plaintiffs
Colleen Grindle, et al., on behalf of a subclass of female employees at Cintas’
Perrysburg, Ohio rental location who allegedly were denied hire, promotion
or
transfer to service sales representative positions. On March 24,
2006, plaintiffs Colleen Grindle, et. al. withdrew their motion to intervene
without prejudice. On February 20, 2007, the plaintiffs Colleen
Grindle, et. al. filed a separate lawsuit in the Court of Common Pleas, Wood
County, Ohio, captioned Colleen Grindle, et al. v. Cintas Corporation
(Grindle), on behalf of a class of female employees at Cintas’
Perrysburg, Ohio location who allegedly were denied hire,
promotion or transfer
to service sales representative positions on the basis of their
gender. The Grindle plaintiffs seek injunctive relief,
compensatory damages, punitive damages, attorneys’ fees and other
remedies. No filings or determinations have been made in
Grindle 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
(Houston). 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.
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
August 29, 2006, the EEOC Indianapolis District Office issued a dismissal and
notice of rights and closed its file on the Clifton Cooper charge served on
Cintas 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. Mr. Cooper’s claims are now part of
the Houston arbitration matter disclosed hereinabove.
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 million in compensatory damages and $100
million 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.
Cintas
is
subject to various environmental laws and regulations, as are other companies
in
the industry. While environmental compliance is not a material
component of our costs, Cintas must incur capital expenditures and associated
operating costs, primarily for water treatment and waste removal, on a regular
basis. Environmental spending related to water treatment and waste
removal was approximately $16 million in fiscal 2007 and fiscal
2006. Capital expenditures to limit or monitor hazardous substances
were approximately $2 million in fiscal 2007 and fiscal 2006. These
expenditures were primarily related to the purchase of water treatment systems,
which are depreciated over a useful life of ten years. Cintas does
not expect a material change in the cost of environmental compliance on a
percent to revenue basis and is not aware of any material non-compliance with
environmental laws.
24
New
Accounting Standards
In
July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48 (FIN 48), Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. This Interpretation is effective for fiscal
years beginning after December 15, 2006. Cintas will adopt this
Interpretation on June 1, 2007, and is currently in the process of evaluating
the impact of FIN 48 on its consolidated financial statements. Any
necessary transition adjustments will not affect net income in the period of
adoption and will be reported as a change in accounting principle in our
consolidated financial statements.
Critical
Accounting Policies
The
preparation of Cintas' consolidated financial statements in conformity with
U.S.
generally accepted accounting principles requires management to make estimates
and judgments that have a significant effect on the amounts reported in the
consolidated financial statements and accompanying notes. These
critical accounting policies should be read in conjunction with Note 1 entitled
Significant Accounting Policies of “Notes to Consolidated Financial
Statements.” Significant changes, estimates or assumptions related to
any of the following critical accounting policies could possibly have a material
impact on the consolidated financial statements.
Revenue
recognition
Rental
revenue is recognized when services are performed and other services revenue
is
recognized when either services are performed or when products are
shipped and the title and risks of ownership pass to the customer.
Allowance
for doubtful accounts
Cintas
establishes an allowance for doubtful accounts. This allowance is an
estimate based on historical rates of collectibility. An
uncollectible accounts provision is recorded for overdue amounts, beginning
with
a nominal percentage and increasing substantially as the account
ages. The amount provided as the account ages will differ slightly
between the Rentals and Other Services segments, because of differences in
customers served and the nature of each segment.
Inventories
Inventories
are valued at the lower of cost (first-in, first-out) or
market. Substantially all inventories represent finished
goods. Cintas applies a commonly accepted practice of using inventory
turns to apply variances between actual to standard costs to the inventory
balances. The judgments and estimates used to calculate inventory
turns will have an impact on the valuation of inventory at the lower of cost
or
market. Inventory obsolescence is determined by specific
identification, as well as an estimate based on historical rates of
obsolescence.
Uniforms
and other rental items in service
Uniforms
and other rental items in service are valued at cost less amortization,
calculated using the straight-line method. Uniforms in service (other
than cleanroom and flame resistant garments) are amortized over their useful
life of eighteen months. Other rental items including shop towels,
mats, cleanroom garments, flame resistant garments, linens and restroom
dispensers are amortized over their useful lives which range from eight to
forty-eight months. The amortization rates used are based on industry
experience, Cintas' experience and wear tests performed by
Cintas. These factors are critical to determining the amount of in
service inventory that is presented in the consolidated financial
statements.
Property
and equipment
Depreciation
is calculated using the straight-line method over the estimated useful lives
of
the assets, which is typically thirty to forty years for buildings, five to
twenty years for building improvements, three to ten years for equipment and
two
to five years for leasehold improvements. When events or
circumstances indicate that the carrying amount of long-lived assets may not
be
recoverable, the estimated future cash flows (undiscounted) are
25
compared
to the carrying amount of the assets. If the estimated future cash flows
are less than the carrying amount of the assets, an impairment loss is
recorded. The impairment loss is measured by comparing the fair value
of the assets with their carrying amounts. Fair value is determined
by discounted cash flows or appraised values, as
appropriate. Long-lived assets that are held for disposal are
reported at the lower of the carrying amount or the fair value, less estimated
costs related to disposition.
Goodwill
and impairment
Goodwill,
obtained through acquisitions of businesses, is valued at cost less any
impairment. Cintas performs annual impairment tests by
segment. These tests include comparisons to current market values,
where available, and discounted cash flow analyses. Significant
assumptions include growth rates based on historical trends and margin
improvement leveraged from such growth. Based on the results of the
impairment tests, Cintas has not recognized an impairment of goodwill for the
years ended May 31, 2007, 2006 or 2005.
Service
contracts and other assets
Service
contracts and other assets, which consist primarily of noncompete and consulting
agreements obtained through acquisitions of businesses, are amortized by use
of
the straight-line method over the estimated lives of the agreements, which
are
generally five to ten years. Certain noncompete agreements, as well
as all service contracts, require that a valuation be determined using a
discounted cash flow model. The assumptions and judgments used in
these models involve estimates of cash flows and discount rates, among other
factors. Because of the assumptions used to value these intangible
assets, actual results over time could vary from original
estimates. Impairment of service contracts and other assets is
through specific identification. No impairment has been recognized by
Cintas for the years ended May 31, 2007, 2006 or 2005.
Stock-based
compensation
At
May
31, 2007, Cintas had an equity compensation plan, which is more fully described
in Note 11 entitled Stock-Based Compensation of “Notes to Consolidated Financial
Statements.” Prior to June 1, 2006, Cintas accounted for this plan
under the intrinsic value method proscribed by APB Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related Interpretations,
as permitted by FASB Statement No. 123 (FAS 123), Accounting for Stock-Based
Compensation. Effective June 1, 2006, Cintas adopted the fair
value recognition provisions of FASB Statement No. 123(R) (FAS 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 FAS 123. FAS 123(R) requires all share-based
payments to employees, including stock options, to be recognized as an expense
in the consolidated statement of income based on their fair
values. Due to this restatement, Cintas’ income before income taxes
and net income decreased by $3.8 million for the year ended May 31, 2006, and
$8.0 million for the year ended May 31, 2005. This adoption lowered
basic earnings per share from $1.95 per share to $1.93 per share for fiscal
2006
and from $1.75 per share to $1.70 per share for fiscal 2005. In
addition, diluted earnings per share were lowered from $1.94 per share to $1.92
per share for fiscal 2006 and from $1.74 per share to $1.69 per share for fiscal
2005. The cumulative effect of the change on paid-in-capital and
retained earnings as of June 1, 2005, was $21,241 and ($39,567),
respectively. The cumulative effect of the change on deferred taxes as of
June 1, 2005, was less than $1million.
As
a
result of adopting FAS 123(R) on June 1, 2006, Cintas’ income before income
taxes and net income for the year ended May 31, 2007, are $4.5 million and
$3.1
million lower, respectively, than if Cintas had continued to account for
share-based compensation under APB 25. Basic and diluted earnings per
share are both $.02 lower for the year ended May 31, 2007, than if Cintas had
continued to account for share-based compensation under APB 25.
Litigation
and environmental matters
Cintas
is
subject to legal proceedings and claims related to environmental matters arising
from the ordinary course of business. U.S. generally accepted
accounting principles require that a liability for contingencies be recorded
when it is probable that a liability has occurred and the amount of the
liability can be reasonably estimated. Significant judgment is
required to determine the existence of a liability, as well as the amount to
be
recorded. Cintas regularly consults with attorneys to ensure that all
of the relevant facts and circumstances are considered before a contingent
liability is recorded. While a significant change in assumptions and
judgments could have a material impact on the amounts recorded for contingent
liabilities, Cintas does not believe that they will result in a material adverse
effect on the consolidated financial statements.
26
A
detailed discussion of litigation matters is discussed above in the section
entitled Litigation and Other Contingencies.
Income
taxes
Deferred
tax assets and liabilities are determined by the differences between the
consolidated financial statement carrying amounts and the tax basis of assets
and liabilities. Please reference Note 7 entitled Income Taxes of
“Notes to Consolidated Financial Statements” for the types of items that give
rise to significant deferred income tax assets and
liabilities. Deferred income taxes are classified as assets or
liabilities based on the classification of the related asset or liability for
financial reporting purposes. Deferred income taxes that are not
related to an asset or liability for financial reporting are classified
according to the expected reversal date. Cintas regularly reviews
deferred tax assets for recoverability based upon projected future taxable
income and the expected timing of the reversals of existing temporary
differences. As a result of this review, Cintas has not established a
valuation allowance against the deferred tax assets.
Cintas
is
periodically reviewed by domestic and foreign tax authorities regarding the
amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various
tax
jurisdictions. In evaluating the exposure associated with various
filing positions, Cintas records reserves as deemed
appropriate. Based on Cintas' evaluation of current tax positions,
Cintas believes its accruals are appropriate.
Outlook
Our
outlook is positive for fiscal 2008. In fiscal 2007, we reorganized
our sales efforts to become more efficient and productive. Although
this reorganization has taken longer and been more costly than anticipated,
we
expect to see revenue growth benefits in fiscal 2008 and continued benefit
over
the long-term. We will continue searching out additional products and
services to become an even more valuable resource for our
customers. We believe that the high level of customer service
provided by our partners and supported by our infrastructure, quality products,
financial resources and corporate culture will provide for continued business
success. As such, we see upside potential for all of our business
units. Although difficult to predict, we anticipate continued growth
in all of our business units.
In
the
marketplace, competition and related pricing pressure will continue; however,
we
believe cost containment initiatives, technological advances and continued
leverage of our infrastructure will soften or offset any impact.
When
appropriate opportunities arise, we will supplement our internal growth with
strategic acquisitions.
Like
most
other companies, we experienced, and anticipate continuing to experience,
increased costs for wages and benefits, including medical
benefits. Changes in energy costs and changes in federal and state
tax laws also impact our results.
Cintas
continues to be the target of a corporate unionization campaign by Unite Here
and the Teamsters unions. These unions are attempting to pressure
Cintas into surrendering our employees' rights to a government-supervised
election and unilaterally accept union representation. Cintas'
philosophy in regard to unions is straightforward: We believe that
employees have the right to say yes to union representation and the freedom
to
say no. This campaign could be materially disruptive to our business
and could materially adversely affect results of operations. We will
continue to vigorously oppose this campaign and to defend our employees'
rights.
27
Item
7A. Quantitative and Qualitative Disclosure About
Market Risk
Cintas
manages interest rate risk by using a combination of variable and fixed rate
debt and investing in marketable securities. Earnings are affected by
changes in short-term interest rates due to the use of commercial paper of
approximately $168 million, with an average interest rate of
5.28%. This exposure is limited by the investment in marketable
securities, which act as a hedge against variability in short-term
rates. If short-term rates change by one-half percent (or 50 basis
points), Cintas' income before income taxes would change by approximately $2
million. This estimated exposure considers the mitigating effects of
marketable securities on the change in the cost of variable rate
debt. This analysis does not consider the effects of a change in
economic activity or a change in Cintas' capital structure.
Through
its foreign operations, Cintas is exposed to foreign currency
risk. Foreign currency exposures arise from transactions denominated
in a currency other than the functional currency and from foreign denominated
revenue and profit translated into U.S. dollars. The primary foreign
currency to which Cintas is exposed is the Canadian dollar. Cintas
does not currently use forward exchange contracts to limit potential losses
in
earnings or cash flows from foreign currency exchange rate
movements.
Item
8. Financial Statements and Supplementary
Data
Index
to Consolidated Financial Statements
Audited
Consolidated Financial Statements for the Years Ended May 31, 2007,
2006
and 2005
|
||
Management’s
Report on Internal Control over Financial Reporting
|
29
|
|
Reports
of Ernst & Young LLP, Independent Registered Public Accounting
Firm
|
30
|
|
Consolidated
Statements of Income
|
32
|
|
Consolidated
Balance Sheets
|
33
|
|
Consolidated
Statements of Shareholders’ Equity
|
34
|
|
Consolidated
Statements of Cash Flows
|
35
|
|
Notes
to Consolidated Financial Statements
|
36
|
28
Management’s
Report on
Internal
Control over Financial Reporting
__________________________________________________________________________________________________________________________________________________________
To
the
Shareholders of Cintas Corporation:
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f)
under the Securities Exchange Act of 1934) to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States. Internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Accordingly, even an
effective system of internal control over financial reporting will provide
only
reasonable assurance with respect to financial statement
preparation.
With
the
supervision of our President and Chief Executive Officer and our Chief Financial
Officer, management assessed our internal control over financial reporting
as of
May 31, 2007. Management based its assessment on criteria established in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Management's assessment included evaluation of such elements
as the design and operating effectiveness of key financial reporting controls,
process documentation, accounting policies and our overall control environment.
This assessment is supported by testing and monitoring performed by our internal
audit function.
Based
on
our assessment, management has concluded that our internal control over
financial reporting was effective as of May 31, 2007, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States.
We
reviewed the results of management's assessment with the Audit Committee of
our
Board of Directors. Additionally, our independent registered public accounting
firm, Ernst & Young LLP, audited management's assessment and independently
assessed the effectiveness of Cintas Corporation’s internal control over
financial reporting. Ernst & Young LLP has issued an attestation report,
which is included in this Annual Report.
|
/s/
|
Scott D. Farmer | |
Scott D. Farmer | |||
President and Chief Executive Officer | |||
|
/s/
|
William C. Gale | |
William C. Gale | |||
Senior Vice President and Chief Financial Officer | |||
29
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareholders of Cintas Corporation:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Cintas Corporation
maintained effective internal control over financial reporting as of May 31,
2007, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Cintas Corporation’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Cintas Corporation maintained effective
internal control over financial reporting as of May 31, 2007, is fairly stated,
in all material respects, based on the COSO criteria. Also, in our
opinion, Cintas Corporation maintained, in all material respects, effective
internal control over financial reporting as of May 31, 2007, based
on the COSO criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Cintas
Corporation as of May 31, 2007 and 2006, and the related consolidated statements
of income, shareholders’ equity and cash flows for each of the three years in
the period ended May 31, 2007, of Cintas Corporation, and our report dated
July
27, 2007, expressed an unqualified opinion thereon.
/s/
ERNST
& YOUNG LLP
Cincinnati,
Ohio
July
27,
2007
30
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareholders of Cintas Corporation:
We
have
audited the accompanying consolidated balance sheets of Cintas Corporation
as of
May 31, 2007 and 2006, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended May 31, 2007. These financial statements are the responsibility of Cintas
Corporation’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Cintas Corporation
at
May 31, 2007 and 2006, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended May 31, 2007, in
conformity with U.S. generally accepted accounting principles.
As
discussed in Note 1, the accompanying consolidated financial statements have
been restated for the adoption of Statement of Financial Accounting Standard
No.
123(R), Share-Based Payment, in fiscal 2007, using the
modified-retrospective transition method.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Cintas Corporation’s
internal control over financial reporting as of May 31, 2007, based on criteria
established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated July 27, 2007, expressed an unqualified opinion thereon.
/s/
ERNST
& YOUNG LLP
Cincinnati,
Ohio
July
27,
2007
31
Consolidated
Statements
of Income
Years
Ended May 31,
|
||||||||||||
(In
thousands except per share data)
|
2007
|
2006
|
2005
|
|||||||||
(Restated)*
|
(Restated)*
|
|||||||||||
Revenue:
|
||||||||||||
Rentals
|
$ |
2,734,629
|
$ |
2,568,776
|
$ |
2,363,397
|
||||||
Other
services
|
972,271
|
834,832
|
703,886
|
|||||||||
3,706,900
|
3,403,608
|
3,067,283
|
||||||||||
Costs
and expenses (income):
|
||||||||||||
Cost
of
rentals
|
1,515,185
|
1,406,829
|
1,295,992
|
|||||||||
Cost
of other
services
|
610,360
|
541,987
|
466,532
|
|||||||||
Selling
and administrative
expenses
|
1,003,958
|
911,750
|
818,203
|
|||||||||
Interest
income
|
(6,480 | ) | (6,759 | ) | (6,914 | ) | ||||||
Interest
expense
|
50,324
|
31,782
|
24,448
|
|||||||||
3,173,347
|
2,885,589
|
2,598,261
|
||||||||||
Income
before income
taxes
|
533,553
|
518,019
|
469,022
|
|||||||||
Income
taxes
|
199,015
|
194,637
|
176,475
|
|||||||||
Net
income
|
$ |
334,538
|
$ |
323,382
|
$ |
292,547
|
||||||
Basic
earnings per
share
|
$ |
2.09
|
$ |
1.93
|
$ |
1.70
|
||||||
Diluted
earnings per
share
|
$ |
2.09
|
$ |
1.92
|
$ |
1.69
|
||||||
Dividends
declared and paid per share
|
$ |
.39
|
$ |
.35
|
$ |
.32
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
See
accompanying notes.
32
Consolidated
Balance
Sheets
As
of May 31,
|
||||||||
(In
thousands except share data)
|
2007
|
2006
|
||||||
(Restated)*
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash
equivalents
|
$ |
35,360
|
$ |
38,914
|
||||
Marketable
securities
|
120,053
|
202,539
|
||||||
Accounts
receivable,
principally trade, less
|
||||||||
allowance
of $14,486 and
$15,519,
respectively
|
408,870
|
389,905
|
||||||
Inventories,
net
|
231,741
|
198,000
|
||||||
Uniforms
and other rental items
in
service
|
344,931
|
337,487
|
||||||
Prepaid
expenses
|
15,781
|
11,163
|
||||||
Total
current
assets
|
1,156,736
|
1,178,008
|
||||||
Property
and equipment, at cost,
net
|
920,243
|
863,783
|
||||||
Goodwill
|
1,245,877
|
1,136,175
|
||||||
Service
contracts,
net
|
171,361
|
179,965
|
||||||
Other
assets,
net
|
76,263
|
67,306
|
||||||
$ |
3,570,480
|
$ |
3,425,237
|
|||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ |
64,622
|
$ |
71,635
|
||||
Accrued
compensation and
related
liabilities
|
62,826
|
50,134
|
||||||
Accrued
liabilities
|
200,686
|
188,927
|
||||||
Income
taxes:
|
||||||||
Current
|
18,584
|
43,694
|
||||||
Deferred
|
52,179
|
51,669
|
||||||
Long-term
debt due within one
year
|
4,141
|
4,288
|
||||||
Total
current
liabilities
|
403,038
|
410,347
|
||||||
Long-term
debt due after one
year
|
877,074
|
794,454
|
||||||
Deferred
income
taxes
|
122,630
|
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
|
||||||||
2007:
172,874,195 shares issued
and 158,676,872 shares outstanding
|
||||||||
2006:
172,571,083 shares issued
and 163,181,738 shares outstanding
|
120,811
|
109,948
|
||||||
Paid
in
capital
|
56,909
|
58,556
|
||||||
Retained
earnings
|
2,533,459
|
2,260,917
|
||||||
Treasury
stock:
|
||||||||
2007: 14,197,323
shares
|
||||||||
2006:
9,389,345
shares
|
(580,562 | ) | (381,613 | ) | ||||
Other
accumulated comprehensive
income (loss):
|
||||||||
Foreign
currency
translation
|
41,815
|
34,389
|
||||||
Unrealized
(loss)/gain on
derivatives
|
(4,421 | ) |
9,150
|
|||||
Unrealized
loss on
available-for-sale
securities
|
(273 | ) | (1,155 | ) | ||||
Total
shareholders'
equity
|
2,167,738
|
2,090,192
|
||||||
$ |
3,570,480
|
$ |
3,425,237
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
See
accompanying notes.
33
Consolidated Statements of |
Other
|
|
||||||||||||||||||||||||||||||
Shareholders’ Equity |
Paid
|
Accumulated
|
Total
|
|||||||||||||||||||||||||||||
Common Stock |
In
|
Retained |
Comprehensive
|
Treasury
Stock
|
Shareholders'
|
|||||||||||||||||||||||||||
(In
thousands)
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Shares
|
Amount
|
Equity
|
||||||||||||||||||||||||
Balance
at June 1, 2004 (Restated)*
|
171,378
|
$ |
85,553
|
$ |
40,736
|
$ |
1,758,951
|
$ |
2,853
|
—
|
$ |
—
|
$ |
1,888,093
|
||||||||||||||||||
Net
income
|
—
|
—
|
—
|
292,547
|
—
|
—
|
—
|
292,547
|
||||||||||||||||||||||||
Equity
adjustment for foreign
currency
translation
|
—
|
—
|
—
|
—
|
9,033
|
—
|
—
|
9,033
|
||||||||||||||||||||||||
Change
in fair value of
derivatives
|
—
|
—
|
—
|
—
|
290
|
—
|
—
|
290
|
||||||||||||||||||||||||
Comprehensive
income, net of
tax
|
|
301,870
|
||||||||||||||||||||||||||||||
Dividends
|
—
|
—
|
—
|
(54,968 | ) |
—
|
—
|
—
|
(54,968 | ) | ||||||||||||||||||||||
Effects
of
acquisitions
|
289
|
—
|
12,818
|
(105 | ) |
—
|
—
|
—
|
12,713
|
|||||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
7,971
|
—
|
—
|
—
|
—
|
7,971
|
||||||||||||||||||||||||
Stock
options exercised, net of
shares
surrendered
|
461
|
9,993
|
(2,894 | ) |
—
|
—
|
—
|
—
|
7,099
|
|||||||||||||||||||||||
Repurchase
of common
stock
|
—
|
—
|
—
|
—
|
—
|
(1,469 | ) | (58,204 | ) | (58,204 | ) | |||||||||||||||||||||
Balance
at May 31, 2005 (Restated)*
|
172,128
|
95,546
|
58,631
|
1,996,425
|
12,176
|
(1,469 | ) | (58,204 | ) |
2,104,574
|
||||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
323,382
|
—
|
—
|
—
|
323,382
|
||||||||||||||||||||||||
Equity adjustment for foreign currency
transaction
|
—
|
—
|
—
|
—
|
20,882 |
—
|
—
|
20,882 | ||||||||||||||||||||||||
Change
in fair value of
derivatives, net of
$5,985
of
tax
|
—
|
—
|
—
|
—
|
10,481
|
—
|
—
|
10,481
|
||||||||||||||||||||||||
Change
in fair value of
available-for-sale
securities,
net of ($674) of
tax
|
—
|
—
|
—
|
—
|
(1,155 | ) |
—
|
—
|
(1,155 | ) | ||||||||||||||||||||||
Comprehensive
income, net of
tax
|
353,590
|
|||||||||||||||||||||||||||||||
Dividends
|
—
|
—
|
—
|
(58,823 | ) |
—
|
—
|
—
|
(58,823 | ) | ||||||||||||||||||||||
Effects
of
acquisitions
|
—
|
—
|
—
|
(67 | ) |
—
|
—
|
—
|
(67 | ) | ||||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
5,277
|
—
|
—
|
—
|
—
|
5,277
|
||||||||||||||||||||||||
Stock
options exercised, net of
shares
surrendered
|
443
|
14,402
|
(5,352 | ) |
—
|
—
|
—
|
—
|
9,050
|
|||||||||||||||||||||||
Repurchase
of common
stock
|
—
|
—
|
—
|
—
|
—
|
(7,920 | ) | (323,409 | ) | (323,409 | ) | |||||||||||||||||||||
Balance
at May 31, 2006 (Restated)*
|
172,571
|
109,948
|
58,556
|
2,260,917
|
42,384
|
(9,389 | ) | (381,613 | ) |
2,090,192
|
||||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
334,538
|
—
|
—
|
—
|
334,538
|
||||||||||||||||||||||||
Equity
adjustment for foreign
currency
translation
|
—
|
—
|
—
|
—
|
7,426
|
—
|
—
|
7,426
|
||||||||||||||||||||||||
Change
in fair value of
derivatives, net of
$8,196
of
tax
|
—
|
—
|
—
|
—
|
(13,571 | ) |
—
|
—
|
(13,571 | ) | ||||||||||||||||||||||
Change
in fair value of
available-for-sale
securities, net
of $522 of tax
|
—
|
—
|
—
|
—
|
882
|
—
|
—
|
882
|
||||||||||||||||||||||||
Comprehensive
income, net of
tax
|
329,275
|
|||||||||||||||||||||||||||||||
Dividends
|
—
|
—
|
—
|
(61,996 | ) |
—
|
—
|
—
|
(61,996 | ) | ||||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
4,500
|
—
|
—
|
—
|
—
|
4,500
|
||||||||||||||||||||||||
Stock
options exercised, net of
shares
surrendered
|
303
|
10,863
|
(6,147 | ) |
—
|
—
|
—
|
—
|
4,716
|
|||||||||||||||||||||||
Repurchase
of common
stock
|
—
|
—
|
—
|
—
|
—
|
(4,808 | ) | (198,949 | ) | (198,949 | ) | |||||||||||||||||||||
Balance
at May 31, 2007
|
172,874
|
$ |
120,811
|
$ |
56,909
|
$ |
2,533,459
|
$ |
37,121
|
(14,197 | ) | $ | (580,562 | ) | $ |
2,167,738
|
* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method. See Note 1 entitled Significant Accounting Policies.
See
accompanying notes.
34
Consolidated
Statements
of Cash Flows
Years
Ended May 31,
|
||||||||||||
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
(Restated)*
|
(Restated)*
|
|||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ |
334,538
|
$ |
323,382
|
$ |
292,547
|
||||||
Adjustments
to reconcile net
income to net
cash
provided by
operating activities:
|
||||||||||||
Depreciation
|
135,181
|
127,117
|
119,813
|
|||||||||
Amortization
of deferred
charges
|
40,745
|
33,536
|
28,362
|
|||||||||
Stock-based
compensation
|
4,500
|
4,725
|
7,971
|
|||||||||
Deferred
income
taxes
|
(332 | ) | (52 | ) |
3,876
|
|||||||
Change
in current assets and
liabilities,
net of acquisitions of businesses:
|
||||||||||||
Accounts
receivable
|
(11,460 | ) | (44,154 | ) | (36,317 | ) | ||||||
Inventories
|
(32,090 | ) |
22,033
|
(26,321 | ) | |||||||
Uniforms
and other rental items
in service
|
(6,968 | ) | (26,683 | ) | (7,168 | ) | ||||||
Prepaid
expenses
|
(4,502 | ) | (2,305 | ) | (892 | ) | ||||||
Accounts
payable
|
(7,654 | ) |
2,329
|
15,727
|
||||||||
Accrued
compensation and
related liabilities
|
12,600
|
11,424
|
6,906
|
|||||||||
Accrued
liabilities and
other
|
9,981
|
(1,905 | ) |
12,444
|
||||||||
Tax
benefit on exercise of
stock options
|
(44 | ) | (306 | ) | (1,165 | ) | ||||||
Income
taxes
payable
|
(25,104 | ) |
11,884
|
(1,885 | ) | |||||||
Net cash provided by operating activities |
449,391
|
461,025
|
413,898 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(180,824 | ) | (156,632 | ) | (140,727 | ) | ||||||
Proceeds
from sale or
redemption of marketable securities
|
118,174
|
87,477
|
102,997
|
|||||||||
Purchase
of marketable
securities and investments
|
(48,515 | ) | (31,932 | ) | (201,947 | ) | ||||||
Acquisitions
of businesses, net
of cash acquired
|
(160,707 | ) | (346,363 | ) | (109,076 | ) | ||||||
Other
|
(1,836 | ) |
7,404
|
(1,981 | ) | |||||||
Net
cash used in investing
activities
|
(273,708 | ) | (440,046 | ) | (350,734 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from issuance of
debt
|
252,460
|
333,500
|
—
|
|||||||||
Repayment
of
debt
|
(169,987 | ) | (7,303 | ) | (10,575 | ) | ||||||
Stock
options
exercised
|
10,863
|
14,402
|
9,993
|
|||||||||
Tax
benefit on exercise of
stock
options
|
44
|
306
|
1,165
|
|||||||||
Dividends
paid
|
(61,996 | ) | (58,823 | ) | (54,968 | ) | ||||||
Repurchase
of common
stock
|
(198,949 | ) | (323,409 | ) | (58,204 | ) | ||||||
Other
|
(11,672 | ) |
16,066
|
5,264
|
||||||||
Net
cash used in financing
activities
|
(179,237 | ) | (25,261 | ) | (107,325 | ) | ||||||
Net
decrease in cash and cash
equivalents
|
(3,554 | ) | (4,282 | ) | (44,161 | ) | ||||||
Cash
and cash equivalents at beginning of year
|
38,914
|
43,196
|
87,357
|
|||||||||
Cash
and cash equivalents at end of
year
|
$ |
35,360
|
$ |
38,914
|
$ |
43,196
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
See
accompanying notes.
35
Notes
to Consolidated Financial Statements
(Amounts
in thousands except per share and share data)
1.
|
Significant
Accounting Policies
|
Business
description. Cintas Corporation
(Cintas) provides highly specialized products and services to businesses of
all
types throughout the United States and Canada. We are North America's
leading provider of corporate identity uniforms through rental and sales
programs, as well as a significant provider of related business services,
including entrance mats, restroom products and services, first aid, safety
and
fire protection products and services, document management services and branded
promotional products. Our products and services are designed to
enhance our customers’ images and to provide additional safety and protection in
the workplace.
Cintas
classifies its businesses into two operating segments, Rentals and Other
Services, based on the similar economic and organizational characteristics
of
the products and services within each segment. The Rentals segment reflects
the
rental and servicing of uniforms and other garments, mats, mops and shop
towels. In addition to these rental items, we also provide our
restroom and hygiene products and services within this segment. The
Other Services 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.
Principles
of consolidation. The consolidated financial statements
include the accounts of Cintas, controlled majority-owned subsidiaries and
any
entities that are not controlled but require consolidation in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities - an interpretation of ARB
No. 51 (collectively, Cintas or the Company). Intercompany
balances and transactions have been eliminated.
Use
of estimates. The preparation of consolidated financial
statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
notes. Financial results could differ from those
estimates.
Revenue
recognition. Rental revenue is recognized when services are
performed and other services revenue is recognized when either services are
performed or when products are shipped and the title and risks of ownership
pass
to the customer.
Cost
of rentals. Cost of rentals consists primarily of production
expenses, delivery expenses and the amortization of in service inventory,
including uniforms, mats, shop towels and other rental items. The
Rentals segment inbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs and other costs of distribution are included
in the cost of rentals.
Cost
of other services. Cost of other services consists primarily
of cost of goods sold (predominantly uniforms and first aid products), delivery
expenses and distribution expenses. The Other Services segment
inbound freight charges, purchasing and receiving costs, inspection costs,
warehousing costs and other costs of distribution are included in the cost
of
other services.
Selling
and administrative expenses. Selling and administrative
expenses consist primarily of sales labor and commissions, management and
administrative labor, payroll taxes, medical expense, insurance expense, legal
and professional costs and amortization of intangible assets.
Cash
and cash equivalents. Cintas considers all highly liquid
investments with a maturity of three months or less, at date of purchase, to
be
cash equivalents.
Marketable
securities. All marketable securities are comprised of debt
securities and classified as available-for-sale. The majority of
these debt securities are obligations of state and political
subdivisions.
Accounts
receivable. Accounts receivable is comprised of amounts owed
through product shipments and are presented net of an allowance for doubtful
accounts. This allowance is an estimate based on historical rates of
collectibility. An uncollectible accounts provision is recorded for
overdue amounts, beginning with a nominal
36
percentage
and increasing substantially as the account ages. The amount provided
as the account ages will differ slightly between the Rentals and Other Services
segments because of differences in customers served and the nature of each
segment. When an account is considered uncollectible, it is written
off against this allowance.
Inventories. Inventories
are valued at the lower of cost (first-in, first-out) or
market. Substantially all inventories represent finished
goods.
Uniforms
and other rental items in service. These items are valued at
cost less amortization, calculated using the straight-line
method. Uniforms in service (other than cleanroom and flame resistant
garments) are amortized over their useful life of eighteen
months. Other rental items including shop towels, mats, cleanroom
garments, flame resistant garments, linens and restroom dispensers are amortized
over their useful lives which range from eight to forty-eight
months.
Property
and equipment. Property and equipment is stated at cost,
less accumulated depreciation. Depreciation is calculated using the
straight-line method primarily over the following estimated useful lives, in
years:
Buildings 30
to 40
Building
improvements 5
to 20
Equipment 3
to 10
Leasehold
improvements 2
to 5
Long-lived
assets. When events or circumstances indicate that the
carrying amount of long-lived assets may not be recoverable, the estimated
future cash flows (undiscounted) are compared to the carrying amount of the
assets. If the estimated future cash flows are less than the carrying
amount of the assets, an impairment loss is recorded. The impairment
loss is measured by comparing the fair value of the assets with their carrying
amounts. Fair value is determined by discounted cash flows or appraised values,
as appropriate. Long-lived assets that are held for disposal are
reported at the lower of the carrying amount or the fair value, less estimated
costs related to disposition.
Goodwill. As
required under Statement of Financial Accounting Standards No. 142 (FAS 142),
Goodwill and Other Intangible Assets, goodwill is separately disclosed
from other intangible assets on the consolidated balance sheet and not
amortized, but is tested for impairment on at least an annual
basis. Cintas completes an annual goodwill impairment test as
required by FAS 142. Based on the results of the impairment tests,
Cintas was not required to recognize an impairment of goodwill for the years
ended May 31, 2007, 2006 or 2005. Cintas will continue to perform
future impairment tests as required by FAS 142 as of March 1 in future years
or
when indicators of impairment are noted.
Service
contracts and other assets. Service contracts and other
assets, which consist primarily of noncompete and consulting agreements obtained
through acquisitions of businesses, are amortized by use of the straight-line
method over the estimated lives of the agreements, which are generally five
to
ten years.
Accrued
liabilities. Accrued liabilities consist primarily of
insurance, medical and profit sharing obligations and legal and environmental
contingencies. These are recorded when it is probable that a
liability has occurred and the amount of the liability can be reasonably
estimated.
Stock-based
compensation. At May 31, 2007, Cintas had an equity
compensation plan, which is more fully described in Note 11 entitled Stock-Based
Compensation. Prior to June 1, 2006, Cintas accounted for this plan
under the intrinsic value method proscribed by APB Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related Interpretations,
as permitted by Statement of Financial Accounting Standards No. 123 (FAS 123),
Accounting for Stock-Based Compensation. Effective June 1,
2006, Cintas adopted the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123(R) (FAS 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 FAS 123. FAS 123(R) requires all share-based
payments to employees, including stock options, to be recognized as an expense
in the consolidated statement of income based on their fair
values. Due to this restatement, Cintas’ income before income taxes
and net income decreased by $3,796 for the year ended May 31, 2006, and $7,971
for the year ended May 31, 2005. This adoption lowered basic earnings
per share from $1.95 per share to $1.93 per share for fiscal 2006 and from
$1.75
per share to $1.70 per share for fiscal 2005. In addition, diluted
earnings per share were lowered from $1.94 per share to $1.92 per share for
fiscal 2006 and from $1.74 per share to $1.69 per share for fiscal
2005. The cumulative effect of the change on paid-in-capital and
retained earnings as of June
37
1,
2005,
was $21,241 and ($39,567), respectively. The cumulative effect of the
change on deferred taxes as of June 1, 2005, was less than $1,000.
As
a
result of adopting FAS 123(R) on June 1, 2006, Cintas’ income before income
taxes and net income for the year ended May 31, 2007, are $4,500 and $3,088
lower, respectively, than if Cintas had continued to account for share-based
compensation under APB 25. Basic and diluted earnings per share are
both $.02 lower for the year ended May 31, 2007, than if Cintas had continued
to
account for share-based compensation under APB 25.
Derivatives
and hedging activities. Derivatives and hedging activities
are presented in accordance with Statement of Financial Accounting Standards
No. 133 (FAS 133), Accounting for Derivatives and Hedging
Activities, as amended. This Standard requires the recognition of all
derivatives on the consolidated balance sheet at fair value and recognition
of
the resulting gains or losses as adjustments to earnings or other comprehensive
income.
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.
See
Note
5 entitled Long-Term Debt for further information on derivatives.
Fair
value of financial instruments. The following methods and
assumptions were used by Cintas in estimating the fair value of financial
instruments:
Cash
and cash
equivalents. The amounts reported approximate market
value.
Marketable
securities. The amounts reported are at market
value. Market values are based on quoted market prices.
Long-term
debt. The amounts reported are at a carrying value
which approximates market value. Market values are determined using
similar debt instruments currently available to Cintas that are consistent
with
the terms, interest rates and maturities.
Reclassification. Certain
prior year amounts have been reclassified to conform to current year
presentation.
Other
accounting pronouncements. In July 2006, the FASB issued
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, which clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Cintas will adopt this
Interpretation on June 1, 2007, and is currently in the process of evaluating
the impact of FIN 48 on its consolidated financial statements. Any
necessary transition adjustments will not affect net income in the period of
adoption and will be reported as a change in accounting principle in our
consolidated financial statements.
38
2.
|
Marketable
Securities
|
All
marketable securities are comprised of debt securities and classified as
available-for-sale. Interest, realized gains and losses and declines
in value determined to be other than temporary on available-for-sale securities
are included in interest income. The cost of the securities sold is
based on the specific identification method.
The
following is a summary of marketable securities:
2007
|
2006
|
|||||||||||||||
|
Estimated
|
Estimated
|
||||||||||||||
Cost
|
Fair
Value
|
Cost
|
Fair
Value
|
|||||||||||||
Obligations
of state and political
subdivisions
|
$ |
24,480
|
$ |
24,415
|
$ |
106,655
|
$ |
105,715
|
||||||||
U.S. government
agency securities
|
12,336
|
12,231
|
46,635
|
45,877
|
||||||||||||
Canadian
Treasury securities
|
76,995
|
76,753
|
37,846
|
37,754
|
||||||||||||
Other
debt
securities
|
6,665
|
6,654
|
13,232
|
13,193
|
||||||||||||
$ |
120,476
|
$ |
120,053
|
$ |
204,368
|
$ |
202,539
|
The
gross
realized gains on sales of available-for-sale securities totaled $9, $3 and
$23
for the years ended May 31, 2007, 2006 and 2005, respectively, and the gross
realized losses totaled $42, $219 and $19, respectively. Net
unrealized losses are $423 and $1,829 at May 31, 2007 and 2006,
respectively.
Purchases
of marketable securities were $30,829, $25,613 and $202,265 for the years ended
May 31, 2007, 2006 and 2005, respectively.
The
cost
and estimated fair value of debt securities at May 31, 2007, by contractual
maturity, are $120,476 and $120,053, respectively. All contractual
maturities are due in one year or less.
3.
|
Property
and Equipment
|
2007
|
|
2006
|
||||||
Land
|
$ |
79,572
|
$ |
81,015
|
||||
Buildings
and
improvements
|
438,680
|
439,992
|
||||||
Equipment
|
884,574
|
774,667
|
||||||
Leasehold
improvements
|
13,171
|
11,068
|
||||||
Construction
in
progress
|
99,195
|
57,383
|
||||||
1,515,192
|
1,364,125
|
|||||||
Less:
accumulated
depreciation
|
594,949
|
500,342
|
||||||
$ |
920,243
|
$ |
863,783
|
Interest
expense is net of capitalized interest of $490, $384 and $749 for the years
ended May 31, 2007, 2006 and 2005, respectively.
39
4.
|
Goodwill,
Service Contracts and Other
Assets
|
Changes
in the carrying amount of goodwill and service contracts for the years ended
May
31, 2007 and 2006, by segment, are as follows:
Goodwill
|
Rentals
|
Other
Services
|
Total
|
|||||||||
Balance
as of June 1,
2005
|
$ |
701,422
|
$ |
188,116
|
$ |
889,538
|
||||||
Goodwill
acquired
|
151,716
|
92,521
|
244,237
|
|||||||||
Foreign
currency
translation
|
1,997
|
403
|
2,400
|
|||||||||
Balance
as of May 31,
2006
|
855,135
|
281,040
|
1,136,175
|
|||||||||
Goodwill
acquired
|
7,697
|
101,368
|
109,065
|
|||||||||
Foreign
currency
translation
|
487
|
150
|
637
|
|||||||||
Balance
as of May 31,
2007
|
$ |
863,319
|
$ |
382,558
|
$ |
1,245,877
|
Service
Contracts
|
Rentals
|
Other
Services
|
Total
|
|||||||||
Balance
as of June 1,
2005
|
$ |
118,350
|
$ |
28,246
|
$ |
146,596
|
||||||
Service
contracts
acquired
|
32,635
|
26,292
|
58,927
|
|||||||||
Service
contracts
amortization
|
(21,527 | ) | (7,076 | ) | (28,603 | ) | ||||||
Foreign
currency
translation
|
2,933
|
112
|
3,045
|
|||||||||
Balance
as of May 31,
2006
|
132,391
|
47,574
|
179,965
|
|||||||||
Service
contracts
acquired
|
3,936
|
18,697
|
22,633
|
|||||||||
Service
contracts
amortization
|
(21,759 | ) | (10,166 | ) | (31,925 | ) | ||||||
Foreign
currency
translation
|
653
|
35
|
688
|
|||||||||
Balance
as of May 31,
2007
|
$ |
115,221
|
$ |
56,140
|
$ |
171,361
|
Information
regarding Cintas' service contracts and other assets follows:
As
of May 31, 2007
|
||||||||||||
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
||||||||||
Service
contracts
|
$ |
317,644
|
$ |
146,283
|
$ |
171,361
|
||||||
Noncompete
and consulting agreements
|
$ |
58,218
|
$ |
24,123
|
$ |
34,095
|
||||||
Investments
|
35,264
|
—
|
35,264
|
|||||||||
Other
|
8,967
|
2,063
|
6,904
|
|||||||||
Total
|
$ |
102,449
|
$ |
26,186
|
$ |
76,263
|
As
of May 31, 2006
|
||||||||||||
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
||||||||||
Service
contracts
|
$ |
295,929
|
$ |
115,964
|
$ |
179,965
|
||||||
Noncompete
and consulting agreements
|
$ |
45,801
|
$ |
15,484
|
$ |
30,317
|
||||||
Investments
|
33,754
|
—
|
33,754
|
|||||||||
Other
|
6,758
|
3,523
|
3,235
|
|||||||||
Total
|
$ |
86,313
|
$ |
19,007
|
$ |
67,306
|
Amortization
expense was $40,745, $33,536 and $28,362 for the years ended May 31, 2007,
2006
and 2005, respectively. Estimated amortization expense, excluding any
future acquisitions, for each of the next five years is $40,450, $37,732,
$34,711, $30,966 and $24,902, respectively.
40
5.
|
Long-Term
Debt
|
2007
|
|
2006
|
||||||
|
||||||||
Unsecured
term notes due through 2036 at an average rate of
5.79%
|
$ |
705,147
|
$ |
453,205
|
||||
Unsecured
notes due through 2009 at an average rate of
5.08%
|
170,866
|
339,228
|
||||||
Industrial
development revenue bonds due through
2015 at an average rate of
4.33%
|
3,441
|
3,948
|
||||||
Other
|
1,761
|
2,361
|
||||||
881,215
|
798,742
|
|||||||
Less:
amounts due within one
year
|
4,141
|
4,288
|
||||||
$ |
877,074
|
$ |
794,454
|
Debt
in
the amount of $5,201 is secured by assets with a carrying value of $5,616 at
May 31, 2007. Cintas has letters of credit outstanding at
May 31, 2007, approximating $75,453. Maturities of long-term debt
during each of the next five years are $4,141, $1,235, $805, $393,729 and $762,
respectively.
Interest
paid, net of amount capitalized, was $45,805, $30,714 and $23,163 for the years
ended May 31, 2007, 2006 and 2005, respectively.
Cintas
has a commercial paper program supported by a $600,000 long-term credit
facility. This program was a $400,000 program during fiscal 2006, but was
expanded to $600,000 during the fourth quarter of fiscal 2007. As of
May 31, 2007, there was $168,000 of commercial paper
outstanding.
Long-term
debt includes $225,000 due on June 1, 2007. This debt was refinanced
effective June 1, 2007, under Cintas’ existing commercial paper
program. The Cintas commercial paper program expires in fiscal
2011.
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 at the time of this
offering.
Cintas
uses cash flow hedges to 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 May 31, 2007. There was also no cash settled
forward starting swap outstanding as of May 31, 2007, as the forward starting
swap that was in place at the end of the third quarter was terminated during
May
2007, as discussed below.
During
the third quarter of fiscal 2006, Cintas entered into a forward starting swap
to
protect forecasted interest payments from interest rate movement in anticipation
of a $200,000, 30-year debt issuance in early fiscal 2008. During the
fourth quarter of fiscal 2007, Cintas changed its intent on issuing this 30-year
debt. This decision was based on current market conditions and
interest rate environment as well as the additional payment flexibility provided
to Cintas under its commercial paper program. As a result of this
decision, Cintas terminated the forward starting swap and recorded the resulting
$6,200 gain in fiscal 2007 as a reduction to administrative
expenses.
Cintas
used interest rate lock agreements to hedge against movements in the treasury
rates at the time Cintas issued its senior notes in fiscal 2002 and in fiscal
2007. The amortization of the cash flow hedges resulted in a credit
to other comprehensive income of $384, $290 and $290 for the years ended May
31,
2007, 2006 and 2005, respectively.
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.
41
Cintas
is
in compliance with all of the significant debt covenants for all periods
presented. If a default of a significant covenant were to occur, the
default could result in an acceleration of the maturity of the indebtedness,
impair liquidity and limit the ability to raise future capital. Cintas’ debt,
net of cash and marketable securities, is $725,802 as of May 31,
2007. For fiscal 2007, net cash provided by operating activities was
$449,391. Capital expenditures were $180,824 for the same period.
6.
|
Leases
|
Cintas
conducts certain operations from leased facilities and leases certain
equipment. Most leases contain renewal options for periods from one
to ten years. The lease agreements provide for increases in rentals
if the options are exercised based on increases in certain price level factors
or other prearranged factors. Step rent provisions, escalation
clauses, capital improvements funding and other lease concessions are taken
into
account in computing minimum lease payments. Minimum lease payments
are recognized on a straight-line basis over the minimum lease
term. Lease payments are not dependent on an existing index or rate
and are not included in minimum lease payments. It is anticipated
that expiring leases will be renewed or replaced.
The
minimum rental payments under noncancelable lease arrangements for each of
the
next five years and thereafter are $22,352, $17,643, $12,988, $9,773, $5,658
and
$7,784, respectively. Rent expense under operating leases during the
years ended May 31, 2007, 2006 and 2005, was $33,268, $30,136 and $25,280,
respectively.
7.
|
Income
Taxes
|
2007
|
2006
|
2005
|
||||||||||
(Restated)*
|
(Restated)*
|
|||||||||||
Income
before income taxes consist of the following
components:
|
||||||||||||
U.S.
operations
|
$ |
488,011
|
$ |
479,427
|
$ |
439,994
|
||||||
Foreign
operations
|
45,542
|
38,592
|
29,028
|
|||||||||
$ |
533,553
|
$ |
518,019
|
$ |
469,022
|
2007
|
2006
|
2005
|
||||||||||
Income
taxes consist of the following components:
|
||||||||||||
Current:
|
||||||||||||
Federal
|
$ |
184,363
|
$ |
180,697
|
$ |
155,987
|
||||||
State
and
local
|
16,181
|
15,026
|
18,043
|
|||||||||
200,544
|
195,723
|
174,030
|
||||||||||
Deferred
|
(1,529 | ) | (1,086 | ) |
2,445
|
|||||||
$ |
199,015
|
$ |
194,637
|
$ |
176,475
|
2007
|
2006
|
2005
|
||||||||||
Reconciliation
of income tax expense using the statutory
rate
and actual income
tax expense is as follows:
|
||||||||||||
Income
taxes at the U.S.
federal statutory rate
|
$ |
186,744
|
$ |
182,635
|
$ |
166,947
|
||||||
State
and local income taxes,
net of federal benefit
|
10,602
|
11,917
|
12,050
|
|||||||||
Other
|
1,669
|
85
|
(2,522 | ) | ||||||||
$ |
199,015
|
$ |
194,637
|
$ |
176,475
|
42
The
components of deferred income taxes included on the consolidated balance sheets
are as follows:
2007
|
2006
|
|||||||
(Restated)*
|
||||||||
Deferred
tax assets:
|
||||||||
Employee
benefits
|
$ |
6,195
|
$ |
4,467
|
||||
Allowance
for doubtful
accounts
|
5,100
|
5,377
|
||||||
Inventory
obsolescence
|
9,735
|
10,445
|
||||||
Insurance
and
contingencies
|
10,222
|
12,652
|
||||||
Other
|
11,909
|
5,989
|
||||||
43,161
|
38,930
|
|||||||
Deferred
tax liabilities:
|
||||||||
In
service
inventory
|
88,838
|
90,675
|
||||||
Property
|
69,189
|
75,047
|
||||||
Intangibles
|
45,233
|
34,369
|
||||||
Other
|
1,231
|
6,976
|
||||||
State
taxes
|
13,479
|
13,776
|
||||||
217,970
|
220,843
|
|||||||
Net
deferred tax
liability
|
$ |
174,809
|
$ |
181,913
|
Income
taxes paid were $220,740, $183,268 and $151,243 for the years ended May 31,
2007, 2006 and 2005, respectively.
U.S.
income taxes of $6,487, net of foreign tax credits, have not been provided
for
on a cumulative total of approximately $136,578 of undistributed earnings for
certain non-U.S. subsidiaries as of May 31, 2007. Cintas intends to
reinvest these earnings indefinitely in operations outside the United
States.
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
8.
|
Acquisitions
|
For
all
acquisitions accounted for as purchases, including insignificant acquisitions,
the purchase price paid for each has been allocated to the fair value of the
assets acquired and liabilities assumed. During fiscal 2007, Cintas
acquired 3 Rentals segment businesses and 29 Other Services segment
businesses. During fiscal 2006, Cintas acquired 9 Rentals segment
businesses and 24 Other Services segment businesses. The following
summarizes the aggregate purchase price for all businesses
acquired:
2007
|
2006
|
|||||||
Fair
value of tangible assets
acquired
|
$ |
20,375
|
$ |
51,798
|
||||
Fair
value of goodwill
acquired
|
109,065
|
244,109
|
||||||
Fair
value of service contracts
acquired
|
22,271
|
58,536
|
||||||
Fair
value of other intangibles
acquired
|
13,149
|
18,782
|
||||||
Total
fair value of assets
acquired
|
164,860
|
373,225
|
||||||
Fair
value of liabilities assumed and incurred
|
3,288
|
26,929
|
||||||
Total
cash paid for
acquisitions
|
$ |
161,572
|
$ |
346,296
|
The
results of operations for the acquired businesses are included in the
consolidated statements of income from the dates of acquisition. The
pro forma revenue, net income and earnings per share information relating to
acquired businesses are not presented because they are not
significant.
43
9.
|
Defined
Contribution Plans
|
Cintas' Partners' Plan (the Plan) is a non-contributory profit sharing plan and ESOP for the benefit of substantially all U.S. Cintas employees who have completed one year of service. The Plan also includes a 401(k) savings feature covering substantially all employees. The amounts of contributions to the Plan and ESOP, as well as the matching contribution to the 401(k), are made at the discretion of Cintas. Total contributions, including Cintas' matching contributions, which approximate cost, were $27,900, $26,500 and $24,400 for the years ended May 31, 2007, 2006 and 2005, respectively.
Cintas
also has a non-contributory deferred profit sharing plan (DPSP), which covers
substantially all Canadian employees. In addition, a registered
retirement savings plan (RRSP) is offered to those employees. The
amounts of contributions to the DPSP, as well as the matching contribution
to
the RRSP, are made at the discretion of Cintas. Total contributions,
which approximate cost, were $1,239, $1,144 and $897 for the years ended
May 31, 2007, 2006 and 2005, respectively.
10.
|
Earnings
per Share
|
Earnings
per share are computed in accordance with Statement of Financial Accounting
Standards No. 128, Earnings per Share. The basic
computations are computed based on the weighted average number of common shares
outstanding during each period. The diluted computations reflect the
potential dilution that could occur if stock options were exercised into common
stock, under certain circumstances, that then would share in the earnings of
Cintas.
The
following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective years:
2007
|
2006
|
2005
|
||||||||||
(Restated)*
|
(Restated)*
|
|||||||||||
Numerator:
|
||||||||||||
Net
income
|
$ |
334,538
|
$ |
323,382
|
$ |
292,547
|
||||||
Denominator:
|
||||||||||||
Denominator
for basic earnings
per share -- weighted average shares (000's)
|
159,769
|
167,951
|
171,679
|
|||||||||
Effect
of dilutive securities -
employee stock options (000's)
|
418
|
594
|
970
|
|||||||||
Demoninator for diluted earnings per share -- adjusted
weighted
average shares and assumed conversions (000's)
|
160,187
|
168,545
|
172,649
|
|||||||||
Basic
earnings per
share
|
$ |
2.09
|
$ |
1.93
|
$ |
1.70
|
||||||
Diluted
earnings per
share
|
$ |
2.09
|
$ |
1.92
|
$ |
1.69
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
11.
|
Stock-Based
Compensation
|
Under
the
2005 equity compensation plan 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 awards, 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 $4,500, $5,277 and $7,971 for the years ended May 31, 2007, 2006 and 2005,
respectively. The amount recorded in fiscal 2007 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 year ended May
31, 2007, are both $.01 higher, respectively, due to this change in estimated
forfeitures. The total income tax
44
benefit
recognized in the consolidated income statement for share-based compensation
arrangements was $1,413, $552 and $0 for the years ended May 31, 2007, 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
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:
2007
|
2006
|
2005
|
||||||||||
Risk-free
interest
rate
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
Dividend
yield
|
.70 | % | .50 | % | .50 | % | ||||||
Expected
volatility of Cintas' common
stock
|
35 | % | 35 | % | 35 | % | ||||||
Expected
life of the option in
years
|
7.5
|
9
|
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
fair
value of stock options granted during fiscal 2007, 2006 and 2005 was $16.01,
$20.95 and $19.80, respectively.
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:
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
May 31, 2004 (811,700 shares exercisable)
|
5,936,559
|
$ |
34.90
|
|||||
Granted
|
1,509,400
|
42.12
|
||||||
Cancelled
|
(441,186 | ) |
39.66
|
|||||
Exercised
|
(562,888 | ) |
16.08
|
|||||
Outstanding
May 31, 2005 (3,086,485 shares exercisable)
|
6,441,885
|
37.92
|
||||||
Granted
|
1,248,450
|
43.96
|
||||||
Cancelled
|
(637,502 | ) |
41.38
|
|||||
Exercised
|
(517,429 | ) |
20.86
|
|||||
Outstanding
May 31, 2006 (2,718,180 shares exercisable)
|
6,535,404
|
40.08
|
||||||
Granted
|
1,226,855
|
38.05
|
||||||
Cancelled
|
(720,927 | ) |
41.47
|
|||||
Exercised
|
(392,728 | ) |
22.40
|
|||||
Outstanding
May 31, 2007 (2,316,157 shares exercisable)
|
6,648,604
|
$ |
40.60
|
45
The
intrinsic value of stock options exercised during fiscal 2007 was
$6,760. The total cash received from employees as a result of
employee stock option exercises for the years ended May 31, 2007, 2006 and
2005
was $5,023, $7,680 and $4,622, respectively.
The
fair value of stock options vested during fiscal
2007 is $3,682.
The
following table summarizes the information related to stock options outstanding
at May 31, 2007:
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||||||||
Average
|
Weighted
|
Weighted
|
||||||||||||||||||||
Remaining
|
Average
|
Average
|
||||||||||||||||||||
Range
of
|
Number
|
Option
|
Exercise
|
Number
|
Exercise
|
|||||||||||||||||
Exercise
Prices
|
Outstanding
|
Life
|
Price
|
Exercisable
|
Price
|
|||||||||||||||||
$ |
23.25
– $ 39.19
|
1,612,677
|
6.42
|
$ |
34.00
|
429,405
|
$ |
26.93
|
||||||||||||||
39.29
– 41.98
|
1,927,977
|
5.47
|
40.67
|
898,652
|
41.77
|
|||||||||||||||||
42.06
– 44.33
|
1,620,150
|
6.32
|
42.35
|
426,400
|
42.76
|
|||||||||||||||||
44.43
– 53.19
|
1,487,800
|
6.69
|
45.68
|
561,700
|
47.70
|
|||||||||||||||||
$ |
23.25
– $ 53.19
|
6,648,604
|
6.18
|
$ |
40.60
|
2,316,157
|
$ |
40.64
|
At
May
31, 2007, the aggregate intrinsic value of stock options outstanding and
exercisable was $7,023 and $4,896, respectively.
The
weighted-average remaining contractual term of
stock options exercisable is 3.5 years.
Restricted
Stock Awards
Restricted
stock awards will consist of Cintas’ common stock which is subject to such
conditions, restrictions and limitations as the Compensation Committee
determines to be appropriate. The vesting period is generally three
years after the grant date. The recipient of restricted stock awards
will have all rights of a shareholder of Cintas, including the right to vote
and
the right to receive cash dividends, during the vesting period.
The
information presented in the following table relates to restricted stock awards
granted and outstanding under the plan adopted in fiscal 2006:
Weighted
|
||||||||
Average
|
||||||||
Shares
|
Fair
Value
|
|||||||
Outstanding,
unvested grants at May 31, 2005
|
-
|
$ |
-
|
|||||
Granted
|
128,075
|
36.08
|
||||||
Cancelled
|
-
|
-
|
||||||
Vested
|
-
|
-
|
||||||
Outstanding,
unvested grants at May 31, 2006
|
128,075
|
36.08
|
||||||
Granted
|
251,011
|
38.11
|
||||||
Cancelled
|
(49,662 | ) |
37.92
|
|||||
Vested
|
-
|
-
|
||||||
Outstanding,
unvested grants at May 31, 2007
|
329,424
|
$ |
37.35
|
The
remaining unrecognized compensation cost related to unvested stock options
and
restricted stock at May 31, 2007, was approximately $40,014, and the
weighted-average period of time over which this cost will be recognized is
4.0
years.
Cintas
reserves shares of common stock to satisfy share option exercises and/or future
restricted stock grants. At May 31, 2007, 13,200,297 shares of common
stock are reserved for future issuance under the 2005 plan.
46
12.
|
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 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 hiring into various service sales representative
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 service
sales representative 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-service sales representative 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 service sales
representative 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. On February 24, 2006, a
motion to intervene in Serrano was filed by intervening plaintiffs
Colleen Grindle, et al., on behalf of a subclass of female employees at Cintas’
Perrysburg, Ohio rental location who allegedly were denied hire, promotion
or
transfer to service sales representative positions. On March 24,
2006, the plaintiffs Colleen Grindle, et. al. withdrew their motion to intervene
without prejudice. On February 20, 2007, the plaintiffs Colleen
Grindle,
47
et.
al.
filed a separate lawsuit in the Court of Common Pleas, Wood
County, Ohio, captioned Colleen Grindle, et al. v. Cintas Corporation
(Grindle), on behalf of a class of female employees at Cintas’ Perrysburg,
Ohio location who allegedly were denied hire, promotion or transfer to service
sales representative positions on the basis of their gender. The
Grindle plaintiffs seek injunctive relief, compensatory damages,
punitive damages, attorneys’ fees and other remedies. No filings or
determinations have been made in Grindle 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
(Houston). 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.
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
August 29, 2006, the EEOC Indianapolis District Office issued a dismissal and
notice of rights and closed its file on the Clifton Cooper charge served on
Cintas 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. Mr. Cooper’s claims are now part of
the Houston arbitration matter disclosed hereinabove.
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.
13.
|
Segment
Information
|
Cintas
classifies its businesses into two operating segments, Rentals and Other
Services, based on the similar economic and organizational characteristics
of
the products and services within each segment. The Rentals segment reflects
the
rental and servicing of uniforms and other garments, mats, mops and shop
towels. In addition to these rental items, we also provide restroom
and hygiene products and services within this segment. The Other
Services 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 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. The
accounting policies of the segments are the same as those described in Note
1
entitled Significant Accounting Policies.
48
Rentals
|
Other
Services
|
Corporate
|
Total
|
|||||||||||||
May
31, 2007
|
||||||||||||||||
Revenue
|
$ |
2,734,629
|
$ |
972,271
|
$ |
—
|
$ |
3,706,900
|
||||||||
Gross
margin
|
$ |
1,219,444
|
$ |
361,911
|
$ |
—
|
$ |
1,581,355
|
||||||||
Selling
and administrative expenses
|
757,058
|
253,124
|
(6,224 | ) |
1,003,958
|
|||||||||||
Interest
income
|
—
|
—
|
(6,480 | ) | (6,480 | ) | ||||||||||
Interest
expense
|
—
|
—
|
50,324
|
50,324
|
||||||||||||
Income
before income
taxes
|
$ |
462,386
|
$ |
108,787
|
$ | (37,620 | ) | $ |
533,553
|
|||||||
Depreciation
and amortization
|
$ |
135,207
|
$ |
40,719
|
$ |
—
|
$ |
175,926
|
||||||||
Capital
expenditures
|
$ |
132,857
|
$ |
47,967
|
$ |
—
|
$ |
180,824
|
||||||||
Total
assets
|
$ |
2,567,070
|
$ |
847,997
|
$ |
155,413
|
$ |
3,570,480
|
||||||||
May
31, 2006 (Restated)*
|
||||||||||||||||
Revenue
|
$ |
2,568,776
|
$ |
834,832
|
$ |
—
|
$ |
3,403,608
|
||||||||
Gross
margin
|
$ |
1,161,947
|
$ |
292,845
|
$ |
—
|
$ |
1,454,792
|
||||||||
Selling
and administrative expenses
|
693,579
|
218,171
|
—
|
911,750
|
||||||||||||
Interest
income
|
—
|
—
|
(6,759 | ) | (6,759 | ) | ||||||||||
Interest
expense
|
—
|
—
|
31,782
|
31,782
|
||||||||||||
Income
before income
taxes
|
$ |
468,368
|
$ |
74,674
|
$ | (25,023 | ) | $ |
518,019
|
|||||||
Depreciation
and amortization
|
$ |
130,327
|
$ |
30,326
|
$ |
—
|
$ |
160,653
|
||||||||
Capital
expenditures
|
$ |
125,290
|
$ |
31,342
|
$ |
—
|
$ |
156,632
|
||||||||
Total
assets
|
$ |
2,530,685
|
$ |
653,099
|
$ |
241,453
|
$ |
3,425,237
|
||||||||
May
31, 2005 (Restated)*
|
||||||||||||||||
Revenue
|
$ |
2,363,397
|
$ |
703,886
|
$ |
—
|
$ |
3,067,283
|
||||||||
Gross
margin
|
$ |
1,067,405
|
$ |
237,354
|
$ |
—
|
$ |
1,304,759
|
||||||||
Selling
and administrative expenses
|
639,637
|
178,566
|
—
|
818,203
|
||||||||||||
Interest
income
|
—
|
—
|
(6,914 | ) | (6,914 | ) | ||||||||||
Interest
expense
|
—
|
—
|
24,448
|
24,448
|
||||||||||||
Income
before income
taxes
|
$ |
427,768
|
$ |
58,788
|
$ | (17,534 | ) | $ |
469,022
|
|||||||
Depreciation
and amortization
|
$ |
125,946
|
$ |
22,229
|
$ |
—
|
$ |
148,175
|
||||||||
Capital
expenditures
|
$ |
117,377
|
$ |
23,350
|
$ |
—
|
$ |
140,727
|
||||||||
Total
assets
|
$ |
2,245,600
|
$ |
504,716
|
$ |
309,428
|
$ |
3,059,744
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
49
14.
|
Quarterly
Financial Data
(Unaudited)
|
The
following is a summary of the results of operations for each of the quarters
within the years ended May 31, 2007 and 2006:
May
31, 2007
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
Revenue
|
$ |
914,161
|
$ |
923,266
|
$ |
905,398
|
$ |
964,075
|
||||||||
Gross
margin
|
$ |
390,481
|
$ |
391,073
|
$ |
385,827
|
$ |
413,974
|
||||||||
Net
income
|
$ |
84,962
|
$ |
82,527
|
$ |
76,727
|
$ |
90,322
|
||||||||
Basic
earnings per share
|
$ |
.53
|
$ |
.51
|
$ |
.48
|
$ |
.57
|
||||||||
Diluted
earnings per share
|
$ |
.53
|
$ |
.51
|
$ |
.48
|
$ |
.57
|
||||||||
Weighted
average number of shares outstanding (000's)
|
160,770
|
160,312
|
159,311
|
158,657
|
May
31, 2006 (Restated)*
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
Revenue
|
$ |
823,475
|
$ |
835,785
|
$ |
836,421
|
$ |
907,927
|
||||||||
Gross
margin
|
$ |
355,488
|
$ |
350,461
|
$ |
352,970
|
$ |
395,873
|
||||||||
Net
income
|
$ |
78,422
|
$ |
76,839
|
$ |
76,594
|
$ |
91,527
|
||||||||
Basic
earnings per share
|
$ |
.46
|
$ |
.46
|
$ |
.46
|
$ |
.55
|
||||||||
Diluted
earnings per share
|
$ |
.46
|
$ |
.46
|
$ |
.45
|
$ |
.55
|
||||||||
Weighted
average number of shares outstanding (000's)
|
168,939
|
167,975
|
168,038
|
166,854
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
15.
|
Supplemental
Guarantor Information
|
Cintas
Corporation No. 2 (Corp. 2) is the indirectly, wholly-owned principal operating
subsidiary of Cintas. Corp. 2 is the issuer of the $700,000 of senior
notes, which are unconditionally guaranteed, jointly and severally, by Cintas
and its wholly-owned, direct and indirect domestic subsidiaries.
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'
consolidated 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:
50
Condensed
Consolidating Income Statement
Year
Ended May 31, 2007
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation
Consolidated
|
||||||||||||||||||
Revenue:
|
||||||||||||||||||||||||
Rentals
|
$ |
—
|
$ |
2,009,095
|
$ |
554,595
|
$ |
171,634
|
$ | (695 | ) | $ |
2,734,629
|
|||||||||||
Other
services
|
—
|
1,337,319
|
543,535
|
57,625
|
(966,208 | ) |
972,271
|
|||||||||||||||||
Equity
in net income of
affiliates
|
334,538
|
—
|
—
|
—
|
(334,538 | ) |
—
|
|||||||||||||||||
334,538
|
3,346,414
|
1,098,130
|
229,259
|
(1,301,441 | ) |
3,706,900
|
||||||||||||||||||
Costs
and expenses (income):
|
||||||||||||||||||||||||
Cost
of
rentals
|
—
|
1,249,798
|
333,004
|
102,133
|
(169,750 | ) |
1,515,185
|
|||||||||||||||||
Cost
of
other services
|
—
|
1,015,381
|
352,099
|
35,424
|
(792,544 | ) |
610,360
|
|||||||||||||||||
Selling
and administrative
expenses
|
—
|
891,836
|
70,341
|
48,817
|
(7,036 | ) |
1,003,958
|
|||||||||||||||||
Interest
income
|
—
|
(2,628 | ) | (528 | ) | (3,324 | ) |
—
|
(6,480 | ) | ||||||||||||||
Interest
expense
|
—
|
50,981
|
(6,307 | ) |
5,650
|
—
|
50,324
|
|||||||||||||||||
—
|
3,205,368
|
748,609
|
188,700
|
(969,330 | ) |
3,173,347
|
||||||||||||||||||
Income
before
income taxes
|
334,538
|
141,046
|
349,521
|
40,559
|
(332,111 | ) |
533,553
|
|||||||||||||||||
Income
taxes
|
—
|
52,853
|
130,972
|
15,190
|
—
|
199,015
|
||||||||||||||||||
Net
income
|
$ |
334,538
|
$ |
88,193
|
$ |
218,549
|
$ |
25,369
|
$ | (332,111 | ) | $ |
334,538
|
51
Condensed
Consolidating Income Statement
Year
Ended May 31, 2006 (Restated)*
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation
Consolidated
|
||||||||||||||||||
Revenue:
|
||||||||||||||||||||||||
Rentals
|
$ |
—
|
$ |
1,887,625
|
$ |
524,556
|
$ |
157,124
|
$ | (529 | ) | $ |
2,568,776
|
|||||||||||
Other
services
|
—
|
1,154,847
|
434,851
|
54,812
|
(809,678 | ) |
834,832
|
|||||||||||||||||
Equity
in net income of
affiliates
|
323,382
|
—
|
—
|
—
|
(323,382 | ) |
—
|
|||||||||||||||||
323,382
|
3,042,472
|
959,407
|
211,936
|
(1,133,589 | ) |
3,403,608
|
||||||||||||||||||
Costs
and expenses (income):
|
||||||||||||||||||||||||
Cost
of
rentals
|
—
|
1,162,222
|
324,602
|
92,753
|
(172,748 | ) |
1,406,829
|
|||||||||||||||||
Cost
of other
services
|
—
|
870,532
|
284,310
|
35,082
|
(647,937 | ) |
541,987
|
|||||||||||||||||
Selling
and administrative
expenses
|
—
|
838,556
|
26,580
|
45,922
|
692
|
911,750
|
||||||||||||||||||
Interest
income
|
—
|
(4,721 | ) | (366 | ) | (1,672 | ) |
—
|
(6,759 | ) | ||||||||||||||
Interest
expense
|
—
|
32,323
|
(4,864 | ) |
4,323
|
—
|
31,782
|
|||||||||||||||||
—
|
2,898,912
|
630,262
|
176,408
|
(819,993 | ) |
2,885,589
|
||||||||||||||||||
Income
before income taxes
|
323,382
|
143,560
|
329,145
|
35,528
|
(313,596 | ) |
518,019
|
|||||||||||||||||
Income
taxes
|
—
|
55,395
|
127,005
|
12,237
|
—
|
194,637
|
||||||||||||||||||
Net
income
|
$ |
323,382
|
$ |
88,165
|
$ |
202,140
|
$ |
23,291
|
$ | (313,596 | ) | $ |
323,382
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
52
Condensed
Consolidating Income Statement
Year
Ended May 31, 2005 (Restated)*
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation Consolidated
|
||||||||||||||||||
Revenue:
|
||||||||||||||||||||||||
Rentals
|
$ |
—
|
$ |
1,750,109
|
$ |
479,868
|
$ |
133,767
|
$ | (347 | ) | $ |
2,363,397
|
|||||||||||
Other
services
|
—
|
734,305
|
334,062
|
41,605
|
(406,086 | ) |
703,886
|
|||||||||||||||||
Equity
in net income of
affiliates
|
292,547
|
—
|
—
|
—
|
(292,547 | ) |
—
|
|||||||||||||||||
292,547
|
2,484,414
|
813,930
|
175,372
|
(698,980 | ) |
3,067,283
|
||||||||||||||||||
Costs
and expenses (income):
|
||||||||||||||||||||||||
Cost
of
rentals
|
—
|
1,051,256
|
300,172
|
79,832
|
(135,268 | ) |
1,295,992
|
|||||||||||||||||
Cost
of other
services
|
—
|
510,470
|
221,521
|
26,867
|
(292,326 | ) |
466,532
|
|||||||||||||||||
Selling
and administrative
expenses
|
—
|
748,414
|
(3,042 | ) |
39,448
|
33,383
|
818,203
|
|||||||||||||||||
Interest
income
|
—
|
(5,691 | ) | (15 | ) | (1,208 | ) |
—
|
(6,914 | ) | ||||||||||||||
Interest
expense
|
—
|
25,467
|
(4,799 | ) |
3,780
|
—
|
24,448
|
|||||||||||||||||
—
|
2,329,916
|
513,837
|
148,719
|
(394,211 | ) |
2,598,261
|
||||||||||||||||||
Income
before income taxes
|
292,547
|
154,498
|
300,093
|
26,653
|
(304,769 | ) |
469,022
|
|||||||||||||||||
Income
taxes
|
—
|
57,802
|
112,272
|
6,401
|
—
|
176,475
|
||||||||||||||||||
Net
income
|
$ |
292,547
|
$ |
96,696
|
$ |
187,821
|
$ |
20,252
|
$ | (304,769 | ) | $ |
292,547
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
53
Condensed
Consolidating Balance Sheet
As
of May 31, 2007
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation Consolidated
|
||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||||||
Cash
and cash
equivalents
|
$ |
—
|
$ |
1,327
|
$ |
7,787
|
$ |
26,246
|
$ |
—
|
$ |
35,360
|
||||||||||||
Marketable
securities
|
—
|
36,664
|
—
|
83,389
|
—
|
120,053
|
||||||||||||||||||
Accounts
receivable,
net
|
—
|
271,868
|
136,349
|
24,252
|
(23,599 | ) |
408,870
|
|||||||||||||||||
Inventories,
net
|
—
|
204,164
|
27,382
|
7,775
|
(7,580 | ) |
231,741
|
|||||||||||||||||
Uniforms
and other rental items
in service
|
—
|
273,246
|
82,654
|
21,482
|
(32,451 | ) |
344,931
|
|||||||||||||||||
Prepaid
expenses
|
—
|
11,486
|
3,391
|
904
|
—
|
15,781
|
||||||||||||||||||
Total
current assets
|
—
|
798,755
|
257,563
|
164,048
|
(63,630 | ) |
1,156,736
|
|||||||||||||||||
Property
and equipment, at cost, net
|
—
|
619,691
|
244,690
|
55,862
|
—
|
920,243
|
||||||||||||||||||
Goodwill
|
—
|
347,516
|
876,380
|
21,981
|
—
|
1,245,877
|
||||||||||||||||||
Service
contracts, net
|
—
|
102,574
|
64,111
|
4,676
|
—
|
171,361
|
||||||||||||||||||
Other
assets, net
|
1,665,370
|
72,191
|
1,374,388
|
194,142
|
(3,229,828 | ) |
76,263
|
|||||||||||||||||
$ |
1,665,370
|
$ |
1,940,727
|
$ |
2,817,132
|
$ |
440,709
|
$ | (3,293,458 | ) | $ |
3,570,480
|
||||||||||||
Liabilities
and Shareholders' Equity
|
||||||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||||||
Accounts
payable
|
$ | (465,247 | ) | $ | (423,711 | ) | $ |
925,208
|
$ |
1,926
|
$ |
26,446
|
$ |
64,622
|
||||||||||
Accrued
compensation and
related
liabilities
|
—
|
42,152
|
17,667
|
3,007
|
—
|
62,826
|
||||||||||||||||||
Accrued
liabilities
|
—
|
196,158
|
(1,015 | ) |
6,477
|
(934 | ) |
200,686
|
||||||||||||||||
Current
income
taxes
|
—
|
586
|
16,183
|
1,815
|
—
|
18,584
|
||||||||||||||||||
Deferred
income
taxes
|
—
|
—
|
50,237
|
1,942
|
—
|
52,179
|
||||||||||||||||||
Long-term
debt due within one
year
|
—
|
3,228
|
1,100
|
—
|
(187 | ) |
4,141
|
|||||||||||||||||
Total
current liabilities
|
(465,247 | ) | (181,587 | ) |
1,009,380
|
15,167
|
25,325
|
403,038
|
||||||||||||||||
Long-term
debt due after one
year
|
—
|
882,921
|
(62,097 | ) |
92,448
|
(36,198 | ) |
877,074
|
||||||||||||||||
Deferred
income taxes
|
—
|
—
|
117,485
|
5,145
|
—
|
122,630
|
||||||||||||||||||
Total
shareholders' equity
|
2,130,617
|
1,239,393
|
1,752,364
|
327,949
|
(3,282,585 | ) |
2,167,738
|
|||||||||||||||||
$ |
1,665,370
|
$ |
1,940,727
|
$ |
2,817,132
|
$ |
440,709
|
$ | (3,293,458 | ) | $ |
3,570,480
|
54
Condensed
Consolidating Balance Sheet
As
of May 31, 2006 (Restated)*
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation 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 | ) | $ | (205,191 | ) | $ |
716,300
|
$ | (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
|
||||||||||||||||
Current
income
taxes
|
—
|
4,081
|
37,355
|
2,258
|
—
|
43,694
|
||||||||||||||||||
Deferred
income
taxes
|
—
|
—
|
50,421
|
1,248
|
—
|
51,669
|
||||||||||||||||||
Long-term
debt due within one
year
|
—
|
3,549
|
911
|
—
|
(172 | ) |
4,288
|
|||||||||||||||||
Total
current
liabilities
|
(465,247 | ) |
27,963
|
810,120
|
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
|
1,113,455
|
1,634,276
|
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
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
55
Condensed
Consolidating Statement of Cash Flows
Year
Ended May 31, 2007
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation Consolidated
|
||||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||||||
Net
income
|
$ |
334,538
|
$ |
88,193
|
$ |
218,549
|
$ |
25,369
|
$ | (332,111 | ) | $ |
334,538
|
|||||||||||
Adjustments
to reconcile net income to net
cash
provided by (used in) operating activities:
|
||||||||||||||||||||||||
Depreciation
|
—
|
96,145
|
32,371
|
6,665
|
—
|
135,181
|
||||||||||||||||||
Amortization
of
deferred
charges
|
—
|
23,349
|
15,079
|
2,317
|
—
|
40,745
|
||||||||||||||||||
Stock-based
compensation
|
4,500
|
—
|
—
|
—
|
—
|
4,500
|
||||||||||||||||||
Deferred
income
taxes
|
—
|
(10,263 | ) |
9,072
|
859
|
—
|
(332 | ) | ||||||||||||||||
Changes
in current assets and liabilities,
net
of acquisitions of busnesses:
|
||||||||||||||||||||||||
Accounts
receivable
|
—
|
(13,456 | ) |
(7,148
|
) | (2,237 | ) |
11,381
|
(11,460 | ) | ||||||||||||||
Inventories
|
—
|
(31,593 | ) |
1,328
|
712
|
(2,537 | ) | (32,090 | ) | |||||||||||||||
Uniforms
and
other rental items in service
|
—
|
(1,049 | ) | (5,192 | ) | (836 | ) |
109
|
(6,968 | ) | ||||||||||||||
Prepaid
expenses
|
—
|
(3,229 | ) | (845 | ) | (428 | ) |
—
|
(4,502 | ) | ||||||||||||||
Accounts
payable
|
—
|
(210,868 | ) |
199,229
|
15,552
|
(11,567 | ) | (7,654 | ) | |||||||||||||||
Accrued
compensation and related liabilities
|
—
|
7,356
|
5,016
|
228
|
—
|
12,600
|
||||||||||||||||||
Accrued
liabilities and
other
|
—
|
5,429
|
3,859
|
678
|
15
|
9,981
|
||||||||||||||||||
Tax
benefit on exercise of stock options
|
(44 | ) |
—
|
—
|
—
|
—
|
(44 | ) | ||||||||||||||||
Income
taxes payable
|
—
|
(3,495 | ) | (21,129 | ) | (480 | ) |
—
|
(25,104 | ) | ||||||||||||||
Net
cash provided by (used in) operating activities
|
338,994
|
(53,481 | ) |
450,189
|
48,399
|
(334,710 | ) |
449,391
|
||||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||||||
Capital
expenditures
|
—
|
(106,396 | ) | (63,606 | ) | (10,822 | ) |
—
|
(180,824 | ) | ||||||||||||||
Proceeds
from sale or redemption of marketable
securities
|
—
|
120,365
|
—
|
(2,191 | ) |
—
|
118,174
|
|||||||||||||||||
Purchase
of marketable securities and investments
|
—
|
(12,247 | ) |
(17,346
|
) | (30,051 | ) |
11,129
|
(48,515 | ) | ||||||||||||||
Acquisitions
of businesses, net of cash acquired
|
—
|
(81,212 | ) | (79,192 | ) | (303 | ) |
—
|
(160,707 | ) | ||||||||||||||
Other
|
(82,765 | ) |
49,477
|
(293,014 | ) |
325
|
324,141
|
(1,836 | ) | |||||||||||||||
Net
cash (used in) provided by investing activities
|
(82,765 | ) | (30,013 | ) | (453,158 | ) | (43,042 | ) |
335,270
|
(273,708 | ) | |||||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||||||
Proceeds
from issuance of debt
|
—
|
250,000
|
2,460
|
—
|
—
|
252,460
|
||||||||||||||||||
Repayment
of
debt
|
—
|
(169,049 | ) | (378 | ) |
—
|
(560 | ) | (169,987 | ) | ||||||||||||||
Stock
options
exercised
|
10,863
|
—
|
—
|
—
|
—
|
10,863
|
||||||||||||||||||
Tax
benefit on exercise of stock
options
|
44
|
—
|
—
|
—
|
—
|
44
|
||||||||||||||||||
Dividends
paid
|
(61,996 | ) |
—
|
—
|
—
|
—
|
(61,996 | ) | ||||||||||||||||
Repurchase
of common
stock
|
(198,949 | ) |
—
|
—
|
—
|
—
|
(198,949 | ) | ||||||||||||||||
Other
|
(6,191 | ) | (5,591 | ) |
—
|
110
|
—
|
(11,672 | ) | |||||||||||||||
Net
cash (used in) provided by financing activities
|
(256,229 | ) |
75,360
|
2,082
|
110
|
(560 | ) | (179,237 | ) | |||||||||||||||
Net
(decrease) increase in cash and cash equivalents
|
—
|
(8,134 | ) | (887 | ) |
5,467
|
—
|
(3,554 | ) | |||||||||||||||
Cash
and cash equivalents at beginning of period
|
—
|
9,461
|
8,674
|
20,779
|
—
|
38,914
|
||||||||||||||||||
Cash
and cash equivalents at end of period
|
$ |
—
|
$ |
1,327
|
$ |
7,787
|
$ |
26,246
|
$ |
—
|
$ |
35,360
|
56
Condensed
Consolidating Statement of Cash Flows
Year
Ended May 31, 2006 (Restated)*
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation Consolidated
|
||||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||||||
Net
income
|
$ |
323,382
|
$ |
88,165
|
$ |
202,140
|
$ |
23,291
|
$ | (313,596 | ) | $ |
323,382
|
|||||||||||
Adjustments
to reconcile net income to net
cash
provided by (used in) operating activities:
|
||||||||||||||||||||||||
Depreciation
|
—
|
91,528
|
29,220
|
6,369
|
—
|
127,117
|
||||||||||||||||||
Amortization
of
deferred
charges
|
—
|
18,611
|
12,115
|
2,810
|
—
|
33,536
|
||||||||||||||||||
Stock-based
compensation
|
4,725
|
—
|
—
|
—
|
—
|
4,725
|
||||||||||||||||||
Deferred
income
taxes
|
—
|
41
|
(484 | ) |
391
|
—
|
(52 | ) | ||||||||||||||||
Changes
in current assets and liabilities,
net of acquisitions of businesses:
|
||||||||||||||||||||||||
Accounts
receivable
|
—
|
(9,074 | ) | (22,532 | ) | (12,376 | ) | (172 | ) | (44,154 | ) | |||||||||||||
Inventories
|
—
|
28,804
|
(1,688 | ) |
831
|
(5,914 | ) |
22,033
|
||||||||||||||||
Uniforms
and
other rental items in service
|
—
|
(16,621 | ) | (2,749 | ) | (3,412 | ) | (3,901 | ) | (26,683 | ) | |||||||||||||
Prepaid
expenses
|
—
|
(1,901 | ) | (537 | ) |
133
|
—
|
(2,305 | ) | |||||||||||||||
Accounts
payable
|
—
|
(294,789 | ) |
311,988
|
(14,870 | ) |
—
|
2,329
|
||||||||||||||||
Accrued
compensation and related liabilities
|
—
|
6,509
|
4,128
|
787
|
—
|
11,424
|
||||||||||||||||||
Accrued
liabilities
|
—
|
(6,848 | ) |
2,902
|
2,028
|
13
|
(1,905 | ) | ||||||||||||||||
Tax
benefit on exercise of stock options
|
(306 | ) |
—
|
—
|
—
|
—
|
(306 | ) | ||||||||||||||||
Income
taxes
payable
|
—
|
4,721
|
6,177
|
957
|
29
|
11,884
|
||||||||||||||||||
Net
cash provided by (used in) operating activities
|
327,801
|
(90,854 | ) |
540,680
|
6,939
|
(323,541 | ) |
461,025
|
||||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||||||
Capital
expenditures
|
—
|
(79,858 | ) | (60,271 | ) | (16,503 | ) |
—
|
(156,632 | ) | ||||||||||||||
Proceeds
from sale or redemption of marketable
securities
|
—
|
70,772
|
—
|
16,705
|
—
|
87,477
|
||||||||||||||||||
Purchase
of marketable securities and investments
|
—
|
(10,266 | ) |
(19,489
|
) | (34,119 | ) |
31,942
|
(31,932 | ) | ||||||||||||||
Acquisitions
of businesses, net of cash acquired
|
—
|
(231,896 | ) | (109,312 | ) | (5,155 | ) |
—
|
(346,363 | ) | ||||||||||||||
Other
|
44,829
|
11,108
|
(346,645 | ) | 3,671 |
294,441
|
7,404
|
|||||||||||||||||
Net
cash provided by (used in) investing activities
|
44,829
|
(240,140 | ) | (535,717 | ) | (35,401 | ) |
326,383
|
(440,046 | ) | ||||||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||||||
Proceeds
from issuance of debt
|
—
|
333,500
|
—
|
—
|
—
|
333,500
|
||||||||||||||||||
Repayment
of
debt
|
—
|
(6,594 | ) | (8,859 | ) |
10,992
|
(2,842 | ) | (7,303 | ) | ||||||||||||||
Stock
options
exercised
|
14,402
|
—
|
—
|
—
|
—
|
14,402
|
||||||||||||||||||
Tax
benefit on exercise of stock options
|
306
|
—
|
—
|
—
|
—
|
306
|
||||||||||||||||||
Dividends
paid
|
(58,823 | ) |
—
|
—
|
—
|
—
|
(58,823 | ) | ||||||||||||||||
Repurchase
of common
stock
|
(323,409 | ) |
—
|
—
|
—
|
—
|
(323,409 | ) | ||||||||||||||||
Other
|
(5,106 | ) |
290
|
—
|
20,882
|
—
|
16,066
|
|||||||||||||||||
Net
cash (used in) provided by financing activities
|
(372,630 | ) |
327,196
|
(8,859 | ) |
31,874
|
(2,842 | ) | (25,261 | ) | ||||||||||||||
Net
(decrease) increase in cash and cash equivalents
|
—
|
(3,798 | ) | (3,896 | ) |
3,412
|
—
|
(4,282 | ) | |||||||||||||||
Cash
and cash equivalents at beginning of period
|
—
|
13,259
|
12,570
|
17,367
|
—
|
43,196
|
||||||||||||||||||
Cash
and cash equivalents at end of period
|
$ |
—
|
$ |
9,461
|
$ |
8,674
|
$ |
20,779
|
$ |
—
|
$ |
38,914
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
57
Condensed
Consolidating Statement of Cash Flows
Year
Ended May 31, 2005 (Restated)*
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-
Guarantors
|
Eliminations
|
Cintas
Corporation Consolidated
|
||||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||||||
Net
income
|
$ |
292,547
|
$ |
96,696
|
$ |
187,821
|
$ |
20,252
|
$ | (304,769 | ) | $ |
292,547
|
|||||||||||
Adjustments
to reconcile net income to net
cash
provided by (used in) operating activities:
|
||||||||||||||||||||||||
Depreciation
|
—
|
89,467
|
24,480
|
5,866
|
—
|
119,813
|
||||||||||||||||||
Amortization
of
deferred
charges
|
—
|
17,723
|
8,295
|
2,344
|
—
|
28,362
|
||||||||||||||||||
Stock-based
compensation
|
7,971
|
—
|
—
|
—
|
—
|
7,971
|
||||||||||||||||||
Deferred
income
taxes
|
—
|
—
|
5,229
|
(1,353 | ) |
—
|
3,876
|
|||||||||||||||||
Changes
in current assets and liabilities,
net of acquisitions of businesses:
|
||||||||||||||||||||||||
Accounts
receivable
|
—
|
(26,906 | ) | (8,917 | ) | (322 | ) | (172 | ) | (36,317 | ) | |||||||||||||
Inventories
|
—
|
(29,704 | ) |
635
|
(2,512 | ) |
5,260
|
(26,321 | ) | |||||||||||||||
Uniforms
and
other rental items in service
|
—
|
(6,335 | ) | (7,214 | ) | (581 | ) |
6,962
|
(7,168 | ) | ||||||||||||||
Prepaid
expenses
|
—
|
225
|
(907 | ) | (210 | ) |
—
|
(892 | ) | |||||||||||||||
Accounts
payable
|
—
|
(78,831 | ) |
105,695
|
(11,137 | ) |
—
|
15,727
|
||||||||||||||||
Accrued
compensation and related liabilities
|
—
|
4,424
|
2,216
|
266
|
—
|
6,906
|
||||||||||||||||||
Accrued
liabilities
|
—
|
12,211
|
(111 | ) |
331
|
13
|
12,444
|
|||||||||||||||||
Tax
benefit on exercise of stock options
|
(1,165 | ) |
—
|
—
|
—
|
—
|
(1,165 | ) | ||||||||||||||||
Income
taxes payable
|
—
|
32,998
|
(35,673 | ) |
790
|
—
|
(1,885 | ) | ||||||||||||||||
Net
cash provided by (used in) operating activities
|
299,353
|
111,968
|
281,549
|
13,734
|
(292,706 | ) |
413,898
|
|||||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||||||
Capital
expenditures
|
—
|
(93,901 | ) | (39,883 | ) | (6,943 | ) |
—
|
(140,727 | ) | ||||||||||||||
Proceeds
from sale or redemption of marketable
securities
|
—
|
79,716
|
247
|
23,034
|
—
|
102,997
|
||||||||||||||||||
Purchase
of marketable
securities and investments
|
—
|
(177,089 | ) | (18,326 | ) | (62,141 | ) |
55,609
|
(201,947 | ) | ||||||||||||||
Acquisitions
of businesses, net of cash acquired
|
—
|
(4,565 | ) | (104,096 | ) | (415 | ) |
—
|
(109,076 | ) | ||||||||||||||
Other
|
(193,280 | ) |
50,040
|
(109,729 | ) | 12,343 |
238,645
|
(1,981 | ) | |||||||||||||||
Net
cash (used in) provided by investing activities
|
(193,280 | ) | (145,799 | ) | (271,787 | ) | (34,122 | ) |
294,254
|
(350,734 | ) | |||||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||||||
Repayment
of
debt
|
—
|
(9,655 | ) | (5,249 | ) |
5,877
|
(1,548 | ) | (10,575 | ) | ||||||||||||||
Stock
options
exercised
|
9,993
|
—
|
—
|
—
|
—
|
9,993
|
||||||||||||||||||
Tax
benefit on exercise of stock
options
|
1,165
|
—
|
—
|
—
|
—
|
1,165
|
||||||||||||||||||
Dividends
paid
|
(54,968 | ) |
—
|
—
|
—
|
—
|
(54,968 | ) | ||||||||||||||||
Repurchase
of common
stock
|
(58,204 | ) |
—
|
—
|
—
|
—
|
(58,204 | ) | ||||||||||||||||
Other
|
(4,059 | ) |
290
|
—
|
9,033
|
—
|
5,264
|
|||||||||||||||||
Net
cash (used in) provided by financing activities
|
(106,073 | ) | (9,365 | ) | (5,249 | ) |
14,910
|
(1,548 | ) | (107,325 | ) | |||||||||||||
Net
(decrease) increase in cash and cash equivalents
|
—
|
(43,196 | ) |
4,513
|
(5,478 | ) |
—
|
(44,161 | ) | |||||||||||||||
Cash
and cash equivalents at beginning of period
|
—
|
56,455
|
8,057
|
22,845
|
—
|
87,357
|
||||||||||||||||||
Cash
and cash equivalents at end of period
|
$ |
—
|
$ |
13,259
|
$ |
12,570
|
$ |
17,367
|
$ |
—
|
$ |
43,196
|
*
Restated to reflect the adoption of FAS 123(R) using the modified-retrospective
method. See Note 1 entitled Significant Accounting
Policies.
58
Item
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Nothing
to report.
Item
9A. Controls and Procedures
Disclosure
Controls and Procedures
With
the
participation of Cintas’ management, including Cintas’ Chief Executive Officer
and President, Chief Financial Officer, General Counsel and Controllers, Cintas
has evaluated the effectiveness of the disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of May 31, 2007. Based on such evaluation, Cintas’
management, including Cintas’ Chief Executive Officer and President, Chief
Financial Officer, General Counsel and Controllers, have concluded that Cintas’
disclosure controls and procedures were effective as of May 31, 2007, in
ensuring (i) information required to be disclosed by Cintas in the reports
that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules and forms and
(ii) information required to be disclosed by Cintas in the reports that it
files
or submits under the Exchange Act is accumulated and communicated to Cintas’
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Internal
Control over Financial Reporting
There
were no changes in Cintas’ internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter ended May 31, 2007, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
See
“Management’s Report on Internal Control over Financial Reporting” and “Report
of Independent Registered Public Accounting Firm” in Item 8 preceding Cintas’
financial statements.
Item
9B. Other Information
Nothing
to report.
Part
III
Items
10,
11, 12, 13 and 14 of Part III are incorporated by reference to the Registrant's
Proxy Statement for its 2007 Annual Shareholders' Meeting to be filed with
the
Commission pursuant to Regulation 14A.
The
information called for by Item 12 relating to "Securities Authorized for
Issuance under Equity Compensation Plans" is set forth in the table
below:
59
Securities
Authorized for Issuance Under Equity Compensation Plans
Equity
Compensation Plan Information
Plan
category
|
Number
of shares to be issued upon exercise of outstanding options
(1)
|
Weighted
average exercise price of outstanding options (1)
|
Number
of shares remaining available for future issuance under equity
compensation plans
|
|||||||||
Equity
compensation plans approved by shareholders
|
6,648,604
|
$ |
40.60
|
13,200,297
|
||||||||
Equity
compensation plans not approved by shareholders
|
—
|
—
|
—
|
|||||||||
Total
|
6,648,604
|
$ |
40.60
|
13,200,297
|
(1)
Excludes 329,424 unvested restricted stock units.
Part
IV
Item
15. Exhibits and Financial Statement
Schedules
(a)
(1) Financial
Statements. All financial statements required to be filed by Item 8
of this Form and included in this report
are
listed in Item 8. No additional financial statements are filed
because the requirements for paragraph (d) under
Item
14
are not applicable to Cintas.
(a)
(2) Financial Statement Schedule:
For
each
of the three years in the period ended May 31, 2007.
Schedule
II: Valuation and Qualifying Accounts and Reserves.
All
other
schedules are omitted because they are not applicable, or not required, or
because the required
information
is included in the Consolidated Financial Statements or Notes
thereto.
(a)
(3) Exhibits.
Exhibit
Number
|
Description
of Exhibit
|
3.1
|
Restated
Articles of Incorporation (Incorporated by reference to Cintas’ Annual
Report on Form 10-K for the year ended May 31, 1989.)
|
3.2
|
Amended
and Restated By-laws (Incorporated by reference to Cintas’ Form 8-K dated
March 8, 2007.)
|
3.3
|
Amendments
to the Articles of Incorporation of Cintas Corporation **
|
60
4.1
|
Indenture
dated as of May 28, 2002, among Cintas Corporation No. 2, as issuer,
Cintas Corporation, as parent guarantor, the subsidiary guarantors
thereto
and Wachovia Bank, National Association, as trustee (Incorporated
by
reference to Cintas’ Form 10-Q for the quarter ended February 28,
2005.)
|
4.2
|
Form
of 5-1/8% Senior Note due 2007 (Incorporated by reference to Cintas’ Form
10-Q for the quarter ended February 28, 2005.)
|
4.3
|
Form
of 6% Senior Note due 2012 (Incorporated by reference to Cintas’ Form 10-Q
for the quarter ended February 28, 2005.)
|
4.4
|
Form
of 6.15% Senior Note due 2036 (Incorporated by reference into Cintas’ Form
8-K dated August 17, 2006.)
|
10.1*
|
Incentive
Stock Option Plan (Incorporated by reference to Cintas’ Registration
Statement No. 33-23228 on Form S-8 filed under the Securities Act
of
1933.)
|
10.2*
|
Partners'
Plan, as Amended (Incorporated by reference to Cintas’ Registration
Statement No. 33-56623 on Form S-8 filed under the Securities Act
of
1933.)
|
10.5
|
Agreement
and Plan of Merger dated January 9, 1999, by and among Unitog Company,
Cintas Image Acquisition Company and Cintas Corporation (Incorporated
by
reference to the Unitog Company’s Form 8-K dated January 9,
1999.)
|
10.6
|
Amendment
No. 1 to Agreement and Plan of Merger dated March 23, 1999, by and
among
Unitog Company, Cintas Image Acquisition Company and Cintas Corporation
(Incorporated by reference to Cintas’ Form 8-K dated March 24,
1999.)
|
10.9*
|
Unitog
Company 1997 Stock Option Plan (Incorporated by reference to the
Unitog
Company’s 1997 Proxy Statement.)
|
10.10*
|
1999
Cintas Corporation Stock Option Plan (Incorporated by reference to
Cintas’
Form 10-Q for the quarter ended November 30, 2000.)
|
10.11*
|
Directors’
Deferred Compensation Plan (Incorporated by reference to Cintas’ Form 10-Q
for the quarter ended November 30, 2001.)
|
10.13
|
Stock
purchase agreement between Cintas Corporation and Filuxel SA dated
as of
March 15, 2002 (Incorporated by reference to Cintas’ Form 10-Q for the
quarter ended February 28, 2002.)
|
10.14
|
Bridge
loan agreement dated May 8, 2002, among Cintas Corporation No. 2,
as
borrower, Cintas Corporation as a guarantor, the lenders, Bank One,
NA, as
agent, and Merrill Lynch Bank USA, as syndication agent (Incorporated
by
reference to Cintas’ Form 8-K dated May 13, 2002.)
|
10.15
|
Purchase
Agreement dated as of May 28, 2002, among Cintas Corporation No.
2, as
issuer, Cintas Corporation as parent guarantor, the subsidiary guarantors
named therein and the initial purchasers named therein
agent (Incorporated by reference to Cintas’ Form 10-K dated May 31,
2002.)
|
10.16*
|
Amended
and Restated 2003 Directors’ Stock Option Plan agent (Incorporated by
reference to Cintas’ Form 10-K dated May 31, 2004.)
|
61
10.17*
|
Form
of agreement signed by Officers, General/Branch Managers, Professionals
and Key Managers, including Executive Officers agent (Incorporated
by
reference to Cintas’ Form 10-Q for the quarter ended February 28,
2005.)
|
10.18*
|
President
and CEO Executive Compensation Plan agent (Incorporated by reference
to
Cintas’ Form 10-K dated May 31, 2005.)
|
10.19*
|
2006
Executive Incentive Plan (Incorporated by reference to Cintas’ Form 10-K
dated May 31, 2005.)
|
10.20*
|
2005
Equity Compensation Plan (Incorporated by reference to Cintas’
Registration Statement No. 333-131375 on Form S-8 filed under the
Securities Act of 1933.)
|
10.21*
|
Criteria
for Performance Evaluation of the President and CEO
|
10.22*
|
2007
Executive Incentive Plan
|
14
|
Code
of Ethics (Incorporated by reference to Cintas’ Form 10-K dated May 31,
2004.)
|
21
|
Subsidiaries
of the Registrant **
|
23
|
Consent
of Independent Registered Public Accounting Firm **
|
31.1
|
Certification
of Principal Executive Officer, Pursuant to Rule 13a – 14(a) of the
Securities Exchange Act of 1934 **
|
31.2
|
Certification
of Principal Financial Officer, Pursuant to Rule 13a – 14(a) of the
Securities Exchange Act of 1934 **
|
32.1
|
Certification
of Chief Executive Officer, Pursuant to 18 U.S.C. § 1350
**
|
32.2
|
Certification
of Chief Financial Officer, Pursuant to 18 U.S.C. § 1350
**
|
|
* Management
compensatory contracts
|
|
**
Filed herewith
|
|
Cintas
will provide shareholders with any exhibit upon the payment of a
specified
reasonable fee, which fee shall be limited to Cintas' reasonable
expenses
in furnishing such exhibit.
|
62
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
CINTAS CORPORATION | |||
By:
/s/Scott D.
Farmer
|
|
||
Scott D. Farmer | |||
Chief Executive Officer | |||
Date
Signed: July 30, 2007
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
|
Capacity
|
Date
|
/s/
Richard T.
Farmer
|
Chairman
of the Board of Directors
|
July
30, 2007
|
Richard
T. Farmer
|
||
/s/
Robert J.
Kohlhepp
|
Vice
Chairman of the Board and Director
|
July
30, 2007
|
Robert
J. Kohlhepp
|
||
/s/
Scott D.
Farmer
|
Chief
Executive Officer, President and Director
|
July
30, 2007
|
Scott
D. Farmer
|
||
/s/
Paul R.
Carter
|
Director
|
July
30, 2007
|
Paul
R. Carter
|
||
/s/
Gerald S.
Adolph
|
Director
|
July
30, 2007
|
Gerald
S. Adolph
|
||
/s/
Gerald V.
Dirvin
|
Director
|
July
30, 2007
|
Gerald
V. Dirvin
|
||
/s/
William C.
Gale
|
Senior
Vice President and Chief Financial Officer
|
July
30, 2007
|
William
C. Gale
|
(Principal
Financial and Accounting Officer)
|
|
63
Cintas Corporation
Schedule
II - Valuation and Qualifying Accounts and Reserves
Additions
|
||||||||||||||||||||
(1)
|
(2)
|
(3)
|
||||||||||||||||||
(In
thousands)
|
Balance
at Beginning of Year
|
Charged
to Costs and Expenses
|
Charged
to Other Accounts
|
Deductions
|
Balance
at
End
of
Year
|
|||||||||||||||
Allowance
for Doubtful Accounts
|
||||||||||||||||||||
May
31, 2005
|
$ |
8,354
|
$ |
3,870
|
$ |
1,993
|
$ |
4,326
|
$ |
9,891
|
||||||||||
May
31, 2006
|
$ |
9,891
|
$ |
8,598
|
$ |
2,498
|
$ |
5,468
|
$ |
15,519
|
||||||||||
May 31, 2007
|
$ |
15,519
|
$ |
3,325
|
$ |
341
|
$ |
4,699
|
$ |
14,486
|
||||||||||
Reserve
for Obsolete Inventory
|
||||||||||||||||||||
May
31, 2005
|
$ |
25,965
|
$ |
3,055
|
$ |
407
|
$ |
4,139
|
$ |
25,288
|
||||||||||
May
31, 2006
|
$ |
25,288
|
$ |
4,518
|
$ |
3,213
|
$ |
8,572
|
$ |
24,447
|
||||||||||
May
31, 2007
|
$ |
24,447
|
$ |
2,559
|
$ |
1,084
|
$ |
5,184
|
$ |
22,906
|
(1)
|
Represents
amounts charged to expense to increase reserve for estimated future
bad
debts or to increase reserve for obsolete inventory. Amounts related
to inventory are computed by performing a thorough analysis of future
marketability by specific inventory
item.
|
(2)
|
Represents
a change in the appropriate balance sheet reserve due to acquisitions
during the respective period.
|
(3)
|
Represents
reductions in the balance sheet reserve due to the actual write-off
of
non-collectible accounts receivable or the physical disposal of obsolete
inventory items. These amounts do not impact Cintas' consolidated
income statement.
|
64