CINTAS CORP - Annual Report: 2008 (Form 10-K)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
X
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 for the Fiscal Year Ended May 31,
2008
|
___
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File No. 0-11399
CINTAS
CORPORATION
(Exact
name of Registrant as specified in its charter)
Incorporated
under the
Laws of Washington
|
IRS
Employer ID
|
|
(State
or other jurisdiction
of incorporation or
organization)
|
No.
31-1188630
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6800 Cintas Boulevard
P.O. Box
625737
Cincinnati,
Ohio 45262-5737
(Address
of principal executive offices)
Phone: (513)
459-1200
(Telephone
number of principal executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock, no par value
|
The
NASDAQ Stock Market LLC
(NASDAQ
Global Select Market)
|
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 checkmark 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 checkmark 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 checkmark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer ü Accelerated Filer
___ Smaller Reporting Company
___ Non-Accelerated
Filer ___
(Do not
check if a smaller reporting company)
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, 2007, was $4,916,136,923 based on a closing sale price of $31.99 per
share. As of June 30, 2008, 173,083,426 shares of Common Stock were
issued and 153,691,103 shares were outstanding.
Documents
Incorporated by Reference
Portions
of the Registrant's Proxy Statement to be filed with the Commission for its 2008
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 | |||
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.
|
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 | |||
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.
|
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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30
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Item
8.
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Financial
Statements and Supplementary Data.
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31
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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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63
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Item
9A.
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Controls
and Procedures.
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63
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Item
9B.
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Other
Information.
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63
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Part III | |||
Item
10.
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Directors
and Executive Officers of the Registrant.
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63
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Item
11.
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Executive
Compensation.
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63
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management
and Related
Stockholder Matters.
|
63
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
|
63
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|
Item
14.
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Principal
Accountant Fees and Services.
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63
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Part IV | |||
Item 15. |
Exhibits
and Financial Statement Schedules.
|
64
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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 its customers.
The
products and services provided by Cintas are as follows:
|
·
|
Uniforms
and Apparel
|
|
·
|
Mats,
Mops and Towels
|
|
·
|
Restroom
and Hygiene Service
|
|
·
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First
Aid
|
|
·
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Safety
|
|
·
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Fire
Protection
|
|
·
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Branded
Promotional Products
|
|
·
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Document
Shredding and Storage
|
|
·
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Cleanroom
Resources
|
|
·
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Flame
Resistant Clothing
|
We
provide our products and services 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 revenue. As a result, the loss of one account would not
have a significant financial impact on Cintas.
Cintas
historically classified its businesses into two operating segments, Rentals and
Other Services. The Rentals operating segment reflects the rental and
servicing of uniforms and other garments, mats, mops and shop towels and other
ancillary items. In addition to these rental items, restroom and
hygiene products and services are also provided within this operating
segment. Effective June 1, 2007, this operating segment has been
renamed Rental Uniforms and Ancillary Products.
The Other
Services operating segment historically consisted 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. Effective June 1, 2007, the Other Services operating
segment was separated into three reportable operating segments – Uniform Direct
Sales operating segment, First Aid, Safety and Fire Protection Services
operating segment and Document Management Services operating
segment. This change provides more visibility to these operating
segments as they continue to grow and have a larger impact on Cintas’
consolidated results of operations. The Uniform Direct Sales
operating segment consists of the direct sale of uniforms and related items and
branded promotional products. The First Aid, Safety and Fire
Protection Services operating segment consists of first aid, safety and fire
protection products and services. The Document Management Services
operating segment consists of document shredding and document storage
services.
4
The
following table sets forth the revenue derived from each operating segment
provided by Cintas. Fiscal 2007 and fiscal 2006 have been restated to
reflect the change to the reportable operating segments made effective June 1,
2007.
Year
Ended May 31, (in thousands)
|
2008
|
2007
|
2006
|
|||||||||
Rental
Uniforms and Ancillary Products
|
$ | 2,834,568 | $ | 2,734,629 | $ | 2,568,776 | ||||||
Uniform
Direct Sales
|
517,490 | 501,443 | 484,934 | |||||||||
First
Aid, Safety and Fire Protection Services
|
403,552 | 362,417 | 285,348 | |||||||||
Document
Management Services
|
182,290 | 108,411 | 64,550 | |||||||||
$ | 3,937,900 | $ | 3,706,900 | $ | 3,403,608 |
Additional
information is also included in Note 13 entitled Segment Information in “Notes
to Consolidated Financial Statements.”
The
primary markets served by all 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’ local
operations. Product, design, price, quality, service and convenience
to the customer are the competitive elements in each of our operating
segments.
Within
the Rental Uniforms and Ancillary Products operating segment, Cintas provides
its products and services to customers via local delivery routes originating
from rental processing plants and branches. Within the Uniform Direct
Sales and First Aid, Safety and Fire Protection Services operating segments,
Cintas provides its products and services via its distribution network and local
delivery routes or local representatives. Within the Document
Management Services operating segment, Cintas provides its services via local
service routes originating from document management branches and document
storage facilities. In total, Cintas has approximately 8,400 local
delivery routes, 405 operations and 8 distribution centers. At May
31, 2008, Cintas employed approximately 34,000 employees of which approximately
400 were represented by labor unions.
Cintas
sources finished products from many outside suppliers. In addition,
Cintas operates 10 manufacturing facilities which provide for 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 $17 million in fiscal 2008 and approximately
$16 million in fiscal 2007. Capital expenditures to limit or monitor
hazardous substances were approximately $4 million in fiscal 2008 and
approximately $2 million in fiscal 2007. 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.
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. The information on Cintas’ website is not part of this Annual
Report on Form 10-K.
5
Item 1A. Risk
Factors
The
statements in this section describe major 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.
In
addition, this section sets forth statements which constitute our cautionary
statements under the Private Securities Litigation Reform Act of
1995.
This
Annual Report on Form 10-K contains forward-looking statements that are subject
to numerous assumptions, risks or uncertainties. 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 and labor 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.
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, lower recycled paper prices, higher interest rates, inflation, higher
tax rates and other changes in tax laws and other economic factors could
increase our costs of rental uniforms and ancillary products and other services
and selling and administrative expenses. As a result, these factors
could adversely affect our sales and results of operation.
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
6
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 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.
Further
increases in fuel and energy costs could adversely affect our results of
operations and financial condition.
The price
of fuel and energy needed to run our vehicles and equipment is unpredictable and
fluctuates based on events outside our control, including geopolitical
developments, supply and demand for oil and gas, actions by OPEC and other oil
and gas producers, war and unrest in oil producing countries, regional
production patterns, limits on refining capacities, natural disasters and
environmental concerns. Recent oil price increases have adversely affected our
operating expense. Any further increase in fuel and energy costs
could adversely affect our results of operations and financial
condition.
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 shredding 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.
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
7
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 significant
additional costs which could adversely affect our results of operation. 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. 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.” 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.
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.
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 which could adversely
affect our business.
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.
8
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 the
consolidated 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
Not
applicable.
9
Item
2. Properties
Cintas
occupies 413 facilities located in 278 cities. Cintas leases 215 of
these facilities for various terms ranging from monthly to the year
2019. Cintas expects that it will be able to renew its leases on
satisfactory terms. Of the 10 manufacturing facilities listed below,
Cintas controls the operations of 2 of these manufacturing facilities, but does
not own or lease the real estate related to these operations. All
other facilities are owned. The principle executive office in
Cincinnati, Ohio 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 8 distribution centers and 10 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
which are used for the route-based deliveries and by the sales
employee-partners.
The
following chart provides additional information concerning Cintas'
facilities:
Type
of Facility
|
#
of Facilities
|
|||
Rental
Processing Plants
|
176 | |||
Rental
Branches
|
94 | |||
First
Aid, Safety and Fire Protection Facilities
|
59 | |||
Document
Management Facilities
|
49 | |||
Distribution
Centers
|
8 | * | ||
Manufacturing
Facilities
|
10 | |||
Direct
Sales Offices
|
17 | |||
Total
|
413 |
Rental
processing plants, rental branches, distribution centers and manufacturing
facilities are used in Cintas’ Rental Uniforms and Ancillary Products operating
segment. Rental processing plants, rental branches, distribution
centers, manufacturing facilities and direct sales offices are all used in the
Uniform Direct Sales operating segment. First aid, safety and fire
protection facilities, rental processing facilities and distribution centers are
used in the First Aid, Safety and Fire Protection Services operating
segment. Document management facilities and rental processing
facilities are used in the Document Management Services operating
segment.
*
Includes the principle executive 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 (Ramirez), 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; Blanca Nelly Avalos, et. al. v.
Cintas Corporation (Avalos), United
States District Court, Eastern District of Michigan, Southern Division, August
30, 2005, alleging class action claims of race, national origin and gender
discrimination in hiring, promotion and pay; On April 27,
2005, the Equal Employment Opportunity Commission (EEOC) intervened in Ramirez; Mirna E. Serrano, et al. v. Cintas
Corporation (Serrano), 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 and Avalos African-American,
Hispanic and female failure to hire into service sales representative positions
claims and the EEOC’s intervention were consolidated for pretrial purposes with
the Serrano case and
transferred to the United States District Court for the Eastern District of
Michigan, Southern Division, the remaining claims in Ramirez were dismissed or
compelled to arbitration; Colleen Grindle, et al. v. Cintas
Corporation (Grindle), 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 service sales representative positions; The Grindle case is stayed
pending the class certification proceedings in Serrano; Larry Houston, et al. v. Cintas
Corporation (Houston), 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.
Breach of
Fiduciary Duties: Manville
Personal Injury Settlement Trust v. Richard T. Farmer, et.
al., A0806822,
Court of Common Pleas, Hamilton County, Ohio, July 17, 2008.
Item
4. Submission of Matters to a Vote of Security
Holders
None in
the fourth quarter of fiscal 2008.
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
2008
|
||||||||
Quarter
Ended
|
High
|
Low
|
||||||
May
2008
|
$ | 31.01 | $ | 27.74 | ||||
February
2008
|
34.75 | 28.78 | ||||||
November
2007
|
38.00 | 31.79 | ||||||
August
2007
|
40.90 | 35.37 |
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 |
Holders
At May
31, 2008, there were approximately 3,000 shareholders on record of Cintas’
Common Stock. Cintas believes that this represents approximately
72,000 beneficial owners.
Dividends
Dividends
on the outstanding Common Stock have been paid annually and amounted to $0.46
per share, $0.39 per share and $0.35 per share in fiscal 2008, fiscal 2007 and
fiscal 2006, respectively.
12
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. 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 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 peer group are G & K Services, Inc., UniFirst Corporation,
ABM Industries and Ecolab, Inc.
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 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/0000723254/000089225108000175/cintasgraph08.jpg)
13
Recent
Sales of Unregistered Securities; Uses of Proceeds from Registered
Securities
None in
the fourth quarter of fiscal 2008.
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
share 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 share buyback program.
During
fiscal 2008, Cintas purchased 5.2 million shares of Cintas’ common stock at an
average price of $36.86 per share, for a total purchase price of approximately
$191 million.
In fiscal
2008, Cintas also acquired 50,608 shares as payment received from employees upon
the exercise of options under the stock option plan.
From the
inception of the share buyback program through July 25, 2008, Cintas has
purchased a total of approximately 19.4 million shares of Cintas common stock at
an average price of $39.81 per share for a total purchase price of $772.0
million. The maximum approximate dollar value of shares that may yet
be purchased under the share buyback program as of July 25, 2008, is $228.0
million.
14
Item 6. Selected
Financial Data
Eleven
Year Financial Summary
(In
thousands except per share and percentage data)
Years
Ended May 31,
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
10-Year
Compd Growth
|
||||||||||||||||||||||||||||
Revenue
|
$ | 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 | 3,937,900 | 10.3% | (3) | ||||||||||||||||||||||||||
Net
Income
|
$ | 130,797 | 136,796 | 190,386 | 218,665 | 229,466 | 243,191 | 265,078 | 292,547 | 323,382 | 334,538 | 335,405 | 9.9% | |||||||||||||||||||||||||||
Pro
Forma Net Income (1)
|
$ | 125,847 | 136,796 | 190,386 | 218,665 | 229,466 | 243,191 | 265,078 | 292,547 | 323,382 | 334,538 | 335,405 | 10.3% | |||||||||||||||||||||||||||
Basic
EPS
|
$ | 0.81 | 0.83 | 1.14 | 1.30 | 1.35 | 1.43 | 1.55 | 1.70 | 1.93 | 2.09 | 2.15 | 10.3% | |||||||||||||||||||||||||||
Diluted
EPS
|
$ | 0.80 | 0.81 | 1.12 | 1.27 | 1.33 | 1.41 | 1.54 | 1.69 | 1.92 | 2.09 | 2.15 | 10.4% | |||||||||||||||||||||||||||
Pro
Forma Basic EPS (1)
|
$ | 0.78 | 0.83 | 1.14 | 1.30 | 1.35 | 1.43 | 1.55 | 1.70 | 1.93 | 2.09 | 2.15 | 10.7% | |||||||||||||||||||||||||||
Pro Forma Diluted EPS
(1)
|
$ | 0.77 | 0.81 | 1.12 | 1.27 | 1.33 | 1.41 | 1.54 | 1.69 | 1.92 | 2.09 | 2.15 | 10.8% | |||||||||||||||||||||||||||
Dividends
Per Share
|
$ | 0.12 | 0.15 | 0.19 | 0.22 | 0.25 | 0.27 | 0.29 | 0.32 | 0.35 | 0.39 | 0.46 | 14.4% | |||||||||||||||||||||||||||
Total
Assets
|
$ | 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 | 3,808,601 | 11.3% | |||||||||||||||||||||||||||
Shareholders’
Equity
|
$ | 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 | 2,254,131 | 11.5% | |||||||||||||||||||||||||||
Return on Average
Equity (2)
|
17.9% | 16.8% | 19.9% | 19.2% | 17.3% | 15.8% | 15.0% | 14.7% | 15.4% | 15.7% | 15.2% | |||||||||||||||||||||||||||||
Long-Term
Debt
|
$ | 307,633 | 283,581 | 254,378 | 220,940 | 703,250 | 534,763 | 473,685 | 465,291 | 794,454 | 877,074 | 942,736 |
(1)
|
Results
for 1998 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’ images. 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.
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.
Results
of Operations
Fiscal
2008 marked the 39th
consecutive year of uninterrupted growth in sales and profits for
Cintas. This milestone was achieved despite challenging economic
conditions, including significant increases in energy
costs. Additionally, we increased our dividends paid to shareholders
by 17.9%.
Cintas
historically classified its businesses into two operating segments, Rentals and
Other Services. The Rentals operating segment reflects the rental and
servicing of uniforms and other garments, mats, mops and shop
towels. In addition to these rental items, restroom and hygiene
products and services are also provided within this operating
segment. Effective June 1, 2007, this operating segment was renamed
Rental Uniforms and Ancillary Products.
The Other
Services operating segment historically consisted 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. Effective June 1, 2007, the Other Services operating
segment was separated into three reportable operating segments – Uniform Direct
Sales operating segment, First Aid, Safety and Fire Protection Services
operating segment and Document Management Services operating
segment. This change provides more visibility to these operating
segments as they continue to grow and have a larger impact on Cintas’
consolidated results. The Uniform Direct Sales operating segment
consists of the direct sale of uniforms and related items and branded
promotional products. The First Aid, Safety and Fire Protection
Services operating segment consists of first aid, safety and fire protection
products and services. The Document Management Services operating
segment consists of document shredding and document storage
services. Revenue and income before income taxes for each of these
operating segments for fiscal 2008, fiscal 2007 and fiscal 2006 are presented in
Note 13 entitled Segment Information of “Notes to Consolidated Financial
Statements.”
16
The
following table sets forth certain consolidated statements of income data as a
percentage of revenue by operating segment and in total for the periods
indicated. Fiscal 2007 and fiscal 2006 amounts have been restated to
reflect the change to the reportable operating segments made effective June 1,
2007.
2008
|
2007
|
2006
|
||||||||||
Revenue:
|
||||||||||||
Rental Uniforms and Ancillary
Products
|
72.0% | 73.8% | 75.5% | |||||||||
Uniform Direct
Sales
|
13.1% | 13.5% | 14.2% | |||||||||
First Aid, Safety and Fire
Protection Services
|
10.3% | 9.8% | 8.4% | |||||||||
Document Management
Services
|
4.6% | 2.9% | 1.9% | |||||||||
Total
revenue
|
100.0% | 100.0% | 100.0% | |||||||||
Cost
of sales:
|
||||||||||||
Rental Uniforms and Ancillary
Products
|
55.8% | 55.4% | 54.8% | |||||||||
Uniform Direct
Sales
|
67.5% | 68.0% | 69.9% | |||||||||
First Aid, Safety and Fire
Protection Services
|
60.1% | 60.1% | 60.3% | |||||||||
Document Management
Services
|
45.4% | 47.6% | 47.5% | |||||||||
Total
cost of sales
|
57.3% | 57.3% | 57.3% | |||||||||
Gross
margin:
|
||||||||||||
Rental Uniforms and Ancillary
Products
|
44.2% | 44.6% | 45.2% | |||||||||
Uniform Direct
Sales
|
32.5% | 32.0% | 30.1% | |||||||||
First Aid, Safety and Fire
Protection Services
|
39.9% | 39.9% | 39.7% | |||||||||
Document Management
Services
|
54.6% | 52.4% | 52.5% | |||||||||
Total
gross margin
|
42.7% | 42.7% | 42.7% | |||||||||
Selling
and administrative expenses
|
28.0% | 27.1% | 26.8% | |||||||||
Interest
income
|
-0.1% | -0.2% | -0.2% | |||||||||
Interest
expense
|
1.3% | 1.4% | 0.9% | |||||||||
Income
before income taxes
|
13.5% | 14.4% | 15.2% |
As shown
above, our First Aid, Safety and Fire Protection Services operating segment
revenue and Document Management Services operating segment revenue have grown as
a percentage of our total revenue over the last two fiscal
years. This shift was driven by 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.” In addition, the continued development of our sales
efforts in the First Aid, Safety and Fire Protection Services operating segment
and the Document Management Services operating segment have contributed to
higher revenue growth in these two operating segments compared to the Rental
Uniforms and Ancillary Products operating segment and the Uniform Direct Sales
operating segment.
Selling
and administrative expenses as a percentage of revenue have increased over the
last two fiscal years primarily due to a reorganization of our sales efforts
which began in fiscal 2007. The financial impact of this
reorganization effort continued into fiscal 2008. The reorganization
has been completed, and we expect to see improved leverage in fiscal
2009.
Fiscal
2008 Compared to Fiscal 2007
Fiscal
2008 total revenue was $3.9 billion, an increase of 6.2% over fiscal
2007. Internal growth was 4.6% in fiscal 2008, compared to 5.3% in
fiscal 2007. The deterioration in the North American economy created
a challenging environment throughout fiscal 2008. The rising
unemployment in the U.S. put pressure on our ability to grow rental uniform
wearers, particularly in the latter half of fiscal 2008, as many of our
customers reduced their workforces. In addition, our fire protection
services business within the First Aid, Safety and Fire
Protection
17
Services
operating segment suffered due to pressure on fire installation system revenue
and lower than anticipated recurring service revenue. Our internal
growth was generated primarily through the sale of document management services
to new and existing customers, continued penetration of our ancillary products
and services such as mats, hygiene supplies and restroom cleaning services to
existing customers, and first aid and safety products and services to new and
existing customers. 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.”
Rental
Uniforms and Ancillary Products operating segment revenue consists predominantly
of revenue 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 Rental Uniforms
and Ancillary Products operating segment increased 3.7% over fiscal
2007. Internal growth for the Rental Uniforms and Ancillary Products
operating segment was 3.4% in fiscal 2008. The increase in the Rental
Uniforms and Ancillary Products operating 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 comprised of customers who were first time
users of uniform rental programs. The remaining growth of 0.3% in
fiscal 2008 resulted from the acquisition of rental businesses.
Other
Services revenue, consisting of revenue from the reportable operating segments
of Uniform Direct Sales, First Aid, Safety and Fire Protection Services and
Document Management Services, increased 13.5% over fiscal
2007. Internal growth accounted for 8.2% of this
increase. This internal growth was generated primarily through the
increased sales of first aid, safety and fire protection products and services
and document management services to customers. The remaining revenue growth of
5.3% was generated through a combination of acquisitions of first aid, safety
and fire protection businesses and document management businesses.
Cost of
rental uniforms and ancillary products increased 4.4% over fiscal
2007. Cost of rental uniforms and ancillary products 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 2007 was primarily driven by the
growth in the Rental Uniforms and Ancillary Products operating segment
revenue. In addition, rising energy costs, especially in the second
half of the fiscal year, contributed to this increase. Energy costs
increased 11.1% in fiscal 2008, from $104.6 million in fiscal 2007 to $116.2
million in fiscal 2008.
Cost of
other services increased 10.5% over fiscal 2007. Cost of other
services consists primarily of cost of goods sold (predominantly uniforms and
first aid products), delivery expenses and distribution expenses in the Uniform
Direct Sales operating segment, the First Aid, Safety and Fire Protection
Services operating segment and the Document Management Services operating
segment. The increase over fiscal 2007 was due to the growth in other
services revenue, derived through a combination of internal growth and
acquisitions. Rising energy costs also impacted the cost of other
services. Other services energy costs increased 35.4% from $18.1
million in fiscal 2007 to $24.5 million in fiscal 2008. Improved
leverage and various cost containment programs in our Uniform Direct Sales,
First Aid, Safety and Fire Protection Services and Document Management Services
operating segments helped to partially offset the increases in energy
costs.
Selling
and administrative expenses increased 10.0% over fiscal 2007. 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 $53.1 million over the prior fiscal year. In
addition, administrative expenses increased by $10.4 million due to an increase
in legal and other professional services.
Operating
income of $577.5 million in fiscal 2008, was relatively flat over fiscal
2007. Gross margin increased by $100.2 million, but was offset by the
increase of $100.2 million in selling and administrative expenses.
Net
interest expense (interest expense less interest income) increased $2.9 million
from the prior fiscal year. This increase was primarily a result of
increased interest expense from additional debt added in fiscal 2008 used to
buyback shares under our share buyback program.
Income
before income tax was $530.7 million, a 0.5% decrease over fiscal
2007. This change reflects the relatively flat operating income being
reduced by the higher net interest expense.
18
Cintas'
effective tax rate was 36.8% for fiscal 2008 as compared to 37.3% for fiscal
2007 (see also Note 7 entitled Income Taxes of “Notes to Consolidated Financial
Statements”).
Net
income for fiscal 2008 of $335.4 million was a 0.3% increase over fiscal 2007,
and diluted earnings per share of $2.15 was a 2.9% increase over fiscal
2007. 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.
Rental Uniforms and
Ancillary Products Operating Segment
As
discussed above, Rental Uniforms and Ancillary Products operating segment
revenue increased $99.9 million, or 3.7%, and the cost of rental uniforms and
ancillary products increased $66.4 million, or 4.4%. The operating
segment’s gross margin was $1,253.0 million, or 44.2% of
revenue. This gross margin percent of revenue of 44.2% decreased from
the 44.6% in fiscal 2007, primarily as a result of an 11.1% increase in energy
costs.
Selling
and administrative expenses for the Rental Uniforms and Ancillary Products
operating segment as a percent to sales, at 28.3%, increased 60 basis points
from the 27.7% in the prior fiscal year. This increase was due to the
increased investment in our sales organization and increases in our marketing
efforts and sales promotions as described above.
Income
before income taxes decreased $11.1 million to $451.3 million for the Rental
Uniforms and Ancillary Products operating segment for fiscal 2008 compared to
the prior fiscal year. Income before income taxes was 15.9% of this
operating segment’s revenue, which is a 100 basis point decrease compared to
fiscal 2007 primarily as a result of the increased energy costs and the
increased investment in our sales organization and increases in our marketing
efforts and sales promotions.
Uniform Direct Sales
Operating Segment
Uniform
Direct Sales operating segment revenue increased $16.0 million for fiscal 2008,
a 3.2% increase over fiscal 2007. There were no acquisitions in the
Uniform Direct Sales operating segment during fiscal 2008.
Cost of
uniform direct sales increased $8.5 million, or 2.5%, for fiscal 2008 due to
increased Uniform Direct Sales volume. The gross margin as a percent
to revenue was 32.5% for fiscal 2008, which was a 50 basis point improvement
over the prior fiscal year. This improvement is due to both sourcing
improvements for catalog products as well as the increased sales
volume.
Selling
and administrative expenses as a percent to revenue, at 20.0%, increased 60
basis points compared to fiscal 2007. This increase is in part due to
the catalog costs associated with the introduction of the new “Uniform Book” and
new healthcare catalog.
Income
before income taxes increased $1.5 million to $64.8 million for the Uniform
Direct Sales operating segment for fiscal 2008 compared to the prior fiscal
year. Income before income taxes was 12.5% of the operating segment’s
revenue, which is a 10 basis point decrease compared to fiscal
2007. This decrease is primarily due to the increased catalog costs
noted above, offset by the gross margin improvements due to sourcing
improvements and increased sales volume.
First Aid, Safety and Fire
Protection Services Operating Segment
First
Aid, Safety and Fire Protection Services operating segment revenue increased
$41.1 million for fiscal 2008, an 11.4% increase over fiscal
2007. This operating segment’s internal growth for fiscal 2008 was
6.1% over the prior fiscal year. The operating segment’s internal
growth was negatively impacted by lower than anticipated fire suppression system
installation revenue and lower than anticipated recurring service revenue within
the fire protection services business. Internal growth was generated
primarily by the sale of first aid and safety products and services to new
customers. The remaining growth was generated through the acquisition
of first aid, safety and fire protection businesses.
Cost of
first aid, safety and fire protection services increased $24.8 million, or
11.4%, for fiscal 2008, due to increased First Aid, Safety and Fire Protection
Services volume. Gross margin for the First Aid, Safety and Fire
Protection Services operating segment is defined as revenue less cost of goods,
warehouse expenses, service expenses
and training expenses. The gross margin as a percent to revenue was
39.9% for fiscal 2008, which is consistent with the prior fiscal
year.
19
Selling
and administrative expenses as a percent to revenue, at 31.0%, increased 170
basis points compared to fiscal 2007. This increase was due to the
increased investment in our sales organization and increases in our marketing
efforts and sales promotions as described above.
Income
before income taxes for the First Aid, Safety and Fire Protection Services
operating segment decreased by $2.6 million in fiscal 2008 compared to the prior
fiscal year. Income before income taxes was 8.8% of the operating
segment’s revenue, which is a 180 basis point decrease compared to last fiscal
year primarily as a result of the increased investment in our sales organization
and increases in our marketing efforts and sales promotions.
Document Management Services
Operating Segment
Document
Management Services operating segment revenue increased $73.9 million for fiscal
2008, or 68.1% over the prior fiscal year. This operating segment’s
internal growth for fiscal 2008 was 38.2% over fiscal 2007. The
internal growth is primarily due to the sale of shredding services to new
customers. The remaining growth was generated through the acquisition
of document management businesses.
Cost of
document management services increased $31.1 million, or 60.2%, for fiscal 2008,
due to increased Document Management Services volume. Gross margin
for the Document Management Services operating segment is defined as revenue
less production and service costs. The gross margin as a percent to
revenue was 54.6% for fiscal 2008, which is a 220 basis point improvement over
the gross margin percentage in fiscal 2007. This improvement is
primarily due to the operating segment’s increased sales volume and favorable
recycled paper prices relative to the prior fiscal year.
Selling
and administrative expenses as a percent to revenue was 40.5% compared to 45.7%
in fiscal 2007. This decrease is due to better leveraging of
administrative functions resulting from the operating segment’s increased sales
volume, partially offset by the increased investment in our sales organization
and increases in our marketing efforts and sales promotions.
Income
before income taxes for the Document Management Services operating segment
increased $18.6 million for fiscal 2008 compared to the prior fiscal
year. Income before income taxes was 14.1% of the operating segment’s
revenue compared to 6.6% in fiscal 2007 primarily as a result of the operating
segment’s increased sales volume.
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.”
Rental
Uniforms and Ancillary Products operating segment revenue consists predominantly
of revenue 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. This operating segment’s revenue
increased 6.5% over fiscal 2006. Internal growth for the Rental
Uniforms and Ancillary Products operating segment was 4.2% in fiscal
2007. The increase in 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 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 businesses.
20
Other
Services revenue, consisting of revenue from the reportable operating segments
of Uniform Direct Sales, First Aid, Safety and Fire Protection Services and
Document Management Services, increased 16.5% over fiscal
2006. Internal growth accounted for 8.6% of this
increase. 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 a combination of acquisitions of first aid, safety and fire
protection businesses and document management businesses.
Cost of
rental uniforms and ancillary products increased 7.7% over fiscal
2006. Cost of rental uniforms and ancillary products 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 Rental Uniforms and Ancillary Products operating segment
revenue. In addition, delivery labor increased $34.1 million due to
increased Rental Uniforms and Ancillary Products operating segment revenue and
the introduction of our restroom cleaning service. As a result, cost
of rental uniforms and ancillary products as a percent of Rental Uniforms and
Ancillary Products operating segment revenue 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 in the Uniform
Direct Sales operating segment, the First Aid, Safety and Fire Protection
Services operating segment and the Document Management Services operating
segment. The increase over fiscal 2006 was due to the growth in Other
Services revenue, derived through a combination of internal growth and
acquisitions.
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 fiscal
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. 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 the 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.
Operating
income was $577.4 million in fiscal 2007, an increase of $34.4 million, or 6.3%,
over fiscal 2006. Gross margin increased by $126.6 million, offset by
the increase of $92.2 million in selling and administrative
expenses.
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. This change reflects the increased operating income being
reduced by the higher net interest expense.
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.
Rental Uniforms and
Ancillary Products Operating Segment
As
discussed above, Rental Uniforms and Ancillary Products operating segment
revenue increased $165.9 million, or 6.5%, and the cost of rental uniforms and
ancillary products increased $108.4 million, or 7.7%. The operating
segment’s gross margin was $1,219.4 million, or 44.6% of revenue. The
gross margin as a percent of revenue
of 44.6% decreased compared to the 45.2% in fiscal 2006. This
decrease is in part due to increased delivery labor associated with the
introduction of our restroom cleaning service.
21
Selling
and administrative expenses for the Rental Uniforms and Ancillary Products
operating segment as a percent to revenue, at 27.7%, increased 70 basis points
compared the prior fiscal year. This increase was due to the
increased investment in our sales organization and increases in our marketing
efforts and sales promotions as described above.
Income
before income taxes decreased $6.0 million to $462.4 million for the Rental
Uniforms and Ancillary Products operating segment for fiscal 2007 compared to
the prior fiscal year. Income before income taxes was 16.9% of this
operating segment’s revenue, which is a 130 basis point decrease compared to
fiscal 2006 primarily as a result of the increase in delivery labor and the
increased investment in our sales organization and increases in our marketing
efforts and sales promotions.
Uniform Direct Sales
Operating Segment
Uniform
Direct Sales operating segment revenue increased $16.5 million for fiscal 2007,
or 3.4% over fiscal 2006. There were no acquisitions in the Uniform
Direct Sales operating segment during fiscal 2007.
Cost of
uniform direct sales increased $1.7 million, or 0.5%, for fiscal 2007 due to
increased Uniform Direct Sales volume. The gross margin as a percent
to revenue was 32.0% for fiscal 2007, which was a 190 basis point improvement
over the prior fiscal year. This improvement is due to both sourcing
improvements for direct sales apparel as well as the increased sales
volume.
Selling
and administrative expenses as a percent to revenue, at 19.4%, decreased 220
basis points compared to fiscal 2006. This decrease is primarily due
to cost containment initiatives and improved leverage due to higher sales
volumes.
Income
before income taxes increased $22.2 million to $63.3 million for the Uniform
Direct Sales operating segment for fiscal 2007 compared to the prior fiscal
year. Income before income taxes was 12.6% of the operating segment’s
revenue, which is a 410 basis point increase compared to fiscal
2006. This increase is primarily due to the gross margin improvements
and cost containment initiatives discussed above.
First Aid, Safety and Fire
Protection Services Operating Segment
First
Aid, Safety and Fire Protection Services operating segment revenue increased
$77.1 million for fiscal 2007, or 27.0% over fiscal 2006. This
operating segment’s internal growth for fiscal 2007 was 12.5% over the prior
fiscal year. The operating segment’s 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. The remaining
growth was generated through the acquisition of first aid, safety and fire
protection businesses.
Cost of
first aid, safety and fire protection services increased $45.8 million, or
26.6%, for fiscal 2007, due to increased First Aid, Safety and Fire Protection
Services operating segment volume. Gross margin for the First Aid,
Safety and Fire Protection Services operating segment is defined as revenue less
cost of goods, warehouse expenses, service expenses and training
expenses. The gross margin as a percent to revenue was 39.9% for
fiscal 2007, which is a 20 basis point increase over the gross margin percentage
in fiscal 2006. This improvement came in both the first aid and fire
protection businesses and is primarily due the operating segment’s increased
sales volume.
Selling
and administrative expenses as a percent to revenue, at 29.3%, increased 50
basis points compared to fiscal 2006. This increase was due to the
increased investment in our sales organization and increases in our marketing
efforts and sales promotions as described above.
Income
before income taxes increased $7.4 million to $38.3 million for the First Aid,
Safety and Fire Protection Services operating segment for fiscal 2007 compared
to the prior fiscal year. Income before income taxes was 10.6% of the
operating segment’s revenue, which is a 20 basis point decrease compared to the
prior fiscal year primarily as a result of the increased investment in our sales
organization and increases in our marketing efforts and sales
promotions.
22
Document Management Services
Operating Segment
Document
Management Services operating segment revenue increased $43.9 million for fiscal
2007, or 67.9% over the prior fiscal year. This operating segment’s
internal growth for fiscal 2007 was 34.2% over fiscal 2006. The
internal growth is primarily due to the sale of shredding services to new
customers. The remaining growth was generated through the acquisition
of document management businesses.
Cost of
document management services increased $20.9 million, or 68.2%, for fiscal 2007,
due to increased Document Management Services volume. Gross margin
for the Document Management Services operating segment is defined as revenue
less production and service costs. The gross margin as a percent to
revenue was 52.4% for fiscal 2007, which is comparable to the gross margin
percentage in fiscal 2006.
Selling
and administrative expenses as a percent to revenue, at 45.7%, decreased 270
basis points compared to fiscal 2006. This decrease is due to better
leveraging of administrative functions resulting from the operating segment’s
increased sales volume, offset by the increased investment in our sales
organization and increases in our marketing efforts and sales
promotions.
Income
before income taxes for the Document Management Services operating segment
increased $4.6 million for fiscal 2007 compared to the prior fiscal
year. Income before income taxes was 6.6% of the operating segment’s
revenue, which is a 250 basis point increase compared to fiscal 2006 primarily
as a result of the operating segment’s increased sales volume.
Liquidity
and Capital Resources
At May
31, 2008, Cintas had $191.7 million in cash, cash equivalents and marketable
securities, representing an increase of $36.3 million from May 31, 2007, or
23.3%. This cash amount includes $26.8 million in bank overdrafts
with no right of offset. In prior fiscal years, we have netted these
bank overdrafts against daily cash holdings at our depository
bank. However, we have transferred these cash holdings in fiscal 2008
to a different bank and, as a result, no longer have right of
offset. Therefore, the bank overdraft balance was reclassified as an
increase to cash and accounts payable in accordance with FASB Interpretation No.
39, Offsetting of Amounts
Related to Certain Contracts. The remaining increase is
primarily due to the improvement in net working capital (defined as current
assets less current liabilities), which increased by $161.4 million in fiscal
2008 compared to fiscal 2007. Cash generated from operations was
$544.5 million in fiscal 2008 as compared to $449.4 million generated in fiscal
2007. This $95.1 million increase was primarily due to an increase in
accounts payable and accrued liabilities and an increase in income taxes
payable. Significant uses of cash in fiscal 2008 were capital
expenditures of $190.3 million, acquisitions of $111.5 million (net of cash
acquired), repurchases of common stock of $191.5 million and dividends of $70.8
million. Cash, cash equivalents and marketable securities will be
used to finance future acquisitions, capital expenditures and share
buybacks.
Marketable
securities consist primarily of Canadian federal government
securities. Cintas' investment policy pertaining to marketable
securities is conservative. The criterion used in making investment
decisions is the preservation of principal, while earning an attractive
yield.
Accounts
receivable increased $21.2 million, primarily due to increased
revenue. The average collection period in fiscal 2008 remained
comparable with fiscal 2007.
Inventories
increased $6.9 million, or 3.0%, primarily due to inventory requirements for the
rollout of our direct sale catalog and for the opening of a new facility
services distribution center. This new distribution center is
designed to improve logistics and enhance the cost structure of our ancillary
products within our Rental Uniforms and Ancillary Products operating
segment.
Working
capital increased $161.4 million to $915.1 million in fiscal
2008. This increase is primarily due to an increase in accounts
payable due to a reclassification of cash and accounts payable as described
above.
Net
property and equipment increased by $54.3 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 2008 totaled
$190.3 million, including $140.8 million for the Rental Uniforms and Ancillary
Products operating segment and $31.0 million for the Document Management
Services operating segment, exceeding depreciation expense by
approximately
23
$41.8
million. Cintas continues to reinvest in land, buildings and
equipment in an effort to expand capacity for future growth. During
fiscal 2008, Cintas completed construction of four new uniform rental facilities
and one new distribution center 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
2009 will be between $180.0 million and $200.0 million.
Long-term
debt totaled $942.7 million at May 31, 2008. This amount includes $225.0
million of 10-year senior notes at a rate of 6.0% issued in fiscal 2002, $250.0
million of 30-year senior notes issued in August 2006 at a rate of 6.15% and
$300.0 million of 10-year senior notes issued in the third quarter of fiscal
2008 at a rate of 6.125%. Proceeds from issuances of the August 2006
30-year senior notes and the fiscal 2008 third quarter 10-year senior notes were
both used to extinguish outstanding commercial paper at the time of their
respective debt issuances. 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 $163.0 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.
Cintas’
total debt to capitalization ratio has increased from 28.9% at May 31, 2007, to
29.5% at May 31, 2008. Total debt increased $62.6 million in fiscal 2008 through
the net activity of the debt issuance noted above (see Note 5 entitled Long-Term
Debt of “Notes to Consolidated Financial Statements”). This
additional indebtedness was used to execute the share buyback program. During
fiscal 2008, Cintas bought back $191.5 million of Cintas common
stock.
During
fiscal 2008, Cintas paid dividends of $70.8 million, or $0.46 per
share. On a per share basis, this dividend is an increase of 17.9%
over the dividend paid in fiscal 2007. This marks the 25th
consecutive year that Cintas has increased its annual dividend, every year since
going public in 1983.
On May 2,
2005, Cintas announced that the Board of Directors authorized a $500.0 million
share 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 2008,
Cintas purchased 5.2 million shares of Cintas stock at an average price of
$36.86 per share, for a total purchase price of $191.5 million. From
the inception of the share buyback program through July 25, 2008, Cintas has
purchased 19.4 million shares of Cintas stock at an average price of $39.81 per
share for a total purchase price of $772.0 million. The Board of
Directors did not specify an expiration date for this program.
Following
is information regarding Cintas' long-term contractual obligations and other
commitments outstanding as of May 31, 2008:
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)
|
$ | 942,657 | $ | 535 | $ | 164,177 | $ | 226,278 | $ | 551,667 | ||||||||||
Capital
lease obligations (2)
|
1,149 | 535 | 255 | 240 | 119 | |||||||||||||||
Operating
leases
(3)
|
91,228 | 24,241 | 35,239 | 18,034 | 13,714 | |||||||||||||||
Interest
payments
(4)
|
711,152 | 53,339 | 105,373 | 84,540 | 467,900 | |||||||||||||||
Interest
swap agreements (5)
|
— | — | — | — | — | |||||||||||||||
Unconditional
purchase obligations
|
— | — | — | — | — | |||||||||||||||
Total
contractual cash obligations
|
$ | 1,746,186 | $ | 78,650 | $ | 305,044 | $ | 329,092 | $ | 1,033,400 |
Cintas
also makes payments to defined contribution plans. The amounts of
contributions made to the defined contribution 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 $33,220, two to three years would be $76,738 and four to five
years would be $92,853. Payments for years thereafter are expected to
continue increasing by 10% each year.
24
(1)
|
Long-term
debt primarily consists of $775,000 in long-term notes and $163,000 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 aircraft.
|
(4)
|
Interest
payments include interest on both fixed and variable rate
debt. Rates have been assumed to remain constant in fiscal
2009, increase 25 basis points for both fiscal 2010 and fiscal 2011, and
an additional 50 basis points in each future year.
|
(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)
|
74,764 | 45,728 | 29,036 | — | — | |||||||||||||||
Guarantees
|
— | — | — | — | — | |||||||||||||||
Standby
repurchase obligations
|
— | — | — | — | — | |||||||||||||||
Other
commercial commitments
|
— | — | — | — | — | |||||||||||||||
Total
commercial commitments
|
$ | 674,764 | $ | 45,728 | $ | 629,036 | $ | — | $ | — |
(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 aircraft. 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, revenue or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Inflation
and Changing Prices
Changes
in wages, benefits and energy costs have the potential to materially impact
Cintas’ financial results. Energy costs, in particular, continue to
rise. Energy costs were 3.6% of total revenue in fiscal 2008 and 3.3%
of total revenue in fiscal 2007. Medical benefit costs have decreased
as a percent to revenue due to better claims experience and a one-time benefit
from a switch to a new provider. Medical benefits were 3.1% of total
revenue in fiscal 2008 and 3.4% of total revenue in fiscal
2007. Although difficult to predict, we do not expect that medical
benefit expense will continue to decrease. 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,
25
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 (Serrano), filed on May 10, 2004, and pending in the United
States District Court, Eastern District of Michigan, Southern
Division. The Serrano plaintiffs allege
that Cintas discriminated against women in hiring into various service sales
representative positions across all divisions of Cintas. 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, Blanca Nelly Avalos, et al. v. Cintas
Corporation (Avalos), currently pending in the United States District
Court, Eastern District of Michigan, Southern Division. Ms. Avalos’
claims have been dismissed, but her putative class complaint remains
pending. The Avalos plaintiffs allege 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. 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 (Ramirez), filed on January 20, 2004, in the United States
District Court, Northern District of California, San Francisco
Division. On April 27, 2005, the EEOC intervened in the claims
asserted in Ramirez. On May
11, 2006, the Ramirez
and Avalos African-American, Hispanic and female failure to hire
into service sales representative positions claims and the EEOC's intervention
were consolidated for pretrial purposes with the Serrano case and transferred to the United
States District Court for the Eastern District of Michigan, Southern
Division. The consolidated case is known as Mirna E. Serrano/Blanca Nelly
Avalos, et al. v. Cintas Corporation (Serrano/Avalos), 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, 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. The Grindle case is stayed
pending the class certification proceedings in Serrano. 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 (Houston), was filed on August 3, 2005, in the United States
District Court for the Northern District of California on behalf of
African-American managers alleging racial discrimination. On November
22, 2005, the court entered an order requiring the named plaintiffs in the Houston lawsuit to arbitrate
all of their claims for monetary damages.
On July
17, 2008, Manville Personal Injury Settlement Trust filed a purported
shareholder derivative lawsuit in the Court of Common Pleas, Hamilton County,
Ohio, captioned Manville Personal Injury
Settlement Trust v. Richard T. Farmer, et. al., A0806822 against certain
directors and officers, alleging that they breached their fiduciary duties to
the Company by consciously failing to cause Cintas to comply with worker safety
and employment-related laws and regulations. The Company is named as
a nominal defendant in the case. The complaint contends that, as a
consequence of such alleged breach of duty, the Company suffered substantial
monetary losses and other injuries and seeks, among other things, an award of
compensatory damages, other non-monetary remedies and
expenses.
The
litigation discussed above, if decided or settled adversely to Cintas, may,
individually or in the aggregate, result in liability material to Cintas’
financial condition or results of operations and could increase costs of operations
on an on-going basis. Any estimated liability relating to these
proceedings is not determinable at this time. 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 interest of
Cintas’ shareholders.
26
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 $17 million in fiscal 2008 and approximately
$16 million in fiscal 2007. Capital expenditures to limit or monitor
hazardous substances were approximately $4 million in fiscal 2008 and
approximately $2 million in fiscal 2007. 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.
New
Accounting Standards
As of
June 1, 2007, Cintas adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes – an
interpretation of FASB Statement No. 109 (FAS 109), which clarifies the
accounting for uncertainty in income taxes recognized in the consolidated
financial statements in accordance with FAS 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. It also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As a result
of the implementation of FIN 48, Cintas recorded a decrease to retained earnings
as of June 1, 2007, of $13,731. Cintas’ adoption of FIN 48 is more
fully described in Note 7 entitled Income Taxes of “Notes to Consolidated
Financial Statements.”
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS
157), which defines fair value, establishes a framework for measuring fair value
under GAAP and expands disclosure requirements about fair value
measurements. Cintas will adopt FAS 157 in the first quarter of
fiscal 2009. In February 2008, the FASB released a FASB Staff
Position (FSP FAS 157-2, Effective Date of FASB Statement No. 157) which delayed
the effective date of FAS 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The
adoption of FAS 157 for our financial assets and liabilities will not have a
material impact upon adoption.
In
December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(FAS 141(R)). Under FAS 141(R), an entity is required to recognize the
assets acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires
that acquisition-related costs are recognized separately from the acquisition
and expensed as incurred, restructuring costs generally are expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. For Cintas, FAS 141(R)
is effective for acquisitions and adjustments to an acquired entity’s deferred
tax asset and liability balances occurring after May 31, 2009. Cintas is
currently evaluating the future impact and disclosures under FAS
141(R).
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, which is recorded in the Rentals Uniforms and Ancillary Products
operating segment, is recognized when services are performed. Other
services revenue, which is recorded in the Uniform Direct Sales, First Aid,
Safety and Fire Protection Services and Document Management Services operating
segments, is recognized when either services are performed or when products
are shipped and the title and risks of ownership pass to the
customer.
27
Allowance
for doubtful accounts
Cintas
establishes an allowance for doubtful accounts. This allowance is an
estimate based on historical rates of collectibility. An allowance
for doubtful accounts 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 Rental
Uniforms and Ancillary Products operating segment and the three other operating
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 inventories at the lower of cost
or market. An inventory obsolescence reserve 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 18 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 8 to 48
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 30 to 40 years for buildings, 5 to 20 years for
building improvements, 3 to 10 years for equipment and 2 to 5 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 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 operating
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, 2008, 2007 or 2006.
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 5 to 10 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, 2008, 2007 or 2006.
28
Stock-based
compensation
As
required under FASB Statement No. 123(R), Share-Based Payment,
compensation expense is recognized for all share-based payments to employees,
including stock options, in the consolidated statements of income based on the
fair value of the awards that are granted. The fair value of stock options
is estimated at the date of grant using the Black-Scholes option-pricing model.
Measured compensation cost, net of estimated forfeitures, is
recognized on a straight line basis over the vesting period of the related
share-based compensation award.
See Note
11 entitled Stock-Based Compensation of “Notes to Consolidated Financial
Statements” for further information.
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. 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.
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.
29
Outlook
While it
is our view that economic conditions will remain sluggish, we believe we can
achieve continued growth in sales and profits. We will pursue our
strategy of achieving 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 and markets to which Cintas has not
historically served. When appropriate opportunities arise, we will
also supplement our internal growth with strategic acquisitions.
We
believe that the high level of customer service provided by our
employee-partners and supported by our infrastructure, quality products,
financial resources and corporate culture will provide for continued business
success. As such, we see upside revenue potential for all of our
business units. However, we do not expect that economic and
competitive pressures will diminish, and these pressures will continue creating
a difficult pricing environment.
Like many
other companies, we anticipate upward pressures on energy costs to remain in
fiscal 2009. This pressure may make gross margin improvements as a
percentage of revenue difficult. However, we expect productivity
improvements brought on by cost containment initiatives, technological advances
and continued leverage of our infrastructure to soften the adverse energy
impact.
Although
difficult to predict, we expect to make improvements to our selling and
administrative expenses as a percentage of revenue in fiscal
2009. The reorganization of our sales efforts has been completed, and
we expect to gain improved leverage from this organization in fiscal
2009. We also expect cost containment initiatives will offset
anticipated increases to wages and benefits, including medical
expenses.
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 $163 million, with an average interest rate of 2.19%. 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 $1 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.
30
Item 8. Financial
Statements and Supplementary Data
Index
to Consolidated Financial Statements
Audited
Consolidated Financial Statements for the Years Ended May 31, 2008, 2007 and
2006
Management’s
Report on Internal Control over Financial
Reporting.................................................................................................................
|
32
|
|
Reports
of Ernst & Young LLP, Independent Registered Public Accounting
Firm..........................................................................................
|
33
|
|
Consolidated
Statements of
Income.........................................................................................................................................................................
|
35
|
|
Consolidated
Balance
Sheets....................................................................................................................................................................................
|
36
|
|
Consolidated
Statements of Shareholders’
Equity................................................................................................................................................
|
37
|
|
Consolidated
Statements of Cash
Flows.................................................................................................................................................................
|
38
|
|
Notes
to Consolidated Financial
Statements..........................................................................................................................................................
|
39
|
31
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, 2008. 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, 2008, 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 | |||
32
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of Cintas Corporation:
We have
audited Cintas Corporation's internal control over financial reporting as of May
31, 2008, 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 included in the accompanying Management’s Report on 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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, 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, Cintas Corporation maintained, in all material respects, effective
internal control over financial reporting as of May 31, 2008, 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, 2008 and 2007, and the related consolidated statements
of income, shareholders’ equity and cash flows for each of the three years in
the period ended May 31, 2008, of Cintas Corporation, and our report dated July
25, 2008, expressed an unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Cincinnati,
Ohio
July 25,
2008
33
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, 2008 and 2007, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended May 31, 2008. 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, 2008 and 2007, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended May 31, 2008, in
conformity with U.S. generally accepted accounting principles.
As
described in Note 1 to the consolidated financial statements, in fiscal 2008,
Cintas Corporation adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement 109.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Cintas Corporation’s internal control over
financial reporting as of May 31, 2008, 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 25, 2008, expressed an
unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Cincinnati,
Ohio
July 25,
2008
34
Consolidated
Statements
of Income
Years
Ended May 31,
|
||||||||||||
(In
thousands except per share data)
|
2008
|
2007
|
2006
|
|||||||||
Revenue:
|
||||||||||||
Rental uniforms and
ancillary products
|
$ | 2,834,568 | $ | 2,734,629 | $ | 2,568,776 | ||||||
Other
services
|
1,103,332 | 972,271 | 834,832 | |||||||||
3,937,900 | 3,706,900 | 3,403,608 | ||||||||||
Costs
and expenses (income):
|
||||||||||||
Cost of rental
uniforms and ancillary products
|
1,581,618 | 1,515,185 | 1,406,829 | |||||||||
Cost of other
services
|
674,682 | 610,360 | 541,987 | |||||||||
Selling and
administrative expenses
|
1,104,145 | 1,003,958 | 911,750 | |||||||||
Operating
income
|
577,455 | 577,397 | 543,042 | |||||||||
Interest
income
|
(6,072 | ) | (6,480 | ) | (6,759 | ) | ||||||
Interest
expense
|
52,823 | 50,324 | 31,782 | |||||||||
Income
before income
taxes
|
530,704 | 533,553 | 518,019 | |||||||||
Income
taxes
|
195,299 | 199,015 | 194,637 | |||||||||
Net
income
|
$ | 335,405 | $ | 334,538 | $ | 323,382 | ||||||
Basic
earnings per
share
|
$ | 2.15 | $ | 2.09 | $ | 1.93 | ||||||
Diluted
earnings per
share
|
$ | 2.15 | $ | 2.09 | $ | 1.92 | ||||||
Dividends
declared and paid per share
|
$ | 0.46 | $ | 0.39 | $ | 0.35 |
See
accompanying notes.
35
Consolidated
Balance
Sheets
As
of May 31,
|
||||||||
(In
thousands except share data)
|
2008
|
2007
|
||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash
equivalents
|
$ | 66,224 | $ | 35,360 | ||||
Marketable
securities
|
125,471 | 120,053 | ||||||
Accounts receivable,
principally trade, less allowance of $13,139
and $14,486, respectively
|
430,078 | 408,870 | ||||||
Inventories,
net
|
238,669 | 231,741 | ||||||
Uniforms
and other rental items in
service
|
370,416 | 344,931 | ||||||
Deferred
tax
asset
|
39,410 | — | ||||||
Prepaid
expenses
|
12,068 | 15,781 | ||||||
Total
current
assets
|
1,282,336 | 1,156,736 | ||||||
Property
and equipment, at cost,
net
|
974,575 | 920,243 | ||||||
Goodwill
|
1,315,569 | 1,245,877 | ||||||
Service
contracts,
net
|
152,757 | 171,361 | ||||||
Other
assets,
net
|
83,364 | 76,263 | ||||||
$ | 3,808,601 | $ | 3,570,480 | |||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 94,755 | $ | 64,622 | ||||
Accrued
compensation and related
liabilities
|
50,605 | 62,826 | ||||||
Accrued
liabilities
|
207,925 | 200,686 | ||||||
Income
taxes:
|
||||||||
Current
|
12,887 | 18,584 | ||||||
Deferred
|
— | 52,179 | ||||||
Long-term
debt due within one
year
|
1,070 | 4,141 | ||||||
Total
current
liabilities
|
367,242 | 403,038 | ||||||
Long-term
liabilities:
|
||||||||
Long-term
debt due within one
year
|
942,736 | 877,074 | ||||||
Deferred
income
taxes
|
124,184 | 122,630 | ||||||
Accrued
liabilities
|
120,308 | — | ||||||
Total
long-term
liabilities
|
1,187,228 | 999,704 | ||||||
Shareholders'
equity:
|
||||||||
Preferred
stock, no par value:
100,000
shares authorized, none outstanding
|
— | — | ||||||
Common stock, no par
value:
425,000,000 shares
authorized
2008: 173,083,426
shares issued and 153,691,103 shares
outstanding
2007:
172,874,195 shares issued and 158,676,872 shares
outstanding
|
129,182 | 120,811 | ||||||
Paid-in
capital
|
60,408 | 56,909 | ||||||
Retained
earnings
|
2,784,302 | 2,533,459 | ||||||
Treasury
stock:
2008:
19,392,323 shares
2007:
14,197,323 shares
|
(772,041 | ) | (580,562 | ) | ||||
Other
accumulated comprehensive income (loss):
|
||||||||
Foreign
currency
translation
|
61,206 | 41,815 | ||||||
Unrealized
loss on
derivatives
|
(8,815 | ) | (4,421 | ) | ||||
Unrealized
loss on available-for-sale
securities
|
(111 | ) | (273 | ) | ||||
Total
shareholders'
equity
|
2,254,131 | 2,167,738 | ||||||
$ | 3,808,601 | $ | 3,570,480 |
See
accompanying notes.
36
Consolidated
Statements
of Shareholders’ Equity
|
(In
thousands)
|
Common
Stock
|
Paid-In
Capital
|
Retained
Earnings
|
Other
Accumulated
Comprehensive
Income
(Loss)
|
Total
Shareholders’
Equity
|
|||
Treasury
Stock
|
||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Balance
at June 1, 2005
|
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 translation
|
— | — | — | — | 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
|
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 | ||||||||||||||||||||||
Net
income
|
— | — | — | 335,405 | — | — | — | 335,405 | ||||||||||||||||||||||||
Equity adjustment
for foreign
currency translation
|
— | — | — | — | 19,391 | — | — | 19,391 | ||||||||||||||||||||||||
Change in fair value
of
derivatives,
net of $2,924 of
tax
|
— | — | — | — | (4,394 | ) | — | — | (4,394 | ) | ||||||||||||||||||||||
Change
in fair value of
available-for-sale securities,
net
of $98 of
tax
|
— | — | — | — | 162 | — | — | 162 | ||||||||||||||||||||||||
Comprehensive
income,
net
of tax
|
350,564 | |||||||||||||||||||||||||||||||
FIN 48
adjustment
|
— | — | — | (13,731 | ) | — | — | — | (13,731 | ) | ||||||||||||||||||||||
Dividends
|
— | — | — | (70,831 | ) | — | — | — | (70,831 | ) | ||||||||||||||||||||||
Stock-based
compensation
|
— | — | 7,456 | — | — | — | — | 7,456 | ||||||||||||||||||||||||
Stock options
exercised,
net
of shares surrendered
|
209 | 8,371 | (3,957 | ) | — | — | — | — | 4,414 | |||||||||||||||||||||||
Repurchase of common stock | — | — | — |
—
|
— | (5,195 | ) | (191,479 | ) | (191,479 | ) | |||||||||||||||||||||
Balance
at May 31, 2008
|
173,083 | $ | 129,182 | $ | 60,408 | $ | 2,784,302 | $ | 52,280 | (19,392 | ) | $ | (772,041 | ) | $ | 2,254,131 |
See accompanying notes.
37
Consolidated
Statements
of Cash Flows
Years
Ended May 31,
|
||||||||||||
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 335,405 | $ | 334,538 | $ | 323,382 | ||||||
Adjustments to
reconcile net income to net cash provided by operating activities:
|
||||||||||||
Depreciation
|
148,566 | 135,181 | 127,117 | |||||||||
Amortization
of deferred charges
|
43,337 | 40,745 | 33,536 | |||||||||
Stock-based
compensation
|
7,456 | 4,500 | 4,725 | |||||||||
Deferred income
taxes
|
1,663 | (332 | ) | (52 | ) | |||||||
Change in
current assets and liabilities, net of acquisitions of businesses:
|
||||||||||||
Accounts
receivable
|
(14,939 | ) | (11,460 | ) | (44,154 | ) | ||||||
Inventories
|
(6,100 | ) | (32,090 | ) | 22,033 | |||||||
Uniforms and other
rental items in service
|
(23,854 | ) | (6,968 | ) | (26,683 | ) | ||||||
Prepaid
expenses
|
3,830 | (4,502 | ) | (2,305 | ) | |||||||
Accounts
payable
|
30,567 | (7,654 | ) | 2,329 | ||||||||
Accrued
compensation and related liabilities
|
(12,430 | ) | 12,600 | 11,424 | ||||||||
Accrued liabilities
and other
|
22,201 | 9,981 | (1,905 | ) | ||||||||
Income taxes
payable
|
8,841 | (25,148 | ) | 11,578 | ||||||||
Net
cash provided by operating activities
|
544,543 | 449,391 | 461,025 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(190,333 | ) | (180,824 | ) | (156,632 | ) | ||||||
Proceeds from sale
or redemption of marketable securities
|
45,791 | 118,174 | 87,477 | |||||||||
Purchase of
marketable securities and investments
|
(54,498 | ) | (48,515 | ) | (31,932 | ) | ||||||
Acquisitions of
businesses, net of cash acquired
|
(111,535 | ) | (160,707 | ) | (346,363 | ) | ||||||
Other
|
(400 | ) | (1,836 | ) | 7,404 | |||||||
Net
cash used in investing activities
|
(310,975 | ) | (273,708 | ) | (440,046 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds from
issuance of debt
|
295,000 | 252,460 | 333,500 | |||||||||
Repayment of
debt
|
(232,409 | ) | (169,987 | ) | (7,303 | ) | ||||||
Stock options
exercised
|
8,371 | 10,863 | 14,402 | |||||||||
Dividends
paid
|
(70,831 | ) | (61,996 | ) | (58,823 | ) | ||||||
Repurchase of
common stock
|
(191,479 | ) | (198,949 | ) | (323,409 | ) | ||||||
Other
|
(11,356 | ) | (11,628 | ) | 16,372 | |||||||
Net
cash used in financing activities
|
(202,704 | ) | (179,237 | ) | (25,261 | ) | ||||||
Net
increase (decrease) in cash and cash equivalents
|
30,864 | (3,554 | ) | (4,282 | ) | |||||||
Cash
and cash equivalents at beginning of year
|
35,360 | 38,914 | 43,196 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 66,224 | $ | 35,360 | $ | 38,914 |
See
accompanying notes.
38
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. Cintas is 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
historically classified its businesses into two operating segments, Rentals and
Other Services. The Rentals operating segment reflects the rental and
servicing of uniforms and other garments, mats, mops and shop towels and other
ancillary items. In addition to these rental items, restroom and
hygiene products and services are also provided within this operating
segment. Effective June 1, 2007, this operating segment has been
renamed Rental Uniforms and Ancillary Products.
The Other
Services operating segment historically consisted 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. Effective June 1, 2007, the Other Services operating
segment was separated into three reportable operating segments – Uniform Direct
Sales operating segment, First Aid, Safety and Fire Protection Services
operating segment and Document Management Services operating
segment. This change provides more visibility to these operating
segments as they continue to grow and have a larger impact on Cintas’
consolidated results of operations. The Uniform Direct Sales
operating segment consists of the direct sale of uniforms and related items and
branded promotional products. The First Aid, Safety and Fire
Protection Services operating segment consists of first aid, safety and fire
protection products and services. The Document Management Services
operating segment consists of document shredding and document storage
services.
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).
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. Actual results could differ from those estimates.
Revenue
recognition. Rental revenue, which is recorded in the Rentals
Uniforms and Ancillary Products operating segment, is recognized when services
are performed. Other services revenue, which is recorded in the
Uniform Direct Sales, First Aid, Safety and Fire Protection Services and
Document Management Services operating segments, 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 rental uniforms and ancillary
products. Cost of rental uniforms and ancillary products
consists primarily of production expenses, delivery expenses and the
amortization of in service inventory, including uniforms, mats, shop towels and
other rental items. The Rental Uniforms and Ancillary Products
operating 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. Cost of other services includes inbound
freight charges, purchasing and receiving costs, inspection costs, warehousing
costs and other costs of distribution are included in the cost of other
services.
39
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.
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. The allowance for doubtful accounts 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 Rental Uniforms and Ancillary Products
operating segment and the three other operating 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 18 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 8 to 48
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 an operating segment basis 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,
2008, 2007 or 2006. 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 5 to 10
years.
Accrued
liabilities. Current 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. Long-term liabilities consist primarily of reserves
associated with unrecognized tax benefits, which are described in more detail in
Note 7 entitled Income Taxes.
40
Stock-based
compensation. As required under Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment,
compensation expense is recognized for all share-based payments to employees,
including stock options, in the consolidated statements of income based on the
fair value of the awards that are granted. The fair value of stock options
is estimated at the date of grant using the Black-Scholes option-pricing model.
Measured compensation cost, net of estimated forfeitures, is
recognized on a straight-line basis over the vesting period of the related
share-based compensation award.
See Note
11 entitled Stock-Based Compensation for further information.
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. FAS 133 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. As of June 1, 2007, Cintas adopted FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes – an
interpretation of FASB Statement No. 109 (FAS 109), which clarifies the
accounting for uncertainty in income taxes recognized in the consolidated
financial statements in accordance with FAS 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. It also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As a result
of the implementation of FIN 48, Cintas recorded a decrease to retained earnings
as of June 1, 2007, of $13,731. Cintas’ adoption of FIN 48 is more
fully described in Note 7 entitled Income Taxes.
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS
157), which defines fair value, establishes a framework for measuring fair value
under GAAP and expands disclosure requirements about fair value
measurements. Cintas will adopt FAS 157 in the first quarter of
fiscal 2009. In February 2008, the FASB released a FASB Staff
Position (FSP FAS 157-2, Effective Date of FASB Statement No. 157) which delayed
the effective date of FAS 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The
adoption of FAS 157 for our financial assets and liabilities will not have a
material impact upon adoption.
In
December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(FAS 141(R)). Under FAS 141(R), an entity is required to recognize the
assets acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires
that acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. For Cintas, FAS 141(R)
is effective for acquisitions and adjustments to an acquired entity’s
deferred tax asset and liability balances occurring after May 31, 2009.
Cintas is currently evaluating the future impact and disclosures under FAS
141(R).
41
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:
2008
|
2007
|
|||||||||||||||
Cost
|
Estimated
Fair
Value
|
Cost
|
Estimated
Fair
Value
|
|||||||||||||
Obligations
of state and political subdivisions
|
$ | — | $ | — | $ | 24,480 | $ | 24,415 | ||||||||
U.S.
government agency securities
|
— | — | 12,336 | 12,231 | ||||||||||||
Canadian
treasury securities
|
125,626 | 125,471 | 76,995 | 76,753 | ||||||||||||
Other
debt securities
|
— | — | 6,665 | 6,654 | ||||||||||||
$ | 125,626 | $ | 125,471 | $ | 120,476 | $ | 120,053 |
As of May
31, 2008, all marketable securities are concentrated in Canada and consist
primarily of Canadian federal treasury bills and Canadian federal treasury
bonds. These funds are not expected to be repatriated, but instead
are expected to be invested indefinitely in foreign subsidiaries.
The gross
realized gains on sales of available-for-sale securities totaled $4, $9 and $3
for the years ended May 31, 2008, 2007 and 2006, respectively, and the gross
realized losses totaled $12, $42 and $219, respectively. Net
unrealized losses are $155 and $423 at May 31, 2008 and 2007,
respectively.
Purchases
of marketable securities were $43,750, $30,829 and $25,613 for the years ended
May 31, 2008, 2007 and 2006, respectively.
The cost
and estimated fair value of debt securities at May 31, 2008, by contractual
maturity, are $125,626 and $125,471, respectively. All contractual
maturities are due within one year.
3. Property and
Equipment
2008
|
2007
|
|||||||
Land
|
$ | 94,539 | $ | 79,572 | ||||
Buildings
and
improvements
|
462,799 | 438,680 | ||||||
Equipment
|
1,029,048 | 884,574 | ||||||
Leasehold
improvements
|
16,700 | 13,171 | ||||||
Construction
in
progress
|
104,704 | 99,195 | ||||||
1,707,790 | 1,515,192 | |||||||
Less:
accumulated
depreciation
|
733,215 | 594,949 | ||||||
$ | 974,575 | $ | 920,243 |
Interest
expense is net of capitalized interest of $1,090, $490 and $384 for the years
ended May 31, 2008, 2007 and 2006, respectively.
42
Changes
in the carrying amount of goodwill and service contracts for the years ended May
31, 2008 and 2007, by operating segment, are as follows:
Goodwill
|
Rental
Uniforms
&
Ancillary
Products
|
Uniform
Direct
Sales
|
First
Aid,
Safety
&
Fire
Protection
|
Document
Management
|
Total
|
|||||||||||||||
Balance
as of June 1, 2006
|
$ | 855,135 | $ | 23,862 | $ | 137,917 | $ | 119,261 | $ | 1,136,175 | ||||||||||
Goodwill
acquired
|
7,697 | — | 24,104 | 77,264 | 109,065 | |||||||||||||||
Foreign
currency translation
|
487 | 21 | — | 129 | 637 | |||||||||||||||
Balance
as of May 31, 2007
|
863,319 | 23,883 | 162,021 | 196,654 | 1,245,877 | |||||||||||||||
Goodwill
(adj.) acquired
|
(1,034 | ) | — | 3,523 | 64,808 | 67,297 | ||||||||||||||
Foreign
currency translation
|
1,296 | 73 | — | 1,026 | 2,395 | |||||||||||||||
Balance
as of May 31, 2008
|
$ | 863,581 | $ | 23,956 | $ | 165,544 | $ | 262,488 | $ | 1,315,569 |
Service
Contracts
|
Rental
Uniforms
&
Ancillary
Products
|
Uniform
Direct
Sales
|
First
Aid,
Safety
&
Fire
Protection
|
Document
Management
|
Total
|
|||||||||||||||
Balance
as of June 1, 2006
|
$ | 121,455 | $ | 1,076 | $ | 42,761 | $ | 14,673 | $ | 179,965 | ||||||||||
Service
contracts acquired
|
3,936 | — | 8,147 | 10,550 | 22,633 | |||||||||||||||
Service
contracts amortization
|
(21,759 | ) | (388 | ) | (5,556 | ) | (4,222 | ) | (31,925 | ) | ||||||||||
Foreign
currency translation
|
653 | 11 | — | 24 | 688 | |||||||||||||||
Balance
as of May 31, 2007
|
104,285 | 699 | 45,352 | 21,025 | 171,361 | |||||||||||||||
Service
contracts (adj.) acquired
|
(19 | ) | — | 2,682 | 11,227 | 13,890 | ||||||||||||||
Service
contracts amortization
|
(21,510 | ) | (401 | ) | (6,090 | ) | (6,502 | ) | (34,503 | ) | ||||||||||
Foreign
currency translation
|
1,818 | 30 | — | 161 | 2,009 | |||||||||||||||
Balance
as of May 31, 2008
|
$ | 84,574 | $ | 328 | $ | 41,944 | $ | 25,911 | $ | 152,757 |
Information
regarding Cintas' service contracts and other assets follows:
As
of May 31, 2008
|
||||||||||||
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
||||||||||
Service
contracts
|
$ | 333,543 | $ | 180,786 | $ | 152,757 | ||||||
Noncompete
and consulting agreements
|
$ | 63,894 | $ | 34,625 | $ | 29,269 | ||||||
Investments
|
46,012 | — | 46,012 | |||||||||
Other
|
10,790 | 2,707 | 8,083 | |||||||||
Total
|
$ | 120,696 | $ | 37,332 | $ | 83,364 |
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 |
43
Amortization
expense was $43,337, $40,745 and $33,536 for the years ended May 31, 2008, 2007
and 2006, respectively. Estimated amortization expense, excluding any
future acquisitions, for each of the next five years is $41,532, $38,286,
$34,519, $28,412 and $12,639, respectively.
5.
|
Long-Term
Debt
|
2008
|
2007
|
|||||||
Unsecured
term notes due through 2036 at an average
rate of 6.11%
|
$ | 779,652 | $ | 705,147 | ||||
Unsecured
notes due through 2009 at an average
rate of 2.19%
|
163,005 | 170,866 | ||||||
Industrial
development revenue bonds
|
— | 3,441 | ||||||
Other
|
1,149 | 1,761 | ||||||
943,806 | 881,215 | |||||||
Less:
amounts due within one year
|
1,070 | 4,141 | ||||||
$ | 942,736 | $ | 877,074 |
Long-term debt in the amount of $1,149 is secured by assets with a carrying value of $1,042 at May 31, 2008. Cintas has $74,764 of letters of credit outstanding at May 31, 2008. Maturities of long-term debt during each of the next five years are $1,070, $703, $163,729, $762 and $225,756, respectively.
Interest
paid, net of amount capitalized, was $49,707, $45,805 and $30,714 for the years
ended May 31, 2008, 2007 and 2006, respectively.
Cintas
has a commercial paper program supported by a $600,000 long-term credit
facility. As of May 31, 2008, there was $163,000 of commercial paper
outstanding. Because Cintas’ commercial paper program expires in
fiscal 2011, the $163,000 outstanding balance is classified as long-term debt on
the balance sheet.
During
the third quarter of fiscal 2008, Cintas issued $300,000 of senior notes due
2017. These senior notes bear an interest rate of 6.125%, paid
semi-annually beginning June 1, 2008. The proceeds generated from the
offering were used to reduce borrowings under our commercial paper
program.
Cintas
periodically 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 swaps, lock agreements or forward
starting swaps outstanding as of May 31, 2008.
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 $521, $384 and $290 for the years ended May 31,
2008, 2007 and 2006, 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. 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
44
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 $752,111 as of May 31, 2008. For
fiscal 2008, net cash provided by operating activities was $544,543. Capital
expenditures were $190,333 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 1 to
10 years. The lease agreements provide for increases in rent expense
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 $24,241, $19,887, $15,352, $10,708, $7,326
and $13,714, respectively. Rent expense under operating leases during
the years ended May 31, 2008, 2007 and 2006, was $34,996, $33,268 and $30,136,
respectively.
7.
|
Income
Taxes
|
2008
|
2007
|
2006
|
||||||||||
Income
before income taxes consist of the following
components:
|
||||||||||||
U.S.
operations
|
$ | 476,279 | $ | 488,011 | $ | 479,427 | ||||||
Foreign
operations
|
54,425 | 45,542 | 38,592 | |||||||||
$ | 530,704 | $ | 533,553 | $ | 518,019 |
2008
|
2007
|
2006
|
||||||||||
Income
taxes consist of the following
components:
|
||||||||||||
Current:
|
||||||||||||
Federal
|
$ | 171,927 | $ | 184,363 | $ | 180,697 | ||||||
State and
local
|
17,225 | 16,181 | 15,026 | |||||||||
189,152 | 200,544 | 195,723 | ||||||||||
Deferred
|
6,147 | (1,529 | ) | (1,086 | ) | |||||||
$ | 195,299 | $ | 199,015 | $ | 194,637 |
2008
|
2007
|
2006
|
||||||||||
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
|
$ | 185,746 | $ | 186,744 | $ | 182,635 | ||||||
State
and local income taxes, net of federal
benefit
|
12,832 | 10,602 | 11,917 | |||||||||
Other
|
(3,279 | ) | 1,669 | 85 | ||||||||
$ | 195,299 | $ | 199,015 | $ | 194,637 |
45
The
components of deferred income taxes included on the consolidated balance sheets
are as follows:
2008
|
2007
|
|||||||
Deferred
tax assets:
|
||||||||
Employee
benefits
|
$ | 8,100 | $ | 6,195 | ||||
Allowance for
doubtful
accounts
|
4,589 | 5,100 | ||||||
Inventory
obsolescence
|
8,793 | 9,735 | ||||||
Insurance and
contingencies
|
10,753 | 10,222 | ||||||
Other
|
16,820 | 11,909 | ||||||
49,055 | 43,161 | |||||||
Deferred
tax liabilities:
|
||||||||
In service
inventory
|
8,248 | 88,838 | ||||||
Property
|
66,339 | 69,189 | ||||||
Intangibles
|
51,993 | 45,233 | ||||||
Other
|
1,187 | 1,231 | ||||||
State
taxes
|
6,062 | 13,479 | ||||||
133,829 | 217,970 | |||||||
Net
deferred tax
liability
|
$ | 84,774 | $ | 174,809 |
Income
taxes paid were $180,634, $220,740 and $183,268 for the years ended May 31,
2008, 2007 and 2006, respectively.
Cintas
has undistributed earnings of foreign subsidiaries of approximately $184,551 at
May 31, 2008, for which deferred taxes have not been provided. Such earnings are
considered indefinitely invested in the foreign subsidiaries. If such earnings
were repatriated, additional tax expense may result. The current
calculation of such additional taxes is not practicable.
As
described in Note 1 entitled Significant Accounting Policies, Cintas adopted FIN
48 in fiscal 2008. FIN 48 addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in
the financial statements. Under FIN 48, companies may recognize the
tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN 48 also
provides guidance on derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased
disclosures.
As a
result of the adoption of FIN 48, Cintas recorded a decrease to retained
earnings as of June 1, 2007, and a corresponding increase in long-term accrued
liabilities of $13,731, inclusive of associated interest and
penalties.
As of
June 1, 2007 and May 31, 2008, there was $27,580 and $27,861, respectively, in
total unrecognized tax benefits, which if recognized, would favorably impact
Cintas’ effective tax rate. Cintas recognizes interest accrued
related to unrecognized tax benefits and penalties in income tax expense in the
consolidated statements of income, which is consistent with the recognition of
these items in prior reporting periods. The total amount accrued for
interest and penalties as of June 1, 2007, was $15,173. Cintas
records the tax liability under FIN 48 in both current and long-term accrued
liabilities on the consolidated balance sheets. Portions of the long-term
liability, particularly parts related to in service inventory deferred tax
liabilities, had been recorded in the net deferred tax liability in fiscal
2007. The total gross unrecognized tax benefits as of June 1, 2007,
were $112,658.
In the
normal course of business, Cintas provides for uncertain tax positions and the
related interest, and adjusts its unrecognized tax benefits and accrued interest
accordingly. During fiscal 2008, unrecognized tax benefits related to
continuing operations increased by approximately $2,770 and accrued interest
increased by approximately $487.
46
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
Balance
at June 1, 2007
|
$ | 112,658 | ||
Additions
based on tax positions related to the current year
|
1,554 | |||
Additions
for tax positions of prior years
|
4,465 | |||
Reductions
for tax positions of prior years
|
— | |||
Settlements
|
(87 | ) | ||
Statute
expirations
|
(3,261 | ) | ||
Balance
at May 31, 2008
|
$ | 115,329 |
The
majority of Cintas’ operations are in the United States and
Canada. Cintas is required to file federal income tax returns as well
as state income tax returns in a majority of the domestic states and also in the
Canadian provinces of Quebec, Alberta, British Columbia and
Ontario. At times, Cintas is subject to audits in these
jurisdictions. The audits, by nature, are sometimes complex and can require
several years to resolve. The final resolution of any such tax audit could
result in either a reduction in Cintas’ accruals or an increase in its income
tax provision, either of which could have an impact on the consolidated results
of operations in any given period.
All U.S.
federal income tax returns are closed to audit through fiscal
2004. Cintas is currently in advanced stages of various audits in
certain foreign jurisdictions and certain domestic states. The years under audit
cover fiscal years back to 1999. Based on the resolution of the
various audits, it is reasonably possible that the balance of unrecognized tax
benefits could decrease by $2,852 for the fiscal year ended May 31,
2008.
8.
|
Acquisitions
|
For all
acquisitions accounted for as purchases, the purchase price paid for each has
been allocated to the fair value of the assets acquired and liabilities
assumed. During fiscal 2008, Cintas acquired one Rental Uniforms
& Ancillary Products operating segment business, nine First Aid, Safety and
Fire Protection Services operating segment businesses and twenty Document
Management Services operating segment businesses. During fiscal 2007,
Cintas acquired three Rental Uniforms & Ancillary Products operating segment
businesses, thirteen First Aid, Safety and Fire Protection Services operating
segment businesses and sixteen Document Management Services operating segment
businesses. The following summarizes the aggregate purchase price for
all businesses acquired:
2008
|
2007
|
|||||||
Fair
value of tangible assets
acquired
|
$ | 13,587 | $ | 20,375 | ||||
Fair
value of goodwill acquired
|
67,758 | 109,065 | ||||||
Fair
value of service contracts acquired
|
13,596 | 22,271 | ||||||
Fair
value of other intangibles acquired
|
5,429 | 13,149 | ||||||
Total
fair value of assets acquired
|
100,370 | 164,860 | ||||||
Fair
value of liabilities assumed and incurred
|
(11,165 | ) | 3,288 | |||||
Total
cash paid for acquisitions
|
$ | 111,535 | $ | 161,572 |
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.
9.
|
Defined Contribution
Plans
|
Cintas'
Partners' Plan (the Plan) is a non-contributory profit sharing plan and Employee
Stock Ownership Plan (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 $28,700, $27,900 and $26,500 for the
years ended May 31, 2008, 2007 and 2006, 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 $1,500,
$1,239 and $1,144 for the years ended May 31, 2008, 2007 and 2006,
respectively.
47
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 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:
2008
|
2007
|
2006
|
||||||||||
Numerator:
|
||||||||||||
Net
income
|
$ | 335,405 | $ | 334,538 | $ | 323,382 | ||||||
Denominator:
|
||||||||||||
Denominator
for basic earnings per share – weighted average shares
(000's)
|
155,678 | 159,769 | 167,951 | |||||||||
Effect
of dilutive securities – employee stock options
(000's)
|
252 | 418 | 594 | |||||||||
Denominator
for diluted earnings per share – adjusted weighted average
shares
and
assumed conversions (000's)
|
155,930 | 160,187 | 168,545 | |||||||||
Basic
earnings per
share
|
$ | 2.15 | $ | 2.09 | $ | 1.93 | ||||||
Diluted
earnings per
share
|
$ | 2.15 | $ | 2.09 | $ | 1.92 |
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 $7,456, $4,500 and $5,277 for the years ended May 31, 2008, 2007 and 2006,
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 benefit recognized in the
consolidated income statement for share-based compensation arrangements was
$2,022, $1,413 and $552 for the years ended May 31, 2008, 2007 and 2006,
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 of the Board of Directors, but no stock option may be
exercised later than 10 years after the date of the grant. The option
awards generally have 10-year terms with graded vesting in years 5 through 10
based on continuous service during that period. Cintas recognizes
compensation expense for these options using the straight-line recognition
method over the vesting period.
48
The fair
value of these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following assumptions:
2008
|
2007
|
2006
|
||||||||||
Risk-free
interest
rate
|
4.50% | 4.00% | 4.00% | |||||||||
Dividend
yield
|
.80% | .70% | .50% | |||||||||
Expected volatility of Cintas' common stock | 30% | 35% | 35% | |||||||||
Expected
life of the option in years
|
8.5 | 7.5 | 9.0 |
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 common 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 2008, 2007 and 2006 was $15.89,
$16.01 and $20.95, 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, 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 | ||||||
Granted
|
1,005,200 | 30.99 | ||||||
Cancelled
|
(745,197 | ) | 40.15 | |||||
Exercised
|
(259,839 | ) | 24.07 | |||||
Outstanding May 31, 2008
(2,041,837 shares exercisable)
|
6,648,768 | $ | 39.85 |
The intrinsic value of stock options exercised during fiscal 2008 was $3,671. The total cash received from employees as a result of employee stock option exercises for the years ended May 31, 2008, 2007 and 2006 was $4,430, $5,023 and $7,680, respectively.
The fair
value of stock options vested during fiscal 2008 is $2,069.
The
following table summarizes the information related to stock options outstanding
at May 31, 2008:
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||||||||||||
Range
of
Exercise
Prices
|
Number
Outstanding
|
Average
Remaining
Option
Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||||
$ | 27.85 | – | $ | 39.19 | 1,693,310 | 7.63 | $ | 32.28 | 260,575 | $ | 32.00 | |||||||||||||||
39.29 | – | 41.65 | 1,710,806 | 5.82 | 40.29 | 503,360 | 41.62 | |||||||||||||||||||
41.72 | – | 44.33 | 1,874,302 | 4.59 | 42.28 | 752,452 | 42.39 | |||||||||||||||||||
44.43 | – | 53.19 | 1,370,350 | 5.67 | 45.71 | 525,450 | 47.73 | |||||||||||||||||||
$ | 27.85 | – | $ | 53.19 | 6,648,768 | 5.90 | $ | 39.85 | 2,041,837 | $ | 42.25 |
49
At May 31, 2008, the aggregate intrinsic value of stock options outstanding and exercisable was $25 and $0, respectively.
The
weighted-average remaining contractual term of stock options exercisable is 2.9
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 of the
Board of Directors 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:
Shares
|
Weighted
Average
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 | ||||||
Granted
|
240,086 | 30.05 | ||||||
Cancelled
|
(35,879 | ) | 38.16 | |||||
Vested
|
— | — | ||||||
Outstanding,
unvested grants at May 31, 2008
|
533,631 | $ | 34.01 |
The remaining unrecognized compensation cost related to unvested stock options and restricted stock at May 31, 2008, was approximately $42,970, and the weighted-average period of time over which this cost will be recognized is 3.8 years.
Cintas
reserves shares of common stock to satisfy share option exercises and/or future
restricted stock grants. At May 31, 2008, 12,622,773 shares of common
stock are reserved for future issuance under the 2005 plan.
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
50
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 (Serrano), filed on May 10, 2004, and pending in the United
States District Court, Eastern District of Michigan, Southern
Division. The Serrano plaintiffs allege
that Cintas discriminated against women in hiring into various service sales
representative positions across all divisions of Cintas. 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, Blanca
Nelly Avalos, et al. v.
Cintas Corporation (Avalos), currently pending in the United States
District Court, Eastern District of Michigan, Southern Division. Ms.
Avalos’ claims have been dismissed, but her putative class complaint remains
pending. The Avalos plaintiffs allege 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. 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 (Ramirez), filed on January 20, 2004, in the United States
District Court, Northern District of California, San Francisco
Division. On April 27, 2005, the EEOC intervened in the claims
asserted in Ramirez. On May
11, 2006, the Ramirez
and Avalos African-American, Hispanic and female failure to hire
into service sales representative positions claims and the EEOC's intervention
were consolidated for pretrial purposes with the Serrano case and transferred to the United
States District Court for the Eastern District of Michigan, Southern
Division. The consolidated case is known as Mirna E. Serrano/Blanca Nelly
Avalos, et al. v. Cintas Corporation (Serrano/Avalos), 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, 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. The Grindle case is stayed
pending the class certification proceedings in Serrano. 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 (Houston), was filed on August 3, 2005, in the United States
District Court for the Northern District of California on behalf of
African-American managers alleging racial discrimination. On November
22, 2005, the court entered an order requiring the named plaintiffs in the Houston lawsuit to arbitrate
all of their claims for monetary damages.
On July
17, 2008, Manville Personal Injury Settlement Trust filed a purported
shareholder derivative lawsuit in the Court of Common Pleas, Hamilton County,
Ohio, captioned Manville Personal Injury
Settlement Trust v. Richard T. Farmer, et. al., A0806822 against certain
directors and officers, alleging that they breached their fiduciary duties to
the Company by consciously failing to cause Cintas to comply with worker safety
and employment-related laws and regulations. The Company is named as
a nominal defendant in the case. The complaint contends that, as a
consequence of such alleged breach of duty, the Company suffered substantial
monetary losses and other injuries and seeks, among other things, an award of
compensatory damages, other non-monetary remedies and
expenses.
The
litigation discussed above, if decided or settled adversely to Cintas, may,
individually or in the aggregate, result in liability material to Cintas’
financial condition or results of operations and could increase costs of
operations on an on-going basis. Any estimated liability relating to
these proceedings is not determinable at this time. 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
interest of Cintas’ shareholders.
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 $17 million in fiscal 2008 and approximately $16
million in fiscal 2007. Capital expenditures to limit or monitor hazardous
substances were approximately $4 million in fiscal 2008 and approximately $2
million in fiscal 2007. 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.
51
13. Operating Segment
Information
Cintas
historically classified its businesses into two operating segments, Rentals and
Other Services. The Rentals operating segment reflects the rental and
servicing of uniforms and other garments, mats, mops and shop
towels. In addition to these rental items, restroom and hygiene
products and services are also provided within this operating
segment. Effective June 1, 2007, this operating segment has been
renamed Rental Uniforms and Ancillary Products.
The Other
Services operating segment historically consisted 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. Effective June 1, 2007, the Other Services operating
segment was separated into three reportable operating segments – Uniform Direct
Sales operating segment, First Aid, Safety and Fire Protection Services
operating segment and Document Management Services operating
segment. This change provides more visibility to these operating
segments as they continue to grow and have a larger impact on Cintas’
consolidated results. The Uniform Direct Sales operating segment
consists of the direct sale of uniforms and related items and branded
promotional products. The First Aid, Safety and Fire Protection
Services operating segment consists of first aid, safety and fire protection
products and services. The Document Management Services operating
segment consists of document shredding and document storage
services.
Cintas
evaluates the performance of each operating segment based on several factors of
which the primary financial measures are operating segment revenue and income
before income taxes. The accounting policies of the operating
segments are the same as those described in Note 1 entitled Significant
Accounting Policies. Information as to the operations of Cintas’
operating segments is set forth below. The information for the years
ended May 31, 2007 and 2006, have been restated to reflect the changes in the
reportable operating segments described above.
52
Rental
Uniforms
&
Ancillary
Products
|
Uniform
Direct
Sales
|
First
Aid,
Safety
&
Fire
Protection
|
Document
Management
|
Corporate
|
Total
|
|||||||||||||||||||
May
31, 2008
|
||||||||||||||||||||||||
Revenue
|
$ | 2,834,568 | $ | 517,490 | $ | 403,552 | $ | 182,290 | $ | — | $ | 3,937,900 | ||||||||||||
Gross
margin
|
$ | 1,252,951 | $ | 168,210 | $ | 160,823 | $ | 99,616 | $ | — | $ | 1,681,600 | ||||||||||||
Selling
and admin. expenses
|
801,691 | 103,444 | 125,185 | 73,825 | — | 1,104,145 | ||||||||||||||||||
Interest
income
|
— | — | — | — | (6,072 | ) | (6,072 | ) | ||||||||||||||||
Interest
expense
|
— | — | — | — | 52,823 | 52,823 | ||||||||||||||||||
Income
before income taxes
|
$ | 451,260 | $ | 64,766 | $ | 35,638 | $ | 25,791 | $ | (46,751 | ) | $ | 530,704 | |||||||||||
Depreciation
and amortization
|
$ | 139,781 | $ | 7,072 | $ | 17,483 | $ | 27,567 | $ | — | $ | 191,903 | ||||||||||||
Capital
expenditures
|
$ | 140,838 | $ | 6,454 | $ | 12,043 | $ | 30,998 | $ | — | $ | 190,333 | ||||||||||||
Total
assets
|
$ | 2,620,138 | $ | 205,638 | $ | 345,479 | $ | 445,651 | $ | 191,695 | $ | 3,808,601 | ||||||||||||
May
31, 2007
|
||||||||||||||||||||||||
Revenue
|
$ | 2,734,629 | $ | 501,443 | $ | 362,417 | $ | 108,411 | $ | — | $ | 3,706,900 | ||||||||||||
Gross
margin
|
$ | 1,219,444 | $ | 160,676 | $ | 144,439 | $ | 56,796 | $ | — | $ | 1,581,355 | ||||||||||||
Selling
and admin. expenses
|
757,058 | 97,361 | 106,171 | 49,592 | (6,224 | ) | 1,003,958 | |||||||||||||||||
Interest
income
|
— | — | — | — | (6,480 | ) | (6,480 | ) | ||||||||||||||||
Interest
expense
|
— | — | — | — | 50,324 | 50,324 | ||||||||||||||||||
Income
before income taxes
|
$ | 462,386 | $ | 63,315 | $ | 38,268 | $ | 7,204 | $ | (37,620 | ) | $ | 533,553 | |||||||||||
Depreciation
and amortization
|
$ | 135,207 | $ | 6,548 | $ | 14,943 | $ | 19,228 | $ | — | $ | 175,926 | ||||||||||||
Capital
expenditures
|
$ | 132,857 | $ | 7,955 | $ | 11,384 | $ | 28,628 | $ | — | $ | 180,824 | ||||||||||||
Total
assets
|
$ | 2,567,070 | $ | 183,373 | $ | 330,735 | $ | 333,889 | $ | 155,413 | $ | 3,570,480 | ||||||||||||
May
31, 2006
|
||||||||||||||||||||||||
Revenue
|
$ | 2,568,776 | $ | 484,934 | $ | 285,348 | $ | 64,550 | $ | — | $ | 3,403,608 | ||||||||||||
Gross
margin
|
$ | 1,161,947 | $ | 145,837 | $ | 113,142 | $ | 33,866 | $ | — | $ | 1,454,792 | ||||||||||||
Selling
and admin. expenses
|
693,579 | 104,672 | 82,259 | 31,240 | — | 911,750 | ||||||||||||||||||
Interest
income
|
— | — | — | — | (6,759 | ) | (6,759 | ) | ||||||||||||||||
Interest
expense
|
— | — | — | — | 31,782 | 31,782 | ||||||||||||||||||
Income
before income taxes
|
$ | 468,368 | $ | 41,165 | $ | 30,883 | $ | 2,626 | $ | (25,023 | ) | $ | 518,019 | |||||||||||
Depreciation
and amortization
|
$ | 130,327 | $ | 6,396 | $ | 11,383 | $ | 12,547 | $ | — | $ | 160,653 | ||||||||||||
Capital
expenditures
|
$ | 125,290 | $ | 8,163 | $ | 11,272 | $ | 11,907 | $ | — | $ | 156,632 | ||||||||||||
Total
assets
|
$ | 2,530,685 | $ | 162,456 | $ | 285,378 | $ | 205,265 | $ | 241,453 | $ | 3,425,237 |
53
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, 2008 and 2007:
May
31, 2008
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
Revenue
|
$ | 969,128 | $ | 983,865 | $ | 975,952 | $ | 1,008,955 | ||||||||
Gross
margin
|
$ | 417,372 | $ | 420,568 | $ | 411,225 | $ | 432,435 | ||||||||
Net
income
|
$ | 81,063 | $ | 82,853 | $ | 81,828 | $ | 89,661 | ||||||||
Basic
earnings per share
|
$ | .51 | $ | .53 | $ | .53 | $ | .58 | ||||||||
Diluted
earnings per share
|
$ | .51 | $ | .53 | $ | .53 | $ | .58 | ||||||||
Weighted
average number of shares outstanding (000's)
|
158,771 | 156,563 | 153,679 | 153,686 |
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 |
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 $775,000 of
long-term notes, which are unconditionally guaranteed, jointly and severally, by
Cintas Corporation 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 consolidated
financial statements of Cintas and notes thereto of which this note is an
integral part.
Effective
June 1, 2007, Cintas reorganized its legal structure to provide better alignment
with the organizational structure of Cintas. The impact of this
change is that certain subsidiary guarantor locations and their balances have
moved into Corp. 2 and certain Corp. 2 locations are now subsidiary
guarantors. The effect of this change is shown in the column entitled
“Effect of Legal Restructure” on the May 31, 2007 consolidated balance sheet as
shown below.
Condensed
consolidating financial statements for Cintas, Corp. 2, the subsidiary
guarantors and non-guarantors are presented on the following
pages:
54
Condensed
Consolidating Income Statement
Year Ended May 31,
2008
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation
Consolidated
|
|||||||||||||||||||
Revenue:
|
|||||||||||||||||||||||||
Rental uniforms and ancillary
products
|
$ | — | $ | 2,055,690 | $ | 578,426 | $ | 201,563 | $ | (1,111 | ) | $ | 2,834,568 | ||||||||||||
Other services
|
— | 1,418,410 | 536,881 | 67,212 | (919,171 | ) | 1,103,332 | ||||||||||||||||||
Equity in net income of
affiliates
|
335,405 | — | — | — | (335,405 | ) | — | ||||||||||||||||||
335,405 | 3,474,100 | 1,115,307 | 268,775 | (1,255,687 | ) | 3,937,900 | |||||||||||||||||||
Costs
and expenses (income):
|
|||||||||||||||||||||||||
Cost of rental uniforms and
ancillary products
|
— | 1,259,752 | 372,225 | 118,443 | (168,802 | ) | 1,581,618 | ||||||||||||||||||
Cost of other
services
|
— | 928,597 | 456,758 | 41,992 | (752,665 | ) | 674,682 | ||||||||||||||||||
Selling and administrative
expenses
|
— | 1,078,047 | (27,702 | ) | 58,176 | (4,376 | ) | 1,104,145 | |||||||||||||||||
Operating
income
|
335,405 | 207,704 | 314,026 | 50,164 | (329,844 | ) | 577,455 | ||||||||||||||||||
Interest income
|
— | — | (1,450 | ) | (4,622 | ) | — | (6,072 | ) | ||||||||||||||||
Interest expense
(income)
|
— | 54,144 | (7,106 | ) | 5,785 | — | 52,823 | ||||||||||||||||||
Income
before income taxes
|
335,405 | 153,560 | 322,582 | 49,001 | (329,844 | ) | 530,704 | ||||||||||||||||||
Income
taxes
|
— | 57,504 | 120,798 | 16,997 | — | 195,299 | |||||||||||||||||||
Net
income
|
$ | 335,405 | $ | 96,056 | $ | 201,784 | $ | 32,004 | $ | (329,844 | ) | $ | 335,405 |
55
Condensed Consolidating Income Statement
Year
Ended May 31, 2007
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation
Consolidated
|
||||||||||||||||||
Revenue:
|
||||||||||||||||||||||||
Rental uniforms and ancillary
products
|
$ | — | $ | 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 rental uniforms and
ancillary poducts
|
— | 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 | |||||||||||||||||
Operating
income
|
334,538 | 189,399 | 342,686 | 42,885 | (332,111 | ) | 577,397 | |||||||||||||||||
Interest income
|
— | (2,628 | ) | (528 | ) | (3,324 | ) | — | (6,480 | ) | ||||||||||||||
Interest expense
(income)
|
— | 50,981 | (6,307 | ) | 5,650 | — | 50,324 | |||||||||||||||||
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 |
56
Condensed Consolidating Income Statement
Year
Ended May 31, 2006
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation
Consolidated
|
||||||||||||||||||
Revenue:
|
||||||||||||||||||||||||
Rental uniforms and ancillary
products
|
$ | — | $ | 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 rental uniforms and
ancillary products
|
— | 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 | ||||||||||||||||||
Operating
income
|
323,382 | 171,162 | 323,915 | 38,179 | (313,596 | ) | 543,042 | |||||||||||||||||
Interest income
|
— | (4,721 | ) | (366 | ) | (1,672 | ) | — | (6,759 | ) | ||||||||||||||
Interest expense
(income)
|
— | 32,323 | (4,864 | ) | 4,323 | — | 31,782 | |||||||||||||||||
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 |
57
Condensed Consolidating Balance Sheet
As
of May 31, 2008
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation
Consolidated
|
||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||||||
Cash and cash
equivalents
|
$ | — | $ | 36,627 | $ | 7,851 | $ | 21,746 | $ | — | $ | 66,224 | ||||||||||||
Marketable
securities
|
— | — | — | 125,471 | — | 125,471 | ||||||||||||||||||
Accounts receivable,
net
|
— | 312,424 | 119,592 | 29,329 | (31,267 | ) | 430,078 | |||||||||||||||||
Inventories,
net
|
— | 218,109 | 18,349 | 8,928 | (6,717 | ) | 238,669 | |||||||||||||||||
Uniforms and other rental items
in service
|
— | 288,097 | 85,753 | 24,319 | (27,753 | ) | 370,416 | |||||||||||||||||
Deferred tax
asset
|
— | — | 41,664 | (2,254 | ) | — | 39,410 | |||||||||||||||||
Prepaid
expenses
|
— | 5,038 | 5,876 | 1,154 | — | 12,068 | ||||||||||||||||||
Total
current assets
|
— | 860,295 | 279,085 | 208,693 | (65,737 | ) | 1,282,336 | |||||||||||||||||
Property
and equipment, at cost, net
|
— | 675,559 | 236,519 | 62,497 | — | 974,575 | ||||||||||||||||||
Goodwill
|
— | — | 1,279,819 | 35,750 | — | 1,315,569 | ||||||||||||||||||
Service
contracts, net
|
— | 145,115 | 2,612 | 5,030 | — | 152,757 | ||||||||||||||||||
Other
assets, net
|
1,736,604 | 1,601,661 | 1,758,268 | 369,232 | (5,382,401 | ) | 83,364 | |||||||||||||||||
$ | 1,736,604 | $ | 3,282,630 | $ | 3,556,303 | $ | 681,202 | $ | (5,448,138 | ) | $ | 3,808,601 | ||||||||||||
Liabilities
and Shareholders' Equity
|
||||||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||||||
Accounts
payable
|
$ | (465,247 | ) | $ | 289,695 | $ | 255,399 | $ | (3,668 | ) | $ | 18,576 | $ | 94,755 | ||||||||||
Accrued compensation and
related liabilities
|
— | 29,869 | 18,210 | 2,526 | — | 50,605 | ||||||||||||||||||
Accrued
liabilities
|
— | 54,113 | 146,669 | 8,063 | (920 | ) | 207,925 | |||||||||||||||||
Current income
taxes
|
— | (75 | ) | 12,686 | 276 | — | 12,887 | |||||||||||||||||
Long-term debt due within one
year
|
— | 698 | 574 | — | (202 | ) | 1,070 | |||||||||||||||||
Total
current liabilities
|
(465,247 | ) | 374,300 | 433,538 | 7,197 | 17,454 | 367,242 | |||||||||||||||||
Long-term
liabilities:
|
||||||||||||||||||||||||
Long-term debt due after one
year
|
— | 952,595 | 893 | 27,213 | (37,965 | ) | 942,736 | |||||||||||||||||
Deferred income
taxes
|
— | — | 118,479 | 5,705 | — | 124,184 | ||||||||||||||||||
Accrued
liabilities
|
— | — | 120,308 | — | — | 120,308 | ||||||||||||||||||
Total
long-term liabilities
|
— | 952,595 | 239,680 | 32,918 | (37,965 | ) | 1,187,228 | |||||||||||||||||
Total
shareholders' equity
|
2,201,851 | 1,955,735 | 2,883,085 | 641,087 | (5,427,627 | ) | 2,254,131 | |||||||||||||||||
$ | 1,736,604 | $ | 3,282,630 | $ | 3,556,303 | $ | 681,202 | $ | (5,448,138 | ) | $ | 3,808,601 |
58
Condensed Consolidating Balance Sheet
As
of May 31, 2007
|
Cintas
Corporation
|
Corp.
2
|
Effect
of Legal Restructure*
|
Subsidiary
Guarantors
|
Non-Guarantors
|
Eliminations
|
Cintas
Corporation
Consolidated
|
|||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||||||||||
Cash and cash
equivalents
|
$ | — | $ | 1,327 | $ | 32,622 | $ | (24,835 | ) | $ | 26,246 | $ | — | $ | 35,360 | |||||||||||||
Marketable
securities
|
— | 36,664 | (36,664 | ) | 36,664 | 83,389 | — | 120,053 | ||||||||||||||||||||
Accounts receivable,
net
|
— | 271,868 | 26,974 | 109,375 | 24,252 | (23,599 | ) | 408,870 | ||||||||||||||||||||
Inventories,
net
|
— | 204,164 | 4,032 | 23,350 | 7,775 | (7,580 | ) | 231,741 | ||||||||||||||||||||
Uniforms and other rental
items
in
service
|
— | 273,246 | 33 | 82,621 | 21,482 | (32,451 | ) | 344,931 | ||||||||||||||||||||
Prepaid
expenses
|
— | 11,486 | (6,115 | ) | 9,506 | 904 | — | 15,781 | ||||||||||||||||||||
Total
current assets
|
— | 798,755 | 20,882 | 236,681 | 164,048 | (63,630 | ) | 1,156,736 | ||||||||||||||||||||
Property
and equipment, at cost,
net
|
— | 619,691 | 25,787 | 218,903 | 55,862 | — | 920,243 | |||||||||||||||||||||
Goodwill
|
— | 347,516 | (347,516 | ) | 1,223,896 | 21,981 | — | 1,245,877 | ||||||||||||||||||||
Service
contracts, net
|
— | 102,574 | 60,387 | 3,724 | 4,676 | — | 171,361 | |||||||||||||||||||||
Other
assets, net
|
1,665,370 | 72,191 | 10,721 | 1,363,667 | 194,142 | (3,229,828 | ) | 76,263 | ||||||||||||||||||||
$ | 1,665,370 | $ | 1,940,727 | $ | (229,739 | ) | $ | 3,046,871 | $ | 440,709 | $ | (3,293,458 | ) | $ | 3,570,480 | |||||||||||||
Liabilities
and Shareholders' Equity
|
||||||||||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||||||||||
Accounts
payable
|
$ | (465,247 | ) | $ | (423,711 | ) | $ | (1,387,144 | ) | $ | 2,312,352 | $ | 1,926 | $ | 26,446 | $ | 64,622 | |||||||||||
Accrued compensation
and
related
liabilities
|
— | 42,152 | 5,478 | 12,189 | 3,007 | — | 62,826 | |||||||||||||||||||||
Accrued
liabilities
|
— | 196,158 | (151,805 | ) | 150,790 | 6,477 | (934 | ) | 200,686 | |||||||||||||||||||
Current income
taxes
|
— | 586 | (23 | ) | 16,206 | 1,815 | — | 18,584 | ||||||||||||||||||||
Deferred income
taxes
|
— | — | — | 50,237 | 1,942 | — | 52,179 | |||||||||||||||||||||
Long-term debt due within
one
year
|
— | 3,228 | 222,586 | (221,486 | ) | — | (187 | ) | 4,141 | |||||||||||||||||||
Total
current liabilities
|
(465,247 | ) | (181,587 | ) | (1,310,908 | ) | 2,320,288 | 15,167 | 25,325 | 403,038 | ||||||||||||||||||
Long-term
debt due after one year
|
— | 882,921 | (221,352 | ) | 159,255 | 92,448 | (36,198 | ) | 877,074 | |||||||||||||||||||
Deferred
income taxes
|
— | — | — | 117,485 | 5,145 | — | 122,630 | |||||||||||||||||||||
Total
shareholders' equity
|
2,130,617 | 1,239,393 | 1,302,521 | 449,843 | 327,949 | (3,282,585 | ) | 2,167,738 | ||||||||||||||||||||
$ | 1,665,370 | $ | 1,940,727 | $ | (229,739 | ) | $ | 3,046,871 | $ | 440,709 | $ | (3,293,458 | ) | $ | 3,570,480 |
* The
amounts in this column represent the net transfer of balances between subsidiary
guarantors and Corp. 2 caused by the legal restructure as described
above. The subsidiary guarantor column has been changed to reflect
the new legal structure as of June 1, 2007. The combination of the
Corp. 2 amounts and this column represents the restructured Corp. 2 as of June
1, 2007.
59
Condensed
Consolidating Statement of Cash Flows
Year
Ended May 31, 2008
|
Cintas
Corporation
|
Corp.
2
|
Subsidiary
Guarantors
|
Non-
Guarantors
|
Eliminations
|
Cintas
Corporation
Consolidated
|
||||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||||||
Net
income
|
$ | 335,405 | $ | 96,056 | $ | 201,784 | $ | 32,004 | $ | (329,844 | ) | $ | 335,405 | |||||||||||
Adjustments to
reconcile net
income to
net cash provided by
(used
in) operating
activities:
|
||||||||||||||||||||||||
Depreciation
|
— | 97,251 | 42,730 | 8,585 | — | 148,566 | ||||||||||||||||||
Amortization of deferred
charges
|
— | 39,762 | 1,303 | 2,272 | — | 43,337 | ||||||||||||||||||
Stock-based compensation
|
7,456 | — | — | — | — | 7,456 | ||||||||||||||||||
Deferred income taxes
|
— | — | 1,380 | 283 | — | 1,663 | ||||||||||||||||||
Changes
in current assets and
liabilities,
net of acquisitions
of
businesses:
|
||||||||||||||||||||||||
Accounts
receivable
|
— | (9,775 | ) | (10,217 | ) | (2,615 | ) | 7,668 | (14,939 | ) | ||||||||||||||
Inventories
|
— | (9,703 | ) | 5,053 | (587 | ) | (863 | ) | (6,100 | ) | ||||||||||||||
Uniforms and other
rental
items in
service
|
— | (14,818 | ) | (3,183 | ) | (1,155 | ) | (4,698 | ) | (23,854 | ) | |||||||||||||
Prepaid
expenses
|
— | 325 | 3,630 | (125 | ) | — | 3,830 | |||||||||||||||||
Accounts
payable
|
— | 2,160,426 | (2,139,010 | ) | 17,021 | (7,870 | ) | 30,567 | ||||||||||||||||
Accrued compensation
and
related
liabilities
|
— | (17,761 | ) | 6,021 | (690 | ) | — | (12,430 | ) | |||||||||||||||
Accrued liabilities and
other
|
— | 20,634 | (752 | ) | 2,305 | 14 | 22,201 | |||||||||||||||||
Income taxes
payable
|
— | (638 | ) | 11,122 | (1,643 | ) | — | 8,841 | ||||||||||||||||
Net
cash provided by (used in)
operating
activities
|
342,861 | 2,361,759 | (1,880,139 | ) | 55,655 | (335,593 | ) | 544,543 | ||||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||||||
Capital
expenditures
|
— | (121,962 | ) | (60,818 | ) | (7,553 | ) | — | (190,333 | ) | ||||||||||||||
Proceeds from sale
or redemption of
marketable
securities
|
— | — | 37,663 | 8,128 | — | 45,791 | ||||||||||||||||||
Purchase of
marketable securities
and
investments
|
— | (1,523,625 | ) | (377,963 | ) | (42,921 | ) | 1,890,011 | (54,498 | ) | ||||||||||||||
Acquisitions of
businesses, net of
cash
acquired
|
— | (93,773 | ) | (41 | ) | (17,721 | ) | — | (111,535 | ) | ||||||||||||||
Other
|
(84,965 | ) | (678,313 | ) | 2,315,520 | (6 | ) | (1,552,636 | ) | (400 | ) | |||||||||||||
Net
cash (used in) provided by
investing
activities
|
(84,965 | ) | (2,417,673 | ) | 1,914,361 | (60,073 | ) | 337,375 | (310,975 | ) | ||||||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||||||
Proceeds from
issuance of debt
|
— | 295,000 | — | — | — | 295,000 | ||||||||||||||||||
Repayment of
debt
|
— | (229,090 | ) | (1,537 | ) | — | (1,782 | ) | (232,409 | ) | ||||||||||||||
Stock options
exercised
|
8,371 | — | — | — | — | 8,371 | ||||||||||||||||||
Dividends
paid
|
(70,831 | ) | — | — | — | — | (70,831 | ) | ||||||||||||||||
Repurchase of
common stock
|
(191,479 | ) | — | — | — | — | (191,479 | ) | ||||||||||||||||
Other
|
(3,957 | ) | (7,318 | ) | — | (81 | ) | — | (11,356 | ) | ||||||||||||||
Net
cash (used in) provided by financing
activities
|
(257,896 | ) | 58,592 | (1,537 | ) | (81 | ) | (1,782 | ) | (202,704 | ) | |||||||||||||
Net
increase (decrease) in cash and cash
equivalents
|
— | 2,678 | 32,685 | (4,499 | ) | — | 30,864 | |||||||||||||||||
Cash
and cash equivalents at beginning of
period
|
— | 33,949 | (24,834 | ) | 26,245 | — | 35,360 | |||||||||||||||||
Cash
and cash equivalents at end of period
|
$ | — | $ | 36,627 | $ | 7,851 | $ | 21,746 | $ | — | $ | 66,224 |
60
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 businesses:
|
||||||||||||||||||||||||
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
|
— | 5,429 | 3,859 | 678 | 15 | 9,981 | ||||||||||||||||||
Income taxes
payable
|
— | (3,495 | ) | (21,173 | ) | (480 | ) | — | (25,148 | ) | ||||||||||||||
Net
cash provided by (used in)
operating
activities
|
339,038 | (53,481 | ) | 450,145 | 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
|
(82,809 | ) | 49,477 | (292,970 | ) | 325 | 324,141 | (1,836 | ) | |||||||||||||||
Net
cash (used in) provided by
investing
activities
|
(82,809 | ) | (30,013 | ) | (453,114 | ) | (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 | ||||||||||||||||||
Dividends paid
|
(61,996 | ) | — | — | — | — | (61,996 | ) | ||||||||||||||||
Repurchase of common
stock
|
(198,949 | ) | — | — | — | — | (198,949 | ) | ||||||||||||||||
Other
|
(6,147 | ) | (5,591 | ) | — | 110 | — | (11,628 | ) | |||||||||||||||
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 |
61
Condensed
Consolidating Statement of Cash Flows
Year
Ended May 31, 2006
|
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 | ) | ||||||||||||
Income taxes
payable
|
— | 4,721 | 5,871 | 957 | 29 | 11,578 | ||||||||||||||
Net
cash provided by (used in)
operating
activities
|
328,107 | (90,854 | ) | 540,374 | 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
|
44,523 | 11,108 | (346,339 | ) | 3,671 | 294,441 | 7,404 | |||||||||||||
Net
cash provided by (used in)
investing
activities
|
44,523 | (240,140 | ) | (535,411 | ) | (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 | ||||||||||||||
Dividends
paid
|
(58,823 | ) | — | — | — | — | (58,823 | ) | ||||||||||||
Repurchase of
common stock
|
(323,409 | ) | — | — | — | — | (323,409 | ) | ||||||||||||
Other
|
(4,800 | ) | 290 | — | 20,882 | — | 16,372 | |||||||||||||
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 |
62
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,
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,
2008. Based on such evaluation, Cintas’ management, including Cintas’
Chief Executive Officer, Chief Financial Officer, General Counsel and
Controllers, have concluded that Cintas’ disclosure controls and procedures were
effective as of May 31, 2008, 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, 2008, 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 2008 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:
63
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
|
6,648,768
|
$39.85
|
12,622,773
|
|||
Equity
compensation plans not approved by shareholders
|
—
|
—
|
—
|
|||
Total
|
6,648,768
|
$39.85
|
12,622,773
|
(1)
Excludes 533,631 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,
2008.
|
|
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
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3.1
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Restated
Articles of Incorporation, as amended (Incorporated by reference to
Exhibit 4.1 to Cintas' Form S-3 Registration Statement filed on December
3, 2007.)
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3.2
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Amended
and Restated By-laws (Incorporated by reference to Cintas’ Form 8-K dated
March 8, 2007.)
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4.1
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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.)
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64
4.2
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Form
of 5-1/8% Senior Note due 2007 (Incorporated by reference to Cintas’ Form
10-Q for the quarter ended February 28, 2005.)
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4.3
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Form
of 6% Senior Note due 2012 (Incorporated by reference to Cintas’ Form 10-Q
for the quarter ended February 28, 2005.)
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4.4
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Form
of 6.15% Senior Note due 2036 (Incorporated by reference to Cintas’ Form
8-K dated August 17, 2006.)
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10.1*
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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.)
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10.2*
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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.)
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10.10*
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1999
Cintas Corporation Stock Option Plan (Incorporated by reference to Cintas’
Form 10-Q for the quarter ended November 30, 2000.)
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10.11*
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Directors’
Deferred Compensation Plan (Incorporated by reference to Cintas’ Form 10-Q
for the quarter ended November 30, 2001.)
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10.16*
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Amended
and Restated 2003 Directors’ Stock Option Plan (Incorporated by reference
to Cintas’ Form 10-K dated May 31, 2004.)
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10.17*
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Form
of agreement signed by Officers, General/Branch Managers, Professionals
and Key Managers, including Executive Officers (Incorporated by reference
to Cintas’ Form 10-Q for the quarter ended February 28,
2005.)
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10.18*
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President
and CEO Executive Compensation Plan (Incorporated by reference to Cintas’
Form 10-K dated May 31, 2005.)
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10.19*
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2006
Executive Incentive Plan (Incorporated by reference to Cintas’ Form 10-K
dated May 31, 2005.)
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10.20*
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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.)
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10.21*
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Criteria
for Performance Evaluation of the President and CEO (Incorporated by
reference to Cintas’ Form 10-K dated May 31, 2006.)
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10.22*
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2007
Executive Incentive Plan (Incorporated by reference to Cintas’ Form 10-K
dated May 31, 2006.)
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14
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Code
of Ethics (Incorporated by reference to Cintas’ Form 10-K dated May 31,
2004.)
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21**
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Subsidiaries
of the Registrant
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23**
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Consent
of Independent Registered Public Accounting Firm
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65
31.1**
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Certification
of Principal Executive Officer, Pursuant to Rule 13a – 14(a) of the
Securities Exchange Act of 1934
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31.2**
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Certification
of Principal Financial Officer, Pursuant to Rule 13a – 14(a) of the
Securities Exchange Act of 1934
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32.1**
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Certification
of Chief Executive Officer, Pursuant to 18
U.S.C. § 1350
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32.2**
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Certification
of Chief Financial Officer, Pursuant to 18
U.S.C. § 1350
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*
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Management
compensatory contracts
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**
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Filed
herewith
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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.
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66
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, 2008
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
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Capacity
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Date
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||
/s/
Richard T.
Farmer
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Chairman
of the Board of Directors
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July
30, 2008
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||
Richard
T. Farmer
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||||
/s/
Robert J.
Kohlhepp
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Vice
Chairman of the Board of Directors
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July
30, 2008
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||
Robert
J. Kohlhepp
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||||
/s/
Scott D.
Farmer
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Chief
Executive Officer, President and Director
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July
30, 2008
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||
Scott
D. Farmer
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||||
/s/
Paul R.
Carter
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Director
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July
30, 2008
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||
Paul
R. Carter
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||||
/s/ Ronald W.
Tysoe
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Director
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July
30, 2008
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||
Ronald
W. Tysoe
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||||
/s/
David C. Phillips
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Director
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July
30, 2008
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||
David
C. Phillips
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||||
/s/
William C.
Gale
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Senior
Vice President and Chief Financial Officer
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July
30, 2008
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||
William
C. Gale
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(Principal
Financial and Accounting Officer)
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67
Cintas
Corporation
Schedule
II - Valuation and Qualifying Accounts and Reserves
Additions
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||||||||||||||||||||
(In
thousands)
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Balance
at Beginning of Year
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(1)
Charged
to Costs and Expenses
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(2)
Charged
to Other Accounts
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(3)
Deductions
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Balance
at
End
of
Year
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|||||||||||||||
Allowance for Doubtful
Accounts
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||||||||||||||||||||
May
31, 2006
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$ | 9,891 | $ | 8,598 | $ | 2,498 | $ | 5,468 | $ | 15,519 | ||||||||||
May 31,
2007
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$ | 15,519 | $ | 3,325 | $ | 341 | $ | 4,699 | $ | 14,486 | ||||||||||
May 31, 2008
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$ | 14,486 | $ | 4,530 | $ | 127 | $ | 6,004 | $ | 13,139 | ||||||||||
Reserve for Obsolete
Inventory
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||||||||||||||||||||
May
31, 2006
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$ | 25,288 | $ | 4,518 | $ | 3,213 | $ | 8,572 | $ | 24,447 | ||||||||||
May
31, 2007
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$ | 24,447 | $ | 2,559 | $ | 1,084 | $ | 5,184 | $ | 22,906 | ||||||||||
May 31, 2008
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$ | 22,906 | $ | 1,431 | $ | 751 | $ | 4,428 | $ | 20,660 |
(1)
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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.
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(2)
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Represents
a change in the appropriate balance sheet reserve due to acquisitions
during the respective period.
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(3)
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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.
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68