CINTAS CORP - Quarter Report: 2009 November (Form 10-Q)

Table of Contents

 

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

( X )             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                                                      SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 30, 2009

 

OR

 

(    )        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                                                      SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                            to                                           

 

Commission file number 0-11399

 

CINTAS CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

6800 CINTAS BOULEVARD

P.O. BOX 625737

CINCINNATI, OHIO 45262-5737

(Address of principal executive offices)

(Zip Code)

 

(513) 459-1200

(Registrant’s telephone number, including area code)

 

Indicate by 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   Ö   No ___

 

Indicate by a checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ____  No ____

 

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    Ö              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    Ö    

 

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

 

 

Table of Contents

 

CINTAS CORPORATION

TABLE OF CONTENTS

 

 

			Page No.
Part I.	Financial Information
	Item 1.	Financial Statements.
		Consolidated Condensed Statements of Income – Three Months and Six Months Ended November 30, 2009 and 2008	3
		Consolidated Condensed Balance Sheets – November 30, 2009 and May 31, 2009	4
		Consolidated Condensed Statements of Cash Flows – Six Months Ended November 30, 2009 and 2008	5
		Notes to Consolidated Condensed Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	34
	Item 4.	Controls and Procedures.	35
Part II.	Other Information
	Item 1.	Legal Proceedings.	36
	Item 4.	Submission of Matters to a Vote of Security Holders.	36
	Item 6.	Exhibits.	37
Signatures			37
Exhibits

 

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CINTAS CORPORATION

ITEM 1. FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share data)

 

		Three Months Ended				Six Months Ended
		November 30,				November 30,
		2009		2008		2009		2008
Revenue:
Rental uniforms and ancillary products		$643,597		$711,454		$1,299,235		$1,432,827
Other services		240,912		273,730		476,843		554,536
		884,509		985,184		1,776,078		1,987,363
Costs and expenses:
Cost of rental uniforms and ancillary products		363,728		401,614		726,657		808,904
Cost of other services		150,934		168,570		296,779		338,376
Selling and administrative expenses		259,406		284,608		523,833		571,903
Legal settlements, net of insurance proceeds		4,052		---		23,529		---
Operating income		106,389		130,392		205,280		268,180
Interest income		(314)		(830)		(673)		(1,895)
Interest expense		12,579		12,768		24,617		25,799
Income before income taxes		94,124		118,454		181,336		244,276
Income taxes		36,948		46,616		70,176		93,802
Net income		$ 57,176		$ 71,838		$  111,160		$  150,474
Basic earnings per share		$     0.37		$     0.47		$        0.72		$        0.98
Diluted earnings per share		$     0.37		$     0.47		$        0.72		$        0.98

 

See accompanying notes.

 

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CINTAS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands except share data)

 

		November 30, 2009		May 31, 2009
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$   342,014		$   129,745
Marketable securities		138,226		120,393
Accounts receivable, net		377,151		357,678
Inventories, net		166,373		202,351
Uniforms and other rental items in service		329,561		335,447
Income taxes, current		8,906		25,512
Deferred income tax asset		69,558		66,368
Prepaid expenses		17,637		17,035
Assets held for sale		15,744		15,744
Total current assets		1,465,170		1,270,273
Property and equipment, at cost, net		888,005		914,627
Goodwill		1,334,773		1,331,388
Service contracts, net		110,104		124,330
Other assets, net		88,296		80,333
		$3,886,348		$3,720,951
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$     73,574		$     69,965
Accrued compensation and related liabilities		46,872		48,414
Accrued liabilities		224,526		198,488
Long-term debt due within one year		588		598
Total current liabilities		345,560		317,465
Long-term liabilities:
Long-term debt due after one year		785,748		786,058
Deferred income taxes		157,143		149,032
Accrued liabilities		101,812		100,987
Total long-term liabilities		1,044,703		1,036,077
Shareholders’ equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding		----		----
Common stock, no par value:
425,000,000 shares authorized,
FY 2010: 173,206,493 issued and 152,869,220 outstanding
FY 2009: 173,085,926 issued and 152,790,170 outstanding		132,034		129,215
Paid-in capital		77,116		72,364
Retained earnings		3,049,579		2,938,419
Treasury stock:
FY 2010: 20,337,273 shares
FY 2009: 20,295,756 shares		(798,847)		(797,888)
Other accumulated comprehensive income		36,203		25,299
Total shareholders’ equity		2,496,085		2,367,409
		$3,886,348		$3,720,951

 

See accompanying notes.

 

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CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Six Months Ended
		November 30, 2009		November 30, 2008
Cash flows from operating activities:
Net income		$111,160		$150,474
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		75,899		78,372
Amortization of deferred charges		20,568		21,522
Stock-based compensation		7,571		6,911
Deferred income taxes		4,777		(1,840)
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net		(12,843)		(8,064)
Inventories, net		34,874		(15,169)
Uniforms and other rental items in service		5,495		(6,237)
Prepaid expenses		(568)		(3,799)
Accounts payable		6,914		(509)
Accrued compensation and related liabilities		(1,646)		(8,685)
Accrued liabilities and other		25,246		(16,400)
Income taxes payable		16,728		(21,435)
Net cash provided by operating activities		294,175		175,141
Cash flows from investing activities:
Capital expenditures		(48,092)		(95,957)
Proceeds from sale or redemption of marketable securities		25,852		61,662
Purchase of marketable securities and investments		(53,060)		(23,222)
Acquisitions of businesses, net of cash acquired		(6,601)		(18,331)
Other, net		1,053		353
Net cash used in investing activities		(80,848)		(75,495)
Cash flows from financing activities:
Proceeds from issuance of debt		----		7,500
Repayment of debt		(321)		(80,749)
Exercise of stock-based compensation awards		2,819		----
Repurchase of common stock		(959)		(25,847)
Other, net		(3,536)		413
Net cash used in financing activities		(1,997)		(98,683)
Effect of exchange rate changes on cash and cash equivalents		939		(4,774)
Net increase (decrease) in cash and cash equivalents		212,269		(3,811)
Cash and cash equivalents at beginning of period		129,745		66,224
Cash and cash equivalents at end of period		$342,014		$ 62,413

 

See accompanying notes.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

1.               Basis of Presentation

 

The consolidated condensed financial statements of Cintas Corporation (Cintas) included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations.  While we believe that the disclosures are adequately presented, it is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes included in our Form 10-K for the fiscal year ended May 31, 2009.  A summary of our significant accounting policies is presented beginning on page 38 of that report.  There have been no material changes in the accounting policies followed by Cintas during the fiscal year.

 

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

 

2.               New Accounting Pronouncements

 

The Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) effective for financial statements issued for interim and annual periods ending after September 30, 2009.  The ASC is an aggregation of previously issued authoritative GAAP in one comprehensive set of guidance organized by subject area.  In accordance with the ASC, references to previously issued accounting standards have been removed.  Subsequent revisions to GAAP will be incorporated into the ASC through Accounting Standards Updates (ASU).  The following is a list of recent pronouncements issued by the FASB.

 

Effective June 1, 2008, Cintas adopted fair value measurements guidance for financial instruments and non-financial instruments accounted for at fair value on a recurring basis.  Effective June 1, 2009, Cintas adopted fair value measurements guidance for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value on a nonrecurring basis.  The guidance defines fair value, establishes guidance for measuring fair value and expands disclosures regarding fair value measurements.  The adoptions did not have a material impact on our consolidated financial statements.  See Note 4 entitled Fair Value Measurements for additional information.

 

Effective June 1, 2009, Cintas adopted new guidance on business combinations, in which an entity is required to recognize assets acquired, liabilities assumed, contractual contingencies and contingent consideration at 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.  This adoption did not have a material impact on Cintas’ results of operations or financial condition.  Any future effects will depend upon the terms and size of future acquisitions.

 

Effective June 1, 2009, Cintas adopted new guidance for determining whether instruments granted in share-based payment transactions are participating securities.  This guidance provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method of determining earnings per share.  The adoption did not have a material impact on basic or diluted earnings per share.  Cintas’ adoption is more fully described in Note 5 entitled Earnings per Share.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

Effective June 1, 2009, Cintas adopted new guidance on subsequent events.  The objective of this guidance is to establish general standards of accounting for and disclosure of events that occur after the consolidated balance sheet date but before the consolidated financial statements are issued or are available to be issued. Cintas has evaluated and disclosed any subsequent events through January 8, 2010, which is the date of filing of the Form 10-Q. This adoption did not have a material impact on Cintas’ results of operations or financial condition.

 

3.               Restructuring and Related Activity

 

Due to declining economic conditions during fiscal 2009 which negatively impacted the U.S. and Canadian economies and Cintas’ businesses, during the fourth quarter of fiscal 2009, management initiated certain restructuring activities to eliminate excess capacity and reduce our cost structure.  These activities include closing or converting to branches 16 of our rental processing plants and reducing our workforce by approximately 1,200 employees.  We expect these restructuring activities to be completed by May 31, 2010.

 

A progression of our restructuring liability balance, primarily recorded in accrued compensation and related liabilities, at November 30, 2009, is as follows:

 

		Employee Termination Costs			Other Exit Costs			Total
Balance as of June 1, 2009		$	5,915		$	2,272		$	8,187
Cash paid – fiscal 2010		(3,005		)	(12)			(3,017		)
Balance as of November 30, 2009		$	2,910		$	2,260		$	5,170

 

Cash paid during the three months ended November 30, 2009, was $1,300.

 

4.               Fair Value Measurements

 

FASB ASC defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.  It also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

Level 1 –	Quoted prices in active markets for identical assets or liabilities.
Level 2 –	Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 –	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

All financial assets that are measured at fair value on a recurring basis (at least annually) have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.  These assets measured at fair value on a recurring basis are summarized below:

 

		As of November 30, 2009
		Level 1		Level 2		Level 3		Fair Value
Cash and cash equivalents		$342,014		$      ----		$ ----		$342,014
Marketable securities		118,245		19,981		----		138,226
Other assets, net		29,532		----		----		29,532
Total assets at fair value		$489,791		$19,981		$ ----		$509,772
Current accrued liabilities		$        ----		$     333		$ ----		$       333
Total liabilities at fair value		$        ----		$     333		$ ----		$       333
		As of May 31, 2009
		Level 1		Level 2		Level 3		Fair Value
Cash and cash equivalents		$129,745		$      ----		$ ----		$129,745
Marketable securities		120,393		----		----		120,393
Accounts receivable, net		----		78		----		78
Other assets, net		17,105		----		----		17,105
Total assets at fair value		$267,243		$       78		$ ----		$267,321
Current accrued liabilities		$        ----		$     253		$ ----		$       253
Total liabilities at fair value		$        ----		$     253		$ ----		$       253

 

As of November 30, 2009, all marketable securities are concentrated in the U.S. and Canada and consist primarily of Canadian treasury securities and U.S. municipal bonds.  The funds invested in Canadian marketable securities are not expected to be repatriated, but instead are expected to be invested indefinitely in foreign subsidiaries.  The amortized cost basis of the marketable securities as of November 30, 2009 and May 31, 2009, is $138,207 and $120,403, respectively.  All contractual maturities of the marketable securities held at November 30, 2009, are within one year.

 

Other assets, net, include certain retirement assets.  Current accrued liabilities include foreign currency forward contracts.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

5.               Earnings per Share

 

As described in Note 2 entitled New Accounting Pronouncements, Cintas adopted new guidance for determining whether instruments granted in share-based payment transactions are participating securities on June 1, 2009, using the retrospective method.  The retrospective application had no impact on the basic and diluted earnings per share for the three months or six months ended November 30, 2008.  The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Cintas’ common shares.

 

		Three Months Ended				Six Months Ended
		November 30,				November 30,
		2009		2008		2009		2008
Basic Earnings per Share		$57,176		$71,838		$111,160		$150,474
Net income
Less: net income allocated to participating unvested securities		226		154		362		270
Net income available to common shareholders		$56,950		$71,684		$110,798		$150,204
Basic weighted average common shares outstanding		152,866		152,788		152,847		153,093
Basic earnings per share		$    0.37		$    0.47		$      0.72		$      0.98
Diluted Earnings per Share
Net income		$57,176		$71,838		$111,160		$150,474
Less: net income allocated to participating unvested securities		226		154		362		270
Net income available to common shareholders		$56,950		$71,684		$110,798		$150,204
Basic weighted average common shares outstanding		152,866		152,788		152,847		153,093
Effect of dilutive securities – employee stock options		----		----		----		----
Diluted weighted average common shares outstanding		152,866		152,788		152,847		153,093
Diluted earnings per share		$    0.37		$    0.47		$      0.72		$      0.98

 

For the three months ended November 30, 2009 and 2008, 3,556 and 5,949 options granted to purchase shares of Cintas common stock were excluded from the computation of diluted earnings per share.  For the six months ended November 30, 2009 and 2008, 4,442 and 5,192 options granted to purchase shares

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

of Cintas common stock were excluded from the computation of diluted earnings per share.  The exercise prices of these options were greater than the average market price of the common shares (anti-dilutive).

 

6.               Goodwill, Service Contracts and Other Assets

 

Changes in the carrying amount of goodwill and service contracts for the six months ended November 30, 2009, by operating segment, are as follows:

 

		Rental				First Aid,
		Uniforms &		Uniform		Safety &
		Ancillary		Direct		Fire		Document
		Products		Sales		Protection		Management		Total
Goodwill
Balance as of June 1, 2009		$861,879		$23,891		$166,872		$278,746		$1,331,388
Goodwill acquired, net		(564	)	----		655		1,794		1,885
Foreign currency translation		527		30		----		943		1,500
Balance as of November 30, 2009		$861,842		$23,921		$167,527		$281,483		$1,334,773
		Rental				First Aid,
		Uniforms &		Uniform		Safety &
		Ancillary		Direct		Fire		Document
		Products		Sales		Protection		Management		Total
Service Contracts
Balance as of June 1, 2009		$65,897		$ ----		$36,042		$22,391		$124,330
Service contracts acquired		----		----		385		848		1,233
Service contracts amortization		(9,379)		(12)		(3,044)		(3,918)		(16,353)
Foreign currency translation		738		12		----		144		894
Balance as of November 30, 2009		$57,256		$ ----		$33,383		$19,465		$110,104

 

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

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

		As of November 30, 2009
		Carrying		Accumulated
		Amount		Amortization		Net
Service contracts		$337,599		$227,495		$110,104
Noncompete and consulting agreements		$  65,195		$  48,578		$  16,617
Investments		64,895		----		64,895
Other		10,638		3,854		6,784
Total		$140,728		$  52,432		$  88,296

 

 

		As of May 31, 2009
		Carrying		Accumulated
		Amount		Amortization		Net
Service contracts		$335,473		$211,143		$124,330
Noncompete and consulting agreements		$  65,683		$  44,320		$  21,363
Investments		51,762		----		51,762
Other		10,675		3,467		7,208
Total		$128,120		$  47,787		$  80,333

 

Amortization expense was $20,568 and $21,522 for the six months ended November 30, 2009 and November 30, 2008, respectively.  Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $39,606, $35,579, $29,228, $13,541 and $10,885, respectively.

 

Investments recorded using the cost or equity method are evaluated for impairment when indicators of impairment are identified.  For the six months ended November 30, 2009, no losses due to impairment were recorded.

 

7.               Debt, Derivatives and Hedging Activities

 

Cintas has certain 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 agreements.  If a default of a significant covenant were to occur, the default could result in an acceleration of the maturity of the indebtedness, impair liquidity and limit the ability to raise future capital.  Cintas is in compliance with all significant debt covenants for all periods presented.

 

Cintas at times may use hedges to hedge its exposure to such things as movements in interest rates or movements in foreign currency rates.  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. The impacts from the effective portion of derivative instruments are reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.  The impacts of any ineffective portion of the hedges are charged to earnings in the current period.  When outstanding, the effectiveness of derivative instruments is reviewed at least every fiscal quarter.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

To hedge the exposure of variability in short-term interest rates, Cintas would use cash flow hedges. These agreements effectively convert a portion of the floating rate long-term debt to a fixed rate basis, thus reducing the impact of short-term interest rate changes on future interest expense.  Examples of cash flow hedging instruments that Cintas may use are interest rate swaps, interest rate lock agreements and forward starting interest rate swaps.  No such instruments were outstanding as of November 30, 2009.

 

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, fiscal 2007 and fiscal 2008. The amortization of the interest rate lock agreements resulted in an increase to other comprehensive income of $191 for both the three months ended November 30, 2009 and November 30, 2008, respectively, and $383 for both the six months ended November 30, 2009 and November 30, 2008, respectively.

 

To hedge the exposure of movements in the foreign currency rates, Cintas uses foreign currency hedges.  These hedges would reduce the impact on cash flows from movements in the foreign currency exchange rates.   Examples of foreign currency hedge instruments that Cintas may use are average rate options and forward contracts.  At November 30, 2009, Cintas had accrued $333 for the liabilities related to its average rate options which is included in current accrued liabilities.  These instruments increased foreign currency exchange costs by $114 and $131 during the three months and six months ended November 30, 2009, respectively.

 

8.               Income Taxes

 

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 the six months ended November 30, 2009, unrecognized tax benefits decreased by approximately $2,018 and accrued interest increased by approximately $2,698.

 

All U.S. federal income tax returns are closed to audit through fiscal 2005.  Cintas is currently in advanced stages of audits in certain foreign jurisdictions and certain domestic states. The years under audit cover fiscal years back to 2000.  Based on the resolution of the various audits, it is reasonably possible that the balance of unrecognized tax benefits could decrease by $714 for the fiscal year ending May 31, 2010.

 

9.               Comprehensive Income

 

Total comprehensive income represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders and, as such, includes net income.  For Cintas, the only components of total comprehensive income are the change in cumulative foreign currency translation adjustments, the change in the fair value of derivatives, the amortization of interest rate lock agreements and the change in the fair value of available-for-sale securities.  The components of comprehensive income for the three and six month periods ended November 30, 2009, and November 30, 2008, are as follows:

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

		Three Months Ended				Six Months Ended
		November 30,				November 30,
		2009		2008		2009		2008
Net income		$57,176		$71,838		$111,160		$150,474
Other comprehensive income:
Foreign currency translation adjustment		9,797		(41,862)		10,526		(61,675)
Change in fair value of derivatives*		(92)		214		(23)		214
Amortization of interest rate lock agreements		191		191		383		383
Change in fair value of available-for-sale securities**		31		139		18		156
Comprehensive income		$67,103		$30,520		$122,064		$ 89,552

 

*	Net of $(55) and $126 of tax expense (benefit) for the three months ended November 30, 2009 and November 30, 2008, respectively. Net of $(14) and $126 of tax expense (benefit) for the six months ended November 30, 2009 and November 30, 2008, respectively.
**	Net of $18 and $(30) of tax expense (benefit) for the three months ended November 30, 2009 and November 30, 2008, respectively. Net of $11 and $(30) of tax expense (benefit) for the six months ended November 30, 2009 and November 30, 2008, respectively.

 

10.         Litigation and Other Contingencies

 

Cintas is subject to legal proceedings, insurance receipts, legal settlements 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 operation 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, 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 alleged 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.  On October 27, 2008, the United States District Court in the Eastern District of Michigan granted summary judgment in favor of Cintas limiting the scope of the putative class in the Serrano lawsuit to female applicants for service sales representative positions at Cintas locations within the state of Michigan.  Consequently, all claims brought by female applicants for service sales representative positions outside of the state of Michigan were dismissed.  Similarly, any claims brought by the EEOC on behalf of similarly situated female applicants outside of the state of Michigan have also been dismissed from the Serrano lawsuit.  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.  The Avalos plaintiffs alleged 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 sought injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies.  The claims in Avalos originally were brought in the lawsuit captioned Robert Ramirez, et al. v. Cintas Corporation (Ramirez),

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

filed on January 20, 2004, in the United States District Court, Northern District of California, San Francisco Division.  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 was known as Mirna E. Serrano/Blanca Nelly Avalos, et al. v. Cintas Corporation (Serrano/Avalos).  On March 31, 2009, the United States District Court, Eastern District of Michigan, Southern Division entered an order denying class certification to all plaintiffs in the Serrano/Avalos lawsuits.  In the Serrano case, the three individual claims of Mirna Serrano, Stephanie McVay and Linda Allen, and the EEOC’s claim of pattern or practice discrimination remain pending.  In the Avalos case, the individual gender claims of Tanesha Davis remain pending.  On December 17, 2009, Davis voluntarily dismissed her claims for race discrimination with prejudice.  The Court has made no determination regarding the merits of Davis’ gender claims.

 

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.  On May 19, 2009, the Grindle plaintiffs dismissed their class action allegations.  On December 17, 2009, the individual claims of Colleen Grindle, Ruth Richardson and Dawn Stevenson were dismissed with prejudice pursuant to a legal settlement.

 

The litigation discussed above, if decided or settled adversely to Cintas, may, individually or in the aggregate, result in liability material to Cintas’ consolidated financial condition or results of operation and could increase costs of operations on an ongoing 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 a defendant in a purported class action lawsuit, Paul Veliz, et al. v. Cintas Corporation (Veliz), 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 April 5, 2004 and February 14, 2006, the Court stayed the claims of all plaintiffs with valid arbitration agreements pending arbitration of those claims.  Claims made in the Veliz action therefore are pending before the United States District Court, Northern District of California and Judge Bruce Meyerson (Ret.), an Arbitrator selected by the parties.  On August 5, 2009, the parties in the Veliz action reached a settlement in principle.  When the settlement is fully documented and approved by the Court, the settlement will resolve all claims now pending or that could have been brought relating to the subject matter of the case before the Court and the Arbitrator. Cintas expects that the approval process will take several months.  The principal terms of the settlement provide for an aggregate cash payment of approximately $23,950 which is accrued in current accrued liabilities at November 30, 2009.  The pre-tax impact, net of insurance proceeds, was $19,477.

 

On August 26, 2009, the parties in a case filed on July 17, 2008, by the Manville Personal Injury Settlement Trust against certain directors and officers of Cintas, reached a settlement.  The amount of the settlement was $475 and will be paid by Cintas’ insurance carrier.  On November 24, 2009, the court granted final approval of the settlement.

 

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

During the second quarter of fiscal 2010, Cintas had legal settlements that totaled $4,052, net of insurance proceeds.  None of these settlements were significant individually.  These settlements included litigation related to multiple subjects including employment practices and insurance coverage.

 

11.         Segment Information

 

Cintas classifies its businesses into four operating segments.  The Rental Uniforms and Ancillary Products operating segment reflects the rental and servicing of uniforms and other garments and facility products and services including mats, mops, shop towels and other ancillary items.  In addition to these rental items, other facility products and services such as restroom and hygiene products and services are also provided within this operating segment.  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 destruction, document imaging and document retention 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 Basis of Presentation.  Information related to the operations of Cintas’ operating segments is set forth below.

 

		Rental				First Aid,
		Uniforms &		Uniform		Safety &
		Ancillary		Direct		Fire		Document
		Products		Sales		Protection		Management		Corporate		Total
For the three months ended November 30, 2009
Revenue		$   643,597		$  99,434		$  81,557		$   59,921		$         ----		$   884,509
Income (loss) before income taxes		$     91,881		$  10,475		$    3,018		$     5,067		$(16,317)		$     94,124
For the three months ended November 30, 2008
Revenue		$   711,454		$120,035		$100,490		$   53,205		$         ----		$   985,184
Income (loss) before income taxes		$   108,370		$    9,237		$    7,668		$     5,117		$(11,938)		$   118,454
As of and for the six months ended November 30, 2009
Revenue		$1,299,235		$188,735		$171,558		$ 116,550		$         ----		$1,776,078
Income (loss) before income taxes		$   194,334		$  18,564		$    8,805		$     7,106		$ (47,473)		$   181,336
Total assets		$2,475,877		$141,920		$311,870		$ 476,441		$ 480,240		$3,886,348
As of and for the six months ended November 30, 2008
Revenue		$1,432,827		$237,518		$209,022		$ 107,996		$         ----		$1,987,363
Income (loss) before income taxes		$   215,429		$  21,240		$  19,018		$   12,493		$ (23,904)		$   244,276
Total assets		$2,657,929		$180,413		$349,518		$ 459,847		$ 127,346		$3,775,053

 

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