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

form10q022809.htm
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 February 28, 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)

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

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

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

Indicate by 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  ü  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   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 _ 

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

Class
 
Outstanding March 31, 2009
Common Stock, no par value
 
152,790,170







 
 

 

CINTAS CORPORATION
TABLE OF CONTENTS
 
 

   
Page No.
Part I.
Financial Information
 
       
 
Item 1.
Financial Statements.
 
       
   
Consolidated Condensed Statements of Income -
  Three Months and Nine Months Ended February 28, 2009
  and February 29, 2008
3
       
   
Consolidated Condensed Balance Sheets -
  February 28, 2009 and May 31, 2008
4
       
   
Consolidated Condensed Statements of Cash Flows -
  Nine Months Ended February 28, 2009 and February 29, 2008 
5
       
   
Notes to Consolidated Condensed Financial Statements
6
       
 
Item 2.
Management's Discussion and Analysis of Financial
  Condition and Results of Operations.
24
       
 
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 5.
Other Information.
36
       
 
Item 6.
Exhibits.
36
       
Signatures
 
36
       
Exhibits
 
 


2
 

 

CINTAS CORPORATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share data)
 
   
Three Months Ended
   
Nine Months Ended
 
   
February 28, 2009
   
February 29, 2008
   
February 28, 2009
   
February 29, 2008
 
Revenue:
                       
  Rental uniforms and ancillary products
  $ 674,701     $ 703,641     $ 2,107,528     $ 2,122,840  
  Other services
    233,938       272,311       788,474       806,105  
      908,639       975,952       2,896,002       2,928,945  
                                 
Costs and expenses:
                               
  Cost of rental uniforms and ancillary products
    379,466       398,318       1,188,370       1,182,019  
  Cost of other services
    152,736       166,409       491,112       497,761  
  Selling and administrative expenses
    257,129       273,194       829,032       825,029  
                                 
Operating income
    119,308       138,031       387,488       424,136  
                                 
  Interest income
    (540 )     (1,510 )     (2,435 )     (4,768 )
  Interest expense
    12,407       13,622       38,206       39,452  
                                 
Income before income taxes
    107,441       125,919       351,717       389,452  
                                 
Income taxes
    35,630       44,091       129,432       143,708  
                                 
Net income
  $ 71,811     $ 81,828     $ 222,285     $ 245,744  
                                 
Basic earnings per share
  $ 0.47     $ 0.53     $ 1.45     $ 1.57  
                                 
Diluted earnings per share
  $ 0.47     $ 0.53     $ 1.45     $ 1.57  
                                 
Dividends declared per share
                  $ 0.47     $ 0.46  
 
 
See accompanying notes.

3
 

 

CINTAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
 (In thousands except share data)
 
   
February 28, 2009
   
May 31,
2008
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
  Cash and cash equivalents
  $ 54,251     $ 66,224  
  Marketable securities
    97,653       125,471  
  Accounts receivable, net
    384,912       430,078  
  Inventories, net
    252,483       238,669  
  Uniforms and other rental items in service
    352,032       370,416  
  Deferred income tax asset
    42,840       39,410  
  Prepaid expenses
    17,751       12,068  
                 
    Total current assets
    1,201,922       1,282,336  
                 
Property and equipment, at cost, net
    980,646       974,575  
                 
Goodwill
    1,325,377       1,315,569  
Service contracts, net
    131,288       152,757  
Other assets, net
    80,211       83,364  
                 
    $ 3,719,444     $ 3,808,601  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
  Accounts payable
  $ 75,677     $ 94,755  
  Accrued compensation and related liabilities
    46,836       50,605  
  Accrued liabilities
    250,209       207,925  
  Current income taxes payable
    895       12,887  
  Long-term debt due within one year
    592       1,070  
                 
    Total current liabilities
    374,209       367,242  
                 
Long-term liabilities:
               
  Long-term debt due after one year
    786,204       942,736  
  Deferred income taxes
    135,083       124,184  
  Accrued liabilities
    103,962       120,308  
                 
    Total long-term liabilities
    1,025,249       1,187,228  
                 
Shareholders' equity:
               
  Preferred stock, no par value:
               
    100,000 shares authorized, none outstanding
    ----       ----  
  Common stock, no par value:
               
        425,000,000 shares authorized,
               
    FY 2009: 173,085,926 issued and 152,790,170 outstanding
               
    FY 2008: 173,083,426 issued and 153,691,103 outstanding
    129,215       129,182  
  Paid-in capital
    69,312       60,408  
  Retained earnings
    2,934,354       2,784,302  
  Treasury stock:
               
    FY 2009:  20,295,756 shares
               
    FY 2008:  19,392,323 shares
    (797,888 )     (772,041 )
  Other accumulated comprehensive (loss) income
    (15,007 )     52,280  
    Total shareholders' equity
    2,319,986       2,254,131  
    $ 3,719,444     $ 3,808,601  
See accompanying notes.

4
 

 

CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
   
Nine Months Ended
 
   
February 28, 2009
   
February 29, 2008
 
Cash flows from operating activities:
           
             
  Net income
  $ 222,285     $ 245,744  
  Adjustments to reconcile net income to net cash provided by operating activities:
               
    Depreciation
    118,119       110,076  
    Amortization of deferred charges
    32,023       32,371  
    Stock-based compensation
    8,904       7,406  
    Deferred income taxes
    9,052       (456 )
    Change in current assets and liabilities, net of acquisitions of businesses:
               
      Accounts receivable, net
    42,118       862  
      Inventories, net
    (16,427 )     (8,925 )
      Uniforms and other rental items in service
    12,998       (18,628 )
      Prepaid expenses
    (5,802 )     1,177  
      Accounts payable
    (22,247 )     (448 )
      Accrued compensation and related liabilities
    (3,250 )     (11,730 )
      Accrued liabilities and other
    (45,734 )     (7,405 )
      Income taxes payable
    (12,320 )     17,886  
Net cash provided by operating activities
    339,719       367,930  
                 
Cash flows from investing activities:
               
                 
  Capital expenditures
    (132,783 )     (144,848 )
  Proceeds from sale or redemption of marketable securities
    92,061       42,393  
  Purchase of marketable securities and investments
    (94,985 )     (32,434 )
  Acquisitions of businesses, net of cash acquired
    (29,381 )     (102,103 )
  Other
    (428 )     (1,202 )
Net cash used in investing activities
    (165,516 )     (238,194 )
                 
Cash flows from financing activities:
               
                 
  Proceeds from issuance of debt
    7,500       313,000  
  Repayment of debt
    (164,510 )     (228,808 )
  Stock options exercised
    ---       8,030  
  Repurchase of common stock
    (25,847 )     (191,479 )
  Other
    736       (11,455 )
Net cash used in financing activities
    (182,121 )     (110,712 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (4,055 )     1,291  
                 
Net (decrease) increase in cash and cash equivalents
    (11,973 )     20,315  
                 
Cash and cash equivalents at beginning of period
    66,224       35,360  
                 
Cash and cash equivalents at end of period
  $ 54,251     $ 55,675  
 
See accompanying notes.

 

 

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 most recent Form 10-K for the fiscal year ended May 31, 2008.  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 Standards
 
Effective June 1, 2008, Cintas adopted Financial Accounting Standards Board (FASB) 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.  FASB Staff Position 157-2 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 did not have a material impact on Cintas’ results of operations or financial condition.  Cintas’ adoption of FAS 157 is more fully described in Note 3 entitled Fair Value Measurements.
 
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).
 
 
 

6
 

 

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
 
3.
Fair Value Measurements
 
Effective June 1, 2008, Cintas adopted FAS 157, which 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.  FAS 157 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.
 
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 February 28, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
                         
Cash and cash equivalents
  $ 54,251     $ ----     $ ----     $ 54,251  
Marketable securities, available-for-sale
    97,653       ----       ----       97,653  
Accounts receivable, net
    ----       695       ----       695  
Other assets, net
    14,419       ----       ----       14,419  
Total assets at fair value
  $ 166,323     $ 695     $ ----     $ 167,018  
                                 
Current accrued liabilities
  $ ----     $ 381     $ ----     $ 381  
Total liabilities at fair value
  $ ----     $ 381     $ ----     $ 381  

 
Accounts receivable, net, includes foreign currency average rate options.  Other assets, net, include retirement assets.  Current accrued liabilities include foreign currency forward contracts.
 
 
 
 
 

 

 

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
 
4.
Earnings per Share
 
The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective periods:
 
   
Three Months Ended
   
Nine Months Ended
 
   
February 28, 2009
   
February 29, 2008
   
February 28, 2009
   
February 29, 2008
 
                         
Numerator:
                       
Net income
  $ 71,811     $ 81,828     $ 222,285     $ 245,744  
                                 
Denominator:
                               
Denominator for basic earnings per share - weighted average shares
    152,993       153,679       152,993       156,346  
 
                               
Effect of dilutive securities - non-vested equity compensation shares
    288       203       334       287  
                                 
 Denominator for diluted earnings per share - adjusted weighted average
  shares and assumed conversions
    153,281       153,882       153,327       156,633  
                                 
Basic earnings per share
  $ 0.47     $ 0.53     $ 1.45     $ 1.57  
                                 
Diluted earnings per share
  $ 0.47     $ 0.53     $ 1.45     $ 1.57  
 
 
5.
Goodwill, Service Contracts and Other Assets
 
Changes in the carrying amount of goodwill and service contracts for the nine months ended February 28, 2009, by operating segment, are as follows:
 

   
Rental
Uniforms &
Ancillary
Products
   
Uniform
Direct
Sales
   
First Aid,
Safety &
Fire
Protection
   
Document
Management
   
Total
 
Goodwill
                             
Balance as of June 1, 2008
  $ 863,581     $ 23,956     $ 165,544     $ 262,488     $ 1,315,569  
                                         
Goodwill acquired
    ---       ---       1,169       16,341       17,510  
                                         
Foreign currency translation
    (3,955 )     (185 )     ---       (3,562 )     (7,702 )
                                         
Balance as of February 28, 2009
  $ 859,626     $ 23,771     $ 166,713     $ 275,267     $ 1,325,377  


 
 
 

 

 

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

   
Rental
Uniforms &
Ancillary
Products
   
Uniform
Direct
Sales
   
First Aid,
Safety &
Fire
Protection
   
Document
Management
   
Total
 
Service Contracts
                             
Balance as of June 1, 2008
  $ 84,574     $ 328     $ 41,944     $ 25,911     $ 152,757  
                                         
Service contracts acquired
    ---       ---       264       3,728       3,992  
                                         
Service contracts amortization
    (8,881 )     (182 )     (4,639 )     (5,560 )     (19,262 )
                                         
Foreign currency translation
    (5,546 )     (92 )     ---       (561 )     (6,199 )
                                         
Balance as of February 28, 2009
  $ 70,147     $ 54     $ 37,569     $ 23,518     $ 131,288  
 
Information regarding Cintas' service contracts and other assets are as follows:

   
As of February 28, 2009
 
   
Carrying
Amount
   
Accumulated
Amortization
   
Net
 
                   
Service contracts
  $ 331,336     $ 200,048     $ 131,288  
                         
Noncompete and consulting agreements
  $ 65,024     $ 41,673     $ 23,351  
Investments
    49,480       ----       49,480  
Other
    10,653       3,273       7,380  
                         
Total
  $ 125,157     $ 44,946     $ 80,211  
                         
   
 
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  

Amortization expense was $32,023 and $32,371 for the nine months ended February 28, 2009, and February 29, 2008, respectively.  Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $42,248, $39,159, $35,402, $29,272 and $13,443, respectively.
 
 

 

 

 
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
 
6.
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 instruments.  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. Cintas’ hedging activities are transacted only with highly-rated institutions, reducing the exposure to credit risk in the event of nonperformance.  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.
 
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 February 28, 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 a credit to other comprehensive income of $192 and $192 for the three months ended February 28, 2009 and February 29, 2008, respectively, and $575 and $330 for the nine months ended February 28, 2009 and February 29, 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 February 28, 2009, Cintas had $695 in average rate options included in accounts receivable, net and $381 in forward contracts included in current accrued liabilities.  These instruments reduced foreign currency exchange loss by $456 and $700 during the three months and nine months ended February 28, 2009, respectively.
 
 
7.
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 three months ended February 28, 2009, unrecognized tax benefits decreased by approximately $13,134 and accrued interest decreased by approximately $3,748.
 
 
 

10 
 

 

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
 
 
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 2001.  Based on the resolution of the various audits, it is reasonably possible that the balance of unrecognized tax benefits could decrease by $98 for the fiscal year ended May 31, 2009.
 
 
8.
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 nine month periods ended February 28, 2009, and February 29, 2008, are as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
February 28, 2009
   
February 29, 2008
   
February 28, 2009
   
February 29, 2008
 
                         
Net income
  $ 71,811     $ 81,828     $ 222,285     $ 245,744  
                                 
Other comprehensive income:
                               
  Foreign currency translation adjustment
    (6,367 )     4,840       (68,042 )     20,791  
  Change in fair value of derivatives*
    (117 )     (1,043 )     97       (4,916 )
  Amortization of interest rate lock agreements     192       192       575       330  
  Change in fair value of available-for-sale securities**
    (73 )     84       83       236  
Comprehensive income
  $ 65,446     $ 85,901     $ 154,998     $ 262,185  
 
  *
Net of $(69) and $(620) of tax for the three months ended February 28, 2009 and February 29, 2008, respectively.  Net of $57 and $(2,924) of tax (benefit) for the nine months ended February 28, 2009 and February 29, 2008, respectively.
 
 **
Net of $63 and $47 of tax for the three months ended February 28, 2009 and February 29, 2008, respectively.  Net of $33 and $138 of tax for the nine months ended February 28, 2009 and February 29, 2008, respectively.
 
 
9.
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.

11 
 

 
 
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
 
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 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).  On October 27, 2008, the United States District Court in the Eastern District of Michigan granted a 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.  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.  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,
 
 

12 
 

 

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
 
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.  The non-service sales representative hiring claims in the previously disclosed Ramirez case had been ordered by the United States District Court for the Northern District of California, San Francisco Division to arbitration and their claims had been stayed pending the completion of arbitration.  The Ramirez purported class action claims included 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 sought injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies. 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 consolidating Houston with Ramirez and ordered the named plaintiffs in Houston to arbitrate all of their claims for monetary damages with the previously filed Ramirez arbitration. On March 16, 2009, the plaintiffs in Ramirez and Houston agreed to voluntarily dismiss all class claims in the case with prejudice and the arbitrator entered an order dismissing all class claims in the consolidated arbitration.  On April 3, 2009, the United States District Court for the Northern District of California entered an order affirming the arbitrator’s decision to dismiss the class claims in Ramirez and Houston with prejudice, and thereby relinquished his jurisdiction over the individual plaintiffs’ class claims.

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 Cintas by consciously failing to cause Cintas to comply with worker safety and employment-related laws and regulations.  Cintas is named as a nominal defendant in the case.  The complaint contends that, as a consequence of such alleged breach of duty, Cintas 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 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.
 
10.
Segment Information
 
Cintas classifies its businesses into four operating segments in accordance with the criteria set forth in FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information.  The Rental Uniforms and Ancillary Products 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

13 
 

 

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
 
items, 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.  Information related to the operations of Cintas’ operating segments is set forth below.

 
   
Rental
Uniforms &
Ancillary
Products
   
Uniform
Direct
Sales
   
First Aid,
Safety &
Fire
Protection
   
Document
Management
   
Corporate
   
Total
 
For the three months ended February 28, 2009
                                   
                                     
Revenue
  $ 674,701     $ 97,010     $ 86,037     $ 50,891     $ ----     $ 908,639  
Income (loss) before income taxes
  $ 110,447     $ 803     $ 4,141     $ 3,917     $ (11,867 )   $ 107,441  
                                                 
For the three months ended February 29, 2008
                                               
Revenue
  $ 703,641     $ 125,277     $ 97,594     $ 49,440     $ ----     $ 975,952  
Income (loss) before income taxes
  $ 106,486     $ 16,186     $ 7,327     $ 8,032     $ (12,112 )   $ 125,919  
                                                 
As of and for the nine months ended February 28, 2009
                                               
Revenue
  $ 2,107,528     $ 334,528     $ 295,059     $ 158,887     $ ----     $ 2,896,002  
Income (loss) before income taxes
  $ 325,876     $ 22,043     $ 23,159     $ 16,410     $ (35,771 )   $ 351,717  
Total assets
  $ 2,595,144     $ 165,976     $ 338,509     $ 467,911     $ 151,904     $ 3,719,444  
                                                 
As of and for the nine months ended February 29, 2008
                                               
Revenue
  $ 2,122,840     $ 378,537     $ 299,003     $ 128,565     $ ----     $ 2,928,945  
Income (loss) before income taxes
  $ 339,278     $ 43,063     $ 25,294     $ 16,501     $ (34,684 )   $ 389,452  
Total assets
  $ 2,621,696     $ 191,715     $ 342,033     $ 443,188     $ 163,646     $ 3,762,278  
 
 

 
14 
 

 

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
 
 
11.
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 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.
 
Condensed consolidating financial statements for Cintas, Corp. 2, the subsidiary guarantors and non-guarantors are presented on the following pages:
 
 
 
 

15 
 

 

 
 
CONDENSED CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED FEBRUARY 28, 2009
(In thousands)
 

   
Cintas
Corporation
   
Corp. 2
   
Subsidiary
Guarantors
   
Non-
Guarantors
   
Eliminations
   
Cintas
Corporation
Consolidated
 
Revenue:
                                   
  Rental uniforms and ancillary products
  $ ----     $ 514,482     $ 140,567     $ 41,818     $ (22,166 )   $ 674,701  
  Other services
    ----       294,282       89,869       12,013       (162,226 )     233,938  
  Equity in net income of affiliates
    71,811       ----       ----       ----       (71,811 )     ----  
      71,811       808,764       230,436       53,831       (256,203 )     908,639  
                                                 
Costs and expenses (income):
                                               
  Cost of rental uniforms and ancillary products
    ----       304,321       86,358       25,195       (36,408 )     379,466  
  Cost of other services
    ----       217,163       79,876       7,398       (151,701 )     152,736  
  Selling and administrative expenses
    ----       244,568       (389 )     13,443       (493 )     257,129  
                                                 
Operating income
    71,811       42,712       64,591       7,795       (67,601 )     119,308  
                                                 
  Interest income
    ----       ----       (220 )     (320 )     ----       (540 )
  Interest expense (income)
    ----       12,820       (425 )     12       ----       12,407  
                                                 
Income before income taxes
    71,811       29,892       65,236       8,103       (67,601 )     107,441  
Income taxes
    ----       8,358       24,509       2,763       ----       35,630  
Net income
  $ 71,811     $ 21,534     $ 40,727     $ 5,340     $ (67,601 )   $ 71,811  

 
 
 

16 
 

 

 
 
CONDENSED CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED FEBRUARY 29, 2008
(In thousands)
 

   
Cintas
Corporation
   
Corp. 2
   
Subsidiary
Guarantors
   
Non-
Guarantors
   
Eliminations
   
Cintas
Corporation
Consolidated
 
Revenue:
                                   
  Rental uniforms and ancillary products
  $ ----     $ 509,064     $ 143,124     $ 51,774     $ (321 )   $ 703,641  
  Other services
    ----       342,152       131,522       16,191       (217,554 )     272,311  
  Equity in net income of affiliates
    81,828       ----       ----       ----       (81,828 )     ----  
      81,828       851,216       274,646       67,965       (299,703 )     975,952  
                                                 
Costs and expenses (income):
                                               
  Cost of rental uniforms and ancillary products
    ----       320,595       86,270       30,167       (38,714 )     398,318  
  Cost of other services
    ----       226,617       109,144       10,137       (179,489 )     166,409  
  Selling and administrative expenses
    ----       219,289       40,934       14,813       (1,842 )     273,194  
                                                 
Operating income
    81,828       84,715       38,298       12,848       (79,658 )     138,031  
                                                 
  Interest income
    ----       ----       (358 )     (1,152 )     ----       (1,510 )
  Interest expense (income)
    ----       14,087       (2,049 )     1,584       ----       13,622  
                                                 
Income before income taxes
    81,828       70,628       40,705       12,416       (79,658 )     125,919  
Income taxes
    ----       25,108       14,682       4,301       ----       44,091  
Net income
  $ 81,828     $ 45,520     $ 26,023     $ 8,115     $ (79,658 )   $ 81,828  


17 
 

 

 
 
CONDENSED CONSOLIDATING INCOME STATEMENT
NINE MONTHS ENDED FEBRUARY 28, 2009
(In thousands)
 

   
Cintas
Corporation
   
Corp. 2
   
Subsidiary
Guarantors
   
Non-
Guarantors
   
Eliminations
   
Cintas
Corporation
Consolidated
 
Revenue:
                                   
  Rental uniforms and ancillary products
  $ ----     $ 1,600,762     $ 438,888     $ 135,745     $ (67,867 )   $ 2,107,528  
  Other services
    ----       1,004,930       327,512       44,165       (588,133 )     788,474  
  Equity in net income of affiliates
    222,285       ----       ----       ----       (222,285 )     ----  
      222,285       2,605,692       766,400       179,910       (878,285 )     2,896,002  
                                                 
Costs and expenses (income):
                                               
  Cost of rental uniforms and ancillary products
    ----       960,159       266,138       82,068       (119,995 )     1,188,370  
  Cost of other services
    ----       720,896       288,509       27,372       (545,665 )     491,112  
  Selling and administrative expenses
    ----       782,461       3,734       44,147       (1,310 )     829,032  
                                                 
Operating income
    222,285       142,176       208,019       26,323       (211,315 )     387,488  
                                                 
  Interest income
    ----       ----       (661 )     (1,774 )     ----       (2,435 )
  Interest expense (income)
    ----       39,588       (1,397 )     15       ----       38,206  
                                                 
Income before income taxes
    222,285       102,588       210,077       28,082       (211,315 )     351,717  
Income taxes
    ----       33,734       86,964       8,734       ----       129,432  
Net income
  $ 222,285     $ 68,854     $ 123,113     $ 19,348     $ (211,315 )   $ 222,285  
 
 
 

18 
 

 

 
 
CONDENSED CONSOLIDATING INCOME STATEMENT
NINE MONTHS ENDED FEBRUARY 29, 2008
(In thousands)
 
 
   
Cintas
Corporation
   
Corp. 2
   
Subsidiary
Guarantors
   
Non-
Guarantors
   
Eliminations
   
Cintas
Corporation
Consolidated
 
Revenue:
                                   
  Rental uniforms and ancillary products
  $ ----     $ 1,540,356     $ 432,819     $ 150,494     $ (829 )   $ 2,122,840  
  Other services
    ----       1,045,347       413,216       46,614       (699,072 )     806,105  
  Equity in net income of affiliates
    245,744       ----       ----       ----       (245,744 )     ----  
      245,744       2,585,703       846,035       197,108       (945,645 )     2,928,945  
                                                 
Costs and expenses (income):
                                               
  Cost of rental uniforms and ancillary products
    ----       959,923       260,506       87,698       (126,108 )     1,182,019  
  Cost of other services
    ----       694,245       347,782       29,532       (573,798 )     497,761  
  Selling and administrative expenses
    ----       654,446       132,678       42,388       (4,483 )     825,029  
                                                 
Operating income
    245,744       277,089       105,069       37,490       (241,256 )     424,136  
                                                 
  Interest income
    ----       ----       (1,191 )     (3,577 )     ----       (4,768 )
  Interest expense (income)
    ----       39,954       (5,162 )     4,660       ----       39,452  
                                                 
Income before income taxes
    245,744       237,135       111,422       36,407       (241,256 )     389,452  
Income taxes
    ----       88,971       41,805       12,932       ----       143,708  
Net income
  $ 245,744     $ 148,164     $ 69,617     $ 23,475     $ (241,256 )   $ 245,744  
 
 
 

19 
 

 


 
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF FEBRUARY 28, 2009
(In thousands)
 

   
Cintas
Corporation
   
Corp. 2
   
Subsidiary
Guarantors
   
Non- Guarantors
   
Eliminations
   
Cintas
Corporation
Consolidated
 
Assets
                                   
Current assets
                                   
  Cash and cash equivalents
  $ ----     $ 37,790     $ 9,659     $ 6,802     $ ----     $ 54,251  
  Marketable securities
    ----       ----       ----       97,653       ----       97,653  
  Accounts receivable, net
    ----       298,911       94,504       19,183       (27,686 )     384,912  
  Inventories, net
    ----       226,864       18,441       8,379       (1,201 )     252,483  
  Uniforms and other rental items in service
    ----       272,885       82,066       19,327       (22,246 )     352,032  
  Deferred income tax asset (liability)
    ----       ----       44,633       (1,793 )     ----       42,840  
  Prepaid expenses
    ----       5,379       11,099       1,273       ----       17,751  
Total current assets
    ----       841,829       260,402       150,824       (51,133 )     1,201,922  
                                                 
Property and equipment, at cost, net
    ----       665,134       267,617       47,895       ----       980,646  
                                                 
Goodwill
    ----       ----       1,292,628       32,749       ----       1,325,377  
Service contracts, net
    ----       125,454       1,880       3,954       ----       131,288  
Other assets, net
    1,869,746       1,600,771       1,779,796       270,778       (5,440,880 )     80,211  
    $ 1,869,746     $ 3,233,188     $ 3,602,323     $ 506,200     $ (5,492,013 )   $ 3,719,444  
                                                 
Liabilities and Shareholders' Equity
                                               
Current liabilities:
                                               
  Accounts (receivable) payable
  $ (465,247 )   $ 293,122     $ 249,536     $ (22,824 )   $ 21,090     $ 75,677  
  Accrued compensation and related liabilities
    ----       30,923       14,172       1,741       ----       46,836  
  Accrued liabilities
    ----       27,571       216,326       6,312       ----       250,209  
  Current income taxes payable (receivable)
    ----       8,848       (4,348 )     (3,605 )     ----       895  
  Long-term debt due within one year
    ----       739       72       ----       (219 )     592  
Total current liabilities
    (465,247 )     361,203       475,758       (18,376 )     20,871       374,209  
                                                 
Long-term liabilities:
                                               
  Long-term debt due after one year
    ----       796,497       241       18,951       (29,485 )     786,204  
  Deferred income taxes
    ----       ----       130,625       4,458       ----       135,083  
  Accrued liabilities
    ----       ----       103,962       ----       ----       103,962  
Total long-term liabilities
    ----       796,497       234,828       23,409       (29,485 )     1,025,249  
                                                 
Total shareholders’ equity
    2,334,993       2,075,488       2,891,737       501,167       (5,483,399 )     2,319,986  
    $ 1,869,746     $ 3,233,188     $ 3,602,323     $ 506,200     $ (5,492,013 )   $ 3,719,444  

 
 

20 
 

 
 
 
 
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 31, 2008
(In thousands)
 
 
   
Cintas
Corporation
   
Corp. 2
   
Subsidiary
Guarantors
   
Non- Guarantors
   
Eliminations
   
Cintas
Corporation
Consolidated
 
Assets
                                   
Current assets:
                                   
  Cash and cash equivalents
  $ ----     $ 37,472     $ 7,851     $ 20,901     $ ----     $ 66,224  
  Marketable securities
    ----       ----       ----       125,471       ----       125,471  
  Accounts receivable, net
    ----       313,050       119,592       28,703       (31,267 )     430,078  
  Inventories, net
    ----       218,109       18,349       8,928       (6,717 )     238,669  
  Uniforms and other rental items in service
    ----       288,493       85,753       23,923       (27,753 )     370,416  
  Deferred income tax asset (liability)
    ----       ----       41,664       (2,254 )     ----       39,410  
  Prepaid expenses
    ----       5,048       5,876       1,144       ----       12,068  
Total current assets
    ----       862,172       279,085       206,816       (65,737 )     1,282,336  
                                                 
Property and equipment, at cost, net
    ----       678,239       236,519       59,817       ----       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       1,608,496       1,751,433       369,232       (5,382,401 )     83,364  
    $ 1,736,604     $ 3,294,022     $ 3,549,468     $ 676,645     $ (5,448,138 )   $ 3,808,601  
                                                 
Liabilities and Shareholders' Equity
                                               
Current liabilities:
                                               
  Accounts (receivable) payable
  $ (465,247 )   $ 292,027     $ 255,399     $ (6,000 )   $ 18,576     $ 94,755  
  Accrued compensation and related liabilities
    ----       29,919       18,210       2,476       ----       50,605  
  Accrued liabilities
    ----       54,260       146,669       7,916       (920 )     207,925  
  Current income taxes payable (receivable)
    ----       340       12,686       (139 )     ----       12,887  
  Long-term debt due within one year
    ----       698       574       ----       (202 )     1,070  
Total current liabilities
    (465,247 )     377,244       433,538       4,253       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       1,964,183       2,876,250       639,474       (5,427,627 )     2,254,131  
    $ 1,736,604     $ 3,294,022     $ 3,549,468     $ 676,645     $ (5,448,138 )   $ 3,808,601  
 
 
 

21 
 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 28, 2009
(In thousands)
 

   
Cintas
Corporation
   
Corp. 2
   
Subsidiary
Guarantors
   
Non-
Guarantors
   
Eliminations
   
Cintas
Corporation
Consolidated
 
Cash flows from operating activities:
                                   
  Net income
  $ 222,285     $ 68,854     $ 123,113     $ 19,348     $ (211,315 )   $ 222,285  
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
                                             
      Depreciation
    ----       74,977       37,085       6,057       ----       118,119  
      Amortization of deferred charges
    ----       29,871       857       1,295       ----       32,023  
      Stock-based compensation
    8,904       ----       ----       ----       ----       8,904  
      Deferred income taxes
    ----       ----       9,052       ----       ----       9,052  
      Changes in current assets and liabilities,
       net of acquisitions of  businesses:
                                               
          Accounts receivable, net
    ----       15,402       25,087       5,210       (3,581 )     42,118  
          Inventories, net
    ----       (8,739 )     (94 )     (2,078 )     (5,516 )     (16,427 )
          Uniforms and other rental items in
           service
    ----       15,520       3,689       (704 )     (5,507 )     12,998  
          Prepaid expenses
    ----       (334 )     (5,223 )     (245 )     ----       (5,802 )
          Accounts payable
    ----       14,969       (19,110 )     (20,619 )     2,513       (22,247 )
          Accrued compensation and related
            liabilities
  ----       1,009       (4,031 )     (228 )     ----       (3,250 )
          Accrued liabilities and other
    ----       (27,179 )     (18,884 )     (591 )     920       (45,734 )
          Income taxes payable
    ----       8,614       (17,034 )     (3,900 )     ----       (12,320 )
                                                 
Net cash provided by (used in) operating activities
    231,189       192,964       134,507       3,545       (222,486 )     339,719  
                                                 
Cash flows from investing activities:
                                               
  Capital expenditures
    ----       (59,740 )     (67,572 )     (5,471 )     ----       (132,783 )
  Proceeds from sale or redemption of marketable
    securities
    ----       ----       ----       92,061       ----       92,061  
  Purchase of marketable securities and
    investments
  ----       1,411       63,708       (91,517 )     (68,587 )     (94,985 )
  Acquisitions of businesses, net of cash acquired
  ----       (19,927 )     ----       (9,454 )     ----       (29,381 )
  Other
    (205,342 )     41,748       (119,418 )     (25 )     282,609       (428 )
                                                 
Net cash (used in) provided by investing activities
    (205,342 )     (36,508 )     (123,282 )     (14,406 )     214,022       (165,516 )
                                                 
Cash flows from financing activities:
                                               
  Proceeds from issuance of debt
    ----       7,500       ----       ----       ----       7,500  
  Repayment of debt
    ----       (163,557 )     (9,417 )     ----       8,464       (164,510 )
  Repurchase of common stock
    (25,847 )     ----       ----       ----       ----       (25,847 )
  Other
    ----       458       ----       278       ----       736  
                                                 
Net cash (used in) provided by financing activities
    (25,847 )     (155,599 )     (9,417 )     278       8,464       (182,121 )
                                                 
Effect of exchange rate changes on cash and cash
  equivalents
    ----       (539 )     ----       (3,516 )     ----       (4,055 )
                                                 
Net increase (decrease) in cash and cash
  equivalents
  ----       318       1,808       (14,099 )     ----       (11,973 )
Cash and cash equivalents at beginning of period
    ----       37,472       7,851       20,901       ----       66,224  
Cash and cash equivalents at end of period
  $ ----     $ 37,790     $ 9,659     $ 6,802     $ ----     $ 54,251  
 
 
 
22
 

 
 
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 29, 2008
(In thousands)
 

   
Cintas
Corporation
   
Corp. 2
   
Subsidiary
Guarantors
   
Non-
Guarantors
   
Eliminations
   
Cintas
Corporation
Consolidated
 
Cash flows from operating activities:
                                   
  Net income
  $ 245,744     $ 148,164     $ 69,617     $ 23,475     $ (241,256 )   $ 245,744  
  Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
                                             
      Depreciation
    ----       68,920       34,872       6,284       ----       110,076  
      Amortization of deferred charges
    ----       29,780       1,004       1,587       ----       32,371  
      Stock-based compensation
    7,406       ----       ----       ----       ----       7,406  
      Deferred income taxes
    ----       ----       (456 )     ----       ----       (456 )
      Changes in current assets and liabilities,
       net of acquisitions of  businesses:
                                               
        Accounts receivable, net
    ----       (1,894 )     2,808       (395 )     343       862  
        Inventories, net
    ----       (11,052 )     5,041       (930 )     (1,984 )     (8,925 )
        Uniforms and other rental items in
           service
    ----       (12,983 )     (2,280 )     (860 )     (2,505 )     (18,628 )
        Prepaid expenses
    ----       (90 )     1,143       124       ----       1,177  
        Accounts payable
    ----       (215,887 )     203,504       13,355       (1,420 )     (448 )
        Accrued compensation and related
            liabilities
    ----       (7,240 )     (3,515 )     (975 )     ----       (11,730 )
        Accrued liabilities and other
    ----       (16,671 )     9,117       (740 )     889       (7,405 )
        Income taxes payable
    ----       8,893       10,307       (1,314 )     ----       17,886  
                                                 
Net cash provided by (used in) operating activities
    253,150       (10,060 )     331,162       39,611       (245,933 )     367,930  
                                                 
Cash flows from investing activities:
                                               
  Capital expenditures
    ----       (88,397 )     (50,875 )     (5,576 )     ----       (144,848 )
  Proceeds from sale or redemption of marketable
   securities
    ----       ----       34,559       7,834       ----       42,393  
  Purchase of marketable securities and
       investments
    ----       (3,065 )     (65,284 )     (21,445 )     57,360       (32,434 )
  Acquisitions of businesses, net of cash acquired
  ----       (86,314 )     ----       (15,789 )     ----       (102,103 )
  Other
    (65,857 )     108,166       (234,074 )     (7 )     190,570       (1,202 )
                                                 
Net cash (used in) provided by investing activities
    (65,857 )     (69,610 )     (315,674 )     (34,983 )     247,930       (238,194 )
                                                 
Cash flows from financing activities:
                                               
  Proceeds from issuance of debt
    ----       313,000       ----       ----       ----       313,000  
  Repayment of debt
    ----       (225,613 )     (1,198 )     ----       (1,997 )     (228,808 )
  Stock options exercised
    8,030       ----       ----       ----       ----       8,030  
  Repurchase of common stock
    (191,479 )     ----       ----       ----       ----       (191,479 )
  Other
    (3,844 )     (7,510 )     ----       (101 )     ----       (11,455 )
                                                 
Net cash (used in) provided by financing activities
    (187,293 )     79,877       (1,198 )     (101 )     (1,997 )     (110,712 )
                                                 
Effect of exchange rate changes on cash and cash
  equivalents
    ----       ----       ----       1,291       ----       1,291  
                                                 
Net increase in cash and cash equivalents
    ----       207       14,290       5,818       ----       20,315  
Cash and cash equivalents at beginning of period
    ----       33,949       (24,834 )     26,245       ----       35,360  
Cash and cash equivalents at end of period
  $ ----     $ 34,156     $ (10,544 )   $ 32,063     $ ----     $ 55,675  


 
23 
 

 

 CINTAS CORPORATION
ITEM 2. 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 through various avenues.  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, safety and fire protection and document management.  Finally, we will continue to evaluate strategic acquisitions as opportunities arise.
 
 
RESULTS OF OPERATIONS
 
The U.S. and Canadian economic environment has been very challenging during the last three months.  We have seen these economies lose approximately 2.2 million jobs during the three months ended February 28, 2009.  A significant number of companies, including many of our customers, have reduced headcount and closed facilities.  Our revenue is directly impacted by these job losses and facility closures.  Fewer jobs result in declining revenue from fewer uniforms, both rented and purchased, less usage of first aid and restroom supplies and less opportunity for ancillary catalog sales such as shoes and jackets.  Facility closures impact our volume of entrance mats, shop towels and linen, restroom cleaning and other facility needs such as fire protection services and document management services.  Because of the job losses and facility closures that impacted our customers, our revenue decreased from $976.0 million for the three months ended February 29, 2008, to $908.6 million for the three months ended February 28, 2009.
 
As a result of the decline in our revenue, we have aggressively enacted cost reduction initiatives to limit the impact on our margins.  These cost reduction initiatives are aimed at eliminating non-value added work and streamlining our existing processes and procedures.  As a result of these initiatives, we have reduced our workforce by approximately 9% from February 29, 2008, to February 28, 2009, and we reduced our operating costs and selling and administrative expenses by approximately $50 million from the three months ended February 29, 2008, to the three months ended February 28, 2009.

24 
 

 

Cintas classifies its businesses into four operating segments in accordance with the criteria set forth in Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information.  The Rental Uniforms and Ancillary Products 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.  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.  Revenue and income before income taxes for each of these operating segments for the three and nine month periods ended February 28, 2009 and February 29, 2008, are presented in Note 10 entitled Segment Information of “Notes to Consolidated Condensed Financial Statements.”
 
New Accounting Pronouncements
 
Effective June 1, 2008, Cintas adopted Financial Accounting Standards Board (FASB) 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.  FASB Staff Position 157-2 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 did not have a material impact on Cintas’ results of operations or financial condition.  Cintas’ adoption of FAS 157 is more fully described in Note 3 entitled Fair Value Measurements.
 
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).
 
Consolidated Results
 
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
 
Total revenue decreased 6.9% for the three months ended February 28, 2009, over the same period in the prior fiscal year from $976.0 million to $908.6 million.  Acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment accounted for growth of 0.5% during the quarter.  This growth was offset by internal growth of -7.4%.  The difficult U.S. and Canadian economic environment that began in our second fiscal quarter worsened in our third fiscal quarter.  These economies lost approximately 2.2 million jobs in our third fiscal quarter.  Because of job losses that impacted our customers, we experienced decreases in uniform revenue, both rented and purchased, and revenue for our hygiene products and first aid and safety products.  In addition, facility closures by our customers reduced our volume of entrance mats, shop towels and other facility needs such as fire protection services and document management services.
 
Rental Uniforms and Ancillary Products revenue decreased 4.1% for the three months ended February 28, 2009, over the same period in the prior fiscal year from $703.6 million to $674.7 million.  There were no acquisitions in the Rental Uniforms and Ancillary Products operating segment during the three months ended February 28, 2009.

25 
 

 

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, decreased 14.1% for the three months ended February 28, 2009, over the same period in the prior fiscal year from $272.3 million to $233.9 million.  Acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment accounted for growth of 1.8% during the quarter.  This growth was offset by an internal growth of -15.9%.  The negative internal growth rate for the quarter was primarily the result of a 22.6% decrease in Uniform Direct Sales operating segment revenue and an 11.8% decrease in First Aid, Safety and Fire Protection Services segment revenue.
 
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.  Cost of rental uniforms and ancillary products decreased $18.9 million, or 4.7%, for the three months ended February 28, 2009, as compared to the three months ended February 29, 2008.  Lower Rental Uniforms and Ancillary Products volume resulted in a decrease in the cost of rental uniforms and ancillary products.  In addition, energy related costs decreased $6.9 million compared to the three months ended February 29, 2008.
 
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.  Cost of other services decreased $13.7 million, or 8.2%, for the three months ended February 28, 2009, as compared to the three months ended February 29, 2008.  This decrease was due to decreased Other Services sales volume.
 
Selling and administrative expenses decreased $16.1 million, or 5.9%, for the three months ended February 28, 2009, as compared to the three months ended February 29, 2008.  Labor and payroll tax expenses decreased by $12.9 million compared to the same period in the prior fiscal year as a result of cost reduction initiatives.
 
Net interest expense (interest expense less interest income) was $11.9 million for the three months ended February 28, 2009, which is relatively consistent with $12.1 million for the same period in the prior fiscal year.
 
Cintas’ effective tax rate decreased to 33.2% for the three months ended February 28, 2009, compared to 35.0% for the prior year period, reflecting the reserve requirements of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.  This decrease is primarily due to the recognition of tax benefits associated with certain statute expirations.
 
Net income decreased $10.0 million, or 12.2% for the three months ended February 28, 2009, from the same period in the prior fiscal year.  Diluted earnings per share were $0.47 for the three months ended February 28, 2009, which was a decrease of 11.3% compared to the same period in the prior fiscal year.  The decreased net income and diluted earnings per share are due primarily to decreased revenue volume for the quarter.
 
Rental Uniforms and Ancillary Products Operating Segment
 
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
 
As discussed above, Rental Uniforms and Ancillary Products operating segment revenue decreased from $703.6 million to $674.7 million, or 4.1%, and the cost of rental uniforms and ancillary products decreased $18.9 million, or 4.7%.  The operating segment’s gross margin was $295.2 million, or 43.8% of revenue.  This gross margin percent of revenues of 43.8% was 40 basis points higher than prior fiscal year’s third quarter of 43.4%.  Energy related costs, which include natural gas, electric and gas, decreased a combined 80 basis points as a percent of revenue over prior year’s third quarter.  In addition, cost reduction initiatives combined to reduce multiple expenses such labor, overtime, temporary labor, supplies, recruiting expense and other expenses by a combined 50 basis points.  These improvements were offset by a 70 basis point increase in material cost and depreciation and a 20 basis point increase in hanger costs.  The material cost and depreciation amounts increased as a percent of revenue mainly due to lower operating segment revenue.  Hanger costs increased as a result of an import tariff imposed by the U.S. government on hangers produced in China.

26 
 

 

Selling and administrative expenses as a percent of revenue, at 27.4%, decreased 90 basis points compared to the third quarter of the prior fiscal year.  This decrease is due to decreased labor and payroll tax expenses resulting from cost reduction initiatives.
 
Income before income taxes increased $4.0 million to $110.4 million for the Rental Uniforms and Ancillary Products operating segment for the period compared to the same period last fiscal year.  Income before income taxes was 16.4% of the operating segment’s revenue, which is a 130 basis point increase compared to the third quarter of the prior fiscal year.  This is primarily due to the decreased energy related costs and the numerous cost reduction initiatives as indicated above.
 
Uniform Direct Sales Operating Segment
 
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
 
Uniform Direct Sales operating segment revenue decreased from $125.3 million to $97.0 million, or 22.6%, for the three months ended February 28, 2009, over the same period in the prior fiscal year.  There were no acquisitions in the Uniform Direct Sales operating segment during the three months ended February 28, 2009.  As the U.S. and Canadian economies deteriorated during the last quarter, many of our customers, especially in the hospitality and gaming industries, dramatically reduced their uniform purchases and delayed roll-outs of new uniform programs.
 
Cost of uniform direct sales decreased $12.0 million, or 14.1%, for the three months ended February 28, 2009, due to decreased Uniform Direct Sales volume.  The gross margin as a percent of revenue was 24.6% for the quarter ended February 28, 2009, which decreased from 32.1% in the same period in the prior fiscal year.  This decrease is due to lower Uniform Direct Sales volume, causing the operating segment’s fixed costs to be a higher percent of revenue.
 
Selling and administrative expenses as a percent of revenue increased from 19.2% in the third quarter last year to 23.8% in this year’s third quarter.  This increase is mainly due to the decline in Uniform Direct Sales volume and in part due to higher bad debt expense, which increased approximately 30 basis points over last fiscal year’s third quarter.  Selling and administrative expenses decreased from $24.0 million in last year’s third quarter to $23.1 million in the third quarter of this fiscal year due to various cost reduction initiatives.
 
Income before income taxes decreased $15.4 million to $0.8 million for the Uniform Direct Sales operating segment for the three months ended February 28, 2009.  Income before income taxes was 0.8% of the operating segment’s revenue compared to 12.9% for the same period last fiscal year.  This decrease in income before income taxes is primarily due to the decrease in Uniform Direct Sales revenue.
 
First Aid, Safety and Fire Protection Services Operating Segment
 
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
 
First Aid, Safety and Fire Protection Services operating segment revenue decreased from $97.6 million to $86.0 million, or 11.8% for the three months ended February 28, 2009.  The 1.8% growth from acquisitions was offset by internal growth of -13.6%.  The difficult U.S. economic conditions negatively affected revenue in this segment, as job losses at our customers resulted in fewer users of first aid and safety products.  Additionally, fire installation revenue decreased $5.9 million due to continued weakness in commercial construction.
 
Cost of first aid, safety and fire protection services decreased $6.4 million, or 10.8%, for the three months ended February 28, 2009.   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 of revenue was 38.5% for the quarter ended February 28, 2009, which is a 70 basis point decrease compared to the gross margin percentage in the third quarter of the prior fiscal year.  This decrease is mainly due to a decrease in sales volume.

27 
 

 
 
Selling and administrative expenses as a percent of revenue, at 33.7%, increased 200 basis points compared to the third quarter of the prior fiscal year.  This increase is due to the lower First Aid, Safety and Fire Protection Services revenue.  Selling and administrative expenses decreased from $30.9 million in last year’s third quarter to $29.0 million in the third quarter of this fiscal year due to various cost reduction initiatives.
 
Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment decreased $3.2 million to $4.1 million for the three months ended February 28, 2009.  Income before income taxes was 4.8% of the operating segment’s revenue, which is a 270 basis point decrease compared to the third quarter of the prior fiscal year, primarily due to the decrease in First Aid, Safety and Fire Protection services revenue.
 
Document Management Services Operating Segment
 
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
 
Document Management Services operating segment revenue increased from $49.4 million to $50.9 million, or 2.9%, for the three months ended February 28, 2009, over the same period in the prior fiscal year.  Acquisitions in this operating segment accounted for growth of 6.4% during the quarter.  This operating segment had negative internal growth for the period of -3.5% over the same period in the prior fiscal year.  Although the operating segment’s volume of shredding services increased by 15% during the quarter ended February 28, 2009, compared to the same quarter last year, declining recycled paper prices caused the operating segment to have negative internal growth for the quarter ended February 28, 2009.  This segment derives revenue from the sale of shredded paper to paper recyclers.  The average price from these paper sales dropped by approximately 50% since February 29, 2008.  The price of standard office paper, which accounts for the majority of the recycled paper revenue, dropped from $235 per ton at February 29, 2008, to $125 per ton at February 28, 2009. 
 
Cost of document management services increased $4.7 million, or 21.4%, for the three months ended February 28, 2009, due to increased Document Management Services operating segment 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 of revenue decreased from 55.5% in last year’s third quarter to 47.5% for the quarter ended February 28, 2009.  This decrease is due to the significant decrease in the recycled paper prices.
 
Selling and administrative expenses as a percent of revenue, at 39.8%, increased 50 basis points compared to the third quarter of the prior fiscal year.  This increase includes a 90 basis point increase in bad debt expense, offset by various cost reduction initiatives.
 
Income before income taxes for the Document Management Services operating segment decreased $4.1 million to $3.9 million for the period compared to the same period in the prior fiscal year.  Income before income taxes as a percentage of the operating segment’s revenue decreased from 16.2% in last year’s third quarter to 7.7% for the quarter ended February 28, 2009, primarily as a result of the significant decrease in recycled paper prices.
 
Consolidated Results
 
Nine Months Ended February 28, 2009 Compared to Nine Months Ended February 29, 2008
 
Total revenue of $2.9 billion decreased $32.9 million, or 1.1% for the nine months ended February 28, 2009, over the same period in the prior fiscal year.  Acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment accounted for growth of 0.8% during the quarter.  This growth was offset by internal growth of -1.4%.  The revenue growth

28 
 

 

rate was negatively impacted by 0.5% by one fewer work day in the nine month period ended February 28, 2009 compared to the nine month period ended February 29, 2008.  The difficult U.S. and Canadian economic environment that began in our second fiscal quarter worsened in our third fiscal quarter.  These economies lost approximately 2.2 million jobs in the three months ended February 28, 2009, and lost approximately 4.0 million jobs in the six months ended February 28, 2009.  Because of job losses that impacted our customers, we experienced a decrease in uniform revenue, both rented and purchased, and revenue for hygiene products and first aid and safety products.  In addition, facility closures by our customers reduced our volume of entrance mats, shop towels and other facility needs such as fire protection services and document management services.
 
Rental Uniforms and Ancillary Products revenue of $2.1 billion decreased $15.3 million, or 0.7% for the nine months ended February 28, 2009, over the same period in the prior fiscal year.  There were no acquisitions in the Rental Uniforms and Ancillary Products operating segment during the nine months ended February 28, 2009.
 
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, decreased 2.2% for the nine months ended February 28, 2009, over the same period in the prior fiscal year from $806.1 million to $788.5 million.  Acquisitions of first aid, safety and fire protection businesses and document management businesses accounted for growth of 2.9%.  Negative internal growth of 4.6% more than offset the impact of the acquisitions.  This internal growth rate was negative during the nine months ended February 28, 2009, primarily as a result of an 11.6% decrease in Uniform Direct Sales operating segment revenue and a 1.3% decrease in First Aid, Safety and Fire Protection Services operating segment revenue.  The Other Services revenue growth rate was negatively impacted by 0.5% by one fewer work day in the nine month period ended February 28, 2009 compared to the nine month period ended February 29, 2008.
 
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.  Cost of rental uniforms and ancillary products increased $6.4 million, or 0.5%, for the nine months ended February 28, 2009, as compared to the nine months ended February 29, 2008.  This increase was due to a $3.5 million increase in energy costs and a $6.6 million increase in hanger costs, offset by various cost reduction initiatives.
 
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.  Cost of other services decreased $6.6 million, or 1.3%, for the nine months ended February 28, 2009, as compared to the nine months ended February 29, 2008. This decrease was mainly due to lower Other Services volume.
 
Selling and administrative expenses increased $4.0 million, or 0.5%, for the nine months ended February 28, 2009, as compared to the nine months ended February 29, 2008.  Medical costs increased by $15.8 million over the same period in the prior fiscal year reflecting continued rising costs in healthcare and additional claims incurred.  In addition, bad debt expense increased by $6.1 million as customers have delayed payments during this fiscal year’s difficult economic environment.  These increases were offset by decreases in labor and payroll tax expenses of $12.1 million due to cost reduction initiatives.
 
Net interest expense (interest expense less interest income) was $35.8 million for the nine months ended February 28, 2009, which is relatively consistent with the $34.7 million for the same period in the prior fiscal year.
 
Cintas’ effective tax rate was 36.8% for the nine months ended February 28, 2009, compared to 36.9% for the prior year period, reflecting the reserve requirements of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.
 
Net income decreased 9.5% for the nine months ended February 28, 2009, from the same period in the prior fiscal year.  Diluted earnings per share decreased 7.6% for the nine months ended February 28, 2009, compared to the same period in the prior fiscal year.  The decreased net income and diluted earnings per share are due to the lower volume and a combination of increases, as described previously, in energy related costs, costs of hangers, medical costs and bad debt expense for the period.

29 
 

 
 
Rental Uniforms and Ancillary Products Operating Segment
 
Nine Months Ended February 28, 2009 Compared to Nine Months Ended February 29, 2008
 
As discussed above, Rental Uniforms and Ancillary Products operating segment revenue decreased $15.3 million, or 0.7%, and the cost of rental uniforms and ancillary products increased $6.4 million, or 0.5%.  The operating segment’s gross margin was $919.2 million, or 43.6% of revenue.  This gross margin percent of revenue of 43.6% was 70 basis points lower than the 44.3% in the same period in the prior fiscal year mainly due to increased energy related costs and hanger costs.  Energy related costs, which include natural gas, electric and gas, increased a combined 20 basis points over the same period in the prior fiscal year.  Hanger costs increased 35 basis points primarily as a result of an import tariff imposed by the U.S. government on hangers produced in China.
 
Selling and administrative expenses in the Rental Uniforms and Ancillary Products operating segment as a percent of revenue, at 28.2%, remained relatively consistent with the same period of the prior fiscal year.
 
Income before income taxes decreased $13.4 million to $325.9 million for the Rental Uniforms and Ancillary Products operating segment for the period.  Income before income taxes was 15.5% of the operating segment’s revenue, which is a 50 basis point decrease compared to the same period in the prior fiscal year.  This is primarily due to the increased energy related costs and hanger costs indicated above.
 
Uniform Direct Sales Operating Segment
 
Nine Months Ended February 28, 2009 Compared to Nine Months Ended February 29, 2008
 
Uniform Direct Sales operating segment revenue decreased from $378.5 million to $334.5 million, or 11.6%, for the nine months ended February 28, 2009, over the same period in the prior fiscal year.  There were no acquisitions in the Uniform Direct Sales operating segment during the nine months ended February 28, 2009.
 
Cost of uniform direct sales decreased $22.1 million, or 8.6%, for the nine months ended February 28, 2009, due to decreased Uniform Direct Sales volume.  The gross margin as a percent of revenue was 29.3% for the nine months ended February 28, 2009, which was a 240 basis point decrease over the same period in the prior fiscal year.  This decrease in gross margin as a percent of revenue is due to the lower Uniform Direct Sales volume, causing the operating segment’s fixed costs to be a higher percent of revenue.
 
Selling and administrative expenses as a percent of revenue, at 22.7%, increased 240 basis points for the nine months ended February 28, 2009, compared to the same period in the prior fiscal year.  This increase is mainly due to the decline in Uniform Direct Sales volume and in part due to higher bad debt expense, which increased approximately 40 basis points over the same period last year.
 
Income before income taxes decreased $21.0 million to $22.0 million for the Uniform Direct Sales operating segment for the period compared to the same period in the prior fiscal year.  Income before income taxes was 6.6% of the operating segment’s revenue, which is a 480 basis point decrease compared to the same period in the prior fiscal year.  This decrease is primarily due to the decreased Uniform Direct Sales volume.
 
 
 
 

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First Aid, Safety and Fire Protection Services Operating Segment
 
Nine Months Ended February 28, 2009 Compared to Nine Months Ended February 29, 2008
 
First Aid, Safety and Fire Protection Services operating segment revenue decreased from $299.0 million to $295.1 million, or 1.3%, for the nine months ended February 28, 2009.  This operating segment’s internal growth for the period was -2.8% over the same period last fiscal year.  Acquisitions of first aid, safety and fire protection businesses accounted for growth of 2.0%.  The First Aid, Safety and Fire Protection Services operating segment revenue growth rate was negatively impacted by 0.5% by one fewer work day in the nine month period ended February 28, 2009, compared to the nine month period ended February 29, 2008.
 
Cost of first aid, safety and fire protection services decreased $3.1 million, or 1.7%, for the nine months ended February 28, 2009, due to decreased 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 of revenue was 39.9% for the nine months ended February 28, 2009, which is a 30 basis point increase compared to the gross margin percentage in the prior fiscal year.  This increase is due to better utilization of fire installation labor and a change in the mix of revenue from the lower gross margin producing revenue of fire system installation revenue and national account first aid and safety programs to the higher gross margin producing revenue of fire test and inspection services and first aid services.
 
Selling and administrative expenses as a percent of revenue, at 32.0%, increased 80 basis points for the nine months ended February 28, 2009, compared to the same period in the prior fiscal year.  This increase is due to increased selling expenses associated with the development of our Fire Protection Services sales force.
 
Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment decreased $2.1 million to $23.2 million for the period compared to the same period of the prior fiscal year.  Income before income taxes was 7.8% of the operating segment’s revenue, which is a 70 basis point decrease compared to the same period in the prior fiscal year as a result of the various items described above.
 
Document Management Services Operating Segment
 
Nine Months Ended February 28, 2009 Compared to Nine Months Ended February 29, 2008
 
Document Management Services operating segment revenue increased from $128.6 million to $158.9 million, or 23.6%, for the nine months ended February 28, 2009, over the same period in the prior fiscal year.  This operating segment’s internal growth for the period was 10.3% over the same period in the prior fiscal year.  The internal growth was due to the sale of shredding services to new customers, offset by a reduction in recycled paper prices.  This segment derives revenue from the sale of shredded paper to paper recyclers.  The average price from these paper sales dropped by approximately 50% since February 29, 2008.  The price of standard office paper, which accounts for the majority of the recycled paper revenue, dropped from $235 per ton at February 29, 2008, to $125 per ton at February 28, 2009.  Acquisitions of document management businesses accounted for growth of 13.9%.  The Document Management Services operating segment revenue growth rate was negatively impacted by 0.6% by one fewer work day in the nine month period ended February 28, 2009 compared to the nine month period ended February 29, 2008.
 
Cost of document management services increased $18.6 million, or 31.7%, for the nine months ended February 28, 2009, due to increased Document Management Services operating segment 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 of revenue was 51.3% for the period ended February 28, 2009, which is a 300 basis point decrease over the gross margin percentage in the prior fiscal year.  This decrease is due to the decrease in the recycled paper prices and a 55 basis point increase in energy related costs.

31 
 

 

Selling and administrative expenses as a percent of revenue, at 41.0%, decreased 50 basis points for the nine months ended February 28, 2009, compared to the same period in the prior fiscal year.  This decrease is due to improved scale of administrative functions resulting from the operating segment’s increased sales volume.
 
Income before income taxes for the Document Management Services operating segment of $16.4 million remained relatively consistent with the same period in the prior fiscal year.  Income before income taxes was 10.3% of the operating segment’s revenue, which is a 250 basis point decrease over the operating segment’s revenue for the same period last fiscal year as a percent of revenue, primarily as a result of decrease in recycled paper prices and the increased energy related costs.
 
Liquidity and Capital Resources
 
At February 28, 2009, Cintas had $151.9 million in cash and cash equivalents and marketable securities which is $39.8 million less than the $191.7 million at May 31, 2008.  The marketable securities consist of highly rated Canadian government securities.  This decrease is primarily due to using cash and cash equivalents and marketable securities to pay down debt balances by $164.5 million and to make capital expenditures of $132.8 million, offset by cash generated from operations of $339.7 million.  We expect capital expenditures for the year ended May 31, 2009, to be between $150 million and $170 million.  Cash and cash equivalents and marketable securities are expected to be used to finance future acquisitions, capital expenditures and expansion.
 
The financial markets have been volatile throughout the past two fiscal quarters.  This volatility has affected and may continue to affect our commercial paper rates.  However, our exposure to higher rates is limited because all of our debt as of February 28, 2009, has a fixed rate of interest.  Additionally, our highly rated commercial paper program has allowed us continued access to the financial markets.  Our commercial paper program has a capacity of $600.0 million and is fully supported by a backup revolving credit facility through a credit agreement with our banking group.  As of February 28, 2009, we had no commercial paper outstanding.  In the event that the commercial paper market becomes inaccessible, we believe that we will be able to borrow the funds we need up to the $600.0 million limit from our banking group through that credit agreement.  The credit agreement expires in February 2011.  We believe this program will be adequate to provide necessary funding for our operations.
 
Net property and equipment increased by $6.1 million from May 31, 2008 to February 28, 2009, due to our investment in computer software, rental facilities and equipment and our document management services fleet.  Cintas had two uniform rental facilities under construction as of February 28, 2009.
 
In May 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.  Cintas made no purchases under the share buyback program during the three months ended February 28, 2009.  From the inception of the share buyback program through March 31, 2009, Cintas has purchased a total of approximately 20.3 million shares of Cintas common stock, or approximately 12% of the total shares outstanding at the beginning of the program, at an average price of $39.31 per share for a total purchase price of approximately $797.9 million.  The maximum approximate dollar value of shares that may yet be purchased under the plan as of March 31, 2009, is $202.1 million.  The Board of Directors did not specify an expiration date for this program.
 
 
 
 
 
 
 
 
 
 

32 
 

 

Following is information regarding Cintas' long-term contractual obligations and other commitments outstanding as of February 28, 2009:
 
(In thousands)
 
Payments Due by Period
 
               
Two to
             
         
One year
   
three
   
Four to
   
After five
 
Long-term contractual obligations
 
Total
   
or less
   
years
   
five years
   
Years
 
                               
Long-term debt (1)
  $ 786,767     $ 563     $ 1,240     $ 233,808     $ 551,156  
Capital lease obligations (2)
    29       29       ----       ----       ----  
Operating leases (3)
    72,710       20,976       28,292       13,428       10,014  
Interest payments (4)
    665,450       49,739       99,079       74,679       441,953  
Interest swap agreements (5)
    ----       ----       ----       ----       ----  
Unconditional purchase obligations
    ----       ----       ----       ----       ----  
Total contractual cash obligations
  $ 1,524,956     $ 71,307     $ 128,611     $ 321,915     $ 1,003,123  
 
(1)
Long-term debt primarily consists of $775,000 in long-term fixed rate notes.
(2)
Capital lease obligations are classified as debt on the consolidated balance sheets.
(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 for the remainder of fiscal 2009, increase 25 basis points in fiscal 2010, increase 75 basis points in fiscal 2011, increase 100 basis points each year in fiscal 2012 and fiscal 2013 and increase 50 basis points in fiscal 2014.
(5)
Reference Note 6 entitled Debt, Derivatives and Hedging Activities of “Notes to Consolidated Condensed Financial Statements” for a detailed discussion of interest swap agreements.
 
 
(In thousands)
 
Amount of Commitment Expiration Per Period
 
               
Two to
             
         
One year
   
three
 
Four to
   
After five
 
Other commercial commitments
 
Total
   
or less
   
years
 
five years
   
Years
 
                               
Lines of credit (1)
  $ 526,326     $ ----     $ 526,326     $ ----     $ ----  
Standby letter of credit (2)
    73,674       73,641       33       ----       ----  
Guarantees
    ----       ----       ----       ----       ----  
Standby repurchase obligations
    ----       ----       ----       ----       ----  
Other commercial commitments
    ----       ----       ----       ----       ----  
Total commercial commitments
  $ 600,000     $ 73,641     $ 526,359     $ ----     $ ----  
 
(1)
Back-up facility for the commercial paper program.
(2)
Support certain outstanding long-term debt and self-insured workers' compensation and general liability insurance programs.
 
Cintas has no off-balance sheet arrangements other than a 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.
 
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.  Please refer to Note 9 entitled Litigation and Other Contingencies of “Notes to Consolidated Condensed Financial Statements” for a detailed discussion of certain specific litigation.

33 
 

 

Forward-Looking Statements
 
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements.  Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “predicts,” “projects,” “plans,” “expects,” “intends,” “target,” “forecast,” “believes,” “seeks,” “could,” “should,” “may” and “will” or the negative versions thereof and similar words, terms and 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.  You should not place undue reliance on any forward-looking statement.  We cannot guarantee that any forward-looking statement will be realized.  These statements are subject to various risks, uncertainties, potentially inaccurate assumptions and other factors that could cause actual results to differ from those set forth in or implied by this Quarterly 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, investigations or other proceedings, higher assumed sourcing or distribution costs of products, the disruption of operations from catastrophic or extraordinary 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 publicly release any revisions to any forward-looking statements or to otherwise update any forward-looking statements whether as a result of new information or to reflect events, circumstances or any other unanticipated developments arising after the date on which such statements are made.  A further list and description of risks, uncertainties and other matters can be found in our Annual Report on Form 10-K for the year ended May 31, 2008 and in our reports on Forms 10-Q and 8-K.  The risks and uncertainties described herein are not the only ones we may face. Additional risks and uncertainties presently not known to us or that we currently believe to be immaterial may also harm our business.
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
In our normal operations, Cintas has market risk exposure to interest rates.  This market risk exposure to interest rates has been previously disclosed on page 30 of our Form 10-K for the year ended May 31, 2008.
 
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 has average rate options in place to limit a portion of the risks of the revenue translation from Canadian foreign currency exchange rate movements during the remainder of the fiscal year; however, the amount of these options is not significant.
 
 
 
 
 
 
 
 
 
 
 
 

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ITEM 4.
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 February 28, 2009.  Based on such evaluation, Cintas’ management, including Cintas’ Chief Executive Officer, Chief Financial Officer, General Counsel and Controllers, has concluded that Cintas’ disclosure controls and procedures were effective as of February 28, 2009, 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 February 28, 2009, 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” on pages 31 and 32 of our Form 10-K for the year ended May 31, 2008.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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CINTAS CORPORATION
 
Part II.  Other Information
 
      Item 1.      Legal Proceedings.
 
I. Supplemental Information:  We discuss certain legal proceedings pending against us in Part I of this Quarterly Report on Form 10-Q under the caption “Item 1. Financial Statements,” in Note 9 entitled Litigation and Other Contingencies of “Notes to Consolidated Condensed Financial Statements,” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Litigation and Other Contingencies.”  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.
 
      Item 5.      Other Information
 
On January 13, 2009, Cintas declared an annual cash dividend of $0.47 per share on outstanding common stock, a 2 percent increase over the dividends paid in the prior year.  The dividend was paid on March 11, 2009, to shareholders of record as of February 4, 2009.
 
 
      Item 6.      Exhibits.
 
 
31.1
Certification of Principal Executive Officer required by Rule 13a-14(a)
 
31.2
Certification of Principal Financial Officer required by Rule 13a-14(a)
 
32.1
Section 1350 Certification of Chief Executive Officer
 
32.2
Section 1350 Certification of Chief Financial Officer
 
 
Signatures
 
Pursuant to the requirements 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
(Registrant)
 
 
       
Date:  April 8, 2009
 /s/ William C. Gale  
     William C. Gale  
     Senior Vice President and Chief Financial Officer  
     (Chief Accounting Officer)  
 
 
 
 
 
 
 
 
 
 
 
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