CINTAS CORP - Quarter Report: 2012 February (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 

 

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

For the quarterly period ended February 29, 2012

 

OR

 

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

For the transition period from                                         to                                        

 

Commission file number 0-11399

 

CINTAS CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

6800 CINTAS BOULEVARD

P.O. BOX 625737

CINCINNATI, OHIO 45262-5737

(Address of principal executive offices)(Zip Code)

 

(513) 459-1200

(Registrant’s telephone number, including area code)

 

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

 

Indicate by a checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes   Ö   No     

 

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer    Ö               Accelerated Filer                          Smaller Reporting Company     

Non-Accelerated Filer          (Do not check if a smaller reporting company)

 

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

 

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

 

 

Table of Contents

 

CINTAS CORPORATION

TABLE OF CONTENTS

 

 

 

Part I.	Financial Information			Page No.
Item 1.		Financial Statements.
		Consolidated Condensed Statements of Income – Three Months and Nine Months Ended February 29, 2012 and February 28, 2011		3
		Consolidated Condensed Balance Sheets – February 29, 2012 and May 31, 2011		4
		Consolidated Condensed Statements of Cash Flows – Nine Months Ended February 29, 2012 and February 28, 2011		5
		Notes to Consolidated Condensed Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.		26
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.		38
Item 4.		Controls and Procedures.		38
Part II.	Other Information
Item 1.		Legal Proceedings.		39
Item 6.		Exhibits.		39
Signatures				40
Exhibits

 

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CINTAS CORPORATION

ITEM 1. FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share data)

 

		Three Months Ended						Nine Months Ended
		February 29,			February 28,			February 29,		February 28,
		2012			2011			2012		2011
Revenue:
Rental uniforms and ancillary products		$	721,012		$	664,976		$2,163,224		$	1,980,387
Other services		291,100			272,851			885,194		817,910
		1,012,112			937,827			3,048,418		2,798,297
Costs and expenses:
Cost of rental uniforms and ancillary products		409,958			380,224			1,223,611		1,129,210
Cost of other services		176,251			165,682			530,067		492,847
Selling and administrative expenses		288,367			283,045			895,945		864,774
Operating income		137,536			108,876			398,795		311,466
Interest income		(373)			(280)			(1,141)		(1,252)
Interest expense		17,219			12,520			52,281		36,955
Income before income taxes		120,690			96,636			347,655		275,763
Income taxes		44,655			37,566			128,632		99,550
Net income		$	76,035		$	59,070		$   219,023		$	176,213
Basic earnings per share		$	0.58		$	0.41		$         1.67		$	1.19
Diluted earnings per share		$	0.58		$	0.41		$         1.67		$	1.19
Dividends declared per share		$	----		$	----		$         0.54		$	0.49

 

 

See accompanying notes.

 

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CINTAS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

 (In thousands except share data)

 

		February 29, 2012			May 31, 2011
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	217,983		$	438,106
Marketable securities		134,631			87,220
Accounts receivable, net		439,650			429,131
Inventories, net		275,673			249,658
Uniforms and other rental items in service		434,475			393,826
Income taxes, current		37,386			33,542
Deferred income tax asset		56,422			45,813
Prepaid expenses and other		29,316			23,481
Total current assets		1,625,536			1,700,777
Property and equipment, at cost, net		944,034			946,218
Goodwill		1,486,465			1,487,882
Service contracts, net		81,666			102,312
Other assets, net		115,466			114,751
		$	4,253,167		$	4,351,940
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	115,566		$	110,279
Accrued compensation and related liabilities		83,007			79,834
Accrued liabilities		224,355			242,691
Long-term debt due within one year		225,633			1,335
Total current liabilities		648,561			434,139
Long-term liabilities:
Long-term debt due after one year		1,059,276			1,284,790
Deferred income taxes		206,047			196,321
Accrued liabilities		142,656			134,041
Total long-term liabilities		1,407,979			1,615,152
Shareholders’ equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding		—			—
Common stock, no par value:
425,000,000 shares authorized,
FY 2012:  173,652,551 issued and 129,742,251 outstanding
FY 2011:  173,346,180 issued and 137,583,884 outstanding		145,120			135,401
Paid-in capital		102,201			95,732
Retained earnings		3,403,459			3,255,256
Treasury stock:
FY 2012:  43,910,300 shares
FY 2011:  35,762,296 shares		(1,505,229)			(1,242,547)
Other accumulated comprehensive income		51,076			58,807
Total shareholders’ equity		2,196,627			2,302,649
		$	4,253,167		$	4,351,940

 

See accompanying notes.

 

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CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Nine Months Ended
		February 29, 2012			February 28, 2011
Cash flows from operating activities:
Net income		$	219,023		$	176,213
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		115,566			112,126
Amortization of deferred charges		29,520			32,166
Stock-based compensation		15,023			9,813
Deferred income taxes		(995)			22,524
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net		(11,760)			(32,844)
Inventories, net		(26,958)			(61,620)
Uniforms and other rental items in service		(40,435)			(38,433)
Prepaid expenses and other		(5,977)			(2,418)
Accounts payable		6,372			26,974
Accrued compensation and related liabilities		3,251			241
Accrued liabilities		9,327			(40,663)
Income taxes payable		(4,243)			3,876
Net cash provided by operating activities		307,714			207,955
Cash flows from investing activities:
Capital expenditures		(117,716)			(142,298)
Proceeds from redemption of marketable securities		519,955			137,879
Purchase of marketable securities and investments		(576,404)			(23,174)
Acquisitions of businesses, net of cash acquired		(20,882)			(158,517)
Other, net		1,853			(2,845)
Net cash used in investing activities		(193,194)			(188,955)
Cash flows from financing activities:
Proceeds from issuance of debt		—			304,781
Repayment of debt		(1,216)			(282,755)
Exercise of stock-based compensation awards		356			—
Dividends paid		(70,820)			(71,812)
Repurchase of common stock		(262,682)			(203,214)
Other, net		1,390			930
Net cash used in financing activities		(332,972)			(252,070)
Effect of exchange rate changes on cash and cash equivalents		(1,671)			6,520
Net decrease in cash and cash equivalents		(220,123)			(226,550)
Cash and cash equivalents at beginning of period		438,106			411,281
Cash and cash equivalents at end of period		$	217,983		$	184,731

 

See accompanying notes.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.             Basis of Presentation

 

The consolidated condensed financial statements of Cintas Corporation (Cintas, the Company, we, us or our) 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 Annual Report on Form 10-K for the fiscal year ended May 31, 2011.  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 current fiscal year.

 

As disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2011, inventories are valued at the lower of cost (first-in, first-out) or market.  Inventory is comprised of the following amounts:

 

			February 29,			May 31,
(In thousands)			2012			2011
Raw materials			$	18,655		$	16,900
Work in process			13,731			18,907
Finished goods			243,287			213,851
			$	275,673		$	249,658

 

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

 

 

2.             New Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance on the presentation of other comprehensive income. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity and requires an entity to present either one continuous statement of net income and other comprehensive income or two separate, but consecutive, statements. This new guidance is effective for Cintas for the first quarter of the fiscal year ending May 31, 2013, and is to be applied retrospectively. Cintas does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

In September 2011, the FASB issued new guidance with respect to the annual goodwill impairment test, which adds a qualitative assessment that allows companies to determine whether they need to perform the two-step impairment test.  The objective of the guidance is to simplify how companies test goodwill for impairment and, more specifically, to reduce the cost and complexity of performing the goodwill impairment test. The guidance may change how the goodwill impairment test is performed, but should not change the timing or measurement of goodwill impairments.  The qualitative screen is effective for companies with fiscal years beginning after December 15, 2011. Early adoption is permitted for all companies.  Cintas will consider the new guidance in performing its annual goodwill impairment test when appropriate.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

3.             Fair Value Measurements

 

FASB Accounting Standard Codification (ASC) Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.  It also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

Level 1 –    Quoted prices in active markets for identical assets or liabilities.

 

Level 2 –   Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 –   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Cintas’ assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

In order to meet the requirements of ASC 820, Cintas utilizes two basic valuation approaches to determine the fair value of its assets and liabilities required to be recorded on a recurring basis at fair value. The first approach is the cost approach. The cost approach is generally the value a market participant would expect to replace the respective asset or liability. The second approach is the market approach. The market approach looks at what a market participant would consider valuing an exact or similar asset or liability to that of Cintas, including those traded on exchanges.

 

All financial instruments 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 consolidated balance sheet date.  These financial instruments measured at fair value on a recurring basis are summarized below:

 

(In thousands)			As of February 29, 2012
			Level 1			Level 2			Level 3			Fair Value
Cash and cash equivalents			$	217,983		$	—		$	—		$	217,983
Marketable securities:
Canadian treasury securities			125,612			9,019			—			134,631
Total assets at fair value			$	343,595		$	9,019		$	—		$	352,614
Current accrued liabilities			$	—		$	31		$	—		$	31
Total liabilities at fair value			$	—		$	31		$	—		$	31

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

(In thousands)			As of May 31, 2011
			Level 1			Level 2			Level 3			Fair Value
Cash and cash equivalents			$	438,106		$	—		$	—		$	438,106
Marketable securities:
Canadian treasury securities			61,142			26,078			—			87,220
Total assets at fair value			$	499,248		$	26,078		$	—		$	525,326
Current accrued liabilities			$	—		$	869		$	—		$	869
Total liabilities at fair value			$	—		$	869		$	—		$	869

 

Cintas’ cash and cash equivalents and marketable securities are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The types of financial instruments based on quoted market prices in active markets include most bank deposits, money market securities and certain Canadian treasury securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.  Cintas does not adjust the quoted market price for such financial instruments.

 

The types of financial instruments valued based on quoted market prices in markets that are not active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency include certain Canadian treasury securities (primarily agency debt obligations). The primary inputs to value Cintas’ marketable securities is the respective instruments future cash flows based on its stated yield and the amount a market participant would pay for a similar instrument. The valuation technique used for Cintas’ marketable securities classified within Level 2 of the fair value hierarchy is primarily the market approach. Primarily all of Cintas’ marketable securities are actively traded and the recorded fair value reflects current market conditions. However, due to the inherent volatility in the investment market, there is at least a possibility that recorded investment values may change in the near term.

 

The funds invested in Canadian marketable securities are not presently expected to be repatriated, but instead are expected to be invested indefinitely in foreign subsidiaries.  However, Cintas may consider repatriating if the operating or international opportunities change.  Interest, realized gains and losses and declines in value determined to be other than temporary on available-for-sale securities are included in interest income or expense. The cost of the securities sold is based on the specific identification method. The amortized cost basis of the marketable securities as of February 29, 2012 and May 31, 2011 was $134.7 million and $87.3 million, respectively. All contractual maturities are due within one year.

 

Current accrued liabilities include foreign currency average rate options and forward contracts. The fair value of Cintas’ foreign currency average rate options and forward contracts are based on similar exchange traded derivatives (market approach) and are, therefore, included within Level 2 of the fair value hierarchy.

 

The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Cintas believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the consolidated balance sheet date.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

Cintas’ non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis primarily relate to assets and liabilities acquired in a business acquisition. Cintas is required to provide additional disclosures about fair value measurements as part of the consolidated financial statements for each major category of assets and liabilities measured at fair value on a non-recurring basis (including business acquisitions).  Based on the nature of Cintas’ business acquisitions, which occur regularly throughout the fiscal year, the majority of the assets acquired and liabilities assumed consist of working capital, primarily valued using Level 2 inputs, property and equipment, also primarily valued using Level 2 inputs and goodwill and other identified intangible assets valued using Level 3 inputs. In general, non-recurring fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows.

 

4.             Earnings per Share

 

The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Cintas’ common shares:

 

(In thousands except per share data)		Three Months Ended						Nine Months Ended
		February 29,			February 28,			February 29,			February 28,
		2012			2011			2012			2011
Basic Earnings per Share
Net income		$	76,035		$	59,070		$	219,023		$	176,213
Less dividends to:
Common shares		$	---		$	---		$	70,055		$	71,197
Unvested shares		---			---			765			615
Total dividends		$	---		$	---		$	70,820		$	71,812
Undistributed net income		$	76,035		$	59,070		$	148,203		$	104,401
Less: net income allocated to participating unvested securities		556			316			1,096			564
Net income available to common shareholders		$	75,479		$	58,754		$	147,107		$	103,837
Basic weighted average common shares outstanding		129,735			145,303			130,261			147,686
Basic earnings per share:
Common shares – distributed earnings		$	0.00		$	0.00		$	0.54		$	0.49
Common shares – undistributed earnings		0.58			0.41			1.13			0.70
Total common shares		$	0.58		$	0.41		$	1.67		$	1.19
Unvested shares - distributed earnings		$	0.00		$	0.00		$	0.54		$	0.49
Unvested shares - undistributed earnings		0.58			0.41			1.13			0.70
Total unvested shares		$	0.58		$	0.41		$	1.67		$	1.19

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

(In thousands except per share data)		Three Months Ended						Nine Months Ended
		February 29,			February 28,			February 29,			February 28,
		2012			2011			2012			2011
Diluted Earnings per Share
Net income		$	76,035		$	59,070		$	219,023		$	176,213
Less dividends to:
Common shares		$	---		$	---		$	70,055		$	71,197
Unvested shares		---			---			765			615
Total dividends		$	---		$	---		$	70,820		$	71,812
Undistributed net income		$	76,035		$	59,070		$	148,203		$	104,401
Less: net income allocated to participating unvested securities		556			316			1,096			564
Net income available to common shareholders		$	75,479		$	58,754		$	147,107		$	103,837
Basic weighted average common shares outstanding		129,735			145,303			130,261			147,686
Effect of dilutive securities – employee stock options		210			---			60			---
Diluted weighted average common shares outstanding		129,945			145,303			130,321			147,686
Diluted earnings per share:
Common shares – distributed earnings		$	0.00		$	0.00		$	0.54		$	0.49
Common shares – undistributed earnings		0.58			0.41			1.13			0.70
Total common shares		$	0.58		$	0.41		$	1.67		$	1.19
Unvested shares - distributed earnings		$	0.00		$	0.00		$	0.54		$	0.49
Unvested shares - undistributed earnings		0.58			0.41			1.13			0.70
Total unvested shares		$	0.58		$	0.41		$	1.67		$	1.19

 

For the three months ended February 29, 2012 and February 28, 2011, 1.1 million and 3.5 million options granted to purchase shares of Cintas common stock were excluded from the computation of diluted earnings per share, respectively. For the nine months ended February 29, 2012 and February 28, 2011, 2.1 million and 3.6 million options granted to purchase shares of Cintas common stock were excluded from the computation of diluted earnings per share, respectively. The exercise prices of these options were greater than the average market price of the common stock (anti-dilutive).

 

On October 26, 2010, we announced that the Board of Directors authorized an additional $500.0 million share buyback program at market prices.  We completed the October 26, 2010 share buyback program by purchasing 8.1 million shares of Cintas common stock in June and July 2011 for an aggregate purchase price of $259.5 million.  From the inception of the October 26, 2010 share buyback program through July 29, 2011, Cintas purchased a total of 15.8 million shares of Cintas common stock at an average price of $31.70 per share for a total aggregate purchase price of $500.0 million.  On October 18, 2011, we announced that the Board of Directors authorized a new $500.0 million share buyback program at market prices.  This new share buyback program does not have an expiration date, and purchases will be made at the discretion of the Board of Directors.

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

5.             Goodwill, Service Contracts and Other Assets

 

Changes in the carrying amount of goodwill and service contracts for the nine months ended February 29, 2012, by operating segment, are as follows:

 

	Rental		First Aid,
	Uniforms &	Uniform	Safety &
	Ancillary	Direct	Fire	Document
	Products	Sales	Protection	Management	Total
Goodwill (in thousands)
Balance as of June 1, 2011	$943,177	$23,995	$192,944	$327,766	$1,487,882
Goodwill acquired/adjusted	2,163	—	(479)	(571)	1,113
Foreign currency translation	(366)	(7)	—	(2,157)	(2,530)
Balance as of February 29, 2012	$944,974	$23,988	$192,465	$325,038	$1,486,465
	Rental		First Aid,
	Uniforms &	Uniform	Safety &
	Ancillary	Direct	Fire	Document
	Products	Sales	Protection	Management	Total
Service Contracts (in thousands)
Balance as of June 1, 2011	$ 44,628	$     —	$ 35,878	$ 21,806	$102,312
Service contracts acquired	1,346	—	838	1,573	3,757
Service contracts amortization	(12,287)	—	(5,522)	(5,717)	(23,526)
Foreign currency translation	(513)	—	—	(364)	(877)
Balance as of February 29, 2012	$ 33,174	$     —	$ 31,194	$ 17,298	$ 81,666

 

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CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

	As of February 29, 2012
	Carrying		Accumulated
(In thousands)	Amount		Amortization		Net
Service contracts	$382,835		$301,169		$	81,666
Noncompete agreements	$  76,231		$  69,076		$	7,155
Investments(1)	91,638		—		91,638
Other	22,578		5,905		16,673
Total	$190,447		$  74,981		$	115,466
	As of May 31, 2011
	Carrying		Accumulated
(In thousands)	Amount		Amortization		Net
Service contracts	$379,967		$277,655		$	102,312
Noncompete agreements	$  76,091		$  63,982		$	12,109
Investments(1)	84,197		—		84,197
Other	23,135		4,690		18,445
Total	$183,423		$  68,672		$	114,751

 

(1)       Investments at February 29, 2012, include the cash surrender value of insurance policies of $58.1 million, equity method investments of $32.7 million and cost method investments of $0.8 million.  Investments at May 31, 2011, include the cash surrender value of insurance policies of $51.1 million, equity method investments of $30.2 million and cost method investments of $2.9 million.

 

Amortization expense was $29.5 million and $32.2 million for the nine months ended February 29, 2012 and February 28, 2011, respectively.  Estimated amortization expense, excluding any future acquisitions, for each of the next five fiscal years is $38.1 million, $21.5 million, $18.1 million, $15.2 million and $9.8 million, respectively.

 

Investments recorded using the cost method are evaluated for impairment on an annual basis or when indicators of impairment are identified.  For the nine months ended February 29, 2012 and February 28, 2011, no losses due to impairment were recorded.

 

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

6.             Debt, Derivatives and Hedging Activities

 

Cintas’ commercial paper program has a capacity of $300.0 million that is fully supported by a backup revolving credit facility through a credit agreement with its banking group.  This revolving credit facility has an accordion feature that allows for a maximum borrowing capacity of $450.0 million.  The revolving credit facility was amended on October 7, 2011, to extend the maturity date from September 26, 2014 to October 6, 2016, to improve the applicable margin used to calculate the interest rate payable on any outstanding loans and the facility fee payable under the agreement and to replace the financial covenant regarding Cintas’ net funded indebtedness to total capitalization with a requirement to maintain a leverage ratio of consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (debt to EBITDA) of no more than 3.5 to 1.0. We believe this program, along with cash generated from operations, will be adequate to provide necessary funding for our future cash requirements.  No commercial paper or borrowings under our revolving credit facility were outstanding as of February 29, 2012 or May 31, 2011.

 

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, fiscal 2008 and fiscal 2011.  The amortization of the interest rate lock agreements resulted in an increase to other comprehensive income of $0.4 million and $0.2 million for the three months ended February 29, 2012 and February 28, 2011, respectively, and $1.1 million and $0.6 million for the nine months ended February 29, 2012 and February 28, 2011, respectively.

 

To hedge the exposure of movements in the foreign currency rates, Cintas uses foreign currency hedges.  These hedges 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.  Cintas had average rate options and forward contracts outstanding, included in current accrued liabilities, of less than $0.1 million and $0.9 million at February 29, 2012 and May 31, 2011, respectively. There were no costs related to the average rate options that settled during the three months ended February 29, 2012.  The average rate options that settled during the three months ended February 28, 2011, increased foreign currency exchange costs by $0.1 million.  The average rate options increased foreign currency exchange costs by less than $0.1 million during both the nine months ended February 29, 2012 and February 28, 2011, respectively.

 

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 EBITDA 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.  As of February 29, 2012, Cintas was in compliance with all significant debt covenants.

 

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

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 29, 2012, unrecognized tax benefits increased by approximately $0.1 million and accrued interest increased by approximately $0.6 million.  During the nine months ended February 29, 2012, unrecognized tax benefits increased by approximately $0.1 million and accrued interest increased by approximately $2.2 million.

 

All U.S. federal income tax returns are closed to audit through fiscal 2008.  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 2004.  Based on the resolution of the various audits, it is reasonably possible that the balance of unrecognized tax benefits could decrease by $12.8 million for the fiscal year ending May 31, 2012.

 

On December 23, 2011, the U.S. Department of the Treasury and the Internal Revenue Service issued temporary regulations (Regulations Section 2011-14) that provide guidance on amounts paid to improve tangible property.  These regulations also provide guidance on amounts paid to acquire or produce tangible property, as well as guidance regarding the disposition of property.  Cintas is currently reviewing these regulations to determine the effect, if any, on Cintas’ consolidated financial statements.

 

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 other 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 are as follows:

 

(In thousands)	Three Months Ended				Nine Months Ended
	February 29,		February 28,		February 29,		February 28,
	2012		2011		2012		2011
Net income	$76,035		$59,070		$219,023		$176,213
Other comprehensive income:
Foreign currency translation adjustment	11,203		15,472		(9,343)		28,846
Change in fair value of derivatives*	304		(152)		485		(777)
Amortization of interest rate lock agreements	377		192		1,131		575
Change in fair value of available-for-sale securities**	(29)		(10)		(4)		18
Comprehensive income	$87,890		$74,572		$211,292		$204,875

 

*   Net of $0.2 million of tax expense and less than $0.1 million of tax benefit for the three months ended February 29, 2012 and February 28, 2011, respectively.  Net of $0.3 million of tax expense and net of $0.5 million of tax benefit for the nine months ended February 29, 2012 and February 28, 2011, respectively.

 

** Net of less than $0.1 million of tax benefit for both the three months ended February 29, 2012 and February 28, 2011, respectively.  Net of less than $0.1 million of tax benefit and less than $0.1 million of tax expense for the nine months ended February 29, 2012 and February 28, 2011, respectively.

 

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

9.             Litigation and Other Contingencies

 

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

 

Cintas is a defendant in a purported class action lawsuit, Mirna E. Serrano, et al. v. Cintas Corporation (Serrano), filed on May 10, 2004, and pending in the United States District Court, Eastern District of Michigan, Southern Division.  The Serrano plaintiffs alleged that Cintas discriminated against women in hiring into various service sales representative positions across all divisions of Cintas.  On November 15, 2005, the Equal Employment Opportunity Commission (EEOC) intervened in the Serrano lawsuit.  The Serrano plaintiffs seek injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies.  On October 27, 2008, the United States District Court in the Eastern District of Michigan granted summary judgment in favor of Cintas limiting the scope of the putative class in the Serrano lawsuit to female applicants for service sales representative positions at Cintas locations within the state of Michigan.  Consequently, all claims brought by female applicants for service sales representative positions outside of the state of Michigan were dismissed.  Similarly, any claims brought by the EEOC on behalf of similarly situated female applicants outside of the state of Michigan have also been dismissed from the Serrano lawsuit.  Cintas is a defendant in another purported class action lawsuit, Blanca Nelly Avalos, et al. v. Cintas Corporation (Avalos), which was filed in the United States District Court, Eastern District of Michigan, Southern Division.  The Avalos plaintiffs alleged that Cintas discriminated against women, African-Americans and Hispanics in hiring into various service sales representative positions in Cintas’ Rental division only throughout the United States.  The Avalos plaintiffs sought injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies.  The claims in Avalos originally were brought in the lawsuit captioned Robert Ramirez, et al. v. Cintas Corporation (Ramirez), filed on January 20, 2004, in the United States District Court, Northern District of California, San Francisco Division.  On May 11, 2006, the Ramirez and Avalos African-American, Hispanic and female failure to hire into service sales representative positions claims and the EEOC’s intervention were consolidated for pretrial purposes with the Serrano case and transferred to the United States District Court for the Eastern District of Michigan, Southern Division.  The consolidated case was known as Mirna E. Serrano/Blanca Nelly Avalos, et al. v. Cintas Corporation (Serrano/Avalos).  On March 31, 2009, the United States District Court, Eastern District of Michigan, Southern Division entered an order denying class certification to all plaintiffs in the Serrano/Avalos lawsuits.   Following denial of class certification, the Court permitted the individual Avalos and Serrano plaintiffs to proceed separately.  In the Avalos case, the Court dismissed the remaining claims of the individual plaintiffs who remained in that case after the denial of class certification.  On May 11, 2010, Plaintiff Tanesha Davis, on behalf of all similarly situated plaintiffs in the Avalos case, filed a notice of appeal of the District Court’s summary judgment order in the United States Court of Appeals for the Sixth Circuit.  The Appellate Court has made no determination regarding the merits of Davis’ appeal.    In September 2010, the Court in Serrano dismissed all private individual claims and all claims of the EEOC and the 13 individuals it claimed to represent.  The EEOC has appealed the District Court’s summary judgment decisions and various other rulings to the United States Court of Appeals for the Sixth Circuit.  The Court of Appeals has not yet ruled on the EEOC’s appeal.

 

The litigation discussed above, if decided or settled adversely to Cintas, may, individually or in the aggregate, result in liability material to Cintas’ consolidated financial condition or consolidated results of operation and could increase costs of operations on an ongoing basis.  Any estimated liability relating to these proceedings is not determinable at this time.  Cintas may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements if it believes such settlement is in the best interest of Cintas’ shareholders.

 

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

10.      Segment Information

 

Cintas classifies its businesses into four operating segments based on the types of products and services provided.  The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops and shop towels and other ancillary items.  In addition to these rental items, restroom cleaning services and supplies and carpet and tile cleaning services are also provided within this operating segment.  The Uniform Direct Sales operating segment consists of the direct sale of uniforms and related items and branded promotional products.  The First Aid, Safety and Fire Protection Services operating segment consists of first aid, safety and fire protection products and services.  The Document Management Services operating segment consists of document destruction, document imaging and document retention services.

 

Cintas evaluates the performance of each operating segment based on several factors of which the primary financial measures are operating segment revenue and income before income taxes.  The accounting policies of the operating segments are the same as those described in Note 1 entitled Basis of Presentation.  Information related to the operations of Cintas’ operating segments is set forth below:

 

		Rental						First Aid,
		Uniforms &			Uniform			Safety &
		Ancillary			Direct			Fire			Document
(In thousands)		Products			Sales			Protection			Management			Corporate			Total
For the three months ended February 29, 2012
Revenue		$	721,012		$	109,114		$	101,378		$	80,608		$	—		$	1,012,112
Income (loss) before
income taxes		$	112,471		$	14,481		$	7,724		$	2,860		$	(16,846)		$	120,690
For the three months ended February 28, 2011
Revenue		$	664,976		$	102,598		$	91,195		$	79,058		$	—		$	937,827
Income (loss) before
income taxes		$	85,558		$	12,383		$	4,628		$	6,307		$	(12,240)		$	96,636
As of and for the nine months ended February 29, 2012
Revenue		$	2,163,224		$	322,762		$	306,808		$	255,624		$	—		$	3,048,418
Income (loss) before
income taxes		$	316,366		$	36,130		$	25,069		$	21,230		$	(51,140)		$	347,655
Total assets		$	2,543,951		$	422,931		$	369,288		$	564,383		$	352,614		$	4,253,167
As of and for the nine months ended February 28, 2011
Revenue		$	1,980,387		$	310,167		$	278,044		$	229,699		$	—		$	2,798,297
Income (loss) before
income taxes		$	241,888		$	35,509		$	13,513		$	20,556		$	(35,703)		$	275,763
Total Assets		$	2,508,299		$	294,238		$	358,536		$	594,292		$	216,705		$	3,972,070

 

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