Table of Contents

 

 

 

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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

 

For the quarterly period ended August 31, 2010

 

OR

 

o         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 x   No o

 

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

 

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 x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

(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 o   No x

 

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

 

Class

 

Outstanding September 30, 2010

Common Stock, no par value

 

145,298,073

 

 

 



Table of Contents

 

CINTAS CORPORATION

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements.

 

 

 

 

 

Consolidated Condensed Statements of Income — Three Months Ended August 31, 2010 and 2009

3

 

 

 

 

Consolidated Condensed Balance Sheets — August 31, 2010 and May 31, 2010

4

 

 

 

 

Consolidated Condensed Statements of Cash Flows — Three Months Ended August 31, 2010 and 2009

5

 

 

 

 

Notes to Consolidated Condensed Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

27

 

 

 

Item 4.

Controls and Procedures.

28

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings.

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

29

 

 

 

Item 6.

Exhibits.

29

 

 

 

Signatures

 

30

 

 

 

Exhibits

 

 

 

2



Table of Contents

 

CINTAS CORPORATION

ITEM 1. FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share data)

 

 

 

Three Months Ended

 

 

 

August 31,
2010

 

August 31,
2009

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

Rental uniforms and ancillary products

 

$

657,564

 

$

655,638

 

Other services

 

266,340

 

235,931

 

 

 

923,904

 

891,569

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of rental uniforms and ancillary products

 

371,515

 

362,929

 

Cost of other services

 

158,718

 

145,845

 

Selling and administrative expenses

 

293,425

 

264,427

 

Legal settlement, net of insurance proceeds

 

 

19,477

 

 

 

 

 

 

 

Operating income

 

100,246

 

98,891

 

 

 

 

 

 

 

Interest income

 

(578

)

(359

)

Interest expense

 

12,274

 

12,038

 

 

 

 

 

 

 

Income before income taxes

 

88,550

 

87,212

 

 

 

 

 

 

 

Income taxes

 

27,273

 

33,228

 

 

 

 

 

 

 

Net income

 

$

61,277

 

$

53,984

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.40

 

$

0.35

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.40

 

$

0.35

 

 

See accompanying notes.

 

3



Table of Contents

 

CINTAS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

 (In thousands except share data)

 

 

 

August 31, 2010

 

May 31, 2010

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

290,646

 

$

411,281

 

Marketable securities

 

78,803

 

154,806

 

Accounts receivable, net

 

383,943

 

366,301

 

Inventories, net

 

184,363

 

169,484

 

Uniforms and other rental items in service

 

347,588

 

332,106

 

Income taxes, current

 

 

15,691

 

Deferred income tax asset

 

52,907

 

52,415

 

Prepaid expenses and other

 

33,903

 

22,860

 

 

 

 

 

 

 

Total current assets

 

1,372,153

 

1,524,944

 

 

 

 

 

 

 

Property and equipment, at cost, net

 

915,358

 

894,522

 

 

 

 

 

 

 

Goodwill

 

1,400,797

 

1,356,925

 

Service contracts, net

 

102,661

 

103,445

 

Other assets, net

 

99,935

 

89,900

 

 

 

 

 

 

 

 

 

$

3,890,904

 

$

3,969,736

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

81,307

 

$

71,747

 

Accrued compensation and related liabilities

 

45,585

 

66,924

 

Accrued liabilities

 

219,994

 

244,402

 

Income taxes, current

 

10,828

 

 

Long-term debt due within one year

 

1,765

 

609

 

 

 

 

 

 

 

Total current liabilities

 

359,479

 

383,682

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Long-term debt due after one year

 

785,682

 

785,444

 

Deferred income taxes

 

148,180

 

150,560

 

Accrued liabilities

 

127,585

 

116,021

 

 

 

 

 

 

 

Total long-term liabilities

 

1,061,447

 

1,052,025

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, no par value:
100,000 shares authorized, none outstanding

 

 

 

Common stock, no par value:
425,000,000 shares authorized,
FY 2011: 173,338,299 issued and 148,009,335 outstanding
FY 2010: 173,207,493 issued and 152,869,848 outstanding

 

135,170

 

132,058

 

Paid-in capital

 

84,550

 

84,616

 

Retained earnings

 

3,141,356

 

3,080,079

 

Treasury stock:
FY 2011: 25,328,964 shares
FY 2010: 20,337,645 shares

 

(930,193

)

(798,857

)

Other accumulated comprehensive income

 

39,095

 

36,133

 

Total shareholders’ equity

 

2,469,978

 

2,534,029

 

 

 

$

3,890,904

 

$

3,969,736

 

 

See accompanying notes.

 

4



Table of Contents

 

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

August 31,
2010

 

August 31,
2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

61,277

 

$

53,984

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

37,362

 

38,549

 

Amortization of deferred charges

 

10,429

 

10,356

 

Stock-based compensation

 

3,046

 

3,630

 

Deferred income taxes

 

(2,538

)

(412

)

Change in current assets and liabilities, net of acquisitions of businesses:

 

 

 

 

 

Accounts receivable, net

 

(13,747

)

(1,425

)

Inventories, net

 

(14,799

)

16,976

 

Uniforms and other rental items in service

 

(15,483

)

5,986

 

Prepaid expenses and other

 

(10,921

)

(4,890

)

Accounts payable

 

8,420

 

3,481

 

Accrued compensation and related liabilities

 

(21,350

)

(7,118

)

Accrued liabilities and other

 

(32,926

)

(6,433

)

Income taxes payable

 

26,528

 

32,210

 

Net cash provided by operating activities

 

35,298

 

144,894

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(48,200

)

(24,819

)

Proceeds from redemption of marketable securities

 

77,653

 

 

Purchase of marketable securities and investments

 

(6,416

)

(19,259

)

Acquisitions of businesses, net of cash acquired

 

(47,824

)

(2,633

)

Other, net

 

(2,762

)

(25

)

Net cash used in investing activities

 

(27,549

)

(46,736

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of debt

 

1,542

 

 

Repayment of debt

 

(148

)

(179

)

Repurchase of common stock

 

(131,336

)

(959

)

Other, net

 

2,181

 

516

 

Net cash used in financing activities

 

(127,761

)

(622

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(623

)

30

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(120,635

)

97,566

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

411,281

 

129,745

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

290,646

 

$

227,311

 

 

See accompanying notes.

 

5



Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

1.               Basis of Presentation

 

The consolidated condensed financial statements of Cintas Corporation (Cintas) included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations.  While we believe that the disclosures are adequately presented, it is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes included in our Form 10-K for the fiscal year ended May 31, 2010.  A summary of our significant accounting policies is presented beginning on page 39 of that report.  There have been no material changes in the accounting policies followed by Cintas during the current 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.               Fair Value Measurements

 

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

 

Level 1 —

Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 —

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

 

 

Level 3 —

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

 

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.

 

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 condensed balance sheet date.

 

6



Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

These financial instruments measured at fair value on a recurring basis are summarized below:

 

 

 

As of August 31, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

290,646

 

$

 

$

 

$

290,646

 

Marketable securities:

 

 

 

 

 

 

 

 

 

U.S. municipal bonds

 

 

22,031

 

 

22,031

 

Canadian treasury securities

 

56,772

 

 

 

56,772

 

Accounts receivable, net

 

 

552

 

 

552

 

Total assets at fair value

 

$

347,418

 

$

22,583

 

$

 

$

370,001

 

 

 

 

As of May 31, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

411,281

 

$

 

$

 

$

411,281

 

Marketable securities:

 

 

 

 

 

 

 

 

 

U.S. municipal bonds

 

 

21,954

 

 

21,954

 

Canadian treasury securities

 

97,791

 

35,061

 

 

132,852

 

Accounts receivable, net

 

 

450

 

 

450

 

Total assets at fair value

 

$

509,072

 

$

57,465

 

$

 

$

566,537

 

 

 

 

 

 

 

 

 

 

 

Current accrued liabilities

 

$

 

$

64

 

$

 

$

64

 

Total liabilities at fair value

 

$

 

$

64

 

$

 

$

64

 

 

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. Cintas does not adjust the quoted market price for such financial instruments.

 

The funds invested in Canadian marketable securities are not expected to be repatriated, but instead are expected to be invested indefinitely in foreign subsidiaries.  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 August 31, 2010 and May 31, 2010, is $78,815 and $154,857, respectively.  All contractual maturities are due within one year.

 

Accounts receivable, net and current accrued liabilities include foreign currency average rate options.  The fair value of Cintas’ foreign currency average rate options are based on similar exchange traded derivatives 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 condensed balance sheet date.

 

7



Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

3.               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:

 

 

 

 

Three Months Ended

 

 

 

August 31,
2010

 

August 31,
2009

 

Basic Earnings per Share

 

 

 

 

 

Net income

 

$

61,277

 

$

53,984

 

 

 

 

 

 

 

Less: net income allocated to participating unvested securities

 

227

 

136

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

61,050

 

$

53,848

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

152,164

 

152,828

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.40

 

$

0.35

 

 

 

 

 

 

 

Diluted Earnings per Share

 

 

 

 

 

Net income

 

$

61,277

 

$

53,984

 

 

 

 

 

 

 

Less: net income allocated to participating unvested securities

 

227

 

136

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

61,050

 

$

53,848

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

152,164

 

152,828

 

 

 

 

 

 

 

Effect of dilutive securities — employee stock options

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

152,164

 

152,828

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.40

 

$

0.35

 

 

At each of August 31, 2010 and 2009, 5,000 options granted to purchase shares of Cintas common stock were excluded from the computation of diluted earnings per share.  The exercise prices of these options were greater than the average market price of the common shares (anti-dilutive).

 

8



Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

4.               Goodwill, Service Contracts and Other Assets

 

Changes in the carrying amount of goodwill and service contracts for the three months ended August 31, 2010, by operating segment, are as follows:

 

 

 

Rental

 

 

 

First Aid,

 

 

 

 

 

 

 

Uniforms &

 

Uniform

 

Safety &

 

 

 

 

 

 

 

Ancillary

 

Direct

 

Fire

 

Document

 

 

 

 

 

Products

 

Sales

 

Protection

 

Management

 

Total

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 1, 2010

 

$

861,117

 

$

23,928

 

$

181,967

 

$

289,913

 

$

1,356,925

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired

 

20,997

 

 

1,172

 

21,182

 

43,351

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

31

 

3

 

 

487

 

521

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of August 31, 2010

 

$

882,145

 

$

23,931

 

$

183,139

 

$

311,582

 

$

1,400,797

 

 

 

 

Rental

 

 

 

First Aid,

 

 

 

 

 

 

 

Uniforms &

 

Uniform

 

Safety &

 

 

 

 

 

 

 

Ancillary

 

Direct

 

Fire

 

Document

 

 

 

 

 

Products

 

Sales

 

Protection

 

Management

 

Total

 

Service Contracts

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 1, 2010

 

$

48,711

 

$

 

$

35,599

 

$

19,135

 

$

103,445

 

 

 

 

 

 

 

 

 

 

 

 

 

Service contracts acquired

 

3,198

 

 

1,410

 

2,447

 

7,055

 

 

 

 

 

 

 

 

 

 

 

 

 

Service contracts amortization

 

(4,377

)

 

(1,658

)

(1,932

)

(7,967

)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

44

 

 

 

84

 

128

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of August 31, 2010

 

$

47,576

 

$

 

$

35,351

 

$

19,734

 

$

102,661

 

 

9



Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

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

 

 

 

As of August 31, 2010

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

Amount

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

Service contracts

 

$

353,752

 

$

251,091

 

$

102,661

 

Noncompete and consulting agreements

 

70,918

 

55,964

 

14,954

 

Investments(1)

 

74,568

 

 

74,568

 

Other

 

14,849

 

4,436

 

10,413

 

 

 

 

 

 

 

 

 

Total

 

$

160,335

 

$

60,400

 

$

99,935

 

 

 

 

As of May 31, 2010

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

Amount

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

Service contracts

 

$

346,569

 

$

243,124

 

$

103,445

 

Noncompete and consulting agreements

 

$

68,435

 

$

53,425

 

$

15,010

 

Investments(1)

 

68,616

 

 

68,616

 

Other

 

10,516

 

4,242

 

6,274

 

 

 

 

 

 

 

 

 

Total

 

$

147,567

 

$

57,667

 

$

89,900

 

 


(1)          Investments at August 31, 2010, include the cash surrender value of insurance policies of $40,947, equity method investments of $29,335 and cost method investments of $4,286.  Investments at May 31, 2010, include the cash surrender value of insurance policies of $34,294, equity method investments of $30,036 and cost method investments of $4,286.

 

Amortization expense was $10,429 and $10,356 for the three months ended August 31, 2010 and 2009, respectively.  Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $39,054, $32,651, $16,544, $13,428 and $10,751, respectively.

 

Investments recorded using the cost method are evaluated for impairment on an annual basis or when indicators of impairment are identified.  For the three months ended August 31, 2010 and 2009, no losses due to impairment were recorded.

 

10



Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

5.               Debt, Derivatives and Hedging Activities

 

As of August 31, 2010, Cintas had a commercial paper program with a capacity of $600,000 that was fully supported by a backup revolving credit facility through a credit agreement with our banking group.  The revolving credit facility had an expiration date of February, 2011.  This revolving credit facility was renewed on September 27, 2010, with a reduced capacity of $300,000 and an accordion feature that allows for a maximum borrowing capacity of $450,000 and an expiration date of September 26, 2014.  As of August 31, 2010 and May 31, 2010, Cintas had no commercial paper outstanding.

 

Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2002, fiscal 2007 and fiscal 2008. The amortization of the interest rate lock agreements resulted in an increase to other comprehensive income of $192 for each of the three months ended August 31, 2010 and 2009.

 

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 August 31, 2010, Cintas had average rate options with a fair value of $552 included in accounts receivable.  At May 31, 2010, Cintas had accrued $64 for the fair value of liabilities related to its average rate options which was included in current accrued liabilities.  The average rate options that settled during the first quarter decreased foreign currency exchange costs by $61 during the three months ended August 31, 2010, and increased foreign currency exchange costs by $17 during the three months ended August 31, 2009.

 

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.

 

6.               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 August 31, 2010, unrecognized tax benefits increased by approximately $1,344 and accrued interest decreased by approximately $8,740 due to the expiration of certain statutes.  During the three months ended August 31, 2009, unrecognized tax benefits decreased by approximately $1,638 and accrued interest increased by approximately $1,392.

 

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 2000.  Based on the resolution of the various audits, it is reasonably possible that the balance of unrecognized tax benefits could decrease by $4,275 for the fiscal year ending May 31, 2011.

 

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Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

7.               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 month periods ended August 31, 2010 and 2009, are as follows:

 

 

 

Three Months Ended

 

 

 

August 31,
2010

 

August 31,
2009

 

 

 

 

 

 

 

Net income

 

$

61,277

 

$

53,984

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation adjustment

 

3,349

 

729

 

Change in fair value of derivatives*

 

(606

)

69

 

Amortization of interest rate lock agreements

 

192

 

192

 

Change in fair value of available-for-sale securities**

 

27

 

(13

)

Comprehensive income

 

$

64,239

 

$

54,961

 

 


*   Net of ($355) and $41 of tax for the three months ended August 31, 2010 and 2009, respectively.

 

** Net of $13 and ($7) of tax for the three months ended August 31, 2010 and 2009, respectively.

 

8.               Litigation and Other Contingencies

 

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

 

Cintas is a defendant in a purported class action lawsuit, Mirna E. Serrano, et al. v. Cintas Corporation (Serrano), filed on May 10, 2004, and pending in the United States District Court, Eastern District of Michigan, Southern Division.  The Serrano plaintiffs alleged that Cintas discriminated against women in hiring into various service sales representative positions across all divisions of Cintas.  On November 15, 2005, the Equal Employment Opportunity Commission (EEOC) intervened in the Serrano lawsuit.  The Serrano plaintiffs seek injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies.  On October 27, 2008, the United States District Court in the Eastern District of Michigan granted summary judgment in favor of Cintas limiting the scope of the putative class in the Serrano lawsuit to female applicants for service sales representative positions at Cintas locations within the state of Michigan.  Consequently, all claims brought by female applicants for service sales representative positions outside of the state of Michigan were dismissed.  Similarly, any claims brought by the EEOC on behalf of similarly situated female applicants outside of the state of Michigan have also been dismissed from the Serrano lawsuit.  Cintas is a defendant in another purported class action lawsuit, Blanca Nelly

 

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Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

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 Judge 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 time for appeal has not yet expired on these Serrano dismissals; but, as of the date of this disclosure, no appeal has been taken.

 

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

 

Cintas is a defendant in a purported class action lawsuit, Paul Veliz, et al. v. Cintas Corporation (Veliz), filed on March 19, 2003, in the United States District Court, Northern District of California, Oakland Division, alleging that Cintas violated certain federal and state wage and hour laws applicable to its service sales representatives, whom Cintas considers exempt employees, and asserting additional related ERISA claims.  On April 5, 2004 and February 14, 2006, the Court stayed the claims of all plaintiffs with valid arbitration agreements pending arbitration of those claims.  Claims made in the Veliz action, therefore, are pending before the United States District Court, Northern District of California and Judge Bruce Meyerson (Ret.), an Arbitrator selected by the parties.  On August 5, 2009, the parties in the Veliz action reached a settlement in principle.  When the settlement is fully documented and approved by the Court, the settlement will resolve all claims now pending or that could have been brought relating to the subject matter of the case before the Court and the Arbitrator. The principal terms of the settlement provide for an aggregate cash payment of approximately $23,950 which is accrued in current accrued liabilities at August 31, 2010.  The pre-tax impact, net of insurance proceeds, was $19,477 during the quarter ended August 31, 2009.

 

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Table of Contents

 

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

 

9.               Segment Information

 

Cintas classifies its businesses into four operating segments.  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 tile and carpet 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

 

 

 

 

 

 

 

Products

 

Sales

 

Protection

 

Management

 

Corporate

 

Total

 

For the three months ended August 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

657,564

 

$

98,780

 

$

93,534

 

$

74,026

 

$

 

$

923,904

 

Income (loss) before income taxes

 

$

78,218

 

$

9,847

 

$

3,778

 

$

8,403

 

$

(11,696

)

$

88,550

 

 Total assets

 

$

2,407,268

 

$

221,053

 

$

347,281

 

$

545,853

 

$

369,449

 

$

3,890,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended August 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

655,638

 

$

89,301

 

$

90,001

 

$

56,629

 

$

 

$

891,569

 

Income (loss) before income taxes

 

$

102,453

 

$

8,089

 

$

5,787

 

$

2,039

 

$

(31,156

)

$

87,212

 

Total Assets

 

$

2,497,775

 

$

130,721

 

$

320,226

 

$

472,469

 

$

357,879

 

$

3,779,070

 

 

10.         Subsequent Events

 

During the month of September 2010, Cintas purchased 2,711 shares of Cintas common stock at an average price of $26.51 per share for a total purchase price of $71,872.  These purchases completed the share buyback program initially authorized for $500,000 by the Board of Directors on May 2, 2005, and expanded in July 2006 to $1,000,000.  From the inception of the share buyback program, Cintas has purchased a total of 27,951 shares at an average price of $35.78 for a total purchase price of $1,000,000.

 

14



Table of Contents

 

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



Table of Contents

 

CONDENSED CONSOLIDATING INCOME STATEMENT

THREE MONTHS ENDED AUGUST 31, 2010

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cintas

 

 

 

Cintas

 

 

 

Subsidiary

 

Non-

 

 

 

Corporation

 

 

 

Corporation

 

Corp. 2

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental uniforms and ancillary products

 

$

 

$

507,351

 

$

132,234

 

$

46,380

 

$

(28,401

)

$

657,564

 

Other services

 

 

330,945

 

121,910

 

22,780

 

(209,295

)

266,340

 

Equity in net income of affiliates

 

61,277

 

 

 

 

(61,277

)

 

 

 

61,277

 

838,296

 

254,144

 

69,160

 

(298,973

)

923,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of rental uniforms and ancillary products

 

 

323,132

 

79,581

 

29,820

 

(61,018

)

371,515

 

Cost of other services

 

 

213,714

 

102,792

 

14,200

 

(171,988

)

158,718

 

Selling and administrative expenses

 

 

274,209

 

378

 

19,987

 

(1,149

)

293,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

61,277

 

27,241

 

71,393

 

5,153

 

(64,818

)

100,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(195

)

(281

)

(100,133

)

100,031

 

(578

)

Interest expense (income)

 

 

12,598

 

(322

)

(2

)

 

12,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

61,277

 

14,838

 

71,996

 

105,288

 

(164,849

)

88,550

 

Income taxes

 

 

3,509

 

17,027

 

6,732

 

5

 

27,273

 

Net income

 

$

61,277

 

$

11,329

 

$

54,969

 

$

98,556

 

$

(164,854

)

$

61,277

 

 

16



Table of Contents

 

CONDENSED CONSOLIDATING INCOME STATEMENT

THREE MONTHS ENDED AUGUST 31, 2009

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cintas

 

 

 

Cintas

 

 

 

Subsidiary

 

Non-

 

 

 

Corporation

 

 

 

Corporation

 

Corp. 2

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental uniforms and ancillary products

 

$

 

$

503,850

 

$

134,220

 

$

43,170

 

$

(25,602

)

$

655,638

 

Other services

 

 

296,767

 

73,461

 

14,207

 

(148,504

)

235,931

 

Equity in net income of affiliates

 

53,984

 

 

 

 

(53,984

)

 

 

 

53,984

 

800,617

 

207,681

 

57,377

 

(228,090

)

891,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of rental uniforms and ancillary products

 

 

290,239

 

80,286

 

25,823

 

(33,419

)

362,929

 

Cost of other services

 

 

218,159

 

63,803

 

8,573

 

(144,690

)

145,845

 

Selling and administrative expenses

 

 

251,029

 

(2,926

)

14,937

 

1,387

 

264,427

 

Legal settlement, net of insurance proceeds

 

 

 

19,477

 

 

 

19,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

53,984

 

41,190

 

47,041

 

8,044

 

(51,368

)

98,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

(283

)

(76

)

 

(359

)

Interest expense (income)

 

 

12,719

 

(682

)

1

 

 

12,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

53,984

 

28,471

 

48,006

 

8,119

 

(51,368

)

87,212

 

Income taxes

 

 

9,676

 

20,858

 

2,694

 

 

33,228

 

Net income

 

$

53,984

 

$

18,795

 

$

27,148

 

$

5,425

 

$

(51,368

)

$

53,894

 

 

17



Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF AUGUST 31, 2010

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cintas

 

 

 

Cintas

 

 

 

Subsidiary

 

Non-

 

 

 

Corporation

 

 

 

Corporation

 

Corp. 2

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

45,493

 

$

140,314

 

$

104,839

 

$

 

$

290,646

 

Marketable securities

 

 

 

22,031

 

56,772

 

 

78,803

 

Accounts receivable, net

 

 

179,244

 

172,461

 

32,238

 

 

383,943

 

Inventories, net

 

 

158,430

 

19,111

 

9,913

 

(3,091

)

184,363

 

Uniforms and other rental items in service

 

 

269,742

 

73,540

 

26,676

 

(22,370

)

347,588

 

Deferred income tax asset (liability)

 

 

 

55,135

 

(2,228

)

 

52,907

 

Prepaid expenses and other

 

 

5,933

 

25,191

 

2,779

 

 

33,903

 

Total current assets

 

 

658,842

 

507,783

 

230,989

 

(25,461

)

1,372,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost, net

 

 

587,074

 

255,366

 

72,918

 

 

915,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

1,334,046

 

66,751

 

 

1,400,797

 

Service contracts, net

 

 

96,622

 

702

 

5,337

 

 

102,661

 

Other assets, net

 

1,965,636

 

1,624,595

 

814,564

 

338,180

 

(4,643,040

)

99,935

 

 

 

$

1,965,636

 

$

2,967,133

 

$

2,912,461

 

$

714,175

 

$

(4,668,501

)

$

3,890,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts (receivable) payable

 

$

(465,247

)

$

102,711

 

$

407,869

 

$

(2,049

)

$

38,023

 

$

81,307

 

Accrued compensation and related liabilities

 

 

32,671

 

10,516

 

2,398

 

 

45,585

 

Accrued liabilities

 

 

44,470

 

141,268

 

34,256

 

 

219,994

 

Income taxes, current (receivable)

 

 

(184

)

24,795

 

(13,783

)

 

10,828

 

Long-term debt due within one year

 

 

832

 

933

 

 

 

1,765

 

Total current liabilities

 

(465,247

)

180,500

 

585,381

 

20,822

 

38,023

 

359,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due after one year

 

 

795,169

 

(9,487

)

 

 

785,682

 

Deferred income taxes

 

 

 

143,407

 

4,773

 

 

148,180

 

Accrued liabilities

 

 

 

126,952

 

633

 

 

127,585

 

Total long-term liabilities

 

 

795,169

 

260,872

 

5,406

 

 

1,061,447

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

2,430,883

 

1,991,464

 

2,066,208

 

687,947

 

(4,706,524

)

2,469,978

 

 

 

$

1,965,636

 

$

2,967,133

 

$

2,912,461

 

$

714,175

 

$

(4,668,501

)

$

3,890,904

 

 

18



Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MAY 31, 2010

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cintas

 

 

 

Cintas

 

 

 

Subsidiary

 

 

 

 

 

Corporation

 

 

 

Corporation

 

Corp. 2

 

Guarantors

 

Non-Guarantors

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

34,905

 

$

339,702

 

$

36,674

 

$

 

$

411,281

 

Marketable securities

 

 

 

21,954

 

132,852

 

 

154,806

 

Accounts receivable, net

 

 

265,594

 

74,256

 

26,451

 

 

366,301

 

Inventories, net

 

 

144,826

 

16,857

 

9,420

 

(1,619

)

169,484

 

Uniforms and other rental items in service

 

 

256,398

 

70,489

 

25,514

 

(20,295

)

332,106

 

Income taxes, current (payable)

 

 

5,306

 

(591

)

10,976

 

 

15,691

 

Deferred tax asset (liability)

 

 

 

54,474

 

(2,059

)

 

52,415

 

Prepaid expenses and other

 

 

5,565

 

15,808

 

1,487

 

 

22,860

 

Total current assets

 

 

712,594

 

592,949

 

241,315

 

(21,914

)

1,524,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost, net

 

 

591,040

 

240,462

 

63,020

 

 

894,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

1,310,675

 

46,250

 

 

1,356,925

 

Service contracts, net

 

 

98,335

 

880

 

4,230

 

 

103,445

 

Other assets, net

 

2,032,649

 

1,608,188

 

814,657

 

322,707

 

(4,688,301

)

89,900

 

 

 

$

2,032,649

 

$

3,010,157

 

$

2,959,623

 

$

677,522

 

$

(4,710,215

)

$

3,969,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts (receivable) payable

 

$

(465,247

)

$

164,131

 

$

343,454

 

$

(8,614

)

$

38,023

 

$

71,747

 

Accrued compensation and related liabilities

 

 

42,181

 

21,730

 

3,013

 

 

66,924

 

Accrued liabilities

 

 

53,432

 

178,698

 

13,092

 

(820

)

244,402

 

Long-term debt due within one year

 

 

805

 

(196

)

 

 

609

 

Total current liabilities

 

(465,247

)

260,549

 

543,686

 

7,491

 

37,203

 

383,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due after one year

 

 

795,541

 

(10,917

)

 

820

 

785,444

 

Deferred income taxes

 

 

 

145,563

 

4,997

 

 

150,560

 

Accrued liabilities

 

 

 

115,549

 

472

 

 

116,021

 

Total long-term liabilities

 

 

795,541

 

250,195

 

5,469

 

820

 

1,052,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

2,497,896

 

1,954,067

 

2,165,742

 

664,562

 

(4,748,238

)

2,534,029