Edgar Filing: CINTAS CORP

CTAS-2012-11.30-10-Q

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 November 30, 2012



( )	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 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 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 December 31, 2012
Common Stock, no par value		123,286,223

CINTAS CORPORATION

TABLE OF CONTENTS



Part I.	Financial Information		Page No.

	Item 1.	Financial Statements.

		Consolidated Condensed Statements of Income – Three Months and Six Months Ended November 30, 2012 and 2011	3

		Consolidated Condensed Statements of Comprehensive Income – Three Months and Six Months Ended November 30, 2012 and 2011	4

		Consolidated Condensed Balance Sheets – November 30, 2012 and May 31, 2012	5

		Consolidated Condensed Statements of Cash Flows – Six Months Ended November 30, 2012 and 2011	6

		Notes to Consolidated Condensed Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	28

	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 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	39

	Item 5.	Other Information.	40

	Item 6.	Exhibits.	40

Signatures			41

Exhibits

CINTAS CORPORATION

ITEM 1. FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share data)



	Three Months Ended						Six Months Ended
	November 30, 2012			November 30, 2011			November 30, 2012			November 30, 2011
Revenue:
Rental uniforms and ancillary products	$	755,839		$	722,789		$	1,510,682		$	1,442,212
Other services	304,547			296,337			601,029			594,094
	1,060,386			1,019,126			2,111,711			2,036,306
Costs and expenses:
Cost of rental uniforms and ancillary products	438,902			410,247			867,050			813,653
Cost of other services	189,448			179,082			366,750			353,816
Selling and administrative expenses	293,013			297,112			599,594			607,578

Operating income	139,023			132,685			278,317			261,259

Interest income	(149		)	(403		)	(226		)	(768		)
Interest expense	16,294			17,728			32,892			35,062

Income before income taxes	122,878			115,360			245,651			226,965
Income taxes	44,851			41,010			90,891			83,977
Net income	$	78,027		$	74,350		$	154,760		$	142,988

Basic earnings per share	$	0.63		$	0.57		$	1.24		$	1.09

Diluted earnings per share	$	0.63		$	0.57		$	1.23		$	1.09

Dividends declared per share	$	0.64		$	0.54		$	0.64		$	0.54

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)



	Three Months Ended						Six Months Ended
	November 30, 2012			November 30, 2011			November 30, 2012			November 30, 2011

Net income	$	78,027		$	74,350		$	154,760		$	142,988

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	1,675			(20,764		)	8,692			(20,546		)
Change in fair value of derivatives⁽¹⁾	—			27			(151		)	181
Amortization of interest rate lock agreements	488			377			976			754
Change in fair value of available-for-sale securities⁽²⁾	(10		)	7			(12		)	25

Other comprehensive income	2,153			(20,353		)	9,505			(19,586		)

Comprehensive income	$	80,180		$	53,997		$	164,265		$	123,402

⁽¹⁾ Net of less than $0.1 million of tax benefit for the three months ended November 30, 2011. Net of less than $0.1 million of tax expense and $0.1 million of tax benefit for the six months ended November 30, 2012 and 2011, respectively.

⁽²⁾ Net of less than $0.1 million of tax benefit for the three months ended November 30, 2012 and 2011, respectively. Net of less than $0.1 million of tax benefit for both the six months ended November 30, 2012 and 2011, respectively.

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands except share data)



	November 30, 2012			May 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	242,487		$	339,825
Marketable securities	33,862			—
Accounts receivable, net	479,106			450,861
Inventories, net	236,195			251,205
Uniforms and other rental items in service	482,001			452,785
Income taxes, current	20,976			22,188
Prepaid expenses and other	25,035			24,704
Total current assets	1,519,662			1,541,568

Property and equipment, at cost, net	967,260			944,305

Goodwill	1,522,411			1,485,375
Service contracts, net	90,480			76,822
Other assets, net	118,069			112,836
	$	4,217,882		$	4,160,906

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	118,534		$	94,840
Accrued compensation and related liabilities	54,480			91,214
Accrued liabilities	325,077			256,642
Deferred tax liability	56,427			2,559
Long-term debt due within one year	661			225,636
Total current liabilities	555,179			670,891

Long-term liabilities:
Long-term debt due after one year	1,308,829			1,059,166
Deferred income taxes	206,782			204,581
Accrued liabilities	66,448			87,133
Total long-term liabilities	1,582,059			1,350,880

Shareholders’ equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding	—			—
Common stock, no par value:
425,000,000 shares authorized,
FY 2013: 174,419,454 issued and 123,228,777 outstanding
FY 2012: 173,745,913 issued and 126,519,758 outstanding	173,127			148,255
Paid-in capital	98,311			107,019
Retained earnings	3,557,088			3,482,073
Treasury stock:
FY 2013: 51,190,677 shares
FY 2012: 47,226,155 shares	(1,794,050		)	(1,634,875		)
Other accumulated comprehensive income	46,168			36,663
Total shareholders’ equity	2,080,644			2,139,135
	$	4,217,882		$	4,160,906

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



	Six Months Ended
	November 30, 2012			November 30, 2011
Cash flows from operating activities:
Net income	$	154,760		$	142,988
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	81,321			76,922
Amortization of intangible assets	11,973			20,104
Stock-based compensation	11,084			9,756
Deferred income taxes	55,245			(11,767		)
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net	(24,528		)	(20,850		)
Inventories, net	15,460			(39,268		)
Uniforms and other rental items in service	(28,105		)	(29,630		)
Prepaid expenses and other	(202		)	(5,128		)
Accounts payable	23,019			1,843
Accrued compensation and related liabilities	(36,899		)	(15,314		)
Accrued liabilities	(36,464		)	26,306
Income taxes payable	599			19,996
Net cash provided by operating activities	227,263			175,958

Cash flows from investing activities:
Capital expenditures	(99,062		)	(79,832		)
Proceeds from redemption of marketable securities	41,453			140,162
Purchase of marketable securities and investments	(80,054		)	(193,527		)
Acquisitions of businesses, net of cash acquired	(53,243		)	(14,551		)
Other, net	(673		)	5,772
Net cash used in investing activities	(191,579		)	(141,976		)

Cash flows from financing activities:
Proceeds from issuance of debt	250,000			—
Repayment of debt	(225,312		)	(903		)
Proceeds from exercise of stock-based compensation awards	2,357			78
Repurchase of common stock	(159,175		)	(262,682		)
Other, net	(2,476		)	1,454
Net cash used in financing activities	(134,606		)	(262,053		)

Effect of exchange rate changes on cash and cash equivalents	1,584			(2,263		)

Net decrease in cash and cash equivalents	(97,338		)	(230,334		)

Cash and cash equivalents at beginning of period	339,825			438,106

Cash and cash equivalents at end of period	$	242,487		$	207,772

See accompanying notes.

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 consolidated 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, 2012. A summary of our significant accounting policies is presented beginning on page 35 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, 2012, inventories are valued at the lower of cost (first-in, first-out) or market. Inventory is comprised of the following amounts:



(In thousands)	November 30, 2012		May 31, 2012

Raw materials	$	20,489	$	19,138
Work in process	13,209		13,052
Finished goods	202,497		219,015
	$	236,195	$	251,205

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 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 November 30, 2012
	Level 1		Level 2		Level 3		Fair Value
Cash and cash equivalents	$	242,487	$	—	$	—	$	242,487
Marketable securities:
U.S. municipal bonds	—		9,781		—		9,781
Canadian treasury securities	—		24,081		—		24,081
Total assets at fair value	$	242,487	$	33,862	$	—	$	276,349



(In thousands)	As of May 31, 2012
	Level 1		Level 2		Level 3		Fair Value
Cash and cash equivalents	$	339,825	$	—	$	—	$	339,825
Total assets at fair value	$	339,825	$	—	$	—	$	339,825

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

The types of financial instruments Cintas classifies within Level 2 include Canadian treasury securities (both federal and provincial) and highly rated U.S. state or municipal bonds. The valuation technique used for Cintas’ marketable securities classified within Level 2 of the fair value hierarchy is primarily the market approach. 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. 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. 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 November 30, 2012 was $33.9 million. There were no outstanding marketable securities as of May 31, 2012. All outstanding marketable securities as of November 30, 2012, had contractual maturities due within one year.

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.

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.

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					Six Months Ended
(In thousands except per share data)	November 30, 2012			November 30, 2011		November 30, 2012		November 30, 2011
Basic Earnings per Share
Net income	$	78,027		$	74,350	$	154,760	$	142,988

Less dividends to:
Common shares	$	78,866		$	70,055	$	78,866	$	70,055
Unvested shares	878			765		878		765
Total dividends	$	79,744		$	70,820	$	79,744	$	70,820

Undistributed net (loss) income	$	(1,717	)	$	3,530	$	75,016	$	72,168

Less: net (loss) income allocated to participating unvested securities	(8		)	21		409		448

Net (loss) income available to common shareholders	$	(1,709	)	$	3,509	$	74,607	$	71,720

Basic weighted average common shares outstanding	124,185			129,727		125,153		130,522

Basic earnings per common share:
Common shares - distributed earnings	$	0.64		$	0.54	$	0.64	$	0.54
Common shares - undistributed earnings	(0.01		)	0.03		0.60		0.55
Total common shares	$	0.63		$	0.57	$	1.24	$	1.09

Unvested shares - distributed earnings	$	0.64		$	0.54	$	0.64	$	0.54
Unvested shares - undistributed earnings	(0.01		)	0.03		0.60		0.55
Total unvested shares	$	0.63		$	0.57	$	1.24	$	1.09



	Three Months Ended					Six Months Ended
(In thousands except per share data)	November 30, 2012			November 30, 2011		November 30, 2012		November 30, 2011
Diluted Earnings per Share
Net income	$	78,027		$	74,350	$	154,760	$	142,988

Less dividends to:
Common shares	$	78,866		$	70,055	$	78,866	$	70,055
Unvested shares	878			765		878		765
Total dividends	$	79,744		$	70,820	$	79,744	$	70,820

Undistributed net (loss) income	$	(1,717	)	$	3,530	$	75,016	$	72,168

Less: net (loss) income allocated to participating unvested securities	(8		)	21		409		448

Net (loss) income available to common shareholders	$	(1,709	)	$	3,509	$	74,607	$	71,720

Basic weighted average common shares outstanding	124,185			129,727		125,153		130,522

Effect of dilutive securities – employee stock options	424			13		388		21

Diluted weighted average common shares outstanding	124,609			129,740		125,541		130,543

Diluted earnings per share:
Common shares - distributed earnings	$	0.64		$	0.54	$	0.64	$	0.54
Common shares - undistributed earnings	(0.01		)	0.03		0.59		0.55
Total common shares	$	0.63		$	0.57	$	1.23	$	1.09

Unvested shares - distributed earnings	$	0.64		$	0.54	$	0.64	$	0.54
Unvested shares - undistributed earnings	(0.01		)	0.03		0.59		0.55
Total unvested shares	$	0.63		$	0.57	$	1.23	$	1.09

For the three months ended November 30, 2012 and 2011, 0.4 million and 3.3 million options granted to purchase shares of Cintas common stock were excluded from the computation of diluted earnings per share, respectively. For the six months ended November 30, 2012 and 2011, 0.7 million and 2.6 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 18, 2011, we announced that the Board of Directors authorized a $500.0 million share buyback program at market prices. During the first six months of fiscal 2013, we purchased 3.8 million shares of Cintas common stock for a total purchase price of $151.7 million. From the inception of the October 18, 2011 share buyback program through January 9, 2013, Cintas has purchased a total of 7.1 million shares of Cintas common stock at an average price of $39.72 for a total purchase price of $281.3 million. In addition, for the six months ended November 30, 2012, Cintas acquired 0.2 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested during the six months ended November 30, 2012. These shares were acquired at an average price of $37.88 per share for a total purchase price of $7.5 million.

4. Goodwill, Service Contracts and Other Assets

Changes in the carrying amount of goodwill and service contracts for the six months ended November 30, 2012, by operating segment, are as follows:



Goodwill (in thousands)	Rental Uniforms & Ancillary Products		Uniform Direct Sales		First Aid, Safety & Fire Protection		Document Management		Total

Balance as of June 1, 2012	$	944,449	$	23,968	$	192,465	$	324,493	$	1,485,375
Goodwill acquired	—		—		24,110		10,610		34,720
Foreign currency translation	608		28		—		1,680		2,316
Balance as of November 30, 2012	$	945,057	$	23,996	$	216,575	$	336,783	$	1,522,411



Service Contracts (in thousands)	Rental Uniforms & Ancillary Products			Uniform Direct Sales		First Aid, Safety & Fire Protection			Document Management			Total

Balance as of June 1, 2012	$	29,156		$	—	$	29,334		$	18,332		$	76,822
Service contracts acquired	—			—		9,951			13,491			23,442
Service contracts amortization	(3,874		)	—		(3,821		)	(3,533		)	(11,228		)
Foreign currency translation	852			—		—			592			1,444
Balance as of November 30, 2012	$	26,134		$	—	$	35,464		$	28,882		$	90,480

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



	As of November 30, 2012
(In thousands)	Carrying Amount		Accumulated Amortization		Net
Service contracts	$	409,522	$	319,042	$	90,480

Noncompete and consulting agreements	$	77,469	$	72,068	$	5,401
Investments⁽¹⁾	95,109		—		95,109
Other	21,538		3,979		17,559
Total	$	194,116	$	76,047	$	118,069



	As of May 31, 2012
(In thousands)	Carrying Amount		Accumulated Amortization		Net
Service contracts	$	384,622	$	307,800	$	76,822

Noncompete and consulting agreements	$	76,036	$	69,954	$	6,082
Investments⁽¹⁾	90,198		—		90,198
Other	19,828		3,272		16,556
Total	$	186,062	$	73,226	$	112,836

⁽¹⁾ Investments at November 30, 2012, include the cash surrender value of insurance policies of $67.0 million, equity method investments of $27.2 million and cost method investments of $0.9 million. During the second quarter of fiscal 2013, Cintas sold stock of an equity method investment for a gain of $8.5 million. Investments at May 31, 2012, include the cash surrender value of insurance policies of $57.4 million, equity method investments of $31.9 million and cost method investments of $0.9 million.

Amortization expense was $12.0 million and $20.1 million for the six months ended November 30, 2012 and 2011, respectively. Estimated amortization expense, excluding any future acquisitions, for each of the next five fiscal years is $23.1 million, $20.7 million, $17.8 million, $12.6 million and $7.6 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 six months ended November 30, 2012 and 2011, no losses due to impairment were recorded.

5. 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 and has a maturity date of October 6, 2016. No commercial paper or borrowings on our revolving credit facility were outstanding as of November 30, 2012 or May 31, 2012.

On June 1, 2012, Cintas repaid at maturity $225.0 million aggregate principal amount of its 6.00% senior notes due 2012. On June 5, 2012, Cintas issued $250.0 million aggregate principal amount of senior notes due June 1, 2022. These senior notes bear interest at a rate of 3.25% paid semi-annually beginning December 1, 2012.

Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2007, fiscal 2008, fiscal 2011 and fiscal 2013. The amortization of the cash flow hedges resulted in an increase to other comprehensive income of $0.5 million and $0.4 million for the three months ended November 30, 2012 and 2011, respectively, and $1.0 million and $0.8 million for the six months ended November 30, 2012 and 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. Cintas is in compliance with all of the significant debt covenants for all periods presented. If a default of a significant covenant were to occur, the default could result in an acceleration of the maturity of the indebtedness, impair liquidity and limit the ability to raise future capital.

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 November 30, 2012, unrecognized tax benefits decreased by approximately $32.5 million and accrued interest decreased by approximately $1.2 million. During the six months ended November 30, 2012, unrecognized tax benefits decreased by approximately $32.1 million and accrued interest decreased by approximately $1.1 million. The decrease in unrecognized tax benefits for the three months and six months ended November 30, 2012, was due to a change in the IRS capitalization regulations adopted by Cintas in the second quarter of fiscal 2013 and resulted in a reclass between long-term accrued liabilities and deferred tax liability.

All U.S. federal income tax returns are closed to audit through fiscal 2010. Cintas is currently in advanced stages of various audits in certain foreign jurisdictions and certain domestic states. The years under audit cover fiscal years back to 2005. Based on the resolution of the various audits and changes in tax law, it is reasonably possible that the balance of unrecognized tax benefits could decrease by $1.3 million for the fiscal year ending May 31, 2013.

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, and acquire or produce tangible property, as well as guidance regarding the disposition of property and the expensing of supplies and materials. The finalized regulations are effective for Cintas' fiscal year ending May 31, 2014. Due to the recently announced extension of effective date of the regulations and indications of changes to the de minimis and disposition rules, Cintas continues to review these regulations, but does not believe there will be a material impact on Cintas’ consolidated financial statements.

7. 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, consolidated results of operation or consolidated cash flows 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. 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 appealed the District Court's summary judgment decisions and various other rulings to the United States Court of Appeals for the Sixth Circuit. On November 9, 2012, a three-judge panel of the Sixth Circuit reversed the District Court's opinion and remanded the claims back to the District Court. On November 21, 2012, Cintas filed a Petition for Rehearing and Rehearing en banc requesting that a full panel of the Sixth Circuit review the decision issued by the three-judge panel and reverse the three-judge panel's decision. The Sixth Circuit ordered the EEOC to respond to the Petition for Rehearing and Rehearing en banc, and the EEOC filed its response on December 14, 2012. As of January 9, 2013, the Sixth Circuit has not yet ruled on Cintas' Petition for Rehearing and Rehearing en banc.

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.

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, consolidated results of operation or consolidated cash flows 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.

8. 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:



(In thousands)	Rental Uniforms & Ancillary Products		Uniform Direct Sales		First Aid, Safety & Fire Protection		Document Management		Corporate			Total
For the three months ended November 30, 2012
Revenue	$	755,839	$	110,203	$	111,513	$	82,831	$	—		$	1,060,386
Income (loss) before income taxes	$	116,051	$	10,404	$	9,654	$	2,914	$	(16,145	)	$	122,878

For the three months ended November 30, 2011
Revenue	$	722,789	$	111,946	$	101,687	$	82,704	$	—		$	1,019,126
Income (loss) before income taxes	$	104,477	$	13,242	$	8,962	$	6,004	$	(17,325	)	$	115,360

As of and for the six months ended November 30, 2012
Revenue	$	1,510,682	$	210,482	$	222,354	$	168,193	$	—		$	2,111,711
Income (loss) before income taxes	$	232,958	$	19,145	$	18,675	$	7,539	$	(32,666	)	$	245,651
Total assets	$	2,813,707	$	143,880	$	393,429	$	590,517	$	276,349		$	4,217,882

As of and for the six months ended November 30, 2011
Revenue	$	1,442,212	$	213,648	$	205,430	$	175,016	$	—		$	2,036,306
Income (loss) before income taxes	$	203,895	$	21,649	$	17,345	$	18,370	$	(34,294	)	$	226,965
Total assets	$	2,803,231	$	157,339	$	364,461	$	552,676	$	337,605		$	4,215,312

9. 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 $1,300.0 million aggregate principal amount of long-term senior notes, which are unconditionally guaranteed, jointly and severally, by Cintas Corporation and its wholly-owned, direct and indirect domestic subsidiaries.

As allowed by SEC rules, the following condensed consolidating financial statements are provided as an alternative to filing separate financial statements of the guarantors. Each of the subsidiaries presented in the following condensed consolidating financial statements has been fully consolidated in Cintas’ consolidated financial statements. The following 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:

Condensed Consolidating Income Statement

Three Months Ended November 30, 2012

(In thousands)



	Cintas Corporation		Corp. 2			Subsidiary Guarantors			Non- Guarantors			Eliminations			Cintas Corporation Consolidated

Revenue:
Rental uniforms and ancillary products	$	—	$	575,274		$	152,771		$	55,370		$	(27,576	)	$	755,839
Other services	—		387,265			10,630			28,964			(122,312		)	304,547
Equity in net income of affiliates	78,027		—			—			—			(78,027		)	—
	78,027		962,539			163,401			84,334			(227,915		)	1,060,386
Costs and expenses (income):
Cost of rental uniforms and ancillary products	—		367,645			95,014			38,923			(62,680		)	438,902
Cost of other services	—		256,524			(6,949		)	18,564			(78,691		)	189,448
Selling and administrative expenses	—		280,259			(7,023		)	23,705			(3,928		)	293,013
Operating income	78,027		58,111			82,359			3,142			(82,616		)	139,023

Interest income	—		(13		)	(126		)	(10		)	—			(149		)
Interest expense (income)	—		16,277			18			(1		)	—			16,294

Income before income taxes	78,027		41,847			82,467			3,153			(82,616		)	122,878
Income taxes	—		14,876			29,241			746			(12		)	44,851

Net income	$	78,027	$	26,971		$	53,226		$	2,407		$	(82,604	)	$	78,027

Condensed Consolidating Income Statement

Three Months Ended November 30, 2011

(In thousands)



	Cintas Corporation		Corp. 2			Subsidiary Guarantors			Non- Guarantors			Eliminations			Cintas Corporation Consolidated

Revenue:
Rental uniforms and ancillary products	$	—	$	558,143		$	141,673		$	51,276		$	(28,303	)	$	722,789
Other services	—		367,926			14,511			28,838			(114,938		)	296,337
Equity in net income of affiliates	74,350		—			—			—			(74,350		)	—
	74,350		926,069			156,184			80,114			(217,591		)	1,019,126
Costs and expenses (income):
Cost of rental uniforms and ancillary products	—		356,105			83,939			35,270			(65,067		)	410,247
Cost of other services	—		236,673			3,794			18,305			(79,690		)	179,082
Selling and administrative expenses	—		266,206			7,402			26,181			(2,677		)	297,112
Operating income	74,350		67,085			61,049			358			(70,157		)	132,685

Interest income	—		(77		)	(111		)	(215		)	—			(403		)
Interest expense (income)	—		17,813			(433		)	348			—			17,728

Income before income taxes	74,350		49,349			61,593			225			(70,157		)	115,360
Income taxes	—		18,231			22,753			36			(10		)	41,010

Net income	$	74,350	$	31,118		$	38,840		$	189		$	(70,147	)	$	74,350

Condensed Consolidating Income Statement

Six Months Ended November 30, 2012

(In thousands)



	Cintas Corporation		Corp. 2			Subsidiary Guarantors			Non- Guarantors			Eliminations			Cintas Corporation Consolidated

Revenue:
Rental uniforms and ancillary products	$	—	$	1,151,559		$	305,588		$	109,154		$	(55,619	)	$	1,510,682
Other services	—		756,671			21,509			58,342			(235,493		)	601,029
Equity in net income of affiliates	154,760		—			—			—			(154,760		)	—
	154,760		1,908,230			327,097			167,496			(445,872		)	2,111,711
Costs and expenses (income):
Cost of rental uniforms and ancillary products	—		731,842			184,356			75,543			(124,691		)	867,050
Cost of other services	—		492,855			(9,366		)	36,272			(153,011		)	366,750
Selling and administrative expenses	—		570,903			(11,162		)	48,006			(8,153		)	599,594
Operating income	154,760		112,630			163,269			7,675			(160,017		)	278,317

Interest income	—		(31		)	(161		)	(34		)	—			(226		)
Interest expense	—		32,843			49			—			—			32,892

Income before income taxes	154,760		79,818			163,381			7,709			(160,017		)	245,651
Income taxes	—		29,255			59,883			1,770			(17		)	90,891

Net income	$	154,760	$	50,563		$	103,498		$	5,939		$	(160,000	)	$	154,760

Condensed Consolidating Income Statement

Six Months Ended November 30, 2011

(In thousands)



	Cintas Corporation		Corp. 2			Subsidiary Guarantors			Non- Guarantors			Eliminations			Cintas Corporation Consolidated

Revenue:
Rental uniforms and ancillary products	$	—	$	1,111,891		$	283,588		$	103,859		$	(57,126	)	$	1,442,212
Other services	—		725,658			31,672			58,640			(221,876		)	594,094
Equity in net income of affiliates	142,988		—			—			—			(142,988		)	—
	142,988		1,837,549			315,260			162,499			(421,990		)	2,036,306
Costs and expenses (income):
Cost of rental uniforms and ancillary products	—		702,881			168,291			71,179			(128,698		)	813,653
Cost of other services	—		457,505			1,734			36,130			(141,553		)	353,816
Selling and administrative expenses	—		541,823			23,397			48,465			(6,107		)	607,578
Operating income	142,988		135,340			121,838			6,725			(145,632		)	261,259

Interest income	—		(157		)	(238		)	(373		)	—			(768		)
Interest expense (income)	—		35,589			(881		)	354			—			35,062

Income before income taxes	142,988		99,908			122,957			6,744			(145,632		)	226,965
Income taxes	—		36,897			45,409			1,683			(12		)	83,977

Net income	$	142,988	$	63,011		$	77,548		$	5,061		$	(145,620	)	$	142,988

Condensed Consolidating Statement of Comprehensive Income

Three Months Ended November 30, 2012

(In thousands)

Cintas
Corporation

Corp. 2

Subsidiary
Guarantors

Non-
Guarantors

Eliminations

Cintas

Corporation

Consolidated