Edgar Filing: CINTAS CORP

Form 10-Q - 2/28/2007

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2007

( ) 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 check mark 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12 b-2 of the Exchange Act.

Large Accelerated Filer ü

Accelerated Filer ___

Non-Accelerated Filer ___

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

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

Class		Outstanding March 31, 2007
Common Stock, no par value		158,652,776

CINTAS CORPORATION

INDEX

			Page No.
Part I.	Financial Information

	Item 1.	Financial Statements.

		Consolidated Condensed Statements of Income - Three Months and Nine Months Ended February 28, 2007 and 2006	3

		Consolidated Condensed Balance Sheets - February 28, 2007 and May 31, 2006	4

		Consolidated Condensed Statements of Cash Flows - Nine Months Ended February 28, 2007 and 2006	5

		Notes to Consolidated Condensed Financial Statements	6

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	25

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	33

	Item 4.	Controls and Procedures.	33

Part II.	Other Information		35

	Item 1.	Legal Proceedings.	35

	Item 1A.	Risk Factors.	36

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	36

	Item 5.	Other Information.	37

	Item 6.	Exhibits.	37

Signatures			37

Certifications			38

CINTAS CORPORATION

ITEM 1. FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share data)

	Three Months Ended						Nine Months Ended
	February 28,						February 28,
		2007			2006			2007			2006
					(Restated)*						(Restated)*
Revenue:
Rentals	$	665,647		$	631,322		$	2,037,796		$	1,890,920
Other services		239,751			205,099			705,029			604,761
		905,398			836,421			2,742,825			2,495,681

Costs and expenses (income):
Cost of rentals		371,185			350,655			1,129,500			1,039,738
Cost of other services		148,386			132,796			445,944			397,024
Selling and administrative expenses		253,128			224,420			745,884			670,014
Interest income		(1,339	)		(1,925	)		(4,488	)		(4,959	)
Interest expense		11,584			7,239			36,499			22,059
		782,944			713,185			2,353,339			2,123,876

Income before income taxes		122,454			123,236			389,486			371,805

Income taxes		45,727			46,642			145,270			139,950

Net income	$	76,727		$	76,594		$	244,216		$	231,855

Basic earnings per share	$	.48		$	.46		$	1.52		$	1.38

Diluted earnings per share	$	.48		$	.45		$	1.52		$	1.37

Dividends declared per share							$	0.39		$	0.35

* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method.

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands except share data)

	February 28, 2007			May 31, 2006
	(Unaudited)			(Restated)*
ASSETS
Current assets:
Cash and cash equivalents	$	31,558		$	38,914
Marketable securities		125,935			202,539
Accounts receivable, net		393,155			389,905
Inventories, net		227,083			198,000
Uniforms and other rental items in service		339,082			337,487
Prepaid expenses		14,926			11,163

Total current assets		1,131,739			1,178,008

Property and equipment, at cost, net		900,772			863,783

Goodwill		1,226,176			1,136,175
Service contracts, net		172,842			179,965
Other assets, net		75,960			67,306

	$	3,507,489		$	3,425,237

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	69,540		$	71,635
Accrued compensation and related liabilities		57,014			50,134
Accrued liabilities		234,840			188,927
Income taxes:
Current		51,057			43,694
Deferred		39,506			51,669
Long-term debt due within one year		229,139			4,288

Total current liabilities		681,096			410,347

Long-term debt due after one year		654,376			794,454

Deferred income taxes		115,858			130,244

Shareholders' equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding		----			----
Common stock, no par value:
425,000,000 shares authorized,
FY 2007: 172,838,020 issued and 158,640,697 outstanding
FY 2006: 172,571,083 issued and 163,181,738 outstanding		130,389			120,860
Paid in capital		44,939			47,644
Retained earnings		2,443,139			2,260,917
Treasury stock:
FY 2007: 14,197,323 shares
FY 2006: 9,389,345 shares		(580,562	)		(381,613	)
Other accumulated comprehensive income		18,254			42,384
Total shareholders' equity		2,056,159			2,090,192
	$	3,507,489		$	3,425,237

* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method.

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended
	February 28,
Cash flows from operating activities:		2007			2006
					(Restated)*
Net income	$	244,216		$	231,855
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation		100,036			94,014
Amortization of deferred charges		30,015			24,130
Stock-based compensation		2,746			4,507
Deferred income taxes		(19,062	)		7,399
Change in current assets and liabilities, net of
acquisitions of businesses:
Accounts receivable		911			(14,187	)
Inventories		(28,176	)		11,984
Uniforms and other rental items in service		(1,595	)		(11,240	)
Prepaid expenses		(3,676	)		(790	)
Accounts payable		(2,070	)		(9,210	)
Accrued compensation and related liabilities		6,880			511
Accrued liabilities		(15,511	)		(32,293	)
Tax benefit on exercise of stock options		(37	)		(706	)
Income taxes payable		7,400			4,947
Net cash provided by operating activities		322,077			310,921

Cash flows from investing activities:

Capital expenditures		(128,636	)		(102,080	)
Proceeds from sale or redemption of marketable securities		102,871			74,820
Purchase of marketable securities		(24,901	)		(11,346	)
Acquisitions of businesses, net of cash acquired		(135,011	)		(327,983	)
Other		(16,303	)		(13,830	)
Net cash used in investing activities		(201,980	)		(380,419	)

Cash flows from financing activities:

Proceeds from issuance of debt		252,460			173,000
Repayment of debt		(167,687	)		(7,068	)
Stock options exercised		9,529			11,404
Tax benefit on exercise of stock options		37			706
Purchase of common stock		(198,949	)		(114,170	)
Other		(22,843	)		10,473
Net cash (used in) provided by financing activities		(127,453	)		74,345

Net (decrease) increase in cash and cash equivalents		(7,356	)		4,847

Cash and cash equivalents at beginning of period		38,914			43,196

Cash and cash equivalents at end of period	$	31,558		$	48,043

* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method.

See accompanying notes.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Amounts 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequately presented, it is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes included in our most recent Form 10-K for the fiscal year ended May 31, 2006. A summary of our significant accounting policies is presented on page 36 of that report. There has been no material changes in the accounting policies followed by Cintas during the fiscal year, with the exception of the new accounting standard discussed in Note 2 below.

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.

Certain prior year amounts have been reclassified to conform to current year presentation.

2.	New Accounting Standard

At February 28, 2007, Cintas had an equity compensation plan, which is described in Note 6. Prior to June 1, 2006, Cintas accounted for this plan under the intrinsic value method proscribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. Effective June 1, 2006, Cintas adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-retrospective transition method. Under that transition method, all prior periods have been restated based on the amounts previously calculated in the pro forma footnote disclosures required by Statement 123. Statement 123(R) requires all share-based payments to employees, including stock options, to be recognized as an expense in the statement of income based on their fair values. Due to this restatement, Cintas’ income before income taxes and net income decreased by $1,151 for the three months ended February 28, 2006, and $3,396 for the nine months ended February 28, 2006. This adoption lowered basic earnings per share for the third quarter of fiscal 2006 from $0.47 per share to $0.46 per share for the quarter. Likewise, diluted earnings per share for the third quarter of fiscal 2006 were lowered from $0.46 per share to $0.45 for the quarter. This adoption also lowered basic earnings per share year-to-date from $1.40 per share to $1.38 per share. In addition, diluted earnings per share year-to-date were lowered from $1.39 per share to $1.37 per share. The cumulative effect of the change on total shareholders’ equity as of May 31, 2006, was less than $1,000.

As a result of adopting Statement 123(R) on June 1, 2006, Cintas’ income before income taxes and net income for the nine months ended February 28, 2007, are $2,746 and $1,739 lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. Basic earnings per share are $.02 lower and diluted earnings per share are $.01 lower for the nine months ended February 28, 2007, than if Cintas had continued to account for share-based compensation under Opinion 25.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

3.	Earnings per Share

The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective periods:

	Three Months Ended				Nine Months Ended
	February 28,				February 28,
	2007		2006		2007		2006
			(Restated)*				(Restated)*
Numerator:
Net income	$	76,727	$	76,594	$	244,216	$	231,855

Denominator:
Denominator for basic earnings per
share-weighted average shares		159,311		168,038		160,144		168,321

Effect of dilutive securities-
employee stock options		388		561		406		594

Denominator for diluted earnings per
share-adjusted weighted average
shares and assuming conversions		159,699		168,599		160,550		168,915

Basic earnings per share	$	.48	$	.46	$	1.52	$	1.38

Diluted earnings per share	$	.48	$	.45	$	1.52	$	1.37

* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method.

4.	Goodwill, Service Contracts and Other Assets

Changes in the carrying amount of goodwill and service contracts for the nine months ended February 28, 2007, by operating segment, are as follows:

				Other
		Rentals			Services			Total
Goodwill
Balance as of June 1, 2006	$	855,135		$	281,040		$	1,136,175

Goodwill acquired		(2,181	)		93,436			91,255

Foreign currency translation		(952	)		(302	)		(1,254	)

Balance as of February 28, 2007	$	852,002		$	374,174		$	1,226,176

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

				Other
	Rentals			Services			Total
Service Contracts
Balance as of June 1, 2006	$	132,391		$	47,574		$	179,965

Service contracts acquired		304			16,225			16,529

Service contracts amortization		(14,903	)		(7,316	)		(22,219	)

Foreign currency translation		(1,364	)		(69	)		(1,433	)

Balance as of February 28, 2007	$	116,428		$	56,414		$	172,842

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

	As of February 28, 2007
		Carrying Amount		Accumulated Authortization		Net

Service contracts	$	309,419	$	136,577	$	172,842
Noncompete and consulting agreements	$	56,081	$	21,370	$	34,711
Investments		34,846		----		34,846
Other		10,428		4,025		6,403

Total	$	101,355	$	25,395	$	75,960

	As of May 31, 2006
		Carrying Amount		Accumulated Amortization		Net

Service contracts	$	295,929	$	115,964	$	179,965
Noncompete and consulting agreements	$	45,801	$	15,484	$	30,317
Investments		33,754		----		33,754
Other		6,758		3,523		3,235

Total	$	86,313	$	19,007	$	67,306

Amortization expense was $30,015 and $24,130 for the nine months ended February 28, 2007 and February 28, 2006, respectively. Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $40,661, $40,099, $37,468, $34,437 and $30,766, respectively.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

5.	Debt, Derivatives and Hedging Activities

On August 15, 2006, Cintas issued $250,000 of senior notes due in 2036. This debt bears an interest rate of 6.15% paid semi-annually beginning February 15, 2007. The proceeds generated from the offering were used to repay a portion of our outstanding commercial paper borrowings.

Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Cintas’ hedging activities are transacted only with highly-rated institutions, reducing the exposure to credit risk in the event of nonperformance. Cintas periodically uses derivatives for fair value hedging and cash flow hedging purposes. There were no fair value hedges in place as of February 28, 2007.

Cash flow hedges are derivative instruments that hedge the exposure of variability in short-term interest rates. These agreements effectively convert a portion of the floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. The effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains or losses on the ineffective portion of the hedge are charged to earnings in the current period. When outstanding, the effectiveness of these derivative instruments is reviewed at least every fiscal quarter. Examples of cash flow hedging instruments that Cintas may use are interest rate swaps, lock agreements and forward starting swaps. There were no interest rate swap or lock agreements outstanding as of February 28, 2007. There was a cash settled forward starting swap in place as of February 28, 2007, which is discussed below.

During the third quarter of fiscal 2006, Cintas entered into a cash settled forward starting swap to protect forecasted interest payments from interest rate movement for an anticipated $200,000 debt issuance in fiscal 2008. The Hypothetical Derivative Method is used to measure hedge effectiveness. Cintas expects the forward starting swap to be perfectly effective as the critical terms of the anticipated debt issuance will perfectly offset the hedged cash flows of the forecasted interest payments. When the $200,000 of hedged debt is issued, the lender will make a payment to Cintas if the 30-year Treasury rate has increased since the inception of the cash settled forward starting swap. Conversely, if the 30-year Treasury rate decreases during that period, Cintas will pay the lender. The value of the cash settled forward starting swap prior to the debt issuance is recorded in other comprehensive income in shareholders’ equity and other assets or accrued liabilities depending on the value of the swap at the end of each reporting period. Once the debt is issued, the value of the forward starting swap will be settled with cash and will be amortized to earnings over the term of the debt issuance.

Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes, both for the senior notes issued in fiscal 2002 and the senior notes issued in fiscal 2007. The amortization of the cash flow hedges resulted in a credit to other comprehensive income of $104 for the three months ended February 28, 2007, and $281 for the nine months ended February 28, 2007.

Cintas has certain significant 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. Cintas is in compliance with all of the significant debt covenants for all periods presented. Were a default of a significant covenant to occur, the default could result in an acceleration of indebtedness, impair liquidity and limit the ability to raise future capital. Cintas’ debt, net of cash and marketable securities, is $726,022 as of February 28, 2007. For the nine months ended February 28, 2007, net cash provided by operating activities was $322,077 and capital expenditures were $128,636.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

6.	Stock-Based Compensation

Under the 2005 equity compensation plan, which was approved by shareholders and adopted by Cintas in fiscal 2006, Cintas may grant officers and key employees equity compensation in the form of stock options, stock appreciation rights, restricted and unrestricted stock, performance awards and other stock unit awards up to an aggregate of 14,000,000 shares of Cintas' common stock. The compensation cost charged against income was $1,497 and $1,462 for the three month periods ended February 28, 2007 and February 28, 2006, respectively. The compensation cost charged against income was $2,746 and $4,507 for the nine month periods ended February 28, 2007 and February 28, 2006, respectively. The amount recorded in the nine month period ended February 28, 2007, reflects a cumulative catch-up adjustment of $2,169 ($2,088 after tax), due to a change in the estimated forfeitures for certain existing stock option and restricted stock grants. Basic and diluted earnings per share for the nine months ended February 28, 2007, are both $.01 higher, respectively, due to this change in estimated forfeitures. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $310 and $117 for the three month periods ended February 28, 2007 and 2006, respectively, and was $1,007 and $418 for the nine month periods ended February 28, 2007 and 2006, respectively.

Stock Options

Stock options are granted at the fair market value of the underlying common stock on the date of grant. The option terms are determined by the Cintas Compensation Committee, but no stock option may be exercised later than ten years after the date of the grant. The option awards generally have ten year terms with graded vesting in years five through ten based on continuous service during that period. Cintas recognizes compensation expense for these options using the straight-line recognition method over the vesting period.

The fair value of these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:

	Three and Nine Months Ended
	February 28,
		2007	2006

Risk-free interest rate		4.00%	4.00%
Dividend yield		.70%	.50%
Expected volatility of Cintas' common stock		35%	35%
Expected life of the option in years		7.5	9

The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options. The determination of expected volatility is based on historical volatility of Cintas stock over the period commensurate with the expected term of stock options, as well as other relevant factors. The weighted average expected term was determined based on the historical employee exercise behavior of the options. The weighted-average grant date fair value of stock options granted during the three months ended February 28, 2007, was $17.39 and was $20.95 for the three months ended February 28, 2006. The weighted-average grant date fair value of stock options granted during the nine months ended February 28, 2007, was $16.02 and was $20.95 for the nine months ended February 28, 2006.

The information presented in the following table relates primarily to stock options granted and outstanding under either the plan adopted in fiscal 2006 or under previously adopted plans:

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

				Weighted Average
	Shares			Exercise Price
Outstanding May 31, 2006 (2,718,180 shares exercisable)		6,535,404		$	40.08
Granted		1,061,005			37.60
Forfeitures/Cancellations		(157,435	)		42.52
Exercised		(144,607	)		18.95
Outstanding August 31, 2006 (2,707,855 shares exercisable)		7,294,367		$	40.09
Granted		111,500			41.31
Forfeitures/Cancellations		(198,545	)		42.02
Exercised		(79,038	)		24.38
Outstanding November 30, 2006 (2,561,212 shares exercisable)		7,128,284		$	40.23
Granted		43,350			41.02
Forfeitures/Cancellations		(256,675	)		40.04
Exercised		(125,049	)		24.49
Outstanding February 28, 2007 (2,394,238 shares exercisable)		6,789,910		$	40.53

The intrinsic value of stock options exercised in the three and nine months ended February 28, 2007, was $2,086 and $6,154, respectively.

The following table summarizes the information related to stock options outstanding at February 28, 2007:

			Outstanding Options				Exercisable Options
			Average		Weighted				Weighted
			Remaining		Average				Average
Range of	Number		Option		Exercise		Number		Exercise
Exercise Prices	Outstanding		Life		Price		Exercisable		Price
$ 18.04 - $ 39.19		1,651,096		6.48	$	33.72		469,989	$	26.63
39.29 - 41.98		1,965,764		5.72		40.67		919,399		41.77
42.06 - 44.33		1,652,000		6.58		42.35		432,650		42.76
44.43 - 53.19		1,521,050		6.95		45.67		572,200		47.69
$ 18.04 - $ 53.19		6,789,910		6.39	$	40.53		2,394,238	$	40.39

At February 28, 2007, the aggregate intrinsic value of stock options outstanding and exercisable was $11,848 and $6,451, respectively.

Restricted Stock

Restricted stock consists of Cintas’ common stock which is subject to such conditions, restrictions and limitations as the Cintas Compensation Committee determines to be appropriate. The vesting period is generally three years after the grant date.

The information presented in the following table relates to restricted stock granted and outstanding under the plan adopted in fiscal 2006:

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

				Weighted Average
	Shares			Price

Outstanding, unvested grants at May 31, 2006		128,075		$	36.08
Granted		230,365			38.06
Cancelled		-			-
Vested		-			-
Outstanding, unvested grants at August 31, 2006		358,440		$	37.36
Granted		15,866			38.97
Cancelled		(2,460	)		36.08
Vested		-			-
Outstanding, unvested grants at November 30, 2006		371,846		$	37.43
Granted		4,780			37.38
Cancelled		(1,878	)		36.08
Vested		-			-
Outstanding, unvested grants at February 28, 2007		374,748		$	37.44

The remaining unrecognized compensation cost related to unvested stock options and restricted stock at February 28, 2007, was approximately $41,639, and the weighted-average period of time over which this cost will be recognized is 3.7 years.

Cintas reserves shares of common stock to satisfy share option exercises and/or future restricted stock grants. At February, 2007, 13,205,262 shares of common stock are reserved for future issuance under the 2005 plan.

During fiscal 2005, the Compensation Committee of the Board of Directors approved a resolution to accelerate the vesting for certain “out-of-the-money” options. The “out-of-the-money” options that were accelerated were provided to employees during fiscal 2000, 2001, 2002 and 2003. The Compensation Committee approved this acceleration in order to provide these employees the increased benefit of exercising these options when they become “in-the-money” and to avoid recognizing future compensation expense related to outstanding options under Statement 123(R). After amendment of all underlying option agreements, compensation expense to be recognized in the statement of income during the first year of adoption of Statement 123(R) was reduced by approximately $3,500.

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 earnings. 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 and the change in the fair value of available-for-sale securities. The components of comprehensive income for the three and nine month periods ended February 28, 2007 and February 28, 2006 are as follows:

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

	Three Months Ended						Nine Months Ended
	February 28,						February 28,
		2007			2006			2007			2006
					(Restated)*						(Restated)*

Net income	$	76,727		$	76,594		$	244,216		$	231,855

Other comprehensive income:
Foreign currency translation adjustment		(4,575	)		4,299			(11,669	)		15,086
Change in fair value of derivatives**		3,358			(3,974	)		(13,330	)		(3,828	)
Change in fair value of available-for-sale securities, net of $130 and $505 of tax, respectively		229			----			869			----
Comprehensive income	$	75,739		$	76,919		$	220,086		$	243,113

* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method.

** Net of ($1,911) of tax for the three months ended February 28, 2007, and net of $7,994 of tax for the nine months ended February 28, 2007.

8.	Litigation and Other Contingencies

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

Cintas is a defendant in a purported class action lawsuit, Paul Veliz, et al. v. Cintas Corporation, filed on March 19, 2003, in the United States District Court, Northern District of California, Oakland Division, alleging that Cintas violated certain federal and state wage and hour laws applicable to its service sales representatives, whom Cintas considers exempt employees, and asserting additional related ERISA claims. On August 23, 2005, an amended complaint was filed alleging additional state law wage and hour claims under the following state laws: Arkansas, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Mexico, Ohio, Oregon, Pennsylvania, Rhode Island, Washington, West Virginia and Wisconsin. The plaintiffs are seeking unspecified monetary damages, injunctive relief or both. Cintas denies these claims and is defending the plaintiffs’ allegations. On February 14, 2006, the court ordered a majority of the opt-in plaintiffs to arbitrate their claims in accordance with the terms of their Cintas employment agreement. On February 14, 2006, the court also permitted plaintiffs to file a second amended complaint alleging state law claims in the 15 states listed above only with respect to the putative class members that may litigate their claims in court. No determination has been made by the court or an arbitrator regarding class certification. There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class. If a court or arbitrator certifies a class in this action and there is an adverse verdict on the merits, or in the event of a negotiated settlement of the action, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas. Any estimated liability relating to this lawsuit is not determinable at this time.

Cintas also is a defendant in a purported class action lawsuit, Mirna E. Serrano, et al. v. Cintas Corporation, filed on May 10, 2004, and pending in the United States District Court, Eastern District of Michigan, Southern Division (“Serrano”). Serrano alleges that Cintas discriminated against women in

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

hiring into various SSR positions across all divisions of Cintas throughout the United States. On November 15, 2005, the Equal Employment Opportunity Commission (“EEOC”) intervened in the Serrano lawsuit. The Serrano plaintiffs seek injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies. Cintas is a defendant in another purported class action lawsuit, Nelly Blanca Avalos, et al. v. Cintas Corporation, currently pending in the United States District Court, Eastern District of Michigan, Southern Division (“Avalos”). Avalos alleges that Cintas discriminated against women, African-Americans and Hispanics in hiring into various SSR positions in Cintas’ Rental division only throughout the United States. On April 27, 2005, the EEOC intervened in the claims asserted in Avalos. The Avalos plaintiffs seek injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies. The claims in Avalos originally were brought in the previously disclosed lawsuit captioned Robert Ramirez, et al. v. Cintas Corporation, filed on January 20, 2004, in the United States District Court, Northern District of California, San Francisco Division (“Ramirez”). On May 11, 2006, however, those claims were severed from Ramirez and transferred to the Eastern District of Michigan, Southern Division, where the case was re-named Avalos. On July 10, 2006, Avalos and Serrano were consolidated for all pretrial purposes, including proceedings on class certification. The consolidated case is known as Mirna E. Serrano/Blanca Nelly Avalos, et al. v. Cintas Corporation, and remains pending in the United States District Court, Eastern District of Michigan, Southern Division (“Serrano/Avalos”). No filings or determinations have been made in Serrano/Avalos as to class certification. There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class. The non-SSR hiring claims in the previously disclosed Ramirez case that have not been dismissed remain pending in the Northern District of California, San Francisco Division, but were ordered to arbitration and stayed pending the completion of arbitration. The Ramirez purported class action claims currently in arbitration include allegations that Cintas failed to promote Hispanics into supervisory positions, discriminated against African-Americans and Hispanics in SSR route assignments and discriminated against African-Americans in hourly pay in Cintas’ Rental division only throughout the United States. The Ramirez plaintiffs seek injunctive relief, compensatory damages, punitive damages, attorneys’ fees and other remedies. No filings or determinations have been made in Ramirez as to class certification. There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class. In addition, a class action lawsuit, Larry Houston, et al. v. Cintas Corporation, was filed on August 3, 2005, in the United States District Court for the Northern District of California on behalf of African-American managers alleging racial discrimination (“Houston”). On November 22, 2005, the court entered an order requiring the named plaintiffs in the Houston lawsuit to arbitrate all of their claims for monetary damages. If there is an adverse verdict or a negotiated settlement of all or any of these actions, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas. Any estimated liability relating to these proceedings is not determinable at this time.

Several other similar administrative proceedings are pending including two charges filed on November 30, 2004, by an EEOC Commissioner with the EEOC Systemic Litigation Unit alleging: (i) failure to hire and assign females to production job positions; and (ii) failure to hire females, African-Americans and Hispanics into the Management Trainee program. The investigations of these allegations are pending and no determinations have been made. On August 29, 2006, the EEOC Indianapolis District Office issued a dismissal and notice of rights and closed its file on the Clifton Cooper charge served on Cintas on March 23, 2005, by Cooper on behalf of himself and a similarly situated class with the EEOC Systemic Litigation Unit alleging discriminatory pay and treatment due to race. Mr. Cooper’s claims are now part of the Houston arbitration matter disclosed hereinabove.

Cintas is also a defendant in a lawsuit, J. Lester Alexander, III vs. Cintas Corporation, et al., which was originally filed on October 25, 2004, and is currently pending in the Circuit Court of Randolph County, Alabama. The case was brought by J. Lester Alexander, III, the Chapter 7 Trustee (the “Trustee”) of Terry Manufacturing Company, Inc. ("TMC") and Terry Uniform Company, LLC ("TUC"), against Cintas in Randolph County, Alabama. The Trustee seeks damages against Cintas for allegedly breaching fiduciary duties to TMC and TUC and for allegedly aiding and abetting breaches of fiduciary duties by others to

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

those entities. The complaint also includes allegations that Cintas breached certain limited liability company agreements, or alternatively, misrepresented its intention to perform its obligations in those agreements and acted as alter egos of the bankrupt TMC and is therefore liable for all of TMC's debts. The Trustee is seeking $50,000 in compensatory damages and $100,000 in punitive damages. Cintas denies these claims and is vigorously defending itself against all claims in the complaint. Cintas filed counterclaims against J. Lester Alexander, III and cross claims against Roy Terry, Rudolph Terry and Cotina Terry (collectively referred to herein as the Individual Co-Defendants). The Individual Co-Defendants have filed cross claims against Cintas alleging fraudulent inducement, breach of fiduciary duty, negligence and wantonness. If there is an adverse verdict on the merits or in the event of a negotiated settlement of this lawsuit, the resulting liability could be material to Cintas. Any estimated liability relating to this lawsuit is not determinable at this time.

The litigation discussed above, if decided adversely to or settled by Cintas, may, individually or in the aggregate, result in liability material to Cintas’ financial condition or results of operations. 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 interests of Cintas’ shareholders.

9.	Segment Information

Cintas classifies its businesses into two operating segments, Rentals and Other Services, based on the similar economic characteristics of the products and services within each segment. The Rentals operating segment reflects the rental and servicing of uniforms and other garments, mats, mops and shop towels. In addition to these rental items, restroom and hygiene products and services are also provided within this segment. The Other Services operating segment consists of the direct sale of uniforms and related items, first aid, safety and fire protection products and services, document management services and branded promotional products. Both segments provide these products and services throughout the United States and Canada to businesses of all types - from small service and manufacturing companies to major corporations that employ thousands of people.

Information as to the operations of Cintas’ different business segments is set forth below based on the distribution of products and services offered. Cintas evaluates performances based on several factors of which the primary financial measures are business segment revenue and income before income taxes.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except per share data)

	Rentals		Other Services		Corporate			Total
For the three months
ended February 28, 2007
Revenue	$	665,647	$	239,751	$	----		$	905,398
Income (loss) before income taxes	$	105,179	$	27,520	$	(10,245	)	$	122,454

For the three months
ended February 28, 2006
(Restated)*
Revenue	$	631,322	$	205,099	$	----		$	836,421
Income (loss) before income taxes	$	108,654	$	19,896	$	(5,314	)	$	123,236

As of and for the nine months
ended February 28, 2007
Revenue	$	2,037,796	$	705,029	$	----		$	2,742,825
Income (loss) before income taxes	$	347,056	$	74,441	$	(32,011	)	$	389,486
Total assets	$	2,525,832	$	824,164	$	157,493		$	3,507,489

As of and for the nine months
ended February 28, 2006
(Restated)*
Revenue	$	1,890,920	$	604,761	$	----		$	2,495,681
Income (loss) before income taxes	$	336,443	$	52,462	$	(17,100	)	$	371,805
Total assets	$	2,491,807	$	619,756	$	250,801		$	3,362,364

* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method.

10.	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 $700,000 of long-term 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 condensed consolidating financial statements has been fully consolidated in Cintas' financial statements. The condensed consolidating financial statements should be read in conjunction with the 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 below:

CONDENSED CONSOLIDATING INCOME STATEMENT

THREE MONTHS ENDED FEBRUARY 28, 2007

	Cintas Corporation		Corp. 2			Subsidiary Guarantors			Non-Guarantors			Eliminations			Cintas Corporation Consolidated
Revenue:
Rentals	$	----	$	489,272		$	135,225		$	41,335		$	(185	)	$	665,647
Other services		----		326,636			131,720			12,932			(231,537	)		239,751
Equity in net income of affiliates		76,727		----			----			----			(76,727	)		----
		76,727		815,908			266,945			54,267			(308,449	)		905,398

Costs and expenses (income):
Cost of rentals		----		310,904			75,122			24,863			(39,704	)		371,185
Cost of other services		----		243,769			85,554			7,866			(188,803	)		148,386
Selling and administrative expenses		----		230,570			12,460			12,151			(2,053	)		253,128
Interest income		----		(526	)		(3	)		(810	)		----			(1,339	)
Interest expense		----		11,915			(1,614	)		1,283			----			11,584
		----		796,632			171,519			45,353			(230,560	)		782,944

Income before income taxes		76,727		19,276			95,426			8,914			(77,889	)		122,454
Income taxes		----		7,134			35,473			3,120			----			45,727
Net income	$	76,727	$	12,142		$	59,953		$	5,794		$	(77,889	)	$	76,727

CONDENSED CONSOLIDATING INCOME STATEMENT

THREE MONTHS ENDED FEBRUARY 28, 2006

(RESTATED)*

	Cintas Corporation		Corp. 2			Subsidiary Guarantors			Non-Guarantors			Eliminations			Cintas Corporation Consolidated
Revenue:
Rentals	$	----	$	462,276		$	129,045		$	40,139		$	(138	)	$	631,322
Other services		----		271,594			108,688			12,976			(188,159	)		205,099
Equity in net income of affiliates		76,594		----			----			----			(76,594	)		----
		76,594		733,870			237,733			53,115			(264,891	)		836,421

Costs and expenses (income):
Cost of rentals		----		291,750			76,548			24,038			(41,681	)		350,655
Cost of other services		----		200,937			73,736			8,712			(150,589	)		132,796
Selling and administrative expenses		----		209,097			2,711			11,998			614			224,420
Interest income		----		(1,398	)		(60	)		(467	)		----			(1,925	)
Interest expense		----		7,155			(1,007	)		1,091			----			7,239
		----		707,541			151,928			45,372			(191,656	)		713,185

Income before income taxes		76,594		26,329			85,805			7,743			(73,235	)		123,236
Income taxes		----		10,256			33,415			2,971			----			46,642
Net income	$	76,594	$	16,073		$	52,390		$	4,772		$	(73,235	)	$	76,594

* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method.

CONDENSED CONSOLIDATING INCOME STATEMENT

NINE MONTHS ENDED FEBRUARY 28, 2007

		Cintas Corporation		Corp. 2			Subsidiary Guarantors		Non-Guarantors					Eliminations		Cintas Corporation Consolidated
Revenue:
Rentals	$	----	$	1,497,418		$	413,096			$	127,771		$	(489	)		$	2,037,796
Other services		----		989,396			392,224				41,978			(718,569	)			705,029
Equity in net income of affiliates		244,216		----			----				----			(244,216	)			----
		244,216		2,486,814			805,320				169,749			(963,274	)			2,742,825

Costs and expenses (income):
Cost of rentals		----		943,530			236,004				75,556			(125,590	)			1,129,500
Cost of other services		----		753,131			255,545				25,583			(588,315	)			445,944
Selling and administrative expenses		----		683,734			32,139				35,630			(5,619	)			745,884
Interest income		----		(2,220	)		(8	)			(2,260	)		----				(4,488	)
Interest expense		----		36,893			(4,448	)			4,054			----				36,499
		----		2,415,068			519,232				138,563			(719,524	)			2,353,339

Income before income taxes		244,216		71,746			286,088				31,186			(243,750	)			389,486
Income taxes		----		26,993			107,634				10,643			----				145,270
Net income	$	244,216	$	44,753		$	178,454			$	20,543		$	(243,750	)		$	244,216

CONDENSED CONSOLIDATING INCOME STATEMENT

NINE MONTHS ENDED FEBRUARY 28, 2006

(RESTATED)*

	Cintas Corporation		Corp. 2			Subsidiary Guarantors			Non-Guarantors			Eliminations			Cintas Corporation Consolidated
Revenue:
Rentals	$	----	$	1,387,723		$	388,746		$	114,842		$	(391	)	$	1,890,920
Other services		----		859,090			310,624			40,064			(605,017	)		604,761
Equity in net income of affiliates		231,855		----			----			----			(231,855	)		----
		231,855		2,246,813			699,370			154,906			(837,263	)		2,495,681

Costs and expenses (income):
Cost of rentals		----		870,459			228,966			67,876			(127,563	)		1,039,738
Cost of other services		----		643,181			212,625			26,165			(484,947	)		397,024
Selling and administrative expenses		----		633,979			1,713			34,184			138			670,014
Interest income		----		(3,631	)		(257	)		(1,071	)		----			(4,959	)
Interest expense		----		21,872			(3,000	)		3,187			----			22,059
		----		2,165,860			440,047			130,341			(612,372	)		2,123,876

Income before income taxes		231,855		80,953			259,323			24,565			(224,891	)		371,805
Income taxes		----		31,158			99,810			8,982			----			139,950
Net income	$	231,855	$	49,795		$	159,513		$	15,583		$	(224,891	)	$	231,855

* Restated to reflect the adoption of FAS 123(R) using the modified-retrospective method.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF FEBRUARY 28, 2007

	Cintas Corporation			Corp. 2			Subsidiary Guarantors		Non- Guarantors		Eliminations			Cintas Corporation Consolidated
Assets
Current assets:
Cash and cash equivalents	$ ----			$ 853			$ 7,374		$ 23,331		$ ----			$ 31,558
Marketable securities	----			57,246			----		68,689		----			125,935
Accounts receivable, net		----			260,400			131,289		20,492		(19,026	)		393,155
Inventories, net		----			202,996			26,841		7,607		(10,361	)		227,083
Uniforms and other rental items in service		----			270,161			81,359		19,193		(31,631	)		339,082
Prepaid expenses		----			9,820			4,292		814		----			14,926
Total current assets		----			801,476			251,155		140,126		(61,018	)		1,131,739

Property and equipment, at cost, net		----			609,764			241,050		49,958		----			900,772

Goodwill		----			336,584			869,502		20,090		----			1,226,176
Service contracts, net		----			103,781			64,406		4,655		----			172,842
Other assets, net		1,634,652			71,825			1,313,649		170,309		(3,114,475	)		75,960
	$	1,634,652		$	1,923,430		$	2,739,762	$	385,138	$	(3,175,493	)	$	3,507,489

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	(465,247	)	$	(405,697	)	$	909,673	$	682	$	30,129		$	69,540
Accrued compensation and related liabilities		----			35,378			19,224		2,412