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| CTAS > SEC Filings for CTAS > Form 10-Q on 8-Jan-2009 | All Recent SEC Filings |
8-Jan-2009
Quarterly Report
BUSINESS STRATEGY
Cintas provides highly specialized products and services to businesses of all types throughout the United States and Canada. We refer to ourselves as "The Service Professionals." We bring value to our customers by helping them provide a cleaner, safer, more pleasant atmosphere for their customers and employees. Our products and services are designed to improve our customers' images. We also help our customers protect their employees and their company by enhancing workplace safety and helping to ensure legal compliance in key areas of their business.
We are North America's leading provider of corporate identity uniforms through rental and sales programs, as well as a significant provider of related business services, including entrance mats, restroom products and services, first aid, safety and fire protection products and services, document management services and branded promotional products.
Our business strategy is to achieve revenue growth for all of our products and services by increasing our penetration at existing customers and by broadening our customer base to include business segments to which Cintas has not historically served. We will also continue to identify additional product and service opportunities for our current and future customers.
To pursue the strategy of increasing penetration, we have a highly talented and diverse team of service professionals visiting our customers on a regular basis. This frequent contact with our customers enables us to develop close personal relationships. The combination of our distribution system and these strong customer relationships provides a platform from which we launch additional products and services.
We pursue the strategy of broadening our customer base in a few ways. Cintas has a national sales organization introducing all of our products and services to prospects in all business segments. Our ever expanding range of products and services allows our sales organization to consider any type of business a prospect. We also broaden our customer base through geographic expansion, especially in our emerging businesses of first aid and safety, fire protection and document management. Finally, we will continue to evaluate strategic acquisitions as opportunities arise.
RESULTS OF OPERATIONS
Cintas classifies its businesses into four operating segments in accordance with the criteria set forth in Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The Rental Uniforms and Ancillary Products operating segment reflects the rental and servicing of uniforms and other garments, mats, mops and shop towels and other ancillary items. In addition to these rental items, restroom and hygiene products and services are also provided within this operating segment. The Uniform Direct Sales operating segment consists of the direct sale of uniforms and related items and branded promotional products. The First Aid, Safety and Fire Protection Services operating segment consists of first aid, safety and fire protection products and services. The Document Management Services operating segment consists of document destruction, document imaging and document retention services. Revenue and income before income taxes for each of these operating segments for the three and six month periods ended November 30, 2008 and November 30, 2007, are presented in Note 10 entitled Segment Information of "Notes to Consolidated Condensed Financial Statements."
New Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157), which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosure requirements about fair value measurements. FASB Staff
Position 157-2 delayed the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Cintas adopted FAS 157 on June 1, 2008, as required. The adoption of FAS 157 for our financial assets and liabilities did not have a material impact on Cintas' results of operations or financial condition. Cintas' adoption of FAS 157 is more fully described in Note 3 entitled Fair Value Measurements of "Notes to Consolidated Condensed Financial Statements."
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (FAS 141(R)). Under FAS 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. For Cintas, FAS 141(R) is effective for acquisitions and adjustments to an acquired entity's deferred tax asset and liability balances occurring after May 31, 2009. Cintas is currently evaluating the future impact and disclosures under FAS 141(R).
Three Months Ended November 30, 2008 Compared to Three Months Ended November 30, 2007
Total revenue increased 0.1% for the three months ended November 30, 2008, over the same period in the prior fiscal year from $983.9 million to $985.2 million. Acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment accounted for growth of 0.8% during the quarter. This growth was mostly offset by an internal growth of -0.7%.
Rental Uniforms and Ancillary Products revenue increased 0.4% for the three months ended November 30, 2008, over the same period in the prior fiscal year from $708.8 million to $711.5 million. Internal growth accounted for the entire increase as a result of the sale of new rental programs to customers, offset by lost business.
Other Services revenue, consisting of revenue from the reportable operating segments of Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services, decreased 0.5% for the three months ended November 30, 2008, over the same period in the prior fiscal year from $275.0 million to $273.7 million. Acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment accounted for growth of 3.0% during the quarter. This growth was mostly offset by an internal growth of -3.5%. This internal growth rate was negative during the quarter primarily as a result of decreased Uniform Direct Sales operating segment revenue, which decreased 10.7%.
Cost of rental uniforms and ancillary products consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other rental items. Cost of rental uniforms and ancillary products increased $9.4 million, or 2.4%, for the three months ended November 30, 2008, as compared to the three months ended November 30, 2007. This increase included a $2.2 million increase in energy related costs and a $3.0 million increase in the cost of hangers. The increase in Rental Uniforms and Ancillary Products revenue also caused a slight increase in the cost of rental uniforms and ancillary products.
Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses in the Uniform Direct Sales operating segment, the First Aid, Safety and Fire Protection Services operating segment and the Document Management Services operating segment. Cost of other services decreased $2.5 million, or 1.5%, for the three months ended November 30, 2008, as compared to the three months ended November 30, 2007. This decrease was due to decreased Other Services sales volume and a change in the mix of Other Services revenue from the lower gross margin producing revenues of Uniform Direct Sales to the higher gross margin producing revenues of Document Management Services revenue and First Aid, Safety and Fire Protection Services revenue.
Selling and administrative expenses increased $9.5 million, or 3.4%, for the three months ended November 30, 2008, as compared to the three months ended November 30, 2007. Medical costs increased by $8.0 million over the same period in the prior fiscal year reflecting continued rising costs in the healthcare industry and additional claims incurred. In addition, bad debt expense increased by $1.3 million.
Net interest expense (interest expense less interest income) was $11.9 million for the three months ended November 30, 2008, which is relatively consistent with the $11.2 million for the same period in the prior fiscal year.
Cintas' effective tax rate was 39.4% for the three months ended November 30, 2008, compared to 38.3% for the prior year period, reflecting the reserve requirements of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.
Net income decreased $11.0 million, or 13.3%, for the three months ended November 30, 2008, from the same period in the prior fiscal year. Diluted earnings per share were $0.47 for the three months ended November 30, 2008, which was a decrease of 11.3% compared to the same period in the prior fiscal year. The decreased net income and diluted earnings per share are due primarily to a combination of increases, as described previously, in energy related costs, costs of hangers, medical costs, bad debt expense and the higher effective tax rate for the quarter.
Rental Uniforms and Ancillary Products Operating Segment
Three Months Ended November 30, 2008 Compared to Three Months Ended November 30, 2007
As discussed above, Rental Uniforms and Ancillary Products revenue increased from $708.8 million to $711.5 million, or 0.4%, and the cost of rental uniforms and ancillary products increased $9.4 million, or 2.4%. The operating segment's gross margin was $309.8 million, or 43.6% of revenue. This gross margin percent to sales of 43.6% was lower than last fiscal year's second quarter of 44.7% mainly due to increased energy related costs and hanger costs. Energy related costs include natural gas, electric and gas, and they increased a combined 30 basis points over last year's second quarter. Hanger costs increased 40 basis points primarily as a result of an import tariff imposed by the U.S. government on hangers produced in China.
Selling and administrative expenses as a percent of revenue, at 28.3%, increased 30 basis points compared to the second quarter of the prior fiscal year. This increase is due to a 20 basis point increase in medical expenses and a 10 basis point increase in bad debt expense.
Income before income taxes decreased $9.6 million to $108.4 million for the Rental Uniforms and Ancillary Products operating segment for the period compared to the same period last fiscal year. Income before income taxes was 15.2% of the operating segment's revenue, which is a 140 basis point decrease compared to the second quarter of the prior fiscal year. This is primarily due to the increased energy related costs, hanger costs, medical costs and bad debt expense as indicated above.
Uniform Direct Sales Operating Segment
Three Months Ended November 30, 2008 Compared to Three Months Ended November 30, 2007
Uniform Direct Sales operating segment revenue decreased from $134.5 million to $120.0 million, or 10.7%, for the three months ended November 30, 2008, over the same period in the prior fiscal year. There were no acquisitions in the Uniform Direct Sales operating segment during the three months ended November 30, 2008.
Cost of uniform direct sales decreased $8.0 million, or 8.7%, for the three months ended November 30, 2008, due to decreased Uniform Direct Sales volume. The gross margin as a percent of revenue was 30.7% for the quarter ended November 30, 2008, which was a 150 basis point decrease over the same period in the prior fiscal year. This decrease is due to the decrease in Uniform Direct Sales volume.
Selling and administrative expenses as a percent of revenue, at 23.0%, increased 250 basis points compared to the second quarter of the prior fiscal year. This increase is mainly due to the drop in Uniform Direct Sales volume and in part due to higher bad debt expense, which increased approximately 50 basis points over last fiscal year's second quarter.
Income before income taxes decreased $6.5 million to $9.2 million for the Uniform Direct Sales operating segment for the period compared to the same period in the prior fiscal year. Income before income taxes was 7.7% of the operating segment's revenue compared to 11.7% for the same period last fiscal year. This decrease in income before income taxes is primarily due to the decrease in Uniform Direct Sales revenue.
First Aid, Safety and Fire Protection Services Operating Segment
Three Months Ended November 30, 2008 Compared to Three Months Ended November 30, 2007
First Aid, Safety and Fire Protection Services operating segment revenue increased from $99.2 million to $100.5 million, or 1.3% for the three months ended November 30, 2008. The growth from acquisitions was partially offset by internal growth of -0.5%.
Cost of first aid, safety and fire protection services decreased $0.7 million, or 1.1%, for the three months ended November 30, 2008. Gross margin for the First Aid, Safety and Fire Protection Services operating segment is defined as revenue less cost of goods, warehouse expenses, service expenses and training expenses. The gross margin as a percent of revenue was 40.2% for the quarter ended November 30, 2008, which is a 150 basis point increase compared to the gross margin percentage in the second quarter of the prior fiscal year. This increase is due to better utilization of fire installation labor and a change in the mix of revenue from the lower gross margin producing revenues of fire system installation revenues and national account first aid and safety programs to the higher gross margin producing revenues of fire test and inspection services and first aid services.
Selling and administrative expenses as a percent of revenue, at 32.6%, increased 130 basis points compared to the second quarter of the prior fiscal year. This increase is due to increased selling expenses associated with the development of our Fire Protection Services sales force.
Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment increased $0.3 million to $7.7 million for the period compared to the same period of the prior fiscal year. Income before income taxes was 7.6% of the operating segment's revenue, which is a 20 basis point increase compared to the second quarter of the prior fiscal year as a result of the various items described above.
Document Management Services Operating Segment
Three Months Ended November 30, 2008 Compared to Three Months Ended November 30, 2007
Document Management Services operating segment revenue increased from $41.4 million to $53.2 million, or 28.5% for the three months ended November 30, 2008, over the same period in the prior fiscal year. Acquisitions in this segment accounted for growth of 15.5% during the quarter. This operating segment's internal growth for the period was 13.0% over the same period in the prior fiscal year. The internal growth was primarily due to the sale of shredding services to new customers and existing customers at Cintas' other segments.
Cost of document management services increased $6.1 million, or 31.9%, for the three months ended November 30, 2008, due to increased Document Management Services operating segment sales volume. Gross margin for the Document Management Services operating segment is defined as revenue less production and service costs. The gross margin as a percent of revenue was 52.4% for the quarter ended November 30, 2008, which is a 120 basis point decrease compared to the gross margin percentage in the second quarter of the prior fiscal year. This decrease is due in part to a 63 basis point increase in energy related costs.
Selling and administrative expenses as a percent of revenue, at 42.8%, decreased 30 basis points compared to the second quarter of the prior fiscal year. This decrease is due to improved scale of administrative functions resulting from the operating segment's increased sales volume.
Income before income taxes for the Document Management Services operating segment increased $0.8 million to $5.1 million for the period compared to the same period in the prior fiscal year. Income before income taxes was 9.6% of the operating segment's revenue, which is a 90 basis point decrease over the operating segment's revenue for the same period last fiscal year, primarily as a result of the increase in energy related costs described above.
Six Months Ended November 30, 2008 Compared to Six Months Ended November 30, 2007
Total revenue increased 1.8% for the six months ended November 30, 2008, over the same period in the prior fiscal year from $1.95 billion to $1.99 billion. Internal growth accounted for 1.6% of this increase. The remaining growth was derived through acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment.
Rental Uniforms and Ancillary Products revenue increased 1.0% for the six months ended November 30, 2008, over the same period in the prior fiscal year from $1.42 billion to $1.43 billion. Internal growth was 1.7% for the six month period, primarily as a result of the sale of new rental programs to customers, offset by lost business. The difference between the internal growth of 1.7% and the total growth of 1.0% represents the adjustment caused by one fewer work day in the six month period ended November 30, 2008 compared to the six month period ended November 30, 2007.
Other Services revenue, consisting of revenue from the reportable operating segments of Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services, increased 3.9% for the six months ended November 30, 2008, over the same period in the prior fiscal year from $533.8 million to $554.5 million. Internal growth accounted for 1.1% of this increase. Internal growth was generated primarily through the increased sales of first aid, safety and fire protection products and services and document management services to new customers and existing customers at Cintas' other segments. Acquisitions of first aid, safety and fire protection businesses and document management businesses accounted for growth of 3.6%. The Other Services revenue growth rate was negatively impacted by 0.8% by one fewer work day in the six month period ended November 30, 2008 compared to the six month period ended November 30, 2007.
Cost of rental uniforms and ancillary products consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other rental items. Cost of rental uniforms and ancillary products increased $25.2 million, or 3.2%, for the six months ended November 30, 2008, as compared to the six months ended November 30, 2007. This increase was mainly due to increased Rental Uniforms and Ancillary Products operating segment revenue, a $10.5 million increase in energy costs and a $6.2 million increase in hanger costs.
Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses in the Uniform Direct Sales operating segment, the First Aid, Safety and Fire Protection Services operating segment and the Document Management Services operating segment. Cost of other services increased $7.0 million, or 2.1%, for the six months ended November 30, 2008, as compared to the six months ended November 30, 2007. This increase was mainly due to increased Other Services sales volume.
Selling and administrative expenses increased $20.1 million, or 3.6%, for the six months ended November 30, 2008, as compared to the six months ended November 30, 2007. Medical costs increased by $15.3 million over the same period in the prior fiscal year reflecting continued rising costs in the healthcare industry and additional claims incurred. In addition, bad debt expense increased by $3.4 million.
Net interest expense (interest expense less interest income) was $23.9 million for the six months ended November 30, 2008, compared to $22.6 million for the same period in the prior fiscal year. This increase in net interest expense is primarily due to the increased level of borrowing used to fund acquisitions and to fund the share buybacks during our first quarter.
Cintas' effective tax rate was 38.4% for the six months ended November 30, 2008, compared to 37.8% for the prior year period, reflecting the reserve requirements of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.
Net income decreased 8.2% for the six months ended November 30, 2008, from the same period in the prior fiscal year. Diluted earnings per share decreased 5.8% for the six months ended November 30, 2008, compared to the same period in the prior fiscal year. The decreased net income and diluted earnings per share are due to a combination of increases, as described previously, in energy related costs, costs of hangers, medical costs, bad debt expense and the higher effective tax rate for the period.
Rental Uniforms and Ancillary Products Operating Segment
Six Months Ended November 30, 2008 Compared to Six Months Ended November 30, 2007
As discussed above, Rental Uniforms and Ancillary Products revenue increased from $1.42 billion to $1.43 billion, or 1.0%, and the cost of rental uniforms and ancillary products increased $25.2 million, or 3.2%. The operating segment's gross margin was $623.9 million, or 43.5% of revenue. This gross margin percent to sales of 43.5% was lower than the 44.8% in the same period in the prior fiscal year mainly due to increased energy related costs and hanger costs. Energy related costs include natural gas, electric and gas, and they increased a combined 70 basis points over the same period in the prior fiscal year. Hanger costs increased 40 basis points primarily as a result of an import tariff imposed by the U.S. government on hangers produced in China.
Selling and administrative expenses in the Rental Uniforms and Ancillary Products operating segment as a percent to sales, at 28.5%, remained relatively consistent with the same period of the prior fiscal year.
Income before income taxes decreased $17.4 million to $215.4 million for the Rental Uniforms and Ancillary Products operating segment for the period. Income before income taxes was 15.0% of the operating segment's revenue, which is a 140 basis point decrease compared to the same period in the prior fiscal year. This is primarily due to the increased energy related costs and hanger costs indicated above.
Uniform Direct Sales Operating Segment
Six Months Ended November 30, 2008 Compared to Six Months Ended November 30, 2007
Uniform Direct Sales operating segment revenue decreased from $253.3 million to $237.5 million, or 6.2%, for the six months ended November 30, 2008, over the same period in the prior fiscal year. There were no acquisitions in the Uniform Direct Sales operating segment during the six months ended November 30, 2008.
Cost of uniform direct sales decreased $10.2 million, or 5.9%, for the six months ended November 30, 2008, due to decreased Uniform Direct Sales volume. The gross margin as a percent of revenue was 31.3% for the quarter ended November 30, 2008, which was a 20 basis point decrease over the same period in the prior fiscal year. This decrease in gross margin as a percent of revenue is due to the lower Uniform Direct Sales volume.
Selling and administrative expenses as a percent of revenue, at 22.3%, increased 140 basis points for the six months ended November 30, 2008, compared to the same period in the prior fiscal year. This increase is mainly due to the drop in Uniform Direct Sales volume and in part due to higher bad debt expense, which increased approximately 46 basis points over last fiscal year's second quarter.
Income before income taxes decreased $5.6 million to $21.2 million for the Uniform Direct Sales operating segment for the period compared to the same period in the prior fiscal year. Income before income taxes was 8.9% of the operating segment's revenue, which is a 170 basis point decrease compared to the same period in the prior fiscal year. This decrease is primarily due to the decreased Uniform Direct Sales volume.
First Aid, Safety and Fire Protection Services Operating Segment
Six Months Ended November 30, 2008 Compared to Six Months Ended November 30, 2007
First Aid, Safety and Fire Protection Services operating segment revenue increased from $201.4 million to $209.0 million, or 3.8% for the six months ended November 30, 2008. This operating segment's internal growth for the period was 2.5% over the same period last fiscal year. Acquisitions of first aid, safety and fire protection businesses accounted for growth of 2.1%. The First Aid, Safety and Fire Protection Services operating segment revenue growth rate was negatively impacted by 0.8% by one fewer work day in the six month period ended November 30, 2008 compared to the six month period ended November 30, 2007.
Cost of first aid, safety and fire protection services increased $3.3 million, or 2.7%, for the six months ended November 30, 2008, due to increased First Aid, Safety and Fire Protection Services volume. Gross margin for the First Aid, Safety and Fire Protection Services operating segment is defined as revenue less cost of goods, warehouse expenses, service expenses and training expenses. The gross margin as a percent of revenue was 40.5% for the six months ended November 30, 2008, which is a 70 basis point increase compared to the gross margin percentage in the prior fiscal year. This increase is due to better utilization of fire installation labor and a change in the mix of revenue from the lower gross margin producing revenues of fire system installation revenues and national account first aid and safety programs to the higher gross margin producing revenues of fire test and inspection services and first aid services.
Selling and administrative expenses as a percent of revenue, at 31.4%, increased 50 basis points for the six months ended November 30, 2008, compared to the same period in the prior fiscal year. This increase is due to increased selling expenses associated with the development of our Fire Protection Services sales force.
Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment increased $1.1 million to $19.0 million for the period compared to the same period of the prior fiscal year. Income before income taxes was 9.1% of the operating segment's revenue, which is a 20 basis point increase compared to the same period in the prior fiscal year as a result of the various items described above.
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