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| CTAS > SEC Filings for CTAS > Form 10-Q on 8-Apr-2009 | All Recent SEC Filings |
8-Apr-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 through various avenues. 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, safety and fire protection and document management. Finally, we will continue to evaluate strategic acquisitions as opportunities arise.
RESULTS OF OPERATIONS
The U.S. and Canadian economic environment has been very challenging during the last three months. We have seen these economies lose approximately 2.2 million jobs during the three months ended February 28, 2009. A significant number of companies, including many of our customers, have reduced headcount and closed facilities. Our revenue is directly impacted by these job losses and facility closures. Fewer jobs result in declining revenue from fewer uniforms, both rented and purchased, less usage of first aid and restroom supplies and less opportunity for ancillary catalog sales such as shoes and jackets. Facility closures impact our volume of entrance mats, shop towels and linen, restroom cleaning and other facility needs such as fire protection services and document management services. Because of the job losses and facility closures that impacted our customers, our revenue decreased from $976.0 million for the three months ended February 29, 2008, to $908.6 million for the three months ended February 28, 2009.
As a result of the decline in our revenue, we have aggressively enacted cost reduction initiatives to limit the impact on our margins. These cost reduction initiatives are aimed at eliminating non-value added work and streamlining our existing processes and procedures. As a result of these initiatives, we have reduced our workforce by approximately 9% from February 29, 2008, to February 28, 2009, and we reduced our operating costs and selling and administrative expenses by approximately $50 million from the three months ended February 29, 2008, to the three months ended February 28, 2009.
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 nine month periods ended February 28, 2009 and February 29, 2008, are presented in Note 10 entitled Segment Information of "Notes to Consolidated Condensed Financial Statements."
New Accounting Pronouncements
Effective June 1, 2008, Cintas adopted Financial Accounting Standards Board (FASB) 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). 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.
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).
Consolidated Results
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
Total revenue decreased 6.9% for the three months ended February 28, 2009, over the same period in the prior fiscal year from $976.0 million to $908.6 million. Acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment accounted for growth of 0.5% during the quarter. This growth was offset by internal growth of -7.4%. The difficult U.S. and Canadian economic environment that began in our second fiscal quarter worsened in our third fiscal quarter. These economies lost approximately 2.2 million jobs in our third fiscal quarter. Because of job losses that impacted our customers, we experienced decreases in uniform revenue, both rented and purchased, and revenue for our hygiene products and first aid and safety products. In addition, facility closures by our customers reduced our volume of entrance mats, shop towels and other facility needs such as fire protection services and document management services.
Rental Uniforms and Ancillary Products revenue decreased 4.1% for the three months ended February 28, 2009, over the same period in the prior fiscal year from $703.6 million to $674.7 million. There were no acquisitions in the Rental Uniforms and Ancillary Products operating segment during the three months ended February 28, 2009.
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 14.1% for the three months ended February 28, 2009, over the same period in the prior fiscal year from $272.3 million to $233.9 million. Acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment accounted for growth of 1.8% during the quarter. This growth was offset by an internal growth of -15.9%. The negative internal growth rate for the quarter was primarily the result of a 22.6% decrease in Uniform Direct Sales operating segment revenue and an 11.8% decrease in First Aid, Safety and Fire Protection Services segment revenue.
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 decreased $18.9 million, or 4.7%, for the three months ended February 28, 2009, as compared to the three months ended February 29, 2008. Lower Rental Uniforms and Ancillary Products volume resulted in a decrease in the cost of rental uniforms and ancillary products. In addition, energy related costs decreased $6.9 million compared to the three months ended February 29, 2008.
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 $13.7 million, or 8.2%, for the three months ended February 28, 2009, as compared to the three months ended February 29, 2008. This decrease was due to decreased Other Services sales volume.
Selling and administrative expenses decreased $16.1 million, or 5.9%, for the three months ended February 28, 2009, as compared to the three months ended February 29, 2008. Labor and payroll tax expenses decreased by $12.9 million compared to the same period in the prior fiscal year as a result of cost reduction initiatives.
Net interest expense (interest expense less interest income) was $11.9 million for the three months ended February 28, 2009, which is relatively consistent with $12.1 million for the same period in the prior fiscal year.
Cintas' effective tax rate decreased to 33.2% for the three months ended February 28, 2009, compared to 35.0% 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. This decrease is primarily due to the recognition of tax benefits associated with certain statute expirations.
Net income decreased $10.0 million, or 12.2% for the three months ended February 28, 2009, from the same period in the prior fiscal year. Diluted earnings per share were $0.47 for the three months ended February 28, 2009, 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 decreased revenue volume for the quarter.
Rental Uniforms and Ancillary Products Operating Segment
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
As discussed above, Rental Uniforms and Ancillary Products operating segment revenue decreased from $703.6 million to $674.7 million, or 4.1%, and the cost of rental uniforms and ancillary products decreased $18.9 million, or 4.7%. The operating segment's gross margin was $295.2 million, or 43.8% of revenue. This gross margin percent of revenues of 43.8% was 40 basis points higher than prior fiscal year's third quarter of 43.4%. Energy related costs, which include natural gas, electric and gas, decreased a combined 80 basis points as a percent of revenue over prior year's third quarter. In addition, cost reduction initiatives combined to reduce multiple expenses such labor, overtime, temporary labor, supplies, recruiting expense and other expenses by a combined 50 basis points. These improvements were offset by a 70 basis point increase in material cost and depreciation and a 20 basis point increase in hanger costs. The material cost and depreciation amounts increased as a percent of revenue mainly due to lower operating segment revenue. Hanger costs increased 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 27.4%, decreased 90 basis points compared to the third quarter of the prior fiscal year. This decrease is due to decreased labor and payroll tax expenses resulting from cost reduction initiatives.
Income before income taxes increased $4.0 million to $110.4 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 16.4% of the operating segment's revenue, which is a 130 basis point increase compared to the third quarter of the prior fiscal year. This is primarily due to the decreased energy related costs and the numerous cost reduction initiatives as indicated above.
Uniform Direct Sales Operating Segment
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
Uniform Direct Sales operating segment revenue decreased from $125.3 million to $97.0 million, or 22.6%, for the three months ended February 28, 2009, 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 February 28, 2009. As the U.S. and Canadian economies deteriorated during the last quarter, many of our customers, especially in the hospitality and gaming industries, dramatically reduced their uniform purchases and delayed roll-outs of new uniform programs.
Cost of uniform direct sales decreased $12.0 million, or 14.1%, for the three months ended February 28, 2009, due to decreased Uniform Direct Sales volume. The gross margin as a percent of revenue was 24.6% for the quarter ended February 28, 2009, which decreased from 32.1% in the same period in the prior fiscal year. This decrease is due to lower Uniform Direct Sales volume, causing the operating segment's fixed costs to be a higher percent of revenue.
Selling and administrative expenses as a percent of revenue increased from 19.2% in the third quarter last year to 23.8% in this year's third quarter. This increase is mainly due to the decline in Uniform Direct Sales volume and in part due to higher bad debt expense, which increased approximately 30 basis points over last fiscal year's third quarter. Selling and administrative expenses decreased from $24.0 million in last year's third quarter to $23.1 million in the third quarter of this fiscal year due to various cost reduction initiatives.
Income before income taxes decreased $15.4 million to $0.8 million for the Uniform Direct Sales operating segment for the three months ended February 28, 2009. Income before income taxes was 0.8% of the operating segment's revenue compared to 12.9% 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 February 28, 2009 Compared to Three Months Ended February 29, 2008
First Aid, Safety and Fire Protection Services operating segment revenue decreased from $97.6 million to $86.0 million, or 11.8% for the three months ended February 28, 2009. The 1.8% growth from acquisitions was offset by internal growth of -13.6%. The difficult U.S. economic conditions negatively affected revenue in this segment, as job losses at our customers resulted in fewer users of first aid and safety products. Additionally, fire installation revenue decreased $5.9 million due to continued weakness in commercial construction.
Cost of first aid, safety and fire protection services decreased $6.4 million, or 10.8%, for the three months ended February 28, 2009. 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 38.5% for the quarter ended February 28, 2009, which is a 70 basis point decrease compared to the gross margin percentage in the third quarter of the prior fiscal year. This decrease is mainly due to a decrease in sales volume.
Selling and administrative expenses as a percent of revenue, at 33.7%, increased 200 basis points compared to the third quarter of the prior fiscal year. This increase is due to the lower First Aid, Safety and Fire Protection Services revenue. Selling and administrative expenses decreased from $30.9 million in last year's third quarter to $29.0 million in the third quarter of this fiscal year due to various cost reduction initiatives.
Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment decreased $3.2 million to $4.1 million for the three months ended February 28, 2009. Income before income taxes was 4.8% of the operating segment's revenue, which is a 270 basis point decrease compared to the third quarter of the prior fiscal year, primarily due to the decrease in First Aid, Safety and Fire Protection services revenue.
Document Management Services Operating Segment
Three Months Ended February 28, 2009 Compared to Three Months Ended February 29, 2008
Document Management Services operating segment revenue increased from $49.4 million to $50.9 million, or 2.9%, for the three months ended February 28, 2009, over the same period in the prior fiscal year. Acquisitions in this operating segment accounted for growth of 6.4% during the quarter. This operating segment had negative internal growth for the period of -3.5% over the same period in the prior fiscal year. Although the operating segment's volume of shredding services increased by 15% during the quarter ended February 28, 2009, compared to the same quarter last year, declining recycled paper prices caused the operating segment to have negative internal growth for the quarter ended February 28, 2009. This segment derives revenue from the sale of shredded paper to paper recyclers. The average price from these paper sales dropped by approximately 50% since February 29, 2008. The price of standard office paper, which accounts for the majority of the recycled paper revenue, dropped from $235 per ton at February 29, 2008, to $125 per ton at February 28, 2009.
Cost of document management services increased $4.7 million, or 21.4%, for the three months ended February 28, 2009, due to increased Document Management Services operating segment 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 decreased from 55.5% in last year's third quarter to 47.5% for the quarter ended February 28, 2009. This decrease is due to the significant decrease in the recycled paper prices.
Selling and administrative expenses as a percent of revenue, at 39.8%, increased 50 basis points compared to the third quarter of the prior fiscal year. This increase includes a 90 basis point increase in bad debt expense, offset by various cost reduction initiatives.
Income before income taxes for the Document Management Services operating segment decreased $4.1 million to $3.9 million for the period compared to the same period in the prior fiscal year. Income before income taxes as a percentage of the operating segment's revenue decreased from 16.2% in last year's third quarter to 7.7% for the quarter ended February 28, 2009, primarily as a result of the significant decrease in recycled paper prices.
Consolidated Results
Nine Months Ended February 28, 2009 Compared to Nine Months Ended February 29, 2008
Total revenue of $2.9 billion decreased $32.9 million, or 1.1% for the nine months ended February 28, 2009, over the same period in the prior fiscal year. 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 offset by internal growth of -1.4%. The revenue growth
rate was negatively impacted by 0.5% by one fewer work day in the nine month period ended February 28, 2009 compared to the nine month period ended February 29, 2008. The difficult U.S. and Canadian economic environment that began in our second fiscal quarter worsened in our third fiscal quarter. These economies lost approximately 2.2 million jobs in the three months ended February 28, 2009, and lost approximately 4.0 million jobs in the six months ended February 28, 2009. Because of job losses that impacted our customers, we experienced a decrease in uniform revenue, both rented and purchased, and revenue for hygiene products and first aid and safety products. In addition, facility closures by our customers reduced our volume of entrance mats, shop towels and other facility needs such as fire protection services and document management services.
Rental Uniforms and Ancillary Products revenue of $2.1 billion decreased $15.3 million, or 0.7% for the nine months ended February 28, 2009, over the same period in the prior fiscal year. There were no acquisitions in the Rental Uniforms and Ancillary Products operating segment during the nine months ended February 28, 2009.
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 2.2% for the nine months ended February 28, 2009, over the same period in the prior fiscal year from $806.1 million to $788.5 million. Acquisitions of first aid, safety and fire protection businesses and document management businesses accounted for growth of 2.9%. Negative internal growth of 4.6% more than offset the impact of the acquisitions. This internal growth rate was negative during the nine months ended February 28, 2009, primarily as a result of an 11.6% decrease in Uniform Direct Sales operating segment revenue and a 1.3% decrease in First Aid, Safety and Fire Protection Services operating segment revenue. The Other Services revenue growth rate was negatively impacted by 0.5% by one fewer work day in the nine month period ended February 28, 2009 compared to the nine month period ended February 29, 2008.
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 $6.4 million, or 0.5%, for the nine months ended February 28, 2009, as compared to the nine months ended February 29, 2008. This increase was due to a $3.5 million increase in energy costs and a $6.6 million increase in hanger costs, offset by various cost reduction initiatives.
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 $6.6 million, or 1.3%, for the nine months ended February 28, 2009, as compared to the nine months ended February 29, 2008. This decrease was mainly due to lower Other Services volume.
Selling and administrative expenses increased $4.0 million, or 0.5%, for the nine months ended February 28, 2009, as compared to the nine months ended February 29, 2008. Medical costs increased by $15.8 million over the same period in the prior fiscal year reflecting continued rising costs in healthcare and additional claims incurred. In addition, bad debt expense increased by $6.1 million as customers have delayed payments during this fiscal year's difficult economic environment. These increases were offset by decreases in labor and payroll tax expenses of $12.1 million due to cost reduction initiatives.
Net interest expense (interest expense less interest income) was $35.8 million for the nine months ended February 28, 2009, which is relatively consistent with the $34.7 million for the same period in the prior fiscal year.
Cintas' effective tax rate was 36.8% for the nine months ended February 28, 2009, compared to 36.9% 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 9.5% for the nine months ended February 28, 2009, from the same period in the prior fiscal year. Diluted earnings per share decreased 7.6% for the nine months ended February 28, 2009, compared to the same period in the prior fiscal year. The decreased net income and diluted earnings per share are due to the lower volume and a combination of increases, as described previously, in energy related costs, costs of hangers, medical costs and bad debt expense for the period.
Rental Uniforms and Ancillary Products Operating Segment
Nine Months Ended February 28, 2009 Compared to Nine Months Ended February 29, 2008
As discussed above, Rental Uniforms and Ancillary Products operating segment revenue decreased $15.3 million, or 0.7%, and the cost of rental uniforms and ancillary products increased $6.4 million, or 0.5%. The operating segment's gross margin was $919.2 million, or 43.6% of revenue. This gross margin percent of revenue of 43.6% was 70 basis points lower than the 44.3% in the same period in the prior fiscal year mainly due to increased energy related costs and hanger costs. Energy related costs, which include natural gas, electric and gas, increased a combined 20 basis points over the same period in the prior fiscal year. Hanger costs increased 35 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 of revenue, at 28.2%, remained relatively consistent with the same period of the prior fiscal year.
Income before income taxes decreased $13.4 million to $325.9 million for the Rental Uniforms and Ancillary Products operating segment for the period. Income before income taxes was 15.5% of the operating segment's revenue, which is a 50 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
Nine Months Ended February 28, 2009 Compared to Nine Months Ended February 29, 2008
Uniform Direct Sales operating segment revenue decreased from $378.5 million to $334.5 million, or 11.6%, for the nine months ended February 28, 2009, over the same period in the prior fiscal year. There were no acquisitions in the Uniform . . .
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