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| CTAS > SEC Filings for CTAS > Form 10-Q on 9-Oct-2009 | All Recent SEC Filings |
9-Oct-2009
Quarterly Report
BUSINESS STRATEGY
Cintas provides highly specialized products and services to businesses of all types throughout the United States, Canada and Europe. 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 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 month periods ended August 31, 2009 and August 31, 2008, are presented in Note 11 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. However, 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). FAS 157 became effective for Cintas for all non-financial assets and non-financial liabilities on June 1, 2009. The adoption of FAS 157 for our non-financial assets and non-financial liabilities did not have a significant impact on our consolidated financial statements.
Effective June 1, 2009, Cintas adopted FASB 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 are recognized separately from the acquisition and expensed as incurred, restructuring costs generally are 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. The adoption of FAS 141(R) did not have a material impact on Cintas' results of operations or financial condition. Any future effects of FAS 141(R) will depend upon the terms and size of future acquisitions.
Effective June 1, 2009, the FASB issued Emerging Issues Task Force (EITF) 03-06-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (EITF 03-06-1). EITF 03-06-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method in FASB Statement No. 128, Earnings per Share. The adoption did not have a material impact on basic or diluted earnings per share. Cintas' adoption of EITF 03-06-1 is more fully described in Note 5 entitled Earnings per Share in "Notes to Consolidated Condensed Financial Statements".
Effective June 1, 2009, Cintas adopted the provisions of FASB Statement No. 165, Subsequent Events (FAS 165). The objective of FAS 165 is to establish general standards of accounting for and disclosure of events that occur after the consolidated balance sheet date but before the consolidated financial statements are issued or are available to be issued. Cintas has evaluated and disclosed any subsequent events through October 9, 2009, which is the date of filing of the Form 10-Q.
Consolidated Results
Three Months Ended August 31, 2009 Compared to Three Months Ended August 31, 2008
Total revenue decreased 11.0% for the three months ended August 31, 2009, over the same period in the prior fiscal year from $1,002.2 million to $891.6 million. The decrease primarily resulted from an organic decrease of 12.6%, partially offset by 0.2% growth attributable to acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment during the quarter. The revenue growth rate was also positively impacted by 1.4% due to one additional work day in the three month period ended August 31, 2009 compared to the three month period ended August 31, 2008. The difficult U.S. and Canadian economic environment that began in fiscal year 2009 continued in our first fiscal quarter. These economies lost approximately 5.9 million jobs in the twelve months ended August 31, 2009. Because of customer job losses, we experienced decreases in uniform revenue, both rented and purchased, and revenue for our hygiene products and first aid and safety products in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. 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 9.1% for the three months ended August 31, 2009, over the same period in the prior fiscal year from $721.4 million to $655.6 million. The revenue growth rate was positively impacted by 1.4% due to one additional work day in the three month period ended August 31, 2009 compared to the three month period ended August 31, 2008, resulting in an organic decrease of 10.5% for the quarter.
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 16.0% for the three months ended August 31, 2009, over the same period in the prior fiscal year from $280.8 million to $235.9 million. The decrease primarily resulted from an organic decrease of 18.1%, partially offset by 0.8% growth attributable to acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment during the quarter. The revenue growth rate was also positively impacted by 1.3% due to one additional work day in the three month period ended August 31, 2009 compared to the three month period ended August 31, 2008. The negative internal growth rate for the quarter was primarily the result of a 24.0% decrease in Uniform Direct Sales operating segment revenue and a 17.1% decrease in First Aid, Safety and Fire Protection Services operating 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 ancillary items. Cost of rental uniforms and ancillary products decreased $44.4 million, or 10.9%, for the three months ended August 31, 2009 compared to the three months ended August 31, 2008. Lower Rental Uniforms and Ancillary Products operating segment volume resulted in a decrease in the cost of rental uniforms and ancillary products. In addition, energy related costs decreased $15.1 million compared to the three months ended August 31, 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 $24.0 million, or 14.1%, for the three months ended August 31, 2009 compared to the three months ended August 31, 2008. This decrease was due to decreased Other Services sales volume.
Selling and administrative expenses decreased $22.9 million, or 8.0%, for the three months ended August 31, 2009 compared to the three months ended August 31, 2008. Labor and payroll tax expenses decreased by $13.3 million compared to the same period in the prior fiscal year as a result of cost reduction initiatives. In addition, bad debt expense decreased $4.4 million due to improved collection efforts.
During the first quarter of fiscal 2010, Cintas and the plaintiffs involved in the litigation, Paul Veliz, et al. v. Cintas Corporation, reached a settlement in principle. The principal terms of the settlement provide for an aggregate cash payment of approximately $24 million. The pre-tax impact, net of insurance proceeds, was approximately $19.5 million. This settlement is more fully described in Note 10 entitled Litigation and Other Contingencies in "Notes to Consolidated Condensed Financial Statements."
Net interest expense (interest expense less interest income) was $11.7 million for the three months ended August 31, 2009, which is relatively consistent with $12.0 million for the same period in the prior fiscal year.
Cintas' effective tax rate increased to 38.1% for the three months ended August 31, 2009, compared to 37.5% 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 $24.7 million, or 31.3%, for the three months ended August 31, 2009, from the same period in the prior fiscal year. Diluted earnings per share were $0.35 for the three months ended August 31, 2009, which was a decrease of 31.4% 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 for the quarter and the legal settlement.
Rental Uniforms and Ancillary Products Operating Segment
Three Months Ended August 31, 2009 Compared to Three Months Ended August 31, 2008
As discussed above, Rental Uniforms and Ancillary Products operating segment revenue decreased from $721.4 million to $655.6 million, or 9.1%, and the cost of rental uniforms and ancillary products decreased $44.4 million, or 10.9%. The operating segment's gross margin was $292.7 million, or 44.6% of revenue. This gross margin percent of revenue of 44.6% was 110 basis points higher than the prior fiscal year's first quarter of 43.5%. Energy related costs, which include natural gas, electric and gas, decreased a combined 170 basis points as a percent of revenue from the prior fiscal year's first quarter.
Selling and administrative expenses as a percent of revenue, at 29.0%, increased 30 basis points compared to the first quarter of the prior fiscal year despite a reduction in selling and administrative expenses of $16.8 million in the first quarter of fiscal 2010 compared to last fiscal year's first quarter. The increase of 30 basis points is due to lower Rental Uniforms and Ancillary Products revenue.
Income before income taxes decreased $4.6 million to $102.5 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 15.6% of the operating segment's revenue, which is an 80 basis point increase compared to the first quarter of the prior fiscal year. This is primarily due to the decreased energy related costs offset by lower Rental Uniforms and Ancillary Products revenue.
Uniform Direct Sales Operating Segment
Three Months Ended August 31, 2009 Compared to Three Months Ended August 31, 2008
Uniform Direct Sales operating segment revenue decreased from $117.5 million to $89.3 million, or 24.0%, for the three months ended August 31, 2009, over the same period in the prior fiscal year. The revenue growth rate was positively impacted by 1.1% due to one additional work day in the three month period ended August 31, 2009 compared to the three month period ended August 31, 2008, resulting in an organic decrease of 25.1%. As the U.S. and Canadian economies continued to lose jobs and remained difficult during the last quarter, many of our customers, especially in the hospitality and gaming industries, continued to delay uniform purchases and roll-outs of new uniform programs.
Cost of uniform direct sales decreased $18.1 million, or 22.5%, for the three months ended August 31, 2009, due to decreased Uniform Direct Sales volume. The gross margin as a percent of revenue was 30.5% for the quarter ended August 31, 2009, which decreased from 31.8% 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 was 21.6% in the first quarter last year and remained relatively consistent at 21.5% in this year's first quarter. Selling and administrative expenses decreased from $25.4 million in last year's first quarter to $19.2 million in the first quarter of this fiscal year due to various cost reduction initiatives.
Income before income taxes decreased $3.9 million to $8.1 million for the Uniform Direct Sales operating segment for the three months ended August 31, 2009. Income before income taxes was 9.1% of the operating segment's revenue compared to 10.2% 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 August 31, 2009 Compared to Three Months Ended August 31, 2008
First Aid, Safety and Fire Protection Services operating segment revenue decreased from $108.5 million to $90.0 million, or 17.1%, for the three months ended August 31, 2009. The decrease primarily resulted from an organic decrease of 18.4%, partially offset by 0.1% growth attributable to acquisitions. The revenue growth rate was also positively impacted by 1.2% due to one additional work day in the three month period ended August 31, 2009 compared to the three month period ended August 31, 2008. The difficult U.S. economic conditions continued to negatively affect revenue in this operating segment.
Cost of first aid, safety and fire protection services decreased $9.7 million, or 15.0%, for the three months ended August 31, 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 39.2% for the quarter ended August 31, 2009, which is a 150 basis point decrease compared to the gross margin percentage in the first 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 32.7%, increased 250 basis points compared to the first quarter of the prior fiscal year. This increase is due to the lower First Aid, Safety and Fire Protection Services operating segment revenue. Selling and administrative expenses decreased from $32.8 million in last year's first quarter to $29.5 million in the first 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 $5.6 million to $5.8 million for the three months ended August 31, 2009. Income before income taxes was 6.4% of the operating segment's revenue, compared to 10.5% in last fiscal year's first quarter. This decrease is primarily due to the decrease in First Aid, Safety and Fire Protection services revenue.
Document Management Services Operating Segment
Three Months Ended August 31, 2009 Compared to Three Months Ended August 31, 2008
Document Management Services operating segment revenue increased from $54.8 million to $56.6 million, or 3.4%, for the three months ended August 31, 2009, over the same period in the prior fiscal year. Growth of 4.2% from acquisitions was offset by an organic decrease of 2.4%. The revenue growth rate was positively impacted by 1.6% due to one additional work day in the three month period ended August 31, 2009 compared to the three month period ended August 31, 2008. Although the operating segment's volume of shredding services increased by 19.7% during the quarter ended August 31, 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 August 31, 2009. This segment derives revenue from the sale of shredded paper to paper recyclers. The average price from these paper sales dropped by approximately 40% since August 31, 2008. The price of standard office paper, which accounts for the majority of the recycled paper revenue, dropped from $205 per ton at August 31, 2008 to $125 per ton at August 31, 2009.
Cost of document management services increased $3.8 million, or 14.9%, for the three months ended August 31, 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 53.8% in last year's first quarter to 48.7% for the quarter ended August 31, 2009. This decrease is due to the significant decrease in the recycled paper prices.
Selling and administrative expenses as a percent of revenue, at 45.1%, increased 470 basis points compared to the first quarter of the prior fiscal year. This increase includes increases in selling labor and support services of 190 basis points and in medical expenses of 110 basis points.
Income before income taxes for the Document Management Services operating segment decreased $5.3 million to $2.0 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 13.5% in last year's first quarter to 3.6% for the quarter ended August 31, 2009, primarily as a result of the significant decrease in recycled paper prices.
Liquidity and Capital Resources
At August 31, 2009, Cintas had $357.9 million in cash and cash equivalents and marketable securities which is $107.7 million more than the $250.1 million at May 31, 2009. The marketable securities consist of highly rated U.S. and Canadian government securities. This increase is primarily due to cash generated from operations of $144.9 million, offset by capital expenditures of $24.8 million. Cash and cash equivalents and marketable securities are expected to be used to finance future acquisitions, capital expenditures and expansion.
Marketable securities consist primarily of Canadian treasury securities. Cintas believes that its investment policy pertaining to marketable securities is conservative. The criterion used in making investment decisions is the preservation of principal, while earning an attractive yield.
Working capital increased $72.8 million to $1,025.6 million at August 31, 2009, due to the increased cash balances discussed above offset by reductions in inventory levels.
Net property and equipment decreased by $13.3 million from May 31, 2009 to August 31, 2009. We continue to reduce our capital spending in this difficult economic environment and in the absence of revenue growth. We have available capacity in our existing facilities to allow for growth.
As of August 31, 2009, we have $775 million in fixed rate notes outstanding with maturities ranging from 2012 to 2036. We have a commercial paper program with a capacity of $600.0 million that is fully supported by a backup revolving credit facility through a credit agreement with our banking group. As of August 31, 2009 and May 31, 2009, we had no commercial paper outstanding. The credit agreement expires in February 2011. We believe this program will be adequate to provide necessary funding for our operations.
Cintas' total debt to capitalization ratio remained relatively consistent at 24.5% at August 31, 2009, compared to 24.9% at May 31, 2009.
Cintas has no off-balance sheet arrangements other than a synthetic lease on a corporate aircraft. The synthetic lease on the aircraft does not currently have, and is not reasonably likely to have, a current or future material effect on Cintas' financial condition, changes in Cintas' financial condition or results of operations.
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 financial position or results of operations of Cintas. Cintas is party to additional litigation not considered in the ordinary course of business. Please refer to Note 10 entitled Litigation and Other Contingencies of "Notes to Consolidated Condensed Financial Statements" for a detailed discussion of certain specific litigation.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. Forward-looking statements may be identified by words such as "estimates," "anticipates," "predicts," "projects," "plans," "expects," "intends," "target," "forecast," "believes," "seeks," "could," "should," "may" and "will" or the negative versions thereof and similar words, terms and expressions and by the context in which they are used. Such statements are based upon current expectations of Cintas and speak only as of the date made. You should not place undue reliance on any forward-looking statement. We cannot guarantee that any forward-looking statement will be realized. These statements are subject to various risks, uncertainties, potentially inaccurate assumptions and other factors that could cause actual results to differ from those set forth in or implied by this Quarterly Report. Factors that might cause such a difference include, but are not limited to, the possibility of greater than anticipated operating costs including energy costs, lower sales volumes, loss of customers due to outsourcing trends, the performance and costs of integration of acquisitions, fluctuations in costs of materials and labor including increased medical costs, costs and possible effects of union organizing activities, failure to comply with government regulations concerning employment discrimination, employee pay and benefits and employee health and safety, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, the cost, results and ongoing assessment of internal controls for financial reporting required by the Sarbanes-Oxley Act of 2002, the initiation or outcome of litigation, investigations or other proceedings, higher assumed sourcing or distribution costs of products, the disruption of operations from catastrophic or extraordinary events, changes in federal and state tax and labor laws and the reactions of competitors in terms of price and service. Cintas undertakes no obligation to publicly release any revisions to any forward-looking statements or to otherwise update any forward-looking statements whether as a result of new information or to reflect events, circumstances or any other unanticipated developments arising after the date on which such statements are made. A further list and description of risks, uncertainties and other matters can be found in our Annual Report on Form 10-K for the year ended May 31, 2009 and in our reports on Forms 10-Q and 8-K. The risks and uncertainties described herein are not the only ones we may face. Additional risks and uncertainties presently not known to us or that we currently believe to be immaterial may also harm our business.
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