Summary of CINTAS CORP - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

BUSINESS STRATEGY

Cintas provides highly specialized products and services to businesses of all types primarily throughout North America, as well as Latin America, Europe and Asia. We bring value to our customers by helping them provide a cleaner, safer and 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 cleaning services and supplies, carpet and tile cleaning services, first aid, safety and fire protection products and services, document management services and branded promotional products.

Cintas' principal objective is "to exceed customers' expectations in order to maximize the long-term value of Cintas for shareholders and working partners," and it provides the framework and focus for Cintas' business strategy. This 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 that we have 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 several ways. Cintas has a national sales organization introducing all of its products and services to prospects in all business segments. Our broad 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 evaluate strategic acquisitions as opportunities arise.

RESULTS OF OPERATIONS

Cintas classifies its businesses into four operating segments based on the types of products and services provided. The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops and shop towels and other ancillary items. In addition to these rental items, restroom cleaning services and supplies and carpet and tile cleaning services are also provided within this operating segment. The Uniform Direct Sales operating segment consists of the direct sale of uniforms and related items and branded promotional products. The First Aid, Safety and Fire Protection Services operating segment consists of first aid, safety and fire protection products and services. The Document Management Services operating segment consists of document destruction, document imaging and document retention services. Revenue and income before income taxes for each of these operating segments for the three and six months ended November 30, 2012 and 2011, are presented in Note 8 entitled Segment Information of "Notes to Consolidated Condensed Financial Statements."

Consolidated Results

Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011

Total revenue increased 4.0% for the three months ended November 30, 2012, over the same period in the prior fiscal year from $1,019.1 million to $1,060.4 million. The increase primarily resulted from an organic growth increase (excludes the impact of acquisitions) in revenue of 3.4%. The remaining 0.6% increase represents growth 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 operating segment revenue increased 4.6% for the three months ended November 30, 2012, over the same period in the prior fiscal year from $722.8 million to $755.8 million. The increase resulted from an organic growth increase in revenue of 4.5% primarily due to improvements in sales representative productivity and an increase in the number of sales representatives. Generally, sales productivity improvements are the result of increased tenure and improved training, which result in a higher number of products and services sold.

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 2.8% for the three months ended November 30, 2012, over the same period in the prior fiscal year from $296.3 million to $304.5 million. Other Services revenue increased organically by 0.5%. The remaining 2.3% increase represents growth derived through acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment. The positive organic growth for Other Services revenue for the quarter was primarily the result of a 4.8% increase in First Aid, Safety and Fire Protection Services operating segment revenue. This organic growth increase in revenue was partially offset by an organic decrease of 1.8% in Document Management Services operating segment revenue and a 1.6% decrease in Uniform Direct Sales 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 increased $28.7 million, or 7.0%, for the three months ended November 30, 2012, compared to the three months ended November 30, 2011. This increase was due to higher Rental Uniforms and Ancillary Products operating segment sales volume, an increase in material cost due to an increase in customer accounts, which require the injection of inventory into in service inventory, and a $1.6 million write-off of a garment processing system.

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 $10.4 million, or 5.8%, for the three months ended November 30, 2012, compared to the three months ended November 30, 2011. This increase was primarily due to increased First Aid, Safety and Fire Protection Services operating segment sales volume.

Selling and administrative expenses decreased $4.1 million, or 1.4%, for the three months ended November 30, 2012, compared to the three months ended November 30, 2011, due to a gain on the sale of stock of an equity method investment and lower amortization of intangible assets related to prior year acquisitions.

Net interest expense (interest expense less interest income) was $16.1 million for the three months ended November 30, 2012, compared to $17.3 million for the three months ended November 30, 2011. This decreased interest cost is due to the maturity of the $225.0 million aggregate principal amount of 6.0% senior notes on June 1, 2012, offset by the new issuance of $250.0 million aggregate principal amount of 3.25% senior notes due 2022 in the first quarter of fiscal 2013.

Cintas' effective tax rate was 36.5% for the three months ended November 30, 2012, compared to 35.5% for the three months ended November 30, 2011. The effective tax rate can fluctuate from quarter to quarter based on tax reserve builds and releases relating to specific discrete items.

Net income increased $3.7 million, or 4.9%, for the three months ended November 30, 2012, from the same period in the prior fiscal year. This increase was primarily due to revenue increasing at a faster rate of 4.0% compared to a 3.9% increase in operating expenses. Revenue grew at a faster rate primarily due to improvements in sales representative productivity and improved customer retention. Diluted earnings per share were $0.63 for the three months ended November 30, 2012, which was an increase of 10.5% compared to the same period in the prior fiscal year. The increase in diluted earnings per share is higher than the increase in net income due to a decrease in weighted average common stock outstanding as a result of purchasing 7.1 million shares of common stock under the October 18, 2011 share buyback program during the fourth quarter of fiscal 2012 and the first half of fiscal 2013.

Rental Uniforms and Ancillary Products Operating Segment

Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011

As discussed above, Rental Uniforms and Ancillary Products operating segment revenue increased from $722.8 million to $755.8 million, or 4.6%, and the cost of rental uniforms and ancillary products increased $28.7 million, or 7.0%, for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. The operating segment's gross margin was $316.9 million, or 41.9% of revenue, for the second quarter of fiscal 2013. This gross margin percent of revenue of 41.9% was 130 basis points lower than the prior fiscal year's second quarter of 43.2%, primarily due to an increase in material cost due to an increase in customer accounts, which require the injection of inventory into in service inventory, and a $1.6 million write-off of a garment processing system.

Selling and administrative expenses as a percent of revenue, at 26.6%, decreased 220 basis points, or $7.2 million, compared to the second quarter of the prior fiscal year due to a gain on the sale of stock of an equity method investment, lower medical expenses and lower amortization of intangible assets related to prior year acquisitions.

Income before income taxes increased $11.6 million to $116.1 million for the Rental Uniforms and Ancillary Products operating segment for the second quarter of fiscal 2013 compared to the same quarter last fiscal year. Income before income taxes was 15.4% of the operating segment's revenue, which is a 90 basis point increase compared to the second quarter of the prior fiscal year. This improvement is primarily due to the decrease in selling and administrative expenses as discussed above, partially offset by the increase in cost of rental uniforms and ancillary products due to the increase in material cost.

Uniform Direct Sales Operating Segment

Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011

Uniform Direct Sales operating segment revenue decreased from $111.9 million to $110.2 million, or 1.6%, for the three months ended November 30, 2012, over the same quarter in the prior fiscal year due to decreased customer orders for uniforms.

Cost of uniform direct sales increased $1.2 million, or 1.5%, for the three months ended November 30, 2012, over the same quarter in the prior fiscal year. The gross margin as a percent of revenue was 27.4% for the three months ended November 30, 2012, which is a 220 basis point decrease compared to the gross margin percent of revenue of 29.6% in the same quarter of the prior fiscal year. The increase in cost of uniform direct sales and the gross margin percent to revenue decrease is due to an unfavorable mix of products being sold and costs incurred in anticipation of large roll-outs scheduled to occur in the second half of fiscal 2013.

Selling and administrative expenses were comparable for the second quarter of fiscal 2013 to the second quarter of fiscal 2012, but as a percent of revenue, at 18.0%, increased 20 basis points for the three months ended November 30, 2012. This increase in percent of revenue is mainly due to lower revenue for the second quarter of fiscal 2013 compared to the same quarter in the prior fiscal year.

Income before income taxes decreased $2.8 million for the Uniform Direct Sales operating segment for the second quarter of fiscal 2013 compared to the same quarter last fiscal year. Income before income taxes was 9.4% of the operating segment's revenue, which is a 240 basis point decrease compared to the same quarter last fiscal year. This decrease in income before income taxes is primarily due to the decline in gross margin as discussed above.

First Aid, Safety and Fire Protection Services Operating Segment

Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011

First Aid, Safety and Fire Protection Services operating segment revenue increased from $101.7 million to $111.5 million, or 9.7%, for the three months ended November 30, 2012. The increase primarily resulted from organic growth in revenue of 4.8% due to improvements in sales representative productivity. The remaining 4.9% increase represents growth through acquisitions.

Cost of first aid, safety and fire protection services increased $6.3 million, or 11.0%, for the three months ended November 30, 2012, over the three months ended November 30, 2011, due to increased First Aid, Safety and Fire Protection Services operating segment 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 42.4% for the quarter ended November 30, 2012, which is a 70 basis point decrease compared to the gross margin percent of revenue of 43.1% in the same quarter of the prior fiscal year. This decrease is due to an unfavorable mix towards more lower margin national account business.

Selling and administrative expenses increased $2.8 million compared to the second quarter of the prior fiscal year, primarily due to an increase in labor and other employee-partner related expenses. Selling and administrative expenses as a percent of revenue, at 33.7%, decreased 60 basis points compared to the second quarter of the prior fiscal year due to the higher rate of growth of revenue for the second quarter of fiscal 2013 compared to the same quarter in the prior fiscal year.

Income before income taxes for the First Aid, Safety and Fire Protection Services operating segment increased $0.7 million to $9.7 million for the three months ended November 30, 2012, compared to the same quarter in the prior fiscal year, primarily due to the increase in First Aid, Safety and Fire Protection Services operating segment revenue. Income before income taxes, at 8.7% of the operating segment's revenue, was comparable to the same quarter last fiscal year.

Document Management Services Operating Segment

Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011

Document Management Services operating segment revenue increased from $82.7 million to $82.8 million, or 0.2%, for the quarter ended November 30, 2012, over the same quarter in the prior fiscal year. Document Management Services operating segment revenue decreased organically by 1.8% due to a decrease in recycled paper revenue. This was offset by revenue growth of 2.0% due to acquisitions. The rate of growth in this operating segment decelerated during the quarter ended November 30, 2012, compared to the quarter ended November 30, 2011, due to a steep decline in recycled paper prices. This operating segment derives a portion of its revenue from the sale of shredded paper to paper recyclers. The average price of recycled paper for the second quarter of fiscal 2013 was approximately 28% below the average for the second quarter of the prior fiscal year.

Cost of document management services increased $2.8 million, or 6.7%, for the three months ended November 30, 2012, over the same quarter in the prior fiscal year 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 was 45.4% for the three months ended November 30, 2012, which is a 340 basis point decrease compared to the gross margin percentage of 48.8% in the second quarter of the prior fiscal year. This decrease is due to the lower recycled paper prices.

Selling and administrative expenses were comparable for the second quarter of fiscal 2013 to the second quarter of fiscal 2012, but as a percent of revenue, at 41.9%, increased 40 basis points for the three months ended November 30, 2012. This increase in percent of revenue is due to the lower recycled paper prices.

Income before income taxes for the Document Management Services operating segment decreased $3.1 million to $2.9 million for the three months ended November 30, 2012, 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 7.3% in last year's second quarter to 3.5% for the quarter ended November 30, 2012, primarily as a result of the lower recycled paper prices.

Consolidated Results

Six Months Ended November 30, 2012 Compared to Six Months Ended November 30, 2011

Total revenue increased 3.7% for the six months ended November 30, 2012, over the same period in the prior fiscal year from $2.0 billion to $2.1 billion. The increase primarily resulted from an organic growth increase in revenue of 3.3%. The remaining 0.4% increase represents growth 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 operating segment revenue increased 4.7% for the six months ended November 30, 2012 , over the same period in the prior fiscal year from $1.4 billion to $1.5 billion. The increase resulted from an organic growth increase in revenue of 4.7% primarily due to improvements in sales representative productivity. Generally, sales productivity improvements are the result of increased tenure and improved training, which result in a higher number of products and services sold.

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 1.2% for the six months ended November 30, 2012, over the same period in the prior fiscal year from $594.1 million to $601.0 million. Other
Services revenue decreased organically by 0.1%. This is offset by a 1.3% increase from growth derived through acquisitions in our First Aid, Safety and Fire Protection Services operating segment and our Document Management Services operating segment. The organic decrease in Other Services revenue for the six months ended November 30, 2012, was primarily the result of a 5.2% decrease in Document Management Services operating segment revenue and a 3.3% decrease in Uniform Direct Sales operating segment revenue. The organic decrease in revenue was offset by organic growth of 5.7% 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 increased $53.4 million, or 6.6%, for the six months ended November 30, 2012, compared to the six months ended November 30, 2011. This increase was due to higher Rental Uniforms and Ancillary Products operating segment sales volume.

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 $12.9 million, or 3.7%, for the six months ended November 30, 2012, compared to the six months ended November 30, 2011. This increase was primarily due to increased First Aid, Safety and Fire Protection Services operating segment sales volume.

Selling and administrative expenses decreased $8.0 million, or 1.3%, for the six months ended November 30, 2012, compared to the six months ended November 30, 2011, due to a gain on the sale of stock of an equity method investment and lower amortization of intangible assets related to prior year acquisitions.

Net interest expense (interest expense less interest income) was $32.7 million for the six months ended November 30, 2012, compared to $34.3 million for the six months ended November 30, 2011. This decreased interest cost is due to the maturity of the $225.0 million aggregate principal amount of 6.0% senior notes on June 1, 2012, offset by the new issuance of $250.0 million aggregate principal amount of 3.25% senior notes due 2022 in the first quarter of fiscal 2013.

Cintas' effective tax rate was 37.0% for both the six months ended November 30, 2012 and 2011.

Net income increased $11.8 million, or 8.2%, for the six months ended November 30, 2012, from the same period in the prior fiscal year. The increase was primarily due to revenue increasing at a faster rate of 3.7% compared to a 3.3% increase in operating expenses. Revenue grew at a faster rate primarily due to improvements in sales representative productivity and improved customer retention. Diluted earnings per share were $1.23 for the six months ended November 30, 2012, which was an increase of 12.8% compared to the same period in the prior fiscal year. The increase in diluted earnings per share is higher than the increase in net income due to a decrease in weighted average common stock outstanding as a result of purchasing 7.1 million shares of common stock under the October 18, 2011 share buyback program during the fourth quarter of fiscal 2012 and the first half of fiscal 2013.

Rental Uniforms and Ancillary Products Operating Segment

Six Months Ended November 30, 2012 Compared to Six Months Ended November 30, 2011

As discussed above, Rental Uniforms and Ancillary Products operating segment revenue increased from $1.4 billion to $1.5 billion, or 4.7%, and the cost of rental uniforms and ancillary products increased $53.4 million, or 6.6%, for the six months ended November 30, 2012, compared to the six months ended November 30, 2011. The operating segment's gross margin was $643.6 million, or 42.6% of revenue, for the six months ended November 30, 2012. This gross margin percent of revenue of 42.6% was 100 basis points lower than the same period of the prior fiscal year of 43.6%. This decrease is due primarily to an increase in material cost due to an increase in customer accounts, which requires an increase in inventory, and a $1.6 million write-off of a garment processing system.

Selling and administrative expenses as a percent of revenue, at 27.2%, decreased 220 basis points, or $14.0 million compared to the same period of the prior fiscal year. This decrease is primarily due to a gain on the sale of stock of an equity method investment, lower medical expenses and lower amortization of intangible assets related to prior year acquisitions.

Income before income taxes increased $29.1 million to $233.0 million for the Rental Uniforms and Ancillary Products operating segment compared to the same period last fiscal year. Income before income taxes was 15.4% of the operating segment's revenue, which is a 130 basis point increase compared to the same period of the prior fiscal year. This improvement is primarily due to revenue increasing at a faster rate of 4.7% compared to a 3.2% increase in operating expenses. Revenue grew at a faster rate due primarily to improvements in sales representative productivity and improved customer retention.

Uniform Direct Sales Operating Segment

Six Months Ended November 30, 2012 Compared to Six Months Ended November 30, 2011

Uniform Direct Sales operating segment revenue decreased from $213.6 million to $210.5 million, or 1.5%, for the six months ended November 30, 2012, over the same period in the prior fiscal year due to decreased customer orders for uniforms.

Cost of uniform direct sales were comparable for the six months ended November 30, 2012, to the same period in the prior fiscal year. The gross margin as a percent of revenue was 28.4% for the six months ended November 30, 2012, which is a 70 basis point decrease compared to the gross margin percentage of 29.1% in the same period of the prior fiscal year. This decrease is due to an unfavorable mix of products being sold and costs incurred in anticipation of large roll-outs scheduled to occur in the second half of fiscal 2013.

Selling and administrative expenses were comparable for the first half of fiscal 2013 to the first half of fiscal 2012, but as a percent of revenue, at 19.3%, increased 30 basis points for the six months ended November 30, 2012. This increase in percent of revenue is mainly due to lower revenue for the first six months of fiscal 2013 compared to the same period in the prior fiscal year.

Income before income taxes decreased $2.5 million to $19.1 million for the Uniform Direct Sales operating segment for the six months ended November 30, 2012. Income before income taxes was 9.1% of the operating segment's revenue compared to 10.1% for the same period last fiscal year, which is a 100 basis point decrease compared to the same period last fiscal year. This decrease in income before income taxes is primarily due to the decline in gross margin as discussed above.

First Aid, Safety and Fire Protection Services Operating Segment

Six Months Ended November 30, 2012 Compared to Six Months Ended November 30, 2011

First Aid, Safety and Fire Protection Services operating segment revenue increased from $205.4 million to $222.4 million, or 8.2%, for the six months ended November 30, 2012. The increase primarily resulted from organic growth in revenue of 5.7% due to improvements in sales representative productivity. The remaining 2.5% increase represents growth through acquisitions.

Cost of first aid, safety and fire protection services increased $10.4 million, or 8.9%, for the six months ended November 30, 2012, over the same period in the prior fiscal year due to increased First Aid, Safety and Fire Protection Services operating segment 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 at 42.8% for the six months ended November 30, 2012, is a 30 basis point decrease compared to the gross margin percent of revenue of 43.1% for the six months ended November 30, 2011. This decrease is due to an unfavorable mix towards more lower margin national account business.

Selling and administrative expenses increased $5.2 million compared to the six months ended November 30, 2011, primarily due to an increase in labor and other employee-partner related expenses. However, selling and administrative expenses as a percent of revenue, at 34.4%, decreased 30 basis points compared to the same period of the prior fiscal year due to higher revenue for the six months . . .