CTAS Cintas Corporation

Cintas Corporation (Nasdaq:CTAS) today reported results for the second quarter of its fiscal year 2010, which ended on November 30, 2009. Revenue for the quarter was $884.5 million, a 1% decrease as compared to the first quarter of fiscal 2010, which ended on August 31, 2009. However, when adjusted for a comparable number of workdays, revenue increased 1% compared to the first quarter.

Scott D. Farmer, Chief Executive Officer, stated, “According to the U.S. Department of Labor, the U.S. economy has lost jobs for 23 consecutive months, with 7.2 million jobs lost during that time frame. These job losses directly affect our business as many of our products and services are dependant on customer employee levels. While job losses have moderated recently, 1.2 million jobs were lost during the last six months and we do not know when positive job growth will return. We will continue to focus on taking care of our customers and actively managing our cost structure in this difficult environment.”

Second quarter net income was $57.2 million and earnings per share were $0.37. Both represented a 6% increase over the first quarter of fiscal 2010. Excluding one-time legal settlements net of insurance proceeds of $4.1 million in the second quarter and $19.5 million in the first quarter, second quarter net income decreased 10% to $59.7 million and earnings per share decreased 9% to $0.39. The Company offset revenue declines, primarily due to job losses, by adding new customers and further penetrating existing customer accounts with additional products and services. The costs associated with this additional revenue, as well as heightened pricing pressures, impacted second quarter margins. In addition, the Company’s effective tax rate increased to 39.3% as expected due to quarterly tax reserve requirements. The Company believes its full fiscal year 2010 tax rate will be approximately 37.5%.

Mr. Farmer continued, “It appears that our business has stabilized as this was our third straight quarter of relatively flat revenue on a per workday basis. Given our businesses’ correlation to employment levels, it is unlikely that we will return to steady growth until the U.S. job market begins to recover, which historically has lagged general economic growth. We anticipate that when job recovery does occur, it will be a slow and lengthy process. In addition, the third quarter of our fiscal year is traditionally our most challenging, with fewer workdays and customer holiday closures. This year, we anticipate customer holiday closures will be longer and more widespread than they have been in better economic climates. For these reasons, we believe that current analyst expectations for Cintas revenue and earnings are too optimistic.”

Mr. Farmer emphasized, “Our solid foundation and focus on cost control and cash generation continue to enable us to weather this difficult economic environment. Over the last six months, we have significantly increased our cash flow. We generated $246 million of free cash flow in the first six months of this fiscal year, which is a $167 million increase over the first six months of last year. This cash flow has helped strengthen an already robust balance sheet. We continue to be a market leader in all of our businesses, with state-of-the-art technology, efficient operations and dedicated employee partners. When market conditions improve, we expect these competitive advantages will provide us enhanced opportunities.”

About Cintas

Headquartered in Cincinnati, Cintas Corporation provides highly specialized services to businesses of all types throughout North America. Cintas designs, manufactures and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products, first aid, safety, fire protection products and services and document management services for approximately 800,000 businesses. Cintas is a publicly held company traded over the Nasdaq Global Select Market under the symbol CTAS, and is a Nasdaq-100 company and component of the Standard & Poor’s 500 Index.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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 Press Release. 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.

Cintas Corporation Consolidated Condensed Statements of Income (Unaudited) (In thousands except per share data)                 Three Months Ended Three Months Ended

November 30,2009

 

August 31,2009

  % Chng.

November 30,2008

  % Chng.   Revenue: Rental uniforms and ancillary products $ 643,597 $ 655,638 -1.8 $ 711,454 -9.5 Other services   240,912       235,931   2.1   273,730   -12.0 Total revenue $ 884,509 $ 891,569 -0.8 $ 985,184 -10.2   Costs and expenses: Cost of rental uniforms and ancillary products $ 363,728 $ 362,929 0.2 $ 401,614 -9.4 Cost of other services 150,934 145,845 3.5 168,570 -10.5 Selling and administrative expenses 259,406 264,427 -1.9 284,608 -8.9 Legal settlements, net of insurance proceeds   4,052       19,477   N/A   -   N/A   Operating income $ 106,389 $ 98,891 7.6 $ 130,392 -18.4   Interest income (314 ) (359 ) -12.5 (830 ) -62.2 Interest expense   12,579       12,038   4.5   12,768   -1.5   Income before income taxes $ 94,124 $ 87,212 7.9 $ 118,454 -20.5 Income taxes   36,948       33,228   11.2   46,616   -20.7 Net income $ 57,176     $ 53,984   5.9 $ 71,838   -20.4   Per share data: Basic earnings per share $ 0.37     $ 0.35   5.7 $ 0.47   -21.3 Diluted earnings per share $ 0.37     $ 0.35   5.7 $ 0.47   -21.3   Weighted average number of shares outstanding 152,866 152,828 152,788 Diluted average number of shares outstanding 152,867 152,828 152,788       Six Months Ended

November 30,2009

 

November 30,2008

  % Chng.   Revenue: Rental uniforms and ancillary products $ 1,299,235 $ 1,432,827 -9.3 Other services   476,843       554,536   -14.0 Total revenue $ 1,776,078 $ 1,987,363 -10.6   Costs and expenses: Cost of rental uniforms and ancillary products $ 726,657 $ 808,904 -10.2 Cost of other services 296,779 338,376 -12.3 Selling and administrative expenses 523,833 571,903 -8.4 Legal settlements, net of insurance proceeds   23,529       -   N/A   Operating income $ 205,280 $ 268,180 -23.5   Interest income (673 ) (1,895 ) -64.5 Interest expense   24,617       25,799   -4.6   Income before income taxes $ 181,336 $ 244,276 -25.8 Income taxes   70,176       93,802   -25.2 Net income $ 111,160     $ 150,474   -26.1   Per share data: Basic earnings per share $ 0.72     $ 0.98   -26.5 Diluted earnings per share $ 0.72     $ 0.98   -26.5   Weighted average number of shares outstanding 152,847 153,093 Diluted average number of shares outstanding 152,847 153,093   CINTAS CORPORATION SUPPLEMENTAL DATA   Three Months Ended       Three Months Ended

November 30,2009

 

August 31,2009

November 30,2008

Rental uniforms and ancillary products gross margin 43.5 %   44.6 % 43.6 % Other services gross margin 37.3 % 38.2 % 38.4 % Total gross margin 41.8 % 42.9 % 42.1 % Net margin 6.5 % 6.1 % 7.3 % Net margin, excluding charges 6.7 % 7.4 % 7.3 %   Depreciation and amortization $ 47,562 $ 48,905 $ 50,009 Capital expenditures $ 23,273 $ 24,819 $ 41,496   Debt to total capitalization 24.0 % 24.5 % 27.2 %     Six Months Ended

November 30,2009

 

November 30,2008

Rental uniforms and ancillary products gross margin 44.1 % 43.5 % Other services gross margin 37.8 % 39.0 % Total gross margin 42.4 % 42.3 % Net margin 6.3 % 7.6 % Net margin, excluding charges 7.1 % 7.6 %   Depreciation and amortization $ 96,467 $ 99,894 Capital expenditures $ 48,092 $ 95,957   Debt to total capitalization 24.0 % 27.2 %   Reconciliation of Non-GAAP Financial Measures and Regulation G Disclosure   The press release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. To supplement its consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP), the Company provides additional measures of operatings results, net earnings and earnings per share adjusted to exclude certain costs, expenses and gains and losses. The Company believes that these non-GAAP financial measures are appropriate to enhance understanding of its past performance as well as prospects for future performance. A reconciliation of the differences between these non-GAAP financial measures with the most directly comparable financial measures calculated in accordance with GAAP is shown above.   Management believes earnings per diluted share excluding the legal settlement charge provides investors pertinent information given the one-time nature of these charges.   Three Months Ended       Three Months Ended

November 30,2009

 

August 31,2009

  % Chng.

November 30,2008

  % Chng.       Income before income taxes $ 94,124   $ 87,212 7.9 $ 118,454 -20.5   Excluding: Legal settlements, net of insurance proceeds   4,052     19,477   -   Total charges $ 4,052 $ 19,477 $ -   Income before income taxes, excluding charges $ 98,176 $ 106,689 -8.0 $ 118,454 -17.1 Income taxes, excluding charges   38,517     40,649   46,616 Net income, excluding charges $ 59,659   $ 66,040 -9.7 $ 71,838 -17.0   Per share data:

Earnings per diluted share, excluding charges

$ 0.39   $ 0.43 -9.3 $ 0.47 -17.0     Six Months Ended

November 30,2009

 

November 30,2008

  % Chng.   Income before income taxes $ 181,336   $ 244,276 -25.8   Excluding: Legal settlements, net of insurance proceeds   23,529     -   Total charges $ 23,529 $ -   Income before income taxes, excluding charges $ 204,865 $ 244,276 -16.1 Income taxes, excluding charges   79,283     93,802 Net income, excluding charges $ 125,582   $ 150,474 -16.5   Per share data:

Earnings per diluted share, excluding charges

$ 0.82   $ 0.98 -16.3   Computation of Free Cash Flow     Six Months Ended November 30, 2009   2008   Net Cash Provided by Operations $ 294,175 $ 175,141   Capital Expenditures $ (48,092 )   $ (95,957 )   Free Cash Flow $ 246,083 $ 79,184  

Note:

 

Management uses free cash flow to assess the financial performance of the Company. Management believes that free cash flow is useful to investors because it relates the operating cash flow of the Company to the capital that is spent to continue, improve and grow business operations.

  SUPPLEMENTAL SEGMENT DATA  

RentalUniforms andAncillaryProducts

 

Uniform DirectSales

 

First Aid,Safety andFireProtection

 

DocumentManagement

  Corporate   Total For the three months ended November 30, 2009           Revenue $ 643,597 $ 99,434 $ 81,557 $ 59,921 $ - $ 884,509 Gross margin $ 279,869 $ 29,182 $ 30,560 $ 30,236 $ - $ 369,847 Selling and administrative expenses $ 187,988 $ 18,707 $ 27,542 $ 25,169 $ - $ 259,406 Legal settlements, net of insurance proceeds $ - $ - $ - $ - $ 4,052 $ 4,052 Interest income $ - $ - $ - $ - $ (314 ) $ (314 ) Interest expense $ - $ - $ - $ - $ 12,579 $ 12,579 Income (loss) before income taxes $ 91,881 $ 10,475 $ 3,018 $ 5,067 $ (16,317 ) $ 94,124   For the three months ended August 31, 2009 Revenue $ 655,638 $ 89,301 $ 90,001 $ 56,629 $ - $ 891,569 Gross margin $ 292,709 $ 27,245 $ 35,262 $ 27,579 $ - $ 382,795 Selling and administrative expenses $ 190,256 $ 19,156 $ 29,475 $ 25,540 $ - $ 264,427 Legal settlement, net of insurance proceeds $ - $ - $ - $ - $ 19,477 $ 19,477 Interest income $ - $ - $ - $ - $ (359 ) $ (359 ) Interest expense $ - $ - $ - $ - $ 12,038 $ 12,038 Income (loss) before income taxes $ 102,453 $ 8,089 $ 5,787 $ 2,039 $ (31,156 ) $ 87,212   For the three months ended November 30, 2008 Revenue $ 711,454 $ 120,035 $ 100,490 $ 53,205 $ - $ 985,184 Gross margin $ 309,840 $ 36,851 $ 40,442 $ 27,867 $ - $ 415,000 Selling and administrative expenses $ 201,470 $ 27,614 $ 32,774 $ 22,750 $ - $ 284,608 Interest income $ - $ - $ - $ - $ (830 ) $ (830 ) Interest expense $ - $ - $ - $ - $ 12,768 $ 12,768 Income (loss) before income taxes $ 108,370 $ 9,237 $ 7,668 $ 5,117 $ (11,938 ) $ 118,454   For the six months ended November 30, 2009 Revenue $ 1,299,235 $ 188,735 $ 171,558 $ 116,550 $ - $ 1,776,078 Gross margin $ 572,578 $ 56,427 $ 65,822 $ 57,815 $ - $ 752,642 Selling and administrative expenses $ 378,244 $ 37,863 $ 57,017 $ 50,709 $ - $ 523,833 Legal settlements, net of insurance proceeds $ - $ - $ - $ - $ 23,529 $ 23,529 Interest income $ - $ - $ - $ - $ (673 ) $ (673 ) Interest expense $ - $ - $ - $ - $ 24,617 $ 24,617 Income (loss) before income taxes $ 194,334 $ 18,564 $ 8,805 $ 7,106 $ (47,473 ) $ 181,336 Assets $ 2,469,393 $ 140,923 $ 311,050 $ 475,836 $ 480,240 $ 3,877,442   For the six months ended November 30, 2008 Revenue $ 1,432,827 $ 237,518 $ 209,022 $ 107,996 $ - $ 1,987,363 Gross margin $ 623,923 $ 74,228 $ 84,566 $ 57,366 $ - $ 840,083 Selling and administrative expenses $ 408,494 $ 52,988 $ 65,548 $ 44,873 $ - $ 571,903 Interest income $ - $ - $ - $ - $ (1,895 ) $ (1,895 ) Interest expense $ - $ - $ - $ - $ 25,799 $ 25,799 Income (loss) before income taxes $ 215,429 $ 21,240 $ 19,018 $ 12,493 $ (23,904 ) $ 244,276 Assets $ 2,657,929 $ 180,413 $ 349,518 $ 459,847 $ 127,346 $ 3,775,053             Cintas Corporation Consolidated Balance Sheets (In thousands except share data)    

ASSETS

November 30,2009

May 31,

2009

(Unaudited) Current assets: Cash & cash equivalents $ 342,014 $ 129,745 Marketable securities 138,226 120,393 Accounts receivable, net 377,151 357,678 Inventories, net 166,373 202,351 Uniforms and other rental items in service 329,561 335,447 Income taxes, current 8,906 25,512 Deferred tax asset 69,558 66,368 Prepaid expenses 17,637 17,035 Assets held for sale   15,744     15,744   Total current assets 1,465,170 1,270,273   Property and equipment, at cost, net 888,005 914,627   Goodwill 1,334,773 1,331,388 Service contracts, net 110,104 124,330 Other assets, net   88,296     80,333     $ 3,886,348   $ 3,720,951    

LIABILITIES AND SHAREHOLDERS' EQUITY

  Current liabilities: Accounts payable $ 73,574 $ 69,965 Accrued compensation and related liabilities 46,872 48,414 Accrued liabilities 224,526 198,488 Long-term debt due within one year   588     598   Total current liabilities 345,560 317,465   Long-term liabilities: Long-term debt due after one year 785,748 786,058 Deferred income taxes 157,143 149,032 Accrued liabilities   101,812     100,987   Total long-term liabilities 1,044,703 1,036,077   Shareholders' equity: Preferred stock, no par value: - - 100,000 shares authorized, none outstanding Common stock, no par value: 132,034 129,215 425,000,000 shares authorized FY10: 173,206,493 issued and 152,869,220 outstanding FY09: 173,085,926 issued and 152,790,170 outstanding Paid-in capital 77,116 72,364 Retained earnings 3,049,579 2,938,419 Treasury stock: (798,847 ) (797,888 ) FY10: 20,337,273 shares FY09: 20,295,756 shares Other accumulated comprehensive income (loss): Foreign currency translation 44,031 33,505 Unrealized loss on derivatives (7,847 ) (8,207 ) Unrealized loss on available-for-sale securities   19     1   Total shareholders' equity 2,496,085 2,367,409   $ 3,886,348   $ 3,720,951                   Cintas Corporation Consolidated Condensed Statement of Cash Flows (Unaudited) (In thousands)       Six Months Ended

Cash flows from operating activities:

November 30,2009

November 30,2008

  Net income $ 111,160 $ 150,474  

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation 75,899 78,372 Amortization of deferred charges 20,568 21,522 Stock-based compensation 7,571 6,911 Deferred income taxes 4,777 (1,840 )

Change in current assets and liabilities, net of acquisitions of businesses:

Accounts receivable, net (12,843 ) (8,064 ) Inventories, net 34,874 (15,169 ) Uniforms and other rental items in service 5,495 (6,237 ) Prepaid expenses (568 ) (3,799 ) Accounts payable 6,914 (509 ) Accrued compensation and related liabilities (1,646 ) (8,685 ) Accrued liabilities and other 25,246 (16,400 ) Income taxes payable   16,728     (21,435 )   Net cash provided by operating activities 294,175 175,141  

Cash flows from investing activities:

  Capital expenditures (48,092 ) (95,957 ) Proceeds from sale or redemption of marketable securities 25,852 61,662 Purchase of marketable securities and investments (53,060 ) (23,222 ) Acquisitions of businesses, net of cash acquired (6,601 ) (18,331 ) Other   1,053     353    

Net cash used in investing activities

(80,848 ) (75,495 )  

Cash flows from financing activities:

  Proceeds from issuance of debt - 7,500 Repayment of debt (321 ) (80,749 ) Exercise of stock-based compensation awards 2,819 - Repurchase of common stock (959 ) (25,847 ) Other   (3,536 )   413     Net cash used in financing activities (1,997 ) (98,683 )   Effect of exchange rate changes on cash and cash equivalents 939 (4,774 )   Net increase (decrease) in cash and cash equivalents 212,269 (3,811 )   Cash and cash equivalents at beginning of period   129,745     66,224     Cash and cash equivalents at end of period $ 342,014   $ 62,413