CTAS

Cintas Corporation 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Cintas Corporation for the period ended November 30, 2006. Cintas is 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, first aid, safety, fire protection, and document management. The company operates in two segments: Rentals and Other Services.

Key Financial Metrics

(Amounts in thousands, except per share data)

Segment Performance (Six Months Ended Nov 30, 2006):

• Rentals: Revenue of $1,372,149; Income before taxes of $241,877.
• Other Services: Revenue of $465,278; Income before taxes of $46,921.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 10.5% for the quarter and 10.7% for the six-month period compared to the prior year. Internal growth was 6.1% (quarter) and 6.2% (six months), with the remainder driven by acquisitions.
• Profitability: Net income increased 7.4% for the quarter and 7.9% for the six-month period. Diluted EPS grew 10.9% (quarter) and 13.0% (six months), outpacing net income growth due to the stock buyback program.
• Expenses: Cost of rentals increased 8.7% (quarter) and 10.0% (six months), driven by material costs and a 10.6% rise in energy costs. Selling and administrative expenses increased 12.5% (quarter) and 10.6% (six months), largely due to increased sales force, marketing, and higher medical/retirement benefit costs.
• Debt Structure: On August 15, 2006, the company issued $250 million in senior notes due in 2036 at 6.15% interest to repay commercial paper borrowings. Net interest expense increased significantly due to higher borrowing levels for acquisitions and buybacks.
• Accounting Change: The company adopted FAS 123(R) effective June 1, 2006, requiring fair value recognition of stock-based compensation. This resulted in a restatement of prior periods and a reduction in current period net income by approximately $1.3 million for the six months ended November 30, 2006.

Guidance, Outlook, and Risks

• Outlook: Management maintains a positive outlook for fiscal 2007, anticipating continued growth in all business units. The company expects to supplement internal growth with strategic acquisitions.
• Capital Allocation: The Board expanded the stock buyback program by an additional $500 million in July 2006. Through December 31, 2006, the company had purchased approximately 13.1 million shares for $534 million. Capital expenditures for the year are expected to be between $150 million and $170 million.
• Risks and Contingencies:
  • Litigation: Cintas is a defendant in several significant class action lawsuits regarding wage and hour violations (Veliz), and race/gender discrimination in hiring (Serrano/Avalos, Ramirez, Houston). Additionally, a lawsuit by a Chapter 7 Trustee (Alexander) seeks $150 million in damages for alleged breach of fiduciary duties. Management believes liabilities are not determinable but could be material.
  • Unionization: The company is the target of a corporate unionization campaign by Unite Here and the Teamsters unions, which could be materially disruptive.
  • Cost Pressures: The company faces ongoing pressure from increased costs for wages, benefits (specifically medical), and energy.

Investor Verification Checklist

• Verify the status and potential financial impact of the consolidated Serrano/Avalos and Veliz class action lawsuits.
• Monitor the progress and cost implications of the ongoing unionization campaign by Unite Here and the Teamsters.
• Review the execution of the expanded $500 million stock buyback program and its impact on share count and EPS.
• Assess the sustainability of revenue growth given the reliance on acquisitions versus internal growth rates.
• Track energy cost trends and their effect on the Rentals segment's gross margin.