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Cintas Fourth Quarter Earnings Call
Author: Albena Toncheva
Last Update: 6:13 AM EDT October 10 2007


The leading rental uniform supplier reported revenue of $964.1 million, representing an increase of 6.2% over the prior year. The gross margin dropped 70 basis points to 42.9%, due to increased delivery cost and material cost, partially offset by improved margins in other services. For fiscal 2008, Cintas projects revenue to range between $3.9 billion and $4.1 billion, equating to total company growth of 5.2% to 10.6%.

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This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Cintas Corporation (CTAS) on July 18, 2007.

Senior VP and CFO: William C. Gale
VP and Treasurer: Michael L. Thompson

Key Investors Issues

- The earnings per share dropped to 57 cents from 55 cents in the prior year.
- Quarterly revenue rose 6.2% over prior year to $964.1 million.
- For fiscal 2007, earning per share were $2.09, on revenue of $3.71 billion.
- During fiscal 2007, the firm bought back $200 million worth of its shares and paid an annual dividend of $62 million.

Fourth Quarter Fiscal 2007 Financial Highlights

Total revenues were $964.1 million for the quarter, a 6.2% increase over that reported in the prior year.

Internal growth was 4.3% during the fourth quarter, and 5.3% for the year. These results were in line with the firmís revenue guidance. The fourth quarter had 66 work days, the same number of work days as the fourth quarter of fiscal 2006.

Total margins of 42.9% declined 70 basis points as compared to 43.6% in the Q4 of 2006, but improved 30 basis points from 42.6% in the Q3 of fiscal 2007.

The increase over the prior year fourth quarter is primarily due to increased delivery cost and material cost, partially offset by improved margins and other services. Energy costs for the fourth were 3.4% of sales, consistent with the fourth quarter of fiscal 2006. The 30-basis point margin improvement as compared to the third quarter of fiscal 2007, reflects the seasonal improvement in material cost in Rental Division, and the improving margins in other services. Energy costs in the fourth quarter were 10 basis points higher than in third quarter, reflecting increased energy pricing. Traditionally, energy costs would remain flat or decrease from the third and the fourth quarter, due to lower consumption levels, reflecting the movement out of the winter months.

Selling and administrative expenses were 26.8% of revenue, an increase of 20 basis points over last year''s fourth quarter.

Selling costs increased 80 basis points, reflecting the increased investment being made in additional sales representatives and new sales structure, in order to benefit growth in the long-term. In addition, the adoption of FAS 123R share-based payments, and related expensing of equity compensation increased administrative expenses by 20 basis points. Offsetting these increases was a 30-basis point improvement in bad debt expense, as the firmís locations executed well in the collection of accounts receivable at year end. In addition, in May of 2007, the firm exited its forward starting swap, which provided miscellaneous income of $6.2 million. This amount has been included as a credit to administrative expense.

Selling and administrating expenses improved by 120 basis points from the third quarter of fiscal 2007. The improvement resulted from the termination of the forward starting swap and the accounts receivable collection effort. Payroll taxes decreased 30 basis points, reflecting a normal event due to the annual resetting of payroll taxes during our third quarter. As compared to both the fourth quarter of the fiscal 2006 and the third quarter of fiscal 2007, the employee workers compensation costs increased. This increase, which was a result of several high exposure claims incurred during the current quarter, was offset by an improvement in employee medical cost during the quarter.

- Net interest costs were 1.2% of revenue this quarter, reflecting an increased long-term debt levels taken on to fund acquisitions and share buybacks over the last 18 months.
- The effective tax rate was 37.3% for the quarter, down slightly from 37.4% in the fourth quarter of last year, but consistent with that of third quarter.
- For the quarter, net income of $90.3 million decreased to 1.3% over the fourth quarter of fiscal 2006, reflecting increased interest expense on higher debt levels.
- Earnings per diluted share increased 3.6% to 57 cents per diluted share, reflecting operational results and the impact of the share repurchase program.

The firmís balance sheet continues to be strong.

- Despite a reduction in cash in marketable securities used for acquisitions and stock buyback program, the current ratio was 2.9:1 at May 31st.
- Cash in marketable securities was approximately $155 million, a reduction of $86 million from May 31, 2006. When available cash in marketable securities were used throughout the year to fund acquisitions and purchases under the buyback program.

- DSOs on accounts receivable were 39 days, which is a slight increase over last year, but a slight improvement from last quarter.
- New goods inventory levels increased $34 million over May 31, 2006. The increase is due to a combination of the replenishing of low inventory levels at May 31, 2006 caused by significant uniform direct sales in May of 2006. Increased inventory requirements at May 31, 2007 required for the rollout of the new direct sale catalog and new line of rental cargo pants.

Long-term debt at May 31, 2007 was $881 million.

Total debt as a percentage of total book capitalization was 28.9%. Long-term debt due after one year includes $225 million of debt that had a maturity date of June 1, 2007. This debt was subsequently refinanced through the commercial paper program and therefore is classified as long-term debt due May 31st. The decision to use the commercial paper program for this refinancing, centered on the current interest rate environment and the favorable interest rate and flexibility afforded by the CP program.

The firm previously entered a forward starting swap in anticipation of refinancing this debt and a new debt with a 30 year maturity. When the decision was made in the fourth quarter to instead refinance this debt through the use of commercial paper, the swap was terminated resulting in a $6.2 million gain.

- The cash flow remains strong with cash provided by operations totaling $449 million.
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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