信達思 (CTAS) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Cintas' quarterly earnings results conference call.

Today's call is being recorded.

At this time I'd like to turn the call over to Bill Gale, Senior Vice President of finance and Chief Financial Officer.

Please go ahead, sir.

Good day and thank you for joining us for our discussion of our third-quarter fiscal 2010 results.

For the quarter ending February 28, 2010 total revenue was $862 million, a 3.7% decrease from the third-quarter revenue of fiscal 2009 when adjusting for the one less workday in this year's third quarter versus last year.

Earnings per share were $0.32 versus $0.47 a year ago.

This is $0.01 higher than the upper end of our previously-issued guidance.

We are pleased to see the stabilization in the economy and the significant reduction in job losses.

In fact, our total revenues have been relatively comparable over the last four quarters when adjusting for workday differentials.

We find this development encouraging, but at the same time we expect job recovery to be sluggish.

We have updated our internal estimates with our third-quarter actual results and continue to believe that our previously-released fourth-quarter guidance is appropriate.

Therefore, we are reiterating our guidance for the fourth quarter of revenue between $870 million to $890 million and earnings per diluted share of $0.30 to $0.34.

Our businesses have been greatly impacted by the large number of job losses and facility closures that have occurred since early in calendar 2008.

During this time we continue to focus on taking care of our customers but working also to reduce our cost structure and conserve cash.

The price environment remains extremely competitive.

Despite the most significant recession since the 1930s, we are pleased to report that our financial condition have strengthened, leaving us with over $550 million in cash and marketable securities and with no short-term debt.

Our ratio of net debt to capitalization improved to 9%, down from over 21% a year ago.

Reflecting the strong cash flow and confidence in our business, last week we paid an annual dividends of $0.48 per share, continuing our practice of raising the dividend every year since going public in 1983.

We continue to be very disciplined in making acquisitions but continue to search for great opportunities at good values.

During this quarter, in addition to some small US- based document management and fire service acquisitions, Cintas expanded its presence in the document managed business in Europe by purchasing a company in Belgium.

Combined with our prior European acquisitions in the Netherlands and Germany we continue to see great opportunities with this business in Northern Europe.

We wish to express again our sincere appreciation to all of our employees who we call partners.

They are to be complimented for their unwavering focus on taking care of the customer and making Cintas the strong Company it is and will continue to be.

With me today is Mike Thompson, Cintas' Vice President and Treasurer, and Mike Hansen, Cintas' Corporate Controller.

After some comments from Mike Thompson we will -- and Mike Hansen we will open the call to questions.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements.

This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance.

These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss.

I refer you to the discussion on these points contained in our most recent filings with the SEC.

Thanks, Bill.

Now let's talk about our income statement.

Our third quarter had 64 workdays, one less than last-year's third quarter, as well as this year second quarter, both of which had 65 workdays.

Total revenue for the third quarter of fiscal 2010 was $862 million and represented a 3.7% decrease from the third quarter of last year on an adjusted workday basis.

As compared to this year's second quarter, revenue declined 1% on an adjusted workday basis.

While US job losses and revenue pressures continue, new business sold to prospects and to existing customers has generally offset these losses, allowing total revenue to be stable over the last four quarters on an adjusted workday basis.

Total Company internal growth was negative 3.6%, an improvement from second quarter internal growth of negative 10%.

As a reminder, there is 66 workdays in this year's fourth quarter.

Note that in fiscal 2011 workdays will actually be the same as fiscal 2010.

That means there will be 66 workdays in Q1, 65 in Q2, and 64 in Q3, and 66 in Q4.

We have four reportable segments; Rental Uniforms and Ancillary Products, Uniform Direct Sales, First Aid, Safety and Fire Protection Services, and Document Management Services.

Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services are combined and presented as other services on the face of the income statement.

The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms, mats, towels and other related items.

The segment also includes restroom supplies and other facility products and services.

Rental Uniforms and Ancillary Products revenue accounted for 72% of Company revenue in the third quarter.

Rental revenue was $622.5 million for the quarter, a 6.3% decrease as compared to last-year's third quarter on an adjusted workday basis, and down 1.8% as compared to last quarter on an equivalent workday basis.

The sequential decrease of 1.8% is largely due to the impact of holiday closures and weather-related issues.

Internal growth was negative 6%, an improvement from second quarter internal growth of negative 9.5%.

While still declining US job losses have moderated.

This moderation of job losses, as well as our efforts to maintain our existing customer base, has resulted in improvements in our lost business metric and the stops with our add/stop metric, as compared to last-year's third quarter and this year's second quarter.

However, achieving new business and traditional customer adds continues to be difficult in an economic where jobs have not yet been added.

Competitive pricing in the marketplace for both customer retention and new business continues to be aggressive.

However, as long as it makes economic sense we will continue to vigorously fight our competition in the marketplace.

We are protecting our market share and our customer satisfaction level remains high.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms, branded promotional products and other related products to national and regional customers.

Uniforms and other related products are also sold to local customers, including product sold to rental customers through our direct sale catalog.

Uniform Direct Sales revenue accounted for 11% of Company revenue in the third quarter.

Revenue levels in this segment continue to be soft, as customers are maintaining uniform programs but few are upgrading or refreshing them.

Last-year's third quarter marked the most dramatic sequential revenue decline in this business during the current downturn.

We are now 12 months out from that decline.

Internal growth was negative 1% in the current third quarter.

While growth has not returned we have seen stabilization in this business.

The third-quarter internal growth rate of negative 1% marks a sizable improvement from a 17% decline last quarter.

Looking forward we continue to believe further economic stabilization needs to occur before customer spending under these more discretionary types of programs returns to more traditional levels.

Our First Aid, Safety and Fire Protection Services operating segment includes revenue from the sale and servicing of first aid products, safety products and training, and fire protection products.

First Aid, Safety and Fire Protection revenue accounted for 9% of Company revenue in the third quarter.

During the quarter revenues within our First Aid, Safety and Fire Protection Services operating segment decreased 8% versus last-year's third quarter.

Internal growth was negative 6%, an improvement from negative 17% last quarter.

As with Uniform Direct Sales last-year's third quarter marked the most dramatic sequential decline in First Aid, Safety and Fire Protection revenue throughout this economic downturn.

Going forward, we expect to see better year-over-year revenue comparisons.

The First Aid and Safety revenue in this segment decreased 5% from last-year's third quarter and was down slightly compared to the second quarter, excluding the normal holiday impact.

Fire Protection Services revenue was down 12% from the third quarter of last year.

However, Fire Services revenue increased 7% over the second quarter, as we continue to focus on test, inspection and repair service.

Our Document Management Services operating segment includes document destruction, storage and imaging services.

Document Management increased to 8% of third-quarter total Company revenue, up from 7% in the second quarter.

Revenue increased 29% over the third quarter of fiscal 2009 and 10% over the second quarter of this year.

Internal growth was 27%.

Recycled paper prices strengthened during the third quarter and accounted for the significant lift in the interim growth rate from 9% in the second quarter to 27% in the third quarter.

When excluding impact of the recycled paper revenue internal growth for document destruction service and purge business was a robust 15%.

We continue to expand our geographic presence and as Bill mentioned earlier, we have expanded into Belgium.

While small relative to the Company in total our European businesses are performing to expectations.

We continue to look for additional document management acquisition opportunities, both domestically and abroad.

Turning to margins.

We continue to actively manage our cost structure in order to maximize results during this challenging environment.

Total Company gross margin for the third quarter was 41.7%, a 30-basis point improvement from the third quarter of last year.

This improvement came in spite of a 20-basis point increase in energy cost from last-year's third quarter.

Third-quarter total Company gross margin decreased 10-basis points from the second quarter.

However, total energy cost increased 40-basis points from the second quarter to the third quarter.

Rental gross margin of 42.7% was down 110-basis points from last-year's third quarter.

Lower revenue levels and one fewer workday this year compared to last-year's third quarter pressured Rental gross margins.

In addition, energy costs increased by 20-basis points.

However, as compared to last-year's third quarter, expenses were reduced by $23 million on a dollar basis.

Rental gross margin declined 80-basis points compared to the second quarter.

Energy cost increased 50-basis points in the third quarter compared to the second quarter.

The one fewer workday in the third quarter also contributed to the lower margin.

Other services gross margin was 39.2% for the quarter, as compared to 34.7% in last-year's third quarter and 37.3% last quarter.

All operating segments within other services had gross margin improvements compared to last-year's third quarter and compared to the second quarter.

Uniform Direct Sales gross margin improved significantly from last year due to our cost savings initiatives of the past year and the rightsizing of the organization.

Gross margin improved slightly from last quarter.

However, gross margins continue to be stressed relative to the historical levels due to lower fixed cost absorption from lower levels and fewer new program redesigns and rollouts.

Third-quarter First Aid, Safety and Fire Protection margins improved, primarily due to the elimination of the lower-margin fire installation business over the past year.

Document Management gross margin improved primarily as a result of recycled paper prices.

Gross margins also benefited from revenue gains, allowing local operations to cover a larger portion of their fixed costs.

Selling and administrative expenses were 32% of revenue, an increase from 28.3% for the third-quarter last year.

In addition to the impact of lower revenues and one less workday, selling expenses increased by 120-basis points compared to last-year's third quarter.

Sales commissions paid on adds where the sales force was involved have increased.

Traditionally adds have occurred when our existing customers hire additional workers and/or add additional services for growth reasons.

Unfortunately, this is still not the case today.

Rather the primary adds, which we are achieving, are by selling new and different products or services to our existing customers and in many cases, using our sales force to obtain this further customer penetration.

We also continued our planned increase in sales force headcount.

As the economy stabilizes, we have positioned ourselves to take advantage of opportunities as they begin to arise.

In addition, medical expenses increased 80-basis points compared to last year due to higher employee utilization of the medical plans.

Sequentially SG&A increased from the second quarter, mainly due to a combination of the reset of payroll taxes on January 1st, the increased plan investment in selling and an increased in medical costs.

Our effective tax rate was 32.8% for the quarter, which reflects the timing of specific reserve builds and releases under FIN-48.

Since the adoption of FIN-48 our effective tax rate has decreased during the third quarter due to the timing of reserve requirements, but then returned to higher levels for the remainder of the year.

We expect this to be the case again this year and anticipate that our effective tax rate for fiscal 2010 will be approximately 37.3%.

And now Make Hansen will discuss our balance sheet and cash flow.

Thanks, Mike.

Our balance sheet continues to get stronger, primarily due to robust cash flow.

Our cash and marketable securities increased almost $72 million from November 30th.

Over the last 12 months we have increased our cash and marketable securities on hand by over $390 million and paid an annual dividend of $74 million.

DSOs on accounts receivable were 39, an improvement from November's DSOs of 41.

We continue to aggressively manage our accounts receivable in order to lessen any impact from current economic conditions.

New goods inventory levels at February 28th were consistent with the levels at the end of last quarter.

We believe current levels are appropriate, based on our current revenue level and mix.

Net property, plant and equipment balances increased slightly from November 30th to $895 million.

CapEx through the first nine months of this year was $79 million, including $31 million in the third quarter.

This is about 60% of the amount we spent through last nine months of last year, when CapEx was $133 million.

Accrued liabilities increased a as of February 28th due to the $74 million accrual of the annual dividend, which was paid on March 10th.

The dividend of $0.48 continued the Company's track record of increasing the annual dividend every year since going public in 1983.

Long-term debt at February 28th remained at $786 million, as all outstanding debt is all fixed rate.

Any early retirement of this debt would require a prepayment penalty and is not currently attractive.

Our average rate on the outstanding debt is approximately 6%.

Total debt as a percentage of total book capitalization remained at 24% while net debt, or long-term debt less cash and marketable securities as a percentage of total capitalization, improved to 9%.

As mentioned earlier, our cash flow continues to be strong.

Through nine months we have generated over $275 million in cash and cash equivalents.

Acquisition activity has picked up to some degree, as we spent $35 million during the quarter with acquisitions, primarily in Document Management and Fire Repair and Inspection Services.

Our combined cash flow, current cash balances and access to additional capital have provided us the ability to weather the economic difficulties of the last 18 months and are allowing us to now begin to act on acquisition opportunities that become available at attractive valuations.

Thank you and we will now take any of your questions.

Thank you.

(Operator Instructions).

We'll take our first question from Ashwin Shirvaikar with Citi.

Thanks.

Hi, Bill, Mike and Mike.

Hi.

My first question is, is it possible for you guys to talk a little bit more quantitatively about things such as pricing and add/stops, even ballpark?

I know you don't give exact numbers but even ballpark.

Well, generally speaking I would tell you that adds have improved over the last couple of quarters to basically equate to the stops, so we're very close to having a neutral impact on that over the -- for several weeks over the last couple of quarters.

So that's a positive sign.

Now, keep in mind some of those adds, a lot of those adds are not necessarily new wearers but rather are additional products and services at existing customers.

As far as pricing is concerned, I think as we mentioned in our comments, it continues to be very, very competitive, and we are finding it, probably one of the most aggressive price environments that we have seen for quite some time; meaning that many of our competitors are in our customers at the end of a contract and offering very low prices.

We are finding some difficulty in obtaining price increases during the contracts themselves, and as we get new business we're often meeting very a very competitive environment and having to basically get business with lower prices than what we would have seen several years ago.

We think a lot of this is due to the desire on the part of our competitors to keep volume in their facilities and cover their fixed costs, so we expect this to continue for some time, but hopefully, we'll resume to more traditional pricing in the not-too-distant future.

On the pricing, is that fairly widespread across small and large competitors, or is it more the smaller or more the larger national competitors?

I would tell you some of the national players are really the ones who are most aggressive, but in order to keep business we're finding local and regional players are having to meet much of the competition, also.

Okay, and one question on Document Management.

Can you maybe break out -- as you grow the storage piece, break out the destruction versus storage?

Ashwin, we will intend to break that into further segments as they get larger.

At this time, though, we're just going to report on the Document Management business in total since it's just about 8% of our revenue.

But given it growth and its growth potential, I would say that at some point in the future we will be giving more detail there.

So where I was leading with that was what kind of incremental CapEx investment do you need on the storage side?

Well, we're really not very aggressive on the storage side, our growth is primarily coming from the shredding side.

Our capital spending is mostly with trucks and with plant-based shredding and bailing systems.

Our revenue is still predominantly from the destruction side of the business.

Got it, got it.

And last question, any update on [SUDA] or healthcare?

On SUDA, certainly it's across the board.

We've seen increases but it varies widely.

So we've certainly have seen an increase, not only with the reset of payroll taxes but certainly some of the preliminary hits we've seen coming through on the states has been significantly higher.

We don't have a good quantification yet because we're still seeing the impact of those.

From the healthcare side, certainly there -- we don't know what's going to happen with the healthcare legislation coming up this weekend but we've certainly seen some increase usage in this quarter by our employees again.

It tends to ebb and flow, so there's no real reason other than we have a medical plan and our employees are using it.

Keep in mind, most of the costs that we're seeing in the third quarter tends to be late in calendar 2009 and as you get near to end of a calendar year employees often will use more medical expenses than they otherwise might.

But I will remind you that our medical expenses in the first quarter was about 4.4% of our revenue, dropped in the second, but then came back up to this level of 4% here in the third quarter.

So it is something that we're continuing to monitor and we had some plan changes go into effect January 1 that we believe will help us control costs as we move through 2010, but they really haven't hit yet.

Okay.

Thank you, guys, very useful.

We'll take our next question from [Justin Hockey] with Robert W.

Baird.

Good evening, guys.

Hi, Justin.

Hi.

So my question really is on the $ental operating margin, it fell 400-basis points sequentially.

I know a lot of that was on the SG&A side just from the added headcount that you have, but I was hoping maybe you could give a little more color on what your expectations are for 4Q and really for the first half of 2011.

Do we -- is it wrong for us to assume that things get better from here or do they hover at this level?

Well, I think a lot of it depends on what happens with the top line.

If we continue to see stabilization in the business I think you'll see improvement in those margins, assuming that there's no big energy spike -- energy cost spike.

So our expectations are that we will begin to see some leverage on those margins as we go forward and we're hopeful that that will take place.

Traditionally you also have -- third quarter is a little different because of the workdays.

So again depending on what happens with the economy going forward, we would hope to get some benefit, Offsetting that obviously we'll have some selling cost because we are keeping the sales force.

If you're looking at operating versus gross margin, pretty active.

I guess just to push on it a little bit more, though, with your commentary that pricing is so aggressive and you're having to take a haircut on some of your new business that you're bringing in, even if we do see some employment growth, are we talking about maybe margins improve 100-basis points over the next couple of quarters, or is that too aggressive?

We are not prepared to quantify the amount at this time.

Okay, and then another question.

Just -- on RFID I know you guys had talked about that in the past, any update on just your thinking on that?

Is that an investment you'd still consider pursuing?

Yes, we're still very interested and we're continuing to evaluate various chips and various processes within our R&D group.

I can tell you that right now we do not have a viable economic solution, but we still think the potential exists and we're continuing to invest in looking for that.

Great.

Thank you very much.

We'll take our next question from John Healy with Northcoast Research.

Good evening, guys.

Hi, John.

I wanted to talk a little bit about the balance sheet and the cash flow.

You guys continue to generate a lot of cash and make the balance sheet even more pristine than has been in the past.

I wonder if you could talk a little bit about what you feel your access to credit is right now in terms of cost and the flexibility to get commercial paper and maybe what you're -- even if you wanted to term out some debt what you think the credit markets would -- what that cost you and how you feel about taking leverage of this Company in the future and maybe your thoughts on capital allocation going forward from here?

Sure, I'll start and then if Bill can jump in he can.

Certainly we believe our access to capital has never been better.

The markets have stabilized.

We have $600 million CP line out there that's being untapped really because there's no reason to tap it and put it on the balance sheet.

We continue to look at acquisition opportunities, but certainly we have plenty of cash in our balance sheet to use.

Historically we've gone as high as a 35% to 40% debt to cap and we're comfortable with that.

Right now we're a debt to cap of less than ten, so it gives us a lot of space to move.

And looking at the current markets we are in constant communication our banking group and we believe we could float quite a bit of debt, easily $500 million even up to $1 billion depending on the CP line.

Not that we need it today, but you're talking rates in 5.5% to 6% range depending on the term.

Our name in the market has been very good.

Whenever we floated CP it's never been an issue to put it out the marketplace and get very favorable rates.

It's just finding the opportunity for the need for that cash and we believe there will be that opportunity in the future.

As far as capital allocation, our current thought continues to be to invest for growth in the Company, both internal -- for internal growth, as well as acquisitions.

You noticed that we did ramp up the acquisitions a bit in the third quarter as opportunities presented themselves that had been not really there earlier in 2009 and we expect that to continue.

So if we cannot make good acquisitions and utilize this cash that would be in the best long-term interest of our shareholders, then the board is committed to look at other ways to get return back to our shareholders.

If that means buying our stock, increasing the dividend, whatever it will take to make sure that we generate an adequate return for the shareholders.

But right now we believe that acquisitions will become more and more available at reasonable prices in the not too distant future and we hope to take advantage of that.

No, that's very helpful.

I wanted to ask you guys a little bit about the gross margin potential for the core uniform business.

I wondering if you could put some thoughts around when we should begin to see some more -- we should begin to see some improvements on the Rental gross margin and I thought being that at some point in time when you begin to anniversary some of these larger losses of customers in your business and some of those garments that have been in merchandising service become fully amortized that maybe aren't being put in place right now, you should have some gross margin recovery even if revenues remain pretty -- revenue growth remains muted.

Are we thinking about that right and maybe your thought process on when that should begin to be seen in the results?

You are thinking about that right.

Remember, we've had to adjust our cost structure dramatically over the last 18 months and have done a decent job of doing that given the revenue declines.

Certainly on the -- when you rotate that, the fixed costs that we have in place will remain such that when the revenues grow or stabilize we will see some other benefits of what we've been doing internally.

But right now job losses continue, revenues are declining to some degree, although lessened as far as existing business.

so there's still that churn effect going on within Cintas of your profitable business of 15 men in uniforms going to 13 men while I'm adding in new services.

So I've got a double hit and I'm losing profitable business and adding the first year of the agreement where it's pretty expensive.

As you move forward, depending on how much new business you sell and what that material cost impact is and the sales cost, you should see gross margins improve, especially because the selling's below the gross margin line.

So we expect it to improve, again depending on what goes on in the marketplace.

We need the job loss to be stable at zero versus continuing to drag down and it seems like we're getting closer to that, but every time we think the next month is going to be the zero month, it's still a little bit down, so hopefully we'll get there.

We've got excess capacity in our plants and in our routes and obviously within our stock rooms, meaning that we have a lot of garments that are continuing to be amortized that could -- that aren't generating any revenue.

So if -- as Mike just said, if we just get stabilization within existing customer you're going to see an improvement in gross margins just from that because we will not have to keep shuffling around trying to manage the capacity as much as we're having to do.

So I think that's the first sign of really an improvement.

And then as we can obtain other new customers and begin to make those customers profitable by growing with them, start seeing some churn in the workforce, which generates additional revenues for us, people leave jobs and go to other jobs, I think that you'll see an improvement going forward.

And the other piece behind that, obviously, is with that capacity that we can begin utilizing a little better, there's -- we don't believe there needs to be a significant increase in CapEx so our cash flow should still continue to be very positive.

When I think about free cash flow maybe going out, maybe a year, or maybe a year or two, is it realistic to think with the capacity that's still in the business that CapEx should remain at lower levels than maybe historic levels for the intermediate timeframe?

It should as long as a couple things.

Again, we have a very localize service model, so if one market or geographic area would spike there could be some additional capital required or if we were to expand with quicker document management or something where we need the access or obviously not in free cash flow but from acquisitions you can use cash, but I'd agree with your statement.

Okay.

Thank you guys.

Thank you.

We'll take our next question from Nate Brochmann with William Blair.

Good after -- good evening, gentlemen, nice quarter.

Thank you, Nate.

Hey, wanted to expand a little bit more on some of the additional services that you are able to sell into your existing customer base.

Obviously that's probably a nice trend in terms of over the last couple of years building out some of those service categories and I was just wondering why it seems like right now in terms of that's gaining a little bit of added traction?

I think it's gaining traction from a couple perspectives.

One is there's additional focus on our part to do it.

As Mike mentioned in the commentary, we are now utilizing our professional sales force in addition to our service group to sell into existing customers, so I think that is helping.

I think the second thing is that there is a broader offering of products and services than we've ever had in the past, so we have more appeal to customers of doing things for them.

And I think the third thing is that I believe there is a better feeling of what the future holds on the part of our customers than what things looked like a year ago or so.

So people are beginning to gain some confidence.

They're still being conservative but they're willing to take on some additional offerings now that maybe a year ago they absolutely were not.

Great, that's very helpful.

A follow-on question to that would be if indeed the customers are starting to feel a little bit better, are you starting to get that sense from maybe some of the non-programmers out there in terms of warming up to investing again back in a uniform program, at least in terms of the sales cycle there?

Nate, in hearing from our sales force we're hearing there is a lot of interest and more interest now than there was a year ago or even six months ago.

I haven't really seen it in the numbers yet, but at least as far as interest and verbals there seems to be some momentum moving forward.

Attitudes seem to be much better.

I wouldn't say they're extremely positive but they're not negative any more so they're certainly moving in that direction.

That's great.

Well, it sounds like everything's moving in the right direction and nice job.

Thank you.

We'll take our next question from Scott Schneeberger with Oppenheimer.

Thanks, good afternoon.

Hi, Scott.

Could you guys address what type of weather impacts you occurred in the quarter and how you think that may impacted the fourth quarter?

We actually were pleasantly surprised that the weather had a relatively minor impact on our businesses, especially in the northeast during the quarter.

If you recall, when we put out the guidance in mid February we put in -- an additional caveat that we were concerned what was happening with weather and how that could impact our businesses, but I have to give it to our operating people and our drivers.

They did a phenomenal job of servicing the customers and the impact was less than what we thought it could have been when we kept hearing about the horrible snow storms and closures throughout the northeast.

Thanks, that's helpful.

Obviously reiterating fourth-quarter guidance but any feel for the high or the low of the range on the heels of those comments?

Not at this point.

I think we have to continue to keep the relatively broad amount of guidance that we gave you the range because so many things can happen in the next ten to 12 weeks.

So I would say that's the only comfort area we are in right now is the guidance we just provided.

We keep getting mixed signals on our KPIs and we'd like to see some trend developing we just haven't seen the trend change enough to change and either tighten that range or change the range, so we feel appropriate to leave it where it is at this time.

Okay, thanks.

And then I noticed you did do the acquisition in the quarter and I think it's the most you spent in two years in a quarter.

A, how is the pipeline?

B, is this predominantly going to be in the Document category and then maybe a little in Fire Service -- that actually surprised me a bit -- or is there a strong [work] rate right now at Uniform Rental and I think you've been talking about how you're waiting for valuations to come down in that category.

So probably four questions in there, but if you could tackle them as best you can?

Thanks.

The pipeline is certainly fuller than it was last quarter, which was fuller than it was six months ago, so there's a lot of discussions beginning to take place.

We;re seeing the predominant amount of activity -- or let's say activity where action can be taken on, in the Document Management and in the Fire Service business, but when I say Fire Service I do not include installation.

We're looking at strictly the service business itself of the inspection of fire extinguishers, emergency exit lights, et cetera, kitchen fire suppression systems.

So that's what we're focusing on and there's a lot of acquisition candidates out there, albeit most of them are relatively small, but we're targeting them and Document Management to expand our footprint throughout the US and then we're now beginning to look at tuck-ins in existing operations.

The Uniform Rental business is still very attractive to us.

As we've mentioned on several of thee calls recently there was a big disconnect between the sellers and the buyers as to what the business was really doing and what the future held in the short term, what kind of volume were you buying and how much of it was going to be there six months later or a year later.

If stabilization does continue then I think that the attractiveness of uniform rental will start to increase because we know we'll have a better idea what we're getting.

So we are still interested in it.

There is tremendous synergies we can get from them.

There are some very nice acquisition opportunities, both big and small, in the industry and we will certainly pursue them if they make sense.

Thanks, and just one more quick follow up on that.

More of a bias internationally or domestically and how much of the cash is held north of the border?

Thanks.

The predominant amount of interest is domestic.

International is still relatively small.

We have a small team also looking at it but you're going to see the majority of the acquisitions I think in the domestic side.

As far as what's held over the border, it's a little over $100 million, so I think it's about $140 million.

Great.

Thanks guys.

We'll take our next question from Gary Bisbee with Barclays Capital.

Hey, guys, good afternoon.

Hey, Gary.

Can you give us a sense -- you said you were remaining very disciplined on acquisitions, what do you mean by that?

Is there a certain hurdle rate?

How do you guys define discipline?

Hurdle rates and expectations.

When we put together the economics of an acquisition what our expectations are for growth versus perhaps what others may think, so we take a -- I would say a conservative view of what we believe that business will bring to us and then obviously that drives the IRR, so that's where I think the discipline comes in.

Also making sure in more difficult environments that is we look at earnouts or hold backs to help us because, again, while things are getting less cloudy they're still cloudy, so we want to make sure that we're not the one putting on all the risk on the acquisition [many times].

Is -- would -- des valuation relative to where your stock is trading play any part, or is it all doing an IRR?

What I'm getting at is, if you use cash, which is obviously low cost and do pretty low-cost debt, would you consider paying much higher EBITDA multiple than you trade at if that would get you an attractive growing business, say in Document or one of the areas that -- one of the non-uniform areas?

That's a is strong maybe.

It depends on the circumstance but certainly if we felt in the long term it was really going to drive future growth and opportunity we may do that, but for the most part we understand there is a buy ourselves or buy other potential there, so we're always looking at both.

But again, you can't look at it in a vacuum on a straight financial decision.

You've got to look out and look at what it's going to do versus the competition, access to markets that we're not in today and also locking up markets that we're in today.

I guess the reason I ask, I'm trying to harp on this, I'm just trying to understand the thought process.

You've done a terrific job generating cash, the balance sheet's better than it's looked in an awfully long time.

By many valuation metrics over the past year your stock has been cheap and yet you haven't bought back any stock in seven quarters and the acquisition, while it may be picking up a little bit, they;re really small mom-and-pop deals that don't seem like -- unless you did an awful lot of them they would have a real significant impact.

So I guess I'm trying to understand maybe what you're waiting for or if there's some reason you haven't been a little more aggressive given the strong shape of your cash flow and balance sheet?

Yes, I think that the -- let's don't have a short memory here.

It wasn't more than 12-months ago I think many people felt we were dropping into a depression and there was tremendous concern about the viability of the financial industry and the whole US economy, the world economy for that matter.

So to say that we maybe missed an opportunity to buy our stock, I think we were looking at making sure the Company could continue to survive and withstand anything that it met.

So it's really just been very recently that things are starting to look a little bit better and we're not out of the woods yet.

And acquisitions, you don't just decide day one you're going to start buying companies up and then you'll start seeing them happening within a couple of months, it takes a while to do the cording and to do the analysis, et cetera.

So I think you need to be a little patient and just recognize that we're not going to just rush into something until we know -- we have confidence in the future and then we know what we're getting makes a lot of sense.

I think hopefully you'll begin to see some of that happen, but as I said earlier to Nate, if it doesn't then we'll have to deploy the cash somehow and either through buying our stock back or doing some other way of returning -- getting better returns for our shareholders.

Okay.

And I didn't mean to insinuate that you had missed an opportunity, I'm just trying to probe how you think about it going forward.

Just one more question on that line of thinking and I'm certainly not asking for names or anything, but do you see as you look at the landscape of the businesses that you're in any potential targets out there that could have more than just a token impact in the short term on the mix of your businesses?

In other words, are there some mid-sized assets that could be attractive in Document or Fire, or is it much more likely to be, as you've done historically more often than not, in a bunch of small mom and pop?

No, I -- Gary, we have a list -- we have a very extensive list of knowing our competitors in all of the businesses we're in and we have interest in companies, both large and small, in all of our businesses.

I would tell you in the Fire Service business there really isn't another big competitor outside of Cintas and Tyco and I don't think Tyco is going to be interested in selling their division and it's much larger than ours is anyway.

But in Document Management there are several good-sized companies that would be attractive.

There are a lot of good regional players that would be attractive.

And in Uniform Rental I don't need to tell you that there are some very good-sized players, there's some great regional players and there's still a lot of local players.

We know all of -- who they are and we will certainly pursue those that look like that they could be doable at the right price.

Okay, and then just one last one.

Can you give us a sense what type of offering customers are adding on?

You said you're getting adds but a lot of it's from the ability to upsell them more stuff.

Is that --?

It covers the gamut of our different service groups and what they can offer.

For example, in the Uniform -- or let's say the Rental business, we've expanded our facility services line now to include a lot of hygiene services, a lot of floor care, chemical dispensing, the Sanus restroom cleaning services.

Those have provided our customers with a lot of different opportunities to outsource some of the services that they need to have done at a price cheaper than what they can even do it themselves, so that's one example.

In the First Aid and Safety and Fire Service we're doing a lot of training.

Our Safety Supply sales are growing very nicely.

The external defibrillators continue to do very well.

Document Management, we've expanded into doing some imaging work for some of our larger customers and we do have storage capability in certain markets.

So each business has something that can broaden the offerings to the customers that they have, or appeal to customers that we have in some of the other businesses.

Great, thanks a lot.

We'll take our next question from Greg Halter with Great Lakes Review.

Yes, good afternoon.

Hi, Greg.

Just wondered if you could provide a status of the SAP initiative and what your costs so far have been on that in the fiscal year?

We are fully converted in the financial system under SAP, and it's gone reasonably well.

As far as where we stand, we are looking -- we are working right now on converting our supply chain and that is still in process and hopefully we'll be converting that sometime this fall.

We're looking other bus -- some of our business units and how they can be integrated into SAP and so there;s some, what they call blueprinting going on with a couple of those businesses right now.

As far as the costs are concerned I'm not prepared to tell you exactly what we've spent right now, but the bulk of the spending was done last fiscal year.

However, we continue to spend at a lower rate this fiscal year and going into the -- I would say probably at 40% to 50% of what we spent last year and this will be a multi-year effort because we have -- each of the businesses will be looked at and if makes sense will be converted into SAP, also.

Okay.

Relative to capital spending, what is your budget for 2010, fiscal 2010?

We're looking at $100 million to $120 million of CapEx for fiscal 2010, so I think we've spent $78 million year to date.

So somewhere between $30 million to $40 million in the fourth quarter is probably what's going to happen.

Would you expect that to ramp-up in fiscal 2011?

Somewhat.

Not substantially but it could have some marginal increase given the improvement in the economy.

Okay.

And one final one for you.

Relative to the First Aid segment, the income before tax there has been down year over year for quite a while.

I think you're at $2 million now on a pre-tax basis and it seems like it's been on a steady decline and just wondering what the management team is doing relative to stemming that and reversing it?

There's two things in there.

First, the fire installation business was certainly a drag for a couple of years there and we've exited that business as of last quarter.

And certainly the change in the external economic conditions that honestly hit First Aid harder than we expected because of the tie-in to headcount.

So with that drop in revenue that happened very quickly, it was the other piece over the last 15 months or so, has impacted us.

So we expect going forward, again depending on what happens in the external economy, by being out of the installation business will certainly help.

And then with that, a stabilization in the revenue -- the top-line revenue we expect it to turn.

And certainly we are cognizant of it, we are watching our cost structure there.

We believe they're both very good businesses to be in and again getting out of the installation business as of last quarter will certainly make the future comparables better.

Okay, thank you.

(Operator Instructions).

We'll go next to Andrew Steinerman, JPMorgan.

Hi, there, Mike.

Could you talk about what level of Rental gross margins of Uniforms is implied in Cintas' fourth-quarter guidance and maybe what headwinds and tailwinds might go into that number relative to the third quarter just reported for Rental gross margins?

We don't provide details on the guidance for the fourth quarter other than we certainly have indicated we believe everything to continue to be sluggish from a top line, which certainly keeps the bottom line relatively stable, other than what happens with energy.

Typically when we look forward with energy we forecast based on where it is at the current time of that guideline announcement.

So we have energy factored in at this point at current levels.

As far as what happened in the quarter, certainly as we indicated, the workday adjustment and also this being our third quarter, the holiday always impacts that -- the gross margin in that business, and I think certainly as we discussed with others on the call, we expect it to improve going forward, albeit we need the economy to stabilize so we're not continuing to chase the route structure, et cetera, as jobs lessen and you continue to lose that very profitable business and that continues to be, to some degree, existing today.

Now it's not as bad as it was six or nine months ago but it continues to occur.

So if it's still bad -- it's still worse than last quarter on a go-forward basis when you lose those jobs and we need that to stop and be zero so that we can start generating it on the up side.

Certainly energy did impact this quarter to the tune of about 20-basis points sequentially.

We expect hopefully that will be flattish in the fourth quarter but that's outside of our control.

I don't know if that answered completely your question, but --

And is \ there any other headwinds or tailwinds when thinking about Rental gross margins fourth quarter versus third, or you just said, hey, energy will be flat?

Material cost --

Are there any other headwinds or tailwinds to think about in the fourth quarter for Rental gross margin?

It's really just volume driven.

I think material cost should be okay unless there's a big influx in new business, which we'd love to have, by the way, but material costs should be okay.

The service costs should be in line for the most part Energy costs I don't know where it's going to go.

So we feel pretty good.

Production costs have been pretty consistent.

It's strictly a top-line impact, I would say, in the short term, Andrew.

Okay, so help me with one more point here.

Rental gross margins usually go up the most sequentially on a typical fourth quarter, sequentially for Cintas.

Is that in the past pretty much all volume driven, because it's also usually a volume seasonal --?

Yes, it is typically almost strictly volume driven.

We do get a little push because it's the end of the year typically in some cases, but no, it's typically volume driven because you have extra workdays traditionally.

And you've been building up to that point throughout the year, so you incur -- you set up your organization at an operation -- you start incurring the cost earlier in the year and then the volume builds in the rental business as you go, so that's always been part of the reason why the fourth quarter has always been some of the strongest.

The difficulty for us is that just like last year this year it's a little bit different world and that traditionally you have a slightly growing economy or positive and we're still losing jobs.

So you need to take that into account a little bit when you look forward and that's why we're being a little cautious in those statements.

And the medical questions and SG&A (inaudible) gross margin?

That is correct.

Just to remind everyone, I know you know this, Andrew, but all medical cost for every employee is in the G&A line.

It's not located in the production or service area is but rather it's recorded in G&A.

Perfect.

Thanks for all the questions.

Yes, thank you.

And that does conclude our question-and-answer session.

At this time I'd like to turn the call back to you, Mr.

Gale, for any additional or closing remarks.

Well, first of all I want to thank you all of you for joining us this evening and I would like to announce that Mike Thompson has been asked by our Chief Executive Officer, Scott Farmer, and our President, Phillip Holloman, to work on a special operational assignment.

During this assignment, which is underway, Mike Hansen will be assisting me with our investor relations activities.

So while Mike Thompson will be helping us with this quarter's follow up, please direct all future requests to either myself or my assistant, [Judy Gerdy.] Either Mike Hansen or I will then get back to you as quickly as possible.

Thanks again for participating and we'll be announcing our fourth-quarter earnings in mid July.

That does conclude today's conference.

Thank you for your participation.