Yesterday, Cintas Corp. (CTAS) settled a class-action lawsuit, pending since 2003, by agreeing to pay $22.8 million as overtime to its workers. The settlement was reached with an arbitrator and awaits court approval. The lawsuit was filed in US District Court for the Northern District of California.

According to the Workers United Union, Cintas classified thousands of route drivers as salaried employees instead of hourly workers in order to avoid paying them overtime for working in excess of 40 hours in a workweek.

The resulting liability is expected to reduce the company’s fiscal 2009 (ended in May) pretax profit of $362 million by about 6% year over year. Moreover, the considerable increase in cost of operations on an ongoing basis would be substantial. However, Cintas is working on better production processes, which we believe will have a positive impact on its operational cost structure.

Cintas reduced its operating and S&A expenses by about $60 million in the beginning of the calendar year 2009. We expect cost-reduction initiatives and falling energy prices to partially offset the impact of weak demand on the company’s margins.

We are cautious on Cintas’ near-term outlook due to current macroeconomic conditions, which are impacting all its business segments. The company’s customers have been forced to cut employment levels and consolidate facilities. Nevertheless, a strong balance sheet, low debt level (debt-to-capitalization ratio of 24.9% at the end of FY09), and healthy cash flow (operating cash flow of $523.5 million in the FY09) will help Cintas to grow as the overall economy improves.

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