FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
| (X) |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 29, 2004 |
OR
| ( ) |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ |
| Commission file number 0-11399 |
| CINTAS CORPORATION | ||
|---|---|---|
| (Exact name of registrant as specified in its charter) |
| WASHINGTON | 31-1188630 | |
|---|---|---|
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
6800 CINTAS BOULEVARD P.O. BOX 625737 CINCINNATI, OHIO 45262-5737 |
||
|---|---|---|
| (Address of principal executive offices) (Zip Code) |
| (513) 459-1200 | ||
|---|---|---|
| (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding March 31, 2004 | |
|---|---|---|
| Common Stock, no par value | 171,188,201 |
-1-
CINTAS CORPORATION
INDEX
| Part I. Financial Information Item 1. Financial Statements. Consolidated Condensed Statements of Income - Three Months and Nine Months Ended February 29, 2004 and February 28, 2003 Consolidated Condensed Balance Sheets - February 29, 2004 and May 31, 2003 Consolidated Condensed Statements of Cash Flows - Nine Months Ended February 29, 2004 and February 28, 2003 Notes to Consolidated Condensed Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Item 4. Controls and Procedures. Part II. Other Information Signatures Certifications |
Page No. 3 4 5 6 20 24 24 25 26 27 |
-2-
CINTAS CORPORATION
ITEM
1. FINANCIAL STATEMENTS.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share data)
| Three Months Ended |
Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| February 29, | February 28, | February 29, | February 28, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||||
| Revenue: | ||||||||||||||
| Rentals | $ | 547,474 | $ | 523,195 | $ | 1,634,334 | $ | 1,573,162 | ||||||
| Other Services | 149,466 | 140,562 | 441,571 | 437,279 | ||||||||||
| 696,940 | 663,757 | 2,075,905 | 2,010,441 | |||||||||||
| Costs and expenses (income): | ||||||||||||||
| Cost of rentals | 303,471 | 293,938 | 906,951 | 876,029 | ||||||||||
| Cost of other services | 97,758 | 95,403 | 292,358 | 294,160 | ||||||||||
| Selling and admin. expenses | 185,019 | 174,192 | 538,103 | 526,870 | ||||||||||
| Interest income | (806 | ) | (825 | ) | (1,779 | ) | (2,176 | ) | ||||||
| Interest expense | 5,958 | 7,434 | 19,306 | 23,470 | ||||||||||
| Write off of loan receivable | -- | -- | 4,343 | -- | ||||||||||
| 591,400 | 570,142 | 1,759,282 | 1,718,353 | |||||||||||
| Income before income taxes | 105,540 | 93,615 | 316,623 | 292,088 | ||||||||||
| Income taxes | 39,047 | 34,560 | 117,146 | 108,046 | ||||||||||
| Net income | $ | 66,493 | $ | 59,055 | $ | 199,477 | $ | 184,042 | ||||||
| Basic earnings per share | $ | .39 | $ | .35 | $ | 1.17 | $ | 1.08 | ||||||
| Diluted earnings per share | $ | .39 | $ | .34 | $ | 1.16 | $ | 1.07 | ||||||
See accompanying notes.
-3-
CINTAS CORPORATION
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands except share data)
| February 29, 2004 |
May 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 113,752 | $ | 32,239 | ||||
| Marketable securities | 135,106 | 25,420 | ||||||
| Accounts receivable, net | 276,718 | 278,147 | ||||||
| Inventories | 204,196 | 228,410 | ||||||
| Uniforms and other rental items in service | 295,188 | 305,721 | ||||||
| Prepaid expenses | 8,072 | 7,607 | ||||||
| Total current assets | 1,033,032 | 877,544 | ||||||
| Property and equipment, at cost, net | 782,318 | 777,432 | ||||||
| Goodwill | 756,118 | 721,855 | ||||||
| Service contracts | 137,988 | 144,899 | ||||||
| Other assets | 45,548 | 61,216 | ||||||
| $ | 2,755,004 | $ | 2,582,946 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 48,902 | $ | 53,909 | ||||
| Accrued compensation and related liabilities | 26,096 | 25,252 | ||||||
| Accrued liabilities | 160,179 | 127,882 | ||||||
| Income taxes: | ||||||||
| Current | 33,355 | 16,527 | ||||||
| Deferred | 54,263 | 53,018 | ||||||
| Long-term debt due within one year | 22,250 | 28,251 | ||||||
| Total current liabilities | 345,045 | 304,839 | ||||||
| Long-term debt due after one year | 482,576 | 534,763 | ||||||
| Deferred income taxes | 116,651 | 97,012 | ||||||
| Shareholders' equity: | ||||||||
| Preferred stock, no par value, | ||||||||
| 100,000 shares authorized, none outstanding | -- | -- | ||||||
| Common stock, no par value, | ||||||||
| 425,000,000 shares authorized, | ||||||||
| 171,174,295 shares issued and outstanding | ||||||||
| (170,599,993 at May 31, 2003) | 87,784 | 76,124 | ||||||
| Retained earnings | 1,717,914 | 1,568,071 | ||||||
| Other accumulated comprehensive income (loss): | ||||||||
| Foreign currency translation | 6,728 | 4,427 | ||||||
| Unrealized loss on derivatives | (1,694 | ) | (2,290 | ) | ||||
| Total shareholders' equity | 1,810,732 | 1,646,332 | ||||||
| $ | 2,755,004 | $ | 2,582,946 | |||||
See accompanying notes.
-4-
CINTAS CORPORATION
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| February 29, 2004 |
February 28, 2003 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 199,477 | $ | 184,042 | ||||
| Adjustments to reconcile net income to net cash provided | ||||||||
| by operating activities: | ||||||||
| Depreciation | 87,808 | 87,700 | ||||||
| Amortization of deferred charges | 19,387 | 21,294 | ||||||
| Deferred income taxes | 20,884 | 5,355 | ||||||
| Change in current assets and liabilities, net of | ||||||||
| acquisitions of businesses: | ||||||||
| Accounts receivable | 4,151 | 10,735 | ||||||
| Inventories | 25,965 | (36,169 | ) | |||||
| Uniforms and other rental items in service | 10,533 | (21,388 | ) | |||||
| Prepaid expenses | (476 | ) | 2,120 | |||||
| Accounts payable | (5,556 | ) | (10,556 | ) | ||||
| Accrued compensation and related liabilities | 844 | (2,521 | ) | |||||
| Accrued liabilities | (19,409 | ) | (17,186 | ) | ||||
| Income taxes payable | 16,828 | 28,502 | ||||||
| Net cash provided by operating activities | 360,436 | 251,928 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (85,019 | ) | (80,447 | ) | ||||
| Proceeds from sale or redemption of marketable securities | 32,174 | 14,038 | ||||||
| Purchase of marketable securities | (141,860 | ) | (4,604 | ) | ||||
| Acquisitions of businesses, net of cash acquired | (49,836 | ) | (24,535 | ) | ||||
| Other | 9,695 | (12,732 | ) | |||||
| Net cash used in investing activities | (234,846 | ) | (108,280 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of long-term debt | (53,334 | ) | (150,092 | ) | ||||
| Issuance of common stock | 6,360 | 3,987 | ||||||
| Other | 2,897 | 4,004 | ||||||
| Net cash used in financing activities | (44,077 | ) | (142,101 | ) | ||||
| Net increase in cash and cash equivalents | 81,513 | 1,547 | ||||||
| Cash and cash equivalents at beginning of period | 32,239 | 40,628 | ||||||
| Cash and cash equivalents at end of period | $ | 113,752 | $ | 42,175 | ||||
See accompanying notes.
-5-
CINTAS CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands except per share data)
1. Basis of Presentation
The consolidated condensed financial statements of Cintas Corporation included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such Securities and Exchange Commission rules and regulations. While we believe that the disclosures are adequately presented, it is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes included in our most recent annual report for the fiscal year ended May 31, 2003. A summary of our significant accounting policies is presented on page 36 of our most recent annual report. There have been no material changes in the accounting policies followed by Cintas during the fiscal year.
Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the results of the interim periods shown have been made.
Certain prior year amounts have been reclassified to conform with current year presentation.
-6-
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
2. Earnings per Share
The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective years:
| Three Months Ended |
Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 | |||||||||||
| Numerator: | ||||||||||||||
| Net income | $ | 66,493 | $ | 59,055 | $ | 199,477 | $ | 184,042 | ||||||
| Denominator: | ||||||||||||||
| Denominator for basic earnings per | ||||||||||||||
| share-weighted average shares | 171,088 | 170,322 | 170,847 | 170,177 | ||||||||||
| Effect of dilutive securities- | ||||||||||||||
| employee stock options | 1,596 | 1,641 | 1,368 | 1,961 | ||||||||||
| Denominator for diluted earnings per | ||||||||||||||
| share-adjusted weighted average | ||||||||||||||
| shares and assumed conversions | 172,684 | 171,963 | 172,215 | 172,138 | ||||||||||
| Basic earnings per share | $ | .39 | $ | .35 | $ | 1.17 | $ | 1.08 | ||||||
| Diluted earnings per share | $ | .39 | $ | .34 | $ | 1.16 | $ | 1.07 | ||||||
3. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended February 29, 2004, by operating segment, are as follows:
“Acquired Intangible Assets”
| Rentals |
Other Services |
Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of June 1, 2003 | $ | 671,955 | $ | 49,900 | $ | 721,855 | |||||
| Goodwill acquired during the period | 663 | 34,095 | 34,758 | ||||||||
| Foreign currency translation | (495 | ) | -- | (495 | ) | ||||||
| Balance as of February 29, 2004 | $ | 672,123 | $ | 83,995 | $ | 756,118 | |||||
-7-
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
Information regarding Cintas’ service contracts and other assets follows:
| As of February 29, 2004 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount |
Accumulated Amortization |
Net | |||||||||
| Service contracts | $ | 225,302 | $ | 87,314 | $ | 137,988 | |||||
| Noncompete and | |||||||||||
| consulting agreements | $ | 46,628 | $ | 32,670 | $ | 13,958 | |||||
| Other | 33,843 | 2,253 | 31,590 | ||||||||
| Total | $ | 80,471 | $ | 34,923 | $ | 45,548 | |||||
| As of May 31, 2003 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount |
Accumulated Amortization |
Net | |||||||||
| Service contracts | $ | 232,826 | $ | 87,927 | $ | 144,899 | |||||
| Noncompete and | |||||||||||
| consulting agreements | $ | 55,456 | $ | 38,990 | $ | 16,466 | |||||
| Other | 46,401 | 1,651 | 44,750 | ||||||||
| Total | $ | 101,857 | $ | 40,641 | $ | 61,216 | |||||
Amortization expense was $19,387 and $21,294 for the nine months ended February 29, 2004 and February 28, 2003, respectively. Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $25,635, $23,844, $22,082, $20,007 and $17,861, respectively.
4. Derivatives and Hedging Activities
Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Cintas’ hedging activities are transacted only with highly-rated institutions, reducing the exposure to credit risk in the event of nonperformance.
Cintas uses derivatives for both cash flow hedging and fair value hedging purposes. For derivative instruments that hedge the exposure of variability in short-term interest rates, designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For the ineffective portion of the hedge, gains or losses are charged to earnings in the current period. For derivative instruments that hedge the exposure to changes in the fair value of certain fixed rate debt, designated as fair value hedges, the effective portion of the net gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate debt attributable to the hedged risk, are recorded in current period earnings.
-8-
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
Cintas periodically uses interest rate swap and lock agreements as hedges against variability in short-term interest rates. These agreements effectively convert a portion of the floating rate debt to a fixed rate basis, or lock in a fixed interest rate, thus reducing the impact of interest rate changes on future interest expense. Cintas uses the Hypothetical Derivative Method for assessing the effectiveness of these swaps. The effectiveness of these swaps is reviewed at least every fiscal quarter. Cintas will also periodically use reverse interest rate swap agreements to convert a portion of fixed rate debt to a floating rate basis, thus hedging for changes in the fair value of the fixed rate debt being hedged. Cintas has determined that the current interest rate swap agreement, designated as a fair value hedge, qualifies for treatment under the short-cut method of measuring effectiveness. Under the provisions of SFAS 133, this hedge is determined to be perfectly effective and there is no requirement to periodically evaluate effectiveness.
The change in fair value of the cash flow hedge, pertaining to interest rate swap and lock agreements, during the third quarter of fiscal year 2004 resulted in a credit of $72 to other comprehensive income. The reverse interest rate swap agreement is a fair value hedge that converts $125 million of fixed rate debt to a floating rate. This agreement expires in 2007, and allows Cintas to receive an effective interest rate of 5.13% and pay an interest rate based on LIBOR. Because this fair value hedge is 100% effective, the $500 favorable change in the fair value of this hedge, which occurred in the third quarter, was directly offset by an increase in the fair value of the debt.
5. Stock-Based Compensation
During the third quarter of fiscal 2003, Cintas adopted the disclosure requirements of FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, but will continue to apply Accounting Principles Board Opinion No. 25 as the method used to account for stock-based employee compensation arrangements. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.
| Three Months Ended |
Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 | |||||||||||
| Net income, as reported | $ | 66,493 | $ | 59,055 | $ | 199,477 | $ | 184,042 | ||||||
| Deduct: Total stock-based | ||||||||||||||
| employee compensation expense | ||||||||||||||
| determined under fair value based | ||||||||||||||
| method for all awards, net of | ||||||||||||||
| related tax effects | 1,637 | 1,315 | 4,906 | 4,099 | ||||||||||
| Pro forma net income | $ | 64,856 | $ | 57,740 | $ | 194,571 | $ | 179,943 | ||||||
| Earnings per share: | ||||||||||||||
| Basic - as reported | $ | .39 | $ | .35 | $ | 1.17 | $ | 1.08 | ||||||
| Basic - pro forma | $ | .38 | $ | .34 | $ | 1.14 | $ | 1.06 | ||||||
| Diluted - as reported | $ | .39 | $ | .34 | $ | 1.16 | $ | 1.07 | ||||||
| Diluted - pro forma | $ | .38 | $ | .34 | $ | 1.13 | $ | 1.05 | ||||||
-9-
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
6. Comprehensive Income
Total comprehensive income represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders and, as such, includes net earnings. For Cintas, the only components of total comprehensive income are the change in cumulative foreign currency translation adjustments and the change in the fair value forecasted cash flows associated with a derivative accounted for as a cash flow hedge. The components of comprehensive income for the three and nine month periods ended February 29, 2004 and February 28, 2003 are as follows:
| Three Months Ended |
Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 | |||||||||||
| Net income | $ | 66,493 | $ | 59,055 | $ | 199,477 | $ | 184,042 | ||||||
| Other comprehensive income (loss): | ||||||||||||||
| Foreign currency translation | ||||||||||||||
| adjustment | (3,223 | ) | 5,011 | 2,301 | 2,840 | |||||||||
| Net unrealized income on | ||||||||||||||
| cash flow hedges | 72 | 366 | 596 | 356 | ||||||||||
| Comprehensive income | $ | 63,342 | $ | 64,432 | $ | 202,374 | $ | 187,238 | ||||||
7. Segment Information
Cintas classifies its businesses into two operating segments: Rentals and Other Services. The Rentals operating segment designs and manufactures corporate identity uniforms which it rents, along with other items, to its customers. The Other Services operating segment involves the design, manufacture and direct sale of uniforms to its customers, as well as the sale of ancillary services including first aid products and services and cleanroom supplies. Substantially all of these services are provided throughout the United States and Canada to businesses of all types — from small service and manufacturing companies to major corporations that employ thousands of people.
The $4,343 write-off of the loan receivable in the first quarter of fiscal 2004 has been included in the Corporate segment.
Information about our different business segments set forth below is based on the distribution of products and services offered. Cintas evaluates performance based on several factors, of which the primary financial measures are business segment revenue and income before income taxes.
-10-
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
| Rentals |
Other Services |
Corporate |
Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the three months | ||||||||||||||
| ended February 29, 2004 | ||||||||||||||
| Revenue | $ | 547,474 | $ | 149,466 | $ | -- | $ | 696,940 | ||||||
| Income before income taxes | $ | 95,822 | $ | 14,870 | $ | (5,152 | ) | $ | 105,540 | |||||
| For the three months | ||||||||||||||
| ended February 28, 2003 | ||||||||||||||
| Revenue | $ | 523,195 | $ | 140,562 | $ | -- | $ | 663,757 | ||||||
| Income before income taxes | $ | 89,048 | $ | 11,176 | $ | (6,609 | ) | $ | 93,615 | |||||
| As of and for the nine months | ||||||||||||||
| ended February 29, 2004 | ||||||||||||||
| Revenue | $ | 1,634,334 | $ | 441,571 | $ | -- | $ | 2,075,905 | ||||||
| Income before income taxes | $ | 295,791 | $ | 42,702 | $ | (21,870 | ) | $ | 316,623 | |||||
| Total assets | $ | 2,197,979 | $ | 308,167 | $ | 248,858 | $ | 2,755,004 | ||||||
| As of and for the nine months | ||||||||||||||
| ended February 28, 2003 | ||||||||||||||
| Revenue | $ | 1,573,162 | $ | 437,279 | $ | -- | $ | 2,010,441 | ||||||
| Income before income taxes | $ | 274,327 | $ | 39,055 | $ | (21,294 | ) | $ | 292,088 | |||||
| Total assets | $ | 2,201,786 | $ | 298,228 | $ | 77,199 | $ | 2,577,213 | ||||||
8. Supplemental Guarantor Information
On May 13, 2002, Cintas completed the acquisition of Omni Services, Inc. (Omni) for $656,071. The purchase price for Omni was funded with $450,000 in long-term notes, $100,000 of borrowings under a commercial paper program and $106,071 in cash. The $450,000 in long-term notes consists of $225,000 with five-year maturities at an interest rate of 5.125% and $225,000 with ten-year maturities at an interest rate of 6%. An additional working capital payment of $3,055 was made during the third quarter of fiscal year 2003, bringing the total purchase price to $659,126.
Effective June 1, 2000, Cintas reorganized its legal structure and created Cintas Corporation No. 2 (Corp. 2) as its indirectly, wholly-owned principal operating subsidiary. Cintas and its wholly-owned, direct and indirect domestic subsidiaries, other than Corp. 2, unconditionally guaranteed, jointly and severally, debt of Corp. 2. As allowed by SEC rules, the following condensed consolidating financial statements are provided as an alternative to filing separate financial statements of the guarantors. Each of the subsidiaries presented in the condensed consolidating financial statements has been fully consolidated in Cintas’ financial statements. The condensed consolidating financial statements should be read in conjunction with the financial statements of Cintas and notes thereto of which this note is an integral part.
Condensed consolidating financial statements for Cintas, Corp. 2, and subsidiary guarantors and non-guarantors are presented below:
-11-
CONDENSED CONSOLIDATED
INCOME STATEMENT
THREE MONTHS ENDED FEBRUARY 29, 2004
| Cintas Corporation |
Corp. 2 |
Subsidiary Guarantors |
Non-Guarantors |
Eliminations |
Cintas Corporation Consolidated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue: | ||||||||||||||||||||
| Rentals | $ | -- | $ | 407,260 | $ | 110,433 | $ | 29,854 | $ | (73 | ) | $ | 547,474 | |||||||
| Other services | -- | 249,619 | 59,262 | 7,473 | (166,888 | ) | 149,466 | |||||||||||||
| Equity in net income of affiliates | 66,493 | -- | -- | -- | (66,493 | ) | -- | |||||||||||||
| 66,493 | 656,879 | 169,695 | 37,327 | (233,454 | ) | 696,940 | ||||||||||||||
| Costs and expenses (income): | ||||||||||||||||||||
| Cost of rentals | -- | 253,441 | 65,587 | 18,277 | (33,834 | ) | 303,471 | |||||||||||||
| Cost of other services | -- | 192,562 | 40,633 | 4,138 | (139,575 | ) | 97,758 | |||||||||||||
| Selling and administrative expenses | -- | 180,573 | (4,490 | ) | 8,282 | 654 | 185,019 | |||||||||||||
| Interest income | -- | (642 | ) | (33 | ) | (131 | ) | -- | (806 | ) | ||||||||||
| Interest expense | -- | 5,908 | (1,020 | ) | 1,070 | -- | 5,958 | |||||||||||||
| -- | 631,842 | 100,677 | 31,636 | (172,755 | ) | 591,400 | ||||||||||||||
| Income before income taxes | 66,493 | 25,037 | 69,018 | 5,691 | (60,699 | ) | 105,540 | |||||||||||||
| Income taxes | -- | 5,485 | 31,948 | 1,614 | -- | 39,047 | ||||||||||||||
| Net income | $ | 66,493 | $ | 19,552 | $ | 37,070 | $ | 4,077 | $ | (60,699 | ) | $ | 66,493 | |||||||
-12-
CONDENSED CONSOLIDATED INCOME
STATEMENT
THREE MONTHS ENDED FEBRUARY 28, 2003
| Cintas Corporation |
Corp. 2 |
Subsidiary Guarantors |
Non-Guarantors |
Eliminations |
Cintas Corporation Consolidated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue: | ||||||||||||||||||||
| Rentals | $ | -- | $ | 393,146 | $ | 105,872 | $ | 24,209 | $ | (32 | ) | $ | 523,195 | |||||||
| Other services | -- | 291,372 | 48,673 | 6,479 | (205,962 | ) | 140,562 | |||||||||||||
| Equity in net income of affiliates | 59,055 | -- | -- | -- | (59,055 | ) | -- | |||||||||||||
| 59,055 | 684,518 | 154,545 | 30,688 | (265,049 | ) | 663,757 | ||||||||||||||
| Costs and expenses (income): | ||||||||||||||||||||
| Cost of rentals | -- | 257,643 | 55,154 | 15,655 | (34,514 | ) | 293,938 | |||||||||||||
| Cost of other services | -- | 222,737 | 35,094 | 3,816 | (166,244 | ) | 95,403 | |||||||||||||
| Selling and administrative expenses | -- | 173,432 | (6,858 | ) | 8,170 | (552 | ) | 174,192 | ||||||||||||
| Interest income | -- | (617 | ) | (138 | ) | (70 | ) | -- | (825 | ) | ||||||||||
| Interest expense | -- | 7,307 | (674 | ) | 801 | -- | 7,434 | |||||||||||||
| -- | 660,502 | 82,578 | 28,372 | (201,310 | ) | 570,142 | ||||||||||||||
| Income before income taxes | 59,055 | 24,016 | 71,967 | 2,316 | (63,739 | ) | 93,615 | |||||||||||||
| Income taxes | -- | 5,027 | 28,289 | 1,244 | -- | 34,560 | ||||||||||||||
| Net income | $ | 59,055 | $ | 18,989 | $ | 43,678 | $ | 1,072 | $ | (63,739 | ) | $ | 59,055 | |||||||
-13 -
CONDENSED CONSOLIDATED
INCOME STATEMENT
NINE MONTHS ENDED FEBRUARY 29, 2004
| Cintas Corporation |
Corp. 2 |
Subsidiary Guarantors |
Non-Guarantors |
Eliminations |
Cintas Corporation Consolidated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue: | ||||||||||||||||||||
| Rentals | $ | -- | $ | 1,219,331 | $ | 329,870 | $ | 85,301 | $ | (168 | ) | $ | 1,634,334 | |||||||
| Other services | -- | 775,213 | 169,981 | 23,002 | (526,625 | ) | 441,571 | |||||||||||||
| Equity in net income of affiliates | 199,477 | -- | -- | -- | (199,477 | ) | -- | |||||||||||||
| 199,477 | 1,994,544 | 499,851 | 108,303 | (726,270 | ) | 2,075,905 | ||||||||||||||
| Costs and expenses (income): | ||||||||||||||||||||
| Cost of rentals | -- | 769,985 | 194,142 | 52,752 | (109,928 | ) | 906,951 | |||||||||||||
| Cost of other services | -- | 581,608 | 119,129 | 13,568 | (421,947 | ) | 292,358 | |||||||||||||
| Selling and administrative expenses | -- | 533,703 | (20,112 | ) | 23,931 | 581 | 538,103 | |||||||||||||
| Interest income | -- | (1,360 | ) | (90 | ) | (329 | ) | -- | (1,779 | ) | ||||||||||
| Interest expense | -- | 19,139 | (2,983 | ) | 3,150 | -- | 19,306 | |||||||||||||
| Write off of loan receivable | -- | -- | 4,343 | -- | -- | 4,343 | ||||||||||||||
| -- | 1,903,075 | 294,429 | 93,072 | (531,294 | ) | 1,759,282 | ||||||||||||||
| Income before income taxes | 199,477 | 91,469 | 205,422 | 15,231 | (194,976 | ) | 316,623 | |||||||||||||
| Income taxes | -- | 16,796 | 95,620 | 4,730 | -- | 117,146 | ||||||||||||||
| Net income | $ | 199,477 | $ | 74,673 | $ | 109,802 | $ | 10,501 | $ | (194,976 | ) | $ | 199,477 | |||||||
-14-
CONDENSED CONSOLIDATED
INCOME STATEMENT
NINE MONTHS ENDED FEBRUARY 28, 2003
| Cintas Corporation |
Corp. 2 |
Subsidiary Guarantors |
Non-Guarantors |
Eliminations |
Cintas Corporation Consolidated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue: | ||||||||||||||||||||
| Rentals | $ | -- | $ | 1,187,014 | $ | 316,282 | $ | 69,970 | $ | (104 | ) | $ | 1,573,162 | |||||||
| Other services | -- | 887,331 | 147,203 | 23,871 | (621,126 | ) | 437,279 | |||||||||||||
| Equity in net income of affiliates | 184,042 | -- | -- | -- | (184,042 | ) | -- | |||||||||||||
| 184,042 | 2,074,345 | 463,485 | 93,841 | (805,272 | ) | 2,010,441 | ||||||||||||||
| Costs and expenses (income): | ||||||||||||||||||||
| Cost of rentals | -- | 770,388 | 164,999 | 44,754 | (104,112 | ) | 876,029 | |||||||||||||
| Cost of other services | -- | 670,978 | 107,669 | 14,364 | (498,851 | ) | 294,160 | |||||||||||||
| Selling and administrative expenses | -- | 534,388 | (30,062 | ) | 23,979 | (1,435 | ) | 526,870 | ||||||||||||
| Interest income | -- | (1,788 | ) | (234 | ) | (154 | ) | -- | (2,176 | ) | ||||||||||
| Interest expense | -- | 22,800 | (1,700 | ) | 2,370 | -- | 23,470 | |||||||||||||
| -- | 1,996,766 | 240,672 | 85,313 | (604,398 | ) | 1,718,353 | ||||||||||||||
| Income before income taxes | 184,042 | 77,579 | 222,813 | 8,528 | (200,874 | ) | 292,088 | |||||||||||||
| Income taxes | -- | 16,087 | 88,391 | 3,568 | -- | 108,046 | ||||||||||||||
| Net income | $ | 184,042 | $ | 61,492 | $ | 134,422 | $ | 4,960 | $ | (200,874 | ) | $ | 184,042 | |||||||
-15-
CONDENSED CONSOLIDATED BALANCE
SHEET
AS OF FEBRUARY 29, 2004
| Cintas Corporation |
Corp. 2 |
Subsidiary Guarantors |
Non-Guarantors |
Eliminations |
Cintas Corporation Consolidated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | -- | $ | 85,838 | $ | 5,412 | $ | 22,502 | $ | -- | $ | 113,752 | ||||||||
| Marketable securities | -- | 126,316 | 1,186 | 7,604 | -- | 135,106 | ||||||||||||||
| Accounts receivable, net | -- | 204,335 | 75,016 | 8,998 | (11,631 | ) | 276,718 | |||||||||||||
| Inventories | -- | 188,997 | 17,892 | 6,539 | (9,232 | ) | 204,196 | |||||||||||||
| Uniforms and other rental items in service | -- | 241,099 | 69,992 | 16,406 | (32,309 | ) | 295,188 | |||||||||||||
| Prepaid expenses | -- | 5,881 | 1,645 | 546 | -- | 8,072 | ||||||||||||||
| Total current assets | -- | 852,466 | 171,143 | 62,595 | (53,172 | ) | 1,033,032 | |||||||||||||
| Property and equipment, at cost, net | -- | 594,545 | 146,633 | 41,140 | -- | 782,318 | ||||||||||||||
| Goodwill | -- | 113,766 | 628,663 | 13,689 | -- | 756,118 | ||||||||||||||
| Service contracts | -- | 25,122 | 103,576 | 9,290 | -- | 137,988 | ||||||||||||||
| Other assets | 1,390,085 | 33,138 | 720,583 | 146,416 | (2,244,674 | ) | 45,548 | |||||||||||||
| $ | 1,390,085 | $ | 1,619,037 | $ | 1,770,598 | $ | 273,130 | $ | (2,297,846 | ) | $ | 2,755,004 | ||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | (465,247 | ) | $ | 125,506 | $ | 343,703 | $ | 6,927 | $ | 38,013 | $ | 48,902 | |||||||
| Accrued compensation and related liabilities | -- | 19,765 | 4,807 | 1,524 | -- | 26,096 | ||||||||||||||
| Accrued liabilities | 49,634 | 169,701 | (62,784 | ) | 3,673 | (45 | ) | 160,179 | ||||||||||||
| Income taxes: | ||||||||||||||||||||
| Current | -- | (29,807 | ) | 64,248 | (1,057 | ) | (29 | ) | 33,355 | |||||||||||
| Deferred | -- | (416 | ) | 52,831 | 1,848 | -- | 54,263 | |||||||||||||
| Long-term debt due within one year | -- | 21,793 | 562 | 54 | (159 | ) | 22,250 | |||||||||||||
| Total current liabilities | (415,613 | ) | 306,542 | 403,367 | 12,969 | 37,780 | 345,045 | |||||||||||||
| Long-term debt due after one year | -- | 490,663 | (50,774 | ) | 74,373 | (31,686 | ) | 482,576 | ||||||||||||
| Deferred income taxes | -- | 9,621 | 101,609 | 5,421 | -- | 116,651 | ||||||||||||||
| Total shareholders' equity | 1,805,698 | 812,211 | 1,316,396 | 180,367 | (2,303,940 | ) | 1,810,732 | |||||||||||||
| $ | 1,390,085 | $ | 1,619,037 | $ | 1,770,598 | $ | 273,130 | $ | (2,297,846 | ) | $ | 2,755,004 | ||||||||
-16-
CONDENSED CONSOLIDATED
BALANCE SHEET
AS OF MAY 31, 2003
| Cintas Corporation |
Corp. 2 |
Subsidiary Guarantors |
Non-Guarantors |
Eliminations |
Cintas Corporation Consolidated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | -- | $ | 16,592 | $ | 5,166 | $ | 9,329 | $ | 1,152 | $ | 32,239 | ||||||||
| Marketable securities | -- | 23,934 | -- | 1,486 | -- | 25,420 | ||||||||||||||
| Accounts receivable, net | -- | 203,438 | 80,537 | 8,107 | (13,935 | ) | 278,147 | |||||||||||||
| Inventories | -- | 218,304 | 15,845 | 6,813 | (12,552 | ) | 228,410 | |||||||||||||
| Uniforms and other rental items in service | -- | 251,118 | 71,413 | 16,680 | (33,490 | ) | 305,721 | |||||||||||||
| Prepaid expenses | -- | 4,865 | 1,812 | 930 | -- | 7,607 | ||||||||||||||
| Total current assets | -- | 718,251 | 174,773 | 43,345 | (58,825 | ) | 877,544 | |||||||||||||
| Property and equipment, at cost, net | -- | 598,558 | 136,896 | 41,978 | -- | 777,432 | ||||||||||||||
| Goodwill | -- | 113,334 | 594,419 | 14,102 | -- | 721,855 | ||||||||||||||
| Service contracts | -- | 29,175 | 105,178 | 10,546 | -- | 144,899 | ||||||||||||||
| Other assets | 1,178,948 | 40,124 | 780,073 | 141,282 | (2,079,211 | ) | 61,216 | |||||||||||||
| $ | 1,178,948 | $ | 1,499,442 | $ | 1,791,339 | $ | 251,253 | $ | (2,138,036 | ) | $ | 2,582,946 | ||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | (465,247 | ) | $ | 11,084 | $ | 467,211 | $ | 2,848 | $ | 38,013 | $ | 53,909 | |||||||
| Accrued compensation and related liabilities | -- | 19,451 | 4,368 | 1,433 | -- | 25,252 | ||||||||||||||
| Accrued liabilities | -- | 178,538 | (54,321 | ) | 4,657 | (992 | ) | 127,882 | ||||||||||||
| Income taxes: | ||||||||||||||||||||
| Current | -- | (33,053 | ) | 50,841 | (1,232 | ) | (29 | ) | 16,527 | |||||||||||
| Deferred | -- | 386 | 50,828 | 1,804 | -- | 53,018 | ||||||||||||||
| Long-term debt due within one year | -- | 27,798 | 604 | 53 | (204 | ) | 28,251 | |||||||||||||
| Total current liabilities | (465,247 | ) | 204,204 | 519,531 | 9,563 | 36,788 | 304,839 | |||||||||||||
| Long-term debt due after one year | -- | 542,572 | (49,078 | ) | 72,630 | (31,361 | ) | 534,763 | ||||||||||||
| Deferred income taxes | -- | 9,245 | 82,795 | 4,972 | -- | 97,012 | ||||||||||||||
| Total shareholders' equity | 1,644,195 | 743,421 | 1,238,091 | 164,088 | (2,143,463 | ) | 1,646,332 | |||||||||||||
| $ | 1,178,948 | $ | 1,499,442 | $ | 1,791,339 | $ | 251,253 | $ | (2,138,036 | ) | $ | 2,582,946 | ||||||||
-17-
CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 29, 2004
| Cintas Corporation |
Corp. 2 |
Subsidiary Guarantors |
Non- Guarantors |
Eliminations |
Cintas Corporation Consolidated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities: | ||||||||||||||||||||
| Net income | $ | 199,477 | $ | 74,673 | $ | 109,802 | $ | 10,501 | $ | (194,976 | ) | $ | 199,477 | |||||||
| Adjustments to reconcile net income to net | ||||||||||||||||||||
| cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation | -- | 56,172 | 27,304 | 4,332 | -- | 87,808 | ||||||||||||||
| Amortization of deferred charges | -- | 6,180 | 11,545 | 1,662 | -- | 19,387 | ||||||||||||||
| Deferred income taxes | -- | (426 | ) | 20,817 | 493 | -- | 20,884 | |||||||||||||
| Changes in current assets and liabilities, | ||||||||||||||||||||
| net of acquisitions of businesses: | ||||||||||||||||||||
| Accounts receivable | -- | (897 | ) | 8,243 | (891 | ) | (2,304 | ) | 4,151 | |||||||||||
| Inventories | -- | 29,307 | (296 | ) | 274 | (3,320 | ) | 25,965 | ||||||||||||
| Uniforms and other rental items in service | -- | 10,019 | 1,421 | 274 | (1,181 | ) | 10,533 | |||||||||||||
| Prepaid expenses | -- | (1,016 | ) | 156 | 384 | -- | (476 | ) | ||||||||||||
| Accounts payable | -- | 114,422 | (124,057 | ) | 4,079 | -- | (5,556 | ) | ||||||||||||
| Accrued compensation and related liabilities | -- | 314 | 439 | 91 | -- | 844 | ||||||||||||||
| Accrued liabilities | -- | (8,837 | ) | (10,535 | ) | (984 | ) | 947 | (19,409 | ) | ||||||||||
| Income taxes payable | -- | 3,246 | 13,407 | 175 | -- | 16,828 | ||||||||||||||
| Net cash provided by (used in) operating activities | 199,477 | 283,157 | 58,246 | 20,390 | (200,834 | ) | 360,436 | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Capital expenditures | -- | (52,175 | ) | (29,342 | ) | (3,502 | ) | -- | (85,019 | ) | ||||||||||
| Proceeds from sale or redemption of marketable securities | -- | 31,979 | -- | 195 | -- | 32,174 | ||||||||||||||
| Purchase of marketable securities | -- | (134,361 | ) | (1,186 | ) | (6,313 | ) | -- | (141,860 | ) | ||||||||||
| Acquisitions of businesses, net of cash acquired | -- | (1,215 | ) | (48,621 | ) | -- | -- | (49,836 | ) | |||||||||||
| Other | (205,837 | ) | (5,675 | ) | 22,887 | (1,642 | ) | 199,962 | 9,695 | |||||||||||
| Net cash (used in) provided by investing activities | (205,837 | ) | (161,447 | ) | (56,262 | ) | (11,262 | ) | 199,962 | (234,846 | ) | |||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Repayment of long-term debt | -- | (53,060 | ) | (1,738 | ) | 1,744 | (280 | ) | (53,334 | ) | ||||||||||
| Issuance of common stock | 6,360 | -- | -- | -- | -- | 6,360 | ||||||||||||||
| Other | -- | 596 | -- | 2,301 | -- | 2,897 | ||||||||||||||
| Net cash provided by (used in) financing activities | 6,360 | (52,464 | ) | (1,738 | ) | 4,045 | (280 | ) | (44,077 | ) | ||||||||||
| Net increase (decrease) in cash and cash equivalents | -- | 69,246 | 246 | 13,173 | (1,152 | ) | 81,513 | |||||||||||||
| Cash and cash equivalents at beginning of period | -- | 16,592 | 5,166 | 9,329 | 1,152 | 32,239 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | -- | $ | 85,838 | $ | 5,412 | $ | 22,502 | $ | -- | $ | 113,752 | ||||||||
-18-
CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 28, 2003
| Cintas Corporation |
Corp. 2 |
Subsidiary Guarantors |
Non- Guarantors |
Eliminations |
Cintas Corporation Consolidated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities: | ||||||||||||||||||||
| Net income | $ | 184,042 | $ | 61,492 | $ | 134,422 | $ | 4,960 | $ | (200,874 | ) | $ | 184,042 | |||||||
| Adjustments to reconcile net income to net | ||||||||||||||||||||
| cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation | -- | 56,359 | 27,537 | 3,804 | -- | 87,700 | ||||||||||||||
| Amortization of deferred charges | -- | 7,932 | 11,904 | 1,458 | -- | 21,294 | ||||||||||||||
| Deferred income taxes | -- | 1,305 | 3,702 | 348 | -- | 5,355 | ||||||||||||||
| Changes in current assets and liabilities, | ||||||||||||||||||||
| net of acquisitions of businesses: | ||||||||||||||||||||
| Accounts receivable | -- | 19,189 | (4,440 | ) | (2,218 | ) | (1,796 | ) | 10,735 | |||||||||||
| Inventories | -- | (35,205 | ) | (137 | ) | (1,421 | ) | 594 | (36,169 | ) | ||||||||||
| Uniforms and other rental items in service | -- | (35,825 | ) | 459 | (2,259 | ) | 16,237 | (21,388 | ) | |||||||||||
| Prepaid expenses | -- | 2,763 | (554 | ) | (86 | ) | (3 | ) | 2,120 | |||||||||||
| Accounts payable | -- | 116,124 | (112,763 | ) | (13,849 | ) | (68 | ) | (10,556 | ) | ||||||||||
| Accrued compensation and related liabilities | -- | (4,310 | ) | 1,827 | (38 | ) | -- | (2,521 | ) | |||||||||||
| Accrued liabilities | -- | (2,486 | ) | (15,263 | ) | (399 | ) | 962 | (17,186 | ) | ||||||||||
| Income taxes payable | -- | 8,169 | 23,262 | (2,929 | ) | -- | 28,502 | |||||||||||||
| Net cash provided by (used in) operating activities | 184,042 | 195,507 | 69,956 | (12,629 | ) | (184,948 | ) | 251,928 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Capital expenditures | -- | (20,575 | ) | (50,978 | ) | (8,894 | ) | -- | (80,447 | ) | ||||||||||
| Proceeds from sale or redemption of marketable securities | -- | 12,042 | 1 | 1,995 | -- | 14,038 | ||||||||||||||
| Purchase of marketable securities | -- | (481 | ) | -- | (4,123 | ) | -- | (4,604 | ) | |||||||||||
| Acquisitions of businesses, net of cash acquired | -- | (8,497 | ) | (10,264 | ) | (5,774 | ) | -- | (24,535 | ) | ||||||||||
| Other | (191,677 | ) | (21,210 | ) | 14,782 | 2,674 | 182,699 | (12,732 | ) | |||||||||||
| Net cash (used in) provided by investing activities | (191,677 | ) | (38,721 | ) | (46,459 | ) | (14,122 | ) | 182,699 | (108,280 | ) | |||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Repayment of long-term debt | -- | (147,792 | ) | (23,355 | ) | 18,806 | 2,249 | (150,092 | ) | |||||||||||
| Issuance of common stock | 3,987 | -- | -- | -- | -- | 3,987 | ||||||||||||||
| Other | 3,648 | 356 | -- | -- | -- | 4,004 | ||||||||||||||
| Net cash provided by (used in) financing activities | 7,635 | (147,436 | ) | (23,355 | ) | 18,806 | 2,249 | (142,101 | ) | |||||||||||
| Net increase (decrease) in cash and cash equivalents | -- | 9,350 | 142 | (7,945 | ) | -- | 1,547 | |||||||||||||
| Cash and cash equivalents at beginning of period | -- | 22,440 | 5,011 | 13,177 | -- | 40,628 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | -- | $ | 31,790 | $ | 5,153 | $ | 5,232 | $ | -- | $ | 42,175 | ||||||||
-19-
CINTAS CORPORATION
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Three Months Ended February 2004 Compared to Three Months Ended February 2003
Revenue Comparison
Total revenue increased 5% for the three months ended February 29, 2004, over the same period in fiscal 2003. While the economy has shown some preliminary signs of recovery, employment numbers through February, 2004, continue to be weak. Since the majority of our revenue is derived from services directly related to employment levels, the continued weakness in employment has caused our internal growth rate to be lower than our stated objective. However, we have continued to grow organically in this environment, mainly through the continued sale of new rental programs and the cross-selling of rental services such as entrance mats and hygiene services to our existing customers.
Rentals operating segment revenues consist primarily of revenues derived from the rental of corporate identity uniforms, mats, shop towels, hygiene (restroom) services and other items. Net Rentals revenue increased 5% for three months ended February 29, 2004, over the same period in the prior fiscal year, primarily due to the sale of new rental programs. Rental revenue growth was negatively impacted by increased lost business and reductions in existing business attributable to the current sluggish economy.
The continued employment weakness in the economy through February, 2004, is reflected in the growth of our Rentals operating segment revenues. Our growth in this segment has been generated mainly through increased revenues from mats and hygiene services versus uniforms, which are more directly linked to employment levels.
Other Services operating segment revenues are derived from the design, manufacture and direct sale of uniforms to our customers, as well as ancillary services including first aid products and services and cleanroom supplies. Revenue from the sale of uniforms and other direct sale items increased 6% for the three months ended February 29, 2004, over the same period in the prior year. The majority of this growth was generated from the acquisition of first aid services businesses. Without the benefit of acquisitions, our revenues would have been flat as compared to the same period last year. The lack of internal growth in this segment is attributed to the continued pressure on our customers in the hotel, gaming, airline and electronics industries.
Expense Comparison
Cost of rentals consists primarily of production expenses, delivery expenses and amortization of in service uniforms and other rental items. Cost of rentals increased 3% for the three months ended February 29, 2004, as compared to the three months ended February 28, 2003, as a result of increased Rentals revenues and increased energy costs. These increases were partially offset by continued productivity improvement in many of our rental operations, especially those operations that absorbed business from the Omni acquisition.
Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses. Cost of other services increased 3% for the three months ended February 29, 2004, as compared to the three months ended February 28, 2003, as a result of increased Other Services revenue. Cost of Other Services for the three months ending February 29, 2004, was positively impacted by continued improvement in the sourcing of fabric and finished garments.
-20-
Selling and administrative expenses increased 6% for the three months ended February 29, 2004, as compared to the three months ended February 28, 2003. For reporting purposes, medical benefits, retirement benefits and payroll taxes, including workers compensation expense, for all Cintas partners (employees) are included as selling and administrative expenses. The 6% increase reflects the rise in healthcare benefits and other payroll costs including state unemployment and workers compensation expense.
Net interest expense (interest expense less interest income) was $5 million for the three months ended February 29, 2004, compared to $7 million for the same period in the prior fiscal year. This decrease was primarily a result of lower outstanding debt levels as compared to the prior year. Cintas’ effective tax rate was 37% for both the three months ended February 29, 2004 and the three months ended February 28, 2003.
Income Comparison
Net income increased 13% for the three months ended February 29, 2004, over the same period in fiscal 2003, primarily due to increased efficiencies from revenue growth and cost containment initiatives. Diluted earnings per share increased 15% for the three months ended February 29, 2004, over the same period in the prior fiscal year.
Nine Months Ended February 2004 Compared to Nine Months Ended February 2003
Revenue Comparison
Total revenue increased 3% for the nine months ended February 29, 2004, over the same period in fiscal 2004. Since the majority of our revenue is derived from services directly related to employment levels, the difficult economic environment and the continued weakness in employment numbers through February, 2004, have caused our internal growth rate to be lower than our stated objective. However, we have continued to grow organically in this environment, mainly through the continued sale of new rental programs and the cross-selling of rental services such as entrance mats and hygiene services to our existing customers.
Rentals operating segment revenues consist primarily of revenues derived from the rental of corporate identity uniforms, mats, shop towels, hygiene (restroom) services and other items. Net Rentals revenue increased 4% for the nine months ended February 29, 2004, over the same period in the prior fiscal year, primarily due to the sale of new rental programs. Rental revenue growth was negatively impacted by increased lost business and reductions in existing business attributable to the current sluggish economy.
The continued employment weakness in the economy through February, 2004, is reflected in the growth of our Rentals operating segment revenues. Our growth in this segment has been generated mainly through increased revenues from mats and hygiene services versus uniforms, which are more directly linked to employment levels.
Other Services operating segment revenues are derived from the design, manufacture and direct sale of uniforms to our customers, as well as ancillary services including first aid products and services and cleanroom supplies. Revenue from the sale of uniforms and other direct sale items increased 1% for the nine months ended February 29, 2004, over the same period in the prior year, mainly due to the acquisition of first aid services businesses. The majority of the revenue growth obtained from acquisitions within this segment was offset by reduced revenues in our existing business caused by the continued pressure on our customers in the hotel, gaming, airline and electronics industries.
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Expense Comparison
Cost of rentals consists primarily of production expenses, delivery expenses and amortization of in service uniforms and other rental items. Cost of rentals increased 4% for the nine months ended February 29, 2004, as compared to the nine months ended February 28, 2003, as a result of increased Rentals revenues and increased energy and wage-related costs. These increases were partially offset by continued productivity improvement in many of our rental operations, especially those operations that absorbed business from the Omni acquisition.
Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses. Cost of other services decreased 1% for the nine months ended February 29, 2004, as compared to the nine months ended February 28, 2003. This reduction is primarily due to a combination of lower Other Services revenue, improved efficiencies in distribution and lower sourcing costs.
Selling and administrative expenses increased 2% for the nine months ended February 29, 2004, as compared to the nine months ended February 28, 2003. For reporting purposes, medical benefits, retirement benefits and payroll taxes, including workers compensation expense, for all Cintas partners (employees) are included as selling and administrative expenses. The 2% increase reflects the rise in healthcare benefits and other payroll costs, including state unemployment and workers compensation expense. Increased efficiencies and cost containment initiatives offset a portion of these increases.
Net interest expense (interest expense less interest income) was $18 million for the nine months ended February 29, 2004, compared to $21 million for the same period in the prior fiscal year. This decrease was primarily a result of lower outstanding debt levels as compared to the prior year. Cintas’ effective tax rate was 37% for both the nine months ended February 29, 2004 and February 28, 2003.
Income Comparison
Included in net income is a pre-tax charge of $4.3 million from a write-off of a receivable from a garment manufacturer. Based on developments concerning the supplier’s viability to remain as a going concern, the collectibility of the receivable became doubtful. As such, the receivable was completely written off during the first quarter of fiscal 2004. Net income after the charge increased 8% for the nine months ended February 29, 2004, over the same period in fiscal 2003, primarily due to increased efficiencies from revenue growth and cost containment initiatives. Diluted earnings per share increased 8% for the nine months ended February 29, 2004, over the same period in the prior fiscal year.
Financial Condition
At February 29, 2004, cash, cash equivalents and marketable securities totaled $248,858, an increase of $191,199 million from May 31, 2003. This increase was primarily due to additional cash generation from cost containment initiatives and the absence of any significant acquisitions. A focused reduction in inventory levels also contributed to this increase. The cash, cash equivalents and marketable securities will be used to finance future growth, capital expenditures, repayment of debt and dividends. We believe that our current cash position, funds generated from operations and the strength of our banking relationships are sufficient to meet our anticipated operational and capital requirements.
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Net property and equipment increased by $5 million from May 31, 2003 to February 29, 2004. This increase reflects capital requirements for increased capacity needs in certain markets. At the end of the third quarter of fiscal 2004, Cintas had ten uniform rental facilities in various stages of construction.
Following is information regarding Cintas’ long-term contractual obligations and other commitments outstanding as of February 29, 2004:
| (In thousands) | Payments Due by Period | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total |
One year or less |
Two to three years |
Four to five years |
After five years | |||||||||||||
| Long-term contractual obligations | |||||||||||||||||
| Long-term debt (1) | $ | 501,258 | $ | 21,714 | $ | 13,490 | $ | 237,539 | $ | 228,515 | |||||||
| Capital lease obligations (2) | 3,568 | 536 | 1,151 | 1,252 | 629 | ||||||||||||
| Operating leases (3) | 47,096 | 12,745 | 18,282 | 11,718 | 4,351 | ||||||||||||
| Unconditional purchase obligations | -- | -- | -- | -- | -- | ||||||||||||
| Total contractual cash obligations | $ | 551,922 | $ | 34,995 | $ | 32,923 | $ | 250,509 | $ | 233,495 | |||||||
| (1) | Long-term debt primarily consists of $450,000 in long-term notes. |
| (2) | Capital lease obligations are classified as long-term debt on the balance sheet. |
| (3) | Operating leases consist primarily of building leases and synthetic leases on the two corporate jets. |
| (In thousands) | Amount of Commitment Expiration Per Period | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total |
One year or less |
Two to three years |
Four to five years |
After five Years | |||||||||||||
| Other commercial commitments | |||||||||||||||||
| Lines of credit (1) | $ | 300,000 | $ | 300,000 | $ | -- | $ | -- | $ | -- | |||||||
| Standby letter of credit (2) | 33,362 | 33,362 | -- | -- | -- | ||||||||||||
| Guarantees | -- | -- | -- | -- | -- | ||||||||||||
| Standby repurchase obligations | -- | -- | -- | -- | -- | ||||||||||||
| Other commercial commitments | -- | -- | -- | -- | -- | ||||||||||||
| Total commercial commitments | $ | 333,362 | $ | 333,362 | $ | -- | $ | -- | $ | -- | |||||||
| (1) | Back-up facility for the commercial paper program. |
| (2) | Support certain outstanding debt and self-insured workers’ compensation and general liability insurance programs. |
Litigation and Other Contingencies
Cintas is party to litigation in the normal course of business, none of which is expected to have a material impact on operating results. In addition, a class action suit was filed in Federal Court in the Northern District of California in May 2001 alleging that Cintas violated certain federal and state wage and hour laws applicable to its service sales representatives, whom Cintas considers exempt employees, and asserting additional related ERISA claims. Cintas believes it has properly classified its service sales representatives as exempt employees and will vigorously defend these allegations. The estimated liability, if any, relating to these lawsuits has not been determined, but is not expected to have a material adverse effect on the financial statements.
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Cintas continues to be the target of a corporate unionization campaign by the Union of Needletrades, Industrial and Textile Employees (UNITE) and Teamsters. These unions are attempting to pressure Cintas into surrendering its employees’ rights to a government-supervised secret ballot election and unilaterally accept union representation. This is unacceptable. Cintas’ philosophy in regard to unions is straightforward: We believe that employees have the right to say yes to union representation and the freedom to say no.
In connection with this campaign, UNITE has publicly stated their intention to file or inspire others to file numerous lawsuits and charges against Cintas, and, in fact, both unions have already filed or inspired others to have filed several of these lawsuits and charges, including, without limitation, a gender and race discrimination class action filed in Federal Court in the Northern District of California. Cintas will vigorously defend any and all such litigation. The estimated liability, if any, related to these lawsuits, individually or in the aggregate, has not been determined, but it is not expected to have a material adverse effect on the financial statements.
The unions’ campaign could be disruptive to our business and could adversely affect results of operations. We will continue to vigorously oppose this campaign and to defend our employees’ rights. Cintas considers its relationships with its employees to be satisfactory.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In our normal operations, Cintas has market risk exposure to interest rates. There has been no significant change in our exposure to these risks, which has been previously disclosed on page 61 of our most recent annual report.
ITEM 4.
CONTROLS AND PROCEDURES.
An evaluation was completed under the supervision and with the participation of Cintas’ management, including Cintas’ President and Chief Executive Officer, Chief Financial Officer, General Counsel and Controllers, of the effectiveness of the design and operation of Cintas’ disclosure controls and procedures as of February 29, 2004. Based on these evaluations, Cintas’ management, including the President and Chief Executive Officer, Chief Financial Officer, General Counsel and Controllers, concluded that Cintas’ disclosure controls and procedures were effective as of February 29, 2004. There has been no change to Cintas’ internal control over financial reporting that occurred during the third quarter of fiscal 2004 that has materially affected, or is reasonably likely to materially affect, Cintas’ internal control over financial reporting.
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, projects, plans, expects, intends, believes, should and similar 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. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ from those set forth in this report. Factors that might cause such a difference include the possibility of greater than anticipated operating costs, lower sales volumes, the performance and costs of integration of acquisitions, fluctuations in costs of materials and labor, costs
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and possible effects of union organizing activities, outcome of pending environmental matters, the initiation or outcome of litigation, higher assumed sourcing or distribution costs of products and the reactions of competitors in terms of price and service. Cintas undertakes no obligation to update any forward-looking statements to reflect the events or circumstances arising after the date on which they are made.
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CINTAS CORPORATION
Part II. Other Information
| Item 6. | Exhibits and Reports on Form 8-K |
| (a.) | Exhibits |
| 31.1 | Certification of Principal Executive Officer required by Rule 13a-14(a) |
| 31.2 | Certification of Principal Financial Officer required by Rule 13a-14(a) |
| 32.1 | Section 1350 Certification of Chief Executive Officer |
| 32.2 | Section 1350 Certification of Chief Financial Officer |
| (b.) | Reports on Form 8-K |
| None. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 14, 2004 |
CINTAS CORPORATION (Registrant) BY: /s/William C. Gale —————————————————— William C. Gale Senior Vice President and Chief Financial Officer (Chief Accounting Officer) |
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