SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

 

Commission File No. 0-11399

 

CINTAS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

6800 Cintas Boulevard

P.O. Box 625737

Cincinnati, Ohio  45262-5737

(Address of principal executive offices)

 

Phone:  (513) 459-1200

(Telephone number of principal executive offices)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

None

 

Securities Registered Pursuant to Section 12(g) of the Act:

 

Common Stock, No Par Value

(Title of class)

 

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, and (2) has been subject to such filing requirements for the past 90 days.

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. o

 

Indicated by check mark whether the Registrant is an accelerated filer as defined in Exchange Act Rule 12b-2.

 

 

The aggregate market value of the Common Stock held by non-affiliates as of November 30, 2003, was $7,978,888,977 based on a closing sale price of $46.69 per share.  As of July 31, 2004, 171,475,331 shares of no par Common Stock were issued and outstanding.

 

Documents Incorporated by Reference

 

Portions of the Registrant’s Proxy Statement to be filed with the Commission for its 2004 Annual Meeting are incorporated by reference in Part III as specified.

 

 

CINTAS CORPORATION

INDEX TO ANNUAL REPORT

ON FORM 10-K

 

Part I
Item 1.	-	Business.
Item 2.	-	Properties.
Item 3.	-	Legal Proceedings.
Item 4.	-	Submission of Matters to a Vote of Security Holders.
Part II
Item 5.	-	Market for Registrant’s Common Equity and Related Stockholder Matters.
Item 6.	-	Selected Financial Data.
Item 7.	-	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A.	-	Quantitative and Qualitative Disclosure About Market Risk.
Item 8.	-	Financial Statements and Supplementary Data.
Item 9.	-	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A.	-	Controls and Procedures.
Part III
Item 10.	-	Directors and Executive Officers of the Registrant.
Item 11.	-	Executive Compensation.
Item 12.	-	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13.	-	Certain Relationships and Related Transactions.
Item 14.	-	Principal Accountant Fees and Services.
Part IV
Item 15.	-	Exhibits, Financial Statement Schedules and Reports on Form 8-K.

 

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 Annual 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 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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PART I

ITEM 1.

BUSINESS

 

Cintas Corporation, a Washington corporation, provides highly specialized services to businesses of all types throughout North America.  Cintas designs, manufactures, and implements corporate identity uniform programs, provides entrance mats, restroom supplies, promotional products, first aid and safety products and services and document management services for over 500,000 businesses.  Cintas was founded in 1968 by Richard T. Farmer, Chairman of the Board, when he left his family’s industrial laundry business in order to develop uniform programs using an exclusive new fabric.  In the early 1970’s, Cintas acquired the family industrial laundry business.

 

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 restroom supplies, first aid and safety products and services, document management services and cleanroom supplies.

 

The rental markets served by Cintas are highly fragmented and competition for this business varies at each of Cintas’ locations.  There are other companies in the uniform rental business which have financial resources comparable to those of Cintas, although much of the competition consists of smaller local and regional firms. In certain instances, local competitors may also have financial resources comparable to those of Cintas in a particular market.  Cintas believes that the primary competitive factors that affect its operations are product, quality, service, design and price.

 

The service provided to the rental markets served by Cintas principally consists of the rental and cleaning of uniforms as well as providing ongoing uniform replacements as required to each customer.  Cintas also offers ancillary products which include the rental or sale of entrance mats, fender covers, towels, mops, linen and restroom products and first aid and safety products and services.

 

Due to its diverse customer base and average account size, the loss of one account would not have a significant financial impact on Cintas.  No individual customer accounts for greater than one percent of Cintas’ total revenues.

 

In its sale of customized uniforms, Cintas competes on a national basis with other uniform suppliers and manufacturers.

 

Cintas operates fourteen manufacturing facilities, which provide for a substantial amount of its standard uniform needs.  Additional products are purchased from numerous outside suppliers. Because of Cintas’ ability to manufacture much of its own uniform needs, the loss of one vendor would not have a significant impact on Cintas.  Cintas purchases fabric, used in its manufacturing process, from several suppliers.  Cintas is not aware of any circumstances that would hinder its ability to obtain these materials.

 

Cintas does not anticipate any material capital expenditures for environmental remediation that would have a material effect on its financial condition. Cintas is not aware of any material non-compliance with environmental laws.

 

At May 31, 2004, Cintas employed approximately 28,300 employees of which approximately 570 were represented by labor unions.  Cintas is currently the target of a corporate unionization campaign by UNITE HERE and the Teamsters unions.  These unions are attempting to pressure Cintas into surrendering our employees’ rights to a government-supervised 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.  This campaign could be materially disruptive to our business and could materially 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.

 

Cintas files annual and quarterly reports and proxy materials with the Securities and Exchange Commission.  The public may copy these materials at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.  20549 and may obtain further information concerning the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an internet site that

 

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contains the same information regarding Cintas that is filed electronically with the SEC.  The address of that site is: http://www.sec.gov.  Cintas’ Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K and amendments to those reports are posted on its website, www.cintas.com, as soon as practicable after filing with the SEC.

 

The following table sets forth the revenues derived from each service segment provided by Cintas.

 

		Year Ended May 31
		2004			2003			2002
		(in thousands)
Rentals		$	2,201,405		$	2,101,785		$	1,753,368
Other Services		612,654			584,800			517,684
		$	2,814,059		$	2,686,585		$	2,271,052

 

See Note 13 entitled Segment Information in “Notes to Consolidated Financial Statements.”

 

ITEM 2.

PROPERTIES

 

Cintas occupies 351 facilities located in 260 cities, of which 165 facilities are leased for various terms ranging from monthly to the year 2019.  Cintas expects that it will be able to renew its leases on satisfactory terms. All other properties are owned.  The corporate offices provide centrally located administrative functions including accounting, finance, marketing and computer system development and support. Cintas operates processing plants that house administrative, sales and service personnel and the necessary equipment involved in the cleaning of uniforms and bulk items.  Branch operations provide administrative, sales and service functions. Cintas operates seven distribution facilities and has fourteen manufacturing plants.  Cintas also operates facilities that distribute first aid products.  Cintas considers the facilities it operates to be adequate for their intended use. Cintas owns or leases 9,561 vehicles.

 

The following chart provides additional information concerning Cintas’ facilities:

 

 

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ITEM 3.

LEGAL PROCEEDINGS

 

Cintas is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract, environmental and employment claims.  In the opinion of management, the aggregate liability, if any, with respect to such ordinary course of business actions, will not have a material adverse effect on the financial position or results of operations of Cintas.  Cintas is party to additional litigation not considered in the ordinary course of business, including the litigation discussed below.

 

Cintas is a defendant in a purported class action lawsuit, Paul Veliz, et al., v. Cintas Corporation, filed on March 19, 2003, in the United States District Court, Northern District of California, Oakland Division, 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.  The plaintiffs are seeking unspecified monetary damages, injunctive relief, or both.  Cintas denies these claims and is defending the plaintiffs’ allegations.  The court ordered arbitration for all potential plaintiffs except for those that fall into one of four narrowly defined exceptions.  As a result, Cintas believes that a majority of the potential plaintiffs will be required to arbitrate their claims.  No determination has been made by the court or an arbitrator regarding class certification.  There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class.  If a court or arbitrator certifies a class in this action and there is an adverse verdict on the merits, or in the event of a negotiated settlement of the action, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas.  Any estimated liability relating to this lawsuit is not determinable at this time.

 

Cintas is also a defendant in a purported class action lawsuit, Robert Ramirez, et al., v. Cintas Corporation, filed on January 20, 2004, and pending in the United States District Court, Northern District of California, San Francisco Division.  The case was brought on behalf of all past and present female, African-American and Hispanic employees of Cintas and its subsidiaries.  The complaint alleges that Cintas has engaged in a pattern and practice of discriminating against women and minorities in recruitment, hiring, promotions, transfers, job assignments and pay.  The complaint seeks injunctive relief, compensatory damages, punitive damages and attorney’s fees, among other things.  Cintas denies these claims and is defending the plaintiffs’ allegations.  No filings or determination has been made as to class certification.  There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class.  If a court certifies a class in this action and there is an adverse verdict on the merits, or in the event of a negotiated settlement of the action, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas.  Any estimated liability relating to this lawsuit is not determinable at this time.

 

The litigation discussed above, if decided adversely to or settled by Cintas, may result in liability material to Cintas’ financial condition or results of operations.  Cintas may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements if it believes such settlement is in the best interests of Cintas’ shareholders.

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None in the fourth quarter of fiscal 2004.

 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY

AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Cintas Corporation’s Common Stock is traded on the NASDAQ National Market System under the symbol

 

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“CTAS”.  The following table shows the high and low closing prices by quarter during the last two fiscal years.

 

Fiscal 2004 Quarter Ended		High			Low
May 2004		$	47.92		$	40.20
February 2004		50.68			42.21
November 2003		47.59			36.80
August 2003		41.87			34.55

 

Fiscal 2003 Quarter Ended		High			Low
May 2003		$	37.85		$	30.73
February 2003		51.67			30.60
November 2002		51.75			39.15
August 2002		52.46			40.15

 

Holders

 

At May 31, 2004, there were approximately 2,000 shareholders of record of Cintas’ Common Stock.  Cintas believes that this represents approximately 65,000 beneficial owners.

 

Dividends

 

Dividends on the outstanding Common Stock are paid annually and amounted to $0.29 per share, $0.27 per share and $0.25 per share in fiscal 2004, fiscal 2003 and fiscal 2002, respectively.

 

Equity Compensation Plan Information

 

							Number of shares
		Number of shares					remaining available
		to be issued		Weighted average			for future issuance
		upon exercise of		exercise price of			under equity
Plan category		outstanding options		outstanding options			compensation plans
Equity compensation plans approved by shareholders		5,936,559		$	34.90		5,635,700
Equity compensation plans not approved by shareholders		—		—			—
Total		5,936,559		$	34.90		5,635,700

 

Recent sales of Unregistered Securities

 

None in the fourth quarter.

 

Issuer Purchases of Equity Securities

 

None in the fourth quarter.

 

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ITEM 6.

SELECTED FINANCIAL DATA

 

Eleven Year Financial Summary

(In thousands except per share and percentage data)

 

Years Ended May 31		1994			1995		1996		1997		1998		1999		2000		2001		2002		2003		2004		10-Year Compd Growth
Revenue		$	803,009		929,534		1,103,492		1,261,899		1,476,945		1,751,568		1,901,991		2,160,700		2,271,052		2,686,585		2,814,059		13.4	%(3)
Net Income		$	67,141		85,413		98,956		118,557		133,654		138,939		193,387		222,451		234,251		249,253		272,205		15.0	%
Pro Forma Net Income (1)		$	64,459		80,752		94,151		112,763		128,704		138,939		193,387		222,451		234,251		249,253		272,205		15.5	%
Basic EPS		$	0.44		0.55		0.64		0.75		0.83		0.84		1.16		1.32		1.38		1.46		1.59		13.7	%
Diluted EPS		$	0.43		0.55		0.63		0.75		0.82		0.82		1.14		1.30		1.36		1.45		1.58		13.9	%
Pro Forma Basic EPS (1)		$	0.42		0.52		0.61		0.72		0.80		0.84		1.16		1.32		1.38		1.46		1.59		14.2	%
Pro Forma Diluted EPS (1)		$	0.41		0.51		0.60		0.71		0.79		0.82		1.14		1.30		1.36		1.45		1.58		14.4	%
Dividends Per Share		$	0.06		0.07		0.09		0.10		0.12		0.15		0.19		0.22		0.25		0.27		0.29		17.1	%
Total Assets		$	700,872		816,508		996,046		1,101,182		1,305,400		1,407,818		1,581,342		1,752,224		2,519,234		2,582,946		2,810,297		14.9	%
Shareholders’ Equity		$	409,053		481,654		553,701		650,603		756,795		871,423		1,042,876		1,231,315		1,423,759		1,646,332		1,887,969		16.5	%
Return on Average Equity (2)		17.6		%	18.1	%	18.2	%	18.7	%	18.3	%	17.1	%	20.2	%	19.6	%	17.6	%	16.2	%	15.4	%
Long-Term Debt		$	132,929		164,332		237,550		227,799		307,633		283,581		254,378		220,940		703,250		534,763		473,685

 

Note:  Results prior to March 24, 1999, have been restated to include Unitog Company.

Results prior to April 8, 1998, have also been restated to include Uniforms To You Companies.

 

(1)          Results for 1998 and prior years were adjusted on a pro forma basis to reflect the true tax impact of Uniforms To You as if it had been reported as a C Corporation prior to the merger with Cintas.

 

(2)          Return on average equity using pro forma net income.

 

(3)          Represents the 10-year compound annual growth rate based on revenue as restated for pooling of interests transactions noted above.

 

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

BUSINESS STRATEGY

 

We are North America’s leading provider of corporate identity uniforms through rental and sales programs, as well as related business services, including entrance mats, restroom products, first aid and safety products and services, document management services and cleanroom services.  Our services are designed to enhance our customers’ images and to provide additional safety and protection in the workplace.

 

Our business strategy is to increase our market share of the uniform rental and sales business in North America through the sale of new uniform programs and to provide our customers with all of the products and services we offer.  We will also continue to identify additional product and service opportunities to provide to our current and future customers.  Our long-term goal is to provide a product or service to every business in North America.

 

To pursue this strategy, we focus on the development of a highly talented and diverse team of employees (who we call partners) – a team that is properly trained and motivated to service our customers.  We support our partners’ service efforts by providing superior products with distinct competitive advantages and we embrace technological advances.

 

Continuous cost containment and product and process innovation are considered hallmarks of our organization.  A more formalized approach in these areas was recently initiated when we commenced a Six Sigma effort within Cintas.  Six Sigma is an analytical process that assists companies in improving quality and customer satisfaction while reducing cycle time and operating costs.  We are pleased with our progress in this endeavor and are optimistic about the improved efficiencies that this process will yield to Cintas.

 

We continue to leverage our size and core competencies to become a more valued business service provider to our current and future customers.  We will also continue to supplement our internal growth with strategic acquisitions and the cultivation of new businesses.

 

RESULTS OF OPERATIONS

 

Fiscal 2004 marked the 35^th consecutive year of uninterrupted growth in sales and profits for Cintas.  In addition to achieving this milestone, Cintas experienced healthy improvements in profitability, cash flow and balance sheet strength. This was accomplished while finalizing the integration of the largest uniform rental acquisition in Cintas’ history, Omni Services, Inc. (Omni).

 

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 customers as well as the sale of ancillary products and services.  These ancillary products and services include restroom supplies, first aid and safety products and services, document management services and cleanroom supplies.  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.

 

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The following table sets forth certain consolidated statements of income data as a percentage of revenue by reporting segment and in total for the periods indicated:

 

		2004		2003		2002
Revenue:
Rentals		78.2	%	78.2	%	77.2	%
Other services		21.8	%	21.8	%	22.8	%
Total revenue		100.0	%	100.0	%	100.0	%
Cost of sales:
Rentals		55.5	%	55.8	%	54.4	%
Other services		66.1	%	67.3	%	69.6	%
Total cost of sales		57.8	%	58.3	%	57.8	%
Gross margin:
Rentals		44.5	%	44.2	%	45.6	%
Other services		33.9	%	32.7	%	30.4	%
Total gross margin		42.2	%	41.7	%	42.2	%
Selling and administrative expenses		25.9	%	25.9	%	25.6	%
Interest income		-0.1	%	-0.1	%	-0.3	%
Interest expense		0.9	%	1.2	%	0.5	%
Write-off of loan receivable		0.1	%	—		—
Income before income taxes		15.4	%	14.7	%	16.4	%

 

As evidenced above, our revenue growth has been consistent between our reporting segments, with Rentals and Other Services each accounting for a consistent percentage of revenue the past two fiscal years.  We have increased our gross margins in both segments in fiscal 2004, while maintaining selling and administrative costs as a percent of revenues.  This overall income improvement occurred despite the soft economy that existed for much of the year and the continued rise in fuel, wage and benefit costs.

 

FISCAL 2004 COMPARED TO FISCAL 2003

 

Fiscal 2004 total revenue was $2.8 billion, an increase of 4.7% over fiscal 2003.  This growth was achieved despite the difficult economic environment that existed for much of the year.  Internal growth for fiscal 2004, when adjusted for the additional workday in fiscal 2004 as compared to fiscal 2003, was 3.0%.  Weakness in employment numbers through the first half of our fiscal year directly affected our business, mainly through reduced uniform wearers and usage of related products, and caused our internal growth rate to be lower than our stated objective.  As employment numbers strengthened over the second half of the year, our internal growth rates improved.  Internal growth by quarter is shown in the table below.  Internal growth percentages have been adjusted for the appropriate number of work days, by quarter and for the year, where applicable.

 

		Internal Growth
First Quarter Ending August 31, 2003		1.1	%
Second Quarter Ending November 30, 2003		2.3	%
Third Quarter Ending February 29, 2004		3.7	%
Fourth Quarter Ending May 31, 2004		5.0	%
For the Year Ending May 31, 2004		3.0	%

 

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Historically, increases in our internal growth rate have lagged employment growth levels as customers add individuals to existing rental or sales programs or enter into new rental or sales programs.  Our organic growth continues to be generated mainly through the continued sale of new uniform rental programs and the increased penetration of ancillary products to our existing customer base.

 

The remaining growth in total revenue was generated predominantly through acquisitions of first aid and safety service businesses and document management businesses.

 

Rentals operating segment revenues consist predominantly of revenues derived from the rental of corporate identity uniforms, mats, shop towels and other rental services.  Revenue from the Rentals segment increased 4.3%, when adjusted for the extra workday that occurred in fiscal 2004 as compared to fiscal 2003.  Internal revenue growth for the Rentals segment was 4.2%, adjusted for the additional workday.  The amount of acquired rental volume was insignificant for the year ending May 31, 2004.

 

The increase in Rentals revenue was primarily due to growth in the customer base as well as the continued penetration of ancillary products into our existing customer base.  New business remained healthy as we experienced continued success in selling uniform rental programs to new customers.  We continue to expand our rental market, with over half of our new business being comprised of customers who were first time users of uniform rental programs.  Rentals revenue growth was mitigated by lost business and reductions in existing business attributable to the sluggish economy, especially during the first half of the year.

 

Other Services operating segment revenues are predominantly derived from the design, manufacture and direct sale of uniforms to our customers and the sale of other direct sale products and services.  Other direct sale products and services include restroom and cleanroom supplies, first aid and safety products and services and document management services.  Other Services revenue increased 4.4%, when adjusted for the extra workday that occurred in fiscal 2004 as compared to fiscal 2003, primarily due to acquisitions of first aid and safety services and document management businesses.

 

Internal revenue in the Other Services segment, adjusted for the additional workday in fiscal 2004, decreased by 1.3% for the year.  This decrease was mainly due to the continued difficulty experienced by our uniform direct sale customers in the hospitality and airline industries.  Weakness in the hospitality sector and delayed purchases by large national account customers has continued to impact our direct sales effort.  Partially offsetting this internal revenue decrease in uniform direct sale revenues were increased revenues from the sale of first aid products and services and document management services.

 

Cost of rentals increased 4.2% over fiscal 2003.  Cost of rentals consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms and other rental items.  The cost increase over fiscal 2003 was primarily driven by the growth in Rentals segment revenues.  An increase in fuel and energy costs and a rise in labor delivery costs also contributed to this increase.  Further assimilation of operations obtained through the Omni acquisition and various cost containment initiatives implemented throughout the year mitigated the increased fuel, energy and delivery costs.

 

Cost of other services increased 2.8% over fiscal 2003.  Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses.  The increase over fiscal 2003 was due to the growth in Other Services revenue, derived predominantly through acquisitions.  The increased volume afforded additional overhead coverage, thereby providing a decrease in cost of other services as a percent to Other Services revenue from 67% in fiscal 2003 to 66% in fiscal 2004.  Sourcing and manufacturing efficiencies and other cost containment initiatives, including Six Sigma initiatives, implemented throughout the year supported this reduction in cost of other services as a percent to Other Services revenue.

 

Selling and administrative expenses increased 4.6% over fiscal 2003, primarily due to increased revenues.  The continued rise in medical costs and increased legal expenses contributed to the increase.

 

Net interest expense decreased $6 million from the prior year.  This decrease was primarily a result of lower debt outstanding.  Total outstanding debt decreased $79 million from May 31, 2003 to May 31, 2004, as cash from operations was used to reduce debt which had been incurred predominantly during the acquisition of Omni in May 2002 (see the Liquidity and Capital Resources section below and Note 5 entitled Long-Term Debt of “Note to Consolidated Financial Statements”).

 

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A write-off of a loan receivable from a garment manufacturer is included in net income as a pre-tax charge of $4.3 million. Due to developments concerning the supplier’s viability to remain as a going concern, the collectibility of the receivable was doubtful.  As such, the receivable was completely written off.

 

Pre-tax income was $432 million, a 9.2% increase over fiscal 2003.  Pre-tax income from the Rentals segment increased 6.7% over the prior year due to higher rental revenue, increased efficiencies obtained from the assimilation of operations obtained from the Omni acquisition and various cost containment initiatives.  Pre-tax income for the Other Services segment increased 19.6% from the prior year, due to increased sales volume, the continued leveraging of fixed costs and sourcing and cost containment initiatives.

 

Cintas’ effective tax rate was 37% for both fiscal 2004 and fiscal 2003 (see also Note 7 entitled Income Taxes of “Notes to Consolidated Financial Statements”).

 

Net income for fiscal 2004 of $272 million was a 9% increase over fiscal 2003 and diluted earnings per share of $1.58 was a 9% increase over fiscal 2003.  Return on average equity was 15% in fiscal 2004 and 16% in fiscal 2003.

 

Cash, cash equivalents and marketable securities increased by $197 million in fiscal 2004, or 341%, primarily due to increased revenues, a reduction in inventory levels and, to a lesser extent, a reduction in uniform and other rental items in service levels.  Cash, cash equivalents and marketable securities will be used to finance future acquisitions, capital expenditures and expansion.  Marketable securities consist primarily of municipal bonds and federal government securities.

 

Accounts receivable increased $7 million due to increased revenues.  Aggressive collection efforts provided for a lower sequential increase in accounts receivable as compared to total revenue growth.

 

Inventories decreased $43 million due to improved processes and management systems, including cycle time reductions and other process improvements initiated primarily through our Six Sigma process.  The completion of the Omni product line consolidation also contributed to this decrease in inventory levels.

 

Net property and equipment increased by $8 million due to real estate purchased in conjunction with acquisitions of first aid and safety services and document management businesses.  Depreciation expense exceeded capital expenditures by $4 million as Cintas continued to consolidate operations obtained from the Omni acquisition in May of 2002.  In addition, due to excess plant capacity and a sluggish economy, Cintas slowed the pace of new plant construction.  During the year, Cintas completed construction of four new uniform rental facilities and has an additional eight uniform rental facilities in various stages of construction to accommodate growth in rental operations.

 

Total debt decreased $79 million through repayment of certain debt related to the purchase of Omni, net of the change in fair market value of the debt (see Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”).  This significant debt reduction was possible due to strong cash flows being generated by operations.

 

FISCAL 2003 COMPARED TO FISCAL 2002

 

Fiscal 2003 marked the 34^th year of uninterrupted growth for Cintas.  Total revenue was $2.7 billion, an increase of 18% over fiscal 2002.  This growth was achieved despite the difficult economic environment that existed throughout the year.  The continued weakness in employment numbers directly affected our business, mainly through reduced uniform wearers, and caused our internal growth rate to be lower than our stated objective.  We continued to grow organically in this environment, mainly through the continued sale of new uniform rental programs.

 

Rentals operating segment revenues consist predominantly of revenues derived from the rental of corporate identity uniforms, mats, shop towels and other items through our Uniform Rental Division.  Revenue from the Rentals segment increased 20%, primarily due to the acquisition of Omni in the fourth quarter of fiscal 2002 and growth in the customer base.  Despite slow economic growth, internal growth in the Rentals segment, adjusted for one less workday during fiscal 2003, averaged over 4% for the year.  New business remained healthy as we experienced continued success in selling uniform

 

11

 

rental programs to new customers.  We continue to expand our rental market, with over half of our new business being comprised of customers who were first time users of uniform rental programs.  Rentals revenue growth was mitigated by increased lost business and reductions in existing business, attributable to the current sluggish economy in the United States and the resulting reduction in the work force.

 

Other Services operating segment revenues are derived from the design, manufacture and direct sale of uniforms to our customers, as well as the sale of ancillary services including restroom supplies, first aid products and services and cleanroom supplies.  Other Services revenue increased 13%, primarily due to acquisitions made in late fiscal 2002 and increased customer sales.  Despite slow economic growth, internal growth in the Other Services segment, adjusted for one less workday during fiscal 2003, averaged 2% for the year.  Revenues from the sale of ancillary services increased 11% for the year due to increased selling efforts.  This growth was partially offset by a 3% decrease in revenues from the direct sale of uniforms to our customers.  This decrease was primarily a result of continued weakness in the hospitality sector and delayed purchases by large national account customers.  Revenue growth in Other Services was also mitigated by increased lost business and reductions in existing business attributable to the current sluggish economy in the United States and the resulting reduction in the work force.

 

Cost of rentals increased 23% over fiscal 2002.  Cost of rentals consists primarily of production expenses, delivery expenses and amortization of in service uniforms and other rental items.  The cost increase over fiscal 2002 was primarily driven by the growth in Rentals segment revenues.  A rise in fuel and energy costs as well as an increase in delivery costs associated with the Omni acquisition (primarily due to expanded route geography and smaller route size) also contributed to this increase.  Cost containment initiatives were implemented throughout the year which mitigated the increased fuel, energy and delivery costs.

 

Cost of other services increased 9% over fiscal 2002.  Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses.  The increase over fiscal 2002 was due to the growth in Other Services revenue, derived primarily through acquisitions.  The increased volume afforded additional overhead coverage, thereby providing a decrease in cost of other services as a percent to Other Services revenue from 70% in fiscal 2002 to 67% in fiscal 2003.  Cost containment initiatives implemented throughout the year also supported this reduction in cost of other services as a percent to Other Services revenue.

 

Selling and administrative expenses increased 20% over fiscal 2002.  This increase was primarily due to increased revenues.  The continued rise in medical costs and additional travel expenses also contributed to this increase.  The increased travel expense was a result of the Omni acquisition and related integration, as well as a return to more normalized travel versus fiscal 2002, when travel expenses were lower due to the impact of the events of September 11.  We also continue to invest heavily in our selling process in order to provide for future growth.

 

Net interest expense increased $23 million from the prior year.  This increase was primarily a result of interest on $450 million in long-term notes issued in late fiscal 2002 to finance the Omni acquisition (see the Liquidity and Capital Resources section below and Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”).

 

Pre-tax income was $396 million, a 7% increase over fiscal 2002.  Pre-tax income from the Rentals segment increased 7% over the prior year, primarily due to the higher rental revenue.  Pre-tax income was negatively impacted by assimilation costs associated with the Omni acquisition.  Pre-tax income for the Other Services segment increased 84% from the prior year, due to increased sales volume and related leveraging of fixed costs.  Cost containment initiatives were implemented throughout the year which mitigated increased delivery, medical and fuel costs.

 

Cintas’ effective tax rate was 37% for both fiscal 2003 and fiscal 2002 (see also Note 7 entitled Income Taxes of “Notes to Consolidated Financial Statements”).

 

Net income for fiscal 2003 of $249 million was a 6% increase over fiscal 2002 and diluted earnings per share of $1.45 was a 7% increase over fiscal 2002.  Return on average equity was 16% in fiscal 2003 and 18% in fiscal 2002.

 

Cash, cash equivalents and marketable securities decreased by $27 million in fiscal 2003, or 32% primarily due to repayment of outstanding commercial paper.  Cash, cash equivalents and marketable securities will be used to finance future acquisitions, capital expenditures and expansion.  Marketable securities consist primarily of municipal bonds and federal government securities.

 

12

 

Accounts receivable decreased $5 million due to increased collection efforts given economic conditions.  Inventories increased $35 million with additional levels needed to support customers obtained through acquisitions, including Omni, and the conversion of Omni customers to our product line.  Additionally, Cintas is now manufacturing more products for our cleanroom and flame resistant clothing customers.

 

Net property and equipment decreased by $1 million due to the excess of depreciation over capital expenditures.  Certain capital expenditures were delayed in fiscal 2003 given reduced capacity requirements due to the sluggish economy.  In fiscal 2003, Cintas completed construction of six new uniform rental facilities and had an additional six uniform rental facilities in various stages of construction to accommodate growth in rental operations.

 

Total debt decreased $159 million through repayment of certain debt related to the purchase of Omni, net of the change in fair market value of the debt (see Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”).  This significant debt reduction was possible due to strong cash flows being generated by operations.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At May 31, 2004, Cintas had $254 million in cash, cash equivalents and marketable securities, representing an increase of $197 million from May 31, 2003.  This increase is primarily due to strong operational cash flows and a significant reduction in required inventory levels.   Cash generated from operations was $510 million in fiscal 2004 as compared to $331 million generated in fiscal 2003.  This $179 million increase was primarily due to increased net income in fiscal 2004 and the significant reduction in inventory levels.  In fiscal 2003, inventory levels increased $35 million due to the acquisition of Omni and the subsequent conversion of Omni customers to the Cintas product line.  Additionally, Cintas began manufacturing more products for cleanroom and flame resistant clothing customers.  In fiscal 2004, inventory levels have decreased by $43 million through significant process improvements, including Six Sigma initiatives, and the consolidation of the Omni product line.  Partially offsetting the increased cash flow was cash used for acquisitions of $102 million.  Other significant uses of cash in fiscal 2004 were debt repayments of $69 million (adjusted for a $10 million change in derivatives), capital expenditures of $113 million and dividends of $50 million.

 

Cintas’ investment policy pertaining to marketable securities is conservative.  Preservation of principal, while earning an attractive yield, is the criteria used in making investment decisions.

 

Working capital increased $136 million to $709 million in fiscal 2004.  This increase is primarily the result of increased cash and marketable securities partially offset by the decrease in inventories discussed above.

 

Capital expenditures for fiscal 2004 totaled $113 million, including $94 million for the Rentals segment and $19 million for Other Services.  Cintas continues to reinvest in land, buildings and equipment in an effort to expand capacity for future growth.  Cintas anticipates that capital expenditures for fiscal 2005 will be between $130 and $150 million.

 

On May 13, 2002, Cintas completed the acquisition of Omni for approximately $659 million.  This acquisition, coupled with smaller acquisitions in both the Rentals and Other Services segments, were financed with a combination of approximately $109 million in cash, $450 million in long-term notes, and approximately $100 million in commercial paper.  As a result of this additional debt, the total debt to total capitalization ratio was 34% at May 31, 2002.  Significant debt repayments occurred in fiscal 2003 ($173 million) and fiscal 2004 ($69 million).  The total debt to total capitalization ratio has decreased to 20% at May 31, 2004.

 

The $450 million in long-term notes consist of $225 million with five-year maturities at a rate of 5.125% and $225 million with ten-year maturities at a rate of 6%.  Cintas has earned credit ratings on these notes of “A” from Standard & Poor’s and “A2” from Moody’s.  Cintas also utilizes a $300 million commercial paper program, on which it has earned credit ratings of “A-1” from Standard & Poor’s and “Prime-1” from Moody’s.  These ratings reflect Cintas’ commitment to conservative financial policies, strong financial management and a disciplined integration strategy for acquisitions.  The commercial paper program is fully supported by a long-term credit facility that matures in 2009.  As of May 31, 2004, there is no commercial paper outstanding.

 

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During the year, Cintas paid dividends of $50 million, or $0.29 per share.  On a per share basis, this dividend is an increase of 7% over the dividend paid in fiscal 2003.

 

Following is information regarding Cintas’ long-term contractual obligations and other commitments outstanding as of May 31, 2004:

 

LONG-TERM CONTRACTUAL OBLIGATIONS

 

		Payments Due by Period
								Two to
					One year			three			Four to			After five
(In thousands)		Total			or less			years			five years			years
Long-term debt (1)		$	480,741		$	9,979		$	9,979		$	232,317		$	228,466
Capital lease obligations (2)		3,467			544			1,163			1,146			614
Operating leases (3)		59,042			15,969			22,735			13,210			7,128
Unconditional purchase obligations		—			—			—			—			—
Total contractual cash obligations		$	543,250		$	26,492		$	33,877		$	246,673		$	236,208

 

(1)          Reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements” for a detailed discussion of long-term debt.

(2)          Capital lease obligations are included in long-term debt detailed in Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”.

(3)          Operating leases consist primarily of building leases and synthetic leases on the two corporate jets.

 

OTHER COMMITMENTS

 

		Amount of Commitment Expiration Per Period
								Two to
					One year			three			Four to			After five
(In thousands)		Total			or less			years			five years			years
Lines of credit (1)		$	300,000		$	—		$	—		$	—		$	300,000
Standby letters of credit (2)		53,052			53,052			—			—			—
Guarantees		—			—			—			—			—
Standby repurchase obligations		—			—			—			—			—
Other commercial commitments		—			—			—			—			—
Total commercial commitments		$	353,052		$	53,052		$	—		$	—		$	300,000

 

(1)          Back-up facility for the commercial paper program (reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements” for further discussion).

(2)          Support certain outstanding debt (reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”), self-insured workers’ compensation and general liability insurance programs.

 

INFLATION AND CHANGING PRICES

 

Changes in wage, benefits and oil and fuel costs have the potential to materially impact Cintas’ financial results.  Medical benefit costs in particular continue to rise, increasing approximately 18% annually over the last three fiscal years.  Medical benefits accounted for approximately 3% of total revenues in fiscal 2004.

 

Management believes inflation has not had a material impact on Cintas’ financial condition or a negative impact on operations.

 

14

 

LITIGATION AND ENVIRONMENTAL MATTERS

 

Cintas is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract, environmental and employment claims.  In the opinion of management, the aggregate liability, if any, with respect to such ordinary course of business actions, will not have a material adverse effect on the financial position or results of operations of Cintas.  Cintas is party to additional litigation not considered in the ordinary course of business, including the litigation discussed below.

 

Cintas is a defendant in a purported class action lawsuit, Paul Veliz, et al., v. Cintas Corporation, filed on March 19, 2003, in the United States District Court, Northern District of California, Oakland Division, 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.  The plaintiffs are seeking unspecified monetary damages, injunctive relief, or both.  Cintas denies these claims and is defending the plaintiffs’ allegations.  The court ordered arbitration for all potential plaintiffs except for those that fall into one of four narrowly defined exceptions.  As a result, Cintas believes that a majority of the potential plaintiffs will be required to arbitrate their claims.  No determination has been made by the court or an arbitrator regarding class certification.  There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class.  If a court or arbitrator certifies a class in this action and there is an adverse verdict on the merits, or in the event of a negotiated settlement of the action, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas.  Any estimated liability relating to this lawsuit is not determinable at this time.

 

Cintas is also a defendant in a purported class action lawsuit, Robert Ramirez, et al., v. Cintas Corporation, filed on January 20, 2004, and pending in the United States District Court, Northern District of California, San Francisco Division.  The case was brought on behalf of all past and present female, African-American and Hispanic employees of Cintas and its subsidiaries.  The complaint alleges that Cintas has engaged in a pattern and practice of discriminating against women and minorities in recruitment, hiring, promotions, transfers, job assignments and pay.  The complaint seeks injunctive relief, compensatory damages, punitive damages and attorney’s fees, among other things.  Cintas denies these claims and is defending the plaintiffs’ allegations.  No filings or determination has been made as to class certification.  There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class.  If a court certifies a class in this action and there is an adverse verdict on the merits, or in the event of a negotiated settlement of the action, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas.  Any estimated liability relating to this lawsuit is not determinable at this time.

 

The litigation discussed above, if decided adversely to or settled by Cintas, may result in liability material to Cintas’ financial condition or results of operations.  Cintas may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements if it believes such settlement is in the best interests of Cintas’ shareholders.

 

Cintas is subject to various environmental laws and regulations, as are other companies in the industry.  While costs related to environmental compliance are not a material component of the cost of rentals, Cintas must incur capital expenditures and associated operating costs for water treatment and waste removal on a regular basis.  Environmental spending amounted to approximately $12 million in fiscal 2004 and $12 million in fiscal 2003.  This spending includes labor and chemical costs for water treatment, as well as costs for waste removal.  Capital expenditures to limit or monitor hazardous substances were $3 million in fiscal 2004 and $3 million in fiscal 2003.  These expenditures were primarily related to the purchase of water treatment systems.

 

15

 

NEW ACCOUNTING STANDARDS

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51.  The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.  Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity.  Cintas adopted this Interpretation on July 1, 2003, with no material effect to its financial statements.

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation - Transition and Disclosure.  This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  Cintas continues to apply Accounting Principles Board Opinion No. 25 for the method used to account for stock-based employee compensation arrangements, where applicable, but has adopted the disclosure requirements of SFAS 148.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of Cintas’ consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that have a significant effect on the amounts reported in the financial statements and accompanying notes.  These critical accounting policies should be read in conjunction with Note 1 entitled Significant Accounting Policies in “Notes to Consolidated Financial Statements”.  Significant changes, estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.

 

Revenue recognition

 

Rental revenue is recognized when services are performed and other services revenue is recognized when products are shipped and the title and risks of ownership pass to the customer.  Cintas also establishes an allowance for uncollectible accounts.  This allowance is an estimate based on historical rates of collectibility.  An uncollectible accounts provision is recorded for overdue amounts, beginning with a nominal percentage and increasing substantially as the account ages.  The amount provided as the account ages will differ slightly between the Rentals and Other Services segments, because of differences in customers served and the nature of each business segment.

 

Inventories

 

Inventories are valued at the lower of cost (first-in, first-out) or market.  Substantially all inventories represent finished goods.  Cintas applies a commonly accepted practice of using inventory turns to apply variances between actual to standard costs to the inventory balances.  The judgments and estimates used to calculate inventory turns will have an impact on the valuation of inventory at the lower of cost or market.  Inventory obsolescence is determined by specific identification, as well as an estimate based on historical rates of obsolescence.

 

Uniforms and other rental items in service

 

Uniform and other rental items in service are valued at cost less amortization, calculated using the straight-line method.  Uniforms in service (other than cleanroom and flame resistant garments) are amortized over their useful life of eighteen months.  Other rental items including shop towels, mats, cleanroom garments, flame resistant garments, linens and restroom dispensers are amortized over their useful lives of eight to forty-eight months.  The amortization rates used are based on industry experience, Cintas’ experience and wear tests performed by Cintas.  These factors are critical to determining the amount of in service inventory that is presented in the financial statements.

 

16

 

Property and equipment

 

Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which is typically thirty to forty years for buildings, five to twenty years for building improvements, three to ten years for equipment and two to five years for leasehold improvements.  When events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the estimated future cash flows (undiscounted) are compared to the carrying amount of the assets.  If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss is recorded.  The impairment loss is measured by comparing the fair value of the assets with their carrying amounts.  Fair value is determined by discounted cash flows or appraised values, as appropriate.  Long-lived assets that are held for disposal are reported at the lower of the carrying amount or the fair value, less estimated costs related to disposition.

 

Goodwill and impairment

 

Goodwill, primarily obtained through acquisitions of businesses, is valued at cost less any impairment.  Cintas performs an annual impairment test.  Based on the results of the impairment tests, Cintas has not recognized an impairment of goodwill for the years ended May 31, 2004, 2003 or 2002.

 

Service contracts and other assets

 

Service contracts and other assets, which consist primarily of noncompete and consulting agreements obtained through acquisitions of businesses, are amortized by use of the straight-line method over the estimated lives of the agreements, which are generally five to ten years.  Certain noncompete agreements, as well as all service contracts, require that a valuation be determined using a discounted cash flow model.  The assumptions and judgments used in these models involve estimates of cash flows and discount rates, among other factors.  Because of the assumptions used to value these intangible assets, actual results over time could vary from original estimates.

 

Environmental and litigation

 

Cintas is subject to legal proceedings and claims related to environmental matters arising from the ordinary course of business.  U.S. generally accepted accounting principles require that a liability for contingencies be recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated.  Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded.  Cintas regularly consults with attorneys to ensure that all of the relevant facts and circumstances are considered before a contingent liability is recorded.  While a significant change in assumptions and judgments could have a material impact on the amounts recorded for contingent liabilities, Cintas does not believe that they will result in a material adverse effect on the financial statements.  A detailed discussion of litigation matters is included in Note 12 entitled Litigation and Environmental Matters of “Notes to Consolidated Financial Statements”.

 

Income taxes

 

Deferred tax assets and liabilities are determined by the differences between the financial statement carrying amounts and the tax basis of assets and liabilities.  Please reference Note 7 entitled Income Taxes of “Notes to Consolidated Financial Statements” for the types of items that give rise to significant deferred income tax assets and liabilities.  Deferred income taxes are classified as assets or liabilities based on the classification of the related asset or liability for financial reporting purposes.  Deferred income taxes that are not related to an asset or liability for financial reporting are classified according to the expected reversal date.  Cintas regularly reviews deferred tax assets for recoverability based upon projected future taxable income and the expected timing of the reversals of existing temporary differences.  As a result of this review, Cintas has not established a valuation allowance against the deferred tax assets.

 

Cintas is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due.  These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions.  In evaluating the exposure associated with various filing positions, Cintas records reserves for probable exposures.  Based on Cintas’ evaluation of current tax positions, Cintas believes it has appropriately accrued for probable exposures.

 

17

 

OUTLOOK

 

As we look forward to fiscal 2005, our outlook is positive, but guarded.  The economy has been gaining traction as employment figures strengthen.  Our internal growth rates have been improving as well.  We see significant upside potential for all of our business units, especially given our relatively low 9% market share of a $31 billion estimated potential market.  Although difficult to predict, we anticipate continued growth in all of our business units.  Overall performance will be largely driven by the continued recovery in the economy.

 

In the marketplace, competition and related pricing pressure will continue; however, we believe cost containment initiatives, technological advances and continued leverage of our infrastructure will soften or offset any impact.

 

When appropriate opportunities arise, we will supplement our internal growth with strategic acquisitions.

 

Like most other companies, we experienced, and anticipate continuing to experience, increased costs for wages and benefits, including medical benefits.  Changes in oil and fuel costs also have the potential to impact our results.

 

Cintas is currently the target of a corporate unionization campaign by UNITE HERE and the Teamsters unions.  These unions are attempting to pressure Cintas into surrendering our employees’ rights to a government-supervised 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.  This campaign could be materially disruptive to our business and could materially adversely affect results of operations.  We will continue to vigorously oppose this campaign and to defend our employees’ rights.

 

We believe that the high level of customer service provided by our partners and supported by our infrastructure, quality products, financial resources and corporate culture will provide for continued business success.  However, a number of factors influence future revenue, margins and profit which make forecasting difficult.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE

ABOUT MARKET RISK

 

Cintas manages interest rate risk by using a combination of variable and fixed rate debt, marketable securities and interest rate swap agreements.  Earnings are affected by changes in short-term interest rates due to the use of variable rate notes and revolving credit facilities amounting to approximately $230 million, with an average interest rate of 2.63%.  This exposure is limited by the purchase of marketable securities and interest rate swap agreements as a hedge against variability in short-term rates.  If short-term rates change by one-half percent (or 50 basis points), Cintas’ income before taxes would change by approximately $1.1 million.  This estimated exposure considers the mitigating effects of marketable securities and swap agreements on the change in the cost of variable rate debt.  This analysis does not consider the effects of a change in economic activity or a change in Cintas’ capital structure.

 

18

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements

 

Audited Consolidated Financial Statements for the Years Ended May 31, 2004, 2003 and 2002

 

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

 

19

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors

Cintas Corporation

 

We have audited the accompanying consolidated balance sheets of Cintas Corporation as of May 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended May 31, 2004.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cintas Corporation at May 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2004, in conformity with U.S. generally accepted accounting principles.

 

	/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
July 1, 2004

 

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CINTAS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years Ended May 31

(In thousands except per share data)

 

		2004			2003			2002
Revenue:
Rentals		$	2,201,405		$	2,101,785		$	1,753,368
Other services		612,654			584,800			517,684
		2,814,059			2,686,585			2,271,052
Costs and expenses (income):
Cost of rentals		1,222,638			1,173,666			953,352
Cost of other services		404,929			393,711			360,330
Selling and administrative expenses		727,618			695,437			580,469
Interest income		(2,650		)	(2,905		)	(5,636		)
Interest expense		25,101			30,917			10,952
Write-off of loan receivable		4,343			—			—
		2,381,979			2,290,826			1,899,467
Income before income taxes		432,080			395,759			371,585
Income taxes		159,875			146,506			137,334
Net income		$	272,205		$	249,253		$	234,251
Basic earnings per share		$	1.59		$	1.46		$	1.38
Diluted earnings per share		$	1.58		$	1.45		$	1.36
Dividends declared and paid per share		$	.29		$	.27		$	.25

 

See accompanying notes.

 

21

 

CINTAS CORPORATION

CONSOLIDATED BALANCE SHEETS

As of May 31

(In thousands except share data)

 

		2004			2003
Assets
Current assets:
Cash and cash equivalents		$	87,357		$	32,239
Marketable securities		166,964			25,420
Accounts receivable, principally trade, less allowance of $8,354 and $7,737, respectively		285,592			278,147
Inventories, net		185,585			228,410
Uniforms and other rental items in service		301,350			305,721
Prepaid expenses		7,395			7,607
Total current assets		1,034,243			877,544
Property and equipment, at cost, net		785,310			777,432
Goodwill		805,441			721,855
Service contracts, net		144,664			144,899
Other assets, net		40,639			61,216
		$	2,810,297		$	2,582,946
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	53,451		$	53,909
Accrued compensation and related liabilities		31,804			25,252
Accrued liabilities		146,226			127,882
Income taxes:
Current		36,640			16,527
Deferred		47,042			53,018
Long-term debt due within one year		10,523			28,251
Total current liabilities		325,686			304,839
Long-term debt due after one year		473,685			534,763
Deferred income taxes		122,957			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, 171,377,679 and 170,599,993 shares issued and outstanding, respectively		94,569			76,124
Retained earnings		1,790,547			1,568,071
Other accumulated comprehensive income (loss):
Foreign currency translation		4,474			4,427
Unrealized loss on derivatives		(1,621		)	(2,290		)
Total shareholders’ equity		1,887,969			1,646,332
		$	2,810,297		$	2,582,946

 

See accompanying notes.

 

22

 

CINTAS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 

										Other
										Accumulated			Total
		Common Stock					Retained			Comprehensive			Shareholders’
		Shares		Amount			Earnings			Income (Loss)			Equity
Balance at May 31, 2001		169,371		$	62,409		$	1,174,330		$	(5,424	)	$	1,231,315
Cumulative effect of accounting change for SFAS 133, net of tax		—		—			—			(44		)	(44		)
Net income		—		—			234,251			—			234,251
Equity adjustment for foreign currency translation		—		—			—			561			561
Change in fair value of derivatives		—		—			—			(2,978		)	(2,978		)
Comprehensive income													231,834
Dividends		—		—			(42,454		)	—			(42,454		)
Effects of acquisitions		137		—			(991		)	—			(991		)
Stock options exercised net of shares surrendered		422		3,247			—			—			3,247
Tax benefit resulting from exercise of employee stock options		—		852			—			—			852
Balance at May 31, 2002		169,930		66,508			1,365,136			(7,885		)	1,423,759
Net income		—		—			249,253			—			249,253
Equity adjustment for foreign currency translation		—		—			—			9,290			9,290
Change in fair value of derivatives		—		—			—			732			732
Comprehensive income													259,275
Dividends		—		—			(46,003		)	—			(46,003		)
Effects of acquisitions		74		2,800			(315		)	—			2,485
Stock options exercised net of shares surrendered		596		5,699			—			—			5,699
Tax benefit resulting from exercise of employee stock options		—		1,117			—			—			1,117
Balance at May 31, 2003		170,600		76,124			1,568,071			2,137			1,646,332
Net income		—		—			272,205			—			272,205
Equity adjustment for foreign currency translation		—		—			—			47			47
Change in fair value of derivatives		—		—			—			669			669
Comprehensive income													272,921
Dividends		—		—			(49,634		)	—			(49,634		)
Effects of acquisitions		274		11,550			(95		)	—			11,455
Stock options exercised net of shares surrendered		504		5,868			—			—			5,868
Tax benefit resulting from exercise of employee stock options		—		1,027			—			—			1,027
Balance at May 31, 2004		171,378		$	94,569		$	1,790,547		$	2,853		$	1,887,969

 

See accompanying notes.

 

23

 

CINTAS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended May 31

(In thousands)

 

		2004			2003			2002
Cash flows from operating activities:
Net income		$	272,205		$	249,253		$	234,251
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		117,285			115,320			101,215
Amortization of deferred charges		25,974			27,741			18,810
Deferred income taxes		15,839			7,648			20,629
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable		(488		)	4,044			3,162
Inventories		46,396			(35,638		)	31,731
Uniforms and other rental items in service		4,381			(24,781		)	(27,257		)
Prepaid expenses		246			2,597			1,330
Accounts payable		(3,223		)	(6,648		)	3,345
Accrued compensation and related liabilities		6,552			(3,734		)	(12,696		)
Accrued liabilities		4,429			(9,851		)	4,534
Income taxes payable		20,113			4,736			(1,621		)
Net cash provided by operating activities		509,709			330,687			377,433
Cash flows from investing activities:
Capital expenditures		(112,888		)	(115,019		)	(107,284		)
Proceeds from sale or redemption of marketable securities		48,078			23,790			157,419
Purchase of marketable securities		(189,622		)	(4,752		)	(165,372		)
Acquisitions of businesses, net of cash acquired		(101,654		)	(37,173		)	(732,227		)
Other		12,282			(3,068		)	(1,882		)
Net cash used in investing activities		(343,804		)	(136,222		)	(849,346		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			—			640,245
Repayment of long-term debt		(68,764		)	(172,891		)	(160,612		)
Stock options exercised		5,868			5,699			3,247
Dividends paid		(49,634		)	(46,003		)	(42,454		)
Other		1,743			10,341			(1,609		)
Net cash (used in) provided by financing activities		(110,787		)	(202,854		)	438,817
Net increase (decrease) in cash and cash equivalents		55,118			(8,389		)	(33,096		)
Cash and cash equivalents at beginning of year		32,239			40,628			73,724
Cash and cash equivalents at end of year		$	87,357		$	32,239		$	40,628

 

See accompanying notes.

 

24