Cintas is an American company specialized in the manufacture and sale of workwear and uniforms
FORM 10-QSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
(X)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2001
OR
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11399
WASHINGTON (State or other jurisdiction of incorporation or organization)
31-1188630 (I.R.S. EmployerIdentification No.)
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.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Common Stock, no par value
Outstanding December 31, 2001169,767,033
CINTAS CORPORATIONINDEX
Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets - November 30, 2001 and May 31, 2001 3 Consolidated Condensed Statements of Income - Three Months and Six Months Ended November 30, 2001 and 2000 4 Consolidated Condensed Statements of Cash Flows - Six Months Ended November 30, 2001 and 2000 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part II. Other Information 15 Signatures 16 CINTAS CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands except share data) November 30, May 31, 2001 2001 ------------- ----------- (Unaudited) ASSETS - ------ Current assets: Cash and cash equivalents $ 101,279 $ 73,724 Marketable securities 101,653 36,505 Accounts receivable, net 252,487 244,450 Inventories 200,065 214,349 Uniforms and other rental items in service 254,698 242,172 Prepaid expenses 10,211 8,470 ----------- ----------- Total current assets 920,393 819,670 Property and equipment, at cost, net 713,751 702,132 Goodwill 139,579 123,753 Other assets 101,476 106,669 ----------- ----------- $ 1,875,199 $ 1,752,224 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 46,336 $ 42,495 Accrued compensation and related liabilities 20,092 35,140 Accrued liabilities 66,937 81,548 Income Taxes - Current 48,056 13,412 Deferred 64,314 57,703 Long-term debt due within one year 21,068 20,605 ----------- ----------- Total current liabilities 266,803 250,903 Long-term debt due after one year 209,031 220,940 Deferred income taxes 54,219 49,066 Shareholders' equity: Preferred stock, no par value, 100,000 shares authorized, none outstanding -- -- Common stock, no par value, 425,000,000 shares authorized, 169,734,781 shares issued and outstanding (169,370,563 at May 31, 2001) 64,563 62,409 Retained earnings 1,288,030 1,174,330 Accumulated other comprehensive loss (7,447) (5,424) ----------- ----------- Total shareholders' equity 1,345,146 1,231,315 ----------- ----------- $ 1,875,199 $ 1,752,224 =========== =========== See accompanying notes.CINTAS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (In thousands except per share data) Three months ended Six months ended November 30 November 30 -------------------- ------------------------ 2001 2000 2001 2000 -------- -------- ---------- ---------- Revenue: Rentals $432,628 $398,929 $ 865,780 $ 788,556 Other services 124,520 140,123 255,968 272,455 -------- -------- ---------- ---------- 557,148 539,052 1,121,748 1,061,011 Costs and expenses (income): Cost of rentals 234,618 223,997 472,538 441,818 Cost of other services 87,332 91,678 176,735 178,552 Selling and admin. expenses 141,662 129,921 287,405 262,856 Interest income (1,290) (1,127) (2,541) (2,387) Interest expense 2,721 3,883 5,807 7,970 -------- -------- ---------- ---------- 465,043 448,352 939,944 888,809 -------- -------- ---------- ---------- Income before income taxes 92,105 90,700 181,804 172,202 Income taxes 34,120 34,167 67,279 64,820 -------- -------- ---------- ---------- Net income $ 57,985 $ 56,533 $ 114,525 $ 107,382 ======== ======== ========== ========== Basic earnings per share $ .34 $ .34 $ .68 $ .64 ======== ======== ========== ========== Diluted earnings per share $ .34 $ .33 $ .67 $ .63 ======== ======== ========== ========== See accompanying notes.CINTAS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended November 30 ----------------------- 2001 2000 --------- ---------- Cash flows from operating activities: - ------------------------------------ Net income $ 114,525 $ 107,382 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 49,578 43,856 Amortization of deferred charges 9,450 10,481 Deferred income taxes 11,764 15,172 Change in current assets and liabilities, net of acquisitions of businesses: Accounts receivable (6,398) (26,219) Inventories 15,131 (35,772) Uniforms and other rental items in service (12,112) (16,418) Prepaid expenses (1,726) (1,319) Accounts payable 2,636 3,746 Accrued compensation and related liabilities (15,069) 1,160 Accrued liabilities (21,661) (25,595) Income taxes payable 34,644 2,830 --------- --------- Net cash provided by operating activities 180,762 79,304 Cash flows from investing activities: - ------------------------------------ Capital expenditures (61,040) (78,041) Proceeds from sale or redemption of marketable securities 4,332 30,687 Purchase of marketable securities (69,480) (10,358) Acquisitions of businesses, net of cash acquired (15,685) (15,044) Other (19) (8,582) --------- --------- Net cash used by investing activities (141,892) (81,338) Cash flows from financing activities: - ------------------------------------ Repayment of long-term debt (11,446) (19,149) Issuance of common stock 1,640 971 Other (1,509) 2,206 --------- --------- Net cash used in financing activities (11,315) (15,972) Net increase/(decrease) in cash and cash equivalents 27,555 (18,006) Cash and cash equivalents at beginning of period 73,724 52,182 --------- --------- Cash and cash equivalents at end of period $ 101,279 $ 34,176 ========= ========= See accompanying notes.
CINTAS CORPORATIONNOTES 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 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, 2001. A summary of our significant accounting policies is presented on page 22 of our most recent annual report. There have been no material changes in the accounting policies followed by Cintas during fiscal year 2002 except for those changes described in notes 3 and 4.
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.
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 periods:
Three Months Ended Six Months Ended November 30 November 30 ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Numerator: Net income $ 57,985 $ 56,533 $114,525 $107,382 Denominator: Denominator for basic earnings per share-weighted avg. shares 169,726 168,660 169,620 168,513 Effect of dilutive securities- employee stock options 2,190 3,178 2,409 2,932 ------- ------- ------- ------- Denominator for diluted earnings per share-adjusted weighted avg. shares and assumed conversions 171,916 171,838 172,029 171,445 ======= ======= ======= ======= CINTAS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (In thousands except per share data) Three Months Six Months Ended Ended November 30 November 30 -------------- ---------------- 2001 2000 2001 2000 ----- ----- ----- ------ Basic earnings per share $ .34 $ .34 $ .68 $ .64 ===== ===== ===== ====== Diluted earnings per share $ .34 $ .33 $ .67 $ .63 ===== ===== ===== ======
3. Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, which eliminates the pooling of interests method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Cintas adopted this accounting standard for business combinations initiated after June 30, 2001.
As of June 1, 2001, Cintas adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested for impairment on a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle.
In accordance with Statement of Financial Accounting Standards No. 142, Cintas discontinued the amortization of goodwill effective June 1, 2001. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect follows:
"Goodwill and Adoption of Statement No. 142" Three Months Ended Six Months Ended November 30 November 30 --------------------- --------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Reported net income $ 57,985 $ 56,533 $114,525 $107,382 Add: Goodwill amortization, net of tax -- 909 -- 1,928 -------- -------- -------- -------- Adjusted net income $ 57,985 $ 57,442 $114,525 $109,310 CINTAS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (In thousands except per share data) Three Months Ended Six Months Ended November 30 November 30 ------------------ ------------------ 2001 2000 2001 2000 ----- ---- ----- ----- Reported basic earnings per share $.34 $.34 $.68 $.64 Add: Goodwill amortization, net of tax per basic share -- -- -- .01 Adjusted basic earnings per share $.34 $.34 $.68 $.65 Reported diluted $.34 $.33 $.67 $.63 earnings per share Add: Goodwill amortization, net of tax per diluted share -- -- -- .01 ---- ---- ---- ---- Adjusted diluted $.34 $.33 $.67 $.64 earnings per share ==== ==== ==== ====
Changes in the carrying amount of goodwill for the six months ended November 30, 2001, by operating segment, are as follows:
"Acquired Intangible Assets" Rentals Other Services Total ---------- -------------- --------- Balance as of June 1, 2001 $110,030 $ 13,723 $123,753 Goodwill acquired during the period 8,025 7,801 15,826 -------- -------- -------- Balance as of November 30, 2001 $118,055 $ 21,524 $139,579 ======== ======== ========
As required by the Statement, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. As a result of Cintas’ analysis, no reclassifications to goodwill were required as of June 1, 2001.
CINTAS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (In thousands except per share data) Information regarding Cintas' other intangible assets follows: As of November 30, 2001 -------------------------------------- Carrying Accumulated Amount Amortization Net ---------- ------------ --------- Service contracts $ 120,256 $ 65,979 $ 54,277 Noncompete and consulting agreements 62,942 44,181 18,761 --------- --------- -------- Total $ 183,198 $110,160 $ 73,038 ========= ========= ======== As of May 31, 2001 -------------------------------------- Carrying Accumulated Amount Amortization Net ---------- ------------ --------- Service contracts $ 118,241 $ 61,810 $ 56,431 Noncompete and consulting agreements 63,519 42,334 21,185 --------- ---------- --------- Total $ 181,760 $104,144 $ 77,616 ========= ========== =========
Amortization expense for the six months ended November 30, 2001 was $9,450. Estimated amortization expense for each of the five succeeding fiscal years is as follows:
Fiscal year ended May 31: Amount ------------------------ -------- 2002 $18,516 2003 $15,954 2004 $12,923 2005 $11,520 2006 $10,787
Cintas completed the transitional goodwill impairment test as required by the Statement using a measurement date of June 1, 2001. Based on the results of the transitional impairment test, Cintas was not required to recognize an impairment of goodwill. Cintas will continue to perform future impairment tests as required by the Statement.
4. Derivative Financial Instruments
Accounting Policy for Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement requires that companies recognize all derivatives on the balance sheet at fair value. Derivatives that do not qualify as hedges must be adjusted to fair value through income. For those derivatives that are designated and qualify as a hedge, changes in the fair value of the derivatives are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The accounting treatment will depend on whether the derivative is considered a fair value hedge or a cash flow hedge.
Cintas has used derivatives for cash flow hedging purposes only. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified to earnings in the period in which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. The adoption of Statement 133 on June 1, 2001 resulted in a charge of $44 in other comprehensive income. The change in fair value during the six months ended November 30, 2001, resulted in a charge of $938 to other comprehensive income.
Cash Flow Hedging Strategy
Cintas uses interest rate swap agreements as a hedge against variability in short term interest rates. These swap agreements effectively convert a portion of our floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense.
During fiscal 2001, and again in the second quarter of fiscal 2002, Cintas entered into interest-rate swap agreements that effectively converted a portion of our floating-rate debt to a fixed-rate basis for a period of two years. Approximately 32%, or $50 million, of outstanding floating rate debt was designated as the hedged items covered by interest-rate swap agreements at November 30, 2001.
5. 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 other components of total comprehensive income are the change in cumulative foreign currency translation adjustments and the change in the fair value of forecasted cash flows associated with a derivative accounted for as a cash flow hedge. The components of comprehensive income for the three and six month periods ended November 30, 2001 and 2000 are as follows:
Three Months Ended Six Months Ended November 30 November 30 ------------------ -------------------- 2001 2000 2001 2000 ------- ------- -------- -------- Net income $57,985 $56,533 $114,525 $107,382 Other comprehensive income: Foreign currency translation adjustment (707) (1,669) (1,041) (1,024) Net unrealized loss on cash flow hedges (826) -- (982) -- ------- ------- -------- -------- Comprehensive income $56,452 $54,864 $112,502 $106,358 ======= ======= ======== ========
6. 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 sanitation supplies, first aid products and 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. Information about our different business segments is set forth 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.
CINTAS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (In thousands except per share data) Other Rentals Services Corporate Total ---------- ---------- --------- ---------- For the three months ended November 30, 2001 Revenue $ 432,628 $ 124,520 $ -- $ 557,148 ========== ========== ======== ========== Income before income taxes $ 87,526 $ 6,010 $ (1,431) $ 92,105 ========== ========== ======== ========== For the three months ended November 30, 2000 Revenue $ 398,929 $ 140,123 $ -- $ 539,052 ========== ========== ======== ========== Income before income taxes $ 77,087 $ 16,369 $ (2,756) $ 90,700 ========== ========== ======== ========== As of and for the six months ended November 30, 2001 Revenue $ 865,780 $ 255,968 $ -- $1,121,748 ========== ========== ======== ========== Income before income taxes $ 170,313 $ 14,757 $ (3,266) $ 181,804 ========== ========== ======== ========== Total assets $1,379,033 $ 293,234 $202,932 $1,875,199 ========== ========== ======== ========== As of and for the six months ended November 30, 2000 Revenue $ 788,556 $ 272,455 $ -- $1,061,011 ========== ========== ======== ========== Income before income taxes $ 150,328 $ 27,457 $ (5,583) $ 172,202 ========== ========== ======== ========== Total assets $1,304,031 $ 295,255 $ 71,487 $1,670,773 ========== ========== ======== ==========
CINTAS CORPORATIONMANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total revenues increased 3% and 6%, respectively, for the three and six months ended November 30, 2001, over the same periods in fiscal 2001. Net rental revenue increased 8% and 10%, respectively, for the three and six months ended November 30, 2001, over the same periods in the prior fiscal year primarily due to growth in the customer base. Revenue from the sale of uniforms and other direct sale items declined 11% and 6% for the three and six months ended November 30, 2001, over the same periods in the prior year. This decrease is primarily driven by our customers’ delay in purchasing new uniforms because of the economic slowdown, the decline in the hospitality and airline industries as a result of the events of September 11, and a strong second quarter in the prior year.
Net income increased 3% and 7%, respectively, for the three and six months ended November 30, 2001, over the same periods in fiscal 2001. Diluted earnings per share increased 3% and 6%, respectively, for the three and six months ended November 30, 2001, over the same periods in the prior fiscal year.
Net interest expense (interest expense less interest income) was $1.4 million and $3.3 million, respectively, for the three and six months ended November 30, 2001, compared to $2.8 million and $5.6 million, respectively, for the same periods in the prior fiscal year. This decrease was a result of lower levels of long-term debt, as well as decreased interest rates. Cintas’ effective tax rate was 37.0% for both the three and six months ended November 30, 2001, compared to 37.7% and 37.6%, respectively, for the same periods in fiscal 2001. The decrease was primarily the result of a decrease in state and local income taxes attributable to state tax planning programs.
Cash, cash equivalents and marketable securities increased by $93 million at November 30, 2001 from May 31, 2001, primarily due to strong cash flow from operations. The implementation of tax planning programs, reductions in direct sale inventory and strong earnings all contributed to this positive operating cash flow. This is slightly offset by decreased accrued liabilities and compensation related liabilities, which include a lower compensation accrual due to timing of the quarter end cut off. The cash, cash equivalents and marketable securities will be used to finance future acquisitions and capital expenditures.
Net property and equipment increased by $12 million from May 31, 2001 to November 30, 2001. At the end of the second quarter of fiscal 2002, we had seven uniform rental facilities in various stages of construction.
Financial Condition
At November 30, 2001, we had $203 million in cash, cash equivalents and marketable securities. 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.
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.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This report contains forward-looking statements that reflect the company’s current views as to future events and financial performance with respect to its operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially 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, the outcome of pending environmental matters, higher assumed sourcing or distribution costs of products and the reactions of competitors in terms of price and service. Forward-looking statements speak only as of the date made. Cintas undertakes no obligation under the Act to update any forward-looking statements to reflect the events or circumstances arising after the date on which they are made.
CINTAS CORPORATION
Part II. Other Information
Item 4. Submission of matters to a vote of security holders
Issue No. 1
FOR 155,337,298ABSTAIN 533,688
AGAINST 439,287 BROKER NON-VOTES 0
Issue No. 2
Authority to elect eight Directors.
Name Richard T. FarmerRobert J. KohlheppScott D. FarmerGerald V. DirvinJames J. GardnerRobert J. HerboldRoger L. HoweDonald P. Klekamp
Shares For143,797,308 144,270,544 143,978,288 151,408,260 150,365,570151,412,492 151,429,643 150,606,564
Withheld Authority12,512,965 12,039,729 12,331,985 4,902,013 5,944,703 4,897,781 4,880,630 5,703,709
Item 6. Exhibits and Reports on Form 8-K
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: January 9, 2002
CINTAS CORPORATION (Registrant)/s/William C. Gale William C. GaleVice President and Chief Financial Officer(Chief Accounting Officer)