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 August 31, 2002
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 September 30, 2002170,166,453
CINTAS CORPORATION INDEX Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets - August 31, 2002 and May 31, 2002 3 Consolidated Condensed Statements of Income - Three Months Ended August 31, 2002 and 2001 4 Consolidated Condensed Statements of Cash Flows - Three Months Ended August 31, 2002 and 2001 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 20 Part II. Other Information 21 Signatures 21 Certifications 23CINTAS CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands except share data) August 31, May 31, 2002 2002 ------------ ------------- (Unaudited) ASSETS - ------ Current assets: Cash and cash equivalents $ 33,407 $ 40,628 Marketable securities 35,753 44,458 Accounts receivable, net 282,351 283,234 Inventories 209,513 193,821 Uniforms and other rental items in service 292,057 280,936 Prepaid expenses 10,963 10,173 ----------- ----------- Total current assets 864,044 853,250 Property and equipment, at cost, net 770,291 778,402 Goodwill 689,043 678,598 Service contracts 155,361 158,529 Other assets 57,213 50,455 ----------- ----------- $ 2,535,952 $ 2,519,234 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 70,854 $ 60,393 Accrued compensation and related liabilities 25,228 29,004 Accrued liabilities 90,105 131,705 Income taxes: Current 26,233 11,791 Deferred 74,290 61,372 Long-term debt due within one year 16,736 18,369 ----------- ----------- Total current liabilities 303,446 312,634 Long-term debt due after one year 663,590 703,250 Deferred income taxes 83,243 79,591 Shareholders' equity: Preferred stock, no par value, 100,000 shares authorized, none outstanding -- -- Common stock, no par value, 425,000,000 shares authorized, 170,142,146 shares issued and outstanding (169,930,290 at May 31, 2002) 68,579 66,508 Retained earnings 1,426,783 1,365,136 Other accumulated comprehensive loss: Foreign currency translation (6,403) (4,863) Unrealized loss on derivatives (3,286) (3,022) ----------- ----------- Total shareholders' equity 1,485,673 1,423,759 ----------- ----------- $ 2,535,952 $ 2,519,234 =========== =========== See accompanying notes.CINTAS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (In thousands except per share data) Three Months Ended August 31, -------------------------- 2002 2001 Revenue: --------- --------- Rentals $ 523,656 $ 433,152 Other services 142,070 131,448 --------- --------- 665,726 564,600 Costs and expenses (income): Cost of rentals 286,951 237,920 Cost of other services 96,762 90,658 Selling and administrative expenses 176,832 144,488 Interest income (739) (1,251) Interest expense 8,024 3,086 --------- --------- 567,830 474,901 --------- --------- Income before income taxes 97,896 89,699 Income taxes 36,249 33,159 --------- --------- Net income $ 61,647 $ 56,540 ========= ========= Basic earnings per share $ .36 $ .33 ========= ========= Diluted earnings per share $ .36 $ .33 ========= ========= See accompanying notes.CINTAS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended August 31, ------------------------ Cash flows from operating activities: 2002 2001 - ------------------------------------ -------- --------- Net income $ 61,647 $ 56,540 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 30,428 24,673 Amortization of deferred charges 7,638 4,732 Deferred income taxes 16,570 12,008 Change in current assets and liabilities, net of acquisitions of businesses: Accounts receivable 1,739 (2,435) Inventories (15,641) 10,727 Uniforms and other rental items in service (11,121) (6,647) Prepaid expenses (773) (2,100) Accounts payable 10,388 (536) Accrued compensation and related liabilities (3,776) (16,820) Accrued liabilities (41,562) (32,685) Income taxes payable 14,442 12,973 -------- -------- Net cash provided by operating activities 69,979 60,430 Cash flows from investing activities: - ------------------------------------ Capital expenditures (21,647) (32,731) Proceeds from sale or redemption of marketable securities 8,686 537 Purchase of marketable securities 19 (25,931) Acquisitions of businesses, net of cash acquired (15,931) (9,839) Other 204 554 -------- -------- Net cash used in investing activities (28,669) (67,410) Cash flows from financing activities: - ------------------------------------ Repayment of long-term debt (48,798) (3,267) Issuance of common stock 2,071 1,070 Other (1,804) 204 -------- -------- Net cash used in financing activities (48,531) (1,993) Net decrease in cash and cash equivalents (7,221) (8,973) Cash and cash equivalents at beginning of period 40,628 73,724 -------- -------- Cash and cash equivalents at end of period $ 33,407 $ 64,751 ======== ======== 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, 2002. A summary of our significant accounting policies is presented on page 28 of our most recent annual report. There have been no material changes in the accounting policies followed by Cintas during the fiscal year.
Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the results of the interim periods shown have been made.
Certain prior year amounts have been reclassified to conform with current year presentation.
2. New Accounting Standard
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses significant issues relating to the implementation of Statement of Financial Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and develops a single accounting model, based on the framework established in SFAS 121 for long-lived assets to be disposed of by sale, whether such assets are or are not deemed to be a business. SFAS 144 also modifies the accounting and disclosure rules for discontinued operations. Effective June 1, 2002, Cintas adopted SFAS 144 and it did not have a material effect on the financial statements.
CINTAS CORPORATIONNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Unaudited)(In thousands except per share data)
3. Earnings per Share
The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective years:
August 31, August 31, 2002 2001 ---------- ---------- Numerator: Net income $ 61,647 $ 56,540 ======== ======== Denominator: Denominator for basic earnings per share-weighted average shares 170,036 169,528 ======== ======== Effect of dilutive securities- employee stock options 2,163 2,642 -------- -------- Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions 172,199 172,170 ======== ======== Basic earnings per share $ .36 $ .33 ======== ======== Diluted earnings per share $ .36 $ .33 ======== ========
4. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the quarter ended August 31, 2002, by operating segment, are as follows:
“Acquired Intangible Assets”
Other Rentals Services Total -------- -------- -------- Balance as of June 1, 2002 $645,445 $ 33,153 $678,598 Goodwill acquired during the period 9,233 1,212 10,445 -------- -------- -------- Balance as of August 31, 2002 $654,678 $ 34,365 $689,043 ======== ======== ========
Information regarding Cintas' other assets follows:
As of August 31, 2002 ------------------------------------------ Carrying Accumulated Amount Amortization Net -------- ------------ -------- Service contracts $228,337 $ 72,976 $155,361 Noncompete and consulting agreements 61,850 42,933 18,917 Other 38,841 545 38,296 -------- -------- -------- Total $329,028 $116,454 $212,574 ======== ======== ======== As of May 31, 2002 ------------------------------------------ Carrying Accumulated Amount Amortization Net -------- ------------ -------- Service contracts $226,023 $ 67,494 $158,529 Noncompete and consulting agreements 61,742 41,792 19,950 Other 31,111 606 30,505 -------- -------- -------- Total $318,876 $109,892 $208,984 ======== ======== ========
Amortization expense was $7,638 and $4,732 for the three months ended August 31, 2002 and 2001, respectively. Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $28,407, $24,851, $21,529, $19,629 and $18,421, respectively.
5. Derivatives and Hedging Activities
Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Cintas’ hedging activities are transacted only with highly-rated institutions, reducing the exposure to credit risk in the event of nonperformance.
Cintas uses derivatives for both cash flow hedging and fair value hedging purposes. For derivative instruments that hedge the exposure of variability in short-term interest rates, designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For the ineffective portion of the hedge, gains or losses are charged to earnings in the current period. For derivative instruments that hedge the exposure to changes in the fair value of certain fixed rate debt, designated as fair value hedges, the effective portion of the net gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate debt attributable to the hedged risk, are recorded in current period earnings.
Cintas uses interest rate swap and lock agreements as hedges against variability in short-term interest rates. These agreements effectively convert a portion of the floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. Cintas uses the Hypothetical Derivative Method for assessing the effectiveness of these swaps. The effectiveness of these swaps is reviewed at least every fiscal quarter. Cintas will also periodically use reverse interest rate swap agreements to convert a portion of fixed rate debt to a floating rate basis, thus hedging for changes in the fair value of the fixed rate debt being hedged. Cintas has determined that the current interest rate swap agreement, designated as a fair value hedge, qualifies for treatment under the short-cut method of measuring effectiveness. Under the provisions of SFAS 133, this hedge is determined to be perfectly effective and there is no requirement to periodically evaluate effectiveness.
Approximately 28%, or $50 million, of outstanding floating rate debt was designated as the hedged items covered by interest-rate swap agreements at August 31, 2002. The change in fair value of these cash flow hedges during the first quarter of FY 2003 resulted in a charge of $264 to other comprehensive income. The reverse interest rate swap agreement is a fair value hedge that converts $125 million of fixed rate debt to a floating rate. This agreement expires in 2007, and allows Cintas to receive an effective interest rate of 5.13% and pay an interest rate based on LIBOR. Because this fair value hedge is 100% effective, the $7.0 million favorable change in the fair value of this hedge was directly offset by an increase in the fair value of the debt.
6. Acquisitions
At the time of the Omni Services, Inc. (Omni) acquisition, management approved a plan to integrate certain Omni facilities into existing Cintas operations. Included in the purchase price allocation was a restructuring charge of approximately $36 million, which includes approximately $6 million in severance-related costs for corporate and field employees and approximately $30 million in asset write-downs and lease cancellation costs.
The integration of Omni facilities is proceeding as planned. Through the first quarter, just under 50% of the acquired Omni facilities were integrated, or in the process of being integrated, into existing Cintas locations. Payments to date for severance-related costs were approximately $3 million, while assets write-downs and lease cancellation costs were approximately $26 million. Cintas expects to complete the integration within the first year of acquisition.
7. 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 month periods ended August 31, 2002 and 2001 are as follows:
August 31, 2002 August 31, 2001 ----------------- --------------- Net income $61,647 $56,540 Other comprehensive income: Foreign currency translation adjustment (1,540) (334) Net unrealized loss on cash flow hedges (264) (156) -------- -------- Comprehensive income $59,843 $56,050 ======== ========
8. Segment Information
Cintas classifies its businesses into two operating segments: Rentals and Other Services. The Rentals operating segment designs and manufactures corporate identity uniforms which it rents, along with other items, to its customers. The Other Services operating segment involves the design, manufacture and direct sale of uniforms to its customers, as well as the sale of ancillary services including first aid products and services and cleanroom supplies. Substantially all of these services are provided throughout the United States and Canada to businesses of all types - from small service and manufacturing companies to major corporations that employ thousands of people. 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.
Other Rentals Services Corporate Total ---------- -------- --------- ---------- As of and for the three months ended August 31, 2002 Revenue $ 523,656 $142,070 $ -- $ 665,726 ========== ======== ======== ========== Income before income taxes $ 94,225 $ 10,956 $ (7,285) $ 97,896 ========== ======== ======== ========== Total assets $2,249,053 $217,739 $ 69,160 $2,535,952 ========== ======== ======== ========== As of and for the three months ended August 31, 2001 Revenue $ 433,152 $131,448 $ -- $ 564,600 ========== ======== ======== ========== Income before income taxes $ 82,787 $ 8,747 $ (1,835) $ 89,699 ========== ======== ======== ========== Total assets $1,366,599 $292,021 $126,650 $1,785,270 ========== ======== ======== ==========
9. Supplemental Guarantor Information
On May 13, 2002, Cintas completed the acquisition of Omni for approximately $656,000. The purchase price for Omni was funded with $450,000 in long-term notes, $100,000 of borrowings under a commercial paper program and approximately $106,000 in cash. The $450,000 in long-term notes consist of $225,000 with five-year maturities at an interest rate of 5 1/8% and $225,000 with ten-year maturities at an interest rate of 6%.
Effective June 1, 2000, Cintas reorganized its legal structure and created Cintas Corporation No. 2 (Corp. 2) as its indirectly, wholly-owned principal operating subsidiary. Cintas and its wholly-owned, direct and indirect domestic subsidiaries, other than Corp. 2, will unconditionally guarantee, jointly and severally, debt of Corp. 2. As allowed by SEC rules, the following condensed consolidating financial statements are provided as an alternative to filing separate financial statements of the guarantors. Each of the subsidiaries presented in the condensed consolidating financial statements has been fully consolidated in Cintas’ financial statements. The condensed consolidating financial statements should be read in conjunction with the financial statements of Cintas and notes thereto of which this note is an integral part.
Condensed consolidating financial statements for Cintas, Corp. 2, the subsidiary guarantors and non-guarantors are presented below:
CONDENSED CONSOLIDATED INCOME STATEMENT THREE MONTHS ENDED AUGUST 31, 2002 Cintas Cintas Subsidiary Non- Corporation Corporation Corp. 2 Guarantors Guarantors Eliminations Consolidated ----------- -------- ---------- ---------- ------------ ------------ Revenue: Rentals $ -- $396,228 $104,482 $22,981 $ (35) $523,656 Other services -- 276,005 49,146 8,356 (191,437) 142,070 Equity in net income of affiliates 61,647 -- -- -- (61,647) -- -------- -------- -------- ------- --------- -------- 61,647 672,233 153,628 31,337 (253,119) 665,726 Costs and expenses (income): Cost of rentals -- 252,039 54,303 14,892 (34,283) 286,951 Cost of other services -- 209,810 36,441 4,365 (153,854) 96,762 Selling and administrative expenses -- 178,202 (9,660) 8,239 51 176,832 Interest income -- (671) (48) (20) -- (739) Interest expense -- 88 7,152 784 -- 8,024 -------- -------- -------- ------- --------- -------- -- 639,468 88,188 28,260 (188,086) 567,830 Income before income taxes 61,647 32,765 65,440 3,077 (65,033) 97,896 Income taxes -- 5,525 29,415 1,309 -- 36,249 -------- -------- -------- ------- --------- -------- Net income $61,647 $ 27,240 $ 36,025 $ 1,768 $ (65,033) $ 61,647 ======== ======== ======== ======= ========= ========CONDENSED CONSOLIDATED INCOME STATEMENT THREE MONTHS ENDED AUGUST 31, 2001 Cintas Cintas Subsidiary Non- Corporation Corporation Corp. 2 Guarantors Guarantors Eliminations Consolidated ----------- -------- ---------- ---------- ------------ ------------ Revenue: Rentals $ -- $ 316,475 $ 97,090 $ 19,643 $ (56) $433,152 Other services -- 219,827 46,096 4,235 (138,710) 131,448 Equity in net income of affiliates 56,540 -- -- -- (56,540) -- ---------- --------- --------- --------- ---------- -------- 56,540 536,302 143,186 23,878 (195,306) 564,600 Costs and expenses (income): Cost of rentals -- 199,173 53,181 12,021 (26,455) 237,920 Cost of other services -- 163,818 34,489 2,437 (110,086) 90,658 Selling and administrative expenses -- 147,197 (7,669) 6,011 (1,051) 144,488 Interest income -- (1,051) (125) (75) -- (1,251) Interest expense -- 6,204 (3,139) 21 -- 3,086 ---------- --------- --------- --------- ---------- -------- -- 515,341 76,737 20,415 (137,592) 474,901 Income before income taxes 56,540 20,961 66,449 3,463 (57,714) 89,699 Income taxes -- 4,281 27,868 1,010 -- 33,159 ---------- --------- --------- --------- ---------- -------- Net income $ 56,540 $ 16,680 $ 38,581 $ 2,453 $ (57,714) $ 56,540 ========= ========= ========= ========= ========= =========CONDENSED CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 2002 Cintas Cintas Subsidiary Non- Corporation Corporation Corp. 2 Guarantors Guarantors Eliminations Consolidated ----------- -------- ---------- ---------- ------------ ------------ Assets Current assets: Cash and cash equivalents $ -- $ 13,537 $ 6,962 $ 12,908 $ -- $ 33,407 Marketable securities -- 34,445 -- 1,308 -- 35,753 Accounts receivable, net -- 199,795 79,020 15,954 (12,418) 282,351 Inventories -- 195,013 16,571 6,482 (8,553) 209,513 Uniforms and other rental items in service -- 226,603 70,387 13,200 (18,133) 292,057 Prepaid expenses -- 6,432 3,677 857 (3) 10,963 ---------- --------- --------- --------- ---------- -------- Total current assets -- 675,825 176,617 50,709 (39,107) 864,044 Property and equipment, at cost, net -- 604,784 132,073 33,434 -- 770,291 Goodwill -- 110,006 568,341 10,696 -- 689,043 Service contracts -- 33,363 111,441 10,557 -- 155,361 Other assets 1,030,115 28,523 789,644 116,259 (1,907,328) 57,213 ----------- ---------- ---------- --------- ----------- ---------- $ 1,030,115 $1,452,501 $1,778,116 $ 221,655 $(1,946,435) $2,535,952 =========== ========== ========== ========= =========== ========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ (465,247) $ (66,429) $ 548,511 $ 16,042 $ 37,977 $ 70,854 Accrued compensation and related liabilities -- 15,519 8,714 995 -- 25,228 Accrued liabilities -- 173,551 (87,043) 3,642 (45) 90,105 Income taxes: Current -- (31,073) 54,189 3,146 (29) 26,233 Deferred -- 696 72,010 1,584 -- 74,290 Long-term debt due within one year -- 16,126 614 115 (119) 16,736 ----------- ---------- ---------- --------- ----------- ---------- Total current liabilities (465,247) 108,390 596,995 25,524 37,784 303,446 Long-term debt due after one year -- 671,069 (42,168) 64,280 (29,591) 663,590 Deferred income taxes -- 9,246 71,847 2,150 -- 83,243 Total shareholders' equity 1,495,362 663,796 1,151,442 129,701 (1,954,628) 1,485,673 ----------- ---------- ---------- --------- ----------- ---------- $ 1,030,115 $1,452,501 $1,778,116 $ 221,655 $(1,946,435) $2,535,952 =========== ========== ========== ========= =========== ==========CONDENSED CONSOLIDATED BALANCE SHEET AS OF MAY 31, 2002 Cintas Cintas Subsidiary Non- Corporation Corporation Corp. 2 Guarantors Guarantors Eliminations Consolidated ----------- -------- ---------- ---------- ------------ ------------ Assets Current assets: Cash and cash equivalents $ -- $ 22,440 $ 5,011 $ 13,177 $ -- $ 40,628 Marketable securities -- 42,472 -- 1,986 -- 44,458 Accounts receivable, net -- 225,364 70,720 782 (13,632) 283,234 Inventories -- 182,858 14,899 5,539 (9,475) 193,821 Uniforms and other rental items in service -- 210,409 71,251 13,101 (13,825) 280,936 Prepaid expenses -- 7,421 1,995 760 (3) 10,173 --------- ---------- ----------- --------- ----------- ---------- Total current assets -- 690,964 163,876 35,345 (36,935) 853,250 Property and equipment, at cost, net -- 637,882 108,258 32,262 -- 778,402 Goodwill -- 104,140 566,748 7,710 -- 678,598 Service contracts -- 34,588 112,488 11,453 -- 158,529 Other assets 966,397 20,983 792,865 94,727 (1,824,517) 50,455 --------- ---------- ---------- --------- ------------ ---------- $966,397 $1,488,557 $1,744,235 $ 181,497 $(1,861,452) $2,519,234 ======== ========== ========== ========= =========== ========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ (465,247) $ (58,727) $ 531,544 $ 14,842 $ 37,981 $ 60,393 Accrued compensation and related liabilities -- 23,441 4,508 1,055 -- 29,004 Accrued liabilities -- 172,125 (43,608) 4,195 (1,007) 131,705 Income taxes: Current -- (34,889) 44,084 2,625 (29) 11,791 Deferred -- 1,737 58,020 1,615 -- 61,372 Long-term debt due within one year -- 16,315 2,126 117 (189) 18,369 ---------- ---------- ---------- -------- ----------- ---------- Total current liabilities (465,247) 120,002 596,674 24,449 36,756 312,634 Long-term debt due after one year -- 710,728 (23,499) 48,111 (32,090) 703,250 Deferred income taxes -- 7,251 70,239 2,101 -- 79,591 Total shareholders' equity 1,431,644 650,576 1,100,821 106,836 (1,866,118) 1,423,759 ---------- ---------- ---------- -------- ----------- ---------- $ 966,397 $1,488,557 $1,744,235 $181,497 $(1,861,452) $2,519,234 ========== ========== ========== ======== =========== ==========CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED AUGUST 31, 2002 Cintas Cintas Subsidiary Non- Corporation Corporation Corp. 2 Guarantors Guarantors Eliminations Consolidated ----------- -------- ---------- ---------- ------------ ------------ Cash flows from operating activities Net income $ 61,647 $ 27,240 $ 36,025 $ 1,768 $(65,033) $ 61,647 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation -- 19,228 9,942 1,258 -- 30,428 Amortization of deferred charges -- 2,625 4,498 515 -- 7,638 Deferred income taxes -- 954 15,598 18 -- 16,570 Changes in current assets and liabilities, net of acquisitions of businesses: Accounts receivable -- 25,977 (8,217) (14,807) (1,214) 1,739 Inventories -- (12,137) (1,639) (943) (922) (15,641) Uniforms and other rental items in service -- (16,194) 864 (99) 4,308 (11,121) Prepaid expenses -- 989 (1,682) (80) -- (773) Accounts payable -- (7,702) 16,967 1,127 (4) 10,388 Accrued compensation and related liabilities -- (7,922) 4,206 (60) -- (3,776) Accrued liabilities -- 1,603 (43,445) (682) 962 (41,562) Income taxes payable -- 3,816 10,105 521 -- 14,442 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 61,647 38,477 43,222 (11,464) (61,903) 69,979 Cash flows from investing activities: Capital expenditures -- 13,899 (33,245) (2,301) -- (21,647) Proceeds from sale or redemption of marketable securities -- 8,027 -- 659 -- 8,686 Purchase of marketable securities -- -- -- 19 -- 19 Acquisitions of businesses, net of cash acquired -- (8,283) (2,020) (5,628) -- (15,931) Other (62,178) (13,893) 14,661 2,280 59,334 204 -------- -------- -------- -------- -------- -------- Net cash (used in) provided by investing activities (62,178) (250) (20,604) (4,971) 59,334 (28,669) Cash flows from financing activities: Repayment of long-term debt -- (46,866) (20,667) 16,166 2,569 (48,798) Stock options exercised 2,071 -- -- -- -- 2,071 Other (1,540) (264) -- -- -- (1,804) -------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 531 (47,130) (20,667) 16,166 2,569 (48,531) Net (decrease) increase in cash and cash equivalents -- (8,903) 1,951 (269) -- (7,221) Cash and cash equivalents at beginning of period -- 22,440 5,011 13,177 -- 40,628 -------- -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 13,537 $ 6,962 $ 12,908 $ -- $ 33,407 ======== ======== ======== ======== ========= ========CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED AUGUST 31, 2001 Cintas Cintas Subsidiary Non- Corporation Corporation Corp. 2 Guarantors Guarantors Eliminations Consolidated ----------- -------- ---------- ---------- ------------ ------------ Cash flows from operating activities Net income $ 56,540 $ 16,680 $ 38,581 $ 2,453 $(57,714) $ 56,540 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation -- 16,281 7,270 1,122 -- 24,673 Amortization of deferred charges -- 2,728 1,552 452 -- 4,732 Deferred income taxes -- (84,172) 95,480 700 -- 12,008 Changes in current assets and liabilities, net of acquisitions of businesses: Accounts receivable -- (20,476) 16,532 1,953 (444) (2,435) Inventories -- 12,177 (270) (1,881) 701 10,727 Uniforms and other rental items in service -- (4,604) (1,366) (1,149) 472 (6,647) Prepaid expenses -- (1,544) (316) (240) -- (2,100) Accounts payable -- 35,319 (39,479) 3,636 (12) (536) Accrued compensation and related liabilities -- (13,349) (3,046) (425) -- (16,820) Accrued liabilities -- 912 (36,523) 2,495 431 (32,685) Income taxes payable -- 1,556 10,774 643 -- 12,973 -------- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 56,540 (38,492) 89,189 9,759 (56,566) 60,430 Cash flows from investing activities: Capital expenditures -- (20,382) (11,270) (1,079) -- (32,731) Proceeds from sale or redemption of marketable securities -- 537 -- -- -- 537 Purchase of marketable securities -- (25,928) -- (3) -- (25,931) Acquisitions of businesses, net of cash acquired -- (9,804) (188) 153 -- (9,839) Other (57,970) 82,761 (79,066) (1,556) 56,385 554 -------- -------- -------- -------- -------- -------- Net cash (used in) provided by investing activities (57,970) 27,184 (90,524) (2,485) 56,385 (67,410) Cash flows from financing activities: Repayment of long-term debt -- (1,878) (1,561) (9) 181 (3,267) Stock options exercised 1,070 -- -- -- -- 1,070 Other 360 (156) -- -- -- 204 -------- -------- -------- -------- -------- -------- ---------------- Net cash provided by (used in) financing activities 1,430 (2,034) (1,561) (9) 181 (1,993) Net (decrease) increase in cash and cash equivalents -- (13,342) (2,896) 7,265 -- (8,973) Cash and cash equivalents at beginning of period -- 57,629 8,792 7,303 -- 73,724 -------- -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 44,287 $ 5,896 $ 14,568 $ -- $ 64,751 ======== ======== ======== ======== ======== ========
CINTAS CORPORATIONMANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total revenue increased 18% for the three months ended August 31, 2002, over the same period in fiscal 2002. Net rental revenue increased 21% for the three months ended August 31, 2002, over the same period in the prior fiscal year, primarily due to the acquisition of Omni in the fourth quarter of fiscal 2002 and growth in the customer base. Revenue from the sale of uniforms and other direct sale items increased 8% for the three months ended August 31, 2002, over the same period in the prior year, due to acquisitions made in fiscal 2002.
Net income increased 9% for the three months ended August 31, 2002, over the same period in fiscal 2002, primarily due to revenue growth. Diluted earnings per share increased 9% for the three months ended August 31, 2002, over the same period in the prior fiscal year.
Net interest expense (interest expense less interest income) was $7 million for the three months ended August 31, 2002 compared to $2 million for the same period in the prior fiscal year. This increase was primarily a result of $450 million of long-term notes issued in late fiscal 2002 to finance the Omni acquisition. Cintas’ effective tax rate was 37.0% for both the three months ended August 31, 2002 and August 31, 2001.
Financial Condition
At August 31, 2002, we had $69 million in cash, cash equivalents and marketable securities, a decrease of $16 million from May 31, 2002, primarily due to repayment of outstanding commercial paper. The cash, cash equivalents and marketable securities will be used to finance future growth, capital expenditures, repayment of debt and dividends. We believe that our current cash position, funds generated from operations and the strength of our banking relationships are sufficient to meet our anticipated operational and capital requirements.
Net property and equipment decreased by $8 million from May 31, 2002 to August 31, 2002, due to the excess of depreciation over capital expenditures in the first quarter. At the end of the first quarter of fiscal 2003, Cintas had eight uniform rental facilities in various stages of construction.
Following is information regarding Cintas’ long-term contractual obligations and other commitments outstanding as of August 31, 2002:
(In thousands) Payments Due by Period - -------------------------------------------------------------------------------- One Two to Four to After Long-term contractual year three five five obligations Total or less years years years - --------------------------------- -------- -------- -------- -------- -------- Long-term debt (1)................ $676,000 $ 16,200 $181,800 $242,000 $236,000 Capital lease obligations (2) .... 4,300 500 1,000 1,200 1,600 Operating leases (3) ............. 62,000 15,000 22,000 14,000 11,000 Unconditional purchase obligations .................... -- -- -- -- -- -------- -------- -------- -------- -------- Total contractual cash obligations................ $742,300 $ 31,700 $204,800 $257,200 $248,600 ======== ======== ======== ======== ======== (1) Long-term debt primarily consists of commercial paper and $450,000 in long-term notes used to finance the Omni acquisition. (2) Capital lease obligations are classified as long-term debt on the balance sheet. (3) Operating leases consist primarily of building leases and synthetic leases on the two corporate jets. (In thousands) Amount of Commitment Expiration Per Period - -------------------------------------------------------------------------------- One Two to Four to After Other commercial year three five five commitments Total or less years years years - --------------------------------- -------- -------- -------- -------- -------- Lines of credit (1)............... $300,000 $150,000 $150,000 $-- $-- Standby letters of credit (2)..... 45,000 45,000 -- -- -- Guarantees........................ -- -- -- -- -- Standby repurchase obligations .................... -- -- -- -- -- Other commercial commitments ..... -- -- -- -- -- -------- -------- -------- -------- -------- Total commercial commitments...... $345,000 $195,000 $150,000 $-- $-- ========= ======== ======== ======== ======== (1) Back-up facility for the commercial paper program. (2) Support certain outstanding debt and self-insured workers' compensation and general liability insurance programs.
Litigation and Other Contingencies
Cintas is party to litigation in the normal course of business, none of which is expected to have a material impact on operating results. This litigation includes lawsuits that challenge the legality of certain ancillary charges on invoices. The estimated liability, if any, related to these lawsuits has not been determined, but is not expected to have a material adverse effect on results. In addition, a class action suit was filed in the State of California alleging that Cintas violated the California overtime pay laws applicable to its service sales representatives, which Cintas believed to be exempt employees. Management has established estimated accruals to the extent that liabilities exist for such matters and believes that any liability in excess of amounts accrued will not have a material impact on the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quantitative and Qualitative Disclosures About Market Risk
In our normal operations, Cintas has market risk exposure to interest rates. There has been no significant change in our exposure to these risks, which has been previously disclosed on page 50 of our most recent annual report.
Controls and Procedures
Cintas performed an evaluation of disclosure controls and procedures within 90 days of filing this quarterly report (the “Evaluation Date”). After evaluating the effectiveness of disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer, along with other key management of Cintas, have determined that disclosure controls and procedures were effective and designed to ensure that material information relating to Cintas and its consolidated subsidiaries would be made known to them on a timely basis. There were no significant changes in internal controls or other factors that could significantly affect these controls subsequent to the Evaluation Date.
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, 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. Forward-looking statements speak only as of the date made. 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.
CINTAS CORPORATION
Part II. Other Information
Item 6.
Exhibits and Reports on Form 8-K
(b.)
On August 27, 2002, Cintas filed a Current Report on Form 8-K to report the filing of the sworn statements by its principal executive officer and principal financial officer with the Securities and Exchange Commission in accordance with Commission Order No. 4-460.
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: October 14, 2002
CINTAS CORPORATION (Registrant)/s/William C. Gale William C. GaleVice President and Chief Financial Officer(Chief Accounting Officer)
Certification of Principal Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002and Securities and Exchange Commission Release 34-46427
I, Robert J. Kohlhepp, the principal executive officer of Cintas Corporation, certify that:
/s/Robert J. Kohlhepp Robert J. KohlheppChief Executive Officer
Certification of Principal Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002and Securities and Exchange Commission Release 34-46427
I, William C. Gale, the principal financial officer of Cintas Corporation, certify that:
/s/William C. Gale William C. GaleVice-President and Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICERPursuant to 18 U.S.C. § 1350, as adopted pursuant to§ 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of Cintas Corporation (the “Company”) on Form 10-Q for the period ending August 31, 2002 (the “Report”), I, Robert J. Kohlhepp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Robert J. Kohlhepp Robert J. KohlheppChief Executive OfficerOctober 14, 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICERPursuant to 18 U.S.C. § 1350, as adopted pursuant to§ 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of Cintas Corporation (the “Company”) on Form 10-Q for the period ending August 31, 2002 (the “Report”), I, William C. Gale, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
/s/William C. Gale William C. GaleChief Financial OfficerOctober 14, 2002