Cintas is an American company specialized in the manufacture and sale of workwear and uniforms
FORM 10-Q SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
OR
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
-1-
CINTAS CORPORATION
INDEX
2
CINTAS CORPORATIONITEM 1. FINANCIAL STATEMENTS.CONSOLIDATED CONDENSED STATEMENTS OF INCOME(Unaudited)(In thousands except per share data)
See accompanying notes.
3
CINTAS CORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS(Unaudited)(In thousands except share data)
4
CINTAS CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(Unaudited)(In thousands)
5
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 U.S. generally accepted accounting principles 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, 2004. A summary of our significant accounting policies is presented on page 24 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 to current year presentation.
2. New Accounting Standard
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for public entities (excluding small business issuers) in the first interim or annual reporting period beginning after June 15, 2005. Cintas will adopt this Statement in the second quarter of fiscal 2006.
6
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:
4. Goodwill, Service Contracts and Other Assets
Changes in the carrying amount of goodwill for the nine months ended February 28, 2005, by operating segment, are as follows:
7
Information regarding Cintas’ service contracts and other assets follows:
Amortization expense was $20,726 and $19,387 for the nine months ended February 28, 2005 and February 29, 2004, respectively. Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $28,016, $27,700, $25,800, $23,486 and $21,060, respectively.
5. Debt, Derivatives and Hedging Activities
Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Cintas’ hedging activities are transacted only with highly-rated institutions, reducing the exposure to credit risk in the event of nonperformance.
Cintas uses derivatives for both cash flow hedging and fair value hedging purposes. For derivative instruments that hedge the exposure of variability in short-term interest rates, designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For the ineffective portion of the hedge, gains or losses are charged to earnings in the current period. For derivative instruments that hedge the exposure to changes in the fair value of certain fixed rate debt, designated as fair value hedges, the effective portion of the net gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate debt attributable to the hedged risk, are recorded in current period earnings.
8
From time to time, 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. There are no interest rate swap agreements outstanding as of February 28, 2005. When outstanding, the effectiveness of these swaps is reviewed at least every fiscal quarter. Cintas also uses 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 agreements, designated as fair value hedges, qualify for treatment under the short-cut method of measuring effectiveness. Under the provisions of SFAS 133, these hedges are determined to be perfectly effective and there is no requirement to periodically evaluate effectiveness.
The amortization of the cash flow hedge, pertaining to interest rate swap and lock agreements, resulted in a credit to other comprehensive income of $73 for the three months ended February 28, 2005, and $218 for the nine months ended February 28, 2005. The reverse interest rate swap agreements are fair value hedges that convert $225 million of fixed rate debt to a floating rate. These agreements expire in 2007 and allow Cintas to receive an effective interest rate of 5.13% and pay an interest rate based on LIBOR. Because these fair value hedges are 100% effective, the $2 million unfavorable change in the fair value of these hedges for the three months ended February 28, 2005, and the net $5 million unfavorable change for the nine months ended February 28, 2005, were directly offset by a decrease in the fair value of the debt.
Cintas has certain significant covenants related to debt agreements. These covenants limit Cintas’ ability to incur certain liens, to engage in sale-leaseback transactions and to merge, consolidate or sell all or substantially all of Cintas’ assets. These covenants also require Cintas to maintain certain debt to capitalization and interest coverage ratios. Cross default provisions exist between certain debt instruments. Cintas is in compliance with all of the significant debt covenants for all periods presented. Were a default of a significant covenant to occur, the default could result in an acceleration of indebtedness, impair liquidity and limit the ability to raise future capital. However, Cintas’ debt, net of cash and marketable securities, is only $105 million. For the nine months ended February 28, 2005, alone, net cash provided by operating activities was $288 million. Capital expenditures were approximately $101 million for the same period.
9
6. Stock-Based Compensation
During the third quarter of fiscal 2003, Cintas adopted the disclosure requirements of FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, but will continue to apply Accounting Principles Board Opinion No. 25 as the method used to account for stock-based employee compensation arrangements. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.
During the third quarter of fiscal 2005, Cintas vested certain employee stock options whose exercise price was greater than current market value.
10
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 components of total comprehensive income are the change in cumulative foreign currency translation adjustments and the change in the fair value of the forecasted cash flows associated with a derivative accounted for as a cash flow hedge. The components of comprehensive income for the three and nine month periods ended February 28, 2005 and February 29, 2004 are as follows:
11
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 entrance mats, shop towels, restroom supplies and other items, to its customers. The Other Services operating segment involves the design, manufacture and direct sale of uniforms to its customers, and the sale of ancillary products and services, including first aid and safety and fire protection 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.
The $4,343 write-off of the loan receivable in the first quarter of fiscal 2004 has been included in the Corporate segment.
Information as to the operations of Cintas’ different business segments is set forth below based on the distribution of products and services offered. Cintas evaluates performances based on several factors of which the primary financial measures are business segment revenue and income before income taxes.
12
9. Litigation and Other Contingencies
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. The court ordered arbitration as to three of the ten named plaintiffs. The United States Equal Employment Opportunity Commission (EEOC) has filed a motion to intervene in order to participate in this lawsuit. No filings or determination has been made in regard to the lawsuit 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. Several related proceedings with similar allegations are pending, including an EEOC charge filed on April 17, 2000, by Mirna Serrano with the EEOC Detroit District office on behalf of female service sales representative applicants at all Cintas locations in Michigan, a class action lawsuit, Mirna E. Serrano, et al., v. Cintas Corporation, filed on May 10, 2004, in the United States District Court for the Eastern District of Michigan, Southern Division on behalf of the same female service sales representative applicants in the EEOC charge, and an administrative action filed on December 15, 2004, by James Morgan with the EEOC Washington, D.C. office and the California Department of Fair Employment and Housing alleging racial discrimination in compensation and training opportunities. If there is an adverse verdict or a negotiated
13
CINTAS CORPORATIONNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)(In thousands except per share data)
settlement of these actions, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas. Any estimated liability relating to these proceedings is not determinable at this time.
Several other administrative proceedings are pending including: (i) two charges filed on November 30, 2004, by an EEOC Commissioner with the EEOC Systemic Litigation Unit alleging failure to hire and assign females to production job positions, and, failing to hire females, African Americans and Hispanics into the Management Trainee program, (ii) a charge filed on January 24, 2005, by Jennifer Fargo on behalf of herself and a similarly situated class with the Augusta Human Relations Commission and the EEOC Detroit District office alleging gender and equal pay discrimination against female Sales Representative and Sales Associates, and (iii) a charge filed on March 23, 2005, by Clifton Cooper on behalf of himself and a similarly situated class with the EEOC Systemic Litigation Unit alleging discriminatory pay and treatment due to race. The investigations of these allegations are pending and no determinations have been made.
Cintas is also a defendant in a lawsuit, J. Lester Alexander, III vs. Cintas Corp., et al., which was originally filed on October 25, 2004, and is currently pending in the United States Bankruptcy Court for the Middle District of Alabama, Eastern Division. The case was brought by J. Lester Alexander, III, the Chapter 7 Trustee (the “Trustee”) of Terry Manufacturing Company, Inc. (“TMC”) and Terry Uniform Company, LLC (“TUC”), against Cintas in Randolph County, Alabama. The Trustee seeks damages against Cintas for allegedly breaching fiduciary duties to TMC and TUC and for allegedly aiding and abetting breaches of fiduciary duties by others to those entities. The complaint also includes allegations that Cintas breached certain limited liability company agreements, or alternatively, misrepresented their intention to perform their obligations in those agreements and acted as alter egos of the bankrupt TMC and are therefore liable for all of TMC’s debts. The Trustee is seeking $50 million in compensatory damages and $100 million in punitive damages. Cintas denies these claims and is vigorously defending itself against all claims in the complaint. If there is an adverse verdict on the merits or in the event of a negotiated settlement of this lawsuit, the resulting liability 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, individually or in the aggregate, 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.
14
10. Supplemental Guarantor Information
Effective June 1, 2000, Cintas reorganized its legal structure and created Cintas Corporation No. 2 (Corp. 2) as its indirectly, wholly-owned principal operating subsidiary. Cintas and its wholly-owned, direct and indirect domestic subsidiaries, other than Corp. 2, unconditionally guaranteed, jointly and severally, debt of Corp. 2.
On May 13, 2002, Cintas completed the acquisition of Omni Services, Inc. (Omni). A portion of the purchase price for Omni was funded with $450,000 in long-term notes. Corp. 2 was the issuer of the long-term notes, which are unconditionally guaranteed, jointly and severally, by Cintas Corporation and the subsidiary guarantors.
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 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:
15
CONDENSED CONSOLIDATED INCOME STATEMENTTHREE MONTHS ENDED FEBRUARY 28, 2005
16
CONDENSED CONSOLIDATED INCOME STATEMENTTHREE MONTHS ENDED FEBRUARY 29, 2004
17
CONDENSED CONSOLIDATED INCOME STATEMENT NINE MONTHS ENDED FEBRUARY 28, 2005
18
CONDENSED CONSOLIDATED INCOME STATEMENT NINE MONTHS ENDED FEBRUARY 29, 2004
19
CONDENSED CONSOLIDATED BALANCE SHEETAS OF FEBRUARY 28, 2005
20
CONDENSED CONSOLIDATED BALANCE SHEETAS OF MAY 31, 2004
21
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWSNINE MONTHS ENDED FEBRUARY 28, 2005
22
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWSNINE MONTHS ENDED FEBRUARY 29, 2004
23
CINTAS CORPORATIONITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 and fire protection 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.
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.
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 mats, shop towels, restroom supplies and 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 first aid and safety and fire protection products and services, document management services and cleanroom supplies. Our products and 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.
Revenue, Expenses and Income
Revenue Comparison
Total revenue increased 8.4% for the three months ended February 28, 2005, over the same period in fiscal 2004. Internal growth for this period was 5.4%. (When adjusted for one less workday for the three months ended February 28, 2005, as compared to the prior year, total revenue internal growth was 7.1%.) The remaining 3.0% represents external growth derived mainly through the acquisitions of first aid and safety, fire protection and document management businesses within our Other Services segment.
24
Net Rentals revenue increased 6.4% for the three months ended February 28, 2005, over the same period in the prior fiscal year. Rentals operating segment internal growth for the third quarter of fiscal 2005 was 5.8% as compared to the three months ended February 29, 2004. (When adjusted for one less workday for the three months ended February 28, 2005, as compared to the prior year, total Rentals internal growth was 7.5%.) This increase is primarily due to the sale of new rental programs to customers, offset by lost business.
Other Services revenue increased 15.5% for the three months ended February 28, 2005, over the same period in the prior year. This increase was mainly due to a combination of acquisitions of first aid and safety, fire protection and document management businesses. Other Services operating segment internal growth for the third quarter of fiscal 2005 was 4.1% as compared to the three months ended February 29, 2004. (When adjusted for one less workday for the three months ended February 28, 2005, as compared to the prior year, total Other Services internal growth was 5.7%.) This internal growth was generated primarily through increased sales of first aid and safety products and services to customers.
Expense Comparison
Cost of rentals consists primarily of production expenses, delivery expenses and amortization of in service uniforms and other rental items. Cost of rentals increased 5.7% for the three months ended February 28, 2005, as compared to the three months ended February 29, 2004, which corresponds to the growth in Rentals revenue. Energy costs were approximately $20 million for the three months ended February 28, 2005, versus approximately $17 million for the same period in the prior year, an 18 percent increase. However, various other operational efficiencies offset this increase.
Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses. Cost of other services increased 15.7% for the three months ended February 28, 2005, as compared to the three months ended February 29, 2004. This increase was mainly due to increased sales in this segment. Gross margin within this segment will fluctuate depending on the type of product or service sold, as products which require additional services generate higher gross margins. Generally, the gross margin for Other Services is in the 30% to 35% range. The current quarter’s gross margin is 34.5%, which is at the upper end of that general range.
Selling and administrative expenses increased 10.2% for the three months ended February 28, 2005, as compared to the three months ended February 29, 2004. Selling and administrative expenses increased mainly due to higher selling expenses. In order to accelerate revenue growth, we have increased our sales force by approximately 11% over the last year and also increased marketing and sales promotions. These measures combined to increase our selling costs by approximately $8 million over the prior year. The cost of providing medical benefits to our employees also increased $4 million.
We anticipate a continued rise in energy and labor-related costs. Recent increases in fuel costs will continue to negatively impact our operating results in coming quarters, except to the extent we are able to offset such costs with price increases and increased operating efficiencies.
25
Net interest expense (interest expense less interest income) was $4.4 million for the three months ended February 28, 2005, compared to $5.2 million for the same period in the prior fiscal year. This decrease was driven primarily from increased interest income due to higher levels of cash and marketable securities. This additional interest income was partially offset by higher interest expense due to higher interest rates on our variable rate outstanding debt.
Cintas’ effective tax rate was 37.0% for both the three months ended February 28, 2005 and February 29, 2004.
Income Comparison
Net income increased 7.3% for the three months ended February 28, 2005, over the same period in fiscal 2004, primarily due to revenue growth. Diluted earnings per share increased 5.1% for the three months ended February 28, 2005, over the same period in the prior fiscal year.
Total revenue increased 8.8% for the nine months ended February 28, 2005, over the same period in fiscal 2004. Internal growth for this period was 5.8%. The 3.0% of external growth was derived mainly through the acquisitions of first aid and safety, fire protection and document management businesses within our Other Services segment.
Net Rentals revenue increased 7.0% for the nine months ended February 28, 2005, over the same period in the prior fiscal year. Rentals operating segment internal growth was 6.4%. This increase is primarily due to the sale of new rental programs to customers, offset by lost business.
Other Services revenue increased 15.5% for the nine months ended February 28, 2005, over the same period in the prior year. This increase was mainly due to a combination of acquisitions of first aid and safety, fire protection and document management businesses. Other Services operating segment internal growth through the third quarter of fiscal 2005 was 3.9% as compared to the nine months ended February 29, 2004. This internal growth was generated primarily through increased sales of first aid and safety products and services to customers.
Cost of rentals consists primarily of production expenses, delivery expenses and amortization of in service uniforms and other rental items. Cost of rentals increased 6.0% for the nine months ended February 28, 2005, as compared to the nine months ended February 29, 2004, which corresponds to the growth in Rentals revenue. Energy costs were approximately $56 million for the nine months ended February 28, 2005, versus approximately $47 million for the same period in the prior year, a 19 percent increase. However, various other operational efficiencies offset this increase.
Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses. Cost of other services increased 16.3% for the nine months ended February 28, 2005, as compared to the nine months ended February 29, 2004. This increase was mainly due to the increased sales in this segment. The cost of other services increased greater than the growth in segment sales due to customer sales mix.
26
Gross margin within this segment will fluctuate depending on the type of product or service sold, as products which require additional services generate higher gross margins. Generally, the gross margin for Other Services is in the 30% to 35% range. This period’s gross margin was 33.3%, which is within that range.
Selling and administrative expenses increased 11.0% for the nine months ended February 28, 2005, as compared to the nine months ended February 29, 2004. Selling and administrative expenses increased mainly due to selling expenses. In order to accelerate revenue growth, we have increased our sales force by approximately 11% over the last year and also increased marketing and sales promotions. These measures combined to increase our selling costs by approximately $28 million over the prior year. The cost of providing medical benefits to our employees also increased approximately $11 million.
Net interest expense (interest expense less interest income) was $13.8 million for the nine months ended February 28, 2005, compared to $17.5 million for the same period in the prior fiscal year. This decrease was driven primarily from increased interest income due to increased levels of cash and marketable securities. Reduced levels of outstanding debt also contributed to this decrease.
Cintas’ effective tax rate was 37.0% for both the nine months ended February 28, 2005 and February 29, 2004.
Included in net income for the first quarter of fiscal 2004 was a pre-tax charge of $4.3 million from a write-off of a receivable from a garment manufacturer. Based on concerns on the supplier’s viability to remain as a going concern, the receivable was completely written off.
Net income increased 9.1% for the nine months ended February 28, 2005, over the same period in fiscal 2004, primarily due to increased revenues. Diluted earnings per share increased 8.6% for the nine months ended February 28, 2005, over the same period in the prior fiscal year.
At February 28, 2005, there was $368 million in cash, cash equivalents and marketable securities, an increase of $113 million from May 31, 2004, primarily due to additional cash generation from increased operating income. Capital expenditures were approximately $101 million for the nine months ended February 28, 2005. We expect capital expenditures for the year to be between $130 and $140 million. Cash, cash equivalents and marketable securities will be used to finance future growth, capital expenditures, repayment of debt and dividends. Cintas also has additional borrowing capacity for use in future acquisitions. 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 increased by $22 million from May 31, 2004 to February 28, 2005, due to continued investment in rental facilities and equipment. At the end of the third quarter of fiscal 2005, Cintas had four uniform rental facilities in various stages of construction.
27
Following is information regarding Cintas’ long-term contractual obligations and other commitments outstanding as of February 28, 2005:
Cintas also makes payments to defined contribution plans. The amounts of contributions made to the plans are made at the discretion of Cintas. Future contributions are assumed to increase 15% annually. Assuming this 15% increase, payments due in one year or less would be $26,697, two to three years would be $66,009 and four to five years would be $87,297. Payments for years thereafter are assumed to continue increasing by 15% each year.
Cintas has no off-balance sheet arrangements other than the synthetic leases on the two corporate jets. The synthetic leases on the aircraft do not currently have, and are not reasonably likely to have, a current or future material effect on Cintas’ financial condition, changes in Cintas’ financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
28
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. The court ordered arbitration as to three of the ten named plaintiffs. The United States Equal Employment Opportunity Commission (EEOC) has filed a motion to intervene in order to participate in this lawsuit. No filings or determination has been made in regard to the lawsuit 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. Several related proceedings with similar allegations are pending, including an EEOC charge filed on April 17, 2000, by Mirna Serrano with the EEOC Detroit District office on behalf of female service sales representative applicants at all Cintas locations in Michigan, a class action lawsuit, Mirna E. Serrano, et al., v. Cintas Corporation, filed on May 10, 2004, in the United States District Court for the Eastern District of Michigan, Southern Division on behalf of the same female service sales representative applicants in the EEOC charge, and an administrative action filed on December 15, 2004, by James Morgan with the EEOC Washington, D.C. office and the California Department of Fair Employment and Housing alleging racial discrimination in compensation and training opportunities. If there is an adverse verdict or a negotiated settlement of these actions, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas. Any estimated liability relating to these proceedings is not determinable at this time.
29
30
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In our normal operations, Cintas has market risk exposure to interest rates. There has been no significant change in our exposure to these risks, which has been previously disclosed on page 47 of our most recent annual report.
ITEM 4.
CONTROLS AND PROCEDURES.
An evaluation was completed under the supervision and with the participation of Cintas’ management, including Cintas’ President and Chief Executive Officer, Chief Financial Officer, General Counsel and Controllers, of the effectiveness of the design and operation of Cintas’ disclosure controls and procedures as of February 28, 2005. Based on these evaluations, Cintas’ management, including the President and Chief Executive Officer, Chief Financial Officer, General Counsel and Controllers, concluded that Cintas’ disclosure controls and procedures were effective as of February 28, 2005. There has been no change to Cintas’ internal control over financial reporting that occurred during the third quarter of fiscal 2005 that has materially affected, or is reasonably likely to materially affect, Cintas’ internal control over financial reporting.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. Forward-looking statements may be identified by words such as estimates, anticipates, projects, plans, expects, intends, believes, should and similar expressions and by the context in which they are used. Such statements are based upon current expectations of Cintas and speak only as of the date made. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ from those set forth in this report. Factors that might cause such a difference include the possibility of greater than anticipated operating costs, lower sales volumes, the performance and costs of integration of acquisitions, fluctuations in costs of materials and labor, costs and possible effects of union organizing activities, outcome of pending environmental matters, the cost, results and timely completion of assessment and remediation of internal controls for financial reporting required by the Sarbanes-Oxley Act of 2002, 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.
31
Part II. Other Information
Item 1. Legal Proceedings
I. Supplemental Information: We discuss certain legal proceedings pending against us in Part I of this quarterly report on Form 10-Q under the caption “Item 1. Financial Statements,” in Note 9 to our financial statements, which is captioned “Litigation and Other Contingencies,” and refer you to that discussion for important information concerning those legal proceedings, including the basis for such actions and, where known, the relief sought. We provide the following additional information concerning those legal proceedings which sets forth the name of the lawsuit, the court in which the lawsuit is pending and the date on which the petition commencing the lawsuit was filed.
II. Environmental Matters: Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters. The following matters are disclosed in accordance with that requirement:
During fiscal 2001, the State of Connecticut filed suit against Cintas in the Superior Court District of Hartford alleging various violations of state environmental laws and alleging that Cintas violated certain wastewater discharge and hazardous waste violations. While this proceeding is not considered material to the business or financial condition of the registrant, management reasonably believes that the proceedings will result in monetary sanctions in excess of $100,000. A reserve has been established for the estimated liability related to these allegations.
Item 5. Other Events
32
Item 6. Exhibits
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.
33