FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ___________________
Commission file number 0-11399
CINTAS CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 31-1188630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6800 CINTAS BOULEVARD
P.O. BOX 625737
CINCINNATI, OHIO 45262-5737
(Address of principal executive offices)
(Zip Code)
(513) 459-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding December 28, 1998
- --------------------------------------- -----------------------------
Common Stock, no par value 105,594,546
CINTAS CORPORATION
INDEX
Page No.
Part I. Financial Information:
Consolidated Condensed Balance Sheets -
November 30, 1998 and May 31, 1998 3
Consolidated Condensed Statements of Income -
Three Months and Six Months Ended November 30,
1998 and 1997 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended November 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information 10
Signatures 11
CINTAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share data)
November 30, May 31,
1998 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,441 $ 12,717
Marketable securities 74,849 88,154
Accounts receivable (net) 187,108 157,603
Inventories 117,637 108,226
Uniforms and other rental items in service 151,050 136,659
Prepaid expenses 6,660 5,242
---------- -----------
Total current assets 541,745 508,601
Property, plant and equipment, at cost, net 422,891 367,094
Other assets 138,366 142,141
------- -------
$1,103,002 $1,017,836
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 41,619 $ 41,801
Accrued compensation and related liabilities 17,003 16,615
Accrued liabilities 66,416 61,239
Income taxes -
Current 11,258 ------
Deferred 34,504 31,219
Long-term debt due within one year 6,353 8,117
---------- --------
Total current liabilities 177,153 158,991
Long-term debt due after one year 168,526 180,007
Deferred income taxes 27,305 24,346
Shareholders' equity:
Preferred stock, no par value,
100,000 shares authorized, none outstanding ----- -----
Common stock, no par value,
300,000,000 shares authorized,
105,550,495 shares issued and outstanding
(104,610,716 at May 31, 1998) 48,182 46,965
Retained earnings 687,206 610,025
Accumulated other comprehensive income (5,370) (2,498)
---------- --------
Total shareholders' equity 730,018 654,492
-------- -------
$1,103,002 $1,017,836
========== ===========
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
----------- ----------
1998 1997 1998 1997
---- ---- ---- ----
Revenue:
Net rentals $ 264,866 $212,302 $ 524,332 $ 415,301
Other service revenue 102,461 81,395 197,340 151,201
------- ------ ------- --------
367,327 293,697 721,672 566,502
Costs and expenses
(income):
Cost of rentals 147,114 118,979 292,600 231,650
Cost of other service
revenue 70,961 56,066 136,796 104,445
Selling and admin.
expenses 83,317 68,113 169,747 135,806
Interest income (1,173) (1,216) (2,380) (2,338)
Interest expense 2,538 2,103 4,981 4,382
----- ----- ----- -----
302,757 244,045 601,744 473,945
------- ------- ------- -------
Income before income
taxes 64,570 49,652 119,928 92,557
Income taxes 24,770 16,920 46,268 31,565
------ ------ ------ ------
Net income $ 39,800 $ 32,732 $ 73,660 $ 60,992
========== ========= ======== =========
Basic earnings per
share $ .38 $ .32 $ .70 $ .60
============ =========== =========== =========
Diluted earnings
per share $ .37 $ .32 $ .69 $ .59
============= ============ =========== ==========
Net income as reported $ 39,800 $ 32,732 $ 73,660 $ 60,992
Pro forma adjustment
for UTY income taxes ------ 1,819 ------- 3,426
----------- ---------- -------- ---------
Pro forma net income $ 39,800 $ 30,913 $ 73,660 $ 57,566
========== ========== ======== ========
Pro forma basic
earnings per share $ .38 $ .31 $ .70 $ .57
============= =========== ========== ========
Pro forma diluted
earnings per share $ .37 $ .30 $ .69 $ .56
============= =========== ========== ========
See accompanying notes.
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
November 30,
----------------
Cash flows from operating activities: 1998 1997
---- ----
Net income $ 73,660 $ 60,992
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 26,485 21,880
Amortization of deferred charges 5,544 5,631
Deferred income taxes 6,535 8,058
Change in current assets and liabilities,
net of acquisitions of businesses:
Accounts receivable (25,210) (15,574)
Inventories (7,782) (9,003)
Uniforms and other rental items in service (13,660) (12,600)
Prepaid expenses (1,342) (1,561)
Accounts payable (5,366) 4,152
Accrued compensation and related liabilities (89) (4,772)
Accrued liabilities 3,768 (7,983)
Income taxes payable 11,225 4,487
------ -------
Net cash provided by operating activities 73,768 53,707
Cash flows from investing activities:
- ------------------------------------
Capital expenditures (80,941) (42,661)
Proceeds from sale or redemption of marketable securities 80,386 39,342
Purchase of marketable securities (67,081) (34,512)
Acquisitions of businesses, net of cash acquired (5,098) (6,727)
Other 5,643 935
------- -------
Net cash used by investing activities (67,091) (43,623)
Cash flows from financing activities:
- ------------------------------------
Proceeds from issuance of long-term debt ---- 8,478
Repayment of long-term debt (13,298) (10,959)
Issuance of common stock 1,195 522
Pre merger dividends to former UTY owners --- (5,049)
Other (2,850) (644)
-------- ------
Net cash used in financing activities (14,953) (7,652)
Net increase/decrease in cash and cash equivalents (8,276) 2,432
Cash and cash equivalents at beginning of period 12,717 16,362
------ ------
Cash and cash equivalents at end of period $4,441 $18,794
====== =======
See accompanying notes.
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
1. The consolidated condensed financial statements of Cintas Corporation (the
"Company") included herein have been prepared by the Company, 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 generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. While the Company believes that the disclosures presented
are adequate to make the information not misleading, it is suggested that
these consolidated condensed financial statements be read in conjunction
with the financial statements and notes included in the Company's most
recent annual report for the fiscal year ended May 31, 1998. A summary of
the Company's significant accounting policies is presented on page 21 of
the Company's most recent annual report. There have been no material
changes in the accounting policies followed by the Company during fiscal
year 1999.
2. 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.
3. In April 1998, the Company acquired Uniforms To You (UTY), a direct sale
uniform provider. The acquisition was accounted for using the pooling of
interests method of accounting. At that time, the accompanying consolidated
financial statements were restated to include the financial position and
operating results of UTY for all periods. Prior to the merger, UTY had
elected S Corporation status for income tax purposes. As a result of the
merger, UTY terminated its S Corporation election. Pro forma adjustment for
income taxes presents the pro forma tax expense of UTY as if UTY had been a
C Corporation during the financial statement periods presented.
4. The following table represents a reconciliation of the shares used to
calculate basic and diluted earnings per share for the respective years:
Three Months Ended Six Months Ended
November 30 November 30
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Net income $39,800 $32,732 $73,660 $60,992
Denominator:
Denominator for basic earnings
per share-weighted avg. shares 105,175 101,431 104,959 101,097
======== ======== ======== ========
Effect of dilutive securities-
employee stock options 2,186 1,754 2,081 1,855
----- ----- ----- -----
Denominator for diluted earnings
per share-adjusted weighted avg.
shares and assumed conversions 107,361 103,185 107,040 102,952
======= ======= ======= =======
Basic earnings per share $ .38 $ .32 $ .70 $ .60
========= ========= ======== =======
Diluted earnings per share $ .37 $ .32 $ .69 $ .59
========= ========= ======= ======
The following table represents a reconciliation of the shares used to calculate
pro forma basic and diluted earnings per share for the respective years:
Three Months Ended Six Months Ended
November 30 November 30
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Pro forma net income $39,800 $30,913 $73,660 $57,566
Denominator:
Denominator for pro forma basic
earnings per share-weighted
avg. shares 105,175 101,431 104,959 101,097
======== ======== ======== ========
Effect of dilutive securities-
employee stock options 2,186 1,754 2,081 1,855
----- ----- ----- -----
Denominator for pro forma diluted
earnings per share-adjusted
weighted avg. shares and assumed
conversions 107,361 103,185 107,040 102,952
======= ======= ======= =======
Pro forma basic earnings per share $ .38 $ .31 $ .70 $ .57
========= ========= ========= ========
Pro forma diluted earnings per
share $ .37 $ .30 $ .69 $ .56
========= ========= ========= ========
5. As of June 1, 1998, the Company adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires the Company's foreign currency
translation adjustment, which prior to adoption was reported separately in
shareholders' equity to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of Statement 130.
The components of comprehensive income for the three and six month periods
ended November 30, 1998 and 1997 are as follows:
Three Months Ended Six Months Ended
November 30 November 30
1998 1997 1998 1997
---- ---- ---- ----
Net income $39,800 $32,732 $73,660 $60,992
Other comprehensive income:
Foreign currency translation
adjustment 637 (381) (2,872) (683)
-------- ------- ----- ------
Comprehensive income $40,437 $32,351 $70,788 $60,309
======= ======= ======= =======
CINTAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total revenues increased 25% and 27% for the three and six months ended November
30, 1998 over the same periods in fiscal 1998. Net rental revenue increased 25%
and 26% for the three and six months ended November 30, 1998 over the same
periods in the prior fiscal year, due primarily to growth in the customer base
and the acquisitions of Apparelmaster and Mechanics Laundry in the second half
of fiscal 1998. Second quarter revenues from other services increased 26% over
the prior year?s second quarter. This increase resulted from increased sales in
the Company's catalog, First Aid and Safety, National Account and Uniforms To
You divisions. For the six months ended November 30, 1998 these revenues
increased 31% over the same period in fiscal 1998.
Net income on a pro forma basis increased 29% and 28% respectively, for the
three and six months ended November 30, 1998, over the same periods in fiscal
1998. Pro forma basic earnings per share increased 22% and 23% respectively, for
the three and six months ended November 30, 1998, over the same periods in
fiscal 1998.
Net interest expense (interest expense less interest income) was $1,365,000 and
$2,601,000 respectively, for the three and six months ended November 30, 1998
compared to $887,000 and $2,044,000 respectively, for the same periods in the
prior fiscal year. Net interest expense has increased primarily due to an
increase in long-term debt related to acquisitions. The Company's effective tax
rate on a pro forma basis was 38% in both periods of fiscal 1999 as well as
fiscal 1998.
Cash, cash equivalents and marketable securities decreased by $22 million at
November 30, 1998 from May 31, 1998 primarily due to higher capital
expenditures. The cash, cash equivalents and marketable securities will be used
to finance future acquisitions and capital expenditures.
Net property, plant and equipment increased by $56 million from May 31, 1998 to
November 30, 1998. At the end of the second quarter of fiscal 1999, the Company
had twenty-two uniform rental facilities in various stages of construction.
Financial Condition
At November 30, 1998, the Company had $79 million in cash, cash equivalents and
marketable securities. The Company believes that its current cash position,
funds anticipated to be generated from operations and the strength of its
banking relationships are sufficient to meet its anticipated operational and
capital needs requirements.
Impact of Year 2000
The Company has completed an assessment of all of its software systems and has
determined what changes need to be made so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
total cost of those changes is not expected to be material and will be expensed
as incurred. The Company incurred the majority of its Year 2000 costs during
fiscal 1998, and the remaining costs are expected to be expensed in fiscal 1999
when all changes are expected to be completed. The Company sees no risk of any
of its systems not being Year 2000 compliant and therefore has developed no
contingency plans for its systems.
The Company has contacted its major suppliers to obtain certification of their
systems Year 2000 compliance in order to identify any high-risk vendors. After
these "high-risk" vendors have been identified the Company will develop a
strategy for minimizing their risk. During 1999, the Company will follow up with
all of its major suppliers to ensure that they meet their target dates.
Strategies will include contingency plans such as alternative suppliers or
alternative processes.
The Company believes it is devoting appropriate resources to resolve any Year
2000 issues in a timely manner and believes that all internal systems will be
prepared for Year 2000 processing. Based upon the work performed to date, the
Company presently believes that the likelihood of the Year 2000 having a
material result on its operations, liquidity or financial position is remote.
CINTAS CORPORATION
Part II. Other Information
Item 2. Changes in Securities
(c.) During the quarterly period ended November 30, 1998,
the registrant issued 586,594 shares of Common Stock
for companies being acquired in twelve separate
transactions to the owners of those companies
numbering one, one, one, two, one, one, two, four,
two, two, two and two, respectively. These issuances
were exempt from the registration requirements of the
Securities Act of 1933 as private offerings pursuant
to Section 4.2 of that Act.
.
Item 4. Submission of matters to a vote of security holders
The Annual Shareholder's meeting of the Company was held on
October 21, 1998, at which the following issues were voted
upon by shareholders:
Issue No. 1
Authority to establish the number of Directors to be elected at the
Meeting at eight.
FOR 95,058,333 AGAINST 226,686 ABSTAIN 99,795 BROKER NON-VOTES 0
---------- --------- --------- -----
Issue No. 2
Authority to elect eight Directors.
Name Shares For Shares - Shares Broker
Withheld Authority Abstained Non-Votes
Richard T. Farmer 94,901,696 483,118 0 0
Scott D. Farmer 94,888,391 496,423 0 0
Gerald V. Dirvin 95,037,076 347,738 0 0
James J. Gardner 94,884,421 500,393 0 0
Roger L. Howe 95,041,651 343,163 0 0
Donald P. Klekamp 94,534,346 850,468 0 0
Robert J. Kohlhepp 94,888,211 496,603 0 0
John S. Lillard 95,034,786 350,028 0 0
Issue No. 3
Amendment to the Articles of Incorporation to increase the number of
authorized shares of common stock from 120 million to 300 million.
FOR 79,397,946 AGAINST 11,113,728 ABSTAIN 226,132 BROKER NON-VOTES 4,673,550
---------- ---------- ------- ---------
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibit Index
Exhibit Number Description of Exhibit
27 Financial Data Schedule
(b.) No reports were filed on Form 8-K during the quarter.
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.
CINTAS CORPORATION
(Registrant)
Date: December 30, 1998 /s/ William C. Gale
-------------------------
William C. Gale
Vice President and
Chief Financial Officer
(Chief Accounting Officer)