1
EXHIBIT 13
ELEVEN YEAR FINANCIAL SUMMARY
- -----------------------------
Years Ended May 31 (In thousands except per share data)
1989 1990 1991 1992 1993 1994
- ----------------------------------------------------------------------------------------------------
Net Revenue $447,995 518,948 569,583 621,041 711,663 803,009
Net Income $ 30,431 33,716 35,261 45,744 54,956 67,141
Pro Forma Net Income (1) $ 28,633 32,761 34,063 45,151 53,374 64,459
Basic EPS $0.32 0.34 0.36 0.46 0.54 0.66
Diluted EPS $0.32 0.34 0.36 0.46 0.53 0.65
Pro Forma Basic EPS (1) $0.30 0.33 0.34 0.45 0.53 0.63
Pro Forma Diluted EPS (1) $0.30 0.33 0.34 0.45 0.52 0.62
Dividends Per Share $0.03 0.04 0.05 0.06 0.07 0.09
Total Assets $351,816 410,628 467,608 501,769 634,197 700,872
Shareholders' Equity $162,818 203,156 233,693 273,501 324,562 409,053
Return on Average Equity 20.1% 17.9% 15.6% 17.8% 17.8% 17.6%
Long-Term Debt $99,589 116,148 130,967 122,372 158,311 132,929
10 Year
Compd
1995 1996 1997 1998 1999 Growth
- ----------------------------------------------------------------------------------------------------
Net Revenue 929,534 1,103,492 1,261,899 1,476,945 1,751,568 14.6%
Net Income 85,413 98,956 118,557 133,654 138,939 16.4%
Pro Forma Net Income (1) 80,752 94,151 112,763 128,704 138,939 17.1%
Basic EPS 0.83 0.96 1.13 1.25 1.26 14.7%
Diluted EPS 0.82 0.94 1.12 1.23 1.23 14.4%
Pro Forma Basic EPS (1) 0.78 0.91 1.08 1.20 1.26 15.4%
Pro Forma Diluted EPS (1) 0.77 0.90 1.06 1.18 1.23 15.2%
Dividends Per Share 0.10 0.13 0.15 0.18 0.22 22.0%
Total Assets 816,508 996,046 1,101,182 1,305,400 1,407,818 14.9%
Shareholders' Equity 481,654 553,701 650,603 756,795 871,423 18.3%
Return on Average Equity 18.1% 18.2% 18.7% 18.8%(2) 20.5%(2)
Long-Term Debt 164,332 237,550 227,799 307,633 283,581
Note: Results prior to March 24, 1999, have been restated to include Unitog
Company.
Results prior to April 8, 1998, have also been restated to include
Uniforms To You Companies.
Results prior to October 1, 1991, have also been restated to include
Rental Uniform Service of Greenville, S.C., Inc.
(1) Results for 1998 and prior years were adjusted on a pro forma basis to
reflect the true tax impact of Uniforms To You as if it had been reported
as a C Corporation prior to the merger with Cintas.
(2) Return on average equity before one-time items. Please refer to Managements
Discussion and Analysis for additional information.
[MAP]
2
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended May 31 (In thousands except per share data)
1999 1998 1997
(Restated) (Restated)
- -------------------------------------------------------------------------------------------------------
Revenue:
Rentals $ 1,297,248 $ 1,090,577 $ 946,923
Other services 454,320 386,368 314,976
----------- ----------- -----------
1,751,568 1,476,945 1,261,899
Costs and expenses (income):
Cost of rentals 758,063 644,809 566,021
Cost of other services 308,643 261,501 214,066
Selling and administrative expenses 403,580 345,664 287,663
Acquisition-related expenses 12,088 17,116 553
Special charge 28,429 -- --
Environmental charge 5,000 -- --
Interest income (4,671) (4,825) (4,449)
Interest expense 16,442 15,824 16,033
----------- ----------- -----------
1,527,574 1,280,089 1,079,887
----------- ----------- -----------
Income before income taxes 223,994 196,856 182,012
Income taxes 85,055 63,202 63,455
----------- ----------- -----------
Net income $ 138,939 $ 133,654 $ 118,557
----------- ----------- -----------
Basic earnings per share $1.26 $1.25 $1.13
----------- ----------- -----------
Diluted earnings per share $1.23 $1.23 $1.12
----------- ----------- -----------
Dividends declared and paid per share $ .22 $ .18 $ .15
----------- ----------- -----------
Net income $ 138,939 $ 133,654 $ 118,557
Pro forma adjustment for income taxes -- 4,950 5,794
----------- ----------- -----------
Pro forma net income $ 138,939 $ 128,704 $ 112,763
----------- ----------- -----------
Pro forma basic earnings per share $1.26 $1.20 $1.08
----------- ----------- -----------
Pro forma diluted earnings per share $1.23 $1.18 $1.06
----------- ----------- -----------
See accompanying notes.
3
CONSOLIDATED BALANCE SHEETS
---------------------------
As of May 31 (In thousands except per share data)
1999 1998
(Restated)
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,803 $ 13,423
Marketable securities 72,315 88,154
Accounts receivable, principally trade, less
allowance of $8,754 and $7,978, respectively 202,079 185,938
Inventories 137,983 129,655
Uniforms and other rental items in service 200,154 181,415
Prepaid expenses 6,151 5,524
---------- ----------
Total current assets 634,485 604,109
Property and equipment, at cost, net 573,087 488,971
Other assets 200,246 212,320
---------- ----------
$1,407,818 $1,305,400
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 46,783 $ 54,275
Accrued compensation and related liabilities 25,521 21,470
Accrued liabilities 83,209 70,908
Deferred income taxes 40,214 43,745
Long-term debt due within one year 16,370 11,741
---------- ----------
Total current liabilities 212,097 202,139
Long-term debt due after one year 283,581 307,633
Deferred income taxes 40,717 38,833
Shareholders' equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding -- --
Common stock, no par value:
300,000,000 shares authorized, 110,949,274
and 109,793,716 shares issued and outstanding, respectively 49,974 47,062
Retained earnings 825,268 712,249
Other accumulated comprehensive income (loss) (3,819) (2,516)
---------- ----------
Total shareholders' equity 871,423 756,795
---------- ----------
$1,407,818 $1,305,400
---------- ----------
See accompanying notes.
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Other
Common stock Accumulated Total
---------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income (Loss) Equity
- -------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1996 98,357 $43,917 $422,446 $ (834) $ 465,529
Adjustment for pooling of interests 5,282 96 88,076 -- 88,172
--------- --------- --------- --------- ---------
Balance at May 31, 1996, as restated 103,639 44,013 510,522 (834) 553,701
Net income -- -- 118,557 -- 118,557
Equity adjustment for foreign
currency translation -- -- -- (191) (191)
---------
Comprehensive income 118,366
---------
Dividends -- -- (15,634) -- (15,634)
Distributions to S
Corporation shareholders -- -- (13,764) -- (13,764)
Effects of acquisitions 1,758 -- 5,375 -- 5,375
Stock options exercised net
of shares surrendered 418 1,121 1,177 -- 2,298
Tax benefit resulting from
exercise of employee
stock options -- 261 -- -- 261
--------- --------- --------- --------- ---------
Balance at May 31, 1997, as restated 105,815 45,395 606,233 (1,025) 650,603
Net income -- -- 133,654 -- 133,654
Equity adjustment for foreign
currency translation -- -- -- (1,491) (1,491)
---------
Comprehensive income 132,163
---------
Dividends -- -- (19,082) -- (19,082)
Distributions to S
Corporation shareholders -- -- (12,423) -- (12,423)
Effects of acquisitions 3,850 13 11,657 -- 11,670
Repurchase of common stock (147) -- (7,971) -- (7,971)
Stock options exercised net
of shares surrendered 276 897 181 -- 1,078
Tax benefit resulting from
exercise of employee
stock options -- 57 -- -- 757
--------- --------- --------- --------- ---------
Balance at May 31, 1998, as restated 109,794 47,062 712,249 (2,516) 756,795
Net income -- -- 138,939 -- 138,939
Equity adjustment for foreign
currency translation -- -- -- (1,303) (1,303)
---------
Comprehensive income 137,636
---------
Adjustment to conform Unitog
Company's fiscal year -- -- 689 -- 689
Dividends -- -- (24,942) -- (24,942)
Effects of acquisitions 981 13 2,072 -- 2,085
Repurchase of common stock (95) -- (3,739) -- (3,739)
Stock options exercised net
of shares surrendered 269 2,309 -- -- 2,309
Tax benefit resulting from
exercise of employee
stock options -- 590 -- -- 590
--------- --------- --------- --------- ---------
Balance at May 31, 1999 110,949 $49,974 $825,268 $ (3,819) $ 871,423
--------- --------- --------- --------- ---------
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended May 31 (In thousands)
1999 1998 1997
(Restated) (Restated)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $138,939 $133,654 $ 118,557
Adjustment to conform Unitog Company's fiscal year 689 -- --
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 68,779 56,791 47,527
Amortization of deferred charges 21,449 18,542 18,828
Write down of assets 12,609 -- --
Deferred income taxes (1,356) 13,443 9,857
Change in current assets and
liabilities, net of acquisitions of businesses:
Accounts receivable (14,484) (24,227) (16,333)
Inventories (5,897) (23,461) (5,684)
Uniforms and other rental
items in service (17,898) (25,632) (11,546)
Prepaid expenses (537) (5,447) 88
Accounts payable (15,089) (5,132) (4,179)
Accrued compensation and
related liabilities 3,559 5,730 1,263
Accrued liabilities 12,299 (1,586) 3,632
-------- -------- --------
Net cash provided by operating activities 203,062 142,675 162,010
Cash flows from investing activities:
Capital expenditures (171,248) (128,566) (86,209)
Proceeds from sale or redemption of marketable securities 235,400 117,342 49,290
Purchase of marketable securities (225,189) (116,841) (64,468)
Acquisitions of businesses, net of cash acquired (15,588) (27,456) (18,981)
Proceeds from divestiture of certain facilities 19,911 -- --
Other (2,785) (899) 274
-------- -------- --------
Net cash used in investing activities (159,499) (156,420) (120,094)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 65,778 73,483 9,699
Repayment of long-term debt (85,502) (25,662) (18,148)
Stock options exercised 2,309 1,078 2,298
Dividends paid (24,942) (19,082) (15,634)
Distribution to S Corporation shareholders -- (12,423) (13,764)
Other common stock activity (562) (5,793) --
Other 1,736 (2,065) (1,689)
-------- -------- --------
Net cash (used in) provided by financing activities (41,183) 9,536 (37,238)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,380 (4,209) 4,678
Cash and cash equivalents at beginning of year 13,423 17,632 12,954
-------- -------- --------
Cash and cash equivalents at end of year $ 15,803 $ 13,423 $ 17,632
-------- -------- --------
See accompanying notes.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Amounts in thousands except per share and share data)
1. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Business description. Cintas classifies its businesses into two operating
segments: Rentals and Other Services. The Rental operating segment designs and
manufactures corporate identity uniforms which it rents, along with other items,
to its customers. The Other Services operating segment involves the design,
manufacture and direct sale of uniforms to its customers as well as the sale of
ancillary services including sanitation supplies, first aid products and
services and cleanroom supplies. All of these services are provided throughout
the United States and Canada to businesses of all types-from small service and
manufacturing companies to major corporations that employ thousands of people.
Principles of consolidation. The consolidated financial statements include the
accounts of Cintas Corporation and its subsidiaries. Intercompany balances and
transactions have been eliminated.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Financial results could differ from those estimates.
Cash and cash equivalents. The Company considers all highly liquid investments
with a maturity of three months or less, at date of purchase, to be cash
equivalents.
Inventories. Inventories are valued at the lower of cost (first-in, first-out)
or market. Substantially all inventories represent finished goods.
Uniforms and other rental items in service. These items are valued at cost less
amortization, calculated using the straight-line method generally over periods
of eight to thirty-six months.
Property and equipment. Depreciation is calculated using the straight-line
method over the following estimated useful lives, in years:
Buildings and Improvements 5 to 40
Equipment 3 to 10
Leasehold Improvements 2 to 5
Long-lived assets. Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable.
Other assets. Other assets consist primarily of service contracts and noncompete
and consulting agreements obtained through the acquisition of businesses, which
are amortized by use of the straight-line method over the estimated lives of the
agreements which are generally three to twelve years, and goodwill, which is
amortized using the straight-line method over twenty to forty years.
Stock options. The Company applies the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no
compensation expense has been reflected in the financial statements as the
exercise price of options granted to employees is equal to the fair market value
of the Company's common stock on the date of grant. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock Based Compensation.
Interest rate swap agreements. Periodic settlements under interest rate swap
agreements are recognized as adjustments to interest expense for the relevant
periods.
Revenue recognition. Rental revenue is recognized when services are performed
and other services revenue is recognized when products are shipped. The Company
also establishes an estimate of allowances for uncollectible accounts when
revenue is recorded.
7
Pro forma adjustment for income taxes. During fiscal 1998, the Company acquired
Uniforms To You Companies (UTY) in a merger transaction accounted for as a
pooling of interests. 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. The 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.
Fair value of financial instruments. The following methods and assumptions were
used by the Company in estimating the fair value of financial instruments:
Cash and cash equivalents. The amounts reported approximate market
value.
Marketable securities. The amounts reported are at cost, which
approximate market value. Market values are based on quoted market
prices.
Long-term debt. The amounts reported are at carrying value which
approximate market value. Market values are determined using similar
debt instruments currently available to the Company that are consistent
with the terms, interest rates and maturities.
Other accumulated comprehensive income. The Company has adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. This
pronouncement establishes standards for reporting items that affect
shareholders' equity but are not components of reported net income. The
Company's only component of comprehensive income is foreign currency translation
adjustment.
Other accounting pronouncements. The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. This pronouncement which
becomes effective in fiscal 2002 is presently being reviewed by the Company and
is not expected to have a material effect on the Company's financial position
or results of operations, although it may result in additional disclosures in
the future.
2. MARKETABLE SECURITIES
- --------------------------------------------------------------------------------
All marketable securities are comprised of debt securities and classified as
available-for-sale. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value determined to be other than temporary on available-for-sale
securities are included in interest income. The cost of the securities sold is
based on the specific identification method. Interest on securities classified
as available-for-sale is included in interest income.
The following is a summary of marketable securities:
1999 1998
- ----------------------------------------------------------------------------------------------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Obligations of state and political subdivisions $42,579 $42,616 $65,791 $65,757
U.S. Treasury securities and obligations of U.S.
government agencies 3,414 3,383 4,938 4,918
Other debt securities 26,322 26,299 17,425 17,504
------- ------- ------- -------
$72,315 $72,298 $88,154 $88,179
======= ======= ======= =======
The gross realized gains on sales of available-for-sale securities totaled $241,
$84 and $31 for the years ended May 31, 1999, 1998 and 1997, and the gross
realized losses totaled $25, $25 and $96, respectively. Net unrealized
(losses)/gains are $(17) and $25 at May 31, 1999 and 1998, respectively.
The amortized cost and estimated fair value of debt and marketable securities at
May 31, 1999, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuers of the securities may
have the right to prepay the obligations without prepayment penalties.
Estimated
Cost Fair Value
- ----------------------------------------------------------------------------------------------------------------
Due in one year or less $ 42,572 $ 42,622
Due after one year through three years 25,794 25,747
Due after three years 3,949 3,929
-------- --------
$ 72,315 $ 72,298
======== ========
8
3. PROPERTY AND EQUIPMENT
- -----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------- ----------
Land $ 48,868 $ 41,550
Buildings and improvements 277,176 225,313
Equipment 473,839 426,337
Leasehold improvements 9,993 8,467
Construction in progress 45,480 53,749
-------- --------
855,356 755,416
Less: accumulated depreciation 282,269 266,445
-------- --------
$573,087 $488,971
-------- --------
4. OTHER ASSETS
- -----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------- ----------
Goodwill $115,936 $116,027
Service contracts 109,447 103,178
Noncompete and consulting agreements 57,203 57,823
-------- --------
282,586 277,028
Less: accumulated amortization 96,734 81,756
-------- --------
185,852 195,272
Other 14,394 17,048
-------- --------
$200,246 $212,320
-------- --------
5. LONG-TERM DEBT
- -----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------- ----------
Secured and unsecured term notes due through 2003
at an average rate of 9.90% $ 11,741 $ 36,257
Unsecured revolving note due in 2001 at a rate of 5.20% 10,000 10,000
Unsecured term notes due through 2026 at an average rate of 6.23% 99,299 91,429
Unsecured notes due through 2009 at an average rate of 6.10% 160,010 159,930
Industrial development revenue bonds due through 2013
at an average rate of 4.60% 15,705 19,768
Other 3,196 1,990
-------- --------
299,951 319,374
Less: amounts due within one year 16,370 11,741
-------- --------
$283,581 $307,633
======== ========
Debt in the amount of $20,660 is secured by assets with a carrying value of
$23,759 at May 31, 1999. The Company has letters of credit outstanding at May
31, 1999 approximating $11,855. Maturities of long-term debt during each of the
next five years are: $16,370, $177,104, $40,114, $18,034 and $15,506,
respectively.
The Company has available on a revolving basis up to $25 million due in 2001 at
interest rates targeted to approximate LIBOR.
The Company has entered into two interest rate swap agreements to manage its
exposure to changes in short-term interest rates. The first agreement totals $10
million, expires in March 2001 and allows the Company to pay an effective
interest rate of approximately 6.16%. The second agreement totals $35 million,
expires in October 2000 and allows the Company to pay an effective interest rate
of approximately 4.6%.
Interest expense is net of capitalized interest of $2,081, $1,808 and $1,022 for
the years ended May 31, 1999, 1998 and 1997, respectively. Interest paid, net of
amount capitalized, was $16,586, $15,189 and $16,468 for the years ended May 31,
1999, 1998 and 1997, respectively.
9
6. LEASES
- ------------------------------------------------------------------------------
The Company conducts certain operations from leased facilities and leases
certain equipment. Most leases contain renewal options for periods from one to
ten years. The lease agreements provide for increases in rentals if the options
are exercised based on increases in certain price level factors or prearranged
increases. It is anticipated that leases that expire will be renewed or
replaced. The minimum rental payments under noncancelable lease arrangements for
each of the next five years and thereafter are: $9,587, $7,491, $5,972, $5,035,
$4,091 and $13,743, respectively. Rent expense under operating leases during the
years ended May 31, 1999, 1998 and 1997 was $14,018, $11,390 and $9,650,
respectively.
7. INCOME TAXES
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------- -------- --------
Income taxes consist of the following components:
Current
Federal $ 75,304 $ 53,856 $ 46,486
State and local 11,177 7,061 7,107
-------- -------- --------
86,481 60,917 53,593
Deferred (1,426) 2,285 9,862
-------- -------- --------
$ 85,055 $ 63,202 $ 63,455
-------- -------- --------
1999 1998 1997
- ------------------------------------------------------------------------------------------------- -------- --------
Reconciliation of income tax expense using the statutory rate and actual income
tax expense is as follows:
Income taxes at the U.S. federal statutory rate $ 78,398 $ 68,900 $ 63,704
State and local income taxes, net of federal benefit 8,156 7,073 6,123
Nontaxable income earned (793) (1,201) (1,048)
Tax credits (500) (288) (206)
Nontaxable items of the Company acquired
in pooling of interests -- (5,050) (5,931)
Deferred tax benefit arising from
pooling of interests (961) (8,280) --
Other 755 2,048 813
-------- --------- --------
$ 85,055 $ 63,202 $ 63,455
======== ========= =========
The components of deferred income taxes included on the balance sheets are as
follows:
1999 1998
- ------------------------------------------------------------------------------------------------- -------- --------
Deferred tax assets:
Employee benefits $ 9,179 $ 7,236
Severance and other acquisition-related items 7,275 --
Allowance for bad debts and other 16,417 13,346
-------- --------
32,871 20,582
Deferred tax liabilities:
In service inventory 71,276 63,084
Depreciation 41,149 37,353
Other 1,377 2,723
-------- --------
113,802 103,160
-------- --------
Net deferred tax liability $ 80,931 $ 82,578
-------- --------
Income taxes paid were $77,381, $59,599 and $50,657 for the years ended May 31,
1999, 1998 and 1997, respectively.
10
8. ACQUISITIONS
- --------------------------------------------------------------------------------
During the year ended May 31, 1999, the Company completed several acquisitions
two of which were significant and were accounted for as a pooling of interests.
During the year ended May 31, 1998, the Company completed several acquisitions
nine of which were significant. Eight of these acquisitions were accounted for
as a pooling of interests and one as a purchase.
Pooling of Interests
The impact of one of the 1999 pooling of interests transactions and seven of the
1998 pooling of interests transactions on the Company's historical consolidated
financial statements were not material, consequently, prior period and current
year financial statements have not been restated for these transactions.
In March 1999, the Company acquired Unitog Company (Unitog), a rental and direct
sale uniform provider. The Company exchanged 5,072,124 shares of its common
stock for all the outstanding stock of Unitog.
The acquisition was treated as a pooling of interests for accounting purposes
and the accompanying consolidated financial statements were restated at that
time to include the financial position and operating results of Unitog for all
periods prior to the merger. In accordance with the pooling of interests method
of accounting, no adjustment has been made to the historical carrying amount of
assets and liabilities of Unitog. As the Company and Unitog had different year
ends at the time of the acquisition, the consolidated statements combine the
consolidated financial position of the Company at May 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the fiscal years
ended May 31, 1999, 1998 and 1997 with the financial position of Unitog at May
31, 1999 and April 26, 1998 and the recasted results of its operations for the
fiscal years ended April 30, 1999, April 26, 1998 and April 27, 1997 and its
cash flows for the periods ended May 31, 1999, April 26, 1998 and April 27,
1997.
Due to the different fiscal year-ends, retained earnings includes an adjustment
to record Unitog's net income for the month ended May 31, 1999, which is not
included in the consolidated financial statements for any fiscal period. For
this period, Unitog had revenue of $19,544, operating expenses of $17,944
including $1,424 of depreciation and amortization and net income of $689.
A reconciliation of revenue, pro forma net income, and pro forma basic and
diluted earnings per share of Cintas (as previously reported), Unitog, and
combined is as follows:
- -------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------- ---------- ----------
Revenue:
Cintas (as previously reported) $1,198,307 $ 995,207
Unitog 278,638 266,692
---------- ---------- ----------
Combined $1,751,568 $1,476,945 $1,261,899
---------- ---------- ----------
Pro forma net income:
Cintas (as previously reported) $ 117,907 $ 100,194
Unitog 10,797 12,569
---------- ---------- ----------
Combined $ 138,939 $ 128,704 $ 112,763
---------- ---------- ----------
Pro forma basic earnings per share:
Cintas (as previously reported) $1.16 $1.01
---------- ---------- ----------
Combined $1.26 $1.20 $1.08
---------- ---------- ----------
Pro forma diluted earnings per share:
Cintas (as previously reported) $1.14 $.99
---------- ---------- ----------
Combined $1.23 $1.18 $1.06
---------- ---------- ----------
In accordance with accounting rules for pooling of interests transactions,
charges to operating income for acquisition-related expenses relating to this
merger approximate $11,000 ($7,000 after tax). They primarily consist of
investment banking fees, a pre-established retention program for certain
employees and professional service fees. The remaining acquisition-related
expenses were for other acquisition activity during the year.
11
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. The Company exchanged 3,959,262 shares of its common stock
for all the outstanding stock of UTY. In accordance with the pooling of
interests method of accounting, no adjustment was made to the historical
carrying amount of assets and liabilities of UTY. The accompanying consolidated
financial statements were restated for the year ended May 31, 1998 to include
the financial position and operating results of UTY for all periods prior to the
merger.
In accordance with accounting rules for pooling of interests transactions,
charges to operating income for acquisition-related expenses were recorded upon
completion of the pooling acquisitions. These acquisition-related expenses
totaled $16,000 ($11,000 after tax) for the UTY transaction and primarily
consisted of a pre-established compensation program for UTY's senior executives.
The remaining acquisition-related expenses were for other acquisition activity
during the year.
Purchases
For all acquisitions accounted for as purchases, including insignificant
acquisitions, the purchase price paid for each has been allocated to the fair
value of the assets acquired and liabilities assumed. The following summarizes
the aggregate purchase price for all businesses acquired which have been
accounted for as purchases:
1999 1998
- --------------------------------------------------------------- -------
Fair value of assets acquired $18,941 $51,242
Liabilities assumed and incurred 3,756 1,787
------- -------
Total cash paid for acquisitions $15,185 $49,455
------- -------
The results of operations for the acquired businesses are included in the
consolidated statements of income from the dates of acquisition. The pro forma
revenue, net income and earnings per share information for acquired businesses
are not presented because they are not material.
9. DEFINED CONTRIBUTION PLANS
- --------------------------------------------------------------------------------
The Company's Partners' Plan (the Plan) is a non-contributory profit sharing
plan and ESOP for the benefit of certain Company employees who have completed
one year of service. The Plan also includes a 401(k) savings feature covering
substantially all employees. The amount of contributions to the profit sharing
plan and ESOP, as well as the matching contribution to the 401(k), are made at
the discretion of the Company. Total contributions, including the Company's
matching contributions, were $12,100, $8,820 and $7,331 for the years ended May
31, 1999, 1998 and 1997, respectively.
The Company also sponsors contributory thrift plans (thrift plans) covering
certain salaried and clerical employees and certain employees subject to
collective bargaining agreements. Under the provisions of these thrift plans,
employees are permitted to contribute a maximum of 6% of their earnings and the
Company makes matching contributions of 25% to 50%. Employees may make
additional unmatched contributions to the plan of up to 9% of their earnings.
The Company's contributions to these thrift plans were $1,191, $1,200 and $1,100
for the fiscal years ended May 31, 1999, 1998 and 1997, respectively.
10. EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Earnings per share and pro forma earnings per share are computed in accordance
with Statement of Financial Accounting Standards No. 128, Earnings per Share.
The basic computations are calculated based on the weighted average number of
common shares outstanding during each period. The diluted computations reflect
the potential dilution that could occur if stock options were exercised into
common stock, under certain circumstances, that then would share in the earnings
of the Company.
12
The following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective years:
1999 1998 1997
- ---------------------------------------------------------------------------------------- -------- --------
Numerator:
Net income $138,939 $133,654 $118,557
-------- -------- --------
Denominator:
Denominator for basic earnings per share -
weighted average shares (000Os) 110,402 107,025 104,528
Effect of dilutive securities - employee stock options (000Os) 2,492 1,911 1,551
Denominator for diluted earnings per share - -------- -------- -------
adjusted weighted average shares and
assumed conversions (000Os) 112,894 108,936 106,079
-------- -------- --------
Basic earnings per share $1.26 $1.25 $1.13
-------- -------- --------
Diluted earnings per share $1.23 $1.23 $1.12
-------- -------- --------
On October 22, 1997, the Board of Directors approved a two-for-one common stock
split effective November 18, 1997. All share and per share information has been
adjusted to retroactively reflect the effect of this stock split for all periods
presented.
11. STOCK BASED COMPENSATION
- --------------------------------------------------------------------------------
Under the stock option plan adopted by the Company in fiscal 1993, the Company
may grant officers and key employees incentive stock options and/or
non-qualified stock options to purchase an aggregate of 4,600,000 shares of the
Company's common stock. Options are granted at the fair market value of the
underlying common stock on the date of grant and generally become exercisable at
the rate of 20% per year commencing five years after grant, so long as the
holder remains an employee of the Company. Options outstanding under this plan
at May 31, 1999 are 3,862,107.
As a result of the Unitog acquisition in March 1999, the Company retained a
non-qualified stock option plan for certain of its employees. The exercise price
of the options granted under this plan is the fair market value at date of grant
and the options vest ratably over four years and expire ten years after the date
of grant. Certain provisions of the plan require immediate vesting and a cash
settlement, as opposed to the issuance of common stock, upon termination of the
option holders' employment prior to March 24, 2000. The total compensation
expense under this arrangement recorded during the fourth quarter of 1999 was
$5,100 of which $4,300 has been paid.
The information presented in the following table relates primarily to stock
options granted and outstanding under either the plan adopted in fiscal 1993 or
under a similar plan which expired in June 1993:
Weighted
Average
Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
Outstanding May 31, 1996 (540,622 shares exercisable) 3,064,870 $ 13.98
Granted 799,413 26.22
Cancelled (128,676) 15.20
Exercised (313,445) 7.09
Outstanding May 31, 1997 (505,282 shares exercisable) 3,422,162 17.44
Granted 1,163,069 36.45
Cancelled (158,005) 22.88
Exercised (297,985) 8.00
Outstanding May 31, 1998 (445,946 shares exercisable) 4,129,241 23.24
Granted 413,450 49.35
Cancelled (199,983) 30.22
Exercised (395,257) 17.58
Outstanding May 31, 1999 (415,520 shares exercisable) 3,947,451 $ 26.20
13
\
The following table summarizes the restated information related to stock options
outstanding at May 31, 1999:
Outstanding Options Exercisable Options
------------------- -------------------
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Option Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
---------------- ----------- ---- ------- ----------- -------
$ 6.08 - $18.38 1,215,607 3.72 $ 13.14 284,607 $ 10.41
19.19 - 34.88 1,323,115 6.58 22.87 106,415 22.20
35.31 - 76.06 1,408,729 8.41 39.65 24,498 19.32
----------------- ---------- ----- ------- -------- -------
$ 6.08 - $76.06 3,947,451 6.41 $ 26.20 415,520 $ 16.07
----------------- ---------- ----- ------- -------- -------
At May 31, 1999, 974,220 shares of common stock are reserved for future
issuance.
Pro forma information regarding earnings and earnings per share is required by
Statement No. 123 and has been determined as if the Company had accounted for
its stock options granted subsequent to May 31, 1995 under the fair value method
of that Statement. The weighted average fair value of stock options granted
during 1999, 1998 and 1997 was $21.13, $15.09 and $11.94, respectively. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
1999 1998 1997
- ---------------------------------------------------------- ----- -----
Risk free interest rate 5.50% 5.50% 6.63%
Dividend yield .32% .45% .53%
Expected volatility of the Company's common stock 27% 24% 26%
Expected life of the option in years 9 8 8.5
----- ----- -----
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are freely
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the Company's opinion existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information is as follows:
1999 1998 1997
- ----------------------------------------------------------------------------- ----- -----
Net income:
As reported $ 138,939 $ 133,654 $ 118,557
Pro forma for Statement No. 123 $ 135,506 $ 130,797 $ 117,207
Earnings per share:
Pro forma basic earnings per share for Statement No. 123 $ 1.23 $ 1.22 $ 1.12
Pro forma diluted earnings per share for Statement No. 123 $ 1.20 $ 1.20 $ 1.11
--------- --------- ---------
The effects of providing pro forma disclosure are not representative of earnings
reported for future years.
14
12. LITIGATION AND ENVIRONMENTAL MATTERS
- --------------------------------------------------------------------------------
The Company is subject to legal proceedings and claims arising from the ordinary
course of its business, including personal injury, customer contract and
employment claims. In the opinion of management, the aggregate liability, if
any, with respect to such actions will not materially adversely affect the
financial position or results of operations of the Company.
In acquiring Unitog in March 1999, the Company became a potentially responsible
party, and thus faces the possibility of joint and several liability under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in
connection with alleged environmental contamination in an area near a rental
facility in Tempe, Arizona. This facility, located near the South Indian Bend
Wash Federal Superfund (SIBW) site, has been tested for soil and groundwater
contamination. The soil testing at the Company's facility detected volatile
organic compounds, and the Company immediately took action to remediate such
contamination. The United States Environmental Protection Agency (EPA) in March
1999 issued a Record of Decision to the effect that groundwater contamination in
the vicinity of the Company's plant does not warrant remediation at this time.
Instead, the low levels of groundwater contamination near the Company's facility
will be monitored and allowed to attenuate naturally. The Record of Decision
requires active groundwater remediation in other parts of the SIBW site, which
are believed to be unrelated to the Company. According to the Record of
Decision, the EPA estimates that the 30 year net present value of costs to be
incurred to remediate and monitor groundwater contamination at the SIBW site is
$22,000. It is possible that the EPA will attempt to recover from the
potentially responsible parties the costs it has incurred to date with respect
to the SIBW site as well as the costs it expects to incur going forward.
As part of the Agreement and Plan of Merger between Unitog Company and the
Company, the Company performed environmental testing at nine previously untested
Unitog laundry facilities. The testing resulted in the discovery of soil and
groundwater contamination at certain of these sites.
As a result of all of the environmental matters noted above, the Company
recorded a charge to operating expense of $5,000 during the third quarter of
fiscal 1999 to reflect its current estimate of the additional costs to be
incurred relative to these sites. At May 31, 1999, the Company has an
undiscounted liability of $5,600 for environmental matters.
13. SPECIAL CHARGE
- --------------------------------------------------------------------------------
As a result of the acquisition of Unitog in March 1999, the Company developed a
plan during the fourth quarter of fiscal 1999 to integrate Unitog into the
Company and close duplicate facilities. The plan was formally approved on May
28, 1999 with the intention to position the Company to improve service to its
customers and achieve higher profitability.
The plan primarily relates to the decision to: (1) exit certain duplicate rental
and manufacturing facilities resulting in asset write downs to estimated fair
value, lease abandonments and costs to sever employees and (2) sell the Unitog
headquarters in Kansas City, Missouri, resulting in asset write downs to their
fair value upon sale and costs to sever employees. Accordingly, the Company
recognized a special charge of $28,429, $17,626 after income taxes and $.16 per
share during 1999. Details of the special charge are as follows:
Accrual at
Special Charge Activity May 31, 1999
- --------------------------------------------------------------- -------- ------------
Severance $15,820 $ 9,772 $ 6,048
Asset write downs 12,609 12,609 --
------- ------- -------
Total $28,429 $22,381 $ 6,048
======= ======= =======
15
Asset write downs associated with the exit of certain redundant rental and
manufacturing facilities relate to the consolidation of facilities in areas
where the Company has sufficient capacity in existing facilities to meet
anticipated requirements. The asset write down associated with the sale of the
Unitog headquarters relates to the closure of the facility and relocating these
business functions to the Company's headquarters in Cincinnati, Ohio. The
closure of the redundant rental and manufacturing facilities is expected to be
completed by the end of fiscal 2000 and the sale of the Unitog headquarters is
expected to be completed by May 31, 2003. The assets are classified as held and
used. In determining the asset write downs, the fair value of the assets to be
held and used was determined primarily using appraised values. The carrying
value of the assets to be held and used at May 31, 1999 is $32.8 million. The
adjusted carrying value of the assets will be depreciated over the remaining
life of the assets.
Severance costs include the cost of separation payments to certain employees who
have been or will be terminated. The elimination of the positions is expected to
be substantially completed by the end of fiscal 2000.
14. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
On June 1, 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information.
This standard established new rules for public companies relating to the
reporting of financial and descriptive information about their operating
segments in financial statements. This standard did not have a material effect
on the financial statements, but did affect the disclosure of segment
information contained elsewhere therein.
Cintas classifies its businesses into two operating segments: Rentals and Other
Services. The Rental operating segment designs and manufactures corporate
identity uniforms which it rents, along with other items, to its customers. The
Other Services operating segment involves the design, manufacture and direct
sale of uniforms to its customers as well as the sale of ancillary services
including sanitation supplies, first aid products and services and cleanroom
supplies. All of these services are provided throughout the United States and
Canada to businesses of all types - from small service and manufacturing
companies to major corporations that employ thousands of people.
Information as to the operations of the Company's different business segments is
set forth based on the distribution of products and services offered. The
Company evaluates performance based on several factors of which the primary
financial measures are business segment revenue and income before income taxes.
As a result of this Statement, certain prior year amounts have been reclassified
to conform to the current year presentation. The accounting policies of the
business segments are the same as those described in the Significant Accounting
Policies (Note 1).
16
Other
Rentals services Corporate Total
------- -------- --------- -----
May 31, 1999
Revenue $ 1,297,248 $ 454,320 $ -- $ 1,751,568
----------- ----------- ----------- -----------
Gross margin $ 539,185 $ 145,677 $ -- $ 684,862
Selling and administrative expenses 302,346 101,234 -- 403,580
Acquisition-related expenses -- -- 12,088 12,088
Special charge -- -- 28,429 28,429
Environmental charge -- -- 5,000 5,000
Interest income -- -- (4,671) (4,671)
Interest expense -- -- 16,442 16,442
----------- ----------- ----------- -----------
Income before income taxes $ 236,839 $ 44,443 $ (57,288) $ 223,994
----------- ----------- ----------- -----------
Depreciation and amortization $ 80,550 $ 9,678 $ -- $ 90,228
----------- ----------- ----------- -----------
Capital expenditures $ 150,007 $ 21,241 $ -- $ 171,248
----------- ----------- ----------- -----------
Total assets $ 1,080,194 $ 239,506 $ 88,118 $ 1,407,818
----------- ----------- ----------- -----------
May 31, 1998
Revenue $ 1,090,577 $ 386,368 $ -- $ 1,476,945
----------- ----------- ----------- -----------
Gross margin $ 445,768 $ 124,867 $ -- $ 570,635
Selling and administrative expenses 256,098 89,566 -- 345,664
Acquisition-related expenses -- -- 17,116 17,116
Interest income -- -- (4,825) (4,825)
Interest expense -- -- 15,824 15,824
----------- ----------- ----------- -----------
Income before income taxes $ 189,670 $ 35,301 $ (28,115) $ 196,856
----------- ----------- ----------- -----------
Depreciation and amortization $ 67,550 $ 7,783 $ -- $ 75,333
----------- ----------- ----------- -----------
Capital expenditures $ 107,293 $ 21,273 $ -- $ 128,566
----------- ----------- ----------- -----------
Total assets $ 994,969 $ 208,854 $ 101,577 $ 1,305,400
----------- ----------- ----------- -----------
May 31, 1997
Revenue $ 946,923 $ 314,976 $ -- $ 1,261,899
----------- ----------- ----------- -----------
Gross margin $ 380,902 $ 100,910 $ -- $ 481,812
Selling and administrative expenses 215,724 71,939 -- 287,663
Acquisition-related expenses -- -- 553 553
Interest income -- -- (4,449) (4,449)
Interest expense -- -- 16,033 16,033
----------- ----------- ----------- -----------
Income before income taxes $ 165,178 $ 28,971 $ (12,137) $ 182,012
----------- ----------- ----------- -----------
Depreciation and amortization $ 60,363 $ 5,992 $ -- $ 66,355
----------- ----------- ----------- -----------
Capital expenditures $ 79,333 $ 6,876 $ -- $ 86,209
----------- ----------- ----------- -----------
Total assets $ 829,005 $ 165,890 $ 106,287 $ 1,101,182
----------- ----------- ----------- -----------
17
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
The following is a summary of the results of operations for each of the quarters
within the years ended May 31, 1999 and 1998. The reported amounts differ from
amounts previously reported in Form 10-Q due to the restatement of the
accompanying consolidated financial statements which have been restated to
include the financial position and operating results of Unitog, an acquisition
accounted for using the pooling of interests method of accounting.
First Second Third Fourth
May 31, 1999 Quarter Quarter Quarter Quarter
(Restated) (Restated) (Restated)
-------- -------- -------- -----------
Revenue:
Cintas (as previously reported) $354,345 $367,327 $360,504
Unitog 72,085 69,171 73,165
-------- -------- -------- -----------
Combined $426,430 $436,498 $433,669 $ 454,971
======== ======== ======== ===========
Gross profits:
Cintas (as previously reported) $143,024 $149,252 $149,538
Unitog 20,501 21,368 23,073
-------- -------- -------- -----------
Combined $163,525 $170,620 $172,611 $ 178,106
======== ======== ======== ===========
Pro forma net income:
Cintas (as previously reported) $ 33,860 $ 39,800 $ 37,872
Unitog 2,391 4,578* 759**
-------- -------- -------- -----------
Combined $ 36,251 $ 44,378 $ 38,631 $ 19,679
======== ======== ======== ===========
Basic earnings per share $ .33 $ .40 $ .35 $ .18
======== ======== ======== ===========
Diluted earnings per share $ .33 $ .39 $ .34 $ .17
======== ======== ======== ===========
Pro forma basic earnings per share $ .33 $ .40 $ .35 $ .18
======== ======== ======== ===========
Pro forma diluted earnings per share $ .33 $ .39 $ .34 $ .17
======== ======== ======== ===========
Weighted average number of
shares outstanding (000Os) 109,929 110,358 110,816 110,858
======== ======== ======== ===========
* Includes a $2,100 gain from the sale of certain facilities.
**Includes a $5,000 charge relating to environmental matters.
18
First Second Third Fourth
May 31, 1998 Quarter Quarter Quarter Quarter
(Restated) (Restated) (Restated)(Restated)
-------- -------- -------- --------
Revenue:
Cintas (as previously reported) $272,805 $293,697 $301,889 $329,916
Unitog 68,671 70,088 69,544 70,335
-------- -------- -------- --------
Combined $341,476 $363,785 $371,433 $400,251
======== ======== ======== ========
Gross profits:
Cintas (as previously reported) $111,755 $118,652 $122,955 $134,699
Unitog 20,212 21,981 20,003 20,378
-------- -------- -------- --------
Combined $131,967 $140,633 $142,958 $155,077
======== ======== ======== ========
Pro forma net income:
Cintas (as previously reported) $ 26,653 $ 30,913 $ 29,289 $ 31,052
Unitog 2,362 3,997 2,722 1,716
-------- -------- -------- --------
Combined $ 29,015 $ 34,910 $ 32,011 $ 32,768
======== ======== ======== ========
Basic earnings per share $ .29 $ .34 $ .31 $ .31
======== ======== ======== ========
Diluted earnings per share $ .28 $ .34 $ .31 $ .30
======== ======== ======== ========
Pro forma basic earnings per share $ .27 $ .33 $ .30 $ .30
======== ======== ======== ========
Pro forma diluted earnings per share $ .27 $ .32 $ .29 $ .30
======== ======== ======== ========
Weighted average number of
shares outstanding (000Os) 106,094 106,757 107,107 108,133
======== ======== ======== ========
19
REPORT OF AUDIT COMMITTEE
- -------------------------
The Audit Committee (the Committee) of the Board of Directors is composed of
three independent directors. The Committee, which held one meeting during fiscal
1999, oversees the Company's financial reporting process on behalf of the Board
of Directors.
In fulfilling its responsibilities, the Committee recommended to the Board of
Directors the selection of the Company's independent auditors. The Committee
discussed with the independent auditors the overall scope and specific plan for
their audits. The Committee also discussed the Company's consolidated financial
statements and the adequacy of the Company's system of internal control.
The Committee meets with the Company's independent auditors, without management
present, to discuss the results of their evaluation of the system of internal
control and the overall quality of the Company's financial reporting. The
meetings are designed to facilitate any private communications with the
Committee desired by the independent auditors.
/s/ Roger L. Howe
Roger L. Howe, Chairman
Audit Committee
July 1, 1999
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- -------------------------------------------------
The Board of Directors
Cintas Corporation
We have audited the accompanying consolidated balance sheets of Cintas
Corporation as of May 31, 1999 and 1998, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended May 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cintas Corporation
at May 31, 1999 and 1998, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended May 31, 1999, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
July 1, 1999
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
FISCAL 1999 COMPARED TO FISCAL 1998
Fiscal 1999 marked another year of uninterrupted growth for the Company. Because
the merger with Unitog was treated as a pooling of interests, the Company's
historical financial results have been restated as if Cintas and Unitog had
always been one company. Total revenue was $1.8 billion, an increase of 19% over
fiscal 1998. Revenue from the rentals segment increased 19% and other services
revenue increased 18%, primarily due to growth in the customer base. Revenue
contributed by Unitog was flat when compared to the prior year, while Cintas
revenue increased 23%.
Excluding one-time charges consisting of acquisition-related expenses, a Unitog
environmental charge and special charges (refer to Notes 8, 12 and 13 for
additional information), pre-tax income was $270 million, an increase of 26%
over fiscal 1998. Including these one-time charges, pre-tax income was $224
million, an increase of 14% over the prior fiscal year. Pre-tax income from the
rentals and other services segments increased 25% and 26%, respectively, over
the prior year.
Acquisition-related expenses for fiscal 1999 and 1998 relate primarily to the
mergers with Unitog and Uniforms To You (UTY), respectively. One-time charges of
$39 million associated with the Unitog merger include acquisition-related
expenses of $11 million for transaction fees (investment banking, legal and
accounting fees and retention bonuses) and a special charge of $28 million
related to integration costs (severance and asset write downs). As a result of
the integration of Unitog and Cintas, redundant operating facilities were
identified based on an evaluation of operating capacity by location. These
redundant facilities will be merged into existing operations during fiscal 2000.
In addition, Unitog corporate functions will be consolidated and the corporate
office building will be sold. The cost to exit all corporate and operating
facilities will include severance payments to affected employees of $15.8
million and an asset write down of $12.6 million. Severance-related costs
include a pre-established severance plan for corporate executives and the cash
settlement of stock options for terminated employees. The Company believes that
these actions will improve service to the customer and reduce future operating
costs.
Results for 1998 were adjusted on a pro forma basis to reflect the true tax
impact of UTY as if it had been reported as a C Corporation prior to the merger
with Cintas. In addition, 1998 results include a one-time tax credit of $8
million to establish a deferred tax asset and $17 million in acquisition-related
expenses, primarily related to a pre-established compensation program for UTY
executives.
Net interest expense increased $1 million over the prior year due to a higher
average debt level in 1999. The Company's effective tax rate was 38% and 35% pro
forma, respectively, for fiscal years 1999 and 1998. Fiscal year 1998 income
taxes were offset by the $8 million credit related to the conversion of UTY from
an S Corporation to a C Corporation.
Excluding one-time items impacting both 1999 and 1998, pro forma net income of
$167 million and pro forma basic earnings per share of $1.51 represent an
increase of 27% and 23%, respectively, over fiscal 1998. Including these
one-time items, pro forma net income of $139 million and pro forma basic
earnings per share of $1.26 represent an 8% and 5% increase, respectively, over
the 1998 fiscal year. Pro forma return on average equity is 17% compared to 18%
for the prior year; however, excluding one-time items, pro forma return on
average equity is 21% compared to 19% for the prior year.
Cash, cash equivalents and marketable securities decreased by $13 million in
1999, primarily due to capital expenditures for new facilities and equipment to
accommodate growth. The cash, cash equivalents and marketable securities will be
used to finance future acquisitions and capital expenditures. Marketable
securities consist primarily of municipal bonds and federal government
securities.
21
Accounts receivable increased $16 million, primarily due to sales growth.
Inventories increased $8 million reflecting growth in the Company. Because of a
focused effort to improve manufacturing inventories, this increase is much lower
than expected given the substantial increase in sales volume.
Net property and equipment increased by $84 million. In fiscal 1999, the Company
completed construction of fifteen new uniform rental facilities and had another
twelve uniform rental facilities in various stages of construction to
accommodate growth in rental operations.
FISCAL 1998 COMPARED TO FISCAL 1997
Fiscal 1998 total revenue was $1.5 billion, net income was $134 million and
basic earnings per share was $1.25, increasing 17%, 13% and 11%, respectively,
over the prior year. Excluding one-time charges, pre-tax income increased $31
million, or 17% over the prior year. Including these one-time charges, pre-tax
income increased $15 million, or 8% over the prior year. Revenue from the
rentals segment increased 15% and other services revenue increased 23%,
primarily due to growth in the customer base. Pre-tax income for the rentals and
other services segments increased 15% and 22%, respectively, over the prior
year.
Net interest expense decreased $1 million due to a lower level of debt and
improved interest rates. The Company's pro forma effective tax rate for 1998 and
1997 was 35% and 38%, respectively. The 1998 tax rate was lower due to a
one-time credit of $8 million to establish a deferred tax asset for UTY.
Excluding one-time charges, pro forma net income of $132 million and pro forma
basic earnings per share of $1.23 increased 17% and 14%, respectively. Including
one-time charges, pro forma net income of $129 million and pro forma basic
earnings per share of $1.20 represent increases of 14% and 11%, respectively.
Cash, cash equivalents and marketable securities decreased $5 million in 1998,
primarily due to capital expenditures for new facilities and equipment to
accommodate growth. The cash, cash equivalents and marketable securities will be
used to finance future acquisitions and capital expenditures. Marketable
securities consist primarily of municipal bonds and federal government
securities.
Accounts receivable increased $35 million due to sales growth and acquisitions
made during the year. Inventories increased $30 million reflecting sales growth
and acquisitions, as well as the expansion of product lines and investment in
the other services segment of the business.
Net property and equipment increased by $92 million. In fiscal 1998, the Company
completed construction of six new uniform rental facilities and had thirteen
others in various stages of completion to accommodate growth in rental
operations.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1999, the Company had $88 million in cash, cash equivalents and
marketable securities. The Company's investment policy pertaining to marketable
securities is conservative. Preservation of principal while earning an
attractive yield are the criteria used in making investments. Working capital
for fiscal year 1999 increased to $422 million, $20 million over the prior year,
primarily due to the increase in accounts receivable and inventories related to
sales growth in both business segments.
Capital expenditures for fiscal 1999 totaled $171 million, including $150
million for the rentals segment and $21 million for other services. The Company
continues to reinvest in land, buildings and equipment in an effort to expand
capacity for future growth. The Company anticipates that capital expenditures
for fiscal 2000 will approximate $170 million.
22
The Company's percentage of debt to total capitalization was 26% at May 31,
1999, versus 30% at May 31, 1998.
During the year, the Company paid dividends of $25 million, or $.22 per share.
This dividend is an increase of 22% over that paid in fiscal 1998.
MARKET RISK
The Company manages interest rate risk by using a combination of variable and
fixed rate debt, marketable securities and interest rate swap agreements. The
Company's earnings are affected by changes in short-term interest rates due to
the use of variable rate notes and revolving credit facilities amounting to
approximately $180 million, with an average interest rate of 5.68%. This
exposure is limited by the purchase of marketable securities and interest rate
swap agreements as a hedge against variability in short-term rates. If
short-term rates increase by one-half percent (or 50 basis points), the
Company's interest expense would increase, and income before taxes would
decrease, by approximately $.5 million. Conversely, if short-term rates decrease
by one-half percent (or 50 basis points), the Company's interest expense would
decrease, and income before taxes would increase, by approximately $.5 million.
This estimated exposure considers the mitigating effects of marketable
securities and swap agreements on the change in the cost of variable rate debt.
This analysis does not consider the effects of a change in economic activity or
a change in the Company's capital structure.
INFLATION AND CHANGING PRICES
Management believes inflation has not had a material impact on the Company's
financial condition or a negative impact on operations.
IMPACT OF YEAR 2000
The Company has determined the changes required to ensure that all of its
software, hardware and operating equipment will function properly with respect
to dates in the Year 2000 and thereafter. The total cost of these changes is not
material and is being expensed as incurred. The Company incurred the majority of
its Year 2000 costs during fiscal 1998, with substantially all of the remaining
costs expensed in fiscal 1999. Approximately $.5 million will be incurred
throughout the first quarter of fiscal 2000 to complete remaining items.
The Company has been proactive in addressing the Year 2000 with a strategy that
consists of the following critical components: inventory, internal assessment,
remediation, testing, vendor assessment and contingency planning. A complete
inventory of all software and hardware was conducted in 1997 and has been
updated for new acquisitions and subsequent purchases. Through a combination of
testing, vendor inquiries and third party assistance, all hardware and software
items requiring remediation were identified. A remediation plan was developed
and implemented, with substantially all of the spending occurring in fiscal 1998
and 1999. All critical equipment used for operations and distribution has been
tested and upgraded or replaced as required. The Company believes that all
critical production systems are now fully compliant. A proactive disaster
recovery test of data center operations will be conducted using the January 1,
2000 system date. Major suppliers were contacted to obtain certification and an
assessment of their Year 2000 compliance, and all high-risk suppliers
identified. Appropriate actions were taken during fiscal 1999 to mitigate this
risk for all critical suppliers, and alternative sources, if practical, are
being identified as required. The Company continues to monitor the progress of
all major suppliers toward completion of their Year 2000 plans, and is
developing contingency plans to minimize any potential risk. These contingency
plans are being formalized and will address all aspects of the business.
Contingency plans are expected to be in place by the end of the Company's first
fiscal quarter.
The Company believes that 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. While the Company believes its efforts are
sufficient to address any Year 2000 issues, it recognizes that failing to
resolve these issues on a timely basis could adversely affect the Company's
ability to manufacture and distribute products and services.
23
DIRECTORS AND OFFICERS
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BOARD OF DIRECTORS
Gerald V. Dirvin
Retired Executive Vice President
and Director of The Procter & Gamble Company
Richard T. Farmer
Chairman of the Board
of the Corporation
Scott D. Farmer
President & Chief Operating Officer
of the Corporation
James J. Gardner
Retired Vice President
of the Corporation
Roger L. Howe
Retired Chairman of the Board
of U.S. Precision Lens, Inc.
Donald P. Klekamp
Senior Partner
of Keating, Muething & Klekamp
Robert J. Kohlhepp
Chief Executive Officer
of the Corporation
John S. Lillard
Retired Chairman-Founder of JMB
Institutional Realty Corporation
CORPORATE OFFICERS
Richard T. Farmer
Chairman of the Board
Robert J. Kohlhepp
Chief Executive Officer
Scott D. Farmer
President & Chief Operating Officer
Robert R. Buck
Senior Vice President &
President - Uniform Rental Division
David T. Jeanmougin
Senior Vice President & Secretary
William C. Gale
Vice President & Chief Financial Officer
Karen L. Carnahan
Vice President & Treasurer
OPERATING, STAFF, AND SUBSIDIARY OFFICERS
Bruce L. Burgess
Vice President
James A. Cain
Vice President
James J. Case
Vice President
Southwest Rental Group
James V. Critchfield
Vice President
Northcentral Rental Group
William L. Cronin
Vice President
Northeast Rental Group
Michael P. DiMino
President & Chief Operating Officer
Uniforms To You
Gregory J. Eling
Vice President
Central Rental Group
Michael B. Frank
Chairman of the Board
Uniforms To You
Michael P. Gaburo
Vice President
Cleanroom Division
Arnold Gedmintas
Vice President
Northern Rental Group
William W. Goetz
Vice President
Marketing & Merchandising
Larry A. Harmon
Vice President
Great Lakes Rental Group
J. Phillip Holloman
Vice President
Research & Development
Jeffry E. Jones
Vice President
Northwest Rental Group
John S. Kean III
Senior Vice President
Southcentral Rental Group
James J. Krupansky
Vice President
Western Rental Group
Glenn W. Larsen
Vice President
Logistics & Manufacturing
John W. Milligan
Vice President
Midwest Rental Group
Robert A. Oswald
Vice President
David Pollak, Jr.
Vice President
First Aid & Safety Division
Rodger V. Reed
Vice President
National Account Division
Bruce E. Rotte
Vice President
Southeast Rental Group
G. Thomas Thornley
Vice President &
Chief Information Officer
24
EXECUTIVE OFFICES
Cintas Corporation
6800 Cintas Boulevard
P.O. Box 625737
Cincinnati, Ohio 45262-5737
AUDITORS
Ernst & Young LLP
1300 Chiquita Center
250 East Fifth Street
Cincinnati, Ohio 45202
MARKET FOR REGISTRANT'S COMMON STOCK
Cintas Corporation Common Stock is traded on the NASDAQ National market System.
The symbol is CTAS.
REGISTRAR AND TRANSFER AGENT
The Fifth Third Bank
Shareholder Services
Mail Drop 10AT66
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(800) 837-2755
ANNUAL MEETING
October 20, 1999
Cintas Corporation
Corporate Headquarters
6800 Cintas Boulevard
Cincinnati, Ohio
10:00 a.m.
SHAREHOLDER INFORMATION
- -----------------------
10-K REPORT
A copy of the Form 10-K annual report filed with the Securities and Exchange
Commission for the year ended May 31, 1999, is available at no charge to
shareholders. Direct requests in writing for this report or other
information to:
William C. Gale
Vice President & Chief Financial Officer
Cintas Corporation
6800 Cintas Boulevard
P.O. Box 625737
Cincinnati, Ohio 45262-5737
(513) 459-1200
FINANCIAL INFORMATION
For financial information visit us on the Internet at http://www.nasdaq.com or
http://www.cintas-corp.com
INFORMATION INTERNET ADDRESS
Visit us at our web site at http://www.cintas-corp.com
SECURITY HOLDER INFORMATION
At May 31, 1999, there were approximately 2,250 shareholders of record of the
Corporation's Common Stock. The Company believes that this represents
approximately 23,000 beneficial owners.
The following table shows the high and low closing prices by quarter during the
last two fiscal years.
- -------------------------------------------------------------------------------
Fiscal 1999 Fiscal 1998
Quarter ended High Low Quarter ended High Low
May 1999 73 3/16 60 May 1998 52- 3/4 42 3/4
February 1999 78 3/4 53 February 1998 46 36 7/8
November 1998 57 1/8 47 1/2 November 1997 40 2/3 34 11/16
August 1998 54 7/8 39 August 1997 35 7/16 30 1/4