10-K 1 a05-13922_110k.htm 10-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

 

 

 

 

for the Fiscal Year Ended May 31, 2005

 

 

 

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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 0-11399

 

CINTAS CORPORATION

(Exact name of registrant as specified in its charter)

 

Incorporated under
the Laws of Washington

 

6800 Cintas Boulevard
P.O. Box 625737
Cincinnati, Ohio  45262-5737

 

No. 31-1188630

(State or other juris-
diction of incorporation
or organization)

 

(Address of principal executive offices)

 

IRS Employer ID

 

Phone:  (513) 459-1200

(Telephone number of principal executive offices)

 

Securities Registered Pursuant to Section 12(b) of the Act:

None

 

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, No Par Value

(Title of class)

 

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, and (2) has been subject to such filing requirements for the past 90 days.

 

YES

NO

 

 

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. ý

 

Indicated by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

 

YES

NO

 

 

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The aggregate market value of the Common Stock held by non-affiliates as of November 30, 2004, was $7,677,965,352 based on a closing sale price of $44.72 per share.  As of July 31, 2005, 172,249,416 shares of Common Stock were issued and 168,324,186 shares were outstanding.

 

Documents Incorporated by Reference

 

Portions of the Registrant’s Proxy Statement to be filed with the Commission for its 2005 Annual Meeting are incorporated by reference in Part II and Part III as specified.

 

 



 

CINTAS CORPORATION

INDEX TO ANNUAL REPORT

ON FORM 10-K

 

Part I

 

 

 

 

 

 

 

 

 

 

Item 1.

-

Business.

 

 

Item 2.

-

Properties.

 

 

Item 3.

-

Legal Proceedings.

 

 

Item 4.

-

Submission of Matters to a Vote of Security Holders.

 

 

 

 

 

 

Part II

 

 

 

 

 

 

 

 

 

 

Item 5.

-

Market for Registrant’s Common Equity, Related

 

 

 

 

Stockholder Matters and Issuer Purchases of
Equity Securities.

 

 

Item 6.

-

Selected Financial Data.

 

 

Item 7.

-

Management’s Discussion and Analysis of Financial
Condition and Results of Operations.

 

 

Item 7A.

-

Quantitative and Qualitative Disclosure About Market Risk.

 

 

Item 8.

-

Financial Statements and Supplementary Data.

 

 

Item 9.

-

Changes in and Disagreements with Accountants on

 

 

 

 

Accounting and Financial Disclosure.

 

 

Item 9A.

-

Controls and Procedures.

 

 

Item 9B.

-

Other Information.

 

 

 

 

 

 

Part III

 

 

 

 

 

 

 

 

 

 

Item 10.

-

Directors and Executive Officers of the Registrant.

 

 

Item 11.

-

Executive Compensation.

 

 

Item 12.

-

Security Ownership of Certain Beneficial Owners and

 

 

 

 

Management and Related Stockholder Matters.

 

 

Item 13.

-

Certain Relationships and Related Transactions.

 

 

Item 14.

-

Principal Accountant Fees and Services.

 

 

 

 

 

 

Part IV

 

 

 

 

 

 

 

 

 

 

Item 15.

-

Exhibits and Financial Statement Schedules.

 

 

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,” “seeks,” “could,” “should,” “may” and “will” or the negative versions thereof 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 or implied by this Annual Report.  Factors that might cause such a difference include, but are not limited to, 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 including increased medical costs, costs and possible effects of union organizing activities, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, 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, changes in federal and state tax laws 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.

 

2



 

PART I

ITEM 1.

BUSINESS

 

Cintas Corporation, a Washington corporation, provides highly specialized services to businesses of all types throughout the United States and Canada.  Cintas designs, manufactures and implements corporate identity uniform programs, provides entrance mats, shop towels, restroom supplies, promotional products, first aid, safety and fire protection products and services and document management services for over 700,000 businesses.  Cintas was founded in 1968 by Richard T. Farmer, Chairman of the Board, when he left his family’s industrial laundry business in order to develop uniform programs using an exclusive new fabric.  In the early 1970’s, Cintas acquired the family industrial laundry business.

 

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 to its customers.  Other items, including entrance mats, shop towels and restroom supplies, are also rented or sold 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 products and services.  These ancillary products and services include first aid, safety and fire protection products and services, document management services and cleanroom supplies.

 

The primary markets served by Cintas are local in nature and highly fragmented.  Competition for this business varies at each of Cintas’ locations.  There are other companies in the uniform rental business which have financial resources comparable to those of Cintas, although much of the competition consists of smaller local and regional firms. In certain instances, local competitors may also have financial resources comparable to those of Cintas in a particular market.  Cintas believes that the primary competitive factors that affect these operations are product, quality, service, design and price.

 

Cintas serves these markets principally through the rental and cleaning of uniforms as well as providing ongoing uniform replacements as required to each customer.  Cintas also provides ancillary products and services which include the rental or sale of entrance mats, shop towels, mops, linen and restroom products and first aid, safety and fire protection products and services and document management services.

 

Due to its diverse customer base and average account size, the loss of one account would not have a significant financial impact on Cintas.  No individual customer accounts for greater than one percent of Cintas’ total revenues.

 

In its sale of customized uniforms, Cintas competes on a national basis with other uniform suppliers and manufacturers.  Cintas believes that the primary competitive factors that affect these operations are design, service and price.

 

Cintas operates fourteen manufacturing facilities, which provide for a substantial amount of its standard uniform needs.  Additional products are purchased from numerous outside suppliers. Because of Cintas’ ability to manufacture much of its own uniform needs, the loss of one vendor would not have a significant impact on Cintas.  Cintas purchases fabric, used in its manufacturing process, from several suppliers.  Cintas is not aware of any circumstances that would hinder its ability to obtain these materials.

 

Cintas is subject to various environmental laws and regulations, as are other companies in the industry.  While environmental compliance is not a material component of our costs, Cintas must incur capital expenditures and associated operating costs, primarily for water treatment and waste removal, on a regular basis.  Environmental spending related to water treatment and waste removal was approximately $14 million in fiscal 2005 and approximately $12 million in fiscal 2004.  Capital expenditures to limit or monitor hazardous substances were $4 million in fiscal 2005 and $3 million in fiscal 2004.  These expenditures were primarily related to the purchase of water treatment systems, which are depreciated over a useful life of ten years.  Cintas does not expect a material change in the cost of environmental compliance on a percent to sale basis and is not aware of any material non-compliance with environmental laws.

 

At May 31, 2005, Cintas employed approximately 30,000 employees of which approximately 450 were represented by labor unions.  Since January 2003, Cintas has been the target of a corporate unionization campaign by UNITE HERE and the Teamsters unions.  These unions are attempting to pressure Cintas

 

3



 

into surrendering its employees’ rights to a government-supervised election and unilaterally accept union representation.  This is unacceptable.  Cintas’ philosophy in regard to unions is straightforward:  We believe that employees have the right to say yes to union representation and the freedom to say no.  This campaign could be materially disruptive to our business and could materially adversely affect results of operations.  We will continue to vigorously oppose this campaign and to defend our employees’ rights.  Cintas considers its relationships with its employees to be satisfactory.

 

Cintas files annual and quarterly reports and proxy materials with the Securities and Exchange Commission.  The public may copy these materials at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580 Washington, D.C.  20549 and may obtain further information concerning the operation of the Public Reference Room by calling the SEC at (202) 551-8090.  The SEC maintains an internet site that contains the same information regarding Cintas that is filed electronically with the SEC.  The address of that site is: http://www.sec.gov.  Cintas’ Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K and amendments to those reports are posted on its website, www.cintas.com, as soon as practicable after filing with the SEC.

 

The following table sets forth the revenues derived from each service segment provided by Cintas.

 

 

 

Year Ended May 31

 

 

 

(in thousands)

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Rentals

 

$

2,363,397

 

$

2,201,405

 

$

2,101,785

 

Other Services

 

703,886

 

612,654

 

584,800

 

 

 

$

3,067,283

 

$

2,814,059

 

$

2,686,585

 

 

See Note 13 entitled Segment Information in “Notes to Consolidated Financial Statements.”

 

4



 

ITEM 2.

PROPERTIES

 

Cintas occupies 377 facilities located in 280 cities, of which 193 facilities are leased for various terms ranging from monthly to the year 2015.  Cintas expects that it will be able to renew its leases on satisfactory terms.  Of the fourteen manufacturing facilities listed below, Cintas controls the operations of four of these manufacturing plants, but does not own or lease the real estate related to these operations.  All other properties are owned.  The corporate offices provide centrally located administrative functions including accounting, finance, marketing and computer system development and support. Cintas operates processing plants that house administrative, sales and service personnel and the necessary equipment involved in the cleaning of uniforms and bulk items, such as entrance mats and shop towels.  Branch operations provide administrative, sales and service functions. Cintas operates seven distribution centers and fourteen manufacturing plants.  Cintas also operates first aid, safety and fire protection and document management facilities and direct sales offices.  Cintas considers the facilities it operates to be adequate for their intended use. Cintas owns or leases 10,725 vehicles.

 

The following chart provides additional information concerning Cintas’ facilities:

 

Type of Facility

 

# of Facilities

 

 

 

 

 

Rental Processing Plants

 

168

 

 

 

 

 

Rental Branches

 

79

 

 

 

 

 

First Aid, Safety and Fire Protection Facilities

 

57

 

 

 

 

 

Document Management Facilities

 

23

 

 

 

 

 

Distribution Centers

 

7

*

 

 

 

 

Manufacturing Facilities

 

14

 

 

 

 

 

Direct Sales Offices

 

29

 

 

 

 

 

Total

 

377

 

 

Rental processing plants, rental branches, distribution centers and manufacturing facilities are used in Cintas’ Rentals segment.  Rental processing plants, rental branches, first aid facilities, document management facilities, distribution centers, manufacturing facilities and direct sale offices are all used in the Other Services segment.

 


* Includes the Corporate office, which is attached to the distribution center in Cincinnati, OH.

 

5



 

 

ITEM 3.

LEGAL PROCEEDINGS

 

I. Supplemental Information:  We discuss certain legal proceedings pending against us in Part II of this Annual Report on Form 10-K under the caption “Item 8. Financial Statements and Supplementary Data,” in Note 12 to our consolidated financial statements, which is captioned “Litigation and Other Contingencies,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Litigation and Other Contingencies,” and refer you to those discussions 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.

 

Wage and Hour Litigation:  Paul Veliz, et al., v. Cintas Corporation, United States District Court, Northern District of California, Oakland Division, March 19, 2003.

 

Race and Gender Litigation and Related Charges:  Robert Ramirez, et al., v. Cintas Corporation, United States District Court, Northern District of California, San Francisco Division, January 20, 2004; Mirna E. Serrano, et al., v. Cintas Corporation, United States District Court for the Eastern District of Michigan, Southern Division, May 10, 2004; Larry Houston, et al., v. Cintas Corporation, United States District Court for the Northern District of California, August 3, 2005; EEOC charge filed by Mirna Serrano on April 17, 2000 with the EEOC Detroit District; EEOC charge filed by James Morgan on December 15, 2004 with the EEOC Washington, D.C. office and the California Department of Fair Employment and Housing; EEOC charge filed by an EEOC Commissioner on November 30, 2004 with the EEOC Systemic Litigation Unit; EEOC charge filed by Jennifer Fargo on January 24, 2005 with the Augusta Human Relations Commission and the EEOC Detroit District; EEOC charge filed by Clifton Cooper on March 23, 2005 with the EEOC Systemic Litigation Unit; EEOC charge filed by Lorelei Reynolds on March 28, 2005 with the EEOC Birmingham District; EEOC charge filed by Melissa Schulz on April 25, 2005 with the EEOC Systemic Litigation Unit and the Oregon Bureau of Labor and Industries, Civil Rights Division; EEOC charge filed by Anthony Jones on May 6, 2005 with the EEOC Systemic Litigation Unit and EEOC charge filed by Mattie Cooper on June 10, 2005 with the EEOC Systemic Litigation Unit.

 

Breach of Fiduciary Duties:  J. Lester Alexander, III vs. Cintas Corp., et al., United States Bankruptcy Court for the Middle District of Alabama, Eastern Division, October 25, 2004.

 

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 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None in the fourth quarter of fiscal 2005.

 

6



 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY,

RELATED STOCKHOLDER MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Cintas Corporation’s Common Stock is traded on the NASDAQ National Market System under the symbol “CTAS”.  The following table shows the high and low closing prices by quarter during the last two fiscal years.

 

Fiscal 2005

 

 

 

 

 

Quarter Ended

 

High

 

Low

 

 

 

 

 

 

 

May 2005

 

$

44.55

 

$

37.89

 

February 2005

 

46.87

 

41.77

 

November 2004

 

45.91

 

40.38

 

August 2004

 

48.06

 

39.51

 

 

Fiscal 2004

 

 

 

 

 

Quarter Ended

 

High

 

Low

 

 

 

 

 

 

 

May 2004

 

$

47.92

 

$

40.20

 

February 2004

 

50.68

 

42.21

 

November 2003

 

47.59

 

36.80

 

August 2003

 

41.87

 

34.55

 

 

Holders

 

At May 31, 2005, there were approximately 2,000 shareholders of record of Cintas’ Common Stock.  Cintas believes that this represents approximately 65,000 beneficial owners.

 

Dividends

 

Dividends on the outstanding Common Stock are paid annually and amounted to $0.32 per share, $0.29 per share and $0.27 per share in fiscal 2005, fiscal 2004 and fiscal 2003, respectively.

 

Equity Compensation Plan Information

 

 

 

 

 

 

 

Number of shares

 

 

 

Number of shares

 

 

 

remaining available

 

 

 

to be issued

 

Weighted average

 

for future issuance

 

 

 

upon exercise of

 

exercise price of

 

under equity

 

Plan category

 

outstanding options

 

outstanding options

 

compensation plans

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by shareholders

 

6,441,885

 

$

37.92

 

4,438,875

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by shareholders

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

6,441,885

 

$

37.92

 

4,438,875

 

 

7



 

Recent Sales of Unregistered Securities

 

None in the fourth quarter of fiscal 2005.

 

Issuer Purchases of Equity Securities

 

On May 2, 2005, Cintas announced that the Board of Directors authorized a $500 million stock repurchase program at market prices.  During fiscal 2005, we purchased approximately 1.5 million shares of Cintas stock at an average price of $39.62 per share, for a total purchase price of approximately $58 million.  The Board did not specify an expiration date for this program.

 

Period

 

Total number
of shares
purchased

 

Average
price paid
per share

 

Total number of
shares purchased
as part of the
publicly announced
plan

 

Maximum
approximate dollar
value of shares that
may yet be
purchased under
the plan

 

March 2005

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

April 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 2005

 

1,468,901

 

39.62

 

1,468,901

 

441,796,359

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,468,901

 

$

39.62

 

1,468,901

 

$

441,796,359

 

 

In fiscal 2005, Cintas also acquired 100,921 shares as payment received from employees upon the exercise of options under the stock option plan.

 

In addition to the purchases made in fiscal 2005, as provided in the table above, Cintas has subsequently purchased 2.4 million shares of Cintas stock at an average price of $39.08 per share for a purchase price of approximately $96 million. As such, from the inception of the stock repurchase program through July 22, 2005, Cintas has purchased a total of approximately 3.9 million shares of Cintas stock at an average price of $39.27 per share for a total purchase price of approximately $154 million. The maximum approximate dollar value of shares that may yet be purchased under the plan as of July 22, 2005, is $345,856,218.

 

8



 

ITEM 6.

SELECTED FINANCIAL DATA

 

Eleven Year Financial Summary

(In thousands except per share and percentage data)

 

Years Ended
May 31

 

1995

 

1996

 

1997

 

1998

 

1999

 

2000

 

2001

 

2002

 

2003

 

2004

 

2005

 

10-Year
Compd
Growth

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

929,534

 

1,103,492

 

1,261,899

 

1,476,945

 

1,751,568

 

1,901,991

 

2,160,700

 

2,271,052

 

2,686,585

 

2,814,059

 

3,067,283

 

12.7

%(3)

Net Income

 

$

85,413

 

98,956

 

118,557

 

133,654

 

138,939

 

193,387

 

222,451

 

234,251

 

249,253

 

272,205

 

300,518

 

13.4

%

Pro Forma Net
Income (1)

 

$

80,752

 

94,151

 

112,763

 

128,704

 

138,939

 

193,387

 

222,451

 

234,251

 

249,253

 

272,205

 

300,518

 

14.0

%

Basic EPS

 

$

0.55

 

0.64

 

0.75

 

0.83

 

0.84

 

1.16

 

1.32

 

1.38

 

1.46

 

1.59

 

1.75

 

12.3

%

Diluted EPS

 

$

0.55

 

0.63

 

0.75

 

0.82

 

0.82

 

1.14

 

1.30

 

1.36

 

1.45

 

1.58

 

1.74

 

12.2

%

Pro Forma Basic
EPS (1)

 

$

0.52

 

0.61

 

0.72

 

0.80

 

0.84

 

1.16

 

1.32

 

1.38

 

1.46

 

1.59

 

1.75

 

12.9

%

Pro Forma Diluted
EPS (1)

 

$

0.51

 

0.60

 

0.71

 

0.79

 

0.82

 

1.14

 

1.30

 

1.36

 

1.45

 

1.58

 

1.74

 

13.1

%

Dividends Per Share

 

$

0.07

 

0.09

 

0.10

 

0.12

 

0.15

 

0.19

 

0.22

 

0.25

 

0.27

 

0.29

 

0.32

 

16.4

%

Total Assets

 

$

816,508

 

996,046

 

1,101,182

 

1,305,400

 

1,407,818

 

1,581,342

 

1,752,224

 

2,519,234

 

2,582,946

 

2,810,297

 

3,059,744

 

14.1

%

Shareholders’ Equity

 

$

481,654

 

553,701

 

650,603

 

756,795

 

871,423

 

1,042,876

 

1,231,315

 

1,423,759

 

1,646,332

 

1,887,969

 

2,104,135

 

15.9

%

Return on Average Equity (2)

 

18.1

%

18.2

%

18.7

%

18.3

%

17.1

%

20.2

%

19.6

%

17.6

%

16.2

%

15.4

%

15.1

%

 

 

Long-Term Debt

 

$

164,332

 

237,550

 

227,799

 

307,633

 

283,581

 

254,378

 

220,940

 

703,250

 

534,763

 

473,685

 

465,291

 

 

 

 


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.

 

(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 using pro forma net income.

 

(3)   Represents the 10-year compound annual growth rate based on revenue as restated for pooling of interests transactions noted above.

 

9



 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

BUSINESS STRATEGY

 

We are North America’s leading provider of corporate identity uniforms through rental and sales programs, as well as a significant provider of related business services, including entrance mats, restroom products and services, first aid, 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 for 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.

 

Continuous cost containment and product and process innovation are considered hallmarks of our organization.  In order to sustain these efforts, we have implemented a Six Sigma effort within Cintas.  Six Sigma is an analytical process that assists companies in improving quality and customer satisfaction while reducing cycle time and operating costs.  We are pleased with our progress in this endeavor and are optimistic about the improved efficiencies that this process will yield to Cintas.

 

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.

 

RESULTS OF OPERATIONS

 

Fiscal 2005 marked the 36th consecutive year of uninterrupted growth in sales and profits for Cintas.  In addition to achieving this milestone, Cintas experienced healthy improvements in profitability, cash flow and balance sheet strength.

 

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 to its customers.  Other items, including entrance mats, shop towels and restroom supplies, are also rented or sold 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, safety and fire protection products and services, document management services and cleanroom supplies.  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.

 

10



 

The following table sets forth certain consolidated statements of income data as a percentage of revenue by reporting segment and in total for the periods indicated:

 

 

 

2005

 

2004

 

2003

 

Revenue:

 

 

 

 

 

 

 

Rentals

 

77.1

%

78.2

%

78.2

%

Other services

 

22.9

%

21.8

%

21.8

%

 

 

 

 

 

 

 

 

Total revenue

 

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

Rentals

 

54.8

%

55.5

%

55.8

%

Other services

 

66.3

%

66.1

%

67.3

%

 

 

 

 

 

 

 

 

Total cost of sales

 

57.5

%

57.8

%

58.3

%

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

Rentals

 

45.2

%

44.5

%

44.2

%

Other services

 

33.7

%

33.9

%

32.7

%

 

 

 

 

 

 

 

 

Total gross margin

 

42.5

%

42.2

%

41.7

%

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

26.4

%

25.9

%

25.9

%

Interest income

 

-0.2

%

-0.1

%

-0.1

%

Interest expense

 

0.8

%

0.9

%

1.2

%

Write-off of loan receivable

 

 

0.1

%

 

 

 

 

 

 

 

 

 

Income before income taxes

 

15.5

%

15.4

%

14.7

%

 

As evidenced above, our revenue growth has been higher in Other Services versus Rentals during fiscal 2005, resulting in a moderate shift in the percentage of revenue between our reporting segments.  This shift was mainly driven by the acquisitions of first aid, safety and fire protection businesses and document management businesses.  Information related to acquisitions is discussed in Note 8 entitled Acquisitions of “Notes to Consolidated Financial Statements.”

 

FISCAL 2005 COMPARED TO FISCAL 2004

 

Fiscal 2005 total revenue was $3.1 billion, an increase of 9.0% over fiscal 2004.  Internal growth improved throughout fiscal 2005 and was 6.3% for the year.  As the economy continued to strengthen and employment rates improved, our internal growth rates improved.  Internal growth by quarter is shown in the table below.  Internal growth percentages have been adjusted for the appropriate number of workdays, by quarter and for the year, where applicable.

 

 

 

Total Company
Internal Growth

 

 

 

 

 

First Quarter Ending August 31, 2004

 

5.6

%

Second Quarter Ending November 30, 2004

 

5.0

%

Third Quarter Ending February 28, 2005

 

7.1

%

Fourth Quarter Ending May 31, 2005

 

7.5

%

 

 

 

 

For the Year Ending May 31, 2005

 

6.3

%

 

Historically, increases in our internal growth rate have lagged an economic upturn as customers add individuals to existing rental or sales programs or enter into new rental or sales programs.  Our internal growth continues to be generated mainly through the continued sale of uniform rental programs to new customers and the increased penetration of ancillary products to our existing customer base.  The remaining growth in total revenue was generated predominantly through acquisitions of first aid, safety and fire protection service businesses and document management businesses.  Information related to acquisitions is discussed in Note 8 entitled Acquisitions of “Notes to Consolidated Financial Statements.”

 

11



 

Rentals operating segment revenues consist predominantly of revenues derived from the rental and/or sale of corporate identity uniforms, mats, shop towels, restroom supplies and other rental services.  Revenue from the Rentals segment increased 7.4% over fiscal 2004.  Internal revenue growth for the Rentals segment was 6.8% in fiscal 2005 compared to 4.2% in fiscal 2004.  The 0.6% of remaining growth in fiscal 2005 resulted from the acquisition of rental volume.

 

The increase in Rentals revenue was primarily due to growth in the customer base as well as the continued penetration of ancillary products into our existing customer base.  New business remained healthy as we experienced continued success in selling uniform rental programs to new customers.  We also continued to expand our rental market, with over half of our new business being comprised of customers who were first time users of uniform rental programs.  Rentals revenue growth was partially offset by lost business of approximately 7.0%.

 

Other Services operating segment revenues are predominantly derived from the design, manufacture and direct sale of uniforms to our customers and the sale of other direct sale products and services.  Other direct sale products and services include cleanroom supplies, first aid, safety and fire protection products and services and document management services.  Other Services revenue increased 14.9% over fiscal 2004, primarily due to acquisitions of first aid, safety and fire protection businesses and document management businesses.

 

Internal revenue growth in the Other Services segment was 4.4% for the year.  This increase was mainly driven by the growth of the sale of first aid, safety and fire protection products and services and document management services.  Growth in these areas continues to be through an increase in the customer base and through further penetration of additional products and services into our existing customer base.

 

Cost of rentals increased 6.0% over fiscal 2004.  Cost of rentals consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other rental items.  The cost increase over fiscal 2004 was primarily driven by the growth in Rentals segment revenues.  Rising oil and fuel costs also contributed to this increase.  Various cost containment initiatives implemented throughout the year provided a decrease in cost of rentals as a percent to Rentals revenue from 55.5% in fiscal 2004 to 54.8% in fiscal 2005.

 

Cost of other services increased 15.2% over fiscal 2004.  Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses.  The increase over fiscal 2004 was due to the growth in Other Services revenue, derived through a combination of internal growth and acquisitions.  Gross margin within this segment generally fluctuates between 30% to 35%, depending on the type of product or service sold.  Products which require additional services generate higher gross margins.  The gross margin for fiscal 2005 is 33.7%, which is in the upper portion of that general range, mainly due to a shift in the product mix.

 

Selling and administrative expenses increased 11.4% over fiscal 2004.  Selling and administrative expenses increased mainly due to higher selling expenses.  In order to accelerate revenue growth, we have increased our sales force, marketing plans and sales promotions.  These measures combined to increase our selling costs by approximately $36 million over the prior fiscal year.  The cost of providing medical benefits to our employees also increased approximately $15 million.  The costs of providing medical benefits are anticipated to continue to rise.

 

Net interest expense decreased $5 million from the prior fiscal year.  This decrease was primarily a result of increased interest income due to higher levels of cash and marketable securities throughout the entire year and an increase in the interest rate environment.

 

Pre-tax income was $477 million, a 10.4% increase over fiscal 2004.  Pre-tax income from the Rentals segment increased 9.2% over the prior year due to higher rental revenue and various cost containment initiatives, which more than offset the increases in selling expenses and medical costs.  Pre-tax income for the Other Services segment decreased 1.4% from the prior year mainly due to increased selling expenses and medical costs.

 

Cintas’ effective tax rate was 37.0% for both fiscal 2005 and fiscal 2004 (see also Note 7 entitled Income Taxes of “Notes to Consolidated Financial Statements” and the Outlook section below).

 

Net income for fiscal 2005 of $301 million was a 10.4% increase over fiscal 2004 and diluted earnings per share of $1.74 was a 10.1% increase over fiscal 2004, both of which are consistent with the increases in pre-tax income.  Return on average equity was approximately 15% in both fiscal 2005 and 2004.  Return on average equity is computed as net income divided by the average of shareholders’ equity.

 

Cash, cash equivalents and marketable securities increased by $55 million in fiscal 2005, or 21.7%, primarily due to increased revenues.  Cash, cash equivalents and marketable securities will be used to finance future acquisitions, capital

 

12



 

expenditures, expansion and possible stock repurchases.  Marketable securities consist primarily of municipal bonds and federal government securities.

 

Accounts receivable increased $41 million due to increased revenues. Accounts receivable also increased due to a loan to an affiliated company.  During the fourth quarter of fiscal 2005, the Board of Directors approved and Cintas provided a $10 million loan to an affiliated company with specific repayment terms over the next three years.  This affiliated company manufactures a significant portion of Cintas’ mats.  A dividend of $5 million was subsequently received by Cintas from this affiliate in the first quarter of fiscal 2006.

 

Inventories increased $28 million mainly due to increased revenues.  Other contributing factors include the continued increase in international sourcing of product, a current conversion of our comfort pant to a new fabric and style, and additional inventory requirements for our Uniform Book, a large catalog used for the direct sale of uniforms and accessories.

 

Net property and equipment increased by $32 million due to continued investment in rental facilities and equipment and real estate purchased in conjunction with the acquisitions of first aid, safety and fire protection and document management businesses.  Capital expenditures exceeded depreciation expense by $21 million.   During the year, Cintas completed construction of five new uniform rental facilities and has an additional three uniform rental facilities in various stages of construction to accommodate growth in rental operations.

 

Total debt decreased $12 million through repayment of certain debt, net of the change in fair market value of the debt (see Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”).

 

FISCAL 2004 COMPARED TO FISCAL 2003

 

Fiscal 2004 total revenue was $2.8 billion, an increase of 4.7% over fiscal 2003.  This growth was achieved despite the difficult economic environment that existed for much of the year.  Internal growth for fiscal 2004, when adjusted for the additional workday in fiscal 2004 as compared to fiscal 2003, was 3.0%.  Weakness in employment numbers through the first half of our fiscal year directly affected our business, mainly through reduced uniform wearers and usage of related products, and caused our internal growth rate to be lower than our stated objective.  As employment numbers strengthened over the second half of the year, our internal growth rates improved.  Internal growth by quarter is shown in the table below.  Internal growth percentages have been adjusted for the appropriate number of workdays, by quarter and for the year, where applicable.

 

 

 

Total Company
Internal Growth

 

 

 

 

 

First Quarter Ending August 31, 2003

 

1.1

%

Second Quarter Ending November 30, 2003

 

2.3

%

Third Quarter Ending February 29, 2004

 

3.7

%

Fourth Quarter Ending May 31, 2004

 

5.0

%

 

 

 

 

For the Year Ending May 31, 2004

 

3.0

%

 

Historically, increases in our internal growth rate have lagged an economic upturn as customers add individuals to existing rental or sales programs or enter into new rental or sales programs.  Our internal growth continues to be generated mainly through the continued sale of uniform rental programs to new customers and the increased penetration of ancillary products to our existing customer base.

 

The remaining growth in total revenue was generated predominantly through acquisitions of first aid and safety service businesses and document management businesses.  Information related to acquisitions is discussed in Note 8 entitled Acquisitions of “Notes to Consolidated Financial Statements.”

 

Rentals operating segment revenues consist predominantly of revenues derived from the rental and/or sale of corporate identity uniforms, mats, shop towels, restroom supplies and other rental services.  Revenue from the Rentals segment increased 4.3%, when adjusted for the extra workday that occurred in fiscal 2004 as compared to fiscal 2003.  Internal revenue growth for the Rentals segment was 4.2%, adjusted for the additional workday.  The amount of acquired rental volume was insignificant for the year ending May 31, 2004.

 

The increase in Rentals revenue was primarily due to growth in the customer base as well as the continued penetration of ancillary products into our existing customer base.  New business remained healthy as we experienced continued

 

13



 

success in selling uniform rental programs to new customers.  We continue to expand our rental market, with over half of our new business being comprised of customers who were first time users of uniform rental programs.  Rentals revenue growth was mitigated by lost business and reductions in existing business attributable to the sluggish economy, especially during the first half of the year.

 

Other Services operating segment revenues are predominantly derived from the design, manufacture and direct sale of uniforms to our customers and the sale of other direct sale products and services.  Other direct sale products and services include cleanroom supplies, first aid and safety products and services and document management services.  Other Services revenue increased 4.4%, when adjusted for the extra workday that occurred in fiscal 2004 as compared to fiscal 2003, primarily due to acquisitions of first aid and safety services and document management businesses.

 

Internal revenue in the Other Services segment, adjusted for the additional workday in fiscal 2004, decreased by 1.3% for the year.  This decrease was mainly due to the continued difficulty experienced by our uniform direct sale customers in the hospitality and airline industries.  Weakness in the hospitality sector and delayed purchases by large national account customers have continued to impact our direct sales effort.  Partially offsetting this internal revenue decrease in uniform direct sale revenues were increased revenues from the sale of first aid products and services and document management services.

 

Cost of rentals increased 4.2% over fiscal 2003.  Cost of rentals consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms and other rental items.  The cost increase over fiscal 2003 was primarily driven by the growth in Rentals segment revenues.  An increase in fuel and energy costs and a rise in labor delivery costs also contributed to this increase.  Further assimilation of operations obtained through the Omni acquisition and various cost containment initiatives implemented throughout the year mitigated the increased fuel, energy and delivery costs.

 

Cost of other services increased 2.8% over fiscal 2003.  Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses.  The increase over fiscal 2003 was due to the growth in Other Services revenue, derived predominantly through acquisitions.  The increased volume afforded additional overhead coverage, thereby providing a decrease in cost of other services as a percent to Other Services revenue from 67.3% in fiscal 2003 to 66.1% in fiscal 2004.  Sourcing and manufacturing efficiencies and other cost containment initiatives, including Six Sigma initiatives, implemented throughout the year supported this reduction in cost of other services as a percent to Other Services revenue.

 

Selling and administrative expenses increased 4.6% over fiscal 2003, primarily due to increased revenues.  The continued rise in medical costs and increased legal expenses contributed to the increase.

 

Net interest expense decreased $6 million from the prior year.  This decrease was primarily a result of lower debt outstanding.  Total outstanding debt decreased $79 million from May 31, 2003 to May 31, 2004, as cash from operations was used to reduce debt which had been incurred predominantly during the acquisition of Omni in May 2002 (see the Liquidity and Capital Resources section below and Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”).

 

A write-off of a loan receivable from a garment manufacturer is included in net income as a pre-tax charge of $4.3 million.  Due to developments concerning the supplier’s viability to remain as a going concern, the collectibility of the receivable was doubtful.  As such, the receivable was completely written off.

 

Pre-tax income was $432 million, a 9.2% increase over fiscal 2003.  Pre-tax income from the Rentals segment increased 6.7% over the prior year due to higher rental revenue, increased efficiencies obtained from the assimilation of operations obtained from the Omni acquisition and various cost containment initiatives.  Pre-tax income for the Other Services segment increased 19.6% from the prior year, due to increased sales volume, the continued leveraging of fixed costs and sourcing and cost containment initiatives.

 

Cintas’ effective tax rate was 37.0% for both fiscal 2004 and fiscal 2003 (see also Note 7 entitled Income Taxes of “Notes to Consolidated Financial Statements”).

 

Net income for fiscal 2004 of $272 million was a 9.2% increase over fiscal 2003 and diluted earnings per share of $1.58 was a 9.0% increase over fiscal 2003.  Return on average equity was 15.4% in fiscal 2004 and 16.2% in fiscal 2003.  Return on average equity is computed as net income divided by the average of shareholders’ equity.

 

14



 

Cash, cash equivalents and marketable securities increased by $197 million in fiscal 2004, or 341.1%, primarily due to increased revenues, a reduction in inventory levels and, to a lesser extent, a reduction in uniform and other rental items in service levels.  Cash, cash equivalents and marketable securities will be used to finance future acquisitions, capital expenditures and expansion.  Marketable securities consist primarily of municipal bonds and federal government securities.

 

Accounts receivable increased $7 million due to increased revenues.  Aggressive collection efforts provided for a lower sequential increase in accounts receivable as compared to total revenue growth.

 

Inventories decreased $43 million due to improved processes and management systems, including cycle time reductions and other process improvements initiated primarily through our Six Sigma process.  The completion of the Omni product line consolidation also contributed to this decrease in inventory levels.

 

Net property and equipment increased by $8 million due to real estate purchased in conjunction with the acquisitions of first aid and safety services and document management businesses.  Depreciation expense exceeded capital expenditures by $4 million as Cintas continued to consolidate operations obtained from the Omni acquisition in May of 2002.  In addition, due to excess plant capacity and a sluggish economy, Cintas slowed the pace of new plant construction.  During the year, Cintas completed construction of four new uniform rental facilities and has an additional eight uniform rental facilities in various stages of construction to accommodate growth in rental operations.

 

Total debt decreased $79 million through repayment of certain debt related to the purchase of Omni, net of the change in fair market value of the debt (see Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”).  This significant debt reduction was possible due to strong cash flows being generated by operations.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At May 31, 2005, Cintas had $309 million in cash, cash equivalents and marketable securities, representing an increase of $55 million from May 31, 2004.  This increase is primarily due to increased net income.   Cash generated from operations was $414 million in fiscal 2005 as compared to $510 million generated in fiscal 2004.  This $96 million decrease was primarily due to increased accounts receivable and inventory levels.  Significant uses of cash in fiscal 2005 were capital expenditures of $141 million, acquisitions of $109 million (net of cash acquired), common stock repurchases of $58 million and dividends of $55 million.

 

Cintas’ investment policy pertaining to marketable securities is conservative.  Preservation of principal, while earning an attractive yield, is the criteria used in making investment decisions.

 

Working capital increased $102 million to $810 million in fiscal 2005.  This increase is primarily the result of increased cash and marketable securities and accounts receivable.

 

Capital expenditures for fiscal 2005 totaled $141 million, including $118 million for the Rentals segment and $23 million for Other Services.  Cintas continues to reinvest in land, buildings and equipment in an effort to expand capacity for future growth.  Cintas anticipates that capital expenditures for fiscal 2006 will be between $150 and $170 million.

 

On May 13, 2002, Cintas completed the acquisition of Omni Services, Inc.  This acquisition, coupled with smaller acquisitions in both the Rentals and Other Services segments, was financed with a combination of cash, long-term notes and commercial paper.  As a result of this additional debt, the total debt to total capitalization ratio was 33.6% at May 31, 2002.  Significant debt repayments have occurred since that time, including $11 million in fiscal 2005 and $69 million in fiscal 2004.  The total debt to total capitalization ratio has decreased to 18.3% at May 31, 2005.

 

The long-term notes total $500 million and consist of $225 million with five-year maturities at a rate of 5.125% and $225 million with ten-year maturities at a rate of 6.0%.  Cintas has earned credit ratings on these notes of “A” from Standard & Poor’s and “A2” from Moody’s.  Cintas also utilizes a $300 million commercial paper program, on which it has earned credit ratings of “A-1” from Standard & Poor’s and “Prime-1” from Moody’s.  According to Standard & Poor’s and Moody’s, these ratings reflect Cintas’ commitment to conservative financial policies, strong financial management and a disciplined integration strategy for acquisitions.  The commercial paper program is fully supported by a long-term credit facility that matures in 2009.  As of May 31, 2005, there is no commercial paper outstanding.  Subsequent to May 31, 2005, Cintas borrowed $64 million under the $300 million commercial paper program for short-term cash requirements.  This financing decision was made in order to allow certain marketable securities to reach maturity rather than Cintas incurring a penalty for early redemption.

 

During the year, Cintas paid dividends of $55 million, or $0.32 per share.  On a per share basis, this dividend is an increase of 10.3% over the dividend paid in fiscal 2004.  This marks the 22nd consecutive year that Cintas has increased

 

15



 

its annual dividend since going public in 1983.

 

On May 2, 2005, Cintas announced that the Board of Directors authorized a $500 million stock repurchase program at market prices.  During fiscal 2005, we purchased approximately 1.5 million shares of Cintas stock at an average price of $39.62 per share, for a total purchase price of approximately $58 million.  Due to the stock being purchased late in fiscal 2005, the amount of purchased shares did not change fiscal 2005 earnings per share. Subsequent to May 31, 2005, Cintas purchased approximately 2.4 million additional shares of Cintas stock at an average price of $39.08 per share for a total purchase price of approximately $96 million.  As such, from the inception of the stock repurchase program through July 22, 2005, Cintas has purchased approximately 3.9 million shares of Cintas stock at an average price of $39.27 per share for a total purchase price of approximately $154 million.  The Board did not specify an expiration date for this program.

 

Following is information regarding Cintas’ long-term contractual obligations and other commitments outstanding as of May 31, 2005:

 

LONG-TERM CONTRACTUAL OBLIGATIONS

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Two to

 

 

 

 

 

 

 

 

 

One year

 

three

 

Four to

 

After five

 

(In thousands)

 

Total

 

or less

 

years

 

five years

 

years

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (1)

 

$

469,668

 

$

6,731

 

$

232,033

 

$

872

 

$

230,032

 

Capital lease obligations (2)

 

2,923

 

569

 

1,213

 

661

 

480

 

Operating leases (3)

 

61,814

 

18,572

 

25,819

 

10,863

 

6,560

 

Interest payments (4)

 

125,345

 

26,225

 

43,147

 

27,708

 

28,265

 

Interest swap agreements (5)

 

(1,719

)

(101

)

(1,618

)

 

 

Unconditional purchase obligations

 

 

 

 

 

 

Total contractual cash obligations

 

$

658,031

 

$

51,996

 

$

300,594

 

$

40,104

 

$

265,337

 

 

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 expected to increase 15% annually.  Assuming this 15% increase, payments due in one year or less would be $29,397, two to three years would be $72,685 and four to five years would be $96,126.  Payments for years thereafter are expected to continue increasing by 15% each year.

 


(1)   Long-term debt primarily consists of $450,000 in long-term notes related to the Omni acquisition.  Reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements” for a detailed discussion of long-term debt.

(2)   Capital lease obligations are included in long-term debt detailed in Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements.”

(3)   Operating leases consist primarily of building leases and synthetic leases on two corporate jets.

(4)   Interest payments include interest on both fixed and variable rate debt.  Rates have been assumed to increase 100 basis points for fiscal 2006, an additional 50 basis points in fiscal 2007 and then remain constant in future years.

(5)   Reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements” for a detailed discussion of interest swap agreements.

 

OTHER COMMITMENTS

 

 

 

 

Amount of Commitment Expiration Per Period

 

 

 

 

 

 

 

Two to

 

 

 

 

 

 

 

 

 

One year

 

three

 

Four to

 

After five

 

(In thousands)

 

Total

 

or less

 

years

 

five years

 

Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Lines of credit (1)

 

$

300,000

 

$

 

$

 

$

300,000

 

$

 

Standby letters of credit (2)

 

43,662

 

43,662

 

 

 

 

Guarantees

 

 

 

 

 

 

Standby repurchase obligations

 

 

 

 

 

 

Other commercial commitments

 

 

 

 

 

 

Total commercial commitments

 

$

343,662

 

$

43,662

 

$

 

$

300,000

 

$

 

 


(1)   Back-up facility for the commercial paper program (reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements” for further discussion).

 

16



 

(2)   Support certain outstanding debt (reference Note 5 entitled Long-Term Debt of “Notes to Consolidated Financial Statements”), self-insured workers’ compensation and general liability insurance programs.

 

Cintas has no off-balance sheet arrangements other than the synthetic leases on 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.

 

INFLATION AND CHANGING PRICES

 

Changes in wages, benefits and oil and fuel costs have the potential to materially impact Cintas’ financial results.  Medical benefits and oil and fuel costs, in particular, continue to rise.  Medical benefit costs have increased due to a combination of rising healthcare costs and an increase in the number of covered participants.  Medical benefits were 3.1% of total revenues in fiscal 2005 and 2.9% of total revenues in fiscal 2004.  Oil and fuel costs were 2.8% of total revenues in fiscal 2005 and 2.5% of total revenues in fiscal 2004.

 

Management believes inflation has not had a material impact on Cintas’ financial condition or a negative impact on operations.

 

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.  On April 27, 2005, the United States Equal Employment Opportunity Commission (EEOC) 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 and seeking similar relief damages and fees 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 job 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 job 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.  In addition, a class action lawsuit, Larry Houston, et al., v. Cintas Corporation, was filed on August 3, 2005, in the United States District Court for the Northern District of California on behalf of African-American managers alleging racial discrimination. 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.

 

17



 

Several other similar 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 representatives and sales associates, (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, (iv) a charge filed on March 28, 2005, by Lorelei Reynolds on behalf of herself and a similarly situated class with the EEOC Birmingham District alleging discriminatory pay and treatment due to race and gender, (v) a charge filed on April 25, 2005, by Melissa Schulz on behalf of herself and a similarly situated class with the EEOC Systemic Litigation Unit and the Oregon Bureau of Labor and Industries, Civil Rights Division alleging discriminatory pay and treatment due to race and gender, (vi) a charge filed on May 6, 2005, by Anthony Jones on behalf of himself and a similarly situated class with the EEOC Systemic Litigation Unit alleging discriminatory pay and treatment due to race and (vii) a charge filed on June 10, 2005, by Mattie Cooper on behalf of herself and a similarly situated class with the EEOC Systemic Litigation Unit alleging discriminatory pay and treatment due to race and gender.  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.

 

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 thousand.  A reserve has been established for the estimated liability related to these allegations.

 

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.

 

Cintas is subject to various environmental laws and regulations, as are other companies in the industry.  While environmental compliance is not a material component of our costs, Cintas must incur capital expenditures and associated operating costs, primarily for water treatment and waste removal, on a regular basis.  Environmental spending related to water treatment and waste removal was approximately $14 million in fiscal 2005 and approximately $12 million in fiscal 2004.  Capital expenditures to limit or monitor hazardous substances were $4 million in fiscal 2005 and $3 million in fiscal 2004.  These expenditures were primarily related to the purchase of water treatment systems, which are depreciated over a useful life of ten years.  Cintas does not expect a material change in the cost of environmental compliance on a percent to sale basis and is not aware of any material non-compliance with environmental laws.

 

NEW ACCOUNTING STANDARDS

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based Payment, (Statement 123R) which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.   Generally, the approach in Statement 123R is similar to the approach described in Statement 123.  However, Statement 123R 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) no later than the beginning of the first fiscal year beginning after June 15, 2005.  Cintas will adopt this Statement no later than the first quarter of fiscal 2007. Cintas is in the process of determining the impact that the adoption of this Statement will have on its financial position and results of operations.

 

18



 

CRITICAL ACCOUNTING POLICIES

 

The preparation of Cintas’ consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that have a significant effect on the amounts reported in the financial statements and accompanying notes.  These critical accounting policies should be read in conjunction with Note 1 entitled Significant Accounting Policies of “Notes to Consolidated Financial Statements.”  Significant changes, estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.

 

Revenue recognition

 

Rental revenue is recognized when services are performed and other services revenue is recognized either when services are performed or when products are shipped and the title and risks of ownership pass to the customer.  Cintas establishes an allowance for uncollectible accounts.  This allowance is an estimate based on historical rates of collectibility.  An uncollectible accounts provision is recorded for overdue amounts, beginning with a nominal percentage and increasing substantially as the account ages.  The amount provided as the account ages will differ slightly between the Rentals and Other Services segments, because of differences in customers served and the nature of each business segment.

 

Inventories

 

Inventories are valued at the lower of cost (first-in, first-out) or market.  Substantially all inventories represent finished goods.  Cintas applies a commonly accepted practice of using inventory turns to apply variances between actual to standard costs to the inventory balances.  The judgments and estimates used to calculate inventory turns will have an impact on the valuation of inventory at the lower of cost or market.  Inventory obsolescence is determined by specific identification, as well as an estimate based on historical rates of obsolescence.

 

Uniforms and other rental items in service

 

Uniform and other rental items in service are valued at cost less amortization, calculated using the straight-line method.  Uniforms in service (other than cleanroom and flame resistant garments) are amortized over their useful life of eighteen months.  Other rental items including shop towels, mats, cleanroom garments, flame resistant garments, linens and restroom dispensers are amortized over their useful lives of eight to forty-eight months.  The amortization rates used are based on industry experience, Cintas’ experience and wear tests performed by Cintas.  These factors are critical to determining the amount of in service inventory that is presented in the financial statements.

 

Property and equipment

 

Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which is typically thirty to forty years for buildings, five to twenty years for building improvements, three to ten years for equipment and two to five years for leasehold improvements.  When events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the estimated future cash flows (undiscounted) are compared to the carrying amount of the assets.  If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss is recorded.  The impairment loss is measured by comparing the fair value of the assets with their carrying amounts.  Fair value is determined by discounted cash flows or appraised values, as appropriate.  Long-lived assets that are held for disposal are reported at the lower of the carrying amount or the fair value, less estimated costs related to disposition.

 

Goodwill and impairment

 

Goodwill, primarily obtained through acquisitions of businesses, is valued at cost less any impairment.  Cintas performs annual impairment tests by segment.  These tests include comparisons to current market values, where available, and discounted cash flow analyses.  Significant assumptions include growth rates based on historical trends and margin improvement leveraged from such growth.  Based on the results of the impairment tests, Cintas has not recognized an impairment of goodwill for the years ended May 31, 2005, 2004 or 2003.

 

Service contracts and other assets

 

Service contracts and other assets, which consist primarily of noncompete and consulting agreements obtained through acquisitions of businesses, are amortized by use of the straight-line method over the estimated lives of the agreements, which are generally five to ten years.  Certain noncompete agreements, as well as all service contracts, require that a valuation be determined using a discounted cash flow model.  The assumptions and judgments used in these models

 

19



 

involve estimates of cash flows and discount rates, among other factors.  Because of the assumptions used to value these intangible assets, actual results over time could vary from original estimates.  Impairment of service contracts and other assets is through specific identification.  No impairment has been recognized by Cintas for the years ended May 31, 2005, 2004 or 2003.

 

Environmental matters and related litigation

 

Cintas is subject to legal proceedings and claims related to environmental matters arising from the ordinary course of business.  U.S. generally accepted accounting principles require that a liability for contingencies be recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated.  Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded.  Cintas regularly consults with attorneys to ensure that all of the relevant facts and circumstances are considered before a contingent liability is recorded.  While a significant change in assumptions and judgments could have a material impact on the amounts recorded for contingent liabilities, Cintas does not believe that they will result in a material adverse effect on the financial statements.  A detailed discussion of litigation matters is discussed above in the section entitled Litigation and Other Contingencies.

 

Income taxes

 

Deferred tax assets and liabilities are determined by the differences between the financial statement carrying amounts and the tax basis of assets and liabilities.  Please reference Note 7 entitled Income Taxes of “Notes to Consolidated Financial Statements” for the types of items that give rise to significant deferred income tax assets and liabilities.  Deferred income taxes are classified as assets or liabilities based on the classification of the related asset or liability for financial reporting purposes.  Deferred income taxes that are not related to an asset or liability for financial reporting are classified according to the expected reversal date.  Cintas regularly reviews deferred tax assets for recoverability based upon projected future taxable income and the expected timing of the reversals of existing temporary differences.  As a result of this review, Cintas has not established a valuation allowance against the deferred tax assets.

 

Cintas is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due.  These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions.  In evaluating the exposure associated with various filing positions, Cintas records reserves for probable exposures.  Based on Cintas’ evaluation of current tax positions, Cintas believes it has appropriately accrued for probable exposures.

 

OUTLOOK

 

As we look forward to fiscal 2006, our outlook remains positive, but guarded.  As the economy has strengthened and employment rates have improved, our internal growth rates have also continued to improve.  Based on our marketing data, we have a relatively low 7% market share of a $42.5 billion estimated potential market.  As such, we see upside potential for all of our business units.  Although difficult to predict, we anticipate continued growth in all of our business units.  Overall performance will be largely driven by external market conditions.

 

In the marketplace, competition and related pricing pressure will continue; however, we believe cost containment initiatives, technological advances and continued leverage of our infrastructure will soften or offset any impact.

 

When appropriate opportunities arise, we will supplement our internal growth with strategic acquisitions.

 

Like most other companies, we experienced, and anticipate continuing to experience, increased costs for wages and benefits, including medical benefits.  Changes in oil and fuel costs and changes in federal and state tax laws also have the potential to impact our results.

 

Cintas continues to be the target of a corporate unionization campaign by UNITE HERE and the Teamsters unions.  These unions are attempting to pressure Cintas into surrendering our employees’ rights to a government-supervised election and unilaterally accept union representation.  This is unacceptable.  Cintas’ philosophy in regard to unions is straightforward:  We believe that employees have the right to say yes to union representation and the freedom to say no.  This campaign could be materially disruptive to our business and could materially adversely affect results of operations.  We will continue to vigorously oppose this campaign and to defend our employees’ rights.

 

We believe that the high level of customer service provided by our partners and supported by our infrastructure, quality products, financial resources and corporate culture will provide for continued business success.  However, a number of factors influence future revenue, margins and profit which make forecasting difficult.

 

20



 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE

ABOUT MARKET RISK

 

Cintas manages interest rate risk by using a combination of variable and fixed rate debt, marketable securities and interest rate swap agreements.  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 $230 million, with an average interest rate of 4.6%.  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 change by one-half percent (or 50 basis points), Cintas’ income before taxes would change by approximately $1 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 Cintas’ capital structure.

 

Through its foreign operations, Cintas is exposed to foreign currency risk.  Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenue and profit translated into U.S. dollars.  The primary foreign currency to which Cintas is exposed is the Canadian dollar.  Cintas does not currently use forward exchange contracts to limit potential losses in earnings or cash flows from foreign currency exchange rate movements.

 

21



 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements

 

Audited Consolidated Financial Statements for the Years Ended May 31, 2005, 2004 and 2003

 

 

 

Management’s Report on Internal Control over Financial Reporting

 

 

 

Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm

 

 

 

Consolidated Statements of Income

 

 

 

Consolidated Balance Sheets

 

 

 

Consolidated Statements of Shareholders’ Equity

 

 

 

Consolidated Statements of Cash Flows

 

 

 

Notes to Consolidated Financial Statements

 

 

22



 

Management’s Report on Internal Control over Financial Reporting

 

To the Shareholders of Cintas Corporation:

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.

 

With the supervision of our President and Chief Executive Officer and our Chief Financial Officer, management assessed our internal control over financial reporting as of May 31, 2005. Management based its assessment on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment. This assessment is supported by testing and monitoring performed by our internal audit function.

 

Based on our assessment, management has concluded that our internal control over financial reporting was effective as of May 31, 2005, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.

 

We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors. Additionally, our independent registered public accounting firm, Ernst & Young LLP, audited management’s assessment and independently assessed the effectiveness of Cintas’ internal control over financial reporting. Ernst & Young has issued an attestation report, which is included in this Annual Report.

 

 

/s/ Scott D. Farmer

 

 

Scott D. Farmer

 

President and Chief Executive Officer

 

 

 

 

 

/s/ William C. Gale

 

 

William C. Gale

 

Senior Vice President and Chief Financial Officer

 

 

 

 

23



 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

Cintas Corporation:

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls over Financial Reporting, that Cintas Corporation maintained effective internal control over financial reporting as of May 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cintas Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that Cintas Corporation maintained effective internal control over financial reporting as of May 31, 2005, is fairly stated, in all material respects, based on the COSO criteria.  Also, in our opinion, Cintas Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2005, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cintas Corporation as of May 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended May 31, 2005 of Cintas Corporation, and our report dated July 22, 2005, expressed an unqualified opinion thereon.

 

 

 

/s/ ERNST & YOUNG LLP

 

 

Cincinnati, Ohio

July 22, 2005

 

24



 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

Cintas Corporation:

 

We have audited the accompanying consolidated balance sheets of Cintas Corporation as of May 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended May 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States).  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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2005, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cintas Corporation’s internal control over financial reporting as of May 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated July 22, 2005, expressed an unqualified opinion thereon.

 

 

 

/s/ ERNST & YOUNG LLP

 

 

Cincinnati, Ohio

July 22, 2005

 

25



 

CINTAS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years Ended May 31

(In thousands except per share data)

 

 

 

2005

 

2004

 

2003

 

Revenue:

 

 

 

 

 

 

 

Rentals

 

$

2,363,397

 

$

2,201,405

 

$

2,101,785

 

Other services

 

703,886

 

612,654

 

584,800

 

 

 

3,067,283

 

2,814,059

 

2,686,585

 

 

 

 

 

 

 

 

 

Costs and expenses (income):

 

 

 

 

 

 

 

Cost of rentals

 

1,295,992

 

1,222,638

 

1,173,666

 

Cost of other services

 

466,532

 

404,929

 

393,711

 

Selling and administrative expenses

 

810,232

 

727,618

 

695,437

 

Interest income

 

(6,914

)

(2,650

)

(2,905

)

Interest expense

 

24,448

 

25,101

 

30,917

 

Write-off of loan receivable

 

 

4,343

 

 

 

 

2,590,290

 

2,381,979

 

2,290,826

 

 

 

 

 

 

 

 

 

Income before income taxes

 

476,993

 

432,080

 

395,759

 

Income taxes

 

176,475

 

159,875

 

146,506

 

Net income

 

$

300,518

 

$

272,205

 

$

249,253

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.75

 

$

1.59

 

$

1.46

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

1.74

 

$

1.58

 

$

1.45

 

 

 

 

 

 

 

 

 

Dividends declared and paid per share

 

$

.32

 

$

.29

 

$

.27

 

 

See accompanying notes.

 

26



 

CINTAS CORPORATION

CONSOLIDATED BALANCE SHEETS

As of May 31

(In thousands except share data)

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

43,196

 

$

87,357

 

Marketable securities

 

266,232

 

166,964

 

Accounts receivable, principally trade, less allowance of $9,891 and $8,354, respectively

 

326,896

 

285,592

 

Inventories, net

 

216,412

 

188,688

 

Uniforms and other rental items in service

 

305,450

 

298,247

 

Prepaid expenses

 

8,358

 

7,395

 

Total current assets

 

1,166,544

 

1,034,243

 

 

 

 

 

 

 

Property and equipment, at cost, net

 

817,198

 

785,310

 

 

 

 

 

 

 

Goodwill

 

889,538

 

805,441

 

Service contracts, net

 

146,596

 

144,664

 

Other assets, net

 

39,868

 

40,639

 

 

 

$

3,059,744

 

$

2,810,297

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

69,296

 

$

53,451

 

Accrued compensation and related liabilities

 

38,710

 

31,804

 

Accrued liabilities

 

166,428

 

146,226

 

Income taxes:

 

 

 

 

 

Current

 

32,864

 

36,640

 

Deferred

 

41,883

 

47,042

 

Long-term debt due within one year

 

7,300

 

10,523

 

Total current liabilities

 

356,481

 

325,686

 

 

 

 

 

 

 

Long-term debt due after one year

 

465,291

 

473,685

 

 

 

 

 

 

 

Deferred income taxes

 

133,837

 

122,957

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, no par value:

 

 

 

 

 

100,000 shares authorized, none outstanding

 

 

 

Common stock, no par value:

 

 

 

 

 

425,000,000 shares authorized

 

 

 

 

 

2005: 172,127,502 shares issued and 170,658,601 shares outstanding

 

 

 

 

 

2004: 171,377,679 shares issued and outstanding

 

114,171

 

94,569

 

Retained earnings

 

2,035,992

 

1,790,547

 

Treasury stock:

 

 

 

 

 

2005: 1,468,901 shares

 

 

 

 

 

2004: 0 shares

 

(58,204

)

 

Other accumulated comprehensive income (loss):

 

 

 

 

 

Foreign currency translation

 

13,507

 

4,474

 

Unrealized loss on derivatives

 

(1,331

)

(1,621

)

Total shareholders’ equity

 

2,104,135

 

1,887,969

 

 

 

$

3,059,744

 

$

2,810,297

 

 

See accompanying notes.

 

27



 

CINTAS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Total

 

 

 

Common Stock

 

Retained

 

Comprehensive

 

Treasury Stock

 

Shareholders’

 

 

 

Shares

 

Amount

 

Earnings

 

Income (Loss)

 

Shares

 

Amount

 

Equity

 

Balance at May 31, 2002

 

169,930

 

$

66,508

 

$

1,365,136

 

$

(7,885

)

 

$

 

$

1,423,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

249,253

 

 

 

 

249,253

 

Equity adjustment for foreign currency translation

 

 

 

 

9,290

 

 

 

9,290

 

Change in fair value of derivatives

 

 

 

 

732

 

 

 

732

 

Comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

259,275

 

Dividends

 

 

 

(46,003

)

 

 

 

(46,003

)

Effects of acquisitions

 

74

 

2,800

 

(315

)

 

 

 

2,485

 

Stock options exercised net of shares surrendered

 

596

 

5,699

 

 

 

 

 

5,699

 

Tax benefit resulting from exercise of employee stock options

 

 

1,117

 

 

 

 

 

1,117

 

Balance at May 31, 2003

 

170,600

 

76,124

 

1,568,071

 

2,137

 

 

 

1,646,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

272,205

 

 

 

 

272,205

 

Equity adjustment for foreign currency translation

 

 

 

 

47

 

 

 

47

 

Change in fair value of derivatives

 

 

 

 

669

 

 

 

669

 

Comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

272,921

 

Dividends

 

 

 

(49,634

)

 

 

 

(49,634

)

Effects of acquisitions

 

274

 

11,550

 

(95

)

 

 

 

11,455

 

Stock options exercised net of shares surrendered

 

504

 

5,868

 

 

 

 

 

5,868

 

Tax benefit resulting from exercise of employee stock options

 

 

1,027

 

 

 

 

 

1,027

 

Balance at May 31, 2004

 

171,378

 

94,569

 

1,790,547

 

2,853

 

 

 

1,887,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

300,518

 

 

 

 

300,518

 

Equity adjustment for foreign currency translation

 

 

 

 

9,033

 

 

 

9,033

 

Change in fair value of derivatives

 

 

 

 

290

 

 

 

290

 

Comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

309,841

 

Dividends

 

 

 

(54,968

)

 

 

 

(54,968

)

Effects of acquisitions

 

289

 

12,818

 

(105

)

 

 

 

12,713

 

Stock options exercised net of shares surrendered

 

461

 

4,621

 

 

 

 

 

 

 

4,621

 

Tax benefit resulting from exercise of employee stock options

 

 

2,163

 

 

 

 

 

2,163

 

Stock repurchases

 

 

 

 

 

(1,469

)

(58,204

)

(58,204

)

Balance at May 31, 2005

 

172,128

 

$

114,171

 

$

2,035,992

 

$

12,176

 

(1,469

)

$

(58,204

)

$

2,104,135

 

 

See accompanying notes.

 

28



 

CINTAS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended May 31

(In thousands)

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

300,518

 

$

272,205

 

$

249,253

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

119,813

 

117,285

 

115,320

 

Amortization of deferred charges

 

28,362

 

25,974

 

27,741

 

Deferred income taxes

 

4,191

 

15,839

 

7,648

 

Change in current assets and liabilities, net of acquisitions of businesses:

 

 

 

 

 

 

 

Accounts receivable

 

(36,317

)

(488

)

4,044

 

Inventories

 

(26,321

)

48,033

 

(36,406

)

Uniforms and other rental items in service

 

(7,168

)

2,744

 

(24,013

)

Prepaid expenses

 

(892

)

246

 

2,597

 

Accounts payable

 

15,727

 

(3,223

)

(6,648

)

Accrued compensation and related liabilities

 

6,906

 

6,552

 

(3,734

)

Accrued liabilities

 

12,444

 

4,429

 

(9,851

)

Income taxes payable

 

(3,050

)

20,113

 

4,736

 

Net cash provided by operating activities

 

414,213

 

509,709

 

330,687

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(140,727

)

(112,888

)

(115,019

)

Proceeds from sale or redemption of marketable securities

 

102,997

 

48,078

 

23,790

 

Purchase of marketable securities

 

(202,265

)

(189,622

)

(4,752

)

Acquisitions of businesses, net of cash acquired

 

(109,076

)

(101,654

)

(37,173

)

Other

 

(1,663

)

12,282

 

(3,068

)

Net cash used in investing activities

 

(350,734

)

(343,804

)

(136,222

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayment of long-term debt

 

(10,575

)

(68,764

)

(172,891

)

Stock options exercised

 

4,621

 

5,868

 

5,699

 

Dividends paid

 

(54,968

)

(49,634

)

(46,003

)

Repurchase of common stock

 

(58,204

)

 

 

Other

 

11,486

 

1,743

 

10,341

 

Net cash used in financing activities

 

(107,640

)

(110,787

)

(202,854

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(44,161

)

55,118

 

(8,389

)

Cash and cash equivalents at beginning of year

 

87,357

 

32,239

 

40,628

 

Cash and cash equivalents at end of year

 

$

43,196

 

$

87,357

 

$

32,239

 

 

See accompanying notes.

 

29



 

CINTAS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share and share data)

 

1.     SIGNIFICANT ACCOUNTING POLICIES

 

Business description.  Cintas Corporation (Cintas) provides highly specialized services to businesses of all types throughout North America.  Cintas designs, manufactures and implements corporate identity uniform programs, provides entrance mats, shop towels, restroom supplies, promotional products, first aid, safety and fire protection products and services and document management services for over 700,000 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 to its customers.  Other items, including entrance mats, shop towels and restroom supplies, are also rented or sold 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, safety and fire protection products and services, document management services and cleanroom supplies.  These services are provided throughout the United States and Canada to businesses of all types - from small service manufacturing companies to major corporations that employ thousands of people.

 

Principles of consolidation.  The consolidated financial statements include the accounts of Cintas and its subsidiaries.  Intercompany balances and transactions have been eliminated.

 

Use of estimates.  The preparation of financial statements in conformity with U.S. 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.

 

Revenue recognition.  Rental revenue is recognized when services are performed and other services revenue is recognized either when services are performed or when products are shipped and the title and risks of ownership pass to the customer.  Cintas also establishes an estimate of allowances for uncollectible accounts when revenue is recorded.

 

Cost of rentals.  Cost of rentals consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other rental items.  The Rentals segment inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution are included in the cost of rentals.

 

Cost of other services.  Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses.  The Other Services segment inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution are included in the cost of other services.

 

Selling and administrative expense.  Selling and administrative expense consists primarily of sales labor and commissions, management labor, payroll taxes, medical expense, insurance expense, legal costs and amortization of intangibles.

 

Cash and cash equivalents.  Cintas considers all highly liquid investments with a maturity of three months or less, at date of purchase, to be cash equivalents.

 

Marketable securities.  All marketable securities are comprised of debt securities and classified as available-for-sale.  The majority of these debt securities are obligations of state and political subdivisions.

 

Accounts receivable.  Accounts receivable are comprised of amounts owed through product shipments and are presented net of an allowance for uncollectible accounts.  This allowance is an estimate based on historical rates of collectibility.  An uncollectible accounts provision is recorded for overdue amounts, beginning with a nominal percentage and increasing substantially as the account ages.  The amount provided as the account ages will differ slightly between the Rentals and Other Services segments because of differences in customers served and the nature of each business segment. When an account is considered uncollectible, it is written off against this allowance.

 

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.  Uniforms in service (other than cleanroom and flame resistant garments) are amortized over their useful life

 

30



 

of eighteen months.  Other rental items including shop towels, mats, cleanroom garments, flame resistant garments, linens and restroom dispensers are amortized over their useful lives of eight to forty-eight months.

 

Property and equipment.  Depreciation is calculated using the straight-line method primarily over the following estimated useful lives, in years:

 

Buildings

 

30 to 40

 

Building improvements

 

5 to 20

 

Equipment

 

3 to 10

 

Leasehold improvements

 

2 to 5

 

 

Long-lived assets.  When events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the estimated future cash flows (undiscounted) are compared to the carrying amount of the assets.  If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss is recorded.  The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Fair value is determined by discounted cash flows or appraised values, as appropriate.  Long-lived assets that are held for disposal are reported at the lower of the carrying amount or the fair value, less estimated costs related to disposition.

 

Goodwill.  As required under Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets, goodwill is separately disclosed from other intangible assets on the balance sheet and no longer amortized, but is tested for impairment on at least an annual basis.  Cintas completed an annual goodwill impairment test for the years ended May 31, 2005, 2004 and 2003, as required by SFAS 142.  Based on the results of the impairment tests, Cintas was not required to recognize an impairment of goodwill in any of these years.  Cintas will continue to perform future impairment tests as required by SFAS 142 as of March 1 in future years, or when indicators of impairment are noted.

 

Service contracts and other assets.  Service contracts and other assets, which consist primarily of noncompete and consulting agreements obtained through acquisitions of businesses, are amortized by use of the straight-line method over the estimated lives of the agreements, which are generally five to ten years.

 

Accrued liabilities.  Accrued liabilities consist primarily of insurance, medical and profit sharing obligations and legal and environmental contingencies.  These are recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated.

 

Stock options.  Cintas applies the provisions of Accounting Principles Board Opinion No. 25 (APB 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 Cintas’ common stock on the date of grant.  Cintas has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation.

 

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation - Transition and Disclosure.  This Statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  Cintas continues to apply APB 25 for the method used to account for stock-based employee compensation arrangements, where applicable, but adopted the disclosure requirements of SFAS 148 during fiscal 2003.

 

31



 

For purposes of pro forma disclosure, the estimated fair value of Cintas’ stock options is amortized to expense over the options’ vesting period.  Pro forma results as if Cintas accounted for its stock-based employee compensation using the fair value based alternative appear below:

 

 

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

300,518

 

$

272,205

 

$

249,253

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(7,971

)

(7,127

)

(6,062

)

 

 

 

 

 

 

 

 

Pro forma net income

 

$

292,547

 

$

265,078

 

$

243,191

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic – as reported

 

$

1.75

 

$

1.59

 

$

1.46

 

Basic – pro forma

 

$

1.70

 

$

1.55

 

$

1.43

 

 

 

 

 

 

 

 

 

Diluted – as reported

 

$

1.74

 

$

1.58

 

$

1.45

 

Diluted – pro forma

 

$

1.69

 

$

1.54

 

$

1.41

 

 

The effects of providing pro forma disclosure are not representative of earnings to be reported for future years.

 

During fiscal 2005, Cintas vested certain employee stock options whose exercise price was greater than current market value.  This vesting will have an impact on basic pro forma and diluted pro forma earnings per share in future years.

 

Derivatives and hedging activities.  Derivatives and hedging activities are presented in accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivatives and Hedging Activities, as amended.  This Standard requires the recognition of all derivatives on the balance sheet at fair value and recognition of the resulting gains or losses as adjustments to earnings or other comprehensive income.

 

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.

 

From time to time, Cintas will use derivatives for both cash flow hedging and fair value hedging purposes.  For derivative instruments that hedge the exposure of variability in short-term interest rates, designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  For the ineffective portion of the hedge, gains or losses are charged to earnings in the current period.  For derivative instruments that hedge the exposure to changes in the fair value of certain fixed rate debt, designated as fair value hedges, the effective portion of the net gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate debt attributable to the hedged risk, are recorded in current period earnings.

 

Cintas uses interest rate swap and lock agreements, from time to time, to hedge against variability in short-term interest rates.  These agreements effectively convert a portion of the floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense.  Cintas uses the Hypothetical Derivative Method for assessing the effectiveness of these swaps.  The effectiveness of these swaps is reviewed at least every fiscal quarter.  Cintas 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 interest rate swap agreements referenced in Note 5, entitled Long-Term Debt, 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.

 

32



 

Fair value of financial instruments.  The following methods and assumptions were used by Cintas 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 approximates market value.  Market values are based on quoted market prices.

 

Long-term debt.  The amounts reported are at a carrying value which approximates market value.  Market values are determined using similar debt instruments currently available to Cintas that are consistent with the terms, interest rates and maturities.

 

Reclassification.  Certain prior year amounts have been reclassified to conform to current year presentation.

 

Other accounting pronouncements. On December 16, 2004, FASB issued Statement No. 123 (revised 2004), Share-Based Payment, (Statement 123R), which is a revision of SFAS 123, Accounting for Stock-Based Compensation.  Generally, the approach in Statement 123R is similar to the approach described in SFAS 123.  However, Statement 123R 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) no later than the beginning of the first fiscal year beginning after June 15, 2005. Cintas will adopt this Statement no later than the first quarter of fiscal 2007. Cintas is in the process of determining the impact that the adoption of this Statement will have on its financial position and results of operations.

 

2.     MARKETABLE SECURITIES

 

All marketable securities are comprised of debt securities and classified as available-for-sale.  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:

 

 

 

2005

 

2004

 

 

 

 

 

Estimated

 

 

 

Estimated

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Obligations of state and political subdivisions

 

$

163,168

 

$

161,258

 

$

134,921

 

$

133,888

 

U.S. Treasury securities and obligations of U.S. government agencies

 

55,143

 

54,583

 

112

 

109

 

Other debt securities

 

47,921

 

47,846

 

31,931

 

31,799

 

 

 

$

266,232

 

$

263,687

 

$

166,964

 

$

165,796

 

 

The gross realized gains on sales of available-for-sale securities totaled $23, $19 and $105 for the years ended May 31, 2005, 2004 and 2003, and the gross realized losses totaled $19, $0 and $10, respectively.  Net unrealized losses are $2,545 and $1,168 at May 31, 2005 and 2004, respectively.

 

The cost and estimated fair value of debt securities at May 31, 2005, 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

 

$

77,809

 

$

77,576

 

Due after one year through three years

 

188,423

 

186,111

 

 

 

$

266,232

 

$

263,687

 

 

33



 

3.     PROPERTY AND EQUIPMENT

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Land

 

$

72,663

 

$

67,360

 

Buildings and improvements

 

431,746

 

411,878

 

Equipment

 

783,244

 

741,740

 

Leasehold improvements

 

10,735

 

10,577

 

Construction in progress

 

72,487

 

59,250

 

 

 

1,370,875

 

1,290,805

 

Less: accumulated depreciation

 

553,677

 

505,495

 

 

 

$

817,198

 

$

785,310

 

 

4.     GOODWILL, SERVICE CONTRACTS AND OTHER ASSETS

 

Changes in the carrying amount of goodwill and service contracts for the years ended May 31, 2005 and 2004, by operating segment, are as follows:

 

 

 

 

 

Other

 

 

 

 

 

Rentals

 

Services

 

Total

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

 

 

Balance as of June 1, 2003

 

$

671,955

 

$

49,900

 

$

721,855

 

Goodwill acquired

 

13,269

 

70,260

 

83,529

 

Foreign currency translation

 

37

 

20

 

57

 

Balance as of May 31, 2004

 

685,261

 

120,180

 

805,441

 

Goodwill acquired

 

15,082

 

67,873

 

82,955

 

Foreign currency translation

 

1,079

 

63

 

1,142

 

Balance as of May 31, 2005

 

$

701,422

 

$

188,116

 

$

889,538

 

 

 

 

 

 

Other