UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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( X )☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | August 31, 2021 |
For the quarterly period ended November 30, 2017
OR
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( )☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
For the transition period from to Commission file number 0-11399
CINTAS CORPORATIONCintas Corporation
(Exact name of Registrantregistrant as specified in its charter)
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WASHINGTONWashington | | 31-1188630 |
(State or other jurisdictionOther Jurisdiction of Incorporation or Organization) | | (I.R.S.IRS Employer Identification Number) |
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incorporation or organization)6800 Cintas Boulevard | | Identification No.) |
P.O. Box 625737 | | |
Cincinnati, | Ohio | | 45262-5737 |
(Address of Principal Executive Offices) | | (Zip Code) |
6800 CINTAS BOULEVARD
P.O. BOX 625737
CINCINNATI, OHIO 45262-5737
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (513) 459-1200
(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
Common stock, no par value | | CTAS | | The NASDAQ Stock Market LLC |
| | (NASDAQ Global Select Market) |
Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Yes ü No _
Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ü☑No _
☐
Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ü☑ Accelerated Filer _ ☐ Non-Accelerated Filer _☐
Smaller Reporting Company _ ☐ Emerging Growth Company _(Do not check if a smaller reporting company)☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. _ ☐
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ü
☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class | | Outstanding December 31, 2017September 30, 2021 |
Common Stock, no par value | | 106,488,799103,407,624 |
CINTAS CORPORATION
TABLE OF CONTENTS
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Part I. | Financial Information | | Page No. |
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| | | November 30, 2017August 31, 2021 and May 31, 20172021
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CINTAS CORPORATION
Part I. Financial Information
ITEM 1.
FINANCIAL STATEMENTS.STATEMENTS
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share data)
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| November 30, 2017 | | November 30, 2016 | | November 30, 2017 | | November 30, 2016 | | August 31, 2021 | | August 31, 2020 | |
Revenue: | |
| | |
| | | | | Revenue: | | | | |
Uniform rental and facility services | $ | 1,308,038 |
| | $ | 1,000,015 |
| | $ | 2,619,822 |
| | $ | 1,994,297 |
| Uniform rental and facility services | $ | 1,508,176 | | | $ | 1,394,411 | | |
Other | 298,403 |
| | 271,062 |
| | 598,122 |
| | 543,430 |
| Other | 388,774 | | | 352,164 | | |
Total revenue | | Total revenue | 1,896,950 | | | 1,746,575 | | |
| 1,606,441 |
| | 1,271,077 |
| | 3,217,944 |
| | 2,537,727 |
| | |
Costs and expenses: | |
| | |
| | | | | Costs and expenses: | | | | |
Cost of uniform rental and facility services | 723,960 |
| | 551,498 |
| | 1,430,823 |
| | 1,088,595 |
| Cost of uniform rental and facility services | 779,301 | | | 715,412 | | |
Cost of other | 166,112 |
| | 154,361 |
| | 331,399 |
| | 307,487 |
| Cost of other | 214,893 | | | 204,962 | | |
Selling and administrative expenses | 468,084 |
| | 361,415 |
| | 954,367 |
| | 731,118 |
| Selling and administrative expenses | 508,655 | | | 476,495 | | |
G&K Services, Inc. transaction and integration expenses | 13,074 |
| | 3,347 |
| | 17,045 |
| | 6,134 |
| |
| | | | | | | | | | |
Operating income | 235,211 |
| | 200,456 |
| | 484,310 |
| | 404,393 |
| Operating income | 394,101 | | | 349,706 | | |
| | | | | | | | | |
Interest income | (291 | ) | | (31 | ) | | (588 | ) | | (96 | ) | Interest income | (56) | | | (64) | | |
Interest expense | 29,129 |
| | 13,267 |
| | 59,446 |
| | 27,439 |
| Interest expense | 21,854 | | | 24,550 | | |
| | | | | | | | | | |
Income before income taxes | 206,373 |
|
| 187,220 |
|
| 425,452 |
|
| 377,050 |
| Income before income taxes | 372,303 | | | 325,220 | | |
Income taxes | 68,636 |
| | 65,270 |
| | 126,607 |
| | 118,892 |
| Income taxes | 41,124 | | | 25,215 | | |
Income from continuing operations | 137,737 |
| | 121,950 |
| | 298,845 |
| | 258,158 |
| |
(Loss) income from discontinued operations, net of tax benefit of $624 and tax expense of $9,851, $41,103 and $10,992, respectively | (628 | ) | | 18,427 |
| | 55,475 |
| | 20,310 |
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| Net income | $ | 137,109 |
| | $ | 140,377 |
|
| $ | 354,320 |
|
| $ | 278,468 |
| Net income | $ | 331,179 | | | $ | 300,005 | | |
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Basic earnings (loss) per share: | | | | | | | | |
Continuing operations | $ | 1.27 |
| | $ | 1.15 |
| | $ | 2.77 |
| | $ | 2.42 |
| |
Discontinued operations | (0.01 | ) | | 0.17 |
| | 0.51 |
| | 0.19 |
| |
| Basic earnings per share | $ | 1.26 |
| | $ | 1.32 |
|
| $ | 3.28 |
|
| $ | 2.61 |
| Basic earnings per share | $ | 3.19 | | | $ | 2.86 | | |
| | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | |
Continuing operations | $ | 1.24 |
| | $ | 1.12 |
| | $ | 2.69 |
| | $ | 2.36 |
| |
Discontinued operations | (0.01 | ) | | 0.17 |
| | 0.50 |
| | 0.19 |
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| Diluted earnings per share | $ | 1.23 |
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| $ | 1.29 |
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| $ | 3.19 |
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| $ | 2.55 |
| Diluted earnings per share | $ | 3.11 | | | $ | 2.78 | | |
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Dividends declared per share | $ | 1.62 |
| | $ | 1.33 |
| | $ | 1.62 |
| | $ | 1.33 |
| Dividends declared per share | $ | 0.95 | | | $ | — | | |
See accompanying notes.
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| August 31, 2021 | | August 31, 2020 | | | | |
| | | | | | | |
Net income | $ | 331,179 | | | $ | 300,005 | | | | | |
| | | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | |
Foreign currency translation adjustments | (24,016) | | | 26,946 | | | | | |
Change in fair value of interest rate lock agreements, net of tax (benefit) expense of $(12,554) and $3,672, respectively | (36,679) | | | 10,842 | | | | | |
Amortization of interest rate lock agreements, net of tax benefit of $148 and $116, respectively | (459) | | | (358) | | | | | |
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Other comprehensive (loss) income, net of tax (benefit) expense of $(12,406) and $3,788, respectively | (61,154) | | | 37,430 | | | | | |
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Comprehensive income | $ | 270,025 | | | $ | 337,435 | | | | | |
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| Three Months Ended | | Six Months Ended |
| November 30, 2017 | | November 30, 2016 | | November 30, 2017 | | November 30, 2016 |
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Net income | $ | 137,109 |
| | $ | 140,377 |
| | $ | 354,320 |
| | $ | 278,468 |
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Other comprehensive (loss) income, net of tax: | | | | | | | |
Foreign currency translation adjustments | (11,374 | ) | | (7,650 | ) | | 23,810 |
| | (7,535 | ) |
Change in fair value of cash flow hedges | — |
| | 26,390 |
| | — |
| | 14,353 |
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Amortization of interest rate lock agreements | (172 | ) | | 385 |
| | (344 | ) | | 770 |
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Change in fair value of available-for-sale securities | (20 | ) | | 1 |
| | — |
| | — |
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Other comprehensive (loss) income | (11,566 | ) | | 19,126 |
| | 23,466 |
| | 7,588 |
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Comprehensive income | $ | 125,543 |
| | $ | 159,503 |
| | $ | 377,786 |
| | $ | 286,056 |
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See accompanying notes.
CINTAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share data) |
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| November 30, 2017 | | May 31, 2017 |
| (Unaudited) | | |
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ASSETS | |
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Current assets: | |
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Cash and cash equivalents | $ | 236,002 |
| | $ | 169,266 |
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Marketable securities | 22,732 |
| | 22,219 |
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Accounts receivable, net | 763,555 |
| | 736,008 |
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Inventories, net | 272,830 |
| | 278,218 |
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Uniforms and other rental items in service | 674,572 |
| | 635,702 |
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Income taxes, current | 35,700 |
| | 44,320 |
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Prepaid expenses and other current assets | 38,058 |
| | 30,132 |
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Assets held for sale | — |
| | 38,613 |
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Total current assets | 2,043,449 |
| | 1,954,478 |
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Property and equipment, net | 1,353,159 |
| | 1,323,501 |
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Investments | 175,663 |
| | 164,788 |
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Goodwill | 2,811,796 |
| | 2,782,335 |
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Service contracts, net | 565,574 |
| | 586,988 |
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Other assets, net | 29,160 |
| | 31,967 |
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| $ | 6,978,801 |
| | $ | 6,844,057 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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Current liabilities: | |
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Accounts payable | $ | 162,981 |
| | $ | 177,051 |
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Accrued compensation and related liabilities | 113,430 |
| | 149,635 |
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Accrued liabilities | 577,960 |
| | 429,809 |
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Debt due within one year | 300,000 |
| | 362,900 |
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Liabilities held for sale | — |
| | 11,457 |
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Total current liabilities | 1,154,371 |
| | 1,130,852 |
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Long-term liabilities: | |
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Debt due after one year | 2,534,222 |
| | 2,770,624 |
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Deferred income taxes | 539,043 |
| | 469,328 |
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Accrued liabilities | 198,132 |
| | 170,460 |
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Total long-term liabilities | 3,271,397 |
| | 3,410,412 |
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Shareholders’ equity: | |
| | |
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Preferred stock, no par value: | — |
| | — |
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100,000 shares authorized, none outstanding |
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Common stock, no par value: | 600,563 |
| | 485,068 |
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425,000,000 shares authorized | |
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FY 2018: 182,338,749 issued and 106,470,073 outstanding | |
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FY 2017: 180,992,605 issued and 105,400,629 outstanding | | | |
Paid-in capital | 192,191 |
| | 223,924 |
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Retained earnings | 5,349,539 |
| | 5,170,830 |
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Treasury stock: | (3,609,697 | ) | | (3,574,000 | ) |
FY 2018: 75,868,676 shares | |
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FY 2017: 75,591,976 shares | | | |
Accumulated other comprehensive income (loss) | 20,437 |
| | (3,029 | ) |
Total shareholders’ equity | 2,553,033 |
| | 2,302,793 |
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| $ | 6,978,801 |
| | $ | 6,844,057 |
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| August 31, 2021 | | May 31, 2021 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 79,749 | | | $ | 493,640 | |
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Accounts receivable, net | 927,360 | | | 901,710 | |
Inventories, net | 463,692 | | | 481,797 | |
Uniforms and other rental items in service | 846,656 | | | 810,104 | |
Income taxes, current | 11,249 | | | 22,282 | |
Prepaid expenses and other current assets | 148,960 | | | 133,776 | |
Total current assets | 2,477,666 | | | 2,843,309 | |
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Property and equipment, net | 1,301,233 | | | 1,318,438 | |
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Investments | 295,268 | | | 274,616 | |
Goodwill | 2,924,993 | | | 2,913,069 | |
Service contracts, net | 403,982 | | | 408,445 | |
Operating lease right-of-use assets, net | 159,289 | | | 168,532 | |
Other assets, net | 295,319 | | | 310,414 | |
| $ | 7,857,750 | | | $ | 8,236,823 | |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 202,968 | | | $ | 230,786 | |
Accrued compensation and related liabilities | 155,212 | | | 241,469 | |
Accrued liabilities | 592,384 | | | 518,910 | |
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Operating lease liabilities, current | 43,308 | | | 43,850 | |
Debt due within one year | 1,275,167 | | | 899,070 | |
Total current liabilities | 2,269,039 | | | 1,934,085 | |
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Long-term liabilities: | | | |
Debt due after one year | 1,343,222 | | | 1,642,833 | |
Deferred income taxes | 395,599 | | | 386,647 | |
Operating lease liabilities | 122,291 | | | 130,774 | |
Accrued liabilities | 418,396 | | | 454,637 | |
Total long-term liabilities | 2,279,508 | | | 2,614,891 | |
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Shareholders’ equity: | | | |
Preferred stock, no par value: | — | | | — | |
100,000 shares authorized, none outstanding | | | |
Common stock, no par value, and paid-in capital: | 1,625,594 | | | 1,516,202 | |
425,000,000 shares authorized | | | |
FY 2022: 190,127,513 shares issued and 103,329,218 shares outstanding | | | |
FY 2021: 189,071,185 shares issued and 104,061,391 shares outstanding | | | |
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Retained earnings | 8,109,368 | | | 7,877,015 | |
Treasury stock: | (6,395,493) | | | (5,736,258) | |
FY 2022: 86,798,295 shares | | | |
FY 2021: 85,009,794 shares | | | |
Accumulated other comprehensive (loss) income | (30,266) | | | 30,888 | |
Total shareholders’ equity | 3,309,203 | | | 3,687,847 | |
| $ | 7,857,750 | | | $ | 8,236,823 | |
See accompanying notes.
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
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| Common Stock and Paid-In Capital | | | | Retained Earnings | | Other Accumulated Comprehensive Income (Loss) | | Treasury Stock | | Total Shareholders' Equity |
| Shares | | Amount | | | | | Shares | | Amount | |
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Balance at June 1, 2021 | 189,071 | | | $ | 1,516,202 | | | | | $ | 7,877,015 | | | $ | 30,888 | | | (85,010) | | | $ | (5,736,258) | | | $ | 3,687,847 | |
Net income | — | | | — | | | | | 331,179 | | | — | | | — | | | — | | | 331,179 | |
Comprehensive loss, net of tax | — | | | — | | | | | — | | | (61,154) | | | — | | | — | | | (61,154) | |
Dividends | — | | | — | | | | | (98,826) | | | — | | | — | | | — | | | (98,826) | |
Stock-based compensation | — | | | 36,496 | | | | | — | | | — | | | — | | | — | | | 36,496 | |
Vesting of stock-based compensation awards | 493 | | | — | | | | | — | | | — | | | — | | | — | | | — | |
Stock options exercised, net of shares surrendered | 564 | | | 72,896 | | | | | — | | | — | | | — | | | — | | | 72,896 | |
Repurchase of common stock | — | | | — | | | | | — | | | — | | | (1,788) | | | (659,235) | | | (659,235) | |
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Balance at August 31, 2021 | 190,128 | | | $ | 1,625,594 | | | | | $ | 8,109,368 | | | $ | (30,266) | | | (86,798) | | | $ | (6,395,493) | | | $ | 3,309,203 | |
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| Common Stock and Paid-In Capital | | | | Retained Earnings | | Other Accumulated Comprehensive Loss | | Treasury Stock | | Total Shareholders' Equity |
| Shares | | Amount | | | | | Shares | | Amount | |
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Balance at June 1, 2020 | 186,793 | | | $ | 1,274,210 | | | | | $ | 7,296,509 | | | $ | (153,380) | | | (83,378) | | | $ | (5,182,137) | | | $ | 3,235,202 | |
Net income | — | | | — | | | | | 300,005 | | | — | | | — | | | — | | | 300,005 | |
Comprehensive income, net of tax | — | | | — | | | | | — | | | 37,430 | | | — | | | — | | | 37,430 | |
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Stock-based compensation | — | | | 29,055 | | | | | — | | | — | | | — | | | — | | | 29,055 | |
Vesting of stock-based compensation awards | 568 | | | — | | | | | — | | | — | | | — | | | — | | | — | |
Stock options exercised, net of shares surrendered | 795 | | | 72,123 | | | | | — | | | — | | | — | | | — | | | 72,123 | |
Repurchase of common stock | — | | | — | | | | | — | | | — | | | (230) | | | (69,011) | | | (69,011) | |
Balance at August 31, 2020 | 188,156 | | | $ | 1,375,388 | | | | | $ | 7,596,514 | | | $ | (115,950) | | | (83,608) | | | $ | (5,251,148) | | | $ | 3,604,804 | |
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See accompanying notes.
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | Six Months Ended | | Three Months Ended |
| November 30, 2017 | | November 30, 2016 | | August 31, 2021 | | August 31, 2020 |
Cash flows from operating activities: | |
| | |
| Cash flows from operating activities: | | | |
Net income | $ | 354,320 |
| | $ | 278,468 |
| Net income | $ | 331,179 | | | $ | 300,005 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 107,578 |
| | 79,590 |
| Depreciation | 60,955 | | | 60,574 | |
Amortization of intangible assets | 31,261 |
| | 7,460 |
| |
Amortization of intangible assets and capitalized contract costs | | Amortization of intangible assets and capitalized contract costs | 36,994 | | | 35,605 | |
Stock-based compensation | 55,204 |
| | 39,582 |
| Stock-based compensation | 36,496 | | | 29,055 | |
Gain on sale of business | (99,060 | ) | | — |
| |
Gain on Shred-it | — |
| | (25,876 | ) | |
Gain on sale of operating assets | | Gain on sale of operating assets | (12,178) | | | — | |
| Deferred income taxes | 42,162 |
| | (3,833 | ) | Deferred income taxes | 22,887 | | | (8,716) | |
Change in current assets and liabilities, net of acquisitions of businesses: | |
| | |
| Change in current assets and liabilities, net of acquisitions of businesses: | | | |
Accounts receivable, net | (24,800 | ) | | (44,920 | ) | Accounts receivable, net | (27,742) | | | 7,118 | |
Inventories, net | 2,595 |
| | (14,616 | ) | Inventories, net | 14,986 | | | (77,944) | |
Uniforms and other rental items in service | (33,294 | ) | | (4,315 | ) | Uniforms and other rental items in service | (39,274) | | | 16,552 | |
Prepaid expenses and other current assets | (18,573 | ) | | (1,952 | ) | |
Prepaid expenses and other current assets and capitalized contract costs | | Prepaid expenses and other current assets and capitalized contract costs | (36,724) | | | (42,277) | |
Accounts payable | (8,706 | ) | | 15,451 |
| Accounts payable | (26,272) | | | 20,358 | |
Accrued compensation and related liabilities | (36,480 | ) | | (18,936 | ) | Accrued compensation and related liabilities | (85,834) | | | (10,067) | |
Accrued liabilities and other | (1,940 | ) | | (4,866 | ) | Accrued liabilities and other | (24,342) | | | (14,297) | |
Income taxes, current | 8,742 |
| | 484 |
| Income taxes, current | 11,010 | | | (3,674) | |
Net cash provided by operating activities | 379,009 |
| | 301,721 |
| Net cash provided by operating activities | 262,141 | | | 312,292 | |
| | | | |
Cash flows from investing activities: | |
| | |
| Cash flows from investing activities: | | | |
Capital expenditures | (132,466 | ) | | (155,173 | ) | Capital expenditures | (48,748) | | | (30,876) | |
Proceeds from redemption of marketable securities | 100,259 |
| | 172,968 |
| |
Purchase of marketable securities and investments | (99,877 | ) | | (118,270 | ) | |
Proceeds from sale of business | 127,835 |
| | — |
| |
Proceeds from sale of investment in Shred-it | — |
| | 25,876 |
| |
| Purchases of investments | | Purchases of investments | (8,738) | | | (4,940) | |
| Proceeds from sale of operating assets | | Proceeds from sale of operating assets | 15,070 | | | — | |
Acquisitions of businesses, net of cash acquired | (1,099 | ) | | (17,778 | ) | Acquisitions of businesses, net of cash acquired | (35,725) | | | (1,984) | |
Other, net | (870 | ) | | 332 |
| Other, net | (6,180) | | | (2,142) | |
Net cash used in investing activities | (6,218 | ) | | (92,045 | ) | Net cash used in investing activities | (84,321) | | | (39,942) | |
| | | | |
Cash flows from financing activities: | |
| | |
| Cash flows from financing activities: | | | |
(Payments) issuance of commercial paper, net | (50,500 | ) | | 66,000 |
| |
Issuance of commercial paper, net | | Issuance of commercial paper, net | 326,000 | | | — | |
| Repayment of debt | (250,000 | ) | | (250,000 | ) | Repayment of debt | (250,000) | | | — | |
Prepaid short-term debt financing fees | — |
| | (13,495 | ) | |
Proceeds from exercise of stock-based compensation awards | 28,558 |
| | 19,225 |
| Proceeds from exercise of stock-based compensation awards | 72,896 | | | 72,123 | |
Dividends paid | | Dividends paid | (79,135) | | | — | |
Repurchase of common stock | (35,697 | ) | | (19,230 | ) | Repurchase of common stock | (659,235) | | | (69,011) | |
Other, net | (1,882 | ) | | (5,572 | ) | Other, net | (610) | | | (869) | |
Net cash used in financing activities | (309,521 | ) | | (203,072 | ) | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (590,084) | | | 2,243 | |
| | | | |
Effect of exchange rate changes on cash and cash equivalents | 3,466 |
| | (2,388 | ) | Effect of exchange rate changes on cash and cash equivalents | (1,627) | | | 1,547 | |
| | | | | |
Net increase in cash and cash equivalents | 66,736 |
| | 4,216 |
| |
Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | (413,891) | | | 276,140 | |
| | | | |
Cash and cash equivalents at beginning of period | 169,266 |
| | 139,357 |
| Cash and cash equivalents at beginning of period | 493,640 | | | 145,402 | |
| | | | | |
Cash and cash equivalents at end of period | $ | 236,002 |
| | $ | 143,573 |
| Cash and cash equivalents at end of period | $ | 79,749 | | | $ | 421,542 | |
See accompanying notes.
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.Note 1 - Basis of Presentation
The consolidated condensed financial statements of Cintas Corporation (Cintas, the Company, we, us or our) included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S.United States generally accepted accounting principles (GAAP)(U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequately presented, we suggest that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2017.2021. A summary of our significant accounting policies is presented beginning on page 3840 of that report. There have been no material changes in the accounting policies followed by Cintas during the current fiscal year other than the adoption of new accounting pronouncements discussed in Note 2. year.
Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the consolidated results of the interim periods shown have been made.
On March 21, 2017, Cintas completed the acquisition of G&K Services, Inc. (G&K) for consideration of approximately $2.1 billion. G&K is now a wholly-owned subsidiary of Cintas that operates within the Uniform Rental and Facility Services operating segment. To finance the G&K acquisition, Cintas used a combination of new senior notes, a term loan, other borrowings under its existing credit facility and cash on hand. G&K's results of operations are included in Cintas' consolidated financial statements as of and from the date of acquisition.
During the three months ended August 31, 2017, Cintas sold a significant business, referred to as "Discontinued Services," and as a result, its operations are classified as discontinued operations for all periods presented. See Note 13 entitled Discontinued Operations for more information.
Inventories, net are measuredvalued at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following amounts at:following:
| | (In thousands) | November 30, 2017 | | May 31, 2017 | (In thousands) | August 31, 2021 | | May 31, 2021 |
| | | | |
Raw materials | $ | 16,231 |
| | $ | 17,528 |
| Raw materials | $ | 15,732 | | | $ | 15,109 | |
Work in process | 23,199 |
| | 17,951 |
| Work in process | 30,681 | | | 37,664 | |
Finished goods | 233,400 |
| | 242,739 |
| Finished goods | 417,279 | | | 429,024 | |
| $ | 272,830 |
| | $ | 278,218 |
| | $ | 463,692 | | | $ | 481,797 | |
Inventories are recorded net of reserves for obsolete inventory (excess and slow-moving) of $37.5$110.2 million and $38.3$111.0 million at November 30, 2017August 31, 2021 and May 31, 2017,2021, respectively. The inventory obsolescence reserve is determined by specific identification, as well as an estimate based on Cintas' historical rates of obsolescence. Once a specific inventory item is written down to the lower of cost or net realizable value, a new cost basis has been established, and that inventory item cannot subsequently be marked up.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. The reclassification has been reflected in the consolidated condensed balance sheet and consolidated condensed statement of shareholders' equity for the fiscal year ended May 31, 2021 and the three months ended August 31, 2020, to combine common stock and paid-in capital for disclosure purposes. These reclassifications had no effect on the Company's reported results of operations.
2.New Accounting Pronouncements
In May 2014,December 2019, the Financial Accounting Standards Board (FASB) issued Accounting StandardStandards Update (ASU) 2014-09, "Revenue from Contracts with Customers2019-12, Income Taxes (Topic 606),"740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is part of the FASB’s overall simplification initiative to clarify revenue recognition principles. This guidance is intendedreduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to improve disclosure requirements and enhance the comparabilityusers of revenue recognition practices. Improved disclosures under the amended guidance relatefinancial statements. ASU 2019-12 removes certain exceptions to the nature, amount, timing and uncertaintygeneral principles of revenue that is recognized from contracts with customers. This guidance will be effective for reporting periods beginning after December 15, 2017. A cross-functional implementation team has been established consisting of representatives from all of our operating segments. The implementation team is working to analyze the impact of the standard on Cintas' contract portfolio by reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to revenue contracts. In addition, we are in the process of identifying and implementing the appropriate changes to business processes and controls to support recognition and disclosure under the new standard.
Based on our preliminary analysis, we currently do not believe the adoption of this guidance will have a material impact on our consolidated condensed financial statements. Based on our evaluation of each revenue stream, we believe that most revenue transactions will be accounted for in a manner substantially consistent with existing guidance. The majority of our business services revenue transactions represent a series of distinct services over the term of the contract where performance obligations are the same each day. We will continue to evaluate the impact of this guidance on our consolidated condensed financial statements, disclosures, and internal controls. Our preliminary assessments are subject to change. Cintas plans to adopt the standard as of the first quarter of fiscal year 2019 using the modified retrospective adoption alternative under this standard, and therefore, it is anticipated we will record a cumulative adjustment to retained earnings as of June 1, 2018.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Topic 842 supersedes the previous leases standard, Accounting Standards Codification (ASC) 840, "Leases." This guidance is effective for reporting periods beginning after December 15, 2018, however, early adoption is permitted. Entities are required740, Income Taxes (ASC 740), in order to use a modified retrospective approach for leases that exist or are entered into afterreduce the beginningcost and complexity of the earliest comparative periodits application in the financial statements. Cintas is currently evaluating the impact thatareas of intraperiod tax allocation, deferred tax liabilities related to outside basis differences, year-to-date losses in interim periods and other areas within ASC 740. The Company adopted ASU 2016-02 will have2019-12 on its consolidated condensed financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference between a reporting unit's carrying value and its fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019.June 1, 2021. The adoption of this standard isASU 2019-12 did not expected to have a material impact on the Company’s consolidated condensed financial statements.statements currently but may in future periods.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.” ASU 2017-07 requires the service component of pension and other postretirement benefit costs to be presented in the same line item as other employee compensation costs on the consolidated condensed statement of income; however, the other components of net benefit costs are required to be presented outside of operating income within the consolidated condensed statements of income. Cintas retrospectively adopted ASU 2017-07 on June 1, 2017.
No other new accounting pronouncement recently issued or newly effective had, or is expected to have, a material impact on Cintas' consolidated condensed financial statements.
3.Note 2 - Revenue Recognition
The following table presents Cintas' total revenue disaggregated by operating segment for the three months ended August 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | | |
(In thousands) | 2021 | | | 2020 | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Uniform Rental and Facility Services | $ | 1,508,176 | | 79.5 | % | | | $ | 1,394,411 | | 79.8 | % | | | | | | |
First Aid and Safety Services | 199,116 | | 10.5 | % | | | 204,481 | | 11.7 | % | | | | | | |
Fire Protection Services | 128,218 | | 6.8 | % | | | 108,065 | | 6.2 | % | | | | | | |
Uniform Direct Sales | 61,440 | | 3.2 | % | | | 39,618 | | 2.3 | % | | | | | | |
Total revenue | $ | 1,896,950 | | 100.0 | % | | | $ | 1,746,575 | | 100.0 | % | | | | | | |
Fire Protection Services and Uniform Direct Sales operating segments are included within All Other as disclosed in Note 12 entitled Segment Information.
Revenue Recognition Policy
Approximately 95% of the Company's revenues are derived from fees for route servicing of Uniform Rental and Facility Services, First Aid and Safety Services and Fire Protection Services, performed by a Cintas employee-partner, at the customer's location of business. Revenues from our route servicing customer contracts represent a single-performance obligation. The Company recognizes revenues over time as services are performed based on the nature of services provided and contractual rates (output method) or at a point in time when the performance obligation under the terms of the contract with a customer are satisfied, at the customer's location of business. The Company's remaining revenue, primarily within the Uniform Direct Sales operating segment, and representing approximately 5% of the Company's total revenue, is recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer.
Revenue recorded is presented net of sales and other taxes we collect on behalf of governmental authorities. Shipping and handling costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Certain of our customer contracts, include pricing terms and conditions that include components of variable consideration. The variable consideration is typically in the form of consideration paid to a customer based on performance metrics specified within the contract. Specifically, some contracts contain discounts or rebates that the customer can earn through the achievement of specified volume levels. Each component of variable consideration is earned based on the Company's actual performance during the measurement period specified within the contract. To determine the transaction price, the Company estimates the variable consideration using the most likely amount method, based on the specific contract provisions and known performance results during the relevant measurement period. When determining if variable consideration should be constrained, the Company considers whether factors outside its control could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal. The Company's performance period generally corresponds with the monthly invoice period. No constraints on our revenue recognition were applied during the three months ended August 31, 2021 or 2020. The Company reassesses these estimates during each reporting period. Cintas maintains a liability for these discounts and rebates within accrued liabilities on the consolidated condensed balance sheets. Variable consideration also includes consideration paid to a customer at the beginning of a contract. Cintas capitalizes this consideration and amortizes it over the life of the contract as a reduction to revenue. These assets are included in other assets, net on the consolidated condensed balance sheets.
Additionally, certain Uniform Direct Sales operating segment customer contracts contain a provision with an enforceable right of payment, and the underlying product has no alternative use to Cintas. Consequently, when both aforementioned provisions are prevalent in a customer contract, the revenue is recorded for finished goods that the customer is obligated to purchase under the termination terms of the contract.
We are exposed to credit losses primarily through our trade receivables. We determine the allowance for credit losses using both an estimate, based on historical rates of collections, and reserves for specific accounts identified as uncollectible. The portion of the allowance that is an estimate based on Cintas' historical rates of collections is recorded for overdue amounts, beginning with a nominal percentage when the account is current and increasing substantially as the account ages. The amount provided as the account ages will differ slightly between the Uniform
Rental and Facility Services reportable operating segment, the First Aid and Safety Services reportable operating segment and All Other because of differences in customers served and the nature of each business. We update our estimate of credit loss reserves quarterly, considering recent write-offs and collections information and underlying economic expectations.
Costs to Obtain a Contract
The Company capitalizes commission expenses paid to our employee-partners when the commissions are deemed to be incremental for obtaining the route servicing customer contract. As permitted by ASC 606, "Revenue", the Company has elected to apply the guidance to a portfolio of contracts (or performance obligations) with similar characteristics because the Company reasonably expects that the effects on the consolidated condensed financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within the portfolio. The Company also continues to expense certain costs to obtain a contract if those costs do not meet the criteria of the standard or the amortization period of the asset would have been one year or less. The deferred commissions are amortized on a straight-line basis over the expected period of benefit. We review the deferred commission balances for impairment on an ongoing basis. Deferred commissions are classified as current or noncurrent based on the timing of when we expect to recognize the expense. The current portion is included in prepaid expenses and other current assets and the noncurrent portion is included in other assets, net on the Company's consolidated condensed balance sheets. As of August 31, 2021, the current and noncurrent assets related to deferred commissions totaled $80.2 million and $227.2 million, respectively. As of May 31, 2021, the current and noncurrent assets related to deferred commissions totaled $79.4 million and $227.1 million, respectively. We recorded amortization expense related to deferred commissions of $21.4 million and $20.4 million during the three months ended August 31, 2021 and 2020, respectively. These expenses are classified in selling and administrative expenses on the consolidated condensed statements of income.
Note 3 - Leases
Cintas has operating leases for certain operating facilities, vehicles and equipment, which provide the right to use the underlying asset and require lease payments over the term of the lease. Each new contract is evaluated to determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. All identified leases are recorded on the consolidated condensed balance sheet with a corresponding operating lease right-of-use asset, net, representing the right to use the underlying asset for the lease term and the operating lease liabilities representing the obligation to make lease payments arising from the lease. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the consolidated condensed balance sheet.
Operating lease right-of-use assets, net and operating lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Lease expense for operating leases is recorded on a straight-line basis over the lease term and variable lease costs are recorded as incurred. Both lease expense and variable lease costs are primarily recorded in cost of uniform rental and facility services and other on the Company's consolidated condensed statements of income. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease costs were $18.2 million and $17.1 million for the three months ended August 31, 2021 and 2020, respectively. Short-term lease expense and variable lease costs are included within operating lease costs and immaterial for the three months ended August 31, 2021 and 2020.
The following table provides supplemental information related to the Company's consolidated condensed statements of cash flows for the three months ended August 31:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
| | | |
| | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 11,913 | | | $ | 12,254 | |
Operating lease right-of-use assets obtained in exchange for new and renewed operating lease liabilities | $ | 2,792 | | | $ | 9,317 | |
| | | |
| | | |
| | | |
Other information related to the operating lease right-of-use assets, net and operating lease liabilities was as follows: | | | | | | | | | | | |
| | | |
| August 31, 2021 | | May 31, 2021 |
| | | |
Weighted-average remaining lease term - operating leases | 5.22 years | | 5.33 years |
Weighted-average discount rate - operating leases | 2.29% | | 2.32% |
The contractual future minimum lease payments of Cintas' operating lease liabilities by fiscal year are as follows as of August 31, 2021:
| | | | | | | | |
(In thousands) | | |
| | |
2022 (remaining nine months) | | $ | 35,794 | |
2023 | | 40,285 | |
2024 | | 29,941 | |
2025 | | 22,509 | |
2026 | | 16,995 | |
Thereafter | | 30,336 | |
Total payments | | 175,860 | |
Less interest | | (10,261) | |
Total present value of lease payments | | $ | 165,599 | |
Note 4 - Fair Value Measurements
All financial instruments that are measured at fair value on a recurring basis (at least annually) have been classified within the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the consolidated condensed balance sheet date. These financial instruments measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of August 31, 2021 |
(In thousands) | Level 1 | | Level 2 | | Level 3 | | Fair Value |
| | | | | | | |
Cash and cash equivalents | $ | 79,749 | | | $ | — | | | $ | — | | | $ | 79,749 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other assets, net: | | | | | | | |
Interest rate lock agreements | — | | | 18,335 | | | — | | | 18,335 | |
Total assets at fair value | $ | 79,749 | | | $ | 18,335 | | | $ | — | | | $ | 98,084 | |
| | | | | | | |
Current accrued liabilities: | | | | | | | |
Interest rate lock agreements | $ | — | | | $ | 88,736 | | | $ | — | | | $ | 88,736 | |
Total liabilities at fair value | $ | — | | | $ | 88,736 | | | $ | — | | | $ | 88,736 | |
| | | As of November 30, 2017 | | As of May 31, 2021 |
(In thousands) | Level 1 | | Level 2 | | Level 3 | | Fair Value | (In thousands) | Level 1 | | Level 2 | | Level 3 | | Fair Value |
| | | | | | | | |
Cash and cash equivalents | $ | 236,002 |
| | $ | — |
| | $ | — |
| | $ | 236,002 |
| Cash and cash equivalents | $ | 493,640 | | | $ | — | | | $ | — | | | $ | 493,640 | |
Marketable securities: | | | | | | | | |
Canadian treasury securities | — |
| | 22,732 |
| | — |
| | 22,732 |
| |
| Other assets, net: | | Other assets, net: | |
Interest rate lock agreements | | Interest rate lock agreements | — | | | 40,400 | | | — | | | 40,400 | |
Total assets at fair value | $ | 236,002 |
| | $ | 22,732 |
| | $ | — |
| | $ | 258,734 |
| Total assets at fair value | $ | 493,640 | | | $ | 40,400 | | | $ | — | | | $ | 534,040 | |
| Long-term accrued liabilities: | | Long-term accrued liabilities: | |
Interest rate lock agreements | | Interest rate lock agreements | $ | — | | | $ | 61,567 | | | $ | — | | | $ | 61,567 | |
Total liabilities at fair value | | Total liabilities at fair value | $ | — | | | $ | 61,567 | | | $ | — | | | $ | 61,567 | |
|
| | | | | | | | | | | | | | | |
| As of May 31, 2017 |
(In thousands) | Level 1 | | Level 2 | | Level 3 | | Fair Value |
| | | | | | | |
Cash and cash equivalents | $ | 169,266 |
| | $ | — |
| | $ | — |
| | $ | 169,266 |
|
Marketable securities: | | | | | | | |
Canadian treasury securities | — |
| | 22,219 |
| | — |
| | 22,219 |
|
Total assets at fair value | $ | 169,266 |
| | $ | 22,219 |
| | $ | — |
| | $ | 191,485 |
|
Cintas’ cash and cash equivalents and marketable securities are generally classified within Level 1 or Level 2 of the fair value hierarchy. Financial instruments classified as Level 1 are based on quoted market prices in active markets, and financial instruments classified as Level 2 are based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The types of financial instruments Cintas classifies within Level 1 include most bank deposits and money market securities. Cintas does not adjust the quoted market price for such financial instruments.
The typesfair values of financial instruments Cintas classifies within Level 2Cintas' interest rate lock agreements are primarily high grade domestic commercial paperbased on similar exchange traded derivatives (market approach) and Canadian treasury securities (federal). The valuation technique used for Cintas’ marketable securities classifiedare, therefore, included within Level 2 of the fair value hierarchy is primarily the market approach.hierarchy. The primary inputs to value Cintas’ marketable securities are the respective instrument's future cash flows based on its stated yield and the amount a market participant would pay for a similar instrument. Primarily all of Cintas’ marketable securities are actively traded and the recorded fair value reflects current market conditions. However, due towas determined by comparing the inherent volatility inlocked rates against the investment market, there is at least a possibility that recorded investment values may change in the near term.
Interest, realized gains and losses and declines in value determined to bebenchmarked treasury rate. No other than temporary on available-for-sale securities areamounts included in interest incomeother assets, net, current accrued liabilities or expense. The cost of the securities sold is basedlong-term accrued liabilities are recorded at fair value on the specific identification method. The amortized cost basis of marketable securities as of November 30, 2017 and May 31, 2017 was $22.7 million and $22.2 million, respectively. All outstanding marketable securities as of November 30, 2017 and May 31, 2017 had contractual maturities due within one year.a recurring basis.
The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Cintas believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the consolidated condensed balance sheet dates.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the CompanyCintas records assets and liabilities at fair value on a nonrecurring basis as required under U.S. GAAP. The Company's acquisition of G&K in the fourth quarter of fiscal 2017 was recordedassets and liabilities measured at fair value. See Note 9 entitled Acquisitions for additional informationvalue on the measurement of the G&Ka nonrecurring basis primarily relate to assets acquired and liabilities assumed. Thereacquired in a business acquisition, which were nonot material acquisitions during the sixthree months ended November 30, 2017.August 31, 2021 and 2020.
4.InvestmentsCintas' investments are summarized as follows:
Investments at November 30, 2017 of $175.7 million include the cash surrender value of insurance policies of $151.3 million, equity method investments of $19.4 million and cost method investments of $5.0 million. Investments at May 31, 2017 of $164.8 million include the cash surrender value of insurance policies of $144.0 million, equity method investments of $15.8 million and cost method investments of $5.0 million.
| | | | | | | | | | | |
| | | |
(In thousands) | August 31, 2021 | | May 31, 2021 |
| | | |
Cash surrender value of insurance policies | $ | 274,721 | | | $ | 252,061 | |
Equity method investments | 18,383 | | | 19,388 | |
Cost method investments | 2,164 | | | 3,167 | |
Total investments | $ | 295,268 | | | $ | 274,616 | |
Investments are generally evaluated for impairment on an annual basis or when indicators of impairment exist. For the sixthree months ended November 30, 2017August 31, 2021 and 2016,2020, no impairment losses were recorded.
5.
Note 6 - Earnings Per Share
Cintas uses the two-class method to calculate basic and diluted earnings per share as a result of outstanding participating securities in the form of restricted stock awards. The following table setstables set forth the computation of basic and diluted earnings per share from continuing operations using the two-class method for amounts attributable to Cintas’ common shares: shares for the three months ending August 31:
| | | | | | | | | | | | | | | |
Basic Earnings per Share (In thousands except per share data) | 2021 | | 2020 | | | | |
| | | |
| | | | | | | |
| | | | | | | |
Net income | $ | 331,179 | | | $ | 300,005 | | | | | |
Less: income allocated to participating securities | 1,765 | | | 2,173 | | | | | |
Income available to common shareholders | $ | 329,414 | | | $ | 297,832 | | | | | |
Basic weighted average common shares outstanding | 103,295 | | | 104,110 | | | | | |
| | | | | | | |
Basic earnings per share | $ | 3.19 | | | $ | 2.86 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
Basic Earnings per Share from Continuing Operations (in thousands except per share data) | November 30, 2017 | | November 30, 2016 | | November 30, 2017 |
| November 30, 2016 |
| | | | | | | |
Income from continuing operations | $ | 137,737 |
| | $ | 121,950 |
| | $ | 298,845 |
| | $ | 258,158 |
|
Less: income from continuing operations allocated to participating securities | 2,111 |
| | 1,923 |
| | 5,298 |
| | 4,775 |
|
Income from continuing operations available to common shareholders | $ | 135,626 |
| | $ | 120,027 |
|
| $ | 293,547 |
|
| $ | 253,383 |
|
Basic weighted average common shares outstanding | 106,340 |
| | 104,957 |
| | 106,039 |
| | 104,719 |
|
| | | | | | | |
Basic earnings per share from continuing operations | $ | 1.27 |
| | $ | 1.15 |
|
| $ | 2.77 |
| | $ | 2.42 |
|
| | | | | | | | | | | | | | | |
Diluted Earnings per Share (In thousands except per share data) | 2021 | | 2020 | | | | |
| | | |
| | | | | | | |
| | | | | | | |
Net income | $ | 331,179 | | | $ | 300,005 | | | | | |
Less: income allocated to participating securities | 1,765 | | | 2,173 | | | | | |
Income available to common shareholders | $ | 329,414 | | | $ | 297,832 | | | | | |
Basic weighted average common shares outstanding | 103,295 | | | 104,110 | | | | | |
Effect of dilutive securities – employee stock options | 2,649 | | | 3,019 | | | | | |
Diluted weighted average common shares outstanding | 105,944 | | | 107,129 | | | | | |
| | | | | | | |
Diluted earnings per share | $ | 3.11 | | | $ | 2.78 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
Diluted Earnings per Share from Continuing Operations (in thousands except per share data) | November 30, 2017 | | November 30, 2016 | | November 30, 2017 | | November 30, 2016 |
| | | | | | | |
Income from continuing operations | $ | 137,737 |
| | $ | 121,950 |
| | $ | 298,845 |
| | $ | 258,158 |
|
Less: income from continuing operations allocated to participating securities | 2,111 |
| | 1,923 |
| | 5,298 |
| | 4,775 |
|
Income from continuing operations available to common shareholders | $ | 135,626 |
| | $ | 120,027 |
| | $ | 293,547 |
| | $ | 253,383 |
|
Basic weighted average common shares outstanding | 106,340 |
| | 104,957 |
| | 106,039 |
| | 104,719 |
|
Effect of dilutive securities – employee stock options | 3,478 |
| | 2,690 |
| | 2,899 |
| | 2,559 |
|
Diluted weighted average common shares outstanding | 109,818 |
| | 107,647 |
| | 108,938 |
| | 107,278 |
|
| | | | | | | |
Diluted earnings per share from continuing operations | $ | 1.24 |
| | $ | 1.12 |
| | $ | 2.69 |
| | $ | 2.36 |
|
For the three months ended November 30, 2017, both basicAugust 31, 2021 and diluted loss per share from discontinued operations were $0.01. Both basic and diluted earnings per share from discontinued operations were $0.17 for the three months ended November 30, 2016. For the six months ended November 30, 2017, basic and diluted earnings per share from discontinued operations were $0.51 and $0.50, respectively. Both basic and diluted earnings per share from discontinued operations were $0.19 for the six months ended November 30, 2016.
For the three months ended November 30, 2017 and 2016,2020, options granted to purchase 0.50.1 million and 0.70.2 million shares of Cintas common stock, respectively, were excluded from the computation of diluted earnings per share. For both the six months ended November 30, 2017 and 2016, options granted to purchase 0.6 million shares of Cintas common stock were excluded from the computation of diluted earnings per share. The exercise prices of these options were greater than the average market price of the common stock (anti-dilutive).
On August 2, 2016,October 29, 2019, Cintas announced that the Board of Directors authorized a $500.0$1.0 billion share buyback program, which was completed during the first quarter of fiscal 2022. From the inception of the October 29, 2019 share buyback program through July 2021, Cintas purchased a total of 2.8 million shares of Cintas common stock at an average price of $358.93 per share for a total purchase price of $1.0 billion. On July 27, 2021, Cintas announced that the Board of Directors authorized a new $1.5 billion share buyback program, which does not have an expiration date. As of November 30, 2017, noThe following tables summarize the share buybacks have occurred underbuyback activity by program for the three months ended August 2, 2016 program and there31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| 2021 | | | 2020 |
Buyback Program (In thousands except per share data) | Shares | | Avg. Price per Share | | Purchase Price | | | Shares | | Avg. Price per Share | | Purchase Price |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
October 29, 2019 | 1,590 | | | $ | 365.41 | | | $ | 581,220 | | | | — | | | $ | — | | | $ | — | |
July 27, 2021 | — | | | $ | — | | | $ | — | | | | — | | | $ | — | | | $ | — | |
| 1,590 | | | $ | 365.41 | | | $ | 581,220 | | | | — | | | $ | — | | | $ | — | |
There were no share buybacks under this programin the period subsequent to November 30, 2017August 31, 2021, through January 5, 2018.October 7, 2021 under any share buyback program.
For the sixthree months ended November 30, 2017,August 31, 2021, Cintas acquired 0.30.2 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested during the six months ended November 30, 2017.vested. These shares were acquired at an average price of $129.01$394.19 per share for a total purchase price of $35.7$78.0 million.
For the three months ended August 31, 2020, Cintas acquired 0.2 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested. These shares were acquired at an average price of $300.01 per share for a total purchase price of $69.0 million.
6.
Note 7 - Goodwill, Service Contracts and Other Assets
Changes in the carrying amount of goodwill and service contracts for the sixthree months ended November 30, 2017,August 31, 2021, by reportable operating segment and All Other, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Goodwill (in thousands) | Uniform Rental and Facility Services | | First Aid and Safety Services | | All Other | | Total |
| | | | | | | |
Balance as of June 1, 2021 | $ | 2,547,510 | | | $ | 248,571 | | | $ | 116,988 | | | $ | 2,913,069 | |
Goodwill acquired | 24,512 | | | — | | | 41 | | | 24,553 | |
| | | | | | | |
Foreign currency translation | (11,565) | | | (1,024) | | | (40) | | | (12,629) | |
Balance as of August 31, 2021 | $ | 2,560,457 | | | $ | 247,547 | | | $ | 116,989 | | | $ | 2,924,993 | |
|
| | | | | | | | | | | | | | | |
Goodwill (in thousands) | Uniform Rental and Facility Services | | First Aid and Safety Services | | All Other | | Total |
| | | | | | | |
Balance as of June 1, 2017 | $ | 2,448,070 |
| | $ | 243,112 |
| | $ | 91,153 |
| | $ | 2,782,335 |
|
Goodwill acquired (1) | 27,107 |
| | 73 |
| | 426 |
| | 27,606 |
|
Foreign currency translation | 927 |
| | 891 |
| | 37 |
| | 1,855 |
|
Balance as of November 30, 2017 | $ | 2,476,104 |
| | $ | 244,076 |
| | $ | 91,616 |
| | $ | 2,811,796 |
|
(1) Adjustments to the G&K preliminary purchase price allocation represent $27.1 million of the acquired goodwill in the Uniform Rental and Facility Services reportable operating segment. See Note 9 entitled Acquisitions for more information.
| | Service Contracts (in thousands) | Uniform Rental and Facility Services | | First Aid and Safety Services | | All Other | | Total | Service Contracts (in thousands) | Uniform Rental and Facility Services | | First Aid and Safety Services | | All Other | | Total |
| |
| | |
| | |
| | |
| |
Balance as of June 1, 2017 | $ | 529,923 |
| | $ | 30,062 |
| | $ | 27,003 |
| | $ | 586,988 |
| |
Balance as of June 1, 2021 | | Balance as of June 1, 2021 | $ | 369,141 | | | $ | 18,294 | | | $ | 21,010 | | | $ | 408,445 | |
Service contracts acquired | 32 |
| | 411 |
| | 533 |
| | 976 |
| Service contracts acquired | 12,807 | | | — | | | 53 | | | 12,860 | |
Service contracts amortization | (21,946 | ) | | (1,927 | ) | | (2,364 | ) | | (26,237 | ) | Service contracts amortization | (12,380) | | | (991) | | | (1,190) | | | (14,561) | |
Foreign currency translation | 3,748 |
| | 99 |
| | — |
| | 3,847 |
| Foreign currency translation | (2,637) | | | (125) | | | — | | | (2,762) | |
Balance as of November 30, 2017 | $ | 511,757 |
| | $ | 28,645 |
| | $ | 25,172 |
| | $ | 565,574 |
| |
Balance as of August 31, 2021 | | Balance as of August 31, 2021 | $ | 366,931 | | | $ | 17,178 | | | $ | 19,873 | | | $ | 403,982 | |
Information regarding Cintas’ service contracts and other assets is as follows:
| | | As of November 30, 2017 | | As of August 31, 2021 | | As of May 31, 2021 |
(In thousands) | Carrying Amount | | Accumulated Amortization | | Net | (In thousands) | Carrying Amount | | Accumulated Amortization | | Net | | | Carrying Amount | | Accumulated Amortization | | Net |
| | | | | | | | |
Service contracts | $ | 917,072 |
| | $ | 351,498 |
| | $ | 565,574 |
| Service contracts | $ | 969,728 | | | $ | 565,746 | | | $ | 403,982 | | | | $ | 961,942 | | | $ | 553,497 | | | $ | 408,445 | |
| | | | | | | | | | |
Capitalized contract costs (1) | | Capitalized contract costs (1) | $ | 480,535 | | | $ | 253,298 | | | $ | 227,237 | | | | $ | 459,079 | | | $ | 231,940 | | | $ | 227,139 | |
Noncompete and consulting agreements | $ | 40,913 |
| | $ | 39,588 |
| | $ | 1,325 |
| Noncompete and consulting agreements | 45,783 | | | 42,601 | | | 3,182 | | | | 44,683 | | | 42,408 | | | 2,275 | |
Other | 35,711 |
| | 7,876 |
| | 27,835 |
| Other | 89,293 | | | 24,393 | | | 64,900 | | | | 105,371 | | | 24,371 | | | 81,000 | |
Total other assets | $ | 76,624 |
| | $ | 47,464 |
| | $ | 29,160 |
| Total other assets | $ | 615,611 | | | $ | 320,292 | | | $ | 295,319 | | | | $ | 609,133 | | | $ | 298,719 | | | $ | 310,414 | |
(1) The current portion of capitalized contract costs, included in prepaid expenses and other current assets on the consolidated condensed balance sheets as of August 31, 2021 and May 31, 2021, is $80.2 million and $79.4 million, respectively. |
| | | | | | | | | | | |
| As of May 31, 2017 |
(In thousands) | Carrying Amount | | Accumulated Amortization | | Net |
| | | | | |
Service contracts | $ | 911,273 |
| | $ | 324,285 |
| | $ | 586,988 |
|
| | | | | |
Noncompete and consulting agreements | $ | 40,743 |
| | $ | 39,244 |
| | $ | 1,499 |
|
Other | 34,890 |
| | 4,422 |
| | 30,468 |
|
Total other assets | $ | 75,633 |
| | $ | 43,666 |
| | $ | 31,967 |
|
Amortization expense for service contracts and other assets for continuing operations was $15.6$36.5 million and $3.2$35.1 million for the three months ended November 30, 2017August 31, 2021 and 2016,2020, respectively. Amortization expense for service contractsThese expenses are recorded in selling and other assets for continuing operations was $29.8 million and $6.4 million foradministrative expenses on the six months ended November 30, 2017 and 2016, respectively. Estimatedconsolidated condensed statements of income. As of August 31, 2021, the estimated future amortization expense for service contracts and other assets, excluding any future acquisitions for eachand commissions to be earned, is as follows:
| | | | | | | | |
Fiscal Year (In thousands) | | |
| | |
2022 (remaining nine months) | | $ | 104,871 | |
2023 | | 122,464 | |
2024 | | 110,029 | |
2025 | | 96,113 | |
2026 | | 79,013 | |
Thereafter | | 204,245 | |
Total future amortization expense | | $ | 716,735 | |
7.Note 8 - Debt, Derivatives and Hedging Activities
Cintas' outstanding debt is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Interest Rate | | Fiscal Year Issued | | Fiscal Year Maturity | | August 31, 2021 | | May 31, 2021 |
| | | | | | | | | |
Debt due within one year | | | | | | | | | |
Senior notes | 4.30 | % | | 2012 | | 2022 | | $ | — | | | $ | 250,000 | |
Senior notes | 2.90 | % | | 2017 | | 2022 | | 650,000 | | | 650,000 | |
Senior notes | 3.25 | % | | 2013 | | 2023 | | 300,000 | | | — | |
Commercial paper | 0.20 | % | (1) | 2022 | | 2022 | | 326,000 | | | — | |
Debt issuance costs | | | | | | | (833) | | | (930) | |
Total debt due within one year | | | | | | | $ | 1,275,167 | | | $ | 899,070 | |
| | | | | | | | | |
Debt due after one year | | | | | | | | | |
Senior notes | 3.25 | % | | 2013 | | 2023 | | $ | — | | | $ | 300,000 | |
Senior notes (2) | 2.78 | % | | 2013 | | 2023 | | 50,707 | | | 50,815 | |
Senior notes (3) | 3.11 | % | | 2015 | | 2025 | | 51,217 | | | 51,301 | |
Senior notes | 3.70 | % | | 2017 | | 2027 | | 1,000,000 | | | 1,000,000 | |
Senior notes | 6.15 | % | | 2007 | | 2037 | | 250,000 | | | 250,000 | |
| | | | | | | | | |
Debt issuance costs | | | | | | | (8,702) | | | (9,283) | |
Total debt due after one year | | | | | | | $ | 1,343,222 | | | $ | 1,642,833 | |
|
| | | | | | | | | | | | | | |
(In thousands) | Interest Rate | | Fiscal Year Issued | | Fiscal Year Maturity | | November 30, 2017 | | May 31, 2017 |
| | | | | | | | | |
Debt due within one year | | | | | | | | | |
Senior notes | 6.13 | % | | 2008 | | 2018 | | $ | 300,000 |
| | $ | 300,000 |
|
Commercial paper | 1.24 | % | (1) | Various | | Various | | — |
| | 50,500 |
|
Current portion of term loan | 2.00 | % | (1) | 2017 | | 2018 | | — |
| | 12,500 |
|
Debt issuance costs | | | | | | | — |
| | (100 | ) |
Total debt due within one year | | | | | | | $ | 300,000 |
| | $ | 362,900 |
|
| | | | | | | | | |
Debt due after one year | | | | | | | | | |
Senior notes | 4.30 | % | | 2012 | | 2022 | | $ | 250,000 |
| | $ | 250,000 |
|
Senior notes | 2.90 | % | | 2017 | | 2022 | | 650,000 |
| | 650,000 |
|
Senior notes | 3.25 | % | | 2013 | | 2023 | | 300,000 |
| | 300,000 |
|
Senior notes (2) | 2.78 | % | | 2013 | | 2023 | | 52,337 |
| | 52,554 |
|
Senior notes (3) | 3.11 | % | | 2015 | | 2025 | | 52,476 |
| | 52,645 |
|
Senior notes | 3.70 | % | | 2017 | | 2027 | | 1,000,000 |
| | 1,000,000 |
|
Senior notes | 6.15 | % | | 2007 | | 2037 | | 250,000 |
| | 250,000 |
|
Long-term portion of term loan | 2.00 | % | (1) | 2017 | | 2022 | | — |
| | 237,500 |
|
Debt issuance costs | | | | | | | (20,591 | ) | | (22,075 | ) |
Total debt due after one year | | | | | | | $ | 2,534,222 |
| | $ | 2,770,624 |
|
(1) Variable rate debt instrument. The rate presented is the variable borrowing rate at MayAugust 31, 2017.2021.
(2) Cintas assumed these senior notes with the acquisition of G&K Services, Inc. (G&K) in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.73%.
(3) Cintas assumed these senior notes with the acquisition of G&K in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.88%.
Cintas' senior notes, excluding the G&K senior notes assumed with the acquisition of G&K in fiscal 2017, and term loan are recorded at cost, net of debt issuance costs. The fair value of the long-term debt is estimated using Level 2 inputs based on general market prices. The carrying value and fair value of Cintas' debt as of November 30, 2017August 31, 2021 were $2,854.8$2,626.0 million and $2,985.2$2,863.8 million,, respectively, and as of May 31, 20172021 were $3,156.0$2,550.0 million and $3,296.8$2,788.8 million,, respectively. During the six months ended November 30, 2017, Cintas made payments of $50.5 million, net on commercial paper borrowings and paid off the term loan balance of $250.0 million with cash on hand. On DecemberJune 1, 2017,2021, in accordance with the terms of the notes, Cintas paid the $300.0$250.0 million aggregate principal amount of its 6.13%4.30%, 10-year senior notes that matured on that date with cash on hand and $265.0hand. During the three months ended August 31, 2021, Cintas issued $326.0 million, in proceeds from the issuancenet of commercial paper.paper borrowings.
The credit agreement that supports our commercial paper program was amended on September 16, 2016. The amendment increased the capacity of thehas a revolving credit facility from $450.0 million to $600.0 million and addedwith a $250.0 million term loan facility. The existing term loan facility was paid in full ascapacity of the first quarter of fiscal 2018.$1.0 billion. The credit agreement has an accordion feature that provides Cintas the ability to request increases to the borrowing commitments under either the revolving credit facility or a new term loan of up to $250.0 million in the aggregate, subject to customary conditions. The maturity date of the revolving credit agreementfacility is September 15, 2021.May 23, 2024. As of NovemberAugust 31, 2021, there was $326.0 million of commercial paper outstanding with maturity dates less than 30 2017,days and with a weighted average interest rate of 0.20% and there was no borrowings on our revolving credit facility. As of May 31, 2021, there was no commercial paper outstanding and no borrowings on our revolving credit facility. As of May 31, 2017, there was $50.5 million of commercial paper outstanding with a weighted average interest rate of 1.24% and maturity dates less than 30 days and no borrowings on our revolving credit facility. The fair value of the commercial paper is estimated using Level 2 inputs based on general market prices. Given its short-term nature, the carrying value of the outstanding commercial paper approximates fair value.
Cintas uses interest rate locks to manage ourits overall interest expense as interest rate locks effectively change the interest rate of specific debt issuances. The interest rate locks are entered into to protect against unfavorable movements in the benchmark treasury rate related to forecasted debt issuances. Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2007, fiscal 2008, fiscal 2012, fiscal 2013 and fiscal 2017. The amortization of the cash flow hedges resulted in a decrease to other comprehensive income of $0.1$0.5 million and $0.4 million three months ended August 31, 2021 and 2020, respectively. During fiscal 2020 and fiscal 2019, Cintas entered into interest rate lock agreements with a total
notional value of $950.0 million and $500.0 million, respectively, for forecasted debt issuances in connection with upcoming debt maturities.
The fair values of the outstanding interest rate lock agreements are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | August 31, 2021 | | May 31, 2021 |
Fiscal Year of Issuance (in thousands) | Notional Value | | Other assets, net | | Current accrued liabilities | | | Other assets, net | | Long-term accrued liabilities |
| | | | | | | | | | |
2020 | $ | 950,000 | | | $ | 18,335 | | | $ | 10,264 | | | | $ | 40,400 | | | $ | — | |
2019 | $ | 500,000 | | | $ | — | | | $ | 78,472 | | | | $ | — | | | $ | 61,657 | |
The interest rate locks are also recorded in other comprehensive income (loss), net of tax. These interest rate locks had no impact on net income or cash flows for the three months ended November 30, 2017 and an increase to other comprehensive income of $0.4 million for the three months ended November 30, 2016. For the six months ended November 30, 2017 and 2016, the amortization of the cash flow hedges resulted in a decrease to other comprehensive income of $0.3 million and an increase to other comprehensive income of $0.8 million, respectively.August 31, 2021 or 2020.
Cintas has certain covenants related to debt agreements. These covenants limit Cintas’Cintas' ability to incur certain liens, to engage in sale-leaseback transactions and to merge, consolidate or sell all or substantially all of Cintas’Cintas' assets. These covenants also require Cintas to maintain certain debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) and interest coverage ratios. Cross-default provisions exist between certain debt instruments. If a default of a significant covenant were to occur, the default could result in an acceleration of the maturity of the indebtedness, impair liquidity and limit the ability to raise future capital. Cintas was in compliance with all of the debt covenants for all periods presented.
8.Note 9 - Income Taxes
In the normal course of business, Cintas provides for uncertain tax positions and the related interest and adjusts its unrecognized tax benefits and accrued interest accordingly. As of November 30, 2017August 31, 2021 and May 31, 2017,2021, recorded unrecognized tax benefits were $18.7$34.6 million and $12.6$34.2 million, respectively, and are included in long-term accrued liabilities on the consolidated condensed balance sheet. The increase in the liability for the six months ended November 30, 2017 is primarily related to an adjustment to the preliminary purchase price allocation for the G&K acquisition.sheets.
All U.S. federal income tax returns are closed to audit through fiscal 2013. Cintas is currently in various audits in certain foreign jurisdictions and certain domestic states. The years under foreign and domestic state audits cover fiscal years back to 2013. Based on the resolution of the various audits and other potential regulatory developments, it is reasonably possible that the balance of unrecognized tax benefits would not change for the fiscal year ending May 31, 2018.
The majority of Cintas' operations are in North America. Cintas is required to file federal income tax returns, as well as state income tax returns in a majority of the domestic states and also in certain Canadian provinces. At times, Cintas is subject to audits in these jurisdictions. The audits, by nature, are sometimes complex and can require several years to resolve. The final resolution of any such tax audit could result in either a reduction in Cintas' accruals or an increase in its income tax provision, either of which could have an impact on the consolidated condensed results of operations in any given period.
All United States federal income tax returns are closed to audit through fiscal 2017. Cintas is currently in various audits in certain foreign jurisdictions and certain domestic states. The years under foreign and domestic state audits cover fiscal years back to 2014. Based on the resolution of the various audits and other potential regulatory developments, it is reasonably possible that the balance of unrecognized tax benefits would not change for the fiscal year ending May 31, 2022.
Cintas’ effective tax rate for continuing operations was 33.3%11.0% and 34.9%7.8% for the three months ended November 30, 2017August 31, 2021 and 2016, respectively. For the six months ended November 30, 2017 and 2016, Cintas' effective tax rate for continuing operations was 29.8% and 31.5%,2020, respectively. The effective tax rate for all periods was largely impacted by certain discrete items (primarily the tax accounting for stock-based compensation).
On December 22, 2017, the President signed into legislation The Tax Cuts and Jobs Act (the Act). The Act changes existing U.S. tax law and includes numerous provisions that will affect our business, including our income tax accounting, disclosure and tax compliance. We believe the most impactful changes within the Act provision are those that will reduce the U.S. corporate tax rates, business-related exclusions and deductions and credits. ASC 740, "Income Taxes" (Topic 740), requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, as of the date of enactment, and during the three months ended February 28, 2018, we will remeasure all deferred tax assets and liabilities at the newly enacted Corporate U.S. income tax rate. We are currently evaluating the impact of the Act, which will include remeasuring the deferred tax assets and liabilities, the one-time transition tax, as well as evaluating our reinvestment assertion on all future earnings and profits of our foreign entities, and we will disclose the estimated impact upon recognition in the third quarter of fiscal 2018.
9.Acquisitions
On March 21, 2017, Cintas acquired G&K for consideration of approximately $2.1 billion. Pursuant to the merger agreement among Cintas, G&K and Bravo Merger Sub, Inc., a wholly-owned subsidiary of Cintas, each share of common stock of G&K issued and outstanding immediately prior to the effective time of the G&K acquisition was canceled and converted into the right to receive $97.50 in cash. The total purchase price was $2,078.4 million, which was funded using a combination of new senior notes, a term loan, other borrowings under our existing credit facility and cash on hand. The net consideration transferred for G&K consisted of the following items:
|
| | | | |
(In thousands) | | |
| | |
Cash consideration for common stock | $ | 1,901,845 |
| (1) |
Cash consideration for share-based awards | 62,257 |
| (2) |
Cash consideration for G&K revolving debt | 124,180 |
| (3) |
Cash consideration for transaction expenses | 24,529 |
| (4) |
Total consideration | 2,112,811 |
| |
Cash acquired | (34,393 | ) | (5) |
Net consideration transferred | $ | 2,078,418 |
| |
(1) The cash consideration for outstanding shares of G&K common stock is the product of the agreed-upon cash per share price of $97.50 and total G&K outstanding shares of approximately 19.5 million.
(2) The cash consideration for share-based awards is the product of the agreed-upon cash per share price of $97.50 and the total number of restricted stock outstanding and the “in the money” stock options net of the weighted average exercise price.
(3) The cash consideration for G&K revolving debt reflects the repayment of the outstanding obligation.
(4) Represents G&K legal and professional fees that were incurred prior to acquisition and were due upon the closing of the transaction.
(5) Represents the G&K cash balance acquired at acquisition.
Cintas accounted for the G&K acquisition using the acquisition method. The preliminary allocation of the purchase price was determined by management with the assistance of third-party valuation specialists and was based on estimates of the fair value of assets acquired and liabilities assumed as of March 21, 2017. During the six months ended November 30, 2017, $28.3 million of adjustments related to deferred taxes and $1.2 million of adjustments related to income taxes, current were made to the preliminary purchase price allocation. Cintas is continuing to evaluate information to determine the fair value of acquired assets and liabilities. As of November 30, 2017, the purchase price allocation for the acquisition was preliminary and subject to completion. The components of the preliminary purchase price allocation, at fair value, are as follows:
|
| | | |
Assets | |
Accounts receivable | $ | 95,846 |
|
Inventories | 30,254 |
|
Uniforms and other rental items in service | 93,659 |
|
Income taxes, current | 15,873 |
|
Prepaid expenses and other current assets | 43,235 |
|
Property and equipment | 254,035 |
|
Goodwill | 1,520,295 |
|
Service contracts | 519,000 |
|
Trade names | 17,000 |
|
Other assets | 15,585 |
|
Liabilities | |
Accounts payable | (53,220 | ) |
Accrued compensation and related liabilities | (9,594 | ) |
Accrued liabilities | (115,109 | ) |
Long-term accrued liabilities | (28,380 | ) |
G&K senior notes | (105,359 | ) |
Deferred income taxes | (214,702 | ) |
Total consideration | $ | 2,078,418 |
|
The preliminary fair value of the intangible assets has been estimated using the income approach through a discounted cash flow analysis (except as noted below with respect to the trade names) with the cash flow projections discounted using a rate of 9.5%. The cash flows are based on estimates used to price the G&K acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from Cintas’ pricing model and the weighted average cost of capital.
The G&K service contract intangible asset will be amortized over a period of 15 years, which represents the estimated useful life of the economic benefit and the asset amortization is based on the annual economic value of the underlying asset which generally decreases over the 15-year term. The trade names represent the G&K corporate trade name and all of the branded variations thereof. Cintas applied the income approach through a relief from royalty method analysis to determine the preliminary fair value of the trade name assets.
The table below sets forth the preliminary valuation and amortization period of identifiable intangible assets:
|
| | | | |
Identifiable intangible assets | Preliminary Valuation | Amortization Period |
| | |
Service contracts | $ | 519,000 |
| 15 years |
Trade names | 17,000 |
| 3 years |
Total | $ | 536,000 |
| |
Cintas estimated the preliminary fair value of the acquired property, plant and equipment using a combination of the cost and market approaches, depending on the type of asset. The preliminary fair value of property, plant and equipment consisted of real property of $141.8 million and personal property of $112.2 million.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. None of the goodwill is expected to be deductible for income tax purposes. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the G&K acquisition. These benefits include improved service capabilities, an enhanced footprint in the markets that we serve, attractive synergy opportunities and value creation. The goodwill is entirely allocated to the Uniform Rental and Facility Services reportable operating segment.
The following unaudited pro forma information presents the combined financial results for Cintas and G&K as if the G&K acquisition had been completed at the beginning of Cintas’ prior fiscal year, June 1, 2016. Prior to the acquisition, G&K used a 52-week or 53-week fiscal year ending on the Saturday nearest June 30. The pro forma financial information set forth below for the three and six months ended November 30, 2016 includes G&K's quarterly and year to date results, respectively, for the periods of October 2, 2016 through December 31, 2016 and July 2, 2016 through December 31, 2016, adjusted for number of working days in Cintas' first and second quarters of fiscal 2017.
|
| | | | | | | |
| Three Months Ended | | Six Months Ended |
(In thousands except per share data) | November 30, 2016 | | November 30, 2016 |
| | | |
Net sales | $ | 1,515,222 |
| | $ | 3,026,600 |
|
Net income from continuing operations | $ | 131,212 |
| | $ | 277,625 |
|
| | | |
Earnings from continuing operations per common share - diluted | $ | 1.20 |
| | $ | 2.54 |
|
The information above does not include the pro forma adjustments that would be required under Regulation S-X for pro forma financial information, and does not reflect future events that may occur after November 30, 2017 or any operating efficiencies or inefficiencies that may result from the G&K acquisition and related financing. Therefore, the information is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented or the results that Cintas will experience going forward.
Cintas is required to provide additional disclosures about fair value measurements as part of the consolidated financial statements for each major category of assets and liabilities measured at fair value on a nonrecurring basis (including business acquisitions). The working capital assets and liabilities, as well as the property and equipment acquired, were valued using Level 2 inputs which included data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets (market approach). Goodwill, service contracts and other intangibles were valued using Level 3 inputs, which are unobservable by nature, and included internal estimates of future cash flow using a discount rate of 9.5% (income approach). Significant increases (decreases) in any of those unobservable inputs in isolation would result in a significantly lower (higher) fair value measurement. Management utilizes third-party valuation firms to assist in the determination of purchase accounting fair values, and specifically those considered Level 3 measurements. Management ultimately oversees the third-party valuation firms to ensure that the transaction-specific assumptions are appropriate for Cintas.
10.Note 10 - Pension Plans
In conjunction with the acquisition of G&K in fiscal 2017, Cintas assumed G&K's noncontributory frozen defined benefit pension plan (the Pension Plan) that covers substantially all legacy G&K employees who were employed as of July 1, 2005, except certain employees who were covered by union-administered plans. Benefits are based on the number of years of service and each employee’s compensation near retirement. We will make annual contributions to the Pension Plan consistent with federal funding requirements. The Pension Plan was frozen by G&K effective December 31, 2006. Future growth in benefits will not occur beyond this date. Applicable accounting standards require that the consolidated condensed balance sheetsheets reflect the funded status of the Pension Plan. The funded status of the Pension Plan is measured as the difference between the plan assets at fair value and the projected benefit obligation.obligation (PBO). The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. The measurement of the PBO is based on the Company’s estimates and actuarial valuations. The net pension liability at November 30, 2017 is included in long-term accrued liabilities on the consolidated condensed balance sheet.sheets. Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive (loss) income inon our consolidated condensed balance sheet.sheets. The difference between actual amounts and estimates based on actuarial assumptions are recognized in other comprehensive (loss) income, net of tax, in the period in which they occur. The Pension Plan assumptions are evaluated annually and are updated as deemed necessary.
The components of net periodic pension cost recognized in other comprehensive incomebenefit are summarized as follows for the Pension Plan are as follows:three months ended August 31:
| | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | | | |
| | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest cost | $ | 542 | | | $ | 512 | | | | | |
Expected return on assets | (917) | | | (731) | | | | | |
Amortization of net loss | — | | | 56 | | | | | |
Net periodic pension benefit | $ | (375) | | | $ | (163) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | |
| Three Months Ended | | Six Months Ended |
(In thousands) | November 30, 2017 | | November 30, 2017 |
| | | |
Interest cost | $ | 711 |
| | $ | 1,421 |
|
Expected return on assets | (716 | ) | | (1,432 | ) |
Amortization of net loss | — |
| | — |
|
Total net periodic benefit cost | $ | (5 | ) | | $ | (11 | ) |
11.Note 11 - Accumulated Other Comprehensive Income (Loss)
The following table summarizestables summarize the changes in the accumulated balances for each component of accumulated other comprehensive (loss) income, (loss), net of tax:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Foreign Currency | | Unrealized Loss on Interest Rate Hedges | | Other | | Total |
| | | | | | | |
Balance at June 1, 2021 | $ | 41,839 | | | $ | (7,308) | | | $ | (3,643) | | | $ | 30,888 | |
Other comprehensive loss before reclassifications | (24,016) | | | (36,679) | | | — | | | (60,695) | |
Amounts reclassified from accumulated other comprehensive (loss) income | — | | | (459) | | | — | | | (459) | |
Net current period other comprehensive loss | (24,016) | | | (37,138) | | | — | | | (61,154) | |
Balance at August 31, 2021 | $ | 17,823 | | | $ | (44,446) | | | $ | (3,643) | | | $ | (30,266) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
(In thousands) | Foreign Currency | | Unrealized Income on Cash Flow Hedges | | Other | | Total |
| | | | | | | |
Balance at June 1, 2017 | $ | (12,726 | ) | | $ | 11,382 |
| | $ | (1,685 | ) | | $ | (3,029 | ) |
Other comprehensive income before reclassifications | 35,184 |
| | — |
| | 20 |
| | 35,204 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | (172 | ) | | — |
| | (172 | ) |
Net current period other comprehensive income (loss) | 35,184 |
|
| (172 | ) |
| 20 |
|
| 35,032 |
|
Balance at August 31, 2017 | 22,458 |
|
| 11,210 |
|
| (1,665 | ) |
| 32,003 |
|
Other comprehensive loss before reclassifications | (11,374 | ) | | — |
| | (20 | ) | | (11,394 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | (172 | ) | | — |
| | (172 | ) |
Net current period other comprehensive loss | (11,374 | ) | | (172 | ) | | (20 | ) | | (11,566 | ) |
Balance at November 30, 2017 | $ | 11,084 |
|
| $ | 11,038 |
|
| $ | (1,685 | ) |
| $ | 20,437 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Foreign Currency | | Unrealized Loss on Interest Rate Hedges | | Other | | Total |
| | | | | | | |
Balance at June 1, 2020 | $ | (26,343) | | | $ | (112,718) | | | $ | (14,319) | | | $ | (153,380) | |
Other comprehensive income before reclassifications | 26,946 | | | 10,842 | | | — | | | 37,788 | |
Amounts reclassified from accumulated other comprehensive (loss) income | — | | | (358) | | | — | | | (358) | |
Net current period other comprehensive income | 26,946 | | | 10,484 | | | — | | | 37,430 | |
Balance at August 31, 2020 | $ | 603 | | | $ | (102,234) | | | $ | (14,319) | | | $ | (115,950) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
(In thousands) | Foreign Currency | | Unrealized Loss on Cash Flow Hedges | | Other | | Total |
| | | | | | | |
Balance at June 1, 2016 | $ | (2,474 | ) | | $ | (20,830 | ) | | $ | (1,570 | ) | | $ | (24,874 | ) |
Other comprehensive income (loss) before reclassifications | 115 |
| | (12,037 | ) | | (1 | ) | | (11,923 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 385 |
| | — |
| | 385 |
|
Net current period other comprehensive income (loss) | 115 |
|
| (11,652 | ) |
| (1 | ) |
| (11,538 | ) |
Balance at August 31, 2016 | (2,359 | ) | | (32,482 | ) | | (1,571 | ) | | (36,412 | ) |
Other comprehensive (loss) income before reclassifications | (7,650 | ) | | 26,390 |
| | 1 |
| | 18,741 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 385 |
| | — |
| | 385 |
|
Net current period other comprehensive (loss) income | (7,650 | ) | | 26,775 |
| | 1 |
| | 19,126 |
|
Balance at November 30, 2016 | $ | (10,009 | ) | | $ | (5,707 | ) | | $ | (1,570 | ) | | $ | (17,286 | ) |
The following table summarizes the reclassifications out of accumulated other comprehensive (loss) income (loss):for the three months ended August 31:
| | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive (Loss) Income Components | Amount Reclassified from Accumulated Other Comprehensive (Loss) Income | Affected Line in the Consolidated Condensed Statements of Income |
(In thousands) | 2021 | | 2020 | | | | | |
| | | | |
| | | | | | | | |
| | | | | | | | |
Amortization of interest rate locks | $ | 607 | | | $ | 474 | | | | | | Interest expense |
Tax expense | (148) | | | (116) | | | | | | Income taxes |
Amortization of interest rate locks, net of tax | $ | 459 | | | $ | 358 | | | | | | |
| | | | | | | | |
| | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Note 12 - Segment Information
Cintas’ reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services. The Uniform Rental and Facility Services reportable operating segment consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops and shop towels and other ancillary items. In addition to these rental items, restroom cleaning services and supplies, and the sale of items from our catalogs to our customers on route are included within this reportable operating segment. The First Aid and Safety Services reportable operating segment consists of first aid and safety products and services. The remainder of Cintas’ operating segments, which consists of the Fire Protection Services operating segment and the Uniform Direct Sale operating segment, is included in All Other.
Cintas evaluates the performance of each operating segment based on several factors of which the primary financial measures are operating segment revenue and income before income taxes. The accounting policies of the operating segments are the same as those described in Note 1 entitled Basis of Presentation. Information related to the operations of Cintas’ reportable operating segments and All Other is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Uniform Rental and Facility Services | | First Aid and Safety Services | | All Other | | Corporate (1) | | Total |
| | | | | | | | | |
| | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
As of and for the three months ended August 31, 2021 | | | | | | |
| | | | | | | | | |
Revenue | $ | 1,508,176 | | | $ | 199,116 | | | $ | 189,658 | | | $ | — | | | $ | 1,896,950 | |
Income (loss) before income taxes | $ | 329,382 | | | $ | 25,728 | | | $ | 38,991 | | | $ | (21,798) | | | $ | 372,303 | |
Total assets | $ | 6,770,296 | | | $ | 636,829 | | | $ | 370,876 | | | $ | 79,749 | | | $ | 7,857,750 | |
| | | | | | | | | |
As of and for the three months ended August 31, 2020 | | | | | | |
| | | | | | | | | |
Revenue | $ | 1,394,411 | | | $ | 204,481 | | | $ | 147,683 | | | $ | — | | | $ | 1,746,575 | |
Income (loss) before income taxes | $ | 315,028 | | | $ | 18,527 | | | $ | 16,151 | | | $ | (24,486) | | | $ | 325,220 | |
Total assets | $ | 6,628,127 | | | $ | 620,169 | | | $ | 373,543 | | | $ | 421,542 | | | $ | 8,043,381 | |
(1) Corporate assets include cash and cash equivalents and marketable securities, if applicable, in all periods.
|
| | | | | | | | | | | | | | | | | | |
Reclassifications out of Accumulated Other Comprehensive Income (Loss) |
| | | | | | | | | | |
Details about Accumulated Other Comprehensive Income (Loss) Components | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | Affected Line in the Consolidated Condensed Statements of Income |
| | | | | | |
| | Three Months Ended | | Six Months Ended | | |
(In thousands) | | November 30, 2017 | | November 30, 2016 | | November 30, 2017 | | November 30, 2016 | | |
| | | | | | | | | | |
Amortization of interest rate locks | | $ | 278 |
| | $ | (615 | ) | | $ | 556 |
| | $ | (1,229 | ) | | Interest expense |
Tax (expense) benefit | | (106 | ) | | 230 |
| | (212 | ) | | 459 |
| | Income taxes |
Amortization of interest rate locks, net of tax | | $ | 172 |
| | $ | (385 | ) |
| $ | 344 |
|
| $ | (770 | ) | | Net income |
ITEM 2.
12.Segment InformationMANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Strategy
Cintas helps more than one million businesses of all types and sizes, primarily in the United States (U.S.), as well as Canada and Latin America, get READY™ to open their doors with confidence every day by providing a wide range of products and services that enhance our customers’ image and help keep their facilities and employees clean, safe and looking their best. With products and services including uniforms, mats, mops, restroom supplies, first aid and safety products, fire extinguishers and testing, and safety training, Cintas helps customers get Ready for the Workday®. Cintas is also the creator of the Total Clean Program™ — a first-of-its-kind service that includes scheduled delivery of essential cleaning supplies, hygienically clean laundering, and sanitizing and disinfecting projects and services.
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 cleaning services and supplies, first aid and safety services and fire protection products and services.
Cintas’ principal objective is “to exceed customers’ expectations in order to maximize the long-term value of Cintas for shareholders and working partners,” and it provides the framework and focus for Cintas’ business strategy. This strategy is to achieve revenue growth for all our products and services by increasing our penetration at existing customers and by broadening our customer base to include market segments to which we have not historically served. We will also continue to identify additional product and service opportunities for our current and future customers.
To pursue the strategy of increasing penetration, we have a highly talented and diverse team of service professionals visiting our customers on a regular basis. This frequent contact with our customers enables us to develop close personal relationships. The combination of our distribution system and these strong customer relationships provides a platform from which we launch additional products and services.
We pursue the strategy of broadening our customer base in several ways. Cintas has a national sales organization introducing all its products and services to prospects in all market segments. Our broad range of products and services allows our sales organization to consider any type of business a prospect. We also broaden our customer base through geographic expansion. Finally, we evaluate strategic acquisitions as opportunities arise.
Results of Operations
Cintas classifies its business into two reportable operating segments and places the remainder of its operating segments in an All Other category. Cintas’ two reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services. The Uniform Rental and Facility Services reportable operating segment consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops and shop towels and other ancillary items. In addition to these rental items, restroom cleaning services and supplies carpet and tile cleaning services and the sale of items from our catalogs to our customers on route are included within this reportable operating segment. The First Aid and Safety Services reportable operating segment consists of first aid and safety products and services. The remainder of Cintas’ business, which consists of the Fire Protection Services operating segment and itsthe Uniform Direct Sale business, is included in All Other.
Cintas evaluates the performance of each operating segment, based on several factors of which the primary financial measures are operating segment revenue and income before income taxes. The accounting policies of the operating segments are the same as those described in Note 1 entitled Basis of Presentation. Information related to the operations of Cintas’ operating segments is set forth below:
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | Uniform Rental and Facility Services | | First Aid and Safety Services | | All Other | | Corporate (1) | | Total |
| | | | | | | | | |
For the three months ended November 30, 2017 | |
| | |
| | |
| | |
| | |
|
Revenue | $ | 1,308,038 |
| | $ | 139,090 |
| | $ | 159,313 |
| | $ | — |
| | $ | 1,606,441 |
|
Income (loss) before income taxes | $ | 203,814 |
| | $ | 17,975 |
| | $ | 13,422 |
| | $ | (28,838 | ) | | $ | 206,373 |
|
| | | | | | | | | |
For the three months ended November 30, 2016 | |
| | |
| | |
| | |
| | |
|
Revenue | $ | 1,000,015 |
| | $ | 124,797 |
| | $ | 146,265 |
| | $ | — |
| | $ | 1,271,077 |
|
Income (loss) before income taxes | $ | 176,947 |
| | $ | 14,779 |
| | $ | 8,730 |
| | $ | (13,236 | ) | | $ | 187,220 |
|
| | | | | | | | | |
As of and for the six months ended November 30, 2017 | |
| | |
| | |
| | |
| | |
|
Revenue | $ | 2,619,822 |
| | $ | 279,672 |
| | $ | 318,450 |
| | $ | — |
| | $ | 3,217,944 |
|
Income (loss) before income taxes | $ | 422,724 |
| | $ | 37,386 |
| | $ | 24,200 |
| | $ | (58,858 | ) | | $ | 425,452 |
|
Total assets | $ | 5,899,010 |
| | $ | 467,902 |
| | $ | 353,155 |
| | $ | 258,734 |
| | $ | 6,978,801 |
|
| | | | | | | | | |
As of and for the six months ended November 30, 2016 | | | | | | | | | |
Revenue | $ | 1,994,297 |
| | $ | 249,636 |
| | $ | 293,794 |
| | $ | — |
| | $ | 2,537,727 |
|
Income (loss) before income taxes | $ | 361,735 |
| | $ | 26,290 |
| | $ | 16,368 |
| | $ | (27,343 | ) | | $ | 377,050 |
|
Total assets | $ | 3,262,448 |
| | $ | 443,151 |
| | $ | 326,039 |
| | $ | 182,941 |
| | $ | 4,214,579 |
|
(1) Corporate assets include cash and marketable securities in all periods. Corporate assets as of November 30, 2016 include the assets of Discontinued Services, which were classified as held for sale at May 31, 2017 and sold during the six months ended November 30, 2017.
13.Discontinued Operations
In fiscal 2018, Cintas sold a significant business referred to as Discontinued Services and received proceeds from the sale of $127.8 million. The results of Discontinued Services are included in discontinued operations for all periods presented. In accordance with the applicable accounting guidance for the disposal of long-lived assets and discontinued operations, the results of Discontinued Services have been excluded from both continuing operations and operating segment results for all periods presented.
During the three months ended November 30, 2016, we received additional proceeds related to contingent consideration on the sale of Shred-it. Cintas realized a pre-tax gain of $25.9 million as a result of the additional consideration received. As of November 30, 2017, Cintas still has the opportunity to receive additional consideration, subject to certain holdback provisions. Because of the uncertainty surrounding the holdback provision, this opportunity represents a gain contingency that has not been recorded.
Following is selected financial information included in net income from discontinued operations for Discontinued Services and Shred-it:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In thousands) | November 30, 2017 | | November 30, 2016 (1) | | November 30, 2017 | | November 30, 2016 (1) |
| | | | | | | |
Revenue | $ | — |
| | $ | 25,845 |
| | $ | 10,773 |
| | $ | 53,326 |
|
| | | | | | | |
(Loss) income before income taxes | (43 | ) | | 2,402 |
| | (2,482 | ) | | 5,426 |
|
Income tax benefit (expense) | 18 |
| | (898 | ) | | 920 |
| | (2,039 | ) |
(Loss) gain on sale of business | (1,209 | ) | | — |
| | 99,060 |
| | — |
|
Gain on Shred-it | — |
| | 25,876 |
| | — |
| | 25,876 |
|
Income tax benefit (expense) on net gain | 606 |
| | (8,953 | ) | | (42,023 | ) | | (8,953 | ) |
Net (loss) income from discontinued operations | $ | (628 | ) | | $ | 18,427 |
|
| $ | 55,475 |
|
| $ | 20,310 |
|
(1) The results of Discontinued Services for the three and six months ended November 30, 2016 were previously included in continuing operations.
14.G&K Services, Inc. Transaction and Integration Expenses
As a result of the acquisition of G&K in fiscal 2017, the Company incurred $13.1 million and $3.3 million in transaction and integration expenses during the three months ended November 30, 2017 and 2016, respectively, and $17.0 million and $6.1 million during the six months ended November 30, 2017 and 2016, respectively. The $13.1 million of costs incurred in the three months ended November 30, 2017 related to integration expenses directly related to the acquisition. During the six months ended November 30, 2017, the costs incurred related to $16.0 million of integration expenses directly related to the acquisition and $1.0 million of employee termination expenses recognized under ASC Topic 712, "Compensation - Nonretirement Postemployment Benefits." The costs incurred in the three and six months ended November 30, 2016 related to legal and professional fees directly related to the acquisition. As of November 30, 2017 and May 31, 2017, employee termination benefits included in accrued compensation and related liabilities on the consolidated condensed balance sheet was $15.7 millionand$24.3 million, respectively. The amount of employee termination benefits paid during the three and six months ended November 30, 2017 was $3.6 million and $9.6 million, respectively.
15.Supplemental Guarantor Information
Cintas Corporation No. 2 (Corp. 2) is the indirectly, wholly-owned principal operating subsidiary of Cintas. Corp. 2 is the issuer of the aggregate principal amount of the $2,857.5 million aggregate principal amount of senior notes outstanding as of November 30, 2017, which are unconditionally guaranteed, jointly and severally, by Cintas Corporation and certain wholly-owned, direct and indirect domestic subsidiaries.
As allowed by SEC rules, the following consolidating condensed financial statements are provided as an alternative to filing separate financial statements of the guarantors. Each of the subsidiaries presented in the following consolidating condensed financial statements has been fully consolidated in Cintas’ consolidated condensed financial statements. The following consolidating condensed financial statements should be read in conjunction with the consolidated condensed financial statements of Cintas and notes thereto of which this note is an integral part. During fiscal 2018, the Company sold Discontinued Services (see Note 13) previously included in Cintas Corporation and Corp. 2. The sale of Discontinued Services has been reflected as discontinued operations as of the beginning of the earliest period presented herein. Consolidating condensed financial statements for Cintas, Corp. 2, the subsidiary guarantors and non-guarantors are presented on the following pages:
Consolidating Condensed Income Statement
Three Months Ended November 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
|
Uniform rental and facility services | $ | — |
| | $ | 1,086,667 |
| | $ | 170,320 |
| | $ | 100,933 |
| | $ | (49,882 | ) | | $ | 1,308,038 |
|
Other | — |
| | 435,539 |
| | (313 | ) | | 21,982 |
| | (158,805 | ) | | 298,403 |
|
Equity in net income of affiliates | 137,737 |
| | — |
| | — |
| | — |
| | (137,737 | ) | | — |
|
| 137,737 |
| | 1,522,206 |
| | 170,007 |
| | 122,915 |
| | (346,424 | ) | | 1,606,441 |
|
Costs and expenses (income): | |
| | |
| | |
| | |
| | |
| | |
|
Cost of uniform rental and facility services | — |
| | 628,123 |
| | 105,954 |
| | 65,220 |
| | (75,337 | ) | | 723,960 |
|
Cost of other | — |
| | 302,065 |
| | (25,046 | ) | | 15,438 |
| | (126,345 | ) | | 166,112 |
|
Selling and administrative expenses | — |
| | 528,369 |
| | (85,417 | ) | | 31,211 |
| | (6,079 | ) | | 468,084 |
|
G&K Services, Inc. transaction and integration expenses | — |
| | 4,192 |
| | 8,319 |
| | 563 |
| | — |
| | 13,074 |
|
Operating income | 137,737 |
| | 59,457 |
| | 166,197 |
| | 10,483 |
| | (138,663 | ) | | 235,211 |
|
| | | | | | | | | | | |
Interest income | — |
| | (45 | ) | | (59 | ) | | (187 | ) | | — |
| | (291 | ) |
Interest expense (income) | — |
| | 29,444 |
| | (313 | ) | | (2 | ) | | — |
| | 29,129 |
|
| | | | | | | | | | | |
Income before income taxes | 137,737 |
|
| 30,058 |
|
| 166,569 |
|
| 10,672 |
|
| (138,663 | ) |
| 206,373 |
|
Income taxes | — |
| | 11,449 |
| | 54,414 |
| | 2,798 |
| | (25 | ) | | 68,636 |
|
Income from continuing operations | 137,737 |
|
| 18,609 |
|
| 112,155 |
|
| 7,874 |
|
| (138,638 | ) | | 137,737 |
|
| | | | | | | | | | | |
Loss from discontinued operations, net of tax | (628 | ) | | (628 | ) | | — |
| | — |
| | 628 |
| | (628 | ) |
| | | | | | | | | | | |
Net income | $ | 137,109 |
| | $ | 17,981 |
| | $ | 112,155 |
| | $ | 7,874 |
| | $ | (138,010 | ) | | $ | 137,109 |
|
Consolidating Condensed Income Statement
Three Months Ended November 30, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
|
Uniform rental and facility services | $ | — |
| | $ | 835,892 |
| | $ | 149,886 |
| | $ | 57,610 |
| | $ | (43,373 | ) | | $ | 1,000,015 |
|
Other | — |
| | 390,963 |
| | 633 |
| | 18,162 |
| | (138,696 | ) | | 271,062 |
|
Equity in net income of affiliates | 121,950 |
| | — |
| | — |
| | — |
| | (121,950 | ) | | — |
|
| 121,950 |
| | 1,226,855 |
| | 150,519 |
| | 75,772 |
| | (304,019 | ) | | 1,271,077 |
|
Costs and expenses (income): | |
| | |
| | |
| | |
| | |
| | |
|
Cost of uniform rental and facility services | — |
| | 483,399 |
| | 94,323 |
| | 37,603 |
| | (63,827 | ) | | 551,498 |
|
Cost of other | — |
| | 271,812 |
| | (19,549 | ) | | 13,636 |
| | (111,538 | ) | | 154,361 |
|
Selling and administrative expenses | — |
| | 398,592 |
| | (48,256 | ) | | 18,703 |
| | (7,624 | ) | | 361,415 |
|
G&K Services, Inc. transaction and integration expenses | — |
| | — |
| | 3,347 |
| | — |
| | — |
| | 3,347 |
|
Operating income | 121,950 |
| | 73,052 |
| | 120,654 |
| | 5,830 |
| | (121,030 | ) | | 200,456 |
|
| | | | | | | | | | | |
Interest income | — |
| | — |
| | (7 | ) | | (25 | ) | | 1 |
| | (31 | ) |
Interest expense (income) | — |
| | 14,528 |
| | (1,176 | ) | | (85 | ) | | — |
| | 13,267 |
|
| | | | | | | | | | | |
Income before income taxes | 121,950 |
| | 58,524 |
| | 121,837 |
| | 5,940 |
| | (121,031 | ) | | 187,220 |
|
Income taxes | — |
| | 20,635 |
| | 42,652 |
| | 2,011 |
| | (28 | ) | | 65,270 |
|
Income from continuing operations | 121,950 |
|
| 37,889 |
|
| 79,185 |
|
| 3,929 |
|
| (121,003 | ) |
| 121,950 |
|
| | | | | | | | | | |
|
|
Income from discontinued operations, net of tax | 18,427 |
| | 17,115 |
| | — |
| | 1,941 |
| | (19,056 | ) | | 18,427 |
|
| | | | | | | | | | | |
Net income | $ | 140,377 |
|
| $ | 55,004 |
|
| $ | 79,185 |
|
| $ | 5,870 |
|
| $ | (140,059 | ) |
| $ | 140,377 |
|
Consolidating Condensed Income Statement
Six Months Ended November 30, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
|
Uniform rental and facility services | $ | — |
| | $ | 2,186,536 |
| | $ | 335,215 |
| | $ | 197,528 |
| | $ | (99,457 | ) | | $ | 2,619,822 |
|
Other | — |
| | 862,841 |
| | (6 | ) | | 42,290 |
| | (307,003 | ) | | 598,122 |
|
Equity in net income of affiliates | 298,845 |
| | — |
| | — |
| | — |
| | (298,845 | ) | | — |
|
| 298,845 |
| | 3,049,377 |
| | 335,209 |
| | 239,818 |
| | (705,305 | ) | | 3,217,944 |
|
Costs and expenses (income): | |
| | |
| | |
| | |
| | |
| | |
|
Cost of uniform rental and facility services | — |
| | 1,250,271 |
| | 204,973 |
| | 125,737 |
| | (150,158 | ) | | 1,430,823 |
|
Cost of other | — |
| | 590,984 |
| | (44,715 | ) | | 30,173 |
| | (245,043 | ) | | 331,399 |
|
Selling and administrative expenses | — |
| | 1,039,324 |
| | (132,955 | ) | | 61,117 |
| | (13,119 | ) | | 954,367 |
|
G&K Services, Inc. transaction and integration expenses | — |
| | 5,713 |
| | 10,754 |
| | 578 |
| | — |
| | 17,045 |
|
Operating income | 298,845 |
| | 163,085 |
| | 297,152 |
| | 22,213 |
| | (296,985 | ) | | 484,310 |
|
| | | | | | | | | | | |
Interest income | — |
| | (76 | ) | | (158 | ) | | (354 | ) | | — |
| | (588 | ) |
Interest expense (income) | — |
| | 60,005 |
| | (452 | ) | | (107 | ) | | — |
| | 59,446 |
|
| | | | | | | | | | | |
Income before income taxes | 298,845 |
| | 103,156 |
| | 297,762 |
| | 22,674 |
| | (296,985 | ) | | 425,452 |
|
Income taxes | — |
| | 31,019 |
| | 89,537 |
| | 6,095 |
| | (44 | ) | | 126,607 |
|
Income from continuing operations | 298,845 |
|
| 72,137 |
|
| 208,225 |
|
| 16,579 |
|
| (296,941 | ) |
| 298,845 |
|
| | | | | | | | | | |
|
|
Income (loss) from discontinued operations, net of tax | 55,475 |
| | 64,374 |
| | (8,899 | ) | | — |
| | (55,475 | ) | | 55,475 |
|
| | | | | | | | | | | |
Net income | $ | 354,320 |
|
| $ | 136,511 |
|
| $ | 199,326 |
|
| $ | 16,579 |
|
| $ | (352,416 | ) |
| $ | 354,320 |
|
Consolidating Condensed Income Statement
Six Months Ended November 30, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Revenue: | |
| | |
| | |
| | |
| | |
| | |
|
Uniform rental and facility services | $ | — |
| | $ | 1,667,852 |
| | $ | 299,034 |
| | $ | 115,273 |
| | $ | (87,862 | ) | | $ | 1,994,297 |
|
Other | — |
| | 779,045 |
| | 1,601 |
| | 37,037 |
| | (274,253 | ) | | 543,430 |
|
Equity in net income of affiliates | 258,158 |
| | — |
| | — |
| | — |
| | (258,158 | ) | | — |
|
| 258,158 |
| | 2,446,897 |
| | 300,635 |
| | 152,310 |
| | (620,273 | ) | | 2,537,727 |
|
Costs and expenses (income): | |
| | |
| | |
| | |
| | |
| | |
|
Cost of uniform rental and facility services | — |
| | 958,620 |
| | 184,995 |
| | 74,717 |
| | (129,737 | ) | | 1,088,595 |
|
Cost of other | — |
| | 535,538 |
| | (34,480 | ) | | 27,464 |
| | (221,035 | ) | | 307,487 |
|
Selling and administrative expenses | — |
| | 806,203 |
| | (98,990 | ) | | 38,968 |
|
| (15,063 | ) | | 731,118 |
|
G&K Services, Inc. transaction and integration expenses | — |
| | — |
| | 6,134 |
| | — |
| | — |
| | 6,134 |
|
Operating income | 258,158 |
| | 146,536 |
| | 242,976 |
| | 11,161 |
| | (254,438 | ) | | 404,393 |
|
| | | | | | | | | | | |
Interest income | — |
| | — |
| | (24 | ) | | (73 | ) | | 1 |
| | (96 | ) |
Interest expense (income) | — |
| | 29,355 |
| | (1,878 | ) | | (38 | ) | | — |
| | 27,439 |
|
| | | | | | | | | | | |
Income before income taxes | 258,158 |
| | 117,181 |
| | 244,878 |
| | 11,272 |
| | (254,439 | ) | | 377,050 |
|
Income taxes | — |
| | 37,304 |
| | 78,178 |
| | 3,464 |
| | (54 | ) | | 118,892 |
|
Income from continuing operations | 258,158 |
|
| 79,877 |
|
| 166,700 |
|
| 7,808 |
|
| (254,385 | ) |
| 258,158 |
|
| | | | | | | | | | |
|
|
Income from discontinued operations, net of tax | 20,310 |
| | 18,998 |
| | — |
| | 1,941 |
| | (20,939 | ) | | 20,310 |
|
| | | | | | | | | | | |
Net income | $ | 278,468 |
|
| $ | 98,875 |
|
| $ | 166,700 |
|
| $ | 9,749 |
|
| $ | (275,324 | ) |
| $ | 278,468 |
|
Consolidating Condensed Statement of Comprehensive Income
Three Months Ended November 30, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Net income | $ | 137,109 |
| | $ | 17,981 |
| | $ | 112,155 |
| | $ | 7,874 |
| | $ | (138,010 | ) | | $ | 137,109 |
|
| | | | | | | | | | | |
Other comprehensive loss, net of tax: | | | | | | | | | | | |
Foreign currency translation adjustments | (11,374 | ) | | — |
| | — |
| | (11,374 | ) | | 11,374 |
| | (11,374 | ) |
Amortization of interest rate lock agreements | (172 | ) | | (172 | ) | | — |
| | — |
| | 172 |
| | (172 | ) |
Change in fair value of available-for-sale securities | (20 | ) | | — |
| | — |
| | (20 | ) | | 20 |
| | (20 | ) |
| | | | | | | | | | | |
Other comprehensive loss | (11,566 | ) | | (172 | ) | | — |
| | (11,394 | ) | | 11,566 |
| | (11,566 | ) |
| | | | | | | | | | | |
Comprehensive income (loss) | $ | 125,543 |
| | $ | 17,809 |
| | $ | 112,155 |
| | $ | (3,520 | ) | | $ | (126,444 | ) | | $ | 125,543 |
|
Consolidating Condensed Statement of Comprehensive Income
Three Months Ended November 30, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Net income | $ | 140,377 |
| | $ | 55,004 |
| | $ | 79,185 |
| | $ | 5,870 |
| | $ | (140,059 | ) | | $ | 140,377 |
|
| | | | | | | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | | | |
Foreign currency translation adjustments | (7,650 | ) | | — |
| | — |
| | (7,650 | ) | | 7,650 |
| | (7,650 | ) |
Change in fair value of cash flow hedges | 26,390 |
| | 26,390 |
| | — |
| | — |
| | (26,390 | ) | | 26,390 |
|
Amortization of interest rate lock agreements | 385 |
| | 385 |
| | — |
| | — |
| | (385 | ) | | 385 |
|
Change in fair value of available-for-sale securities | 1 |
| | — |
| | — |
| | 1 |
| | (1 | ) | | 1 |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | 19,126 |
| | 26,775 |
| | — |
| | (7,649 | ) | | (19,126 | ) | | 19,126 |
|
| | | | | | | | | | | |
Comprehensive income (loss) | $ | 159,503 |
| | $ | 81,779 |
| | $ | 79,185 |
| | $ | (1,779 | ) | | $ | (159,185 | ) | | $ | 159,503 |
|
Consolidating Condensed Statement of Comprehensive Income
Six Months Ended November 30, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Net income | $ | 354,320 |
| | $ | 136,511 |
| | $ | 199,326 |
| | $ | 16,579 |
| | $ | (352,416 | ) | | $ | 354,320 |
|
| | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
Foreign currency translation adjustments | 23,810 |
| | — |
| | — |
| | 23,810 |
| | (23,810 | ) | | 23,810 |
|
Amortization of interest rate lock agreements | (344 | ) | | (344 | ) | | — |
| | — |
| | 344 |
| | (344 | ) |
| | | | | | | | | | | |
Other comprehensive income (loss) | 23,466 |
| | (344 | ) | | — |
| | 23,810 |
| | (23,466 | ) | | 23,466 |
|
| | | | | | | | | | | |
Comprehensive income | $ | 377,786 |
| | $ | 136,167 |
| | $ | 199,326 |
| | $ | 40,389 |
| | $ | (375,882 | ) | | $ | 377,786 |
|
Consolidating Condensed Statement of Comprehensive Income
Six Months Ended November 30, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Net income | $ | 278,468 |
| | $ | 98,875 |
| | $ | 166,700 |
| | $ | 9,749 |
| | $ | (275,324 | ) | | $ | 278,468 |
|
| | | | | | | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | | | |
Foreign currency translation adjustments | (7,535 | ) | | — |
| | — |
| | (7,535 | ) | | 7,535 |
| | (7,535 | ) |
Change in fair value of cash flow hedges | 14,353 |
| | 14,353 |
| | — |
| | — |
| | (14,353 | ) | | 14,353 |
|
Amortization of interest rate lock agreements | 770 |
| | 770 |
| | — |
| | — |
| | (770 | ) | | 770 |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | 7,588 |
| | 15,123 |
| | — |
| | (7,535 | ) | | (7,588 | ) | | 7,588 |
|
| | | | | | | | | | | |
Comprehensive income | $ | 286,056 |
| | $ | 113,998 |
| | $ | 166,700 |
| | $ | 2,214 |
| | $ | (282,912 | ) | | $ | 286,056 |
|
Consolidating Condensed Balance Sheet
As of November 30, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
Assets | |
| | |
| | |
| | |
| | |
| | |
|
Current assets: | |
| | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | — |
| | $ | 42,126 |
| | $ | 83,515 |
| | $ | 110,361 |
| | $ | — |
| | $ | 236,002 |
|
Marketable securities | — |
| | — |
| | — |
| | 22,732 |
| | — |
| | 22,732 |
|
Accounts receivable, net | — |
| | 586,992 |
| | 117,106 |
| | 59,457 |
| | — |
| | 763,555 |
|
Inventories, net | — |
| | 224,217 |
| | 31,994 |
| | 16,620 |
| | (1 | ) | | 272,830 |
|
Uniforms and other rental items in service | — |
| | 562,724 |
| | 81,459 |
| | 49,025 |
| | (18,636 | ) | | 674,572 |
|
Income taxes, current | — |
| | (16,790 | ) | | 47,940 |
| | 4,550 |
| | — |
| | 35,700 |
|
Prepaid expenses and other current assets | — |
| | 7,837 |
| | 29,222 |
| | 999 |
| | — |
| | 38,058 |
|
Total current assets | — |
| | 1,407,106 |
| | 391,236 |
| | 263,744 |
| | (18,637 | ) | | 2,043,449 |
|
| | | | | | | | | | | |
Property and equipment, net | — |
| | 875,883 |
| | 366,041 |
| | 111,235 |
| | — |
| | 1,353,159 |
|
| | | | | | | | | | | |
Investments (1) | 321,083 |
| | 3,598,267 |
| | 947,722 |
| | 1,713,070 |
| | (6,404,479 | ) | | 175,663 |
|
Goodwill | — |
| | — |
| | 2,770,504 |
| | 41,403 |
| | (111 | ) | | 2,811,796 |
|
Service contracts, net | — |
| | 483,985 |
| | — |
| | 81,589 |
| | — |
| | 565,574 |
|
Other assets, net | 1,766,703 |
| | 557 |
| | 3,489,627 |
| | 13,866 |
| | (5,241,593 | ) | | 29,160 |
|
| $ | 2,087,786 |
| | $ | 6,365,798 |
| | $ | 7,965,130 |
| | $ | 2,224,907 |
| | $ | (11,664,820 | ) | | $ | 6,978,801 |
|
| | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | |
| | |
| | |
| | |
| | |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
Accounts payable | $ | (465,247 | ) | | $ | (1,458,658 | ) | | $ | 2,162,751 |
| | $ | (113,813 | ) | | $ | 37,948 |
| | $ | 162,981 |
|
Accrued compensation and related liabilities | — |
| | 101,379 |
| | 6,141 |
| | 5,910 |
| | — |
| | 113,430 |
|
Accrued liabilities | — |
| | 187,828 |
| | 368,784 |
| | 21,348 |
| | — |
| | 577,960 |
|
Debt due within one year | — |
| | 300,000 |
| | — |
| | — |
| | — |
| | 300,000 |
|
Total current liabilities | (465,247 | ) | | (869,451 | ) | | 2,537,676 |
| | (86,555 | ) | | 37,948 |
| | 1,154,371 |
|
| | | | | | | | | | | |
Long-term liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
Debt due after one year | — |
| | 2,533,832 |
| | — |
| | 390 |
| | — |
| | 2,534,222 |
|
Deferred income taxes | — |
| | — |
| | 492,999 |
| | 46,044 |
| | — |
| | 539,043 |
|
Accrued liabilities | — |
| | 32,998 |
| | 163,863 |
| | 1,271 |
| | — |
| | 198,132 |
|
Total long-term liabilities | — |
| | 2,566,830 |
| | 656,862 |
| | 47,705 |
| | — |
| | 3,271,397 |
|
| | | | | | | | | | | |
Total shareholders’ equity | 2,553,033 |
| | 4,668,419 |
| | 4,770,592 |
| | 2,263,757 |
| | (11,702,768 | ) | | 2,553,033 |
|
| $ | 2,087,786 |
| | $ | 6,365,798 |
| | $ | 7,965,130 |
| | $ | 2,224,907 |
| | $ | (11,664,820 | ) | | $ | 6,978,801 |
|
(1) Investments include inter company investment activity. Corp 2 and Subsidiary Guarantors hold $20.3 million and $155.4 million, respectively, of the $175.7 million consolidated net investments.
Consolidating Condensed Balance Sheet
As of May 31, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
Assets | |
| | |
| | |
| | |
| | |
| | |
|
Current assets: | |
| | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | — |
| | $ | 48,658 |
| | $ | 17,302 |
| | $ | 103,306 |
| | $ | — |
| | $ | 169,266 |
|
Marketable securities | — |
| | — |
| | — |
| | 22,219 |
| | — |
| | 22,219 |
|
Accounts receivable, net | — |
| | 543,769 |
| | 137,881 |
| | 54,358 |
| | — |
| | 736,008 |
|
Inventories, net | — |
| | 243,677 |
| | 21,466 |
| | 14,461 |
| | (1,386 | ) | | 278,218 |
|
Uniforms and other rental items in service | — |
| | 531,295 |
| | 78,012 |
| | 45,388 |
| | (18,993 | ) | | 635,702 |
|
Income taxes, current | — |
| | 16,173 |
| | 25,138 |
| | 3,009 |
| | — |
| | 44,320 |
|
Prepaid expenses and other current assets | — |
| | 13,234 |
| | 16,188 |
| | 710 |
| | — |
| | 30,132 |
|
Assets held for sale | — |
| | 23,095 |
| | 15,518 |
| | — |
| | — |
| | 38,613 |
|
Total current assets | — |
| | 1,419,901 |
| | 311,505 |
| | 243,451 |
| | (20,379 | ) | | 1,954,478 |
|
| | | | | | | | | | | |
Property and equipment, net | — |
| | 851,018 |
| | 364,724 |
| | 107,759 |
| | — |
| | 1,323,501 |
|
| | | | | | | | | | | |
Investments (1) | 321,083 |
| | 3,605,457 |
| | 929,657 |
| | 1,711,070 |
| | (6,402,479 | ) | | 164,788 |
|
Goodwill | — |
| | — |
| | 2,742,898 |
| | 39,549 |
| | (112 | ) | | 2,782,335 |
|
Service contracts, net | — |
| | 505,698 |
| | — |
| | 81,290 |
| | — |
| | 586,988 |
|
Other assets, net | 1,516,463 |
| | 14,705 |
| | 3,489,653 |
| | 11,983 |
| | (5,000,837 | ) | | 31,967 |
|
| $ | 1,837,546 |
| | $ | 6,396,779 |
| | $ | 7,838,437 |
| | $ | 2,195,102 |
| | $ | (11,423,807 | ) | | $ | 6,844,057 |
|
| | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | |
| | |
| | |
| | |
| | |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
Accounts payable | $ | (465,247 | ) | | $ | (1,596,731 | ) | | $ | 2,292,388 |
| | $ | (91,467 | ) | | $ | 38,108 |
| | $ | 177,051 |
|
Accrued compensation and related liabilities | — |
| | 94,505 |
| | 42,866 |
| | 12,264 |
| | — |
| | 149,635 |
|
Accrued liabilities | — |
| | 191,819 |
| | 219,303 |
| | 18,687 |
| | — |
| | 429,809 |
|
Debt due within one year | — |
| | 362,900 |
| | — |
| | — |
| | — |
| | 362,900 |
|
Liabilities held for sale | — |
| | 11,457 |
| | — |
| | — |
| | — |
| | 11,457 |
|
Total current liabilities | (465,247 | ) | | (936,050 | ) | | 2,554,557 |
| | (60,516 | ) | | 38,108 |
| | 1,130,852 |
|
| | | | | | | | | | | |
Long-term liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
Debt due after one year | — |
| | 2,770,234 |
| | — |
| | 390 |
| | — |
| | 2,770,624 |
|
Deferred income taxes | — |
| | — |
| | 436,613 |
| | 32,715 |
| | — |
| | 469,328 |
|
Accrued liabilities | — |
| | 28,384 |
| | 140,923 |
| | 1,153 |
| | — |
| | 170,460 |
|
Total long-term liabilities | — |
| | 2,798,618 |
| | 577,536 |
| | 34,258 |
| | — |
| | 3,410,412 |
|
| | | | | | | | | | | |
Total shareholders’ equity | 2,302,793 |
| | 4,534,211 |
| | 4,706,344 |
| | 2,221,360 |
| | (11,461,915 | ) | | 2,302,793 |
|
| $ | 1,837,546 |
| | $ | 6,396,779 |
| | $ | 7,838,437 |
| | $ | 2,195,102 |
| | $ | (11,423,807 | ) | | $ | 6,844,057 |
|
(1) Investments include inter company investment activity. Corp 2 and Subsidiary Guarantors hold $29.0 million and $135.8 million, respectively, of the $164.8 million consolidated net investments.
Consolidating Condensed Statement of Cash Flows
Six Months Ended November 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Cash flows from operating activities: | |
| | |
| | |
| | |
| | |
| | |
|
Net income | $ | 354,320 |
| | $ | 136,511 |
| | $ | 199,326 |
| | $ | 16,579 |
| | $ | (352,416 | ) | | $ | 354,320 |
|
Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
| | |
| | |
| | |
| | |
|
Depreciation | — |
| | 65,942 |
| | 34,789 |
| | 6,847 |
| | — |
| | 107,578 |
|
Amortization of intangible assets | — |
| | 24,522 |
| | 2,547 |
| | 4,192 |
| | — |
| | 31,261 |
|
Stock-based compensation | 55,204 |
| | — |
| | — |
| | — |
| | — |
| | 55,204 |
|
Gain on sale of business | — |
| | (114,581 | ) | | 15,521 |
| | — |
| | — |
| | (99,060 | ) |
Deferred income taxes | — |
| | — |
| | 40,555 |
| | 1,607 |
| | — |
| | 42,162 |
|
Changes in current assets and liabilities, net of acquisitions of businesses: | |
| | |
| | |
| | |
| | |
| | |
|
Accounts receivable, net | — |
| | (42,881 | ) | | 20,790 |
| | (2,709 | ) | | — |
| | (24,800 | ) |
Inventories, net | — |
| | 17,728 |
| | (13,863 | ) | | 115 |
| | (1,385 | ) | | 2,595 |
|
Uniforms and other rental items in service | — |
| | (29,520 | ) | | (112 | ) | | (3,305 | ) | | (357 | ) | | (33,294 | ) |
Prepaid expenses and other current assets | — |
| | (5,428 | ) | | (13,609 | ) | | 464 |
| | — |
| | (18,573 | ) |
Accounts payable | — |
| | 155,461 |
| | (153,831 | ) | | (10,176 | ) | | (160 | ) | | (8,706 | ) |
Accrued compensation and related liabilities | — |
| | 6,341 |
| | (39,311 | ) | | (3,510 | ) | | — |
| | (36,480 | ) |
Accrued liabilities and other | — |
| | (26,847 | ) | | 26,373 |
| | (1,466 | ) | | — |
| | (1,940 | ) |
Income taxes, current | — |
| | 32,963 |
| | (22,794 | ) | | (1,427 | ) | | — |
| | 8,742 |
|
Net cash provided by operating activities | 409,524 |
| | 220,211 |
| | 96,381 |
| | 7,211 |
| | (354,318 | ) | | 379,009 |
|
| | | | | | | | | | | |
Cash flows from investing activities: | |
| | |
| | |
| | |
| | |
| | |
|
Capital expenditures | — |
| | (90,497 | ) | | (36,875 | ) | | (5,094 | ) | | — |
| | (132,466 | ) |
Proceeds from redemption of marketable securities and investments | — |
| | 12,400 |
| | — |
| | 87,859 |
| | — |
| | 100,259 |
|
Purchase of marketable securities and investments | — |
| | 5,510 |
| | (20,064 | ) | | (87,323 | ) | | 2,000 |
| | (99,877 | ) |
Proceeds from sale of business | — |
| | 127,835 |
| | — |
| | — |
| | — |
| | 127,835 |
|
Acquisitions of businesses | — |
| | (1,099 | ) | | — |
| | — |
| | — |
| | (1,099 | ) |
Other, net | (402,385 | ) | | 21,470 |
| | 26,771 |
| | 956 |
| | 352,318 |
| | (870 | ) |
Net cash (used in) provided by investing activities | (402,385 | ) | | 75,619 |
| | (30,168 | ) | | (3,602 | ) | | 354,318 |
| | (6,218 | ) |
| | | | | | | | | | | |
Cash flows from financing activities: | |
| | |
| | |
| | |
| | |
| | |
|
Payments of commercial paper, net | — |
| | (50,500 | ) | | — |
| | — |
| | — |
| | (50,500 | ) |
Repayment of debt | — |
| | (250,000 | ) | | — |
| | — |
| | — |
| | (250,000 | ) |
Proceeds from exercise of stock-based compensation awards | 28,558 |
| | — |
| | — |
| | — |
| | — |
| | 28,558 |
|
Repurchase of common stock | (35,697 | ) | | — |
| | — |
| | — |
| | — |
| | (35,697 | ) |
Other, net | — |
| | (1,862 | ) | | — |
| | (20 | ) | | — |
| | (1,882 | ) |
Net cash used in financing activities | (7,139 | ) | | (302,362 | ) | | — |
| | (20 | ) | | — |
| | (309,521 | ) |
| | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | — |
| | 3,466 |
| | — |
| | 3,466 |
|
| | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | — |
| | (6,532 | ) | | 66,213 |
| | 7,055 |
| | — |
| | 66,736 |
|
Cash and cash equivalents at beginning of period | — |
| | 48,658 |
| | 17,302 |
| | 103,306 |
| | — |
| | 169,266 |
|
Cash and cash equivalents at end of period | $ | — |
| | $ | 42,126 |
| | $ | 83,515 |
| | $ | 110,361 |
| | $ | — |
| | $ | 236,002 |
|
Consolidating Condensed Statement of Cash Flows
Six Months Ended November 30, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cintas Corporation | | Corp. 2 | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Cintas Corporation Consolidated |
| | | | | | | | | | | |
Cash flows from operating activities: | |
| | |
| | |
| | |
| | |
| | |
|
Net income | $ | 278,468 |
| | $ | 98,875 |
| | $ | 166,700 |
| | $ | 9,749 |
| | $ | (275,324 | ) | | $ | 278,468 |
|
Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
| | |
| | |
| | |
| | |
|
Depreciation | — |
| | 52,259 |
| | 22,412 |
| | 4,919 |
| | — |
| | 79,590 |
|
Amortization of intangible assets | — |
| | 6,847 |
| | 175 |
| | 438 |
| | — |
| | 7,460 |
|
Stock-based compensation | 39,582 |
| | — |
| | — |
| | — |
| | — |
| | 39,582 |
|
Gain on Shred-it | — |
| | (23,935 | ) | | — |
| | (1,941 | ) | | — |
| | (25,876 | ) |
Deferred income taxes | — |
| | (9,578 | ) | | 5,395 |
| | 350 |
| | — |
| | (3,833 | ) |
Changes in current assets and liabilities, net of acquisitions of businesses: | |
| | |
| | |
| | |
| | |
| | |
|
Accounts receivable, net | — |
| | (36,939 | ) | | (6,813 | ) | | (1,168 | ) | | — |
| | (44,920 | ) |
Inventories, net | — |
| | (14,038 | ) | | 2,871 |
| | (1,593 | ) | | (1,856 | ) | | (14,616 | ) |
Uniforms and other rental items in service | — |
| | 754 |
| | (4,182 | ) | | 511 |
| | (1,398 | ) | | (4,315 | ) |
Prepaid expenses and other current assets | — |
| | 412 |
| | (2,411 | ) | | 47 |
| | — |
| | (1,952 | ) |
Accounts payable | — |
| | 23,367 |
| | (10,857 | ) | | 2,831 |
| | 110 |
| | 15,451 |
|
Accrued compensation and related liabilities | 2,819 |
| | (12,734 | ) | | (8,935 | ) | | (86 | ) | | — |
| | (18,936 | ) |
Accrued liabilities and other | 139,766 |
| | 3,711 |
| | (148,384 | ) | | 41 |
| | — |
| | (4,866 | ) |
Income taxes, current | — |
| | (1,635 | ) | | 1,460 |
| | 659 |
| | — |
| | 484 |
|
Net cash provided by operating activities | 460,635 |
| | 87,366 |
| | 17,431 |
| | 14,757 |
| | (278,468 | ) | | 301,721 |
|
| | | | | | | | | | | |
Cash flows from investing activities: | |
| | |
| | |
| | |
| | |
| | |
|
Capital expenditures | — |
| | (85,207 | ) | | (60,837 | ) | | (9,129 | ) | | — |
| | (155,173 | ) |
Proceeds from redemption of marketable securities | — |
| | — |
| | — |
| | 172,968 |
| | — |
| | 172,968 |
|
Purchase of marketable securities and investments | — |
| | (4,560 | ) | | (28,751 | ) | | (102,692 | ) | | 17,733 |
| | (118,270 | ) |
Proceeds from sale of investment in Shred-it | — |
| | 23,935 |
| | — |
| | 1,941 |
| | — |
| | 25,876 |
|
Acquisitions of businesses, net of cash acquired | — |
| | (7,245 | ) | | — |
| | (10,533 | ) | | — |
| | (17,778 | ) |
Other, net | (460,630 | ) | | 177,446 |
| | 21,190 |
| | 1,591 |
| | 260,735 |
| | 332 |
|
Net cash (used in) provided by investing activities | (460,630 | ) | | 104,369 |
| | (68,398 | ) | | 54,146 |
| | 278,468 |
| | (92,045 | ) |
| | | | | | | | | | | |
Cash flows from financing activities: | |
| | |
| | |
| | |
| | |
| | |
|
Issuance of commercial paper, net | — |
| | 66,000 |
| | — |
| | — |
| | — |
| | 66,000 |
|
Proceeds from issuance of debt | — |
| | — |
| | (2,000 | ) | | 2,000 |
| | — |
| | — |
|
Repayment of debt | — |
| | (250,000 | ) | | — |
| | — |
| | — |
| | (250,000 | ) |
Prepaid short-term debt financing fees | — |
| | (13,495 | ) | | — |
| | — |
| | — |
| | (13,495 | ) |
Proceeds from exercise of stock-based compensation awards | 19,225 |
| | — |
| | — |
| | — |
| | — |
| | 19,225 |
|
Repurchase of common stock | (19,230 | ) | | — |
| | — |
| | — |
| | — |
| | (19,230 | ) |
Other, net | — |
| | (5,572 | ) | | — |
| | — |
| | — |
| | (5,572 | ) |
Net cash (used in) provided by financing activities | (5 | ) | | (203,067 | ) | | (2,000 | ) | | 2,000 |
| | — |
| | (203,072 | ) |
| | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | — |
| | (2,388 | ) | | — |
| | (2,388 | ) |
| | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | — |
| | (11,332 | ) | | (52,967 | ) | | 68,515 |
| | — |
| | 4,216 |
|
Cash and cash equivalents at beginning of period | — |
| | 57,893 |
| | 55,392 |
| | 26,072 |
| | — |
| | 139,357 |
|
Cash and cash equivalents at end of period | $ | — |
| | $ | 46,561 |
| | $ | 2,425 |
| | $ | 94,587 |
| | $ | — |
| | $ | 143,573 |
|
CINTAS CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
BUSINESS STRATEGY
Cintas helps more than one million businesses of all types and sizes, primarily in North America, as well as Latin America, Europe and Asia, get Ready™ to open their doors with confidence every day by providing a wide range of products and services that enhance our customers’ image and help keep their facilities and employees clean, safe and looking their best. With products and services including uniforms, floor care, restroom supplies, first aid and safety products, fire extinguishers and testing, and safety and compliance training, Cintas helps customers get Ready for the Workday™.
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 cleaning services and supplies, carpet and tile cleaning services, first aid and safety services and fire protection products and services.
Cintas’ principal objective is “to exceed customers’ expectations in order to maximize the long-term value of Cintas for shareholders and working partners,” and it provides the framework and focus for Cintas’ business strategy. This strategy is to achieve revenue growth for all of our products and services by increasing our penetration at existing customers and by broadening our customer base to include business segments to which we have not historically served. We will also continue to identify additional product and service opportunities for our current and future customers.
To pursue the strategy of increasing penetration, we have a highly talented and diverse team of service professionals visiting our customers on a regular basis. This frequent contact with our customers enables us to develop close personal relationships. The combination of our distribution system and these strong customer relationships provides a platform from which we launch additional products and services.
We pursue the strategy of broadening our customer base in several ways. Cintas has a national sales organization introducing all of its products and services to prospects in all business segments. Our broad range of products and services allows our sales organization to consider any type of business a prospect. We also broaden our customer base through geographic expansion, especially in our first aid and safety service reportable operating segment and fire protection businesses. Finally, we evaluate strategic acquisitions as opportunities arise.
RESULTS OF OPERATIONS
Cintas classifies its business into two reportable operating segments and places the remainder of its operating segments in an All Other category. Cintas’ two reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services. The Uniform Rental and Facility Services operating segment consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops, and shop towels and other ancillary items. In addition to these rental items, restroom cleaning services and supplies and carpet and tile cleaning services are also provided within this operating segment. The First Aid and Safety Services operating segment consists of first aid and safety services. The remainder of Cintas’ business, which consists of Fire Protection Services and its Uniform Direct Sale business, is included in All Other. These operating segments consist of fire protection products and services and the direct sale of uniforms and related items. Cintas evaluates operating segment performance based on revenue and income before income taxes. Revenue and income before income taxes for the sixthree months endedNovember 30, 2017 August 31, 2021 and 20162020, for the two reportable operating segments and All Other isare presented in Note 12 entitled Segment Information of “Notes to Consolidated Condensed Financial Statements.”
On March 21, 2017,We have operations throughout the U.S. and Canada and participate in a global supply chain. During most of fiscal 2021, the existence of the novel strain of coronavirus (COVID-19) pandemic, the fear associated with the COVID-19 pandemic and the reactions of governments around the world in response to the COVID-19 pandemic to regulate the flow of labor and products and impede the business of our customers, impacted our ability to conduct normal business operations, which had an adverse effect on our business. Many of Cintas' customers were also impacted by the COVID-19 pandemic, and we saw an impact on some customer's ability to pay timely. While there was
minimal disruption to our supply chain, Cintas completeddid increase inventory, primarily personal protective equipment and facility services inventory, in response to the acquisitioncustomer needs and demand associated with the safety and cleanliness requirements of G&K Services, Inc. (G&K)COVID-19. The increase in inventory resulted in additional inventory reserves during fiscal 2021 and could result in future inventory reserve increases if demand for considerationpersonal protective equipment materially declines. The on-going roll out of approximately $2.1 billion. G&Kthe COVID-19 vaccines and gradual lifting of COVID-19 restrictions had a positive impact on our business during the three months ended August 31, 2021. The impact of the COVID-19 pandemic is now a wholly-owned subsidiary of Cintas that operates withinfluid and continues to evolve, and therefore, we cannot predict the Uniform Rental and Facility Services operating segment. To finance the G&K acquisition, Cintas used a combination of new senior notes, a term loan, other borrowings under its existing credit facility and cash on hand. G&K'sextent to which our business, consolidated results of operations, are included in Cintas' consolidated financial statements as of and from the date of acquisition. See Note 9 entitled Acquisitions of “Notes to Consolidated Condensed Financial Statements” for additional information.condition or liquidity will ultimately be impacted.
During the first quarter of the current fiscal year, Cintas sold a significant business, referred to as "Discontinued Services," and as a result, its operations are classified as discontinued operations for all periods presented. See Note 13 entitled Discontinued Operations of “Notes to Consolidated Condensed Financial Statements” for more information.
Consolidated Results
Three Months EndedNovember 30, 2017 August 31, 2021 Compared to Three Months EndedNovember 30, 2016 August 31, 2020
Total revenue increased 26.4%8.6% to $1,897.0 million for the three months ended November 30, 2017 overAugust 31, 2021, compared to $1,746.6 million for the same period in the prior fiscal year, from $1,271.1 million to $1,606.4 million. Revenue increased organically by 7.7% as a result of increased sales volume. Organicthree months ended August 31, 2020. The organic revenue growth rate, which adjusts for the impact of acquisitions, divestitures and foreign currency exchange rate fluctuations. Total revenuefluctuations, was 8.6%. Revenue growth was negatively impacted by a net 0.5% due to acquisitions and divestitures and positively impacted by 0.3%0.5% due to foreign currency exchange rate fluctuations and by 18.4% due to acquisitions, primarily the acquisition of G&K.fluctuations.
Uniform Rental and Facility Services reportable operating segment revenue increased 30.8%was $1,508.2 million for the three months ended November 30, 2017 overAugust 31, 2021, compared to $1,394.4 million for the same period in the prior fiscal year, from $1,000.0 million to $1,308.0 million. Revenue increased organically by 7.3%which was an increase of 8.2%. The organic revenue grow rate for this reportable operating segment was 8.2%. Revenue growth in the Uniform Rental and Facility Services reportable operating segment was positivelynegatively impacted 23.2%by a net 0.5% due to acquisitions primarily G&K. Foreignand divestitures and positively impacted by 0.5% due to foreign currency exchange rate fluctuations positively impactedfluctuations. Revenue growth by 0.3%. Growth was driven by many factors includinga result of new business, sold by sales representatives,the penetration of additional products and services into existing customers and strong customer retention.price increases, partially offset by lost business. New business growth resulted from an increase in the number of sales representatives.
Other revenue, consisting of revenue from the First Aid and Safety Services reportable operating segment and All Other, increased 10.1%10.4% for the three months ended November 30, 2017August 31, 2021, compared to the same period in the prior fiscal year, from $271.1$352.2 million to $298.4 million. Revenue increased organically by 9.2%$388.8 million. The organic revenue grow rate for other revenue was 10.3%. Revenue growth was positively impacted by 0.2%0.1% due to foreign currency exchange rate fluctuations and by 0.7% due to growth derived through acquisitions in our First Aid and Safety Services reportable operating segment and our Fire Protection business, which is included in All Other.fluctuations.
Cost of uniform rental and facility services consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other ancillary items. Cost of uniform rental and facility services increased $172.5$63.9 million, or 31.3%8.9%, for the three months ended November 30, 2017,August 31, 2021, compared to the three months ended November 30, 2016.August 31, 2020. This increasechange from prior fiscal year was primarily due to higher Uniform Rental and Facility Services reportable operating segment sales volume, including the newly acquired G&K sales volume.as well as increased labor and energy costs.
Cost of other consists primarily of cost of goods sold (predominantly first aid and safety products, personal protective equipment, uniforms, and fire protection products), delivery expenses and distribution expenses in the First Aid and Safety Services reportable operating segment and All Other. Cost of other increased $11.8$9.9 million,, or 7.6%4.8%, for the three months ended November 30, 2017,August 31, 2021, compared to the three months ended November 30, 2016.August 31, 2020. Cost of other improved as a percentage of revenue, decreasing from 58.2% for three months ended August 31, 2020 to 55.3% for the three months ended August 31, 2021. The increasedecrease in cost of sales as a percent to revenue was primarily due to highera favorable change sales volumemix, including a decrease in the First Aid and Safety Services reportable operating segment and All Other.proportion of sales related to personal protective equipment.
Selling and administrative expenses increased $106.7$32.2 million, or 6.7%, or 29.5%,in the three months ended August 31, 2021, compared to the same period of the prior fiscal year. The increase in expense was due to increases in selling labor and increased travel and meeting expenses, partially offset by a gain on the sale of certain operating assets within the Uniform Direct Sales operating segment. Selling and administrative expenses as a percent of revenue were 26.8% for the three months ended November 30, 2017,August 31, 2021, which is a 50 basis point improvement compared to 27.3% for the same period in the prior fiscal year. The increaseimprovement as a percent of revenue was primarily due to higher sales volume, increased labor and other employee-partner related expenses as a resultrevenue growth outpacing the growth in expenses.
Operating income was $394.1 million, or 20.8% of G&K, increased amortization expense related to intangible assets acquired as a result of the G&K acquisition and increased costs related to investments in a new enterprise resource planning system. Operating incomerevenue, for the three months ended November 30, 2017 was negatively impacted by $13.1August 31, 2021, compared to $349.7 million, or 20.0% of transaction and integration expenses incurred in connection with the G&K acquisition. Forrevenue, for the three months ended November 30, 2017,August 31, 2020. The 80 basis point increase in operating income as a percent of revenue was due to both cost of sales and selling and administrative expenses decreasing as a percent of revenue for the after-tax effect of these transaction and integration expenses represents a negative impact of $0.07 per share on diluted earnings per share.three months ended August 31, 2021.
Net interest expense (interest expense less interest income) was $28.8$21.8 million for the three months ended November 30, 2017,August 31, 2021, compared to $13.2$24.5 million for the three months ended November 30, 2016.August 31, 2020. The increasechange was primarily due to the additionalrefinancing of $250.0 million from senior debt issued to finance the G&K acquisition.with an interest rate of 4.30% which matured on June 1, 2021, into commercial paper which had an interest rate of 0.20% at August 31, 2021.
Cintas’ effective tax rate for continuing operations was 33.3%11.0% and 34.9%7.8% for the three months ended November 30, 2017August 31, 2021 and 2016,2020, respectively. The effective tax rate forin both periods was largely impacted by certain discrete items, (primarilyprimarily the tax accounting impact for stock-based compensation).compensation.
Net income from continuing operations for the three months ended November 30, 2017August 31, 2021 increased $15.8$31.2 million, or 12.9%10.4%, compared to the three months ended November 30, 2016.August 31, 2020. Diluted earnings per share from continuing operations was $1.24were $3.11 for the three months ended November 30, 2017,August 31, 2021, which was an increase of 10.7%11.9% compared to the same period in the prior fiscal year. Diluted earnings per share from continuing operations increased primarily due to the increase in earningsnet income combined with the decrease in weighted average common shares outstanding. The decrease in common shares outstanding resulted from continuing operations.purchasing an aggregate of approximately 3.0 million shares of common stock under the October 30, 2018 and October 29, 2019 share buyback programs since the beginning of the third quarter of fiscal 2021 through the first quarter of fiscal 2022.
Uniform Rental and Facility Services Reportable Operating Segment
Three Months Ended November 30, 2017 August 31, 2021 Compared to Three Months EndedNovember 30, 2016 August 31, 2020
Uniform Rental and Facility Services reportable operating segment revenue increased from $1,000.0was $1,508.2 million to $1,308.0 million, or 30.8%, for the three months ended November 30, 2017, overAugust 31, 2021 compared to $1,394.4 million for the same period inof the prior fiscal year, and the cost of uniform rental and facility services increased $172.5$63.9 million,, or 31.3%8.9%. Revenue increased organically by 7.3%The organic revenue grow rate for the reportable operating segment was 8.2%. The reportable operating segment’s gross margin was $584.1$728.9 million,, or 44.7%48.3% of revenue. The gross margin was 2040 basis points lower than the prior fiscal year’s secondfirst quarter gross margin of 44.9%48.7%. The decreasedifference in gross margin as a percent to revenue was driven primarily by the recent G&K acquisition, which has lower margins than our legacy Cintas margins.an increase in labor and energy costs.
Selling and administrative expenses for the Uniform Rental and Facility Services reportable operating segment increased $99.0$35.5 million in the three months ended August 31, 2021 compared to 28.1%the same period of the prior fiscal year. Selling and administrative expenses as a percent of revenue for the three months ended August 31, 2021 was 26.5% compared to 26.8%26.1% in the secondfirst quarter of the prior fiscal year. ThisThe increase as a percent of revenue was primarily due to increases in expense was due primarily to increasedselling labor and employee-partner related expenses incurred as a result of the G&K acquisition, increased amortization expense related to intangibles acquired as a result of the G&K acquisitiontravel and an investment in an enterprise resource planning system.meeting expenses.
Income before income taxes increased $26.9$14.4 million, or 15.2%4.6%, for the Uniform Rental and Facility Services reportable operating segment for the three months ended November 30, 2017August 31, 2021, compared to the same period in the prior fiscal year. Income before income taxes was 15.6%21.8% of the reportable operating segment’s revenue, which was a 21080 basis point decrease compared to the secondfirst quarter of the prior fiscal year of 17.7%22.6%. This decrease was primarily due to the increasepreviously discussed changes in gross margin and selling and administrative expenses as previously discussed, and the G&K transaction and integration expenses incurred during the quarter, which had a 70 basis point impact.percent of revenue.
First Aid and Safety Services Reportable Operating Segment
Three Months Ended November 30, 2017August 31, 2021 Compared to Three Months Ended November 30, 2016August 31, 2020
First Aid and Safety Services reportable operating segment revenue increaseddecreased from $124.8$204.5 million to $139.1$199.1 million, or 11.5%2.6%, for the three months ended November 30, 2017August 31, 2021, over the same period in the prior fiscal year. Revenue increasedfor the reportable operating segment declined organically by 10.8% as a result of increased sales volume. Total3.3%. First Aid and Safety Services reportable operating segment revenue was positively impacted by 0.5% due to acquisitions and by 0.2% due to foreign currency exchange rate fluctuations andfluctuations. The change in revenue was caused by 0.5% due to acquisitionsa decrease in the three months ended November 30, 2017 compared to the three months ended November 30, 2016. Growth was driven by many factors including new business sold by sales representatives, penetrationdemand for personal protective equipment.
Cost of first aid and safety services increased $6.6decreased $12.5 million, or 9.8%10.2%, for the three months ended November 30, 2017,August 31, 2021, over the three months ended November 30, 2016,August 31, 2020, due to higherlower sales volume. The gross margin as a percent of revenue was 46.9%44.8% for the quarter ended November 30, 2017, which is an increase of 80 basis pointsAugust 31, 2021, compared to the gross margin as a percent of revenue of 46.1%40.2% in the same period of the prior fiscal year. The increaseimprovement in gross margin from the first quarter of the prior year was primarily driven primarily by improved sourcing, leveraginga decrease in the proportion of existing warehouses and optimization of delivery routes.sales related to personal protective equipment, which typically have lower gross margins than first aid cabinet sales.
Selling and administrative expenses increased $4.5remained at $63.5 million, compared towhich is in line with the samefirst quarter inof the prior fiscal year. The increase was due primarily toyear, but increased labor. Selling and administrative expenses as a percent of revenue improved to 34.0%31.9%, compared to 34.3%31.1% in the secondfirst quarter of the prior fiscal year. The decrease in selling and administrative expenseschange as a percent toof revenue from the prior year was primarily due to revenue growing at a faster pace than labor and employee-partner related expenses.lower revenue.
Income before income taxes for the First Aid and Safety Services reportable operating segment increased $3.2$7.2 million to $18.0$25.7 million for the three months ended November 30, 2017, compared to the same period in the prior fiscal year, due to the previously discussed growth in revenue, improvement in the gross margin percentage and improvement in selling and administrative expenses as a percent to revenue. Income before income taxes, at 12.9% of the reportable operating segment’s revenue, was a 110 basis point increase compared to the same quarter last fiscal year due to the reasons previously mentioned.
Consolidated Results
Six Months Ended November 30, 2017 Compared to Six Months Ended November 30, 2016
Total revenue increased 26.8% for the six months ended November 30, 2017 over the same period in the prior fiscal year, from $2,537.7 million to $3,217.9 million. Revenue increased organically by 8.0% as a result of increased sales volume. Organic growth adjusts for the impact of acquisitions and foreign currency exchange rate fluctuations. Total revenue was positively impacted by 0.2% due to foreign currency exchange rate fluctuations and by 18.6% due to acquisitions, primarily the acquisition of G&K.
Uniform Rental and Facility Services reportable operating segment revenue increased 31.4% for the six months ended November 30, 2017 over the same period in the prior fiscal year, from $1,994.3 million to $2,619.8 million. Revenue increased organically by 7.7%. Revenue growth was positively impacted by 0.2% due to foreign currency exchange rate fluctuations and 23.5% due to acquisitions, primarily the acquisition of G&K. Growth was driven by many factors including new business sold by sales representatives, penetration of additional products and services into existing customers and strong customer retention.
Other revenue, consisting of revenue from the First Aid and Safety Services reportable operating segment and All Other, increased 10.1% for the six months ended November 30, 2017 compared to the same period in the prior fiscal year, from $543.4 million to $598.1 million. Revenue increased organically by 9.0%. Revenue growth was positively impacted by 0.2% due to foreign currency exchange rate fluctuations and by 0.9% due to growth derived through acquisitions in our First Aid and Safety Services reportable operating segment and our Fire Protection business, which is included in All Other.
Cost of uniform rental and facility services consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other ancillary items. Cost of uniform rental and facility services increased $342.2 million, or 31.4%, for the six months ended November 30, 2017, compared to the six months ended November 30, 2016. This increase was due to higher Uniform Rental and Facility Services reportable operating segment sales volume, including the newly acquired G&K sales volume.
Cost of other consists primarily of cost of goods sold (predominantly first aid and safety products, uniforms, and fire protection products), delivery expenses and distribution expenses in the First Aid and Safety Services reportable operating segment and All Other. Cost of other increased $23.9 million, or 7.8%, for the six months ended November 30, 2017, compared to the six months ended November 30, 2016. The increase was primarily due to higher sales volume in the First Aid and Safety Services reportable operating segment and All Other.
Selling and administrative expenses increased $223.2 million, or 30.5%, for the six months ended November 30, 2017, compared to the same period in the prior fiscal year. The increase was due to higher sales volume, increased labor and other employee-partner related expenses as a result of the acquisition of G&K, increased amortization expense related to intangible assets acquired as a result of the G&K acquisition and increased costs related to investments in a new enterprise resource planning system. Operating income for the six months ended November 30, 2017 was negatively impacted by $17.0 million of transaction and integration expenses incurred in connection with the G&K acquisition. For the six months ended November 30, 2017, the after-tax effect of these transaction and integration expenses represents a negative impact of $0.10 per share on diluted earnings per share.
Net interest expense (interest expense less interest income) was $58.9 million for the six months ended November 30, 2017, compared to $27.3 million for the six months ended November 30, 2016. The increase was primarily due to the additional debt issued to finance the G&K acquisition.
Cintas’ effective tax rate for continuing operations was 29.8% and 31.5% for the six months ended November 30, 2017 and 2016, respectively. The effective tax rate for both periods was largely impacted by certain discrete items (primarily the tax accounting for stock-based compensation).
Net income from continuing operations for the six months ended November 30, 2017 increased $40.7 million, or 15.8%, compared to the six months ended November 30, 2016. Diluted earnings per share from continuing operations was $2.69 for the six months ended November 30, 2017, which was an increase of 14.0% compared to the same period in the prior fiscal year. Diluted earnings per share from continuing operations increased due to the increase in earnings from continuing operations.
Uniform Rental and Facility Services Reportable Operating Segment
Six Months Ended November 30, 2017 Compared to Six Months Ended November 30, 2016
Uniform Rental and Facility Services reportable operating segment revenue increased from $1,994.3 million to $2,619.8 million, or 31.4%, for the six months ended November 30, 2017, over the same period in the prior fiscal year, and the cost of uniform rental and facility services increased $342.2 million, or 31.4%. Revenue increased organically by 7.7%. The reportable operating segment’s gross margin was $1,189.0 million, or 45.4% of revenue, which was the same gross margin as the prior year's first half gross margin. The increase in gross margin was a result of new business sold by sales representatives, penetration of additional products and services into existing customers and continuous improvement in process efficiency that was offset by lower margin business attributed to the recent G&K acquisition.
Selling and administrative expenses increased $211.4 million to 28.6% of revenue, compared to 27.0% in the first six months of the prior fiscal year. This increase in expense was due primarily to increased labor and employee-partner related expenses incurred as a result of the G&K acquisition, increased amortization expense related to intangibles acquired as a result of the G&K acquisition and an investment in an enterprise resource planning system.
Income before income taxes increased $61.0 million, or 16.9%, for the Uniform Rental and Facility Services reportable operating segment for the six months ended November 30, 2017August 31, 2021, compared to the same period in the prior fiscal year. Income before income taxes was 16.1%12.9% of the reportable operating segment’s revenue which was a 200 basis point decrease compared to the first halfquarter of the prior fiscal year of 18.1%9.1%. This decreasechange was primarily due to the previously discussed increase in sellinggross margin.
Liquidity and administrative expenses, as previously discussed, and the G&K transaction and integration expenses incurred during the quarter, which had a 40 basis point impact.
First Aid and Safety Services Reportable Operating Segment
Six Months Ended November 30, 2017 Compared to Six Months Ended November 30, 2016
First Aid and Safety Services reportable operating segment revenue increased from $249.6 million to $279.7 million, or 12.0%, for the six months ended November 30, 2017 over the same period in the prior fiscal year. Revenue increased organically by 11.4% as a result of increased sales volume. Total revenue was positively impacted by 0.6% due to acquisitions in the six months ended November 30, 2017 compared to the six months ended November 30, 2016. Growth was driven by many factors including new business sold by sales representatives, penetration of additional products and services into existing customers and strong customer retention.
Cost of first aid and safety services increased $12.7 million, or 9.4%, for the six months ended November 30, 2017, over the six months ended November 30, 2016, due to higher sales volume. The gross margin as a percent of revenue was 47.2% for the six months ended November 30, 2017, which is an increase of 130 basis points compared to the gross margin as a percent of revenue of 45.9% in the same period of the prior fiscal year. The increase was driven primarily by improved sourcing, leveraging of existing warehouses and optimization of delivery routes, as a result of the ZEE Medical Inc. (ZEE) acquisition.
Selling and administrative expenses increased $6.3 million compared to the first half of the prior fiscal year. The increase was due primarily to increased labor. Selling and administrative expenses as a percent of revenue improved to 33.8% compared to 35.4% in the first half of the prior fiscal year. The decrease in selling and administrative expenses as a percent to revenue was due to revenue growing at a faster pace than labor and employee-partner related expenses as a result of the ZEE acquisition.
Income before income taxes for the First Aid and Safety Services reportable operating segment increased $11.1 million to $37.4 million for the six months ended November 30, 2017, compared to the same period in the prior fiscal year, due to the growth in revenue, the improvement in the gross margin percentage and the decrease in selling and administrative expenses as a percent to revenue. Income before income taxes, at 13.4% of the reportable operating segment’s revenue, was a 290 basis point increase compared to the same period last fiscal year due to the reasons previously mentioned.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
The following is a summary of our cash flows and cash and cash equivalents and marketable securities as of and for the sixthree months ended November 30, 2017August 31:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
| | | |
Net cash provided by operating activities | $ | 262,141 | | | $ | 312,292 | |
Net cash used in investing activities | $ | (84,321) | | | $ | (39,942) | |
Net cash (used in) provided by financing activities | $ | (590,084) | | | $ | 2,243 | |
| | | |
Cash and cash equivalents at the end of the period | $ | 79,749 | | | $ | 421,542 | |
| | | |
Cash and 2016:
|
| | | | | | | |
(In thousands) | 2017 | | 2016 |
| | | |
Net cash provided by operating activities | $ | 379,009 |
| | $ | 301,721 |
|
Net cash used in investing activities | $ | (6,218 | ) | | $ | (92,045 | ) |
Net cash used in financing activities | $ | (309,521 | ) | | $ | (203,072 | ) |
| | | |
Cash and cash equivalents at the end of the period | $ | 236,002 |
| | $ | 143,573 |
|
Marketable securities at the end of the period | $ | 22,732 |
| | $ | — |
|
Cash, cash equivalents and marketable securities as of November 30, 2017August 31, 2021 and 20162020, include $133.1$38.1 million and $94.6$36.3 million, respectively, that is located outside of the United States. We expect to use these amounts to fund our international operations and international expansion activities. U.S.
Cash flows provided by operating activities have historically supplied us with a significant source of liquidity. We generally use these cash flows to fund most, if not all, of our operations and expansion activities and dividends on our common stock. We may also use cash flows provided by operating activities, as well as proceeds from long-term debt and short-term borrowings, to fund growth and expansion opportunities, as well as other cash requirements such as the repurchase of our common stock and payment of long-term debt.
We expect our cash flows from operating activities to remain sufficient to provide us with adequate levels of short-term liquidity. In addition, we have access to $1.0 billion of short-term debt from our revolving credit facility. Although the impact of the COVID-19 pandemic is fluid and continues to evolve, we believe our long-term liquidity position remains strong. We believe the Company has sufficient liquidity to operate in the current business environment. Acquisitions and dividends remain strategic objectives, but they will be dependent on the economic outlook and liquidity of the Company.
Net cash provided by operating activities was $379.0$262.1 million for the sixthree months ended November 30, 2017,August 31, 2021, compared to $312.3 million for the three months ended August 31, 2020. The change from the prior fiscal year was primarily due to an increase in accounts receivable and uniforms and other rental items in service which resulted from the growth in sales. Additionally, there were uses of $77.3 million comparedcash from the change in accrued compensation and other related liabilities, which was caused by the differences in the annual bonus payments and accounts payable, which was due to the six months ended November 30, 2016. The increase was the resulttiming. These uses of highercash were partially offset by increased net income offset byand favorable changes in working capital.capital, specifically, inventories, net.
Net cash used in investing activities includes capital expenditures, purchases of investments, proceeds from the sale of businessesoperating assets and cash paid for acquisitions of businesses. Capital expenditures were $132.5$48.7 million and $155.2$30.9 million for the sixthree months ended November 30, 2017August 31, 2021 and 2016,2020, respectively. Capital expenditures in fiscal 2018 primarily relate to expansion efforts inthree months ended August 31, 2021 included $34.5 million for the Uniform Rental and Facility Services reportable operating segment representing $111.4and $10.7 million offor the current year amount.First Aid and Safety Services reportable operating segment. Cash paid for acquisitions of businesses was $1.1$35.7 million and $17.8$2.0 million for the sixthree months ended November 30, 2017August 31, 2021 and 2016,
2020, respectively. The acquisitions during the sixthree months ended November 30, 2017August 31, 2021 occurred in our Uniform Rental and Facility Services reportable operating segment First Aid and Safety Services reportable operating segment and our Fire Protection business,operating segment, which is included in All Other. ForThe acquisitions during the sixthree months ended November 30, 2017, investing activities includedAugust 31, 2020 occurred in our Uniform Rental and Facility Services reportable operating segment. Also, during the three months ended August 31, 2021, the Company received proceeds of $127.8$15.1 million related tofrom the sale of Discontinued Services.certain operating assets in All Other. Net cash used in investing activities also includes net proceeds from purchases and redemptions of marketable securities and investments of $0.4$8.7 million and $54.7$4.9 million forof purchases of investments during the sixthree months ended November 30, 2017August 31, 2021 and 2016,2020, respectively.
Net cash used in financing activities was $309.5 million and $203.1$590.1 million for the sixthree months endedNovember 30, 2017 August 31, 2021, and 2016, respectively. net cash provided by financing activities was $2.2 million for the three months ended August 31, 2020. The change in cash used in financing activities was primarily due to the increase in share buyback activity, debt payments and dividend payments, partially offset by the net issuance of commercial paper in the three months ended August 31, 2021.
On August 4, 2015,October 29, 2019, we announced that the Board of Directors authorized a $500.0 million$1.0 billion share buyback program. Duringprogram, which was completed during the six months ended November 30, 2016, under the August 4, 2015 share buyback plan, we purchased 0.1 million shares at an average pricefirst quarter of $94.11 per share for a total purchase price of $3.7 million. This completed the August 4, 2015 program through which Cintas purchased a total of 5.7 million shares of Cintas common stock at an average price of $87.89 for a total purchase price of $500.0 million.fiscal 2022. On August 2, 2016,July 27, 2021, we announced that the Board of Directors authorized a new $500.0 million$1.5 billion share buyback program, which does not have an expiration date. As of November 30, 2017, no share buybacks have occurred underThe following table summarizes the August 2, 2016buyback activity by program and therefor the three months ended August 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
Buyback Program (In thousands except per share data) | Shares | | Avg. Price per Share | | Purchase Price | | Shares | | Avg. Price per Share | | Purchase Price |
| | | | | | | | | | | |
| | | | | | | | | | | |
October 29, 2019 | 1,590 | | | $ | 365.41 | | | $ | 581,220 | | | — | | | $ | — | | | $ | — | |
July 27, 2021 | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
| 1,590 | | | $ | — | | | $ | 581,220 | | | — | | | $ | — | | | $ | — | |
There were no share buybacks under this programin the period subsequent to November 30, 2017August 31, 2021, through January 5, 2018.October 7, 2021 under any share buyback program. In addition, for the sixthree months ended November 30, 2017,August 31, 2021, Cintas acquired 0.30.2 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested during the sixthree months ended November 30, 2017.August 31, 2021. These shares were acquired at an average price of $129.01$394.19 per share for a total purchase price of $35.7$78.0 million. For the three months ended August 31, 2020, Cintas acquired 0.2 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested during the three months ended August 31, 2020. These shares were acquired at an average price of $300.01 per share for a total purchase price of $69.0 million.
On April 13, 2021, our Board of Directors declared a quarterly dividend of $0.75 per share on outstanding common stock. These dividends, totaling $79.1 million, were paid on June 15, 2021, to shareholders of record as of May 15, 2021. On July 27, 2021, the Board of Directors declared a quarterly dividend of $0.95 per share on outstanding common stock. This dividend of $98.8 million was accrued on the August 31, 2021 consolidated condensed balance sheet and was paid on September 15, 2021, during the second quarter of fiscal 2022, to shareholders of record as of August 13, 2021. Any future dividend declarations, including the amount of any dividends, are at the discretion of the Board of Directors and dependent upon then-existing conditions, including the Company's consolidated operating results and consolidated financial condition, capital requirements, contractual restrictions, business prospects and other factors that the Board of Directors may deem relevant.
During the sixthree months ended November 30, 2016,August 31, 2021, Cintas paid $13.5 million in prepaid short term debt financing fees related to bridge loan financing in connection with the entry into the merger agreement among Cintas, G&K and Bravo Merger Sub, Inc., a wholly-owned subsidiary of Cintas, pursuant to which Cintas would acquire all outstanding shares of G&K for $97.50 per share in cash, for a total enterprise value of approximately $2.1 billion, including acquired net debt.
During the six months ended November 30, 2017, Cintas made payments of $50.5issued $326.0 million, net onof commercial paper borrowings and paid off the term loan balance of $250.0 million with cash on hand.borrowings. On June 1, 2016, Cintas paid the $250.0 million aggregate principal amount of five-year senior notes that matured on that date with cash on hand and proceeds from the issuance of commercial paper. On December 1, 2017,2021, in accordance with the terms of the notes, Cintas paid the $300.0$250.0 million aggregate principal amount of 6.13%its 4.30%, 10-year senior notes that matured on that date with cash on handhand. During the next 12 months, Cintas expects to issue long-term debt to pay the $650 million principal amount of its 2.90%, 5-year senior notes that mature in the fourth quarter of fiscal 2022 and $265.0the $300 million principal amount of its 3.25%, 10-year senior notes that mature in proceeds from the issuancefirst quarter of commercial paper.fiscal 2023.
The following table summarizes Cintas' outstanding debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Interest Rate | | Fiscal Year Issued | | Fiscal Year Maturity | | August 31, 2021 | | May 31, 2021 |
| | | | | | | | | |
Debt due within one year | | | | | | | | | |
Senior notes | 4.30 | % | | 2012 | | 2022 | | $ | — | | | $ | 250,000 | |
Senior notes | 2.90 | % | | 2017 | | 2022 | | 650,000 | | | 650,000 | |
Senior notes | 3.25 | % | | 2013 | | 2023 | | 300,000 | | | — | |
Commercial paper | 0.20 | % | (1) | 2022 | | 2022 | | 326,000 | | | — | |
Debt issuance costs | | | | | | | (833) | | | (930) | |
Total debt due within one year | | | | | | | $ | 1,275,167 | | | $ | 899,070 | |
| | | | | | | | | |
Debt due after one year | | | | | | | | | |
Senior notes | 3.25 | % | | 2013 | | 2023 | | $ | — | | | $ | 300,000 | |
Senior notes (2) | 2.78 | % | | 2013 | | 2023 | | 50,707 | | | 50,815 | |
Senior notes (3) | 3.11 | % | | 2015 | | 2025 | | 51,217 | | | 51,301 | |
Senior notes | 3.70 | % | | 2017 | | 2027 | | 1,000,000 | | | 1,000,000 | |
Senior notes | 6.15 | % | | 2007 | | 2037 | | 250,000 | | | 250,000 | |
| | | | | | | | | |
Debt issuance costs | | | | | | | (8,702) | | | (9,283) | |
Total debt due after one year | | | | | | | $ | 1,343,222 | | | $ | 1,642,833 | |
|
| | | | | | | | | | | | | | |
(In thousands) | Interest Rate | | Fiscal Year Issued | | Fiscal Year Maturity | | November 30, 2017 | | May 31, 2017 |
| | | | | | | | | |
Debt due within one year | | | | | | | | | |
Senior notes | 6.13 | % | | 2008 | | 2018 | | $ | 300,000 |
| | $ | 300,000 |
|
Commercial paper | 1.24 | % | (1) | Various | | Various | | — |
| | 50,500 |
|
Current portion of term loan | 2.00 | % | (1) | 2017 | | 2018 | | — |
| | 12,500 |
|
Debt issuance costs | | | | | | | — |
| | (100 | ) |
Total debt due within one year | | | | | | | $ | 300,000 |
| | $ | 362,900 |
|
| | | | | | | | | |
Debt due after one year | | | | | | | | | |
Senior notes | 4.30 | % | | 2012 | | 2022 | | $ | 250,000 |
| | $ | 250,000 |
|
Senior notes | 2.90 | % | | 2017 | | 2022 | | 650,000 |
| | 650,000 |
|
Senior notes | 3.25 | % | | 2013 | | 2023 | | 300,000 |
| | 300,000 |
|
Senior notes (2) | 2.78 | % | | 2013 | | 2023 | | 52,337 |
| | 52,554 |
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Senior notes (3) | 3.11 | % | | 2015 | | 2025 | | 52,476 |
| | 52,645 |
|
Senior notes | 3.70 | % | | 2017 | | 2027 | | 1,000,000 |
| | 1,000,000 |
|
Senior notes | 6.15 | % | | 2007 | | 2037 | | 250,000 |
| | 250,000 |
|
Long-term portion of term loan | 2.00 | % | (1) | 2017 | | 2022 | | — |
| | 237,500 |
|
Debt issuance costs | | | | | | | (20,591 | ) | | (22,075 | ) |
Total debt due after one year | | | | | | | $ | 2,534,222 |
| | $ | 2,770,624 |
|
(1)Variable rate debt instrument. The rate presented is the variable borrowing rate at MayAugust 31, 2017.2021.
(2)(1) Cintas assumed these senior notes with the acquisition of G&K Services, Inc. (G&K) in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.73%.
(3) (2) Cintas assumed these senior notes with the acquisition of G&K in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.88%.
The credit agreement that supports our commercial paper program was amended on September 16, 2016. The amendment increased the capacity of thehas a revolving credit facility from $450.0 millionwith capacity to $600.0 million and added a $250.0 million term loan facility. The existing term loan facility was paid in full during the first quarter of fiscal 2018.$1.0 billion. The credit agreement has an accordion feature that provides Cintas the ability to request increases to the borrowing commitments under either the revolving credit facility or a new term loan of up to $250.0 million in the aggregate, subject to customary conditions. The maturity date of the revolving credit agreementfacility is September 15, 2021.May 23, 2024. As of November 30, 2017,August 31, 2021, there was no$326.0 million of commercial paper outstanding and no borrowings on our revolving credit facility. As of May 31, 2017,2021, there was $50.5 million ofno commercial paper outstanding with a weighted average interest rate of 1.24% and maturity dates less than 30 days and no borrowings on our revolving credit facility. The fair value of the commercial paper is estimated using Level 2 inputs based on general market prices. Given its short-term nature, the carrying value of the outstanding commercial paper approximates fair value.
Cintas has certain covenants related to debt agreements. These covenants limit our ability to incur certain liens, to engage in sale-leaseback transactions and to merge, consolidate or sell all or substantially all of Cintas' assets. These covenants also require Cintas to maintain certain debt to earnings before interest, taxes, depreciation and amortization (EBITDA) and interest coverage ratios. Cross-default provisions exist between certain debt instruments. If a default of a significant covenant were to occur, the default could result in an acceleration of the maturity of the indebtedness, impair liquidity and limit the ability to raise future capital. As of November 30, 2017, Cintas was in compliance with all of the debt covenants.covenants for all periods presented.
Our access to the commercial paper and long-term debt markets has historically provided us with sources of liquidity. We do not anticipate having difficulty in obtaining financing from those markets in the future in view of our favorable experiences in the debt markets in the recent past. Ourpast, including, without limitation, to repay our long-term debt that is maturing in the next twelve months. However, the COVID-19 pandemic, which has caused disruption in the capital markets, could make financing more difficult and/or expensive. Additionally, our ability to continue to access the commercial paper and long-term debt markets on favorable interest rate and other terms will depend, to
a significant degree, on the ratings assigned by the credit rating agencies to our indebtedness. As of November 30, 2017,August 31, 2021, our ratings were as follows:
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Rating Agency | | Outlook | | Commercial Paper | | Long-term Debt |
| | | | | | |
Rating Agency | | Outlook | | Commercial Paper | | Long-term Debt |
| | | | | | |
Standard & Poor’s | | Stable | | A-2 | | BBB+A- |
Moody’s Investors Service | | Stable | | P-2 | | A3 |
In the event that the ratings of our commercial paper or our outstanding long-term debt issues were substantially lowered or withdrawn for any reason, or if the ratings assigned to any new issue of long-term debt securities were significantly lower than those noted above, particularly if we no longer had investment grade ratings, our ability to access the debt markets may be adversely affected. In addition, in such a case, our cost of funds for new issues of commercial paper and long-term debt would be higher than our cost of funds would have been had the ratings of those new issues been at or above the level of the ratings noted above. The rating agency ratings are not recommendations to buy, sell or hold our commercial paper or debt securities. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating. Moreover, each credit rating is specific to the security to which it applies.
To monitor our credit rating and our capacity for long-term financing, we consider various qualitative and quantitative factors. One such factor is the ratio of our total debt to EBITDA. For the purpose of this calculation, debt is defined as the sum of short-term borrowings, long-term debt due within one year, obligations under capital leases due in one year, long-term debt and long-term obligations under capital leases.standby letters of credit.
Financial and Nonfinancial Disclosure About Issuers and Guarantors of Cintas’ Senior Notes
Cintas Corporation No. 2 (Corp. 2) is the President signed into legislation The Tax Cuts and Jobs Act (the Act). The Act changes existing U.S. tax law and includes numerous provisions that will affect our business, including our income tax accounting, disclosure and tax compliance. We believeindirectly, wholly owned principal operating subsidiary of Cintas. Corp. 2 is the most impactful changes within the Act provision are those that will reduce the U.S. corporate tax rates, business-related exclusions and deductions and credits. We are currently evaluating the impactissuer of the Act,$2,300.0 million aggregate principal amount of senior notes outstanding as of August 31, 2021, which willare unconditionally guaranteed, jointly and severally, by Cintas Corporation and its wholly owned, direct and indirect domestic subsidiaries.
Basis of Preparation of the Summarized Financial Information
The following tables include remeasuringsummarized financial information of Cintas Corporation (Issuer), Corp. 2 and subsidiary guarantors (together, the deferred tax assetsObligor Group). Investments in and liabilities,equity in the one-time transition tax,earnings of non-guarantors, which are not members of the Obligor Group, have been excluded. Non-guarantor subsidiaries are located outside the U.S., and therefore, excluded from the Obligor Group.
The summarized financial information of the Obligor Group is presented on a combined basis with intercompany balances and transactions between entities in the Obligor Group eliminated. The Obligor Group’s amounts due from, amounts due to and transactions with non-guarantors have been presented in separate line items, if they are material. Summarized financial information of the Obligor Group is as well evaluating our reinvestment assertion on all future earningsfollows:
| | | | | | | | | | | | | | |
| | Three Months Ended |
Summarized Consolidated Condensed Statement of Income (In thousands) | | August 31, 2021 | | August 31, 2020 |
| | | | |
Net sales to unrelated parties | | $ | 1,788,303 | | | $ | 1,647,338 | |
Net sales to non-guarantors | | $ | 1,493 | | | $ | 831 | |
Operating income | | $ | 380,322 | | | $ | 338,962 | |
Net income | | $ | 320,957 | | | $ | 292,039 | |
| | | | | | | | | | | | | | |
Summarized Consolidated Condensed Balance Sheets (In thousands) | | August 31, 2021 | | May 31, 2021 |
| | | | |
ASSETS | | | | |
Receivables due from non-obligor subsidiaries | | $ | 4,667 | | | $ | 2,292 | |
Total other current assets | | $ | 2,283,848 | | | $ | 2,652,810 | |
Total other noncurrent assets | | $ | 4,935,913 | | | $ | 4,924,550 | |
| | | | |
LIABILITIES | | | | |
Amounts due to non-obligor subsidiaries | | $ | 1,446 | | | $ | 457 | |
Current liabilities | | $ | 2,234,867 | | | $ | 1,893,352 | |
Noncurrent liabilities | | $ | 2,216,902 | | | $ | 2,549,911 | |
Litigation and profits of our foreign entities. We expect the Act to have a positive impact on our cash flows through a reduction of cash taxes paid.
LITIGATION AND OTHER CONTINGENCIES
Other Contingencies
Cintas is subject to other legal proceedings, insurance receipts, legal settlements 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 consolidated financial position, orconsolidated results of operationoperations or consolidated cash flows of Cintas.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains 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,” “predicts,” “projects,” “plans,” “expects,” “intends,” “target,” “forecast,” “believes,” “seeks,” “could,” “should,” “may” and “will” or the negative versions thereof and similar words, terms and 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. You should not place undue reliance on any forward-looking statement. We cannot guarantee that any forward-looking statement will be realized. These statements are subject to various risks, uncertainties, potentially inaccurate assumptions and other factors that could cause actual results to differ from those set forth in or implied by this Quarterly Report. Factors that might cause such a difference include, but are not limited to, risks inherent with the G&K transaction in the achievement of cost synergies and the timing thereof, including whether the transaction will be accretive and within the expected timeframe and the actual amounts of future transaction and integration expenses; the possibility of greater than anticipated operating costs including energy and fuel costs; lower sales volumes; loss of customers due to outsourcing trends; the performance and costs of integration of acquisitions, including G&K;acquisitions; fluctuations in costs of materials and labor including increased medical costs; costs and possible effects of union organizing activities; failure to comply with government regulations concerning employment discrimination, employee pay and benefits and employee health and safety; the effect on operations of exchange rate fluctuations, tariffs and other political, economic and regulatory risks; uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation; the cost, results and ongoing assessment of internal controls for financial reporting required byreporting; the Sarbanes-Oxley Acteffect of 2002; costs of our SAP system implementation;new accounting pronouncements; disruptions caused by the inaccessibility of computer systems data, including cybersecurity risks; the initiation or outcome of litigation, investigations or other proceedings; higher assumed sourcing or distribution costs of products; the disruption of operations from catastrophic or extraordinary events including viral pandemics such as the negative impacts from hurricanes Harvey and Irma;COVID-19 coronavirus; the amount and timing of repurchases of our common stock, if any; changes in federal and state tax and labor laws; and the reactions of competitors in terms of price and service. Cintas undertakes no obligation to publicly release any revisions to any forward-looking statements or to otherwise update any forward-looking statements whether as a result of new information or to reflect events, circumstances or any other unanticipated developments arising after the date on which such statements are made. A further list and description of risks, uncertainties and other matters can be found in our Annual Report on Form 10-K for the year ended May 31, 20172021 and in our reports on Forms 10-Q and 8-K. The risks and uncertainties described herein are not the only ones we may face. Additional risks and uncertainties presently not known to us, or that we currently believe to be immaterial, may also harm our business.
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.RISK
In our normal operations, Cintas has market risk exposure to interest rates. There has been no material change to this market risk exposure to interest rates from that which was previously disclosed on page 2829 of our Annual Report on Form 10-K for the year ended May 31, 2017.2021.
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 currency denominated revenue and profit translated into U.S. dollars. The primary foreign currency to which Cintas is exposed is the Canadian dollar.
ITEM 4.
CONTROLS AND PROCEDURES.PROCEDURES
Disclosure Controls and Procedures
With the participation of Cintas’ management, including Cintas’ President and Chief Executive Officer, Chief Financial Officer, General Counsel and Controllers, Cintas has evaluated the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of November 30, 2017.August 31, 2021. Based on such evaluation, Cintas’ management, including Cintas’ President and Chief Executive Officer, Chief Financial Officer, General Counsel and Controllers, has concluded that Cintas’ disclosure controls and procedures were effective as of November 30, 2017,August 31, 2021, in ensuring (i) information required to be disclosed by Cintas in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’sSecurities and Exchange Commission's rules and forms and (ii) information required to be disclosed by Cintas in the reports that it files or submits under the Exchange Act is accumulated and communicated to Cintas’ management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There were no changes in Cintas’ internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended November 30, 2017,August 31, 2021, that have materially affected, or are reasonably likely to materially affect, Cintas' internal control over financial reporting.
Part II. Other Information
ItemITEM 1.
LEGAL PROCEEDINGS
Cintas is subject to legal proceedings, insurance receipts, legal settlements 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 consolidated financial position, consolidated results of operations or consolidated cash flows of Cintas.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
UNREGISTERED SALES OF EQUITY |
| | | | | | | | | | | | | |
Period (In millions, except share and per share data) | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of the publicly announced plan (1) | | Maximum approximate dollar value of shares that may yet be purchased under the plan (1) |
| | | | | | | |
September 1 - 30, 2017 (2) | 957 |
| | $ | 136.10 |
| | — |
| | $ | 500.0 |
|
October 1 - 31, 2017 (3) | 1,261 |
| | $ | 149.04 |
| | — |
| | $ | 500.0 |
|
November 1 - 30, 2017 (4) | 2,232 |
| | $ | 152.03 |
| | — |
| | $ | 500.0 |
|
Total | 4,450 |
| | $ | 147.76 |
| | — |
| | $ | 500.0 |
|
SECURITIES AND USE OF PROCEEDS | | | | | | | | | | | | | | | | | | | | | | | |
Period (In millions, except share and per share data) | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of the publicly announced plan (1) | | Maximum approximate dollar value of shares that may yet be purchased under the plan (1) |
| | | | | | | |
June 1 - 30, 2021 (2) | 1,158,068 | | | $ | 358.64 | | | 1,153,324 | | | $ | 167.6 | |
July 1 - 31, 2021 (3) | 628,949 | | | $ | 386.86 | | | 437,265 | | | $ | 1,500.0 | |
August 1 - 31, 2021 (4) | 1,484 | | | $ | 395.77 | | | — | | | $ | 1,500.0 | |
Total | 1,788,501 | | | $ | 368.60 | | | 1,590,589 | | | $ | 1,500.0 | |
(1) On August 2, 2016,October 29, 2019, Cintas announced that the Board of Directors authorized a $500.0$1.0 billion share buyback program, which was completed during the first quarter of fiscal 2022. From the inception of the October 29, 2019 share buyback program through July, 2021, Cintas has purchased a total of 2.8 million shares of Cintas common stock at an average price of $358.93 per share for a total purchase price of $1.0 billion. On July 27, 2021, Cintas announced that the Board of Directors authorized a new $1.5 billion share buyback program, which does not have an expiration date. There were no share buybacks under the July 27 2021 share buyback program through August 31, 2021.
(2) During September 2017,June 2021, Cintas acquired 9574,744 shares of Cintas common stock in trade for employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were acquired at an average price of $136.10$357.11 per share for a total purchase price of $0.1$1.7 million.
(3) During October 2017,July 2021, Cintas acquired 1,261191,684 shares of Cintas common stock in trade for employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were acquired at an average price of $149.04$395.10 per share for a total purchase price of $0.2$75.7 million.
(4) During November 2017,August 2021, Cintas acquired 2,2321,484 shares of Cintas common stock in trade for employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were acquired at an average price of $152.03$395.77 per share for a total purchase price of $0.3$0.6 million.
Item 5. Other Information.
On October 17, 2017, Cintas declared an annual cash dividend of $1.62 per share on outstanding common stock, a 21.8% increase over the annual dividend paid in the prior year. The dividend was paid on December 8, 2017, to shareholders of record as of November 10, 2017.
Item 6. Exhibits.
ITEM 6.
EXHIBITS
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22 | Exhibit 22 to Cintas' Annual Report on Form 10-K for the year ended May 31, 2021). |
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101.INS101 | XBRL Instance DocumentThe following financial statements from Cintas' Quarterly Report on Form 10-Q for the period ended August 31, 2021, formatted in Inline XBRL: (i) Consolidated Condensed Statements of Income (unaudited), (ii) Consolidated Condensed Statements of Comprehensive Income (unaudited), (iii) Consolidated Condensed Balance Sheets (unaudited), (iv) Consolidated Condensed Statements of Shareholders' Equity (unaudited), (v) Consolidated Condensed Statements of Cash Flows (unaudited) and (vi) Notes to Consolidated Condensed Financial Statements, tagged as blocks of text and including detailed tags. |
101.SCH104 | Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Documentand contained in Exhibit 101) |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | CINTAS CORPORATION | |
| | | (Registrant) | |
| | | | | |
Date: | January 5, 2018October 7, 2021 | | /s/ | J. Michael Hansen | |
| | | | |
| | | | J. Michael Hansen |
| | | | SeniorExecutive Vice President and Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer) |