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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
August 31, 2019
 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                         to                                        
 
Commission file number 0-11399
 cintasreadyfortheworkday.jpg
Cintas Corporation
(Exact name of registrant as specified in its charter)
Washington
 
31-1188630
(State or Other Jurisdiction of Incorporation)
 
(IRS Employer Identification Number)
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
Securities registered pursuant to Section 12(b) of the Act:
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
Indicate by checkmark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes 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,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer          Accelerated Filer            Non-Accelerated Filer  
Smaller Reporting Company        Emerging Growth 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 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding September 30, 2019
Common Stock, no par value
 
103,499,651




CINTAS CORPORATION
TABLE OF CONTENTS

 
 
 
 
Page No.
Part I.
Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended August 31, 2019 and 2018
 
 
 
 
 
 
 
 
Three Months Ended August 31, 2019 and 2018
 
 
 
 
 
 
 
 
August 31, 2019 and May 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Three Months Ended August 31, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Signatures
 
 

2



Part I. Financial Information

ITEM 1.                  FINANCIAL STATEMENTS
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share data)

 
Three Months Ended
 
August 31,
2019
 
August 31,
2018
Revenue:
 

 
 

Uniform rental and facility services
$
1,454,527

 
$
1,374,938

Other
356,612

 
323,037

Total revenue
1,811,139

 
1,697,975

 
 
 
 
Costs and expenses:
 

 
 

Cost of uniform rental and facility services
768,676

 
746,453

Cost of other
193,321

 
176,810

Selling and administrative expenses
542,996

 
504,634

G&K Services, Inc. integration expenses

 
4,850

 
 
 
 
Operating income
306,146

 
265,228

 
 
 
 
Interest income
(162
)
 
(496
)
Interest expense
27,321

 
24,304

 
 
 
 
Income before income taxes
278,987


241,420

Income taxes
28,175

 
28,873

Income from continuing operations
250,812

 
212,547

Loss from discontinued operations, net of tax benefit of $10

 
(32
)
Net income
$
250,812

 
$
212,515

 
 
 
 
Basic earnings per share:
 
 
 
Continuing operations
$
2.40

 
$
1.96

Discontinued operations
0.00

 
0.00

Basic earnings per share
$
2.40

 
$
1.96

 
 
 
 
Diluted earnings per share:
 
 
 
Continuing operations
$
2.32

 
$
1.89

Discontinued operations
0.00

 
0.00

Diluted earnings per share
$
2.32


$
1.89

 

See accompanying notes.

3



CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

 
Three Months Ended
 
August 31, 2019
 
August 31, 2018
 
 
 
 
Net income
$
250,812

 
$
212,515

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
6,724

 
(3,019
)
Change in fair value of interest rate lock agreements
(29,903
)
 
(3,168
)
Amortization of interest rate lock agreements
(295
)
 
(295
)
 
 
 
 
Other comprehensive loss
(23,474
)
 
(6,482
)
 
 
 
 
Comprehensive income
$
227,338

 
$
206,033



See accompanying notes.







4



CINTAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share data)
 
August 31,
2019
 
May 31,
2019
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
102,131

 
$
96,645

Accounts receivable, net
917,535

 
910,120

Inventories, net
336,290

 
334,589

Uniforms and other rental items in service
796,187

 
784,133

Income taxes, current

 
7,475

Prepaid expenses and other current assets
137,675

 
103,318

Total current assets
2,289,818

 
2,236,280

 
 
 
 
Property and equipment, net
1,422,351

 
1,430,685

 
 
 
 
Investments
208,987

 
192,346

Goodwill
2,849,613

 
2,842,441

Service contracts, net
482,977

 
494,595

Operating lease right-of-use assets, net
163,089

 

Other assets, net
245,065

 
240,315

 
$
7,661,900

 
$
7,436,662

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
237,242

 
$
226,020

Accrued compensation and related liabilities
99,200

 
155,509

Accrued liabilities
395,416

 
433,940

Income taxes, current
9,238

 

Operating lease liabilities, current
43,010

 

Debt due within one year
338,776

 
312,264

Total current liabilities
1,122,882

 
1,127,733

 
 
 
 
Long-term liabilities:
 

 
 

Debt due after one year
2,538,057

 
2,537,507

Deferred income taxes
436,755

 
438,179

Operating lease liabilities
125,684

 

Accrued liabilities
387,816

 
330,522

Total long-term liabilities
3,488,312

 
3,306,208

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock, no par value:

 

100,000 shares authorized, none outstanding


 


Common stock, no par value:
1,036,125

 
840,328

425,000,000 shares authorized
 

 
 

FY 2020: 185,952,964 shares issued and 103,364,545 shares outstanding
 

 
 

FY 2019: 184,790,626 shares issued and 103,284,401 shares outstanding
 
 
 
Paid-in capital
110,441

 
227,928

Retained earnings
6,939,240

 
6,691,236

Treasury stock:
(4,974,449
)
 
(4,717,619
)
FY 2020: 82,588,419 shares
 

 
 

FY 2019: 81,506,225 shares
 
 
 
Accumulated other comprehensive loss
(60,651
)
 
(39,152
)
Total shareholders’ equity
3,050,706

 
3,002,721

 
$
7,661,900

 
$
7,436,662

See accompanying notes.

5



CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
 
Common Stock  
 
Paid-In
Capital
 
Retained
Earnings
 
Other
Accumulated
Comprehensive
Loss
 
Treasury Stock  
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 1, 2019
184,791

 
$
840,328

 
$
227,928

 
$
6,691,236

 
$
(39,152
)
 
(81,506
)
 
$
(4,717,619
)
 
$
3,002,721

Net income

 

 

 
250,812

 

 

 

 
250,812

Comprehensive loss, net of tax

 

 

 

 
(23,474
)
 

 

 
(23,474
)
Stock-based compensation

 

 
40,395

 

 

 

 

 
40,395

Vesting of stock-based compensation
   awards
605

 
157,882

 
(157,882
)
 

 

 

 

 

Stock options exercised, net of shares
   surrendered
557

 
37,915

 

 

 

 

 

 
37,915

Repurchase of common stock

 

 

 

 

 
(1,082
)
 
(256,830
)
 
(256,830
)
Cumulative effect of change in accounting
   principle

 

 

 
(2,808
)
 
1,975

 

 

 
(833
)
Balance at August 31, 2019
185,953

 
$
1,036,125

 
$
110,441

 
$
6,939,240

 
$
(60,651
)
 
(82,588
)
 
$
(4,974,449
)
 
$
3,050,706

 
Common Stock  
 
Paid-In
Capital
 
Retained
Earnings
 
Other
Accumulated
Comprehensive
Income
 
Treasury Stock  
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 1, 2018
182,723

 
$
618,464

 
$
245,211

 
$
5,837,827

 
$
16,343

 
(76,397
)
 
$
(3,701,319
)
 
3,016,526

Cumulative effect of change in accounting
   principle

 

 

 
189,192

 

 

 

 
189,192

Net income

 

 

 
212,515

 

 

 

 
212,515

Comprehensive loss, net of tax

 

 

 

 
(6,482
)
 

 

 
(6,482
)
Dividends

 

 

 
1

 

 

 

 
1

Stock-based compensation

 

 
46,172

 

 

 

 

 
46,172

Vesting of stock-based compensation
   awards
739

 
151,012

 
(151,012
)
 

 

 

 

 

Stock options exercised, net of shares
   surrendered
594

 
27,512

 

 

 

 

 

 
27,512

Repurchase of common stock

 

 

 

 

 
(689
)
 
(139,468
)
 
(139,468
)
Balance at August 31, 2018
184,056

 
$
796,988

 
$
140,371

 
$
6,239,535

 
$
9,861

 
(77,086
)
 
$
(3,840,787
)
 
$
3,345,968

See accompanying notes.

6



CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) 
 
Three Months Ended
 
August 31,
2019
 
August 31,
2018
Cash flows from operating activities:
 

 
 

Net income
$
250,812

 
$
212,515

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

 
 

Depreciation
56,726

 
52,745

Amortization of intangible assets and capitalized contract costs
35,268

 
33,550

Stock-based compensation
40,395

 
46,172

Deferred income taxes
7,910

 
9,022

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

 
 

Accounts receivable, net
(6,636
)
 
(15,051
)
Inventories, net
(1,726
)
 
(34,629
)
Uniforms and other rental items in service
(11,305
)
 
(23,019
)
Prepaid expenses and other current assets and capitalized
   contract costs
(41,928
)
 
(46,930
)
Accounts payable
13,357

 
(329
)
Accrued compensation and related liabilities
(58,718
)
 
(56,186
)
Accrued liabilities and other
(24,082
)
 
(27,556
)
Income taxes, current
16,828

 
12,681

Net cash provided by operating activities
276,901

 
162,985

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(64,743
)
 
(64,528
)
Proceeds from redemption of marketable securities

 
1,558

Purchase of investments
(9,391
)
 

Acquisitions of businesses, net of cash acquired
(3,896
)
 
(7,613
)
Other, net
(109
)
 
(202
)
Net cash used in investing activities
(78,139
)
 
(70,785
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Issuance of commercial paper, net
26,500

 

Proceeds from exercise of stock-based compensation awards
37,915

 
27,512

Repurchase of common stock
(256,830
)
 
(139,468
)
Other, net
(1,192
)
 
(552
)
Net cash used in financing activities
(193,607
)
 
(112,508
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
331

 
(60
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
5,486

 
(20,368
)
 
 
 
 
Cash and cash equivalents at beginning of period
96,645

 
138,724

 
 
 
 
Cash and cash equivalents at end of period
$
102,131

 
$
118,356

See accompanying notes.

7



CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited) 
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. generally accepted accounting principles (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, 2019. A summary of our significant accounting policies is presented beginning on page 41 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 below. 

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.

Inventories, net are measured at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following: 
(In thousands)
August 31,
2019
 
May 31,
2019
 
 
 
 
Raw materials
$
16,541

 
$
17,812

Work in process
25,618

 
28,820

Finished goods
294,131

 
287,957

 
$
336,290

 
$
334,589


Inventories are recorded net of reserves for obsolete inventory of $33.4 million and $32.7 million at August 31, 2019 and May 31, 2019, respectively.
 
New Accounting Pronouncements
Effective June 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)” using a modified retrospective transition approach. Topic 842 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. 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. Topic 842 provided a number of optional practical expedients in transition, and we have determined to use certain of these practical expedients upon our adoption of Topic 842. Specifically, the Company elected the package of practical expedients permitted under Topic 842, which allows a lessee to carryforward their population of existing leases, the classification of each lease, as well as the treatment of initial direct lease costs as of the period of adoption. The Company also elected the practical expedient related to lease and non-lease components, as an accounting policy election for the fleet and vehicle asset classes, which allows a lessee to not separate non-lease from lease components and instead account for consideration paid in a contract as a single lease component. In addition, the Company elected the short-term lease recognition exemption for all leases with a term of 12 months or less, which means it will not recognize right-of-use assets or lease liabilities for these leases. The adoption of Topic 842, on June 1, 2019, resulted in the Company recognizing right-of-use assets, net of $168.0 million and corresponding lease liabilities of $173.4 million. The adoption of Topic 842 did not have a material impact on the Company's consolidated condensed statements of income or consolidated condensed statements of cash flows.


8



Effective June 1, 2019, Cintas adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows companies to elect to reclassify the disproportionate income tax effects resulting from the Tax Cuts and Jobs Act (Tax Act) on items within accumulated other comprehensive income to retained earnings. The adoption of ASU 2018-02, on a prospective basis, resulted in a $2.0 million reclassification adjustment of the stranded tax effects from retained earnings to accumulated other comprehensive loss that was determined using a specific identification method.

In April 2019, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 will replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In connection with recognizing credit losses on receivables and other financial instruments, Cintas will be required to use a forward-looking expected loss model rather than the incurred loss model. This standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The adoption of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. Cintas is currently evaluating the impact that ASU 2016-13 will have 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. The adoption of this standard is not expected to have an impact on the consolidated condensed financial statements.

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.

Note 2 - Revenue Recognition
The following table presents Cintas' total revenue disaggregated by service type:
 
Three Months Ended
 
August 31,
2019
 
August 31,
2018
(In thousands)
Revenue
%
 
Revenue
%
 
 
 
 
 
 
Uniform Rental and Facility Services
$
1,454,527

80.3
%
 
$
1,374,938

81.0
%
First Aid and Safety Services
172,090

9.5
%
 
153,417

9.0
%
Fire Protection Services
110,126

6.1
%
 
98,109

5.8
%
Uniform Direct Sales
74,396

4.1
%
 
71,511

4.2
%
Total revenue
$
1,811,139

100.0
%
 
$
1,697,975

100.0
%

Fire Protection Services and Uniform Direct Sales are recorded within the All Other segment disclosed in Note 12 entitled Segment Information.

Revenue Recognition Policy
More than 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 these revenues over time as services are performed based on the nature of services provided and contractual rates (input method). The Company's remaining revenues, primarily within the Uniform Direct Sales operating segment, and representing less than 5% of the Company's total revenues, are 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.


9



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, primarily within our Uniform Direct Sales business, 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, 2019 or 2018. 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 in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue (ASC 606). These assets are included in other assets, net on the consolidated condensed balance sheet.

Additionally, in accordance with ASC 606, certain Uniform Direct Sales 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.

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. 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, 2019, the current and noncurrent assets related to deferred commissions totaled $71.3 million and $212.0 million, respectively. As of May 31, 2019, the current and noncurrent assets related to deferred commissions totaled $69.6 million and $206.0 million, respectively. We recorded amortization expense related to deferred commissions of $18.8 million and $17.1 million during the three months ended August 31, 2019 and 2018, respectively. These expenses are classified in selling and administrative expense on the consolidated condensed statements of income.


10



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.

The following table presents the operating lease cost and information related to the operating lease right-of-use assets, net and operating lease liabilities for the three months ended August 31, 2019:
(In thousands, except lease term and discount rate)
 
 
 
 
 
Lease cost
 
 
Operating lease costs including short-term lease expense and variable lease costs, which
   were immaterial in the quarter
 
$
17,200

 
 
 
Operating cash flow impacts
 
 
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
12,342

Operating lease right-of-use assets obtained in exchange for new operating lease liabilities
 
$
6,828

Weighted-average remaining lease term - operating leases
 
5.36 years
Weighted-average discount rate - operating leases
 
2.68%


The contractual future minimum lease payments of Cintas' operating lease liabilities by fiscal year are as follows as of August 31, 2019:
(In thousands)
 
 
 
 
 
2020 (remaining nine months)
 
$
35,753

2021
 
40,981

2022
 
31,877

2023
 
24,487

2024
 
15,691

Thereafter
 
33,065

Total payments
 
181,854

Less interest
 
(13,160
)
Total present value of lease payments
 
$
168,694




11



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, 2019
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
102,131

 
$

 
$

 
$
102,131

Total assets at fair value
$
102,131

 
$

 
$

 
$
102,131

 
 
 
 
 
 
 
 
Long-term accrued liabilities:
 
 
 
 
 
 
 
  Interest rate lock agreements
$

 
$
76,141

 
$

 
$
76,141

Total liabilities at fair value
$

 
$
76,141

 
$

 
$
76,141

 
As of May 31, 2019
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
96,645

 
$

 
$

 
$
96,645

Total assets at fair value
$
96,645

 
$

 
$

 
$
96,645

 
 
 
 
 
 
 
 
Long-term accrued liabilities:
 
 
 
 
 
 
 
  Interest rate lock agreements
$

 
$
36,393

 
$

 
$
36,393

Total liabilities at fair value
$

 
$
36,393

 
$

 
$
36,393


Cintas’ cash and cash equivalents are generally classified within Level 1 of the fair value hierarchy. Financial instruments classified as Level 1 are based on quoted market prices in active markets. 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.

Interest, realized gains and losses and declines in value determined to be other than temporary on available-for-sale securities are included in interest income or expense. The cost of the securities sold is based on the specific identification method. There were no outstanding marketable securities as of August 31, 2019 or May 31, 2019.

As of August 31, 2019 and May 31, 2019, long-term accrued liabilities included the fair value of outstanding interest rate lock agreements. The fair values of Cintas' interest rate lock agreements are based on similar exchange traded derivatives (market approach) and are, therefore, included within Level 2 of the fair value hierarchy. The fair value was determined by comparing the locked rates against the benchmarked treasury rate. All other amounts included in long-term accrued liabilities are not recorded at fair value.

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, Cintas records assets and liabilities at fair value on a nonrecurring basis as required under U.S. GAAP.


12



Note 5 - Investments
Investments at August 31, 2019 of $209.0 million include the cash surrender value of insurance policies of $187.4 million, equity method investments of $18.4 million and cost method investments of $3.2 million. Investments at May 31, 2019 of $192.3 million include the cash surrender value of insurance policies of $170.5 million, equity method investments of $18.6 million and cost method investments of $3.2 million. Investments are generally evaluated for impairment on an annual basis or when indicators of impairment exist. For the three months ended August 31, 2019 and 2018, no impairment losses were recorded.

Note 6 - Earnings Per Share 
The following tables 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: 
 
Three Months Ended
Basic Earnings per Share from Continuing Operations
(in thousands except per share data)
August 31,
2019
 
August 31,
2018
 
 
 
 
Income from continuing operations
$
250,812

 
$
212,547

Less: income from continuing operations allocated to participating securities
2,016

 
2,945

Income from continuing operations available to common shareholders
$
248,796

 
$
209,602

Basic weighted average common shares outstanding
103,543

 
106,835

 
 
 
 
Basic earnings per share from continuing operations
$
2.40

 
$
1.96


 
Three Months Ended
Diluted Earnings per Share from Continuing Operations
(in thousands except per share data)
August 31,
2019
 
August 31,
2018
 
 
 
 
Income from continuing operations
$
250,812

 
$
212,547

Less: income from continuing operations allocated to participating securities
2,016

 
2,945

Income from continuing operations available to common shareholders
$
248,796

 
$
209,602

Basic weighted average common shares outstanding
103,543

 
106,835

Effect of dilutive securities – employee stock options
3,540

 
3,813

Diluted weighted average common shares outstanding
107,083

 
110,648

 
 
 
 
Diluted earnings per share from continuing operations
$
2.32

 
$
1.89



There were no amounts recorded in discontinued operations for the three months ended August 31, 2019. For the three months ended August 31, 2018, both basic and diluted earnings per share from discontinued operations rounded to zero.
For the three months ended August 31, 2019 and 2018, options granted to purchase 0.2 million and 0.3 million shares of Cintas common stock, respectively, 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 October 30, 2018, Cintas announced that the Board of Directors authorized a $1.0 billion share buyback program, which does not have an expiration date. For the three months ended August 31, 2019, we purchased 0.8 million shares of Cintas common stock at an average price of $230.66 per share for a total purchase price of $193.1 million. There were no share buybacks in the period subsequent to August 31, 2019 through October 8, 2019. From the inception of the October 30, 2018 share buyback program through October 8, 2019, Cintas has purchased a total of 3.5 million shares of Cintas common stock at an average price of $209.82 for a total purchase price of $736.5 million.

For the three months ended August 31, 2019, Cintas acquired 0.2 million shares of Cintas common stock for employee payroll taxes dues on restricted stock awards that vested during the three months ended August 31, 2019. These shares were acquired at an average price of $260.83 per share for a total purchase price of $63.7 million.

13



Note 7 - Goodwill, Service Contracts and Other Assets
Changes in the carrying amount of goodwill and service contracts for the three months ended August 31, 2019, 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, 2019
$
2,496,402

 
$
243,459

 
$
102,580

 
$
2,842,441

Goodwill acquired

 
164

 
3,022

 
3,186

Foreign currency translation
3,675

 
296

 
15

 
3,986

Balance as of August 31, 2019
$
2,500,077

 
$
243,919

 
$
105,617

 
$
2,849,613


Service Contracts (in thousands)
Uniform Rental
 and Facility Services
 
First Aid
 and Safety Services
 
All
Other
 
Total
 
 

 
 

 
 

 
 

Balance as of June 1, 2019
$
445,016

 
$
23,380

 
$
26,199

 
$
494,595

Service contracts acquired

 
325

 
1,133

 
1,458

Service contracts amortization
(11,783
)
 
(970
)
 
(1,378
)
 
(14,131
)
Foreign currency translation
1,030

 
25

 

 
1,055

Balance as of August 31, 2019
$
434,263

 
$
22,760

 
$
25,954

 
$
482,977



Information regarding Cintas’ service contracts and other assets is as follows:
 
As of August 31, 2019
(In thousands)
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
Service contracts
$
931,682

 
$
448,705

 
$
482,977

 
 
 
 
 
 
Capitalized contract costs (1)
$
301,854

 
$
89,840

 
$
212,014

Noncompete and consulting agreements
42,494

 
40,740

 
1,754

Other
50,684

 
19,387

 
31,297

Total other assets
$
395,032

 
$
149,967

 
$
245,065

 
As of May 31, 2019
(In thousands)
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
Service contracts
$
928,635

 
$
434,040

 
$
494,595

 
 
 
 
 
 
Capitalized contract costs (2)
$
277,016

 
$
71,062

 
$
205,954

Noncompete and consulting agreements
42,308

 
40,524

 
1,784

Other
50,306

 
17,729

 
32,577

Total other assets
$
369,630

 
$
129,315

 
$
240,315


(1) 
The current portion of capitalized contract costs, included in prepaid expenses and other current assets on the consolidated condensed balance sheet as of August 31, 2019, is $71.3 million.
(2) 
The current portion of capitalized contract costs, included in prepaid expenses and other current assets on the consolidated condensed balance sheet as of May 31, 2019, is $69.6 million.


14



Amortization expense for service contracts and other assets for continuing operations was $34.6 million and $33.0 million for the three months ended August 31, 2019 and 2018, respectively. The estimated future amortization expense for service contracts and other assets, excluding any future acquisitions and commissions to be earned, as of August 31, 2019 is as follows:
Fiscal Year (In thousands)
 
 
 
 
 
2020 (remaining nine months)
 
$
100,846

2021
 
120,954

2022
 
109,078

2023
 
90,379

2024
 
79,144

Thereafter
 
274,800

Total future amortization expense
 
$
775,201



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,
2019
 
May 31,
2019
 
 
 
 
 
 
 
 
 
 
Debt due within one year
 
 
 
 
 
 
 
 
 
Commercial paper
2.36
%
(1) 
2020
 
2020
 
$
139,000

 
$
112,500

Term loan
2.88
%
(1) 
2019
 
2020
 
200,000

 
200,000

Debt issuance costs
 
 
 
 
 
 
(224
)
 
(236
)
Total debt due within one year
 
 
 
 
 
 
$
338,776

 
$
312,264

 
 
 
 
 
 
 
 
 
 
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
 
51,576

 
51,684

Senior notes (3)
3.11
%
 
2015
 
2025
 
51,889

 
51,973

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
 
 
 
 
 
 
(15,408
)
 
(16,150
)
   Total debt due after one year
 
 
 
 
 
 
$
2,538,057

 
$
2,537,507

(1)
Variable rate debt instrument. The rate presented is the variable borrowing rate at August 31, 2019.
(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 August 31, 2019 were $2,889.0 million and $3,115.0 million, respectively, and as of May 31, 2019 were $2,866.2 million and $2,998.7 million, respectively. During the three months ended August 31, 2019, Cintas issued $26.5 million, net of commercial paper.

The credit agreement that supports our commercial paper program was amended and restated on May 24, 2019. The amendment increased the capacity of the revolving credit facility from $600.0 million to $1.0 billion and created a new term loan of $200.0 million. The credit agreement has an accordion feature that provides Cintas the ability to request

15



increases to the borrowing commitments under either the revolving credit facility or the term loan of up to $250.0 million in the aggregate, subject to customary conditions. The maturity date of the revolving credit facility is May 23, 2024, and the maturity date of the term loan in May 23, 2020, which can be extended 12 months, annually, for up to four years. As of August 31, 2019 and May 31, 2019 there was $139.0 million and $112.5 million of commercial paper outstanding with maturity dates less than 30 days and with a weighted average interest rates of 2.36% and 2.68%, respectively. There were no borrowings on our revolving credit facility as of August 31, 2019 and May 31, 2019.

Cintas uses interest rate locks to manage our 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 2012, fiscal 2013 and fiscal 2017. The amortization of the cash flow hedges resulted in a decrease to other comprehensive income of $0.3 million for both the three months ended August 31, 2019 and 2018. During fiscal 2019, Cintas entered into interest rate lock agreements with a notional value of $500.0 million for a forecasted debt issuance. As of August 31, 2019 and May 31, 2019, the fair value of these interest rate locks was a liability of $76.1 million and $36.4 million, respectively, and were recorded in long-term accrued liabilities and in other comprehensive income, net of tax. These interest rate locks had no impact on net income or cash flows from continuing operations for the three months ended August 31, 2019 or 2018.

Cintas has certain covenants related to debt agreements. These covenants limit Cintas’ ability to incur certain liens, to engage in sale-leaseback transactions and to merge, consolidate or sell all or substantially all of Cintas’ assets. These covenants also require Cintas to maintain certain debt to 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. As of August 31, 2019, Cintas was in compliance with all debt covenants.

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 August 31, 2019 and May 31, 2019, recorded unrecognized tax benefits were $38.6 million and $37.3 million, respectively, and are included in long-term accrued liabilities on the consolidated condensed balance sheet.

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 results of operations in any given period.

All U.S. federal income tax returns are closed to audit through fiscal 2015. 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, 2020.

Cintas’ effective tax rate for continuing operations was 10.1% and 12.0% for the three months ended August 31, 2019 and 2018, respectively. Both periods were impacted by certain discrete items (primarily the tax accounting for stock-based compensation).

16



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 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 sheet 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. The net pension liability is included in long-term accrued liabilities on the consolidated condensed balance sheets. Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive income in our consolidated condensed balance sheets. The difference between actual amounts and estimates based on actuarial assumptions are recognized in other comprehensive income 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 benefit cost are summarized as follows:
 
Three Months Ended
(In thousands)
August 31, 2019
 
August 31, 2018
 
 
 
 
Interest cost
$
720

 
$
781

Expected return on assets
(740
)
 
(721
)
Net periodic benefit cost
$
(20
)
 
$
60



Note 11 - Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss), net of tax:
(In thousands)
Foreign
Currency
 
Unrealized Loss on
Interest Rate Hedges