Debt, Derivatives and Hedging Activities

6 Months Ended

Nov. 30, 2011

Debt, Derivatives and Hedging Activities

Debt, Derivatives and Hedging Activities

6. Debt, Derivatives and Hedging Activities

Cintas’ commercial paper program has a capacity of $300.0 million that is fully supported by a backup revolving credit facility through a credit agreement with its banking group.  This revolving credit facility has an accordion feature that allows for a maximum borrowing capacity of $450.0 million.  The revolving credit facility was amended on October 7, 2011, to extend the maturity date from September 26, 2014 to October 6, 2016, to improve the applicable margin used to calculate the interest rate payable on any outstanding loans and the facility fee payable under the agreement and to replace the financial covenant regarding Cintas’ net funded indebtedness to total capitalization with a requirement to maintain a leverage ratio of consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (debt to EBITDA) of no more than 3.5 to 1.0. We believe this program, along with cash generated from operations, will be adequate to provide necessary funding for our future cash requirements.  No commercial paper or borrowings under our revolving credit facility were outstanding as of November 30, 2011 or May 31, 2011.

Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2002, fiscal 2007, fiscal 2008 and fiscal 2011.  The amortization of the interest rate lock agreements resulted in an increase to other comprehensive income of $0.4 million and $0.2 million for the three months ended November 30, 2011 and 2010, respectively, and $0.8 million and $0.4 million for the six months ended November 30, 2011 and November 30, 2010, respectively.

To hedge the exposure of movements in the foreign currency rates, Cintas uses foreign currency hedges.  These hedges would reduce the impact on cash flows from movements in the foreign currency exchange rates.  Examples of foreign currency hedge instruments that Cintas may use are average rate options and forward contracts.  Cintas had average rate options included in accounts receivable, net of less than $0.1 million as of November 30, 2011, but did not have average rate options included in accounts receivable, net at May 31, 2011.  Cintas also had average rate options and forward contracts outstanding, included in current accrued liabilities, of $0.5 million and $0.9 million at November 30, 2011 and May 31, 2011, respectively. There were no costs related to the average rate options that settled during the three months ended November 30, 2011.  The average rate options that settled during the three months ended November 30, 2010, decreased foreign currency exchange costs by less than $0.1 million.  The average rate options increased foreign currency exchange costs by less than $0.1 million during the six months ended November 30, 2011, and decreased foreign currency exchange costs by less than $0.1 million during the six months ended November 30, 2010.

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 EBITDA and interest coverage ratios. Cross-default provisions exist between certain debt instruments.  Cintas is in compliance with all of the significant debt covenants for all periods presented.  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.