Cintas' common stock is traded on the NASDAQ Global Select Market under the symbol "CTAS." The following table provides the high and low sales prices of shares of Cintas' common stock by quarter during the last two fiscal years:
The following graph summarizes the cumulative return on $100 invested in Cintas' common stock, the S&P 500 Stock Index and the common stocks of a selected peer group of companiescompanies. Because our products and services are diverse, Cintas does not believe that any single published industry index is appropriate for comparing shareholder return. Therefore, the peer groupsgroup used in the performance graph combines publicly traded companies in the business services industry that have similar characteristics as Cintas for each fiscal year, such as route based delivery of products and services. Prior to fiscal 2017, Cintas compared its common stock returns to the following publicly traded companies: G & K Services, Inc., UniFirst Corporation, ABM Industries and Iron Mountain, Inc. (Old Peer Group). In fiscal 2016, Cintas completed the sale of the businesses within the former Document Management Services operating segment. As a result, Cintas made the change to a new peer group (New Peer Group). The companies included in the New Peer Group are UniFirst Corporation, ABM Industries, andAramark, Rollins, Inc. Rollins, Inc. was added to the New Peer Group because it is a route based provider of products and services with similar characteristics as Cintas.UniFirst Corporation.
Total shareholder return was based on the increase in the price of the common stock and assumed reinvestment of all dividends. Further,Furthermore, total return was weighted according to market capitalization of each company. The companies in the Peer GroupsGroup are not the same as those considered by the Compensation Committee of the Board of Directors.
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(1)
| In accordance with the applicable accounting guidance for the disposal of long-lived assets and discontinued operations, the results of our Discontinued Services, Shredding and Storage have been excluded from continuing operations for all periods presented. Please see Note 16 entitled Discontinued Operations of "Notes to Consolidated Financial Statements" for additional information. |
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(2)
| Includes G&K results of operations from March 21, 2017 through May 31, 2017. Historical periods presented prior to fiscal 2017 do not include G&K and as a result, the information may not be comparable. Please see Note 9 entitled Acquisitions and Divestitures of "Notes to Consolidated Financial Statements" for additional information regarding the G&K acquisition. |
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(3)
| In accordance with the applicable accounting guidance for simplifying the presentation of debt issuance costs, the debt costs related to recognized debt liabilities have been excluded from Total Assets and reclassified to Long-Term Debt as a direct deduction from the carrying amount of the debt liabilities. The impact of this change in accounting principle on balances previously reported for fiscal 2016, 2015, 2014 and 2013 were reclassifications of $5.6 million, $6.8 million, $8.0 million and $9.2 million, respectively, from other assets to long-term liabilities. |
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(4)
| Return on average equity is computed as net income from continuing operations divided by the average of shareholders' equity. We believe that disclosure of this non-GAAP financial measure gives management and shareholders a good indication of Cintas' historical performance. |
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(5)
| Includes issuance of approximately $2.1 billion in debt to fund the G&K acquisition. Please see Note 6 entitled Debt and Derivatives of "Notes to Consolidated Financial Statements" for additional information. |
Item 7. Management's Discussion and Analysis
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,the U.S., as well as Canada and Latin America, Europe and Asia, get Ready™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,mats, mops, restroom supplies, first aid and safety products, fire extinguishers and testing, and safety and compliance training, Cintas helps customers get Ready for the Workday™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, 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 businessmarket 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 ourits products and services to prospects in all businessmarket 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 and fire protection businesses.expansion. Finally, we evaluate strategic acquisitions as opportunities arise.
Results of Operations
On March 21, 2017, This Management’s Discussion and Analysis of Financial Condition and Results of Operations focuses on discussion of fiscal 2021 results compared to fiscal 2020 results. For discussion of fiscal 2020 results compared to fiscal 2019 results, see the "Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report on Form 10-K for the fiscal year ended May 31, 2020, filed with the SEC on July 29, 2020.
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 will operate 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 underclassifies 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.
U. S. GAAP requires companies to evaluate theirbusiness into two reportable operating segments
periodically and
when certain events occur. As a resultplaces the remainder of
our evaluation in fiscal 2016, effective June 1, 2015, Cintas realigned its
organizational structure and updated its reportable operating segments in
light of certain changes in its business, including the acquisition of ZEE Medical Inc. (ZEE) in the first quarter of fiscal 2016.an All Other category. Cintas’
updatedtwo reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services. The Uniform Rental and Facility Services reportable operating segment
which includes G&K, 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
which includes ZEE, 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,operating segment, 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 each of these reportable operating segments for the years ended May 31,
2017, 20162021, 2020 and
20152019 are presented in
Note 14 entitled Operating Segment Information of "Notes"Notes to Consolidated Financial Statements.Statements." The Company regularly reviews its operating segments for reporting purposes based on the information its chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance and makes changes when appropriate.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, and has since spread globally. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Efforts to contain the spread of COVID-19 intensified during our fiscal 2020 fourth quarter and have remained in effect throughout our fiscal 2021. Most states and municipalities within the U.S., as well as Canada, enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. Many of the business closures, quarantine orders and other restrictive measures remained in place through fiscal 2021. Within the U.S., our business was designated an essential business, which allowed us to continue to serve customers that remained open. During our fiscal 2021 fourth quarter, the roll out of vaccines, lower COVID-19 case counts and lifting of restrictions on businesses had a positive impact on our business.
At May 31, 2017, Cintas has classified
We have operations throughout the U.S. and Canada and participate in a significant business, referred to as Discontinued Services, as held for sale. Prior to meetingglobal supply chain. During most of fiscal 2021, the held for sale criteria, Discontinued Services was primarily included in All Other. In fiscal 2014, Cintas completed its partnership transactionexistence of the COVID-19 pandemic, the fear associated with the shareholdersCOVID-19 pandemic and the reactions of Shred-it International Inc.governments around the world in response to combine Shreddingthe 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 did increase inventory, primarily personal protective equipment and facility services inventory, in response to the customer needs and demand associated with the shredding businesssafety and cleanliness requirements of Shred-it International Inc. Pursuant to the Shredding Transaction, the Shred-it Partnership was owned 42% by Cintas and 58% by the shareholders of Shred-it International Inc. Cintas' investmentCOVID-19. The increase in Shred-it and the results of Shredding are classified as discontinued operations for all periods presented as a result of selling the investmentinventory resulted in additional inventory reserves during fiscal 2016. During fiscal 2015, Cintas sold Storage2021 and as acould result its operations are also classified as discontinued operationsin future inventory reserve increases if demand for all periods presented. In accordance with the applicable accounting guidance for the disposalpersonal protective equipment declines. See Note 1 entitled Significant Accounting Policies of long-lived assets and discontinued operations, the results of Discontinued Services, Shredding and Storage have been excluded from both continuing operations and operating segment results for all periods presented. Please see Note 16 entitled Discontinued Operations of "Notes"Notes to Consolidated Financial Statements"Statements" for additional information.detail on the additional reserve placed on inventory. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot predict the extent to which our business, consolidated results of operations, consolidated financial condition or liquidity will ultimately be impacted.
The following table sets forth certain consolidated statements of income data as a percent of revenue by reportable operating segment, All Other and in total for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Revenue: | | | | | |
| Uniform Rental and Facility Services | 80.0% | | 79.7% | | 80.6% |
| First Aid and Safety Services | 11.0% | | 10.0% | | 9.0% |
| All Other | 9.0% | | 10.3% | | 10.4% |
| Total revenue | 100.0% | | 100.0% | | 100.0% |
| | | | | |
| Cost of sales: | | | | | |
| Uniform Rental and Facility Services | 52.4% | | 54.1% | | 54.5% |
| First Aid and Safety Services | 57.6% | | 52.2% | | 52.0% |
| All Other | 57.0% | | 58.2% | | 57.4% |
| Total cost of sales | 53.4% | | 54.4% | | 54.6% |
| | | | | |
| Gross margin: | | | | | |
| Uniform Rental and Facility Services | 47.6% | | 45.9% | | 45.5% |
| First Aid and Safety Services | 42.4% | | 47.8% | | 48.0% |
| All Other | 43.0% | | 41.8% | | 42.6% |
| Total gross margin | 46.6% | | 45.6% | | 45.4% |
| | | | | |
| Selling and administrative expenses: | | | | | |
| Uniform Rental and Facility Services | 26.0% | | 28.1% | | 27.6% |
| First Aid and Safety Services | 32.0% | | 32.7% | | 33.4% |
| All Other | 30.8% | | 34.9% | | 33.3% |
| Total selling and administrative expenses | 27.1% | | 29.2% | | 28.7% |
| | | | | |
| G&K Services, Inc. integration expenses | —% | | —% | | 0.2% |
| | | | | |
| Gain on sale of a cost method investment | —% | | —% | | 1.0% |
| | | | | |
| Interest expense, net | 1.4% | | 1.5% | | 1.5% |
| | | | | |
| Income from continuing operations before income taxes | 18.1% | | 14.9% | | 16.0% |
|
| | | | | | | | |
| | 2017(1) | | 2016(1) | | 2015(1) |
| | | | | | |
| Revenue: | | | | | |
| Uniform Rental and Facility Services | 79.0 | % | | 78.4 | % | | 80.5 | % |
| First Aid and Safety Services | 9.5 | % | | 9.6 | % | | 7.5 | % |
| All Other | 11.5 | % | | 12.0 | % | | 12.0 | % |
| Total revenue | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | |
| Cost of sales: | | | | | |
| Uniform Rental and Facility Services | 54.9 | % | | 55.7 | % | | 56.6 | % |
| First Aid and Safety Services | 54.7 | % | | 57.3 | % | | 53.4 | % |
| All Other | 58.3 | % | | 58.6 | % | | 59.1 | % |
| Total cost of sales | 55.3 | % | | 56.2 | % | | 56.6 | % |
| | | | | | |
| Gross margin: | | | | | |
| Uniform Rental and Facility Services | 45.1 | % | | 44.3 | % | | 43.4 | % |
| First Aid and Safety Services | 45.3 | % | | 42.7 | % | | 46.6 | % |
| All Other | 41.7 | % | | 41.4 | % | | 40.9 | % |
| Total gross margin | 44.7 | % | | 43.8 | % | | 43.4 | % |
| | | | | | |
| Selling and administrative expenses: | | | | | |
| Uniform Rental and Facility Services | 27.1 | % | | 26.5 | % | | 26.2 | % |
| First Aid and Safety Services | 34.9 | % | | 31.9 | % | | 32.8 | % |
| All Other | 34.5 | % | | 33.1 | % | | 34.3 | % |
| Total selling and administrative expenses | 28.7 | % | | 27.8 | % | | 27.7 | % |
| | | | | | |
| G&K Services, Inc. transaction and integration expenses | 1.5 | % | | — | % | | — | % |
| | | | | | |
| Gain on sale of stock of an equity method investment | — | % | | — | % | | 0.5 | % |
| | | | | | |
| Interest expense, net | 1.6 | % | | 1.3 | % | | 1.5 | % |
| | | | | | |
| Income from continuing operations before income taxes | 12.9 | % |
| 14.7 | % |
| 14.7 | % |
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(1)
| The figures presented reflect the change in classification of Discontinued Services, Shredding and Storage to discontinued operations within the Consolidated Statements of Income. See Note 16 entitled Discontinued Operations of "Notes to Consolidated Financial Statements." |
Fiscal 20172021 Compared to Fiscal 20162020
Fiscal 20172021 total revenue was $5.3$7.1 billion, an increase of 11.0%0.4% over the prior fiscal year. Revenue increased organically by 6.7%0.2% as a result of increased sales volume. Organic growth adjusts for the impact of acquisitions and divestitures, workday differences and foreign currency exchange rate fluctuations.fluctuations and workday differences. Total revenue was positively impacted by 4.8% due to acquisitions, primarily through the acquisition of G&K. Revenue growth was negatively impacted by 0.1%a net 0.3% due to acquisitions and divestitures, positively impacted by 0.2% due to foreign currency exchange rate fluctuations and 0.4%positively impacted by 0.3% due to one lessmore workday in fiscal 20172021 compared to fiscal 2016.2020.
As previously discussed, government enactments of temporary and indefinite closures of certain businesses in response to the COVID-19 pandemic continued to impact our ability to access and service some of our customers impacted by these mandates during fiscal 2021. Due to the constantly changing impact of the COVID-19 pandemic, uncertainty remains about the pace of the economic recovery and about its impact on future Cintas consolidated financial results.
Organic growthrevenue by quarter for fiscal 2021 is shown in the table below.
| | | | | |
| Organic Revenue |
| |
| Organic Growth |
| |
First Quarter Endingquarter ended August 31, 20162020 | 6.0%(5.0)% |
Second Quarter Endingquarter ended November 30, 20162020 | 6.0%(4.4)% |
Third Quarter Endingquarter ended February 28, 20172021 | 6.6%(0.1)% |
Fourth Quarter Endingquarter ended May 31, 20172021 | 8.1%11.5% |
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For the Fiscal Year Endingfiscal year ended May 31, 20172021 | 6.7%0.2% |
Uniform Rental and Facility Services reportable operating segment revenue consists predominantly of revenue derived from the rental of corporate identity uniforms and other garments, including flame resistant clothing and the rental and/or sale of mats, mops, shop towels, restroom supplies and other rental services. Revenue from the Uniform Rental and Facility Services reportable operating segment increased 11.8%0.8% compared to fiscal 2016. The increase resulted from2020 due to an organic growth increase of 0.7%. Revenue growth was negatively impacted by a net 0.5% due to acquisitions and divestitures, positively impacted by 0.2% due to foreign currency exchange rate fluctuations and positively impacted by 0.4% due to one more workday in revenue of 6.9%. The amountfiscal 2021 compared to fiscal 2020. Revenue growth was a result of new business, grew, resultingthe penetration of additional products and services into existing customers, partially offset by lost business. New business growth resulted from an increase in the number and productivity of sales representatives. Generally, sales productivity improvements are the result ofdue to increased tenure and improved training, which result inproduce a higher number of products and services sold. Revenue growth was negatively impacted by 0.1% due to foreign currency exchange rate fluctuations and 0.4% due to one less workday in fiscal 2017 compared to the same period in the prior fiscal year. Revenue was positively impacted by 5.4% due to acquisitions, primarily G&K.
Other revenue, consisting of revenue from the First Aid and Safety Services reportable operating segment and All Other, increased 8.2%decreased 1.0% compared to fiscal 2016.2020. Revenue increasedimprovement from increases in sales representative productivity and sales of personal protection equipment was more than offset by a decrease in sales related to customers in All Other as a result of the impact from the COVID-19 pandemic. Revenue declined organically by 6.1% due primarily to improved sales representative productivity.1.9%. Revenue growth was negativelypositively impacted by 0.1%0.5% due to foreign currency exchange rate fluctuationsrevenue growth derived through acquisitions in our First Aid and Safety Services reportable operating segment and our Fire Protection operating segment, which is included in All Other, and by 0.4% due to one lessmore workday in fiscal 20172021 compared to fiscal 2016. Acquisitions positively impacted revenue by 2.6%.2020.
Cost of uniform rental and facility services increased 10.3%decreased 2.3% compared to fiscal 2016.2020. 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. The cost of uniform rental and facility services increasedecreased compared to fiscal 2016 was2020 primarily due to increased Uniform Rentalcertain cost control measures such as reduced labor and Facility Services reportable operating segment sales volume from internal growth and the acquired G&K sales volume.supplies that were partially offset by increases in material cost, primarily related to personal protective equipment.
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 5.6%2.8% in fiscal 20172021 compared to fiscal 2016.2020. The increase was primarily relateddue to an increase in the increasedproportion of sales volumes in the First Aid and Safety Services reportable operating segment of personal protective equipment, which typically have lower gross margins compared to other First Aid and All Other.Safety Services reportable operating segment products.
Selling and administrative expenses increased $195.0decreased $141.9 million, or 14.6%,to 27.1% as a percent of revenue, compared to 29.2% in fiscal 20162020. The improvement as a percent of revenue was primarily due primarily to increasesefficiencies in labor and other employee-partner related expenses. Asexpenses as well as lower discretionary spending and a resultone-time benefit from the gain on the sale of certain operating assets. In addition, during the acquisitionfourth quarter of G&Kfiscal 2020, Cintas initiated certain one-time activities to reduce operating costs and better align its workforce with the needs of its ongoing business and recorded $24.5 million in fiscal 2017, the Company incurred various transactionemployee termination costs and integration expenses which relate primarily to$9.2 million in long-lived asset impairment charges, legal and professional fees, employee termination expenses, the write-off of excess inventory and other miscellaneous expenses. In fiscal 2017, G&K transaction and integration expenses were $79.2 million or 1.5% of total revenue.costs.
Net interest expense (interest expense less interest income) was $86.3$97.7 million in fiscal 20172021 compared to $63.6$104.4 million in fiscal 2016.2020. The increasedecrease in net interest expense iswas primarily due to the additionaldecrease in total debt issuedoutstanding during fiscal 2021 compared to finance the G&K acquisition and $17.1 million of short-term debt financing fees incurred in connection with the acquisition.fiscal 2020.
Income before income taxes was $687.4$1,287.7 million, a decreasean increase of $17.9$229.5 million, or 2.5%21.7%, compared to fiscal 2016.2020. The decreaseincrease in income before income taxes was primarily due to both cost of sales and selling and administrative expenses decreasing in total and as a percent of revenue in fiscal 2021. Income before income taxes also benefited from a one-time net gain on the G&K transaction and integration expenses and the increase in interest expense previously mentioned. These impacts were partially offset by the increase in gross margin.sale of certain operating assets.
Cintas' effective tax rate on continuing operations was 33.5%13.7% for fiscal 20172021 compared to 36.4%17.2% in fiscal 2016. The decrease was primarily due to the adoption of Accounting Standard Update (ASU) 2016-09, "Improvements to Employee Share-Based Payment Accounting."2020. The effective tax rate in both periods was impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. In addition, the effective tax rate for fiscal 20172021 included a one-time tax benefit on the sale of $29.4 million as a result of the adoption of ASU 2016-09. This benefit was partially offset by the election to recognize forfeitures as they occur, which resulted in additional stock compensation expense of $8.3 million when compared to our historical practice of estimating forfeiture for expense purposes. The adoption of ASU 2016-09 also resulted in an increase in the effect of dilutive securities in fiscal 2017 of 0.8 million shares. For fiscal 2017, the net impact on diluted earnings per share from the adoption of ASU 2016-09 was an increase of $0.19 per share over what diluted earnings per share would have been if ASU 2016-09 was not adopted in the current year.certain operating assets.
Net income from continuing operations for fiscal 20172021 of $457.3$1,111.0 million was a 1.9%26.8% increase compared to fiscal 2016.2020. Diluted earnings per share from continuing operations of $4.17$10.24 was a 3.7%26.3% increase compared to fiscal 2016.2020 diluted earnings per share from continuing operations of $8.11. Diluted earnings per share from continuing operations increased primarily due to the lower effective tax rate combined with the decreaseincrease in weighted average common shares outstanding. The decrease in weighted average common shares outstanding resulted from purchasing 8.8 million shares of common stock under the January 13, 2015 and August 4, 2015 share buyback programs since the beginning of fiscal 2016.net income.
Uniform Rental and Facility Services Reportable Operating Segment
Uniform Rental and Facility Services reportable operating segment revenue increased $443.0$46.1 million, or 11.8%0.8%, and the cost of uniform rental and facility services increased $214.9decreased $71.6 million, or 10.3%2.3%, asdue to the reasons previously discussed. The reportable operating segment's fiscal 20172021 gross margin was 45.1%47.6% of revenue compared to 44.3%45.9% in fiscal 2016.2020. The 80 basis point improvementincrease in gross margin was drivenprimarily due to certain cost control measures such as reduced labor and supplies that were partially offset by many factors,increases in material cost, including new business sold byincreases related to increased sales representatives, penetration of additional products and services into existing customers and continuously improving the efficiency of internal processes.personal protective equipment.
Selling and administrative expenses for the Uniform Rental and Facility Services reportable operating segment increased $143.8decreased $103.5 million in fiscal 20172021 compared to fiscal 2016.2020. Selling and administrative expense as a percent of revenue for fiscal 20172021 was 27.1%26.0% compared to 26.5%28.1% in fiscal 2016.2020. The increaseimprovement in selling and administrative expenses foras a percent of revenue was primarily due to efficiencies in labor and employee-partner related expenses as well as lower discretionary spending and a one-time benefit from the gain on the sale of certain operating assets, which was partially offset by a one-time asset impairment on certain long-lived assets. Also, in the fourth quarter of fiscal 2020, the Uniform Rental and Facility Services reportable operating segment is primarily relatedinitiated certain one-time activities to reduce operating costs and better align its workforce with the G&K acquisition.
As a resultneeds of its ongoing business. During the G&K acquisition,fourth quarter of fiscal 2020, the Uniform Rental and Facility Services reportable operating segment incurred $79.2recorded $20.2 million of transactionin employee termination costs and integration expenses. These expenses consisted of the following:$9.2 million in long-lived asset impairment charges of $23.3 million, legal and professional fees directly related to the acquisition of $17.4 million, employee termination expenses recognized under ASC Topic 712, "Compensation - Nonretirement Postemployment Benefits" of $31.0 million, write-off of excess inventory of $5.5 million and $2.0 million of other miscellaneous integration expenses.costs.
Income before income taxes increased $5.0$221.3 million to $677.1$1,225.8 million for fiscal 20172021 compared to fiscal 2016.2020. Income before income taxes as a percent of revenue at 16.1%, decreased 18021.5% increased 370 basis points from 17.9%17.8% in fiscal 2016.2020. The decrease isincrease was primarily due to the G&K transactionpreviously discussed improvement in gross margin and integrationselling and administrative expenses mentioned above.as a percent of revenue.
First Aid and Safety Services Reportable Operating Segment
First Aid and Safety Services reportable operating segment revenue increased $46.5 million in fiscal 2017, a 10.1% increase compared to fiscal 2016. Revenue increased organically by 5.9% as a result of increased sales volume. Revenue growth was positively impacted by 4.6% due to acquisitions. One less workday in fiscal 2017 compared to the prior year negatively impacted growth by 0.4%.
Cost of first aid and safety services increased $13.3 million, or 5.0%, in fiscal 2017, due primarily to increased First Aid and Safety Services reportable operating segment volume. Gross margin for the First Aid and Safety Services reportable operating segment is defined as revenue less cost of goods, warehouse expenses, service expenses and training expenses. The gross margin as a percent of revenue was 45.3% for fiscal 2017 compared to 42.7% in fiscal 2016. The increase in gross margin was due to the benefits realized as a result of the integration of ZEE. These benefits included improved delivery efficiencies and improved sourcing of goods.
Selling and administrative expenses for the First Aid and Safety Services reportable operating segment increased by $29.9 million, or 20.3%, in fiscal 2017 compared to fiscal 2016. Selling and administrative expenses as a percent of
revenue were 34.9% in fiscal 2017 compared to 31.9% in fiscal 2016. The increase in selling and administrative expenses is primarily the result of the investment in selling resources to grow the acquired ZEE customer base and increases in various employee-partner related expenses.
Income before income taxes was $52.8 million in fiscal 2017, an increase of $3.3 million, or 6.6%, compared to fiscal 2016. Income before income taxes as a percent of revenue, at 10.4%, decreased from 10.7% in fiscal 2016, due primarily to the investment in selling resources mentioned above.
Fiscal 2016 Compared to Fiscal 2015
Fiscal 2016 total revenue was $4.8 billion, an increase of 9.8% over the prior fiscal year. Revenue increased organically by 6.8% as a result of increased sales volume. Organic growth excludes the impact of acquisitions, divestitures, foreign currency exchange rate fluctuations and workday differences. Total revenue was positively impacted by 2.9% due to acquisitions and 0.8% due to two more workdays in fiscal 2016 compared to fiscal 2015. Revenue growth was negatively impacted by 0.7% due to foreign currency exchange rate fluctuations.
Organic growth by quarter is shown in the table below.
|
| |
| Organic Growth |
| |
First Quarter Ending August 31, 2015 | 6.9% |
Second Quarter Ending November 30, 2015 | 6.6% |
Third Quarter Ending February 28, 2016 | 7.1% |
Fourth Quarter Ending May 31, 2016 | 6.8% |
| |
For the Fiscal Year Ending May 31, 2016 | 6.8% |
Uniform Rental and Facility Services reportable operating segment revenue consists predominantly of revenue derived from the rental of corporate identity uniforms and other garments, including flame resistant clothing, and the rental and/or sale of mats, mops, shop towels, restroom supplies and other rental services. Revenue from the Uniform Rental and Facility Services reportable operating segment increased 6.8% compared to fiscal 2015. The increase resulted from an organic growth increase in revenue of 6.5%. The amount of new business grew, resulting from an increase in the number and productivity of sales representatives. Generally, sales productivity improvements are the result of increased tenure and improved training, which result in a higher number of products and services sold. Revenue was positively impacted by 0.3% due to acquisitions, 0.8% due to two more workdays in fiscal 2016 compared to 2015 and negatively impacted by 0.8% due to foreign currency exchange rate fluctuations.
Other revenue, consisting of revenue from the First Aid and Safety Services reportable operating segment and All Other, increased 21.8% compared to fiscal 2015. The increase primarily resulted from an organic growth increase of 8.3%, which was largely due to improved sales representative productivity. Revenue in fiscal 2016 was negatively impacted by 0.5% due to foreign currency exchange rate fluctuations. Acquisitions positively impacted the growth rate by 13.0%, and two more workdays in fiscal 2016 contributed an additional 1.0%.
Cost of uniform rental and facility services increased 5.0% compared to fiscal 2015. 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. The increase in the cost of uniform rental and facility services compared to fiscal 2015 was due to increased Uniform Rental and Facility Services reportable operating segment sales volume.
Cost of other increased 24.3% compared to fiscal 2015. 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. The increase from fiscal 2015 was primarily due to increased First Aid and Safety Services reportable operating segment sales volume.
Selling and administrative expenses increased $123.1 million, or 10.2%, compared to fiscal 2015 due primarily to increases in labor and other employee-partner related expenses.
During fiscal 2015, Cintas sold stock in an equity method investment. In conjunction with the sale of the equity method investment, the Company received a cash dividend. The sale resulted in the recording of a gain of $21.7 million in fiscal 2015.
Operating income of $768.9 million in fiscal 2016 increased $85.3 million, or 12.5%, compared to fiscal 2015.
Net interest expense (interest expense less interest income) was $63.6 million in fiscal 2016 compared to $64.8 million in fiscal 2015. The decrease in net interest expense is primarily due to the capitalization of $1.1 million of interest in fiscal year 2016 versus $0.6 million of interest capitalized in fiscal 2015.
Income before income taxes was $705.3 million, an increase of $64.8 million, or 10.1%, compared to fiscal 2015. The increase in income before income taxes was primarily due to revenue growing at a faster rate than expenses.
Cintas' effective tax rate in fiscal 2016 was 36.4%, which was comparable to the effective tax rate of 37.2% in fiscal 2015. See Note 8 entitled Income Taxes of "Notes to Consolidated Financial Statements" for more information on income taxes.
Net income from continuing operations for fiscal 2016 of $448.6 million was a 11.4% increase compared to fiscal 2015. Diluted earnings per share from continuing operations of $4.02 was a 18.6% increase compared to fiscal 2015. The increase in diluted earnings per share is higher than the increase in net income due to a decrease in weighted average common stock outstanding as a result of Cintas purchasing 8.7 million shares of common stock under the January 13, 2015 share buyback program since the beginning of fiscal 2016.
Uniform Rental and Facility Services Reportable Operating Segment
Uniform Rental and Facility Services reportable operating segment revenue increased $240.3 million, or 6.8%, and the cost of uniform rental and facility services increased $100.2 million, or 5.0%. Revenue in fiscal 2016 was negatively affected by 0.8% due to foreign currency exchange rate changes compared to fiscal 2015 and positively affected by 0.3% due to acquisitions and 0.8% due to two more workdays in fiscal 2016 compared to 2015. The reportable operating segment's fiscal 2016 gross margin was 44.3% of revenue compared to 43.4% in fiscal 2015. The increase in gross margin as a percent of revenue over fiscal 2015 was due to new business sold by sales representatives, penetration of additional products and services into existing customers, and continuously improving the efficiency of internal processes. In addition, lower energy-related expenses increased gross margin 50 basis points.
Selling and administrative expenses for the Uniform Rental and Facility Services reportable operating segment increased $72.0 million in fiscal 2016 compared to fiscal 2015 primarily due to increases in labor and other employee-partner related expenses. Selling and administrative expense as a percent of revenue for fiscal 2016 was 26.5% compared to 26.2% in fiscal 2015.
Income before income taxes increased $68.1 million to $672.1 million for fiscal 2016 compared to fiscal 2015. Income before income taxes as a percent of revenue, at 17.9%, increased from 17.2% in fiscal 2015. This increase is primarily due to the increase in gross margin.
First Aid and Safety Services Reportable Operating Segment
First Aid and Safety Services reportable operating segment revenue increased $135.2$75.7 million in fiscal 2016,2021, a 41.4%10.7% increase compared to fiscal 2015.2020. Revenue increased organically by 9.7%10.0% as a result of increasednew business and sales volume.productivity increases, penetration of additional products and services into existing customers and sales of personal protective equipment in response to the COVID-19 pandemic. Revenue growth was positively impacted by 1.1%0.2% due to twoacquisitions, by 0.1% due to foreign currency exchange rate fluctuations and by 0.4% due to one more workdaysworkday in fiscal 20162021 compared to fiscal 2015. The remaining 30.6% increase in growth represents growth derived through acquisitions, primarily the ZEE acquisition.2020.
Cost of first aid and safety services increased $90.5 million, or 51.9%, in fiscal 2016, due primarily to increasedsales for the First Aid and Safety Services reportable operating segment volume.increased $82.0 million, or 22.2%, in fiscal 2021, primarily due to higher sales volume and change in sales mix. Gross margin for the First Aid and Safety Services reportable operating segment is defined as revenue less cost of goods, warehouse expenses, service expenses and training expenses. The gross margin as a percent of revenue was 42.7%42.4% for fiscal 20162021 compared to 46.6%47.8% in fiscal 2015. ZEE integration costs and the lower efficiency2020. The decrease was primarily a result of the acquired ZEE routes were primarily responsible forincrease in the decrease inproportion of sales related to personal protective equipment, as a result of the impact of the COVID-19 pandemic. Personal protective equipment typically has lower gross margin.margins than other First Aid and Safety Services reportable operating segment products.
Selling and administrative expenses for the First Aid and Safety Services reportable operating segment increased by $40.3$19.4 million, or 37.6%8.4%, in fiscal 20162021 compared to fiscal 2015 primarily due to an increase in labor and other employee-partner related expenses and costs associated with the integration of ZEE. Selling and administrative expenses2020, but improved as a percent of revenue at 31.9%, decreased from 32.8%to 32.0% in fiscal 2015.2021 compared to 32.7% in fiscal 2020. The improvement as a percent of revenue was primarily due to revenue growing at a faster pace than labor and employee-partner related expenses and lower discretionary spending.
Income before income taxes for the First Aid and Safety Services reportable operating segment was $49.5$81.2 million in fiscal 2016, an increase2021, a decrease of $4.4$25.7 million, or 9.7%24.1%, compared to fiscal 2015.2020. Income before income taxes as a percent of revenue at 10.7%10.4%, decreased from 13.8%15.1% in fiscal 2015,2020 due to the previously discussed decrease in gross margin discussed above.margin.
Liquidity and Capital Resources
The following is a summary oftable summarizes our cash flows and cash and cash equivalents and marketable securities as of and for the fiscal years endingended May 31:
| | | | | | | | | | | |
| (In thousands) | 2021 | | 2020 |
| | | |
| Net cash provided by operating activities | $ | 1,360,740 | | | $ | 1,291,483 | |
| Net cash used in investing activities | $ | (137,215) | | | $ | (285,398) | |
| Net cash used in financing activities | $ | (879,868) | | | $ | (955,207) | |
| | | |
| Cash and cash equivalents at end of year | $ | 493,640 | | | $ | 145,402 | |
| | | |
|
| | | | | | | |
| (In thousands) | 2017 | | 2016 |
| | | | |
| Net cash provided by operating activities | $ | 763,887 |
| | $ | 465,845 |
|
| Net cash (used in) provided by investing activities | $ | (2,310,349 | ) | | $ | 128,381 |
|
| Net cash provided by (used in) financing activities | $ | 1,578,502 |
| | $ | (866,724 | ) |
| | | | |
| Cash and cash equivalents at the end of the period | $ | 169,266 |
| | $ | 139,357 |
|
| Marketable securities at the end of the period | $ | 22,219 |
| | $ | 70,405 |
|
Cash and cash equivalents and marketable securities as of May 31, 20172021 and 20162020 include $125.5$37.9 million and $96.5$30.2 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.stock and payment of long-term debt.
The disruption from the COVID-19 pandemic continued to have an impact on Cintas' fiscal 2021 financial results. However, net cash flow provided by operating activities was not significantly impacted. 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 $763.9 million$1.36 billion for fiscal 2017,2021, which was an increase of $298.0$69.3 million compared to fiscal 2016. Net cash provided2020. The increase was primarily the result of increased net income and favorable changes in accrued compensation and other, partially offset by operating activitieschanges in fiscal 2016 was negatively impacted by the $229.5 million payment ofworking capital, specifically income taxes, due on the gain on the sale of Shred-it.accounts receivable and accrued liabilities and other.
Net cash used in investing activities was $2,310.3$137.2 million in fiscal 2017,2021, compared to $128.4$285.4 million of netin fiscal 2020. Net cash provided byused in investing activities in fiscal 2016.includes capital expenditures, purchases of investments, proceeds from the sale of operating assets and cash paid for acquisitions of businesses. Capital expenditures were $273.3$143.5 million and $275.4$230.3 million for fiscal 20172021 and fiscal 2016,2020, respectively. Capital expenditures for fiscal 20172021 included $232.8$104.0 million for the Uniform Rental and Facility Services reportable operating segment and $26.9$34.4 million for the First Aid and Safety Services reportable operating segment. The decrease in capital expenditures from fiscal 2020 to fiscal 2021 was due to reduced growth capacity needs within the slower growth landscape of the COVID-19 pandemic. Cash paid for acquisitions of businesses, net of cash acquired, was $2,102.4$10.0 million and $156.6$53.7 million for fiscal 20172021 and fiscal 2016,2020, respectively. The acquisitions in both fiscal 20172021 and 20162020 occurred in our Uniform Rental and Facility Services reportable operating segment, which includes G&K, our First Aid and Safety Services reportable operating segment and our Fire Protection business,operating segment, which is included in All Other. Net cash provided byIn fiscal 2021 and fiscal 2020, investing activities included proceeds related toof $31.7 million and $13.3 million, respectively, from the sale of Shred-it and Storagecertain operating assets, net of $28.3 million and $616.2 million in fiscal 2017 and 2016, respectively.
cash disposed. Net cash used in investing activities for fiscal 2017also included net proceeds$4.3 million and $10.0 million of $37.3 million from purchases and redemptions of marketable securities and investments compared to net purchases of $60.0 million ininvestments during fiscal 2016.2021 and fiscal 2020, respectively.
Net cash provided by financing activities was $1,578.5 million for fiscal 2017, compared to net cash used in financing activities of $866.7was $879.9 million for fiscal 2016.2021, compared to $955.2 million in fiscal 2020. The increasedecrease in cash used from financing activities from fiscal 2017 over fiscal 20162020 is primarily due to the net issuancepayment of $1,732.7the $312.5 million of debt in fiscal 2020, partially offset by an increase in cash used to pay dividends and the decreaserepurchase common stock in stock buybacks. To finance the G&K acquisition, Cintas issued various forms of debt, totaling $2,091.2 million, net. In addition, on June 1, 2016, Cintas paid the $250.0 million five-year senior notes that matured on that date with cash on hand and proceeds from the issuance of commercial paper.
fiscal 2021. On August 4, 2015,October 30, 2018, we announced that the Board of Directors authorized a $500.0 million$1.0 billion share buyback program, which was completed during fiscal 2021. On October 29, 2019, we announced the Board of Directors authorized a new $1.0 billion share buyback program, which does not have an expiration date. DuringThe following table summarizes the buyback activity by program and fiscal 2017,year ended May 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 30, 2018 | 190 | | | $ | 319.88 | | | $ | 60,877 | | | 1,607 | | | $ | 246.19 | | | $ | 395,681 | |
| October 29, 2019 | 1,196 | | | 350.31 | | | 418,779 | | | — | | | — | | | — | |
| 1,386 | | | $ | 346.13 | | | $ | 479,656 | | | 1,607 | | | $ | 246.19 | | | $ | 395,681 | |
In the period subsequent to May 31, 2021 through July 28, 2021, we purchased 0.1 million shares at an average price of $94.09 per share for a total purchase price of $3.7 million. This completed the August 4, 2015October 29, 2019 program through which Cintas purchased a total of 5.7by purchasing 1.6 million shares of Cintas common stock at an average price of $87.89$365.41 for a total purchase price of $500.0$581.2 million. During fiscal 2016, weFrom the inception of the October 29, 2019 program through July 28, 2021, Cintas purchased $759.2a total of 2.8 million shares of Cintas common stock under previously authorizedat an average price of $358.93 per share buyback programs. On August 2, 2016, we announced that the Boardfor a total purchase price of Directors authorized a new $500.0 million share buyback program, which does not have an expiration date. For$1.0 billion. In addition, for the fiscal year ended May 31, 2017,2021, Cintas acquired 0.2 million shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted stock awards that vested during the fiscal year. These shares were acquired at an average price of $101.37$302.52 per share for a total purchase price of $17.0$74.4 million. For the fiscal year ended May 31, 2020, Cintas acquired 0.3 million shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted awards that vested during the fiscal year. These shares were acquired at an average price of $260.89 per share for a total purchase price of $68.8 million.
On October 18, 2016,27, 2020, Cintas declared an annual cash dividend of $1.33 per share on outstanding common stock, representing a
26.7% 10.2% increase over the annual dividend paid in the prior fiscal year. The dividend was paid on December 2, 2016 to shareholders of record as of November 4, 2016. This marked the 3438th consecutive year that Cintas has increased its annual dividend, every year since going public in 1983. Also on October 27, 2020, the Cintas Board of Directors approved a change in the dividend policy from an annual dividend to a quarterly dividend and subsequently declared a quarterly dividend on outstanding common stock. 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. Our Board of Directors declared the following dividends during the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | |
Declaration Date (In millions except per share data) | Record
Date | | Payment
Date | Dividend
Per Share | | Amount |
| | | | | | |
| Fiscal Year 2021 | | | | | | |
| October 27, 2020 | November 6, 2020 | | December 4, 2020 | $ | 2.81 | | | $ | 297.7 | |
| October 27, 2020 | November 6, 2020 | | December 4, 2020 | 0.70 | | | 74.1 | |
| January 19, 2021 | February 15, 2021 | | March 15, 2021 | 0.75 | | | 79.5 | |
April 13, 2021 (1) | May 15, 2021 | | June 15, 2021 | 0.75 | | | 79.2 | |
| Total | | | | $ | 5.01 | | | $ | 530.5 | |
| | | | | | |
| Fiscal Year 2020 | | | | | | |
| October 29, 2019 | November 8, 2019 | | December 6, 2019 | $ | 2.55 | | | $ | 268.0 | |
| | | | | | |
| Fiscal Year 2019 | | | | | | |
| October 30, 2018 | November 9, 2018 | | December 7, 2018 | $ | 2.05 | | | $ | 220.8 | |
On March 21, 2017,.(1) The dividend declared on April 13, 2021 was included in current accrued liabilities on the Company completedconsolidated balance sheet at May 31, 2021.
During the acquisitionfiscal year ended May 31, 2020, Cintas paid a net total of G&K. To finance$112.5 million on commercial paper borrowings and paid off the G&K acquisition, Cintas used a combination of new senior notes, a term loan other borrowings under its existing credit facility andbalance of $200.0 million with cash on hand.
There was no commercial paper outstanding during fiscal 2021. The following table summarizes Cintas' outstanding debt at May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Interest
Rate | | Fiscal Year
Issued | | Fiscal Year
Maturity | | 2021 | | 2020 |
| | | | | | | | | |
| Debt due within one year | | | | | | | | | |
| Senior notes | 4.30% | | 2012 | | 2022 | | $ | 250,000 | | | $ | — | |
| Senior notes | 2.90% | | 2017 | | 2022 | | 650,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Debt issuance costs | | | | | | | (930) | | | — | |
| Total debt due within one year | | | | | | | $ | 899,070 | | | $ | — | |
| | | | | | | | | |
| Debt due after one year | | | | | | | | | |
| Senior notes | 4.30% | | 2012 | | 2022 | | $ | — | | | $ | 250,000 | |
| Senior notes | 2.90% | | 2017 | | 2022 | | — | | | 650,000 | |
| Senior notes | 3.25% | | 2013 | | 2023 | | 300,000 | | | 300,000 | |
Senior notes (1) | 2.78% | | 2013 | | 2023 | | 50,815 | | | 51,250 | |
Senior notes (2) | 3.11% | | 2015 | | 2025 | | 51,301 | | | 51,637 | |
| 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 | | | | | | | (9,283) | | | (13,182) | |
| Total debt due after one year | | | | | | | $ | 1,642,833 | | | $ | 2,539,705 | |
|
| | | | | | | | | | | | | | |
| (In thousands) | Interest Rate | | Fiscal Year Issued | | Fiscal Year Maturity | | 2017 | | 2016 |
| | | | | | | | | | |
| Debt due within one year | | | | | | | | | |
| Senior notes | 2.85 | % | | 2007 | | 2017 | | $ | — |
| | $ | 250,000 |
|
| Senior notes | 6.13 | % | | 2008 | | 2018 | | 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 | | | | | | | $ | 362,900 |
| | $ | 250,000 |
|
| | | | | | | | | | |
| Debt due after one year | | | | | | | | | |
| Senior notes | 6.13 | % | | 2008 | | 2018 | | $ | — |
| | $ | 300,000 |
|
| Senior notes | 4.30 | % | | 2012 | | 2022 | | 250,000 |
| | 250,000 |
|
| Senior notes | 2.90 | % | | 2017 | | 2022 | | 650,000 |
| | — |
|
| Senior notes | 3.25 | % | | 2013 | | 2023 | | 300,000 |
| | 250,000 |
|
Senior notes (2) | 2.78 | % | | 2013 | | 2023 | | 52,554 |
| | — |
|
Senior notes (3) | 3.11 | % | | 2015 | | 2025 | | 52,645 |
| | — |
|
| Senior notes | 3.70 | % | | 2017 | | 2027 | | 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 | | | | | | | (22,075 | ) | | (5,578 | ) |
| Total debt due after one year | | | | | | | $ | 2,770,624 |
| | $ | 1,044,422 |
|
(1) Variable rate debt instrument. The rate presented is the variable borrowing rate at May 31, 2017.
(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 3.73%.
(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 and restated on September 16, 2016.May 24, 2019. The amendment increased the capacity of the revolving credit facility from $450.0$600.0 million to $600.0 million$1.0 billion and addedcreated a $250.0 millionnew term loan facility. The $150.0 million increase in the revolving credit facility took effect upon the consummation of the merger (Merger) contemplated by the Merger Agreement among the Cintas, G&K and Bravo Merger Sub, Inc. (Merger Sub), a wholly-owned subsidiary of Cintas. The term loan was funded upon the consummation of the Merger.$200.0 million. 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 the term loan of up to $250.0 million in the aggregate, subject to customary conditions. The maturity date of the agreementrevolving credit facility is September 15, 2021.May 23, 2024. As of May 31, 2017,2021 and 2020, 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. No commercial paper or borrowingsOn June 1, 2021, in accordance with the terms of the notes, Cintas paid the $250.0 million aggregate principal amount of its 4.30%, 10-year senior notes that matured on our revolving credit facility were outstanding at May 31, 2016.that date with cash on hand. During fiscal 2022, Cintas expects to issue long-term debt to pay the $650.0 million principal amount of its 2.90%, 5-year senior notes that mature in the fourth quarter of fiscal 2022.
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. Cintas was in compliance with all of the debt 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 our ability to refinance the $650.0 million aggregate principal amount of our senior notes that mature in fiscal 2022. 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 May 31, 2017,2021, our ratings were as follows:
| | | | | | | | | | | | | | | | | | | | |
| 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 indirectly, wholly owned principal operating subsidiary of Cintas. Corp. 2 is the issuer of the $2,550.0 million aggregate principal amount of senior notes outstanding as of May 31, 2021, which are unconditionally guaranteed, jointly and severally, by Cintas Corporation and its wholly owned, direct and indirect domestic subsidiaries. See Note 7 entitled Debt and Derivatives of "Notes to Consolidated Financial Statements" for more information on Cintas' outstanding debt.
Basis of Preparation of the Summarized Financial Information
The following tables include summarized financial information of Cintas Corporation (Issuer), Corp. 2 and subsidiary guarantors (together, the Obligor Group). Investments in and equity in the 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 follows for the fiscal years ended May 31:
| | | | | | | | | | | | | | |
Summarized Consolidated Statements of Income (In thousands) | | 2021 | | 2020 |
| | | | |
| Net sales to unrelated parties | | $ | 6,705,820 | | | $ | 6,642,196 | |
| Net sales to non-guarantors | | $ | 3,460 | | | $ | 4,778 | |
| Operating income | | $ | 1,319,444 | | | $ | 1,140,318 | |
| Net income | | $ | 1,058,837 | | | $ | 860,022 | |
| | | | | | | | | | | | | | |
Summarized Consolidated Balance Sheets (In thousands) | | 2021 | | 2020 |
| | | | |
| Assets | | | | |
| Receivables due from non-obligor subsidiaries | | $ | 2,292 | | | $ | 3,199 | |
| Total other current assets | | $ | 2,652,810 | | | $ | 2,143,489 | |
| Total other noncurrent assets | | $ | 4,924,550 | | | $ | 4,938,093 | |
| | | | |
| Liabilities | | | | |
| Amounts due to non-obligor subsidiaries | | $ | 457 | | | $ | 3,437 | |
| Current liabilities | | $ | 1,893,352 | | | $ | 843,203 | |
| Noncurrent liabilities | | $ | 2,549,911 | | | $ | 3,495,956 | |
Contractual Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| (In thousands) | Total | | One year
or less | | Two to
three years | | Four to
five years | | After five
years |
| | | | | | | | | |
Debt (1) | $ | 2,550,000 | | | $ | 900,000 | | | $ | 350,000 | | | $ | 50,000 | | | $ | 1,250,000 | |
Operating leases (2) | 185,801 | | | 47,564 | | | 69,138 | | | 39,089 | | | 30,010 | |
| Interest payments | 510,653 | | | 90,155 | | | 115,370 | | | 106,690 | | | 198,438 | |
| Total contractual cash obligations | $ | 3,246,454 | | | $ | 1,037,719 | | | $ | 534,508 | | | $ | 195,779 | | | $ | 1,478,448 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In thousands) | Total | | One year or less | | Two to three years | | Four to five years | | After five years |
| | | | | | | | | | |
Debt (1) | $ | 3,155,699 |
| | $ | 363,000 |
| | $ | 25,000 |
| | $ | 1,112,500 |
| | $ | 1,655,199 |
|
Operating leases (2) | 176,004 |
| | 43,775 |
| | 64,417 |
| | 39,295 |
| | 28,517 |
|
Interest payments (3) | 936,383 |
| | 119,547 |
| | 199,498 |
| | 196,841 |
| | 420,497 |
|
| Unconditional purchase obligations | — |
| | — |
| | — |
| | — |
| | — |
|
| Total contractual cash obligations | $ | 4,268,086 |
| | $ | 526,322 |
| | $ | 288,915 |
| | $ | 1,348,636 |
| | $ | 2,104,213 |
|
Cintas also makes payments to defined contribution plans.plans and may make payments to defined benefit plans to satisfy minimum funding requirements. The amount of contributions made to the defined contribution plans are at the discretion of the Board of Directors of Cintas. Future contributions to the defined contribution plans are expected to be $51.7$82.6 million in the next year, $111.2$177.9 million in the next two to three years and $122.6$196.1 million in the next four to five years. Cintas may make paymentsFuture contributions to the defined benefit plans are expected to satisfy minimum funding requirements. Currently, Cintas does not expect to make any such payments duringbe $0.3 million in the next year, $3.0 million in the next two to three years and $3.0 million in the next four to five years.
| |
(1)
| See Note 6 entitled Debt and Derivatives of "Notes to Consolidated Financial Statements" for a detailed presentation of Cintas' debt. |
| |
(2)
| Operating leases consist primarily of operational facility leases. |
| |
(3)
| Interest payments include interest on both fixed and variable rate debt. As of May 31, 2017, Cintas had approximately $300.5 million of variable rate debt outstanding, which consisted of $50.5 million of commercial paper and a $250.0 million term loan. The interest payments for variable rate debt were estimated using forecasted rates in future years. |
Other Commitments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Commitment Expiration per Period |
| (In thousands) | Total | | One year
or less | | Two to
three years | | Four to
five years | | After five
years |
| | | | | | | | | |
Lines of credit (1) | $ | 999,234 | | | $ | — | | | $ | 999,234 | | | $ | — | | | $ | — | |
Standby letters of credit and surety bonds (2) | 120,597 | | | 120,597 | | | — | | | — | | | — | |
| Total other commitments | $ | 1,119,831 | | | $ | 120,597 | | | $ | 999,234 | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | |
| | Amount of Commitment Expiration per Period |
| (In thousands) | Total | | One year or less | | Two to three years | | Four to five years | | After five Years |
| | | | | | | | | | |
Lines of credit (1) | $ | 549,399 |
| | $ | — |
| | $ | 549,399 |
| | $ | — |
| | $ | — |
|
Standby letters of credit and surety bonds (2) | 110,893 |
| | 110,893 |
| | — |
| | — |
| | — |
|
| Total other commitments | $ | 660,292 |
| | $ | 110,893 |
| | $ | 549,399 |
| | $ | — |
| | $ | — |
|
(2)These standby letters of credit and surety bonds support certain outstanding debt (reference Note 7 entitled Debt and Derivatives of "Notes to Consolidated Financial Statements"), self-insured workers' compensation and general liability insurance programs. | |
(1)
| Back-up facility for the commercial paper program (reference Note 6 entitled Debt and Derivatives of "Notes to Consolidated Financial Statements" for further discussion). |
| |
(2)
| These standby letters of credit support certain outstanding debt (reference Note 6 entitled Debt and Derivatives of "Notes to Consolidated Financial Statements"), self-insured workers' compensation and general liability insurance programs. |
Inflation and Changing Prices
Changes in wages, benefits and energy costs have the potential to materially impact Cintas' consolidated financial results.results of operations. Management believes inflation has not had a material impact on Cintas' consolidated financial condition or a negative impact on the consolidated results of operations.
Litigation and Other Contingencies
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.
The Company, the Board of Directors, Scott Farmer (Executive Chairman) and the Investment Policy Committee are defendants in a purported class action, filed on December 13, 2019, pending in the U.S. District Court for the Southern District of Ohio alleging violations of ERISA. The lawsuit asserts that the defendants improperly managed the costs of the employee retirement plan, breached their fiduciary duties in failing to investigate and select lower cost alternative funds and failed to monitor and control the employee retirement plan’s recordkeeping costs. The defendants deny liability.
New Accounting Standards
In April 2014,2019, the Financial Accounting Standards Board (FASB) issued Accounting StandardStandards Update (ASU) 2014-08, “Reporting Discontinued Operations and Disclosures2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Disposals of Components of an Entity,Credit Losses on Financial Instruments.” which amended accounting guidance related toASU 2016-13 replaces the reporting of discontinued operations and disclosures of disposals of components of an entity. The amended guidance changes the thresholds for disposals to qualify as discontinued operationsincurred loss impairment methodology with a methodology that reflects expected credit losses and requires additional disclosures. This guidance is effective for reporting periods beginning after December 15, 2014consideration of a broader range of reasonable and is requiredsupportable information to be applied prospectively.inform credit loss estimates. In connection with recognizing credit losses on accounts receivable and other financial instruments, Cintas adopted ASU 2014-08 duringnow uses a forward-looking expected loss model rather than the quarter ended August 31, 2015 and applied the amended accounting guidance to Shred-it and will apply it to future transactions, as appropriate.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," to clarify revenue recognition principles. This guidance is intended to improve disclosure requirements and enhance the comparability of revenue recognition practices. Improved disclosures under the amended guidance relate to the nature, amount, timing and uncertainty of revenue that is recognized from contracts with customers. This guidance will be effective for reporting periods beginning after December 15, 2017 and will be required to be applied retrospectively. Early application of the amendments in this update is not permitted. 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 the 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. Cintas plans to adopt the standard as of the first quarter of fiscal year 2019 using the modified retrospective approach and will record a cumulative adjustment to equity for open contracts as of June 1, 2018. Cintas is continuing to evaluate the impactincurred loss model. Adoption of ASU 2014-09 and an estimate of the impact to the consolidated financial statements cannot be made at this time.
In April 2015, the FASB issued ASU 2015-17, “Balance Sheet Classifications of Deferred Taxes,” which amended accounting guidance related to the presentation of deferred tax liabilities and assets. The amended guidance2016-13 requires that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. This guidance is effective for reporting periods beginning after December 15, 2016; however, early adoption is permitted. This guidance can also be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Cintas adopted ASU 2015-17 during the quarter ended November 30, 2015 and has applied this amended accounting guidance to its deferred tax liabilities and assets for all periods presented.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the consolidated condensed balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim periods beginning after December 15, 2015. The guidance is applied retrospectively and early adoption is permitted. Cintas adopted ASU 2015-03 during the quarter ended August 31, 2016 and has applied this amended accounting guidance to its long-term debt and other assets for all periods presented. The impact of this change in accounting principle on balances previously reported as of May 31, 2016 was a reclassification of $5.6 million from other assets to debt due after one year within long-term liabilities.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments.” This amendment eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. This amendment became effective for Cintas beginning June 1, 2016, and was adopted prospectively in accordance with the standard. The adoption of this amendment did not have an effect on our consolidated financial statements for the fiscal year ended May 31, 2017.
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, ASC 840, Leases. This guidance is effective for reporting periods beginning after December 15, 2018; however, early adoption is permitted. Entities are required to useusing a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Cintas is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 is intended to simplify accounting for share-based payments. Upon adoption, ASU 2016-09 requires that excess tax benefits for share-based payments be recorded as a reduction of income tax expense and reflected within operating cash flows rather than being recorded within equity and reflected within financing cash flows. The standard also permits the repurchase of more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. This update is effective for interim and annual periods beginning after December 15, 2016; however, early adoption is permitted. Cintas adopted ASU 2016-09 during the quarter ended August 31, 2016 and elected to make an accounting policy change to recognize forfeitures as they occur. The adoption impact on the consolidated balance sheet wasthrough a cumulative-effect adjustment of $26.7 million, increasing openingto retained earnings as of the effective date to align existing credit loss methodology with the new standard. This standard was adopted by Cintas on June 1, 2020 and decreasing paid-in capital.
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 continues to require 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 statement of income and changes the presentation of other components of net benefit cost so that these items will be presented outside of operating income within the consolidated statements of income. Cintas plans to adopt ASU 2017-07 in fiscal 2018 and apply it prospectively. Cintas doesdid not expect the adoption of ASU 2017-07 to have a material impact on itsthe Company's consolidated financial statements.
No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of Cintas' consolidated financial statements in conformity with U. S.U.S. GAAP requires management to make estimates and judgments that have a significant effect on the amounts reported in the consolidated financial statements and accompanying notes. These critical accounting policies should be read in conjunction with Note 1 entitled Significant Accounting Policies of "Notes"Notes to Consolidated Financial Statements.Statements." Significant changes, estimates or assumptions related to any of the following critical accounting policies, including those impacted by the COVID-19 pandemic, could possibly have a material impact on the consolidated financial statements.
Revenue recognition
Rental revenue, which is recorded in the Uniform Rental and Facility Services reportable operating segment, is recognized when services are performed.performed or the obligations under the terms of a contract with a customer are satisfied. Other revenue, which is recorded in the First Aid and Safety Services reportable operating segments and All Other, is recognized when either services are performed or when productsthe obligations under the terms of a contract with a customer are shipped andsatisfied. See Note 2 entitled Revenue Recognition of the title and risks of ownership pass"Notes to the customer.Consolidated Financial Statements" for more information on Cintas' revenue. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market. Cintas applies a commonly accepted practice of using inventory turns to apply variances between actual and standard costs to the inventory balances. The judgments and estimates used to calculate inventory turns will have an impact on the valuation of inventories at the lower of cost or market. An inventory obsolescence reserve is determined by specific identification, as well as an estimate based on the Company's historical rates of obsolescence.
Uniforms and other rental items in service
Uniforms and other rental items in service are valued at cost less amortization, calculated using the straight-line method. Uniforms in service (other than cleanroom and flame resistant clothing) are amortized over their useful life of 18 months. Uniforms acquired in the G&K acquisition will be amortized over 12 months. Other rental items, including shop towels, mats, mops, cleanroom garments, flame resistant clothing, linens and restroom dispensers, are amortized over their useful lives, which range from 8 to 60 months. The amortization rates used are based on industry experience, Cintas' specific experience and wear tests performed by Cintas. These factors are critical to determining the amount of in service inventory and related cost of uniforms and ancillary products that are presented in the consolidated financial statements.
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets based on industry and Cintas specific experience, which is typically 30 to 40 years for buildings, 5 to 20 years for building improvements, 3 to 10 years for equipment and 2 to 15 years for leasehold improvements. When events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the estimated undiscounted future cash flows are compared to the carrying amount of the assets. If the estimated undiscounted future cash flows are less than the carrying amount of the assets, an impairment loss is recorded based on the excess of the carrying amount of the assets over their respective fair values. Fair value is generally determined by discounted cash flows or based on prices of similar assets, as appropriate. As a result of the identification of certain G&K plants and branches for future closure, an indicator of potential impairment was identified. Cintas recognized an impairment loss of $23.3 million during the year ended May 31, 2017, based on the excess of the carrying amount of asset over their respective fair values. The undiscounted cash flows were estimated, using Level 2 inputs based on both the cost and market approaches, at the lowest discernible level, which is at the location level. Cintas did not identify any indicators of impairment for the years ended May 31, 2016 and 2015.
Goodwill
Goodwill, obtained through acquisitions of businesses, is valued at cost less any impairment. Cintas completes an annual impairment test, which may includethat includes an assessment of qualitative factors including, but not limited to, macroeconomic conditions, industry and market conditions, and entity specific factors such as strategies and financial performance. The test may also include the determination of the estimated fair value of Cintas' reporting units via comparisons to current market values, where available, and discounted cash flow analyses. Significant assumptions may include growth rates based on historical trends and margin improvement leveraged from such growth, as well as discount rates. We determine discount rates separately for each reporting unit using the weighted average cost of capital, which includes a calculation of cost of equity, which is developed using the capital asset pricing model and comparable company betas (a measure of systemic risk), and cost of debt. We also use comparable market earnings
multiple data and our market capitalization to corroborate our reporting unit valuations. We test for goodwill impairment at the reporting unit level. As a result of Cintas’ operating segment realignment in fiscal 2016 and the acquisition of G&K in fiscal 2017, the composition of Cintas’ reporting units for the evaluation of goodwill impairment has changed. Cintas has identified sixfour reporting units for purposes of evaluating goodwill impairment: Uniform Rental and Facility Services, G&K Services Uniform Rental and Facility Services, First Aid and Safety Services and threetwo reporting units within All Other. Given the proximity of the G&K acquisition date to the consolidated balance sheet date, the Company performed a high level qualitative analysis for its G&K reporting unit, which considered indicators of impairment to evaluate whether the fair value was more-likely-than-not in excess of its carrying value. The key indicators considered include macroeconomic conditions, industry/market considerations, financial performance, cash flow, changes in management, and composition of net assets. Based on the results of the annual impairment tests, Cintas was not required to recognize an impairment of goodwill for the fiscal years ended May 31, 2017, 20162021, 2020 or 2015.2019. Cintas will continue to perform impairment tests as of March 1 in future years and when indicators of impairment exist.
Service contracts and other assets
Service contracts and other assets, which consist primarily of noncompete and consulting agreements obtained through acquisitions of businesses, are amortized by use of the straight-line method over the estimated lives of the agreements, which are generally 5 to 10 years. Insurance reserve
The G&K service contract asset will be amortized over a period of 15 years, whichinsurance reserve represents the estimated 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. Certain noncompete agreements, as well as all service contracts, require that a valuation be determined using a discounted cash flow model. The assumptions and judgments used in these models involve estimates of cash flows and discount rates, among other factors. Because of the assumptions used to value these intangible assets, actual results over time could vary from original estimates. Impairment of service contracts and other assets is accomplished through specific identification. No impairment has been recognized by Cintas for the fiscal years ended May 31, 2017, 2016 or 2015.
Business Combinations
Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income. See Note 9 entitled Acquisitions and Divestitures of the "Notes to Consolidated Financial Statements" for a discussion of the G&K and ZEE Acquisitions.
General insurance liabilities
General insurance liabilities represent the estimated ultimate cost of all asserted and unasserted claims, incurred, primarily related to worker'sworkers' compensation, auto liability and other general liability exposure through the consolidated balance sheet dates. Our incurred but not reported reserves are estimated through actuarial procedures, with the assistance of third-party actuarial specialists, of the insurance industry and by using industry assumptions, adjusted for specific expectations based on our claims history. Cintas records an increase or decrease in selling and administrative expenses related to development of prior claims, higher claims activity and other environmental factors in the period in which it becomes known. These changes in estimates may be material to the consolidated financial statements.
Stock-based compensation
Compensation expense is recognized for all share-based payments to employees, including stock options and restricted stock awards, in the consolidated statements of income based on the fair value of the awards that are granted. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model. MeasuredGenerally, measured compensation cost, net of estimatedactual forfeitures, is recognized on a straight-line basis over the vesting period of the related share-based compensation award. See Note 12 entitled Stock-Based Compensation of "Notes"Notes to Consolidated Financial Statements"Statements" for further information.
Litigation and other contingencies
Cintas is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract, environmental and employment claims. U.S. GAAP requires that a liability for contingencies be recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence of a liability, as well as the amount to be recorded. While a significant change in assumptions and judgments could have a material impact on the amounts recorded for contingent liabilities, Cintas does not believe that they will result in a material adverse effect on the consolidated financial statements.
Income taxes
Deferred tax assets and liabilities are determined by the differences between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in future periods. Cintas accounts for Global Intangible Low-Taxed Income (GILTI) as a current-period expense when incurred. See Note 89 entitled Income Taxes of "Notes"Notes to Consolidated Financial Statements"Statements" for the types of items that give rise to significant deferred income tax assets and liabilities. Deferred income taxes are classified as assets or liabilities based on the classification of the related asset or liability for financial reporting purposes. Cintas regularly reviews deferred tax assets for recoverability based upon projected future taxable income and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, as adjusted for valuation allowances, will be realized.
Accounting for uncertain tax positions requires the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Companies may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Cintas is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, Cintas records reserves as deemed appropriate. Based on Cintas' evaluation of current tax positions, Cintas believes its tax related accruals are appropriate.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Earnings aremay be affected by changes in short-term interest rates due to investments, if any, in marketable securities and money market accounts and periodic issuances of commercial paper. If short-term rates changed by one-half percent (or 50 basis points), Cintas' income before income taxes would change by approximately $1.1$0.5 million. This estimated exposure considers the effects on investments. This analysis does not consider the effects of a change in economic activity or a change in Cintas' capital structure.
Through its foreign operations, Cintas is exposed to foreign currency risk. Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenue and profit translated into U.S. dollars. Foreign denominated revenue and profit represents less than 10% of Cintas' consolidated revenue and profit. Cintas periodically uses foreign currency hedges such as average rate options and forward contracts to mitigate the risk of foreign currency exchange rate movements resulting from foreign currency revenue and from international cash flows. The primary foreign currency to which Cintas is exposed is the Canadian dollar.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Audited Consolidated Financial Statements for the Fiscal Years Ended May 31, 2017, 20162021, 2020 and 20152019
Management's Report on
Internal Control over Financial Reporting
To the Shareholders of Cintas Corporation:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.
With the supervision of our ChairmanPresident and Chief Executive Officer and our Chief Financial Officer, management assessed our internal control over financial reporting as of May 31, 2017.2021. Management based its assessment on criteria established in Internal Control — Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment. This assessment is supported by testing and monitoring performed by our internal audit function. The Company’s evaluation of internal control over financial reporting did not include the internal controls of G&K operations subsequent to the acquisition on March 21, 2017, which are included in the 2017 consolidated financial statements and constituted 37.6% of total assets (inclusive of acquired goodwill and identifiable intangible assets which represents 29.6% of total assets) as of May 31, 2017, and 3.5% of revenue for the year then ended.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of May 31, 2017,2021, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.
We reviewed the results of management's assessment with the Audit Committee of our Board of Directors. Additionally, our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of Cintas Corporation's internal control over financial reporting. Ernst & Young LLP has issued an attestation report, which is included in this Annual Report on Form 10-K.
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| | |
| | Scott D. Farmer
ChairmanTodd M. Schneider
President and Chief Executive Officer
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| | |
| | J. Michael Hansen Senior
Executive Vice President and Chief Financial Officer
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Report of Independent
Registered Public Accounting Firm
TheTo the Shareholders and the Board of Directors and Shareholders of Cintas Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cintas Corporation (the Company) as of May 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended May 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of May 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated July 28, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements, and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
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| Valuation of Insurance Reserves |
| |
| Description of the Matter | At May 31, 2021, the Company's insurance reserve was $156.4 million. As described in Note 1 to the Company’s consolidated financial statements, the Company’s insurance reserve represents the estimated ultimate cost of all asserted and unasserted (incurred but not reported) claims primarily related to workers' compensation, auto liability and other general liability exposure. The incurred but not reported insurance reserve is estimated through actuarial procedures and by using industry assumptions, adjusted for Company specific expectations based on claims history.
Auditing the Company's estimate of the incurred but not reported insurance reserve is judgmental and complex due to the significant estimation uncertainty of the potential value of unasserted claims, which are developed with the assistance of a third-party actuarial specialist. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company’s incurred but not reported insurance reserve. This includes internal controls over the claims activity and actuarial methods used to establish the incurred but not reported insurance reserve. Specifically, we tested internal controls related to management’s review of data provided to the actuary, validation of claim activity and review of actuarial methods.
To test the incurred but not reported insurance reserve, our audit procedures included, among others, assessing the methodologies used to estimate the incurred but not reported insurance reserve, testing the completeness and accuracy of the underlying claims data, vouching payments made to third parties, and testing the mathematical accuracy of the actuarially determined incurred but not reported insurance reserve. Furthermore, we involved our actuarial specialists to assist in evaluating the methodologies used by management to determine the incurred but not reported insurance reserve and comparing the Company’s recorded incurred but not reported insurance reserve to a range developed based on independently selected actuarial methodologies. |
We have served as the Company's auditor since 1968
Cincinnati, Ohio
July 28, 2021
Report of Independent
Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cintas Corporation
Opinion on Internal Control over Financial Reporting
We have audited Cintas Corporation’s internal control over financial reporting as of May 31, 2017,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Cintas Corporation’sCorporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of May 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of May 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended May 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated July 28, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s“Management's Report on Internal Control over Financial Reporting.Reporting”. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of G&K Services, Inc., which is included in the May 31, 2017 consolidated financial statements of Cintas Corporation and constituted 37.6% of total assets (inclusive of acquired goodwill and identifiable intangible assets which represents 29.6% of total assets) as of May 31, 2017, and 3.5% of revenues for the year then ended. Our audit of internal control over financial reporting of Cintas Corporation also did not include an evaluation of the internal control over financial reporting of G&K Services, Inc.
In our opinion, Cintas Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2017, based onthe COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cintas Corporation as of May 31, 2017 and 2016 and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended May 31, 2017 and our report dated July 31, 2017 expressed an unqualified opinion thereon.
|
| | | | | | | |
| | /s/ ERNSTErnst & YOUNGYoung LLP |
Cincinnati, Ohio
July 31, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Cintas Corporation
We have audited the accompanying consolidated balance sheets of Cintas Corporation as of May 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended May 31, 2017. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of Cintas Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cintas Corporation at May 31, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cintas Corporation’s internal control over financial reporting as of May 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated July 31, 2017 expressed an unqualified opinion thereon.
Cincinnati, Ohio
July 31, 2017
28, 2021
|
| | | | | | | | | | | |
Consolidated Statements of Income | | | | | |
| | Fiscal Years Ended May 31, |
| (In thousands except per share data) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Revenue: | | | | | |
| Uniform rental and facility services | $ | 4,202,490 |
| | $ | 3,759,524 |
| | $ | 3,519,199 |
|
| Other | 1,120,891 |
| | 1,036,248 |
| | 850,478 |
|
| | 5,323,381 |
| | 4,795,772 |
| | 4,369,677 |
|
| Costs and expenses: | | | | | |
| Cost of uniform rental and facility services | 2,307,774 |
| | 2,092,833 |
| | 1,992,665 |
|
| Cost of other | 635,312 |
| | 601,599 |
| | 484,089 |
|
| Selling and administrative expenses | 1,527,380 |
| | 1,332,399 |
| | 1,209,284 |
|
| G&K Services, Inc. transaction and integration expenses | 79,224 |
| | — |
| | — |
|
| Operating income | 773,691 |
| | 768,941 |
| | 683,639 |
|
| | | | | | |
| Gain on sale of stock of an equity method investment | — |
| | — |
| | 21,739 |
|
| | | | | | |
| Interest income | (237 | ) | | (896 | ) | | (339 | ) |
| Interest expense | 86,524 |
| | 64,522 |
| | 65,161 |
|
| | | | | | |
| Income before income taxes | 687,404 |
| | 705,315 |
| | 640,556 |
|
| Income taxes | 230,118 |
| | 256,710 |
| | 238,003 |
|
| Income from continuing operations | 457,286 |
| | 448,605 |
| | 402,553 |
|
Income from discontinued operations, net of tax of $15,057, $138,184 and $15,910, respectively | 23,422 |
| | 244,915 |
| | 28,065 |
|
| Net income | $ | 480,708 |
| | $ | 693,520 |
| | $ | 430,618 |
|
| | | | | | |
| Basic earnings per share | | | | | |
| Continuing operations | $ | 4.27 |
| | $ | 4.08 |
| | $ | 3.44 |
|
| Discontinued operations | 0.22 |
| | 2.22 |
| | 0.24 |
|
| Basic earnings per share | $ | 4.49 |
| | $ | 6.30 |
| | $ | 3.68 |
|
| | | | | | |
| Diluted earnings per share | | | | | |
| Continuing operations | $ | 4.17 |
| | $ | 4.02 |
| | $ | 3.39 |
|
| Discontinued operations | 0.21 |
| | 2.19 |
| | 0.24 |
|
| Diluted earnings per share | $ | 4.38 |
| | $ | 6.21 |
| | $ | 3.63 |
|
| | | | | | |
| Dividends declared and paid per share | $ | 1.33 |
| | $ | 1.05 |
| | $ | 1.70 |
|
| | | | | | | | | | | | | | | | | |
Consolidated
Statements of Income | Fiscal Years Ended May 31, |
| (In thousands except per share data) | 2021 | | 2020 | | 2019 |
| | | | | |
| Revenue: | | | | | |
| Uniform rental and facility services | $ | 5,689,632 | | | $ | 5,643,494 | | | $ | 5,552,430 | |
| Other | 1,426,708 | | | 1,441,626 | | | 1,339,873 | |
| Total revenue | 7,116,340 | | | 7,085,120 | | | 6,892,303 | |
| | | | | |
| Costs and expenses: | | | | | |
| Cost of uniform rental and facility services | 2,983,514 | | | 3,055,145 | | | 3,027,599 | |
| Cost of other | 818,175 | | | 796,227 | | | 736,116 | |
| Selling and administrative expenses | 1,929,159 | | | 2,071,052 | | | 1,980,644 | |
| G&K Services, Inc. integration expenses | 0 | | | 0 | | | 14,410 | |
| Operating income | 1,385,492 | | | 1,162,696 | | | 1,133,534 | |
| | | | | |
| Gain on sale of a cost method investment | 0 | | | 0 | | | 69,373 | |
| | | | | |
| Interest income | (467) | | | (988) | | | (1,228) | |
| Interest expense | 98,210 | | | 105,393 | | | 101,736 | |
| | | | | |
| Income before income taxes | 1,287,749 | | | 1,058,291 | | | 1,102,399 | |
| Income taxes | 176,781 | | | 181,931 | | | 219,764 | |
| Income from continuing operations | 1,110,968 | | | 876,360 | | | 882,635 | |
(Loss) income from discontinued operations, net of tax (benefit) expense of $0, $(107) and $757, respectively | 0 | | | (323) | | | 2,346 | |
| Net income | $ | 1,110,968 | | | $ | 876,037 | | | $ | 884,981 | |
| | | | | |
| Basic earnings per share: | | | | | |
| Continuing operations | $ | 10.52 | | | $ | 8.36 | | | $ | 8.23 | |
| Discontinued operations | 0.00 | | | 0.00 | | | 0.02 | |
| Basic earnings per share | $ | 10.52 | | | $ | 8.36 | | | $ | 8.25 | |
| | | | | |
| Diluted earnings per share: | | | | | |
| Continuing operations | $ | 10.24 | | | $ | 8.11 | | | $ | 7.97 | |
| Discontinued operations | 0.00 | | | 0.00 | | | 0.02 | |
| Diluted earnings per share | $ | 10.24 | | | $ | 8.11 | | | $ | 7.99 | |
| | | | | |
| Dividends declared and paid per share | $ | 5.01 | | | $ | 2.55 | | | $ | 2.05 | |
See accompanying notes.
|
| | | | | | | | | | | |
Consolidated Statements of Comprehensive Income | | | | | |
| | Fiscal Years Ended May 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| | | | | | |
| Net income | $ | 480,708 |
| | $ | 693,520 |
| | $ | 430,618 |
|
| | | | | | |
| Other comprehensive (loss) income, net of tax: | | | | | |
| Foreign currency translation adjustments | (10,252 | ) | | (11,933 | ) | | (38,538 | ) |
| Cumulative translation adjustment on Shred-it | — |
| | 6,472 |
| | — |
|
| Change in fair value of cash flow hedges | 31,136 |
| | (12,156 | ) | | 37 |
|
| Amortization of interest rate lock agreements | 1,076 |
| | 1,952 |
| | 1,952 |
|
| Other | (115 | ) | | (738 | ) | | (350 | ) |
| | | | | | |
Other comprehensive income (loss), net of tax expense (benefit) of $19,118, ($9,813) and $1,043, respectively | 21,845 |
| | (16,403 | ) | | (36,899 | ) |
| | | | | | |
| Comprehensive income | $ | 502,553 |
| | $ | 677,117 |
| | $ | 393,719 |
|
| | | | | | | | | | | | | | | | | |
Consolidated Statements
of Comprehensive Income | Fiscal Years Ended May 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Net income | $ | 1,110,968 | | | $ | 876,037 | | | $ | 884,981 | |
| | | | | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Foreign currency translation adjustments | 68,182 | | | (11,321) | | | (21,572) | |
Change in fair value of interest rate lock agreements, net of tax expense (benefit) of $36,172, $(32,793) and $(8,734), respectively | 106,843 | | | (94,954) | | | (27,659) | |
Amortization of interest rate lock agreement, net of tax benefit of $463, $463 and $717, respectively | (1,433) | | | (1,433) | | | (1,179) | |
Other, net of tax expense (benefit) of $3,578, $(2,802) and $(1,618), respectively | 10,676 | | | (8,495) | | | (5,085) | |
| | | | | |
Other comprehensive income (loss), net of tax expense (benefit) of $40,213, $(35,132) and $(9,635), respectively | 184,268 | | | (116,203) | | | (55,495) | |
| | | | | |
| Comprehensive income | $ | 1,295,236 | | | $ | 759,834 | | | $ | 829,486 | |
See accompanying notes.
|
| | | | | | | |
Consolidated Balance Sheets | | | |
| | As of May 31, |
| (In thousands except share data) | 2017 | | 2016 |
| | | | |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 169,266 |
| | $ | 139,357 |
|
| Marketable securities | 22,219 |
| | 70,405 |
|
| Accounts receivable, principally trade, less allowance of $20,525 and $19,103, respectively | 736,008 |
| | 546,488 |
|
| Inventories, net | 278,218 |
| | 249,362 |
|
| Uniforms and other rental items in service | 635,702 |
| | 538,286 |
|
| Income taxes, current | 44,320 |
| | 1,712 |
|
| Prepaid expenses and other current assets | 30,132 |
| | 25,948 |
|
| Assets held for sale | 38,613 |
| | 19,021 |
|
| Total current assets | 1,954,478 |
| | 1,590,579 |
|
| | | | |
| Property and equipment, at cost, net | 1,323,501 |
| | 993,692 |
|
| | | | |
| Investments | 164,788 |
| | 124,952 |
|
| Goodwill | 2,782,335 |
| | 1,276,076 |
|
| Service contracts, net | 586,988 |
| | 78,194 |
|
| Other assets, net | 31,967 |
| | 14,283 |
|
| Long-term assets held for sale | — |
| | 21,039 |
|
| | $ | 6,844,057 |
| | $ | 4,098,815 |
|
| Liabilities and Shareholders' Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 177,051 |
| | $ | 110,940 |
|
| Accrued compensation and related liabilities | 149,635 |
| | 101,391 |
|
| Accrued liabilities | 429,809 |
| | 343,266 |
|
| Liabilities held for sale | 11,457 |
| | 9,958 |
|
| Debt due within one year | 362,900 |
| | 250,000 |
|
| Total current liabilities | 1,130,852 |
| | 815,555 |
|
| | | | |
| Long-term liabilities: | | | |
| Debt due after one year | 2,770,624 |
| | 1,044,422 |
|
| Deferred income taxes | 469,328 |
| | 259,475 |
|
| Accrued liabilities | 170,460 |
| | 136,704 |
|
| Total long-term liabilities | 3,410,412 |
| | 1,440,601 |
|
| | | | |
| Shareholders' equity: | | | |
| Preferred stock, no par value: | | | |
| 100,000 shares authorized, none outstanding | — |
| | — |
|
| Common stock, no par value: | | | |
| 425,000,000 shares authorized | | | |
| 2017: 180,992,605 shares issued and 104,213,479 shares outstanding | |
| | |
|
| 2016: 179,598,516 shares issued and 105,400,629 shares outstanding | 485,068 |
| | 409,682 |
|
| Paid-in capital | 223,924 |
| | 205,260 |
|
| Retained earnings | 5,170,830 |
| | 4,805,867 |
|
| Treasury stock: | |
| | |
|
| 2017: 75,591,976 shares | | | |
| 2016: 75,385,037 shares | (3,574,000 | ) | | (3,553,276 | ) |
| Accumulated other comprehensive loss | (3,029 | ) | | (24,874 | ) |
| Total shareholders' equity | 2,302,793 |
| | 1,842,659 |
|
| | $ | 6,844,057 |
| | $ | 4,098,815 |
|
| | | | | | | | | | | |
Consolidated
Balance Sheets | As of May 31, |
| (In thousands except share data) | 2021 | | 2020 |
| | | |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 493,640 | | | $ | 145,402 | |
| | | |
Accounts receivable, principally trade, less allowance of $12,097 and $35,433, respectively | 901,710 | | | 870,369 | |
| Inventories, net | 481,797 | | | 408,898 | |
| Uniforms and other rental items in service | 810,104 | | | 770,411 | |
| Income taxes, current | 22,282 | | | 0 | |
| Prepaid expenses and other current assets | 133,776 | | | 114,619 | |
| Total current assets | 2,843,309 | | | 2,309,699 | |
| | | |
| Property and equipment, net | 1,318,438 | | | 1,403,065 | |
| | | |
| Investments | 274,616 | | | 214,847 | |
| Goodwill | 2,913,069 | | | 2,870,020 | |
| Service contracts, net | 408,445 | | | 451,529 | |
| Operating lease right-of-use assets, net | 168,532 | | | 159,967 | |
| Other assets, net | 310,414 | | | 260,758 | |
| | | |
| $ | 8,236,823 | | | $ | 7,669,885 | |
| Liabilities and Shareholders' Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 230,786 | | | $ | 230,995 | |
| Accrued compensation and related liabilities | 241,469 | | | 127,417 | |
| Accrued liabilities | 518,910 | | | 456,653 | |
| Income taxes, current | 0 | | | 27,099 | |
| Operating lease liabilities, current | 43,850 | | | 43,031 | |
| Debt due within one year | 899,070 | | | 0 | |
| Total current liabilities | 1,934,085 | | | 885,195 | |
| | | |
| Long-term liabilities: | | | |
| Debt due after one year | 1,642,833 | | | 2,539,705 | |
| Deferred income taxes | 386,647 | | | 388,579 | |
| Operating lease liabilities | 130,774 | | | 122,695 | |
| Accrued liabilities | 454,637 | | | 498,509 | |
| Total long-term liabilities | 2,614,891 | | | 3,549,488 | |
| | | |
| Shareholders' equity: | | | |
Preferred stock, no par value: 100,000 shares authorized, NaN outstanding | 0 | | | 0 | |
Common stock, no par value: 425,000,000 shares authorized 2021: 189,071,185 shares issued and 104,061,391 shares outstanding 2020: 186,793,207 shares issued and 103,415,368 shares outstanding | 1,417,343 | | | 1,102,689 | |
| Paid-in capital | 98,859 | | | 171,521 | |
| Retained earnings | 7,877,015 | | | 7,296,509 | |
Treasury stock: 2021: 85,009,794 shares 2020: 83,377,839 shares | (5,736,258) | | | (5,182,137) | |
| Accumulated other comprehensive income (loss) | 30,888 | | | (153,380) | |
| Total shareholders' equity | 3,687,847 | | | 3,235,202 | |
| $ | 8,236,823 | | | $ | 7,669,885 | |
See accompanying notes.
Consolidated
Statements of Shareholders' Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid-In
Capital | | Retained
Earnings | | Other
Accumulated
Comprehensive
Income (Loss) | | Treasury Stock | | Total
Shareholders'
Equity |
| (In thousands) | 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 | |
| Net income | — | | | — | | | — | | | 884,981 | | | — | | | — | | | — | | | 884,981 | |
| Comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (55,495) | | | — | | | — | | | (55,495) | |
| Dividends | — | | | — | | | — | | | (220,764) | | | — | | | — | | | — | | | (220,764) | |
| Stock-based compensation | — | | | — | | | 139,210 | | | — | | | — | | | — | | | — | | | 139,210 | |
| Vesting of stock-based compensation awards | 766 | | | 156,493 | | | (156,493) | | | — | | | — | | | — | | | — | | | 0 | |
Stock options exercised, net of shares
surrendered | 1,302 | | | 65,371 | | | — | | | — | | | — | | | — | | | — | | | 65,371 | |
| Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | (5,109) | | | (1,016,300) | | | (1,016,300) | |
Cumulative effect of change in accounting
principle | — | | | — | | | — | | | 189,192 | | | — | | | — | | | — | | | 189,192 | |
| Balance at May 31, 2019 | 184,791 | | | 840,328 | | | 227,928 | | | 6,691,236 | | | (39,152) | | | (81,506) | | | (4,717,619) | | | 3,002,721 | |
| Net income | — | | | — | | | — | | | 876,037 | | | — | | | — | | | — | | | 876,037 | |
| Comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (116,203) | | | — | | | — | | | (116,203) | |
| Dividends | — | | | — | | | — | | | (267,956) | | | — | | | — | | | — | | | (267,956) | |
| Stock-based compensation | — | | | — | | | 115,435 | | | — | | | — | | | — | | | — | | | 115,435 | |
| Vesting of stock-based compensation awards | 641 | | | 171,842 | | | (171,842) | | | — | | | — | | | — | | | — | | | 0 | |
Stock options exercised, net of shares
surrendered | 1,361 | | | 90,519 | | | — | | | — | | | — | | | — | | | — | | | 90,519 | |
| Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | (1,872) | | | (464,518) | | | (464,518) | |
Cumulative effect of change in accounting
principle | — | | | — | | | — | | | (2,808) | | | 1,975 | | | — | | | — | | | (833) | |
| Balance at May 31, 2020 | 186,793 | | | 1,102,689 | | | 171,521 | | | 7,296,509 | | | (153,380) | | | (83,378) | | | (5,182,137) | | | 3,235,202 | |
| Net income | — | | | — | | | — | | | 1,110,968 | | | — | | | — | | | — | | | 1,110,968 | |
| Comprehensive income, net of tax | — | | | — | | | — | | | — | | | 184,268 | | | — | | | — | | | 184,268 | |
| Dividends | — | | | — | | | — | | | (530,462) | | | — | | | — | | | — | | | (530,462) | |
| Stock-based compensation | — | | | — | | | 112,035 | | | — | | | — | | | — | | | — | | | 112,035 | |
| Vesting of stock-based compensation awards | 610 | | | 184,697 | | | (184,697) | | | — | | | — | | | — | | | — | | | 0 | |
Stock options exercised, net of shares
surrendered | 1,668 | | | 129,957 | | | — | | | — | | | — | | | — | | | — | | | 129,957 | |
| Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | (1,632) | | | (554,121) | | | (554,121) | |
| | | | | | | | | | | | | | | |
| Balance at May 31, 2021 | 189,071 | | | $ | 1,417,343 | | | $ | 98,859 | | | $ | 7,877,015 | | | $ | 30,888 | | | (85,010) | | | $ | (5,736,258) | | | $ | 3,687,847 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Paid-In Capital | | Retained Earnings | | Other Accumulated Comprehensive Income (Loss) | | Treasury Stock | | Total Shareholders' Equity |
| (In thousands) | Shares | | Amount | | | | | Shares | | Amount | |
| | | | | | | | | | | | | | | | |
| Balance at June 1, 2014 | 176,378 |
| | $ | 251,753 |
| | $ | 134,939 |
| | $ | 3,998,893 |
| | $ | 28,428 |
| | (59,341 | ) | | $ | (2,221,155 | ) | | $ | 2,192,858 |
|
| Net income | — |
| | — |
| | — |
| | 430,618 |
| | — |
| | — |
| | — |
| | 430,618 |
|
| Comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (36,899 | ) | | — |
| | — |
| | (36,899 | ) |
| Dividends | — |
| | — |
| | — |
| | (201,891 | ) | | — |
| | — |
| | — |
| | (201,891 | ) |
| Stock-based compensation | — |
| | — |
| | 47,002 |
| | — |
| | — |
| | — |
| | — |
| | 47,002 |
|
| Vesting of stock-based compensation awards | 575 |
| | 37,265 |
| | (37,265 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock options exercised, net of shares surrendered | 1,164 |
| | 40,230 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 40,230 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (7,073 | ) | | (551,970 | ) | | (551,970 | ) |
| Other | — |
| | — |
| | 12,507 |
| | — |
| | — |
| | — |
| | — |
| | 12,507 |
|
| Balance at May 31, 2015 | 178,117 |
| | 329,248 |
| | 157,183 |
| | 4,227,620 |
| | (8,471 | ) | | (66,414 | ) | | (2,773,125 | ) | | 1,932,455 |
|
| Net income | — |
| | — |
| | — |
| | 693,520 |
| | — |
| | — |
| | — |
| | 693,520 |
|
| Comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (16,403 | ) | | — |
| | — |
| | (16,403 | ) |
| Dividends | — |
| | — |
| | — |
| | (115,273 | ) | | — |
| | — |
| | — |
| | (115,273 | ) |
| Stock-based compensation | — |
| | — |
| | 79,293 |
| | — |
| | — |
| | — |
| | — |
| | 79,293 |
|
| Vesting of stock-based compensation awards | 605 |
| | 52,208 |
| | (52,208 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock options exercised, net of shares surrendered | 876 |
| | 28,226 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28,226 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (8,971 | ) | | (780,151 | ) | | (780,151 | ) |
| Other | — |
| | — |
| | 20,992 |
| | — |
| | — |
| | — |
| | — |
| | 20,992 |
|
| Balance at May 31, 2016 | 179,598 |
| | 409,682 |
| | 205,260 |
| | 4,805,867 |
| | (24,874 | ) | | (75,385 | ) | | (3,553,276 | ) | | 1,842,659 |
|
| Net income | — |
| | — |
| | — |
| | 480,708 |
| | — |
| | — |
| | — |
| | 480,708 |
|
| Comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 21,845 |
| | — |
| | — |
| | 21,845 |
|
| Dividends | — |
| | — |
| | — |
| | (142,433 | ) | | — |
| | — |
| | — |
| | (142,433 | ) |
| Stock-based compensation | — |
| | — |
| | 88,868 |
| | — |
| | — |
| | — |
| | — |
| | 88,868 |
|
| Vesting of stock-based compensation awards | 429 |
| | 43,516 |
| | (43,516 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock options exercised, net of shares surrendered | 966 |
| | 31,870 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 31,870 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (207 | ) | | (20,724 | ) | | (20,724 | ) |
| Adoption of new accounting guidance | — |
| | — |
| | (26,688 | ) | | 26,688 |
| | — |
| | — |
| | — |
| | — |
|
| Balance at May 31, 2017 | 180,993 |
| | $ | 485,068 |
| | $ | 223,924 |
| | $ | 5,170,830 |
| | $ | (3,029 | ) | | (75,592 | ) | | $ | (3,574,000 | ) | | $ | 2,302,793 |
|
See accompanying notes.
|
| | | | | | | | | | | |
Consolidated Statements of Cash Flows | | | | | |
| | Fiscal Years Ended May 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 480,708 |
| | $ | 693,520 |
| | $ | 430,618 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 171,565 |
| | 149,691 |
| | 140,624 |
|
| Amortization of intangible assets | 25,030 |
| | 15,588 |
| | 14,458 |
|
| Stock-based compensation | 88,868 |
| | 79,293 |
| | 47,002 |
|
| Gain on Storage | (1,460 | ) | | (15,786 | ) | | (38,573 | ) |
| (Gain) loss on Shred-it | (25,457 | ) | | (354,071 | ) | | 3,851 |
|
| Gain on sale of stock of an equity method investment | — |
| | — |
| | (21,739 | ) |
| Asset impairment charge | 23,331 |
| | — |
| | — |
|
| G&K Services, Inc. transaction and integration costs | 31,445 |
| | — |
| | — |
|
| Short-term debt financing fees included in net income | 17,062 |
| | — |
| | — |
|
| Settlement of cash flow hedges | 30,194 |
| | — |
| | — |
|
| Deferred income taxes | 3,902 |
| | (59,302 | ) | | 20,866 |
|
| Change in current assets and liabilities, net of acquisitions of businesses: | |
| | |
| | |
|
| Accounts receivable, net | (93,557 | ) | | (52,762 | ) | | (1,443 | ) |
| Inventories, net | (668 | ) | | (17,917 | ) | | 23,785 |
|
| Uniforms and other rental items in service | (8,732 | ) | | (6,306 | ) | | (31,994 | ) |
| Prepaid expenses and other current assets | 24,201 |
| | (965 | ) | | (3,202 | ) |
| Accounts payable | 13,726 |
| | (564 | ) | | (33,445 | ) |
| Accrued compensation and related liabilities | 13,654 |
| | 13,512 |
| | 3,234 |
|
| Accrued liabilities and other | (501 | ) | | 22,714 |
| | 33,066 |
|
| Income taxes, current | (29,424 | ) | | (800 | ) | | (6,832 | ) |
| Net cash provided by operating activities | 763,887 |
| | 465,845 |
| | 580,276 |
|
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (273,317 | ) | | (275,385 | ) | | (217,720 | ) |
| Proceeds from redemption of marketable securities | 218,324 |
| | 434,179 |
| | 161,938 |
|
| Purchase of marketable securities and investments | (181,065 | ) | | (494,146 | ) | | (195,471 | ) |
| Proceeds from Storage transactions, net of cash contributed | 2,400 |
| | 35,338 |
| | 158,428 |
|
| Proceeds from Shredding transactions | 25,876 |
| | 580,837 |
| | 3,344 |
|
| Proceeds from sale of stock of an equity method investment | — |
| | — |
| | 29,933 |
|
| Dividends received on equity method investment | — |
| | — |
| | 5,247 |
|
| Dividends received on Shred-it | — |
| | — |
| | 113,400 |
|
| Acquisitions of businesses, net of cash acquired | (2,102,371 | ) | | (156,579 | ) | | (15,495 | ) |
| Other, net | (196 | ) | | 4,137 |
| | 1,383 |
|
| Net cash (used in) provided by investing activities | (2,310,349 | ) | | 128,381 |
| | 44,987 |
|
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of commercial paper, net | 50,500 |
| | — |
| | — |
|
| Proceeds from issuance of debt, net | 1,932,229 |
| | — |
| | — |
|
| Repayment of debt | (250,000 | ) | | (16 | ) | | (518 | ) |
| Payment of short-term debt financing fees | (17,062 | ) | | — |
| | — |
|
| Proceeds from exercise of stock-based compensation awards | 31,870 |
| | 28,226 |
| | 40,230 |
|
| Dividends paid | (142,433 | ) | | (115,273 | ) | | (201,891 | ) |
| Repurchase of common stock | (20,724 | ) | | (780,151 | ) | | (551,970 | ) |
| Other, net | (5,878 | ) | | 490 |
| | 1,589 |
|
| Net cash provided by (used in) financing activities | 1,578,502 |
| | (866,724 | ) | | (712,560 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (2,131 | ) | | (5,218 | ) | | (8,918 | ) |
| Net increase (decrease) in cash and cash equivalents | 29,909 |
| | (277,716 | ) | | (96,215 | ) |
| Cash and cash equivalents at beginning of year | 139,357 |
| | 417,073 |
| | 513,288 |
|
| Cash and cash equivalents at end of year | $ | 169,266 |
| | $ | 139,357 |
| | $ | 417,073 |
|
| | | | | | | | | | | | | | | | | |
Consolidated
Statements of Cash Flows | Fiscal Years Ended May 31, |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 1,110,968 | | | $ | 876,037 | | | $ | 884,981 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 243,836 | | | 235,905 | | | 223,631 | |
| Amortization of intangible assets and capitalized contract costs | 144,115 | | | 143,148 | | | 136,462 | |
| Stock-based compensation | 112,035 | | | 115,435 | | | 139,210 | |
| Net gain on sale of operating assets | (22,030) | | | 0 | | | (3,200) | |
| Long-lived asset impairment | 5,114 | | | 9,220 | | | 0 | |
| Gain on sale of a cost method investment | 0 | | | 0 | | | (69,373) | |
| | | | | |
| Deferred income taxes | (42,242) | | | (16,252) | | | 31,708 | |
| Change in current assets and liabilities, net of acquisitions of businesses: | | | | | |
| Accounts receivable, net | (32,576) | | | 39,681 | | | (94,918) | |
| Inventories, net | (75,501) | | | (74,773) | | | (60,039) | |
| Uniforms and other rental items in service | (35,659) | | | 12,773 | | | (90,228) | |
Prepaid expenses and other current assets and capitalized
contract costs | (102,600) | | | (110,248) | | | (100,765) | |
| Accounts payable | (2,604) | | | 2,629 | | | 12,276 | |
| Accrued compensation and related liabilities | 113,769 | | | (26,476) | | | 15,321 | |
| Accrued liabilities and other | (6,735) | | | 49,906 | | | 30,910 | |
| Income taxes, current | (49,150) | | | 34,498 | | | 11,886 | |
| Net cash provided by operating activities | 1,360,740 | | | 1,291,483 | | | 1,067,862 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (143,470) | | | (230,289) | | | (276,719) | |
| | | | | |
| Purchase of marketable securities and investments | (4,299) | | | (10,031) | | | (17,841) | |
| Proceeds from sale of operating assets, net of cash disposed | 31,705 | | | 13,300 | | | 3,200 | |
| Proceeds from sale of a cost method investment | 0 | | | 0 | | | 73,342 | |
| | | | | |
| Acquisitions of businesses, net of cash acquired | (10,038) | | | (53,720) | | | (9,813) | |
| Other, net | (11,113) | | | (4,658) | | | (7,807) | |
| Net cash used in investing activities | (137,215) | | | (285,398) | | | (235,638) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| (Payments) issuance of commercial paper, net | 0 | | | (112,500) | | | 112,500 | |
| Proceeds from issuance of debt | 0 | | | 0 | | | 200,000 | |
| Repayment of debt | 0 | | | (200,000) | | | 0 | |
| Proceeds from exercise of stock-based compensation awards | 129,957 | | | 90,519 | | | 65,371 | |
| Dividends paid | (451,327) | | | (267,956) | | | (220,764) | |
| Repurchase of common stock | (554,121) | | | (464,518) | | | (1,016,300) | |
| Other, net | (4,377) | | | (752) | | | (14,112) | |
| Net cash used in financing activities | (879,868) | | | (955,207) | | | (873,305) | |
| Effect of exchange rate changes on cash and cash equivalents | 4,581 | | | (2,121) | | | (998) | |
| Net increase (decrease) in cash and cash equivalents | 348,238 | | | 48,757 | | | (42,079) | |
| Cash and cash equivalents at beginning of year | 145,402 | | | 96,645 | | | 138,724 | |
| Cash and cash equivalents at end of year | $ | 493,640 | | | $ | 145,402 | | | $ | 96,645 | |
See accompanying notes.
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Business description. Cintas Corporation (collectively with its majority-owned subsidiaries and any entities over which it has control, Cintas)Cintas, Company, we, us or our) helps more than one million1000000 businesses of all types and sizes, primarily in North America,the United States (U.S.), as well as Canada and Latin America, Europe and Asia, get Ready™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,mats, mops, restroom supplies, first aid and safety products, fire extinguishers and testing, and safety and compliance training, Cintas helps customers get Ready for the Workday™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.
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 will operate within
Cintas’ reportable operating segments are the Uniform Rental and Facility Services operating segment. To financesegment and 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.
U.S. Generally Accepted Accounting Principles (U. S. GAAP) requires companies to evaluate their reportable operating segments periodically and when certain events occur. As a result of our evaluation in fiscal 2016, effective June 1, 2015, Cintas realigned its organizational structure and updated its reportable operating segments in light of certain changes in its business, including the acquisition of ZEE Medical Inc. (ZEE) in the first quarter of fiscal 2016. Cintas’ updated reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety
Services.Services operating segment. The Uniform Rental and Facility Services reportable operating segment,
which includes G&K, 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,operating segments, which consists of
the Fire Protection Services
operating segment and
itsthe Uniform Direct Sale
business, isoperating segment, are included in All Other. Cintas evaluates operating segment performance based on revenue and income before income taxes. Revenue and income before income taxes for each of these reportable operating segments for the years ended May 31,
2017, 20162021, 2020 and
20152019 are presented in
Note 14 entitled Operating Segment Information. The Company regularly reviews its operating segments for reporting purposes based on the information its chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance and makes changes when appropriate.At May 31, 2017, Cintas
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, and has classifiedsince spread globally. In March 2020, the World Health Organization characterized COVID-19 as a significant business, referredpandemic. Efforts to contain the spread of COVID-19 intensified during our fiscal 2020 fourth quarter and have remained in effect throughout our fiscal 2021. Most states and municipalities within the U.S., as "Discontinued Services,"well as held for sale. Prior to meeting the held for sale criteria, Discontinued Services was primarily includedCanada, enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in All Other. In fiscal 2014, Cintas completed its partnership transaction with the shareholders of Shred-it International Inc. to combine Cintas' shredding business (Shredding) with the shredding business of Shred-it International Inc. (the Shredding Transaction). Pursuantresponse to the Shredding Transaction,COVID-19 pandemic. Many of the newly formed partnership (the Shred-it Partnership)business closures, quarantine orders and other restrictive measures remained in place through fiscal 2021. Within the U.S., our business was owned 42% by Cintasdesignated an essential business, which allowed us to continue to serve customers that remained open. In these consolidated financial statements and 58% byrelated disclosures, we have assessed the shareholderscurrent impact of Shred-it International Inc. Cintas' investment in the Shred-it Partnership (Shred-it) and theCOVID-19 on our consolidated financial condition, results of Shredding are classifiedoperations, and cash flows, as discontinued operations for all periods presentedwell as a resultour estimates and accounting policies. We have made additional disclosures of sellingthese assessments, as necessary. The impact of the investment during fiscal 2016. During fiscal 2015, Cintas soldCOVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot predict the storageextent to which our business, (Storage) and, as a result, its operations are also classified as discontinued operations for all periods presented. In accordance with the applicable accounting guidance for the disposal of long-lived assets and discontinued operations, theconsolidated results of Discontinued Services, Shredding and Storage have been excluded from both continuing operations, and operating segment results for all periods presented. See Note 16 entitled Discontinued Operations for additional information.consolidated financial condition or liquidity will ultimately be impacted.
Principles of consolidation. The consolidated financial statements include the accounts of Cintas controlled majority-owned subsidiaries and any entities over which Cintas has control. Intercompany balances and transactions have been eliminated as appropriate.
Consolidated Financial statement presentation. We have reclassified certain prior-year amounts, primarily related to discontinued operations, to conform to the current year’s presentation.
Use of estimates. The preparation of consolidated financial statements in conformity with U.S. GAAPgenerally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company’s results are affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, government policies surrounding the containment of COVID-19 and changes in the prices of raw materials, can have a significant effect on operations. These factors and other events couldmay cause actual results to differ from management's estimates.
Revenue recognition. Rental revenue, which is recorded in the Uniform Rental and Facility Services reportable operating segment, is recognized when services are performed.performed or the performance obligation under the terms of a contract with a customer are satisfied. Other revenue, which is recorded in the First Aid and Safety Services reportable operating segment and All Other, is recognized when either services are performed or when productsthe performance obligation under the terms of a contract with a customer are shipped andsatisfied. Revenue is measured as the title and risksamount of ownership passconsideration we expect to receive in exchange for the customer.performance of the service or transfer of the inventory. See Note 2 entitled Revenue Recognition.
Cost of uniform rental and facility services. 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. The Uniform Rental and Facility Services reportable operating segment inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution are included in the cost of uniform rental and facility services.
Cost of other. 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 includes inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution.
Selling and administrative expenses. Selling and administrative expenses consist primarily of sales labor and commissions, management and administrative labor, payroll taxes, medical expense, insurance expense, legal and professional costs and amortization of finite-lived intangible assets.assets and capitalized contract costs. As a result of the adverse impact that the COVID-19 pandemic has had on the economic environment in North America and the ongoing uncertainty regarding the severity and duration of the pandemic, Cintas initiated certain activities to reduce operating costs and better align its workforce with the needs of its ongoing business. During the fourth quarter of fiscal 2020, Cintas recorded a total of $24.5 million in employee termination costs, of which $20.2 million was recorded in the Uniform Rental and Facility Services reportable operating segment. The amount of employee termination benefits paid during the fiscal year ended May 31, 2021 and 2020 was $10.2 million and $14.3 million, respectively. The related liability balance was $0.0 million at May 31, 2021 and was $10.2 million at May 31, 2020. The May 31, 2020 liability balance was recorded in accrued compensation and related liabilities on the consolidated balance sheets. Cintas did 0t record employee termination costs during fiscal 2021.
G&K transaction andServices, Inc. integration expenses. As a result of the acquisition of G&K Services, Inc. (G&K) in fiscal 2017, the Company incurred various transaction and integration expenses in fiscal 2019, which relaterelated primarily to asset impairment charges, legalfacility closure expenses. No such costs were incurred in fiscal 2021 or 2020. The integration expenses for fiscal 2019 are included in a single line in the consolidated statements of income and professional fees, employee termination expenses, the write-off of excess inventory and other miscellaneous expenses. See are reported by operating segment in Note 1714 entitled G&K Transaction and Integration Expenses.Operating Segment Information.
Cash and cash equivalents. Cintas considers all highly liquid domestic investments with a maturity of three months or less, at date of purchase, to be cash equivalents. At both May 31, 20172021 and 2016,2020, cash and cash equivalents includes $30.6$31.8 million and $50.6 million, respectively, of restricted cash used as collateral associated with the generalour insurance program.reserve.
Marketable securities. Marketable securities are typically comprised of fixed income securities and are classified as available-for-sale.
Accounts receivable.Accounts receivable is comprised of amounts owed through product shipments and services provided and is presented net of an allowance for doubtful accounts. The allowance isincludes both an estimate, based on historical rates of collections, and allowancesreserves 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. As of May 31, 2020, in response to the economic disruption created by the COVID-19 pandemic, Cintas performed an additional evaluation of amounts due from customers in every operating segment that were deemed to be higher collection risk. This evaluation, which occurred in the fourth quarter of fiscal 2020, resulted in an allowance for doubtful accounts in excess of historical rates. The judgment applied to increase the allowance for doubtful accounts beyond our historical policy was deemed to be reasonable and supportable based on the data available as of the consolidated balance sheet date. Certain of the corresponding trade receivables were collected during fiscal 2021, and $14.2 million of incremental allowance for doubtful accounts recorded as of May 31, 2020 was reversed through selling and administrative expenses as the Company's estimates and assumptions related to the impact of COVID-19 changed
during fiscal 2021. As of May 31, 2021, no incremental allowance for doubtful accounts was deemed necessary. When an account is considered uncollectible, it is written off against the allowance for doubtful accounts.
Inventories.
Inventories, net. Inventories are valued at the lower of cost (first-in, first-out) or market. Cintas applies a commonly accepted practice of using inventory turns to apply variances between actual and standard costs to the inventory balances. The judgments and estimates used to calculate inventory turns will have an impact on the valuation of inventories at the lower of cost or market.net realizable value. Inventory is comprised of the following amounts at May 31:
| | | | | | | | | | | |
| (In thousands) | 2021 | | 2020 |
| | | |
| Raw materials | $ | 15,109 | | | $ | 18,661 | |
| Work in process | 37,664 | | | 29,497 | |
| Finished goods | 429,024 | | | 360,740 | |
| $ | 481,797 | | | $ | 408,898 | |
|
| | | | | | | |
| (In thousands) | 2017 | | 2016 |
| | | | |
| Raw materials | $ | 17,528 |
| | $ | 17,794 |
|
| Work in process | 17,951 |
| | 14,731 |
|
| Finished goods | 242,739 |
| | 216,837 |
|
| | $ | 278,218 |
| | $ | 249,362 |
|
Inventories are recorded net of reserves for obsolete inventory (excess and slow-moving) of $38.3$111.0 million and $32.7$45.5 million at May 31, 20172021 and 2016,2020, respectively. The inventory obsolescence reserve is determined by specific identification, as well as an estimate based on Cintas' historical rates of obsolescence. The increasedisruption created by the COVID-19 pandemic beginning in the reserve duringfourth quarter of fiscal 2017 is related to2020 resulted in larger quantities of inventory on hand as of May 31, 2021 and 2020. As of May 31, 2021, our Uniform Rental and Facility Services and First Aid and Safety reportable operating segments held an excess amount of personal protective equipment inventory on hand. The excess inventory, obtaineddetermined through specific identification, resulted in an increase to the G&K acquisition.obsolescence reserve of $43.6 million as of May 31, 2021, in comparison to May 31, 2020. As of May 31, 2020, an incremental obsolescence reserve was recorded within our Uniform Direct Sales operating segment due to larger quantities of inventory remaining on hand, at the consolidated balance sheet date, as a result of disruption created by the onset of the COVID-19 pandemic. Obsolete inventory reserves are recorded in selling and administrative expenses on the consolidated statements of income. The judgment applied to increase the obsolete inventory reserve as of May 31, 2021 and 2020, beyond our historical policy was deemed to be reasonable and supportable based on the data available as of the consolidated balance sheet dates. 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.
Uniforms and other rental items in service. These items are valued at cost less amortization, calculated using the straight-line method. Uniforms in service (other than cleanroom and flame resistant clothing) are amortized over their useful life of 18 months. Uniforms acquired in the G&K acquisition will be amortized over 12 months. Other rental items, including shop towels, mats, mops, cleanroom garments, flame resistant clothing, linens and restroom dispensers, are amortized over their useful lives, which range from 8 to 60 months. The amortization rates used are based on industry experience, Cintas' specific experience and wear tests performed by Cintas. These factors are critical to determining the amount of in service inventory and related cost of uniforms and facility services that are presented in the consolidated financial statements.
Property and equipment. Property and equipment is stated at cost, less accumulated depreciation or at fair value upon acquisition. Depreciation is calculated using the straight-line method primarily over the following estimated useful lives of the assets based on industry and Cintas specific experience, in years:
| | | | | |
| Years |
| |
| Buildings | 30 to 40 |
| Building improvements | 5 to 20 |
| Equipment | 3 to 10 |
| Leasehold improvements | 2 to 15 |
Investments. Investments consists primarily of the cash surrender value of life insurance policies and equity method investments. The equity method is used to account for an investment if our investment gives us the ability to exercise significant influence over the operating and financial policies of the investee. In general, equity method investments are initially measured at cost. However, an equity method investment resulting from a transaction in which a controlled group of assets that constitutes a business is deconsolidated is initially measured at fair value. Cintas recognizes its share of the investee’s earnings or losses in income. Cintas also adjusts its share of the investee's earnings for intra-entity transactions, basis differences, investee capital transactions and other comprehensive income through income or other comprehensive income as appropriate. Equity method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable.
Long-lived assets.When events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the estimated undiscounted future cash flows are compared to the carrying amount of the assets. If the estimated undiscounted future cash flows are less than the carrying amount of the assets, an impairment loss is recorded based on the excess of the carrying amount of the assets over their respective fair values. Fair value is generally determined by discounted cash flows, prices of similar assets or third partythird-party real estate valuations, as appropriate. As a result of the identification of certain G&K plantsactivities to eliminate excess capacity and branches for future closure,reduce our cost structure in response to COVID-19, an indicator of potential impairment was identified. Cintas recognized an impairment loss of $23.3$9.2 million in the Uniform Rental and Facility Services reportable operating segment during the year ended May 31, 2017,2020. Cintas recognized a long-lived asset impairment loss of $5.1 million in the Uniform Direct Sale operating segment during the year ended May 31, 2021. The long-lived asset impairments in both fiscal years were based on the excess of the carrying amount of
asset over their respective fair values. The long-lived asset impairment charge was recorded within selling and administrative expenses on the consolidated statements of income. The undiscounted cash flows used to test recoverability were performed,estimated, using Level 2 inputs based on both the cost and market approaches, at the lowest discernible level of cash flows, which is at the location level. Cintas did not identify any indicators of impairment for the yearsfiscal year ended May 31, 20162019.
Investments. Investments consists primarily of the cash surrender value of life insurance policies and 2015.equity method investments. The equity method is used to account for an investment if our investment gives us the ability to exercise significant influence over the operating and financial policies of the investee. In general, equity method investments are initially measured at cost. Cintas recognizes its share of the investee’s earnings or losses in income. Equity method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable.
Goodwill. Goodwill, obtained through acquisitions of businesses, is valued at cost less any impairment. Cintas completes an annual impairment test, which may includethat includes an assessment of qualitative factors including, but not limited to, macroeconomic conditions, industry and market conditions, and entity specific factors such as strategies and financial performance. The test may also include the determination of the estimated fair value of Cintas' reporting units via comparisons to current market values, where available, and discounted cash flow analyses. Significant assumptions may include growth rates based on historical trends and margin improvement leveraged from such growth, as well as discount rates. We determine discount rates separately for each reporting unit using the weighted average cost of capital, which includes a calculation of cost of equity, which is developed using the capital asset pricing model and comparable company betas (a measure of systemic risk), and cost of debt. We also use comparable market earnings multiple data and our market capitalization to corroborate our reporting unit valuations. We test for goodwill impairment at the reporting unit level. As a result of Cintas’ operating segment realignment in fiscal 2016 and the acquisition of G&K in fiscal 2017, the composition of Cintas’ reporting units for the evaluation of goodwill impairment has changed. Cintas has identified six4 reporting units for purposes of evaluating goodwill impairment: Uniform Rental and Facility Services, G&K Services Uniform Rental and Facility Services, First Aid and Safety Services and threetwo reporting units within All Other. Given the proximity of the G&K acquisition date to the consolidated balance sheet date, the Company
performed a high level qualitative analysis for its G&K reporting unit, which considered indicators of impairment to evaluate whether the fair value was more-likely-than-not in excess of its carrying value. The key indicators considered include macroeconomic conditions, industry/market considerations, financial performance, cash flow, changes in management, and composition of net assets. Based on the results of the annual impairment tests, Cintas was not required to recognize an impairment of goodwill for the fiscal years ended May 31, 2017, 20162021, 2020 or 2015.2019. Cintas will continue to perform impairment tests as of March 1 in future years and when indicators of impairment exist.
Service contracts and other assets. Service contracts and other assets, which consist primarily of capitalized contract costs and noncompete and consulting agreements obtained through acquisitions of businesses, are generally amortized by use of the straight-line method over the estimated lives of the agreements, which are generally 5 to 10 years. The G&K service contract asset will beis being amortized over a period of 15 years, which represents the estimated life of the economic benefit and thebenefit. The G&K service contract asset amortization is based on the annual economic value of the underlying asset which generally decreases over the 15-year term. Certain noncompete agreements, as well as all service contracts, require that a valuation be determined using a discounted cash flow model. The assumptions and judgments used in these models involve estimates of cash flows and discount rates, among other factors. Because of the assumptions used to value these intangible assets, actual results over time could vary from original estimates. Impairment of service contracts and other assets is accomplished through specific identification. NoNaN impairment has been recognized by Cintas for the fiscal years ended May 31, 2017, 20162021, 2020 and 2015.2019.
Business Combinations. Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income. See Note 9 entitled Acquisitions and Divestitures for a discussion of the G&K and ZEE Acquisitions.
Debt Issuance Costs. issuance costs. Debt issuance costs for the revolving credit facility are included in other assets, net and all other debt issuance costs reduce the carrying amount of long-term debt.
Accrued liabilities. Current accrued liabilities are recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated. Current accrued liabilities includeconsist of the following amounts at May 31:
| | | | | | | | | | | |
| (In thousands) | 2021 | | 2020 |
| | | |
| Insurance reserve | $ | 156,447 | | | $ | 165,427 | |
| Employee benefit related liabilities | 129,348 | | | 134,846 | |
| Dividends | 79,135 | | | 0 | |
| Accrued interest | 24,420 | | | 24,538 | |
| Other | 129,560 | | | 131,842 | |
| $ | 518,910 | | | $ | 456,653 | |
Long-term accrued liabilities consist primarily of retirement obligations, which are described in more detail in Note 10 entitled Employee Benefit Plans, interest rate lock agreements, which are described in more detail in Note 7 entitled Debt and Derivatives, reserves associated with unrecognized tax benefits, which are described in more detail in Note 9 entitled Income Taxes and environmental obligations, which are further described below.
|
| | | | | | | |
| (In thousands) | 2017 | | 2016 |
| | | | |
| General insurance liabilities | $ | 153,743 |
| | $ | 128,759 |
|
| Employee benefit related liabilities | 110,104 |
| | 75,587 |
|
| Taxes and related liabilities | 8,057 |
| | 5,765 |
|
| Accrued interest | 36,638 |
| | 26,682 |
|
| Other | 121,267 |
| | 106,473 |
|
| | $ | 429,809 |
| | $ | 343,266 |
|
GeneralInsurance reserve. The insurance liabilities representreserve represents the estimated ultimate cost of all asserted and unasserted claims incurred, primarily related to workers' compensation, auto liability and other general liability exposure through the consolidated balance sheet dates. Our reserves areincurred but not reported reserve is estimated through actuarial procedures, with the assistance of third-party actuarial specialists, of the insurance industry and by using industry assumptions, adjusted for specific expectations based on our claims history. Cintas records an increase or decrease in selling and administrative expenses related to development of prior claims, higher claims activity and other environmental factors in the period in which it becomes known. These changes in estimates may be material to the consolidated financial statements. The increase
Environmental obligations. Environmental obligations, including obligations obtained through past business acquisitions, are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. Cintas’ environmental obligations are estimated based on an evaluation of various factors, including currently available facts, existing technology, presently enacted laws and regulations, and remediation experience. Where the available information is sufficient to estimate the amount of the obligation, that estimate has been recorded. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. Management actively monitors all locations for compliance and changes in accrued liabilities from May 31, 2016facts and circumstances. No one location or site is deemed to May 31, 2017 is primarily relatedbe material or in violation of the applicable laws and regulations, even though costs are being incurred. Costs estimated for environmental obligations are not discounted to the acquisition of G&K.their present value.
Long-term accrued liabilities consists primarily of reserves associated with unrecognized tax benefits, which are described in more detail in Note 8 entitled Income Taxes, and retirement obligations, which are described in more detail in Note 10 entitled Employee Benefit Plans.
Pension Plans.plans. The Company assumed G&K's noncontributory, defined benefit pension plan (the Pension Plan) covering substantially all employees who were employed as of July 1, 2005, except certain employees who are covered by union-administered plans. Benefits are based on the number of years of service and each employee's compensation near retirement. G&K froze the Pension Plan effective December 31, 2006. Future growth in benefits will not occur after this date. The Company's funding policy provides for contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at May 31, the measurement date. The benefit obligation is the projected benefit 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 fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants. These valuations reflect the terms of the Pension Plan and use participant-specific information such as compensation, age and years of service, as well as certain assumptions that require significant judgment, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. We recognize, as of a measurement date, any unrecognized actuarial net gains or losses that exceed 10%ten percent of the larger of the projected benefit obligations or the plan assets, defined as the "corridor." Amounts insideoutside the corridor are amortized over the plan participants' life expectancy. We determine the expected return on assets using the fair value of plan assets. See Note 10 entitled Employee Benefit Plans.
Stock-based compensation. Compensation expense is recognized for all share-based payments to employees, including stock options and restricted stock awards, in the consolidated statements of income based on the fair value of the awards that are granted. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model. MeasuredGenerally, measured compensation cost, net of actual forfeitures, is recognized on a straight-line basis over the vesting period of the related share-based compensation award. See Note 12 entitled Stock-Based Compensation.
Derivatives and hedging activities. Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Derivatives are recorded at fair value on the consolidated balance sheet, and gains and losses are recorded as adjustments to income or other comprehensive income, as appropriate. For derivative financial instruments that are designated as a hedge, unrealized gains and losses related to the effective portion are either recognized in income immediately to offset the realized gain or loss on the hedged item, or are deferred and reported as a component of other comprehensive income (loss) in stockholders'shareholders' equity and subsequently recognized in net income when the hedged item affects net income. The change in fair value of the ineffective portion of a derivative financial instrument is recognized in net income immediately.
Income taxes. The provision for income taxes includes taxes paid, currently payable or receivable and those deferred. Deferred tax assets and liabilities are determined by the differences between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in future periods. Cintas accounts for Global Intangible
Low-Taxed Income (GILTI) as a current-period expense when incurred. See Note 89 entitled Income Taxes for the types of items that give rise to significant deferred income tax assets and liabilities. Deferred income taxes are classified as assets or liabilities based on the classification of the related asset or liability for financial reporting purposes. Cintas regularly reviews deferred tax assets for recoverability based upon projected future taxable income and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, as adjusted for valuation allowances, will be realized.
Accounting for uncertain tax positions requires the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Companies may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Cintas is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, Cintas records reserves as deemed appropriate. Based on Cintas' evaluation of current tax positions, Cintas believes its tax related accruals are appropriate.
Litigation and other contingencies. Cintas is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract, environmental and employment claims. U.S. GAAP requires that a liability for contingencies be recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated. 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 or consolidated results of operations of Cintas.
Fair value measurements. Financial Accounting Standards Board (FASB) Accounting StandardStandards Codification (ASC) Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. It also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
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| | | | |
| Level 1 — | Quoted prices in active markets for identical assets or liabilities. |
| |
| Level 2 — | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| |
| Level 3 — | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Cintas' assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between levels for the years ended May 31, 20172021 or 2016.2020. The carrying value of accounts receivable and accounts payable, and other current assets and liabilities, approximate fair value because of the short-term maturity of those instruments.
In order to meet the requirements of ASC 820, Cintas utilizes two basic valuation approaches to determine the fair value of its assets and liabilities required to be recorded on a recurring basis at fair value. The first approach is the cost approach. The cost approach is generally the value a market participant would expect to replace the respective
asset or liability. The second approach is the market approach. The market approach looks at what a market participant would consider valuing an exact or similar asset or liability to that of Cintas, including those traded on exchanges.
Cintas' non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis primarily relate to assets revalued in an impairment analysis and to assets and liabilities acquired in a business acquisition unless otherwise noted in Note 23 entitled Fair Value Disclosures. 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 non-recurring basis (including business acquisitions). Based on the nature of Cintas' business acquisitions, which occur regularly throughout the fiscal year, the majority of the assets acquired and liabilities assumed consist of working capital, primarily valued using Level 2 inputs, property and equipment, also primarily valued using Level 2 inputs and goodwill and other identified intangible assets valued using Level 3 inputs. In general, non-recurring fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows and company specific discount rates.
New accounting pronouncements. In April 2014,2019, the FASB issued Accounting StandardStandards Update (ASU) 2014-08, “Reporting Discontinued Operations and Disclosures2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Disposals of Components of an Entity,Credit Losses on Financial Instruments.” which amended accounting guidance related toASU 2016-13 replaces the reporting of discontinued operations and disclosures of disposals of components of an entity. The amended guidance changes the thresholds for disposals to qualify as discontinued operationsincurred loss impairment methodology with a methodology that reflects expected credit losses and requires additional disclosures. This guidance is effective for reporting periods beginning after December 15, 2014consideration of a broader range of reasonable and is requiredsupportable information to be applied prospectively.inform credit loss estimates. In connection with recognizing credit losses on accounts receivable and other financial instruments, Cintas adopted ASU 2014-08 duringnow uses a forward-looking expected loss model rather than the quarter ended August 31, 2015 and applied the amended accounting guidance to Shred-it and will apply it to future transactions, as appropriate.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," to clarify revenue recognition principles. This guidance is intended to improve disclosure requirements and enhance the comparability of revenue recognition practices. Improved disclosures under the amended guidance relate to the nature, amount,
timing and uncertainty of revenue that is recognized from contracts with customers. This guidance will be effective for reporting periods beginning after December 15, 2017 and will be required to be applied retrospectively. Early application of the amendments in this update is not permitted. 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. Cintas plans to adopt the standard as of the first quarter of fiscal year 2019 using the modified retrospective approach and will record a cumulative adjustment to equity for open contracts as of June 1, 2018. Cintas is continuing to evaluate the impactincurred loss model. Adoption of ASU 2014-09 and an estimate of the impact to the consolidated financial statements cannot be made at this time.
In April 2015, the FASB issued ASU 2015-17, “Balance Sheet Classifications of Deferred Taxes,” which amended accounting guidance related to the presentation of deferred tax liabilities and assets. The amended guidance2016-13 requires that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. This guidance is effective for reporting periods beginning after December 15, 2016; however, early adoption is permitted. This guidance can also be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Cintas adopted ASU 2015-17 during the quarter ended November 30, 2015 and has applied this amended accounting guidance to its deferred tax liabilities and assets for all periods presented.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the consolidated condensed balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim periods beginning after December 15, 2015. The guidance is applied retrospectively and early adoption is permitted. Cintas adopted ASU 2015-03 during the quarter ended August 31, 2016 and has applied this amended accounting guidance to its long-term debt and other assets for all periods presented. The impact of this change in accounting principle on balances previously reported as of May 31, 2016 was a reclassification of $5.6 million from other assets to debt due after one year within long-term liabilities.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments.” This amendment eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. This amendment became effective for Cintas beginning June 1, 2016, and was adopted prospectively in accordance with the standard. The adoption of this amendment did not have an effect on our consolidated financial statements for the fiscal year ended May 31, 2017.
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, ASC 840, Leases. This guidance is effective for reporting periods beginning after December 15, 2018; however, early adoption is permitted. Entities are required to useusing a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Cintas is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 is intended to simplify accounting for share-based payments. Upon adoption, ASU 2016-09 will require that excess tax benefits for share-based payments be recorded as a reduction of income tax expense and reflected within operating cash flows rather than being recorded within equity and reflected within financing cash flows. The standard also permits the repurchase of more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. This update is effective for interim and annual periods beginning after December 15, 2016; however, early adoption is permitted. Cintas adopted ASU 2016-09 during the quarter ended August 31, 2016 and elected to make an accounting policy change to recognize forfeitures as they occur. The adoption impact on the consolidated
balance sheet wasthrough a cumulative-effect adjustment of $26.7 million, increasing openingto retained earnings as of the effective date to align existing credit loss methodology with the new standard. This standard was adopted by Cintas on June 1, 2020 and decreasing paid-in capital.
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 continues to require 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 statement of income and changes the presentation of other components of net benefit cost so that these items will be presented outside of operating income within the consolidated statements of income. Cintas plans to adopt ASU 2017-07 in fiscal 2018 and apply it prospectively. Cintas doesdid not expect the adoption of ASU 2017-07 to have a material impact on itsthe Company's consolidated financial statements.
No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the consolidated financial statements.
Note 2. Revenue Recognition
The following table presents Cintas' total revenue disaggregated by operating segment for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2021 | | | 2020 | | | 2019 |
| | | | | | | | | | |
| | | | | | | | | | |
Uniform Rental and Facility
Services | $ | 5,689,632 | | 80.0 | % | | | $ | 5,643,494 | | 79.6 | % | | | $ | 5,552,430 | | 80.6 | % |
| First Aid and Safety Services | 784,291 | | 11.0 | % | | | 708,569 | | 10.0 | % | | | 619,470 | | 9.0 | % |
| Fire Protection Services | 446,441 | | 6.3 | % | | | 422,688 | | 6.0 | % | | | 405,467 | | 5.9 | % |
| Uniform Direct Sales | 195,976 | | 2.7 | % | | | 310,369 | | 4.4 | % | | | 314,936 | | 4.5 | % |
| Total revenue | $ | 7,116,340 | | 100.0 | % | | | $ | 7,085,120 | | 100.0 | % | | | $ | 6,892,303 | | 100.0 | % |
Fire Protection Services and Uniform Direct Sales operating segments are included within All Other as disclosed in Note 14 entitled Operating 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. Revenue from our route servicing customer contracts represent a single-performance obligation. The Company recognizes revenue 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 fiscal years ended May 31, 2021, 2020 or 2019. The Company reassesses these estimates during each reporting period. Cintas maintains a liability for these discounts and rebates within accrued liabilities on the consolidated 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 ASU 2014-08, "Revenue from Contracts with Customers (Topic 606)." These assets are included in other assets, net on the consolidated balance sheets.
Additionally, in accordance with Topic 606, 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.
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 Topic 606, 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 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 new 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 balance sheets. As of May 31, 2021 the current and noncurrent assets related to deferred commissions totaled $79.4 million and $227.1 million, respectively. As of May 31, 2020 the current and noncurrent assets related to deferred commissions totaled $76.2 million and $227.1 million, respectively. We recorded amortization expense related to deferred commissions of $83.1 million, $77.8 million and $71.1 million during the fiscal years ended May 31, 2021, 2020 and 2019, respectively. These expenses are classified in selling and administrative expenses on the consolidated statements of income.
Note 3. Fair Value Disclosures
All financial instruments that are measured at fair value on a recurring basis (at least annually) have been segregated intoclassified within the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the consolidated balance sheet date. These financial instruments measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of May 31, 2021 |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Fair Value |
| | | | | | | |
| Cash and cash equivalents | $ | 493,640 | | | $ | 0 | | | $ | 0 | | | $ | 493,640 | |
| Other assets, net: | | | | | | | |
| Interest rate lock agreements | 0 | | | 40,400 | | | 0 | | | 40,400 | |
| | | | | | | |
| Total assets at fair value | $ | 493,640 | | | $ | 40,400 | | | $ | 0 | | | $ | 534,040 | |
| | | | | | | |
| Long-term accrued liabilities: | | | | | | | |
| Interest rate lock agreements | $ | 0 | | | $ | 61,567 | | | $ | 0 | | | $ | 61,567 | |
| Total liabilities at fair value | $ | 0 | | | $ | 61,567 | | | $ | 0 | | | $ | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of May 31, 2020 |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Fair Value |
| | | | | | | |
| Cash and cash equivalents | $ | 145,402 | | | $ | 0 | | | $ | 0 | | | $ | 145,402 | |
| Other assets, net: | | | | | | | |
| Interest rate lock agreements | 0 | | | 1,546 | | | 0 | | | 1,546 | |
| | | | | | | |
| | | | | | | |
| Total assets at fair value | $ | 145,402 | | | $ | 1,546 | | | $ | 0 | | | $ | 146,948 | |
| | | | | | | |
| Long-term accrued liabilities: | | | | | | | |
| Interest rate lock agreements | $ | 0 | | | $ | 165,686 | | | $ | 0 | | | $ | 165,686 | |
| Total liabilities at fair value | $ | 0 | | | $ | 165,686 | | | $ | 0 | | | $ | 165,686 | |
|
| | | | | | | | | | | | | | | |
| | As of May 31, 2016 |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Fair Value |
| | | | | | | | |
| Cash and cash equivalents | $ | 139,357 |
| | $ | — |
| | $ | — |
| | $ | 139,357 |
|
| Marketable securities: | | | | | | | |
| Canadian treasury securities | — |
| | 70,405 |
| | — |
| | 70,405 |
|
| Total assets at fair value | $ | 139,357 |
| | $ | 70,405 |
| | $ | — |
| | $ | 209,762 |
|
| | | | | | | | |
| Long-term accrued liabilities: | | | | | | | |
| Interest rate lock agreement | $ | — |
| | $ | 19,628 |
| | $ | — |
| | $ | 19,628 |
|
| Total liabilities at fair value | $ | — |
| | $ | 19,628 |
| | $ | — |
| | $ | 19,628 |
|
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 types of financial instruments Cintas classifies within Level 2 are primarily high grade domestic commercial paper and Canadian treasury securities (federal). The valuation technique used for Cintas’ marketable securities classified within Level 2 of the fair value hierarchy is primarily the market approach. 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 to the inherent volatility in the investment market, there is at least a possibility that recorded investment values may change in the near term.
The funds invested in Canadian treasury securities are not presently expected to be repatriated, but instead are expected to be invested indefinitely in foreign subsidiaries. Interest, realized gains and losses and declines in value determined to be other than temporary on available-for-sale securitiesfair values of outstanding interest rate lock agreements are included in interest income or expense. The cost of the securities sold is based on the specific identification method. The amortized cost basis of marketable securities as of May 31, 2017other assets, net and 2016 was $22.2 million and $70.4 million, respectively. Purchases of marketable securities were $171.3 million, $488.8 million and $179.2 million for the fiscal years ended May 31, 2017, 2016 and 2015, respectively. All outstanding marketable securities as of May 31, 2017 and 2016 had contractual maturities due within one year.
As of May 31, 2016, long-term accrued liabilities include interest rate lock agreements.at both May 31, 2021 and 2020. The fair valuevalues 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 interest rate lock agreements outstanding at May 31, 2016 were settled during fiscal 2017. Allfair value was determined by comparing the locked rates against the benchmarked treasury rate. No other amounts included in other asset, net or long-term accrued liabilities are not recorded at fair value.value on 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 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. Cintas' acquisition of G&K in fiscal 2017The assets and ZEE in fiscal 2016 were recordedliabilities measured at fair value. See Note 9 entitled Acquisitionsvalue on a nonrecurring basis primarily relate to assets revalued in an impairment analysis and Divestitures for additional information on the measurement of the G&K and ZEE assets acquired and liabilities assumed.acquired in a business acquisition.
3.
Note 4. Property and Equipment
Cintas' property and equipment is summarized as follows at May 31: | | | (In thousands) | 2017 | | 2016 | (In thousands) | 2021 | | 2020 |
| | | | | |
| Land | $ | 173,166 |
| | $ | 117,881 |
| Land | $ | 190,711 | | | $ | 188,720 | |
| Buildings and improvements | 624,615 |
| | 509,193 |
| Buildings and improvements | 698,094 | | | 682,768 | |
| Equipment | 1,930,018 |
| | 1,582,793 |
| Equipment | 2,409,785 | | | 2,347,636 | |
| Leasehold improvements | 32,679 |
| | 28,412 |
| Leasehold improvements | 38,320 | | | 40,188 | |
| Construction in progress | 79,400 |
| | 173,367 |
| Construction in progress | 36,749 | | | 54,548 | |
| | 2,839,878 |
| | 2,411,646 |
| | 3,373,659 | | | 3,313,860 | |
| Less: accumulated depreciation | 1,516,377 |
| | 1,417,954 |
| |
| | $ | 1,323,501 |
| | $ | 993,692 |
| |
| Accumulated depreciation | | Accumulated depreciation | (2,055,221) | | | (1,910,795) | |
| Property and equipment, net | | Property and equipment, net | $ | 1,318,438 | | | $ | 1,403,065 | |
Investments are evaluated for impairment on an annual basis or when indicators of impairment exist. For fiscal years 2017, 20162021, 2020 and 2015, no2019, 0 impairment losses due to impairment were recorded.
Changes in the carrying amount of goodwill and service contracts by reportable operating segment and All Other, are as follows:presented in the following tables:
Cintas uses interest rate locks to manage its 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 2011,2012, fiscal 2013 and fiscal 2017. The amortization of the cash flow hedges resulted in an increasea decrease to other comprehensive income (loss) of $1.1$1.4 million, $2.0$1.4 million and $2.0$1.2 million in the fiscal years ended May 31, 2017, 20162021, 2020 and 2015,2019, respectively. During the third quarter of fiscal 2016,2020 and 2019, Cintas entered into an interest rate lock agreementagreements with a total notional value of $550.0$950.0 million and $500.0 million, respectively, for a forecasted debt issuance. Asissuances in connection with upcoming debt maturities.
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)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.
