QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2019
OR
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11399
CINTAS CORPORATION
(Exact name of Registrant as specified in its charter)
WASHINGTON
31-1188630
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
6800 CINTAS BOULEVARD
P.O. BOX 625737
CINCINNATI, OHIO 45262-5737
(Address of principal executive offices)(Zip code)
(513) 459-1200
(Registrant’s telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ü No _
Indicate by checkmark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ü No _
Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ü Accelerated Filer _ Non-Accelerated Filer _
Smaller Reporting Company _ Emerging Growth Company _
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. _
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No ü
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Income from discontinued operations, net of tax expense of $772, tax benefit of $6,157, tax expense of $768 and tax expense of $34,946, respectively
2,411
6,306
2,398
61,781
Net income
$
203,334
$
302,095
$
658,862
$
656,415
Basic earnings per share:
Continuing operations
$
1.89
$
2.73
$
6.10
$
5.50
Discontinued operations
0.02
0.06
0.02
0.57
Basic earnings per share
$
1.91
$
2.79
$
6.12
$
6.07
Diluted earnings per share:
Continuing operations
$
1.83
$
2.66
$
5.91
$
5.35
Discontinued operations
0.02
0.05
0.02
0.55
Diluted earnings per share
$
1.85
$
2.71
$
5.93
$
5.90
Dividends declared per share
$
2.05
$
1.62
$
2.05
$
1.62
See accompanying notes.
3
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
Nine Months Ended
February 28, 2019
February 28, 2018
February 28, 2019
February 28, 2018
Net income
$
203,334
$
302,095
$
658,862
$
656,415
Other comprehensive income (loss),
net of tax:
Foreign currency translation adjustments
5,025
2,374
(8,617
)
26,184
Change in fair value of interest rate lock
agreements
(8,183
)
—
(6,430
)
—
Amortization of interest rate lock agreements
(295
)
(294
)
(884
)
(638
)
Other comprehensive (loss) income
(3,453
)
2,080
(15,931
)
25,546
Comprehensive income
$
199,881
$
304,175
$
642,931
$
681,961
See accompanying notes.
4
CINTAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share data)
February 28, 2019
May 31, 2018
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
80,859
$
138,724
Accounts receivable, net
878,037
804,583
Inventories, net
339,805
280,347
Uniforms and other rental items in service
773,534
702,261
Income taxes, current
42,552
19,634
Prepaid expenses and other current assets
108,969
32,383
Total current assets
2,223,756
1,977,932
Property and equipment, net
1,424,063
1,382,730
Investments
191,818
175,581
Goodwill
2,847,783
2,846,888
Service contracts, net
508,402
545,768
Other assets, net
237,851
29,315
$
7,433,673
$
6,958,214
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
214,567
$
215,074
Accrued compensation and related liabilities
136,814
140,654
Accrued liabilities
425,470
420,129
Debt due within one year
217,500
—
Total current liabilities
994,351
775,857
Long-term liabilities:
Debt due after one year
2,536,958
2,535,309
Deferred income taxes
439,011
352,581
Accrued liabilities
283,861
277,941
Total long-term liabilities
3,259,830
3,165,831
Shareholders’ equity:
Preferred stock, no par value:
—
—
100,000 shares authorized, none outstanding
Common stock, no par value:
826,175
618,464
425,000,000 shares authorized
FY 2019: 184,559,502 shares issued and 104,932,029 shares outstanding
FY 2018: 182,723,471 shares issued and 106,326,383 shares outstanding
Paid-in capital
197,327
245,211
Retained earnings
6,465,121
5,837,827
Treasury stock:
(4,309,543
)
(3,701,319
)
FY 2019: 79,627,473 shares
FY 2018: 76,397,088 shares
Accumulated other comprehensive income
412
16,343
Total shareholders’ equity
3,179,492
3,016,526
$
7,433,673
$
6,958,214
See accompanying notes.
5
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Common Stock
Paid-In
Capital
Retained
Earnings
Other
Accumulated
Comprehensive
Income
Treasury Stock
Total
Shareholders'
Equity
Shares
Amount
Shares
Amount
Balance at June 1, 2018
182,723
$
618,464
$
245,211
$
5,837,827
$
16,343
(76,397
)
$
(3,701,319
)
$
3,016,526
Cumulative effect of change in accounting
principle
—
—
—
189,192
—
—
—
189,192
Net income
—
—
—
212,515
—
—
—
212,515
Comprehensive loss, net of tax
—
—
—
—
(6,482
)
—
—
(6,482
)
Dividends
—
—
—
1
—
—
—
1
Stock-based compensation
—
—
46,172
—
—
—
—
46,172
Vesting of stock-based compensation awards
739
151,012
(151,012
)
—
—
—
—
—
Stock options exercised, net of shares
surrendered
594
27,512
—
—
—
—
—
27,512
Repurchase of common stock
—
—
—
—
—
(689
)
(139,468
)
(139,468
)
Balance at August 31, 2018
184,056
$
796,988
$
140,371
$
6,239,535
$
9,861
(77,086
)
$
(3,840,787
)
$
3,345,968
Net income
—
—
—
243,013
—
—
—
243,013
Comprehensive loss, net of tax
—
—
—
—
(5,996
)
—
—
(5,996
)
Dividends
—
—
—
(220,792
)
—
—
—
(220,792
)
Stock-based compensation
—
—
28,612
—
—
—
—
28,612
Vesting of stock-based compensation awards
11
2,146
(2,146
)
—
—
—
—
—
Stock options exercised, net of shares
surrendered
86
5,100
—
—
—
—
—
5,100
Repurchase of common stock
—
—
—
—
—
(1,943
)
(368,661
)
(368,661
)
Balance at November 30, 2018
184,153
$
804,234
$
166,837
$
6,261,756
$
3,865
(79,029
)
$
(4,209,448
)
$
3,027,244
Net income
—
—
—
203,334
—
—
—
203,334
Comprehensive loss, net of tax
—
—
—
—
(3,453
)
—
—
(3,453
)
Dividends
—
—
—
31
—
—
—
31
Stock-based compensation
—
—
30,769
—
—
—
—
30,769
Vesting of stock-based compensation awards
2
279
(279
)
—
—
—
—
—
Stock options exercised, net of shares
surrendered
404
21,662
—
—
—
—
—
21,662
Repurchase of common stock
—
—
—
—
—
(598
)
(100,095
)
(100,095
)
Balance at February 28, 2019
184,559
$
826,175
$
197,327
$
6,465,121
$
412
(79,627
)
$
(4,309,543
)
$
3,179,492
See accompanying notes.
6
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Common Stock
Paid-In
Capital
Retained
Earnings
Other
Accumulated
Comprehensive
(Loss) Income
Treasury Stock
Total
Shareholders'
Equity
Shares
Amount
Shares
Amount
Balance at June 1, 2017
180,993
$
485,068
$
223,924
$
5,170,830
$
(3,029
)
(75,592
)
$
(3,574,000
)
2,302,793
Net income
—
—
—
217,211
—
—
—
217,211
Comprehensive income, net of tax
—
—
—
—
35,032
—
—
35,032
Dividends
—
—
—
(1
)
—
—
—
(1
)
Stock-based compensation
—
—
28,630
—
—
—
—
28,630
Vesting of stock-based compensation awards
656
84,040
(84,040
)
—
—
—
—
—
Stock options exercised, net of shares
surrendered
395
17,256
—
—
—
—
—
17,256
Repurchase of common stock
—
—
—
—
—
(272
)
(35,040
)
(35,040
)
Balance at August 31, 2017
182,044
$
586,364
$
168,514
$
5,388,040
$
32,003
(75,864
)
$
(3,609,040
)
$
2,565,881
Net income
—
—
—
137,109
—
—
—
137,109
Comprehensive loss, net of tax
—
—
—
—
(11,566
)
—
—
(11,566
)
Dividends
—
—
—
(175,610
)
—
—
—
(175,610
)
Stock-based compensation
—
—
26,574
—
—
—
—
26,574
Vesting of stock-based compensation awards
18
2,897
(2,897
)
—
—
—
—
—
Stock options exercised, net of shares
surrendered
277
11,302
—
—
—
—
—
11,302
Repurchase of common stock
—
—
—
—
—
(5
)
(657
)
(657
)
Balance at November 30, 2017
182,339
$
600,563
$
192,191
$
5,349,539
$
20,437
(75,869
)
$
(3,609,697
)
$
2,553,033
Net income
—
—
—
302,095
—
—
—
302,095
Comprehensive income, net of tax
—
—
—
—
2,080
—
—
2,080
Dividends
—
—
—
22
—
—
—
22
Stock-based compensation
—
—
30,840
—
—
—
—
30,840
Vesting of stock-based compensation awards
22
3,642
(3,642
)
—
—
—
—
—
Stock options exercised, net of shares
surrendered
197
7,280
—
—
—
—
—
7,280
Repurchase of common stock
—
—
—
—
—
(8
)
(1,353
)
(1,353
)
Balance at February 28, 2018
182,558
$
611,485
$
219,389
$
5,651,656
$
22,517
(75,877
)
$
(3,611,050
)
$
2,893,997
See accompanying notes.
7
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
February 28, 2019
February 28, 2018
Cash flows from operating activities:
Net income
$
658,862
$
656,415
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
164,380
157,319
Amortization of intangible assets and capitalized contract costs
101,949
47,583
Stock-based compensation
105,553
86,044
Gain on sale of a cost method investment
(69,373
)
—
Gain on sale of business
(2,419
)
(99,060
)
Deferred income taxes
25,079
(120,428
)
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net
(61,102
)
(40,046
)
Inventories, net
(70,716
)
4,011
Uniforms and other rental items in service
(72,336
)
(44,050
)
Prepaid expenses and other current assets and capitalized
contract costs
(85,123
)
(17,925
)
Accounts payable
79
(580
)
Accrued compensation and related liabilities
(3,866
)
(2,209
)
Accrued liabilities and other
3,614
10,997
Income taxes, current
(23,864
)
22,793
Net cash provided by operating activities
670,717
660,864
Cash flows from investing activities:
Capital expenditures
(207,805
)
(196,040
)
Proceeds from redemption of marketable securities
—
146,302
Purchase of marketable securities and investments
(17,544
)
(157,528
)
Proceeds from sale of a cost method investment
73,342
—
Proceeds from sale of business
3,200
127,835
Acquisitions of businesses, net of cash acquired
(7,403
)
(12,298
)
Other, net
(6,804
)
1,746
Net cash used in investing activities
(163,014
)
(89,983
)
Cash flows from financing activities:
Issuance of commercial paper, net
217,500
137,000
Repayment of debt
—
(550,000
)
Proceeds from exercise of stock-based compensation awards
54,274
35,838
Dividends paid
(220,760
)
(175,589
)
Repurchase of common stock
(608,224
)
(37,050
)
Other, net
(8,088
)
(2,489
)
Net cash used in financing activities
(565,298
)
(592,290
)
Effect of exchange rate changes on cash and cash equivalents
(270
)
4,706
Net decrease in cash and cash equivalents
(57,865
)
(16,703
)
Cash and cash equivalents at beginning of period
138,724
169,266
Cash and cash equivalents at end of period
$
80,859
$
152,563
See accompanying notes.
8
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated condensed financial statements of Cintas Corporation (Cintas, the Company, we, us or our) included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequately presented, we suggest that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018. A summary of our significant accounting policies is presented beginning on page 39 of that report. There have been no material changes in the accounting policies followed by Cintas during the current fiscal year other than the adoption of new accounting pronouncements discussed below.
Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the consolidated results of the interim periods shown have been made.
On March 21, 2017, Cintas completed the acquisition of G&K Services, Inc. (G&K) for consideration of approximately $2.1 billion. G&K is now a wholly-owned subsidiary of Cintas that operates within the Uniform Rental and Facility Services operating segment. To finance the G&K acquisition, Cintas used a combination of new senior notes, a term loan, other borrowings under its existing credit facility (see Note 7 entitled Debt, Derivatives and Hedging Activities for additional discussion related to debt obligations) and cash on hand. G&K's results of operations are included in Cintas' consolidated financial statements as of and from the date of acquisition.
During the three months ended August 31, 2017, Cintas sold a significant business, referred to as "Discontinued Services," and as a result, its operations are classified as discontinued operations for all periods presented. See Note 12 entitled Discontinued Operations for more information.
Inventories, net are measured at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following amounts at:
(In thousands)
February 28, 2019
May 31, 2018
Raw materials
$
18,628
$
17,042
Work in process
32,525
27,350
Finished goods
288,652
235,955
$
339,805
$
280,347
Inventories are recorded net of reserves for obsolete inventory of $32.6 million and $37.0 million at February 28, 2019 and May 31, 2018, respectively.
9
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (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. We adopted ASU 2014-09, and all the related amendments, effective June 1, 2018 using the modified retrospective method. ASU 2014-09 requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Upon adoption of ASU 2014-09, we recorded an adjustment to the opening balance of retained earnings as of June 1, 2018. The adjustment to retained earnings primarily relates to the capitalization of certain direct and incremental contract costs required by the new guidance. Capitalized costs are amortized ratably over the anticipated period of benefit. We applied ASU 2014-09 only to contracts that were not completed prior to fiscal 2019. Results for reporting periods beginning after May 31, 2018 are presented under ASU 2014-09, while comparative prior period amounts have not been restated and continue to be presented under accounting standards in effect in those periods.
There were two implementation adjustments upon adoption of ASU 2014-09: (1) capitalization of certain direct and incremental contract costs and (2) the timing of revenue recognition for certain contracts with customers that create an asset with no alternative use to the Company and an enforceable right of payment from the customer upon termination. Adoption of ASU 2014-09 impacted the Company's previously reported results as of May 31, 2018 as follows:
Capitalization of Contract Costs. The Company has elected to apply the guidance, as a practical expedient, to a portfolio of contracts (or performance obligations) with similar characteristics because the Company reasonably expects that the effects on the consolidated condensed financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within the portfolio. The Company also continues to expense certain costs to obtain a contract if those costs do not meet the criteria of the new standard or the amortization period of the asset would have been one year or less.
Assets With No Alternative Use. For our Uniform Direct Sale business, our revenue, prior to the adoption of ASU 2014-09, was primarily generated from the sale of finished products to customers as products are shipped and title passes to the customers. For certain contracts with customers, the Company creates an asset with no alternative use to the Company, and the Company has an enforceable right to payment for performance completed to date. For these contracts, we have moved from a point-in-time model to an over-time model in which our measure of progress is finished goods with no alternative use in accordance with the provisions of ASU 2014-09. We expect ASU 2014-09 will have no cash impact and will not affect the economics of our underlying customer contracts.
Impacts of Adopting
ASU 2014-09
(In thousands)
May 31,
2018
Capitalization
of Contract
Costs
Assets With
No Alternative
Use
June 1,
2018
ASSETS
Accounts receivable, net
$
804,583
$
—
$
13,426
$
818,009
Inventories, net
280,347
—
(11,265
)
269,082
Prepaid expenses and other current assets
32,383
63,463
—
95,846
Total current assets
1,977,932
63,463
2,161
2,043,556
Other assets, net
29,315
187,503
—
216,818
Total assets
$
6,958,214
$
250,966
$
2,161
$
7,211,341
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deferred income taxes
$
352,581
$
63,389
$
546
$
416,516
Total long-term liabilities
3,165,831
63,389
546
3,229,766
Retained earnings
5,837,827
187,577
1,615
6,027,019
Total shareholders' equity
3,016,526
187,577
1,615
3,205,718
Total liabilities and shareholders' equity
$
6,958,214
$
250,966
$
2,161
$
7,211,341
10
The impacts of adopting ASU 2014-09 on our fiscal 2019 consolidated condensed financial statements are presented in the following tables:
Nine Months Ended
February 28, 2019
Consolidated Condensed Statement of Income
(In thousands)
As
Reported
Under
Historical Guidance
Impact of Adopting
ASU 2014-09
Revenue:
Uniform rental and facility services
$
4,124,038
$
4,127,359
$
(3,321
)
Other
974,535
971,995
2,540
Total revenue
5,098,573
5,099,354
(781
)
Costs and expenses:
Cost of other
537,007
535,364
1,643
Selling and administrative expenses
1,472,404
1,493,553
(21,149
)
Operating income
819,123
800,398
18,725
Income before income taxes
813,499
794,774
18,725
Income taxes
157,035
152,466
4,569
Income from continuing operations
656,464
642,308
14,156
Net income
$
658,862
$
644,706
$
14,156
Diluted earnings per share
$
5.93
$
5.80
$
0.13
Balance at
February 28, 2019
Consolidated Condensed Balance Sheet
(In thousands)
As
Reported
Under
Historical Guidance
Impact of Adopting
ASU 2014-09
ASSETS
Accounts receivable, net
$
878,037
$
861,725
$
16,312
Inventories, net
339,805
352,714
(12,909
)
Income taxes, current
42,552
42,855
(303
)
Prepaid expenses and other current assets
108,969
40,616
68,353
Total current assets
2,223,756
2,152,303
71,453
Other assets, net
237,851
37,756
200,095
Total assets
$
7,433,673
$
7,162,125
$
271,548
LIABILITIES AND SHAREHOLDERS’ EQUITY
Long-term liabilities:
Deferred income taxes
$
439,011
$
370,811
$
68,200
Total long-term liabilities
3,259,830
3,191,630
68,200
Retained earnings
6,465,121
6,261,773
203,348
Total shareholders' equity
3,179,492
2,976,144
203,348
Total liabilities and shareholders' equity
$
7,433,673
$
7,162,125
$
271,548
The adoption of ASU 2014-09 had no impact to the Company's fiscal 2019 operating cash flow, and the only impact of the adoption on our fiscal 2019 consolidated condensed statement of comprehensive income was the impact to net income as presented in the table above.
11
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 can be accounted for similar to existing guidance for operating leases today, which is an accounting policy election in Topic 842 that the Company will elect. The guidance also requires disclosures that meet the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases. Topic 842 supersedes the previous leases standard, Accounting Standards Codification (ASC) 840, "Leases." This guidance is effective for reporting periods beginning after December 15, 2018, and will be adopted by the Company on June 1, 2019. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, to provide an additional transition method option available to registrants. In accordance with Topic 842, a registrant can elect not to present comparative financial information under Topic 842 if it recognizes a cumulative-effect adjustment to retained earnings upon adoption. The Company intends to make this transition election. The amendments in Topic 842 are effective for the Company on the same date as ASU 2016-02. The Company has implemented a new lease system in connection with the adoption of Topic 842. The majority of our lease spend relates to certain real estate with the remaining lease spend primarily related to equipment. We currently expect the adoption of this standard to result in a material increase to the assets and liabilities on the consolidated condensed balance sheets, but we do not expect a material impact on the consolidated condensed statements of income or consolidated condensed statements of cash flows.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 makes eight targeted changes to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company’s adoption of this standard on June 1, 2018 did not have a material impact on its consolidated condensed statements of cash flows.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference between a reporting unit's carrying value and its fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The adoption of this standard is not expected to have an impact on the consolidated condensed financial statements.
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows entities to elect to reclassify the income tax effects resulting from the Tax Cuts and Jobs Act (Tax Act) on items within accumulated other comprehensive income to retained earnings and requires additional related disclosures. This standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, however, early adoption is permitted. Cintas is currently evaluating the impact that ASU 2018-02 will have on its consolidated condensed financial statements.
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Among other amendments, the update allows entities to designate the variability in cash flows attributable to changes in a contractually specified component stated in the contract as the hedged risk in a cash flow hedge of a forecasted purchase or sale of a nonfinancial asset. This standard is effective for annual periods beginning after December 15, 2018. We adopted the standard effective as of June 1, 2018, and the effect of adoption of this standard did not have a material impact to our consolidated condensed financial statements.
No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on Cintas' consolidated condensed financial statements.
12
2. Revenue Recognition
The following table presents Cintas' total revenue disaggregated by service type:
Three Months Ended
Nine Months Ended
February 28,
2019
February 28,
2018
February 28,
2019
February 28,
2018
(In thousands)
Revenue
%
Revenue
%
Revenue
%
Revenue
%
Uniform Rental and
Facility Services
$
1,358,322
80.7
%
$
1,284,516
80.8
%
$
4,124,038
80.9
%
$
3,904,338
81.2
%
First Aid and Safety
Services
149,170
8.9
%
137,327
8.7
%
455,935
8.9
%
416,999
8.7
%
Fire Protection
Services
99,688
5.9
%
87,498
5.5
%
293,980
5.8
%
254,994
5.3
%
Uniform Direct Sales
75,150
4.5
%
79,797
5.0
%
224,620
4.4
%
230,751
4.8
%
Total revenue
$
1,682,330
100.0
%
$
1,589,138
100.0
%
$
5,098,573
100.0
%
$
4,807,082
100.0
%
For the three and nine months ended February 28, 2019, the percentage of revenue recognized over time as the services are performed was 95.4% and 95.6%, respectively, of Uniform Rental and Facility Services revenue, 90.6% and 90.7%, respectively, of First Aid and Safety Services revenue and 100% and 100%, respectively, of Fire Protection Services revenue. During the same periods, the Uniform Direct Sales business unit recognized 96.3% and 96.4%, respectively, of revenue at a point in time, which generally occurs when the goods are transferred to the customer. Fire Protection Services and Uniform Direct Sales are recorded within the All Other reportable segment disclosed in Note 11 entitled Segment Information.
Revenue Recognition Policy
More than 95% of the Company's revenues are derived from fees for route servicing of Uniform Rental and Facility Services, First Aid and Safety Services and Fire Protection Services, performed by a Cintas employee-partner, at the customer's location of business. Revenues from our route servicing customer contracts represent a single-performance obligation. The Company recognizes these revenues over time as services are performed based on the nature of services provided and contractual rates (input method). The Company's remaining revenues, primarily within the Uniform Direct Sales operating segment, and representing less than 5% of the Company's total revenues, are recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer.
Certain of our customer contracts, primarily within our Uniform Direct Sales business, include pricing terms and conditions that include components of variable consideration. The variable consideration is typically in the form of consideration paid to a customer based on performance metrics specified within the contract. Specifically, some contracts contain discounts or rebates that the customer can earn through the achievement of specified volume levels. Each component of variable consideration is earned based on the Company's actual performance during the measurement period specified within the contract. To determine the transaction price, the Company estimates the variable consideration using the most likely amount method, based on the specific contract provisions and known performance results during the relevant measurement period. When determining if variable consideration should be constrained, the Company considers whether factors outside its control could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal. The Company's performance period generally corresponds with the monthly invoice period. No constraints on our revenue recognition were applied during the three or nine months ended February 28, 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 condensed balance sheets. Variable consideration also includes consideration paid to a customer at the beginning of a contract. Cintas capitalizes this consideration and amortizes it over the life of the contract as a reduction to revenue in accordance with ASC 606. These assets are included in other assets, net on the consolidated condensed balance sheet.
Additionally, in accordance with ASC 606, certain Uniform Direct Sales customer contracts contain a provision with an enforceable right of payment and the underlying product has no alternative use to Cintas. Consequently, when both aforementioned provisions are prevalent in a customer contract, the revenue is recorded for finished goods that the customer is obligated to purchase under the termination terms of the contract.
13
Costs to Obtain a Contract
The Company capitalizes commission expenses paid to our employee-partners when the commissions are deemed to be incremental for obtaining the route servicing customer contract. The deferred commissions are amortized on a straight-line basis over the expected period of benefit. We review the deferred commission balances for impairment on an ongoing basis. Deferred commissions are classified as current or noncurrent based on the timing of when we expect to recognize the expense. The current portion is included in prepaid expenses and other current assets and the noncurrent portion is included in other assets, net on the Company's consolidated condensed balance sheets. As of February 28, 2019, the current and noncurrent assets related to deferred commissions totaled $68.4 million and $203.3 million, respectively. We recorded amortization expense related to deferred commissions of $18.0 million and $52.7 million during the three and nine months ended February 28, 2019, respectively. These expenses are classified in selling and administrative expense on the consolidated condensed statements of income.
3. Fair Value Measurements
All financial instruments that are measured at fair value on a recurring basis have been classified within the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the consolidated condensed balance sheet date. These financial instruments measured at fair value on a recurring basis are summarized below:
As of February 28, 2019
(In thousands)
Level 1
Level 2
Level 3
Fair Value
Cash and cash equivalents
$
80,859
$
—
$
—
$
80,859
Total assets at fair value
$
80,859
$
—
$
—
$
80,859
Accrued liabilities:
Interest rate lock agreements
$
—
$
8,460
$
—
$
8,460
Total liabilities at fair value
$
—
$
8,460
$
—
$
8,460
As of May 31, 2018
(In thousands)
Level 1
Level 2
Level 3
Fair Value
Cash and cash equivalents
$
138,724
$
—
$
—
$
138,724
Total assets at fair value
$
138,724
$
—
$
—
$
138,724
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.
Interest, realized gains and losses and declines in value determined to be other than temporary on available-for-sale securities are included in interest income or expense. The cost of the securities sold is based on the specific identification method. There were no outstanding marketable securities as of February 28, 2019 or May 31, 2018.
As of February 28, 2019, accrued liabilities included the fair value of outstanding interest rate lock agreements. The fair values of Cintas' interest rate lock agreements are based on similar exchange traded derivatives (market approach) and are, therefore, included within Level 2 of the fair value hierarchy. The fair value was determined by comparing the locked rates against the benchmarked treasury rate.
The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Cintas believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the consolidated condensed balance sheet dates.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a nonrecurring basis as required under GAAP.
14
4. Investments
Investments at February 28, 2019 of $191.8 million include the cash surrender value of insurance policies of $170.2 million, equity method investments of $18.4 million and cost method investments of $3.2 million. Investments at May 31, 2018 of $175.6 million include the cash surrender value of insurance policies of $154.0 million, equity method investments of $16.4 million and cost method investments of $5.2 million. Investments are generally evaluated for impairment on an annual basis or when indicators of impairment exist. For the nine months ended February 28, 2019 and 2018, no impairment losses were recorded.
During the second quarter of fiscal 2019, Cintas sold a cost method investment to a third party. Proceeds from the sale were $73.3 million, which resulted in a pre-tax gain of $69.4 million.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share from continuing operations using the two-class method for amounts attributable to Cintas’ common shares:
Three Months Ended
Nine Months Ended
Basic Earnings per Share from Continuing Operations
(in thousands except per share data)
February 28, 2019
February 28, 2018
February 28, 2019
February 28, 2018
Income from continuing operations
$
200,923
$
295,789
$
656,464
$
594,634
Less: income from continuing operations allocated to participating securities
2,783
5,248
8,977
10,546
Income from continuing operations available to common shareholders
$
198,140
$
290,541
$
647,487
$
584,088
Basic weighted average common shares outstanding
105,080
106,558
106,147
106,210
Basic earnings per share from continuing operations
$
1.89
$
2.73
$
6.10
$
5.50
Three Months Ended
Nine Months Ended
Diluted Earnings per Share from Continuing Operations
(in thousands except per share data)
February 28, 2019
February 28, 2018
February 28, 2019
February 28, 2018
Income from continuing operations
$
200,923
$
295,789
$
656,464
$
594,634
Less: income from continuing operations allocated to participating securities
2,783
5,248
8,977
10,546
Income from continuing operations available to common shareholders
$
198,140
$
290,541
$
647,487
$
584,088
Basic weighted average common shares outstanding
105,080
106,558
106,147
106,210
Effect of dilutive securities – employee stock options
3,082
3,617
3,436
3,044
Diluted weighted average common shares outstanding
108,162
110,175
109,583
109,254
Diluted earnings per share from continuing operations
$
1.83
$
2.66
$
5.91
$
5.35
For both the three and nine months ended February 28, 2019, both basic and diluted earnings per share from discontinued operations were $0.02. Basic and diluted earnings per share from discontinued operations were $0.06 and $0.05, respectively, for the three months ended February 28, 2018, and $0.57 and $0.55, respectively, for the nine months ended February 28, 2018.
15
For the three months ended February 28, 2019 and 2018, options granted to purchase 0.7 million and 1.0 million shares of Cintas common stock, respectively, were excluded from the computation of diluted earnings per share. For the nine months ended February 28, 2019 and 2018, options granted to purchase 0.5 million and 0.8 million shares of Cintas common stock, respectively, were excluded from the computation of diluted earnings per share. The exercise prices of these options were greater than the average market price of the common stock (anti-dilutive).
On August 2, 2016, Cintas announced that the Board of Directors authorized a $500.0 million share buyback program, which does not have an expiration date. The August 2, 2016 share buyback program was completed during the second quarter of fiscal 2019. From the inception of the August 2, 2016 share buyback program through November 2018, Cintas purchased a total of 2.6 million shares of Cintas common stock at an average price of $188.82 per share for a total purchase price of $500.0 million. On October 30, 2018, we announced that the Board of Directors authorized a new $1.0 billion share buyback program, which does not have an expiration date. The following table summarizes the buyback activity by program and fiscal period.
(In thousands except per share data)
Three Months Ended
February 28, 2019
Nine Months Ended
February 28, 2019
Buyback Program
Shares
Avg. Price per Share
Purchase Price
Shares
Avg. Price per Share
Purchase Price
August 2, 2016
—
$
—
$
—
2,130
$
192.55
$
410,003
October 30, 2018
598
$
167.32
$
100,000
799
$
170.87
$
136,579
598
$
167.32
$
100,000
2,929
$
186.63
$
546,582
In the period subsequent to February 28, 2019 through April 5, 2019, we purchased 0.4 million shares of Cintas common stock under the new share buyback program at an average price of $203.26 for a total purchase price of $83.3 million. From the inception of the October 30, 2018 share buyback program through April 5, 2019, Cintas has purchased a total of 1.2 million shares of Cintas common stock at an average price of $181.85 for a total purchase price of $219.9 million.
For the three months ended February 28, 2019, Cintas acquired less than 0.1 million shares of Cintas common stock for employee payroll taxes dues on restricted stock awards that vested during the three months ended February 28, 2019. These shares were acquired at an average price of $195.14 per share for a total purchase price of less than $0.1 million. During the nine months ended February 28, 2019, Cintas acquired 0.3 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested during the nine months ended February 28, 2019. These shares were acquired at an average price of $204.31 per share for a total purchase price of $61.6 million.
16
6. Goodwill, Service Contracts and Other Assets
Changes in the carrying amount of goodwill and service contracts for the nine months ended February 28, 2019, by reportable operating segment and All Other, are as follows: