QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
November 30, 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 Incorporation)
(IRS Employer Identification Number)
6800 Cintas Boulevard
P.O. Box 625737
Cincinnati,
Ohio
45262-5737
(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code: (513) 459-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, no par value
CTAS
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by checkmark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes☑No ☐
Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer☑ Accelerated Filer ☐ Non-Accelerated Filer ☐
Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
(Loss) income from discontinued operations, net of tax benefit of $107, tax expense of $6, tax benefit of $107 and tax benefit of $4, respectively
(323
)
19
(323
)
(13
)
Net income
$
246,120
$
243,013
$
496,932
$
455,528
Basic earnings per share:
Continuing operations
$
2.35
$
2.25
$
4.75
$
4.21
Discontinued operations
0.00
0.00
0.00
0.00
Basic earnings per share
$
2.35
$
2.25
$
4.75
$
4.21
Diluted earnings per share:
Continuing operations
$
2.27
$
2.18
$
4.60
$
4.07
Discontinued operations
0.00
0.00
0.00
0.00
Diluted earnings per share
$
2.27
$
2.18
$
4.60
$
4.07
Dividends declared per share
$
2.55
$
2.05
$
2.55
$
2.05
See accompanying notes.
3
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
Six Months Ended
November 30, 2019
November 30, 2018
November 30, 2019
November 30, 2018
Net income
$
246,120
$
243,013
$
496,932
$
455,528
Other comprehensive income (loss),
net of tax:
Foreign currency translation adjustments
1,413
(10,623
)
8,137
(13,642
)
Change in fair value of interest rate lock
agreements
22,761
4,921
(7,142
)
1,753
Amortization of interest rate lock agreements
(358
)
(294
)
(653
)
(589
)
Other comprehensive income (loss)
23,816
(5,996
)
342
(12,478
)
Comprehensive income
$
269,936
$
237,017
$
497,274
$
443,050
See accompanying notes.
4
CINTAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share data)
November 30, 2019
May 31, 2019
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
226,535
$
96,645
Accounts receivable, net
949,122
910,120
Inventories, net
348,304
334,589
Uniforms and other rental items in service
817,859
784,133
Income taxes, current
24,878
7,475
Prepaid expenses and other current assets
123,589
103,318
Total current assets
2,490,287
2,236,280
Property and equipment, net
1,425,584
1,430,685
Investments
218,873
192,346
Goodwill
2,852,801
2,842,441
Service contracts, net
469,933
494,595
Operating lease right-of-use assets, net
169,233
—
Other assets, net
260,626
240,315
$
7,887,337
$
7,436,662
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
254,611
$
226,020
Accrued compensation and related liabilities
124,349
155,509
Accrued liabilities
674,240
433,940
Operating lease liabilities, current
44,263
—
Debt due within one year
199,788
312,264
Total current liabilities
1,297,251
1,127,733
Long-term liabilities:
Debt due after one year
2,538,606
2,537,507
Deferred income taxes
443,857
438,179
Operating lease liabilities
130,580
—
Accrued liabilities
372,073
330,522
Total long-term liabilities
3,485,116
3,306,208
Shareholders’ equity:
Preferred stock, no par value:
—
—
100,000 shares authorized, none outstanding
Common stock, no par value:
1,066,814
840,328
425,000,000 shares authorized
FY 2020: 186,298,161 shares issued and 103,702,675 shares outstanding
FY 2019: 184,790,626 shares issued and 103,284,401 shares outstanding
Paid-in capital
134,041
227,928
Retained earnings
6,917,310
6,691,236
Treasury stock:
(4,976,360
)
(4,717,619
)
FY 2020: 82,595,486 shares
FY 2019: 81,506,225 shares
Accumulated other comprehensive loss
(36,835
)
(39,152
)
Total shareholders’ equity
3,104,970
3,002,721
$
7,887,337
$
7,436,662
See accompanying notes.
5
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Common Stock
Paid-In
Capital
Retained
Earnings
Other
Accumulated
Comprehensive
Loss
Treasury Stock
Total
Shareholders'
Equity
Shares
Amount
Shares
Amount
Balance at June 1, 2019
184,791
$
840,328
$
227,928
$
6,691,236
$
(39,152
)
(81,506
)
$
(4,717,619
)
$
3,002,721
Net income
—
—
—
250,812
—
—
—
250,812
Comprehensive loss, net of tax
—
—
—
—
(23,474
)
—
—
(23,474
)
Stock-based compensation
—
—
40,395
—
—
—
—
40,395
Vesting of stock-based compensation
awards
605
157,882
(157,882
)
—
—
—
—
—
Stock options exercised, net of shares
surrendered
557
37,915
—
—
—
—
—
37,915
Repurchase of common stock
—
—
—
—
—
(1,082
)
(256,830
)
(256,830
)
Cumulative effect of change in accounting
principle
—
—
—
(2,808
)
1,975
—
—
(833
)
Balance at August 31, 2019
185,953
$
1,036,125
$
110,441
$
6,939,240
$
(60,651
)
(82,588
)
$
(4,974,449
)
$
3,050,706
Net income
—
—
—
246,120
—
—
—
246,120
Comprehensive income, net of tax
—
—
—
—
23,816
—
—
23,816
Dividends
—
—
—
(268,050
)
—
—
—
(268,050
)
Stock-based compensation
—
—
29,003
—
—
—
—
29,003
Vesting of stock-based compensation
awards
21
5,403
(5,403
)
—
—
—
—
—
Stock options exercised, net of shares
surrendered
324
25,286
—
—
—
—
—
25,286
Repurchase of common stock
—
—
—
—
—
(7
)
(1,911
)
(1,911
)
Balance at November 30, 2019
186,298
$
1,066,814
$
134,041
$
6,917,310
$
(36,835
)
(82,595
)
$
(4,976,360
)
$
3,104,970
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
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
See accompanying notes.
7
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
November 30, 2019
November 30, 2018
Cash flows from operating activities:
Net income
$
496,932
$
455,528
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
115,367
107,112
Amortization of intangible assets and capitalized contract costs
70,963
67,559
Stock-based compensation
69,398
74,784
Gain on sale of a cost method investment
—
(69,373
)
Deferred income taxes
7,632
19,227
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net
(37,940
)
(85,748
)
Inventories, net
(13,402
)
(53,227
)
Uniforms and other rental items in service
(32,744
)
(57,684
)
Prepaid expenses and other current assets and capitalized
contract costs
(68,409
)
(58,161
)
Accounts payable
28,055
(1,955
)
Accrued compensation and related liabilities
(29,326
)
(20,969
)
Accrued liabilities and other
(17,883
)
(15,322
)
Income taxes, current
(17,292
)
(17,204
)
Net cash provided by operating activities
571,351
344,567
Cash flows from investing activities:
Capital expenditures
(126,167
)
(137,614
)
Purchases of investments
(10,121
)
(14,071
)
Proceeds from sale of a cost method investment
—
73,342
Proceeds from sale of assets
13,300
—
Acquisitions of businesses, net of cash acquired
(6,582
)
(6,580
)
Other, net
(2,103
)
(1,717
)
Net cash used in investing activities
(131,673
)
(86,640
)
Cash flows from financing activities:
(Payments) issuance of commercial paper, net
(112,500
)
173,500
Proceeds from exercise of stock-based compensation awards
63,201
32,612
Repurchase of common stock
(258,741
)
(508,129
)
Other, net
(1,952
)
(5,362
)
Net cash used in financing activities
(309,992
)
(307,379
)
Effect of exchange rate changes on cash and cash equivalents
204
(793
)
Net increase (decrease) in cash and cash equivalents
129,890
(50,245
)
Cash and cash equivalents at beginning of period
96,645
138,724
Cash and cash equivalents at end of period
$
226,535
$
88,479
See accompanying notes.
8
CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated condensed financial statements of Cintas Corporation (Cintas, the Company, we, us or our) included herein have been prepared by Cintas, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequately presented, we suggest that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019. A summary of our significant accounting policies is presented beginning on page 41 of that report. There have been no material changes in the accounting policies followed by Cintas during the current fiscal year other than the adoption of new accounting pronouncements discussed below.
Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the consolidated results of the interim periods shown have been made.
Inventories, net are measured at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following:
(In thousands)
November 30, 2019
May 31, 2019
Raw materials
$
15,550
$
17,812
Work in process
27,148
28,820
Finished goods
305,606
287,957
$
348,304
$
334,589
Inventories are recorded net of reserves for obsolete inventory of $33.8 million and $32.7 million at November 30, 2019 and May 31, 2019, respectively.
New Accounting Pronouncements
Effective June 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”, using a modified retrospective transition approach. Topic 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Topic 842 provided a number of optional practical expedients in transition, and we have determined to use certain of these practical expedients upon our adoption of Topic 842. Specifically, the Company elected the package of practical expedients permitted under Topic 842, which allows a lessee to carryforward their population of existing leases, the classification of each lease, as well as the treatment of initial direct lease costs as of the period of adoption. The Company also elected the practical expedient related to lease and non-lease components, as an accounting policy election for the fleet and vehicle asset class, which allows a lessee to not separate non-lease from lease components and instead account for consideration paid in a contract as a single lease component. In addition, the Company elected the short-term lease recognition exemption for all leases with a term of 12 months or less, which means it will not recognize right-of-use assets or lease liabilities for these leases. The adoption of Topic 842, on June 1, 2019, resulted in the Company recognizing right-of-use assets, net of $168.0 million and corresponding lease liabilities of $173.4 million. The adoption of Topic 842 did not have a material impact on the Company's consolidated condensed statements of income or consolidated condensed statements of cash flows.
9
Effective June 1, 2019, Cintas adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows companies to elect to reclassify the disproportionate income tax effects resulting from the Tax Cuts and Jobs Act (Tax Act) on items within accumulated other comprehensive income to retained earnings. The adoption of ASU 2018-02, on a prospective basis, resulted in a $2.0 million reclassification adjustment of the stranded tax effects from retained earnings to accumulated other comprehensive loss that was determined using a specific identification method.
In April 2019, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 will replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In connection with recognizing credit losses on accounts receivable and other financial instruments, Cintas will be required to use a forward-looking expected loss model rather than the incurred loss model. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The adoption of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. Cintas is currently evaluating the impact that ASU 2016-13 will have on its consolidated condensed financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference between a reporting unit's carrying value and its fair value (impairment loss is limited to the carrying value). ASU 2017-04 is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have an impact on the consolidated condensed financial statements.
No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on Cintas' consolidated condensed financial statements.
Note 2 - Revenue Recognition
The following table presents Cintas' total revenue disaggregated by service type:
Three Months Ended
Six Months Ended
November 30, 2019
November 30, 2018
November 30, 2019
November 30, 2018
(In thousands)
Revenue
%
Revenue
%
Revenue
%
Revenue
%
Uniform Rental and
Facility Services
$
1,469,976
79.7
%
$
1,390,778
81.0
%
$
2,924,503
80.0
%
$
2,765,716
81.0
%
First Aid and Safety
Services
169,668
9.2
%
153,348
8.9
%
341,758
9.4
%
306,765
9.0
%
Fire Protection
Services
106,735
5.8
%
96,183
5.6
%
216,861
5.9
%
194,292
5.7
%
Uniform Direct
Sales
97,370
5.3
%
77,959
4.5
%
171,766
4.7
%
149,470
4.3
%
Total revenue
$
1,843,749
100.0
%
$
1,718,268
100.0
%
$
3,654,888
100.0
%
$
3,416,243
100.0
%
Fire Protection Services and Uniform Direct Sales are recorded within the All Other segment disclosed in Note 12 entitled Segment Information.
Revenue Recognition Policy
More than 95% of the Company's revenues are derived from fees for route servicing of Uniform Rental and Facility Services, First Aid and Safety Services and Fire Protection Services, performed by a Cintas employee-partner, at the customer's location of business. Revenues from our route servicing customer contracts represent a single-performance obligation. The Company recognizes these revenues over time as services are performed based on the nature of services provided and contractual rates (input method). The Company's remaining revenues, primarily within the Uniform Direct Sales operating segment, and representing less than 5% of the Company's total revenues, are recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer.
10
Revenue recorded is presented net of sales and other taxes we collect on behalf of governmental authorities. Shipping and handling costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Certain of our customer contracts, primarily within our Uniform Direct Sales business, include pricing terms and conditions that include components of variable consideration. The variable consideration is typically in the form of consideration paid to a customer based on performance metrics specified within the contract. Specifically, some contracts contain discounts or rebates that the customer can earn through the achievement of specified volume levels. Each component of variable consideration is earned based on the Company's actual performance during the measurement period specified within the contract. To determine the transaction price, the Company estimates the variable consideration using the most likely amount method, based on the specific contract provisions and known performance results during the relevant measurement period. When determining if variable consideration should be constrained, the Company considers whether factors outside its control could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal. The Company's performance period generally corresponds with the monthly invoice period. No constraints on our revenue recognition were applied during the three or six months endedNovember 30, 2019 or 2018. The Company reassesses these estimates during each reporting period. Cintas maintains a liability for these discounts and rebates within accrued liabilities on the consolidated condensed balance sheets. Variable consideration also includes consideration paid to a customer at the beginning of a contract. Cintas capitalizes this consideration and amortizes it over the life of the contract as a reduction to revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue (ASC 606). These assets are included in other assets, net on the consolidated condensed balance sheet.
Additionally, in accordance with ASC 606, certain Uniform Direct Sales customer contracts contain a provision with an enforceable right of payment and the underlying product has no alternative use to Cintas. Consequently, when both aforementioned provisions are prevalent in a customer contract, the revenue is recorded for finished goods that the customer is obligated to purchase under the termination terms of the contract.
