QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2018
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. (Check one):
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 (loss) from discontinued operations, net of tax expense of $6, tax benefit of $624, tax benefit of $4 and tax expense of $41,103, respectively
19
(628
)
(13
)
55,475
Net income
$
243,013
$
137,109
$
455,528
$
354,320
Basic earnings (loss) per share:
Continuing operations
$
2.25
$
1.27
$
4.21
$
2.77
Discontinued operations
0.00
(0.01
)
0.00
0.51
Basic earnings per share
$
2.25
$
1.26
$
4.21
$
3.28
Diluted earnings (loss) per share:
Continuing operations
$
2.18
$
1.24
$
4.07
$
2.69
Discontinued operations
0.00
(0.01
)
0.00
0.50
Diluted earnings per share
$
2.18
$
1.23
$
4.07
$
3.19
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
Six Months Ended
November 30, 2018
November 30, 2017
November 30, 2018
November 30, 2017
Net income
$
243,013
$
137,109
$
455,528
$
354,320
Other comprehensive (loss) income,
net of tax:
Foreign currency translation adjustments
(10,623
)
(11,374
)
(13,642
)
23,810
Change in fair value of interest rate lock
agreements
4,921
—
1,753
—
Amortization of interest rate lock agreements
(294
)
(172
)
(589
)
(344
)
Change in fair value of available-for-sale securities
—
(20
)
—
—
Other comprehensive (loss) income
(5,996
)
(11,566
)
(12,478
)
23,466
Comprehensive income
$
237,017
$
125,543
$
443,050
$
377,786
See accompanying notes.
4
CINTAS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share data)
November 30, 2018
May 31, 2018
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
88,479
$
138,724
Accounts receivable, net
904,062
804,583
Inventories, net
321,874
280,347
Uniforms and other rental items in service
758,246
702,261
Income taxes, current
36,595
19,634
Prepaid expenses and other current assets
106,614
32,383
Total current assets
2,215,870
1,977,932
Property and equipment, net
1,410,530
1,382,730
Investments
183,548
175,581
Goodwill
2,845,244
2,846,888
Service contracts, net
521,505
545,768
Other assets, net
228,386
29,315
$
7,405,083
$
6,958,214
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
211,900
$
215,074
Accrued compensation and related liabilities
117,645
140,654
Accrued liabilities
611,641
420,129
Debt due within one year
173,500
—
Total current liabilities
1,114,686
775,857
Long-term liabilities:
Debt due after one year
2,536,408
2,535,309
Deferred income taxes
435,461
352,581
Accrued liabilities
291,284
277,941
Total long-term liabilities
3,263,153
3,165,831
Shareholders’ equity:
Preferred stock, no par value:
—
—
100,000 shares authorized, none outstanding
Common stock, no par value:
804,234
618,464
425,000,000 shares authorized
FY 2019: 184,152,836 shares issued and 105,123,513 shares outstanding
FY 2018: 182,723,471 shares issued and 106,326,383 shares outstanding
Paid-in capital
166,837
245,211
Retained earnings
6,261,756
5,837,827
Treasury stock:
(4,209,448
)
(3,701,319
)
FY 2019: 79,029,323 shares
FY 2018: 76,397,088 shares
Accumulated other comprehensive income
3,865
16,343
Total shareholders’ equity
3,027,244
3,016,526
$
7,405,083
$
6,958,214
See accompanying notes.
5
CINTAS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
November 30, 2018
November 30, 2017
Cash flows from operating activities:
Net income
$
455,528
$
354,320
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
107,112
107,578
Amortization of intangible assets and capitalized contract costs
67,559
31,261
Stock-based compensation
74,784
55,204
Gain on sale of a cost method investment
(69,373
)
—
Gain on sale of business
—
(99,060
)
Deferred income taxes
19,227
42,162
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable, net
(85,748
)
(24,800
)
Inventories, net
(53,227
)
2,595
Uniforms and other rental items in service
(57,684
)
(33,294
)
Prepaid expenses and other current assets and capitalized
contract costs
(58,161
)
(18,573
)
Accounts payable
(1,955
)
(8,706
)
Accrued compensation and related liabilities
(20,969
)
(36,480
)
Accrued liabilities and other
(15,322
)
(1,940
)
Income taxes, current
(17,204
)
8,742
Net cash provided by operating activities
344,567
379,009
Cash flows from investing activities:
Capital expenditures
(137,614
)
(132,466
)
Proceeds from redemption of marketable securities
—
100,259
Purchase of marketable securities and investments
(14,071
)
(99,877
)
Proceeds from sale of a cost method investment
73,342
—
Proceeds from sale of business
—
127,835
Acquisitions of businesses, net of cash acquired
(6,580
)
(1,099
)
Other, net
(1,717
)
(870
)
Net cash used in investing activities
(86,640
)
(6,218
)
Cash flows from financing activities:
Issuance (payments) of commercial paper, net
173,500
(50,500
)
Repayment of debt
—
(250,000
)
Proceeds from exercise of stock-based compensation awards
32,612
28,558
Repurchase of common stock
(508,129
)
(35,697
)
Other, net
(5,362
)
(1,882
)
Net cash used in financing activities
(307,379
)
(309,521
)
Effect of exchange rate changes on cash and cash equivalents
(793
)
3,466
Net (decrease) increase in cash and cash equivalents
(50,245
)
66,736
Cash and cash equivalents at beginning of period
138,724
169,266
Cash and cash equivalents at end of period
$
88,479
$
236,002
See accompanying notes.
6
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)
November 30, 2018
May 31, 2018
Raw materials
$
14,005
$
17,042
Work in process
32,420
27,350
Finished goods
275,449
235,955
$
321,874
$
280,347
Inventories are recorded net of reserves for obsolete inventory of $31.9 million and $37.0 million at November 30, 2018 and May 31, 2018, respectively.
7
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
8
The impacts of adopting ASU 2014-09 on our fiscal 2019 consolidated condensed financial statements are presented in the following tables:
Six Months Ended
November 30, 2018
Consolidated Condensed Statement of Income
(In thousands)
As
Reported
Under
Historical Guidance
Impact of Adopting
ASU 2014-09
Revenue:
Uniform rental and facility services
$
2,765,716
$
2,767,884
$
(2,168
)
Other
650,527
649,802
725
Total revenue
3,416,243
3,417,686
(1,443
)
Costs and expenses:
Cost of other
358,801
357,902
899
Selling and administrative expenses
996,305
1,010,394
(14,089
)
Operating income
540,868
529,121
11,747
Income before income taxes
561,944
550,197
11,747
Income taxes
106,403
103,537
2,866
Income from continuing operations
455,541
446,660
8,881
Net income
$
455,528
$
446,647
$
8,881
Diluted earnings per share
$
4.07
$
3.99
$
0.08
Balance at
November 30, 2018
Consolidated Condensed Balance Sheet
(In thousands)
As
Reported
Under
Historical Guidance
Impact of Adopting
ASU 2014-09
ASSETS
Accounts receivable, net
$
904,062
$
889,716
$
14,346
Inventories, net
321,874
334,038
(12,164
)
Income taxes, current
36,595
36,600
(5
)
Prepaid expenses and other current assets
106,614
39,642
66,972
Total current assets
2,215,870
2,146,721
69,149
Other assets, net
228,386
32,666
195,720
Total assets
$
7,405,083
$
7,140,214
$
264,869
LIABILITIES AND SHAREHOLDERS’ EQUITY
Long-term liabilities:
Deferred income taxes
$
435,461
$
368,665
$
66,796
Total long-term liabilities
3,263,153
3,196,357
66,796
Retained earnings
6,261,756
6,063,683
198,073
Total shareholders' equity
3,027,244
2,829,171
198,073
Total liabilities and shareholders' equity
$
7,405,083
$
7,140,214
$
264,869
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.
9
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. 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, however, early adoption is permitted. Entities are required to use 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 will adopt this ASU on June 1, 2019 and we expect to elect the practical expedient which will allow us to not apply the amended lease accounting guidance to comparative periods that will be presented. The Company is implementing new lease systems in connection with the adoption and is also evaluating the impact that ASU 2016-02 will have on its consolidated condensed financial statements. 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 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 (the 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.
10
2. Revenue Recognition
The following table presents Cintas' total revenue disaggregated by service type:
Three Months Ended
Six Months Ended
November 30,
2018
November 30,
2017
November 30,
2018
November 30,
2017
(In thousands)
Revenue
%
Revenue
%
Revenue
%
Revenue
%
Uniform Rental and
Facility Services
$
1,390,778
81.0
%
$
1,308,038
81.4
%
$
2,765,716
81.0
%
$
2,619,822
81.4
%
First Aid and Safety
Services
153,348
8.9
%
139,090
8.7
%
306,765
9.0
%
279,672
8.7
%
Fire Protection
Services
96,183
5.6
%
80,949
5.0
%
194,292
5.7
%
167,496
5.2
%
Uniform Direct Sales
77,959
4.5
%
78,364
4.9
%
149,470
4.3
%
150,954
4.7
%
Total revenue
$
1,718,268
100.0
%
$
1,606,441
100.0
%
$
3,416,243
100.0
%
$
3,217,944
100.0
%
For the three and six months ended November 30, 2018, the percentage of revenue recognized over time as the services are performed was 94.7% and 95.2%, respectively, of Uniform Rental and Facility Services revenue, 90.8% and 90.8%, 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 96.7% 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 six months ended November 30, 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 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.
11
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 November 30, 2018, the current and noncurrent assets related to deferred commissions totaled $67.0 million and $199.7 million, respectively. We recorded amortization expense related to deferred commissions of $17.6 million and $34.7 million during the three and six months ended November 30, 2018, 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 November 30, 2018
(In thousands)
Level 1
Level 2
Level 3
Fair Value
Cash and cash equivalents
$
88,479
$
—
$
—
$
88,479
Other assets, net:
Interest rate lock agreements
—
2,307
—
2,307
Total assets at fair value
$
88,479
$
2,307
$
—
$
90,786
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 November 30, 2018 or May 31, 2018.
As of November 30, 2018, other assets 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.
12
4. Investments
Investments at November 30, 2018 of $183.5 million include the cash surrender value of insurance policies of $165.4 million, equity method investments of $16.9 million and cost method investments of $1.2 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 six months ended November 30, 2018 and 2017, no impairment losses were recorded.
During the three months ended November 30, 2018, 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
Six Months Ended
Basic Earnings per Share from Continuing Operations
(in thousands except per share data)
November 30, 2018
November 30, 2017
November 30, 2018
November 30, 2017
Income from continuing operations
$
242,994
$
137,737
$
455,541
$
298,845
Less: income from continuing operations allocated to participating securities
3,376
2,111
6,308
5,298
Income from continuing operations available to common shareholders
$
239,618
$
135,626
$
449,233
$
293,547
Basic weighted average common shares outstanding
106,475
106,340
106,652
106,039
Basic earnings per share from continuing operations
$
2.25
$
1.27
$
4.21
$
2.77
Three Months Ended
Six Months Ended
Diluted Earnings per Share from Continuing Operations
(in thousands except per share data)
November 30, 2018
November 30, 2017
November 30, 2018
November 30, 2017
Income from continuing operations
$
242,994
$
137,737
$
455,541
$
298,845
Less: income from continuing operations allocated to participating securities
3,376
2,111
6,308
5,298
Income from continuing operations available to common shareholders
$
239,618
$
135,626
$
449,233
$
293,547
Basic weighted average common shares outstanding
106,475
106,340
106,652
106,039
Effect of dilutive securities – employee stock options
3,399
3,478
3,605
2,899
Diluted weighted average common shares outstanding
109,874
109,818
110,257
108,938
Diluted earnings per share from continuing operations
$
2.18
$
1.24
$
4.07
$
2.69
For the three and six months ended November 30, 2018, both basic and diluted earnings per share from discontinued operations were $0.00. Both basic and diluted loss per share from discontinued operations were $0.01 for the three months ended November 30, 2017. For the six months ended November 30, 2017, basic and diluted earnings per share from discontinued operations were $0.51 and $0.50, respectively.
13
For the three months ended November 30, 2018 and 2017, options granted to purchase 0.4 million and 0.5 million shares of Cintas common stock, respectively, were excluded from the computation of diluted earnings per share. For the six months ended November 30, 2018 and 2017, options granted to purchase 0.4 million and 0.6 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
November 30, 2018
Six Months Ended
November 30, 2018
Buyback Program
Shares
Avg. Price per Share
Purchase Price
Shares
Avg. Price per Share
Purchase Price
August 2, 2016
1,740
$
190.66
$
331,547
2,130
$
192.55
$
410,003
October 30, 2018
201
$
181.41
$
36,579
201
$
181.41
$
36,579
1,941
$
189.69
$
368,126
2,331
$
191.58
$
446,582
In the period subsequent to November 30, 2018 through January 8, 2019, we purchased 0.6 million shares of Cintas common stock under the new share buyback program at an average price of $167.32 for a total purchase price of $100.0 million. From the inception of the October 30, 2018 share buyback program through January 8, 2019, Cintas has purchased a total of 0.8 million shares of Cintas common stock at an average price of $170.87 for a total purchase price of $136.6 million.
For the three months ended November 30, 2018, 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 November 30, 2018. These shares were acquired at an average price of $194.14 per share for a total purchase price of $0.4 million. During the six months ended November 30, 2018, Cintas acquired 0.3 million shares of Cintas common stock for employee payroll taxes due on restricted stock awards that vested during the six months ended November 30, 2018. These shares were acquired at an average price of $204.32 per share for a total purchase price of $61.5 million.
14
6. Goodwill, Service Contracts and Other Assets
Changes in the carrying amount of goodwill and service contracts for the six months ended November 30, 2018, by reportable operating segment and All Other, are as follows:
Goodwill (in thousands)
Uniform Rental
and Facility Services
First Aid
and Safety Services
All
Other
Total
Balance as of June 1, 2018
$
2,505,476
$
244,279
$
97,133
$
2,846,888
Goodwill acquired
15
—
5,092
5,107
Foreign currency translation
(6,233
)
(499
)
(19
)
(6,751
)
Balance as of November 30, 2018
$
2,499,258
$
243,780
$
102,206
$
2,845,244
Service Contracts (in thousands)
Uniform Rental
and Facility Services
First Aid
and Safety Services
All
Other
Total
Balance as of June 1, 2018
$
492,067
$
27,294
$
26,407
$
545,768
Service contracts acquired
739
14
4,959
5,712
Service contracts amortization
(23,477
)
(1,926
)
(2,680
)
(28,083
)
Foreign currency translation
(1,845
)
(47
)
—
(1,892
)
Balance as of November 30, 2018
$
467,484
$
25,335
$
28,686
$
521,505
Information regarding Cintas’ service contracts and other assets is as follows:
As of November 30, 2018
(In thousands)
Carrying
Amount
Accumulated
Amortization
Net
Service contracts
$
928,010
$
406,505
$
521,505
Capitalized contract costs (1)
$
234,446
$
34,726
$
199,720
Noncompete and consulting agreements
42,116
40,190
1,926
Other
41,282
14,542
26,740
Total other assets
$
317,844
$
89,458
$
228,386
(1) The current portion of capitalized contract costs, included in prepaid expenses and other current assets on the consolidated condensed balance sheet as of November 30, 2018, is $67.0 million.
As of May 31, 2018
(In thousands)
Carrying
Amount
Accumulated
Amortization
Net
Service contracts
$
924,978
$
379,210
$
545,768
Noncompete and consulting agreements
$
41,710
$
39,877
$
1,833
Other
38,787
11,305
27,482
Total other assets
$
80,497
$
51,182
$
29,315
Amortization expense for service contracts and other assets for continuing operations was $33.3 million and $15.6 million for the three months ended November 30, 2018 and 2017, respectively. Amortization expense for service contracts and other assets for continuing operations was $66.2 million and $29.8 million for the six months ended November 30, 2018 and 2017, respectively. Estimated amortization expense for service contracts and other assets, excluding any future acquisitions and commissions to be earned, for each of the next five full fiscal years and thereafter is $132.6 million, $124.7 million, $109.6 million, $97.7 million, $79.7 million and $323.1 million, respectively.
15
7. Debt, Derivatives and Hedging Activities
Cintas' outstanding debt is summarized as follows:
(In thousands)
Interest
Rate
Fiscal Year
Issued
Fiscal Year
Maturity
November 30,
2018
May 31,
2018
Debt due within one year
Commercial paper
2.60
%
(1)
Various
Various
$
173,500
$
—
Total debt due within one year
$
173,500
$
—
Debt due after one year
Senior notes
4.30
%
2012
2022
$
250,000
$
250,000
Senior notes
2.90
%
2017
2022
650,000
650,000
Senior notes
3.25
%
2013
2023
300,000
300,000
Senior notes (2)
2.78
%
2013
2023
51,902
52,119
Senior notes (3)
3.11
%
2015
2025
52,140
52,309
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
(17,634
)
(19,119
)
Total debt due after one year
$
2,536,408
$
2,535,309
(1) Variable rate debt instrument. The rate presented is the variable borrowing rate at November 30, 2018.
(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) Cintas assumed these senior notes with the acquisition of G&K in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.88%.
Cintas' senior notes, excluding the G&K senior notes assumed with the acquisition of G&K in fiscal 2017, are recorded at cost, net of debt issuance costs. The fair value of the long-term debt is estimated using Level 2 inputs based on general market prices. The carrying value and fair value of Cintas' debt as of November 30, 2018 were $2,723.5 million and $2,715.0 million, respectively, and as of May 31, 2018 were $2,550.0 million and $2,582.0 million, respectively. During the six months ended November 30, 2018, Cintas issued $173.5 million, net of commercial paper.
The credit agreement that supports our commercial paper program was amended on September 16, 2016. The amendment increased the capacity of the revolving credit facility from $450.0 million to $600.0 million and added a $250.0 million term loan facility. 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 a new term loan of up to $250.0 million in the aggregate, subject to customary conditions. The maturity date of the credit agreement is September 15, 2021. As of November 30, 2018, there was $173.5 million of commercial paper outstanding with a weighted average interest rate of 2.60% and maturity dates less than 30 days and no borrowings on our revolving credit facility. As of May 31, 2018, there was no commercial paper outstanding and no borrowings on our revolving credit facility.
Cintas uses interest rate locks to manage our overall interest expense as interest rate locks effectively change the interest rate of specific debt issuances. The interest rate locks are entered into to protect against unfavorable movements in the benchmark treasury rate related to forecasted debt issuances. Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2007, fiscal 2012, fiscal 2013 and fiscal 2017. The amortization of the cash flow hedges resulted in a decrease to other comprehensive income of $0.3 million and $0.1 million for the three months ended November 30, 2018 and 2017, respectively. For the six months ended November 30, 2018 and 2017, the amortization of the cash flow hedges resulted in a decrease to other comprehensive income of $0.6 million and $0.3 million, respectively. During the first quarter of fiscal 2019, Cintas entered into interest rate lock agreements with a notional value of $500.0 million for a forecasted debt issuance. As of November 30, 2018, the fair value of these interest rate locks was an asset of $2.3 million recorded in other assets and in other comprehensive income, net of tax. The interest rate locks had no impact on net income or cash flows from continuing operations for the three and six months ended November 30, 2018.
16
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 debt covenants for all periods presented.
8. Income Taxes
In the normal course of business, Cintas provides for uncertain tax positions and the related interest and adjusts its unrecognized tax benefits and accrued interest accordingly. As of November 30, 2018 and May 31, 2018, recorded unrecognized tax benefits were $28.8 million and $26.9 million, respectively, and are included in long-term accrued liabilities on the consolidated condensed balance sheet.
The majority of Cintas' operations are in North America. Cintas is required to file federal income tax returns, as well as state income tax returns in a majority of the domestic states and also in certain Canadian provinces. At times, Cintas is subject to audits in these jurisdictions. The audits, by nature, are sometimes complex and can require several years to resolve. The final resolution of any such tax audit could result in either a reduction in Cintas' accruals or an increase in its income tax provision, either of which could have an impact on the consolidated condensed results of operations in any given period.
All U.S. federal income tax returns are closed to audit through fiscal 2014. Cintas is currently in various audits in certain foreign jurisdictions and certain domestic states. The years under foreign and domestic state audits cover fiscal years back to 2013. Based on the resolution of the various audits and other potential regulatory developments, it is reasonably possible that the balance of unrecognized tax benefits would not change for the fiscal year ending May 31, 2019.
On December 22, 2017, the President signed into legislation the Tax Act. Among other changes, the Tax Act reduces the U.S. corporate tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of foreign subsidiaries. The Tax Act also includes provisions that are expected to offset some of the benefit of the U.S. corporate tax rate reduction, including the repeal of the deduction for domestic production activities and the expansion of the limitation on the deduction of certain executive compensation. In addition, the Tax Act alters the landscape of taxation of non-U.S. operations and provides immediate deductions for certain new investments, among other provisions.
In acknowledgment of the substantial changes incorporated in the Tax Act, and with the timing of the enactment being just weeks before the majority of the provisions became effective, the SEC staff issued Staff Accounting Bulletin (SAB) 118 to provide certain guidance in determining the accounting for income tax effects of the legislation in the accounting period of enactment as well as provide a measurement period within which to finalize and reflect such final effects associated with the Tax Act. During the first quarter of fiscal 2019, Cintas recorded an adjustment to the provisional transition tax, net of foreign tax credits, of $3.3 million. Cintas is still revising the transition tax calculation, and this amount is subject to change based on computation of the final fiscal 2018 earnings and profit and the amounts held in cash and cash equivalents at the end of fiscal 2018. There were no provisional adjustments recorded during the three months ended November 30, 2018. Cintas also analyzed the impact of the new provisions under the Tax Act surrounding executive compensation, the foreign derived intangible income deduction and global intangible low-taxed income and determined that the impact was immaterial for the three and six months ended November 30, 2018.
Cintas’ effective tax rate for continuing operations was 24.2% and 33.3% for the three months ended November 30, 2018 and 2017, respectively. For the six months ended November 30, 2018 and 2017, Cintas' effective tax rate for continuing operations was 18.9% and 29.8%, respectively. The effective tax rate for all periods was largely impacted by certain discrete items (primarily the tax accounting for stock-based compensation). The three and six-month periods ended November 30, 2018 were also impacted by the reduced U.S. corporate tax rate as a result of the enactment of the Tax Act.
17
9. Pension Plans
In conjunction with the acquisition of G&K in fiscal 2017, Cintas assumed G&K's noncontributory frozen defined benefit pension plan (the Pension Plan) that covers substantially all G&K employees who were employed as of July 1, 2005, except certain employees who were covered by union-administered plans. Benefits are based on the number of years of service and each employee’s compensation near retirement. We will make annual contributions to the Pension Plan consistent with federal funding requirements. The Pension Plan was frozen by G&K effective December 31, 2006. Future growth in benefits will not occur beyond this date. Applicable accounting standards require that the consolidated condensed balance sheet reflect the funded status of the Pension Plan. The funded status of the Pension Plan is measured as the difference between the plan assets at fair value and the projected benefit obligation. The net pension liability is included in long-term accrued liabilities on the consolidated condensed balance sheets. Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive income in our consolidated condensed balance sheets. The difference between actual amounts and estimates based on actuarial assumptions are recognized in other comprehensive income in the period in which they occur. The Pension Plan assumptions are evaluated annually and are updated as deemed necessary.
The components of net periodic pension cost (benefit) recognized in other comprehensive income for the Pension Plan are as follows:
Three Months Ended
Six Months Ended
(In thousands)
November 30, 2018
November 30, 2017
November 30, 2018
November 30, 2017
Interest cost
$
781
$
711
$
1,562
$
1,421
Expected return on assets
(720
)
(716
)
(1,441
)
(1,432
)
Total net periodic pension cost (benefit)
$
61
$
(5
)
$
121
$
(11
)
18
10. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss), net of tax:
(In thousands)
Foreign
Currency
Unrealized Income on Interest Rate Hedges
Other
Total
Balance at June 1, 2018
$
6,550
$
10,449
$
(656
)
$
16,343
Other comprehensive loss before reclassifications
(3,019
)
(3,168
)
—
(6,187
)
Amounts reclassified from accumulated other comprehensive income (loss)
—
(295
)
—
(295
)
Net current period other comprehensive loss
(3,019
)
(3,463
)
—
(6,482
)
Balance at August 31, 2018
3,531
6,986
(656
)
9,861
Other comprehensive (loss) income before
reclassifications
(10,623
)
4,921
—
(5,702
)
Amounts reclassified from accumulated other comprehensive income (loss)
—
(294
)
—
(294
)
Net current period other comprehensive (loss) income
(10,623
)
4,627
—
(5,996
)
Balance at November 30, 2018
$
(7,092
)
$
11,613
$
(656
)
$
3,865
(In thousands)
Foreign
Currency
Unrealized Income on Interest Rate Hedges
Other
Total
Balance at June 1, 2017
$
(12,726
)
$
11,382
$
(1,685
)
$
(3,029
)
Other comprehensive income before reclassifications
35,184
—
20
35,204
Amounts reclassified from accumulated other comprehensive income (loss)
—
(172
)
—
(172
)
Net current period other comprehensive income (loss)
35,184
(172
)
20
35,032
Balance at August 31, 2017
22,458
11,210
(1,665
)
32,003
Other comprehensive loss before reclassifications
(11,374
)
—
(20
)
(11,394
)
Amounts reclassified from accumulated other comprehensive income (loss)
—
(172
)
—
(172
)
Net current period other comprehensive loss
(11,374
)
(172
)
(20
)
(11,566
)
Balance at November 30, 2017
$
11,084
$
11,038
$
(1,685
)
$
20,437
The following table summarizes the reclassifications out of accumulated other comprehensive income (loss):
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components
Amount Reclassified from Accumulated Other
Comprehensive Income (Loss)
Affected Line in the Consolidated Condensed Statements of Income
Three Months Ended
Six Months Ended
(In thousands)
November 30, 2018
November 30, 2017
November 30, 2018
November 30, 2017
Amortization of interest
rate locks
$
474
$
278
$
948
$
556
Interest expense
Tax expense
(180
)
(106
)
(359
)
(212
)
Income taxes
Amortization of interest
rate locks, net of tax
$
294
$
172
$
589
$
344
Net income
19
11. Segment Information
Cintas classifies its business into two reportable operating segments and places the remainder of its operating segments in an All Other category. Cintas’ two reportable operating segments are Uniform Rental and Facility Services and First Aid and Safety Services. The Uniform Rental and Facility Services reportable operating segment, 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, which consists of Fire Protection Services and its Uniform Direct Sale business, is included in All Other.
Cintas evaluates the performance of each operating segment based on several factors of which the primary financial measures are operating segment revenue and income before income taxes. The accounting policies of the operating segments are the same as those described in Note 1 entitled Basis of Presentation. Information related to the operations of Cintas’ operating segments is set forth below:
(In thousands)
Uniform Rental
and Facility Services
First Aid
and Safety Services
All
Other
Corporate (1)
Total
For the three months ended November 30, 2018
Revenue
$
1,390,778
$
153,348
$
174,142
$
—
$
1,718,268
Income before income taxes
$
242,891
$
21,328
$
11,421
$
44,884
$
320,524
For the three months ended November 30, 2017
Revenue
$
1,308,038
$
139,090
$
159,313
$
—
$
1,606,441
Income (loss) before income taxes
$
203,814
$
17,975
$
13,422
$
(28,838
)
$
206,373
As of and for the six months ended November 30, 2018
Revenue
$
2,765,716
$
306,765
$
343,762
$
—
$
3,416,243
Income before income taxes
$
474,425
$
43,311
$
23,132
$
21,076
$
561,944
Total assets
$
6,438,400
$
495,054
$
383,150
$
88,479
$
7,405,083
As of and for the six months ended November 30, 2017
Revenue
$
2,619,822
$
279,672
$
318,450
$
—
$
3,217,944
Income (loss) before income taxes
$
422,724
$
37,386
$
24,200
$
(58,858
)
$
425,452
Total assets
$
5,899,010
$
467,902
$
353,155
$
258,734
$
6,978,801
(1) Corporate assets include cash and marketable securities in all periods.
20
12. Discontinued Operations
During the first quarter of fiscal 2018, Cintas sold a significant business referred to as Discontinued Services and received proceeds from the sale of $127.8 million. The results of Discontinued Services are included in discontinued operations for all periods presented. In accordance with the applicable accounting guidance for the disposal of long-lived assets and discontinued operations, the results of Discontinued Services have been excluded from both continuing operations and operating segment results for all periods presented.
Following is selected financial information included in net income (loss) from discontinued operations for Discontinued Services: