Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Business description. Cintas Corporation (collectively with its majority-owned subsidiaries and any entities over which it has control, Cintas, Company, we, us or our) helps more than one million businesses of all types and sizes, primarily in the United States (U.S.), as well as Canada and Latin America, get READY™ to open their doors with confidence every day by providing a wide range of products and services that enhance our customers’ image and help keep their facilities and employees clean, safe and looking their best. With products and services including uniforms, mats, mops, restroom supplies, first aid and safety products, fire extinguishers and testing, and safety training, Cintas helps customers get Ready for the Workday®. Cintas is also the creator of the Total Clean Program™ — a first-of-its-kind service that includes scheduled delivery of essential cleaning supplies, hygienically clean laundering, and sanitizing and disinfecting projects and services.
Cintas’ reportable operating segments are the Uniform Rental and Facility Services operating segment and the First Aid and Safety Services operating segment. 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 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’ operating segments, which consists of the Fire Protection Services operating segment and the Uniform Direct Sale operating segment, are included in All Other. Cintas evaluates operating segment performance based on revenue and income before income taxes. Revenue and income before income taxes for each of these reportable operating segments for the years ended May 31, 2021, 2020 and 2019 are presented in Note 14 entitled Operating Segment Information. The Company regularly reviews its operating segments for reporting purposes based on the information its chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance and makes changes when appropriate.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, and has since spread globally. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Efforts to contain the spread of COVID-19 intensified during our fiscal 2020 fourth quarter and have remained in effect throughout our fiscal 2021. Most states and municipalities within the U.S., as well as Canada, enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. Many of the business closures, quarantine orders and other restrictive measures remained in place through fiscal 2021. Within the U.S., our business was designated an essential business, which allowed us to continue to serve customers that remained open. In these consolidated financial statements and related disclosures, we have assessed the current impact of COVID-19 on our consolidated financial condition, results of operations, and cash flows, as well as our estimates and accounting policies. We have made additional disclosures of these assessments, as necessary. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot predict the extent to which our business, consolidated results of operations, consolidated financial condition or liquidity will ultimately be impacted.
Principles of consolidation. The consolidated financial statements include the accounts of Cintas controlled majority-owned subsidiaries and any entities over which Cintas has control. Intercompany balances and transactions have been eliminated as appropriate.
Use of estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company’s results are affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, government policies surrounding the containment of COVID-19 and changes in the prices of raw materials, can have a significant effect on operations. These factors and other events may cause actual results to differ from management's estimates.
Revenue recognition. Rental revenue, which is recorded in the Uniform Rental and Facility Services reportable operating segment, is recognized when services are performed or the performance obligation under the terms of a contract with a customer are satisfied. Other revenue, which is recorded in the First Aid and Safety Services reportable operating segment and All Other, is recognized when either services are performed or the performance obligation under the terms of a contract with a customer are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for the performance of the service or transfer of the inventory. See Note 2 entitled Revenue Recognition.
Cost of uniform rental and facility services. Cost of uniform rental and facility services consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other ancillary items. The Uniform Rental and Facility Services reportable operating segment inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution are included in the cost of uniform rental and facility services.
Cost of other. Cost of other consists primarily of cost of goods sold (predominantly first aid and safety products, uniforms and fire protection products), delivery expenses and distribution expenses in the First Aid and Safety Services reportable operating segment and All Other. Cost of other includes inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and other costs of distribution.
Selling and administrative expenses. Selling and administrative expenses consist primarily of sales labor and commissions, management and administrative labor, payroll taxes, medical expense, insurance expense, legal and professional costs and amortization of finite-lived intangible assets and capitalized contract costs. As a result of the adverse impact that the COVID-19 pandemic has had on the economic environment in North America and the ongoing uncertainty regarding the severity and duration of the pandemic, Cintas initiated certain activities to reduce operating costs and better align its workforce with the needs of its ongoing business. During the fourth quarter of fiscal 2020, Cintas recorded a total of $24.5 million in employee termination costs, of which $20.2 million was recorded in the Uniform Rental and Facility Services reportable operating segment. The amount of employee termination benefits paid during the fiscal year ended May 31, 2021 and 2020 was $10.2 million and $14.3 million, respectively. The related liability balance was $0.0 million at May 31, 2021 and was $10.2 million at May 31, 2020. The May 31, 2020 liability balance was recorded in accrued compensation and related liabilities on the consolidated balance sheets. Cintas did not record employee termination costs during fiscal 2021.
G&K Services, Inc. integration expenses. As a result of the acquisition of G&K Services, Inc. (G&K) in fiscal 2017, the Company incurred various integration expenses in fiscal 2019, which related primarily to facility closure expenses. No such costs were incurred in fiscal 2021 or 2020. The integration expenses for fiscal 2019 are included in a single line in the consolidated statements of income and are reported by operating segment in Note 14 entitled Operating Segment Information.
Cash and cash equivalents. Cintas considers all highly liquid domestic investments with a maturity of three months or less, at date of purchase, to be cash equivalents. At both May 31, 2021 and 2020, cash and cash equivalents includes $31.8 million of restricted cash used as collateral associated with our insurance reserve.
Accounts receivable. Accounts receivable is comprised of amounts owed through product shipments and services provided and is presented net of an allowance for doubtful accounts. The allowance includes both an estimate, based on historical rates of collections, and reserves for specific accounts identified as uncollectible. The portion of the allowance that is an estimate based on Cintas' historical rates of collections is recorded for overdue amounts, beginning with a nominal percentage when the account is current and increasing substantially as the account ages. The amount provided as the account ages will differ slightly between the Uniform Rental and Facility Services reportable operating segment, the First Aid and Safety Services reportable operating segment and All Other because of differences in customers served and the nature of each business. As of May 31, 2020, in response to the economic disruption created by the COVID-19 pandemic, Cintas performed an additional evaluation of amounts due from customers in every operating segment that were deemed to be higher collection risk. This evaluation, which occurred in the fourth quarter of fiscal 2020, resulted in an allowance for doubtful accounts in excess of historical rates. The judgment applied to increase the allowance for doubtful accounts beyond our historical policy was deemed to be reasonable and supportable based on the data available as of the consolidated balance sheet date. Certain of the corresponding trade receivables were collected during fiscal 2021, and $14.2 million of incremental allowance for doubtful accounts recorded as of May 31, 2020 was reversed through selling and administrative expenses as the Company's estimates and assumptions related to the impact of COVID-19 changed
during fiscal 2021. As of May 31, 2021, no incremental allowance for doubtful accounts was deemed necessary. When an account is considered uncollectible, it is written off against the allowance for doubtful accounts.
Inventories, net. Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of the following amounts at May 31:
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(In thousands)
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2021
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2020
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Raw materials
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$
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15,109
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|
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$
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18,661
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Work in process
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37,664
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29,497
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Finished goods
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429,024
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|
|
360,740
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$
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481,797
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$
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408,898
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Inventories are recorded net of reserves for obsolete inventory (excess and slow-moving) of $111.0 million and $45.5 million at May 31, 2021 and 2020, respectively. The inventory obsolescence reserve is determined by specific identification, as well as an estimate based on Cintas' historical rates of obsolescence. The disruption created by the COVID-19 pandemic beginning in the fourth quarter of fiscal 2020 resulted in larger quantities of inventory on hand as of May 31, 2021 and 2020. As of May 31, 2021, our Uniform Rental and Facility Services and First Aid and Safety reportable operating segments held an excess amount of personal protective equipment inventory on hand. The excess inventory, determined through specific identification, resulted in an increase to the obsolescence reserve of $43.6 million as of May 31, 2021, in comparison to May 31, 2020. As of May 31, 2020, an incremental obsolescence reserve was recorded within our Uniform Direct Sales operating segment due to larger quantities of inventory remaining on hand, at the consolidated balance sheet date, as a result of disruption created by the onset of the COVID-19 pandemic. Obsolete inventory reserves are recorded in selling and administrative expenses on the consolidated statements of income. The judgment applied to increase the obsolete inventory reserve as of May 31, 2021 and 2020, beyond our historical policy was deemed to be reasonable and supportable based on the data available as of the consolidated balance sheet dates. Once a specific inventory item is written down to the lower of cost or net realizable value, a new cost basis has been established, and that inventory item cannot subsequently be marked up.
Uniforms and other rental items in service. These items are valued at cost less amortization, calculated using the straight-line method. Uniforms in service (other than cleanroom and flame resistant clothing) are amortized over their useful life of 18 months. Other rental items, including shop towels, mats, mops, cleanroom garments, flame resistant clothing, linens and restroom dispensers, are amortized over their useful lives, which range from 8 to 60 months. The amortization rates used are based on industry experience, Cintas' specific experience and wear tests performed by Cintas. These factors are critical to determining the amount of in service inventory and related cost of uniforms and facility services that are presented in the consolidated financial statements.
Property and equipment. Property and equipment is stated at cost, less accumulated depreciation or at fair value upon acquisition. Depreciation is calculated using the straight-line method primarily over the following estimated useful lives of the assets based on industry and Cintas specific experience:
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Years
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Buildings
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30 to 40
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Building improvements
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5 to 20
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Equipment
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3 to 10
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Leasehold improvements
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2 to 15
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When events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the estimated undiscounted future cash flows are compared to the carrying amount of the assets. If the estimated undiscounted future cash flows are less than the carrying amount of the assets, an impairment loss is recorded based on the excess of the carrying amount of the assets over their respective fair values. Fair value is generally determined by discounted cash flows, prices of similar assets or third-party real estate valuations, as appropriate. As a result of certain activities to eliminate excess capacity and reduce our cost structure in response to COVID-19, an indicator of impairment was identified. Cintas recognized an impairment loss of $9.2 million in the Uniform Rental and Facility Services reportable operating segment during the year ended May 31, 2020. Cintas recognized a long-lived asset impairment loss of $5.1 million in the Uniform Direct Sale operating segment during the year ended May 31, 2021. The long-lived asset impairments in both fiscal years were based on the excess of the carrying amount of
asset over their respective fair values. The long-lived asset impairment charge was recorded within selling and administrative expenses on the consolidated statements of income. The undiscounted cash flows were estimated, using Level 2 inputs based on both the cost and market approaches, at the lowest discernible level of cash flows, which is at the location level. Cintas did not identify any indicators of impairment for the fiscal year ended May 31, 2019.
Investments. Investments consists primarily of the cash surrender value of life insurance policies and equity method investments. The equity method is used to account for an investment if our investment gives us the ability to exercise significant influence over the operating and financial policies of the investee. In general, equity method investments are initially measured at cost. Cintas recognizes its share of the investee’s earnings or losses in income. Equity method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable.
Goodwill. Goodwill, obtained through acquisitions of businesses, is valued at cost less any impairment. Cintas completes an annual impairment test, that includes an assessment of qualitative factors including, but not limited to, macroeconomic conditions, industry and market conditions, and entity specific factors such as strategies and financial performance. We test for goodwill impairment at the reporting unit level. Cintas has identified four reporting units for purposes of evaluating goodwill impairment: Uniform Rental and Facility Services, First Aid and Safety Services and two reporting units within All Other. Based on the results of the annual impairment tests, Cintas was not required to recognize an impairment of goodwill for the fiscal years ended May 31, 2021, 2020 or 2019. Cintas will continue to perform impairment tests as of March 1 in future years and when indicators of impairment exist.
Service contracts and other assets. Service contracts and other assets, which consist primarily of capitalized contract costs and noncompete and consulting agreements obtained through acquisitions of businesses, are generally amortized by use of the straight-line method over the estimated lives of the agreements, which are generally 5 to 10 years. The G&K service contract asset is being amortized over a period of 15 years, which represents the estimated life of the economic benefit. The G&K service contract asset amortization is based on the annual economic value of the underlying asset which generally decreases over the 15-year term. Certain noncompete agreements, as well as all service contracts, require that a valuation be determined using a discounted cash flow model. The assumptions and judgments used in these models involve estimates of cash flows and discount rates, among other factors. Because of the assumptions used to value these intangible assets, actual results over time could vary from original estimates. Impairment of service contracts and other assets is accomplished through specific identification. No impairment has been recognized by Cintas for the fiscal years ended May 31, 2021, 2020 and 2019.
Debt issuance costs. Debt issuance costs for the revolving credit facility are included in other assets, net and all other debt issuance costs reduce the carrying amount of debt.
Accrued liabilities. Current accrued liabilities are recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated. Current accrued liabilities consist of the following at May 31:
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(In thousands)
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2021
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2020
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Insurance reserve
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$
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156,447
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|
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$
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165,427
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Employee benefit related liabilities
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129,348
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|
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134,846
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Dividends
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79,135
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—
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Accrued interest
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24,420
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24,538
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Other
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129,560
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131,842
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$
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518,910
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$
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456,653
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Long-term accrued liabilities consist primarily of retirement obligations, which are described in more detail in Note 10 entitled Employee Benefit Plans, interest rate lock agreements, which are described in more detail in Note 7 entitled Debt and Derivatives, reserves associated with unrecognized tax benefits, which are described in more detail in Note 9 entitled Income Taxes and environmental obligations, which are further described below.
Insurance reserve. The insurance reserve represents the estimated ultimate cost of all asserted and unasserted claims incurred, primarily related to workers' compensation, auto liability and other general liability exposure through the consolidated balance sheet dates. Our incurred but not reported reserve is estimated through actuarial procedures, with the assistance of third-party actuarial specialists, of the insurance industry and by using industry assumptions, adjusted for specific expectations based on our claims history. Cintas records an increase or decrease in selling and administrative expenses related to development of prior claims, higher claims activity and other environmental factors in the period in which it becomes known. These changes in estimates may be material to the consolidated financial statements.
Environmental obligations. Environmental obligations, including obligations obtained through past business acquisitions, are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. Cintas’ environmental obligations are estimated based on an evaluation of various factors, including currently available facts, existing technology, presently enacted laws and regulations, and remediation experience. Where the available information is sufficient to estimate the amount of the obligation, that estimate has been recorded. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. Management actively monitors all locations for compliance and changes in facts and circumstances. No one location or site is deemed to be material or in violation of the applicable laws and regulations, even though costs are being incurred. Costs estimated for environmental obligations are not discounted to their present value.
Pension plans. The Company assumed G&K's noncontributory, defined benefit pension plan (the Pension Plan) covering substantially all employees who were employed as of July 1, 2005, except certain employees who are covered by union-administered plans. Benefits are based on the number of years of service and each employee's compensation near retirement. G&K froze the Pension Plan effective December 31, 2006. Future growth in benefits will not occur after this date. The Company's funding policy provides for contributions of an amount between the minimum required and maximum amount that can be deducted for federal income tax purposes. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at May 31, the measurement date. The benefit obligation is the projected benefit obligation (PBO). The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. The measurement of the PBO is based on the Company’s estimates and actuarial valuations. The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants. These valuations reflect the terms of the Pension Plan and use participant-specific information such as compensation, age and years of service, as well as certain assumptions that require significant judgment, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. We recognize, as of a measurement date, any unrecognized actuarial net gains or losses that exceed ten percent of the larger of the projected benefit obligations or the plan assets, defined as the "corridor." Amounts outside the corridor are amortized over the plan participants' life expectancy. We determine the expected return on assets using the fair value of plan assets. See Note 10 entitled Employee Benefit Plans.
Stock-based compensation. Compensation expense is recognized for all share-based payments to employees, including stock options and restricted stock awards, in the consolidated statements of income based on the fair value of the awards that are granted. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model. Generally, measured compensation cost, net of actual forfeitures, is recognized on a straight-line basis over the vesting period of the related share-based compensation award. See Note 12 entitled Stock-Based Compensation.
Derivatives and hedging activities. Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Derivatives are recorded at fair value on the consolidated balance sheet, and gains and losses are recorded as adjustments to income or other comprehensive income, as appropriate. For derivative financial instruments that are designated as a hedge, unrealized gains and losses related to the effective portion are either recognized in income immediately to offset the realized gain or loss on the hedged item, or are deferred and reported as a component of other comprehensive income (loss) in shareholders' equity and subsequently recognized in net income when the hedged item affects net income.
Income taxes. The provision for income taxes includes taxes paid, currently payable or receivable and those deferred. Deferred tax assets and liabilities are determined by the differences between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in future periods. Cintas accounts for Global Intangible
Low-Taxed Income (GILTI) as a current-period expense when incurred. See Note 9 entitled Income Taxes for the types of items that give rise to significant deferred income tax assets and liabilities. Deferred income taxes are classified as assets or liabilities based on the classification of the related asset or liability for financial reporting purposes. Cintas regularly reviews deferred tax assets for recoverability based upon projected future taxable income and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, as adjusted for valuation allowances, will be realized.
Accounting for uncertain tax positions requires the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Companies may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Cintas is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, Cintas records reserves as deemed appropriate. Based on Cintas' evaluation of current tax positions, Cintas believes its tax related accruals are appropriate.
Litigation and other contingencies. Cintas is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract, environmental and employment claims. U.S. GAAP requires that a liability for contingencies be recorded when it is probable that a liability has occurred and the amount of the liability can be reasonably estimated. In the opinion of management, the aggregate liability, if any, with respect to such ordinary course of business actions will not have a material adverse effect on the consolidated financial position or consolidated results of operations of Cintas.
Fair value measurements. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. It also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
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Level 1 —
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Quoted prices in active markets for identical assets or liabilities.
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Level 2 —
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Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
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Level 3 —
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Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
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In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Cintas' assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between levels for the years ended May 31, 2021 or 2020. The carrying value of accounts receivable and accounts payable, and other current assets and liabilities, approximate fair value because of the short-term maturity of those instruments.
In order to meet the requirements of ASC 820, Cintas utilizes two basic valuation approaches to determine the fair value of its assets and liabilities required to be recorded on a recurring basis at fair value. The first approach is the cost approach. The cost approach is generally the value a market participant would expect to replace the respective
asset or liability. The second approach is the market approach. The market approach looks at what a market participant would consider valuing an exact or similar asset or liability to that of Cintas, including those traded on exchanges.
Cintas' non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis primarily relate to assets revalued in an impairment analysis and to assets and liabilities acquired in a business acquisition unless otherwise noted in Note 3 entitled Fair Value Disclosures. Cintas is required to provide additional disclosures about fair value measurements as part of the consolidated financial statements for each major category of assets and liabilities measured at fair value on a non-recurring basis (including business acquisitions). Based on the nature of Cintas' business acquisitions, which occur regularly throughout the fiscal year, the majority of the assets acquired and liabilities assumed consist of working capital, primarily valued using Level 2 inputs, property and equipment, also primarily valued using Level 2 inputs and goodwill and other identified intangible assets valued using Level 3 inputs. In general, non-recurring fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows and company specific discount rates.
New accounting pronouncements. In April 2019, the FASB issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces 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 now uses a forward-looking expected loss model rather than the incurred loss model. Adoption of ASU 2016-13 requires using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align existing credit loss methodology with the new standard. This standard was adopted by Cintas on June 1, 2020 and did not have a material impact on the Company's consolidated financial statements.
No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the consolidated financial statements.
Note 2. Revenue Recognition
The following table presents Cintas' total revenue disaggregated by operating segment for the fiscal years ended May 31:
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(In thousands)
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2021
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2020
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2019
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Uniform Rental and Facility
Services
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$
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5,689,632
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|
80.0
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%
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|
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$
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5,643,494
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|
79.6
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%
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|
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$
|
5,552,430
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|
80.6
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%
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First Aid and Safety Services
|
784,291
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11.0
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%
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708,569
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10.0
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%
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|
|
619,470
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|
9.0
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%
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Fire Protection Services
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446,441
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|
6.3
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%
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422,688
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6.0
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%
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405,467
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5.9
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%
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Uniform Direct Sales
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195,976
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2.7
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%
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|
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310,369
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4.4
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%
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314,936
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4.5
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%
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Total revenue
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$
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7,116,340
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100.0
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%
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|
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$
|
7,085,120
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100.0
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%
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$
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6,892,303
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100.0
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%
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Fire Protection Services and Uniform Direct Sales operating segments are included within All Other as disclosed in Note 14 entitled Operating Segment Information.
Revenue Recognition Policy
Approximately 95% of the Company's revenues are derived from fees for route servicing of Uniform Rental and Facility Services, First Aid and Safety Services and Fire Protection Services, performed by a Cintas employee-partner, at the customer's location of business. Revenue from our route servicing customer contracts represent a single-performance obligation. The Company recognizes revenue over time as services are performed based on the nature of services provided and contractual rates (output method) or at a point in time when the performance
obligation under the terms of the contract with a customer are satisfied, at the customer's location of business. The Company's remaining revenue, primarily within the Uniform Direct Sales operating segment, and representing approximately 5% of the Company's total revenue, is recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer.
Revenue recorded is presented net of sales and other taxes we collect on behalf of governmental authorities. Shipping and handling costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Certain of our customer contracts include pricing terms and conditions that include components of variable consideration. The variable consideration is typically in the form of consideration paid to a customer based on performance metrics specified within the contract. Specifically, some contracts contain discounts or rebates that the customer can earn through the achievement of specified volume levels. Each component of variable consideration is earned based on the Company's actual performance during the measurement period specified within the contract. To determine the transaction price, the Company estimates the variable consideration using the most likely amount method, based on the specific contract provisions and known performance results during the relevant measurement period. When determining if variable consideration should be constrained, the Company considers whether factors outside its control could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal. The Company's performance period generally corresponds with the monthly invoice period. No constraints on our revenue recognition were applied during the fiscal years ended May 31, 2021, 2020 or 2019. The Company reassesses these estimates during each reporting period. Cintas maintains a liability for these discounts and rebates within accrued liabilities on the consolidated balance sheets. Variable consideration also includes consideration paid to a customer at the beginning of a contract. Cintas capitalizes this consideration and amortizes it over the life of the contract as a reduction to revenue in accordance with ASU 2014-08, "Revenue from Contracts with Customers (Topic 606)." These assets are included in other assets, net on the consolidated balance sheets.
Additionally, in accordance with Topic 606, certain Uniform Direct Sales operating segment customer contracts contain a provision with an enforceable right of payment and the underlying product has no alternative use to Cintas. Consequently, when both aforementioned provisions are prevalent in a customer contract, the revenue is recorded for finished goods that the customer is obligated to purchase under the termination terms of the contract.
Costs to Obtain a Contract
The Company capitalizes commission expenses paid to our employee-partners when the commissions are deemed to be incremental for obtaining the route servicing customer contract. As permitted by Topic 606, the Company has elected to apply the guidance to a portfolio of contracts (or performance obligations) with similar characteristics because the Company reasonably expects that the effects on the consolidated financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within the portfolio. The Company also continues to expense certain costs to obtain a contract if those costs do not meet the criteria of the new standard or the amortization period of the asset would have been one year or less. The deferred commissions are amortized on a straight-line basis over the expected period of benefit. We review the deferred commission balances for impairment on an ongoing basis. Deferred commissions are classified as current or noncurrent based on the timing of when we expect to recognize the expense. The current portion is included in prepaid expenses and other current assets and the noncurrent portion is included in other assets, net on the Company's consolidated balance sheets. As of May 31, 2021 the current and noncurrent assets related to deferred commissions totaled $79.4 million and $227.1 million, respectively. As of May 31, 2020 the current and noncurrent assets related to deferred commissions totaled $76.2 million and $227.1 million, respectively. We recorded amortization expense related to deferred commissions of $83.1 million, $77.8 million and $71.1 million during the fiscal years ended May 31, 2021, 2020 and 2019, respectively. These expenses are classified in selling and administrative expenses on the consolidated statements of income.
Note 3. Fair Value Disclosures
All financial instruments that are measured at fair value on a recurring basis (at least annually) have been classified within the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the consolidated balance sheet date. These financial instruments measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2021
|
(In thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
493,640
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
493,640
|
|
Other assets, net:
|
|
|
|
|
|
|
|
Interest rate lock agreements
|
—
|
|
|
40,400
|
|
|
—
|
|
|
40,400
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
493,640
|
|
|
$
|
40,400
|
|
|
$
|
—
|
|
|
$
|
534,040
|
|
|
|
|
|
|
|
|
|
Long-term accrued liabilities:
|
|
|
|
|
|
|
|
Interest rate lock agreements
|
$
|
—
|
|
|
$
|
61,567
|
|
|
$
|
—
|
|
|
$
|
61,567
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
61,567
|
|
|
$
|
—
|
|
|
$
|
61,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2020
|
(In thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
145,402
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
145,402
|
|
Other assets, net:
|
|
|
|
|
|
|
|
Interest rate lock agreements
|
—
|
|
|
1,546
|
|
|
—
|
|
|
1,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
145,402
|
|
|
$
|
1,546
|
|
|
$
|
—
|
|
|
$
|
146,948
|
|
|
|
|
|
|
|
|
|
Long-term accrued liabilities:
|
|
|
|
|
|
|
|
Interest rate lock agreements
|
$
|
—
|
|
|
$
|
165,686
|
|
|
$
|
—
|
|
|
$
|
165,686
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
165,686
|
|
|
$
|
—
|
|
|
$
|
165,686
|
|
Cintas' cash and cash equivalents are generally classified within Level 1 or Level 2 of the fair value hierarchy. Financial instruments classified as Level 1 are based on quoted market prices in active markets, and financial instruments classified as Level 2 are based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The types of financial instruments Cintas classifies within Level 1 include most bank deposits and money market securities. Cintas does not adjust the quoted market price for such financial instruments.
The fair values of outstanding interest rate lock agreements are included in other assets, net and long-term accrued liabilities at both May 31, 2021 and 2020. 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. No other amounts included in other asset, net or long-term accrued liabilities are recorded at fair value on a recurring basis.
The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Cintas believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the consolidated balance sheet dates.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, Cintas records assets and liabilities at fair value on a nonrecurring basis as required under U.S. GAAP. The assets and liabilities measured at fair value on a nonrecurring basis primarily relate to assets revalued in an impairment analysis and assets and liabilities acquired in a business acquisition.
Note 4. Property and Equipment
Cintas' property and equipment is summarized as follows at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2021
|
|
2020
|
|
|
|
|
Land
|
$
|
190,711
|
|
|
$
|
188,720
|
|
Buildings and improvements
|
698,094
|
|
|
682,768
|
|
Equipment
|
2,409,785
|
|
|
2,347,636
|
|
Leasehold improvements
|
38,320
|
|
|
40,188
|
|
Construction in progress
|
36,749
|
|
|
54,548
|
|
|
3,373,659
|
|
|
3,313,860
|
|
Accumulated depreciation
|
(2,055,221)
|
|
|
(1,910,795)
|
|
Property and equipment, net
|
$
|
1,318,438
|
|
|
$
|
1,403,065
|
|
Cintas capitalizes certain expenditures for software that are purchased or internally developed for use in business. Included in equipment at May 31, 2021 and 2020, were $283.8 million and $273.0 million, respectively, of internal use software. Amortization of internal use software begins when the software is ready for service and continues on the straight-line method over the estimated useful life, generally 10 years. Accumulated amortization related to internal use software was $154.1 million and $131.7 million at May 31, 2021 and 2020, respectively. We recorded amortization expense related to internal use software of $22.3 million, $21.5 million and $21.6 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. These expenses are classified in selling and administrative expenses on the consolidated statements of income.
Note 5. Investments
At May 31, 2021, investments were $274.6 million and include the cash surrender value of insurance policies of $252.1 million, equity method investments of $19.4 million and cost method investments of $3.1 million. At May 31, 2020, investments were $214.8 million and include the cash surrender value of insurance policies of $192.7 million, equity method investments of $19.0 million and cost method investments of $3.1 million. Investments are evaluated for impairment on an annual basis or when indicators of impairment exist. For fiscal years 2021, 2020 and 2019, no impairment losses were recorded.
During 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.
Note 6. Goodwill, Service Contracts and Other Assets
Changes in the carrying amount of goodwill and service contracts by reportable operating segment and All Other, are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
(In thousands)
|
Uniform Rental
and Facility
Services
|
|
First Aid
and Safety
Services
|
|
All
Other
|
|
Total
|
|
|
|
|
|
|
|
|
Balance at June 1, 2019
|
$
|
2,496,402
|
|
|
$
|
243,459
|
|
|
$
|
102,580
|
|
|
$
|
2,842,441
|
|
Goodwill acquired
|
21,081
|
|
|
164
|
|
|
11,137
|
|
|
32,382
|
|
Foreign currency translation
|
(4,442)
|
|
|
(357)
|
|
|
(4)
|
|
|
(4,803)
|
|
Balance at May 31, 2020
|
2,513,041
|
|
|
243,266
|
|
|
113,713
|
|
|
2,870,020
|
|
Goodwill acquired
|
1,568
|
|
|
2,545
|
|
|
3,161
|
|
|
7,274
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
32,901
|
|
|
2,760
|
|
|
114
|
|
|
35,775
|
|
Balance at May 31, 2021
|
$
|
2,547,510
|
|
|
$
|
248,571
|
|
|
$
|
116,988
|
|
|
$
|
2,913,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Contracts
(In thousands)
|
Uniform Rental
and Facility
Services
|
|
First Aid
and Safety
Services
|
|
All
Other
|
|
Total
|
|
|
|
|
|
|
|
|
Balance at June 1, 2019
|
$
|
445,016
|
|
|
$
|
23,380
|
|
|
$
|
26,199
|
|
|
$
|
494,595
|
|
Service contracts acquired
|
11,058
|
|
|
325
|
|
|
3,288
|
|
|
14,671
|
|
Service contracts amortization
|
(47,070)
|
|
|
(3,877)
|
|
|
(5,374)
|
|
|
(56,321)
|
|
Foreign currency translation
|
(1,393)
|
|
|
(23)
|
|
|
—
|
|
|
(1,416)
|
|
Balance at May 31, 2020
|
407,611
|
|
|
19,805
|
|
|
24,113
|
|
|
451,529
|
|
Service contracts acquired
|
2,369
|
|
|
2,132
|
|
|
1,736
|
|
|
6,237
|
|
Service contracts amortization
|
(49,016)
|
|
|
(3,912)
|
|
|
(4,839)
|
|
|
(57,767)
|
|
Foreign currency translation
|
8,177
|
|
|
269
|
|
|
—
|
|
|
8,446
|
|
Balance at May 31, 2021
|
$
|
369,141
|
|
|
$
|
18,294
|
|
|
$
|
21,010
|
|
|
$
|
408,445
|
|
Information regarding Cintas' service contracts and other assets is as follows as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
(In thousands)
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service contracts
|
$
|
961,942
|
|
|
$
|
553,497
|
|
|
$
|
408,445
|
|
|
|
$
|
941,383
|
|
|
$
|
489,854
|
|
|
$
|
451,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized contract costs (1)
|
$
|
459,079
|
|
|
$
|
231,940
|
|
|
$
|
227,139
|
|
|
|
$
|
375,912
|
|
|
$
|
148,853
|
|
|
$
|
227,059
|
|
Noncompete and consulting
agreements
|
44,683
|
|
|
42,408
|
|
|
2,275
|
|
|
|
43,890
|
|
|
41,317
|
|
|
2,573
|
|
Other
|
105,371
|
|
|
24,371
|
|
|
81,000
|
|
|
|
54,239
|
|
|
23,113
|
|
|
31,126
|
|
Other assets
|
$
|
609,133
|
|
|
$
|
298,719
|
|
|
$
|
310,414
|
|
|
|
$
|
474,041
|
|
|
$
|
213,283
|
|
|
$
|
260,758
|
|
(1) The current portion of capitalized contract costs, included in prepaid expenses and other current assets on the consolidated balance sheets as of May 31, 2021 and 2020, is $79.4 million and $76.2 million, respectively.
Amortization expense for service contracts and other assets for continuing operations was $141.9 million, $140.8 million and $134.0 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. At May 31, 2021, the weighted average amortization period for service contracts, capitalized contract costs, noncompete and consulting agreements and other was 14 years, 7 years, 5 years and 10 years, respectively. As of May 31, 2021, the estimated future amortization expense for service contracts and other assets for continuing operations, excluding any future acquisitions and commissions to be earned, is as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year (In thousands)
|
|
|
2022
|
|
$
|
137,142
|
|
2023
|
|
117,803
|
|
2024
|
|
105,362
|
|
2025
|
|
91,948
|
|
2026
|
|
74,815
|
|
Thereafter
|
|
192,794
|
|
Total future amortization expense
|
|
$
|
719,864
|
|
Note 7. Debt and Derivatives
Cintas' outstanding debt is summarized as follows at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Interest
Rate
|
|
Fiscal Year
Issued
|
|
Fiscal Year
Maturity
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Debt due within one year
|
|
|
|
|
|
|
|
|
|
Senior notes
|
4.30%
|
|
2012
|
|
2022
|
|
$
|
250,000
|
|
|
$
|
—
|
|
Senior notes
|
2.90%
|
|
2017
|
|
2022
|
|
650,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
|
|
|
|
(930)
|
|
|
—
|
|
Total debt due within one year
|
|
|
|
|
|
|
$
|
899,070
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Debt due after one year
|
|
|
|
|
|
|
|
|
|
Senior notes
|
4.30%
|
|
2012
|
|
2022
|
|
$
|
—
|
|
|
$
|
250,000
|
|
Senior notes
|
2.90%
|
|
2017
|
|
2022
|
|
—
|
|
|
650,000
|
|
Senior notes
|
3.25%
|
|
2013
|
|
2023
|
|
300,000
|
|
|
300,000
|
|
Senior notes (1)
|
2.78%
|
|
2013
|
|
2023
|
|
50,815
|
|
|
51,250
|
|
Senior notes (2)
|
3.11%
|
|
2015
|
|
2025
|
|
51,301
|
|
|
51,637
|
|
Senior notes
|
3.70%
|
|
2017
|
|
2027
|
|
1,000,000
|
|
|
1,000,000
|
|
Senior notes
|
6.15%
|
|
2007
|
|
2037
|
|
250,000
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
|
|
|
|
(9,283)
|
|
|
(13,182)
|
|
Total debt due after one year
|
|
|
|
|
|
|
$
|
1,642,833
|
|
|
$
|
2,539,705
|
|
(1) 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%.
(2) Cintas assumed these senior notes with the acquisition of G&K in the fourth quarter of fiscal 2017, and they were recorded at fair value. The interest rate shown above is the effective interest rate. The principal amount of these notes is $50.0 million with a stated interest rate of 3.88%.
The average interest rate for all Cintas debt at May 31, 2021 was 3.8%, with maturity dates through fiscal year 2037. 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 May 31, 2021 were $2,550.0 million and $2,788.8 million, respectively, and as of May 31, 2020 were $2,550.0 million and $2,804.2 million, respectively. During the fiscal year ended May 31, 2020, Cintas paid a net total of $112.5 million of commercial paper. On June 1, 2021, in accordance with the terms of the notes, Cintas paid the $250.0 million aggregate principal amount of its 4.30%, 10-year senior notes that matured on that date with cash on hand. There was no commercial paper outstanding during fiscal 2021.
Letters of credit outstanding were $120.6 million at both May 31, 2021 and 2020. Maturities of debt during each of the next five years are $900.0 million, $350.0 million, $0.0 million, $50.0 million and $0.0 million, respectively.
Interest paid was $98.3 million, $105.5 million and $101.8 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively.
The credit agreement that supports our commercial paper program was amended and restated on May 24, 2019. The amendment increased the capacity of the revolving credit facility from $600.0 million to $1.0 billion and created a new term loan of $200.0 million. The credit agreement has an accordion feature that provides Cintas the ability to request increases to the borrowing commitments under either the revolving credit facility or the term loan of up to $250.0 million in the aggregate, subject to customary conditions. The maturity date of the revolving credit facility is May 23, 2024. As of May 31, 2021 and 2020, there was no commercial paper outstanding and no borrowings on our revolving credit facility.
Cintas uses interest rate locks to manage its overall interest expense as interest rate locks effectively change the interest rate of specific debt issuances. The interest rate locks are entered into to protect against unfavorable movements in the benchmark treasury rate related to forecasted debt issuances. Cintas used interest rate lock agreements to hedge against movements in the treasury rates at the time Cintas issued its senior notes in fiscal 2007, fiscal 2012, fiscal 2013 and fiscal 2017. The amortization of the cash flow hedges resulted in a decrease to other comprehensive income (loss) of $1.4 million, $1.4 million and $1.2 million in the fiscal years ended May 31, 2021, 2020 and 2019, respectively. During fiscal 2020 and 2019, Cintas entered into interest rate lock agreements with a total notional value of $950.0 million and $500.0 million, respectively, for forecasted debt issuances in connection with upcoming debt maturities.
The fair values of the outstanding interest rate lock agreements is summarized as follows at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Fiscal Year of Issuance
(in thousands)
|
Notional
Value
|
|
Other
assets, net
|
|
Long-term
accrued liabilities
|
|
Other
assets, net
|
|
Long-term
accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
2020
|
$
|
950,000
|
|
|
$
|
40,400
|
|
|
$
|
—
|
|
|
$
|
1,546
|
|
|
$
|
53,817
|
|
2019
|
$
|
500,000
|
|
|
$
|
—
|
|
|
$
|
61,657
|
|
|
$
|
—
|
|
|
$
|
111,869
|
|
The interest rate locks are also recorded in other comprehensive income (loss), net of tax. These interest rate locks had no impact on net income or cash flows from continuing operations for the fiscal years ended May 31, 2021, 2020 or 2019.
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 EBITDA and interest coverage ratios. Cross-default provisions exist between certain debt instruments. If a default of a significant covenant were to occur, the default could result in an acceleration of the maturity of the indebtedness, impair liquidity and limit the ability to raise future capital. Cintas was in compliance with all of the debt covenants for all periods presented.
As of May 31, 2020, the Company had unrecognized inventory purchase commitments with various suppliers totaling $117.6 million, respectively. All unrecognized inventory purchase commitments outstanding at May 31, 2020 were satisfied during fiscal 2021.
Note 8. Leases
Cintas has operating leases for certain operating facilities, vehicles and equipment, which provide the right to use the underlying asset and require lease payments over the term of the lease. Each new contract is evaluated to determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. All identified leases are recorded on the consolidated balance sheet with a corresponding operating lease right-of-use asset, net, representing the right to use the underlying asset for the lease term and the operating lease liabilities representing the obligation to make lease payments arising from the lease. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the consolidated balance sheet.
Operating lease right-of-use assets, net and operating lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Lease expense for operating leases is recorded on a straight-line basis over the lease term and variable lease costs are recorded as incurred. Both lease expense and variable lease costs are primarily recorded in cost of uniform rental and facility services and other on the Company's consolidated statements of income. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease costs, including short-term lease expense and variable lease costs, which were immaterial in each period, were $71.0 million, $70.4 million and $69.7 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively.
The following table provides supplemental information related to the Company's consolidated statements of cash flows for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2021
|
|
2020
|
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
49,345
|
|
|
$
|
50,816
|
|
Operating lease right-of-use assets obtained in exchange for new and renewed
operating lease liabilities
|
$
|
51,850
|
|
|
$
|
40,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information related to the operating lease right-of-use assets, net and operating lease liabilities was as follows at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
Weighted-average remaining lease term - operating leases
|
5.33 years
|
|
5.19 years
|
Weighted-average discount rate - operating leases
|
2.32%
|
|
2.66%
|
The contractual future minimum lease payments of Cintas' operating lease liabilities by fiscal year are as follows as of May 31, 2021:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
2022
|
|
$
|
47,564
|
|
2023
|
|
39,585
|
|
2024
|
|
29,553
|
|
2025
|
|
22,310
|
|
2026
|
|
16,779
|
|
Thereafter
|
|
30,010
|
|
Total payments
|
|
185,801
|
|
Less interest
|
|
(11,177)
|
|
Total present value of lease payments
|
|
$
|
174,624
|
|
Note 9. Income Taxes
Income before income taxes for continuing operations consists of the following components for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
U.S. operations
|
$
|
1,221,690
|
|
|
$
|
1,035,902
|
|
|
$
|
1,061,505
|
|
Foreign operations
|
66,059
|
|
|
22,389
|
|
|
40,894
|
|
|
$
|
1,287,749
|
|
|
$
|
1,058,291
|
|
|
$
|
1,102,399
|
|
Income tax expense (benefit) for continuing operations consists of the following components for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
164,104
|
|
|
$
|
153,736
|
|
|
$
|
134,174
|
|
State and local
|
42,340
|
|
|
34,502
|
|
|
40,949
|
|
Foreign
|
12,417
|
|
|
6,985
|
|
|
9,882
|
|
|
218,861
|
|
|
195,223
|
|
|
185,005
|
|
Deferred
|
(42,080)
|
|
|
(13,292)
|
|
|
34,759
|
|
|
$
|
176,781
|
|
|
$
|
181,931
|
|
|
$
|
219,764
|
|
Reconciliation of income tax expense (benefit) for continuing operations using the statutory rate and actual income tax expense is as follows for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Income taxes at the U.S. federal statutory rate
|
$
|
270,427
|
|
|
$
|
222,258
|
|
|
$
|
231,503
|
|
Permanent differences (1)
|
(101,870)
|
|
|
(67,075)
|
|
|
(51,201)
|
|
State and local income taxes, net of federal benefit
|
27,304
|
|
|
25,294
|
|
|
31,687
|
|
Capital loss carryback
|
(14,072)
|
|
|
—
|
|
|
—
|
|
Other (2)
|
(5,008)
|
|
|
1,454
|
|
|
6,506
|
|
Impact of the Tax Cuts and Jobs Act (the Tax Act):
|
|
|
|
|
|
Deemed repatriation of non-U.S. earnings, net of foreign
tax credits and other (collectively, transition tax)
|
—
|
|
|
—
|
|
|
153
|
|
Non-U.S. withholding taxes related to certain non-U.S.
earnings subject to repatriation
|
—
|
|
|
—
|
|
|
690
|
|
Remeasurement of U.S. net deferred tax liabilities from
35% to 21%
|
—
|
|
|
—
|
|
|
426
|
|
|
$
|
176,781
|
|
|
$
|
181,931
|
|
|
$
|
219,764
|
|
(1) Primarily consists of the excess tax benefits related to stock-based compensation.
(2) Primarily consists of adjustments for uncertain tax positions and tax credits.
The components of deferred income taxes included on the consolidated balance sheets are as follows at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2021
|
|
2020
|
|
|
|
|
Deferred tax assets:
|
|
|
|
Reserves related to accounts receivable
|
$
|
10,292
|
|
|
$
|
14,718
|
|
Inventory obsolescence
|
30,617
|
|
|
13,744
|
|
Insurance reserves
|
45,802
|
|
|
45,197
|
|
Stock-based compensation
|
74,898
|
|
|
78,802
|
|
Net operating loss and foreign related carry-forwards
|
3,885
|
|
|
7,657
|
|
Treasury locks
|
3,140
|
|
|
39,046
|
|
Operating lease liabilities
|
44,530
|
|
|
42,191
|
|
Deferred compensation and other
|
107,528
|
|
|
73,562
|
|
|
320,692
|
|
|
314,917
|
|
Valuation allowance
|
(2,037)
|
|
|
(6,411)
|
|
|
318,655
|
|
|
308,506
|
|
Deferred tax liabilities:
|
|
|
|
Uniform and other rental items in service
|
202,846
|
|
|
189,787
|
|
Property and equipment
|
167,622
|
|
|
177,664
|
|
Service contracts and other intangible assets
|
207,834
|
|
|
207,610
|
|
|
|
|
|
Capitalized contract costs
|
79,356
|
|
|
77,741
|
|
Operating lease right-of-use assets
|
44,530
|
|
|
42,191
|
|
State taxes and other
|
3,114
|
|
|
2,092
|
|
|
705,302
|
|
|
697,085
|
|
Net deferred tax liability
|
$
|
386,647
|
|
|
$
|
388,579
|
|
Although realization is not assured, management has evaluated its deferred tax assets to determine whether a valuation allowance is required or should be adjusted. This evaluation considers, among other items, the nature, frequency and amount of recent losses, reversal periods of taxable temporary differences, duration of statutory periods and tax planning strategies. As a result of this analysis, management believes it is more likely than not that the recorded deferred tax assets, net of valuation allowances, will be realized.
The progression of the valuation allowance is as follows at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2021
|
|
2020
|
|
|
|
|
Balance at beginning of year
|
$
|
(6,411)
|
|
|
$
|
(7,308)
|
|
|
|
|
|
Subtractions
|
4,374
|
|
|
897
|
|
Balance at end of year
|
$
|
(2,037)
|
|
|
$
|
(6,411)
|
|
Income taxes paid were $245.5 million, $160.3 million and $173.2 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively.
As of May 31, 2021 and 2020, there was $34.2 million and $35.9 million, respectively, in total unrecognized tax benefits, which, if recognized, would favorably impact Cintas' effective tax rate. Cintas recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense in the consolidated statements of income, which is consistent with the recognition of these items in prior reporting periods. The total amount accrued for interest and penalties as of May 31, 2021 and 2020, was $4.2 million and $3.7 million, respectively. Cintas records this tax liability in long-term accrued liabilities on the consolidated balance sheets.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits (exclusive of interest and penalties) is as follows:
|
|
|
|
|
|
(In thousands)
|
|
|
|
Balance at June 1, 2019
|
$
|
48,715
|
|
Additions for tax positions of the current year
|
3,976
|
|
Additions for tax positions of prior years
|
4,325
|
|
Settlements
|
(5,473)
|
|
Statute expirations
|
(6,873)
|
|
Balance at May 31, 2020
|
44,670
|
|
Additions for tax positions of the current year
|
4,728
|
|
Additions for tax positions of prior years
|
2,726
|
|
Settlements
|
(5,593)
|
|
Statute expirations
|
(4,074)
|
|
Balance at May 31, 2021
|
$
|
42,457
|
|
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 results of operation in any given period.
All U.S. federal income tax returns are closed to audit through fiscal 2017. 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 2014. Based on the resolution of the various audits and other potential regulatory developments, it is expected that the balance of unrecognized tax benefits will not materially change for the fiscal year ending May 31, 2022.
Foreign Withholding Tax
The Company asserts that all foreign earnings will be indefinitely reinvested, with the exception of certain foreign investments in which earnings and cash generation are in excess of local needs. With the passage of the Tax Act in the U.S., dividends of earnings from non-U.S. operations are generally no longer subject to U.S. income tax. Cintas continues to analyze the estimated impact of the non-U.S. income and withholding tax liabilities based on the source of these earnings, as well as the expected means through which those earnings may be taxed; however, the unrecorded tax is not material.
Note 10. Employee Benefit Plans
Pension Plans
In conjunction with the acquisition of G&K in fiscal 2017, Cintas assumed the Pension Plan that covers substantially all legacy 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 balance sheets 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 PBO. The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. The measurement of the PBO is based on the Company’s estimates and actuarial valuations. The net pension liability at May 31, 2021 and 2020 is included in long-term accrued liabilities on the consolidated balance sheets. Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive income (loss) on our consolidated balance sheets. The difference between actual amounts and estimates based on actuarial assumptions are recognized in other comprehensive income (loss), net of tax, in the period in which they occur. The estimated amortization from accumulated other comprehensive income (loss) into net periodic benefit cost during fiscal year 2022 is immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
Obligations and Funded Status at May 31:
(In thousands)
|
2021
|
|
2020
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
Projected benefit obligation, beginning of year
|
$
|
105,357
|
|
|
$
|
91,935
|
|
Interest cost
|
2,050
|
|
|
2,881
|
|
Actuarial (gain) loss
|
(4,460)
|
|
|
13,662
|
|
Benefits paid
|
(3,219)
|
|
|
(3,121)
|
|
Projected benefit obligation, end of year
|
$
|
99,728
|
|
|
$
|
105,357
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets, beginning of year
|
$
|
68,341
|
|
|
$
|
62,267
|
|
Actual return on plan assets
|
9,509
|
|
|
7,097
|
|
Employer contributions
|
3,613
|
|
|
2,098
|
|
Benefits paid
|
(3,219)
|
|
|
(3,121)
|
|
Fair value of plan assets, end of year
|
$
|
78,244
|
|
|
$
|
68,341
|
|
|
|
|
|
Funded status-net amount recognized
|
$
|
(21,484)
|
|
|
$
|
(37,016)
|
|
The net pension liability of $21.5 million and $37.0 million was included in long-term accrued liabilities on the consolidated balance sheets as of May 31, 2021 and 2020, respectively. An unrecognized net actuarial loss of $5.0 million and $16.2 million related to the Pension Plan was included in "other" within the accumulated other comprehensive income (loss) on the consolidated balance sheets at May 31, 2021 and 2020, respectively.
The components of net periodic pension benefit are summarized as follows for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2021
|
|
2020
|
|
|
|
|
Interest cost
|
$
|
2,050
|
|
|
$
|
2,881
|
|
Expected return on assets
|
(2,924)
|
|
|
(2,961)
|
|
Amortization of net loss
|
222
|
|
|
—
|
|
Net periodic pension benefit
|
$
|
(652)
|
|
|
$
|
(80)
|
|
Assumptions
The following weighted average assumptions were used to determine benefit obligations for the Pension Plan for the fiscal years ended May 31 :
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Discount rate
|
2.83
|
%
|
|
2.54
|
%
|
Rate of compensation increase
|
N/A
|
|
N/A
|
The following weighted average assumptions were used to determine net periodic pension benefit for the Pension Plan for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Discount rate
|
2.54
|
%
|
|
3.54
|
%
|
Expected return on plan assets
|
4.25
|
%
|
|
4.80
|
%
|
Rate of compensation increase
|
N/A
|
|
N/A
|
Plan Assets
The asset allocations in the Pension Plan at May 31, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2021
|
|
2020
|
|
Target Asset
Allocation
|
|
Actual Asset
Allocation
|
|
Actual Asset
Allocation
|
|
|
|
|
|
|
Large cap equity
|
26.0
|
%
|
|
29.8
|
%
|
|
25.0
|
%
|
Small cap equity
|
5.0
|
%
|
|
6.0
|
%
|
|
4.4
|
%
|
International equity
|
8.0
|
%
|
|
8.3
|
%
|
|
6.7
|
%
|
Fixed income
|
45.0
|
%
|
|
44.1
|
%
|
|
51.5
|
%
|
Absolute return strategy funds
|
16.0
|
%
|
|
11.3
|
%
|
|
11.9
|
%
|
Cash
|
—
|
%
|
|
0.5
|
%
|
|
0.5
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Our investment committee, assisted by outside consultants, evaluates the objectives and investment policies concerning our long-term investment goals and asset allocation strategies. Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. To develop the expected long-term rate of return on asset assumptions, we consider the historical returns and future expectations of returns for each asset class, as well as the target asset allocation, changes in investments expenses and investment goals of the pension portfolio. This resulted in the selection of 4.25% expected return on plan assets for fiscal year 2021 and 4.80% expected return on plan assets for fiscal year 2020. The investment goals are (1) to meet or exceed the assumed actuarial rate of return over the long term within reasonable and prudent levels of risk, and (2) to preserve the real purchasing power of assets to meet future obligations. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Pension plan assets for our qualified pension plans are held in a trust for the benefit of the plan participants and are invested in a diversified portfolio of equity investments, fixed income investments and cash. Risk targets are established and monitored against acceptable ranges. All investment policies and procedures are designed to ensure that the plans' investments are in compliance with the Employee Retirement Income Security Act. Guidelines are established defining permitted investments within each asset class.
The implementation of the investment strategy discussed above is executed through a variety of investment types, including U.S. government securities, corporate debt and mutual funds. The mutual fund investments are valued at the closing price reported on the active market on which the individual securities are traded and are not adjusted from the quoted active market price at the consolidated balance sheet date. The remaining investments, primarily corporate debt, are valued using unadjusted observable inputs such as third-party quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our 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 fair value measurement at the consolidated balance sheet date.
Information on the Pension Plan investments, using the fair value hierarchy discussed in Note 1 entitled Significant Accounting Polices, is as follows as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
(In thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
556
|
|
|
|
$
|
585
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
585
|
|
U.S. government
securities
|
3,066
|
|
|
4,500
|
|
|
—
|
|
|
7,566
|
|
|
|
2,733
|
|
|
4,327
|
|
|
—
|
|
|
7,060
|
|
Corporate debt
|
—
|
|
|
26,762
|
|
|
—
|
|
|
26,762
|
|
|
|
—
|
|
|
27,666
|
|
|
—
|
|
|
27,666
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. securities
|
36,909
|
|
|
—
|
|
|
—
|
|
|
36,909
|
|
|
|
28,455
|
|
|
—
|
|
|
—
|
|
|
28,455
|
|
International securities
|
6,451
|
|
|
—
|
|
|
—
|
|
|
6,451
|
|
|
|
4,575
|
|
|
—
|
|
|
—
|
|
|
4,575
|
|
Total
|
$
|
46,982
|
|
|
$
|
31,262
|
|
|
$
|
—
|
|
|
$
|
78,244
|
|
|
|
$
|
36,348
|
|
|
$
|
31,993
|
|
|
$
|
—
|
|
|
$
|
68,341
|
|
We expect to make contributions of approximately $0.3 million to the Pension Plan during the next 12 months. The Pension Plan benefit payments expected to be paid for each of the next five years and thereafter are $4.1 million, $4.2 million, $4.4 million, $4.5 million, $4.7 million and $25.0 million, respectively.
Future changes in plan asset returns, assumed discount rates and various other factors related to the Pension Plan will impact future net periodic pension benefit (cost) and liabilities. We cannot predict the impact of these changes in the future, and any changes may have a material impact on our consolidated results of operations and consolidated financial position.
Cintas also administers a pension plan that was assumed in a previous acquisition and has historically been deemed immaterial for disclosure purposes. As of May 31, 2021 and 2020, the fair value of this pension plan's total assets was $9.2 million and $7.3 million, respectively, and the PBO was $8.9 million and $9.4 million, respectively.
Non-Contributory Retirement Plans
Cintas' Partners' Plan (the Plan) is a non-contributory profit sharing plan and Employee Stock Ownership Plan (ESOP) for the benefit of substantially all U.S. Cintas employee-partners who have completed one year of service. The Plan also includes a 401(k) savings feature covering substantially all U.S. employee-partners. The amounts of contributions to the Plan and ESOP, as well as the matching contribution to the 401(k), are made at the discretion of the Board of Directors. Total contributions, including Cintas' matching contributions, which approximate cost, were $75.6 million, $74.3 million and $67.6 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. The expense associated with these contributions was recorded in selling and administrative expenses on the consolidated statements of income.
Cintas has a non-contributory deferred profit sharing plan (DPSP), which covers substantially all Canadian employee-partners. In addition, a registered retirement savings plan (RRSP) is offered to those employees. The amounts of contributions to the DPSP, as well as the matching contribution to the RRSP, are made at the discretion of the Board of Directors. Total contributions, which approximate cost, were $3.1 million, $2.6 million and $2.5 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively.
Cintas has a supplemental executive retirement plan (SERP) subject to Section 409A of the Internal Revenue Code for the benefit of certain highly compensated Cintas employee-partners. The SERP allows participants to defer the receipt of compensation which would otherwise become payable to them. Matching contributions are made at the discretion of the Board of Directors. Total matching contributions, which approximates cost, were $9.1 million, $8.4 million and $8.6 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. The expense associated with these contributions was recorded in selling and administrative expenses on the consolidated statements of income.
Note 11. Earnings per Share
Cintas uses the two-class method to calculate basic and diluted earnings per share as a result of outstanding participating securities in the form of restricted stock awards. See Note 12 entitled Stock-Based Compensation for additional information on restricted stock awards. The following tables set 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 for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share from Continuing Operations
(In thousands except per share data)
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
1,110,968
|
|
|
$
|
876,360
|
|
|
$
|
882,635
|
|
Less: income from continuing operations allocated to
participating securities
|
7,623
|
|
|
8,158
|
|
|
9,568
|
|
Income from continuing operations available to common
shareholders
|
$
|
1,103,345
|
|
|
$
|
868,202
|
|
|
$
|
873,067
|
|
Basic weighted average common shares outstanding
|
104,874
|
|
|
103,816
|
|
|
106,080
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations
|
$
|
10.52
|
|
|
$
|
8.36
|
|
|
$
|
8.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share from Continuing Operations
(In thousands except per share data)
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
1,110,968
|
|
|
$
|
876,360
|
|
|
$
|
882,635
|
|
Less: income from continuing operations allocated to
participating securities
|
7,623
|
|
|
8,158
|
|
|
9,568
|
|
Income from continuing operations available to common
shareholders
|
$
|
1,103,345
|
|
|
$
|
868,202
|
|
|
$
|
873,067
|
|
Basic weighted average common shares outstanding
|
104,874
|
|
|
103,816
|
|
|
106,080
|
|
Effect of dilutive securities – employee stock options
|
2,833
|
|
|
3,196
|
|
|
3,415
|
|
Diluted weighted average common shares outstanding
|
107,707
|
|
|
107,012
|
|
|
109,495
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations
|
$
|
10.24
|
|
|
$
|
8.11
|
|
|
$
|
7.97
|
|
Basic and diluted earnings per share from discontinued operations were calculated using the two-class method. There were no discontinued operations for the fiscal year ended May 31, 2021. Basic earnings per share from discontinued operations rounded to $0.00 and $0.02 for the fiscal years ended May 31, 2020 and 2019, respectively. Diluted earnings per share from discontinued operations rounded to $0.00 and $0.02 for the fiscal years ended May 31, 2020 and 2019, respectively.
For the fiscal years ended May 31, 2021, 2020 and 2019, options granted to purchase 0.2 million, 0.2 million and 0.5 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 shares (anti-dilutive).
On August 2, 2016, we announced that the Board of Directors authorized a $500.0 million share buyback program. This program was completed in November 2018. On October 30, 2018, we announced that the Board of Directors authorized a $1.0 billion share buyback program. This program was completed in January 2021. On October 29, 2019, we announced the Board of Directors authorized a new $1.0 billion share buyback program, which does not have an expiration date.
The following table summarizes the buyback activity by program and fiscal year ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
Buyback Program
(In thousands except
per share data)
|
Shares
|
|
Average
Price per Share
|
|
Purchase
Price
|
|
Shares
|
|
Average
Price per Share
|
|
Purchase
Price
|
|
Shares
|
|
Average
Price per Share
|
|
Purchase
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2, 2016
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2,130
|
|
|
$
|
192.55
|
|
|
$
|
410,003
|
|
October 30, 2018
|
190
|
|
|
$
|
319.88
|
|
|
$
|
60,877
|
|
|
1,607
|
|
|
$
|
246.19
|
|
|
$
|
395,681
|
|
|
2,673
|
|
|
$
|
203.30
|
|
|
$
|
543,442
|
|
October 29, 2019
|
1,196
|
|
|
$
|
350.31
|
|
|
$
|
418,779
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1,386
|
|
|
$
|
346.13
|
|
|
$
|
479,656
|
|
|
1,607
|
|
|
$
|
246.19
|
|
|
$
|
395,681
|
|
|
4,803
|
|
|
$
|
198.53
|
|
|
$
|
953,445
|
|
In the period subsequent to May 31, 2021, through July 28, 2021, we completed the October 29, 2019 program by purchasing 1.6 million shares of Cintas common stock at an average price of $365.41 for a total purchase price of $581.2 million. From the inception of the October 29, 2019 program through July 28, 2021, Cintas has purchased a total of 2.8 million shares of Cintas common stock at an average price of $358.93 per share for a total purchase price of $1.0 billion.
In addition to the buyback programs, Cintas acquired shares of Cintas common stock in satisfaction of employee payroll taxes due on restricted stock awards that vested during the fiscal year. For the fiscal year ended May 31, 2021, Cintas acquired 0.2 million shares at an average price of $302.52 per share for a total purchase price of $74.4 million. For the fiscal year ended May 31, 2020, Cintas acquired 0.3 million shares at an average price of $260.89 per share for a total purchase price of $68.8 million. For the fiscal year ended May 31, 2019, Cintas acquired 0.3 million shares at an average price of $204.50 per share for a total purchase price of $62.9 million.
Note 12. Stock-Based Compensation
On August 2, 2016, the Board of Directors approved and adopted the Cintas Corporation 2016 Equity and Incentive Compensation Plan (the 2016 Plan) to replace the Cintas' 2005 Equity Compensation Plan, as amended (the 2005 Plan). The 2016 Plan was approved by Cintas shareholders at its Annual Meeting on October 18, 2016, at which time the 2016 Plan became effective. Under the 2016 Plan, Cintas may grant officers and key employee-partners equity compensation in the form of stock options, stock appreciation rights, restricted and unrestricted stock awards, performance awards and other stock unit awards representing up to an aggregate of 12,500,000 shares of Cintas' common stock. Any shares of common stock that remained available under the 2005 Plan became part of the total available share balance of 12,500,000 shares under the 2016 Plan. At May 31, 2021, 6,358,437 shares of common stock were reserved for future issuance under the 2016 Plan. Total compensation cost for stock-based awards for continuing operations was $112.0 million, $115.4 million and $139.2 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. Cintas accounts for forfeitures of stock-based awards as they occur. The total income tax benefit recognized in the consolidated statements of income for share-based compensation arrangements for continuing operations was $28.6 million, $29.2 million and $34.0 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively.
Stock Options
Stock options are granted at the fair market value of the underlying common stock on the date of grant. The option terms are determined by the Compensation Committee of the Board of Directors, but no stock option may be exercised later than 10 years after the date of the grant. The option awards generally have 10-year terms with graded vesting in years 3 through 5 based on continuous service during that period. Cintas recognizes compensation expense for these options using the straight-line recognition method over the vesting period.
The fair value of options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Risk-free interest rate
|
0.4
|
%
|
|
1.9
|
%
|
|
2.7
|
%
|
Dividend yield
|
1.1
|
%
|
|
1.1
|
%
|
|
1.2
|
%
|
Expected volatility of Cintas' common stock
|
23.5
|
%
|
|
19.0
|
%
|
|
17.9
|
%
|
Expected life of the option in years
|
5.5
|
|
6.0
|
|
6.0
|
The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options. The determination of expected volatility is based on historical volatility of Cintas' common stock over the period commensurate with the expected term of stock options, as well as other relevant factors. The weighted average expected term was determined based on the historical employee exercise behavior of the options. The weighted-average fair value of stock options granted during fiscal 2021, 2020 and 2019 was $66.52, $48.20 and $47.68, respectively.
The information presented in the following table relates primarily to stock options granted and outstanding under either the 2016 Plan or under previously adopted plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
Outstanding, June 1, 2018 (2,006,922 shares exercisable)
|
8,930,186
|
|
|
$
|
96.71
|
|
Granted
|
1,013,005
|
|
|
219.37
|
|
Canceled
|
(3,045)
|
|
|
58.03
|
|
Forfeited
|
(397,304)
|
|
|
155.39
|
|
Exercised
|
(1,333,908)
|
|
|
54.14
|
|
Outstanding, May 31, 2019 (1,919,976 shares exercisable)
|
8,208,934
|
|
|
123.80
|
|
Granted
|
575,813
|
|
|
250.50
|
|
Canceled
|
(5,432)
|
|
|
72.17
|
|
Forfeited
|
(312,391)
|
|
|
185.08
|
|
Exercised
|
(1,361,525)
|
|
|
70.03
|
|
Outstanding, May 31, 2020 (1,913,374 shares exercisable)
|
7,105,399
|
|
|
145.54
|
|
Granted
|
747,550
|
|
|
348.24
|
|
Canceled
|
(1,452)
|
|
|
59.51
|
|
Forfeited
|
(91,722)
|
|
|
193.94
|
|
Exercised
|
(1,704,251)
|
|
|
83.31
|
|
Outstanding, May 31, 2021 (1,548,867 shares exercisable)
|
6,055,524
|
|
|
$
|
191.11
|
|
The intrinsic value of stock options exercised was $402.3 million, $262.1 million and $193.6 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. The total cash received from employees as a result of employee stock option exercises for the fiscal years ended May 31, 2021, 2020 and 2019 was $130.0 million, $90.5 million and $65.4 million, respectively.
The fair value of stock options vested was $30.5 million, $27.8 million and $22.4 million for the fiscal years ended May 31, 2021, 2020 and 2019, respectively.
The following table summarizes the information related to stock options outstanding at May 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
Exercisable Options
|
Range of
Exercise Prices
|
Number
Outstanding
|
|
Average
Remaining
Option Life
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
$28.14 - $108.39
|
1,621,375
|
|
3.93
|
|
$
|
83.28
|
|
|
1,248,866
|
|
|
$
|
75.94
|
|
$108.40 - $204.48
|
1,329,236
|
|
6.30
|
|
143.30
|
|
|
280,610
|
|
|
137.55
|
|
$204.49 - $260.79
|
1,865,666
|
|
7.58
|
|
228.36
|
|
|
6,752
|
|
|
230.79
|
|
$260.80 - $361.09
|
1,239,247
|
|
9.61
|
|
327.37
|
|
|
12,639
|
|
|
277.33
|
|
$28.14 - $361.09
|
6,055,524
|
|
6.74
|
|
$
|
191.11
|
|
|
1,548,867
|
|
|
$
|
89.42
|
|
At May 31, 2021, the aggregate intrinsic value of stock options outstanding and exercisable was $983.6 million and $409.1 million, respectively. The weighted-average remaining contractual term of stock options exercisable is 4.1 years.
Restricted Stock Awards
Restricted stock awards consist of Cintas' common stock that is subject to such conditions, restrictions and limitations as the Compensation Committee of the Board of Directors determines to be appropriate. The vesting period is generally three years after the grant date. The recipient of restricted stock awards will have all rights of a shareholder of Cintas, including the right to vote and the right to receive cash dividends during the vesting period. Cintas recognizes compensation expense for these restricted stock awards using the straight-line recognition method over the vesting period.
The information presented in the following table relates to restricted stock awards granted and outstanding under either the 2016 Plan or under previously adopted plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Price
|
|
|
|
|
Outstanding, unvested grants at June 1, 2018
|
2,641,114
|
|
|
$
|
122.18
|
|
Granted
|
425,614
|
|
|
221.27
|
|
Forfeited
|
(109,393)
|
|
|
169.48
|
|
Vested
|
(765,647)
|
|
|
93.37
|
|
Outstanding, unvested grants at May 31, 2019
|
2,191,688
|
|
|
149.12
|
|
Granted
|
228,292
|
|
|
248.39
|
|
Forfeited
|
(135,934)
|
|
|
208.37
|
|
Vested
|
(658,831)
|
|
|
113.93
|
|
Outstanding, unvested grants at May 31, 2020
|
1,625,215
|
|
|
199.73
|
|
Granted
|
274,843
|
|
|
352.68
|
|
Forfeited
|
(48,586)
|
|
|
241.95
|
|
Vested
|
(610,249)
|
|
|
147.32
|
|
Outstanding, unvested grants at May 31, 2021
|
1,241,223
|
|
|
$
|
264.63
|
|
The remaining unrecognized compensation cost related to unvested stock options and restricted stock at May 31, 2021 was $224.0 million. The weighted-average period of time over which this cost will be recognized is 1.98 years.
Note 13. 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
Loss on
Interest
Rate Hedges
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
Balance at June 1, 2019
|
$
|
(15,022)
|
|
|
$
|
(18,389)
|
|
|
$
|
(5,741)
|
|
|
$
|
(39,152)
|
|
Cumulative effect of change in accounting principle (1)
|
—
|
|
|
2,058
|
|
|
(83)
|
|
|
1,975
|
|
Other comprehensive loss before reclassifications
|
(11,321)
|
|
|
(94,954)
|
|
|
(8,495)
|
|
|
(114,770)
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
—
|
|
|
(1,433)
|
|
|
—
|
|
|
(1,433)
|
|
Net current period other comprehensive loss
|
(11,321)
|
|
|
(96,387)
|
|
|
(8,495)
|
|
|
(116,203)
|
|
Balance at May 31, 2020
|
(26,343)
|
|
|
(112,718)
|
|
|
(14,319)
|
|
|
(153,380)
|
|
Other comprehensive income before reclassifications
|
68,182
|
|
|
106,843
|
|
|
10,676
|
|
|
185,701
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
—
|
|
|
(1,433)
|
|
|
—
|
|
|
(1,433)
|
|
Net current period other comprehensive income
|
68,182
|
|
|
105,410
|
|
|
10,676
|
|
|
184,268
|
|
Balance at May 31, 2021
|
$
|
41,839
|
|
|
$
|
(7,308)
|
|
|
$
|
(3,643)
|
|
|
$
|
30,888
|
|
(1) Effective June 1, 2019, Cintas adopted ASU 2018-02, on a prospective basis, which resulted in this reclassification adjustment of the stranded tax effects from retained earnings to accumulated other comprehensive income that was determined using a specific identification method.
The following table summarizes the reclassifications out of accumulated other comprehensive income (loss) during the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated
Other Comprehensive
Income (Loss) Components
|
|
Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss)
|
|
Affected Line in the
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
(In thousands)
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
Amortization of interest rate locks
|
|
$
|
1,896
|
|
|
$
|
1,896
|
|
|
Interest expense
|
Tax expense
|
|
(463)
|
|
|
(463)
|
|
|
Income taxes
|
Amortization of interest rate locks,
net of tax
|
|
$
|
1,433
|
|
|
$
|
1,433
|
|
|
|
Note 14. Operating Segment Information
Cintas’ 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, 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’ operating segments, which consists of the Fire Protection Services operating segment and the Uniform Direct Sale operating segment, 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 Significant Accounting Policies. Information related to the operations of Cintas' reportable operating segments and All Other is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Uniform Rental
and Facility Services
|
|
First Aid
and Safety Services
|
|
All Other
|
|
Corporate (1)
|
|
Total
|
May 31, 2021
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
5,689,632
|
|
|
$
|
784,291
|
|
|
$
|
642,417
|
|
|
$
|
—
|
|
|
$
|
7,116,340
|
|
Gross margin
|
$
|
2,706,118
|
|
|
$
|
332,336
|
|
|
$
|
276,197
|
|
|
$
|
—
|
|
|
$
|
3,314,651
|
|
Selling and administrative expenses
|
1,480,278
|
|
|
251,153
|
|
|
197,728
|
|
|
—
|
|
|
1,929,159
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
97,743
|
|
|
97,743
|
|
Income before income taxes
|
$
|
1,225,840
|
|
|
$
|
81,183
|
|
|
$
|
78,469
|
|
|
$
|
(97,743)
|
|
|
$
|
1,287,749
|
|
Depreciation and amortization
|
$
|
323,596
|
|
|
$
|
43,314
|
|
|
$
|
21,041
|
|
|
$
|
—
|
|
|
$
|
387,951
|
|
Capital expenditures
|
$
|
104,020
|
|
|
$
|
34,384
|
|
|
$
|
5,066
|
|
|
$
|
—
|
|
|
$
|
143,470
|
|
Total assets
|
$
|
6,743,272
|
|
|
$
|
637,663
|
|
|
$
|
362,248
|
|
|
$
|
493,640
|
|
|
$
|
8,236,823
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2020
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
5,643,494
|
|
|
$
|
708,569
|
|
|
$
|
733,057
|
|
|
$
|
—
|
|
|
$
|
7,085,120
|
|
Gross margin
|
$
|
2,588,349
|
|
|
$
|
338,661
|
|
|
$
|
306,738
|
|
|
$
|
—
|
|
|
$
|
3,233,748
|
|
Selling and administrative expenses
|
1,583,791
|
|
|
231,769
|
|
|
255,492
|
|
|
—
|
|
|
2,071,052
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
104,405
|
|
|
104,405
|
|
Income before income taxes
|
$
|
1,004,558
|
|
|
$
|
106,892
|
|
|
$
|
51,246
|
|
|
$
|
(104,405)
|
|
|
$
|
1,058,291
|
|
Depreciation and amortization
|
$
|
317,699
|
|
|
$
|
38,516
|
|
|
$
|
22,838
|
|
|
$
|
—
|
|
|
$
|
379,053
|
|
Capital expenditures
|
$
|
183,364
|
|
|
$
|
35,678
|
|
|
$
|
11,247
|
|
|
$
|
—
|
|
|
$
|
230,289
|
|
Total assets
|
$
|
6,531,673
|
|
|
$
|
611,205
|
|
|
$
|
381,605
|
|
|
$
|
145,402
|
|
|
$
|
7,669,885
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
5,552,430
|
|
|
$
|
619,470
|
|
|
$
|
720,403
|
|
|
$
|
—
|
|
|
$
|
6,892,303
|
|
Gross margin
|
$
|
2,524,831
|
|
|
$
|
297,074
|
|
|
$
|
306,683
|
|
|
$
|
—
|
|
|
$
|
3,128,588
|
|
Selling and administrative expenses
|
1,533,711
|
|
|
206,990
|
|
|
239,943
|
|
|
—
|
|
|
1,980,644
|
|
G&K Services, Inc. integration expenses
|
14,410
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,410
|
|
Gain on sale of a cost method investment
|
—
|
|
|
—
|
|
|
—
|
|
|
69,373
|
|
|
69,373
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
100,508
|
|
|
100,508
|
|
Income before income taxes
|
$
|
976,710
|
|
|
$
|
90,084
|
|
|
$
|
66,740
|
|
|
$
|
(31,135)
|
|
|
$
|
1,102,399
|
|
Depreciation and amortization
|
$
|
301,328
|
|
|
$
|
36,824
|
|
|
$
|
21,941
|
|
|
$
|
—
|
|
|
$
|
360,093
|
|
Capital expenditures
|
$
|
220,373
|
|
|
$
|
36,783
|
|
|
$
|
19,563
|
|
|
$
|
—
|
|
|
$
|
276,719
|
|
Total assets
|
$
|
6,442,461
|
|
|
$
|
504,920
|
|
|
$
|
392,636
|
|
|
$
|
96,645
|
|
|
$
|
7,436,662
|
|
(1) Corporate assets represent the consolidated cash balance in all periods presented.